Greeting, and welcome to the BlueLinx Holdings’ First Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Taylor, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Welcome to the BlueLinx Holdings’ first quarter 2022 earnings call. Presenting today are Dwight Gibson, President and CEO of BlueLinx; and Kelly Janzen, our Chief Financial Officer. Our first quarter news release and Form 10-Q were issued yesterday after the close of the market along with our webcast presentation. These items are available in the Investors section of our website, bluelinxco.com. We encourage you to follow along with the detailed information on the slides during our webcast. In addition to our Q1 earnings, we also announced yesterday that our Board of Directors increased our share repurchase authorization to $100 million, with $60 million to be repurchased via an accelerated share repurchase plan. Dwight and Kelly will provide more details on that news during our call this morning. As a reminder, today's discussion contains forward-looking statements, actual results may differ from those forward-looking statements due to various risks and uncertainties, including the risk described in our most recent SEC filings. Today's presentation includes certain non-GAAP and adjusted financial measures that we believe provide helpful context for investors evaluating our business. Reconciliations to the closest GAAP financial measure can be found in the appendix of our presentation. At the conclusion of our prepared remarks, we will open the line for questions. And with that, I'll turn the call over to Dwight.

Thanks, Ryan, and good morning, everyone. Thank you for joining us on the call today. This is an exciting time in the history of BlueLinx. As we continue to exceed expectations during one of the most dynamic periods in the history of the U.S. housing industry. I'm extremely proud of the BlueLinx team. Our continued strong execution contributed to record first quarter profitability. Our operating priorities continue to be focusing our sales mix and higher margin specialty products, making disciplined purchasing, and pricing decisions and rigorous management of commodity inventory. These efforts have contributed to outstanding performance for six consecutive peers as compared to our historical results. Over the past six quarters, we've averaged net sales growth of 39%, adjusted EBITDA of $117 million, and adjusted EBITDA margins of 10.5%. We believe our results over this extended period demonstrate our ability to capitalize on the robust demand to navigate supply constraints and to successfully manage historic volatility in wood-based commodity prices. We believe the progress we've made over the past 18 months has significantly increased our baseline performance, even in a normalized environment. While we are encouraged by our improvement, we are equally excited about our potential, as we have identified additional opportunities to drive greater efficiency across our business and increased capacity growth sales of our higher margin specialty products. We are closely monitoring the impact of higher mortgage rates, broad based inflation and ongoing volatility in wood-based commodities. Even with these headwinds, we currently believe fundamentals for the U.S. housing industry remain healthy, underpinned by low levels of unemployment, strong demand for new homes and record levels of home equity, which is contributing to strong repair and remodel activity. We ended Q1 in a strong financial position with low net leverage and available liquidity of $421 million. We…

Thanks, Dwight and good morning everyone. Our Q1 results reflect improved execution and our ability to capitalize on market trends as compared to the prior year. Net sales were $1.3 billion, up 27% year-over-year led by specialty product sales, which increased 36%. Gross profit increased 61% to $291 million resulting in a 22.3% overall gross margin and all time high on a quarterly basis. As a percent of sales, SG&A was at 7% consistent with the prior year period. However, SG&A cost increased 21% year-over-year to $91 million. This was due primarily to higher variable compensation and to a lesser extent increased delivery and logistics cost. Net income was $133 million and diluted EPS was $13.19 per share more than double the prior year period. Our tax rate for the quarter was 26.2% in line with our expectations. Adjusted EBITDA was $202 million or 15.5% of net sales. This was also an all time high on a quarterly basis. And free cash flow increased $26 million over the prior year period. Our year-over-year growth and excellent profitability reflect the benefits from our emphasis on growing high value specialty product sales, alongside continuous operational improvements, while also demonstrating our ability to capitalize on favorable market conditions. Now, I’ll discuss the product categories for the first quarter starting with specialty products. Net sales were $768 million, up 36% or $205 million when compared to the prior year period. Gross profit was $184 million, up $76 million or 70% year-over-year. Our gross margin expanded 470 basis points to 24%, our second highest rate ever. The net sales growth and improved profitability were again driven by disciplined value-based pricing actions and also reflect a favorable shift in volume to strategic specialty categories, such as millwork, siding and engineered wood. Sales volumes and millwork and…

Thanks, Kelly. In closing, it’s an exciting time for BlueLinx. We are off to a strong start in 2022 with record profitability in Q1 and a good April. We have exceeded expectations for six consecutive quarters demonstrating our ability to capitalize in a dynamic market environment and raising the base level performance of our business. We’re increasing accountability, emphasizing growth in our specialty products and driving continuous improvement throughout the business. Our financial position is strong. We are investing in our business to improve efficiency and increase capacity to deliver sustainable profitable growth. And we are repurchasing $60 million of BlueLinx shares, demonstrating confidence in business strategy, continued improvement in our execution and commitment to delivering shareholder value through disciplined capital allocation. As we look to the future, I believe we are in an opportunity rich environment to create long-term value for all stakeholders. And we are steadfastly committed to that goal. Our aspiration is to be the preeminent building products distributor in North America, and we believe we have a long runway of growth ahead of us as we leverage our scale and product breadth to expand relationships with our best customers and key vendors. At our Investor Day in June, our executive leadership team will share details about our plan to accelerate growth, drive productivity and increase shareholder value. If you’d like to attend, please RSVP using the QR code provided in our presentation or reach out to Ryan. That concludes our prepared remarks. At this time, we’re happy to answer any questions.

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Greg Palm with Craig-Hallum. Please proceed.

Yes. Thanks. Good morning, everybody. And congrats on the really good results here.

Good morning. Thank you.

Thank you.

I wanted to start with supply chain. I’m just curious if your thoughts around when some of the supply chain challenges might ease. If you’ve thought about how long that lasts given where we are. And then more importantly as those supply chain challenges do start to ease, what’s your view on pricing at that point? Do you think pricing can be maintained at current levels? You think that pricing needs to come in at all? Just want to get some high level thoughts on what you’re seeing out there?

Yes. So, we really see the supply environment continuing to be tight for the balance of the year. A lot of our supplies that we stay connected to are investing to increase capacity. But there is a lag between when those investments happen, when you actually see more products available in the market. So we think the balance of the year will be more of the same. And as we’ve said in past calls, and as Kelly has mentioned, we still think that we are able to manage and hold price and the expectations around, particularly in the specialty side being in the 20% range we think are solid.

Okay, good. And if you look back at the last year or so, I mean, obviously, it’s been a string of positive really impressive results. I know it’s been a strong backdrop, but do you think you’re gaining shared at all? I mean, do you feel like you’re maybe getting your hands on more supply than some of your peers? Or would you really characterize just as a really good environment with strong pricing and overall execution?

Yes. I mean, we’re focused on the things we can control, which is really our performance. So we’ve really been leaning into just driving greater execution, managing our inventory, building deeper and better relationships with our supplies and our customers. The supply environment continues to be challenging. So we want to make sure we’re getting our fair share of the right kinds of products. But gaining share in this market’s a challenging thing. So we’ll continue just to really focus on shifting our mix, building good deep sticky customer relationships, and be prepared for more volume as it becomes available.

Okay. And then just lastly, in light of the buyback news, should we expect that that means you’re not necessarily pairing back on M&A. But just kind of curious if your capital allocation sort of priorities have changed at all, just given, a, the news, b, where the stock price is and c, certainly what the – either M&A or pipeline looks like or overall environment?

No. I mean, our operating principles around capital allocation are unchanged, right? We’re focused on making investments that generate a return greater than our weighted average cost of capital. We always are excited about prioritizing organic investments that can increase our capacity and efficiency and scale of our business. And we’re going to continue to be thoughtful around things that could accelerate that which could be inorganic activities. And then, as available return share – return capital to shareholders. So those priorities are kind of enduring. And we believe that this was an opportune time to kind of return share to – return capital to shareholders. But we’re also continued to stay engaged and look for opportunities to drive our strategies forward.

Yes. And you’ll hear in my prepared remarks that kind of how we think about capital allocation in more detail as we’re looking at the bigger picture as Dwight mentioned and our target leverage remains unchanged. So, feel really – I think it’s just us taking the next step and evolving, having a detailed plan around capital allocation as we’ve been discussing with you previously that we would – that we were in the process of doing.

Yes. Makes sense. All right. Best of luck going forward. Thanks.

Thanks, Greg.

Our next question comes from Reuben Garner, The Benchmark Company. Please proceed.

Thank you. Good morning, everybody and congrats on the strong results guys.

Thanks, Reuben.

Let’s see, so where to start. So I wanted to get some more color on the specialty business, and specifically there are obvious risks in the market now with where mortgage rates have gone and your margin structure is very different than it’s been historically. If we did see any kind of soft patch or slow down or things go sideways. I mean, do you still – is the 20% margin number that you put out in the past, is that something you think you could do even if the market were to soften up? Or would you see risk to that level? I know it’s sort of a tough question. But just want to get your thoughts on kind of the downside to the margins if we were to see a soft period.

Yes. Well, thanks Reuben for the question. So as you know, the last few quarters we’ve been well above the 20%, the 23%, 24% range. That 20% really comes down to actually incorporating our thoughts around if we saw some softening in the market or nor – I’ll say it differently, a little normalization. We believe we would be right around that rate. We believe we made fundamental differences and changes in our pricing structure to support that. Now that considers a softening, I mean, certainly we don’t know what’s going to happen in the future. But we feel pretty good about that number and that’s why we continue to support it and reiterate it.

Okay. And then, I heard private label mentioned earlier. Do you guys – are there plans to increase private labeling in some of the other specialty categories that you participate in? Or was that specific to kind of growing your engineered wood platform more aggressively in the coming quarters?

Yes, it’s a great question. The answer is yes, and yes. We like our private label business, get on centers, kind of the number three EWP engineered wood brand in the marketplace. And we think there’s room to run there, working really hard to get more supply. And we think there’s other categories that we’ve been able to introduce some pretty cool products under private label brands, prime woods brands or polling brands and other things. So we think there’s other opportunities, core categories or core specialty categories to explore expanding and offering new private label products.

Okay. And on that note in your efforts to grow the specialty business, I think historically people – investors would’ve thought BlueLinx as maybe tilted heavily to new construction. But you guys have grown the specialty business quite a bit in some of those categories, like decking and siding are more tilted towards R&R. Do you have a sense or an estimate of what you’re kind of mix is between new construction in R&R now that you guys have changed so much in the last couple few years?

Yes. Reuben, we did some work on this within the last year or so. And based on our data, we’re approximately 45% R&R, only 40% new construction. So we’re actually a little bit tilted toward R&R as a whole. And then the rest kind of commercial multifamily, et cetera. But that’s where we stand based on our kind of current view of that.

Perfect. And then a last one for me, I’m going to sneak one in if I could. So if you could help us the first month of the second quarter, the structural gross margins, I think you said they were high single digits. That’s sort of unbelievable for lack of a better word. How – has something changed in the market that allows you even in declining commodity price environments to put forth kind of stable or normal margin profile? I guess, said differently, I kind of thought that, even with your programs and different things you guys have in place to centralize that that with prices going from $1,400 to sub $1,000 over the course of a month, it would be tough for you to have a positive margin, much less to be sort of where you’ve historically been in stable markets.

Yes. Well, Reuben, we continue to refine our approach around managing our commodity inventory. We don’t just – we continue to rethink and look at it and improve. We have weekly calls and we’ve have done that since the middle of 2020. But we continue to think it through. And I think specifically this quarter, we really even – brought it even further and upped our game around continuing to keep very lean inventory and still be able to serve our customers. And I think the number marks on the call as well, we said, specialty inventory is really closer to 85% now, 15% commodity, that’s a big improvement. Even from just a few months ago where we said commodities closer to 20%, 25%. So we continue to just refine and improve. And I think that’s shown we got off our inventory very quickly. And then the market did stabilized to be fair pretty quickly as well. So, yes, so right around our – the margin rate that we’ve typically set is a more normalized margin rate for us for the commodity business right now.

Great. Very helpful. Thanks guys and congrats on results.

Our next question comes from Kurt Yinger with D.A. Davidson. Please proceed.

Great. Thank you and good morning, everyone. Just wanted to start off within the specialty segment on the comment regarding kind of shifting volume towards higher margin categories, could you maybe just add some color around what that looks like from a product perspective and how much of that is kind of market and customer driven versus your own internal initiatives?

Well, I'll start and I'll let Dwight add on to this. Our general volume changes we're seeing are upticks in mostly siding and millwork where we're able to get a little more supply and to be able to kind of improve our share there. Specifically EWP is also I've been on mix shift over the last several months, however, where it's a little tighter from a supply perspective. So it's a little more flat than the other two categories we've spoken about. And then just as an overall perspective, like sequentially as like from Q4 to Q1, we saw an overall 8% volume across almost all the categories. So yes, it's just an intentional focus on these key categories as core for our business, as we continue to talk about focusing on the specialty products side of the product line. Dwight?

Yes, I think Kelly nailed it. We're being really, really intentional and aligning the entire organization around the areas of the business that we want to drive or from a product perspective and also markets, right. So we've had some opportunities as we've gotten a little bit more volume to really lean into some program as expanding those, that availability across some additional branches and locations, which is contributing to what you see. And we're going to continue to kind of drive that with energy over the course of the year.

Got it. Okay. That's helpful. And then just thinking about the impact of price on the specialty segment over the next few quarters excluding, maybe SEDAR and some of the other kind of industrial products that may be kind of tangential to commodities, any overall range you're thinking about in terms of average price inflation in 2022?

Really no – we unfortunately don't have a good view of that. All I can tell you is that currently we've been able to sustain the price. We've seen continued price hikes from the end of 2020. We continue to sustain that pricing. And in fact, we saw a little bit more going into even in this past quarter. So from what we see, we don't see in abatement in the near-term, as it relates to pricing, of course, we're cognizant and monitoring the macro environment, just like everybody else is certainly. But we haven't seen it yet.

Got it. All right. And then there's been a couple different comments in terms of operational improvements and commercial excellence focus. I was hoping you can maybe just provide a few examples of wins you've seen or been able to achieve there over the last couple quarters?

Yes. So I'll talk about that in a couple different areas. One of the things that I've been really pleased to see is the team really understanding and making sure we have good opportunities relationships with some of our larger customers, particularly on the national account side and some of our larger regional customers. So we've been able to put together some programs that really speak to their needs a bit more specifically around certain products that we've been able to offer certain services that we've been able to offer in addition to the products that leverage our expertise and leverage our capabilities. And we've had some nice wins in most of our regions around that. And I'll talk – probably talk about that in a little bit more detail at our upcoming Investor Day. And then in just terms of how we're running the business, really, really driving standard processes and approaches that are best practice across all of our locations as it relates to how we manage our inventory, how we price, making sure there's consistency and clarity and good visibility around deviations and managing that appropriately. And then also around safety, just making sure that from a safety perspective, something we're very proud of and I think is a contributor to efficiency and capacity, making sure we're driving that in a consistent way across the organization. Then having metrics that are consistent and common that we hold people accountable to and make sure we're seeing progress. So lots of things on the commercial side, the operational side. And again, I still think we're in the early days of the work we're doing to continue to make BlueLinx the best it could be.

Okay. All right. Appreciate that, and then just my last one, kind of a bigger picture question. I mean, the balance sheet and liquidity has drastically improved over the last couple years. Your increasing investments back into the business when you speak with suppliers and customers, do you think that's had an impact on how they view BlueLinx as a partner? And when you think about the competitive landscape and trying to align yourself with the best brands and products, do you think the current state of the business puts you in a better position to attract those premium brands to the platform?

Yes, I think the team has done a really, really good job of driving performance throughout the business. And we've also really continue to drive a high level of engagement with customers and with vendors. And that's been recognized, I've had the opportunity now to meet with almost all of our top customers and pretty much most of our top suppliers and visit them and spend time with them. And they've referenced that. And so we're excited about that. We feel good about that, but the work's not yet done. We still have – I think, meaningful opportunities to continue to grow our wallet share with the big customers and be even a bigger partner to the best brands in the industry. And that's what we're focused on.

Got it. Okay. Appreciate all the color and I'll turn it over guys. Thanks.

Thank you.

Our next question comes from Jeff Stevenson of Loop Capital Markets. Please proceed.

Hey, thanks for taking my questions today and congrats on the great quarter.

Thanks, Jeff.

Sure. Yes. My first question was just around the decision to increase the share repurchase authorization to $100 million and include the ASR. Just wondering how that came about, because previously you held off buying back shares in the back half of last year, but the market volatility just make current valuation levels too low to ignore.

Yes, again we are really, really trying to drive a thoughtful and disciplined approach to capital allocation as we've kind of talked about. And we felt that with the performance that we were delivering in the business and as we were, obviously ramping up our organic investments. We've kind of taken that up a fair amount over the past a few quarters. We'll continue to be really thoughtful and build a really nice pipeline. Sean has been doing a good job on the M&A side. And we also wanted to make sure that we would be opportunistic as we've said in the past and also move with pace once we decided to think about returning capital to shareholders and all those things came together, great engagement and support from our board. And we still think with the liquidity that we have in the year, what we expect over the next couple years, it doesn't restrict our ability to continue to invest in the business in other ways. So felt like the right thing to do and really excited about getting that out into the marketplace.

Great. That's helpful. And then I just wanted to touch on structural products volume growth, given your playbook of running lower inventory levels and using consignment to limit what commodity risk. Just wondering how volumes were in the first quarter and if we should expect them to lag on a year-over-year basis, moving forward giving the lower inventory levels.

Yes. So we did – so the year-over-year volume change is a slight decrease. As really the last few quarters have been decreased as year-over-year. As we manage the inventory, we're keeping it lower, we're more focused on driving volume growth on our specialty side. We're absolutely supporting the commodity structural business and supporting our customers in the best way. But we have given a little bit up on the volume side to really manage and balance the risk associated with the commodity market.

Got it. And then shift into the specialty side. You had – increased both sequentially and year-over-year on the inventory side. Was this just an opportunity to ensure you had enough product on hand in a strong demand environment or there another reason for that?

Well, year-over-year was a slight decrease with increases specifically in key categories, such as the millwork, siding that I had mentioned earlier. sequentially, we had a nice increase, an 8% increase and all that is really, it's just kind of shifting around depending on the allocation of supply that we have. The demand is good. The market is really good, still good right now for these products. And I think we're executing really well. So we're making the most of what we've got.

Okay. Thank you.

Thanks Jeff. This is Ryan Taylor…

I would like to turn the call back over to management for some closing comments.

Yes. Thank you so much. This is Ryan Taylor, VP of Investor Relations. That concludes our question-and-answer session for today's call. We really appreciate everybody joining us today. If you have any follow up questions, please feel free to reach out to Alexander or myself. We'll be happy to get back to you or schedule a time to talk. Thank you so much, everyone. We'll talk to you next time.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation. Have a great day.