Q4 2020 Bluelinx Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the for quarter plenty Plenty Bluelinx Holdings, Inc. Earnings Conference call. At this time all participant lines are in a listen only mode.
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I'd like to hand, the conference over to Mary Moll. Thank you Pease go ahead.
Thank you and good morning, everyone. We appreciate you joining us for the Bluelinx Twenty-twenty fourth quarter earnings Conference call. The earnings release is posted in the investors 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.
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Many of US on the call today are Mitch Lewis, Chief Executive Officer, and Kelly Janzen, 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 SEC. 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 the earnings release and in the investors section of our website with that.
Now I'll turn the call over to Mitch.
Thanks, Mary and good morning.
2020 was an exceptional year for Bluelinx, a year of rapid change and transformation.
The pandemic has created incredible challenges for our company and the Bluelinx team has faced these challenges would resolve while always keeping the safety and wellbeing of our associates is our top priority.
We were able to capitalize on the opportunities we were afforded in 2020, delivering a record financial performance, while significantly deleveraging the company and the process.
We began 2020 with strong momentum realizing the benefits from the investments we made in people and processes in the second half of 2019, which drove operational efficiencies and improve customer service.
These efforts included investments in our centralized logistics team.
Relentless focus on enhancing our customer service levels and executing on market share growth initiatives at the local and national level.
We also began company wide initiatives to strengthen our partnerships with strategic suppliers with a renewed emphasis on certain key product categories.
Towards the end of the first quarter.
We started to feel the impact of the pandemic and the Bluelinx organization immediately reacted to the resulting market conditions through a focus on employee safety rigor.
Rigor and controlling working capital and liquidity a reduction of fixed costs and closely managing pricing.
Fortunately.
The pandemic related shocks to the housing market proved to be short lived as the residential housing market recovered quickly through the second half of the year.
During this period, we also encountered a historic price escalation in our wood based commodity products.
Our investment and efforts in the second half of 2019 and into the pandemic allowed us to capitalize on the markets we experienced.
These efforts have continued to pay off as our results in the fourth quarter were outstanding with revenue gross margin and adjusted EBITDA all significantly increased in 2020 compared to 2019 levels.
For the fourth quarter, our net sales were $865 million, an increase of 41% over 2019 levels for gross profit was $124 million and we had a gross margin rate of 14.4%, resulting in adjusted EBITDA of 39 million.
This compares to $11 million in the fourth quarter of 2019.
The strength of the fourth quarter ended a fantastic year in 2020 with the highest adjusted EBITDA in our company's history for $170 million.
Our adjusted EBITDA, coupled with the close management of our working capital drove a fundamental enhancement to our liquidity, while significantly reducing our annual interest expense.
We ended the year with excess availability of $184 million under our ABL over $100 million higher than last year.
Earlier this week, we use some of this increase liquidity differs further reduced the principal under our term loan by $25 million, which now brings the term loan principal balance below $20 million.
We are now from both a capital structure and leverage perspective, a fundamentally different company than we were a year ago, having brought a new level of financial flexibility into the business Kelly.
Kelly will highlight our strong fourth quarter and full year results in more detail, which will clearly illustrate our renewed financial strength.
Yes.
When we last reported earnings in October we were beginning to see wood based commodity prices falling towards more typical historical levels.
Prices continued to decline in the first two months of the fourth quarter before sharply rebounding in December supply demand imbalances have continued to persist in the first quarter of 2021.
In both the lumber and panel composite indices have reached new all time highs, surpassing the peak that prices experienced in 2020.
Today Wood based commodity prices remain at historically high levels and we continue to take advantage of these market conditions to enhance the financial strength and liquidity of the business.
While we cannot predict when commodity prices will return to a more normalized rate we are confident that they will ultimately decline.
So we will continue our disciplined approach to closely managing our structural inventory levels, while utilizing mitigation strategies to reduce the impact when the commodity markets weakened.
The robust demand in housing coupled with supply disruptions associated with the pandemic.
I have also led to extended lead times and inevitable inflationary pressures in many of our specialty product categories as well.
Our team has done a great job staying focused on our customers through these supply chain challenges and using similar pricing strategies with these product categories that we utilized for structural products.
Well, we are successfully navigating through the current market environment. We also continue to execute on our most important strategic imperative organic growth.
Our efforts include a continued investment in our national accounts team.
Emphasizing and investing in product categories, where we have a competitive advantage.
And a rigorous process for identifying and capitalizing on local market share opportunities.
We believe that our extensive product assortment excellent supply chain and national footprint, all position us well to excel in these areas.
Another key area of our focus continues to be improving our logistics operational administrative efficiency.
Our operational performance improved in 2020 by reducing labor costs through efficiency initiatives investing in our operational center of excellence model modernizing our fleet and upgrading technologies.
We will continue to invest in these areas to drive incremental operating leverage and productivity.
In addition to these investments there are significant opportunities to improve operational efficiency through route optimization.
Facility layout enhancements and automation and process redesign for our administrative and transaction processing areas.
This focus on operating performance improvement ties directly to our core value of continuous improvement. We will continue to evaluate everything we do through the lens of operating in a more efficient and effective manner.
While our number one focus remains on providing excellent service to our customers.
Before I turn it over to Kelly I'd like to thank the entire Bluelinx team for their hard work determination and commitment to safety through perhaps the most challenging year in our history there.
Their collective efforts led to our historic performance in 2020, a year that was truly transformative for Bluelinx, we're simply a different company today than we were a year ago.
We have a much stronger balance sheet to support the continuing execution of our sales growth and operational initiatives that will propel our success in the months ahead.
No one can predict the long term impact for the last 12 months.
But my optimism for the future remains strong and I am confident that the future for Bluelinx as bright the bluelinx team seize this opportunity and in 'twenty 'twenty. One we will continue to drive towards our goal of being the industry leader in the markets we serve.
And now I'd like to turn it over to Kelly, who will walk you through our fourth quarter and full year 2020 financial performance in more detail.
Thank you Mitch and good.
Everyone I will now give a brief overview of the fourth quarter and full year financial performance as Mitch mentioned the fourth quarter was another successful one for Bluelinx with significant improvement in our financial performance on a year over year basis, We reported net sales of 865 million of Q.
52 million when compared to the prior year period, along with a related improvement in gross margin, which was up 90 basis points year over year to $14 four per cent.
We also reported adjusted EBITDA of 39 million an improvement of 28 million over last year, we ended the quarter with cash on hand, and excess availability under our ABL of approximately 184 million an increase of 104 million over the prior year period net sales for the full year were $3 one.
1 billion.
416 million when compared to last year gross margin increased 190 basis points to $15 four per cent for the full year and adjusted EBITDA improved by 99 million to 170 million the highest full year adjusted EBITDA and Bluelinx is history.
Fourth quarter net sales of specialty products, which includes products such as engineered wood theater molding siding metal products and installation were $498 million, an increase of 100 million year over year and accounted for 58% of net sales for the current period.
Products typically comprised between 60 and 65% of our total net sales and are less sensitive to what base commodity markets given their specialized nature.
Our structural products are primarily wood based commodities, whose prices have continued to be impacted by the supply demand imbalances that Mitch previously mentioned.
Wood based commodity prices declined from the peak levels experienced in mid September to fourth quarter levels in November at 550 for the framing lumber composite index and 645 for the structural panel composite index in December prices started rising sharply again in the year finished with it.
Framing lumber composite at 874, and the structural panel composite nearing 800.
We attribute the continued inflation to unseasonably strong demand for housing along with continued supply constraints at key North American Mills as a result, net sales of structural products, which includes products such as lumber plywood oriented strand board rebar and rematch with 367.
Again, an increase of 152 million compared to the prior year.
Similar to the third quarter, we estimate that structural sales would've been lower by a range of between 105 and 115 million. So when the $210 million to $230 million range for the year had the market conditions has been more typical as a reminder, our structural products have range between 35 at <unk> 40 per side.
Total net sales in recent years, but the inflation we saw during the quarter contributed to an above average sales mix at 42%.
Framing lumber comprised approximately 70% of structural net sales for the fourth quarter and panel sales, making up the remaining 30% for the full year of 2020 framing lumber sales as a percentage of total structural sales range between 65, and 70% and panel sales range between 30 and 35 per cent.
We recorded a 17.4% gross margin for specialty products, which is an increase of 130 basis points compared to last year's margin rate of $16. One per cent and is consistent with the last two quarters, we attribute the specialty margin year over year increase to a more disciplined pricing strategy coupled with strong.
Market dynamics, the wood based commodity impact on the structural net sales I discussed a few moments ago with also the contributing factor to the increase in structural products gross margin from eight 7% in the prior year to 10, 2% in the current year period, which is higher than our historical averages.
Yes.
In 2021 year to date sales volume for both structural and specialty impeded by supply and weather constraints have been slightly lower than last year recent structural margin rates are in the 14 per cent range, while specialty rates continue to be robust.
SG&A for the quarter was 89 million a $16 million increase when compared to Q4 of 2019. It reflects an increase of $12 million year over year related to variable incentive compensation and increased and increased commissions, resulting from improved financial results along with costs related to the fourth quarter.
For a 2020, having an extra week in the fiscal period.
This was offset by a $3 million reduction of overhead cost primarily related to labor due to actions taken earlier in the year that we have sustained improving operating efficiency.
When compared to the third quarter of 2020, the increase was approximately 10 million all due to the additional variable incentive compensation and increased commissions that I just mentioned.
Our full year SG&A percentage of net sales was 10, 1%, which is an improvement of 100 basis points when compared to the prior year percentage of 11, 1%. This is also an improvement of 40 basis points over our first half 2020, SG&A percentage of net sales of 10, 5%, which we believe is more typical.
As we look at the variability of our SG&A as a percentage of net sales. We consider approximately 75 per cent of our SG&A to be fixed of course in the event that there were significant significant market disruption impacting sales activity. Many of these fixed costs can also be reduced.
We don't consider fixed are primarily related to outbound shipping and handling and include items, such as warehouse and delivery labor fuel and third party free.
We generated positive net income both in the fourth quarter and for the full year of $20 million and $81 million respectively.
Regarding taxes, our effective tax rate for the fourth quarter with zero percent and for the full year 2020 was 14, 9% reflecting releases evaluation allowances for both state net operating losses and previously disallowed interest. In addition, we made cash tax payments of 14 million in December impacting.
Our operating cash flow.
We have now utilized all of our federal Nols that for the first quarter of 2021, we expect our effective tax rate to be between 24 and 28 per cent.
As we discussed on our previous Ernest earnings calls, we made significant changes in how we manage working capital in 2020, especially around how we purchase and control inventory I am pleased that we have maintained our discipline around managing our working capital since then and as a result, our working capital metrics have improved on a year over year basis.
Day sales of inventory improved by 18 days or approximately 30% for fourth quarter 2020 compared to the prior year period higher December net sales drove an increase in receivables a 52% in the fourth quarter compared to last year. Our performance remains strong January 2021 currency rate at <unk>.
93%.
In addition to the tax payments I just mentioned, we also made strategic inventory purchases in areas such as theater, where we are moving to a more efficient hub and spoke distribution platform siding and millwork products, which are both used heavily in the spring building season. These investments contributed to a $19 million use of cash for operations.
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Cash provided by operating activities improved 65 million to $55 million in 2020 with this improvement coming from the significant increase in earnings coupled with closely managing our working capital throughout the year.
Our borrowings under the ABL were 288 million at quarter end compared to $326 million for the same quarter last year and our term loan balance was 43 million at quarter end compared to $147 million at the fourth quarter and last year.
Debt was reduced by $142 million year over year or 30%.
Full year 2020 interest expense decreased approximately $7 million or 13% compared to full year 2019, given the reduction in debt and lower interest rates.
Liquidity improved by over 100 million to $184 million in cash on hand, and excess availability under our ABL.
Additionally, our operating performance, resulting in 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 three point.
Five time.
And as Mitch mentioned earlier this week, we utilized our ABL to further reduce our true reduce our term loan by $25 million, bringing the principal balance to approximately $18 million as of March 1st.
We will continue to assess our liquidity needs, but currently anticipate paying down the remaining balance on the term loan by the end of the third quarter at the latest.
Our 2020 financial performance was fantastic and the transformation of our balance sheet provides the opportunity for us to increasingly invest and support the growth of the company going forward.
Our focus in early 2021 has been to effectively maneuver the supply demand imbalances, while at the same time, ensuring that we manage our working capital and maintain cost efficiency.
As I mentioned last time I believe the Bluelinx team is up for the challenge and I continue to be optimistic regarding our team's ability to drive sales expand margin and contain cost.
Now we would like to open the line for any questions.
Thank you as a reminder to ask a question you will need to press Star followed the one thing I've touched on telephone against that as star one to ask a question.
Your first question comes from the lineup Reuben Garner from Benchmark Company. Your line is now open. Please proceed.
Thank you and good morning, everybody.
Good morning Arnie.
Maybe maybe we could start with the specialty.
Growth and margin performance in the back half of last year, I guess, a nice acceleration can you can you kind of give us some.
The color of what you what you're seeing there are there specific product categories within specialties that are that are driving that or is it just in you know in general end market.
Strength I mean.
20, plus percent growth, it's obviously very.
Very strong is that the sort of level, we could see for the next couple of quarters that some of the activity from last summer sort of starts to flow through.
Well.
There are really two areas that have enhanced the growth that we've seen one is in investment in specific product categories. So we've actually brought in some experts into the organization, who are helping to drive and manage opportunities that we have some key product areas that I think I've mentioned.
That for the company long term or strategic and important to the business. The second piece that we've done is we've put in place that were going on about a year now of a process where at the local markets. They are identifying opportunities that they see.
Often in specialty products and executing on that and it's a process that we've embedded into the culture of the company and if you look at the performance in specific opportunities that we're seeing at a local level relative to the overall business, we're seeing a significant improvement as well. So generally not we don't give guidance on you know what it's going to look.
Going forward, but we we have identified as we've talked about.
Organic growth has been key and critical to the business and we're emphasizing it and we're seeing real results on the specialty side.
Yeah and to add to that I think you know the last three quarters of 2020, we saw them.
Rates at that 17.3 dollars four per son, and I think we take some credit for that and our continued focus on price effectiveness in the specialty space has also been really helpful and and hopefully.
Relatively sustainable.
Yes.
And so we should look at that that 17, $3 17 for as kind of a new baseline for for specialty assuming the market continues to grow is that fair.
I mean, I think it's fair to say that we've done a good job on continuing to execute to that margin rate over now a reasonable period of time you know.
Three quarters.
And we've been we've invested in pricing and we've talked about that in the past where were for really emphasizes the opportunities we see across the organization to make sure. We're getting paid for the services, we provide to our customer base. So that's an important important piece. The one caveat I would say is obviously in an inflationary environment on a percentage basis.
Sometimes that can impact your margins that we're certainly seeing inflation moving in not only on the commodity structural side, but also on the specialty side, yeah and in my remarks, I said that you know what we're seeing this quarter in Q1 at the specialty rate continues to be robust.
Okay.
And then.
On the structural side, you mentioned, some mitigating factors I guess they could maybe.
Lessen the blow if you will on a on a return to normal commodity prices can you.
The last time, there was a serious deflationary environment was maybe the back half of.
18, and you guys had kind of mid single digit gross margin profile can you talk about the differences now and what the business looks like how you're operating versus then and maybe how we should think about.
You know that declining commodity price environment from a gross margin perspective.
Sure well the first and most important thing is we're controlling it from a centralized perspective at a much greater level with much more scrutiny than we did at that time period and if you look for example.
At the balances we had in our warehouses at that time from a unit basis. They were almost twice as big as they are today. So from an inventory perspective were watching it closely which were comfortable as helping will help to mitigate the risks as it's going down.
Similarly, as I talked about from a pricing perspective, we're very closely managing what.
What is happening from a price perspective across the organization and we've again invested centrally and experts who are having a dialogue, including enhanced communication with our traders who are out in the field, making day to day decisions as it relates to pricing.
Okay moving to the working.
Working capital investment in the fourth quarter cash.
Maybe.
I guess.
Two part question one.
You, you're obviously, making some investments in inventory in anticipation of growth I assume do do we pick some of that back up in the first quarter and then secondarily I I didn't I had some technical difficulties. So I don't know if you said this but I think receivables were up pretty nicely year over year and I assume.
That was just timing related can you can you just clarify those two points for them.
Sure as it relates to inventory and kind of what we're seeing I think we would expect we did build for them in the fourth quarter.
As we mentioned and we would expect that we'd probably continue to build some inventory during this quarter.
This normal and typical for this time of year to support the spring building season. We're also seed seeing inflationary impact in both of our product categories.
Inflation in inventory and cost of sales as well as you know it.
It is connected with the with the increase in sales.
So, but as we mentioned our DSI has significantly improved compared to last year and we're continuing to focus on that as well. So I think that's really kind of what we're expecting to see for for this quarter from an inventory.
Perspective, and then really when it relates to the receivables point yeah. So we haven't we were about $100 million higher and receivables at the end of 2020 as compared to 19 and and that really is kind of the way that we saw the sales occur during the fourth quarter. So we saw.
A slight in the structural side, a slight a decrease going into October and as we as we really work to manage through the margin.
Per preservation versus the <unk>.
Volume kind of doing some trade off there coming on as those commodity prices start to significantly decline going into November but then we saw prices come back up and we saw demand stay really good through December with mild weather and just the overall macro factors and so that is higher sales in December really contributed to that.
Hi receivable number.
And we and that margin followed on the structural side, along with that where we saw higher margins in December as well.
Thank you. Your next question comes from the line of Greg Palm from Craig Hallum Capital Group. Your line is now open.
Great. Thanks, Hey, Mitchell Kelly good morning, Congrats on the really good results and execution here.
Thanks for thanks, Craig.
Maybe first I was hoping you could comment on volumes in the quarter, just trying to get a sense for the magnitude of price versus volume associated upside in the quarter and maybe how volumes compared to what you saw in Q3, Kelly that last comment that you made.
It almost makes it seem like there wasn't much of a seasonal slowdown in the December quarter for versus the previous quarter just wanted to confirm that.
Sure Yeah as.
As I mentioned, we saw a little bit of a decline year over year, you know kind of the same quarter last year from a structural perspective, and I really contribute that more towards that's really managing through them.
You know, making some tradeoffs between margin and volume as well as we saw some impact of some supply shortages and a true.
We're out the quarter, but but overall slightly down from from this time last year from the same quarter last year on the specialty side, we saw it slightly up and very much a somewhat contributing December was a very strong month for us it unseasonably, so and and then as you compare it to Q3.
We saw again specialty.
Slightly up over over Q3, and a structural and we saw that actually about about the about the same so.
To really fairly consistent.
Okay. That's that's helpful.
It feels like you know in this you know significant commodity inflation environment that we're in and you know a lot of supply chain disruptions that are that are going on I mean do you see more of your customers leaning on you I mean more so than normal given the environment. We're in and you know some of those who maybe can't tie up additional work in <unk>.
Capital and you know even even some of your versus some of your smaller competitors I feel I am wondering if this is an environment, where maybe you can see some share gains as well.
Yeah, as we look at commodities generally share gains tend to be very transient right. So it's there clearly is the service aspect that's important.
I would say that certainly our customer base are leaning on us, but they're trying to find product wherever they can find it in right now to your point.
The supply constraints are so so.
As for home at this at this moment that they're certainly trying to get it from us, but also getting it from the mills.
Directly I would say that.
No we haven't seen a material shift from our perspective on.
US getting commodity products preferentially to smaller competitors at this time.
And of course, any any any kind of.
No no.
Any kind of enhancement.
Enhancement or increase that we might see from a market.
Share perspective is certainly counter weighed by the supply constraints that are out there in the marketplace.
Yep understood.
Understood.
It would be helpful. Also to maybe get your kind of high level opinion on you know the housing cycle, where we're out there seems to be a little bit of sort of fear or concern.
Recently, but you know the commentary on you know kind of what you're seeing out there in the supply of housing stock it.
It certainly feels like things are still pretty strong, but what what's your sense.
Our customers are very optimistic certainly for the first half for the year the builders generally have backlogs.
They need to build homes and they need to finish building homes.
That creates a very robust.
Dynamic in the marketplace. So.
I would say generally in.
Greg as well as I do I mean, you have the you have the move away from the urban centers.
That that obviously are a tailwind you have interest rates that while they've risen a little bit they're still so low on a historical basis that also should provide some habitus and you have on the other hand inflation and you know ultimately that may impact.
Housing, but we certainly don't see that over the short term.
Okay.
And then the the debt reduction and really the balance sheet transformation over the last year I mean, it's been just phenomenal.
I'm curious what as you look ahead, what are your largest capital allocation priorities.
Outside of continued debt pay down.
Yeah, I mean, I think you know we're at while they're very proud.
Proud and excited about our our our leverage right now we know that's coming off of cash very strong trailing 12 months EBITDA. So we will continue to focus on deleveraging, that's certainly going to be a focus for us as we go through this next year. We're also looking to see.
See where we need to make the right strategic investments whether that be you know maybe some of our rolling stock.
Was that those that that's an area. We're looking at we're looking at technology investments, there's anything that's going to drive productivity into the company. So so those are the kind of the thought process for us right now as it relates to allocation.
Okay. Good.
And then just last one I just wanted to clarify I think Kelly you said was it quarter to date structural gross margin was running at 14% did I hear that right.
That's right Yeah, that's what our recent recent rates have looked like got it so 14% relative to the 10 per cent you saw in December so pretty big increase at least in the first few months of Q1.
Yeah, that's right and just to be.
Yeah, just to be clear on this the rates for the fourth quarter.
It's 10 per cent for the quarter, but there was quite a bit of up and down within that quarter. So.
Kind of going into October we started seeing.
The commodity prices coming down a bit and we saw rate that was pretty consistent with a slightly lower than what we saw for the average and then we drill it dipped down to in November about six.
And then we can move back up into that double digits into that 14 ish range in December so we saw a bit of a up and down.
Our GAAP.
And it really just the dollars that the cycle is we talk about when we see those up those prices go up and down it really depending on how that works with our average cost of inventory.
What the spreads were able to demand depending on the.
Depending on the market, but that is I think it followed a similar path as what we had discussed in Q3.
The detailed color as much appreciated all I'll leave it there thanks and best of luck going forward.
Okay. Thanks, Greg Thank you.
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Okay. Thank you well. Thank you very much for your time and your interest in Bluelinx.
And we look forward to sharing our first quarter results with you in the next few months.
Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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