BlueLinx Holdings Inc. (BXC) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Mary, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2018 Investor Relations Call. All lines have been placed on mute to avoid any background noise. After the speakers’ remarks, there will be a question-and answer-session. [Operator Instructions] Thank you. I will now turn the call over to Mary Moll, Director of Investor Relations, Ms. Moll, you may begin.

Thank you, Mary, and good morning, everyone. We appreciate you joining us for the fourth quarter 2018 earnings conference call. The earnings release and presentation slides for this call can be found in the Investors 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’ll 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 certain risks and uncertainties that could 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 with 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, Mary, and good morning. We would like to update you today on our fourth quarter's performance, our continued efforts on integration, the recent amendment to our term loan, and what we are seeing in our markets in the first two months of the year. Before I dive into our business performance, I’d like to let you know that D. Wayne Trousdale will be leaving his fulltime role with BlueLinx in April. D. Wayne has agreed to continue collaborating with BlueLinx on a part-time basis for the next three years. As many of you know, D. was one of the founders of Cedar Creek and he has been instrumental in bringing our two companies together culturally, while also helping to realize the synergies we have achieved. D. Wayne has decided to spend more time with his family and an alternative business interest and I want to personally thank him on behalf of the entire BlueLinx organization for not only his contributions in the past, but also the value we know he will bring to our team in the years ahead. We are rapidly approaching the one-year anniversary of the Cedar Creek acquisition and are pleased with the progress of the integration. The initial enthusiasm we felt at the time of the announcement of the transaction has only increased, as we have seen firsthand the likely commercial benefits to the combined entity. We remain confident that we will exceed the promise, $50 million in synergies as we exit 2019, and we are pleased to once again reduce our estimate of the cost to achieve these synergies. Our new estimate of the cost associated with achieving our synergies is between $25 million and $30 million, well below our initial $40 million to $55 million range. In addition, we are firmly ahead of our initial integration schedule and expect most of the integration efforts associated with the synergies to be completed by the end of the third quarter. We have now consolidated 11 locations and expect to consolidate two additional locations by June. At that point, we will have five remaining overlap locations, which may require significant capital investment to consolidate. We will be assessing these remaining locations over the next several months but will likely not make any additional consolidations until at least 2020. No incremental synergies from the consolidation of these locations are included in our projected $50-plus-million of annual synergies, nor are any of the associated costs included in our cost to achieve these synergies. We are also ahead of pace in our ERP implementation. As of this past weekend, we now have 46 of our 62 locations on the same ERP platform and anticipate having all of our facilities on one ERP system by the end of June. As you would expect, it has been both, challenging and disruptive to drive this ERP implementation in a little over one year. We fully expect that having the business on one system will help propel continued efficiencies, but more importantly enable the organization to utilize harmonized information to deliver results in the months ahead. When faced with the headwinds we experienced in the fourth quarter, we accelerated our previously planned reduction in G&A costs. We now anticipate that synergies associated with G&A reductions will exceed $20 million annually, which is approximately $10 million higher than we reported during our Q3 earnings results. In order to take advantage of the combined strength of the larger BlueLinx, our relationships with some suppliers have necessarily been affected. While we are confident that our combination enhances our value to our supply base, we anticipated short-term disruptions in costs as we recast many of our commercial arrangements. We remain confident that BlueLinx provides an excellent distribution channel for our supplier partners, while enhancing their revenue potential with our approximately 700 associates who call on our customers every day. This strength coupled with our distribution excellence should enhance our sales synergies in the years ahead. While we made great progress in integrating Cedar Creek, the fourth quarter was another challenging period for two-step building products distributors. The continued deterioration in commodity panel and lumber prices once again negatively impacted our results. In fact, the decline from mid-summer through December was the worst price collapse that we have experienced in these markets in at least the last 20 years. The composite framing lumber index declined by about 41% from June through the end of the year, while the composite structural panel index dropped by approximately 36%. During the same period, OSB prices dropped by about 50%. This level of decline over 3 to 6-month period is highly unusual, and has not occurred in over two decades. And we certainly don't anticipate that this historic pricing collapse will repeat itself in the future. Susan will discuss the impact that this decline had on our fourth quarter performance in detail, but I do want to reiterate that the impact to our margins from the decline in commodity lumber and panel market was not due to speculation in these products. As we discussed during our last call, the inventory in our warehouses, which is typically 30 days or less for domestic commodity products, as well as our in-transit shipments have a higher cost and prevailing market prices in a rapidly declining price environment. This compresses our margins and significantly impacted us in the third and fourth quarters of 2018. Good news is that our gross margins in these products moved-up as we entered into 2019, which correlated with the apparent bottoming of pricing for lumber and panel commodity products towards the end of 2018. While we are fighting through the commodity collapse, we also saw softening in the single-family housing starts during the fourth quarter. Single-family housing starts declined approximately 10% in the fourth quarter of 2018, compared to 2017 levels. As you would expect, this slowdown in the industry impacted our volume as well. We remain bullish on the long-term prospects of single-family housing starts as the December 2018, seasonally average rate for single family housing starts was still 27% below the average annual start level over the last 58 years. As I alluded to earlier, one way we reacted quickly to the challenges we faced in the fourth quarter was by reducing non-essential costs and eliminating additional fixed salaries in the business. We are starting to see the impact of these cost reductions in the first quarter and will continue to aggressively manage all aspects of the business to help mitigate the impact of any volume declines we experienced. We also wanted to give you some color on what we are seeing in the markets through the first couple of months of this year. We appear to be gaining momentum in first half of January, but volume dropped as we entered into February, correlating with the stronger winter than we experienced in 2018. The good news is that I've been able to talk to many customers over the last 30 days and can report that there remains cautious optimism for 2019. While the expectations for growth are muted in the low to mid single-digit range for 2019, our lumber yard customers generally believe that the slow start to 2019 is primarily a result of weather patterns which have impacted performance relative to last year, rather than an inflection point in the momentum we have seen in single-family housing starts over the last few years. They are optimistic that the second quarter should improve as the country dries out and warms up. While the current headwinds of the slowdown in housing starts and short-term sales disintermediation will likely impact our short-term revenue performance, our synergy efforts will understandably help mitigate this effect. I can tell you that our organization is excited that we are very close to putting the integration behind us. The integrations of major companies are by their nature, intrinsically focused exercises. We are pleased that by the end of the summer, we expect of essentially integrated Cedar Creek. This will be an important milestone for BlueLinx as it will enable the organization to focus more clearly on our remaining key strategic objectives, utilizing our enhanced service proposition and product offering to ultimately grow market share, enhancing margins in our products and deleveraging the company. We think the recent amendment of our term loan was a good step in our efforts to reduce our leverage. Our lending partners supported our ability to enter into sale-leaseback arrangements of up to $50 million this year. This amount is in addition to an approximate $25 million of specifically identified real estate that we can sell through our consolidation efforts. We are actively pursuing both opportunities and hope to be able to provide you more definitive information regarding these deleveraging activities by the end of the second quarter. It's been a busy 8 months at BlueLinx. We have merged 2 executive leadership teams, established 10 new general managers in local markets across the country, converted 24 locations to a common ERP platform, consolidated 11 facilities, negotiated key new strategic supply partnerships, integrated our entire compensation and benefit programs, and stayed focused on our commitment to excellence in distribution and in customer service. It's truly been a great effort by the team. I’d like to personally thank our BlueLinx team for their hard work during this transition period. We clearly understand that we are just getting started, and that the best is yet to come. And now, I’d like to turn it over to Susan, who will provide details on our financial performance.

Thanks, Mitch, and good morning, everyone. It's a pleasure for me to speak with you today and to review our fourth quarter and full-year 2018 business results. As Mitch discussed, last year was a transformative year for BlueLinx with the acquisition of Cedar Creek in April 2018. We are excited about the great progress we have made to date with our integration efforts. We are ahead of schedule and exceeded our 2018 exit run rate synergy objective obtaining over $30 million in cost savings that we expect to realize in 2019. This is double our original 2018 end-of-year run rate estimate of $15 million. The integration results that we achieved in 2018 give us continued confidence that we will achieve at least $50 million in annual run rate synergies by the end of 2019. And now that we are further along in our integration actions, we also continue to refine our cost to achieve objectives. We now estimate the cost to achieve these synergies to be $25 million to $30 million, a range that is $15 million to $20 million lower than what we shared with you right after the acquisition, and an even tighter range than we shared with you in our third quarter call. As we've discussed on previous calls, one of the key attributes of combining our two legacy businesses is the improved financial flexibility that will support our growth and long-term deleveraging. Real estate remains a key strength of our business, a hidden asset on our balance sheet. We have 33 properties owned with an estimated market value of a $150 million to $160 million, and approximately four times the book value. That's why we are so pleased with our recent term loan amendment. In addition to our ability to sell certain specified properties, the amended facilities allows us to monetize upto $50 million of properties through sale leasebacks in 2019 and provide additional flexibility with our covenants and reporting requirements. We are now beginning to move forward with potential sale leaseback opportunities to monetize certain owned properties and deleverage the company. To the extent we enter into any sale leaseback, the first $30 million of these proceeds will pay down our term loan with any remainder reducing our ABL balance. I'm now pleased to share with you our financial results for the fourth quarter and full-year. Starting on page 10 in the presentation, I will touch on some highlights for the quarter. Net sales were $673 million, up $239 million or 55%. Pro forma net sales, which take into account the acquisition of Cedar Creek, as this occurred on January 1, 2017 were $673 million, down $104 million or 13% versus the same period last year. The volume decline, we experienced during the fourth quarter is in line with the 10% decline in single-family housing starts during the quarter. We delivered gross profit of $81 million, up $26 million over the same prior year period. Included in gross profit is the impact of commodity deflation. As Mitch shared, commodity wood prices continued to decline significantly during the fourth quarter, impacting gross profit by $14 million. The impact to gross profit was offset by the reversal of $5 million of the lower of cost or net realizable value reserve from the third quarter. Gross margin for this quarter was 12.1% when you add back the third quarter LC and RV reserve. For the quarter, we had positive adjusted EBITDA of $7 million. This is our 5th consecutive year of positive adjusted EBITDA in the fourth quarter. And we are pleased to share that we ended the fourth quarter with strong liquidity, averaging $132 million during the quarter in excess availability and cash on hand. As we move to page 11, we’ll highlight our full year 2018 performance. Net sales were $2.9 billion, up $1 billion or 58%. On a pro forma basis, net sales were $3.3 billion, up $27 million over the prior year. Full-year gross profit was $332 million, up $101 million. Commodity price deflation experienced in the second half of 2018 impacted gross profit by $26 million for the year, offset by the reversal of substantially all of the LC and RV that was booked in the third quarter. Full-year gross margin was 11.6%, which was further reduced by the one-time acquisition related inventory step-up charge of approximately $12 million. Excluding the acquisition-related inventory step-up charge, full-year gross margin was 12%. We reported a net loss of $48 million for the year, which included $38 million of one-time acquisition and stock appreciation right charges, as well as the previously mentioned one-time acquisition-related inventory step-up charge of approximately $12 million. In addition to this $50 million impact to net income, as part of our continuing strategy to de-risk pension liability, we negotiated a partial withdrawal from a multiemployer pension plan at four consolidated locations during the third quarter of 2018. This withdrawal had an additional $7 million reduction to net income for the year. The long-term benefits for our company greatly outweigh the accounting charge, as it mitigates the risk of future assessments from multiemployer pension plans, while having an immaterial impact on our annual cash pension obligation. We are pleased with the way we manage expenses in late 2018, especially during the macro environment that we experienced in the second half of the year. Given the embedded cost of integration on the P&L, it's a bit tricky to see but we’re working hard on creating a leaner operation while staying committed to our investment in sales personnel. With our core value of continuous improvement, we have found ways to run the business more efficiently together, especially in back office costs. Heading into 2019, we are well-positioned with our cost structure. Year-to-date adjusted EBITDA was $68 million, up $25 million over -- year-over-year. This is our highest full-year adjusted EBITDA since 2006. Pro forma adjusted EBITDA was $80 million. The historic decline in panel and lumber commodity prices and its resulting negative consolidated impact to our gross profit in the third and fourth quarters of approximately $26 million, significantly impacted our performance for the second half of 2018. Moving to page 12. On our third quarter earnings call, we discussed with you the impact of the decline in commodity prices on our gross margin and volumes. Page 12 indicates the impact this continued decline had in our fourth quarter performance. In addition to reducing net sales by approximately 11% for the quarter compared to 2017 levels, we saw commodity and lumber and panel sales volume in the fourth quarter remain correlated to the decline in single-family housing starts. The gross profit impact for the quarter was $14 million, we reversed $5 million from the LC and RV reserve we took at the end of the third quarter, which reduced the EBITDA impact to $9 million. We certainly do not anticipate this historical level of price decline, in our wood based commodities will occur again in the near future. Commodity prices have remained relatively stable since December and have recently begun to tick up, ending February at 3.74 and 3.77 for lumber and panels respectively. As we are now in March, we can see this relatively stable -- stability has helped impact and alleviate the gross margin pressure on commodities that we experienced in the back half of 2018. Moving to page 13. We think it's important to understand the potential of post-integration uses of cash basis on an annualized basis. As an illustration, if you assume $120 million in estimated annual adjusted EBITDA and then take into account the major estimated annual cash outlays, including interest and capital leases, CapEx, state taxes which remain a cash item and a few smaller items, it could be $50 million or more in cash available to deleverage the Company by paying down debt. This of course does not include changes in working capital, which are seasonally funded through our ABL. Consistent with our third quarter presentation, on page 14, we show you some ways to think about our annual cash generation attributes and our real estate and then see how either or both could be meaningful factors in deleveraging BlueLinx. Our term loan balance was $179 million at year-end, implying term loan leverage of only 1.5 times when including the $40 million in unrealized expected run rate synergies with our annual pro forma adjusted EBITDA. Our revolver balance was $333 million, as of the end of the fourth quarter 2018. Remember that our revolver supports our working capital and is the day-in, day-out part of our business, enabling us to serve our customers with supply chain financing. The revolver seasonally expands and contracts to the building seasons, and we secure with our high quality inventory and receivables. In fact, at the end of December, our inventory and receivables were approximately $200 million higher than the ABL balance. On page 15, our real estate remains a valuable asset that provides unrealized value on the balance sheet, as well as additional opportunities to delever the Company. Our unencumbered real estate was appraised by a national real estate appraisal firm near the end of 2017 to be worth $150 million to $160 million, which is approximately four times the book-value. In addition to sale-leaseback opportunities, our real-estate team is now proactively marketing seven properties that we exited in connection with our consolidations. We estimate the value of these properties to be disposed of approximately $25 million. These industrial properties are desirable for their location as we as access to rail service. The industrial property market remained strong and we have received substantial interest in these properties, including unsolicited offers. As a matter of fact, we are in active contract negotiations for our few properties and anticipate being able to update you regarding our progress with these potential sales in the second quarter. I would also like to highlight our tax assets. Due to our sale leasebacks that occurred during the first quarter of 2018, we currently have estimated taxable income of approximately $68 million to the fourth quarter. We anticipate using our federal NOLs to offset this income, leaving approximately $91 million in NOLs available for use in the future. As we think about our market opportunities for organic and inorganic growth, we are well-positioned to offset gains from ordinary income and real estate gains with our remaining federal NOLs. 2018 was a historical year for BlueLinx for many reasons but most importantly as we welcomed Cedar Creek at BlueLinx family. We exceeded our integration goals for 2018 on navigating through a challenging commodity market in the second half of the year. I would like to sincerely thank our entire BlueLinx team for their hard work and efforts. The results we share today are testament to your many contributions. And of course, special thanks throughout to our customers and suppliers for their continued partnership. We look forward to the year ahead. And now, Mary, we'd like to open it up for any questions that we may have at this time.

[Operator Instructions] Your first question is from the line of Alan Weber from Robotti Advisors. Your line is open.

Mitch, can you talk about -- you talked a little about I guess the issues with suppliers. Could you just kind of explain kind of where you are today regarding that?

Yes. So, we have -- from a synergy integration perspective, we had used third-party consultant group to help us strategically approach our supply base and our product categories. And we have gone through the first round of that. But it's an iterative process. So, as you would expect, particularly when we started the process which was in May and June of 2018, the commodity markets were very hot, it was difficult getting products and it was a difficult time also, as you would expect to negotiate potential opportunities. So, what we're doing now is we are going back through, on a product category basis, our supply chain, to look at opportunities to rationalize that. The other point I was alluding to was that in connection with some of the rationalizations and discussions that we've had, we definitely have had some disruption from a supply perspective. And so, we're realigning to a certain extent some of the brands that we have in the product categories that we have which is natural. You may recall from the outset when we talked about the acquisition, we intentionally did not include any sales synergies from bringing the companies together and that was because of the concern that in the process we may have supplier disruption as well as share disruption to local markets as we consolidate facilities, integrate the business and so forth. The confidence that we have as a leadership team as it relates to bringing the companies together and the long-term opportunity that -- the scale of this business and the breadth that we have and the sales effort that we have for the industry remains unbeatable. We feel very confident and that over the long-term what we're doing now will bode well for this company from a sales perspective.

And just a follow-up on that. Can you talk about the kind of the positive on sales synergies, when that could happen? And I guess, you can't really quantify, but just kind of talk about that.

We're starting to see some of that now. So, one of the things we were able to do was take existing product categories or brands that we had in either one of the legacy markets and push those to facilities or -- geographic territories that didn't have the opportunity to sell those products. So, that's happening now. We're getting some very good positive response in some of that product that's coming out. And that will, we believe, continue to propel relationships we have with key suppliers, the ability to continue to sell and grow both territories and volume for them. As far as a clear-cut timeframe, it's difficult to say exactly how long that takes. Any time you are trying to move new products into particular location and displace existing market share, it's an effort and typically takes some time.

Okay. And I guess, my last question is, basically, I mean -- when you look at the results in the last half of the year, what really -- I mean, obviously, the pro forma numbers are down, and you talk about volume and pricing. Is there any part of that that kind of surprised you? In other words, given those declines, which you obviously didn't know six months before the quarter began, anything in that actually surprised you or disappointed you?

Well, obviously, the way that the market moved was very disappointing. And one of the things, Alan, it's an interesting exercise to do, to look at our structural product sales in the back half of the year and then imply a typical, however you want to use, a two or three-year margin compared to what the margin was we saw there. And I think if you did that exercise, you would see clearly $20-plus-million of gross profit. Now, obviously, it's the past and the future may be different. But, I think from a true understanding of what happened, the commodity decline was very important and significant to us. I would say, in all candor, we clearly didn't hit a homerun in every one of the consolidations. And so, we had a long-term strategy, as we talked about as it related to some of the multi-employer plans from a pension perspective, which made us move pretty quickly in some locations that was challenging. So, I would say, I think, that long-term strategy was terrific, underappreciated probably some of the short-term implications of that. But, generally, it really feels like more of a story about what was going on in the market as about anything we've done. And I really feel good and the team should be proud of the way we put together an integration team that was fully dedicated, the speed in which we've integrated, which as you know is critical for the long-term benefits of an integration. So, generally, we feel really good about it. And I think the market has just created some headwinds for us that we did not anticipate.

Our next question is from the line of Tim Dougherty [ph] from [indiscernible]. The line is open.

Hey. Just wondering, since we've seen lumber bottom here kind of in November, December time period, can we sort of assume that this $13 million, $14 million a quarter of gross margin headwinds is kind of behind us, as we enter this year?

I think, the short answer is yes. From a gross margin standpoint, as we talk about it, it certainly was an anomaly that we hadn’t experienced since the last six months in two decades. So, we would expect that. And we're starting to see that [Technical Difficulty]

And then, do you have an investor presentation here, $13 million to $14 million kind of quarterly headwind on the commodity side? Is there any headwinds we've seen from commodity prices in the structural side of the business?

Yes, not especially. No, I mean, as we look at the specialty markets, we feel good about where they were in, they were not certainly no nowhere near the impact that [technical difficulty] standpoint. So, we're not seeing really much bleed over from the pure commodities into our specialty products.

[Operator Instructions] There are no further questions at this time. Speakers, I turn the call back over to you.

Okay. Well, thank you, Mary. We certainly appreciate your time and everyone's continued interest in BlueLinx. And we look forward to sharing our progress with you during our next call.

This concludes today's conference call. Thank you everyone for joining. You may now disconnect.