Greeting, and welcome to the BlueLinx Holdings’ Second Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A 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. And welcome to the BlueLinx Holdings’ second quarter 2022 earnings call. Presenting today are Dwight Gibson, President and CEO of BlueLinx; and Kelly Janzen, our Chief Financial Officer. Our second 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 Web site, bluelinxco.com. We encourage you to follow along with the detailed information on the slides during our webcast. Today's discussion contains forward-looking statements, actual results may differ significantly 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. 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. Before I get started, I want to acknowledge Leroy [Diggs], a material handler at our Richmond branch and congratulate him on celebrating 50 years of outstanding service to BlueLinx. Leroy exemplifies our core value of teamwork and we thank him for his commitment and dedication to the company. It is people like Leroy who make BlueLinx a great place to work. It continues to be an exciting time to BlueLinx and a dynamic period for the US housing industry. Our first half financial results are the best combination of first half results in our company's history. We delivered $2.5 billion of sales, $314 million of adjusted EBITDA and $97 million of free cash flow. As compared to the first half of 2021, a period of historically strong demand, we grew sales by 9% and adjusted EBITDA by 15% while generating operating cash about 5 times greater than the prior year period. This represents our most profitable first half ever. In Q2, we delivered our third highest quarter ever in three key metrics, with diluted EPS of $7.48 per share, adjusted EBITDA of $112 million and $101 million of operating cash. We delivered a strong level of profitability and cash generation despite greater than 50% [deflation] in wood based commodities and increased market uncertainty due to rapidly rising interest rates. Following two years of strong growth in the building products industry underpinned by low housing supply and fueled by the global pandemic, the first half 2022 marked a turning point, a several key indicators are pointing towards a slowdown. Moderation from the high demand we experienced since the onset of the pandemic could lead to an easing of supply chains and a more stable environment in…

Thanks, Dwight and good morning, everyone. As Dwight just mentioned, historically speaking, our financial results for the second quarter of 2022 mark one of our strongest performances on record despite significant headwinds from the wood based commodity deflation. Net sales were $1.2 billion, down 5% year-over-year in total. Specialty product sales grew 70% over the prior year. This growth was offset by a 29% reduction in structural product sales, which was primarily caused by the steep declines in wood based commodity prices during the period. Gross profit was $201 million and gross margin was 16.3% for the quarter, and over 85% of our gross profit was from specialty product sales. Taking a closer look at specialty products for the second quarter. Net sales were $788 million, up 17% or $113 million year-over-year. This growth was primarily driven by our disciplined value based pricing offset partially by a modest decline in volume as compared to the second quarter of 2021, which is a difficult comparison given the exceptionally strong demand for building products the industry experienced during this period last year. The modest decline in volume was primarily related to specialty treated lumber and panels. And within that, however, was a nice increase in siding volume. On a sequential basis, sales of specialty products increased 3%, including 1% volume growth. Gross profit on specialty product sales was $180 million, up $15 million or 9% year-over-year. Specialty gross margin was 22.9%, a strong margin from a historical perspective but down 150 basis points from 24.4% in Q2 of last year, which was an all time high. Through July, specialty product’s gross margin was in the range of 22% to 23%. And sales volumes were consistent with Q2 levels. Now moving on to structural products. Net sales were $452 million, a 29% decrease…

Thanks, Kelly. In closing, we delivered our best first half on record with $2.5 billion in sales and $314 million of adjusted EBITDA, representing 9% sales growth and 15% adjusted EBITDA growth over a very strong first half of 2021. We continue to grow our specialty products while driving continuous improvement throughout the business. Our financial position is as strong as it has ever been and we are investing in our business to drive efficiency and increase our capacity to deliver profitable growth. We remain laser focused on the things within our control, accelerating growth in specialty products, optimizing productivity and driving world class performance. Our aspiration is to be the preeminent building products distributor in North America and we believe we have the scale, products and service offerings to continue to expand relationships with our best customers and key suppliers. We're confident that our strategy will create long term value for all stakeholders and we are steadfastly committed to that goal. That concludes our prepared remarks. At this time, we're happy to answer any questions.

[Operator Instructions] Our first question is coming from Greg Palm with Craig-Hallum.

I guess a couple of items more strategy wise, lots changed over the last few months. And I'm just wondering how that's maybe changed your view of the business, whether you're approaching strategic investments any differently, capital allocation. Just curious if there's any areas of the business where you're becoming either more conservative or more aggressive, just given what's going on in the macro?

We really like where we are. We feel very confident in the strategy that we communicated, we're focused on driving mix in the right direction, building scale in the right markets, and we think we're well positioned to lean into that strategy. As always, we're going to continue to look for opportunities to make the business more efficient from a process perspective and from a people perspective, and that doesn't change. But we think there are opportunities particularly surprises [abed] and for us to meaning to trying to take share organically and as always looking at the right opportunities in organically to accelerator strategies.

Are you able to shift maybe more focused towards let's say the R&R market if it holds up better than new builds or maybe areas like manufacturing housing or even some of the non housing areas like commercial? I mean, are you able to shift more focus in some of that if traditional housing continues to slow here?

If you think about our mix, 60% of our businesses is non new home construction driven. So R&R and those other areas you mentioned, and as we think about the products we're excited about, the products we're leaning into, they play well in those spaces. So we think there's a natural connection in terms of us leaning into the markets that have still fairly healthy dynamics around it and we're going to continue to kind of focus on that.

And then last one, thinking about the specialty segment and the tailwind from pricing that the business has gotten over the last, I don’t know, 18 months or so. How much of that is sticky in a slowing housing environment, how much would need to normalize if overall housing demand starts to come in?

So I'll start us here and Kelly can add some color. Clearly, there's been supportive pricing environment across the business, a little bit more volatile on the structural side but definitely a little bit more stable on the specialty side that we've been able to take advantage of. But let's be clear, the team has also done some intentional things around our pricing capabilities from an analytics perspective, from an execution perspective, which we believe is going to allow us to enjoy better specialty margins than we've had historically. And we are continuing to kind of really emphasize that and lean into that from a governance perspective, from a margin floors perspective, all of the things we think are going to allow us to continue to perform well on the specialty side. And we believe there's absolutely a more opportunity to continue to do that.

I would echo Dwight's comments and just add to that, that we continue to do analysis that supports the numbers that I've mentioned in the past that we think that 19% to 20% specialty margin is a good margin to think of a normalized margin in a relative downturn environment, and which I think is the macro and that we're looking at right now. So I feel really comfortable with all the discussion we've had around that previously and we wouldn't change our view on that at this time.

Our next question is coming from the line of Kurt Yinger with D.A. Davidson.

Kelly, I just wanted to start off in your prepared comments on specialty you noted, I think 1% volume growth. Was that just siding itself or kind of the collective focus growth areas in specialty?

So that's kind of within -- we generally had a modest decline overall. But we saw some -- we did see some bright spots such as siding. So that's just kind of indicating the couple areas where we saw some growth within the overall impact.

Okay, that makes sense. And over…

And that's relative to last year, which was a very strong quarter. So still a really -- it's still up from last -- from the sequential quarter, and I think that's what I was also referring to is that we were out in the sequential quarter.

And over the last couple of quarters, you've talked about some of the material availability challenge and how I guess that's kind of played in to the volumes on the specialty side. Has anything changed there in any categories that gives you confidence you could start seeing I guess improved volume trends on the specialty side, notwithstanding the end markets? And what are you focused on in terms of positioning the business to potentially pick-up some share into 2023?

So it's a mix bag, to be honest. We still see some challenges from a supply perspective in a couple categories. EWP remains constraint some of our industrial products. Barbara Ciment siding, but we have seen some easing in other areas around millwork and some outdoor living categories and some of the import products. And so we are really focused on just continuing to run strategy. So our national accounts, we think there is opportunity to continue to grow share of wallet with, and we are putting together programs and building sales efforts to kind of drive that. We are also looking at expanding availability of some of these products across our branches and across our network. So we are really excited about that. We see some opportunities to do more of that, particularly as it relates to outdoor living products, siding products, east region and the west region and parts of the south. So it's again, how do we drive great service levels for our best customers so we can earn more of their business, how do we make these products available in more parts of our network and how do we continue to focus on really executing at a high level and delighting our customers and continuing to operate as efficiently as we can.

And you mentioned that commodity volumes were, I guess, through July running ahead of Q2 levels. Does that represent any sort of shift in strategy in structural, given perhaps a lower level of risk with prices where they sit today?

It really doesn't reflect that. We always have ebbs and flows on the commodity volume, and I think it just represents a little bit of a -- just opening up of the markets as the prices are starting to come up. When they go down and people kind of hold back and I think we just had some increase in demand over the last few weeks as the prices have started to rebound. But no, nothing has changed in our strategy. We continue to keep inventory as low as possible and still serve our customers and manage that risk appropriately. So overall, we would still expect volumes to kind of be where they have been as it relates to lower than what we saw a couple years ago.

I'll emphasize that, we are pretty convicted in our approach. We are looking to really manage structural business as tightly as we can, and really make sure that we have just what we need for our core customers. And our emphasis, our priorities and what we see investment overtime is going to continue to be driving our specialty business and particularly our mix, on those five core categories that we talked about, no change.

No, I understand that. And obviously the specialty strategy is quite important. But I mean, if we look into 2023 and we do get a much more challenging demand environment. I guess, is there a downside to perhaps leaning more into the structural side where you walked away from business and I guess what would hold you back from doing that?

No. Again, I think, we spent a lot of time and energy thinking about how do we maximize the value creation for our business and how do we position ourselves in a way that we can continue to be a key partner for our key supplies and our key customers. And we are really convinced that the play we are running is the right play. It’s how do we make sure that the things we provide and provide value around it, how do we make sure we're connected to the parts of their business, both supplies and customers that they care about the most, allow them to service their needs the best, and we believe that's our specialty business. And we believe that continuing to create capability there, investing there, supporting and wrapping value around that is the right way to run. Structural plays a role, we want to make sure we're very clear on that role and it's complimentary to what we do. But it is, again, an area that we want to kind of continue to manage and keep inventory at a really good level, and we think even in a softer market environment that will still hold.

And just my last one on working capital. From where you sit today, do you expect that to be a use or source of cash this year?

We continue to -- you know we had a great quarter from a cash flow perspective, when you combine the earnings with the working capital. It was really deflation driven and as well as our focus on working capital. And we continue to focus on that and would expect, at this point, probably some continued deflation through the year, and so we're looking towards a cash flow positive for the rest of the year.

Our next question is coming from the line of Reuben Garner with The Benchmark Company.

So on the specialty side, Kelly, appreciate the normalized 19% to 20%. I guess my question is how volume dependent is that? In other words, is that 19% to 20% just kind of normalization in the supply chain and things kind of loosening up and so therefore pricing changes, or is that normalization, meaning going back to the single family starts we saw kind of pre-COVID? Can you just kind of clarify what that means and what would lead to downside to that level?

So it means really kind of going back to, I would say, around pre-COVID type of levels, and it's really -- we've continued to refresh that analysis as we consider the -- it's really both right. As supply chain open up, we would expect that volume would be more available to us. And as that sort of put the demand supply it’s going to put some pressure on pricing, that's kind of where we think we'd fall out given the changes that we've done in our strategic pricing approach. I think any downward pressure to that would have to be really just more of a fundamental shift in the overall macro environment to be worse than, I think, what we're currently anticipating at this point in time. So I couldn't totally anticipate what else would be pressure on that. You never know, is the short story. But I feel pretty confident around the analysis that we've done so far. And I think it would have to be -- and right now, we don't see that as a potential risk at this point. It could always happen.

And then question on SG&A and how to think about that kind of in that same normalization with lumber prices coming in, maybe volume normalizing. The last couple of quarters, I think north of $90 million pre-COVID that was kind of mid 70s. What was that dollar amount look like in a kind of normalized environment on a quarterly basis?

Well, if you remember around the time of COVID, we pulled in SG&A very, very tightly. We did a RIF, we also pulled in all of our discretionary spending and that brought us down into the 70s. Since then, we've been very targeted around adding certain costs back to invest on our workforce and then we've also had some of the discretionary spend come back for us to be able to serve our customers like T&E. And then in addition, we've seen some inflationary impacts in fuel and third party freight, and those types of things are in recent times related to our delivery costs that we mentioned. And that is probably the most volume dependent types of costs. So as we see cost -- I mean, volumes increase, we would see some SG&A increase probably related to that, and that would be not a terrible thing. But of course, we're being as efficient as we possibly can around those costs. So we monitor it closely. And we were at 91, we were in the 80s, last year. So I think we're still doing a great job containing our cost, considering our strategies that we want to employ going forward and the fact that we've had such a significant increase in profitability.

And the other element I'd add to that is we're focused on the efficiency for SG&A. And so as we think about it on a relative basis relative to our volume, that's one of the things we think about to make sure that we're getting the right return from our SG&A investment, and we feel pretty good about that. And Kelly and the broader team are really focused on maintaining that discipline in a good market and in the down market. And if you look at our SG&A as a percentage of sales, I think that's an area that we're going to continue to stay focused on.

And then last one from me, if I could sneak one more in, is the M&A pipeline. Any commentary about maybe how that's kind of evolved over the last few months, or is it increasing the likelihood that you guys are going to find a deal in this kind of choppy environment? Or is it making it more difficult and less likely to see something come to fruition?

So we remain very engaged in evaluating opportunities that fit with our strategy, again, allow us to serve our core customers better in certain markets, provide opportunities to continue to mix up on the specialty side and things that would kind of accelerate our sales down our journey. And interesting time, you've seen particularly as rates come up that financial sponsors are maybe a little bit more reticent. And again, given where we are from a balance sheet perspective, we think we're well positioned to move opportunistically if we see some good opportunities. So we remain very engaged, evaluating things, again, leveraging the framework that we shared and talked about to make sure we can create value greater than our risk adjusted cost of capital and we're continuing to really stay active there and we'll see what happens.

Our next question is coming from Jeff Stevenson with Loop Capital Markets.

So just do you still plan to maintain normalized specialty products inventory levels in the back half of the year given the continued supply constraints you're seeing in a number of categories, or would you expect at some point to run lower segment inventories due to an uncertain residential outlook moving forward?

We want to turn our inventory as quickly as we can. And we look at the velocity of that as a key element of how we are performing. So we are going to continue to really work with the teams, our sales teams and our product teams and our purchasing teams to make sure we have the right balance between supply and demand, and so that's an area of focus for us. And we have done a really good job with that on the structural side. And we are starting to really lean into that as well on the specialty side. So we look to continue to drive inventory velocity, not only the second half this year as we moved through 2023.

And then my second question is just on kind of your visibility into new residential volumes at the moment. I know you cited, you expect things to slow down at some point. But right now there is still elevated new housing backlogs given the dislocation between starts and completions over the past year. And just wonder how much of a backlog you have right now and how long that could kind of blast into the end of the year early next?

So I think you captured a lot of key elements, a lot of the builders. And if you listen to their earnings and conversations I've had are still -- have a fair amount of backlog they are working through in 2022 and obviously, some of our products support that. And we are continuing to make sure we are in a position to do that. And everyone is expecting to see some pull back in starts in '23. Again, that's 40% of our exposure. We continue to manage that fairly tightly and we we’ll be prepared for that. But we also see there’s an opportunity quite honestly, as some supply comes on to really drive some target selling and focusing some accounts that we have access to that we think we can do more of and potentially some new ones as well. So we feel okay as it relates to 2022 second half, as it stands today. But we are going to stay flexible and focused to make sure we can adjust in either direction.

And then, Dwight, you talked about before once supply normalizes in specialty that you'll be able to out pursue share gains moving forward. And you talked about EWP and fiber cement becoming less constrained. Would you expect to start seeing share gains here in the back half of the year based on your strategic initiatives, or how should we think about that moving forward?

That's our intent, that's what the teams are focused on, that's what their compensations align to, that's what we talk about all the time. Obviously, we got to do that in a environment that's fairly uncertain and fairly volatile. But our focus is on understanding where the opportunities are for share gain, making sure our value proposition is strong and leaning into that commercially and operationally. And our expectation is overtime that gains in these categories will be the result. Will that happen in the next 90 days or next 180 days [TBD], but that's where we are steadily focused.

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back to management for any closing comments.

All right. Thanks, Jesse. This is Ryan Taylor. I just want thank everybody for joining us on the call this morning. We appreciate your interest and the questions from our analysts. Alexander and I'll be around the rest of the day and throughout the balance of the week, if there is any other follow ups, please feel free to reach out to us. Thanks for joining us. We'll talk to you next time.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.