Greetings, and welcome to BlueLinx Holdings' Third Quarter 2021 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Ryan Taylor, Vice President Investor Relations & Treasury. Thank you. You may begin.

Thank you, operator, good morning, everyone, and welcome to the BlueLinx Holdings' Third Quarter 2021 Conference Call. With me on the call today are President and CEO, Dwight Gibson; and Chief Financial Officer, Kelly Janzen. Our third quarter news release and Form 10-Q were issued yesterday, along with the webcast presentation. These items are available in the Investors section of our website, bluelinxco.com. We encourage you to follow along on the webcast with the detailed information on the slides. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our most recent SEC filings. Except as required by law, we undertake no obligation to update our forward-looking statements. Today's presentation also includes certain non-GAAP financial measures that we believe provide helpful context for investors evaluating our business. Reconciliations of these measures to the closest GAAP financial measure can be found in the appendix of our presentation. All variances in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we'll open the line for questions. And with that, I'll turn the call over to Dwight.

Thanks, Ryan, and welcome to the BlueLinx team. Good morning, everyone. Thank you for joining our call today. We appreciate your engagement. This is an exciting time for BlueLinx. We delivered an exceptional third quarter, capitalizing on robust demand for building materials as well as our size and scale to provide both strong profitability and cash generation. While supply chain remains challenging, and we saw significant wood-based commodity market price deflation during the quarter, our team remained disciplined and focused on their margin preservation strategies when navigating these challenges to generate another strong quarter. Our financial strength positions us well to be able to invest in our business to fuel both organic and inorganic growth while also taking a focused approach to driving continuous improvement. As we move into a new phase of growth, we continue to further emphasize importance of fostering a performance-based culture that creates an exceptional employee and customer experience. This is prima to maximizing our significant potential. Looking at our Q3 results at a high level. I'm pleased to report that net sales grew by 11%. We delivered $79 million of adjusted EBITDA and generated strong cash flow of over $100 million, all of which helped reduce our net leverage ratio to 1.3x. This marks the sixth consecutive quarter of net leverage reduction, a tremendous accomplishment driven by disciplined debt reduction and significant EBITDA growth. During the quarter, we capitalized on continued strong demand for our specialty products, while successfully navigating historic and rapid wood-based commodity price deflation through disciplined, strategic inventory management. Overall, we delivered results that exceeded expectations for the quarter and demonstrated the strength and resiliency of our business. We continue to execute on strategic actions that further diversify our business into specialty product categories and drive sustainable, profitable growth through all economic…

Thanks, Dwight, and good morning, everyone. Our third quarter results reflect continued positive momentum across the business. As Dwight indicated, underlying demand fundamentals remain very strong across the markets we serve. Third quarter sales were $971 million, up 11% year-over-year, driven by 29% growth in specialty product sales, offset partially by a 12% decline in structural product sales. Consolidated gross profit was $153 million or 16% of sales. Net income was $47 million and diluted earnings per share was $4.74. The tax rate for the quarter was 25.6%, in line with our expectations. Adjusted EBITDA was $79 million or 8% of sales. This level of bottom line profitability is a notable achievement, given the sharp decline in wood-based commodity prices during the period. Looking now at the product categories, beginning with specialty products. Net sales were $641 million, up 29% or $145 million over the prior year period. Gross profit increased $62 million to $148 million and gross margin expanded 560 basis points to 23%. The sales growth and improved profitability were driven largely by our ability to capitalize on supply demand dynamics by executing strategic pricing actions consistently across our locations. This growth was modestly offset by lower sales volume due to supply chain disruption and product availability. Overall, specialty product sales volume decreased by low double digits year-over-year. But on a positive note, sales volumes in certain categories where we are targeting growth, such as industrial products, molding and siding, increased compared to last year. Moving to our structural products. Net sales were $330 million, down 12% or $45 million as compared to the third quarter of 2020. Gross profit was $6 million and about 2% of sales. The decline in structural product sales and profitability was due primarily to the significant price deflation for commodity wood products…

Thanks, Kelly. In summary, I'm proud of our team for their combined efforts in the third quarter. Together, we exceeded expectations by delivering double-digit revenue growth, $79 million of adjusted EBITDA and over $100 million of cash generation. One of the collective strengths of our team is resiliency, pride and passion they've been to work every day. We are committed to serving our customers, growing our business and creating value for stakeholders in all that we do. Consistent with that sentiment, I want to briefly touch on our growing ESG focus. This is a topic that I'm personally very passionate about and I'm committed to embedding in our culture of business strategy. I'll highlight a few areas that impressed me upon joining BlueLinx. First, we truly have a culture of safety that we continue to emphasize and improve throughout the organization. Our 2 key safety stats, total recordable incident rates and days away, restricted or transferred, declined meaningfully in the past 2 years, down to 1.6 and 0.9, respectively, in 2021. These are top quartile rates in our industry, and I'm very proud of our team for prioritizing safety and well-being. Second, our commitment to diversity and inclusion starts at the top, with 60% of our leadership team being diverse. Third, we have strong, highly rated government practices in place. These key pillars provide us a great foundation to build from as we increase our focus on ESG moving forward. In closing, it's an exciting time in the history of BlueLinx. With a proven track record as a leading U.S. 2-step distributor of building products, we have a strong foundation from which to build on. We are entrenched as an essential part of a complex supply chain and are a value-added partner to our customers. We are capitalizing on the current market environment and are well positioned to benefit from favorable long-term market expectations. And we are focused on creating a performance based culture, emphasizing growth in our specialty products and driving continuous improvement throughout the business. The completed senior secured note offering and cash on hand provides ample liquidity to strategically invest in our business to fuel organic and inorganic growth. Due to the fragmented nature of our industry, we believe there are strategic opportunities to accelerate our growth through acquisitions that broaden our specialty product offering or expand our regional coverage. As we look to the future, I believe there's ample opportunity to create long-term value for all stakeholders, and we are steadfastly committed to that goal. That concludes our prepared remarks. At this time, we are happy to answer any questions.

[Operator Instructions]. Our first question comes from Greg Palm with Craig-Hallum Capital Group.

Nice job here navigating what is a pretty tricky environment out there. I guess starting off, hoping to dive into some of the volume trends, specifically for Q3. I guess can you quantify the impact from supply chain challenges, lack of inventory? I'm assuming that held back some amount of revenue overall. And I guess more importantly, how do you see that progressing going forward?

Yes. Thanks for that. So yes, it was definitely an interesting quarter to put it mildly. Clearly, the historic deflation we saw on lumber and panels was something we were very focused on managing through. And we think we did an effective job of that, really continuing our kind of a lean and mean approach. On the specialty side, we did see some volume improvement; molding, siding, industrials to some degree, still constrained on the EWP side in particular. Supply is still a challenge there. We are working with our vendors to continue to secure as much product as we can, and we're hopeful that as we move into 2022, we'll see that situation improve as their capacity comes online.

And in terms of specialty, sticking on that segment, in terms of the sustainability of those margins, I think in the past, you've talked about that driven by the supply chain challenges. So I guess, should we assume that if we start seeing things free up as we progress through calendar '22, do we see the specialty margins come back down? Or do you think that there's a chance where we're sort of normalized on a higher level than what we've seen historically?

Yes. Well, Greg, I think we think we are normalized at a higher level than what we've seen historically, for sure, regardless of things, what the markets do going forward as it relates to supply chain constraints. However, that's when we spoke about last quarter, and I think we'd reiterate the fact that we don't know that this level that we've seen in the 23%, 24% is the sustainable number. We would say probably we would expect it go down into the -- maybe the 20-ish percent range. But we feel pretty comfortable that that would be a floor of what we would expect going forward, even with the supply chain change.

Makes sense. And I guess just last one, kind of broadly thinking about this environment that we're in and inflation and supply chain challenge related. I'm just curious, does that change the value proposition of 2-step distributors? I mean, I'm just kind of wondering if this type of environment can drive more business your way?

Yes. We really like our position in the market. We think we are a critical part of the supply chain for new home construction and repair and renovation. We are the link between the large manufacturers and the end users, including kind of professional dealers or national retailers. We bring value in terms of being able to manage a broader product portfolio, breaking bulk, adding value around [indiscernible] or the light manufacturing and other design services, which is just becoming more and more important in an environment where end-use demand is strong, and the supply chain has even more complexity in it. So we're really excited about where we are. We're having some great conversations with all of our key partners, both on the vendor side and the customer side, and we're looking forward to continue to take full advantage of that

Our next question is from Jeff Stevenson with Loop Capital.

My first one was just on specialty pricing. And I was just wondering if you were able to obtain incremental price increases on most specialty categories in the third quarter? Or was there increased pricing primarily from continued realization from the first half increases? Also, as we move forward, how should we think about specialty pricing moving forward, given the continued supply constraints?

Yes. Great question. Thank you. Thanks for joining the call. So yes, we -- as we've said in the past, we're very intentional about making sure that we add value for our customers in addition to the products we provide. And so as they put price increases in, there's things that we do, whether it's touching the product to make it a better fit for that customer needs and design services and other things that we get paid for. So it's a combination of kind of the price increases we see, the value we bring, which we look to get paid for that results in kind of margin expansion in totality. And to Kelly's point, we really do believe that there's sustainability at a more elevated level around specialty, higher than historic. So as she said, 20% feels like a good number for us, and we're obviously going to continue to work as hard as we can to make sure that we could maintain that and hopefully do a bit better.

Okay. No, that makes sense. And then obviously, with lumber rising kind of nearly 50% of August lows. Just on the structural margin front, I mean, it seems like the higher price inventory has been largely sold off. And in the past, we've discussed kind of a normalized margin level of closer to 8% to 9%, but with October tracking low double digits. How should we think about specialty margins as we kind of move through the fourth quarter and early 2022? Just any updated outlook would be helpful.

Yes. Sure, Jeff. So yes, we are benefiting right now from that really steady incline in commodity price that's been happening since the early part of September, kind of late August. As we did cycle out of that high-cost inventory and as we started replenishing at those lower dollars, we're just seeing that improvement on top of our distributors' margin kind of give us that extra lift to that low double-digit margin. As it has with every cycle, with the commodity cycle, over the next few weeks, if prices stayed stable or flat, we would start seeing that margin flatten out to our more normalized margin. And so you'd have a weighted average of the next 3 months as it relates to that type of dynamic happening for the fourth quarter. So most likely unless something really falls off at the end of the quarter, you would see a bit of an elevated structural margin for the quarter. But of course have to wait and see, we'll have to see how things go and what commodity prices do in the second half of the quarter. Going into next year, it's really difficult because these cycles are very short lived. So we would suggest that our normalized margin is still in that 9% range for structural going forward.

That's very helpful, Kelly. Thank you. And then just last question. Just wanted to get an update on when things -- where things stand on the return to M&A. Dwight, the focus has been kind of building up the M&A team and developing an organic strategy. But any more color on kind of how far things along and when you could potentially return to the market would be helpful?

Yes. So we see that as a lever that we will pull in our overall kind of value creation approach and strategy. We are -- we like where we are in the market. We think our scale provides advantage, but there's clearly areas that we think we can deepen our presence. And we're looking at those very, very carefully. It is an active market, still very fragmented market, but we're going to make sure that we remain disciplined and thoughtful as we think about any opportunities like that, but we are keeping a close eye on how things are developing. And if we see opportunities that will potentially accelerate our strategy, we'll take a really close.

Great. Thanks again and congrats on the good quarter.

Thank you very much.

Thanks.

Our next question is from Reuben Garner with The Benchmark Company.

Congrats on the results in the tough period. Can you -- let's see, starting on the specialty side, the volume headwinds, can you go into a little bit more detail there? Was there an element of you guys maybe walking away from business that didn't meet your pricing or margin requirement? Or was this truly you couldn't get the supply to keep up with the demand? And it's just pushed out to future periods. And I know it's a long-winded question, but if you could maybe give us an example of the kind of products that are short supply, that would be helpful.

Yes. Thank you for the question. So on the specialty side, we're really keen on driving growth there, both volume and margin, obviously. So if we have the product, we can sell it. The challenges we saw in the quarter were really just around availability, particularly around engineered wood, still pretty tight environment there. Those are struggling to kind of ramp up to the higher demand levels. And so that's an area where, if we had more product, we would sell it. That's still probably the biggest pain point for us from a volume perspective. Great performance around margin, but I definitely love to have more product available because our customers definitely want it. On the other side, we are driving some specific programs around our specialty business, again, to drive share gain and volume growth there. And we did see some improvement there, where we had availability. So we talked a bit about millwork, we talked about siding. We talked about industrial products. So we had the volume, we're able to sell it, and we'll continue to kind of focus on that and drive those programs as we move forward. And then overall, we really, really are excited about that part of our business. We're investing in capabilities to support that business from a value-add perspective. And we think that's going to bear fruit for us, particularly as we double down and really stay close to our core customers and make sure we can address the needs they have and service them at a high level.

Great. And how are you guys feeling about -- I believe I saw during the press release or maybe I just heard in your prepared comments, it sounds like you're still being relatively cautious on the inventory front for the structural products. Am I hearing that right? And is there a price point where you would be more aggressive to get ready for the spring building season as prices pull back this winter?

Yes. So Reuben, I really think that what's proven out this quarter, especially as our approach to structural inventory on keeping it really tight, really more of a just-in-time replenishment and just very much staying focused on margin over volume. And I think that's played really well for us. For the last 18 months, it's played well, but specifically in this really historic decline that we saw deflation that we saw from May, June through the summer, that certainly supported our -- both our Q2 and our Q3 results by employing that approach. So we have no plans to change that at this time. And so therefore, the price -- there's no specific price point or inventory build that we would plan outside of what we're doing right now, which is continuing to monitor our inventory levels and buy appropriately as needed.

Yes. I want to reemphasize that point that Kelly is making. We want to make sure we have sufficient product to service our core customers on the structural side, but the energy intent and strategic focus for the business is around continuing to grow our specialty business, building out our capabilities to support those product lines and driving penetration in the marketplace. That's where we believe our core capabilities serve us best. And we see great opportunity. We like the balance of having both structural and specialty. I think that positioned us uniquely, but emphasis is really around growth, volume growth on the specialty side and we continue to be really prudent on the structural side.

Got it. And last one for me. Any -- can you help us with either the year-to-date or the third quarter, what your average realized prices for lumber and/or panels, just to get a sense for modeling 2022, if we're going to assume maybe a $400 or $450 price level, how much pressure there would be just on the price element of the business?

Yes. Well, we don't provide that data. We do -- I think you can kind of get a feel for that by just taking the average index, if you take the average of the indices for both the lumber and panels and you add on our relative margin, I think you'll get a pretty good sense of where our average price turned out on the commodity.

Okay. Thanks. Congrats again, and good luck through the rest of the year.

Thank you very much.

We have reached the end of the question and answer session. I'd now like to turn the call back over to Dwight Gibson for closing comments.

Well, thank you for your time and interest today. We really deeply appreciate your support of BlueLinx. And we look forward to connecting with you on our next quarterly call. And again, if you have any follow-up questions or want to learn more about our business, please don't hesitate to reach out to Ryan Taylor. Thanks again.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.