Bluelinx Holdings Inc.

Greetings and welcome to the Blue Links Holdings third quarter 2022 results call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ryan Taylor, Vice President, Investor Relations and Treasuring for Blue Links Holdings. Thank you. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to the Blue Links Holdings third quarter 2022 earnings call. Presenting today are Dwight Gibson, President and CEO of Blue Links, and Kelly Jansen, our Chief Financial Officer. Our third quarter news release and Form 10-Q were issued yesterday after the close of the market, along with our webcast presentation. These items are available in the investor section of our website, bluelinksco.com. We encourage you to follow along with the detailed information on the slides during our webcast. Today's discussion contains forward-looking statements. Actual results may differ from those forward-looking statements due to various risk factors and uncertainties, including the risks described in our most recent SEC filings. Today's presentation includes certain non-GAAP and adjusted financial measures that we believe provide helpful context for investors evaluating our business. Reconciliations to the closest gap financial measure can be found in the appendix of our presentation. At the conclusion of our prepared remarks, we will open the line for questions. And with that, I'll turn the call over to Dwight.

Thanks, Ryan, and good morning, everyone. Thank you for joining us on the call today. It continues to be an exciting time at Blue Links, and 2022 has been a historic year for our team. Despite a volatile end market environment, We are on pace to achieve our most profitable year ever, and we have invested prudently to advance our strategy of further strengthening our balance sheet. Through September, we have delivered $3.6 billion of sales, $415 million for adjusted EBITDA, and generated $246 million of operating cash. And we are on pace to deliver record earnings per share and operating cash in 2022. As compared to the first nine months of 2021, we grew sales by 9% and adjusted EBITDA by 18%, while generating operating cash nearly two times greater than the prior year period. Our strong financial performance has fortified our balance sheet and given us the flexibility to prudently invest in high return growth opportunities while maintaining significant liquidity for the future. Our disciplined capital allocation approach was punctuated with our strategic acquisition of Vandermeer forest products on October 3rd. Vandermeer provides us a platform for specialty growth in the Pacific Northwest and gives us a footprint that now serves all 50 states. This acquisition demonstrates our ability to identify and acquire high-quality strategic assets at an attractive valuation. We will continue to pursue attractive acquisitions and believe we are well positioned to be opportunistic, given our strong balance sheet and a softer macro environment. In addition to the Vandermeer acquisition, through the first nine months of this year, we have invested $19 million in capital expenditures to support future growth. And we repurchased 9% of our outstanding shares. Even after these investments, our financial position remains strong, with net leverage below one times and available liquidity over $560 million, including over $220 million of cash. As we prepare for 2023 and beyond, we believe our scale, strategic supply relationships, and strong balance sheet are key differentiators that position us to take advantage of opportunities as demand in the U.S. housing industry moderates. and we will continue to invest in our strategy to optimize productivity, increase our specialty product sales mix, and drive world-class performance while maintaining a disciplined approach to capital allocation.

A refresher on the Vandermeer acquisitions.

Vandermeer is a wholesale distributor serving the Pacific Northwest, Alaska, and Hawaii, as well as British Columbia and Alberta, Canada. Over the past year, Vandermeer generated approximately $150 million of sales and just under $20 million of EBITDA. The total purchase price was $67 million, and we paid just over three times trailing 12 months EBITDA for the business. We funded the transaction with cash on hand and expect it to be immediately accretive to earnings per share in the fourth quarter. This acquisition accelerates our growth in specialty products, particularly signing, expands our geographic presence in attractive metropolitan areas, and enhances our strategic supplier relationships and ability to serve our national accounts. We also believe there are opportunities to expand sales of our key specialty products in Vandermeer's markets, including our top private label brands, On Center for Engineered Wood, and Prime Links for Millwork. We prepared extensively for the transaction, and so far, the integration is going as planned. Turning now to our performance in Q3 2022, we delivered $1.1 billion of sales, $189 million of gross profit, and $100 million of adjusted EBITDA, our fourth consecutive quarter with $100 million or more of EBITDA. Our Q3 results further demonstrate the strength and stability of our specialty products business, which comprise 68% of sales and 80% of gross profit. Specialty product sales grew 13% year-over-year to $724 million, with a gross margin of 21%. The growth in specialty products was broad-based, with double-digit growth across our strategic product categories, including engineered wood, millwork siding, and industrial products. And we generated $143 million operating cash in the third quarter, a record level. Shifting gears to the U.S. housing industry. As a reminder, approximately 45% of our annual sales are tied to the repair and remodel market, with 40% tied to residential new home construction and 15% related to commercial markets. Over the past two years, demand across these end markets outpaced supply and fueled explosive growth. However, with mortgage rates more than doubling this year and made historically high inflation and significant home price appreciation, home affordability has been reduced for most buyers, leading to a dramatic slowdown in new home starts. In the third quarter alone, single-family starts in the U.S. declined 18% year-over-year and 20% sequentially. Over the past eight weeks, we have started to experience the impact of these developments on our business as demand for building products moderated and supply constraints began to ease across many product categories. As we head into 2023, we believe demand for building products will slow as new home starts decline and growth in repair and remodel activity moderates. We believe certain factors, including the undersupply of homes, supportive demographic shifts, necessary repair activity, and high levels of home equity are positives from industry over the medium term. In the repair and remodel market, we believe recent housing turnover, aged housing stock, and high levels of homeowners' equity will support continued growth in 2023. The estimate published in October from the Joint Center for Housing Studies supports this view, with remodeling investments expected to grow, albeit more slowly, over the next four quarters. We believe growth in the repair and remodel market ties in well with our strategy to grow in key specialty product categories. We will continue to focus on the things within our control, while executing our long-term strategy. Our key strategic priorities include shifting our sales mix to 80 plus percent specialty products, expanding our relationships with strategic suppliers and key customers, driving procurement excellence, optimizing productivity, and rigorously managing our working capital. We're confident that our strategy, along with a strong balance sheet and disciplined approach to capital allocation provides us a differentiated opportunity to create compelling value for shareholders. In summary, we have delivered historically strong financial results in a volatile environment and made good progress on our long-term strategy while fortifying our balance sheet. Our position as a national leader in building product distribution gives us confidence in our ability to navigate a soft-to-demand environment going forward. I'm proud of the entire Bluemix team for their efforts and contributions to the quarter. That concludes my opening remarks at this time. I'll turn the call over to Kelly for a more detailed discussion of our financial results and capital structure.

Following that, I'll provide closing remarks before we take your questions. Kelly?

Thanks, Dwight, and good morning, everyone. Taking a closer look at our third quarter results, net sales were $1.1 billion, up 9% year over year. Specialty product sales grew 13% over the prior year. and structural product sales were up 2%. Gross profit was $189 million, and gross margin was 17.9% for the quarter, up 210 basis points versus the prior year. 80% of our gross profit was from specialty product sales. Looking now at the third quarter results for specialty products, net sales were $724 million, up 13%, or $83 million year-over-year. This growth was primarily driven by continued value-based pricing. Volume was relatively flat overall, with an increase in engineered wood volume offset by lower millwork. Gross profit on specialty product sales was $151 million, up $4 million, or 3% year-over-year. Specialty gross margin was 20.9%, a strong margin from a historical perspective However, down 200 basis points from 23% in Q3 of last year when supply was predominantly on allocation. Through October, specialty products gross margin was approximately 20%, with daily sales volumes down modestly on a sequential basis from Q3 of 2022. This reflects some normal seasonality in our business as building activity generally slows in the winter months, as well as some impact from the recent changes in the macroeconomic environment. Now, moving on to structural products, net sales were $336 million, up 2% compared to the prior year period. This increase was primarily due to higher composite lumber prices, partially offset by lower composite prices for panels. Per random length, the average price in the third quarter of 2022 for framing lumber was $587 per thousand board foot, up 26% year-over-year. And the average price for panels was $671 per thousand square foot, down 12%. Structural sales volume increased modestly year-over-year, primarily in panels. Gross profit was $38 million, up $32 million year-over-year. and gross margin was 11.3% as compared to 1.7% in the prior year period. The increase in gross profit reflects the benefits from our continued improvement in managing structural inventory. It is also impacted by the dramatic decline in wood-based commodity prices we experienced during the third quarter of last year. At the end of Q3 of 2022, lumber prices were down to around $500 per thousand board foot, and panel prices declined to about $600 per thousand square foot, a 17% and 8% decrease, respectively, compared to the start of the quarter. As a result, we recorded a $4 million lower of cost or net realizable value reserve at the end of September to adjust our structural inventory value to reflect the reduction in market pricing. This partially offset the reversal of the $9.8 million reserve recorded earlier in the year in Q2 using the same methodology, resulting in a net benefit of $5.7 million to Q3's gross profit. Our team continues to do an exceptional job managing structural inventory through leveraging consignment and utilizing centralized purchasing and pricing decisions to keep structural inventory levels low and mitigate risk. Over the past two years, we have reduced structural inventory by about 65%, which has significantly improved our ability to manage volatility in wood-based commodity prices. Through October, daily volumes for structural products were generally consistent with Q3 2022 levels, and structural gross margin was in the range of 9% to 10%. This excludes any net impact that could arise from inventory adjustments. We will continue to evaluate market pricing for wood-based commodities and adjust accordingly at the end of each period. SG&A was $92 million in Q3 of 2022, consistent with our quarterly run rate in the first half of the year. On a year-over-year basis, SG&A increased approximately 20%, due mostly to higher delivery costs, along with strategic investments to build capabilities in our workforce, and to support our specialty growth and branch optimization initiatives. As a percent of sales, SG&A was 8.6% in Q3, a good outcome given the inflationary environment. Net income was $60 million, up 26% over the prior year period. And diluted EPS grew 35% to $6.38 per share. driven by the increase in profitability and a 43 cent benefit from our share repurchases during the year. Diluted shares outstanding were 9.3 million, down from 10 million in the prior year period. Our tax rate for the quarter was 26.2%, in line with our expectations. For Q4, we anticipate our tax rate to be in the 20 to 24% range. Q3 2022 adjusted EBITDA was $100 million, or 9.4% of net sales. That's 130 basis points better than the prior year period. As Dwight mentioned, this is the fourth consecutive quarter that we've reported adjusted EBITDA of $100 million or greater. Turning now to cash flow and working capital. During the third quarter, we generated operating and free cash flow of $143 million, and $130 million, respectively. Our cash generation was supported by a reduction in receivables, which also reflects wood-based commodity deflation during the period. We ended Q3 with $536 million of inventory, of which more than 85% related to specialty products. In total, overall inventory was down 7% sequentially, as we continue to closely manage buying decisions and inventory levels. We also continue to invest in our business. In Q3 2022, we invested $12 million of cash and capital expenditures related primarily to enhancements to our distribution branches and upgrades to our fleet of rolling stock. For the full year, we expect to invest at least $30 million in capital expenditures in these same areas. Future investments will be focused on continued facility improvements and upgrading of our fleet, as well as enhancing our digital and technology capabilities. Looking now at our balance sheet, as of the end of the third quarter, cash on hand was $229 million. Total debt was $573 million, and net debt was $343 million. Net leverage was 0.7 times, down from 1.3 times at the end of the third quarter of 2021. When considering our cash on hand and undrawn revolver capacity of $346 million, Available liquidity was $576 million at the end of Q3. That's the highest level of available liquidity we have had at any point in our history. Following the acquisition of Vandermeer, our net leverage remained below one time. And as of October 31st, cash on hand was over $220 million and available liquidity was over $560 million. Reflecting back on the past two years, we have been deliberate in our approach to fortify our balance sheet. Since the end of 2020, we reduced total gross debt by 5% and recapitalized our debt by issuing $300 million of senior notes at 6%, retiring our term loan and amending our credit facility. These actions significantly improved our debt structure and extended our debt maturities. We have no material debt obligations until 2029. These actions combined with our strong EBITDA and cash generation over the past two years fortified our financial position. In turn, it's enabled us to expand our capital allocation options and invest in high return opportunities, including organic growth investments, acquisitions, and share repurchases. As a reminder of our guiding principles for capital allocation, we intend to maintain a strong balance sheet, which enables us to invest in our business through economic cycles while maintaining a long-term target of net leverage of at or around three times. As we invest for growth, we will evaluate both organic and acquisition opportunities that yield a risk-adjusted return above our weighted average cost of capital and are consistent with our strategy to increase our mix of specialty products. We will maintain a disciplined approach to all growth investments, comparing those opportunities against the value of returning capital to shareholders. To summarize, in the third quarter of 2022, we delivered 9% sales growth year over year, 35% EPS growth, 27% adjusted EBITDA growth, and also delivered a record level of operating cash. And through the first nine months of the year, We invested $67 million to acquire Vandermeer, $66 million to repurchase 9% of our outstanding shares. This includes the completion of our accelerated share repurchase plan in Q3, and $19 million in CapEx to support our business. Even after these actions, our balance sheet is in excellent shape, with low leverage below one time, over $220 million of cash on hand, and over $560 million of liquidity. Looking forward, we are focused on executing our strategy, maintaining a strong financial position, and delivering long-term value to our shareholders. At this time, I'll turn the call back over to Dwight for closing remarks.

Thanks, Kelly. In closing, through the first nine months of 2022, we've delivered 9% sales growth and 18% EBITDA growth, while generating $246 million of operating cash nearly two times the prior year period. We acquired Vandermeer, invested in organic growth, and repurchased 9% of our outstanding shares. Even after that, our financial position is very strong, and we will continue to invest in our business to drive efficiency and increase our capacity to deliver profitable growth. We remain laser-focused on the things within our control, accelerating growth in specialty products, optimizing productivity, and driving world-class performance. Our aspiration is to be the preeminent building products distributor in North America, and we believe we have the scale, products, and service offerings to continue to expand relationships with our best customers and key suppliers. We are confident that our strategy will create long-term value for all stakeholders, and we are steadfastly committed to that goal. That concludes our prepared remarks. At this time, we are happy to answer any questions.

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Craig Palm with Craig Hallam Capital Group. Please proceed with your question.

Hey, thanks. This is actually Danny Egerich on for Craig today. Thanks for taking the questions. I guess just starting maybe anecdotally with your view of your different markets going into 2023, maybe the balance between new construction and R&R activity, obviously maybe some lessening of that new construction market. I guess, how are you seeing potentially consumer dollars being reallocated into more R&R-type spend in wake of maybe shifting away from the new home sales? Just wondering what you're seeing there now and maybe what your expectation is entering into this new year.

Yeah, well, hey, good morning. Thanks for the question. So I think the story around what's happening with new home construction is fairly well told at this point. So clearly there'll be some further moderation there as a result of all the actions that are happening, particularly around rates and driving affordability challenges. As a reminder, 45% of our demand we think comes from the repair and remodel space and 40% from new home So we're prepared for a, and are preparing for a softer environment on the start side. So, you know, continue to really drive lean inventory management, continue to focus our efforts on the value we bring and our value added services and communicating that value to our key customers to make sure we get appropriately compensated for that. And also looking for other opportunities to drive efficiencies in the business. On the R&R side, we expect the environment to be a bit better. and expect further growth in that space for all the obvious reasons. The vast majority of homeowners now are locked in at mortgage rates lower than what they can get out in the market. There's been a fair amount of purchases of new homes recently, and generally speaking, when you see that level of activity, it spurs some remodeling activity, and we expect to be really well positioned to support that. We're going to continue to focus on the things that we can, which is providing high-level service to our customers, making sure that we have the products and the services that are appropriate and necessary in delivering them quickly, safely, and making sure that we can support their needs going forward.

Got it. Thanks. Maybe just digging into specialty margin a little bit. I guess in light of the more challenging macro, I mean, What is your confidence level? Obviously, you gave the October 20% level. What's your confidence that you can kind of stay at somewhere near that level, given maybe some further easing of supply chains and how pricing looks?

Yeah, so that's a critical element for us, something that we spend a lot of time and energy on internally. And so we've done quite a bit of work over the last couple of years, year and a half in particular, making sure we have better processes around our pricing, making sure pricing reflect kind of the market expectation and also kind of the value added that we bring, make sure that we've segmented our customers appropriately and are having the appropriate conversation around relative pricing for them as is necessary. So we're going to continue to focus on those things. Clearly, as a supplier, constraints ease and demand falls that will provide pressure. But we're staying really focused on continuing to sell our value, communicating our value, making sure that's clear. And we'll continue to stay really, really focused on driving that outcome. And we're confident that those actions will be beneficial over the medium and long term.

Okay, great. I'll leave it there. Thanks.

Thank you. Our next question comes from the line of Curt Younger with DA Davidson. Please proceed with your question.

Great, thanks, and good morning, everyone. Just wanted to follow up on that last question and maybe take it from a little bit different angle. You know, clearly specialty margins in Q3 still pretty strong, but below Q2, and it looks like we're moderating here a bit in Q4. Has the pace of that surprised you at all? I guess, to date, and is there anything from a product-specific standpoint relative to the framework you use to get to that normalized gross margin range that you think is at risk or has surprised you at all? Any thoughts there?

Yeah, I'll start, and maybe Kelly could add some color as well. I think it's important to level set the context around what's happening in the market. The rate of change in rates is is unprecedented, right? So, you know, more than doubling of mortgage rates in less than roughly around six months. So, you know, the market isn't accustomed to that level of change at that rate in such a short period of time. And so there's going to be some, you know, settling out that happens. And the demand impact, I think, is going to be meaningful. Coupled with, at the very same time, supply constraints really easing. I think, you know, our ability to kind of maintain the margins we did in Q3, and even to this point, is a meaningful accomplishment. That being said, you know, we're going to continue to watch the market. We expect, you know, supply to continue to be eased, and, you know, we'll see what happens with demand. So we're going to continue to navigate that, again, focusing the things we can, our strategic pricing actions, our customer segmentation, making sure that the value add we bring, particularly around things like EWP, continues to be communicated to our customers and will navigate as appropriate. You know, the interesting category that a lot of supply came to the market unexpectedly was millwork. So there's a fair amount of that in the market now, and that's putting some pressure on margins. But, you know, again, we're being very thoughtful around that, very disciplined around that. And, you know, we'll continue to run the play that we've been running and, you know, challenging teams to deliver a good outcome.

And I'll just add, you know, I think it's normalizing and maybe the pace is always hard to predict. But for the last few quarters, we've been mentioning that, you know, when things would normalize, we would expect the margin to be in the range of around where we're starting to see it for October. So I think it's, you know, I think it really gives us a lot of validity to our models and what we thought was going to occur. And we don't know what's going to happen going forward. You know, there's still a lot of you know, macro environment challenges. And we'll just continue to monitor that and continue to update you as we go forward. But I think right now it's kind of going right in line with what we've been communicating.

Okay. All right. Great. That's helpful. And then maybe I'll ask one more and jump back in. But realizing you don't specifically give guidance on specialty pricing and there's a lot of different product categories within that, As we get into Q4, do you still expect pricing to be favorable on a year-over-year basis? And any thoughts around when that might flip and start working against you?

I think, hey, just a point of context and reference, Q4 2021 was an interesting time. If you call pretty big uptick in structural margins. We saw a pretty big rebound from the bottom, kind of the September timeframe, and that kind of moved up a bit. We don't anticipate that will happen this quarter. And then we also, you know, there was continued strength on the specialty margin side. Allocation continued to be really tight. Demand continued to be really strong. So, hey, our focus is on, you know, driving the highest level of profitability we can. You know, we expect that, you know, the guidance we've given previously around margins and thoughts at our investor day are where we're expecting the business to land, provided the market environments remain as is. You know, rates are going to get announced again today. We'll see what the Fed does, and there'll be continued activity. But again, we're going to focus on making sure we continue to service our customers well, continue to drive good customer segmentation, continue to drive pricing well, consistency and process throughout the organization and continue to focus on delivering a really excellent service to our customers.

Okay, great. I appreciate the color and I'll turn it over.

Thank you. Our next question comes from the line of Ruben Garner with the Benchmark Company. Please proceed with your question.

Thanks. Good morning, everybody, and congrats on the strong quarter.

Thank you. At your investor day, you gave a kind of a downside scenario or framework, I guess, a way to think about margins and a 25% revenue decline. Can you talk to us, you know, I think a lot has probably changed since that took place. Talk to us about, I guess, how you feel about that scenario today. And then if for whatever reason it were to be worse than that, if revenue were to decline today, more than the 25% versus 2021, how to think about decremental margins, you know, on the downside.

Yeah. Well, thanks, Ruben, for the question. You know, we've put a lot of thought and thoughtfulness in the modeling that we did to get ready for Investor Day. And so, I think, you know, kind of to the earlier question that we answered, we still feel pretty good about where we are as it relates to that modeling and in the normalization that we're starting to see, I think it is validating the fact that we feel that that was an appropriate range to think about. Certainly, we do, with the softness, do expect some impact. And when you're seeing that, we're seeing those margins come into a reasonable range right around those numbers that we gave. And again, just to reiterate that, we're saying in a normalized environment, we expected margins to fall into more of a 19% to 20% range for specialty and around 9% for structural. And I think that's exactly what we're seeing right here in October and what we would defend as something that we feel comfortable with. Do we know what further decrement would bring? We don't know exactly, is the short story. In all of our models, it's fairly complicated as it relates to the number of products that sit in our specialty. And so it really just depends on how we manage and strategize around the pricing. of each category independently, and also what allocation brings and what the, you know, kind of the buildup in the inventory, in the supply chain around each product line brings. So that being said, I wouldn't change kind of what we have right now. I actually feel really confident about where we are, you know, with all of that, knowing that we could have changes that we can't anticipate, and we're going to keep on top of it, and we're going to just keep communicating what we see. as we go forward. But I really feel great about where we have landed as it relates to what we thought was going to happen and what is happening.

Yeah, we feel pretty good about the work we've done to kind of prepare for a softer environment. A lot of the activity that we've been focused on as relates to driving efficiency improvements, simplifying our business, getting a level of capability in the organization to manage through all economic cycles. We think those things are starting to really, really bear fruit now. And we would really lean into that as we think about 2023, if it's going to be a tougher environment. And the plane we've been talking about and the areas of focus we've been driving are the right ones. And we'll just lean in harder if needed, if we see further demand deterioration beyond kind of that downside case we talked about yesterday.

Okay, perfect. And then the balance sheet's obviously in great shape. even in some of the downside scenarios, I'd imagine you're going to generate a decent amount of cash going into next year as well. I saw the increased share repurchase. I guess any changes or an update on how you think about investing in this environment, some of that cash, any thoughts on M&A? Obviously, you just did a deal, but has the pipeline kind of increase? Does it seem more likely that folks will sell that maybe are kind of seeing the tides turn a little bit? And just a big picture update on capital allocation would be great.

Yeah, I'll get us started. So, hey, we put a lot of thought into how we think about capital allocation, and we've talked about that at LEND. Kelly's kind of provided a lot of details around that. We're staying fairly consistent with our approach. We're going to look at opportunities that allow us to create a return that we're excited about. We still think we have opportunities from a CapEx perspective to continue to make the business better. And again, things that will allow us to have greater capacity around our specialty business and lower our cost to run the business. So a lot of investments that we've made, whether it be rolling stock or other equipment or the facility improvement support that. And we're going to continue to kind of lean into that. And we also like our positioning as it relates to inorganic opportunities. We're very pleased with the Vandermeer deal and remain active and in search of other opportunities aligned with our strategy, whether it be around geographic expansion or specialty growth. And we're going to continue to be highly engaged in that space. And again, if we find a good opportunity at an attractive price, that supports our strategy, we're in a position to kind of move on that. So those are the things we'll continue to do, investing to make the business better. We do believe the long-term fundamentals around the space we're operating, housing, are strong. There's still not enough homes out there for the demand that exists. We're in a unique environment now with rapid rise in rates really driving a pullback. But the consumer balance sheet remains very strong, and people still need places to live, and they still need to make them work for the lifestyles they want. And we're going to make sure we're prepared to participate that in a big way once things normalize.

Great. Congrats again, and good luck going forward, guys. Thank you.

Thank you. Our next question comes from Jeff Stevenson with Loop Capital Markets. Please proceed with your question.

Hi, thanks for taking my questions today and congrats on the quarter. Thank you. So there have been some building products companies that reported they've started to see some slowdown in discretionary R&R demand during the quarter. Just wondered if you could provide an update on kind of what you're seeing there and hearing from suppliers and channel partners right now regarding R&R demand as we move into 2023.

Yeah, I mean, we watched that very closely, obviously, given it's such an important part of our business. On the demand side, it's still holding, right? There's some seasonality that we're starting to see in Q4 as weather changes and less building activity happens. But we haven't seen a tremendous pullback in markets. The stuff we do on the retail side and the pro-dealer side have actually held reasonably well. But we're going to watch it closely. We expect, you know, there'll be some volatility there. All the forecasts suggest that will hold in 23, albeit at a lower rate. We still feel pretty good about the R&R space and our ability to kind of play there.

Great. That's helpful. And then last quarter, I asked you about kind of how you plan to manage specialty products inventories moving forward. And you mentioned that the focus will be on turning over inventories quickly and finding the kind of right supply and demand balance. And just wondered if you could provide an update on kind of how that strategy is working and whether there could be opportunities for destocking in the future on the specialty side, especially supply constraints start to moderate here.

Yeah, we've been really focused on improving our capabilities there, and I'm pleased with the progress we're making. We've been able to demonstrate some really good inventory management practices on our structural side, and we've moved some of those activities, and I'm moving some of those activities more in our specialty business, so we still think there's opportunity there, and we're being very thoughtful around, given the demand environment we're in, how we think about supply and what we bring in and how much and when. And so we'll continue to focus on that. We expect that to support, you know, improve velocity in our specialty business going forward.

Great. Thank you.

Thank you. Our next question comes from the line of Walt Liptak with Seaport Global. Please proceed with your question.

Hi. Thanks. Good morning.

And I'll give you a congratulations, too. Great quarter. Thanks. I wanted to ask about I wanted to ask about the comments about millwork and the pressure there. I wonder if you just provide some more details, maybe starting with how big of a product is that as a percentage of sales? Just refresh us on that. Is this an inventory correction or is it a capacity issue? What do you think the timing is here for the millwork pressure on margins?

Yeah, so I'll give you some context. So a fair amount of that product comes from overseas, Walt. And then, you know, the height of the pandemic and up until recently, supply constraints were tough, whether it be transportation challenges and things of that nature, getting that product across to us. A lot of those things started to ease and a lot of capacity got to the U.S. a little bit sooner than folks had expected. And at greater amounts, folks have kind of ordered ahead to kind of manage through that. So that's one of the drivers of kind of, you know, a fair amount of supply being available across industry on millwork in the third quarter. We feel pretty good about where we are. You know, we're working through that. The benefit, again, we have, given our scale and our national footprint, is that we can position inventory in the place where demand is strongest and allows us to kind of manage that optimally and protect margins. So we're kind of working through that. It's a great product. It's a product that we like. It's a product that gets good value in the marketplace, and we feel confident that we'll be able to kind of work through it. But that's really the drive of what happened there. A lot of the easing happened all at the same time and fairly high levels of product coming to market at the same time. But we feel pretty good about where we are, and the team's focused on it. And we're making sure that, you know, we're thinking about volume and price appropriately.

Yeah, and it's one of many products that we have in our specialty business. You know, we normally list a lot of the different products and we have in that group. And so it's not, you know, the primary product.

Okay, got it.

Yeah, and are there any other products within specialty that are similar to Millwork? where there could be one of these inventory adjustments that you're on the watch for?

No, actually, this was a unique situation given the fact that most of it's imported. That's why we called it out. The rest of the categories are very much in line with how we normally operate.

Okay, great. And then if I could switch over to Vandermeer and that acquisition, what kind of an impact do you expect in the coming quarter on gross margin and what's your approach to managing Vandermeer? Are you taking an active approach or are you going to let them get some back office things done first before you start adding your own processes?

Yeah, so we're really excited about them being a part of the Blue Links family now. Very well, highly regarded organization, great exposure in the Pacific Northwest. The markets they operate in are well in line with the markets we want to be leaders in. So we really feel excited about having them in the team. And our approach is to grow that business. They have some great our products and relationships on the specialty side. There's some gaps we think we can supplement and support, millwork actually being one of them and EWP being another. And so we think there's great volume growth opportunity and specialty through the combination, and the team's focused on making sure that's appropriate, spending a lot of time with their customers. We also have some opportunity to improve kind of the delivery capabilities. They really operated primarily through third parties, and we're looking to kind of put in place a fleet there in that market, which great reactions and positive reactions to from their customers and suppliers to some extent. So we really see integrating them into the business, building upon the great track record they have, providing a high level of service to their customers, providing a broader specialty offer to their customers, and as a consequence, expect a really good outcomes from that as we move forward. Okay, great.

And maybe one last one on M&A. I've had one industrial company that recently took on a really big transformational acquisition and shareholders didn't like it. It was too big, taking on too much debt. I wonder what your view is at this point in the cycle on M&A. It sounds like you're clearly still looking, but just size of M&A. You know, what's your range?

Yeah, you know, no real deviation from what we've communicated in the past. We still think there's opportunities to improve our scale and our reach, and particularly on the specialty side in certain markets. So we're going to stay focused on that. It's a fragmented space, and we think there are deals similar to Vandermeer, give or take, That could be interesting. And, you know, we will only move forward if we believe it's something that's going to create meaningful value that advances us down our path to being a bigger specialty organization, more profitable and more efficient. So that remains kind of our framework. And we're just happy to have the opportunity to kind of engage and hopefully make some good choices.

Okay. Sounds great. Thank you. Thanks, Walt.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Taylor for any final comments. Thanks.

Thank you, Melissa. Thanks for everybody that joined us on the call today. We appreciate your engagement and your questions. Alexandra and I will be available if there's any follow-up questions, and we look forward to speaking with you next time. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.