Q3 2022 Bluelinx Holdings Inc Earnings Call
Greetings and welcome to the Bluelinx Holdings third quarter 2022 results call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being.
Recorded I would now like to turn the conference over to your host Ryan Taylor, Vice President Investor Relations and Treasury for Bluelinx Holdings. Thank you you may begin.
Thank you operator, and good morning, everyone welcome to the Bluelinx Holdings third quarter 2022 earnings call.
Today, our Dwight Gibson, President and CEO of Blue links and Kelly Johnson, our Chief Financial Officer.
Our third quarter news release and Form 10-Q were issued yesterday after the close of the market along with our webcast presentation.
These items are available in the investors section of our website Bluelinx C O dot com.
We encourage you to follow along with the detailed information on the slides during our webcast.
Today's discussion contains forward looking statements actual results may differ from those forward looking statements due to various risk factors and uncertainties.
Putting the risks described in our most recent SEC filings.
Today's presentation includes certain non-GAAP and adjusted financial measures that we believe provide helpful context for investors evaluating our business.
Reconciliations to the closest GAAP financial measure can be found in the appendix of our presentation.
At the conclusion of our prepared remarks, we will open the line for questions and with that I'll turn the call over to Dwight.
Okay.
Thanks, Ryan and good morning, everyone.
Thank you for joining us on the call today.
It continues to be an exciting time at Bluelinx in 2022 that's been a historic year for our team.
Despite a volatile end market environment, we are on pace to achieve our most profitable year ever and we have invested prudently to advance our strategy of further strengthening our balance sheet.
Through September we have delivered $3 $6 billion of sales.
$415 million of adjusted EBITDA and generated $246 million operating cash.
And we were on pace to deliver record earnings per share and operating cash in 2022.
As compared to the first nine months of 2021.
Grew sales by 9% and adjusted EBITDA by 18%, while generating operating cash nearly two times greater than the prior year period.
Okay.
Our strong financial performance has fortified our balance sheet.
And given us the flexibility to prudently invest in high return growth opportunities, while maintaining significant liquidity for the future.
Our disciplined capital allocation approach was punctuated with our strategic acquisition abandon mirror forest products on October three.
Randy Mayor provides us a platform for specialty growth in the Pacific Northwest and gives us a footprint that now serves all 50 states.
This acquisition demonstrates our ability to identify and acquire high quality strategic assets at an attractive valuation.
We will continue to pursue attractive acquisitions and believe we are well positioned to be opportunistic given our strong balance sheet and a softer macro environment.
In addition to the bathroom or acquisition through the first nine months of this year.
We invested $19 million and capital expenditures to support future growth.
And we repurchased 9% outstanding shares.
Even after these investments our financial position remains strong with net leverage below one times and available liquidity over $560 million, including over $220 million of cash.
As we prepare for 2023 and beyond we believe our scale strategic supplier relationships and strong balance sheet are key differentiators that position us to take advantage of opportunities as demand in the U S housing industry Margaret.
And we will continue to invest in our strategy to optimize productivity increase our specialty product sales mix and drive world class performance, while maintaining a disciplined approach to capital allocation.
A refresher on the Vanda mirror acquisition.
Random here as a wholesale distributor serving a specific northwest, Alaska, and Hawaii, as well as British Columbia, and Alberta, Canada.
Over the past year trying to mirror generated approximately $150 million of sales and just under $20 million of EBITDA.
The total purchase price was $67 million and we paid just over three times trailing 12 months EBITDA for the business.
We funded the transaction with cash on hand.
But it to be immediately accretive to earnings per share in the fourth quarter.
This acquisition accelerates our growth in specialty products, particularly exciting.
<unk> expands our geographic presence in attractive metropolitan areas.
And enhances our strategic supplier relationships and ability to serve our national accounts.
We also believe there are opportunities to expand sales of our key specialty products and brand in those markets, including our top private label brands on center for engineered wood and prime links for millwork.
We prepared extensively for the transaction and so far the integration is going as planned.
Turning now to our performance in Q3 2022.
We delivered $1 $1 billion of sales hundred at $89 million of gross profit and $100 million of adjusted EBITDA, our fourth consecutive quarter with $100 million or more of EBITDA.
Our Q3 results further demonstrate the strength and stability of our specialty products business, which comprised 68% of sales and 80% of gross profit.
Specialty product sales grew 13% year over year to $724 million with gross margin of 21%.
The growth in specialty products was broad based with double digit growth across our strategic product categories, including engineered wood millwork siting and industrial products.
And we generated $143 million operating cash in the third quarter a record level.
Shifting gears to the U S housing industry.
As a reminder, approximately 45% of our annual sales are tied to the repair and remodel market with 40% tied to residential new home construction and 15% related to commercial markets.
Over the past two years demand across these end markets outpaced supply fueled explosive good.
However, with mortgage rates more than doubling this year and made historically high inflation and significant home price appreciation home affordability has been reduced for most parts leading to a dramatic slowdown in new home starts.
In the third quarter alone single family starts in the U S declined 18% year over year and 20% sequentially.
Over the past eight weeks, we have started to experience the impact of these developments on our business as demand for building products moderated and supply constraints began to ease across many product categories.
As we head into 2023, we believe demand for building products. They slow as new home starts decline and growth in repair and remodel activity moderates.
We believe certain factors, including the under supply chains supportive demographic shifts necessary repair activity and higher levels of home equity are positives from industry over the medium term.
And the repair and remodel market. We believe recent housing turnover, aged housing stock and high levels of homeowners equity will support continued growth in 2023.
The estimate published in October from a joint Center for housing studies supports this view with remodeling investments expected to grow, albeit more slowly.
Over the next four quarters.
We believe growth in the repair remodel market ties in well with our strategy to grow in key specialty product categories.
We will continue to focus on the things within our control while executing our long term strategy.
Our key strategic priorities, including shifting our sales mix to 80 plus percent specialty products.
Expanding our relationships with strategic suppliers and key customers.
Driving the current excellence optimizing productivity and rigorously managing our working capital.
We're confident that our strategy along with a strong balance sheet and disciplined approach to capital allocation provides us a differentiate opportunity to create compelling value for shareholders.
In summary, we have delivered historically strong financial results in a volatile environment and made good progress on our long term strategy of fortifying our balance sheet.
Our position as a national leader in building product distribution. It gives us confidence in our ability to navigate a softer demand environment going forward.
I'm proud of the entire bluelinx team for their efforts and contributions to the quarter.
That concludes my opening remarks at this time I'll turn the call over to Kelly for more detailed discussion of our financial results and capital structure.
Following that I'll provide closing remarks before we take your questions.
Kelly.
Thanks, Ray and good morning, everyone, taking a closer look at our third quarter results.
Net sales were $1 1 billion up 9% year over year.
The product sales grew 13% over the prior year and structural product sales were up 2%.
Gross profit was $189 million and gross margin was 17, 9% for the quarter up 210 basis points versus the prior year.
80% of our gross profit from specialty product sales.
Looking now at the third quarter results for specialty products net sales were $724 million.
13% or $83 million year over year. This growth was primarily driven by continued value based pricing.
Volume was relatively flat overall with an increase in engineered wood volume offset by lower network.
Gross profit on specialty product sales was $151 million up $4 million or 3% year over year.
Specialty gross margin was 29% a strong margin from a historical perspective, however, down 200 basis points from 23% in Q3 of last year when supply was predominantly on allocation.
Through October specialty products gross margin was approximately 20% with daily sales volumes down modestly on a sequential basis from Q3 of 2022.
This reflects the normal seasonality in our business as building activity generally slows in the winter months as well as some impact from the recent changes in the macroeconomic environment.
Yeah.
Now moving onto structural products net sales were $336 million up 2% compared to the prior year period.
This increase was primarily due to higher composite lumber prices, partially offset by lower composite prices for panel.
Pro rata length, the average price in the third quarter of 2022 for framing lumber was $587 per thousand board foot up 26% year over year.
And the average price for panels with $671 per thousand square foot down 12%.
Structural sales volume increased modestly year over year, primarily in panel.
Gross profit was $38 million up $32 million year over year, and gross margin was 11, 3% as compared to one 7% in the prior year period.
The increase in gross profit reflects the benefits from our continued improvement in managing structural inventory. It is also impacted by the dramatic decline in wood based commodity prices, we experienced during the third quarter of last year.
At the end of Q3 of 2022, one of our prices were down to around $500 per thousand board, but and panel prices declined to about $600 per thousand square foot, 17% and 8% decrease respectively compared to the started the quarter.
As a result, we recorded a $4 million lower of cost or net realizable value reserve at the end of September to adjust our structural inventory value to reflect the reduction in market pricing.
This partially offset the reversal of the $9 8 million dollar reserve recorded earlier in the year in Q2, using the same methodology, resulting in a net benefit of $5 $7 million to Q3's gross profit.
Our team continues to do an exceptional job managing structural inventory through leveraging consignment and utilizing centralized purchasing and pricing decisions to keep structural inventory levels low and mitigate risk.
Over the past two years, we have reduced structural inventory by about 65%, which has significantly improved our ability to manage volatility and wood based commodity prices.
Through October daily volumes for structural products were generally consistent with Q3, 2022 level and structural gross margin was in the range of 9% to 10%.
This excludes any of that impact that could arise from inventory adjustment.
We will continue to evaluate market pricing for wood based commodities and adjust accordingly at the end of each period.
SG&A was $92 million in Q3 of 2022, consistent with our quarterly run rate in the first half of the year.
On a year over year basis, SG&A increased approximately 20% due mostly to higher delivery costs, along with strategic investments to build capabilities in our workforce and to support our specialty growth and branch optimization initiatives.
As a percent of sales SG&A was eight 6% in Q3, a good outcome given the inflationary environment.
Net income was $60 million up 26% over the prior year period.
And diluted EPS grew 35% to $6 38 per share driven by the increase in profitability and a 43 cent benefit from our share repurchases during the year.
Diluted shares outstanding were $9 3 million down from 10 million in the prior year period.
Yeah.
Our tax rate for the quarter was 26, 2% in line with our expectations.
For Q4, we anticipate our tax rate to be in the 20% to 24% range.
Q3, 2022 adjusted EBITDA was $100 million or nine 4% of net sales, that's 130 basis points better than the prior year period.
As Dwayne mentioned this is the fourth consecutive quarter that we've reported adjusted EBITDA of 100 million are greater.
Turning now to cash flow and working capital.
During the third quarter, we generated operating and free cash flow of 143 million and $130 million respectively.
Our cash generation was supported by a reduction in receivables, which also reflects wood based commodity deflation during the period.
We ended Q3 with $536 million of inventory.
More than 85% related to specialty products.
In total overall inventory was down 7% sequentially as we continue to closely manage buying decisions and inventory levels. We also continue to invest in our business.
In Q3, 2022 we invested $12 million of cash and capital expenditures related primarily to enhancements to our distribution branches and upgrades to our fleet of rolling stock.
For the full year, we expect to invest at least $30 million in capital expenditures in these same areas future.
Future investments will be focused on continued facility improvements and upgrading of our fleet as well as enhancing our digital and technology capabilities.
Looking now at our balance sheet as of the end of the third quarter cash on hand was $229 million total debt was $573 million and net debt was 343 million net leverage with 0.7 times down from 1.3 times at the end of the third quarter.
2020 one.
Instead of being our cash on hand, and Undrawn revolver capacity of $346 million available liquidity was $576 million at the end of Q3.
That's the highest level of available liquidity, we have had.
At any point in our history.
Following the acquisition of Andrew Muir, our net leverage remained below one times.
And as of October 31st cash on hand, with over $220 million and available liquidity was over $560 million.
Reflecting back on the past two years, we have been deliberate in our approach to fortify our balance sheet.
Since the end of 2020, we reduced total gross debt by 5% and recapitalize our debt by issuing $300 million of senior notes at 6% retiring our term loan and amending our credit facility.
These actions significantly improved our debt structure and extended our debt maturity.
We have no material debt obligations until 2029.
These actions combined with our strong EBITDA and cash generation over the past two years fortified our financial position and.
In turn it's enabled us to expand our capital allocation options and invest in high return opportunities, including organic growth investments acquisitions and share repurchases.
As a reminder of our guiding principles for capital allocation, we intend to maintain a strong balance sheet, which enables us to invest in our business through economic cycles, while maintaining a long term target of net leverage.
They are around three times.
As we invest for growth, we will evaluate both organic and acquisition opportunities that yield a risk adjusted return above our weighted average cost of capital and are consistent with our strategy to increase our mix of specialty products.
We will maintain a disciplined approach to our growth investments comparing those opportunities against the value of returning capital to shareholders.
Yeah.
To summarize in the third quarter of 2022, we delivered 9% sales growth year over year, 35% EPS growth, 27% adjusted EBITDA growth.
And also delivered a record level of operating cash.
And through the first nine months of the year, we invested $67 million to acquire vandermeer $66 million to repurchase 9% of our outstanding shares. This.
This includes the completion of our accelerated share repurchase plan in Q3 and $19 million in Capex.
To support our business.
Even after these actions our balance sheet is in excellent shape with low leverage below one times over $220 million of cash on hand and.
And over $560 million of liquidity.
Looking forward, we are focused on executing our strategy, maintaining a strong financial position and delivering long term value to our shareholders.
At this time I'll turn the call back over to Dwight for closing remarks.
Thanks Kelly.
Through the first nine months of 2022 we have delivered 9% sales growth and 18% EBITDA growth, while generating $246 million of operating cash nearly two times the prior year period.
We acquired Bandon mirror invested in organic growth and repurchased 9% of our outstanding shares.
Even after that our financial position is very strong and we will continue to invest in our business to drive efficiency and increase our capacity to deliver profitable growth.
We remain laser focused on the things within our control.
Solid growth in specialty products, optimizing productivity and driving world class performance.
Our aspiration is to be the pre eminent building products distributor in North America, and we believe we have the scale products and service offerings to continue to expand relationships with our best customers and key suppliers.
We're confident that our strategy will create long term value for all stakeholders.
Steadfastly committed tobacco.
That concludes our prepared remarks and at this time, we're happy to answer any questions.
Thank him if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys in the interest of time.
We ask that you each keep to one question and one follow up thank you.
Our first question.
Comes from the line of Craig Palm with crime, Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Hey, Thanks, This is actually Danny acreage on for Greg today, Thanks for taking the questions.
I guess just starting maybe.
Anecdotally with with your view of you know your different markets going into 2023, and maybe the balance between new construction and R&R activity, obviously, maybe some lessening of that new construction market I guess, how are you seeing potentially consumer dollars being reallocated.
Into more R&R type spend you know I in wake of maybe a shifting away from that the new home sales I'm, just wondering what youre seeing there now and maybe what your expectation is entering into this new year.
Yeah, well hey, good morning, Thanks for the question and so I think the story around what's happening with new home construction is fairly well.
Told at this point, so clearly there'll be some further moderation there as a result of all the actions that will happen, particularly around rates and driving affordability challenges.
As a reminder, and a 45% of our demand. We think is comes from the repair and remodel space and 40% from new home starts.
Starch.
So we're prepared for a and.
And are preparing for a softer environment on the start side. So you know continuing to really drive lean inventory management continue to focus our efforts on the value we bring in our value added services and communicating that value to our key customers to make sure we get appropriately compensated for that.
And also looking for other opportunities to drive efficiencies in the business on the R&R side, we expect a good environment to be a bit better.
And expect further growth in that space for all the obvious reasons you know the vast majority of homeowners narrow locked to the mortgage rates are low.
Lower than what they can get out in the market. There's been a fair amount of purchases of new homes recently and generally speaking when you see that level of activity is it spurs some remodeling activity and we expect to be really well positioned to support that so we're going to continue to focus on the things that we can.
Which is providing high level of service to our customers and making sure that we have the products and the services that are appropriate and necessary and delivering them.
Quickly safely and making sure that we can support their needs going forward.
Got it thanks, maybe just digging into a specialty margin a little bit I guess in light of the more challenging macro I mean.
What is your confidence level. Obviously, you gave the October 20% level, what's your confidence that you can kind of stay at somewhere near that level. Given you know maybe some some further easing of supply chains and how pricing looks.
Yeah. So that's a critical element for us something that we spent a lot of time and energy on internally.
So we've done quite a bit of work over the last couple of years, you're going to have in particular, making sure we have a better processes around our pricing pricing you know, making sure our pricing reflect kind of the market expectation and also kind of the value added that we bring make sure that you know we've segmented our customers appropriately and they are having.
The appropriate conversation around relative pricing for them.
As is necessary. So we're going to continue to focus on those things clearly as a supply constraints ease and demand falls that will provide pressure, but we're staying really focused on continuing to sell our valued communicating our value, making sure. That's clear and you know we'll continue to stay really really focused.
Driving that I'll come in and are confident that those actions will be beneficial over the medium and long term.
Okay, Great I'll leave it there thanks.
Thank you. Our next question comes from the line of Kurt Yinger with D. A Davidson. Please proceed with your question.
Great. Thanks, and good morning, everyone. Just wanted to follow up on that last question and maybe take it from a little bit different angle you know clearly specialty margins in Q3 is still pretty strong but are below Q2, and it looks like we're moderating here a bit in Q4.
As the pace of that surprised you at all I guess to date and is there anything from a product specific standpoint relative to the framework you use to get to that normalized gross margin range.
That you think is at risk score or has surprised you at all any thoughts there.
Yeah, I'll start and then maybe Kelly can add some color as well I think it's important to you know to level set the context around what's happening in the market you know the rate of change in rates is unprecedented right. So you know more than doubling of mortgage rates and less than and roughly around <unk>.
Six months. So you know the market isn't accustomed to that level of change at that rate in such a short period of time and so there's going to be some you know.
Settling out that happens and the demand impact is I think it's going to be meaningful coupled with at the very same time supply constraints really easing I think you know our ability to kind of maintain the margins. We did in Q3 and even to this point.
Hum.
A meaningful accomplishment that being said you know we're going to continue to watch the market. We expect supply to continue to be eased and we will see what happens with demand. So we're going to continue to navigate that again, focusing the things, we can our strategic pricing actions or customer segmentation and making sure that the value.
We bring particularly around things like AWP continues to be communicated to our customers.
Navigator is appropriate you know that the interest in category that a lot of supply came to the market unexpectedly was millwork. So theres a fair amount of that in the market now and that's putting some pressure on margins, but you know again, we're being very thoughtful around that very disciplined around that.
And you know, we'll continue to run the play that we've been running and challenged the teams to deliver a good outcome.
And I'll just add you know I think it's normalizing in maybe the pace that it's always hard to predict but for the last few quarters. We've been mentioning that you know when things would normalize we would expect the margin to be in the range of around where we're starting to see it for October . So I think it's you know I think it really gives us a lot of validity.
Key to our models and what we thought was going to occur and we don't know what's going to happen going forward. You know there's still a lot of you know macro environment challenges and and we'll just continue to monitor that and continue to update you as we go forward, but I think right now it's kind of going right in line with what we what we've been communicating.
Okay. All right great. That's helpful. And then maybe I'll ask one more and jump back in but we.
Realizing you don't specifically give guidance on on specialty pricing and Theres a lot of different product categories within that as we get into Q4, you still expect pricing to be favorable on a year over year basis, and any thoughts around when that might flip and start work.
[noise] against you.
I think he disappointed of context and reference Q4 2021.
The interest in time, if you call a pretty big uptick in our structural margins are we saw a pretty big rebound from the bottom I'm kind of the September timeframe and that kind of moved up a bit we don't anticipate that will happen.
This year this quarter and then we also you know there was continued strength on the specialty margins on allocation continue to be really tight demand continued to be really strong. So hey, our are our focus is on driving the highest level of profitability we can.
We expect that you know the guidance you've given previously around margins and thoughts at our Investor day, where we're expecting the business to land I provided the market environments remain as as you know rates are going to get announced again today, we will see what the fed does and there'll be continued activity, but again, we're going to focus on.
Making sure.
We continue to service our customers well continue to drive good customer segmentation, we continue to drive pricing consistency and process throughout the organization and continue to focus on delivering a really excellent service to our customers.
Okay, Great appreciate the color and I'll turn it over.
Thank you. Our next question comes from the line of Reuben Garner with the benchmark Company. Please proceed with your question.
Thanks, Good morning, everybody and congrats on the strong quarter.
So thank you.
Your Investor Day, you gave a kind of a downside scenario or framework I guess the way to think about margins in the 25% revenue decline.
Can you talk to us.
I think a lot that's probably changed since that took place talk to us about I guess, how you feel about that scenario today and then if if for whatever reason it would be worse than that if revenue were to decline more than the 25% versus 2021.
How to think about decremental margins on the downside.
Yeah, well thanks Ruben for the question and you know, we thought put a lot of thought and and and and.
Thoughts on this and the modeling that we did to get ready for Investor day, and so I think you know.
To the earlier question that we answered we still feel pretty good about where we are as it relates to that modeling and where that that's what the normalization that we're starting to see I think it is validating. The fact that we feel that that was an appropriate range to think about and certainly we do with the softness.
Back to some impact and when you when youre seeing that and we're seeing those margins come into a reasonable range right around that.
Those numbers that we gave.
And again just to reiterate that we are staying in a normalized environment, we expected margins to fall into more of a 19% to 20% range for for specialty at around 9% for structural and I think that's exactly what we're seeing right here in October .
And what we've you know, but we would you know.
To find out is something that we feel comfortable with.
Do we know what further decrement would bring we don't know exactly I. It's the short story we are.
And all of our models you know it's it's.
Fairly complicated as relates to the number of products that sit in our specialty and so it really just depends on how we how we manage and strategize around the pricing of each category independently and also what allocation brings and what the with the you know kind of the buildup in the inventory and the supply chain around each.
Each product line brings so so that being said I wouldnt change kind of what we have right now I actually feel really confident about where we are I'm not you know with all of that knowing that we could have changes that we can't anticipate and we're going to keep on top of it and we're going to just keep communicating what we see as we go forward, but I.
I haven't really feel great about where we have landed as it relates to what we thought was going to happen and what is happening there.
Yeah, we feel pretty good about the work we've done to kind of prepare for a softer environment. You know a lot of the activity that we've been focused on as it relates to driving efficiency improvements.
Simplifying our business you know getting a level of capability in the organization to manage through all economic cycles.
Those things are starting to.
Really really bear fruit now and we would really lean into that as we think about 2023, if it's gonna be a tougher environment and the play we've been talking about and there is a focus we've been driving are the right ones and I will just lean in harder if needed. If we see further demand deterioration beyond kind of that downside case, we've talked to.
Private investor.
Okay, perfect and then the balance sheet is obviously in great shape, what you know and even in the even in some of the downside scenarios I imagine you're going to generate a decent amount of tests going into next year as well, but that's all the increased share repurchase I guess.
Any changes or an update on how you think about investing in this environment. Some.
Some of that cash are any thoughts on M&A.
M&A, but you know obviously you just did a deal but it has the pipeline kind of increase does it seem more likely that folks will sell that maybe are kind of seeing that the tides turn a little bit and.
Big picture update on capital allocation would be great.
Yeah, I'll get us started saying, hey, we or put a lot of thought into how we think about capital allocation and we've talked about that atlantica was kind of and provide a lot of details around that we're staying fairly consistent with our approach we're going to look at opportunities that allow us to create a return that we're excited.
[noise] about we still think we have opportunities are from a capex perspective to continue to make the business better and again things that will allow us to have greater capacity around our specialty business and lower our cost to run the business a lot of investments that we've made whether it be rolling stock or the equipment or the facility improvements support that.
We're going to continue to kind of lean into that.
And we also like our positioning as it relates to inorganic opportunities and we're very pleased with the random air deal and remain active in it.
Search or other opportunities aligned with our strategy, whether it be around geographic expansion of our specialty growth and we're going to continue to be highly engaged in that space and again.
We find a good opportunity at an attractive price that sportswear strategy. We're in a position to kind of move on that so those are the things we'll continue to do investing to make their business better. We do believe the long term fundamentals around the space. We operating housing are strong there's still not enough homes out there for the demand that exist.
We're in a unique environment now with rapid rise in rates really driving a pullback, but the consumer balance sheet remains very strong and people still need places to live and they still need to make them work for their lifestyle as we want and we're going to make sure we're prepared to participate a big way once things normalize.
Great Congrats again and good luck going forward guys.
Thank you.
Thank you. Our next question comes from the line of Jeff Stevenson with loop capital markets. Please proceed with your question.
Oh, Thanks for taking my questions and congrats on the quarter.
Thank you.
So there have been some building products companies that reported they've started to see some slowdown in discretionary R&R demand during the quarter. I was just wondering if you could provide an update on kind of what youre seeing there and we're hearing from suppliers and channel partners right now regarding R&R demand as we move into 2023.
Yeah, I mean, we watch that very closely obviously agreements, which are important part of our business on the demand side.
Is it still holding right. There is some seasonality that we're starting to see in Q4 as the weather changes and unless building activity happens, but we haven't seen a tremendous pull back and actually some end markets. You know the stuff we do on the retail side the pro dealer sign up actually held reasonably well, but we're going.
To watch it closely and would expect you know there'll be some some volatility there are all the forecasts suggest that will hold and twenty-three.
Albeit at a lower rate.
We still feel pretty good about the R&R space, an ability to kind of play there.
Great No. That's helpful. And then last quarter I'd ask you about kind of how you plan to manage specialty products inventories moving forward and you mentioned that the focus will be on turning over inventories quickly and finding the right supply and demand balance and I'm. Just wondering if you could provide an update on kind of how that strategy is working.
And whether there could be opportunities for destocking in the future on the specialty side, especially there are supply constraints start to moderate here.
Yeah, we've been really focused on improving our capabilities there.
And I'm pleased with the progress we're making you know we've been able to demonstrate some really good inventory management practices on the structural side.
Some of those activities and I'm moving from those activities more in our specialty business. So we still think there's opportunity there and we're being very thoughtful.
Round, given the demand environment were in.
How we think about supply and what we bring in and how much and when and so we'll continue to focus on that and do you expect that to support.
Improved velocity in our specialty business going forward.
Great. Thank you.
Thank you. Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your question.
Hi, Thanks, Good morning, and I'll give you a congratulations to a great quarter.
Thank you I wanted to ask you about.
I wanted to ask about the comments about no work.
And the pressure there.
I Wonder if you could just provide some more details.
Maybe starting with you know how big of a product as a percentage of sales just refresh us on that and is this an inventory correction or is it a capacity issue like you know what do you think the timing is here for the millwork pressure on margins.
Yeah. So I'll give you some context, so a fair amount of that product comes from overseas Walton.
Height of the pandemic and up until recently supply constraints were tough whether it be transportation challenges and things of that nature of getting that product across across to us a lot of those things starting to ease and a lot of capacity got to the U S. A little bit sooner than folks had expected and that.
Later amount folks who come ordered ahead to kind of manage through that so that's one of the drivers of kind of.
A fair amount of supply being available across industry on millwork in the third quarter, we feel we feel pretty good about where we are working through that the benefit again, we have given our scale and our international footprint is that we can position inventory in a place where demand is strongest and allows us to kind of manage that off.
Similarly in and protect margins, so we're kind of working through that.
Great product.
With that we like it's product that gets good value in the marketplace and we feel confident that we'd be able to kind of work through it but that's really the driver of what happened and there are a lot of it easing happening all at the same time and in fairly high levels of the product coming coming to market.
Same time, but we feel pretty good about where we are in teams focused on it and we're making sure that we're thinking about volume and price them appropriately and it's one of many products that we have in our specialty business you know what we'd normally with a lot of the different products and we have not and that that in that group and so its not you know the primary product.
Yeah.
Okay got it.
Yeah.
Are there any other projects within specialties that are similar to millwork.
Where there could be one of these.
You know inventory adjustments.
<unk>.
That you're on the on the watch for.
No actually we this is this was a unique situation given the fact that most of it's imported you know that's why we called it out the rest of the categories are very much in line with how we normally operate.
Okay great.
And then if I can switch over to Vanda mirror and.
And that.
That acquisition, what what kind of an impact do you expect them to come.
Quarter on gross margin and <unk>.
And what's your approach.
To managing <unk> already taken an active approach or are you are you.
Let them.
Get some back office things done first before you start your own process.
Yeah. So we're really excited about them being a part of the Bluelinx family now are very well in a highly regarded organization great exposure in the Pacific Northwest the markets. We operate in are well in line with the markets we want to.
B leaders and so we really feel excited about having him on the team and our approaches to grow that business. They have some great products and relationships on the specialty side. There were some gaps we think we can supplement and support millwork actually being one of them and AWP being another and so we think theres great.
Volume growth opportunity in specialty through the combination and the team's focused on making sure that it's appropriate spending a lot of time with our customers and we also have some opportunity to improve kind of the delivery capabilities.
They they they really operated primarily through third parties and we're looking to kind of put in put in place a fleet there in that market, which are great reactions impasse reactions due from their customers and suppliers to some extent, so we really see integrating them into the business.
Building upon the great track record they are providing a higher level of service to the customers, providing a broader specialty offered to their customers and as a consequence, they expect a really good outcomes from that as we move forward.
Okay, Great and maybe one last one on M&A.
I've I've had one industrial company that recently took time that are really big transformational acquisition and.
[noise] holders didn't like it was it was too big taking out too much debt I Wonder what your view is at this point in the cycle on M&A. It sounds like you're clearly still looking but just size of M&A.
You know what what's your range.
Yeah, No no real deviation from what we've communicated in the past, we still think there's opportunities to improve our our scale and our reach and particularly on the specialty side in certain markets. So we're going to stay focused on that.
It's a fragmented space and we think there are deals similar to vanda mayor give or take.
That could be interesting.
We will only move forward. If we believe it's something that's going to create meaningful value at advances us down a path to being a bigger specialty organization more profitable and more efficient so that remains kind of our framework.
And we're just happy to have the opportunity to kind of engage and hopefully.
<unk> made some good choices.
Okay sounds great. Thank you.
Thanks, Rob.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Taylor for any final comments.
Thank you Melissa Thanks for everybody that joined US on the call today. We appreciate your engagement and your questions Alexandra and I will be available if there's any follow up questions and we look forward to speaking with you next time. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.