Bluelinx Holdings Inc.

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2020 Bluelinks Holdings Inc. Earnings Conference Call. At this time, all participants lie in their listen-only mode. After this 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mary Moll. Thank you. Please go ahead.

Thank you, and good morning, everyone. We appreciate you joining us for the Blue Links 2020 Fourth 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. The 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 in the presentation materials, the earnings release, and in the investor section of our website. With that, I'll turn the call over to Mitch.

Thanks, Mary, and good morning. 2020 was an exceptional year for Blue Links, a year of rapid change and transformation. The pandemic has created incredible challenges for our company, and the Blue Links team has faced these challenges with resolve. while always keeping the safety and well-being of our associates as our top priority. We were able to capitalize on the opportunities we were afforded in 2020, delivering a record financial performance while significantly deleveraging the company in the process. We began 2020 with strong momentum, realizing the benefits from the investments we made in people and processes in the second half of 2019 which drove operational efficiencies and improved customer service. These efforts included investments in the centralized logistics team, a relentless focus on enhancing our customer service levels, and executing on market share growth initiatives at the local and national level. We also began company-wide initiatives to strengthen our partnerships with strategic suppliers with a renewed emphasis on certain key product categories. Toward the end of the first quarter, we started to feel the impact of the pandemic, and the Blue Links organization immediately reacted to the resulting market conditions through a focus on employee safety, rigor in controlling working capital and liquidity, a reduction of fixed costs, and closely managing pricing. Fortunately, the pandemic-related shock to the housing market proved to be short-lived as the residential housing market recovered quickly through the second half of the year. During this period, we also encountered a historic price escalation in our wood-based commodity products. Our investment and efforts in the second half of 2019 and into the pandemic allowed us to capitalize on the markets we experienced. These efforts have continued to pay off, as our results in the fourth quarter were outstanding, with revenue, gross margin, and adjusted EBITDA all significantly increased in 2020-21. compared to 2019 levels. For the fourth quarter, our net sales were $865 million, an increase of 41 percent over 2019 levels. Our gross profit was $124 million, and we had a gross margin rate of 14.4 percent, resulting in adjusted EBITDA of $39 million. This compares to $11 million in the fourth quarter of 2019. The strength of the fourth quarter ended a fantastic year in 2020 with the highest adjusted EBITDA in our company's history of $170 million. Our adjusted EBITDA, coupled with the close management of our working capital, drove a fundamental enhancement to our liquidity while significantly reducing our annual interest expense. We ended the year with excess availability of $184 million under our ABL, over $100 million higher than last year. Earlier this week, we used some of this increased liquidity to further reduce the principal under our term loan by $25 million, which now brings the term loan principal balance below $20 million. We are now, from both a capital structure and leverage perspective, a fundamentally different company than we were a year ago, having brought a new level of financial flexibility into the business. Kelly will highlight our strong fourth quarter and full year results in more detail, which will clearly illustrate our renewed financial strength. When we last reported earnings in October, we were beginning to see wood-based commodity prices falling towards more typical historical levels. Prices continued to decline in the first two months of the fourth quarter before sharply rebounding in December. Supply-demand imbalances have continued to persist in the first quarter of 2021, and both the lumber and panel composite indices have reached new all-time highs, surpassing the peak that prices experienced in 2020. Today, wood-based commodity prices remain at historically high levels, and we continue to take advantage of these market conditions to enhance the financial strength and liquidity of the business. While we cannot predict when commodity prices will return to a more normalized rate, we are confident that they will ultimately decline. So we'll continue our disciplined approach to closely managing our structural inventory levels while utilizing mitigation strategies to reduce the impact when the commodity markets weaken. The robust demand in housing coupled with supply disruptions associated with the pandemic have also led to extended lead times and inevitable inflationary pressures in many of our specialty product categories as well. Our team has done a great job staying focused on our customers through these supply chain challenges and using similar pricing strategies with these product categories that we utilize for structural products. While we are successfully navigating through the current market environment, we also continue to execute on our most important strategic imperative organic growth. Our efforts include a continued investment in our national accounts team, emphasizing and investing in product categories where we have a competitive advantage, and a rigorous process for identifying and capitalizing on local market share opportunities. We believe that our extensive product assortment, excellent supply chain, and national footprint all position us well to excel in these areas. Another key area of our focus continues to be improving our logistics, operational, and administrative efficiency. Our operational performance improved in 2020 by reducing labor costs through efficiency initiatives, investing in our operational center of excellence, modernizing our fleet, and upgrading technologies. We will continue to invest in these areas to drive incremental operating leverage and productivity. In addition to these investments, there are significant opportunities to improve operational efficiency through route optimization, facility layout enhancements, and automation and process redesign for our administrative and transaction processing areas. This focus on operating performance improvement ties directly to our core value of continuous improvement, We will continue to evaluate everything we do through the lens of operating in a more efficient and effective manner, while our number one focus remains on providing excellent service to our customers. Before I turn it over to Kelly, I'd like to thank the entire Blue Links team for their hard work, determination, and commitment to safety through perhaps the most challenging year in our history. Their collective efforts led to our historic performance in 2020. a year that was truly transformative for Bluelinks. We're simply a different company today than we were a year ago. We have a much stronger balance sheet to support the continuing execution of our sales growth and operational initiatives that will propel our success in the months ahead. No one can predict the long-term impact of the last 12 months, but my optimism for the future remains strong, and I am confident that the future for Bluelinks is bright. The Blue Links team seized this opportunity, and in 2021, we will continue to drive towards our goal of being the industry leader in the markets we serve. And now I'd like to turn it over to Kelly, who will walk you through our fourth quarter and full year 2020 financial performance in more detail.

Thank you, Mitch, and good morning, everyone. I will now give a brief overview of the fourth quarter and full year financial performance. As Mitch mentioned, the fourth quarter was another successful one for BlueLinks, with significant improvement in our financial performance on a year-over-year basis. We reported net sales of $865 million, up $252 million when compared to the prior year period, along with a related improvement in gross margin, which was up 90 basis points year-over-year to 14.4%. We also reported adjusted EBITDA of $39 million, an improvement of $28 million over last year. We ended the quarter with cash on hand and excess availability under our ABL of approximately $184 million, an increase of $104 million over the prior year period. Net sales for the full year were $3.1 billion, up $460 million when compared to last year. Gross margin increased 190 basis points. to 15.4% for the full year, and adjusted EBITDA improved by $99 million to $170 million, the highest full-year adjusted EBITDA in Blue Links' history. Fourth quarter net sales of specialty products, which includes products such as engineered wood, cedar, molding, siding, metal products, and insulation, were $498 million, an increase of $100 million year-over-year, and accounted for 58%. of net sales for the current period. These products typically comprise between 60% and 65% of our total net sales and are less sensitive to wood-based commodity markets given their specialized nature. Our structural products are primarily wood-based commodities whose prices have continued to be impacted by the supply, demand, and balances that Mitch previously mentioned. Wood-based commodity prices declined from the peak levels experienced in mid-September to fourth-quarter lows in November of $550 for the framing lumber composite index and $645 for the structural panel composite index. In December, prices started rising sharply again, and the year finished with the framing lumber composite at $874 and the structural panel composite nearing $800. We attribute the continued inflation to unseasonably strong demand for housing, along with continued supply constraints at key North American mills. As a result, net sales of structural products, which includes products such as lumber, plywood, oriented strandboard, rebar, and remesh, was $367 million, an increase of $152 million compared to the prior year. Similar to the third quarter, we estimate that structural sales would have been lower by a range of between $105 and $115 million. So in the $210 to $230 million range for the year, had the market conditions been more typical? As a reminder, structural products have ranged between 35% and 40% of total net sales in recent years, but the inflation we saw during the quarter contributed to an above-average sales mix of 42%. Framing Lumber comprised approximately 70% of structural net sales for the fourth quarter and panel sales making up the remaining 30%. For the full year of 2020, Framing Lumber sales as a percent of total structural sales ranged between 65% and 70%, and panel sales ranged between 30% and 35%. We recorded a 17.4% gross margin for specialty products, which is an increase of 130 basis points compared to last year's margin rate of 16.1%, and is consistent with the last two quarters. We attribute the specialty margin year-over-year increase to a more 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 8.7% in the prior year to 10.2% in the current year period, which is higher than our historical averages. In 2021, year to date, Sales volumes for both structural and specialty, impeded by supply and weather constraints, have been slightly lower than last year. Recent structural margin rates are in the 14% range, while specialty rates continue to be robust. SG&A for the quarter was $89 million, a $16 million increase when compared to Q4 of 2019. It reflects an increase of $12 million year-over-year related to variable incentive compensation and increased commissions. resulting from improved financial results, along with costs related to the fourth quarter of 2020 having an extra week in the fiscal period. This was offset by a $3 million reduction of overhead cost primarily related to labor due to actions taken earlier in the year that we have sustained, improving operating efficiency. When compared to the third quarter of 2020, the increase was approximately $10 million, all due to the additional variable incentive compensation and increased commissions that I just mentioned. Our full year SG&A percent of net sales is 10.1%, which is an improvement of 100 basis points when compared to the prior year percentage of 11.1%. This is also an improvement of 40 basis points over our first half 2020 SG&A percent of net sales of 10.5%. which we believe is more typical. 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 that there was significant market disruption impacting sales activity, many of these fixed costs can also be reduced. Costs we don't consider fixed are primarily related to outbound shipping and handling and include items such as warehouse and delivery labor, fuel, and third-party freight. We generated positive net income both in the fourth quarter and for the full year of $20 million and $81 million, respectively. Regarding taxes, our effective tax rate for the fourth quarter was 0%, and for the full year 2020, it was 14.9%, reflecting releases of valuation allowances for both state net operating losses and previously disallowed interest. In addition, we made cash tax payments of $14 million in December, impacting our operating cash flow. We have now utilized all of our federal NOLs, and for the first quarter of 2021, we expect our effective tax rate to be between 24% and 28%. As we discussed on our previous earnings calls, we made significant changes in how we manage working capital in 2020, 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 have improved on a year-over-year basis. Day sales of inventory improved by 18 days, or approximately 30% for fourth quarter 2020 compared to the prior year period. Higher December net sales drove an increase in receivables of 52% in the fourth quarter compared to last year. AR performance remains strong, January 2021's currency rate at 93%. In addition to the tax payments I just mentioned, we also made strategic inventory purchases in areas such as Cedar, where we are moving to a more efficient hub and spoke distribution platform, siding, and millwork products, which are both used heavily in the spring building season. These investments contributed to a $19 million use of cash for operations during the fourth quarter. We also invested almost $2 million in capital expenditures in the fourth quarter, which put our full-year CapEx at close to $4 million. Cash provided by operating activities improved $65 million to $55 million in 2020, with this improvement coming from the significant increase in earnings coupled with closely managing our working capital throughout the year. Our borrowings under the AVL were $288 million at quarter end compared to $326 million for the same quarter last year. And our term loan balance was $43 million at quarter end compared to $147 million at the fourth quarter end last year. Bank debt was reduced by $142 million year-over-year, or 30%. Full year 2020 interest expense decreased approximately $7 million, or 13% compared to full year 2019, given the reduction in debt and lower interest rates. Liquidity improved by over $100 million to $184 million in cash on hand and excess availability under our ABL. Additionally, our operating performance, resulting in 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 3.5 times. And as Mitch mentioned earlier, this week we utilized our ABL to further reduce our term loan by $25 million, bringing the principal balance to approximately $18 million as of March 1st. We will continue to assess our liquidity needs, but currently anticipate paying down the remaining balance on the term loan by the end of the third quarter at the latest. Our 2020 financial performance was fantastic, and the transformation of our balance sheet provides the opportunity for us to increasingly invest and support the growth of the company going forward. Our focus in early 2021 has been to effectively maneuver the supply-demand imbalances while at the same time ensure that we manage our working capital and maintain cost efficiency. As I mentioned last time, I believe the Bluelinks team is up for the challenge, and I continue to be optimistic regarding our team's ability to drive sales, expand margin, and contain cost. Now, we would like to open the line for any questions.

Thank you. As a reminder, to ask a question, you will need to press star and follow day one on your touchtone telephone. Again, that is star one to ask a question. Your first question comes from the line of Ruben Gardner from Benchmark Company. Your line is now open. Please proceed. Thank you.

Good morning, everybody. Good morning. Good morning. Maybe we could start with the specialty growth and margin performance in the back half of last year. I guess a nice acceleration. Can you kind of give us some color, what you're seeing there? Are there specific product categories within specialty that are driving that or is it just in general and market strength? I mean, 20 plus percent growth is obviously very strong. Is that the sort of level we could see for the next couple of quarters as some of the activity from last summer sort of starts to flow through?

Well, There are really two areas that have enhanced the growth that we've seen. One is in investment in specific product categories. So we've actually brought in some experts into the organization who are helping to drive and manage opportunities that we have in some key product areas that I think I mentioned that for the company long term are strategic and important to the business. The second piece that we've done is we put in place, we're going on about a year now, of a process where at the local markets, they are identifying opportunities that they see, you know, often in specialty products and executing on that. And it's a process that we've embedded into the culture of the company. And if you look at the performance in specific opportunities that we're seeing at a local level relative to the overall business, we're seeing a significant improvement as well. Generally, we don't give guidance on, you know, what it's going to look like going forward, but we have identified, as we've talked about, organic growth as being key and critical to the business, and we're emphasizing it, and we're seeing real results on the specialty side.

Yeah, and to add to that, I think, you know, the last three quarters of 2020, we saw rates at that 17.3, 0.4%, and I think we, you know, take some credit for that, and I continue to focus on price effectiveness in the specialty space has also been really helpful and hopefully relatively sustainable.

And so we should look at that 17.3, 17.4 as kind of a new baseline for specialty, assuming the market continues to grow. Is that fair?

I mean, I think it's fair to say that we've done a good job on continuing to execute to that margin rate over now a reasonable period of time, you know. three quarters.

And Ruben, we've invested in pricing, and we've talked about that in the past, where we're really emphasizing the opportunities that we see across the organization to make sure we're getting paid for the services we provide to our customer base. So that's an important piece. The one caveat I would say is obviously in an inflationary environment on a percentage basis, sometimes that can impact your margins. And we're certainly seeing inflation moving in not only on the commodity structural side, but also on the specialty side.

Yeah. And in my remarks, I said that, you know, what we're seeing this quarter in Q1 is the specialty rate continues to be robust.

Okay. And then on the structural side, you mentioned some mitigating factors, I guess, that could maybe lessen the blow, if you will, on a return to normal commodity prices. Can you I think the last time there was a serious deflationary environment was maybe the back half of 18, and you guys had kind of mid-single-digit gross margin profile. Can you talk about the differences now and what the business looks like, how you're operating versus then, and maybe how we should think about that declining commodity price environment from a gross margin perspective?

Sure. Well, the first and most important thing is we're controlling it from a centralized perspective. at a much greater level with much more scrutiny than we did at that time period. And if you look, for example, at the balances we had in our warehouses at that time from a unit basis, they were almost twice as big as they are today. So from an inventory perspective, we're watching it closely, which we're comfortable is helping, will help to mitigate the risk as it's going down. Similarly, as I talked about from a pricing perspective, we're very closely monitoring managing what is happening from a price perspective across the organization. And we've, again, invested centrally in experts who are having a dialogue, including enhanced communication with our traders around the field, making day-to-day decisions as it relates to pricing.

Okay. Moving to the working capital investment in the fourth quarter, Kelly, maybe I guess two-part question. One, you're obviously making some investments in inventory in anticipation of growth. I assume do we pick some of that back up in the first quarter? And then secondarily, I didn't – I had some technical difficulties, so I don't know if you said this, but I think receivables were up pretty nicely year over year, and I think I assume that was just timing related. Can you just clarify those two points for me?

Sure. As it relates to inventory and kind of what we're seeing, I think we would expect, you know, we did build some in the fourth quarter, as we mentioned, and we would expect that we'd probably continue to build some inventory during this quarter. Is this normal and typical for this time of year to support the spring building season? We're also seeing inflationary impacts. in both of our product categories. Inflation in inventory and cost of sales as well is connected with the increase in sales. But as we mentioned, our DSI has significantly improved compared to last year, and we're continuing to focus on that as well. So I think that's really kind of what we're expecting to see for this quarter from an inventory. And then really when it relates to the receivables point, yes, we were about $100 million higher in receivables at the end of 2020 as compared to 2019. And that really is kind of the way that we saw the sales occur during the fourth quarter. So we saw a slight in the structural side, a slight decrease going into October. And as we really work to manage through the margin preservation versus the volume, kind of doing some trade-offs there, as those commodity prices start to significantly decline going into November. But then we saw prices come back up, and we saw demand stay really good through December with mild weather. and just overall macro factors. And so those higher sales in December really contributed to that high receivable number. And the margin followed on the structural side along with that, where we saw higher margins in December as well.

Thank you. Your next question comes from the line of Greg Palm from Craig Helen Capital Group. Your line is now open.

Great. Thanks. Hey, Mitch. Hey, Kelly. Good morning. Congrats on the really good results and execution here.

Thanks, Greg.

Thanks, Greg. Maybe first was hoping you could comment on volumes in the quarter, just trying to get a sense for, you know, the magnitude of price versus volume, you know, the associated upside in the quarter, and maybe how volumes compared to what you saw in Q3. Kelly, that last comment that you made almost makes it seem like there wasn't much of a seasonal slowdown in the December quarter versus the previous quarter. Just wanted to confirm that.

Sure, yeah. As I mentioned, we saw a little bit of a decline year over year, kind of the same quarter last year from a structural perspective, and I really contribute that more towards us really managing through making some tradeoffs between margin and volume, as well as we saw some impact of some supply shortages throughout the quarter. But overall, slightly down from this time last year, from the same quarter last year. On the specialty side, we saw it slightly up and very much somewhat contributing. December was a very strong month for us, unseasonably so. And then as you compare it to Q3, we saw, again, specialty slightly up over Q3, and structural We saw that actually about the same, so really fairly consistent.

Okay, that's helpful. It feels like in this significant commodity inflation environment that we're in and a lot of supply chain disruptions that are going on, do you see more of your customers – leaning on you, I mean, more so than normal, given the environment we're in and, you know, some of those that maybe can't tie up additional working capital and, you know, even versus some of your smaller competitors. I'm wondering if this is an environment where maybe you can see some share gains as well.

Yeah, as we look at commodities, generally share gains tend to be very transient, right? So there clearly is the service aspect that's important. I would say that certainly our customer base are leaning on us, but they're trying to find product wherever they can find it. And right now, to your point, the supply constraints are so strong at this moment that they're certainly trying to get it from us, but also getting it from the mills directly. I would say that we haven't seen a material shift from our perspective on us getting commodity products, you know, preferentially to smaller competitors at this time. And, of course, any kind of, you know, any kind of enhancement or increase that we might see from a market share perspective is certainly counterweight by the supply constraints that are out there in the marketplace.

Yep. Understood. Mitch, it would be helpful also to maybe get your high-level opinion on the housing cycle, where we're at. There seems to be a little bit of fear and concern building up recently, but the commentary on what you're seeing out there and the supply of housing stock, it certainly feels like things are still pretty strong. What's your sense?

Yeah, our customers are very optimistic, certainly for the first half of the year. The builders generally have backlogs that they need to build homes and they need to finish building homes. And, you know, that creates a very robust dynamic in the marketplace. So I would say, you know, generally, and you know, Greg, as well as I do, I mean, you have the You have the move away from the urban centers that obviously are tailwinds. You have interest rates that while, you know, they've risen a little bit, they're still so low on a historical basis that also should provide some impetus. And you have, on the other hand, inflation. And, you know, ultimately that may impact housing, but we certainly don't see that over the short term.

Okay. Okay. And then the debt reduction and really the balance sheet transformation over the last year, I mean, it's been just phenomenal. I'm curious, as you look ahead, what are your largest capital allocation priorities, you know, outside of continued debt pay down?

Yeah, I mean, I think, you know, while we're very – proud and excited about our leverage right now. We know that's coming off of very strong trailing 12 months EBITDA. So we'll continue to focus on due leveraging. That's certainly going to be a focus for us as we go through this next year. We're also looking to see where we need to make the right strategic investments, whether that be maybe some of our rolling stock. That's an area we're looking at. We're looking at technology investments, Is this anything that's going to drive productivity into the company? So those are kind of the thought process for us right now as it relates to allocation.

Okay, good. And then just last one, I just want to clarify, I think, Kelly, you said, was it quarter to date structural gross margin was running at 14%? Did I hear that right?

That's what our recent rates have looked like.

Got it. So 14% relative to the 10% you saw in December. So a pretty big increase, at least in the first few months of Q1.

Yeah, that's right. And just to be clear on the rates for the fourth quarter, it's 10% for the quarter, but there was quite a bit of up and down within that quarter. So, you know, kind of going into October, we started seeing, you know, the commodity prices coming down a bit, and we saw a rate that was pretty consistent with slightly lower than what we saw for the quarter average. And then we dipped down to, in November, about 6%, and then we kind of moved back up into that double digits, into that 14-ish range in December. So we saw a bit of an up and down for the quarter average. And it really just follows the cycle, as we talk about, when we see those prices go up and down, really depending on how that works with our average cost of inventory and what the spreads are able to demand depending on the market. But I think it followed a similar path as what we had discussed in Q3.

The detailed color is much appreciated. I'll leave it there. Thanks, and best of luck going forward. Okay.

Thanks, Greg.

Thank you.

As a reminder, to ask a question, please press star one. Again, that is star one to ask a question. To withdraw the question, just press the pound key. Please press star one to ask a question. Speakers, I'm seeing no further questions in the queue. Please continue.

Okay, thank you. Well, thank you very much for your time and your interest in BlueLynx, and we look forward to sharing our first quarter results with you in the next few months.

Have a great day. Ladies and gentlemen, this concludes today's conference call. Thank you for participating in Enatus Connect.