Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter 2020 BlueLinx Holdings Inc. Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speaker's 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 Mary Moll. Thank you. Please go ahead.

Thank you, and good morning, everyone. We appreciate you joining us for the BlueLinx's 2020 Fourth 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. 2020 was an exceptional year for BlueLinx, a year of rapid change and transformation. The pandemic has created incredible challenges for our company and the BlueLinx team has faced these challenges with resolve, while always keeping the safety and well-being of our associates as our top priority. We were able to capitalize on the opportunities we were afforded in 2020, delivering a record financial performance while significantly deleveraging the company in the process. We began 2020 with strong momentum, realizing the benefits from the investments we made in people and processes in the second half of 2019, which drove operational efficiencies and improved customer service. These efforts included investments in the centralized logistics team, a relentless focus on enhancing our customer service levels and executing on market share growth initiatives at the local and national level. We also began company-wide initiatives to strengthen our partnerships with strategic suppliers, with a renewed emphasis on certain key product categories. Towards the end of the first quarter, we started to feel the impact of the pandemic and the BlueLinx organization immediately reacted to the resulting market conditions through a focus on employee safety, rigor and controlling working capital and liquidity, a reduction of fixed costs and closely managing pricing. Fortunately, the pandemic-related shock to the housing market proved to be short-lived, as the residential housing market recovered quickly through the second half of the year. During this period, we also encountered a historic price escalation in our wood-based commodity products. Our investment and efforts in the second half of 2019 and into the pandemic allowed us to capitalize on the markets we experienced. These efforts have continued to pay off, as our results in the fourth quarter were outstanding with revenue gross margin and adjusted EBITDA, all significantly…

Thank you, Mitch, and good morning, everyone. I will now give a brief overview of the fourth quarter and full-year financial performance. As Mitch mentioned, the fourth quarter was another successful one for BlueLinx, with significant improvement in our financial performance on a year-over-year basis. We reported net sales of $865 million, up $252 million when compared to the prior year period along with a related improvement in gross margin, which was up 90 basis points year-over-year to 14.4%. We also reported adjusted EBITDA of $39 million, an improvement of $28 million over last year. We ended the quarter with cash on hand and excess availability under our ABL, of approximately $184 million, an increase of $104 million over the prior year period. Net sales for the full year were $3.1 billion, up $460 million when compared to last year. Gross margin increased 190 basis points to 15.4% for the full year and adjusted EBITDA improved by $99 million to $170 million, the highest full year adjusted EBITDA in BlueLinx's history. Fourth quarter net sales of Specialty products, which includes products such as engineered wood, cedar, molding, siding, metal products and installations, were $498 million, an increase of $100 million year-over-year and accounted for 58% of net sales for the current period. These products, typically comprise between 60% and 65% of our total net sales, and are less sensitive to wood-based commodity markets given their specialized nature. Our Structural products are primarily wood-based commodities, whose prices have continued to be impacted by the supply-demand imbalances that Mitch previously mentioned. Wood-based commodity prices declined from the peak levels, experienced in mid-September to fourth quarter lows in November of 550 for the framing lumber Composite Index and 645 for the Structural panel Composite Index. In December, prices started rising sharply again, and…

Thank you. [Operator Instructions] Your first question comes from the line of Reuben Garner from Benchmark Company. Your line is now open. Please proceed.

Thank you. Good morning everybody.

Good morning.

Good morning.

Maybe we could start with the Specialty growth and margin performance in the back half of last year. I guess, a nice acceleration. Can you kind of give us some color what you're seeing there? Are there specific product categories within Specialty that are driving that, or is it just in general end market strength? I mean, 20-plus percent growth is obviously very strong. Is that the sort of level we could see for the next couple of quarters as some of the activity from last summer sort of starts to flow through?

Well, there are really two areas that have enhanced the growth that we've seen. One is in an investment in specific product categories. So we've actually brought in some experts into the organization, who are helping to drive and manage opportunities that we have in some key product areas that, I think, I mentioned that for the company long-term are strategic and important to the business. The second piece that we've done is, we put in place -- we're going on about a year now of a process where at the local markets, they are identifying opportunities that they see often in Specialty products and executing on that. And it's a process that we've embedded into the culture of the company. And if you look at the performance in specific opportunities that we're seeing at a local level relative to the overall business, we're seeing a significant improvement as well. So, generally, not -- we don't give guidance on what it's going to look like going forward. But we have identified as we've talked about organic growth has been key and critical to the business, and we're emphasizing it and we're seeing real results on the Specialty side.

Yes. And to add to that, I think, the last three quarters of 2020, we saw rates at that 17.3%, 17.4%. And I think we take some credit for that and a continued focus on price effectiveness in the Specialty space has also been really helpful and hopefully relatively sustainable.

And so we should look at that 17.3%, 17.4% is kind of a new baseline for Specialty assuming the market continues to grow. Is that fair?

I mean, I think it's fair to say that we've done a good job on continuing to execute to that margin rate over now a reasonable period of time in three quarters or so.

And Reuben, we've invested in pricing and we've talked about that in the past where we're really emphasizing the opportunities that we see across the organization to make sure we're getting paid for the services we provide to our customer base. So that's an important piece. The one caveat, I would say is, obviously, in an inflationary environment on a percentage basis sometimes that can impact your margins, and we're certainly seeing inflation moving in not only on the commodity Structural side, but also on the Specialty side.

Yes. And in my remarks, I have said that, what we're seeing this quarter in Q1 is the Specialty rate continues to be robust.

Okay. And then on the Structural side, you mentioned some mitigating factors I guess that could maybe less than the blow if you will on a return to normal commodity prices. Can you -- I think the last time there was a serious deflationary environment was maybe the back half of 2018 and you guys had kind of mid-single-digit gross margin profile. Can you talk about the differences now and what the business looks like? How you're operating versus then? And maybe how we should think about that declining commodity price environment from a gross margin perspective?

Sure. Well the first and most important thing is we're controlling it from a centralized perspective at a much greater level, with much more scrutiny than we did at that time period. And if you look for example, at the balances we had in our warehouses at that time from a unit basis, they were almost twice as big as they are today. So from an inventory perspective, we're watching it closely which we're comfortable is helping -- will help to mitigate the risk as it's going down. Similarly as I talked about from a pricing perspective, we're very closely managing what is happening from a price perspective across the organization. And we've again invested centrally in experts who are having a dialogue including enhanced communication with our traders around in the field making day-to-day decisions as it relates to pricing.

Okay. Moving to the working capital investment in the fourth quarter. Kelly, maybe I guess two-part question. One you're obviously making some investments in inventory in anticipation of growth. I assume do we pick some of that back up in the first quarter? And then secondarily, I didn't -- I had some technical difficulty. So I don't know if you said this, but I think receivables were up pretty nicely year-over-year and I assume that was just timing related. Can you just clarify those two points for me?

Sure. As it relates to inventory and kind of what we're seeing, I think we would expect -- we did build some in the fourth quarter as we mentioned. And we would expect that we probably continue to build some inventory during this quarter. Is this normal and typical for this time of year to support the spring building season, we're also seeing inflationary impacts in both of our product categories. Inflation and inventory and cost of sales as well as -- is connected with the increase in sales. So -- but as we mentioned, our DSI has significantly improved compared to last year and we're continuing to focus on that as well. So I think that's really kind of what we're expecting to see for this quarter from an inventory perspective. And then really when it relates to the receivables point, yes, we were about $100 million higher in receivables at the end of 2020 as compared to 2019. And that really is the kind of the way that we saw the sales occurred during the fourth quarter. So we saw a slight -- in the Structural side, a slight a decrease going into October and as we really work to manage through the margin preservation versus the volume kind of doing some trade-off there coming off as those commodity prices start to significantly decline going into November. But then we saw prices come back up and we saw demand stay really good through December with mild weather and just overall macro factors. And so those higher sales in December really contributed to that high receivable number. And the margin followed on the Structural side along with that where we saw higher margins in December as well.

Thank you. Your next question comes from the line of Greg Palm from Craig-Hallum Capital Group. Your line is now open.

Great. Thanks. Hey, Mitch, hey, Kelly, good morning. Congrats on the really good results and execution here.

Thanks, Greg.

Thanks, Greg.

Maybe first I was hoping you could comment on volumes in the quarter. Just trying to get a sense for the magnitude of price versus volume the associated upside in the quarter. And maybe how volumes compared to what you saw in Q3, Kelly that last comment that you made -- almost makes it seemed like there wasn't much of a seasonal slowdown in the December quarter versus the previous quarter. I just wanted to confirm that?

Sure. Yeah. As I mentioned, we saw a little bit of a decline year-over-year kind of the same quarter last year from a Structural perspective and I really contribute that more towards us really managing through making some trade-offs between margin and volume as well as we saw some impact of some supply shortages throughout the quarter. But overall, slightly down from this time last year, from the same quarter last year. On the Specialty side, we saw it slightly up and very much -- somewhat contributing. December was a very strong month for us unseasonably so. And then as you compare it to Q3, we saw again Specialty slightly up over Q3 and Structural, we saw that actually about the same. So it's really fairly consistent.

Okay. That's helpful. Just -- it feels like in this significant commodity inflation environment that we're in and a lot of supply chain disruptions that are going on. I mean, do you see more of your customers leaning on you, I mean more so than normal given in the environment we're in and some of those that maybe can't tie up additional working capital and even some of your -- versus some of your smaller competitors I feel -- I'm wondering if this is an environment where maybe you can see some share gains as well?

Yeah. As we look at commodities, generally share gains tend to be very transient, right? So it's -- there clearly is the service aspect and that's important. I would say that certainly our customer base are leaning on us, but they're trying to find product wherever they can find it. And right now to your point, the supply constraints are so strong at this moment that they're certainly trying to get it from us, but also getting it from the mills directly. I would say that we haven't seen a material shift from our perspective on us getting commodity products preferentially to smaller competitors at this time. And of course any kind of enhancement or increase that we might see from a market share perspective is certainly counterweighed by the supply constraints that are out there in the marketplace.

Yeah. Understood. I mean, Mitch should be helpful also to maybe get your kind of high-level opinion on the housing cycle where we're at. There seems to be a little bit of sort of fear or concern building up recently, but the commentary on kind of what you're seeing out there and the supply of housing stock I mean, it certainly feels like things are still pretty strong. What's your sense?

Yeah our customers are very optimistic, certainly for the first half of the year. The builders generally have backlogs that they need to build homes and they need to finish building homes. And that creates a very robust dynamic in the marketplace. So, I would say, generally, and you know Greg as well as I know, I mean, you have the move away from the urban centers, that obviously are tailwinds. You have interest rates that while they've risen a little bit, they're still so low on a historical basis that also should provide some impetus. And you have on the other hand, inflation. And ultimately, that may impact housing. But we certainly don't see that, over the short-term.

Okay. And then, the debt reduction and really the balance sheet transformation over the last year. I mean, it's been just phenomenal. I'm curious, as you look ahead, what are your largest capital allocation priorities, outside of continued debt paydown?

Yeah. I mean, I think, while we're very proud and excited about our leverage right now. We know that's coming off of very strong trailing 12 months EBITDA. So we'll continue to focus on deleveraging. That's certainly going to be a focus for us, as we go through this next year. We're also looking to, see where we need to make the right strategic investments, whether that be -- maybe some of our rolling stock. We've got -- that's an area we're looking at. We're looking at technology investments. So if anything that's going to drive productivity into the company. So those are the kind of the thought process for us right now, as it relates to allocation.

Okay. That's good. And then, just last one, I just want to clarify. I think, Kelly you said, was it quarter-to-date Structural gross margin was running at 14%? Did I hear that right?

That's -- yeah, that's what our recent rates have looked like.

Got it. So 14% relative to the 10% you saw in December, so a pretty big increase at least in the first few months of Q1.

Yeah. That's right. And, just to be -- yeah, just to be clear on just the rates for the fourth quarter. It's 10% for the quarter, but there was quite a bit up and down within that quarter. So kind of going into October we started seeing the commodity prices coming down a bit, and we saw a rate that was pretty consistent with slightly lower than what we saw for the quarter average. And then, we dipped down to in November, about 6%. And then we've kind of move back up into that, double-digits, into that 14-ish range in December. So we saw, a bit of a, up and down for the quarter. And it really just follows the cycle as we talk about, when we see those prices go up and down, it's really depending on how that works with our average cost of inventory. And what the spreads were able to demand, depending on the market. But that -- I think it followed a similar path, as what we had discussed in Q3.

The detail color is much appreciated. I'll leave it there. Thanks. And best of luck going forward.

Okay. Thanks, Greg.

Thank you.

[Operator Instructions] Speakers, I'm seeing no further questions in the queue, please continue.

Okay. Thank you. Well thank you very much for your time and your interest in BlueLinx. And we look forward to sharing our first quarter results with you, in the next few months. Have a great day.

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