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…

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…

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.