BlueLinx Holdings Inc. (BXC) Q3 2022 Earnings Report, Transcript and Summary

Greetings and welcome to the BlueLinx Holdings' Third Quarter 2022 Results Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ryan Taylor, Vice President, Investor Relations and Treasury for BlueLinx Holdings. Thank you. You may begin.

Thank you, operator and good morning, everyone. Welcome to the BlueLinx Holdings' third quarter 2022 earnings call. Presenting today are Dwight Gibson, President and CEO of BlueLinx; and Kelly Janzen, our Chief Financial Officer. Our third 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. Today's discussion contains forward-looking statements. Actual results may differ from those forward-looking statements due to various risk factors and uncertainties, including the risks 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. It continues to be an exciting time to BlueLinx and 2022 has been a historic year for our team. Despite a volatile end market environment, we are on pace to achieve our most profitable year ever. And we have invested prudently to advance our strategy of further strengthening our balance sheet. Through September, we have delivered $3.6 billion of sales, $415 million adjusted EBITDA and generated $246 million of operating cash. And we are on pace to deliver record earnings per share and operating cash in 2022. As compared to the first 9 months of 2021, we grew sales by 9% and adjusted EBITDA by 18%, while generating operating cash nearly 2x greater than the prior year period. Our strong financial performance has fortified our balance sheet and given us the flexibility to prudently invest in high return growth opportunities, while maintaining significant liquidity for the future. Our disciplined capital allocation approach was punctuated with our strategic acquisition of Vandermeer Forest Products on October 3. Vandermeer provides us a platform for specialty growth in the Pacific Northwest and gives us a footprint that now serves all 50 states. This acquisition demonstrates our ability to identify and acquire high quality, strategic assets at an attractive valuation. We will continue to pursue attractive acquisitions and I believe we are well-positioned to be opportunistic, given our strong balance sheet and a softer macro environment. In addition to the Vandermeer acquisition, through the first 9 months of this year, we've invested $19 million in capital expenditures to support future growth. And we repurchased 9% of outstanding shares. Even after these investments, our financial position remains strong with net leverage below 1x and available liquidity over $560 million including over $220 million of cash. As we prepare for 2023 and beyond, we believe our scale, strategic supplier relationships and strong balance sheet are key differentiators that position us to take advantage of opportunities as demand in the U.S. housing industry moderate. And we will continue to invest in our strategy to optimize productivity, increase our specialty product sales mix and drive world-class performance, while maintaining a disciplined approach to capital allocation. A refresher on the Vandermeer acquisition. Vandermeer is a wholesale distributor serving the Pacific Northwest, Alaska and Hawaii, as well as British Columbia and Alberta, Canada. Over the past year, Vandermeer generated approximately $150 million of sales and just under $20 million of EBITDA. The total purchase price was $67 million. And we paid just over 3x trailing 12 months EBITDA for the business. We funded the transaction with cash on hand and expect it to be immediately accretive to earnings per share in the fourth quarter. This acquisition accelerates our growth in Specialty Products, particularly siding, expands our geographic presence in attractive metropolitan areas and enhances our strategic supplier relationships and ability to serve our national accounts. We also believe there are opportunities to expand sales for our key specialty products in Vandermeer's markets, including our top private label brands, onCENTER for engineered wood and PrimeLinx for millwork. We prepared extensively for the transaction. And so far the integration is going as planned. Turning now to our performance in Q3 2022. We delivered $1.1 billion of sales, $189 million of gross profit and $100 million of adjusted EBITDA, our fourth consecutive quarter with $100 million or more of EBITDA. Our Q3 results further demonstrate the strength and stability of our Specialty Products business which comprised 68% of sales and 80% of gross profit. Specialty Products sales grew 13% year-over-year to $724 million with gross margin of 21%. The growth in Specialty Products was broad-based with double-digit growth across our strategic product categories, including engineered wood, millwork, siding and industrial products and we generated $143 million of operating cash in the third quarter, a record level. Shifting gears to the U.S. housing industry. As a reminder, approximately 45% of our annual sales are tied to the repair and remodel market, with 40% tied to residential new home construction and 15% related to commercial markets. Over the past 2 years, demand across these end markets outpaced supply and fueled explosive growth. However, with mortgage rates more than doubling this year and a historically high inflation and significant home price appreciation, home affordability has been reduced for most parts, leading to a dramatic slowdown in new home starts. In the third quarter alone, single-family starts in the U.S. declined 18% year-over-year and 20% sequentially. Over the past 8 weeks, we have started to experience impact of these developments on our business as demand for building products moderated and supply constraints began to ease across many product categories. As we head into 2023, we believe demand for building products will slow as new home starts decline and growth in repair and remodel activity moderates. We believe certain factors, including the undersupply of homes, supportive demographic shifts, necessary repair activity and high levels of home equity are positives from industry over the medium term. In the repair and remodel market, we believe recent housing turnover, aged housing stock and high levels of homeowners' equity will support continued growth in 2023. The estimate published in October from the Joint Center for Housing Studies supports this view with remodeling investments expected to grow, albeit more slowly over the next 4 quarters. We believe growth in the repair and remodel market ties in well with our strategy to grow in key specialty product categories. We will continue to focus on the things within our control while executing our long-term strategy. Our key strategic priorities include shifting our sales mix to 80%-plus Specialty Products, expanding our relationships with strategic suppliers and key customers, driving procurement excellence, optimizing productivity and rigorously managing our working capital. We are confident that our strategy, along with our strong balance sheet and disciplined approach to capital allocation provides us a differentiated opportunity to create compelling value for shareholders. In summary, we have delivered historically strong financial results in a volatile environment and made good progress on our long-term strategy while fortifying our balance sheet. Our position as a national leader in building product distribution gives us confidence in our ability to navigate a softer demand environment going forward. I'm proud of the entire BlueLinx team for their efforts and contributions to the quarter. That concludes my opening remarks at this time. I'll turn the call over to Kelly for a more detailed discussion of our financial results and capital structure. Following that, I'll provide closing remarks before we take your questions. Kelly?

Thanks, Dwight and good morning, everyone. Taking a closer look at our third quarter results. Net sales were $1.1 billion, up 9% year-over-year. Specialty Products sales grew 13% over the prior year and structural product sales were up 2%. Gross profit was $189 million and gross margin was 17.9% for the quarter, up 210 basis points versus the prior year. 80% of our gross profit was from Specialty Products sales. Looking now at the third quarter results for Specialty Products. Net sales were $724 million, up 13% or $83 million year-over-year. This growth was primarily driven by continued value-based pricing. Volume was relatively flat overall with an increase in engineered wood volume offset by lower millwork. Gross profit on Specialty Products sales was $151 million, up $4 million or 3% year-over-year. Specialty gross margin was 20.9%, a strong margin from a historical perspective, however, down 200 basis points from 23% in Q3 of last year when supply was predominantly on allocation. Through October, Specialty Products gross margin was approximately 20%, with daily sales volumes down modestly on a sequential basis from Q3 of 2022. This reflects some normal seasonality in our business as building activity generally slows in the winter months as well as some impact from the recent changes in the macroeconomic environment. Now moving on to Structural Products. Net sales were $336 million, up 2% compared to the prior year period. This increase was primarily due to higher composite lumber prices, partially offset by lower composite prices for panels. Per random length, the average price in the third quarter of 2022 for framing lumber was $587 per thousand board foot, up 26% year-over-year. And the average price for panels was $671 per thousand square foot, down 12%. Structural sales volume increased modestly year-over-year, primarily in panels. Gross profit was $38 million, up $32 million year-over-year and gross margin was 11.3% as compared to 1.7% in the prior year period. The increase in gross profit reflects the benefits from our continued improvement in managing structural inventory. It is also impacted by the dramatic decline in wood-based commodity prices we experienced during the third quarter of last year. At the end of Q3 of 2022, lumber prices were down to around $500 per thousand board foot and panel prices declined to about $600 per thousand square foot, a 17% and 8% decrease, respectively, compared to the start of the quarter. As a result, we recorded a $4 million lower of cost or net realizable value reserve at the end of September to adjust our structural inventory value to reflect the reduction in market pricing. This partially offset the reversal of the $9.8 million reserve recorded earlier in the year in Q2 using the same methodology, resulting in a net benefit of $5.7 million to Q3's gross profit. Our team continues to do an exceptional job managing structural inventory through leveraging consignment and utilizing centralized purchasing and pricing decisions to keep structural inventory levels low and mitigate risk. Over the past 2 years, we have reduced structural inventory by about 65% which has significantly improved our ability to manage volatility in wood-based commodity prices. Through October, daily volumes for Structural Products were generally consistent with Q3 2022 level and Structural gross margin was in the range of 9% to 10%. This excludes any net impact that could arise from inventory adjustments. We will continue to evaluate market pricing for wood-based commodities and adjust accordingly at the end of each period. SG&A was $92 million in Q3 of 2022, consistent with our quarterly run rate in the first half of the year. On a year-over-year basis, SG&A increased approximately 20% due mostly to higher delivery costs, along with strategic investments to build capabilities in our workforce and to support our specialty growth and branch optimization initiatives. As a percent of sales, SG&A was 8.6% in Q3, a good outcome given the inflationary environment. Net income was $60 million, up 26% over the prior year period. And diluted EPS grew 35% to $6.38 per share driven by the increase in profitability and a $0.43 benefit from our share repurchases during the year. Diluted shares outstanding were 9.3 million, down from 10 million in the prior year period. Our tax rate for the quarter was 26.2%, in line with our expectations. For Q4, we anticipate our tax rate to be in the 20% to 24% range. Q3 2022 adjusted EBITDA was $100 million or 9.4% of net sales. That's 130 basis points better than the prior year period. As Dwight mentioned, this is the fourth consecutive quarter that we've reported adjusted EBITDA of $100 million or greater. Turning now to cash flow and working capital. During the third quarter, we generated operating and free cash flow of $143 million and $130 million, respectively. Our cash generation was supported by a reduction in receivables which also reflects wood-based commodity deflation during the period. We ended Q3 with $536 million of inventory, of which more than 85% related to Specialty Products. In total, overall inventory was down 7% sequentially as we continue to closely manage buying decisions and inventory levels. We also continue to invest in our business. In Q3 2022, we invested $12 million of cash and capital expenditures related primarily to enhancements to our distribution branches and upgrades to our fleet of rolling stock. For the full year, we expect to invest at least $30 million in capital expenditures in these same areas. Future investments will be focused on continued facility improvements and upgrading of our fleet as well as enhancing our digital and technology capabilities. Looking now at our balance sheet. As of the end of the third quarter, cash on hand was $229 million. Total debt was $573 million and net debt was $343 million. Net leverage was 0.7x, down from 1.3x at the end of the third quarter of 2021. When considering our cash on hand and undrawn revolver capacity of $346 million, available liquidity was $576 million at the end of Q3. That's the highest level of available liquidity we have had at any point in our history. Following the acquisition of Vandermeer, our net leverage remained below 1x. And as of October 31, cash on hand was over $220 million and available liquidity was over $560 million. Reflecting back on the past 2 years, we have been deliberate in our approach to fortify our balance sheet. Since the end of 2020, we reduced total gross debt by 5% and recapitalized our debt by issuing $300 million of senior notes at 6%, retiring our term loan and amending our credit facility. These actions significantly improved our debt structure and extended our debt maturities. We have no material debt obligations until 2029. These actions, combined with our strong EBITDA and cash generation over the past 2 years, fortified our financial position. In turn, it's enabled us to expand our capital allocation options and invest in high-return opportunities, including organic growth investments, acquisitions and share repurchases. As a reminder of our guiding principles for capital allocation, we intend to maintain a strong balance sheet which enables us to invest in our business through economic cycles while maintaining a long-term target of net leverage of at or around 3x. As we invest for growth, we will evaluate both organic and acquisition opportunities that yield a risk-adjusted return above our weighted average cost of capital and are consistent with our strategy to increase our mix of specialty products. We will maintain a disciplined approach to all growth investments comparing those opportunities against the value of returning capital to shareholders. To summarize, in the third quarter of 2022, we delivered 9% sales growth year-over-year, 35% EPS growth, 27% adjusted EBITDA growth and also delivered a record level of operating cash. And through the first 9 months of the year, we invested $67 million to acquire Vandermeer, $66 million to repurchase 9% of our outstanding shares. This includes the completion of our accelerated share repurchase plan in Q3 and $19 million in CapEx to support our business. Even after these actions, our balance sheet is in excellent shape with low leverage below 1x, over $220 million of cash on hand and over $560 million of liquidity. Looking forward, we are focused on executing our strategy, maintaining a strong financial position and delivering long-term value to our shareholders. At this time, I'll turn the call back over to Dwight for closing remarks.

Thanks, Kelly. In closing, through the first nine months of 2022, we have delivered 9% sales growth and 18% EBITDA growth while generating $246 million of operating cash, nearly 2x the prior year period. We acquired Vandermeer, invested in organic growth and repurchased 9% of our outstanding shares. Even after that, our financial position is very strong and we will continue to invest 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 are 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. And at this time, we are happy to answer any questions.

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

This is actually Danny Eggerichs on for Greg today. I guess just starting maybe anecdotally with your view of your different markets going into 2023, maybe the balance between new construction and R&R activity, obviously, maybe some lessening of that new construction market. I guess how are you seeing potentially consumer dollars being reallocated into more R&R-type spend in the wake of maybe shifting away from that -- the new home sales. Just wondering what you're seeing there now and maybe what your expectation is entering into this new year.

Yes. Thanks for the question. So I think the story around what's happening with new home construction is fairly well told at this point. So clearly, there will be some further moderation there as a result of all the actions that are happening, particularly around rates and driving affordability challenges. As a reminder, 45% of our demand, we think, comes from the repair and remodel space and 40% from new home starts. And so we're prepared for a -- and are preparing for a softer environment on the start side, so continuing to really drive lean inventory management, continue to focus our efforts on the value we bring and our value-added services and communicating that value to our key customers to make sure we get appropriately compensated for that and also looking for other opportunities to drive efficiencies in the business. On the R&R side, we expect the environment to be a bit better and expect further growth in that space for all the obvious reasons. The vast majority of homeowners now are locked in at mortgage rates lower than what they can get out in the market. There's been a fair amount of purchases of new homes recently. And generally speaking, when you see that level of activity, it spurs some remodeling activity and we expect to be really well-positioned to support that. So we're going to continue to focus on the things that we can which is providing a high level of service to our customers, making sure that we have the products and the services that are appropriate and necessary in delivering them quickly, safely and making sure that we could support their needs going forward.

Got it. Maybe just digging into specialty margin a little bit. I guess in light of the more challenging macro, I mean, what is your confidence level? Obviously, you gave the October 20% level. What’s your confidence that you can stay at somewhere near that level given maybe some further easing of supply chains and how pricing looks?

Yes. So that's a critical element for us, something that we spend a lot of time and energy on internally. And so we've done quite a bit of work over the last couple of years, 1.5 years, in particular, making sure we have better processes around our pricing, making sure pricing reflect the market expectation and also the value-added that we bring, make sure that we've segmented our customers appropriately and are having the appropriate conversation around relative pricing for them as is necessary. So we're going to continue to focus on those things. Clearly, as supply constraints ease and demand falls that will provide pressure. But we're staying really focused on continuing to sell our value, communicating our value, making sure that's clear. And we'll continue to stay really, really focused on driving that outcome and we're confident that those actions will be beneficial over the medium and long-term.

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

Great. Just wanted to follow up on that last question and maybe take it from a little bit different angle. Clearly, specialty margins in Q3 still pretty strong but below Q2 and it looks like we’re moderating here a bit in Q4. Has the pace of that surprised you at all, I guess, to date? And is there anything from a product-specific standpoint relative to the framework you used to get to that normalized gross margin range that you think is at risk or has surprised you at all? Any thoughts there?

Yes, I'll start and maybe Kelly could add some color as well. I think it's important to level set the context around what's happening in the market. The rate of change in rates is unprecedented, right? So more than doubling of mortgage rates and less than -- roughly around 6 months. So the market isn't accustomed to that level of change at that rate in such a short period of time. And so there's going to be some settling out that happens and the demand impact, I think, is going to be meaningful, coupled with, at the very same time, supply constraints really easing. I think our ability to maintain the margins we did in Q3 and even to this point is a meaningful accomplishment. That being said, we're going to continue to watch the market. We expect supply to continue to be eased and we'll see what happens with demand. So we're going to continue to navigate that, again, focusing the things we can, our strategic pricing actions, our customer segmentation, making sure that the value-add we bring, particularly around things like EWP continues to be communicated to our customers and we'll navigate as appropriate. The interesting category that a lot of supply came to the market unexpectedly was millwork. So there's a fair amount of that in the market now and that's putting some pressure on margins. But again, we're being very thoughtful around that, very disciplined around that. And we'll continue to run the play that we've been running and challenge the teams to deliver a good outcome.

Yes. And I'll just add, I think it's normalizing and maybe the pace is always hard to predict. But for the last few quarters, we've been mentioning that when things would normalize, we would expect the margin to be in the range of around where we're starting to see it for October. So I think it's -- I think it really gives us a lot of validity to our models and what we thought was going to occur and we don't know what's going to happen going forward. There's still a lot of macro environment challenges and we'll just continue to monitor that and continue to update you as we go forward. But I think right now, it's going right in line with what we've been communicating.

All right. Great. That's helpful. And then maybe I'll ask one more and jump back in. But realizing you don't specifically give guidance on specialty pricing and there's a lot of different product categories within that. As we get into Q4, do you still expect pricing to be favorable on a year-over-year basis? And any thoughts around when that might flip and start working against you?

I think, hey, just a point of context and reference. Q4 2021 was an interesting time. If you recall, a pretty big uptick in structural margins, we saw a pretty big rebound from the bottom kind of the September time frame and that moved up a bit. We don't anticipate that will happen this quarter. And then we also -- there was continued strength on the specialty margin side. Allocation continued to be really tight. Demand continued to be really strong. So hey, our focus is on driving the highest level of profitability we can. We expect that the guidance we've given previously around margins and thoughts at our Investor Day or where we're expecting the business to land and provided the market environments remain as is. Rates are going to get announced again today. We'll see what the Fed does and there'll be continued activity. But again, we're going to focus on making sure we continue to service our customers well, continue to drive good customer segmentation, we continue to drive pricing, consistency and process throughout the organization and continue to focus on delivering really excellent service to our customers.

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

Congrats on the strong quarter. So at your Investor Day, you gave a kind of a downside scenario or framework, I guess, the way to think about margins and a 25% revenue decline. Can you talk to us -- I think a lot has probably changed since that took place. Talk to us about, I guess, how you feel about that scenario today. And then if for whatever reason, it were to be worse than that, if revenue were to decline more than the 25% versus 2021, how to think about decremental margins on the downside?

Yes. Well, thanks, Reuben, for the question. We put a lot of thought and thoughtfulness in the modeling that we did to get ready for Investor Day. And so I think kind of to the earlier question that we answered, we still feel pretty good about where we are as it relates to that modeling and where that -- and in the normalization that we're starting to see, I think it is validating the fact that we feel that, that was an appropriate range to think about. Certainly, we do with the softness, do expect some impact. And when you're seeing that, we're seeing those margins come into a reasonable range right around that -- those numbers that we gave. And again, just to reiterate that, we're saying in a normalized environment, we expected margins to fall into more of a 19% to 20% range for specialty and around 9% for structural. And I think that's exactly what we're seeing right here in October. And what we've -- what we would defend as something that we feel comfortable with. Do we know what further decrement would bring? We don't know exactly is the short story. We are -- in all of our models, it's fairly complicated as it relates to the number of products that fit in our specialty. And so it really just depends on how we manage and strategize around the pricing of each category independently. And also what allocation brings and what the -- with the buildup in the inventory and the supply chain around each product line brings. So that being said, I wouldn't change what we have right now. I actually feel really confident about where we are with all of that knowing that we could have changes that we can't anticipate and we're going to keep on top of it and we're going to just keep communicating what we see as we go forward. But I really feel great about where we have landed as it relates to what we thought was going to happen and when it's happening.

Yes. We feel pretty good about the work we've done to prepare for a softer environment. A lot of the activity that we've been focused on as it relates to driving efficiency improvements, simplifying our business, getting a level of capability in the organization to manage through all economic cycles. We think those things are starting to really bear fruit now and we would really lean into that as we think about 2023 if it's going to be a tougher environment. And the play we've been talking about and the areas of focus we've been driving are the right ones and we'll just lean in hard if needed, if we see further demand deterioration beyond that downside case we talked about at Investor Day.

Okay, perfect. And then, the balance sheet is obviously in great shape. What -- even in some of the downside scenarios, I'd imagine you're going to generate a decent amount of cash going into next year as well. That's all the increased share repurchase. I guess, any changes or an update on how you think about investing in this environment, some of that cash? Any thoughts on M&A? Obviously, you just did a deal but has the pipeline increased? Does it seem more likely that folks will sell that maybe or kind of seeing the tide turn a little bit? And just a big picture update on capital allocation would be great.

Yes. I'll get it started. So, we put a lot of thought into how we think about capital allocation and we've talked about that at length. Kelly has kind of provided a lot of details around that. We're staying fairly consistent with our approach. We're going to look at opportunities that allow us to create a return that we're excited about. We still think we have opportunities from a CapEx perspective to continue to make the business better. And again, things that will allow us to have greater capacity around our specialty business and lower our cost to run the business, a lot of the investments that we've made, whether it be rolling stock or other equipment or the facility improvement to support that and we're going to continue to kind of lean into that. And we also like our positioning as it relates to inorganic opportunities. And we're very pleased with the Vandermeer deal and we remain active and in search of other opportunities and monitor our strategy, whether it be around geographic expansion or specialty growth and we're going to continue to be highly engaged in that space. And again, if we find a good opportunity at an attractive price that supports our strategy, we're in a position to kind of move on that. So those are the things we'll continue to do, investing to make the business better. We do believe the long-term fundamentals around the space we operate in, housing are strong. There's still not enough homes out there for the demand that exists. We’re in a unique environment now with rapid rising rates really driving a pullback. But the consumer balance sheet remains very strong and people still need places to live and they still need to make them work for the lifestyles they want and we’re going to make sure we’re prepared to participate in that in a big way once things normalize.

Our next question comes from the line of Jeff Stevenson with Loop Capital Markets.

So there have been some building products companies that reported they’ve started to see some slowdown in discretionary R&R demand during the quarter. Just wondered if you could provide an update on what you’re seeing there and hearing from suppliers and channel partners right now regarding R&R demand as we move into 2023?

Yes. I mean we watch that very closely, obviously, given it's such an important part of our business. On the demand side, it's still holding, right? There's some seasonality that we're starting to see in Q4 as weather changes and less building activity happens. But we haven't seen a tremendous pullback in actually some end markets. The stuff we do on the retail side, the pro dealer side have actually held reasonably well. But we're going to watch it closely. We expect that there'll be some volatility there. All the forecast suggests that will hold in '23, albeit at a lower rate but we still feel pretty good about the R&R space and our ability to kind of play there.

Great, that's helpful. And then last quarter, I asked you about how you plan to manage Specialty Products inventories moving forward. And you mentioned that the focus will be on turning over inventories quickly and finding the right supply and demand balance. And just wondered if you could provide an update on how that strategy is working and whether there could be opportunities for destocking in the future on the specialty side, especially as supply constraints start to moderate here?

Yes. We’ve been really focused on improving our capabilities there and I’m pleased with the progress we’re making. We’ve been able to demonstrate some really good inventory management practices on our structural side and we’ve moved some of those activities and are moving some of those activities more in our specialty business. And we still think there’s opportunity there and we’re being very thoughtful around given the demand environment we’re in, how we think about supply and what we bring in and how much and when. And so we’ll continue to focus on that and we expect that to support improved velocity in our specialty business going forward.

Our next question comes from the line of Walt Liptak with Seaport Global.

And I’ll give you congratulations too. Great quarter. I wanted to ask about the comments about millwork and the pressure there. And I wonder if you could just provide some more details, maybe starting with how big of a product is as a percentage of sales, just refresh us on that? And is this an inventory correction? Or is it a capacity issue? Like what do you think the timing is here for the millwork pressure on margins?

Yes. So I'll give you some context. So a fair amount of that product comes from overseas, Walt and then the height of the pandemic and up until recently, supply constraints were tough, whether it be transportation challenges and things of that nature, getting that product across to us. A lot of those things started to ease and a lot of capacity got to the U.S. a little bit sooner than folks had expected and at greater amounts, folks have come ordered ahead to kind of manage through that. So that's one of the drivers of a fair amount of supply being available across industry on millwork in the third quarter. We feel pretty good about where we are and we're working through that. The benefit, again, we have, given our scale and our national footprint is that we can position inventory in the place where demand is strongest and allows us to manage that optimally and protect margins. So we're working through that. It's a great product. It's a product that we like. It's a product that gets good value in the marketplace and we feel confident that we'll be able to work through it. But that's really the draw-up of what happened there. A lot of that easing happened all at the same time and fairly high levels of product coming to our market at the same time. But we feel pretty good about where we are and teams focused on it and we're making sure that we're thinking about volume and price appropriately.

Yes. And it's one of many products that we have in our specialty business. We normally list a lot of the different products a lot and we have in that group and so it's not the primary product.

Yes. And are there any other products within specialty that are similar to millwork where there could be one of these inventory adjustments that you’re on the watch for?

No. Actually, we -- this was a unique situation given the fact that most of its imported. That's why we called it out. The rest of the categories are very much in line with how we normally operate.

And then, if I could switch over to Vandermeer and that acquisition, what kind of an impact do you expect in the coming quarter on gross margin? And what’s your approach to managing Vandermeer? Are you taking an active approach? Or are you going to let them get some back office things done first before you start adding your own process?

Yes. So we're really excited about them being a part of the BlueLinx family now, very well, highly regarded organization, great exposure in the Pacific Northwest. The markets they operate in are well in line with the markets we want to be leaders in. So we really feel excited about having them in the team. And our approach is to grow that business. They have some great products and relationships on the specialty side. There's some gaps we think we can supplement and support, millwork actually being one of them and EWP being another. And so we think there's great volume growth opportunity in specialty through the combination and the team is focused on making sure that's appropriate, spending a lot of time with their customers. We also have some opportunity to improve the delivery capabilities. They really operate primarily through third parties and we're looking to put in place a fleet there in that market which great reactions and positive reactions too from their customers and suppliers, to some extent. So we really see integrating them into the business, building upon the great track record they have, providing a high level of service to their customers, providing a broader specialty offering to their customers. And as a consequence, I expect really good outcomes from that as we move forward.

And maybe one last one on M&A. I've had one industrial company that recently took on a really big transformational acquisition and shareholders didn't like it. It was too big, taking on too much debt. And I wonder of your -- what your view is at this point in the cycle on M&A. It sounds like you're clearly still looking but just size of M&A, what's your range?

Yes. No real deviation from what we’ve communicated in the past. We still think there’s opportunities to improve our scale and our reach and particularly on the specialty side in certain markets. So we’re going to stay focused on that. It’s a fragmented space and we think there are deals similar to Vandermeer give or take, that could be interesting. And we will only move forward if we believe it’s something that’s going to create meaningful value that advances us down our path to being a bigger specialty organization, more profitable and more efficient. So that remains our framework. And we’re just happy to have the opportunity to engage and hopefully make some good choices.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Taylor for any final comments.

Thanks. Thank you, Melissa. Thanks for everybody that joined us on the call today. We appreciate your engagement and your questions. Alexander [ph] and I will be available if there’s any follow-up questions. We look forward to speaking with you next time. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.