Ladies and gentlemen, thank you for standing by and welcome to the BlueLinx Third Quarter 2019 Investor Relations Call. At this time, all participants’ line are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Mary Moll, Director, Investor Relations. Thank you. Please go ahead ma'am.

Thank you, May, and good morning, everyone. We appreciate you joining us for the BlueLinx 2019 third quarter earnings conference call. The earnings release is posted in the Investors section of our website at www.bluelinxco.com. We will also be referring to a supplementary presentation as we go through the call. The presentation is available on our website as well. Joining us on the call today are Mitch Lewis, Chief Executive Officer; and Susan O'Farrell, Chief Financial Officer. Before we get started, I'd like to remind you that this presentation includes forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those reflected in the statements. Those risks and uncertainties are described in our earnings release and discussed in our filings with the SEC. Today's presentation also includes references to non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterpart in the presentation materials, the earnings release and in the Investors section of our website. With that, I'll turn the call over to Mitch.

Thanks, Mary, and good morning. Thank you for joining our third quarter 2019 earnings call. I'd like to begin this morning with a brief overview of the quarter and then Susan will review our financial performance. I will then finish our remarks and we'll open up the line for questions. Today we are reporting increased adjusted EBITDA during the quarter compared to Q3 2018. This resulted primarily from an improvement in gross margin, which was our highest quarterly gross margin since the Cedar Creek acquisition 18 months ago. In the third quarter, we generated adjusted EBITDA of $19 million compared to $16.6 million in Q3 2018. Gross margin for the quarter was 13.8%, an improvement of 50 basis points from the second quarter and a 310 basis point improvement from Q3 2018 when we were negatively impacted by a rapid decline in commodity prices. Our margin improvement is not just a commodity story. Our gross margin for Specialty products hit 16.2% in the third quarter compared to 15.1% in Q3 of 2018. The gross margin improvement resulted in gross profit, increasing $2 million from Q3 2018, despite the headwinds we experienced on the top line. We also continued to make great progress in reducing bank debt, which declined by $92 million from the third quarter of 2018 and $127 million since Q2 2018, the quarter in which we acquired Cedar Creek. We remain committed to continuing to delever BlueLinx in the months ahead. Net sales of $679 million for the quarter was again significantly impacted by the deflationary environment of commodity prices, with a substantially lower price environment as compared to the third quarter of 2018. Composite lumber prices at the end of July were 31% lower than July 2018 and ended the quarter still 15% below September 2018 levels.…

Thanks, Mitch, and good morning, everyone. I'll briefly review the financial results and our financial position. Starting with slide 6. Net sales were $679 million compared to $860 million in the third quarter of last year. As Mitch discussed net sales were impacted primarily by lower commodity prices year-over-year, the significant decline in siding product sales due to the loss of a key product brand and lingering transaction-related sales dis-synergies in overlap markets. While the difference in commodity price levels narrowed from the second quarter, overall prices were lower for the quarter with lumber prices roughly averaging 15% lower and panel prices averaging 30% lower than the third quarter of last year. Despite the lower levels of sales, we delivered higher gross profit on a year-over-year basis, generating $94 million versus $92 million, resulting in a gross margin of 13.8% versus 10.7%, an improvement of 310 basis points. For the third quarter, we had adjusted EBITDA of $19 million compared to $16.6 million last year, an increase of approximately 14.5%. Cash on hand and excess availability under the ABL, averaged $101 million during the third quarter, providing ample liquidity to meet our working capital and other cash needs. Debt under our term-loan and revolving credit facility was reduced by $92 million over the prior year period. Moving to slide 7. In the first nine months of 2019, net sales totaled $2 billion, compared to $2.2 billion generated in the first nine months of 2018. Despite lower sales, we delivered gross profit for the first nine months of $274 million, up $23 million or 9.2% over the prior year period. For the nine-month period, we had adjusted EBITDA of $61 million compared to $62 million in the prior year period. Turning to slides 8 and 9. This slide illustrates the strides…

Thanks, Susan. In closing, I think it's important to reiterate the optimism that we have for the future of BlueLinx and the tremendous opportunity that remains for the company in the months ahead as a clear leader in the wholesale distribution industry. The investment thesis for the acquisition of Cedar Creek has not changed. We have one of the largest product assortments and most comprehensive geographic footprint among our competitors. We still have significant upside in leveraging our operating position to effectively reduce our cost platform to provide an even more efficient solution for our customer and supplier partners. And we clearly remain well positioned to be the consolidation leader in a highly fragmented market. However first things first, to be clear our immediate focus is on regaining the market share we lost in connection with the acquisition while continuing to delever the company. The timing of the anticipated benefits of the Cedar Creek acquisition have been delayed, but the investment thesis and the business enhancement opportunities have not changed. While we certainly anticipated a quicker improvement than what we've seen our resolve and conviction remains steadfast. We will grow our market share and we will realize the benefits we have committed to. And now May we'd like to open it up for any questions we may have.

[Operator Instructions] Your first question is from the line of Alex Rygiel from FBR.

Thank you. Good morning Mitch and Susan.

Good morning.

A couple of quick questions. If you could help us to think about revenue -- organic revenue over the next couple of quarters understanding that September and October you saw sort of 3% volume decline in overlapping markets. What do you think market growth was over that period of time? And where do you think market growth is going over the next 6 to 12 months? And how your internal actions can take advantage of that and start to regain market share?

Well Alex as mentioned, we clearly believe and are seeing evidence of the fact that we've fixed the problems we had in the overlap markets and that we -- the market share loss we saw is as I mentioned abated. We're working hard to regain that market share and it's taking time. But again the last couple of months have -- are very optimistic evidence that we're making good progress. Obviously, October is just in. We haven't seen single-family housing starts. So how we measure our performance against how the overall market does is challenging. I can tell you, we have -- as I mentioned streamlined the organizational structure put in a significant methodology as far as processes as it relates to the sales force. I alluded to the fact that we have local market strategies and targets that we're having biweekly calls at the local level, monthly calls in a more senior level to drive activity. In addition, of course we're emphasizing areas where we do have competitive advantages like national accounts, multi-family opportunities, specific product categories. So we're making a lot of progress. What we can tell you is exactly what that will amount to. And we're not in a position unfortunately to do that at this time. As I mentioned on the call, we feel comfortable saying that this 10% market share growth that we're going to be getting that in the back half of the year. And I can tell you there are many opportunities that we're seeing that are starting to take hold that we think will bear fruit in 2020 and beyond.

That's helpful. And Susan maybe coming back to SG&A a little bit, I appreciate the importance of customer service and agree with you on that front. Can you help us to think about that line item kind of going forward, beyond kind of the fourth quarter? Is this sort of a new kind of step back up? Or these expenses that -- are a little bit more sort of onetime in nature but will kind of continue for two quarters?

Sure. Well some of the costs were temporary labor which means we can readily take that out as we improve the operations. And so the first thing has to be just making sure, we deliver outstanding customer service. So we're able to take those costs out as we improve. So we're happy with that. I did call out a pension expense for a partial withdrawal from a multi-employer pension. To be clear, that's in essence an accounting calculation for the net present value of payments over the future cost of time. It's very small on a cash basis, but we don't expect that to continue. So that would be something that came up in the quarter that we wouldn't expect to see in future quarters. There's always actuarial life tables suggesting that we would not consider that to be continuing. So, we'll just continue to work on lean operations on the warehouses and take cost out as we can. And I think would then see us returning more historical levels which are a lower rate than we experienced this quarter.

And Alex I would also say the bias of how we're running the business strategically as the top line right now. And an example would be where we've delayed an opportunity to lower SG&A cost would be in a route optimization where we may have deficient routes running between two facilities. Now, we started moving down that path to garner those costs. What happens is it's potentially disruptive to customers. They're getting it from a new truck driver for example. The phone call they may have made historically with the long-term relationship from a particular warehouse manager that person's changed now. What we've elected to do is not put the topline of the business at risk for the benefit of cost savings. Right now we want to make sure we square up our position in the marketplace and we garner back market share. So, that will impact some of the timing. And we certainly, as I mentioned, have a significant amount of confidence in our ability to continue to operate this business more efficiently. And we sure would expect certainly at the volume levels we have now not to have the SG&A levels. And we will take advantage of increased opportunities we have from an efficiency perspective.

And lastly as it relates to real estate sales. You've got three properties in the market for $10 million. What do you anticipate the timeline of monetizing those will be? And then you've got another 28 properties remaining valued at $100 million. What do you think the time line for that opportunity could be? Obviously, it's greater I suspect.

Well, we can't -- I mean I can tell you we're in active discussions and there's a lot of marketing going on as it relates to properties and the continued real estate monetization that we've talked about. Unfortunately, we're not in a position to elaborate on the timing. I mean I think before when we amended earlier in the year the term loan to enable us to do sale leasebacks, we obviously did that with a purpose in mind. We similarly have done that with this term loan. And so obviously as we talked about it is the intent to delever this company. And the real estate remains a tremendous asset for the company to enable us to do that.

Perfect. Thank you very much.

Okay. Thank you.

Your next question is from the line of Brett Hendrickson from Nokomis Capital. Your line is now open.

Hey guys. I think you just answered most of my questions. Susan I just want to confirm so the pension expense, the extra pension expense that's the same thing that we see in the press release from the multi-employer pension withdrawal of $954,000?

Yes, very same thing. So, while it shows as $1 million of expense, if you think about it, it's about $75,000 a year in cash. So, it's very de minimis.

And I guess just maybe you can further expound. So, I understand the need to not try and harvest synergies too fast and disrupt customers. SG&A was still SG&A from operations even when I kind of exclude some of these things you mentioned in the press release during this call. It was still higher than I thought. The route optimization is one thing. I guess were there other things that caused SG&A to be higher in the quarter and here what you guided to for Q4?

Yes. So, Brett examples of what caused it to be higher. I mean as I'm sure you know and have heard in the industry drivers remain a challenge for us. So, for example, we spent more on third-party freight which is a function of not having the amount of drivers we needed. During the course of the quarter, we actually had two dedicated people to do nothing, but driver recruiting from a company standpoint. And so by the end of the quarter relative to the beginning of the quarter, we made really good progress on the drivers. But that's a cost that we did not want to disrupt the customer service aspects of the business so we paid incrementally more money to outsource something that we have historically done internally. That would be an example. From a sales standpoint, we put in place to help motivate and get the organization aligned around the movement towards focusing on the topline, a new incentive program that we just put in place in July of the year that incented team members for back half improvement over the first half. So there's some costs associated with that. I mentioned investments on the sales side as well related to where we feel like we have opportunities to drive performance in national accounts certain product categories that we brought in for example a Vice President of Structural Products where we've segregated now the Specialty and Structural Products where we feel like we have better emphasis and focus both with our suppliers and with the sales team on both of those product categories to help drive growth in both of the product categories. So, those will be examples of other places for example we had higher SG&A cost.

Okay, great. We'll follow-up more offline. Thanks Mitch.

Okay, sure. Thank you.

Your next question is from the line of Peter Van Roden from Durant Partners. Your line is now open.

Hi guys.

Hey Peter.

Good morning.

Just a quick question on the amendment and the land sales. So, in the last amendment, I think you put a cap on the amount of properties you can sell. And I was trying to get through that language and I didn't really understand it. So, if you could just help us there? That's my first question.

Yes, on the amendment we just did, there's no cap on our real estate sales. So, we amended it so that we can do sale leasebacks or sell the property to pay down the bank debt.

Okay. And my second question is it looks like you took your covenants up again. But there's a pretty material step-down between Q3 and Q4. I think covenants go from like 7.5 times to 6.5 or 6.25 times. How do we get there from here?

Yes. So, we have a lot of confidence in our ability to reduce our bank debt, which is part of the strategy from a delevering standpoint. And we have a lot of confidence of our ability to enhance our EBITDA. And obviously those – that's the numerator and the denominator. And so when we put in place the new covenants, we intentionally put in place covenants that we thought would enable us to focus on running the business and deleveraging the company. And so we feel really good. We feel like we have a great partner on the term loan and HPS and they've worked with us very well. And so we wanted to put in place something so we ultimately do not want to have to talk about. Covenants we're worried about covenants as we operate our business day-to-day. The final thing, I would say is, we didn't talk about it. But from a working capital perspective, we feel like we still have opportunities to become more efficient. As it relates to that, obviously there's variability in that and seasonality in that. But one of the value propositions of bringing the companies together and the scale that we have is to be very efficient as it relates to that. Again, we're just being very careful and thoughtful about even inventory reductions that may negatively impact a perception from a customer as the emphasis of the company is on the top line of the business.

Got it. Okay. Thank you.

Okay. Thank you very much.

[Operator Instructions] Next is from the line of Kevin Leary from Hallador. Your line is now open.

Good morning, guys. Thanks for taking the question. I wanted to ask about gross margins. So, it was good to see the continued step-up in Structural. But from a high level can you give us some color about how much of the gross margin improvement in the third quarter of this year was due to commodity deflation?

So, as we think about gross margin on the Structural side the way that usually flows is really the moving – the weighted moving average of inventory cost. So it's really about the recency versus the year-over-year change. So when we talk about the top line the year-over-year change is really important to track and that's why we called it out to you so you could follow that. But as it relates to the gross margin, it's more of the recent costs of the products that we're buying in that drive the realizations of those gross margins. And so you can see the numbers tracking. It's been a relatively flat slightly undulating over the second quarter to third quarter. So it's relatively flat and that's gotten us back to those historical levels closer to that 9%.

And Kevin when you see – to Susan's point when you see a rapid escalation or a decline in commodity prices last year is a great example, right? At the – kind of in the July time frame of Q3 and through Q4 that's when the pricing drops so quickly, it's hard to capture that in the marketplace. Similarly, if you have just an incredible run-up, there tends to be some short-term benefit. When there's general stability in the market, we generally see kind of what we've seen from a structural standpoint. And Susan has talked to the point that, if you look at 2016 to 2017 it tends to be in the 8.8% to 9.2% range, which is kind of how we think about it more in a normalized market. But as we look at the third quarter in particular, shouldn't say there was a particular significant benefit or hurt – or anything that hurt us from rapid changes, one way or other in the commodity markets.

Okay. I mean, it's a little surprising just given the level or the magnitude of volatility in commodities. We track a number of distributors. And as you say, it's hard to catch-up on the way up. But there's naturally some kind of benefit on the way down.

Yeah. Actually for us it's not the case. So, if you think about – if you think about pick your number, if you had 30 days of inventory and you have a rapid decline we're in a situation where we have higher cost inventory. But because it's a commodity a lot of times you have smaller purchasers, including our customers that can find another route maybe to bring in the product. And they'll take more volume than they otherwise would at a lower cost. So, when you are sitting in a rapid decline situation, we're sitting on a higher cost inventory than we purchased prior. And then our customers have options, so we have to match that in the marketplace. So we're moving higher cost inventory at lower market costs. It maybe for distributors and there certainly are some that have for example 30-day averages on the price side with their customers and that would be like a one-step distributor as an example or pro dealer, they may have them benefits when the price is going down, because they have a fixed sell price. We don't – we have very little fixed sale prices. It's pretty much kind of every day on the commodities. So we don't get a benefit of an actual fixed sale price in that situation.

Got it. Thanks.

[Operator Instructions] There are no questions at this time. Presenters please continue.

Okay. Thanks, May. Thank you for joining us. We certainly appreciate your continued interest and support of BlueLinx. We look forward to speaking with you in the future to discuss our fourth quarter and year-end results. Have a great day.

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.