Greetings, and welcome to the BlueLinx Second Quarter 2023 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gui Nebel, Vice President of Finance & Treasury Manager of IR. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to the BlueLinx Holdings second quarter 2023 earnings call. Presenting today are Shyam Reddy, President and CEO of BlueLinx; and Kelly Janzen, our Chief Financial Officer. Also present on the call is Andy Wamser, Senior Vice President and Chief Financial Officer-Elect. Our second quarter news release and Form 10-Q were issued yesterday after the close of the market, along with our webcast presentation. These items are available in the Investors section of our website, bluelinxco.com. We encourage you to follow along with the detailed information on those slides during our webcast. Today's discussion contains forward-looking statements. Actual results may differ significantly from those forward-looking statements due to various risks and uncertainties, including the 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 Shyam.

Thanks, Gui, and good morning, everyone. We appreciate you joining us today. Before we discuss the second quarter results, I want to reemphasize our commitment to generating profitable sales growth in a challenging housing and building products environment by driving our corporate strategy into every facet of the business. By focusing on our strategic priorities, we are well positioned to meet stakeholder expectations and live up to our potential to be the leading building products distributor in the United States. First, we remain focused on growing our five high value specialty product categories, engineered wood siding, millwork, industrial, and outdoor living products to generate higher net sales and gross profit results. In fact, specialty products represented about 70% of our net sales and 80% of our gross profit dollars in the second quarter. We're growing our specialty categories by being more strategic, not just by making more customer calls and visits, although that's important. Specifically, we're leveraging our scale national reach, selling capabilities and product depth to expand our offerings in key markets to support both new and existing customers. For instance, we recently leveraged our proven track record with two key specialty product suppliers to expand certain sighting and specialty panel brands and new markets. We're also making key investments in equipment and value-added service offerings to strengthen our value proposition and position us to be more competitive along with investing in commercial excellence initiatives to generate more profitable sales. Second, we are driving operational, pricing and procurement excellence into the DNA of the organization by continuing to leverage our corporate capabilities in these specific areas for the benefit of the entire company. These efforts enhance the go-to-market strategies of our local and national market leaders, while providing their branch managers with corporate expertise to strengthen their local market…

Thanks, Shyam, and good morning, everyone. I'll start with the second quarter results. We delivered a solid financial performance highlighted by strong margins across both our specialty and structural product categories. Net sales were 816 million, down 34% year over year. Specialty product sales were down 28% compared to the last year, due to a combination of deflation and lower volumes Structural product sales were down 46% due to significant year-over-year declines in wood-based commodity prices. Total gross profit was $136 million, and gross margin was 16.6%, up 30 basis points from the prior year period. When reviewing the year over year comparisons, it's important to point out that in the second quarter of 2022, we experienced historically high levels of demand and significant price inflation across the business. Thus, while the variances are quite significant, we are pleased with the financial results we generated this quarter considering the recent market condition. Turning now to the second quarter results for specialty products, net sales were $571 million down 28%, when compared to last year. This decline was driven by a combination of deflation and lower volumes, especially in categories that are tied to new residential construction, like engineered wood and siding. Gross profits from specialty product sales were $109 million down 71 million due to the net sales decline. Specialty gross margin was 19.1%, a strong margin, but down 380 basis points from last year when prices were near their peak. Given most of the supply was still on allocation. Through the first four weeks of Q3 specialty products gross margin was in the range of 18.5% to 19.5% with daily sales volumes consistent with the second quarter. Now, moving on to structural products, net sales were $207 million down 46% compared to the prior year period. This decrease was…

Thanks, Kelly. In closing, we are pleased with our second quarter results and our ability to maintain both our price and cost discipline, along with proactively managing our working capital. As a result, we have a strong balance sheet that allows us to invest in the business and position us for long-term success, while providing us with flexibility to return capital to shareholders. Looking ahead, we will continue to focus on our strategic priorities, specifically growing our five high value specialty product categories, driving operational pricing and procurement excellence and remaining discipline in our approach to capital allocation by investing in profitable sales growth initiatives, pursuing accretive acquisition targets that support our growth strategy, making capital investments that strengthen our ability to grow the business and returning capital to our shareholders. Our financial position remains strong with ample liquidity and no material outstanding debt maturities until 2029, and we were purchased $12 million of shares remaining under our current share repurchase program during the period. I am proud of our associates for their contributions during Q2 as they enabled us to achieve solid results during challenging market conditions in a normalizing environment that historical grit, resilience, and competitive spirit continue to shine through in everything our associates do. I'd also like to thank our customers and suppliers for their support and faith in us. Without them, there is no blue links. I'm excited about our future in continuing to deliver what matters so that we can be the leading building products distributor in the United States. That concludes our prepared remarks. At this time, we are open to answering any questions.

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

I guess maybe just starting off, can you give us a little bit more sense for the cadence of the quarter, and I think, you talked about volumes on a year over year basis, but can you talk about how volumes were versus Q1 specifically as well per segment?

Yeah, thanks Greg. Really appreciate the question. So I would say with the cadence, we're continuing to see volume improvement quarter over quarter July has shown to keep maintain that trend from June into July. So we feel really good about where we're heading in Q3.

Yep. And I'll just add onto that. So Greg, from a cadence perspective, certainly April was our softest month. We continue to improve week over week from there on out through the quarter with May and June being nice, solid months for us. And when you think about it sequentially, as it relates to obviously the year-over-year, as you point out as a relatively, big variances. But sequentially, we are seeing some, definitely seeing an improvement, specialties up 5% on volume. And a big piece of that is EWP, which is that volume's up over 10% quarter-over-quarter from the first quarter. We're still seeing competition out there as it relates to price, et cetera. But we've been able to hold margins as we saw. So I think we're cautiously optimistic as we continue to move forward. And you know, I think we're seeing some nice trends here.

And also just to finish up on that point, we're doubling down on our strategy to drive those organic volume growth initiatives. So focusing on those key specialty product categories. As we talked about earlier, we've expanded a couple of key strategic supplier relationships and siding of specialty panels. In fact, I've spent some time with these key suppliers to help drive that expansion and we'll continue to do that going forward.

And then, so specialty, just specifically, so total revenue in the June quarter basically flat sequentially. But it sounds like that was more pricing that offset higher volumes. Is that right?

That's right. And again, we had, like I said, April was a bit soft for us as it as we were coming out of the first quarter, and then we got the momentum going from then. So I think there's a little bit of impact from that. If we, from a timing perspective, and I do want to point out that, we're as the markets are improving, but we are a two-step distributor. We're on a lag. So we usually see as the builders start to improve and start to come back, we typically can see our impact come, 60, 90, even a little bit after that. We could be, we can up to a quarter lag. So we haven't talked a lot about that in more recent times, but that is definitely our business model works that way. So, I want to, I would say that as things have been coming back and from market perspective in the last few months, we're starting to feel that too. It's just a little bit behind of what the builders see.

Maybe just a quick follow up on that, because we have heard from a couple of distributors and I think they're seeing much more robust growth sequentially than kind of what you're talking about. And I'm just curious if there's any kind of just differences you want to point out, whether it's inventory or whether it's certain product lines, but why wouldn't you be seeing a bigger jump? Or maybe it's just a little bit of a lag and we're just going to wait to what you talked about maybe 60 to 90 days until you start seeing some of that acceleration as well?

Look, I'd like to reemphasize the lag. We're seeing that flow through the P&L in Q3 now with volumes being up. But at the same time, historically speaking, there has generally been a 60 to a 90 day lag between when the start posting and when we actually start seeing it, flow through our sales. That said, we're really optimistic or feel good about what the builders are doing to reduce their cycle times, thus pulling forward, some of that or reducing some of that lag time. So, again, we're feeling good in light of builder sentiment and housing starts continuing to improve over the course of the year.

And just to add on that a little bit further to your point, Greg. Although there are distributors that are similar to us, we all have different mixes. We have a very broad array of product lines. Some are up, some are down, that that diversity sometimes supports us. Sometimes it can be a little soft for us. So I would say there's just not one that's exactly like us. And our goal is to continue to make sure the entire portfolio is strong and sometimes they could have differences in what they did in Q1 versus we did, etc. So I would just say that we see strengths coming back in our key categories. We had a bit of a, we're seeing really nice margins and continued execution on our structural business as well to support. And I think overall we put a nice EBITDA margin on the board, so all we can do is work on what we can control.

Next question comes from Kurt Yinger with D.A. Davidson.

It seemed like the discipline approach to pricing, I mean, is showing through in terms of specialty margins, but I'm curious if that's holding back volumes at all in terms of you guys walking away from any business. And can you just talk about the overall competitive environment and your willingness to protect volumes if some peers or competitors continue to be more promotional on the pricing front?

Yes, I mean, look, we're absolutely committed to driving pricing excellence into the business. It's not at the expense of good volume. We're trying to grow the business with profitable sales and really have strategic relationships with our customers that are stickier, but to the extent there is very profitable transactional business that makes sense, we're not running away from it. But holistically, we're trying to grow the business. And given our volumes and how they're trending from Q1 and Q2 and into July, I feel pretty good about finding the right balance between our pricing initiatives and our volume growth. We are absolutely committed to growing this business in the right way.

And then I guess in terms of the specialty year-over-year pricing deflation, EWP been down sequentially, but is kind of flattish year-over-year. Is the pressure primarily kind of treated products, metal, maybe some millwork? Could you just help us kind of understand what the big drivers of that were in the quarter?

Yes, sure. Look, I mean, I think everybody's, we're seeing pricing, deflation across the board. And really all of our categories and certainly in this, and you point out the specialty other, certainly in that, that's one of the bigger categories we are seeing, given that we do have some sensitivity to the commodity markets, obviously the margins are much higher than our structural business, but there is some sensitivity as it relates to the treating, treated lumbar panels as you mentioned. So certainly, that is there, I mean, but in general, prices last year were definitely at their peak and we have seen some deflation as it relates to that, but we've also seen deflation on our cost side, which I think is showing why we're seeing still the good normalized margins that we said we would expect to see.

Okay. That makes sense.

I was just going to make a final point to follow-up on what Kelly said. Look, to the extent there's deflation, like this is one of those levers that we can absolutely put our mind to as it relates to the procurement and pricing excellence initiatives that we're driving into the DNA of the organization, whether it be training or Salesforce or targeted selling or strengthening our processes with respect to supplier and customer onboarding to using data-driven analytics to make sure that we are pricing appropriately in the markets that we serve. So again, it's something that we are absolutely taking control of and doing our best to maximize the margins in light of competitive pressures.

And then as you think about, I guess at a high level, the second half versus the first half, we're seeing the improving volume trends. The data on the new side is pretty good. Repair and remodel seem to be holding in commodity pricing and improved a bit. I mean, is there anything that gives you pause that the second half shouldn't be at least a little bit better than the first half? Or how do you think about that?

That's a great way to ask the question. There's nothing that gives me pause. Other than the general uncertainty of this year following an unprecedented two years. I feel good about the efforts we've undertaken to grow the business, to normalize, to operate competitively in what's otherwise a normalizing market. And again, taking ownership of the levers at our disposal, whether it be operational pricing or procurement excellence, to really execute against our five specialty growth area categories, I think gives me comfort. So there's not anything other than some existential risk that materializes that gives me that we don't know about. That gives me pause, especially in light of the underlying fundamentals of the housing industry on top of seven months of increasing builder sentiment in addition to some other indicators out there that suggest good runway over the course of the year.

Yeah, and I just said we're cautiously optimistic. Of course, to Shyam’s point, there is definitely some uncertainty out there. There's varying, you know, ups and downs as it relates to some of those macro factors. So I would just say, we're happy with where we are right in the last few weeks. And if that continues for the second half, it'll be -- it should be slightly better.

And then just lastly, you guys have kind of a host of capital allocation priorities, but I mean the stocks, I think trading at eight times kind of annualized first half earnings, the cash balance is at an all-time high. Could you just help us frame where share repurchases are in terms of kind of the priority set at this stage?

Sure. Yes. We have -- look, it is a priority. We've already proven that commitment already with $78 million of share repurchases and our intent to repurchase $22 million of shares to complete the current $100 million program at some point in the near future. As we've said before, we are committed to exploring investing our capital in initiatives that absolutely contribute to shareholder values such as accretive M&A transactions, sales growth initiatives, et cetera. But at the end of the day, returning capital shareholders in the most efficient, effective way possible in light of other all the other priorities is an absolute priority at the company as evidenced by the demonstrated efforts so far.

Next question comes from Jeff Stevenson with Loop Capital Markets.

It's actually [indiscernible] for Jeff. Thanks for having me on today. I wanted to follow-up first on what you're seeing on the -- side. Think you mentioned that the demand is still positive, but is maybe slowing. So any additional color on R&R would be great.

You want to go ahead?

Sure. I'll kick it off Kelly and then turn it over to you. So, thanks Garrett for the question. Really appreciate it. Look, I mean, when I think about R&R, I really feel, I think about the underlying fundamentals that drive R&R activity. The indices out there suggest that R&R will be down through the first half of 2024. That said, with home equity values strong customer sentiment, et cetera, and also a lack of inventory on the housing side. And coupled with the fact that we have a very strong presence with the home retailers or the national on our national account side of the business. We believe that we have an important role to play in the R&R world, because folks will be still doing repair and remodel work, albeit maybe smaller projects. So again, I think it will be an important part of our business going forward, precisely because of those underlying fundamentals in the fact that we have a customer base that supports the R&R market. Good diversification on our part.

I wanted to follow up on the specialty product margins that continue to hold kind of in this 18%, 19% range, it seems like the outlook for the third quarter. Is positive relative to the more normalized levels. And I'm just curious, what your views are moving forward. Do you have increased confidence here that specialty margins are sustainable? And, just curious if the housing market does start to recover recognizing, you do operate with a lag, what does it speak for the margin outlook longer term?

Yes. Well, I mean as you saw, we went from last quarter, we were eight, a little under 19, we're 91 point right now. We gave a range of a little bit between 18.5 and 19.5 for where we are in July. So I mean, I think margins are, we've been saying normalized specialty margins right around 19%, and that's kind of exactly where we're landing. As I said, the trend run rate's slightly above 19 at this point. So, I feel really good about where we are. I continue to say the 18% to 19% range because there is a recovering market and there are a number of things that we work through as we continue to try to ensure that we are being competitive. And then we have a diverse mix as well that impacts that too. So that's something we're managing. We've mentioned before that, managing that mix, we have some up, some down, et cetera. So I feel good about as we move into the next quarter, that being the range that we're running in, that we're chasing and I think for the foreseeable future. That makes sense. Certainly, every quarter we're going to update you on if we see any changes there.

I'll take it from a business perspective. So look, I mean, again, I've mentioned this a few times. I truly believe in our pricing excellence and commercial excellence initiatives. From our centralized pricing team is working with those local market leaders to apply these data-driven approaches to ensure we're preventing gross margin leakage. We're valuing our service appropriately in the markets and which we serve. And so even though it's a declining market or we're in normalizing times, the fact is given our diverse product mix and other aspects of the business, we can do things like sell mixed truckloads of products to achieve higher blended margins. We can bundle products; we can think about dynamic pricing. We're just trying to apply a sophisticated approach to making sure we're finding the right balance between, really trying to achieve the right sales approach when working with our customers and suppliers to grow the market and grow our share and do right by our stakeholders.

Last question is just on inventories and you've done a good job of working down inventory, since the last several quarters, frankly. I was curious sequentially how much of the inventory reduction was deflation versus volume? And then moving forward, how do you view your inventory levels here as we're moving into maybe a cautiously optimistic volume environment?

Yes, the primary amount of inventory that came down from really the beginning of the year is it's actually volume. We've made a very conscious effort to reduce our inventory as a whole to right size it and align with normalized demand and where we are go, where we are expecting to go forward, as well as we just want to manage inventory better and do have strong working capital rigor. So certainly there's a little bit of price in there, but the majority is just really good execution by the team to reduce inventory.

Next question comes from Reuben Garner with Benchmark Company.

Most of my questions have been answered. I want to ask one on your warehousing versus the direct business. I don't think I saw the Q2 mix. Sorry, we had a several reports this morning. Are you seeing continued increase in the use of the warehousing piece and can you discuss maybe your margin difference between those two? Is that helping kind of margins sustain at these 6% EBITDA type levels?

Yes, we're not seeing a material change between what our percentage of warehouse and directs are, as well as a related margin, similar directs generally a little higher than structural. And then, you've seen our warehousing going in higher than that. So, it's certainly something we watch that mix of warehouse and direct is important as it relates to our blended margins. And it's something we actually talk about quite a bit internally on ensuring that when we get business. We are being cognizant of the impact of that. But really I wouldn't say there's been a material change in either the amount coming out of warehouse nor the margin impact recently.

We've heard consistently that the dealers are pretty hesitant to carry kind of normal levels of inventory just with risks with the consumer and the economy and everything else. Is there risk to the downside that if they do get more comfortable and they carry their own inventory and usually rather more direct, that that would be a mix drag for you? And I guess how big of a drag could that be if it happened?

That's a great segue into the point I was going to make earlier, which is, as Kelly said, we are, as we think about our strategic growth initiatives, we are focused on, obviously growing our specialty product categories and driving out warehouse sales, and making sure that mix is appropriate. But as it relates to this market and the point you just made, two step distribution and in particular, a pure play two step distribution, like Blue Links plays a vital role in helping our customers manage their inventory. As you think about kind of our warehouse layouts and in what we have lots of outdoor storage given the acreage on our premises. We're rail served, we have large warehouses, so our customers by and large do not have the space to carry. A lot of material. You know, what you're seeing in this normalizing market probably is in some cases some folks have gone from, let's say, buying direct from manufacturers with rail cars, and they've shifted to managing their inventory more tightly and buying truckloads of materials, which is very, very good for our business. So it allows us to really help them manage their working capital, provide just in time delivery and do other things that help them manage their business in light of the current conditions, but also serve their customers better. We've also expanded to do more job site delivery. We've invested in more Moffitt’s on our fleet and so on and so forth. So I feel really good about where the market is heading and the value proposition that Blue Links as a two-step distributor plays with our customers.

And then my only other question is just a follow-up. Kelly, you mentioned pricing declines sequentially, I think in the specialty category. I just want to clarify there, I mean, I understand the EWP and the treated lumber piece of that where there's a little bit more commodity tied to it. What about some of the other categories that you guys serve, whether it's decking or siding or doors or some of the things that are less commodity tied. Are those prices stable sequentially, or are you seeing pressure on them as well?

Yeah, well, I think I might have been referring to a little bit more with a year, more of a year over year pricing declines in my earlier comments versus sequentially. But as it relates to so just to clarify that we obviously saw some pretty significant deflation year over year, but sequentially, I mean, we're really, where we're seeing if there's any little bit of price change, we're also seeing relevant cost reductions as well, so we're holding those margins. So a little bit on the top line, certainly, we saw a little bit of commodity impact, not just in the structural side, but also a bit on the specialty other sequentially as well. We saw a little bit of softness and now we're starting to see that pickup with improvements in the commodity markets in July. So, it's not -- it wasn't the big story really sequentially. It's more the year-over-year.

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

Thank you, operator. That concludes our call today. So should you have any questions, please reach out to our Investor Relations department. You may now disconnect. Have a good day.

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