Good morning. My name is Adrian, and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx Second Quarter 2019 Investor Relations Conference Call. All lines have been placed on mute to prevent any background noise. [Operator instructions] I would now like to turn the call over to your host Mary Moll, Director of Investor Relations. Please go ahead.

Thank you, Adrian, and good morning, everyone. We appreciate you joining us for the BlueLinx 2019 second quarter earnings conference call. The earnings release can be found in the Investors section of our company's website at www.bluelinxco.com. In addition, at points throughout our commentary, we will be utilizing an Investor presentation. This presentation is also available on our website. 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, including statements about our future operations and financial performance. These statements are subject to risks and uncertainties than can 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 it over to Mitch.

Thanks, Mary, and good morning. I would like begin our call this morning with an overview of our operating performance for the quarter and the first half of the year. Susan will then review our financial performance, and I will finish our remarks with a discussion on our view for the remainder of 2019, the macroeconomic factors we are seeing throughout our industry and their likely impact to BlueLinx. We are pleased to confirm that the integration of Cedar Creek has been substantially completed. We achieved this key milestone ahead of schedule and well under our original budget. This was a result of our team's hard work over the past 15 months to combine two industry leaders. This challenging undertaking required a consolidation of systems and processes and assessment and plan to address numerous overlapping markets, and last, but certainly not least, the merging of two employee basis and cultures. I'm proud of the dedicated commitment by our associates to achieve this significant milestone. And we feel that the organization is well positioned to build on our strong market presence east of the Rockies. We have begun to see trends where our combined business platform is now benefiting BlueLinx and feel this will materialize further as our integration activities season over time. Going forward, we will communicate to investors about our business as a fully integrated entity. As we discussed during our first quarter call, we understood that we would be facing tough year-over-year comparisons in the second quarter due to the significantly higher commodity wood product prices that occurred in the second quarter of 2018. The year-over-year comparison was further amplified as second quarter 2019 commodity wood-based prices actually declined during the quarter. For the second quarter of 2019, net sales of $706 million were down approximately $187 million…

Thanks, Mitch, and good morning, everyone. I'll briefly review the financial results and then discuss our financial position. And for any questions, we welcome investors to take part in the Q&A following our prepared remarks. Starting with Slide 7. Net sales were $706 million compared to $893 million in the second quarter last year. As discussed by Mitch, sales were impacted from a softer-than-expected housing market, historical commodity deflation year-over-year and the short-term transaction-related sales dissynergies. Year-over-year comparisons were particularly challenging this quarter as commodity wood product prices reached their peak in the second quarter of 2018 and remained lower-than-normalized levels in the second quarter of 2019. We delivered gross profit of $94 million compared to $104 million in the prior year period. Gross margin improved 170 basis points to 13.3% from 11.6% from the prior year period, which included an acquisition-related inventory step-up charge of approximately $11 million. For the quarter, we had adjusted EBITDA of $25 million compared to $37 million. Cash on hand and excess availability under the ABL, as of quarter-end, was approximately $101 million, up $9 million from year-end 2018, which should provide ample liquidity to meet our working capital and other cash needs. Debt under our term loan and revolving credit facility was reduced by $113 million over the prior year period, as we continue to make significant our bank debt. Moving to Slide 8. In the first half of 2019, net sales totaled $1.3 billion, equal to the first half of 2018. Gross profit was $180 million compared to $159 million in the prior year period. Gross margin improved by 140 basis points to 13.4% from 11.9% from the prior year period. The prior year period includes the previously mentioned impact of the acquisition-related inventory step-up charge of $11 million. For the six…

Thanks, Susan. We would like to provide additional color today on our expectations for the second half of 2019 and into 2020 and beyond. Looking ahead to the second half of the year, as Susan mentioned, we have recently seen improvement in the gross margins of our Structural wood-based products. While we acknowledge that we certainly cannot predict commodity prices, we do believe that the historical decline we experienced over the last 12 months is not likely to repeat itself in the near-term. We expect that our Structural gross margins for the remainder of the year are likely to approach the more normalized averages we saw through 2016 and 2017. The gross margins we are seeing early in the third quarter support this view. We also anticipate that the improved gross margin we experienced in Specialty products in the second quarter will likely continue through the rest of the year. The good news is that even if we conservatively assume that single-family housing starts will be flat for the remainder of 2019 and that we do not regain any of the dissynergies we have experienced this year until 2020, as a result of these gross margin improvements, we still anticipate a stronger EBITDA performance in the second half of the year relative to the first half. In addition, we also expect to see efficiency gains in the second half of the year adding an additional $5 million to $8 million in operational cost savings when compared to the first half of 2019. As we look ahead into 2020 and beyond, we remain focused on the long-term opportunities BlueLinx affords its stakeholders. We have challenged our sales teams to grow our revenues from current levels by at least 10% in 2020 and another 10% in 2021. This growth, based on our…

[Operator Instructions] Your first question comes from the line of Alex Rygiel [B. Riley FBR].

Thank you. Good morning and congratulations on your debt reduction actions and the completions of the Cedar Creek integration.

Thank you, Alex.

Couple of questions. First, you're currently marketing five properties valued at $13 million, but you've got a total of 29 properties with a total value of $115 million. Have you started to do some work on additional properties over and above the five that are currently being marketed? In any way, you could kind of bracket what that opportunity is maybe in 2020 for further sales?

So we definitely have begun looking at alternatives that we have. Obviously, we've gotten pretty good at sale leasebacks on properties in areas that we anticipate staying for long period of time. So we are having some dialogue about that. We have not – we're not in a position right now to let you know what that actual gross amount potentially could be in 2020.

Fair enough. And then it's exciting that you've completed the integration and I suspect you're going to, at some point, sort of switch gears from a cost-cutting organization to a sales and market share and regain market share kind of organization. At what point do you think that kind of switch plays out as it's sort of happening today or should it happen maybe in early 2020?

Yes, so we actually kind of turned the page a couple of weeks ago. We had – in the last six weeks or so, we've had the Senior Regional Vice President and Senior Executive Leadership team together to talk about moving forward from a share gain perspective. In the last couple of weeks, we had 50-plus of our sales management leaders or General Managers come together in Atlanta and spend 2.5 days talking about opportunities that we have locally and on a consolidated basis to grow the top line of the business and establish clear-cut goal deployment execution plans by location to help drive the top line of the business. So organizationally, we've turned that page. We're focusing now on the business going forward. Obviously, we will continue to emphasize opportunities that we have from an efficiency perspective, but as we look at the time it takes to start realizing this year enhancements to the organization. It will take some time, and that's why we talked about a growth of 10% in 2020 and also talk about what we believe to be strong characteristics of the business even if we don't grow in the back half of this year, which, of course, is not what our target is. We will challenge the organization to continue to grow.

Obviously, your opportunities for organic growth are pretty significant, but longer term, obviously, additional M&A opportunities, I suspect, are very fruitful. How should we think about M&A in your future? I suspect it's more of later 2020 event, but can you comment on that? And is there any possibility of M&A that actually works towards deleveraging the organization as well?

Yes, so we're focused on deleveraging. We certainly will be opportunistic, if there appears to be an acquisition that makes sense for the company and is deleveraging at the same time. We clearly believe in the thesis that long-term the wholesale distribution channel is too fragmented, that there will be over the next several years less competitors in the marketplace. And we believe we will be one of the strongest, if not, the strongest supplier of wholesale distribution at that time. So it's clearly on our radar. We want to be very thoughtful about incremental capital coming into the system through debt or otherwise to pay for acquisitions. And right now we currently have the organization to continue to focus on the debt reduction that we have.

Thank you very much.

Okay. Thank you, Alex.

[Operator Instructions] The next question comes from the line of Kyle Mowery [GrizzlyRock Capital].

Good morning. And thank you for your time. I was hoping you could maybe go back through the second half thoughts and maybe expand a little bit – you went through it a little bit quick for me to jot it all down?

Going back through the expectations for the second half of the year, Kyle?

Correct.

Okay.

Yes. So I think what we were trying to give guidance towards is looking at for Structural margins, gross margins, more of what we saw in line of 2016 and 2017. From a Specialty perspective, the enhancements that we've seen and that were evidenced in the second quarter of 2019, we expect that to continue at a similar level. And then we talked about incremental operational efficiencies from the first half of another $5 million to $8 million. And that's making an assumption as it relates to the overall sales market being relatively flat.

So what sort of operational leverage could we think about? Obviously, it's positive. It starts to tick up in anyway, but is it – is there any numbers you can frame that out with?

Yes. So for sure, in the back half of the year, that $5 million to $8 million is part of what we expect from the efficiency standpoint. As far as growing the top line of the business, as you look at the SG&A as a component of the total cost and what that is from a fixed versus variable perspective, it tends to be depending on timing and quarters in the 50% of those cost range. And then you can have a nice healthy debate on, what your variable costs are? Are all variable? An example would be, when you typically think of freight costs as variable. If you have a trough that has 80% utilization and you take that trough from 80% to 95% utilization, that incremental 15% certainly is going to be a lot cheaper of what is a variable cost than the first 80% of the trough.

Excellent. Very helpful. And then one for Susan, just with respect to – I don't think the 10-Q is out yet. On Slide 11, you talk about the ABL, it's $369 million. Do you have the book value of the assets that are offset against that ABL, the $369 million?

We'll go through – I'll get that for you offline, Kyle, or I'll share that in time with everyone. But the receivables – if you think about it, we've got the receivables and the inventory – hang on here for a second, $366 million on inventory and $262 million on receivables. So if we add that together, it's $628 million or $630 million or so against that. So I mean, it's a nice healthy cushion over and above what we borrowed against it. So really lots of ample room there, over and above.

Great, thank you very much.

[Operator Instructions] We have a follow-up question from the line of Alex Rygiel [B. Riley FBR].

Thank you. You had some positive comments with regards to margin improvements in July. I believe it was in your Specialty segment. Could you comment on the overall strength of the business in July, relative to maybe trends in April, May and June?

Yes. So the overall enhancement we talked about was that we expect both the Specialty margins to stay at the level we saw in Q2, and we're seeing that certainly in July. But I think, specifically we talked about the Structural margins being in that range of 2016 and 2017 that we saw. So we're seeing that. Again, a lot of that has to do with a relative stabilization on commodity prices. We saw a decline again in commodity prices in the second quarter of 2019. And so what we're experiencing now is not as much predicated on demand but more of relative stability from an underlying cost standpoint.

And so just to add a little color to that, Alex, at the end of July, lumber was at $357, which was up about $21 from the end of the quarter and panels was $344, up modestly $6 from the end of the quarter. So as you think about our structural gross margin rates, recency of the costs for the last 30 to 60 days changes that gross margin trajectory. So as we reported 7.7% for Structural for the second quarter, with those increase in rates what we see is certainly an increase in that gross margin rates, and again, looking back to more historical or levels of experience in 2016 and 2017. When we went back and looked at those numbers, they ran anywhere from, I'll call it, 8.8% to 9.2%, would be kind of fairly typical levels over the course of time, and we're certainly enjoying those as we see margins stabilize.

Perfect. Thank you.

Sure.

[Operator Instructions] And there are no further questions.

Well, thanks, Adrienne. And thank you for your time today and your continued interest in BlueLinx. We certainly look forward to sharing our third quarter results with you in the months ahead. Have a great day.

This concludes today's call. You may now disconnect.