BlueLinx Holdings Inc. (BXC) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Roche and I will be your conference operator today. And at this time, I would like to welcome everyone to the Second Quarter 2017 BlueLinx Call. [Operator Instructions] Thank you, Ms. Poulos, you may begin your conference.

Thank you, Roche and good morning everyone. We appreciate you joining us for our second quarter 2017 earnings call. The earnings release and presentation slides for this call can be found in the Investor Relations section of the company's website at www.bluelinxco.com. Joining us on the call today are Mitch Lewis, Chief Executive Officer and Susan O'Farrell, Chief Financial Officer. I will also remind you that this presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our future operations and financial performance. These statements are subject to risks and uncertainties that cause our actual results to differ materially from those provided, including, but not limited to those identified in our press release and discussed in our filings within the Securities and Exchange Commission. Forward-looking statements speak only as of the date of this presentation and we undertake no obligation to revise them in light of new information. Today's presentation also includes references to non-GAAP financial measures. With that, I’ll turn the call over to Mitch.

Thanks Natalie, and good morning. We're pleased to be able to report another solid quarter of BlueLinx. We had positive net income of $3.2 million compared to a loss of $3.1 million in the second quarter of 2016. Our second quarter was the fourth consecutive quarter in which we have posted positive net income in the seven consecutive quarter which adjusted EBITDA exceeded our prior year's performance. Our adjusted EBITDA for the quarter was $12.8 million which was also our best second quarter performance since 2008. From a revenue perspective the quarter was somewhat choppy. The quarter started strong and then appeared to soften as it progressed. We believe the uncertainty associated with certain international duties and tariffs including the Canadian softwood lumber agreement, the Chinese plywood dispute, and the Trump Administration Section 232 investigation associated with steel may have impacted the quarter. And this environment we were still able to achieve revenue growth of 5.1% when taking into account the facility closures and product rationalization activities that we initiated in the second quarter last year. Unfortunately there remains uncertainty in commodity raw material prices. There's been no clear resolution to any of these potential tariffs duties or quotas. And we've seen an escalation in many of these commodity prices in July. We're hopeful that there will be resolution by the end of the year on most of these disputes which should add some stability to the market. The long-term prospects for market demand for BlueLinx remains strong. We are bullish on single-family housing starts over the long-term. As we've indicated in the past, BlueLinx has historically been highly correlated to single family housing starts. In 2016, single family housing starts were 781,000 units. This compares to an annual $1.2 million average from 2000 to 2009 and a $1.1 million annual average from 1990 to 1999. In fact 2016 single family housing start levels would still need to increase by approximately 30% just to hit the average annual single family housing starts that have taken place in the United States since 1959 when the Census Bureau began publishing the data in its current form. So while we've seen some percentage gains in recent years, there remains significant opportunity in single family housing starts in years ahead, and this means significant opportunity for BlueLinx as well. As you may recall in the second quarter of last year, we announced that we would focus on deleveraging our balance sheet while continuing our companywide emphasis on improving margin. I'm pleased to report that we've made great progress on both initiatives. Our overall debt has been reduced by over $75 million from the second quarter in 2016 and this comparison is to a quarter when we began to make great progress in deleveraging initiatives as we exited facilities, and rationalized our product offerings. Susan will discuss our current debt levels in more detail but rest assured we remain committed to reducing our leverage. There remains a strategic priority as we continue to improve our balance sheet to enable BlueLinx to enjoy taking advantage of the consolidation that we anticipate will take place in wholesale distribution over the next few years. While we were making progress in our debt reduction, we were also able to remain focused on our margin improvement initiatives as well. Our gross margin for the quarter was the highest second quarter gross margin in almost a decade. We are particularly proud of this accomplishment in light of the pricing environment we faced with our lumber products during the period. We experienced a significant decline in lumber pricing as we move through the quarter. Commodity price degradation has historically negatively impacted the gross margins of BlueLinx. Our team did a great job managing both our lumber inventory and pricing which enabled the organization to enjoy our continued overall margin improvement. We did not announce any major sale-leasebacks of our real estate in the second quarter. We spent most of the quarter assessing potential financing alternatives for real estate. We did continue our discussions with several third parties regarding potential sale leaseback transactions and we'll continue to evaluate opportunities to utilize our real estate to provide a solid capital foundation for BlueLinx. As we have discussed previously, we are now pivoting the organization to focus on growing our market share in certain key markets and product categories. To support this initiative, we have invested an additional sales and marketing resources. We now have in-house training for inside and outside sales representatives and have also created an analytical market and pricing team that assesses profitability, as well as product and market trends which enables us to quickly react to accretive opportunities. We also invested an additional outside sales support in markets and geographic territories where we believe we are under penetrated. And we are aggressively pursuing new product development and additional brand representation to enhance our overall product portfolio. While these efforts are all relatively new, we are beginning to realize opportunities from these growth initiatives and look forward to sharing our success in the quarters ahead. The second quarter of 2017 continues the positive trend we've enjoyed now for over two years but we're just getting started. Significant opportunities for improvement at BlueLinx continue to exist in virtually every aspect of our business and our core value of continuous improvement is helping us take advantage of these opportunities. I want to thank our loyal customers and suppliers for your continued support of BlueLinx and I want to thank the entire BlueLinx team for their tremendous efforts and a job well done. And now I'd like to turn it over to Susan who will walk you through our financial performance for the second quarter in greater detail.

Thanks Mitch, and good morning everyone. It’s my pleasure to speak with you today and to review our second quarter business results. On Page 7, let's review some of our highlights first before we get into more details review our financial results. Our primary focus over the past year has been our strategic initiative to delever the business. Last year we rationalized our local inventory assortments, closing underperforming facilities, and began monetizing select real estate properties which we collectively referred to as our operational efficiency initiatives. We're very pleased with the successful completion of these initiatives and the results we have achieved to-date. We sold closed facilities and entered into several facilities back transactions denouncing our deleveraging plan, enabling us to reduce our debt principal balance by $76.4 million since Q2 2016. The successful execution against our strategy also enabled us meet our first mortgage obligation of $60 million in 2017 amongst ahead of our schedule. Net sales were $474 million for the quarter. Although net sales were down year-over-year, when excluding the effects of our operational efficiency initiative, our adjusted Same Center net sales were up $23.2 million or 5.1% from the prior year period. And even with the pressure on commodity lumber prices during the quarter, our overall gross margin increased by 150 basis points to 12.8%. This is our best second quarter gross margin since 2008. This gross margin results has been driven by our continued focus on our margin enhancement activities. Our structural products also grew from 40% to 45% of our business and that mix had a 10 basis point headwind on our overall gross margin rate. Even with the shift in our product mix to more commodity type items coupled with the volatile lumber market, we still delivered strong gross margin results for the quarter. Net income as reported for the quarter was $3.2 million, up $6.4 million from the period year ago. I'm pleased to share that this was our best second quarter of net income since 2008. And our adjusted EBITDA was $12.8 million for the quarter. Again, another highlight for BlueLinx as this was our best second quarter adjusted EBITDA since 2008. Operating working capital also improved by $21.6 million. This improvement primarily reflects our improvement in working capital components including a decrease in receivables of $14 million and other current assets of $8.3 million. We continue to work hard on improving our working capital processes and are pleased with the progress we've made. And although our commodity inventory values increased approximately $6 million from this period a year ago due to commodity raw material cost, we continue to stay focused on our in-stock inventory positions ensuring we have the just-in-time inventory our customers need. We are pleased to share that we had over $74 million and excess availability under our revolver which has improved $8 million from Q2 2016 based on the qualifying inventory and receivable levels. With lower working capital on our revolver and an interest-only mortgage, we also incurred less interest expense during the quarter and year-to-date of $900,000 and $2.89 million respectively from prior year level. Moving on to Page 8, we’ll highlight our year-to-date performance. Net sales were $902.6 million for the first half of the year. And on an adjusted Same Center basis, sales increased $32.2 million or 3.7% from 2016. Additionally, our adjusted Same Center gross profit which excludes the effects of our operational efficiency initiative, increased $6 million from the prior year. We are also very pleased to report that Same Center adjusted EBITDA year-to-date increased $1.7 million or 8.9% from the first six months ended 2016. As we move to Slide 9, we want to reiterate that over the last two years, the organization’s goal has been to restore the company's financial strength and finally rebound from the great recession that so many in our industry faced. Since then, we’ve significantly improved our profitability with increased gross margin of 370 basis points from Q2 2013. Mitch talked to you earlier about some of the initiatives we have underway, and we are gaining traction on our margin enhancement opportunities. And while we've improved, we strive to raise the bar every day. In Slide 10, we are pleased to see our adjusted Same Center net sales increased $23.2 million, or 5.1% from the prior year period. This quarter-over-quarter increase was largely led by our engineered wood and vinyl siding product sales in our specialty product category. Additionally, we experienced significant increased sales in our rebar and wood based structural product categories respectively. Equally important is the revenue increase with experience year-to-date compared to the first six months of 2016 which was also led by increased sales in our structural product category. We’re excited to see the emerging trends in our topline growth as we remain focused on sales excellence and garnering market share through our local market strategy. Moving to Slide 11, even with the property sales incurred since announcing our deleveraging strategy last year, we still have significant value available to us in our real estate. In late 2015, we had a desktop valuation performed which resulted in a $332 million to $352 million estimate for our real estate portfolio at that time. This previous desktop appraisal is supported by the value of the real estate sales that we've experienced over the past 18 months. Our real estate continues to prove to be a valuable and attractive asset as the collective value received of the property sales were over 98% of that desktop evaluation. Taking into account the property sales incurred over the past 18 months, we estimate having our remaining real estate valuation of approximately $264 million to $284 million. That’s a lot of excess value within outstanding mortgage bounce of just under $98 million. As we remain focused on improving our company's capital structure and deleveraging our balance sheet, we're exploring additional sale and leaseback transaction, as well as alternative mortgage refinancing options. On Slide 12, our debt principle balance is down $76.4 million from the second quarter 2016. As mentioned earlier, this is significant progress on our deleveraging initiative. Our mortgage principal is down $60.9 million, and our ABL debt balance is down $15.5 million from this time a year ago mainly driven by working capital efficiencies and successful execution against our real estate monetization plan. In conclusion, I'd like to thank our BlueLinx team for their hard work and efforts. Your contributions certainly show an outstanding result we're able to share today. And, of course, a special thanks to our customers and suppliers for their continued partnership. And now Roche, we’d like to open it up for any questions we may have at this time.

[Operator Instructions] Your first question comes from the line of [indiscernible].

You've done a beautiful job of this, I understand your words and I'm listening to all this, but how are you able to come up with such wonderful quarter with your sales being down, I mean your cost of goods sold - that you've done a remarkable job here. It seems to me that you just gotten extremely efficient, your costs were down very nicely and your profit went up but your sales went down I mean that's just the remarkable piece. So what's - give me some more color as to how you did that that's like a miracle quarter?

We have - for the last year we've focused the organization on effective sales and so while we have not, and I think we’ve been pretty public about this and not really focused on growing the topline of the business. We've been much more focused on margin opportunities we have and making sure the sales that we have are efficient. So where it doesn't make sense for instance for us on the variable basis to profitably sell, we stopped doing that. And we've got the entire organization focused on variable contribution margin which includes investing in the team to help train and improve the performance that we have within the organization. And we're starting to see improvement - my view is as an organization, we have been emphasizing that but ultimately obviously we got to grow this business. And so we're starting I would say the pivot of the organization to start thinking about share growth as well without diluting the efforts that we have on incremental of variable margin for the organization.

Well really beautiful quarter, so congratulations. And my next follow-up is, are you finding any specific areas that are extremely attractive that you think will continue to have good follow through in sales or and the converse are you finding areas that are considerably weaker than you thought?

So more of the former than the latter - one of the things also that we did again it's just about two years or maybe a little over two years ago, is that we identify pretty quickly that we needed to have the sales leadership of the organization in the market. And so whereas before the strategy of the business was more centralized to try to take advantage of economies of scale. We've basically pushed out our leadership into the market. So I'm more as for example 2.5 years ago you’d find the general managers who had sales P&L responsibility primarily located in Atlanta or Denver now of our roughly 25 general managers which are couple are located there everybody else's in the market. So what we’ve done now is been able to identify at the local level opportunities that we have, as well as opportunity to transcend just a particular market and in those areas on a consolidated basis we’re making investments. So don’t want to give away some of the strategic work we’re working on as you can imagine, but there are areas that we are underpenetrated, in geographies or areas that we’re underpenetrated in products, and there are areas that we have underpenetrated in markets and that’s kind of a pivot that the organization starting to focus on now.

And your next question line of Mitchell Scott with CHOICE Equities.

Congratulations on a clean and profitable quarter nice work.

Thank you.

I was wondering just thinking about the topline the 5% growth if you could perhaps pass out or at least point us in the right direction on how volume and price contributed to that number?

So if you look at that, I'll start with structural maybe it’s a little bit more straightforward, but we were positive in those volume and price in those categories for us for the quarter. So we were pleased to see that. On the specialty side it gets a little bit harder to compare apples-to-oranges on volume as you add across the categories. So what I’ll share is overall price is up in our specialty product categories and as we just look at our top three categories individually, it's probably the easiest way to look at that we were also up in volume. So an overall we had some puts and calls that we like looking at those big categories and seeing them grow on both the volume and the price.

And thinking of about the existing distribution center work today and so the way they breakout single family housing starts on the census data. Is it fair to say we should really be focusing on south and the northeast regions and perhaps even just kind of aggregating those totals to think about your market growth rates?

Yes, that’s a great point. Actually I would say the Midwest as well, it's interesting because as you know we exited on the West we don't have a facility that is West of the Rockies right now. When you look at the quarter for example on single-family housing starts, the West was up north of 20%, the Northeast where we have a strong penetration was down for the quarter single family housing starts in the 13% range. So we look at it now, we've moved to looking at single family housing starts by - particular facilities to see how we’re doing and challenging ourselves to see how we are growing share relative to the local markets, but yes I would as you're looking at it I would focus on the Northeast, the Midwest and the South and really not consider the West.

And that was kind of why I asked, I mean I has seen that the Northeast came in kind of down middle single-digits for the quarter and even aggregating it in the South was only up 2.8. So good volume work there in the context of the market for whatever reasons may be a little underneath the national average. Is there anything in particular about the Northeast market that’s going on, that's causing the lag in national average or is it just comparability and whether as these things are always pretty volatile?

Yes, we asked that question a lot as you would imagine and hope I guess and we’re hearing as there is nothing fundamental that has changed in that overall market. Definitely the weather patterns relative to last year or certainly not as good. But I hate it to use weather as an excuse, but we don't think anything fundamentally has changed in the Northeast and our teams up there actually are very bullish on the back half of the year. So we'll see whether that materializes or not, but there's nothing that we see that fundamentally is changed.

I have asked you this before but if you could just kind of help us - help remind us the seasonality of your business obviously 1Q and 4Q are light and the meat of the season is 2Q and 3Q. If its first half to second half or perhaps you could call out which of those shorter quarters tends to be the lightest just any help on the kind of normal seasonality of the year would be helpful?

So in general as you said our business is seasonal and probably you gave so much color on year-over-year, I’m comparing quarter-to-quarter but the first-half of the year is slightly more sales in the back half. So you’d expect to see the back half of the year and this is looking over seven year period or so. You would see the back half of the year being lighter by 4% or 5% in the first half of the year. So that's just first half, second half but really again within the quarters it’s where you see the difference so as you look at the third and fourth quarter, you’ll see the third quarter is stronger than our fourth quarter. So in order first half is certainly a little bit stronger and then between third quarter and fourth quarter you’ll see increased sales in the third quarter versus the fourth quarter.

And that solves the sales I guess for the next one obviously the working capital will come down as we approach short of the winter, but I'm looking at it just to try to sort to gauge what the interest expense might be. I have got kind of a 21 million run rate in the first half given the mortgage balance and a lower revolver is pointing me towards something like an $18 million run rate for the second half. Is that directionally accurate?

Well, we don’t give forward-looking guidance so I would share that. We continue to work on making sure we have just the right amount of inventory we always want to stay in stock for the customer. And so year-over-year we did decrease our revolver balance by working on our efficiencies and that was offset slightly by interest rates as you know with the Fed reserve interest rate changes we had an increase. And so year-over-year the interest rates were up about 75 basis points but the working capital balance is in the ADL of balance itself was down on average throughout the quarter just a little bit less than $20 million. So we had some offsetting factors there but pleased with the efforts that we got there.

Mitch what I would say also just as we’ve talked about any sale of property could materially impact the way you're thinking about the interest cost going forward as well.

Last one from me and then I’ll hop off – especially gross margin number was very impressive I don’t recall seeing a number that has a record I am just kind of curious how you’re thinking about that and is that a number that can continue to go higher?

So I don’t think we know the answer whether it was a record or not and I would – just reiterate this organization is focused on continuous improvement. We view there's always opportunity to perform better and so the answer is yes. We’re going to continue to work very hard to drive cost down and where it make sense and we’re creating value for our customers and make sure that we're getting paid for that as well.

We look forward to see you and what you guys can to do as you start to turning your efforts a little more towards office events. So my congratulations and keep the work, thanks.

Your next question is from the line of Alan Weber with Robotti Company.

Mitch you made a comment about the consolidation, the wholesale distribution over the next few years and could just talk about that and what do you think it means to BlueLinx and how you can benefit?

So what we’ve seen is private equity has started to dip their toe into the wholesale distribution market with some of our competitors. So we’re seeing a couple of regional competitors that has been acquired from a private equity perspective. There has been some competitors that have been on the market and it is interestingly a space that if you look at the downturn there really wasn't a lot of competition that left the market. So there is capacity certainly from a square footage standpoint I think from a logistics perspective and so that creates opportunities. As it relates to BlueLinx and we’ve been talking about this internally again for about a year where we thought this was going to happen and then it materialized with some transactions that taken place in some shopping of companies that have taken place. And from our perspective it's twofold with the right balance sheet it certainly, potentially it creates opportunities to be positive and potentially to have – at least ability to utilize our equity as currency right so that's an opportunity. And then my view – we obviously had tremendous scale anyway in the marketplace and even if we're not an acquirer in the marketplace it gives us the opportunity to utilize capital to take advantage of opportunities that will likely take place with the disruption of consolidating competitors in the market. And whether that is investment in facilities, investment in products or working capital, investment in people that happened with the dislocation. We want to be ready so we’re trying to be and as good shape as possible be opportunistic and that really is the mission of the company.

And just as a follow on to that given kind of where your balance sheet is today versus where it was when you first came to the company. Can you just talk about kind of besides acquisitions kind of does it give you more opportunities with vendors, customers and like that could you do to average for your balance sheet is much more of strength today then obviously compared to what it was a few years ago?

The short answer is yes, it was - Susan and I spent a tremendous amount of time early on placating suppliers and vendors to make sure they understood we weren’t going anywhere and that would be in their long-term strategic interest to partner with us. We’re fortunate that we have some fantastic supply supporters from our vendor base and we certainly appreciate that and are growing and have - we’ll continue to develop relationships with them. But it creates opportunities obviously from a brand expansion opportunities, it creates opportunities as it relates to, for example, imports where you typically have an incremental working capital expense relative to domestic opportunities. It enables you to expand, it enables modest vertical integration capital investments. So where we are - and to be very clear, our leverage is not where we wanted to be and where we’re driving the organization to try to take it. But where we are relative to where we were is certainly much more enabling for the organization as we can take advantage of opportunities that we see now.

And then my last question is, do you know approximately what percent of your business is with the larger national pro-builders and like that?

The answer is we know that as you would hope we do, but we don't report on that. So if you're looking for - maybe let me answer a question that you maybe leading towards if that makes sense which is, the organization has a high disparity as it relates to its customer base. So if you look at any one customer of the organization, it is clearly less than double digits as it relates to the total revenue of the company. So maybe that's a way to help you think about it. So as we look at certainly a consolidation of our infinite lumber yards in the marketplace, it’s something that we think about and look at and create risk and opportunities for the organization. We’re not in a situation where we’re completely reliant on any particular customer.

That was just really more thinking longer term as that part of the distribution world consolidates what - obviously we’ve had some in last few years, and as they get integrated, what that means for BlueLinx going forward if there’s a continuation?

Well, the national consolidators are very important large customers for BlueLinx. And remain so even after they’re consolidated. So we would expect to do everything in our power to continue to add great value to them as customers for the company.

[Operator Instructions] And your next question comes from the line of [indiscernible].

I've a couple of questions. EBITDA for the first six months, I guess you reported they’re just north of 20 million. Are you willing to give us any sense or guide for kind of the full year where you'd expect EBITDA perhaps to come at?

As you might imagine, we think about that internally and how we can maximize but we don’t give forward looking guidance on that. So what we’re focused on is as you can see, driving those efficient sales where we get the incremental gross margin which really is being paid for that value that we provide to our customers. So the more we keep focusing on taking great care of our customers, it’s our intention to keep growing profitable sales. And through the result, we’ll continue to grow.

This is a little bit related. So maybe it’s hard to answer this as well. But I did see that the business consumed a lot of cash in the first six months. It looks like net cash used in operating activities was about $55 million or $54.5 which was up quite a bit from the same period last year. Could you give us maybe a little more detail on that? And I know that kind of tends to reverse in the back half of the year, but do you feel confident that that will in fact fully reverse towards the back half of the year?

Yes, that’s a great question. So specifically a portion of that was commodity price increases in the raw material good. So we certainly saw some of that throughout the quarter. And then Mitch also talked about the volatility of the commodity prices. And when we see that happening, sometimes customers take a pause or a deep breath. And so we believe we’ve got product in stock in our inventory that has consumed cash that it’s high quality inventory that will be spinning as we move forward in Q3. So we think that's a temporary thing, and we’ll be working thorough that this quarter and over the coming time. But you’ll see it was it was inventory really consuming a good amount of that cash.

I certainly look like that was the biggest one. And then I guess receivables was up significantly as well.

No, actually receivables was favorable. And if you want to, we can walk you through that. But we received the work on receivables.

What was free operating cash flow minus CapEx for the last year? Can you remind us how much that was?

It would just take me a few minutes if you want, I can get back to you on that one.

That’s okay. And then for Mitch probably or anybody, Cerberus Capital, how involved are they kind of day-to-day at this point?

They're not very involved at all. And candidly we haven't been for the last 18 months or 2 years. The good news is I think they’re obviously very bright people, shrewd investors. And I think as a management team, we’re pretty proud that after staying close to the business for the first several months that the new management team came on board, we think they developed confidence in the management team so that they felt like they could go focus on some other things. So from a board representation standpoint, we have a Director who is from Cerberus, we have a observer who is from Cerberus. And certainly, as you would expect to the extent they can help us from a capital market standpoint as Advisors and Directors. And, again, they’re very talented people. We lean on them.

And is there anything you can share or anything they have shared with you in terms of what their long term plan is for this particular investment events?

Another great question, I would encourage you to talk to them directly. We certainly can’t speak for Cerberus and their plans for the company.

And I know some private equity operations there is in fact they firm deadline. I mean, there is a time where they sort of have to sell and monetize their investments. Do you know if they have a firm deadline?

I don't know that. And again, I think that's something that would be better answered directly with Cerberus.

[Operator Instructions] At this time, there are no further questions. Ms. Poulos, you may begin.

Thanks Roche. I want to I guess just thank you all for the kind words for the quarter we have. And I just want to reiterate the fact that while we have improved, we got a long way to go. And so, again, I want to reiterate my appreciation to our team who have done tremendous work in improving this company, more importantly who understand that there’s tremendous work left ahead of us. So we’re going to work hard to continue to deliver results for you, and we certainly appreciate your continued interest in BlueLinx and look forward to sharing our third quarter results with you in a month ahead. So thanks very much, have a great day.

This concludes today's conference call. You may now disconnect at this time.