Q3 2020 Bluelinx Holdings Inc Earnings Call
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Just because they can be done there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad. Thank you I would now like to hand to conference over to your speaker for today.
Many more investor relations for <unk>.
Thank you Jay and good morning, everyone. We appreciate you joining us for the Bluelinx 2023rd quarter earnings Conference call.
Oh.
Earnings release is posted in the investors section of our website at Www Dot Bluelinx co dot Gov.
We will also be referring to a supplementary presentation as we go through the call 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 I'd like 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 and reconciled to their GAAP counterparts in the presentation materials.
Earnings release in the Investor section of our website with that I will turn the call over to Mitch Thanks, Mary and good morning.
Well, we'll be spending time. This morning discussing the business results for Bluelinx in the third quarter I would first like to acknowledge the incredible challenges created by the pandemic across Bluelinx.
Country and the world.
Its impact has been felt daily by our associates and our extended Bluelinx family.
And we know we are very fortunate to have had only a very small number of team members and their families infected with the virus.
We will always put the safety and well being of our associates as our top priority.
We remain deeply appreciative of the hundreds of thousands of first responders across our great nation. You continue to put their lives at risk every day to ensure the safety of orders.
Before diving into the numbers I think it's important that we step back and remind everyone of the actions. We took beginning in the latter half of 2019, which positioned us to fully benefit from the favorable market conditions that were present during the third quarter.
These efforts included investing in a centralized team to drive logistics and operational efficiency across our broad distribution network.
Targeted initiatives to grow market share enhancing our partnerships with strategic suppliers, a renewed emphasis in driving growth through our national customers and focusing on key product categories that offer unique opportunities for growth.
These investments paid significant dividends as the operating performance of the business improved considerably enabling us to provide an even higher level of service to our customers.
Additionally, we began to recover market share last year, as we worked with our customers and suppliers to add value to the entire supply chain.
By the first quarter 2020, the business had good momentum as a result of these measures.
Then in mid March.
We started to fill the impact of the pandemic.
I'm proud of the ability of the Bluelinx organization to immediately and dramatically react to the resulting market conditions we experience.
In addition to the rigorous safety protocols that we put in place to protect our associates, we established a similar rigor approaching the opportunities to manage and control our working capital and liquidity.
We immediately initiated centralized control process says to analyze and manage our purchasing and receivables across our platform.
While adding more robust analytical capabilities.
And we also doubled up on our efforts to closely assess and manage our pricing across the business.
These efforts led to a material improvement in our performance during the second quarter and we sustain these efforts as market conditions continue to improve.
In the third quarter, we enjoyed the impact of all our hard work over the past year Paul.
Following the short lived pandemic related shock that we saw in the second quarter residential housing market has recovered in a remarkable fashion design.
This improvement coupled with a historic run up and wood based commodity prices resulted in bluelinx reporting its strongest quarter in the history of our company with revenue gross margin and adjusted EBITDA are all significantly increasing compared to last year.
For Boyds this was a transformational quarter like non we've ever experienced.
Our net sales were $871 million or gross profit was $159 million and we had a gross margin rate of 18.3%, resulting in adjusted EBITDA of $81 million.
Our year to date adjusted EBITDA through the third quarter was $132 million at our LTM EBITDA through the third quarter was $143 million.
Perhaps even more importantly, we are fundamentally enhance the liquidity of our company, while significantly reducing our annual interest expense we.
We ended September with excess availability of over $200 million a level, we haven't seen since the robust housing market our country experience before the great recession.
In October we use some of this increased liquidity to further reduce our term loan to $44 million, eliminating the leverage covenant associated with that facility.
The capital structure and leverage perspective, the impact of the third quarter is simple to explain we are fundamentally a different company today than we were just four months ago, having brought a new level of financial flexibility into the business.
It's always going to dive into our numbers in a few minutes, where shall highlight how strong our third quarter results were in more detail and also clearly illustrate our current financial strength.
And while the quarter was terrific I think it's also important to highlight the fact that the significant improvement in our profit was primarily driven by our ability to capitalize on a rising wood base commodity markets.
We did this by selling structural products inventories that were being sold at prices that were quickly rising above its cost and in many cases, we were also expanding the margin we typically enjoy.
We also continue the improvement in our specialty product gross margins during the third quarter.
A trend that has continued unabated over the last year as our investment in pricing analytics and training continues to add value.
As we know.
Commodities by their very nature or cyclical.
And we were acutely aware that the historic run up we experienced in the third quarter would ultimately subside and October commodity prices started falling back towards more historical levels, which is generating lower structural margins than we experienced in the third quarter.
The good news is that we continue to focus on managing our structural inventory levels tightly and have established several mitigation strategies to reduce the impact of declining commodity price environment.
We've also enhanced our efforts to drive growth with our strategic supplier partners at the national level.
Evidence of this effort is the expansion of our distribution footprint for marquee brands and the re initiation of opportunities that were lost with key suppliers.
Prime examples include our recent announcement to drive market share growth with LP smartside in the northeastern part of the country.
Our expanded relationship with all capsules decking product increases in our market share with Huber and adding new markets with Hardy.
Another way, we are driving topline growth and where we anticipate having a competitive advantage is through strategic product categories that our wholesale distribution friendly great. Examples of these product categories include our import private label products, our own center engineered wood products brand.
And SKU intensive product categories, like millwork, SEDAR and vinyl siding, where we can add value by providing just in time inventory to our customer base.
We also have significant market share growth opportunity at the local level, we lost market share during the first half of 2019 as we integrated with locations from our Cedar Creek acquisition and our first step to fix that loss was to enhance our service proposition we've done that now.
Now, we are systematically assessing and developing strategies to get that share back.
We have established a rigorous internal control growth process to drive growth initiatives across the company X.
Examples of recent successes include utilizing products and market expertise to cross sell and new locations investing in equipment that provides best in class service and local markets.
And expanding our teams to grow our expertise and customer relationships where appropriate.
We are also relentless and improving our logistics operational and administrative efficiency, while investing in areas such as updating our rolling stock, which includes tractors trailers and forklifts many.
Many investments in modernizing our fleet are immediately cash flow accretive as they replace older models, resulting in reduced maintenance costs. In fact during the third quarter, we entered into $3 million of new leases for replacement tractors that are planning more in the coming months coming months now that we've reduced our capital constraints.
There remains significant opportunity to enhancing our operating cost structure as we reengage and route optimization additional consolidations and enhance the efficiency of our administrative processes throughout the company through automation and process redesign.
This emphasis on improving our operating performance is not merely a reaction to the tumultuous environment, we now face it's being baked into our culture.
While we are acutely aware that the pandemic is not behind us and that significant political and social RIS are on the horizon, which may negatively impact our business. We've proven that were up for the challenge.
We will continue to assess everything we do to operate in a more efficient manner as we continue to provide industry, leading service to our customers.
Before I turn it over to Kelly I would be remiss, if I did not make it clear that our third quarter performance is a testament to the Bluelinx team and the support of our extended Bluelinx family.
In March we simply rolled up our sleeves and got it done.
Through hard work and determination, we set the stage over the past year to enjoy the quarter. We just experienced the bluelinx team is incredible and every day I'm reminded of how fortunate I am to be on their team and.
Then how honored I am to represent them.
I am confident that today.
The future of Bluelinx is brighter than it has been since I joined the company almost seven years ago.
The third quarter was transformative and with our team.
Our renewed financial stability, our unyielding commitment to our customers and our inherent strength in the markets. We serve I know that we are just getting started.
And now I'd like to turn it over to Kelly, who will walk you through our third quarter financial performance in more detail.
Thank you, Matt and good morning, everyone.
I will now give a brief overview of the third quarter financial performance.
As Mitch mentioned, the third quarter generated record results, we reported net sales of 871 million and 192 million when compared to the prior year period, along with the related improvement in gross margin, which was up 450 basis points year over year to 18.3% we are.
Our reported adjusted EBITDA of 81 million an improvement of 62 million over last year. This improvement led to strong cash generation during the quarter and that along with sustained working capital management provided cash flow from operating activities 61 million and cash on hand, and excess availability under our ABL now of approximately two.
Hundred $2 million as at the end of the quarter Importantly, this improved liquidity allowed for the reduction of the term loan to a principal balance of $44 million in October eliminating the net leverage covenant.
Third quarter net sales of specialty products, which includes products such as engineered wood theater molding, citing metal products and installation were $496 million, an increase of $43 million year over year and accounted for 57% of net sales for the current period. These products typically comprised between 60 and.
65% of our total net sales and are not very sensitive to what based commodity market given their specialized nature.
Many of our structural projects products. However, our however would be commodities prices rose sharply throughout the third quarter continuing the strong rebound that began at the end of the second quarter commodity indices for random lengths peaked at unprecedented levels in mid September at $955 for the framing lumber composite index.
And $788 for the structural panel composite index. We attribute these increases to an improved demand for housing along with the extended supply chain supply constraints at key North American mill that we're pervasive throughout the period.
As a result net sales of structural products, which includes products such as lumber plywood oriented strand board rebar and rematch with 375 million, an increase of $149 million compared to the prior year.
The market conditions than more typical however, we estimate that structural sales would have been lower by a range of between 105 and $115 million.
So in the range of $260 million to $270 million structural products have ranged between 35 and 40% of total net sales in recent years, but the significant inflation. We saw during the quarter contributed to a higher net sales mix, a 43% of our net sales for the quarter.
We recorded a 17.4% gross margin for specialty products, which is an increase of 120 basis points compared to last year's margin rate of 16.2% and continued a year to date trend of increasing specialty margins as a result of our disciplined pricing strategy, coupled with strong market dynamics.
The what based commodity impact on the structural in that sales I discussed a few moments ago was also a contributing factor to the increase in the structural products gross margin from 9% in the prior year period to 19.6% in the current quarter well above our historical averages we.
We would have expected at gross margins similar to the prior year third quarter, which also approximates the average of the last six quarters preceding the current period had the market environment been more typical ASP.
SGN eight for the quarter was 79 million a 3 million dollar increase when compared to Q3 of 2019. It reflects an increase of $10 million year over year related to variable incentive compensation as well as increased sales commissions, resulting from this year significantly improved financial results.
This was offset by a $7 million reduction of overhead cost primarily related to labor.
When compared to Q2 of 2020, the increase was 9 million, which is all due to the additional variable incentive comp and sales commissions that I just mentioned.
The variable incentive compensation recorded this quarter included a year to date catch up of 3.2 million given the positive impact of the quarter on all of our incentive metrics.
During the third quarter, we sustained many of the cost reduction actions taken earlier in the year as part of our COVID-19 measures and they continue to support improved operating efficiency.
Our trailing 12 month as gene a margin as of the third quarter, 2020, and 10.4%, which is an improvement of 30 basis points when compared to the trailing 12 months ended third quarter of 2019 and that margin rate was 10.7%. This is also consistent with our first half 2020, SGN a margin of 10.5%.
And we believe this is more reflective of a typical margin than the actual third quarter rate of 9.1% given the commodity inflation impact.
As we look at the variability of our SGN as a percentage of net sales, we consider approximately 75% of our SG and HIV effects of course in the event of significant significant degradation in our net sales. Many of these fixed costs can also be reduced.
We are pleased to have generated positive net income in the third quarter of 55 million.
Our net income benefited from approximately $8 million of nonrecurring items, including a gain of approximately $9 million from a sale leaseback transaction involving our Denver facility.
Excluding nonrecurring items net income still increased by $49 million on a year over year basis.
For the same period last year, we didn't incur any income tax. However, this year. It was 16 million given the improvement in our financial results and we expect that the federal and allows that we're remaining at the end of 2019 of approximately 80 million will be fully utilized in 2020.
As we discussed on our last earnings call earlier this year upon the onset of the pandemic, we made significant changes and how we manage working capital, especially around how we purchase and control inventory I.
I am pleased that we have maintained our discipline around managing our working capital since then and as a result, our working capital metrics continued to improve in the third quarter. The closing the close management of our inventory led to our days sales of inventory improving to 40 days, which is 16 days better than the prior year period.
Day sales of inventory was also positively impacted during the current period by the mix shift to structural product, which typically turns faster than our specialty inventory.
With a continued focus on collection days sales outstanding also showed an improvement over the prior year decreasing four days to 30 days as compared to last year and our trade receivables averaged over 91% current during the quarter.
Third quarter cash flow was incredibly strong given the significant increase in earnings coupled with closely managing our working capital.
Cash provided by operating activities increased $46 million year over year to $61 million, the majority of which was available to pay down debt.
Our borrowings under the ABL were 263 million at quarter end compared to $355 million for the same quarter last year and our term loan balance was $58 million at quarter end compared to $147 million at the end of third quarter last year. Thank.
Bank debt was reduced by $181 million year over year and had been reduced by 309 million since the second quarter of 2018, the first fiscal quarter end after our acquisition of Cedar Creek.
Total interest expense decreased approximately 20% or $2.6 million in the third quarter as compared to the same quarter last year, which is the lowest amount of quarterly interest expense we've had since the acquisition.
We are also in great shape from a liquidity perspective, as we had $202 million in cash on hand, and excess availability under our ABL.
Additionally, our operating performance along with the significant cash generation has led to a dramatic decline in our overall leverage.
Our ratio of overall net debt, which includes our bank debt and financing leases to adjusted EBITDA ended the quarter at 4.1 times.
And while we ended the third quarter with a total net leverage ratio well in compliance under our term loan in October we made a voluntary prepayment that reduced the term loan balance to below $44 million, eliminating the covenant and again, reducing our overall interest cost.
We are committed to continuing to closely manage our balance sheet and capital structure and as you may have seen from our SEC filings yesterday, we have filed a prospective prospectus supplement to commence and at the market offering that allows us to sell up to $50 million of our common stock with Jefferies LLC acting as our sales.
Jan.
And at the market equity offering allows us the flexibility to sell these shares over the life of our form S. Three registration statement, which is effective until September 2023 at prices and amounts we choose to sell as the program continues we plan to use the net proceeds from any shares and we might sell under the program.
Graham for general corporate purposes, which may include making capital expenditures funding working capital and repaying indebtedness.
The timing of any sales will depend on a variety of factors.
Because of Federal Securities Law restrictions, we are limited in what we can say about the offering so I'd encourage you to read our prospectus supplement and our form 8-K. So as the third quarter ended I don't think any of us could have imagined the industry Tailwinds, we experienced but what I do know is that our bluelinx team was very prepared to take.
Full advantage of the market condition through stock through strong discipline around purchasing inventory management and sales execution, we maximize our structural products net sales and related gross margin at the same time, we also ensure that our rigor around the sales of our specialty products, which provides the majority of our net sales remained strong.
And our focus on operational excellence and efficiency was evident throughout the quarter. When combined these actions provided recorded record adjusted EBITDA analysts and liquidity during the quarter, which we opportunistically used to strengthen our balance sheet and operating performance.
While in October we started seeing wood based commodity markets returning back to historical levels, we leave the quarter with a permanently improved balance sheet positioning us well for the future.
Now Jay I'd like to open the line for any questions.
Thank you, ladies and gentlemen, if you would like to ask a question you May Press Star then the number one on your telephone keypad. Once again, you May press star one to ask a question. Please stand by while we compile it began in Austin.
Okay.
Once again, if you would like to ask a question you May press star one on your telephone keypad.
You have a question coming from the line of respect Hendrickson from Nicole Miller Capital. Your line is open.
Good afternoon, everyone hear me.
Yes, we can hear you brown.
Thanks, Good morning.
Just wanted to ask you know.
What are your thoughts I know you guys like to leave in the past that thank you.
You thought you'd like to leave about 15, I think it was about $50 million of excess availability on the credit line. What are your thoughts on making more voluntary payments on the term loan just because there is a significant interest arbitrage there was between 8% and 2.5%. So what are your thoughts around just using either cash flow from operations for Q4.
Sure.
Or just some of that excess availability on the credit line to just get rid of the term loan all together.
No. It's it's the covenant lite.
Kind of.
Termed out people that now, but I mean, I don't think variable rates are going to go up in the next three years. So I think it's pretty safe to just get rid of it now I'm curious to hear your thoughts.
Yes, so obviously, there's the there's the arbitrage benefit of moving away from higher interest on that term loan by utilizing the ABS and of course.
With a quarter that we've just had.
Kelly indicated we certainly have transformed the balance sheet of the business. So we will watch it very closely as we move forward into the fourth quarter and if it makes sense I will comfortable.
To do that will certainly move in that direction quickly.
Okay and similar question I would think now.
But you've got your trailing 12 months leverage looks a whole world of difference from what it used to look like I would assume that in the future sale lease backs, if even should the drilling because maybe don't need to do them anymore.
But to the extent you choose to do would come at all things equal about a moderately at least moderately better cap rate because you're a better credit to the landlord and my thinking about that right.
Well I'm not I'm not real sure where the current market is from a sale leaseback perspective, but you know as we've looked at historically, obviously all of our capital decisions I think we've proven it excuse me over the last two years that were really thoughtful about the capital structure as we look of course to maximize long term value for our shareholders. So.
We haven't.
Announced today in our strategy to continue to move down the sale leaseback.
Path.
But of course, we would look at any anything and everything as it makes sense for the company going forward.
Okay and.
As I emailed you guys I think I think some shareholders myself included were surprised with the size of your gym following given the.
In our minds, you don't really need it. So was that just made was the 50 million just made the match what was on the shelf for what was the methodology, which one you had putting 50 million I wouldn't have been shocked if you came out with a 10 or $15 million lumber 50 million with.
A huge multiples of what the company would need.
Given how short the industry is of houses with how fast builders me to frame <unk> next 12 months.
And Brett I appreciate the question and and certainly appreciate the potential sensitivity about the ATM and again first and foremost I want to I want to be very clear again that our management team and our board, we're completely aligned with creating long term shareholder value.
It's our fiduciary duty and we obviously take that obligation very seriously.
The intent of the ATM was all about capital structure flexibility.
It enables us to sell some shares in the market at the price of the company determines at our sole discretion for basically three years until September 2023, and we certainly don't know what the capital markets or what our stock price will look like over the next three years. So we thought this option made sense to.
To specifically answer your question.
We just set the amount and the duration to wind up with the EPS three that we originally filed about a year ago.
But I want to be clear that we have no obligation and we will not commit to selling shares under this program and of course, we'd only sell shares in the future. It made sense to the company from a capital perspective at that time, taking into consideration here all the relevant factors.
That's that's about it I think I think we made it pretty clear, we we feel really great about the future Bluelinx and where we're going and I think we've proven over the last few years that we're we're very thoughtful about our capital structure and consistent with what we're trying to do which is maximize long term value for our shareholders and.
I can assure you.
And everyone that that will clearly continue.
To be the case in the years ahead.
Okay. Appreciate it Mitch thanks for your time Okay.
Okay. Thank you.
Thank you once again, if you would like to ask a question you May press star one on your telephone keypad.
We have a question coming from the line of Dustin Shapiro from Castle nights. Your line is open.
How do you.
How do you gauge the ability to increase margins going forward what should we expect in 21 22 on both.
In both segments.
So.
To start we generally don't.
Give out guidance as it relates to future margins, what I can talk about a couple of things, let's start with specialty.
We have invested historically and continue to invest in.
Resources to enhance the margins that we have from a pricing perspective with our specialty business. So we actually set up a centralized team.
To help monitor educate.
And continue the momentum that Weve shown from a specialty perspective of course, there are you know mix issues that always arise but.
But our strategy is to continue to.
You know really emphasize specialty products that are highly accretive to the company going forward and to keep our focus on.
The margin enhancement for the business from a pricing perspective.
On the structural side.
We've come off what is.
You know historically.
Good margins for the business related to just an incredible run up from a commodity pricing in the marketplace. I think we indicated that we see that coming down now, but we are we are closely monitoring. It. So we would not certainly not expect a normal course now to be the kind of margins that we saw in the third quarter. However.
You know historically as housing market improves a minute.
It'd be typical with classic supply and demand you would expect that to be able to take advantage of some of the margin opportunities. There and then I would say overall as you look at the entire margin of all of our product categories. We feel like we have a lot of opportunity to operate the business more efficiently.
From a logistics standpoint from administrative standpoint into.
And to continue to enhance the overall margins of the business as we move forward.
Got it.
Thank you on the computer consolidation for you and your competitors.
Including bolt on.
In new and new.
And new or existing markets.
Yeah, I mean, I would exist I would answer your question. This way I mean are the wholesale distribution market is but you know what our view highly fragmented.
There are no.
Dozens and dozens of competitors some that are our regional some that are specialty distributors.
And you know we will always look at opportunities that make sense for the company that we feel like our enhancing and accretive for the business.
And so we'll we'll certainly be looking at that.
I would view my opinion is that the market will yes continue to consolidate and in the years ahead and it really it's falling on a theme that happen from.
From a builders perspective, as they continue to garner market share from our customers' perspective I'm sure you're aware for example, with the large.
BFS BMC a merger that was announced there's continuing consolidation there I expect that that ultimately will continue to find its way in wholesale distribution as well.
Got it and then in terms of what you're seeing today in terms of.
We'll talk with seasonal slowdown.
What are you seeing today in terms of demand.
Okay.
Yes, it's.
It's really interesting.
Good question one of the things that we like to track because we think it's it's correlative, particularly the single family housing starts is our structural unit volume was really interesting. If you look back in in Q3.
What we saw was as the the price went up from a commodity perspective, we sequentially saw volume declines during that actually during the quarter to makes that makes sense for a couple of reasons right. One is there some supply disruption, which led to the incremental increases in pricing on the other is we feel like.
That the our customer base because of the price increase was squeezing their inventories and that theres been inventories squeeze out of the supply chain. So as we as we roll back end October we talked about the fact that we certainly are experiencing margins that are lower than structural products than we saw in the third quarter were also seeing.
Volumes increase on a unit basis in October for example, compared to the September.
Excellent well, thank you very much for your time.
Congratulations to you. Thank you very much.
Thank you once again, if you would like to ask a question any press star one on your telephone keypad.
Speakers is there I know my questions at this moment you make a decision.
Okay well. Thanks, Thank you Joanna and of course. Thank you for your continued interest in Bluelinx and we look forward to discussing our fourth quarter results with you.
In the first quarter of next year. So thank you very much.
Thank you speakers, ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.
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