Q2 2019 Earnings Call
If he would like to ask a question. During this time simply play stores. The number one on your telephone keypad.
If you would like to withdraw your question press the pound key. Thank you I would now to turn the call over to your host Mary malls director of Investor Relations. Please go ahead.
Thank you Adrian good morning, everyone. We appreciate you joining us for the Bluelinx 2019 second quarter earnings Conference call. The earnings release can be found in the investors section of our company's website at Www Dot Bluelinx co dot com.
In addition at points throughout our commentary will be utilizing an investor presentation. This presentation is also available on our website.
Joining us on the call today are Mitch Lewis, Chief Executive Officer, and Susan Ofarrell, Chief Financial Officer.
I'll also remind you that this presentation includes forward looking statements, including statements about our future operations and financial performance.
These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those provided including but not limited to those identified in our press release and discussed in our filings with the Securities and Exchange Commission.
Forward looking statements speak only as of the date of this presentation and we undertake no obligation to revise them in light of new information. Today's presentation. Also includes references to non-GAAP financial measures and with that I'll turn it over to Matt Thanks, Mary and good morning.
I would like to begin our call. This morning, with an overview of our operating performance for the quarter and the first half of the year. Susan will then review our financial performance and I will finish my remarks with a discussion on our view for the remainder of 2019, the macro economic factors, we are seeing throughout our industry and they're likely impact of Bluelinx.
We're pleased to confirm that the integration of Cedar Creek has been substantially completed we achieved this key milestone ahead of schedule and well under our original budget.
This was a result of our team's hard work over the past 15 months to combine two industry leaders. This challenging undertaking required a consolidation of systems and processes.
An assessment and plan to address numerous overlapping markets and last but certainly not least the merging of two employee bases and cultures.
I'm proud of the dedicated commitment by our associates to achieved a significant milestone.
And we feel that the organization is well positioned to build on our strong market presence east of the Rockies.
We've begun to see trends, where our combined business platform is now benefiting bluelinx and feel this will materialize further as our integration aktiv activities season over time.
Going forward, we will communicate to investors about our business as a fully integrated entity.
As we discussed during our first quarter call, we understood that we would be facing tough year over year comparisons in the second quarter due to the significantly higher commodity wood product prices that occurred in the second quarter of 2018.
The year over year comparison was further amplified as second quarter 2019 commodity wood based prices actually declined during the quarter.
For the second quarter of 2019 net sales of $706 million were down approximately $187 million from last year.
We estimate that approximately 40% of the year over year quarterly decline in net sales was due to the deflation in commodity panel and lumber prices. This year over year deflationary comparison should moderate as we head into the end of the summer season.
Current general macroeconomic indicators and demographic trends, including the federal reserve's reduction in interest rates last week point to what should be a strengthening housing market in the back half of the year.
These factors however did not help single family housing starts in the second quarter, which were down 6.2% compared to 2018 levels.
We estimate that the lower than expected number of single family housing starts accounted for approximately 30% of the difference and year over year net sales that we experienced.
Transaction related dis synergies led to the balance of the decreased volumes in the second quarter.
We noted on the first quarter called it a legacy Cedar Creek, citing supplier moved at siding business for Bluelinx, which accounted for approximately 20% of the reduction in net sales that we experienced in the second quarter.
To help mitigate this impact we are pleased to have sourced siding products from James Hardie during the second quarter in certain markets.
And also have expanded our distribution network and commitment to Laura.
Miratec ply gem morial, another premium, citing an accessory manufacturers.
Well, we will continue to develop and expand these relationships.
These relationships this effort will take some time to ramp up.
Finally in certain territories, where we had overlapping legacy facilities following the merger.
Our sales volumes continued to be temporarily affected in the second quarter.
Our teams have been working diligently to improve our operating performance as well as the level of our customer service at these locations over the last several months both of which have improved considerably.
We recently established a center for operational excellence at Bluelinx to augment our local facilities performance. We view the operational challenges we experienced in these markets. During the first half of the year as transitory in nature and believe that we are now in a position to begin to regain the ground. We lost during our integration of these locations.
I am pleased to report Bluelinx was able to drive gross margin improvement in the second quarter, which was led by our specialty products category. We validated key components of our merger rationale as we generated measurable gains from procurement efficiencies.
We also continue to assess our cost structure, and we were able to reduce or eliminate additional cost as a result in the second quarter. We maintained the SGN a cost level that we experienced in the first quarter of 2019, even though our sales increased by over 10% during the second quarter, which highlights the opportunity we have to leverage our operating costs as the business expands.
We're also pleased to have made significant progress in our debt reduction by executing for real estate transactions in the second quarter.
Well Susan will provide additional details in her remarks. These transactions generated aggregate gross proceeds of $57 million, which were used to pay down our term loan and revolving credit facility.
We will continue to evaluate similar transactions to potentially augment the operational de leveraging we expect from our business.
Combination with Cedar Creek made Bluelinx, one of the largest building products distributors east of the Rockies possessing one of the most comprehensive product offerings and a broad geographic footprint.
Well, we undertook this transformative event during an incredibly volatile operating environment the core of our business our product breadth, our service offerings and our position in the marketplace have not changed.
The rationale for this merger still holds true.
Over the past 15 months, we've demonstrated the flexibility of our business model, maintaining a lean operation and ensuring that costs aligned with the level of sales. We are confident that as conditions stabilize and we're optimistic that they will not just stabilize but will improve that blue links will be well positioned to reap the benefits and now I'd like to turn it over to Susan who will provide details on our financial performance.
Thanks, Mitch and good morning, everyone.
I'll briefly review the financial results and then discuss our financial position and for any questions. We welcome investors to take part in the Q and eight following our prepared remarks.
Starting with slide seven net sales were $706 million compared to $893 million in the second quarter last year.
As discussed by Mitch sales were impacted from a softer than expected housing market historical commodity deflation year over year and the short term transaction related sales dis synergies.
Year over year comparisons were particularly challenging this quarter as commodity wood product prices reached their peak in the second quarter 2018, and remain lower than normalized levels in the second quarter of 2019.
We delivered gross profit of $94 million compared to $104 million in the prior year period.
Gross margin improved 170 basis points to 13.3% from 11.6 here present from the prior year period, which included an acquisition related inventory step up charge of approximately $11 million.
For the quarter, we had adjusted EBITDA of $25 million compared to $37 million.
Cash on hand, and excess availability under the ABL ill as of quarter end with approximately $101 million up $9 million from year end 2018, which you provide ample liquidity to meet our working capital and other cash needs.
Debt under our term loan and revolving credit facility was reduced by $113 million over the prior year period and B as we continue to make significant progress on reducing our bank debt.
Moving to slide eight.
In the first half of 2019 net sales totaled $1.3 billion equal to the first half of 2018.
Gross profit was $180 million compared to $159 million in the prior year period.
Gross margin improved by 140 basis points to 13.4% from 11.9% from the prior year period.
The prior year period includes the previously mentioned impact of the acquisition related inventory step up charge of $11 million.
For the six month period, we had adjusted EBITDA of $42 million compared to $45 million in the prior year period.
Moving to slide nine as we look at the second half of the year, we anticipate a continued stabilization in wood based commodity prices.
We do not expect the historical decline and wood based commodity pricing that we experienced in the second half of 2018, we should favorably impact our comparable structural products gross margin.
We faced a peak year over year declines in commodity wood prices in the second quarter of 2019.
The composite lumber index was an average of $540 in the second quarter of 2018, which decreased 36% to an average of $344 in the second quarter 2019.
Composite panels continue to trend the same way running an average of $550 in the second quarter of 2018 compared to an average of $350 per second quarter 2019 also declining 36%.
As we look at slide 10 lumber and panels make up the majority of our structural products and these products such as lumber LSB and plywood tend to be more sensitive to commodity pricing.
Our structural products accounted for approximately 32% of our sales in the second quarter.
The remainder of our sales are in specialty products, such as citing engineered lumber cedar products holding in insulation and specialty products made up approximately 68% of our sales in the second quarter.
We are pleased with the margin expansion, we achieved during the quarter. Despite the challenges from commodity pricing.
In our second quarter overall gross margin rate was 13.3% up 170 basis points.
The prior year period includes the impact of an acquisition related inventory step up charge of $11 million.
Specialty gross margin was 15.9% of 100 basis points over the prior year period. This reflects the benefit of our leadership in wholesale distribution and the purchasing power it affords.
Structural gross margin was 7.7% down 90 basis points from last year.
While this level was impacted by second quarter demand and continued pricing pressure given the recent wood based commodity price product stabilization, we've seen a nice uptick in our structural gross margin rate in July signaling a return towards the second quarter 2018 levels.
Moving to the company's strong de leveraging potential on page 11 debt reduction remains one of our top priorities.
Given our relatively low capital requirements and low working capital financing cost through our ideal bluelinx is well positioned to be able to pay down debt.
We are pleased that on a year over year basis debt reduction under the term loan and revolving credit facility was reduced by $113 million.
Our continued real estate monetization efforts contribute to this significant reduction as we completed four real estate transactions during the quarter.
Gross proceeds from the two sale leasebacks and to outright property sales totaled approximately $57 million and were used to pay down the term loan as well as our revolving credit facility.
Following the closing of the four transactions Bluelinx still owns 29 properties appraised at approximately $115 million.
We are actively marketing the five remaining properties that we exited as part of the Cedar Creek transaction.
These properties have an estimated aggregate market value of approximately $13 million and proceeds from the sales would go to further debt reduction.
Bluelinx also retains federal and wealth now totaling approximately $53 million that should help us optimize the tax impact of future earnings as well as additional income from selling real estate.
The cash flow characteristics of Bluelinx continue to provide an excellent platform to generate cash and to reduce debt.
Slide 12 indicates our current estimated uses of cash on an annual basis.
These costs, including interest finance lease payments capital expenditures state taxes, and a few other small items total about $70 million annually.
And now I'll turn the call back over to Mitch.
Thanks, Susan.
We would like to provide additional color today on our expectations for the second half of 2019 and into 2020 and beyond.
Looking ahead to the second half of the year as Susan mentioned, we have recently seen improvement in the gross margins of our structural wood based products.
Well, we acknowledge that we certainly cannot predict commodity prices, we do believe that the historical decline we experienced over the last 12 months is not likely to repeat itself in the near term.
We expect that our structural gross margins for the remainder of the year are likely to approach the more normalized averages we saw through 2016 and 2017.
The gross margins we are seeing early in the third quarter support this view.
We also anticipate that the improved gross margin we experienced in specialty products in the second quarter will likely continue through the rest of the year.
The good news is that even if we conservatively assume that single family housing starts will be flat for the remainder of 2019 and that we do not regain any of the dis synergies we've experienced this year until 2020.
As a result of these gross margin improvements, we still anticipate a stronger EBITDA performance in the second half of the year relative to the first half. In addition, we also expect to see efficiency gains in the second half of the year, adding an additional $5 million to $8 million and operational cost savings when compared to the first half of 2019.
As we look ahead to 2020 and beyond we remain focused on the long term opportunity bluelinx affords its stakeholders.
Weve challenged our sales teams to grow our revenues from current levels by at least 10% in 2020 and another 10% in 2021.
This growth based on our operating leverage should continue to enhance our EBITDA and cash flow.
We believe this growth is an achievable target in light of our consolidated strength and the early dis synergies that have occurred.
We also expect to receive additional assistance as our overall markets improve from current levels.
Finally, our EBITDA should be further enhanced as we are confident that there remain additional cost saving opportunities that we intend to realize from logistics optimization expense rationalization and the continued utilization of the advantage that our combined business platform affords us.
To be clear.
While the team made good progress we are simply not satisfied with our performance in the second quarter. We can we will do better.
We do believe that the second quarter will prove to have been an inflection point for our company that the hard work, we have done and remain committed to do have set the stage for significant value creation for bluelinx in the years ahead.
We plan to visit with investors in the coming months at both Investor conferences and on road shows and hope to speak with several of you before we report the next quarter.
And with that Adrian we'd now like to open it up for any questions that we may have.
At this time I would like to.
Remind everyone in order to ask a question press Star then the number one that is star one for question well pause for just a moment to compile the queue any rough.
Your first question comes from the line of Alex Rygiel.
Thank you good morning, and congratulations on your debt reduction actions in the completion of the Cedar Creek integrations.
Great. Thank you Alex.
Couple of questions.
First.
You're currently marketing five properties valued at $13 million, but you've got a total of 29 properties with a total value of 115 million.
Have you started to do some work on additional properties over and above the five that are currently being marketed.
In any way you could kind of bracket what that opportunity is maybe in 2020 for further sales.
So we definitely have begun looking at alternatives that we have obviously, we've gotten pretty good at sale leasebacks on properties in areas that we anticipate staying for a long period of time. So we are having some dialogue about that.
We have not right now that are not in a position right now to to let you know what that actual gross amount potentially could be.
In 2020.
Fair enough.
And then.
It's exciting that you've completed the integration and I suspect you're going to.
At some point sort of switch gears from a cost cutting organisation to sales in.
Market share and regain market share kind of organization.
At what point do you think that kind of switch plays out is it sort of happening today or should it happen maybe in early 2020.
Yes, so we actually kind of turned the page a couple of weeks ago. We had in the last six weeks or so we've had the senior regional Vice Presidents and senior executive leadership team together to talk about moving forward from a share gain perspective in the last couple of weeks, we had 50 plus of our.
Sales management leaders, our general managers come together in Atlanta, and spent two and a half days.
Talking about opportunities that we have locally and on a consolidated basis to grow the topline in the business and establishing a clear cut goal deployment execution plans by location to help drive the topline in the business. So.
Organizationally, we've turned that page, we're focusing now on the business going forward, obviously, we will continue to.
Emphasize opportunities that we have from an efficiency perspective.
But as we look at.
The time it takes to start realizing this year.
And enhancements to the organization it will take some time, that's why we talk about a.
Hey, a growth of 10%.
In 2020, and also talk about what we believe to be strong characteristics of the business. Even if we don't grow in the back half of this year, which of course is not what our target is we will challenge the organization to continue to grow.
Obviously your opportunities for organic growth a pretty significant.
But longer term, obviously additional M&A opportunities I suspect are very fruitful.
How should we think about M&A in your future I suspect it's more of a later 2020 event, but.
If you comment on that and is there any possibility of M&A that actually.
Term the wholesale distribution channel is too fragmented.
That there will be over the next several years less competitors in the marketplace and we believe we will be one of the strongest if not the strongest.
Supplier wholesale distribution at that time, so it's clearly on our radar we want to be very thoughtful about incremental capital coming into the to the system through debt or otherwise to pay for acquisitions and right. Now we clearly have the organization to continue to focus on on the debt reduction that we have.
Thank you very much.
Okay. Thank you.
Again, if you would like to ask a question press Star and then number one that is 21 for your question. The next question comes from the line of Kyle will you.
Hi, Good morning, and thank you for your time I was hoping you could.
Maybe go back through the second half thought to maybe expand a little bit.
You went through a little bit quick for me to jot It all down.
Okay, I was going back through the expectations for the second half of the year Kyle.
Correct.
Okay, Yes, so I think what we were trying to give got EUR guidance towards is looking at for structural margins gross margins more of.
What we saw in line of 2016 in 2017.
From a specialty perspective, the enhancements that we've seen and that were evidenced in the second quarter of 2019, we expect that to continue at this at a similar level and then we talked about incremental operational efficiencies.
From the first half of another $5 million and that that's making an assumption.
As it relates to the overall.
Sales market being.
Relatively flat.
So what sort of operational leverage could we think about obviously.
Positive starts to pick up in any way.
But is it is there any.
Numbers, you can frame that out with.
Yes, so for sure in the back half of the year that $5 million to $8 million as part of what we expect from an efficiency standpoint as far as I was growing.
The top line of the business.
As you look at the SDMA as a component of the total costs and what that is fixed versus variable.
Perspective, it tends to be depending on timing in quarters in the 50% of those cost range.
And then you can decide and then you should have a nice healthy debate on whether your variable costs are are are all variable. An example would be.
Well you typically think of freight costs as variable on if you have a truck that has 80% utilization and you take it that truck from 80% to 95% utilization that incremental 15% certainly is going to be a lot cheaper. Although it is the variable cost in the first 8% in the trust.
Excellent very helpful. And then one for Susan just with respect to another I don't think the 10-Q is out yet.
On Slide 11, you talked about the a b O with 369 million do you have the.
The book value of the assets that are offset against that you'd be out of the 369.
Well go through I'll get that for you offline, Colorado, we'll share that in some ways to everyone, but the receivables. So if we think about it we've got the receivables and the inventory, but on here for a second.
366 million on inventory and $262 million of receivable. So if we add that together $600.
28 million 630 million or so.
Against that so I mean, it's a nice healthy cushion over and above what we borrow against it.
So really lots of ample room, there over and above.
Great. Thank you very much.
Again, if you would like to ask a question Press Star then the number one that is star one for questions.
We have a follow up question from the line of Alex right now.
Thank you you had some positive comments with regards to margin improvement in July .
I believe it was in your specialty segment could you comment on the overall strength of the business in July relative to maybe trends in April may and June .
Yes, so that the overall enhancement, we think we talked about was that is that we expect both the specialty margins to stay at the level. We saw in Q2, and we're seeing that certainly in July but we are I think specifically talked about the structural margins being in that.
A range of 2016 and 2017 that we saw so we're seeing that again a lot of that has to do with with.
A relative stabilization on commodity prices, we saw a decline again in commodity price prices in the second quarter of <unk>.
2019.
And so what we're experiencing now is not as much.
Predicated on demand, but more of relative stability from underlying cost standpoint, and so just to add a little color to that Alex at the end of July lumber was at 357, which was up about $21 from the end of the quarter and panels was 344 up modestly at $6 and ended the quarter. So as you think about our structural gross margin rate recency of the cost of the last 30 to 60 days changes that gross margin trajectory. So as we reported 7.7% for structural for the second quarter.
With the increase in rates, what we see is certainly an increase in that gross margin rate and again looking back to more historical or.
Levels that we experienced in 2016 and 2017, when we went back and looked at those numbers. They ran anywhere from 8.8% to 9.2% would be kind of fairly typical levels over the course of time and we're certainly enjoying those as we see margins stabilize.
Perfect. Thank you.
Sure.
Again, if you like to ask a question press tightened the number one that is star one for question.
Okay.
That is star one for question.
And there are no further questions well, thanks, Adrian and thank you for your time today and your continued interest in Bluelinx, we certainly look forward to sharing our third quarter results with you in the months ahead have a great day.
This concludes today's call you may now disconnect.