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…

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…

[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.