Q3 2024 BlueLinx Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Bluelinx Holdings third quarter 'twenty 'twenty four earnings conference call.
At this time all participants are in a listen only mode and today's call is being recorded.
We will begin with opening remarks and introductions.
Speaker Change: At this time I would like to turn the conference over to your host Investor Relations Officer, Tom Morabito. Please go ahead.
Tom Morabito: Thank you operator, and welcome to the Bluelinx third quarter 2024 earnings call. Joining me on today's call are Sham ready, our president and Chief Executive Officer, and Andy <unk>, Our Chief Financial Officer and Treasurer.
Tom Morabito: At the end of today's prepared remarks, we will take questions.
Tom Morabito: Our third quarter news release and Form 10-Q were issued yesterday after the close of the market along with our webcast presentation and these items are available in the investors section of our website Bluelinx co dot com.
Tom Morabito: We encourage you to follow along with the detailed information on the slides during the webcast.
Tom Morabito: Today's discussion contains forward looking statements actual results may differ significantly from these forward looking statements due to various risks and uncertainties, including the risks described in our most recent SEC filings.
Tom Morabito: Today's presentation includes certain non-GAAP and adjusted financial measures that we believe provide helpful context for investors evaluating our business.
Tom Morabito: Reconciliations to the closest GAAP financial measures can be found in the appendix of our presentation.
Speaker Change: Now I'll turn it over to Sam.
Sam: Thanks, Tom and good morning, everyone. Our third quarter 2024 results demonstrated solid gross margins of over 19% and our specialty products business and 11% for structural products. Despite the impact of continued price deflation.
Sam: We partially offset this deflation in both by driving volume growth in key specialty product categories, such as millwork and engineered wood products.
Sam: As well as structural lumber and panels.
Sam: Ari pleased with the entire Bluelinx team for their continued hard work and dedication to deliver these results despite the difficult deflationary pricing environment.
Sam: We remain focused on growing our key specialty product categories at a higher rate than our structural product business. So that our product mix shifts over the next several years. We also continue to execute successfully on our local and national market share gains strategies as seen by our multifamily growth expansion of product wise with feedback.
Sam: Net accounts or expansion of branded product lines into new geographic markets and launches a new product lines among others. Our digital transformation efforts are moving forward on schedule with phase one on track to be completed by Q3 2025, we believe that subsequent phases will further enhance our operational and commercial capabilities.
Sam: And we anticipate that our continued focus on modernizing the business with new technology will ultimately enable us to differentiate ourselves in the marketplace. So that we can accelerate our profitable sales growth and operational excellence initiatives.
Sam: We also continue to explore and evaluate greenfield and M&A opportunities to expand our geographic reach and to support our specialty product sales growth initiatives.
Sam: Our first Greenfield will be announced by the end of this year.
Sam: Before turning to our third quarter results I want to briefly address the effects of hurricanes to lead and build it on our facilities are most impacted location was in Erwin, Tennessee, which is on the Tennessee, North Carolina border and area hit hard by Helene. Most importantly, our employees and their families are safe and we can.
Sam: To appreciate the relentless dedication to our suppliers customers each other and their communities.
Sam: The damage to the distribution operations was significant and the financial impact will largely be covered by insurance, which Andy will speak to it a little bit we are absolutely committed to rebuilding and Irwin and we expect this distribution center to be up and running later in 2025 in the meantime, we are servicing all of our customers by leveraging nearby distribution centers.
In terms of Hurricane Milton our tablet Lakeland locations were in the path of the storm, but were impacted only for a week. They are fully operational along with all other branches in Florida.
Now turning to our third quarter results.
Sam: We generated net sales of $747 million and adjusted EBITDA of $36 6 million for a four 9% adjusted EBITDA margin adjusted.
Sam: Adjusted net income was $16 7 million or $1 95 per share.
Sam: Specialty products accounted for approximately 70% of net sales and about 80% of gross profit for the third quarter specials.
Sam: Specialty product revenues declined 7% year over year due to continued price deflation versus the prior year.
Sam: Price deflation has persisted longer than we anticipated due to slower demand related to the soft housing recovery combined with excess manufacturing capacity.
Sam: Both against the backdrop of a very competitive environment.
Sam: However, while we still expect to see a year over year improvement in pricing in 2025 as the market recovers, we believe it will likely be in the back half of the year.
Sam: As I mentioned earlier, we drove solid volume growth in key specialty product categories, such as millwork and engineered wood products. We also delivered solid gross margin performance of 19, 4% in specialty products, which was above our expected range, although our specialty margins were partially due to the tariff benefit.
Sam: Focus on business excellence continues to deliver solid specialty gross margin performance quarter after quarter.
Sam: Our disciplined approach positions us very well for the housing and building products market recovery that has yet to come.
Sam: Other structural product revenues declined 9% due to significant price deflation in lumber and panels, we drove positive volume growth across the board as Andy will highlight for the quarter average lumber and panel prices for the industry were down, 12% and 19% year over year, respectively, regardless, we want.
Sam: Again leveraged our strategic and disciplined approach to inventory management and our centers of business excellence to deliver strong 11% gross margins for structural products of positive volume growth.
Sam: Lastly on the quarter, our financial position remains strong and our significant liquidity leaves us well positioned to achieve our vision execute on our profitable sales growth strategy and take advantage of share gain opportunities as the market rebounds.
Sam: We also continue to have flexibility to return capital to shareholders. During the third quarter, we repurchased $15 million in shares, bringing the total amount repurchased over $138 million since the beginning of 2022 once again, demonstrating our commitment to returning capital to shareholders.
Sam: Now, let's turn to our perspective on the broader housing and building products market.
Sam: Earlier this year industry sources indicated a renewed sense of optimism for the overall market, especially for the second half of 2024. Since then however, low existing home turnover and a full affordability issues. Among other factors anchored the housing market and kept it for moving forward into recovery mode.
Sam: Of course, one of the critical factor standing in the way of the start to the housing recovery is the federal reserve's positioning regarding rate cuts.
Sam: Partially fueled by the recent rate cuts from the federal reserve mortgage rates are currently above six 5%.
Sam: Although they are lower than the 8% peak last year. They are still above the 20 year average of about 5%. It's also important to note that the federal reserve interest rate cuts do not necessarily result in lower mortgage rates in fact since the federal reserve cut rates on September 18th mortgage rates have actually increase moving from just below 6% to one.
Sam: Again, now being above six 5% rate cuts are merely the first domino to fall in the Cascade of market forces that need to materialize to drive housing starts and repair and remodel activity.
Sam: For example, many homeowners are currently in low interest rate mortgages. So although we expect these initial interest rate cuts to help kickstart. The housing recovery, we believe that sustained reductions in interest rates over time are necessary to bring mortgage rates down to the long term averages and continue the housing recovery over the coming years stay.
Sam: Another way closing the gap between homeowners existing mortgage rates and what's currently available in the market will be key to sustaining the housing recovery. After it starts which we believe wont occur until the back half of 2025.
Sam: The U S housing market remains volatile as reflected by September total housing starts coming in at an adjusted annual rate of $135 billion down.
Sam: Down 5% from August and down.
Sam: 7% year over year.
Sam: Seasonally adjusted single family housing starts increased two 7% from August and increased five 5% year over year.
Sam: Large multifamily starts were down four 5% from August and down 15, 7% from September 2023.
Sam: In addition, builder's confidence was <unk> 43 in October up three points year over year and up from 41 at September 2024 for the second month in a row after declining over the previous four months.
Sam: While there was a slight improvement it is still down from <unk> 51 in the March April timeframe, which continues to reflect a volatile and uncertain market conditions. We're currently is looking.
Sam: Looking at the components present sales conditions was <unk> 47 up from 46 last October expected sales of the next six months was <unk> 57 up from 44 last October and traffic of perspective buyers was 29 up from 26 last October.
Sam: <unk> remodel spending continues to be lower than the elevated levels of 2022, and 2023 years during which pulled forward an expansive R&R occurred during pandemic related conditions as people spend more time in their holds also as interest rate increase impacts began accelerating in 2023 existing home sales say to the low.
Sam: <unk> levels in 30 years, a trend that has continued into 2024.
Sam: As a result, a significant amount of repair and remodel activity that occurs with family sell their homes and buy new homes isn't happening due to current weak sales velocity dynamics for the first eight months of 2020 for the turnover rate for homes solely to 5% the lowest level in over 30 years and new listings are at.
Sam: The lowest levels that at least a decade.
Sam: Despite the increases in housing starts on a sequential and year over year basis, we continue to see large public builders, gaining a greater share of single family housing starts in a high interest rate environment, because they are using their size their scale and their balance sheet to buy down mortgage rates offer more attractive deals to consumers and buy directly from <unk>.
Sam: Factors to support their production schedules.
Two step distributors like Bluelinx, however tend to correlate more closely with smaller and custom homebuilder activity and do not participate as much in the large production builder market. We expect a single family start trend to continue for the remainder of 2024, however, as mortgage rates come down and get closer to the 20 year averages, we anticipate that more smaller.
Sam: Custom homebuilders will reenter the housing market, which will help fuel our business.
Although the near term outlook remains uncertain, we continue to believe in the long term prospects of the housing and building product sector. As many of you already know one 8 million homes needs to be built every year for the next 10 years to meet the housing demand, which doesn't even include any forecasting tied to expected immigration.
Sam: This considerable shortage of homes on top of supportive demographic shifts <unk> housing stock necessary repair remodel activity and high levels of home equity should continue to benefit the building products industry and bluelinx in the years to come as interest rates and home prices continue to come down we took all of these macro economic driver.
Into account will be developed our share gain strategy to drive profitable sales growth across the enterprise, which is already starting to bear fruit focus and clarity will continue to be critical to the successful execution of our strategy now I will turn it over to Andy who will provide more details on our financial results and our capital structure.
Andy: Thanks, Sam and good morning, everyone. Let's first go through the consolidated highlights for the quarter.
Speaker Change: Overall, both our specialty and structural products businesses delivered strong gross margins despite the impact of price deflation.
Andy: Both businesses experienced solid increases in volume, but were offset by price declines.
Andy: Net sales were $747 million down 8% year over year total gross profit was $126 million and gross.
Andy: Margin was 16, 8% down 40 basis points from the prior period.
Andy: As we've noted in previous calls our first and second quarter 2024 results for specialty products reflected an estimated net benefit for import duty related matters incurred in prior periods.
Andy: During the third quarter of 2024, the estimate was updated resulting in additional net benefit of $3 5 million.
Andy: More details on these matters are available in our 10-Q.
Andy: SG&A was $92 million up $1 million from last year's third quarter. The increase was mainly due to higher technology expenses associated with our digital transformation, partially offset by lower fleet related logistics costs.
Andy: Net income was $16 million or $1 87 per share.
Andy: During the quarter, we recognized a $2 $2 million adjustment of the settlement charge recorded in the fourth quarter of 2023 to settle our defined benefit pension plan.
Andy: This was partially offset by the estimated net losses at our Erwin Tennessee branch that was damaged by Hurricane Helene that Jim mentioned earlier.
Andy: Adjusted net income was $16 $7 million or $1 95 per share.
Andy: Tax expense for the third quarter was $5 $6 million or 26%.
For the fourth quarter of 2024, we anticipate our tax rate to be in the range of 24% to 28%.
Andy: Adjusted EBITDA was $36 6 million or four 9% of net sales and includes the favorable duty related matters.
Andy: Not including these matters adjusted EBITDA would have been $33 million or four 4% of net sales.
Andy: Turning now to third quarter results for specialty products net sales were $519 million down 7% year over year. This decline was driven by price deflation across specialty products as Sam mentioned, given current market conditions, we expect to see improved pricing dynamics in 2025, but likely.
Andy: Not until the second half of the year.
Andy: Gross profit from specialty product sales was $100 million down.
Andy: Down 9% year over year.
Andy: <unk> gross margin was 19, 4% down 40 basis points from last year, primarily due to price deflation largely offset by the duty related items and increases in volume now.
Not including this benefit specialty gross margins were still solid at 18, 7% in the third quarter in line with our expectations through the first four weeks of Q4 specialty product gross margin wasn't a range of 18% to 19% with sequential daily sales volumes slightly lower when compared to the third.
Andy: <unk> 2024, and higher than the equivalent period last year.
Andy: Now moving onto structural products net sales were $228 million down 9% compared to the prior year period. This decrease was primarily due to lower lumber and panel pricing when compared to last year's levels.
Andy: Gross profit from structural products was $25 million, a decrease of 11% year over year and structural gross margin was 11% down 30 basis points from the same period last year.
Andy: <unk> benefited from a $2 4 million inventory write down at the end of the second quarter of 2024 due to market conditions, and the panel and lumber markets, which resulted in lower cost of products sold in the third quarter when the associated inventory was sold.
Andy: In the third quarter of 2024 average lumber prices were about $385 per thousand board feet and panel prices were about $515 per thousand square feet, a 12% decrease and 19% decrease respectively compared to the averages in the third quarter of last year.
Andy: Sequentially, comparing the third quarter of 2024 with the second quarter lumber prices were roughly flat in panel prices were down 14%.
Andy: Through the first four weeks of Q4 structural products gross margin was in the range of 9% to 10% with daily sales volumes, improving slightly from the third quarter.
Andy: Looking now at our balance sheet, our liquidity remains excellent due to the strong execution of our strategic initiatives and effective management of working capital at the end of the quarter cash on hand was $526 million, an increase of $35 million from Q2, largely due to normal seasonal patterns in working capital when.
Andy: Our cash on hand, and Undrawn revolver capacity of $346 million.
Andy: Available liquidity was approximately $873 million at the end of the quarter.
Andy: Total debt, excluding our real property financing leases was $351 million and net debt was a negative $176 million or net leverage ratio was a negative one two times given our positive net cash position and we have no material outstanding debt maturities until 2020.
Andy: Nine.
Andy: Our balance sheet and liquidity remains strong and when combined with our solid EBITDA generation, we are well positioned to support our strategic initiatives, including our digital transformation efforts. These include investments in our highest return prospects such as organic and inorganic growth initiatives and opportunistic share repurchases.
Now moving on to working capital and free cash flow during the third quarter, we generated operating cash flow was $62 million and free cash flow of $54 million.
Andy: Primarily driven by net income and improved working capital.
Andy: Turning now to capital allocation during the quarter, we spent $8 million in Capex, primarily tied to our digital investments and to improve our distribution facilities for.
Andy: For 2024, we expect capital investments to be slightly lower than the $40 million previously anticipated. The investments will continue to be focused on facility improvements further upgrades to our fleet and the technology improvements previously discussed as a reminder, our digital investments while also have at least a $5 million in.
Andy: Packed on operating expenses this year related to software licenses as well as increased head count associated with the initiative.
Speaker Change: As Sam mentioned during the third quarter, we repurchased $15 million of stock and we had $61 million of repurchases remaining at quarter end on our current share repurchase authorization. We are committed to our share repurchase efforts and plan to remain opportunistic in the market are.
Speaker Change: Our guiding principles for capital allocation remain consistent we intend to maintain a strong balance sheet, which enables us to invest in our business through economic cycles expand our geographic footprint and pursue a disciplined M&A strategy as well as return capital to shareholders. We also plan to maintain our long term net leverage ratio.
Speaker Change: So a two times or less.
Speaker Change: Overall, we are pleased with our volumes and gross margins in both specialty and structural products price deflation continued to impact results and we are optimistic that pricing will improve along with the overall housing environment in 2025, our strong balance sheet and our liquidity positions us well to execute on our strategy in <unk>.
Speaker Change: <unk> to Opportunistically return capital to shareholders, operator, we will now take questions.
Speaker Change: And thank you we will now begin the question and answer session.
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Speaker Change: Again, it is star one if you would like to join the queue.
Speaker Change: And your first question comes from Jeffrey Stevenson with loop capital. Your line is open.
Jeffrey Stevenson: Hi, Thanks for taking my questions today, and congrats on a nice quarter.
So the positive volume growth in your specialty products business was encouraging those see during the quarter and just wondering what the primary driver of the volume improvement in categories, such as AWP and Millwork was that you cited was at healthy levels of new housing completions seasonality benefits or something else that you would say.
Speaker Change: Yes. Thanks for the question, Jeff. So we have a we have a strong focus.
As I mentioned earlier around clarity along with that focus on our share gain strategy, which which really is tied to Nash.
Speaker Change: National accounts in multifamily and driving product line expansion, along with branded products and geographic new geographic territories.
Speaker Change: Along with launches of new products as it relates to AWP and millwork as we think about those channels, whether it be multifamily our national accounts and in particular.
Speaker Change: Those accounts that allow us to truly take advantage of our scale, we can despite the macroeconomic forces or the low demand and excess supply.
Speaker Change: We can we can absolutely drive incremental or better than market volumes with respect to AWP and no work.
Speaker Change: Because on a year over year basis that focus for instance on multifamily is allowing us to.
To improve volumes in those two categories. There is also some seasonal benefit as well.
Speaker Change: Got it that's great to hear.
Speaker Change: And then I was just wondering if you've seen any sequential moderation of price declines on these key specialty category use AWP and millwork, which have seen.
Speaker Change: The kind of year over year deflation this year and do you believe the price seen in lease categories could stabilize moving forward, especially if we begin to see some improvement in single family housing starts in the 2025.
Speaker Change: Yes, Jeff Great question, what I would say is as we think about sequentially for pricing.
Speaker Change: In specialty we are seeing an improving the first four weeks of Q4, so it's up low single digits and Thats what gives us the confidence that when we talk about price improvement in the second half of next year.
Speaker Change: What gives us that confidence we're probably was in the back half of next year, we will see the year over year improvement in pricing, but yes, it's a slight sequential improvement, which is which is great to see.
Speaker Change: So that's great and then.
We see a rebound on structural margins as lumber and OSB prices rebounded off July lows.
Speaker Change: We believe industry supply demand dynamics have improved in both categories over the last 90 days.
Speaker Change: If we do start to see some improvement on the single family side do you think prices could continue to move higher moving forward.
Just given that are at or below normalized levels right now.
Speaker Change: Yes, so what I would say is if we.
Speaker Change: Like a reminder, in second quarter, there was massive deflation that we saw in the structural market, where Penn on pricing was down pretty meaningfully.
Speaker Change: And as a result, the channel was pretty heavy as it relates to the inventory and so.
Speaker Change: Second quarter, I'd say, a structural margins were artificially low because we had a reserve taken so it was about seven 9% and then that reserve flipped in Q3 and was 11, but as we think about for the year for year to date its about nine 8%.
What that means is that we saw probably an imbalance probably in the second quarter with inventory and then probably more of a normalization I would say with inventory here in the third quarter. So we feel good about where.
Speaker Change: Manufacturers are in the supply and where the channels are and as a reminder for US we always keep low.
Speaker Change: Inventory in terms of a low 20 day supply of structural so we're not caught offsides, but we feel good about where the industry sits right now.
Speaker Change: Great. Thank you.
Speaker Change: And your next question comes from Greg Palm with Craig Hallum Capital Group. Your line is open.
Greg Palm: Yes, thanks, good morning.
Greg Palm: Everybody I was wondering if you can maybe just update us on the competitive landscape a bit.
Greg Palm: Sure.
Greg Palm: As we mentioned share gains, but what are you seeing out in the market. What are you seeing from competitors, maybe areas, specifically, where youre seeing some share gains and I guess kind of going forward.
Greg Palm: Or areas that you're most hopeful for in terms of potential share gains going forward that would be helpful as well.
Speaker Change: Yes, so I think all the all the regions we have the east has been pretty pretty solid.
Speaker Change: Some markets have been hit harder than others I E. The west and the South all of which I think.
Speaker Change: Body in building products is experiencing.
Speaker Change: But at the end of the day as we think about what we're focused on whether it's deanna take take.
Multifamily commercial and really driving those sales are going into the national accounts, and really leveraging our scale to help them or support their scalable.
Speaker Change: Sales activities is what's helping us manage through the headwinds and pick up incremental business. Another differentiator I would say is for example in millwork in AWP. Despite the deflationary impacts we're seeing by having private label products. We can off we can actually weather the storms and a more competitive.
Speaker Change: Manner than I think some of the other to other players in our in our space and as a result use that to convert business and pick up share.
Speaker Change: There are also some other strategies that we've employed whether it be in the context of pull through business with with builders and how they go about how they go about.
Speaker Change: Managing through their inventory and cycling through housing completions.
Speaker Change: It relates to our how we how we develop programs in the context of pricing and rebates that allow us to.
Speaker Change: It gives us a competitive advantage in order to get in terms of gaining share. Another thing that we're doing to combat. These headwinds is just leaning into direct sales. Although the margins are lower there is obviously zero to low cost to serve and so it is EBITDA accretive so long as the other elements of our strategy are playing out which they are.
Speaker Change: In terms of what I'm seeing in the market, obviously, no matter, which customer I talked to you in whatever region I'm in.
Speaker Change: There is a general sense of uncertainty that continues.
Speaker Change: Again until we have the sustained rate cuts.
Speaker Change: That will bring those mortgage rates down to the 20 year averages.
Speaker Change: And then you start seeing the sales velocity with existing homes, which which we might be seeing some signs of life, but theyre still at 30 year lows.
Speaker Change: There is a again there'll be it there is a general sense of uncertainty and there is there are no supply chain constraints as we all know there's meaningful excess capacity in the market combined with the softness in the market.
Speaker Change: So it's incumbent upon us to basically grabbed the levers at our disposal in order to drive those incremental those incremental sales and drive profitable sales.
Speaker Change: Yes.
Speaker Change: I know everybody's kind of waiting.
Speaker Change: On a move lower from rates and I know your business or I guess, two steppers, specifically are may be more exposed, but what happens if we don't get those rate reductions in the housing market shortages keeps chugging along doing what it's been doing the big production builders keep taking share versus the smaller players I mean does that change your strategy.
Speaker Change: <unk> at all.
Speaker Change: What are your focus on growth or allocating resources et cetera.
Speaker Change: So, although we haven't talked about M&A and greenfield but of.
Speaker Change: Of the two an area that we're focused on is greenfield, we have a robust pipeline of potential M&A deals.
Speaker Change: But just given our given our our multiple in and where the where that pricing is on on those deals. We continue to believe that reinvesting in the business and returning capital to shareholders via share buybacks is a better play it makes more sense, but on the Greenfield side, we will be announcing one soon and then we have.
Speaker Change: Our roadmap.
To enter into new markets and get closer to the customer that will help us grow the business, but if you take a step back and you look at the market dynamics.
Speaker Change: Basically we need $1 8 million homes per year over the next decade in order to meet existing supply and forecast, which as I said earlier doesn't even take into account immigration forecasting and the only way to build.
Speaker Change: Build enough fast enough quite.
Speaker Change: Quite frankly or even get through the dynamics of a.
Speaker Change: Single family housing with respect to within current zoning requirements.
Speaker Change: Is to really lean into commercial and multifamily, which is something that we're doing we built up new capacity to support that business across the enterprise.
Speaker Change: And then at the same time as we think about our scale how can we how can we leverage the 60 distribution center footprint as it sits today in order to provide a consistent service offering across across the entire <unk>.
Speaker Change: 50 states and over time, we'll continue to greenfield, but if we can if we can.
Speaker Change: Stay focused on these new channel opportunities that we haven't historically been focused on then I think that we will continue to gain share no matter the headwinds at the same time, the transactional business and really leaning into the night fights that we're dealing with on a day to day basis, whether it be transactional or direct sale.
Speaker Change: <unk>.
Speaker Change: All of which are our EBITDA accretive in and clearly support the profitable sales strategy. So even though some of the smaller custom homebuilders are sitting on the sidelines today.
Through it all of the above approach via that those points I made earlier around product expansion geographic expansion.
Even within key suppliers moving moving beyond what our historical SKU.
Speaker Change: Mix has been I mean, all of these things that really helped us gain more share and we're very focused on these.
Speaker Change: Key things five years, four or five key things of combined with the channel approach.
Speaker Change: So thats, how we will ultimately continue to gain share no matter the market headwinds and the and of course the underlying demographics.
Speaker Change: Market dynamics.
Speaker Change: Port the long term thesis.
Speaker Change: Yeah makes sense I appreciate all the insights.
Speaker Change: And your next question comes from Reuben Garner with the benchmark Company. Your line is open.
Reuben Garner: Thank you and good morning, everybody.
Speaker Change: Good morning Reuben.
Reuben Garner: Just I'll start well a couple of clarification questions. The first is on the structural margin. So I think after last quarter, you said that the start of the third quarter.
Reuben Garner: Margins were kind of in the 8% to 9% range and clearly they came in much higher and that category was that.
Reuben Garner: And I think you also mentioned maybe a reversal of the you took in the second quarter.
Reuben Garner: Can you just talk about how that played out in the quarter like did lumber just bottoming midway through the quarter allow for you to have above normal margins late in the quarter and Thats, how you net to 11% or was there something one time in that.
Reuben Garner: And that <unk> number yes.
Reuben Garner: Yes, Ruben what happened was.
Reuben Garner: We took.
Reuben Garner: Our reserve at about a $2 5 million reserves $2 4 million reserve in the second quarter and that's what brought our I'd say, our structural rates down to about seven 9%. What happened is as we sold that inventory in Q3 that reserve flipped and so.
Reuben Garner: Now it goes to my point, we're even though.
Reuben Garner: On face value to 11%.
Reuben Garner: In Q3 for a structural margins.
Reuben Garner: The normalized rate would be more of the year to date, which would be in the high nines like nine, 8%, which that 9% which is right in line with our.
Reuben Garner: Our expectation for the for Q4 in that 9% to 10%.
Speaker Change: Okay and do you feel like you have had to walk away from any business or leave any business out there on the structural side to maintain these kind of margins we'd hurt in the quarter the things were fairly competitive.
Speaker Change: Lumber.
Speaker Change: Was bottoming out kind of middle way through the quarter.
Speaker Change: Yes, I'll take the first part of that and Andy will follow ups. So.
Speaker Change: So look I mean, let's start with the the underlying thesis foundational approach, we have which is very principled around inventory management and so we manage very optimal levels of structural inventory across the enterprise and that in and of itself is what allows us.
Speaker Change: To protect the balance sheet and maintain the margins. We do we don't walk away from business, but at the same time, we're not we're not building. It so they will come and we do that in a very disciplined way with respect to every product category with structural in particular, having heavy focus just in terms of turn days and days days of inventory.
Speaker Change: On hand, et cetera, and so I would.
Speaker Change: I would think about it from that perspective as opposed to walking away from business, but in no way shape or form or walking away from business. We operate in the markets we have.
Speaker Change: Based on current competitive market dynamics, and then manage through the inventory in a very responsible disciplined way that not only supports our customers, but it puts us in a position to maintain healthy structural margins, which ultimately protect the balance sheet.
Speaker Change: Yes.
Speaker Change: Just to add to that as we talk about how.
Speaker Change: Our commentary net sales were down nine and that includes.
Speaker Change: Price deflation of.
Speaker Change: 12% number 19% and panels.
Speaker Change: As a result, almost do the opposite we had really high volume. So we were.
High single digits in volume for the quarter and structural so that clearly shows that we're not walking away.
Speaker Change: What the deflationary issue I'd say right now but.
Speaker Change: Volumes being up high single digits in that categories was good result for the quarter.
Speaker Change: Yes, it really isn't that going to be my next question. So it sounds like on both sides of the business you had better than expected or better than market volume just to be clear do you think some of this is is.
Speaker Change: Kind of a recovery in your <unk>.
Speaker Change: Customers with the smaller builders in the.
Speaker Change: Small builders and some of the R&R markets, you're exposed to or do you feel that it's just the initiatives that you've put in place to drive share gains.
Speaker Change: I would say.
Speaker Change: Obviously some of it well some of it may be tied to some backend seasonal.
Speaker Change: Seasonal adjustments, but for the most part I believe it strongly correlates with the share gain strategy.
Speaker Change: As you think about the work we're doing to drive, let's say multifamily commercial sales and also even with respect to some of the direct the direct the strategic direct business were doing with respect to certain channels that that in and of itself supports.
Speaker Change: A meaningful part of the structural volume growth. So the point is the point being that despite whatever the market conditions are as it relates to small and custom homebuilders being on the sidelines.
Speaker Change: And big builders picking up more market share there is still there.
Speaker Change: There are certain strategies, we can employ which we are doing in order to gain share key business service our customers.
Speaker Change: And you combine that with our disciplined approach to inventory management, we're able to maintain margins and grow volume.
Speaker Change: Despite deflationary deflation.
Speaker Change: Okay, great I'm going to sneak one more in if that's alright.
Speaker Change: And inventory management.
Speaker Change: We've seen some.
Speaker Change: Categories.
The outdoor living as an example at the entry level, we've heard Destocking at distribution I know you guys run structural side pretty tight how are you thinking about inventory in some of your.
Speaker Change: Your growth specialty categories, as we head into the seasonally weaker part of the year.
Speaker Change: Yes, so look I mean, we have five key specialty product categories and outdoor living being one of them.
Speaker Change: The significant elements of our long term strategy and so our goal is to manage our inventory to very specific turned a targets.
Speaker Change: And to support our customers based on the forecasting we do we do have and as I think about any destocking that may be happening on the part of customers.
Speaker Change: That ultimately.
Speaker Change: <unk> supports our business right. So the less inventory they carry the more we need to carry in order to meet their demands and support again from a working capital management perspective cash flow perspective for the customer and and then.
Speaker Change: Obviously, the adjusted time.
Speaker Change: Characteristics just in time benefits that we can provide.
Speaker Change: Really support support that so at the at the end of the day, we're not we're not necessarily seeing.
Speaker Change: Anything similar to what we saw last year as people were <unk>.
Destocking and sales started to drop off from a two step distribution, because we haven't seen a commensurate or an equivalent buildup in inventory like you had post pandemic.
Speaker Change: I think that again the fundamentals are such today that there is a valuable role to play for two step distribution and outdoor living whether it be railing. Our decade is a very flatbed friendly two step distribution product, where we color on assortment, where we carry an assortment of colors to be able to support our customers.
Speaker Change: In that specific space and I think over time, whether it be the east or the west I mean outdoor living tends to be a great R&R friendly product and as interest rates come down to those HELOC rates come down you could see you could see people going from concrete patios to death.
Speaker Change: Decks or kind of play this out multifamily commercial that's a very good a good area for us to focus.
Speaker Change: Outdoor living products on there isn't a multifamily development you go buy or even a commercial hotel property that doesn't have outdoor decks that need railing for exit for instance, and that happens to be one of the areas, where we've had some really.
Great sales and successful opportunities that we've been able to capitalize on so.
Speaker Change: So continue to be a focus.
Speaker Change: Great. Thanks for the detail guys. Congrats again on the strong results and good luck.
Speaker Change: Thanks Steven.
Speaker Change: And your next question comes from Kurt Yinger with D. A Davidson your line is open.
Speaker Change: Great. Thanks, and good morning, everyone.
Kurt Yinger: In terms of the specialty deflation how much of that would you say is kind of strictly manufacturer list price factors versus maybe competitive dynamics and then as we think sequentially. We know AWP is continuing to be pretty soft here any other categories that stand out.
Speaker Change: Where.
Versus Q2, or the first half pricing, maybe getting a little bit more challenging.
Speaker Change: Yes, So let me talk about the.
Deflation in terms of where we're seeing the improvement in let's say pockets of.
Speaker Change: We see some optimism so we think on a sequential basis.
Speaker Change: Four.
Where we sit today.
Speaker Change: In the fourth quarter.
Speaker Change: It's encouraging that millwork is one sort of bright sign that we're seeing in terms of where we're seeing some price.
Speaker Change: Inflation and that's actually in our private label product largely in our private label product within within millwork.
Speaker Change: When I think about the year over year sort of.
Speaker Change: Challenges that we've had in deflation I would say, it's really been primarily AWP and millwork, particularly in the third quarter, but thats as Jim mentioned, we had really strong volumes there. So.
Speaker Change: I would say as we as we look out.
Speaker Change: For the next.
Speaker Change: I'd say for the back back half of next year, I would expect improvement and really AWP millwork and to a degree some of the specialty lumber and panels.
Speaker Change: Areas.
Speaker Change: Martha.
Speaker Change: Sorry go ahead I'm sorry.
Speaker Change: No no no go ahead.
Speaker Change: No I was just going to follow up on the specialty.
Speaker Change: Maybe some of those products and specialty is still tied to commodity pricing broadly is there any way to think about what.
Speaker Change: Yes.
Speaker Change: The carryover headwinds from lumber and panel prices has been within the specialty segment. This year.
Speaker Change: Yes.
Speaker Change: But some of that and I would say that's the reason why I would say that maybe our expectation of where we originally we said that we thought we'd see price increases in the beginning of next year in terms of where we'd see sort of price inflation and now maybe back up a quarter or two.
Speaker Change: Largely attributed to that massive deflation that we saw in the second quarter from mid may to the end of June.
Speaker Change: We're seeing that sort of come through.
Speaker Change: P&L. So we're really on one side, it's really great that we have had really strong volumes in Q3, but I'd say the deflation has been more than probably we expected.
Speaker Change: Maybe six months ago nine months ago, but when we look sequentially. We're encouraged as we look at Q4 in terms of seeing some of these modest price increases.
Speaker Change: We expect to have improvement here in the back half of next year, which Jim and I alluded to.
Speaker Change: Yes, and then from a market dynamic standpoint, obviously.
Speaker Change: What has happened post pandemic there was a lot of new capacity that came came online. So there is adequate supply in the marketplace and youre seeing a lot of interesting things play out whether it be mills being shut down or curtailments happening.
Speaker Change: Because theres not enough demand due to the soft housing market.
Speaker Change: And obviously.
Speaker Change: Soft repair and remodel market as well at the same time, when you ask about AWP and millwork, whether it be the channel strategy. So there are certain things we're focused on that are driving.
Speaker Change: Millwork and AWP sales along with some of the other product categories that are very friendly to those specific channels.
Speaker Change: Theres also been some substitution in the marketplace due to market dynamics, where folks have shifted from let's say truss trusses to AWP and we have taken advantage of some of those market dynamics to drive AWP sales, which I feel like given our private label product, we can do more so competitively than <unk>.
Speaker Change: Some of the other folks.
And Thats helpful. We've also invested in certain markets in in equipment that allows us to for example pre cut.
Speaker Change: <unk> to allow for more efficient.
Speaker Change: Installation of the AWP and thus allow for example, HVAC.
Speaker Change: Folks to run duct work through through.
Speaker Change: Through the AWP again that helps reduce labor costs are a part of.
Speaker Change: The ultimate end user and so on so they are they are very specific things we're doing to drive these volumes given current market dynamics.
Speaker Change: We will we will double down on those as as the markets continue to evolve.
Speaker Change: Got it okay. Appreciate the color there and.
Speaker Change: On the product line expansions and the new geographies I mean, it does look like that's yielding benefits how much opportunity kind of across the footprint remains there.
Speaker Change: And if we were to think about it from a product category perspective are there any in particular, where you think youre still.
Speaker Change: Relatively under index in terms of kind of geographic coverage.
Speaker Change: Yes, there are definitely markets.
Speaker Change: So the answer to that is yes.
Speaker Change: That's not a bad thing because there's a lot of opportunity for us to grow in those markets, where we're underpenetrated, but as we continue to move forward. We are taking very specific actions to ensure optimal stocking positions across all the key categories in all the markets. So that we can provide.
Our full service proposition no matter the market we're in.
Speaker Change: So again to take full advantage of our scale for.
Speaker Change: For example earlier this summer we rolled out a new product and it was a great exercise and how powerful this can be we launched a new product with our great supplier, Georgia Pacific and.
Speaker Change: Ensure there would be a stocking position in all locate and substantially all locations by a certain date, which helped fuel.
Speaker Change: The channel strategy as it as it related to that product and where it would support our customers best and that that bore a fair amount of fruits of that strategy along with.
Speaker Change: Some of the channel strategy as we have we will continue to fuel our our strategic priorities or support the strategic priorities.
Speaker Change: Right, Okay that makes sense and then just lastly.
It sounds like quarter to date daily sales volumes up versus Q3.
Speaker Change: Presumably given typical seasonality that would be up year over year as well is that a fair statement in terms of what you've seen thus far through October.
Speaker Change: Yes, that's a fair statement I would say when you think about it year over year volumes are.
Speaker Change: Up mid single in both categories, which is good but don't read too much into the first four weeks because of the typical seasonal pattern, where our second and third quarter generally our biggest quarters and then Q4 and Q1 are generally the softest, but.
Speaker Change: <unk> for the as we sit here today first four weeks volumes were up mid single, which is good.
Speaker Change: Year over year perfect.
Speaker Change: Thanks for the details.
Kurt Yinger: Thanks Kurt.
Speaker Change: And that concludes our question and answer session I will now turn the conference back over to Tom Morabito for closing remarks.
Tom Morabito: Thanks, Eddie Thank you again for joining us today, and we look forward to speaking with you in February as we share our fourth quarter and full year 2020 for our results.
Speaker Change: And ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.
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