Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Bluelinx third quarter 2019, Investor Relations call. This time, all participants line or you know isn't only mode. After the speakers presentation as they will be a question and answer session to ask a question Jimmy the session you will need to press tar one on your telephone.
These would be a device that today's consensus being recorded if you require any further assistance. We suppress cards you know I would know liked to have the conference over to your speaker today, Miss <unk> Director Investor Relations. Thank you. Please go ahead ma'am.
Thank you may and good morning, everyone. We appreciate you join us for the Blue length 2019 third quarter earnings Conference call. The earnings release has posted in the Investor section of our website W.W.W. Dot Bluelinx code Dot Com will also be referring to a supplementary presentation as we go through the call.
The presentation is available on our website as well.
In in us on the call today, or Mitch Lewis, Chief Executive Officer, and Susan Ofarrell, Chief Financial Officer.
Before we get started I'd like to remind you that this presentation includes forward looking statements. These statements are subject to risk and uncertainties that could cause or actual results to defer materially windows reflected in the statements.
Was risk and uncertainties are described in our earnings relays and discussed in our families where the F.D.C.
Today's presentation also includes references to non-GAAP financial measures. These non-GAAP measures are described and reconciled to their gap counterpart in the presentation materials.
Earnings release, Enema investors section of our website.
With that I'll turn the call ever to match.
Thanks marrying a good morning.
Thank you for joining or third quarter 2000, a 19, earning skull I'd like to begin this morning with a brief overview of the quarter and then Susan will review our financial performance I will then finish our remarks and will open up the line for questions.
Today, we are reporting increased adjusted either died during the quarter compared to Q3 2018.
Resulted primarily from an improvement and gross margin, which was our highest quarterly gross margins since the Cedar Creek acquisition 18 months ago.
In the third quarter, we generated adjusted EBITDA $19 million compared to $16.6 million in 232018.
Gross margin for the quarter was 13.8% an improvement of 50 basis points from the second quarter and the 310 basis point improvement from Q3 2018, when we were negatively impacted by rapid decline a commodity prices.
Or margin improvement is not just a commodity story or gross margin for specialty products hit 16.2% in the third quarter compared to 15.1% and Q3 of 2080.
The gross margin improvement resulted in gross profit increasing $2 million from Q3 2018, despite the headwinds we experienced on the top line.
We also continue to make great progress that reducing bank debt, which declined by $92 million from the third quarter of 2018 in $127 million since Q2 2018, the quarter in which we acquired Cedar Creek.
We remain committed to continuing to deliver bluelinx in the months ahead.
Net sales of $679 million for the quarter was again significantly impacted by the deflationary environment of commodity prices would they substantially lower price environment as compared to the third quarter of 2080.
Posit lumber prices at the end of July were 31% lower than July 2018, and ended the quarter still 15% below September 2018 levels.
Deposit panel prices remained around 30% lower during the quarter compared to levels and the third quarter last year.
We estimate that approximately $70 million of the year over year decrease in net sales was due to lower commodity lumber panel prices.
What a more positive note single family housing starts improves slightly about 1.7% higher than Q2, 2019, and 3.7% higher than Q3 2018.
The modest improvement in single family housing starts was offset by the continued comparative impact we are seeing from our side in products.
We've discussed some protocols after challenging negotiations with a legacy Cedar Creek, citing supplier al program for deciding product was discontinued which began flowing through to the top line in the first quarter of this year.
Ramped down to this product line is virtually complete at this point, but it will continue to fact top line comparisons on a year over year basis for the next few quarters.
For the third quarter of the year over year sales decline was approximately $52 million, which compares to a second quarter year over year impact of approximately $42 million.
Expect the comparative year over year revenue decline from this moved to be approximately $45 million and Q4 2000, a 19th.
A million dollars in Q1, 2020, and $15 million into 220, 20 at which point the comparative impact Willoughby.
This has had a significant impact on our revenue and as I have described before we have added or supplemented our citing portfolio with products from James Hardy and another and the number of other premium manufacturers, such as allure, a miratec pledge and and Royal among others.
Well, we are pleased with the progress, we're making with these new and expanded premium products. The recovery of this revenue inciting will take time as there is a ramp up period with any new major supplier relationship or expansion in geographic territory.
We've talked previously about Disynergies that arose from the operational and customer service dynamics associated with overlapping markets. Following the Cedar Creek acquisition, which led to market share rose and in some markets.
In response, our teams in these markets are working hard to improve operating performance, while providing the best in class customer service Bluelinx is traditionally known for.
Prudently invested in enhancing our customer service, including adding operational leadership and expertise to support our regions and evaluating the efficiency and service level of our warehouses fleet production in logistics.
And this emphasis on our customer service is clearly starting to make a difference we are seeing that sales volume and overlapping markets is recovering at an increasing rate quarter to quarter.
In fact, when you exclude the impact of the loss of deciding products are discussed previously are volume decline in the overlap markets in September and October we're only 3% from 2018 levels, we are clearly making progress.
Our primary focus now is to profitably grow the business and our emphasis on cost savings associated with the acquisition may have come at the expense of our revenues, we have read dedicated or organization to profitable sales growth through disciplined accountability and now have several areas where attacking first.
Our local teams are laser focused on tactics, they established and the third quarter to drive sales revenue in their respective local markets.
Monitoring these initiatives and measuring performance on a local an aggregate basis to ensure execution.
We also continue to develop our key supplier relationships with an emphasis to grow. These partnerships. We've made good progress and extending certain marquee brands across geographic regions and we will continue to grow the business for these key suppliers to warrant continued expansion.
In addition, the company has invested in National Count leadership to help drive this important customers segment, where we enjoy a competitive advantage against most of our competition.
We've also recently streamlined a regional structure from seven to five regions.
This change enables the organization to be more nimble and quickly drive strategic sales activities at the local level.
Finally, we have elevated our head of sales analytics and pricing, who now reports directly to me I'm confident that her team will help us drive a more robust inconsistent pricing and sales process throughout the organization.
We have numerous initiatives to grow the company's revenue, but recapturing market share will take time.
Action last quarter, we have challenged our sales team to hit a run rate of 10% marketshare growth and 2020 and they now peers that were more likely to start approaching that level in the back half of 2020.
<unk> that we clearly understand the urgency of utilizing the competitive advantage is we have in the market to grow the top one of our business.
Now I'd like to turn it over to Susan who will provide details on our financial performance.
Thanks, Mitch and good morning, everyone I'll briefly review the financial results and our financial position starting that slide six net sales were $679 million compared to $860 million and the third quarter of last year.
As much discussed that sales were impacted primarily by lower commodity prices. Your every year.
Significant decline inciting product sales do the lots of the key product brand and lingering transaction related sales disynergies an overlap markets.
While the difference in commodity price levels narrowed from the second quarter overall prices were lower for the quarter with lumber prices, roughly averaging 15% lower and panel prices, averaging 30% lower than the third quarter of last year.
Despite the lower level of those sales, we delivered higher gross profit on a year or your basis generating $94 million versus $92 million, resulting in a gross margin of 13.8% versus 10.7 and improvement 310 basis points.
For the third quarter, we had adjusted EBITDA of $19 million compared to $16.6 million last year and increase of approximately 14.5%.
Cash on hand in excess availability under the A.B.L. average $101 million during the third quarter, providing ample liquidity tomato working capital and other cash needs.
Debt under our term line and revolving credit facility with reduced $92 million over the prior year period.
Living to slide seven and the first nine months of 2019 net sales totaled $2 billion compared to $2.2 billion generated in the first nine months of 2018.
Lower sales, we delivered gross profit for the first nine months of $274 million.
$23 million or 9.2% over the prior year period.
For the nine month period, we had adjusted <unk> $61 million compared to $62 million and the prior year period.
Trying to slide eight and nine the slide illustrate strive to be are making and gross margin improvements across the business for both structural and specialty categories.
Because of you who are familiar with our business that lumberton panels make up at the majority of our structural products category, which typically account for approximately one third of our sale.
While commodity prices were lower your every year for both number and panels as previously discussed.
Able to generate gross margin at 8.9% in this category compared to 4.8% one year ago.
As we said on the second quarter 2019 earnings call or 2016, and 2017 structural gross margin averages were between 8.8 and 9.2%. So third quarter commodity results are in line with historical averages.
Especially to gross margin this quarter with 16.2% compared to 15.1% last year, increasing 110 basis points and reaching historical levels.
We certainly believe there is room for additional margin expansion from pricing discipline and sales analytics.
On now discussed as Jeanette expensive in more detail.
<unk>, we experienced as Jean a cost of $80 million, which was substantially less than to $88 million and S.G.N.A. in third quarter 2018.
$5.8 million higher than R.S.G.A. costs and that previous quarter.
Our primary focus at or distribution centres is providing excellent customer service and we allocated additional resources to meet these objectives, resulting in increased warehouse and third party freight costs of approximately $2 million and $1 million respectively.
The increased warehouse costs were comprised of approximately $1 million and maintenance expenses and $1 million, an incremental payroll and temporary labor at or distribution centers.
The continuing impact of the industrywide shortage skill drivers drove our third party freight and delivering costs, which were approximately $1 million higher than the second quarter.
Also contributing to the increase in as Jean in cost of the quarter was approximately $1 million for incremental sales confrontation primarily associate with the sales growth investment Mitch described earlier.
D risking our future pension obligations has been and remains a long term strategy for Bluelinx in line with this objective we incurred charges for partial multi employer pension plan withdrawal of approximately $1 million and the third quarter.
Last quarter, we indicated that we believed an additional $5 million to $8 million, an operational costs savings could be achieved over the second half of 2019.
Following a comprehensive analysis and with our current focused squarely on best in class customer service and growing our business. We are no longer expecting that incremental cost savings by ended the year.
Rather we anticipate that our overall as Jean expenses at the percentage of sales and Q4 will be relatively close to the level we experience during this quarter.
Significant efficiency opportunities that remain include a realignment of our facility routing enhancing ever lean warehouse operations and realizing cost savings from the technology and rolling stock investments that we had made in the last summer.
Timing of these initiatives has not presently been defined as our current primary focus is growing our top line and increasing our market share, but once we begin to execute on them the longer term cost savings should follow.
Moving to the balance sheet and slide 10.
You need to make progress on our debt reduction initiative, which remains one of our top priorities are total barrings on a year over year basis or $92 million lower than at the end of the third quarter last year.
We also continue to make progress with our real estate modernization activities I mean completed the sale of an overlap property, which of course proceeds of approximately $2 million during the quarter and recently sold the parts of land for approximately $1.3 million.
We have three remaining overlap facilities in the market for approximately $10.
On October 24th we amended are turned one among other things the amendment permit it used to proceeds from future sale leaseback transactions to reduce our debt.
Bluelinx currently.
28 operational properties appraised at approximately $100 million, which remain at four times the book value in the aggregate and continue to provide strength to our balance sheet.
We continue to vigorously pursue our real estate Mando nation efforts, we are at various stages, but the potential buyers and and number of opportunities and while we're not able to announce any other actions today, we look forward to keeping you informed as we complete additional transactions.
Finally, I'll conclude with a review of the cash uses for Bluelinx since 911, which remains at approximately $70 million on an annual basis.
They use is shown here include lease payments, an interest expense modest capital expenditures and amount per state to cash taxes, and other items and exclude principal payment on the term loan and <unk>.
Bluelinx possesses approximately $68 million in federal and as well. So we do not expect significant cash tax obligations at the federal level for some time.
Considering the relatively low annual capital investment.
Lengths and the opportunities we have to reduce costs increase operational efficiency regained market share and continue enhance our gross margins. We remain confident that the bluelinx business model provides a strong platform capable of generating cash over and beyond our annual uses and with that I'd like to turn to call back over it image thinks Susan.
Enclosing I think it's important to reiterate the optimism that we have for the future of Bluelinx and the tremendous opportunity that remains for the company in the months ahead as a clear leader in the wholesale distribution industry.
The investment thesis for the acquisition of Cedar Creek has not changed.
We have one of the largest product assortments most comprehensive geographic footprint among our competitors, we still have significant upside and leveraging our operating position to effectively reduce our costs <unk> form.
To provide than even more efficient solution for customer and supplier partners.
And we clearly remain well position to be the consolidation leader in the highly fragmented market.
However, first things first to be clear our media focuses on regaining the market share we lost in connection with the acquisition, while continuing to deliver the company.
The timing of the anticipated benefits of the Cedar Creek acquisition of been delayed but the investment thesis in the business enhancement opportunities have not changed while we certainly anticipated a quicker improvement than what we've seen our resolve and conviction remain steadfast we will grow our market share and we will realize the benefits.
Committed to.
And now may we'd like to open it up for any questions where they have.
Thank you.
My day to ask a question you will need to press, Taiwan on your telephone to they try your question to press the pound key piece standby wildly compiled the <unk>.
Your first question is from the line of Alex right field from S.B.R. Your line is now all pen.
Thank you could morning mentioned Susan.
Demartino at one.
You know a couple of quick questions. If he could help us to think about.
Revenue organic revenue over the next couple of quarters, you know understanding that September and October you saw sort of 3% volume declined in overlapping markets.
What do you think market growth was over that period of time, and where do you think market growth is going.
Over the next six to 12 months and how you are internal actions can.
Take advantage of that start to regain mark sure.
Wallich's, we you know as mentioned, we clearly believe.
Seeing evidence of the fact that we've.
The problems, we had in the overlap markets.
We you know the market your loss, we saw it as I mentioned invaded.
We're working hard to read gang that market share and it's taking time, but again the last couple of months have.
Are very optimistic evidence that we're making good progress.
Obviously October is you know just and we haven't seen single family housing starts so how we measure our performance against how the overall marketed does is challenging I can tell you we have.
As I mentioned streamline the organizational structure put in you know significant.
Methodology as far as processes as it relates to the sales force I alluded to the fact that we have a local market strategies and targets that we're having biweekly calls at the local level monthly calls it a more senior level to to drive activity. In addition of course, we're emphasizing areas where we.
You have competitive advantages like national accounts multi family opportunities specific.
Product categories. So, we're making a lot of progress what we can't tell you is exactly what that will mountain and and we and we're not in a position. Unfortunately to do that at this time as I mentioned on the call we feel comfortable saying that this 10% market share gross that we're going to be getting that in the back half of the year.
And I can tell you there are many opportunities that we're seeing that are starting to take hold that we think will bear fruit and 2020 ambulance.
That's helpful and Susan maybe coming back test you know you a little bit.
I appreciate the importance of customer service and agree with you on that front can you help us to think about that line item kind of going forward beyond kind of the fourth quarter is this sort of new kind of step back up.
Or are these.
That a little bit more sort of one time in nature, but will kind of continue for two quarters.
Tour well in some of the costs were a temporary labor, which means we can readily take that out as we improve the operation and so the first thing has to be just making sure we deliver outstanding customer service. So we're able to take those costs out you know as we improved so we're happy with that I did call out.
Pension expense for partial withdraw from multiemployer pension to be cleared that's in essence.
An accounting calculation for the net present value of payments over the future costs of time, it's very small like cash basis, but we don't expect that to continue so that would be.
Something that came up in the quarter that we wouldn't expect to see in future quarters, there's already actuarial tables adjusting that we do not consider that to be continuing so we'll just continue to work on lean operations of the warehouses and take cost out as we can.
I think would then C.S. returning historical levels, which are lower rate than with experience this quarter.
You know I would also say the biased how we're running the business strategically as a top on right now and you know an example would be where we've delayed an opportunity to lower espionage, hey cost would be in a route optimization.
Where we may have inefficient routes running between two facilities now we started moving down that path.
Into those costs, what happens is it's potentially disruptive to customers. They are getting it from new truck driver for example.
Phone call. They may have made historically with a long term relationship from particular warehouse manager that person's change now what we've elected to do is not.
Put the top line of the business at risk.
For the benefit of cost savings right now we want to make sure we square up our position in the marketplace and we garner back market share so that will impact some of the timing it was certainly.
I mentioned have significant amount of confidence in our ability to continue to operate this business more efficiently. We sure would expect you necessarily at the volume levels. We have now not to have the yesterday levels.
We will take advantage of you know increase opportunities we have from an efficiency perspective.
And lastly, as it relates to a real estate sales you've got three properties in the market for 10 million.
What do you anticipate the timeline.
Enticing those will be and then you've got another 28.
Properties remaining Diane at 100 million.
What do you think the timeline for that opportunity could be obviously, it's greater I suspect.
Well, we can't I may I can tell you we are.
Active.
<unk>.
There's a lot of marketing going on as it relates to properties and the continued real estate monitor modernization that we've talked about unfortunately, we're not in a position to to elaborate.
On the timing I mean, I think before when we.
Amended earlier in the year the term loan to enable us to do sale leasebacks.
He did that with a purpose in mind.
Similarly have done that with this turmoil and so obviously you know as we talked about it is the intent to deliver this company and the real estate remains a tremendous asset for the company to enable us to do that.
Thank you very much.
Thank you.
Your next question is from the line of a brat Hentic send some they'll call me capital. Your line is how open.
Hey, guys I think you just answered most of my question soon just want to confirm the so the the pension expense <unk>. That's the same thing that we've seen the Presley from a month unemployed pension withdrawal, yes, 1000, yeah very same thing so while it shows as a million dollars expense you think about it.
It's about $75000 a year in cash so.
It's very dependable.
And I guess just made me can further expound, so I understand the need to not.
Trend harbor synergies too fast.
I've customers.
That's today was still yesterday from operations anymore I kind of.
Exclude some of some of these things you mentioned that priceless no one's called still higher than I thought it.
The route optimization is one thing I guess.
Whether whether other things that cause yesterday to be higher.
In the corner and here, what you got to for Q4 .
Yeah. So.
Examples of of what causes the higher as I'm sure you know a report in the industry driver's remain to challenge force. So for example, we did we spent more on third party freight which is a function and not having the amount of drivers we needed during the course of the quarter, we actually had to dedicated people to do nothing.
Thing, but driver recruiting from a company's standpoint, and so by the end of the quarter relative to the beginning of the quarter.
Really good progress.
On the driver's, but that's a cost that we did not want to disrupt the customer service aspects of the business, we paid no incrementally more money to.
To outsource something that we have historically done.
Internally that would be an example from a sale standpoint for we we put in place to help motivate and you know get the organization aligned around the movement towards focusing on the top line a new incentive program that would just put in place in July of the year that Incented team members for back half improvement over the.
<unk>.
There's you know some cost associated with that.
I mentioned investments on the sales side as well related to where we feel like we have opportunities to drive performance and national count certain product categories that we brought in for example, vice president of structural products, where we segregated now the special instructional products, where we feel like we have.
Better emphasis and focus both with our suppliers and with the sales team or both of those product categories to help help drive growth and both of the product categories. Those would be examples of of other places for example, we had hire us genetic costs.
Okay, great well, followed moral fine thanks much.
Okay shorter thank you.
Your next question is from the line of Peter <unk> Partners. Even line is now okay.
Hi, guys.
Computer to morning.
Just a quick question.
The land cells.
So in the last amendment I think if you put a cap on the amount of.
You can you can.
So.
And and get through that language I didn't really understand it. So if you could just help us there.
That's my first question.
Yeah on the on the Amendment, we just did there's no cap on our real estate sales. So we we amended it so that we can do sale leaseback source or sell the property to pay down the bank debt.
Okay.
I am a second question is it looks like you you took your cousins up again.
But there's a pretty materials stepped down.
Between Q3 in Q4 I think governance go from et cetera, and a half times to six six and a half.
Or 6.25 times.
How do we get there from here.
Yeah. So we we have a lot of confidence in our ability to.
Reduce or bank debt, which is part of the strategy from a delevering delevering standpoint, and we have a lot of confidence of our ability to enhance our Eva dog and obviously those yeah, that's the numerate or in the denominator and so when we put in place.
The new the new covenants.
Intentionally put in place covenants that we thought would enable us to focus on running the business and d. leverage in the company and so we feel really good we feel like we have a great partner on the term London, HBS and I've worked with us very well and so we wanted to put in place something so we we ultimately do not want to have to talk about Kevin.
I worry about covenants as we operator business day today. The final thing I would say is.
Didn't talk about it but from a working capital perspective, you know, we've we feel like we still have opportunities to become more efficient as it relates to that obviously, there's variability in that are and seasonality in that.
But wanted to value propositions of.
Bringing the company's together in a scale that we have is to be very efficient as it relates that again.
Just being very careful and thoughtful about even inventory.
Options that may negatively impact a perception from a customers that has the emphasis of the company is on the top on in business.
Got it okay. Thank you okay.
Okay. Thank you very much.
Once again, if you wish to ask a question. Please press Taiwan on your telephone and wait for your name to the anonymous.
In some the line of Kevin leak from Hallador. Your line is now okay.
Good morning, guys. Thanks for taking the question I.
I wanted to ask me about gross margins.
Good to see that continued step up.
Structural.
But from a high level can you give us some color.
About how much of the gross margin improvement.
And the third quarter of this year was due to commodity deflation.
So as we think about gross margin on the structural side the way that usually flows is really.
Moving the weighted moving average of inventory cost. So it's really about the recency versus the year over year changed so when we talk about the topline year over the year changes really important to track and Thats why we called that out to you.
Follow that but as it relates to the gross margin. It's more the recent cost of the products that were buying in that drives the realization of those gross margin and so you can see the numbers tracking it's been a relatively flat slightly undulating.
Over the second quarter third quarter, so it's relatively flat and that's gotten us back to those historical levels closer to that 9% and Kevin when you see decisions point when you see a wrap a rapid escalation or or a decline in commodity prices last year is a great example, right at the kind of in the July timeframe in Q3 and through Q4.
Thats when the when the pricing drops so quickly it's hard to capture to that in the marketplace. Similarly, if you have just incredible run up there tends to be some short term benefit when there's when there's general stability in the market.
We generally see kind of what we've seen from a structural standpoint, and Susan has talked to the point that if you look at 16 2016 that 2017, it tends to be in the 8.8% to 9.2% range, which is kind of how we think about at more normalized market, but as we looked at as we look at the third quarter in particular.
Our shouldn't say there was no particular significant benefit or her or anything that hurt us from rapid changes, one one way or other than in the commodity markets.
Okay.
A little surprising just given the the level or the magnitude of volatility in commodities, we track number distributors.
As you say, it's hard to it's hard to catch up on the way up but there is naturally some kind of benefit on the way down.
Yes actually for us it's not the case, so if you think about.
You think about pick your number if you had 30 days of inventory in you have a rapid decline.
We're in a situation, where we have higher cost inventory, but because it's a commodity a lot of times you have smaller.
Purchasers, including our customers that can find another route maybe to bring in the product and I will take more volume and the otherwise would at a lower cost. So when you are sitting in a rapid.
A decline situation, we're sitting on higher cost inventory that we purchased prior and then.
And then our customers has the option. So we have to match at in the marketplace. So we're moving higher cost inventory at lower market cost it maybe.
For.
For distributors and there certainly are some that have for example, a 30 day average is on the price side with their customers and that would be.
Unlike a.
One step distributor as an example of pro dealer. They may have then benefits when the prices going down because they have a fix sell price. We don't we have very little of fixed sale prices, it's pretty much kind of everyday on the commodities. So so we don't get a benefit of an actual fix sale price in that situation.
Got it thanks.
Sure.
Again, if you would like to ask a question. Please press star one on your telephone.
Glenn the questions at this time presenters. Please continue.
Okay. Thanks, Mike. Thank you for joining US we certainly appreciate your continued interest and support of Bluelinx.
We look forward to speaking with you in the future to discuss our fourth quarter and year end results.
Have a great deal.
Thank you presented ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.