Q3 2021 Bluelinx Holdings Inc Earnings Call
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Greetings and welcome to Bluelinx Holdings third quarter 2021 results conference call. At this time all participants are on a listen only mode. A question and answer session will follow the formal presentation.
They want should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I'd now like to turn the call over to your host Mr. Ryan Taylor, Vice President Investor Relations and Treasury. Thank you you may begin.
Thank you operator, and good morning, everyone and welcome to the Bluelinx Holdings third quarter 2021 conference call.
With me on the call today are president and CEO, Dwight Gibson, Chief Financial Officer, Kelly Janzen.
Our third quarter news release Form 10-Q were issued yesterday, along with the webcast presentation.
These items are available in the investors section of our website links C O dot com.
We encourage you to follow along on the webcast with the detailed information on the slides.
Today's discussion contains forward looking statements about <unk>.
Future business and financial expectations.
Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties.
Including the risks described in our most recent SEC filings.
Except as required by law, we undertake no obligation to update our forward looking statements.
Today's presentation also includes certain non-GAAP financial measures that we believe provide helpful context for investors evaluating our business.
Reconciliations of these measures to the closest GAAP financial measure can be found in the appendix of our presentation.
All variances in today's discussion refer to year over year progress, except where noted.
At the conclusion of our prepared remarks, we'll open the line for questions and with that I'll turn the call over to Duane.
Thanks, Ryan and welcome to the Bluelinx team. Good morning, everyone. Thank you for joining our call today, we appreciate your engagement.
This is an exciting time for Bluelinx, we delivered an exceptional third quarter capitalizing on robust demand for building materials as well as our size and scale.
Both strong profitability and cash generation.
While the supply chain remains challenging and we saw significant wood based commodity market price deflation during the quarter. Our team remained disciplined and focused on their margin preservation strategies. We're navigating these challenging to generate another strong quarter.
Our financial strength positions us well to be able to invest in our business to fuel both organic and inorganic growth.
While also taking a focused approach to driving continuous improvement.
As we move into a new phase of growth. We continue to further emphasize the importance of fostering a performance based culture.
It creates an exceptional employee and customer experience. This is paramount to maximizing our significant countries.
Looking at our Q3 results at a high level.
I am pleased to report that net sales grew by 11%, we delivered $79 million of adjusted EBITDA and generated strong cash flow over $100 million all of which helped reduce our net leverage ratio to one three times.
This marks the sixth consecutive quarter of net leverage reduction a tremendous accomplishment driven by disciplined debt reduction and significant EBITDA growth.
During the quarter, we capitalized on continued strong demand for our specialty products.
Separately navigating historic and rapid wood based commodity price deflation to disciplined strategic inventory management.
Overall, we delivered results that exceeded expectations for the quarter and demonstrated the strength and resiliency of our business.
We continue to execute on strategic actions that further diversify our business the specialty product categories and drive sustainable profitable growth through all economic cycles.
These actions include.
Continuing to leverage our centralized purchasing and pricing team.
Emphasizing growth in our higher margin specialty products.
Maintaining a disciplined approach to structural inventory.
And the issuance of our $300 million senior secured notes.
Before diving into the details I'd like to recognize our team members across the country for their tremendous effort and teamwork during the quarter.
Together, we maintain focus on delivering to our best customers with turbulent pricing and supply chain environment.
Taking a closer look at the end market environment.
The residential housing market remains very strong with U S housing starts up 9% year over year in Q3, including an 8% increase in September.
New home sales were up 14% in September.
Mortgage rates remained favorable.
And repair and remodel activity is expected to remain at high levels well into next year.
Wood based commodity pricing experienced historic from deflation.
<unk> and panel prices plummeting, 74% and 66% respectively.
Tween June and August.
This marks the most significant decline over a two month period of wood based commodity pricing in the past 20 years.
Pricing gradually bounced off August lows and modestly improved to September and October.
Even so average October prices of $556 per thousand board foot for lumber and $654 per square foot for panels, where approximately 60 effectively between June and August reached in this mark the most significant declines has resulted in a relatively more stable wood based commodity.
Price environment, so far in the fourth quarter.
To sum up our view of the market.
New home and repair demand continues to look strong for the foreseeable future and the go forward outlook is positive from our perspective.
While we are encouraged by these favorable market dynamics. It is important to underscore the strength of our unique position in the housing industry and ability to perform well through macroeconomic cycles.
As a leading two step distributor of building products in the United States, We are an entrenched and essential part of the supply chain and the residential new homes and repair market.
We provide a differentiated value proposition to our customers across the growing regional markets we serve.
Our deep long standing supplier relationships broad product offering an integrated value added services have enabled us to capitalize on the strong demand environment across new home construction and renovation markets, while delivering an exceptional customer experience.
With residential construction activity continuing to be robust, our broad customer base, including the national home centers pro dealers and distributors count on us as a vital sourcing partner.
For many customers and suppliers, we are a natural extension of their own internal sales teams and they look to us to provide technical expertise and application knowledge across the markets we serve.
As a result, we are in a central value added supplier to our customers throughout the ebbs and flows of the housing industry.
And we are especially well positioned to capitalize on the current market environment.
Even so we continue to focus on continuous improvement efforts to further strengthen our business.
We are in the early stages of implementing standard repeatable work processes with an emphasis on data driven decision making.
Over the past few months, we implemented improved processes and tools to guide purchasing and pricing actions, while also centralizing key decisions to drive consistency across our locations.
The benefits of this approach are evident in our third quarter performance.
We continued our approach to keep structural product inventory loan to mitigate the risk of wood based commodity price deflation.
The wisdom of these decisions was on display in Q3, as we nimbly manage the decline of greater than 60% in commodity wood prices and still delivered positive gross margin on structural product sales.
As we look ahead bluelinx remains exceptionally well positioned with ample opportunity to drive continuous improvement and profitable growth.
In support of this we continue to build a performance driven culture designed to develop retain and attract leaders align with our values and vision for the organization.
On the commercial front, we continue to focus on driving a higher quality of sales in part by concentrating our sales and specialty product categories, while selectively investing in efficiency and reliability of our operations.
Our path to continued margin expansion includes driving a higher quality sales mix concentrating sales growth and specialty product categories, while prudently managing our structural product business.
Disciplined capital allocation will play a critical role in future value creation.
Over the past six quarters, you've been appropriately focused on debt reduction and deleveraging.
With our balance sheet now in a strong and flexible position, we're broadening our aperture for capital allocation.
We intend to invest strategically in our business to drive organic and inorganic growth.
On that front, we are increasing our capital expenditures this year as we continue to invest in upgrading our fleet and modernizing our distribution facilities.
Additionally, we are actively building out our internal capabilities to support enterprise strategy and evaluate and pursue acquisition opportunities.
With respect to acquisitions, we intend to be strategic and disciplined in our approach.
At this time I'll turn the call over to Kelly for a more detailed discussion of our third quarter financial results and capital structure.
Following that I'll provide a brief summary, before we take your questions.
Kelly.
Thanks, Blake and.
And good morning, everyone. Our third quarter results reflect continued positive momentum across the business.
Dwight indicated underlying demand fundamentals remain very strong across the markets we serve.
Third quarter sales were $971 million up 11% year over year, driven by 29% growth in specialty product sales offset partially by a 12% decline in structural products out.
Consolidated gross profit was $153 million or 16% of sales net income was $47 million and diluted earnings per share was $4, 70% the tax rate for the quarter was 25, 6% in line with our expectation.
Adjusted EBITDA was $79 million or 8% of sales.
This level of bottom line profitability is a notable achievement given the sharp decline in wood based commodity prices during the period.
Looking now at the product categories, beginning with specialty products net sales were $641 million up 29% or $145 million over the prior year period gross profit increased $62 million to $148 million and gross margin expanded 560 basis.
<unk> to 23%.
The sales growth and improved profitability were driven largely by our ability to capitalize on supply demand dynamics by executing strategic pricing action consistently across our location.
This growth was modestly offset by lower sales volume due to supply chain disruption and product availability.
Overall specialty product sales volume decreased by low double digit year over year, but on a positive.
Of note sales volumes in certain categories, where we are targeting growth such as industrial products molding and fighting increased compared to last year.
Moving to our structural products net sales were $330 million down, 12% or $45 million as compared to the third quarter of 2020 gross profit was $6 million and about 2% of sales the decline in structural product sales and profitability was due primarily.
Two the significant price deflation for commodity wood products during the period and to a lesser degree lower sales volume as we continue to carefully manage our structural inventory level.
In July and August high Costed Wood based inventory cycled out at low margin. Following that we saw a sharp recovery in September gross margin to 7%.
Margin improvement continued into October with structural products gross margin up into the low double digits.
And we continue to prudently manage structural product inventories to mitigate that spot market exposure a market improvement from previous cycles.
SG&A came in at $76 million down, 5% or $4 million year over year, due primarily to a lower level of variable incentive compensation and we continue to manage our discretionary costs in a disciplined manner.
Moving on to cash flow in Q3, we generated operating and free cash flow of $104 million and $102 million respectively or.
Our cash generation was driven largely by a reduction in receivables given structural product deflation, which was offset by specialty specialty inventory build and the timing of payables.
Net working capital increased 38% year over year attributable to specialty products and in line with our sales strategy. This increase was in specialty product receivable than inventory and also reflects approximately $130 million of inflation.
Given our focus on shifting our sales mix to specialty products and related inventory build towards the end of Q3 days sales of inventory increased versus the prior year period.
Looking at our balance sheet as of October 2nd total debt was $500 million, including $233 million drawn on our revolving credit facility and $277 million of long term lease obligation.
Net leverage was one three times down nearly three turns from four one times at the end of Q3 of 2020.
Our trailing 12 month, EBITDA was $391 million or 9% of sales.
In October we completed an offering of $300 million of senior secured notes at 6% that mature in 2029 interest on the notes is paid by annually and they are callable beginning in 2024.
Concurrent with this transaction, we reduced our revolving revolver capacity to $350 million down from $600 million previously.
We believe this demonstrates sound financial discipline, while also balancing what is now a long dated debt structure with an attractive fixed rate component.
A majority of the net proceeds were used to pay down all outstanding borrowings on our revolving credit facility with the balance of the proceeds available as cash on hand.
As of October 29th gross debt was $577 million in cash on hand was $87 million net.
Net debt was 490 million with net leverage largely unchanged.
This brings our total liquidity to about $430 million when considering the untapped revolver and cash on hand.
We believe that the newly issued tranche of senior secured notes and Undrawn $350 million revolver revolving credit facility provide a flexible balanced capital structure with significant operating flexibility to support future growth.
At the outset of the fourth quarter residential construction and repair and remodel activity remain elevated contributing to sustained demand for construction materials across all key regions and end markets.
As a result gross margins are off to a strong start in the fourth quarter.
For October specialty product margin was consistent with Q3 levels and structural product margin improved into the low double digits.
We are targeting the Q4 tax rate to be in the range of 24% to 28%.
In terms of Capex, we have invested about $5 million through the first nine months of the year and in the fourth quarter. We currently plan to invest up to an additional $10 million of Capex. This is approximately $3 million more than discussed last quarter and in total these investments will be made primarily to upgrade our current site trailer fleet and to also make some.
Improvements in certain distribution facilities.
At this time I will turn the call back over to Dwight for closing remarks.
Thanks Kelly.
In summary, I'm proud of our team for their combined efforts in the third quarter.
Together, we exceeded expectations by delivering double digit revenue growth $79 million of adjusted EBITDA and over $100 million of cash generation.
One of the collective strength of our team as a resiliency pride and passion they bring to work every day.
We are committed to serving our customers growing our business and creating value for stakeholders and all of that we do.
Consistent with that sentiment I wanted to briefly touch on our growing ESG focus.
This is a topic that I'm personally very passionate about and I'm committed to embedding in our culture and business strategy.
I'll highlight a few areas that impress me from joining bluelinx.
First we truly have a culture of safety and we continue to emphasize improved throughout the organization.
Our two key safety stats total recordable incident rates and days away restricted or transferred declined meaningfully the past two years down to one six and 0.9, respectively in 2021.
These are top quartile rigs in our industry I am very proud of our team for prioritizing safety and wellbeing.
Second our commitment to diversity and inclusion starts at the top with 60% of our leadership team being diverse.
Third we have strong highly rated governments practices in place.
These key pillars provide us a great foundation to build from as we increase our focus on ESG moving forward.
In closing it is an exciting time in the history of Bluelinx.
Moving track record of meeting U S. Two step distributor of building products, we have a strong foundation from which to build on.
We're entrenched as in a central part of a complex supply chain and are a value added partner to our customers.
We're capitalizing on the current market environment and are well positioned to benefit from favorable long term market expectations.
And we are focused on creating a performance based culture emphasizing growth in our specialty products and driving continuous improvement throughout the business.
The completed senior secured note offering and cash on hand provides us ample liquidity to strategically invest in our business to fuel organic and inorganic growth.
Yes.
Due to the fragmented nature of our industry. We believe there are strategic opportunities to accelerate our growth through acquisitions that broaden our specialty product offering or expand our regional cartilage.
As you look to the future I believe there is ample opportunity to create long term value for all stakeholders and we are steadfastly committed tobacco.
Concludes our prepared remarks at this time, we're happy to answer any questions.
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One moment, please while we poll for questions.
Our first question comes from Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Yeah. Thanks, good morning, everyone and a nice job here navigating what is a pretty tricky environment out there.
Thank you thanks, Greg.
I guess, starting off hoping to dive into some of the volume trends specifically for Q3, I guess can you quantify the impact from supply chain challenges lack of inventory I'm, assuming not held back some amount of revenue overall and I guess more importantly, how do you see that progressing going forward.
Yes, thanks for that so yes, it was definitely an interest in quarter to put it mildly.
The historic deflation, we saw lumber and panels was something we were very focused on managing through and we think we did an effective job of that really continuing our kind of our maintenance mean approach on the specialty side, we did see some volume improvement molding siding industrials to some degree still constrained on the AWP side.
In particular.
Supply is still a challenge there and we are working with our vendors to continue to secure as much product as we can and we're hopeful that as we move into 2022, we'll see that situation improve as our capacity comes online.
And in terms of specialty sticking sticking on that segment.
In terms of the sustainability of those margins I think in the past you've talked about that driven by the supply chain challenges. So I guess should we assume that if we start seeing things free up as we progress through calendar 'twenty two do we see the specialty.
<unk> come back down or do you think that you know.
There is a chance, where we're sort of normalized on a higher level than what we've seen historically.
Yeah, well, Greg I think we think we are normalized at a higher level than what we've seen historically for sure regardless I think what the markets do going forward as it relates to supply chain constraints. However.
That's when we spoke about it last quarter and I think we'd reiterate the fact that we don't know that this level that we've seen in the 'twenty three 'twenty, 4% is the sustainable number we would say probably we would expect it to go down into the maybe the twentyish percent range, but we feel pretty comfortable that that would be.
Floor of what we would expect going forward, even with the supply chain.
Change.
That makes sense and I guess, just last one kind of broadly thinking about.
This environment that we're in and you know inflation and supply chain challenge related I'm. Just curious does that change the value proposition of two step distributors I mean, I'm just kind of wondering if this type of environment can drive more business your way.
Yeah.
We really like our position in the market. We think we are.
Part of the supply chain for new home construction and repair and renovation. We are the link between the large manufacturers and the end users, including kind of professional dealers with national retailers, we bring value in terms of being able to manage a broader product portfolio breaking bulk adding value around reman.
Overnight manufacturing and other design services, which is just becoming more and more important in an environment, where end use demand is strong and the supply chain has even more complexity unit. So.
We're really excited about where we are we having some great conversations with all of our key partners. Both on the vendor starting the customer site and we're looking forward to continue to take full advantage of that.
Okay, great. Thanks for the color best of luck going forward.
Thank you.
Our next question is from Jeff Stevenson with loop capital. Please proceed with your question.
Hi, Thanks for taking my questions.
My first one was just some specialty pricing and I was just wondering if you were able to obtain incremental price increases the most specialty categories in the third quarter or was the increased pricing primarily from continued realization from our first half increases I'm also as we move forward how should we think about <unk>.
Specialty pricing moving forward given the continued supply constraints.
Yeah, Great question. Thank you thanks for joining the call. So yes, we are.
As we've said in the past we are very intentional about making sure that we add value for our customers. In addition to the products, we provide and so as they put price increases and there's things that we do whether it's touching the product to make it better fit for that customer needs, adding designed surfaces and other things that we.
Get paid for it so it's a combination of kind of the price increases we see the value, we bring which we look to get paid for our results in kind of the margin expansion in totality and to Kelly's point, we really do believe that there is sustainability at a more elevated level around specialty higher than historic So she said, 20% feels like a good number.
For us and we're obviously going to continue to work as hard as we can to make sure that we could maintain that and hopefully we'll get better.
Okay.
So some of them.
Honestly with lumber rising nearly 50% off August lows.
On the structural margin front I mean, it seems like the higher price inventory has been largely sold off.
As we've discussed kind of a normalized margin level is closer to 8% to 9%, but where it's October tracking low double digits.
How should we think about specialty margins as we kind of move through the fourth quarter and early 2022, just any updated outlook would be helpful.
Yeah sure.
So yes, we are benefiting right now from that now really steady incline in commodity price that's been happening since the early part of September kind of late late August.
As we did cycle out of that high cost inventory and at least to start replenishing at those lower dollars worth of seeing that improvement on top of our distributors margin kind of gives us that extra left in the market to that low double digit margin as it has with every cycle with the commodity cycle over the next few weeks as price.
Sustained stable or flat, we would start seeing that margin flatten out to our more normalized margin and so you'd have a.
Weighted average of the next three months as it relates to that type of dynamic happening for that for the fourth quarter.
Most likely unless something really falls off at the end of the quarter, you would see a bit of an elevated structural margin for the quarter.
But of course, Thats, a wait and see we'll have to see how things go and what commodity prices do in the second half of the quarter going into next year, it's really difficult. Because these cycles are very short lived so we would suggest that our normalized margin is still in that 9% range for structural going forward.
That's very helpful. Thank you and just last question just wanted to get an update on one thing where things stand on the return to the M&A I know Dwayne the focus has been on kind of building up in him an ATM and develop an organic strategy, but any more color on kind of how part of things.
Along and when you said essentially returned to the market would be helpful.
Yes, so we see that as a lever that we will pull in our overall kind of value creation approach and strategy.
We are we like.
Where we are in the market. We think our scale provides advantage that is clearly areas that we think we can deepen our presence and were looking at those.
Very very carefully it is a active market still very fragmented market, but we're going to make sure that we remain disciplined and thoughtful as we think about any opportunities like that but we are.
Keeping a close eye on how things are developing and if we see opportunities that will potentially accelerate.
Our strategy I will take it will close later.
Great. Thanks, again, and congrats on the good quarter.
Thank you very much.
Our next question is from Reuben Garner with the benchmark company. Please proceed with your question.
Thanks, Good morning, everybody.
Good morning Congrats.
On the results.
Tough period.
Can you let's see.
Starting on the specialty side.
The volume headwinds can you go into a little bit more detail. There was there an element of you guys, maybe walking away from business that didn't meet your pricing or margin requirement or was this truly you couldnt get the supply to keep up with the demand.
And its just pushed out to future periods.
I know, it's a long winded question, but if you could maybe give us some examples of the kind of products that are short supply.
Supply that that would be helpful. Thank you.
Yes. Thank you for the question so on the specialty side.
We're really keen on driving growth there both volume and margin obviously, so if we have the product we can sell it.
The challenges we saw in the quarter were really just around availability.
Particularly Ron engineered wood still pretty tight environment, there are more struggling to kind of ramp up to the higher demand levels.
So that's an area, where if we had more product with solid that's still probably the biggest pinpoint fresh from a volume perspective, great performance around margin, but definitely love to have more product available because our customers definitely want it on the other side, we are driving some specific programs around our specialty business again to drive share.
Gain and volume growth, there and we did see some improvement there.
Where we have availability, so we talked a bit about millwork, we talked about siding.
Talk about industrial products. So we had the wrong, we're able to sell it and we will continue to kind of focus on that and drive those programs as we move forward.
And then overall, we really really are excited about that part of our business. We are investing in capabilities to support that business from a value add perspective.
And we think that's going to bear fruit for us, particularly as we double down and really stay close to our core customers and make sure. We can address the needs. They have in service some of the high level.
Great and how how are you guys feeling about I believe I saw either in the press release or maybe I. Just heard you in your prepared comments it sounds like youre still being relatively cautious on the inventory front for the structural products am I am I hearing that right and is there a price point, where you would be more.
<unk> to get ready for.
The spring building season as prices pullback. This this winter.
Yeah suburban I really think that what is proven out this quarter, especially as our approach to structural inventory I'm keeping it really tight really more of a just in time replenishment and just very much staying focused on margin.
Margin over volume and I think that's played really well for us for the last 18 months. It played well, but specifically and that's really historic decline that we saw deflation that we saw from you know may June through the summer that certainly.
Supported our are our both our Q2 and our Q3 results.
Employing that approach. So we have no plans to change that at this time and so therefore, the price there's no specific price point or inventory build that we would plan outside of what we're doing right now which is continuing to monitor inventory levels and by appropriately.
As needed.
I want to reemphasize the point that Kelly's making.
We want to make sure we have sufficient product to service our core customers on the structural side, but the energy intense and strategic focus for the business around continuing to grow our specialty business.
Building out our capabilities to support those product lines and driving penetration in the marketplace, That's where we believe our core capability service best and that we see we see great opportunity.
Mike the balance.
Having both structural and specialty I think that positions us uniquely for an emphasis is really around growth volume growth on the specialty side and be continue to be very prudent on the structural side.
Got it and last one for me.
Can you help us with either the year to date or the third quarter. What your average realized prices for lumber <unk> panels, just to get a sense for modeling 2022, if we're going to assume you know.
Maybe.
400, or $450 price level, how much pressure there would be just on the price element of the business.
Yeah, well, we don't provide that data we do I think you can kind of get a feel for that by just taking the average index. If you take the average of the index indices for both lumber and panels and you add on our relative margin I think you'll get a pretty good sense of where our average price turned out on that.
Got it.
Yes.
Okay. Thanks.
Congrats again and good luck through the rest of the year.
Thank you very much.
We have reached out as a question and answer session I'd now like to turn the call back over to twice Gibson for closing comments.
Well. Thank you for your time and interest today are we really are deeply appreciate your support of Bluelinx and we look forward to connecting with you on our next quarterly call and again, if you have any follow up questions or want to learn more about our business. Please don't hesitate to reach out to Brian Taylor. Thanks again.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.