Q2 2020 Bluelinx Holdings Inc Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Bluelinx second quarter 2020 earnings presentation.

At this time all participants are in the listen only mode.

So to speak refreshing patient there will be a question and answer session.

Ask your question. During this session you will need to press star one north Alison.

Please be advised that studies conference is being recorded.

If you're acquire any further since these spreads bars and zero.

I would now like turn the conference over to speaker today.

Ms. Mary more.

Director of Investor Relations.

Thank you. Please go ahead Matt.

Thank you and good morning, everyone. We appreciate you joining us for the Blue Lakes Twentytwenty second 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 are Mitch Lewis Chief Executive Officer, and Kelly Janssen, Chief Financial Officer before we get started a white to remind you that this presentation includes forward looking statements. These statements are subject to risk.

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 presentation. Also includes references to non-GAAP financial measures. These non-GAAP measures are described in reconciled to their gap counterparts in the presentation materials. The earnings release, an investor section of our website.

With that I'll turn the call over to match.

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Thanks, Mary and good morning.

The second quarter of 2020 has been one of the most challenging periods in our history both professionally.

That's what was in our personal lives.

Well I will be spending time. This morning discussing the business results for Bluelinx and the second quarter, it's not lost on us the emotional and physical told the cobot 19 pandemic has caused us to our nation and the world.

Our thoughts are with all of those who have been affected.

We also want to extend special thanks, and our deepest gratitude to our country's health care professionals first responders.

All of those on the front lines are putting their lives at risk every day to serve and protect our communities impacted by cobot 19.

We truly appreciate their servers and sacrifice.

As we discussed briefly on our last call by late February following the initial news of the Cobot 19 outbreak in the public health crisis oppose.

We had organized ourselves to respond to the pandemic.

Though much of our nation entered into shelter in place mandates beginning in late March and continuing through April and May.

Our business was deemed essential in every state that we operate we quick we developed a companywide plan to safe we continue operations.

Establish new protocols regarding health sanitation and safety in order to ensure that we prioritized our associates health and safety with respect to all business decisions.

With the cooperation and tremendous effort of our associates, we've been able to deliver outstanding service store customers with minimal business disruption during this challenging time.

These efforts translated into strong results for the second quarter, delivering net sales of $699 million in total adjusted EBITDA of $31 million.

24% improvement from 2019 levels.

We also generated a record gross margin of 14.4%.

Driven by a strong performance in both our structural and specialty product categories.

Our second quarter results reflect dramatically shifting market demand as the quarter progressed, we've been experiencing weakness in our sales volume towards the end of March due to the onset of locked down restrictions and the vast uncertainty that permeated the country at that time.

But as we noted in our earnings call in May we were pleasantly surprised to see our sales volumes start to improve in late April.

As we progressed into May and June.

Sales volume continue to improve across our business with the housing industry staging a remarkable reversal from earlier predictions and indicators, while the repair and remodeling markets also contributed to what became an overall good market demand environment.

Oh results were also supported by the continued execution of our sales strategies and processes that we began implementing in the back half of 2019.

Ultimately, we were able to gain momentum to the point that our overall sales volume during the second quarter were relatively consistent with last year.

And the momentum we experienced exiting the quarter was certainly stronger than the business activity levels. We saw at the same time in 2019.

The wood based commodity market also experienced a dramatic improvement as the quarter progressed after the lumber lumber and panel markets bottomed out in early April following the onset of the pandemic.

Prices reverse rapidly as demand for wood products was stronger than anticipated while market capacity had been reduced.

Tony will discuss commodity prices in more detail well while positive the overall impact they had on a revenue during the quarter was only around $14 million or about 2% of our second quarters net sales.

Our top one answer party as a pandemic began was closely managing the liquidity the business, we reassigned associates to work on centralized team is driving a monitoring all aspects of our working capital. We also establish robust processes to authorize and closely scrutinized all credit inventory procurement and routine operator.

Total expenditures finally, we immediately instituted daily senior leadership meetings, where we reviewed all aspects of our working capital.

These measures worked inventories a great example.

<unk> decreased by $65 million since he ended the first quarter.

This positively impacted our bank debt as Arabia balance was reduced by $47 million compared to the second quarter of 2019.

We ended the quarter with $138 million, an excess availability in cash on hand.

In addition to our efforts to enhance liquidity, we continued our relentless focus on operational improvement in the second half of last year, we streamlined our regional structure, giving us the ability to react quickly and consistently to changes in the market.

Our regional operations directors are staying close to all aspects of our logistics costs at the branch level.

And by instituting a national operational center of Excellence last year, we created capability within the organization to provide oversight around areas such as fleet optimization and warehouse efficiency.

These efforts combined with disciplined cost management actions that are being driven by daily operational metrics and review at the facility level have resulted in improvements in our overall SGN a performance.

We're also making good progress with our growth initiatives, we continue to develop locally driven strategic sales opportunities designed to increase volume in our respective local markets.

We regularly monitor these initiatives a measure performance on a local an aggregate basis to ensure execution.

And we're investing in executive sales leadership to help drive these initiatives and hold our teams accountable. For example, we recently reorganized our national accounts team, so that will have to dedicate to leaders.

One for our pro dealers specialty distributors and co ops and the other to focus on our home center customers.

The momentum from these initiatives is becoming visible if we've already seen improvements in July sales volume year over year.

In the coming months will remain cautious as the pandemic continues with our key focus centered around maintaining solid liquidity, while emphasizing growth and operational efficiency.

Our sales teams are laser focused on executing on their local market strategies to drive increased sales volume and revenue in the second half of 2020.

In addition, we still have tremendous opportunity for operational efficiency through process improvements and route optimization.

The pandemic has been a catalyst for us to examine and then we examine every aspect of how we operate and measure results. Our goal is to drive sustainable cost reduction strategies. So that its impact will benefit the business for years to come.

Well it likes is one of the largest product assortments and comprehensive geographic footprints, among our competitors, enabling us to provide solutions for our customers and supplier partners.

The breadth of our product offering coupled with our strong service model, it's been an asset to many of our customers during the pandemic as they have relied on us to help them efficiently manage their working capital.

This is just one of the many ways we generate value.

Our longstanding customer relationships have always been a competitive advantage that we've enjoyed and the strength of these close relationships with key customers at national and local levels has never been more evident that during this crisis for that.

We're thankful.

We've also received strong support from our suppliers and continue to take steps to enhance those relationships, we work with our suppliers everyday to offer deep sales coverage across our territories and provide product expertise to help educate sales teams and customers.

We have continued offering these services throughout the pandemic and are working with our suppliers to add value and expand their market share for our mutual benefit.

The strength and development of these relationships and the expansion of marquee brands as a key component of our overall growth strategy.

As evidenced by our second quarter results. The current market conditions for Bluelinx approve and resilient single family housing starts which have historically held a strong correlation with our business declined dramatically in April as a result of the pandemic, but recovered by June which was only modestly down compared to 2019.

Levels.

Even with the improving trend single family housing starts were still down 13% for the quarter compared to last year.

And as of June seasonally adjusted single family housing starts remained well below the 50 year historical average.

The builders confidence index after experiencing a cobot 19, driven 42 point decline from March to April.

It's also rebounded sharply to 72 in July reflecting the change in sentiment that occurred over this relatively short period of time scores about 50 indicate the builders generally view conditions as favorable. So we currently have clear momentum and the single family housing market.

Unfortunately.

The overall strength for the next several months and into 2021 is not as clear.

We're still facing double digit unemployment levels and do not know what toll pandemic will ultimately have on the broader economy.

Historically wages and unemployment have been key drivers to the health of the overall U.S. housing market and there was concern that these factors may outweigh the car demand drivers in the industry.

There are also remain constraints on labor availability and the risk that escalating costs of raw materials will negatively impact housing affordability. Additionally, the recent spike and cobot 19 cases across the country could limit or slow down the opening of local economies.

Well, we remain cautious we still believe there's reason for optimism.

Stay at home orders in the movement to remote working could drive the acceleration of de urbanization as professionals and families migrate to less populated areas movement in consumer spending from travel and entertainment to new home construction and home improvement would also benefit the building products industry.

With remote working potentially becoming a more permanent solution for many companies consumers may also desire more square footage that is provided by a house on the supply side near term inventory shortages, coupled with an aging housing stock may further drive the need for new housing construction and the future.

We're certainly seeing evidence of this optimism in the month of July.

End markets were relatively robust even as we work through intermittent supply chain disruptions due to increased demand and pandemic related closures and constraints and our structural product commodity markets have remained red hot with commodities, we clearly understand that what goes up eventually must come down so we initiate.

I didn't have executed on a game plan to help mitigate the inevitable declining commodity pricing.

That game plan includes an active centralized management of our purchasing an inventory levels as well as a movement to less price sensitive procurement policies, such as contract based pricing and increasing consigned inventory in which our costs are determined very close to the time, when we ship products to our customers.

Yeah.

Well, we are seeing continued evidence of strengthen our markets. We simply have to acknowledge that these are unprecedented times I am not not smart enough nor oppression enough to predict what the future holds.

What I can talk to you about his bluelinx and how we've changed.

The second quarter numbers and the trend line within the quarter tell a wonderful story.

And as I mentioned, we appear to be off to a very good early start in the third quarter.

But that's only a small part of the story.

But I believe is most important to understand as a stakeholder.

Is that this pandemic has forced us to quickly make a large number of operational strategic and tactical decisions that we might not have otherwise made.

The result of these changes is that in virtually every aspect of our business. We are a much better company today.

We were just a 120 days ago.

Many companies have survived the pandemic indeed, many of flourished we simply got better.

Circumstances required us to accelerate our pace of change and we met that challenge.

And none of this would have been accomplished without our incredible associates, who have remained focused engaged and dedicated during this extraordinary time.

Every day without fail I.

Hi, Marvel at the resilience of our team.

And I'm very honored to be here to represent them.

And now I'd like to turn it over to Kelly.

Thank you match and good morning to everyone that is with us on the call today I will now briefly review the financial performance for the second quarter.

We were very pleased with the second quarter's results, especially considering the coven 19 impact we saw in March and the first half of April we reported record gross margin of 14.4%, which is an improvement of 110 basis points year over year at 35 basis point higher than the first quarter. We also reported adjusted EBITDA.

31 million as a result of the higher margin rate and improvement of 6 million year over year. This led to 51 million of adjusted EBITDA in the first half of the year in a market that has certainly been challenged by the pandemic. In addition, strong cash generation and working capital management provided cash on had an excess availability under the ABL.

All of approximately 138 million at the end of the quarter and provided cash flow from operating activities 72 million.

On page nine you will see that net sales for the quarter were 699 million compared to 706 million for the same period last year net sales increased 9 million year over year, when considering the 16 million comparative effect of the discontinued citing line. This is the last quarter that the comparative effect will be sick.

Again enough to highlight.

I see in a for the quarter with 70 million, which was 10% of net sales and consistent with last year reductions in SJ of approximately 4 million compared to last year resulted from actions taken throughout the quarter to reduce fixed costs, such as labor reduction limiting discretionary spend and improvements in operational efficiencies.

We expect that most of these reductions will be sustainable as our continued scrutiny of all expenditures as a top priority.

However, some will depend upon the extent of the Pandemics impact on our future operating results.

These decreases were offset by an increase in annual incentive expense.

Plan is based on a combination of adjusted EBITDA and return on working capital both of which are higher this year.

We generated positive net income for the quarter of 7 million. This is an increase of 8 million when considering the gains from sales of real estate of approximately $10 million that we recognized last year and the effect of other onetime items.

On Slide 10, you will see that the second quarter began with April commodity prices below average coming off a steep decline that started in mid March.

This is continue to increase in may and were above the five year averages by the end of June.

This rebound can be attributed to increased demand as well as low inventory in the supply chain. In fact, we continue to see increases through July with current average composite pricing of Fiat, 558% board feet for lumber and 552 per thousand board feet the board feet for panels.

The improvement in the market throughout the quarter contributed to net sales that were relatively consistent with prior year and to our improved overall gross margin.

On page 11, you will also see that gross margin was strong in both our structural and specialty products segment, our structural segment, which is most impacted by commodity price movement recorded gross margin of 9.3%.

160 basis points year over year.

While this was a strong improvement compared to Q2 of 19, the improvement was not as significant when compared to the long term average, which typically in the 8% to 9% range.

Our specialty products also had an improved gross margin recording 17.3%, which has an increase of 140 basis points compared to last year's margin rate of 15.9% and an increase of 90 basis points from the first quarter.

Moving to slide 12 concerns regarding the.

Potential impact the pandemic could have on liquidity pushed us to accelerate changes towards the end of the first quarter and how we manage working capital we were able to maintain this discipline throughout the second quarter and plan to sustain it sustain at long term on this slide you will see the operating working capital improved by 27 million year over year.

And inventory decreased by 65 million since the end of the first quarter.

Through an increased focus on collection days sales outstanding improved by over two days compared to last year, and we ended the quarter with our trade receivables almost 92% current.

On slide 13, our borrowings under the ABL were 322 million at quarter end compared to 369 million for the same quarter last year, our term loan balances 69 million at quarter end compared to 147 million at the second quarter end last year debt under our term loan in revolving.

Credit facility was reduced by 125 million over the prior year period. It's also worth noting that the reduction in bank that contribute to an overall decrease in our interest expense of approximately 2 million year over year.

As you May recall early in the pandemic, we were able to prepare for a downside scenario when we amended at no cost to the company the minimum turn on leverage ratios to 8.75 for both the second and third quarters of 2020.

We ended the second quarter at 4.86, well below the required ratio.

Even with the significant cushion we will continue to look for opportunities to pay down the term loan to below 45 million, which would eliminate the leverage ratio requirement in its entirety.

One vehicle for that for debt reduction to pay down the term loan is the continued monetization of our owned real estate, which is valued at approximately 40 million.

Well activity slowed early in the quarter due to uncertainties related to covert 19 industrial real estate markets are recovering.

Three of the 13 remaining properties valued at approximately 8 million are considered dark property and are available for sale. While the other 10 are still operating we're also actively pursuing potential additional lease sale lease backs of certain properties and we'll keep you updated on our progress.

The past quarter was certainly an unusual first full quarter for me.

I'm very proud of the Bluelinx team and our accomplishment and incredibly challenging environment.

Well there is still uncertainty as to future impacts at the pandemic me brain, we feel that we are better prepared than we've ever been to manage through potential challenges.

Our improved liquidity fixed cost structure and operational discipline provide a stronger platform to execute on our financial and business objectives in the near term.

Now I'd like to open the line for any questions.

As a reminder to ask a question you will meet the press Star one for New York telephone.

We draw your question Brett step out.

Please stand by wildly compiled the kuni roster.

Your first question comes from the line up Alex Rigel. Your line is open. Please ask your question.

Thank you good morning, and congratulations on a very nice quarter.

Great. Thank you good morning, Thank you.

Could you talk a little bit about the components of free cash flow, how you're thinking about them.

And maybe offer up some guidance for 2020, I know you think about free cash flow.

Yeah. So what I can talk to you about is the free cash flow that we had for the corner, we saw significant improvement as it related to just gross margin improvement. So those earnings really drove a lot of that and in addition, we had some improvement coming up the working capital if you at least that.

Improvement in inventory really drove a lot of that we had about 43 million of improvement.

And the cash flow as it relates to bringing not off the balance sheet. So those two are the main drivers of cash flow. We obviously still have a lot a long way to go as it relates to understanding what next year would look like so unfortunately, I don't really have a outlook for you at that this time, but hopefully.

As we continue to generate stronger earnings if that's possible in the next few months.

We would start to see a an improvement and then maybe we can get a better view.

And then as it relates to price and volume can you help us understand how that.

Played out into Q, and how that might play out in the second half and maybe niche touched upon.

How blue links.

Benefits and or gets hurt.

Commodity price volatility.

Sure so on the volume side really the second quarter.

What was dramatically different and the in April and then rebounded as we talked about in May and June and so if you look at the volume generally across the quarter.

Year over year, it was relatively flat hub guessing what the you know what we can talk about watch, which we did of course is is where we are in July we certainly have seen a robust market, which you know we've heard on the backs of homebuilder shortly our customers as well and a in a very strong commodity market.

As as we look forward Alex the I can tell you there is a very strong.

Sentiment that housing will do well for the rest of the year from our customer base, they're optimistic our supply base, we're talking about in some cases unprecedented.

Demand.

But what we don't know of course is the impact that the pandemic ultimately will have what what impact the unemployment rates will have.

The increase in.

And commodity pricing for example may have an impact ultimately on demand is if it continues to escalate the way that we've seen it as we manage the commodity price and the risk of course of that coming down you touched a little bit on I want to talk earlier.

We've we're aware of this more monitoring and I can tell you very closely.

As as we view what the risk is and we've put in place. We believe our mitigating factors to help diminish the risk of you know collapse on from a commodity standpoint, if that were to happen and so some of those are just moving the inventory for one lower generally which of course protects us that we're watching or.

The Tories much closer and at the same time trying to to move products more towards a cost basis that is closer to the time of shipment to our customer base.

Lastly, the term loans declined from let's call it 120 million at year end too.

69 million agenda this quarter fantastic decline there I suspect the goal is to get it to 45 as quick as possible to eliminate the covenants, but could you comment on you know kind of prioritizing your use of cash flow going forward.

Good where it has moved that term on down to 45 rank.

Sure.

Correct, we are still prioritizing the pay down of the term loan below the 45 million.

We continue to focus on monetization of our own properties and real estate, we're continuing to pursue those opportunities. While we don't have anything specific to talk about today. Those are certainly actively working on that and in addition, we will as we generate operating cash flow.

And of course, our first priority there is required on the baby out, but but there could be some additional ability to.

Okay.

Hey down the term loan from operating cash flow at some point in the future depending on.

How are how our covenants turn out so.

So I think that's where we stand right now as a kind of our prioritization of cash. It certainly is term loans specific as it relates to those using those value from the property and that of course as we generate cash flow will also continue to pay down a bill as well as we did this quarter.

Do you have one last question sorry.

You know a while back you kind of shifted gears to pursue growth in market share.

Obviously cove it kind of disrupted that but can you comment on where you think the company is that right now as it relates to you know going down that path of recapturing market share.

Sure I mean, Fortunately all all attention to the organization of course with.

To resolve the company make sure we protect the company during the pandemic, but the top priorities. We've talked about is getting the operational service levels of the business back to where our expectations are which we have and the growing the top line and the business. So we spent a tremendous amount of time.

Last year in the back half of the year, putting together local market strategies.

We were executing on it actually seeing really good traction in the first quarter, obviously, the pandemic slowed that down a bit but we rolled right back into that men had one on one strategic sessions with each general manager with the RVP, So with Alex Arceo I myself.

Going through local strategies that that at the market at the local markets we feel.

Can continue to drive the business. In addition to that we feel like there's great opportunity from a national account basis, and again I talked about this little bit.

Before which is we act we're spending the resources to put two leaders in place where before we had wanted to focus a bifurcated focused one on the specialty distributors the co ops national Pro dealers and the other on home centers and we're getting traction already on that as well so I feel like it's a two tiered strategy for.

Gross one is the team is doing really tremendous job at the local level, not only maintaining relationships and volume of the customers, but growing them and seizing opportunities and that's just getting started and there were attacking it at the national level as well and I would say that is just getting started from an opportunity standpoint.

Congratulations good luck.

Thank you Alex.

There are no forget a question at this time please continue.

Okay, well, thank you Justin and again, thank you for joining US. We certainly appreciate your continued interest in support of Bluelinx and we look forward to speaking to again in October.

This concludes today's conference call. Thank you for participating you may now disconnect.

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