Bluelinx Holdings Inc.

Ladies and gentlemen, thank you for standing by and welcome to Bluelink's third quarter 2020 investor relations call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Thank you. I would now like to hand the conference over to your speaker today, Ms. Mary Mong, investor relations for Bluelink.

Thank you, Jay, and good morning, everyone. We appreciate you joining us for the Bluelinks 2020 Third Quarter Earnings Conference Call. The earnings release is posted in the investor section of our website at www.bluelinksco.com. We will also be referring to a supplementary presentation as we go through the call. Presentation is available on our website as well. Joining us on the call today are Mitch Lewis, Chief Executive Officer, and Kelly Jansen, Chief Financial Officer. Before we get started, I'd like to remind you that this presentation includes forward-looking statements. These statements are subject to risk and uncertainties that could cause our actual results to differ materially from those reflected in the statements. Those risks and uncertainties are described in our earnings release and discussed in our filings with the SEC. Today's presentation also includes references to non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts and the presentation materials, the earnings release, and an investor section of our website. With that, I'll turn the call over to Mitch.

Thanks, Mary, and good morning. While we'll be spending time this morning discussing the business results for Blue Links in the third quarter, I would first like to acknowledge the incredible challenges created by the pandemic across Blue Links, our country, and the world. Its impact has been felt daily by our associates and our extended Blue Links family. And we know we are very fortunate to have had only a very small number of team members and their families infected with the virus. Blue Links will always put the safety and well-being of our associates as our top priority. And we remain deeply appreciative of the hundreds of thousands of first responders across our great nation who continue to put their lives at risk every day to ensure the safety of ours. Before diving into the numbers, I think it's important that we step back and remind everyone of the actions we took beginning in the latter half of 2019, which positioned us to fully benefit from the favorable market conditions that were present during the third quarter. These efforts included investing in a centralized team to drive logistics and operational efficiency across our broad distribution network. targeted initiatives to grow market share, enhancing our partnerships with strategic suppliers, a renewed emphasis in driving growth for our national customers, and focusing on key product categories that offer unique opportunities for growth. These investments paid significant dividends as the operating performance of the business improved considerably, enabling us to provide an even higher level of service to our customers. Additionally, we began to recover market share last year as we worked with our customers and suppliers to add value to the entire supply chain. By the first quarter of 2020, the business had good momentum as a result of these measures. Then in mid-March, we started to feel the impact of the pandemic. I'm proud of the ability of the Blue Links organization to immediately and dramatically react to the resulting market conditions we experienced. In addition to the rigorous safety protocols that we put in place to protect our associates, we established a similar rigor approaching the opportunities to manage and control our working capital and liquidity. We immediately initiated centralized control processes to analyze and manage our purchasing and receivables across our platform, while adding more robust analytical capabilities. And we also doubled up on our efforts to closely assess and manage our pricing across the business. These efforts led to a material improvement in our performance during the second quarter, and we sustained these efforts as market conditions continued to improve. In the third quarter, we enjoyed the impact of all our hard work over the past year. Following the short-lived pandemic-related shock that we saw in the second quarter, the residential housing market has recovered in a remarkable fashion. This improvement, coupled with a historic run-up in wood-based commodity prices, resulted in Blue Links reporting its strongest quarter in the history of our company, with revenue, gross margin, and adjusted EBITDA all significantly increasing compared to last year. For Blue Links, this was a transformational quarter like none we've ever experienced. Our net sales were $871 million, our gross profit was $159 million, and we had a gross margin rate of 18.3 percent, resulting in adjusted EBITDA of $81 million. Our year-to-date adjusted EBITDA through the third quarter was $132 million, and our LTM EBITDA through the third quarter was $143 million. Perhaps even more importantly, we have fundamentally enhanced the liquidity of our company while significantly reducing our annual interest expense. We ended September with excess availability of over $200 million, a level we haven't seen since the robust housing market our country experienced before the Great Recession. In October, we used some of this increased liquidity to further reduce our term loan to $44 million, eliminating the leverage covenant associated with that facility. From a capital structure and leverage perspective, the impact of the third quarter It's simple to explain. We are fundamentally a different company today than we were just four months ago, having brought a new level of financial flexibility into the business. Kelly's going to dive into our numbers in a few minutes, where she'll highlight how strong our third quarter results were in more detail, and also clearly illustrate our current financial strength. And while the quarter was terrific, I think it's also important to highlight the fact that the significant improvement in our profit was primarily driven by our ability to capitalize on a rising wood-based commodity market. We did this by selling structural products inventory that were being sold at prices that were quickly rising above its costs. And in many cases, we were also expanding the margin we typically enjoy. We also continued the improvement in our specialty product gross margins during the third quarter, a trend that has continued unabated over the last year our investment in pricing analytics and training continues to add value as we know commodities by their very nature are cyclical and we were acutely aware that the historic run-up we experienced in the third quarter would ultimately subside in October commodity prices started falling back towards more historical levels which is generating lower structural margins than we experienced in the third quarter the good news is is that we continue to focus on managing our structural inventory levels tightly and have established several mitigation strategies to reduce the impact of a declining commodity price environment. Our mitigation strategies include increasing our levels of consigned inventory, which has less exposure to reduction in market pricing, ensuring purchasing lead times are as short as possible, keeping inventory levels low while continuing to serve our customer base, and closely managing our supply chain to move excess inventory to adjacent locations to minimize inventory risk across our platform. These efforts are making a difference, and we now anticipate that our structural gross margins for the month of October will actually exceed the levels we experienced in the fourth quarter of 2019. While our third quarter was exceptional, what I am most excited about is that we set the stage for fundamental improvements in the business in the months ahead. Today, our number one strategic imperative is organic growth. There are three primary ways in which we intend to achieve this objective. By increasing our national account presence, by focusing on product categories and brands that give Blue Links a competitive advantage, and by identifying market share opportunities at the local level. We have recently invested in senior executive sales leadership to drive our national account presence and take advantage of our scale and geographic footprint, which creates the opportunity to grow our relationship with our national account customers. Additionally, our extensive product assortment and excellent supply chain enables us to enhance our customers' product portfolio by providing additional products that they do not carry at their stores. We've also enhanced our efforts to drive growth with our strategic supplier partners at the national level. Evidence of this effort is the expansion of our distribution footprint for marquee brands and the reinitiation of opportunities that were lost with key suppliers. Prime examples include our recent announcement to drive market share growth with LP SmartSide in the northeastern part of the country. Our expanded relationship with Old Castle's decking product increases in our market share with Huber and adding new markets with Hardy. Another way we are driving top-line growth and where we anticipate having a competitive advantage is through strategic product categories that are wholesale distribution friendly. Great examples of these product categories include our import private label products, our on-center engineered wood products brand, and SKU-intensive product categories like millwork, cedar, and vinyl siding, where we can add value by providing just-in-time inventory to our customer base. We also have significant market share growth opportunity at the local level. We lost market share during the first half of 2019 as we integrated locations from our Cedar Creek acquisition, and our first step to fix that loss was to enhance our service proposition. We've done that. Now we are systematically assessing and developing strategies to get that share back. We've established a rigorous internal control growth process to drive growth initiatives across the company. Examples of recent successes include utilizing products and market expertise to cross-sell in new locations, investing in equipment that provides best-in-class service in local markets, and expanding our teams to grow our expertise and customer relationships where appropriate. We are also relentless in improving our logistics, operational, and administrative efficiency. We're investing in areas such as updating our rolling stock, which includes tractors, trailers, and forklifts. Many investments in modernizing our fleet are immediately cash flow accretive as they replace older models resulting in reduced maintenance costs. In fact, during the third quarter, we entered into $3 million of new leases for replacement tractors and are planning more in the coming months now that we've reduced our capital constraints. There remains significant opportunity to enhancing our operating cost structure as we reengage in route optimization, additional consolidations, and enhance the efficiency of our administrative processes throughout the company through automation and process redesign. This emphasis on improving our operating performance is not merely a reaction to the tumultuous environment we now face. It's being baked into our culture. While we are acutely aware that the pandemic is not behind us and that significant political and social risks are on the horizon, which may negatively impact our business, we've proven that we're up for the challenge. We will continue to assess everything we do to operate in a more efficient manner as we continue to provide industry-leading service to our customers. Before I turn it over to Kelly, I would be remiss if I did not make it clear that our third quarter performance is a testament to the Blue Lynx team and the support of our extended Blue Lynx family. In March, we simply rolled up our sleeves and got it done. Through hard work and determination, we set the stage over the past year to enjoy the quarter we just experienced. The Blue Lynx team is incredible, and every day I'm reminded of how fortunate I am to be on their team and how honored I am to represent them. I am confident that today the future of Bluelinks is brighter than it has been since I joined the company almost seven years ago. The third quarter was transformative, and with our team, our renewed financial stability, our unyielding commitment to our customers, and our inherent strength in the markets we serve, I know that we are just getting started. And now I'd like to turn it over to Kelly, who will walk you through our third quarter financial performance in more detail.

Thank you, Mitch, and good morning, everyone. I will now give a brief overview of the third quarter financial performance. As Mitch mentioned, the third quarter generated record results. We reported net sales of 871 million, up 192 million when compared to the prior year period, along with a related improvement in gross margin, which was up 450 basis points year over year to 18.3%. We also reported adjusted EBITDA of 81 million, an improvement of 62 million over last year. This improvement led to strong cash generation during the quarter that along with sustained working capital management provided cash flow from operating activities of $61 million and cash on hand and excess availability under our ABL of approximately $202 million as of the end of the quarter. Importantly, this improved liquidity allowed for the reduction of the term loan to a principal balance of $44 million in October, eliminating the net leverage covenants. Third quarter net sales of specialty products, which includes products such as engineered wood, cedar, molding, siding, metal products, and insulation, were 496 million, an increase of 43 million year over year, and accounted for 57% of net sales for the current period. These products typically comprise between 60 and 65% of our total net sales, and are not very sensitive to wood-based commodity markets, given their specialized nature. Many of our structural products are, however, wood-based commodities whose prices rose sharply throughout the third quarter, continuing the strong rebound that began at the end of the second quarter. Commodity indices for random links peaked at unprecedented levels in mid-September at $955 for the Framing Lumber Composite Index and $788 for the Structural Panel Composite Index. We attribute these increases to an improved demand for housing along with the extended supply constraints at key North American mills that were pervasive throughout the period. As a result, net sales of structural products, which includes products such as lumber, plywood, oriented strandboard, rebar and remesh, was $375 million, an increase of $149 million compared to the prior year. Had the market conditions been more typical, however, We estimate that structural sales would have been lower by a range of between $105 and $115 million, so in the range of $260 to $270 million. Structural products have ranged between 35% and 40% of total net sales in recent years, but the significant inflation we saw during the quarter contributed to a higher net sales mix of 43% of our net sales for the quarter. We recorded a 17.4% gross margin for specialty products, which is an increase of 120 basis points compared to last year's margin rate of 16.2%, and continues a year-to-date trend of increasing specialty margins as a result of our disciplined pricing strategy coupled with strong market dynamics. The wood-based commodity impact on the structural net sales I discussed a few moments ago was also the contributing factor to the increase in the structural products gross margin, from 9% in the prior year period to 19.6% in the current quarter, well above our historical averages. We would have expected a gross margin similar to the prior year third quarter, which also approximates the average of the last six quarters preceding the current period, had the market environment been more typical. SG&A for the quarter was $79 million, a $3 million increase when compared to Q3 of 2019. It reflects an increase of $10 million year-over-year related to variable incentive compensation as well as increased sales commissions resulting from this year's significantly improved financial results. This was offset by a $7 million reduction of overhead costs primarily related to labor. When compared to Q2 of 2020, the increase was $9 million, which is all due to the additional variable incentive comp and sales commissions that I just mentioned. The variable incentive compensation recorded this quarter included a year-to-date catch-up of $3.2 million, given the positive impact of the quarter on all of our incentive metrics. During the third quarter, we sustained many of the cost reduction actions taken earlier in the year as part of our COVID-19 measures, and they continue to support improved operating efficiency. Our trailing 12-month SG&A margin as of the third quarter 2020 is 10.4%, which is an improvement of 30 basis points when compared to the trailing 12 months ended third quarter of 2019, and that margin rate was 10.7%. This is also consistent with our first half 2020 SG&A margin of 10.5%. And we believe this is more reflective of a typical margin than the actual third quarter rate of 9.1% given the commodity inflation impact. As we look at the variability of our SG&A as a percentage of net sales, we consider approximately 75% of our SG&A to be fixed. Of course, in the event of significant degradation in our net sales, many of these fixed costs can also be reduced. We are pleased to have generated positive net income in the third quarter of 55 million. Our net income benefited from approximately eight million of non-recurring items, including a gain of approximately nine million from a salee spec transaction involving our Denver facility. Excluding non-recurring items, net income still increased by $49 million on a year-over-year basis. For the same period last year, we didn't incur any income tax. However, this year, it was $16 million given the improvement in our financial results. And we expect that the federal NOLs that were remaining at the end of 2019 of approximately $80 million will be fully utilized in 2020. As we discussed on our last earnings call, Earlier this year, upon the onset of the pandemic, we made significant changes in how we manage working capital, especially around how we purchase and control inventory. I am pleased that we have maintained our discipline around managing our working capital since then. And as a result, our working capital metrics continue to improve in the third quarter. The close management of our inventory led to our day sales of inventory improving to 40 days, which is 16 days better than the prior year period. Day sales of inventory was also positively impacted during the current period by the mix shift to structural products, which typically turns faster than our specialty inventory. With a continued focus on collection, day sales outstanding also showed an improvement over the prior year, decreasing four days to 30 days as compared to last year. And our trade receivables averaged over 91% current during the quarter. Third quarter cash flow was incredibly strong given the significant increase in earnings coupled with closely managing our working capital. Cash provided by operating activities increased 46 million year over year to 61 million, the majority of which was available to pay down debt. Our borrowings under the ABL were 263 million at quarter end compared to 355 million for the same quarter last year. And our term loan balance was 58 million at quarter end compared to $147 million at the end of third quarter last year. Bank debt was reduced by $181 million year over year and has been reduced by $309 million since the second quarter of 2018, the first fiscal quarter end after our acquisition of Cedar Creek. Total interest expense decreased approximately 20%. or $2.6 million in the third quarter as compared to the same quarter last year, which is the lowest amount of quarterly interest expense we've had since the acquisition. We are also in great shape from a liquidity perspective, as we had $202 million in cash on hand and excess availability under our ABL. Additionally, our operating performance, along with the significant cash generation, has led to a dramatic decline in our overall leverage. Our ratio of overall net debt, which includes our bank debt and financing leases, to adjusted EBITDA ended the quarter at 4.1 times. And while we ended the third quarter with the total net leverage ratio well in compliance under our term loan in October, we made a voluntary prepayment that reduced the term loan balance to below $44 million, eliminating the covenant and again reducing our overall interest cost. We are committed to continuing to closely manage our balance sheet. and capital structure. And as you may have seen from our SEC filings yesterday, we have filed a prospective supplement to commence an at-the-market offering that allows us to sell up to 50 million of our common stock with Jefferies LLC acting as our sales agent. An at-the-market equity offering allows us the flexibility to sell these shares over the life of our Form S3 registration statement, which is effective until September 2023. At prices and amounts, we choose to sell as the program continues. We plan to use the net proceeds from any shares we might sell under the program for general corporate purposes, which may include making capital expenditures, funding working capital, and repaying indebtedness. The timing of any sales will depend on a variety of factors. Because of federal securities law restrictions, we're limited in what we can say about the offering. So I'd encourage you to read our prospective supplement and our Form 8K. So as the third quarter ended, I don't think any of us could have imagined the industry tailwinds we experienced, but what I do know is that our BlueLynx team was very prepared to take full advantage of the market condition. Through strong discipline around purchasing, inventory management, and sales execution, we maximized our structural products, net sales, and related gross margins. At the same time, we also ensured that our rigor around the sales of our specialty products, which provides the majority of our net sales, remained strong. And our focus on operational excellence and efficiency was evident throughout the quarter. When combined, these actions provided record adjusted EBITDA and liquidity during the quarter, which we opportunistically used to strengthen our balance sheet and operating performance. While in October, we started seeing wood-based commodity markets returning back to historical levels, we leave the quarter with a permanently improved balance sheet, positioning us well for the future. Now, Jay, I'd like to open the line for any questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, you may press star, then the number one on your telephone keypad. Once again, you may press star one to ask a question. Please stand by while we compile the Q&A roster. Once again, if you would like to ask a question, you may press star 1 on your telephone keypad. We have a question coming from the line of Brett Hendrickson from Nokomis Capital. Your line is open.

Just wanted to ask, can everybody hear me? Yeah, we can hear you, Brett. Great, thanks, Mitch. Just wanted to ask, you know, what are your thoughts? I know you guys like to leave in the past. I think you you thought you'd like to leave about 50, I think it was about 50 million of excess availability on the credit line. What are your thoughts on making more voluntary payments on the term loan? Just because there's a significant interest arbitrage there with between 8% and two and a half percent. So what are your thoughts around just using either cashflow from operations for Q4 or just some of that excess availability on the, on the credit line to just get rid of the term loan altogether? I know it's a covenant-light kind of termed-out piece of debt now, but, I mean, I don't think variable rates are going to go up in the next three years, so I think it would be pretty safe to just get rid of it now. I'm curious to hear your thoughts.

Yeah, so obviously there's the arbitrage benefit of moving away from a higher interest on that term loan by utilizing the ABL. And, of course, with the quarter that we've just had, You know, as Kelly indicated, we certainly have transformed the balance sheet of the business. So we'll watch it very closely as we move forward into the fourth quarter. And, you know, if it makes sense and we're comfortable to do that, we'll certainly move in that direction quickly.

Okay. And similar question, I would think now – that you've got your trailing 12 months leverage looks a whole world of difference from what it used to look like. I would assume that in the future for sale-leasebacks, if you even choose to do them, because maybe you don't need to do them anymore, but to the extent you choose to do them would come at all things equal, at least moderately better cap rate because you're a better credit to the landlord. Am I thinking about that right?

Well, I'm not real sure where the current market is from a sale-leaseback perspective, but You know, as we've looked at historically, obviously, all of our capital decisions, I think we've proven it, excuse me, over the last two years that we're really thoughtful about the capital structure as we look, of course, to maximize long-term value for our shareholders. So we haven't announced today, you know, a strategy to continue to move down the sale-leaseback path. But, of course, we would look at anything and everything as it makes sense for the company going forward.

Okay, and as I emailed you guys, I think some shareholders, myself included, were surprised at the size of the ATM filing given that in our minds you don't really need it. So was that just made – was the $50 million just made to match what was on the shelf or what was the methodology behind putting $50 million? I wouldn't have been shocked if you came out with a $10 or $15 million one, but $50 million was a huge multiple of what the company would need – given how short the industry is of houses and how fast builders need to frame houses in the next 12 months.

Brett, I appreciate the question and certainly appreciate the potential sensitivity about the ATM. Again, first and foremost, I want to be very clear again that our management team and our board were completely aligned with creating long-term shareholder value. It's our fiduciary duty, and we obviously take that obligation very seriously. The intent of the ATM was all about capital structure flexibility. It enables us to sell some shares into the market at the price the company determines in our sole discretion for basically three years until September 2023. And we certainly don't know what the capital markets or what our stock price will look like over the next three years. So we thought this option made sense. To specifically answer your question, we just set the amount and the duration to line up with the S3 that we originally filed about a year ago. But I want to be clear that we have no obligation and we will not commit to selling shares under this program. And of course, we'd only sell shares in the future if it made sense to the company from a capital perspective at that time, taking into consideration all the relevant factors. That's about it. I think we made it pretty clear. We feel really great about the future of Blue Links and where we're going. And, you know, I think we've proven over the last two years that we're very thoughtful about our capital structure and, you know, consistent with what we're trying to do, which is maximize long-term value for our shareholders. And I can assure you, Brett and everyone, that that will clearly continue to be the case in the years ahead.

Okay. Appreciate it, Mitch. Thanks for your time. Okay. Thank you.

Thank you. Once again, if you would like to ask a question, you may press star 1 on your telephone keypad. We have a question coming from the line of Dustin Shapir from Castle Knights. Your line is open.

How do you gauge the ability to increase margins going forward? What should we expect in 21, 22? on both, in both segments.

So, to start, we generally don't give out guidance as it relates to future margins. What I can talk about are a couple things. Let's start with specialty. We have invested historically and continue to invest in resources to enhance the margins that we have from a pricing perspective with our specialty business. So, we actually set up a centralized team to help monitor, educate, and continue the momentum that we've shown from a specialty perspective. Of course, there are, you know, mixed issues that always arise, but our strategy is to continue to, you know, really emphasize specialty products that, you know, are highly accretive to the company going forward and to keep our focus on, you know, the margin enhancement for the business from a pricing perspective. On the structural side, we've come off what is, you know, historically good margins for the business related to just an incredible run-up from a commodity pricing in the marketplace. I think we indicated that we see that coming down now. But we are we are closely monitoring it so we would not certainly not expect the normal course now To be the kind of margins that we saw in the third quarter. However, you know historically as housing market improves And it you know be it'd be typical with classic supply and demand you would expect that to be able to take advantage of some of the margin opportunities there and then I would say overall as you look at the entire margin of Of all of our product categories, we feel like we have a lot of opportunity to operate the business more efficiently from a logistics standpoint, from an administrative standpoint, and to continue to enhance the overall margins of the business as we move forward.

Got it. Thank you. Do you see further consolidation for you and your competitors, including bolt-ons? in new or existing markets?

I mean, I would answer a question this way. I mean, the wholesale distribution market is, in our view, highly fragmented. There are dozens and dozens of competitors, some that are regional, some that are specialty distributors. And, you know, we will always look at opportunities that make sense for the company that we feel like are enhancing and accretive for the business. And so we'll certainly be looking at that. I would view my opinion is that the market will, yes, continue to consolidate in the years ahead. And really, it's falling on a theme that happened from a builder's perspective as they continue to garner market share. From our customer's perspective, I'm sure you're aware, for example, of the large BFS, BMC merger that was announced, and there's continuing consolidation there. I expect that that ultimately will continue to find its way in wholesale distribution as well.

Got it. And then in terms of what you're seeing today, in terms of, you know, sometimes people talk about a seasonal slowdown. What are you seeing today in terms of demand here?

Yeah, it's a really interesting and good question. One of the things that we like to track because we think it's correlative, particularly to single-family housing starts, is our structural unit volume. It was really interesting, if you look back in Q3, what we saw was as the price went up from a commodity perspective, we sequentially saw volume declines actually during the quarter. which makes sense for a couple of reasons, right? One is there's some supply disruption which led to the incremental increases in pricing. The other is we feel like that our customer base, because of the price increase, was squeezing their inventories and that there's been inventory squeezed out of the supply chain. So, as we roll back into October, we talked about the fact that we certainly are experiencing margins that are lower in the structural products than we saw in the third quarter. We're also seeing volumes increase on a unit basis in October, for example, compared to the September.

Excellent. Well, thank you very much for your time. Congratulations. Thank you. Thank you very much.

Thank you. Once again, if you would like to ask a question, you may press star 1 on your telephone keypad. Speakers, there are no more questions asked at this moment. You may continue.

Okay. Well, thank you, Joanna. And, of course, thank you for your continued interest in Blue Links. And we look forward to discussing our fourth quarter results with you in the first quarter of next year. So thank you very much.

Thank you, speakers. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.