Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the moving fourth quarter 2019, Investor Relations Conference call.
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I would now like to have the conference over to your Speaker today Speaker Mary Mall director of Investor Relations. Thank you. Please go ahead mark.
Thank you Nora and good morning, everyone. We appreciate you joining us for the Bluelinx 2019 fourth quarter earnings Conference call. The earnings release is posted in the Investor section of our website at Www Dot Bluelinx co Dot com, we will also be referring to a supplementary presentation.
As we go through the call. The presentation is available on our website as well.
Joining us on the call today, our Mitch Lewis, Chief Executive Officer, and Susan O'farrell, 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 risks and uncertainties that could cause our actual results to differ materially from those reflected in the statement those risks and uncertainties are described in our earnings release and discussed in our filings with the FCC Today's press.
Taishan also includes references to non-GAAP financial measures. These non-GAAP measures are described and reconciled to their gap counterparts in the presentation materials. The earnings release, and then the best for sections of our website with that I'll turn the call over to Mitch Thanks married and good morning.
Before we dive into our fourth quarter end 2019 performance I'd like to discuss the news, we announced yesterday that Susan O'farrell will be retiring from Bluelinx in early April.
As many of you know Susan joint Bluelinx, a few months after I began with a company in 2014 and over the last five years she's been a tireless advocate for Bluelinx I speak on behalf of the entire Bluelinx family when I think Susan for her many contributions to our organization and wish her well what I know will be a successful next chapter.
I'm also pleased to announce that Kelly Janssen will be joining bluelinx on April 13th as our CFO upon Susan's departure.
Kelly has strong technical process expertise through a very career, including more than a decade, a general electric roles with increasing responsibility.
She has been a chief accounting officer for the last six years for both Baker Hughes and more recently Westrock, an 18 billion dollar corrugated and consumer packaging company.
We're pleased to have Kelly on our team and are confident that are knowledge and expertise will help us drive process improvement and innovation as we continue to garner administrative and operational efficiencies within our organization.
2019 was a transitional year for Bluelinx as a marked our first full year of operations. Following our 2018 acquisition of Cedar Creek.
There was a period of dramatic change for our organization in which we consolidated facilities in three additional markets for a total of 13 facility consolidations.
Converted 25 facilities to our ERP platform, which is complete with the exception of two fabrication facilities entered into several sale leasebacks, which coupled with our twentytwenty sale leasebacks have reduced our term loan by over $100 million realigned our executive sales leadership to help drive market share growth.
Reduced our operating regions and regional officers from seven to five created a new national operational center of excellence to help drive efficiency and logistics.
And invested an additional headcount and resources and strategic product and sales categories to help fuel profitable sales growth.
We made significant progress in 2019 and are beginning to see the results of our efforts. The first two months of 2020 reflective of this progress as our sales volumes increased compared to the same period in 2019, we understand we have significant work ahead of us, but we're clearly on our way.
Turning to our financial results for the first fourth quarter or net sales of $613 million were basically flat to prior year. When you consider the 46 million dollar decline from the discontinued citing line for the quarter compared to 2018 levels.
Coupled with a commodity deflationary impact of $13 million.
As we've discussed previously our distribution of deciding line was discontinued in early 2019 and wound down during the first half of that year.
We estimate that the 2019 net sales impact was approximately $160 million compared to pro forma 2018.
We expect this comparative headwind to diminished at $32 million into first quarter of 2020 and $16 million in the second quarter at which point the comparative effect will be negligible.
We're continuing to make good progress in driving new sales in our siding category as well as other product categories, which is evident in the volume increases we've enjoyed in January and February.
Adjusted EBITDA for the fourth quarter was $10.9 million compared to $6.8 million in 2018, the improvement in adjusted EBITDA was driven primarily by higher gross profit and lower S. DNA expenses, demonstrating the progress we've made in improving our operations.
We continue to maintain a reference on gross margin enhancements as it improved 140 basis points from 12.1% in Q4, 2018% to 13.5% in Q4 2019.
We've previously discussed the integration challenges that we faced in 2019 with respect to overlapping markets that negatively impacted our market share and late summer we renewed our historical focus on providing world class customer service, we invested an additional staff for customer service teams added operational.
Leadership and provided additional support to our warehouses to ensure that the service level of these locations returned to the high historical levels at Bluelinx is traditionally known for.
These measures have clearly made a difference as sales unit volumes recovered in the fourth quarter of 2019.
In higher year over year volumes are continuing into Twentytwenty in fact, the fourth quarter represented the first full quarter that we experienced a year over year increase in volumes and overlapping markets since the acquisition of Cedar Creek.
As you can see on slide four this trend has continued and twentytwenty through February.
As our volume for these overlap markets was up around 14% compared to the same period in 2019.
With respect to housing well various macroeconomic indicators such as wages unemployment and interest rates that support the general housing market were strong throughout the year overall housing activity was relatively modest with single family housing starts a key driver of our business.
Just 1.5% for the full year in 2019 much of the annual increase was driven in the last two months of the year, which are seasonally slower months for our industry.
We do believe that some of the strength we experienced in the first two months of 2020 was based on the increase single family housing starts towards the end of the fourth quarter.
Of course, there is a great deal of uncertainty regarding future market demand in light of the current a virus outbreak.
Nonetheless, as late as last week, we had not seen a decline in our demand in fact, our gross sales for the first week of March actually increased around 14% from the same period a year ago.
We're also fortunate that our direct purchases from China relatively low representing less than 3% of the company's total product purchases in 2019.
We've only seen relatively minor supply disruption from China directly to Bluelinx. So far this year to be clear, though we do understand that it is likely that the corona virus will cause further disruption and potential market deterioration.
While we have established internal teams to closely monitor and react to this situation, we anticipate that it will likely create some headwinds to an otherwise excellent start to the year.
As we made clear our number one priority in 2020 is to profitably grow our business as I mentioned previously we commence various initiatives in 2019 that are driving our performance in 2020, including investing in our sales organization.
In addition, our local teams continue to develop and implement local market strategies that have shown to be effective in driving sales rep driving sales revenues.
We have initiated robust processes to monitor data and measure performance to ensure execution.
On the supplier side, we continue to invest in developing and expanding our key supplier relationships through collaborative initiatives intended to grow market share.
In addition, leveraging our ability to provide an efficient distribution platform to our national customers remains a high priority for Bluelinx as we have developed specific plans to grow with these key partners. We are committed to profitably grow our business in 2020 and the early results confirm this commitment.
Finally, I want to highlight the great progress, we made and de leveraging in 2019 and into Twentytwenty.
As we have consistently stated strategic imperative following the acquisition of Cedar Creek was to reduce reduce debt, which at the end of the second quarter in 2018 totaled $629 million.
Throughout the course of 2019 and into early this year, our team did a fantastic job and executing numerous real estate transactions, both sale lease backs and outright sales that generated significant proceeds, allowing us to reduce our term loan.
Today, our term loan balances down to $77 million from the initial principle of $180 million.
We're pleased to have de risking our balance sheet materially over the course of the year and to have entered twentytwenty on a stronger financial footing.
Last week, we also announced an amendment to our term loan that eliminates our leverage covenant once we reduce our principal to $45 million.
We entered into this amendment solely to take advantage of a no fee option to eliminate leverage covenants in the future.
I want to be clear that we fully expect to be in a in compliance with our leverage covenants as we continue increasing EBITDA, while executing on our historical strategy of deleveraging the company.
I also want to reiterate that as we've stated in the past we do not have any intention of issuing equity to reduce the principal on our term loan we have confidence in our future and do not believe that our current market capitalization appropriately reflects our long term value.
Our continued emphasis to reduce bank debt to real estate monetization as well as to enhance operating performance should provide ample ability to continue to meet our covenants and reduce our term loan balance in the months ahead.
Of course, we believed it was prudent with no downside to create this option to eliminate the leverage covenant and the days ahead.
Now I'd like to turn it over to Susan who will provide more details on our financial performance. Thanks, Mitch and good morning, everyone. I'll briefly review the financial results in our financial position for the quarter and full year, starting with slide seven net sales were $613 million compared to $673 million in the fourth quarter of last year.
As much discussed net sales were impacted primarily by lower commodity prices year over year.
Typically panel prices and the decline in siding product sales did the loss of the key product brand and the ensuing compared to that.
We continued our trended higher gross profit on a year over year basis, generating $83 million compared to $81 million, reflecting gross margin of 13.5% compared to 12.1% and improvement of 140 basis points.
We achieved gains in both structural and specialty product categories. The structural gross margin improving to 8.7% from 3.6 last year and specialty gross margin of 16.1% compared to 14.8% last year.
For the fourth quarter, we delivered adjusted EBITDA of $10.9 million compared to $6.8 million last year, driven by higher gross profit and lower SGN expenses on an absolute basis.
As you know it was down approximately $5 million for the fourth quarter on a year over year basis, as DNA was 12.4% of sales, which was mostly a function of lower sales.
As we mentioned in our last call we made investments in the areas of businesses necessary to provide our customers with best in class customer service such as delivery related expenses in material handling and these investments are starting to pay off as we've seen sales volume increases across our entire business for the fourth quarter and the volume increases have continued into the first quarter two.
Cash on hand in excess availability under the ABL averaged $88 million during the fourth quarter and was approximately $80 million at quarter end, providing ample liquidity to meet our working capital and other cash needs.
For the full year 2019, net sales totaled $206 billion compared to 209 billion generated in 2018.
Pro forma net sales, which take into account the acquisition of Cedar Creek as if it had occurred on January Onest 2017 were also down year over year pro forma net sales were affected primarily by significant commodity deflation of $221 million as compared to prices in 2018 and $160 million from the impact of the disconnect.
And you mentioned that the major citing program.
In 2019, we delivered gross profit of $357 million compared to $332 million in 28.
Or $394 million on a pro forma basis.
Overall gross profit margin improved 13.5% from 11.6% and 2018 up 140 basis points on a pro forma basis.
The improvement in gross margin was driven by gains in both our structural and specialty product categories. As we begin to gain traction from our pricing initiatives and see the benefit of scale from the acquisition at Cedar Creek.
For the full year 2019, we had adjusted EBITDA of $71.4 million compared to $68.5 million in 2018 or $80 million on a pro forma basis adjusted EBITDA benefited from higher gross margin rate yet was impacted by lower net sales.
Turning to slide 928 team with a historic year in terms of both commodity price levels and volatility as lumber and panel prices soared in the second quarter before dramatically declining throughout the remainder of the year and 2019 prices stabilized and remained at lower levels, which significantly impacted our net sales on a comparative basis.
On a full year basis, our SDMA costs were down approximately $14 million.
305 million for 2019 compared to 319 million last year.
On a pro forma basis as unit costs were lower by approximately $29 million year over year. This includes substantial savings from payroll costs, especially back office and corporate costs, reflecting the value of our acquisition.
I'll ask unit costs were down. These figures still include incremental seven second half expenses related to improving customer service looking ahead to Twentytwenty. We will continue to focus on our customers to ensure we keep growing market share while aligning our operational expenses to the rate of sales.
Moving to slide 10.
This slide demonstrates the sustained progress we have made from a gross margin standpoint with respect to both structural and specialty categories specialty gross margin was 16.1% up 130 basis points over the prior year.
We continue to generate some structural gross margins in the high 8% range with the slight change from the prior quarter attributable to product mix. These gross margin results reflect operational improvements. We have made in addition to the benefits we have gained from the acquisition.
Moving to the balance sheet on slide 11 sure. The detailed on the term loan reduction we have shared with you.
Debt reduction was a key priority for us for the company. Following the acquisition in 2018, and we stated our intention to utilize our and real estate portfolio to help us reduce our term loan and a beyond that.
We reduced our term loan substantially by $102 million.
The reduction in term loan includes approximately $70 million a net proceeds from a series of sale leaseback transactions that closed shortly after year end.
Our term loan balance now stands at $77 million compared to $179 million at the end of 2018.
We're very pleased to have reduced our term loan balance has significantly.
We did this primarily by completing 10 real estate transactions totaling 21 properties, which generated net proceeds of approximately $128 million and it's important to note that these transactions continue to hold up to their appraised value and generated proceeds of 106% of appraised value.
Additionally, the most recent sale leasebacks were executed at a weighted average cap rate of 7.4%.
This is the reduction in cap rates from our previous deal and as a lower rates than our term loan which was 8.7% at the end of 2019.
With this continue change our capital structure, we have lowered our estimated Andrew uses of cash to approximately $65 million, which includes the approximate payments as follows.
Real estate property finance lease payment of $23 million.
ABL interest of approximately $15 million.
Equipment lease payments at $8 million term loan interest to $6 million.
Capex of $6 million and cash taxes pension and other cost an aggregate amount about $7 million.
Following these most recent transactions we have 13 remaining properties valued at approximately $40 million that we can monetize.
This includes three remaining overlap facilities are dark properties with an estimated market value of approximately $8 million and 10 operational properties appraised at approximately $32 million, but the corresponding book value of 7 million.
We will continue to assess opportunities as they arise we do not anticipate announcing any further material real estate transactions in the near term.
We are in full compliance with our term loan and ABL agreement and we look forward to continue our efforts to reduce prepay debt had schedule.
We remain confident that the Bluelinx business model provides a strong platform capable of generating cash over and beyond our annual uses.
And in closing on a personal note. After 35 years of working with Accenture Southern company gas to home depot and of course, Bluelinx I've been fortunate to learn from so many terrific business leaders.
It's now my time to step back from Bluelinx in order to pursue my other passions more fully I want to continue and to expand my board work and to be able to share. Some of my business experiences I'm really excited about what lies ahead.
I want to thank metric for the past six years.
For my team I am so very appreciative of your talent and passion for our business together you continue to make a positive impact on our business.
And as a mentor said this isn't retirement this is time for my requirement.
And with that mentioned like to turn the call back to you. Thank you Susan.
So looking ahead for the remainder of the year, we are well positioned financially with a significantly de levered balance sheet solid liquidity and a plan for topline growth.
We're pleased to see a solid start to the year in the first two months, which provided optimism on how this start would play out throughout the year and translate into product demand as we enter the busy spring and summer seasons as I mentioned the Corona virus has certainly made the next several weeks uncertain and yet we are confident in the foundation, we're creating to provide.
Hi, this strong future for Bluelinx.
We will continue to work in areas that we can control, we have made great strides and recapturing market share and overlap markets and we've made significant progress and initiatives that will help us grow further organically.
We've turned the organizations complete focus on profitably growing the business, which is our most important priority and Twentytwenty. Our plan is to take advantage of our position as a leader in the wholesale distribution industry, while ensuring that we always provide both great value and great service to our customers and our suppliers.
Finally, I want to thank the Bluelinx team it is difficult to clearly articulate how challenging the integration in 2019 was tar daily routine.
Our associates have weathered the storm and made fundamental changes to our business that will serve us well in the months and years ahead truly truly great work. Thank you.
And now nor we'd like it out like to open it up for any questions.
As a reminder to ask a question your lead to press Star one on your telephone until we get question first Uptown key features standby will be compiled mccaney roster.
Your first question comes from the line of Alex Rygiel of B. Riley FBR. Your line is open fair.
Thank you good morning mentioned Susan congratulations.
Thank you. Thank you.
Couple of random questions here first Mitch thanks for the update on the volume growth year to date.
14%, that's fantastic could you comment on sort of the aggregate impact of lumber and panel prices year to date.
On the business so far.
Yes, so obviously, we've seen a ball all and both lumber and price.
Lumber and panel during the first part of the year and when you see some escalation in commodity wood prices that tends to have a short term impact on demand.
So it's very difficult for us to assess how much as the actual market growing and how much is someone demand being created by incremental increases in in commodity prices, but we certainly think that has had some effect.
And you would you characterize that sort of in the single digits or is that also on the double digits as well year over year.
As far as the demand created by the increase in commodity wood based process. It would be Alex just really challenging for us to to kind of break that out by.
By the five year request as a percentage.
Okay, and SGT seemed a little high in the fourth quarter.
Could be my modeling.
But if you could comment on SGN, a and how you think about.
SGN a in 2020 relative to 2019 that would be helpful.
Well, it's certainly we came in a little bit higher than we thought although again, we're pleased that we were down almost $5 million. So we said, we're going to take action and we did but we were very thoughtful it does action on as you can see our focus has been on turning the ship on sales and you've seen the positive impact on volumes that we lifted up for you.
And we think Theres a correlation there were making the right investments in the right places, but still being thoughtful about taking cost out we know there's still an opportunity to lean out this business and we still see those opportunities ahead of us. So first thing on the fleet has to be taking care of customers and if that means incremental delivery expenses like we've spent we think it.
The wise investment.
Over the course of time, though we still believe there is opportunity to lean out and if we look back at our previous run rate.
Delivery cost as unit costs, we know we can get lower but right now when you think about it just always remember that its course at the numerator and denominator.
We're working on lowering your cost while we make sure we take care the sale. So we look to see improvements in the coming year.
And lastly, as it relates to the 13 remaining properties can you help us appreciate sort of the timeline of when those properties could be.
Good.
So we're we're actively pursuing the three dark property properties that we've talked about in the past so we're.
Not in a position be able to comment on where we are there but.
Certainly actively looking at that and then we're being thoughtful and selective as it relates to potential sale leaseback opportunities for the remaining properties as we look at those locations.
And the specific properties in relation to long term strategic value of below the locations whether those are the right properties. So I'd say very quickly on on dark properties and certainly assessing a few of the properties that we might do sale leasebacks way.
Very helpful. Thank you.
Okay. Thank you.
There are no further questions I'd like to turn the call back to the presenters.
Okay well. Thank you very much we certainly appreciate your continued interest in support of Bluelinx and we look forward to updating you on our continued progress during our may call. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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