BlueLinx Holdings Inc. (BXC) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the BlueLinx Second Quarter 2020 Earnings Presentation. [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 of Investor Relations. Thank you. Please go ahead, ma’am.

Thank you, and good morning, everyone. We appreciate you joining us for the BlueLinx 2020 second 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 Kelly Janzen, 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 counterparts 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. The second quarter of 2020 has been one of the most challenging periods in our history, both professionally as well as in our personal lives. While we’ll be spending time this morning discussing the business results for BlueLinx in the second quarter, it’s not lost on us the emotional and physical toll that COVID-19 pandemic has caused to our nation and the world. Our thoughts are with all of those who have been affected. We also want to extend special thanks and our deepest gratitude to our country’s health care professionals, first responders and all of those on the front lines who are putting their lives at risk every day to serve and protect our communities impacted by COVID-19. We truly appreciate their service and sacrifice. As we discussed briefly on our last call, by late February, following the initial news of the COVID-19 outbreak and the public health crisis it posed, we had organized ourselves to respond to the pandemic. Though much of our nation entered into shelter-in-place mandates beginning in late March and continuing through April and May, our business was deemed essential in every state that we operate. We quickly developed a company-wide plan to safely continue operations. We established new protocols regarding health, sanitation and safety in order to ensure that we prioritize our associates’ health and safety with respect to all business decisions. With the cooperation and tremendous effort of our associates, we have been able to deliver outstanding service to our customers with minimal business disruption during this challenging time. These efforts translated into strong results for the second quarter, delivering net sales of $699 million and total adjusted EBITDA of $31 million, a 24% improvement from 2019 levels. We also generated a record gross margin of 14.4% driven by a strong performance in both our Structural and Specialty product categories. Our second quarter results reflect dramatically shifting market demand as the quarter progressed. We began experiencing weakness in our sales volume towards the end of March due to the onset of lockdown restrictions and the vast uncertainty that permeated the country at that time. But as we noted in our earnings call in May, we were pleasantly surprised to see our sales volumes start to improve in late April. As we progressed into May and June, sales volume continued to improve across our business, with the housing industry staging a remarkable reversal from earlier predictions and indicators, while the repair and remodeling markets also contributed to what became an overall good market demand environment. Our results were also supported by the continued execution of our sales strategies and processes that we began implementing in the back half of 2019. Ultimately, we were able to gain momentum to the point that our overall sales volume during the second quarter were relatively consistent with last year. And the momentum we experienced exiting the quarter was certainly stronger than the business activity levels we saw at the same time in 2019. The wood-based commodity market also experienced a dramatic improvement as the quarter progressed. After the lumber and panel markets bottomed out in early April following the onset of the pandemic, prices reversed rapidly as demand for wood products was stronger than anticipated, while market capacity had been reduced. Kelly will discuss commodity prices in more detail, but while positive, the overall impact they had on our revenue during the quarter was only around $14 million or about 2% of our second quarter’s net sales. Our top financial priority as the pandemic began was closely managing the liquidity of the business. We reassigned associates to work on centralized teams, driving and monitoring all aspects of our working capital. We also established robust processes to authorize and closely scrutinize all credit, inventory procurement and routine operational expenditures. Finally, we immediately instituted daily senior leadership meetings where we reviewed all aspects of our working capital, and these measures worked. Inventory is a great example, as it decreased by $65 million since the end of the first quarter. This positively impacted our bank debt as our ABL balance was reduced by $47 million compared to the second quarter of 2019, and we ended the quarter with $138 million in excess availability and cash on hand. In addition to our efforts to enhance liquidity, we continued our relentless focus on operational improvement. In the second half of last year, we streamlined our regional structure, giving us the ability to react quickly and consistently to changes in the market. Our regional operations directors are staying close to all aspects of our logistics costs at the branch level. And by instituting a national operational center of excellence last year, we created capability within the organization to provide oversight around the areas such as fleet optimization and warehouse efficiency. These efforts, combined with disciplined cost management actions that are being driven by daily operational metrics and review at the facility level, have resulted in improvements in our overall SG&A performance. We’re also making good progress with our growth initiatives. We continue to develop locally driven strategic sales opportunities designed to increase volume in our respective local markets. We regularly monitor these initiatives and measure performance on a local and aggregate basis to ensure execution. And we’re investing in executive sales leadership to help drive these initiatives and hold our teams accountable. For example, we recently reorganized our national accounts team so that we’ll have two dedicated leaders, one for our pro dealers, specialty distributors and co-ops and the other to focus on our home center customers. The momentum from these initiatives is becoming visible as we have already seen improvements in July sales volume year-over-year. In the coming months, we’ll remain cautious as the pandemic continues, with our key focus centered around maintaining solid liquidity while emphasizing growth and operational efficiency. Our sales teams are laser-focused on executing on their local market strategies to drive increased sales volume and revenue in the second half of 2020. In addition, we still have tremendous opportunity for operational efficiency through process improvements and route optimization. The pandemic has been a catalyst for us to examine and then reexamine every aspect of how we operate and measure results. Our goal is to drive sustainable cost reduction strategies so that its impact will benefit the business for years to come. BlueLinx has one of the largest product assortments and comprehensive geographic footprints among our competitors, enabling us to provide solutions for our customers and supplier partners. The breadth of our product offering, coupled with our strong service model, has been an asset to many of our customers during the pandemic as they have relied on us to help them efficiently manage their working capital. This is just one of the many ways we generate value. Our long-standing customer relationships have always been a competitive advantage that we’ve enjoyed, and the strength of these close relationships with key customers at national and local levels has never been more evident than during this crisis. For that, we are thankful. We have also received strong support from our suppliers and continue to take steps to enhance those relationships. We work with our suppliers every day to offer deep sales coverage across our territories and provide product expertise to help educate sales teams and customers. We have continued offering these services throughout the pandemic and are working with our suppliers to add value and expand their market share for our mutual benefit. The strength and development of these relationships and the expansion of marquee brands is a key component of our overall growth strategy. As evidenced by our second quarter results, the current market conditions for BlueLinx have proven resilient. Single-family housing starts, which have historically held a strong correlation with our business, declined dramatically in April as a result of the pandemic, but recovered by June, which was only modestly down compared to 2019 levels. Even with the improving trend, single-family housing starts were still down 13% for the quarter compared to last year. And as of June, seasonally adjusted single-family housing starts remain well below the 50-year historical average. The Builders Confidence Index, after experiencing a COVID-19-driven 42-point decline from March to April, has also rebounded sharply to 72 in July, reflecting the change in sentiment that occurred over this relatively short period of time. Scores above 50 indicate that builders generally view conditions as favorable. So we currently have clear momentum in the single-family housing market. Unfortunately, the overall strength for the next several months and into 2021 is not as clear. We’re still facing double-digit unemployment levels and do not know what toll the pandemic will ultimately have on the broader economy. Historically, wages and unemployment have been key drivers to the health of the overall U.S. housing market, and there is concern that these factors may outweigh the current demand drivers in the industry. There also remain constraints on labor availability and the risk that escalating costs of raw materials will negatively impact housing affordability. Additionally, the recent spike in COVID-19 cases across the country could limit or slow down the opening of local economies. While we remain cautious, we still believe there’s reason for optimism. Stay-at-home orders and the movement to remote working could drive the acceleration of deurbanization as professionals and families migrate to less populated areas. Movement in consumer spending from travel and entertainment to new home construction and home improvement would also benefit the building products industry. With remote working potentially becoming a more permanent solution for many companies, consumers may also desire more square footage that is provided by a house. On the supply side, near-term inventory shortages coupled with an aging housing stock, may further drive the need for new housing construction in the future. We’re certainly seeing evidence of this optimism in the month of July. Our end markets were relatively robust even as we work through intermittent supply chain disruptions due to increased demand and pandemic-related closures and constraints. And our structural product commodity markets have remained red hot. With commodities, we clearly understand that what goes up eventually must come down. So we initiated and have executed on a game plan to help mitigate the inevitable decline in commodity pricing. That game plan includes an active, centralized management of our purchasing and inventory levels as well as a movement to less price-sensitive procurement policies, such as contract-based pricing and increasing consigned inventory in which our costs are determined very close to the time when we ship products to our customers. While we are seeing continued evidence of strength in our markets, we simply have to acknowledge that these are unprecedented times. I’m not smart enough nor pression enough to predict what the future holds. What I can talk to you about is BlueLinx and how we’ve changed. The second quarter numbers and the trend line within the quarter tell a wonderful story. And as I mentioned, we appear to be off to a very good early start in the third quarter. But that’s only a small part of the story. What I believe is most important to understand as a stakeholder is that this pandemic has forced us to quickly make a large number of operational, strategic and tactical decisions that we might not have otherwise made. The result of these changes is that in virtually every aspect of our business, we are a much better company today than we were just 120 days ago. Many companies have survived the pandemic. Indeed, many have flourished. We simply got better. Circumstances required us to accelerate our pace of change, and we met that challenge. And none of this would have been accomplished without our incredible associates who have remained focused, engaged and dedicated during this extraordinary time. Every day, without fail, I marvel at the resilience of our team, and I’m very honored to be here to represent them. And now I’d like to turn it over to Kelly.

Thank you, Mitch, and good morning to everyone that is with us on the call today. I will now briefly review the financial performance for the second quarter. We were very pleased with the second quarter’s results, especially considering the COVID-19 impact we saw in March and the first half of April. We reported record gross margin of 14.4%, which is an improvement of 110 basis points year-over-year and a 35 basis point higher than the first quarter. We also reported adjusted EBITDA of $31 million as a result of the higher margin rate, an improvement of $6 million year-over-year. This led to $51 million of adjusted EBITDA in the first half of the year in a market that has certainly been challenged by the pandemic. In addition, strong cash generation and working capital management provide cash on hand and excess availability under the ABL of approximately $138 million at the end of the quarter and provided cash flow from operating activities of $72 million. On Page 9, you will see that net sales for the quarter were $699 million compared to $706 million for the same period last year. Net sales increased $9 million year-over-year when considering the $16 million comparative effect of the discontinued siding line. This is the last quarter that the comparative effect will be significant enough to highlight. SG&A for the quarter was $70 million, which was 10% of net sales and consistent with last year. Reductions in SG&A of approximately $4 million compared to last year resulted from actions taken throughout the quarter to reduce fixed costs such as labor reductions, limiting discretionary spend and improvements in operational efficiencies. We expect that most of these reductions will be sustainable as our continued scrutiny of all expenditures is a top priority. However, some will depend upon the extent of the pandemic’s impact on our future operating results. These decreases were offset by an increase in annual incentive expense. Our incentive plan is based on a combination of adjusted EBITDA and return on working capital, both of which are higher this year. We generated positive net income for the quarter of $7 million. This is an increase of $8 million when considering the gains from sales of real estate of approximately $10 million that we recognized last year and the effect of other one-time items. On Slide 10, you will see that the second quarter began with April commodity prices below average, coming off a steep decline that started in mid-March. Prices continued to increase in May and were above their five-year averages by the end of June. This rebound can be attributed to increased demand as well as low inventory in the supply chain. In fact, we continue to see increases through July with current average composite pricing of $558 per thousand board feet for lumber and $552 per thousand board feet for panels. The improvement in the market throughout the quarter contributed to net sales that were relatively consistent with prior year and to our improved overall gross margin. On Page 11, you will also see that gross margin was strong in both our Structural and Specialty products segments. Our Structural segment, which is most impacted by commodity price movements, recorded gross margin of 9.3%, up 160 basis points year-over-year. While this was a strong improvement compared to Q2 of 2019, the improvement was not as significant when compared to the long-term average, which is typically in the 8% to 9% range. Our Specialty products also had an improved gross margin, recording 17.3%, which is an increase of 140 basis points compared to last year’s margin rate of 15.9% and an increase of 90 basis points from the first quarter. Moving to Slide 12. Concerns regarding the potential impact the pandemic could have on liquidity pushed us to accelerate changes towards the end of the first quarter and how we manage working capital. We were able to maintain this discipline throughout the second quarter and plan to sustain it long term. On this slide, you will see that operating working capital improved by $27 million year-over-year, and inventory decreased by $65 million since the end of the first quarter. Through an increased focus on collections, days sales outstanding improved by over two days compared to last year, and we ended the quarter with our trade receivables almost 92% current. On Slide 13, our borrowings under the ABL were $322 million at quarter end compared to $369 million for the same quarter last year. Our term loan balance was $69 million at quarter end compared to $147 million at the second quarter end last year. Debt under our term loan and revolving credit facility was reduced by $125 million over the prior year period. It’s also worth noting that the reduction in bank debt contributed to an overall decrease in our interest expense of approximately $2 million year-over-year. As you may recall, early in the pandemic, we were able to prepare for a downside scenario when we amended, at no cost to the company, the minimum term loan leverage ratio to 8.75 for both the second and third quarters of 2020. We ended the second quarter at 4.86, well below the required ratio. Even with this significant cushion, we will continue to look for opportunities to pay down the term loan to below $45 million, which would eliminate the levered ratio requirement in its entirety. One vehicle for debt reduction to pay down the term loan is the continued monetization of our owned real estate, which is valued at approximately $40 million. While activity slowed early in the quarter due to uncertainties related to COVID-19, industrial real estate markets are recovering. 3 of the 13 remaining owned properties valued at approximately $8 million are considered dark properties and are available for sale, while the other 10 are still operating. We are also actively pursuing potential additional sale leasebacks of certain properties and will keep you updated on our progress. The past quarter was certainly an unusual first full quarter for me, but I am very proud of the BlueLinx team and our accomplishments in an incredibly challenging environment. While there is still uncertainty as to future impacts that the pandemic may bring, we feel that we are better prepared than we have ever been to manage through potential challenges. Our improved liquidity, fixed cost structure and operational discipline provide a stronger platform to execute on our financial and business objectives in the near term. Now I’d like to open the line for any questions.

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

Thank you. Good morning and congratulations on a very nice quarter. Could you talk a little bit about the components of free cash flow, how you’re thinking about them and maybe offer up some guidance for 2020 and how you think about free cash flow?

Yes. So what I can talk to you about is the free cash flow that we had for the quarter. We saw a significant improvement as it related to just gross margin improvement. So those earnings really drove a lot of that. And in addition, we had some improvement coming out of the working capital, as we said that improvement in inventory really drove a lot of that. We had about $43 million of improvement in the cash flow as it relates to bringing that off the balance sheet. So those two are the main drivers of cash flow. We obviously still have a lot – a long way to go as it relates to understanding what next year would look like. So unfortunately, I don’t really have an outlook for you at that – this time, but hopefully, as we continue to generate stronger earnings, if that’s possible in the next few months, we would start to see an improvement and then maybe we can get a better view.

And then as it relates to price and volume, can you help us to understand how that played out in 2Q and how that might play out in the second half? And maybe Mitch touch upon how BlueLinx benefits and/or gets hurt from commodity price volatility?

Sure. So on the volume side, really, the second quarter was dramatically different in April and then rebounded, as we talked about, in May and June. And so if you look at the volume generally across the quarter, year-over-year, it was relatively flat. I’m guessing what the – what we can talk about, which we did, of course, is where we are in July. And we certainly have seen a robust market, which we’ve heard on the backs of homebuilders, certainly, our customers as well and a very strong commodity market. As we look forward, Alex, the – I can tell you there’s a very strong sentiment that housing will do well for the rest of the year from our customer base. They’re optimistic. Our supply base, we’re talking about, in some cases, unprecedented demand. But what we don’t know, of course, is the impact that the pandemic ultimately will have, what impact the unemployment rates will have. The increase in commodity pricing, for example, may have an impact ultimately on demand if it continues to escalate the way that we’ve seen it. As we manage the commodity price and the risk, of course, of it coming down, we touched a little bit on that when I talked earlier. We – we’re aware of this. We’re monitoring, and I can tell you, very closely as we view what the risk is. And we’ve put in place what we believe are mitigating factors to help diminish the risk of a collapse from a commodity standpoint, if that were to happen. And so some of those are just moving the inventory, for one, lower generally, which, of course, protects us. So we’re watching our inventories much closer, and at the same time, trying to move products more towards a cost basis that is closer to the time of shipment to our customer base.

And lastly, the term loans declined from, let’s call it, $120 million at year-end to $69 million at the end of this quarter. Fantastic decline there. I suspect the goal is to get it to $45 million as quick as possible to eliminate the covenants. But could you comment on kind of prioritizing your use of cash flow going forward? And where does moving that term loan down to $45 million rank?

Sure. You are correct. We are still prioritizing the pay down of the term loan below the $45 million. And we continue to focus on monetization of our own properties and real estate, and we’re continuing to pursue those opportunities. While we don’t have anything specific to talk about today, those are – we’re certainly actively working on that. And in addition, we will – as we generate operating cash flow, of course, our first priority there is required on the ABL, but there could be some additional ability to pay down the term loan from operating cash flow at some point in the future, depending on how our covenants turn out. So I think that’s where we stand right now as kind of our prioritization of cash. It certainly is term loan specific as it relates to those using those values from the property. And then, of course, as we generate cash flow, we’ll also continue to pay down the ABL as well as we did this quarter.

And I do have one last question, sorry. Mitch, a while back, you kind of shifted gears to pursue growth and market share. Obviously, COVID kind of disrupted that. But can you comment on where you think the company is at right now as it relates to going down that path of recapturing market share?

Sure. I mean, fortunately, all attention of the organization, of course, went to resolve the company and make sure we protect the company during the pandemic. But the top priorities we talked about is getting the operational service levels of the business back to where our expectations are, which we have, and then growing the top line of the business. So we spent a tremendous amount of time last year in the back half of the year, putting together local market strategies that we were executing on and actually seeing really good traction in the first quarter. Obviously, the pandemic slowed that down a bit. But we rolled right back into that and had one-on-one strategic sessions with each general manager with the RVPs, with Alex, our COO and myself, going through local strategies that at the market – at the local markets, we feel, can continue to drive the business. In addition to that, we feel like there’s great opportunity from a national account basis. And again, I talked about this a little bit before, which is we’re spending the resources to put two leaders in place where before we had one to focus a bifurcated focus, one on the specialty distributors, the co-ops, the national pro dealers and the other one on home centers. And we’re getting traction already on that as well. So I feel like it’s a two-tiered strategy for growth. One is the team is doing really a tremendous job at the local level, not only maintaining relationships and volume of the customers, but growing them and seizing opportunities. And that’s just getting started. And then we’re attacking it at the national level as well. And I would say that is just getting started from an opportunity standpoint.

Congratulations, good luck.

Thank you, Alex.

There are no further question at this time. Please continue.

Okay. Well, thank you, Justin. And again, thank you for joining us. We certainly appreciate your continued interest and support of BlueLinx, and we look forward to speaking to you again in October.

This concludes today’s conference call. Thank you for participating. You may now disconnect.