Greetings. And welcome to the BlueLinx Holdings' Fourth Quarter and Full Year 2022 Results Conference Call. At this time, all participants are in a listen only mode [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexandra, Manager of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. And welcome to the BlueLinx Holdings' fourth quarter and full year 2022 earnings call. Presenting today are Dwight Gibson, President and CEO of BlueLinx; and Kelly Janzen, our Chief Financial Officer. Our fourth quarter and full year news release and Form 10-K 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 risk 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. With that, I'll turn the call over to Dwight.

Thanks, Alexandra, and good morning, everyone. Thank you for joining us on the call today. Over the past year, our team has built BlueLinx into a stronger, more profitable and more resilient business. We have transformed our balance sheet with leverage under 1 times and total liquidity of $645 million. Despite the soft and market environment, we are positioned to continue to execute our strategy, which includes growing our higher value specialty product sales, driving operational excellence across our business, fortifying our balance sheet while investing in profitable growth, and building a strong team that is committed to driving a high performance culture and generating long term value. In 2022, favorable market conditions combined with these strategic priorities contributed to us achieving one of the best annual financial performances in our history, in terms of net sales, earnings per share, adjusted EBITDA and operating cash flow, even as market conditions began to decline late into the year. For the fiscal year 2022, we delivered $4.5 billion in sales and $296 million in net income. This translated into adjusted EBITDA of $478 million, a new record, and more than $32 in diluted earnings per share on an adjusted basis. We also generated a record $400 million in operating cash flows, of which approximately $170 million was allocated during the year to acquire Vandermeer Forest Products for $67 million, make capital investments that improve the effectiveness for our distribution facilities and fleet, and acquire 9% of our outstanding shares under our share repurchase programs. For the fourth quarter of 2022, we generated net sales of $848 million and $32 million of net income. This resulted in $3.97 per diluted share on an adjusted basis and $63 million for adjusted EIBTDA. We also generated $154 million of operating cash flow, a significant increase…

Thanks, Dwight, and good morning, everyone. I'll start with the full year results and then turn to the fourth quarter performance. As Dwight mentioned, 2022 was indeed one of the best financial performances in our company's history. For the full year, net sales were $4.5 billion, up 4% compared with the prior year. Gross profit was $833 million, an increase of 7% from the prior year and gross margin expanded 50 basis points to 18.7%. Net income was $296 million and diluted EPS was $31.51 per share. On an adjusted basis, net income was $306 million and diluted EPS was $32.55. Adjusted EBITDA for the 12 months was $478 million, up 3% year-over-year or 10.7% of net sales. We generated $400 million in operating cash flow and $364 million of free cash flow. We ended the year with $645 million of available liquidity along with a net leverage ratio of 0.6 times. Our full year performance provides us with a fortified balance sheet that positions us well going into a more challenging cycle while giving us the flexibility to execute on our strategy more effectively. Now looking at the fourth quarter. Our performance was solid despite a shift in market sentiment and a swift decline in volumes starting in mid-November that continued through the end of the year. We generated record operating cash and delivered strong margins for both our specialty and structural product categories. Net sales were $848 million. And when we compare this to the fourth quarter of 2021, a period where we saw significantly strong demand and price inflation, net sales were down 13%. Specialty product sales represented 70% of net sales, up from 66% last year and they were down only 8% over the prior year, while structural product sales were down 23% due to significant…

Thanks, Kelly. In closing, through the fourth quarter and full year 2022, we delivered solid results, highlighted by strong margins and record operating cash flow generation. We continue to make good progress in our strategic initiatives by focusing on our higher value specialty product sales, optimizing effectiveness in our distribution branches and building capabilities within the organization. Our financial position is very strong with ample liquidity, no impending material debt maturities and a low leverage profile. We have built a stronger, more resilient business and are prepared to navigate the downturn, and continue to progress towards our aspiration to be the leading wholesale building products distributor for the top brands and customers in North America. We remain focused on the things within our control, aim to create long term value for all stakeholders, and we are steadfastly committed to that goal. That concludes our prepared remarks. At this time, we are happy to answer any questions.

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

This is Danny Eggerichs on for Greg today. Just more broadly on maybe the overall housing environment, maybe your thoughts right now relative to a month or two months ago. You know given what a lot of the home builders have been -- comments coming from, from their calls, maybe a bit better than feared. So I guess just looking ahead to 2023, how you're seeing the overall maybe more new home construction market relative to what you were thinking month or two months ago?

We still expect it to be a challenging market on the new home construction side in 2023. I think the mood is a bit better but it's still expected to be double digits down year-over-year, and we think that's appropriate just given the activity levels. We're hearing from the builders in their communities, the conversations as a part of that at the Builders’ Show earlier this year and what we're seeing in our business and what we're hearing from our customers. So we still think it'll be a down year on the new home construction side and our guidance or expectation is kind of in the double digit level mid teens or so.

Maybe just digging into one on the specialty margin, appreciate the color quarter to date so far in that 18 to 19% range. Maybe just digging into that a little bit more, obviously coming from that 21.1% in Q4 that's a fairly sizable sequential decline, which isn't normal seasonality. So maybe whether it's pricing or volumes, maybe you can just bucket some of that stuff and a little more color on what's going on with the specialty margin?

Well, I think we've been saying for a number of months now that we didn't expect the 21% to be a sustainable number when we went to a more normalized environment. We've been talking about that 19% to 20% type of range. And of course, we're seeing a bit more impact than what you'd consider normal, I believe. But the team has done a great job holding price in this rapidly changing demand environment. And the primary reason we're seeing that decline is really around the demand pressure, particularly we've had lower demand on EWP recently, that's a high margin product. However, as costs adjust as we keep going, I think we would expect to stay in kind of similar range that we're seeing right now that 18% to 19% unless things get a lot worse. But right now, I think, we're kind of coming right in line with what we thought we would be when the market would correct. And then there's just other dynamics as far as working through market share and inventory management. So yes, I don't think we are surprised by that impact and we're managing it really closely. And like I said, the team is doing an excellent job on price right now.

And I'll add a bit of color to that. I think Kelly captured it really well. I think, the demand environment has really evolved meaningfully in the past 60 days or so. And I think the team has been really focused on a couple of things. One, making sure we are focusing on our customers and servicing them in a high quality way and so we've done a lot of work around customer segmentation, and that's just remains a priority for us. And then to Kelly's point in the mix, mix has shifted a bit, EWP, higher margin category for us. We're seeing fair amount of demand pressure there and working through that. And also the supply scenario is very different now than it was a quarter ago, and manufacturers are adjusting prices to reflect that. And we're working to kind of manage through that as well. So we're confident that the margin profile in our specialty business will continue to be meaningfully better than it was pre-pandemic, but we want to make sure we're in a position to be opportunistic, protect our share and continue to focus on our customers in a high quality way.

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

There's been a pretty consistent team in building products here in the second half of ‘22 around channel inventory destocking and some areas have been impacted more than others, but very few seem to have completely avoided that dynamic. Last quarter, you talked about seeing that a bit Millwork, but as you kind of look across the different areas within specialty today, are there any that stand out to you where you feel like order rates are being really negatively impacted by customers running down inventories or anything of that nature?

We're absolutely seeing different demand profiles across the specialty categories. Interestingly enough, Millwork’s actually holding up pretty well and as well as our industrial categories, and we're pricing the most pressure on the EWP side. And I think that's probably consistent with what manufacturers are saying and markets saying and just given what's happening with starts and things of that nature. So we're continuing to manage through that. We've actually had some success in that category in a couple of our regions and we're committed to continuing to position our ourselves to be the distributor of choice around that category, and all the value add things we do to make sure we can continue to support our customers in a high quality way.

Does it seem like we've kind of largely moved past that in Q4, and we're kind of back at normalized levels, and might be -- or might see a little bit of a seasonal bump heading into Q2, or where do you think we are in that kind of destocking equation?

I think, it's still relatively early in the year. We kind of shared what we're seeing through the first seven weeks, which is volume down in specialty year-over-year. And granted the comparable was a pretty strong one in ‘22 with the big bump up in demand and inflation, so that's something to be mindful of. But we still think we're not quite all the way there yet. I think our customers are still a bit cautious, still trying to navigate, there's uncertain environment, and they're being very lean in terms of their stocking levels, and we are making sure that we are also managing that appropriately. So not quite all the way there. And again, we'll see how this year goes but we think we're prepared and positioned to navigate it successfully and be ready to pounce when we see recovery.

And then just at a high level, could you talk about any kind of vendor wins or expansions with key brands that you're particularly excited about in 2023? And do you feel like the current environment is more or less advantageous in terms of kind of the refreshed BlueLinx’s platform starting to resonate with suppliers?

I mean, it's a fun topic and I could talk about that a lot. So I'm going to try to reign myself in a bit here. Yes, the team has worked really hard to make sure that we understand and build deeper relationships with supplies that we feel are strategic, and we've made some nice progress there. So siding is a good example, we've been able to kind of really secure some more supply and even a stronger distribution in relationship in the Texas market and a few others with [indiscernible], it’s something we're very, very excited about. We're continuing to kind of make progress with some other major siding suppliers that we've worked with historically in a couple other markets as well, and excited around what that's going to do for the business. And then we've also looked to partner even more closely with some of our larger supplies on the EWP side, and that's going to help us and position us well in a couple of regions where we weren't at the supply level, but I wanted us to be to make sure we could take care of opportunities. So definitely progress and I feel encouraged by that. And on the customer side as well, we spend a lot of time and energy making sure we understand where critical customers are, both regionally and nationally. And we've been able to secure some wins in our specialty categories with them as well that positions as well and I think as we move through 2023, against this broader backdrop of a tougher macro environment. But I think our supply situation probably in the strongest position it's been in a while, and we're starting to make some good traction with the customers that we're focused on.

And then just my last one, could you talk a bit about the contributions you've seen thus far from Vandermeer, and any kind of initial learnings or observations regarding that business and deal?

Yes, we're really excited about having Vandermeer Forest Products as a part of the BlueLinx family, tremendously talented team, very customer oriented, very commercially minded. They have great, deep, high quality relationships. And we're incredibly proud of the progress we've made in a really short period of time. The thing that's really been very exciting is the opportunity for product expansion in that market. They had really good capabilities and specialty particularly on the siding side. We've had the ability to improve kind of their EWP offering, bring in some additional products that they hadn't had access to, which is creating some good opportunities for growth. And we're starting to see that, we've been able to kind of grow with some of their existing customers as we've established programs for 2023. And on the operational side, they were a -- they didn't own their own trucks, they have their own fleet, so they generally delivered products through third parties. We're started to put some equipment into that market, which provides a little bit more consistency around delivery. And we're seeing that translate to growth opportunities as well. So early days yet but integration's off to a good start and we're excited about the possibilities of that business over time.

Yes, and I'll just add that related to the acquisition model, they're actually over-delivering to that model. So the financials have been excellent and it's just been a really nice accretive business to our company.

The next question comes from Reuben Garner with The Benchmark Company.

Maybe the follow up on the mix discussion within specialty. Is it safe to say that EWP probably was down more consistent? I guess you could just use the start of this year more consistent with that single family starts decline that you discussed in the month of January? And the other products maybe were down but much more modestly. Is that a safe assumption?

Yes, I think it's safe to say that the biggest impact we've seen is EWP as it relates to just the finishing up of the pipeline that came out of last year, as well as the starts down as you mentioned. So I think both of those are contributing and that's what we're seeing as it relates to the other product lines. The other product lines are actually really holding, but really hanging in there as a whole. Clearly, we have year-over-year variances, as Dwight mentioned, that are pretty sporty, right? So last year's really not the best benchmark, but I think we're certainly more of that than anything else.

And those other products would be more exposed to the R&R market that you're thinking is more flattish, right? So in that same vein, is there something going on in the structural side to start this year? I was a little surprised to see those volumes flat. I know you guys weren't exactly chasing business a year ago, so maybe it's just an easier comp dynamic than any color you could give. Is it inventory rebuild at some of your customers after maybe they got carried away at the end of ‘22, any color on why that was so strong to start the year?

I think it's more the first thing, which is really we have always -- we've been just trying to maintain a steady structural business as it relates to really mostly focusing our specialty business and then continuing on with that core business volume and market share that we have. And I think you're seeing that. In addition, our team is just really stepping up as it relates to ensuring that we're getting everything that we can in this market. And not only that, the margins they've been able to -- we've been able to generate, considering the deflationary kind of ups and downs that we keep seeing in the commodity market, albeit it's not as been as dramatic as it was previously, but it certainly has been downward pressure. And the team is just doing an excellent job on both fronts. So it’s holding volume and maintaining that price. We're still very committed to the inventory, lean inventory approach, that hasn't changed. In fact, it's leaner now than it was even 12 months ago. So I think it's just continuing to show that it works and gives us the time to focus on our specialty strategy.

And then last one for me, Kelly, you made a comment about your midterm margin target, and I missed it, I want to make sure I heard it correctly. Could you repeat what you said? I think it was something about this year coming in below that. But could you just clarify for me?

I think, what we're just -- what we're saying is we put up some midterm targets in June, right? So we said, the volumes are going to be softer -- but softer this year and that the specialty pricing would remained under some pressure this year. And when we did those midterm targets, it was assuming some normalization, but not the really the decline that we've seen in the market, at least to date. So we do expect there should be some short term margin compression. And I think we talked -- we saw that in the 18% to 19% range, which is about a 100 basis points lower than the range we have given previously if we moved to a more normal environment, that 19% to 20%. So that's what we're alluding to there in script.

And if I could sneak one more in actually, so the specialty -- the structural category is, I don't want to say it's easy, but it's easier for us to kind of get a sense on where pricing is. Can you give us any kind of indication on what specialty pricing looks like or could look like this year? Maybe what is down year over year for the first seven weeks? Just something to kind of -- there's a lot of moving pieces within there. I'm sure EWP is the bulk of the pressure, but anything you could give us would be helpful.

So like we said, it's a bit of a unusual environment where you have rates doubling in under a year, supply constraints, easing in relatively short period of time, the second half. And other uncertainty in the broader environment coming together that I think has really kind of impacted demand in a meaningful way for our products in this industry in general. And so as that settles there's a little bit more certainty around rates, we think the overall environment will be close to what we were -- we expect on a normalized basis. But all those things together have contributed to manufacturers kind of looking at prices away to drive volume in the market. So we've seen kind of the pricing pressure on EWP side. We're seeing it to a lesser extent in other specialty categories. But we expect that to continue to be the case as folks try to find the equilibrium price that makes the most sense in a much softer market. So to Kelly's point, we think that'll put pressure on specialty margins a bit. But again, we're prepared to kind of manage through that, we're going to make sure our costs are appropriately aligned with where demand is. We're going to make sure that we're focused on the customers that we have an opportunity to grow wallet share with. We're going to try to be opportunistic around getting share with good customers and markets where we have good capability and kind of manage through that. But we think the pricing environment should be fairly similar to what we've seen so far this year until things normalize.

Next question comes from Jeff Stevenson with Loop Capital Markets.

This is Garik Shmois on for Jeff. I wanted to ask first off, just on the repair and remodel side, appreciate your view of flat for this year. But just wondering if you're expecting that to be consistent throughout the year, are you seeing perhaps any warning signs there as well, just given the inflation and the macro considering there's been some noise from some of the manufacturers and retailers on the R&R side of the equation?

We think it's going to be relatively flat depending on which forecast or you look at, it's either slightly up or slightly down, and so we think it's going to be within that range. There's a couple of things that are supportive of that we think. If you look at any of the data recently around home pricing, they're generally holding for the most part, in even some instances up slightly year-over-year. We think home equity again remains at a historically high level. And just given the cost of debt and the rates that most or many homeowners are locked in at, the opportunity to improve in place and invest in their homes, we think remains meaningful. Coupled with the fact that unemployment still at record low levels. So the homeowner for the most part, as inflation starts to come down a bit, I think has been a little bit more confident around making investments in their home. So that's our thinking around what's going to provide some support for R&R, and we expect that to be relatively consistent through the course of the year. Obviously, if things change in either direction, that outcome and that outlook could change. But that's kind of where we're at right now.

I wanted to switch to SG&A, I've had a pretty consistent run rate here in the, call it, $92 million per quarter range. Is that a pretty good assumption to still use here in ‘23, maybe to speak to some of the cost baskets supporting that, i.e. labor and logistics?

One thing I do want to mention is that we do have some Vandermeer costs additive in the fourth quarter. So our run rate was actually a little lower than what it had been the rest of the year when you consider that, and that add that was probably in the $1.5 million to $2 million range. So we're really closer to 90. And certainly we are going to be -- we look at costs very, very closely and we are going to ensure that it's aligned with what our profitability profile looks like in this new environment. So I would expect it to not be more than that, of course. And we're going to continue to actually drive efficiency and focus on it, continuing to make adjustments as needed to align with the demand profile.

Next question comes from Walt Liptak with Seaport.

I wanted to ask one from 60,000 feet. So at the Analyst Day, you guys talked about lumber prices kind of in your long term at 400 and at that level the BlueLinx EBITDA at around 250. And so obviously, there have been some things that have changed since the Analyst Day. I wonder if how you think about that, is that still a ballpark or have you given it some new thoughts?

And as you know, Walt, we don't give guidance on an annual basis, but we think if I break the business in two between our specialty and our structural, we'll start with the structural, we feel pretty good about our ability to kind of navigate that environment. I think our performance over the last year and a half kind of supports that with meaningful volatility. So being able to kind of deliver margins in that 9% range and even with some of the volatility we saw or the inflation we saw in Q4, we were able to do a bit better than that. So we think given where prices are now closer to the historical average than they've been in the past, our ability to kind of execute against that business is pretty good. On the specialty side, similar story. I think, we've spent a lot of time and energy optimizing our commercial capability around there as we think about customer segmentation, as we think about improvements around our pricing capability, pricing more consistently, having better visibility around overrides and some other net analytics. And we think that's going to be supportive for specialty margins over the medium and definitely over the longer term. But this current environment is very different than it was in June. You got starts down 15% plus, you have rates and affordability a bit higher and you have a lot more supply available. So I think it's going to take a bit of time for that to settle. But we think the core of our strategy is still good and we're continued and focused on executing against that, and how we drive more specialty volume, both PLEs and margin, and how do we grow the business and be in the markets that we have great excitement around. So we’re going to continue to do that and still feel pretty good about where this business will be over the medium and long term.

Just to add to that, on the model side. Structural is in line with the model and specialties off because of the rapidly demand decline that we've seen that really -- that was a normalization model, this is not normal. We're in a fairly severe downturn right now in the short term. And so that being said, we're still -- still delivered 7.5% EBITDA margin in the fourth quarter. And like I said, we're maintaining margins pretty well through the first seven weeks. So it's not going to be that number right now on a run rate basis. But certainly we're holding in as it relates to kind of some of our key metrics.

In the first quarter, how are you thinking about your working capital accounts? I think, seasonally you typically have to build them a little bit, but what are you thinking of in the current environment?

Good news is that, what we've been able to do is adjust our inventory as it relates to kind of seeing this downturn. And so instead of build, it's been the opposite. We've actually taken 5% out of our inventory just since year end through right now and continued to be a big focus on our team to bring that inventory down and adjust to the demand level. So feel great about that. The team has made a lot of progress there, big momentum within the organization to ensure that we're being very efficient with our working capital.

And the last one for me on the -- how are you thinking about the M&A pipeline, and what are the discussions like is it a tough time to buy or to negotiate with a company now with the market kind of in this tougher environment?

Yes, that remains a meaningful focus there for us, a big priority. Our pipeline of opportunity is solid, spending a fair amount of my time along with Sean who leads M&A strategy for us, having conversations with potential targets and building relationships to allow us to kind of move quickly as things mature. So we remain focused on it. We think sellers are adjusting to the new normal in terms of kind of market environment and we want to be seen as a partner of choice as they get more comfortable with where valuations are, where multiples are. And we think we'll be in a position to move if and when opportunities present themselves. But no, it remains a big priority and we're focused on finding good opportunities to transact in 2023.

There are no further questions at this time. I would like to turn the floor back over to Alexandra for calling comments.

Thank you, operator. And thank you to everyone that joined us on the call today. We appreciate your engagement and your questions. Our IR team will be available to assist you should you have any questions. We look forward to speaking with you next quarter. That concludes our call. You may now disconnect.

The conference is now concluded. Thank you for participation, and have a great day.