Ladies and gentlemen, thank you for standing by, and welcome to the BlueLinx Holdings Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode, and today's call is being recorded. We will begin with opening remarks and introductions. At this time, I would like to turn the conference over to your host, Investor Relations Officer, Tom Morabito. Please go ahead.

Thank you, operator, and welcome to the BlueLinx Third Quarter 2024 Earnings Call. Joining me on today's call are Shyam Reddy, our President and Chief Executive Officer; and Andy Wamser, our Chief Financial Officer and Treasurer. At the end of today's prepared remarks, we will take questions. Our third quarter news release and Form 10-Q were issued yesterday after the close of the market along with our webcast presentation, and 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 the webcast. Today's discussion contains forward-looking statements. Actual results may differ significantly from these 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 contexts for investors evaluating our business. Reconciliations to the closest GAAP financial measures can be found in the Appendix of our presentation. Now, I'll turn it over to Shyam.

Thanks, Tom, and good morning everyone. Our Q3 2024 results demonstrated solid gross margins of over 19% in our specialty products business and 11% for structural products, despite the impact of continued price deflation. We partially offset this deflation in both by driving volume growth in key specialty product categories such as millwork and engineered wood products, as well as structural lumber and panels. I'm very pleased with the entire BlueLinx team for their continued hard work and dedication to deliver these results, despite the difficult deflationary pricing environment. We remain focused on growing our key specialty product categories at a higher rate than our structural product business, so that our product mix shifts over the next several years. We also continue to execute successfully on our local and national market share gain strategies as seen by our multi-family growth, expansion of product lines with key national accounts, our expansion of branded product lines into new geographic markets and launches of new product lines among others. Our digital transformation efforts are moving forward on schedule with Phase 1 on track to be completed by Q3 2025. We believe that subsequent phases will further enhance our operational and commercial capabilities and we anticipate that our continued focus on modernizing the business with new technology will ultimately enable us to differentiate ourselves in the marketplace, so that we can accelerate our profitable sales growth and operational excellence initiatives. We also continue to explore and evaluate greenfield and M&A opportunities to expand our geographic reach and to support our specialty product sales growth initiatives. The first greenfield will be announced by the end of this year. Before turning to our third quarter results, I want to briefly address the effects of hurricanes Helene and Milton on our facilities. Our most impacted location was…

Thanks, Shyam, and good morning, everyone. Let's first go through the consolidated highlights for the quarter. Overall, both our Specialty and Structural Products businesses delivered strong gross margins despite the impact of price deflation. Both businesses experienced solid increases in volume, but were offset by price declines. Net sales were $747 million down 8% year-over-year. Total gross profit was $126 million and gross margin was 16.8%, down 40 basis points from the prior period. As we've noted in previous calls, our first and second quarter 2024 results for Specialty Products, reflected an estimated net benefit for import duty related matters incurred in prior periods. During the third quarter of 2024, the estimate was updated resulting in additional net benefit of $3.5 million. More details on these matters are available in our 10-Q. SG&A was $92 million up $1 million from last year's third quarter. The increase was mainly due to higher technology expenses associated with our digital transformation, partially offset by lower fleet related logistics costs. Net income was $16 million or $1.87 per share. During the quarter, we recognized a $2.2 million adjustment of the settlement charge recorded in the fourth quarter of 2023 to settle our defined benefit pension plan. This was partially offset by the estimated net losses at our Erwin, Tennessee branch that was damaged by Hurricane Helene that Shyam mentioned earlier. Adjusted net income was $16.7 million or $1.95 per share. Tax expense for the third quarter was $5.6 million or 26%. For the fourth quarter of 2024, we anticipate our tax rate to be in the range of 24% to 28%. Adjusted EBITDA was $36.6 million or 4.9% of net sales and includes the favorable duty related matters. Not including these matters, adjusted EBITDA would have been $33 million or 4.4% of net sales.…

And thank you. We will now begin the question-and-answer session. And your first question comes from Jeffrey Stevenson with Loop Capital. Your line is open.

Hi. Thanks for taking my questions today and congrats on the nice quarter. So the positive volume growth in your Specialty Products business was encouraging to see during the quarter and just wondered what the primary driver of the volume improvement in categories such as EWP and millwork was that you cited. Was it healthy levels of new housing completion, seasonality benefits or something else that you would say?

Yeah. Thanks for the question, Jeff. So we have a strong focus, and as I mentioned earlier around clarity along with that focus on our share gain strategy, which really is tied to national accounts and multifamily and driving product line expansion along with branded products and geographic -- new geographic territories, along with launches of new products, as it relates to EWP and Millwork. As we think about those channels, whether it be multifamily or national accounts and in particular, those accounts that allow us to truly take advantage of our scale, we can despite the macroeconomic forces or the low demand and excess supply, we can absolutely drive incremental or better than market volumes with respect to EWP and millwork. Because on a year-over-year basis, that focus for instance on multifamily is allowing us to improve volumes in those two categories. There's also some seasonal benefit as well.

Got it. That's great to hear. And then I was just wondering if you've seen any sequential moderation of price declines in these key specialty categories, EWP and Millwork, which have elevated any kind of year-over-year deflation this year? And do you believe that pricing in these categories could stabilize, moving forward especially if we begin to see some improvement in single-family housing starts in the 2025?

Yes, Jeff, great question. What I would say is as we think about sequentially for pricing in specialty, we're seeing an improvement in the first, four weeks of Q4, so it's up low single digit and that's what gives us the confidence that when we talk about price improvement in the second half of next year, what gives us that confidence where probably within the back half of next year -- we'll see the year-over-year improvement in pricing. But yes, a slight sequential improvement, which is great to see.

That's great. And then, obviously a rebound in structural margins as lumber and OSB prices rebounded-off July lows. Do you believe the industry supply demand dynamics have improved in both categories over the last 90 days? And if we do start to see some improvement on the single family side, do you think prices could continue to move higher moving forward, just giving their at or below normalized levels right now?

Yeah. So what I would say is if we -- as a reminder in second quarter, there was massive deflation that we saw in the structural market where panel pricing was down pretty meaningfully. And as a result, the channel was pretty heavy, as it relates to the inventory. And so, the second quarter, I'd say our structural margins were artificially low because we had a reserve taken, so it was about 7.9% and then that reserve flipped in Q3 and was 11%. But as we think about for the year-to-date, it's about 9.8%. So what that means is that we saw probably an imbalance probably in the second quarter, with inventory and then probably more of a normalization I'd say with inventory here in the third quarter. So we feel good about where manufacturers are in the supply and where the channels are. And as a reminder for us, we always keep low inventory in terms of a low 20-day supply of structural, so we're not caught off sides, but we feel good about where the industry sits right now.

Great. Thank you. And your next question comes from Greg Palm with Craig-Hallum Capital Group. Your line is open.

Yes, thanks. Good morning, everybody. I was wondering if you could maybe just update us on the competitive landscape a bit. I know, Chan, you briefly mentioned share gains, but what are you seeing out in the market? What are you seeing from competitors, maybe areas specifically where you're seeing some share gains and I guess kind of going forward, if there are areas that you're most hopeful for -- in terms of potential share gains going forward, that'd be helpful as well.

Yeah. So I think of all the regions we have, the east has been pretty, pretty solid. Some markets have been hit harder than others, i.e., the west and the south, all of which I think everybody in building products is experiencing. But, you know, at the end of the day, as we think about what we're focused on whether it's, take multi-family commercial and really driving those sales or going into the national accounts and really leveraging our scale to help them or support their scalable sales activities, is what's helping us manage through the headwinds and pick up incremental business. Another differentiator I would say is, for example, in Millwork and EWP, despite the deflationary impacts we're seeing by having private-label products, we can actually weather the storms in a more competitive manner than I think some of the other players in our space and as a result, use that to convert business and pick up share. There are also some other strategies that we've employed, whether it be in the context of pull-through business with builders and how they go about, managing through their inventory and cycling through housing completions, as it relates to our how we develop programs in the context of pricing and rebates that allow us to give us a competitive advantage in order to -- in terms of gaining share. Another thing that we're doing to combat these headwinds is just leaning into direct sales. Although the margins are lower, there's obviously zero to low cost to serve. And so it's EBITDA accretive so long as the other elements of our strategy are playing out, which they are. In terms of what I'm seeing in the market, obviously no matter which customer I talk to and whatever region I'm in, there's a general sense of uncertainty that continues. Until we have these sustained rate cuts, that will bring those mortgage rates down to the 20 year averages. And then you start seeing the sales velocity with existing homes, which we might be seeing some signs of life, but they're still at 30 year-lows. There is a again, there'll be a there's a general sense of uncertainty. And there's -- there are no supply chain constraints as we all know. There's meaningful excess capacity in the market combined with the softness in the market. And so it's incumbent upon us to basically grab the levers at our disposal in order to drive those incremental sales and drive profitable sales.

Yeah. I mean, I know everybody's kind of waiting on a move lower from rates and I know your business or I guess two steppers specifically are maybe more exposed. But what happens if we don't get those rate reductions in the housing market sort of just keeps chugging along, doing -- what's been doing, the big production builders keep taking share versus the smaller players. I mean, does that change your strategy at all in terms of where you're focused on growth or allocating resources, et cetera?

Well, first so I know we haven't talked about M&A and Greenfield, but of the two, an area that we're focused on is Greenfield. We have a robust pipeline of potential M&A deals. But just, you know, given our multiple and where that pricing is on those deals. We continue to believe that reinvesting in the business and returning capital to shareholders via share buybacks is a better play. It makes more sense. But on the greenfield side, we will be announcing one soon and then we have a roadmap, to enter into new markets and get closer to the customer that will help us grow the business. But if you take a step back and you look at the market dynamics, basically we need 1.8 million homes per year over the next decade in order to meet existing supply and forecast, which as I said earlier, doesn't even take into account immigration forecasting. And the only way to build enough -- fast enough, quite frankly, or even get through the dynamics of single-family housing with respect to within current zoning requirements is to really lean into commercial and multifamily, which is something that we're doing. We built up new capacity to support that business across the enterprise. And then at the same time, as we think about our scale, how can we leverage the 60 distribution center footprint as it sits today in order to provide a consistent service offering across the entire 50 states, and over time we'll continue to Greenfield. But if we can, stay focused on these new channel opportunities that we haven't historically been focused on, then I think that we will continue to gain share no matter the headwinds. At the same time, the transactional business and really leaning into the [knife fights] (ph) that we're dealing with on a day-to-day basis, whether it be transactional or direct sales, all of which are EBITDA accretive and clearly support the profitable sales strategy. So even though some of the small and custom home builders are sitting on the sidelines today, you know, through an all of the above approach via that those points I made earlier around product expansion, geographic expansion, even within key suppliers moving beyond what our historical SKU, mix has been. I mean, all of these things that really helped us gain more share. And we're very focused on these five key things, you know, four or five key things combined with the channel approach. So that's how we will ultimately continue to gain share no matter the market headwinds, in the -- and of course, the underlying demographics, market dynamics, support the long-term thesis.

Yeah, makes sense. All right. I appreciate all the insights. Thanks.

And your next question comes from Reuben Garner with The Benchmark Company. Your line is open.

Thank you. Good morning, everybody.

Good morning, Reuben.

Just to start, well, a couple of clarification questions. The first is on the structural margin. So I think after last quarter, you said that the start of the third quarter margins were kind of in the 8% to 9% range and clearly they came in much higher in that category. Was that -- and I think you also mentioned maybe a reversal of the hit you took in the second quarter. Can you just talk about how that played out in the quarter? Like, did lumber just bottoming midway through the quarter allow for you to have above normal margins late in the quarter, and that's how you net to 11%? Or was there something onetime in that 3Q number?

Yes. Reuben, what happened was we took a reserve about a $2.5 million reserve -- $2.4 million reserve in the second quarter. And that's what brought our -- I would say, our structural rates down to about 7.9%. What happened is as we sold that inventory in Q3, that reserve flipped. And so that goes to my point where even though I would say on face value, it is 11% in Q3 for structural margins. A normalized rate would be more the year-to-date, which would be in the high 9s, like 9.8%, which is right in-line with our expectation for Q4 in that 9% to 10%.

Okay. And do you feel like you've had to walk away from any business or leave any business out there on the structural side to maintain these kind of margins we'd heard in the quarter that things were fairly competitive as lumber was bottoming out kind of middle way through the quarter?

Yes, I'll take the first part of that, and then Andy will follow up. So look, I mean, let's start with the underlying thesis, foundational approach we have, which is very principled around inventory management. And so we manage very optimal levels of structural inventory across the enterprise. And that in and of itself is what allows us to protect the balance sheet and maintain the margins we do. We don't walk away from business, but at the same time, we are not building it so they will come. And we do that in a very disciplined way with respect to every product category with structural in particular, having heavy focus just in terms of turn days and days of inventory on hand, et cetera. And so I would think about it from that perspective as opposed to walking away from business. But in no way, shape or form are we walking away from business. We operate in the markets we have based on current competitive market dynamics and then manage through the inventory in a very responsible, disciplined way that not only supports our customers, but puts us in a position to maintain healthy structural margins, which ultimately protect the balance sheet.

Yes. Just to add to that, as we talk about how in the commentary, net sales were down 9%, and that includes price deflation of 12% in lumber and 19% in panels. So as a result, I would almost say the opposite, we had a really high volume. I mean, so we were high-single digits in volume for the quarter in structural. So that clearly shows that we're not walking away. We're just dealing with the deflationary issue, I'd say, right now. But volumes being up high single digits in that category was a good result for the quarter.

Yes, it really is, and that was going to be my next question. So it sounds like on both sides of the business, you had better than expected or better than market volume. Just to be clear, do you think some of this is kind of a recovery in your customers with the smaller builders and the -- smaller builders and some of the R&R markets you're exposed to? Or do you feel that it's just the initiatives that you've put in place that drive share gains?

I’d say, obviously, some -- well, some of it may be tied to some back-end seasonal adjustments. But for the most part, I believe it strongly correlates with the share gain strategy. As you think about the work we are doing to drive, let's say, multifamily commercial sales and also even with respect to some of the direct -- the strategic direct business we're doing with respect to certain channels, that in and of itself supports a meaningful part of the structural volume growth. So the point being that despite whatever the market conditions are as it relates to small and custom homebuilders being on the sidelines and big builders picking up more market share, there's still -- there are certain strategies we can employ, which we are doing in order to gain share, keep business, service our customers. And you combine that with our disciplined approach to inventory management, we're able to maintain margins and grow volume despite deflation.

Okay. Great. I'm going to sneak one more in, if that's all right. You mentioned inventory management. We've seen some categories, outdoor living, as an example, at the entry level, we've heard destocking at distribution. I know you guys run the structural side pretty tight. How are you thinking about inventory in some of your growth specialty categories as we head into kind of the seasonally weaker part of the year?

Yes. So look, I mean, we have five key specialty product categories and outdoor living being one of the significant elements of our long-term strategy. And so our goal is to manage our inventory to very specific turn day targets to support our customers based on the forecasting we do have. And as I think about any destocking that may be happening on the part of customers, that ultimately supports our business, right? So the less inventory they carry, the more we need to carry in order to meet their demands and support -- again, from a working capital management perspective, cash flow perspective for the customer and then obviously, the just-in-time characteristics, just-in-time benefits that we can provide really support that. So at the end of the day, we are not necessarily seeing anything similar to what we saw last year as people were destocking and sales started to drop off from a two-step distribution because we haven't seen a commensurate or an equivalent buildup in inventory like you had post-pandemic. So I think that, again, the fundamentals are such today that there is a valuable role to play for two-step distribution and outdoor living, whether it be railing or decking is a very flatbed friendly two-step distribution product where we color -- where we carry an assortment of colors to be able to support our customers in that specific space. And I think over time, whether it be the East or the West, I mean outdoor living tends to be a great R&R friendly product. And as interest rates come down and those HELOC rates come down, you could see people going from concrete patios to decks or you kind of play this out. Multifamily commercial, that's a very good area for us to focus outdoor living products on. There isn't a multifamily development you go buy or even a commercial hotel property that doesn't have outdoor decks that need railing for exit, for instance, and that happens to be one of the areas where we've had some really great sales and successful opportunities that we've been able to capitalize on. So continue to be a focus.

Great. Thanks for the details guys. Congrats again on a strong results and good luck.

Thanks Erwin.

And your next question comes from Kurt Yinger with D.A. Davidson. Your line is open.

Great. Thanks and good morning everyone. In terms of the specialty deflation, how much of that would you say is kind of strictly manufacturer list price factors versus maybe competitive dynamics? And then as we think sequentially, we know EWP has continued to be pretty soft here. Any other categories that stand out where versus Q2 or the first half, pricing may be getting a little bit more challenging?

Yes. So let me talk about the deflation in terms of where we are seeing the improvement and, let's say pockets of where we see some optimism. So when we think on a sequential basis, for at least where we sit today in the fourth quarter, I would say it is encouraging that millwork is one sort of bright sign that we're seeing in terms of where we're seeing some price inflation. And that's actually in our private label product, largely in our private label product within millwork. When I think about the year-over-year sort of challenges that we've had in deflation, I would say, it's really been primarily EWP and millwork, particularly in the third quarter. But that's -- as Shyam mentioned, we had really strong volumes there. So I would say as we look out for the next -- I would say, for the back half of next year, I would expect improvement in really EWP, millwork and to a degree -- some of the specialty lumber and panels areas.

Got it. And --.

And market --. I'm sorry.

Sorry, go ahead, Shyam.

No, no, no, go ahead.

No, I was just going to follow-up. I mean, on the specialty, maybe some of those products in specialty still tied to commodity pricing broadly. Is there any way to think about what maybe the carryover headwind from lumber and panel prices has been within the specialty segment this year?

Yes. I mean, there certainly was some of that. And I would say that that's the reason why I would say that maybe our expectation of where we -- originally, we said that we thought we'd see price increases in the beginning of next year in terms of where we'd see sort of price inflation and now it's maybe back up a quarter or two. And that's largely attributed to that massive deflation that we saw in the second quarter from mid-May to the end of June. And we're seeing that sort of come through the P&L. So we are really on one side, it's really great that we've had really strong volumes in the Q3, but I'd say the deflation has been more than probably we expected maybe six months ago, nine months ago. But when we look sequentially, we're encouraged as we look at Q4 in terms of seeing some of these modest price increases that we expect to have improvement here in the back half of next year, which Shyam and I alluded to.

Yes. And from a market dynamic standpoint, obviously what has happened post-pandemic, there was a lot of new capacity that came online. So there's adequate supply in the marketplace, and you're seeing a lot of interesting things play out, whether it be mills being shut down or curtailments happening just because there's not enough demand due to the soft housing market and obviously, soft repair and remodel market as well. At the same time, when you ask about EWP and millwork, whether it be the channel strategy, so there are certain things we're focused on that are driving millwork and EWP sales along with some of the other product categories that are very friendly to those specific channels. There's also been some substitution in the marketplace due to market dynamics where folks have shifted from, let's say trusses to EWP, and we have taken advantage of some of those market dynamics to drive EWP sales, which I feel like given our private-label product, we can do more so competitively than some of the other folks, and that's helpful. We've also invested in certain markets in equipment that allows us to for example, pre-cut EWP to allow for more efficient installation of the EWP and thus allow for example, HVAC folks to run ductwork through the EWP. Again, that helps reduce labor costs on the part of the ultimate end-user and so on. So there are very specific things we're doing to drive these volumes given current market dynamics, and we will double down on those as the markets continue to evolve.

Got it. Okay. I appreciate the color there. And on the product-line expansions into new geographies, I mean, it does look like that's yielding benefits. How much opportunity kind of across the footprint remains there? And if we were to think about it from a product category perspective, are there any in particular where you think you're still relatively under-indexed in terms of kind of geographic coverage?

Yes. There are definitely markets. So the answer to that is yes. But that's not a bad thing because there's a lot of opportunity for us to grow in those markets where we are underpenetrated. But as we continue to move forward, we’re taking very specific actions to ensure optimal stocking positions across all the key categories in all the markets so that we can provide a full service proposition no matter the market we are in. So again, to take full advantage of our scale. For example, earlier this summer, we rolled out a new product, and it was a great exercise and how powerful this can be. We launched a new product with our great supplier, Georgia-Pacific, and ensure that there would be a stocking position in all -- in substantially all locations by a certain date, which helped fuel the channel strategy, as it related to that product and where it would support our customers best. And that bore a fair amount of fruit. So that strategy, along with some of the channel strategies we have will continue to fuel our strategic priorities or support the strategic priorities.

Right. Okay. That makes sense. And then just lastly, it sounds like quarter-to-date daily sales volumes up versus Q3. I mean presumably, given typical seasonality, that would be up year-over-year as well. Is that a fair statement in terms of what you've seen thus far through October?

Yes. That's a fair statement. I would say when you think about it year-over-year, volumes are up mid-single in both categories, which is good. But don't read too much into the first four weeks because of the typical seasonal pattern where our second and third quarter are generally our biggest quarters and then Q4 and Q1 are generally the softest. But regardless, for the -- as we sit here today, first four weeks, volumes are up mid-single, which is good year-over-year.

Perfect. Thanks for the details.

Yeah, thanks Kurt.

And that concludes our question-and-answer session. I will now turn the conference back over to Tom Morabito for closing remarks.

Thanks, Abby. Thank you again for joining us today, and we look forward to speaking with you in February as we share our fourth quarter and full-year 2024 results.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.