BlueLinx - Earnings Call - Q1 2019

Transcript

Speaker 0

Good morning. My name is Mary, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter twenty nineteen Earnings Call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question and answer session.

Thank you. I will now turn the call over to Mary Mall, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Mary, and good morning, everyone. We appreciate you joining us for the twenty nineteen first quarter earnings conference call. Our earnings release and the presentation materials that we will be referring to on this call can be found in the Investors section of our website at www.bluelinksco.com. Joining us on the call today are Mitch Lewis, Chief Executive Officer and Susan O'Farrell, Chief Financial Officer. I'll remind you that this presentation includes forward looking statements, which include statements about our future operations and financial performance.

These statements are subject to risks and uncertainties, including those risks and uncertainties identified in our press release and discussed in our filings with the Securities and Exchange Commission. These risks and uncertainties could cause our actual results to differ materially from the forward looking statements. Forward looking statements speak only as of the date of this presentation, and we disclaim any obligation to revise them in light of new information. Today's presentation also includes references to non GAAP financial measures. With that, I'll turn the call over to Mitch.

Speaker 2

Thanks, Mary. Good morning. Today, I'd like to discuss BlueLinx's operating performance, review key milestones and share our perspective on the current status of macroeconomic factors surrounding our industry. Susan will review our first quarter twenty nineteen results and financial position in detail, and then we'll be happy to take any questions you may have. It's now been a little over one year since we closed the acquisition of Cedar Creek.

At the time of the acquisition, our company had successfully navigated numerous cyclical changes in our markets and repositioned the business to where our major strategic imperative as a two step distributor was to gain enhanced scale. There were efficiencies that we knew we could capture through the acquisition, and our increased size could be used to improve margins and enhance financial performance. We are pleased to confirm that we will realize on schedule at least $50,000,000 in annual synergies from this acquisition. In addition, we expect to spend no more than $30,000,000 to achieve them well below our original 40,000,000 to $55,000,000 estimate. These results exceed the projections we forecasted during the announcement of the Cedar Creek acquisition.

Overall, we knew that there would be substantial commercial benefits from combining with Cedar Creek. And as a combined company, we now possess one of the largest product offerings in the building products industry and are a market leader with a broad geographic footprint. When we acquired Cedar Creek, we made clear that there were three steps to be completed over the next eighteen months: integration, margin enhancement, and sales growth. The first step was to complete the integration and capture the synergies we determined were available. We knew the integration of two companies on this scale would create a challenge for our team, given the numerous overlapping markets, ERP systems to standardize, and the melding of two cultures.

We have consolidated 13 facilities and have seven remaining overlapping markets that we will continue to assess, with the ultimate goal of optimizing our regional markets. We consider these additional overlapping markets as opportunities for incremental gains above our projected annual synergies, and any associated costs with these gains are not included in our cost to achieve these synergies. We now have approximately 70% of our revenue on the same ERP system. We're confident that there will be substantial upside from centralizing our IT and ERP platform. We will continue to enhance our systems as we thoughtfully convert remaining facilities while minimizing the impact to our customer base.

Susan will discuss our margin improvement in more detail, but we were pleased to have achieved incremental gains in overall gross margin during the first quarter, even in light of continued challenging conditions for our end markets. The good news is that we believe there is runway in which to expand our gross margins even further. The final step was to utilize the benefits of the BlueLinx and Cedar Creek combination to enhance sales growth. This is an area where we have an opportunity to improve. On a pro form a basis, our first quarter sales were down approximately $146,000,000 from twenty eighteen levels.

There are several dynamics associated with this performance, but they essentially fall into two categories: macroeconomic factors and transaction related dissynergies. Instability in the macro environment certainly impacted our revenue in the first quarter. In the past few quarters, we have discussed the unique collapse in commodity panel and lumber prices in 2018. Today, these commodity prices are substantially below first quarter twenty eighteen levels and remain below the five year historical averages. We estimate that the deflationary pricing in our wood based commodity products alone accounted for approximately 30% of the year over year quarterly decline in our revenue.

This comparative market pricing decline significantly impacted our revenue for the first quarter, and we anticipate that it will continue to impact us in the second quarter as well, which Susan will discuss in more detail. The second macroeconomic factor impacting our sales for the quarter was the performance of single family housing starts, potentially accounting for approximately 25% of the quarterly sales decline when you consider the high historical correlation between our sales volume and single family housing starts. I suspect most of you are aware of the current state of housing. As a management team of a two step distributor, we tend to take a longer term view of the overall market. Over the first quarter, housing starts were down 10% compared to 2018 levels, while single family housing starts performed modestly better, but were still down 5%.

This included a drop of approximately 10% in single family housing starts in March, which typically has higher daily selling averages during the quarter than January and February due to improved weather patterns. We remain optimistic for the longer term prospects for homebuilding in The United States. We were pleased to see the Builder Confidence Index turn upward during the period. Builder confidence remains favorable according to the latest National Association of Home Builders, Wells Fargo Housing Market Index. The April index reading was 63.

In March, it was 62. At 51 or higher, the general outlook is positive. We believe that the builders' confidence bodes well for recovering 2019, and our customers tell us that they generally share this confidence as well. While macroeconomic factors likely accounted for more than half our sales change, there are also factors that have impacted sales volume in the short term that are specific to BlueLinx. We have previously discussed our decision to not include any sales synergies in our thesis for the Cedar Creek acquisition.

Our rationale was that in bringing the companies together, there were likely to be dislocations with certain products and markets that could have a short term impact on the gains we ultimately believe we'll realize. While we remain confident that there will be a sales benefit to the enhanced geographic size and presence of BlueLinx, we are seeing our volumes in the short term impacted by two contributing factors. In light of challenging negotiations, we were not surprised when a legacy Cedar Creek siding brand began to move their business from BlueLinx in the first quarter. While this move certainly has had an impact, it's important to note that no one supplier provided any specialty product category that exceeded 7% of our net sales in 2018. We believe this is a short term disruption, and we will continue to solidify and expand existing relationships with superior manufacturers with strong siding and trim brands such as Allura, Royal, Plygen and MiraTec to help mitigate this loss.

In addition, we believe there are opportunities to take advantage of new distribution relationships with excellent manufacturers. To that end, we recently signed a distribution agreement with James Hardie for siding products in six markets throughout the Midwest. Our goal in the coming quarters and years is to continue to partner with exceptional manufacturers, serve as a strong distributor for their products and help them grow their market share while expanding these products into new markets. We remain confident that our geographic scale and platform with approximately 700 customer facing associates will provide the best wholesale distribution option to drive our suppliers' products in the market. The final factor impacting our volume in the first quarter was related to potential short term market share loss in overlapping markets.

As we analyzed our sales decline during the first quarter, it became apparent that certain geographic territories in which we previously had both legacy Cedar Creek and BlueLinx locations were underperforming compared to locations that had only one facility in a territory. Our standalone markets were generally performing to our expectations in light of current market conditions, but we needed to improve the volume and coordination across those overlapping markets. The bottom line is that the speed and complexity of certain consolidations came at the expense of our operational performance. Our emphasis on quickly integrating facilities under one ERP system and consolidating into one location impacted our customer service in certain locations. We have already seen that this issue can be quickly remedied.

BlueLinx excels at operations and logistics, and our singular focus is on exceptional customer service. Following our assessment of these overlapping locations, we identified certain priorities that we felt would better optimize volume and performance. With close senior level oversight, we've already begun seeing improved operating performance in the current quarter. As we discussed last quarter, a key strength for BlueLinx is that we have a level of operating variability that helps us flex costs as volume declines. During the quarter, we reduced non essential costs and eliminated additional fixed salaries in the business.

This effort, coupled with the synergy benefits that we are now realizing, significantly helped our adjusted EBITDA during the quarter. More importantly, we believe it demonstrates the upside potential of increased sales as we enjoy the benefit of our operating leverage. Rest assured that we will continue to aggressively manage all aspects of the business to help reduce the impact of volume declines in the short term. Overall, we were pleased that given all the various factors impacting our market that we produced solid margin expansion and remain on track with the goals we outlined upon announcing our Cedar Creek acquisition. We're confident that our strategic initiatives are gaining traction and will ultimately lead to expanded market share.

In the coming quarters, we expect to capitalize on any rebound in the housing and remodeling markets going into the busy seasonal spring and summer periods. Ultimately, we believe that BlueLinx is well positioned to deliver solid bottom line performance and cash flow generation as we unlock the value created from the Cedar Creek acquisition. Finally, let me take a moment to thank all the BlueLinx associates for their talent and hard work. Our company has over 2,200 associates managing over 10,000 customers that cover the entire country. It's a result of this effort that we believe we can execute on the initiatives we have in place.

And now I'd like to turn it over to Susan, who will provide details on our financial performance.

Speaker 3

Thanks, Mitch, and good morning, everyone. I'll go through the financial results and then discuss our financial position. I'll be brief and we certainly welcome any questions from investors that would like to discuss our results in greater detail following our prepared remarks. Starting with Slide eight, net sales were $639,000,000 up $2.00 $1,000,000 or 46% as a result of the Cedar Creek acquisition last year. It's important to note that the one year anniversary of the transaction was April 13, so we will see a partial quarter of combined financial results through our second quarter.

Pro form a net sales, which take into account the acquisition as it occurred on 01/01/2017, were $639,000,000 compared to $784,000,000 in the first quarter of last year. The revenue decline we experienced during the first quarter was largely due to the housing market decline, commodity deflation and the sales dis synergies that Mitch noted earlier. We delivered gross profit of $86,000,000 up $31,000,000 over the same prior year period and gross profit was down $14,000,000 on a pro form a basis. Gross margin improved to 13.5% from 12.6% from the prior year period. That's up 90 basis points, a terrific improvement.

For the quarter, we had positive adjusted EBITDA of $17,000,000 up $9,000,000 from the prior year and down only $2,000,000 on a pro form a basis. Given the top line, we are pleased with this relative performance. Cash on hand and excess availability under the amended ABL as of March 3039, was approximately $114,000,000 This is an increase from the $92,000,000 at year end 2018. Moving to Slide nine. As we think ahead to the second quarter, we will continue to see an effect on the top line revenues as structural commodity wood prices continue their return to more normalized historical levels.

For example, the composite lumber index was an average of $540 in the 2018. We exited April 2019 with a composite lumber composite price of $351 slightly below the five year average. While we don't know what lumber prices will do in the future, if the prices remained the same for the second quarter, that would be a 35 percent decline in lumber pricing independent of volumes. Composite panels are in a similar situation, running an average of $549 in the 2018, while we exited April 2019 with panel pricing at $354 a 36% decline. Lumber and panels make up the majority of our structural business.

On Slide 10, as a reminder, our business is largely split between two types of building products: specialty products, such as cedar products, molding, insulation and engineered lumber and structural products like lumber, OSB, plywood and rebar. Specialty products make up approximately 69% of our sales in the first quarter and structural products, which are typically more sensitive to commodity pricing, represented 31% of our sales. We are pleased with the margin improvement we realized compared to our twenty eighteen Q1 pro form a results. Our first quarter overall gross margin rate was 13.5%, up 80 basis points on a pro form a basis. Pro form a gross margin for Specialty Products was 15.6%, up 90 basis points over the prior year period.

Structural gross margin was 9.5, up 20 basis points from last year and significantly up from the fourth quarter. These improvements reflect the procurement synergies we have been able to realize, coupled with a stabilizing commodity market. As Mitch noted earlier, we do expect to realize the at least $50,000,000 in annual synergies from the Cedar Creek acquisition ahead of schedule and substantially come by the 2019. For those of you following along on our slide presentation, this is outlined on Slide 11. In addition, we expect to spend no more than $30,000,000 to achieve these synergies, well below our original 40,000,000 to $55,000,000 estimate.

Moving to our deleveraging initiatives, it's important to be able to dissect the elements impacting cash utilization and free cash flow potential with greater scale following the integration. In our slide presentation on Slide 12, we illustrate this deleveraging potential at varying levels of operating scale. Our annual cash costs, not accounting for any working capital changes, include interest, financing leases, CapEx, state taxes, which remain a cash item, and a few smaller items. With our current capital structure, these items total approximately $70,000,000 annually. In other words, our low capital requirements and low interest rate ABL debt create a significant platform to deleverage the company by paying down debt.

There are also elements where we believe there is further upside cash flow potential to unlock, particularly through our real estate. Our owned real estate remains an opportunity given the flexibility for our amended term loan earlier this year. Let me take a moment to walk you through the optionality these real estate investments afford BlueLinx. BlueLinx has 33 owned properties. Our unencumbered real estate was appraised by a national real estate appraisal firm near the 2017 to be worth $150,000,000 to $160,000,000 which is approximately four times the book value.

During the period, we've been actively marketing seven properties that we exited as part of Cedar Creek transaction. These are held on our balance sheet, and we intend to sell these properties and utilize those proceeds to pay down debt. We estimate these locations have an approximate value of $25,000,000 We are in active contract negotiations for a few properties and anticipate being able to update you regarding our progress of these potential sales in the coming weeks. In addition to our ability to sell certain specified properties, we believe there is considerable deleveraging potential in sale leaseback opportunities, which was enhanced following our recent amendment of our term loan facility. This amended loan allows us to monetize up to $50,000,000 of properties through sale leasebacks in 2019 and provides additional flexibility with our covenants and reporting requirements.

We've made significant progress with potential sale leaseback opportunities to monetize certain owned properties and are also expect to be able to update you on developments during the second quarter. As a reminder, the first $30,000,000 of any of these proceeds will pay down the term loan with the remainder reducing our ABL balance. So in total, we see up to $75,000,000 from real estate that we could utilize to deleverage this business this year. We are pleased with our progress on the real estate front and we expect to update you soon. We also expect to have federal NOLs that we can help shelter the tax impact from selling real estate as well as future earnings.

At quarter end, these NOLs were approximately $100,000,000 As Mitch noted earlier, our focus remains on taking great care of our customers operationally, concluding our integration work and maximizing all of the assets we have available at the company. As we've discussed on previous calls, one of the key attributes of combining our two legacy businesses is the improved financial flexibility that will support our growth and long term deleveraging. Finally,

Speaker 4

over the

Speaker 3

course of the next few months, we intend to be proactive in speaking with the investment community to highlight our market position and value proposition. And with that, Mary, we'd now like to open it up for questions.

Speaker 0

Thank you. Our first question is from the line of Alex Rydell from B. Riley FBR. Your line is now open.

Speaker 4

Thank you. Good morning, Mitch, Susan.

Speaker 2

Good morning.

Speaker 4

Couple of questions. First, congratulations on cutting down the overall cost of integration here to $30,000,000 Maybe I missed it, but if you could kind of characterize some of the bigger buckets of where you found the savings?

Speaker 2

Sure. I mean, generally, one of the things we did is we stood up a internal team, where we took some of the most talented folks we had in the organization and dedicated them to the IMO group that helped with the integration and the consolidation. And so we were well under budget related to third party costs that we thought we were going to have from a professional standpoint. We're getting some good news, think, on some of the lease breakage opportunities that we have from a real estate perspective as we've seen with our own land and that we actually own, as well as the lease facilities, the properties that we have seem to be pretty desirable. So we're getting some good news on the ability to sublet or get out of these leases as well.

That would be two areas that right off the top of my head that I would say would be contributing to that.

Speaker 4

And as it relates to some of the dis synergies that have occurred following consolidation, you've got seven remaining overlapping markets. So I suspect there's some future dis synergies that could develop. But from the 13 that have already played out so far, can you help us to sort of understand how long do those dis synergies linger for?

Speaker 2

Yes. So I talked about it in two buckets. One was dislocation from a supplier standpoint. I mean, will take some time to recover because we have to bring in new inventory. We have to obviously promote new brands.

We have lot of confidence in our ability to do that. But when you lose that sales revenue quickly and you try to recover it, it just takes a little bit of time. The second piece though, as it relates to bringing the facilities together and causing a disruption in the local market, Those we should be able to fix, and are already seeing enhanced benefits from just attacking it quickly. So we actually sent out about a dozen of our senior operation leaders, to various locations to help. And part of that is training associates locally, for example, on products, so they can be more efficient as they pull on products.

Outsourcing, for example, logistics short term that enable us to get rid of backlogs that has enhanced lead time or that have hurt lead times for customers. So that I would say is much quicker. I think about we should be primarily complete with that activity by the end of the second quarter. I would say the other thing is and then the final thing is just the final point with the potential of these remaining overlap markets and the potential of the synergies. I can tell you we've learned a lot as a team in a year.

And we will be very thoughtful about how we bring those remaining facilities together. It's one of the reasons we basically have said, hey, mission accomplished. And that's additive going forward, because we want to make sure we do it exactly right without negatively impacting our customer base.

Speaker 4

Sure. And then as it relates to real estate assets that can be monetized, 75,000,000 in 2019 is a very attractive number. Post or after 2019, could you maybe put a range on what other real estate might be remaining to monetize over 2020, 2021?

Speaker 3

Yes. So we think about it, we said there's 150,000,000 to $160,000,000 which includes the $75,000,000 that we're going after this year. So we have the balance remaining after that. And I think we'll look at it market by market. So there's still another $80,000,000 or so remaining that we could choose to monetize and that's a very market by market decision as far as what we think the position is in the real estate and the attractiveness, but we have optionality on that that we could certainly pursue.

Speaker 4

And then lastly, housing starts in March, you mentioned were down.

Speaker 5

How did

Speaker 4

the cadence look in, April and May?

Speaker 2

It definitely looked, increased relative to the first quarter. We felt some optimism. It dried out particularly later in the month from a volume standpoint. Again, and I'm sure you've heard, there are the second quarter as we mentioned clearly will be tough comps compared to the 2018 levels, which were robust both from a demand perspective as well as an escalating commodity price perspective. But certainly relative to the first quarter, we've seen it improve.

Speaker 4

Very helpful. Thank you.

Speaker 5

Sure. Thank you.

Speaker 0

Your next question is from the line of Alan Weber from Robotti Advisors. Your line is now open.

Speaker 5

Good morning. How are you?

Speaker 2

Good. Good morning. Good morning.

Speaker 5

Good. So a quick question on Mitch, when you talked about the dis synergies or dislocations, I I know you can never really know if the if the bulk are behind you. It's hard to really guarantee. You can't guarantee that. I understand.

But is it do you think the bulk of these dislocations are behind you?

Speaker 2

Yeah. I would say, when you when we say behind me, I think we have, you know, experienced the bulk of them. Yes. So I mean, they will again, particularly as it related to the supplier dislocation, I mean, that's that's, you know, the, that will continue, going forward until we recover from that. But as far as these operational, you know, stub our toes, you know, I I feel very good that, you know, by the end of, this quarter, we should be in position to have put most of that behind us.

Speaker 5

And once and when do you become, you know, even though if you think about you look at your press release on the calls, you talk a lot about the synergies, and you're doing a great job. When do you become more proactive in terms of trying to get the positive sales synergies that you talked about at one point? When does that really start to happen? Do you think that opportunity is better or worse than you originally thought when you did the deal?

Speaker 2

Yeah. So that's happened. I mean, as we one of the things, that happened in there so for example, I was out in several markets talking individually, you know, to, sales teams as well as customers. And one of the consistent themes from our customer base is that they realize the value that we bring into the markets. So we feel really good about that.

In markets that are not where we don't have the overlaps, we are farther along with the ability to move forward and start getting sales synergies, because they have enhanced products, brands that we're starting to sell and we're starting to get make some good progress. I would say the focus still in locations where we have these overlap markets is making sure that we serve our existing customer base well with the products that we have. And we want to make sure that we have some stability there before we get very aggressive from a growth standpoint. But I can tell you, the top line of this business is a conversation that for the last sixty days has been first and foremost on the executive team and the entire organization. And it's something that we're focused on and will emphasize.

As far as the long term opportunity, we've stated consistently, and I still believe that this market will continue to consolidate and that enhanced geographic locations and products creates operating efficiency that's good for our customer base, the ultimate consumer and provides opportunity the bigger you are in a fragmented market. So I continue to believe that we have significant sales synergy opportunities. But as we've said from the outset, we didn't bake any of that into the acquisition thesis for Deer Creek.

Speaker 5

Okay, great. Thank you very much.

Speaker 2

Thank you.

Speaker 0

Okay. We have no further questions over the phone, presenters.

Speaker 2

Okay. Well, thank you, Mary. And we certainly appreciate you joining us today and your continued support and interest in BlueLinx. We look forward to speaking with you on our second quarter conference call in August. Thank you so much.

Speaker 0

This concludes today's conference call. Thank you everyone for joining. You may now disconnect.