BlueLinx - Earnings Call - Q4 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the Ruling Fourth Quarter twenty nineteen Investor Relations Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, speaker Mary Moll, Director of Investor Relations.

Thank you. Please go ahead, madam.

Speaker 1

Thank you, Nora, and good morning, everyone. We appreciate you joining us for the BlueLinx twenty nineteen fourth quarter earnings conference call. The earnings release is posted in the Investors 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 Susan O'Farrell, 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 risks 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 Investors section of our website. With that, I'll turn the call over to Mitch.

Speaker 2

Thanks, Mary, good morning. Before we dive into our fourth quarter and 2019 performance, I'd like to discuss the news we announced yesterday that Susan O'Farrell will be retiring from BlueLinx in early April. As many of you know, Susan joined BlueLinx a few months after I began with the company in 2014. And over the last five years, she's been a tireless advocate for BlueLinx. I speak on behalf of the entire BlueLinx family when I thank Susan for her many contributions to our organization and wish her well in what I know will be a successful next chapter.

I'm also pleased to announce that Kelly Jansen will be joining BlueLinx on April 13 as our CFO upon Susan's departure. Kelly has strong technical and process expertise through a varied career, including more than a decade at General Electric and roles with increasing responsibility. She has been the Chief Accounting Officer for the last six years for both Baker Hughes and more recently WestRock, an $18,000,000,000 corrugated and consumer packaging company. We are pleased to have Kelly on our team and are confident that her knowledge and expertise will help us drive process improvement and innovation as we continue to garner administrative and operational efficiencies within our organization. 2019 was a transitional year for BlueLinx as it marked our first full year of operations following our 2018 acquisition of Cedar Creek.

The year was a period of dramatic change for our organization in which we consolidated facilities in three additional markets for a total of 13 facility consolidations, converted 25 facilities to our ERP platform, which is complete with the exception of two fabrication facilities entered into several sale leasebacks, which coupled with our twenty twenty sale leasebacks have reduced our term loan by over $100,000,000 realigned our executive sales leadership to help drive market share growth, reduced our operating regions and regional officers from seven to five, created a new national operational center of excellence to help drive efficiency and logistics and invested in additional headcount and resources in strategic product and sales categories to help fuel profitable sales growth. We made significant progress in 2019 and are beginning to see the results of our efforts. The first two months of 2020 are reflective of this progress as our sales volumes increased compared to the same period in 2019. We understand we have significant work ahead of us, but we're clearly on our way. Turning to our financial results for the fourth quarter.

Our net sales of six thirteen million dollars were basically flat to prior year when you consider the $46,000,000 decline from the discontinued Siding line for the quarter compared to 2018 levels coupled with a commodity deflationary impact of $13,000,000 As we have discussed previously, our distribution of the Siding line was discontinued in early twenty nineteen and wound down during the first half of that year. We estimate that the 2019 net sales impact was approximately $160,000,000 compared to pro form a 2018. And we expect this comparative headwind to diminish to $32,000,000 in the 2020 and $16,000,000 in the second quarter, at which point the comparative effect will be negligible. We are continuing to make good progress in driving new sales in our Siding category as well as other product categories, which is evident in the volume increases we have enjoyed in January and February. Adjusted EBITDA for the fourth quarter was $10,900,000 compared to $6,800,000 in 2018.

The improvement in adjusted EBITDA was driven primarily by higher gross profit and lower SG and A expenses, demonstrating the progress we have made in improving our operations. We continue to maintain our efforts on gross margin enhancements as it improved 140 basis points from 12.1% in Q4 twenty eighteen to 13.5% in Q4 twenty nineteen. We've previously discussed the integration challenges that we faced in 2019 with respect to overlapping markets that negatively impacted our market share. In late summer, we renewed our historical focus on providing world class customer service. We invested in additional staff for our customer service teams, added operational leadership and provided additional support to our warehouses ensure that the service level of these locations returned to the high historical levels that BlueLinx is traditionally known for.

These measures have clearly made a difference as sales unit volumes recovered in the 2019 and higher year over year volumes are continuing into 2020. In fact, the fourth quarter represented the first full quarter that we experienced a year over year increase in volumes in overlapping markets since the acquisition of Cedar Creek. And as you can see on Slide four, this trend has continued in 2020 through February as our volume for these overlap markets was up around 14% compared to the same period in 2019. With respect to housing, while various macroeconomic indicators such as wages, unemployment and interest rates that support the general housing market were strong throughout the year, overall housing activity was relatively modest with single family housing starts, a key driver of our business, up just 1.5% for the full year in 2019. Much of the annual increase was driven in the last two months of the year, which are seasonally slower months for our industry.

We do believe that some of the strength we experienced in the first February 2020 was based on the increased single family housing starts towards the end of the fourth quarter. Of course, there is a great deal of uncertainty regarding future market demand in light of the coronavirus outbreak. Nonetheless, as late as last week, we had not seen a decline in our demand. In fact, our gross sales for the March actually increased around 14% from the same period a year ago. We're also fortunate that our direct purchases from China are relatively low, representing less than 3% of the company's total product purchases in 2019.

We've only seen relatively minor supply disruption from China directly to BlueLinx so far this year. To be clear though, we do understand that it is likely that the coronavirus will cause further disruption and potential market deterioration. While we have established internal teams to closely monitor and react to this situation, we anticipate that it will likely create some headwinds to an otherwise excellent start to the year. As we made clear, our number one priority in 2020 is to profitably grow our business. As I mentioned previously, we commenced various initiatives in 2019 that are driving our performance in 2020, including investing in our sales organization.

In addition, our local teams continue to develop and implement local market strategies that have shown to be effective in driving sales revenues. We have initiated robust processes to monitor data and measure performance to ensure execution. On the supplier side, we continue to invest in developing and expanding our key supplier relationships through collaborative initiatives intended to grow market share. In addition, leveraging our ability to provide an efficient distribution platform to our national customers remains a high priority for BlueLinx as we have developed specific plans to grow with these key partners. We are committed to profitably grow our business in 2020 and the early results confirm this commitment.

Finally, I want to highlight the great progress we made in deleveraging in 2019 and into 2020. As we have consistently stated, a strategic imperative following the acquisition of Cedar Creek was to reduce debt, which at the end of the second quarter in twenty eighteen totaled $629,000,000 Throughout the course of 2019 and into early this year, our team did a fantastic job in executing numerous real estate transactions, both sale leasebacks and outright sales that generated significant proceeds allowing us to reduce our term loan. Today, our term loan balance is down to $77,000,000 from the initial principal of $180,000,000 We are pleased to have derisked our balance sheet materially over the course of the year and to have entered 2020 on a stronger financial footing. Last week, we also announced an amendment to our term loan that eliminates our leverage covenant once we reduce our principal to $45,000,000 We entered into this amendment solely to take advantage of a no fee option to eliminate leverage covenants in the future. I want to be clear that we fully expect to be in compliance with our leverage covenants as we continue increasing EBITDA while executing on our historical strategy of deleveraging the company.

I also want to reiterate that as we have stated in the past, we do not have any intention of issuing equity to reduce the principal on our term loan. We have confidence in our future and do not believe that our current market capitalization appropriately reflects our long term value. Our continued emphasis to reduce bank debt through real estate monetization as well as to enhance operating performance should provide ample ability to continue to meet our covenants and reduce our term loan balance in the months ahead. Of course, we believe that it was prudent with no downside to create this option to eliminate the leverage covenant in the days ahead. And now I'd like to turn it over to Susan, who will provide more details on our financial performance.

Speaker 3

Thanks, Mitch, good morning, everyone. I'll briefly review the financial results and our financial position for the quarter and full year. Starting with slide seven, net sales were $613,000,000 compared to $673,000,000 in the fourth quarter of last year. As Mitch discussed, net sales were impacted primarily by lower commodity prices year over year, specifically panel prices and the decline in siding product sales due to the loss of a key product brand and the ensuing comparative effect. We continued our trend of higher gross profit on a year over year basis, generating 83,000,000 compared to $81,000,000 reflecting gross margin of 13.5% compared to 12.1%, an improvement of 140 basis points.

We achieved gains in both structural and specialty product categories with structural gross margin improving to 8.7 from 3.6% last year and specialty gross margin of 16.1% compared to 14.8% last year. For the fourth quarter, we delivered adjusted EBITDA of $10,900,000 compared to $6,800,000 last year, driven by higher gross profit and lower SG and A expenses on an absolute basis. SG and A was down approximately $5,000,000 for the fourth quarter on a year over year basis. SG and A was 12.4% of sales, which was mostly a function of lower sales. As we mentioned in our last call, we made investments in the areas of businesses necessary to provide our customers with best in class customer service, such as delivery related expenses and material handling.

And these investments are starting to pay off as we've seen sales volumes increases across our entire business for the fourth quarter and the volume increases have continued into the first quarter too. Cash on hand and excess availability under the ABL averaged $88,000,000 during the fourth quarter and was approximately $80,000,000 at quarter end, providing ample liquidity to meet our working capital and other cash needs. For the full year 2019, net sales totaled $2.00 $6,000,000,000 compared to $2.00 $9,000,000,000 generated in 2018. Pro form a net sales, which take into account the acquisition of Cedar Creek as if it had occurred on 01/01/2017, were also down year over year. Pro form a net sales were affected primarily by significant commodity deflation of $221,000,000 as compared to prices in 2018 and $160,000,000 from the impact of the discontinuation of a major siding program.

In 2019, we delivered gross profit of $357,000,000 compared to $332,000,000 in 2018 or $394,000,000 on a pro form a basis. Overall, profit margin improved from 13.5% from 11.6 in 2018, up 140 basis points on a pro form a basis. The improvement in gross margin was driven by gains in both our structural and specialty product categories as we begin to gain traction from our pricing initiatives and see the benefit of scale from the acquisition of Cedar Creek. For the full year 2019, we had adjusted EBITDA of $71,400,000 compared to $68,500,000 in 2018 or $80,000,000 on a pro form a basis. Adjusted EBITDA benefited from higher gross margin rates, yet was impacted by lower net sales.

Turning to slide '9, 2018 was a historic year in terms of both commodity price levels and volatility as lumber and panel prices soared in the second quarter before dramatically declining throughout the remainder of the year. In 2019, prices stabilized and remained at lower levels, which significantly impacted our net sales on a comparative basis. On a full year basis, our SG and A costs were down approximately $14,000,000 $3.00 $5,000,000 for 2019 compared to $319,000,000 last year. On a pro form a basis, SG and A costs were lower by approximately $29,000,000 year over year. This includes substantial savings from payroll costs, especially back office and corporate costs, reflecting the value of our acquisition.

And while SG and A costs were down, these figures still include incremental second half expenses related to improving customer service. Looking ahead to 2020, we will continue to focus on our customers to ensure we keep growing market share while aligning our operational expenses to the rate of sales. Moving to slide 10. This slide demonstrates the sustained progress we have made from a gross margin standpoint with respect to both structural and specialty categories. Specialty gross margin was 16.1%, up 130 basis points over the prior year.

We continue to generate structural gross margins in the high 8% range with the slight change from the prior quarter attributable to product mix. These gross margin results reflect operational improvements we have made in addition to the benefits we have gained from the acquisition. Moving to the balance sheet on Slide 11. Here are the details on the term loan reduction we have shared with you. Debt reduction was a key priority for us for the company following the acquisition in 2018, and we stated our intention to utilize our owned real estate portfolio to help us reduce our term loan and ABL debt.

We reduced our term loan substantially by $102,000,000 The reduction in term loan includes approximately $70,000,000 in net proceeds from a series of sale leaseback transactions that closed shortly after year end. Our term loan balance now stands at $77,000,000 compared to $179,000,000 at the 2018. We are very pleased to have reduced our term loan balance so significantly. We did this primarily by completing 10 real estate transactions totaling 21 properties, which generated net proceeds of approximately $128,000,000 And it's important to note that these transactions continue to hold up to their appraised value and generated proceeds of 106% of appraised value. Additionally, the most recent sale leasebacks were executed at a weighted average cap rate of 7.4%.

This is a reduction in cap rates from our previous deals and is a lower rate than our term loan, which was 8.7% at the 2019. With this continued change in our capital structure, we have lowered our estimated annual uses of cash to approximately $65,000,000 which includes the approximate payments as follows: real estate property finance lease payments of $23,000,000 ABL interest of approximately $15,000,000 equipment lease payments of $8,000,000 term loan interest of $6,000,000 CapEx of $6,000,000 and cash taxes, pension and other costs in the aggregate amount of about $7,000,000 Following these most recent transactions, we have 13 remaining properties valued at approximately $40,000,000 that we can monetize. This includes three remaining overlap facilities or dark properties with an estimated market value of approximately $8,000,000 and 10 operational properties appraised at approximately $32,000,000 with a corresponding book value of 7,000,000 We will continue to assess opportunities as they arise. We do not anticipate announcing any further material real estate transactions in the near term. We are in full compliance with our term loan and ABL agreement, and we look forward to continuing our efforts to reduce and prepay debt ahead of schedule.

We remain confident that the BlueLinx business model provides a strong platform capable of generating cash over and beyond our annual uses. And in closing on a personal note, after thirty five years of working with Accenture, Southern Company Gas, The Home Depot and of course BlueLinx, I've been fortunate to learn from so many terrific business leaders. It's now my time to step back from BlueLinx in order to pursue my other passions more fully. I want to continue and to expand my board work and to be able to share some of my business experiences. I'm really excited about what lies ahead.

And I want to thank Mitch for the past six years. And for my team, I'm so very appreciative of your talents and passion for our business. Together, you continue to make a positive impact on our business. And as a mentor said, this isn't retirement, this is time for my rewirement. And with that Mitch, I'd like to turn the call back to you.

Speaker 2

Thank you, Susan. So looking ahead for the remainder of the year, we are well positioned financially with a significantly delevered balance sheet, solid liquidity and a plan for top line growth. We're pleased to see a solid start to the year in the first two months, which provided optimism on how this start would play out throughout the year and translate into product demand as we enter the busy spring and summer seasons. As I mentioned, the coronavirus has certainly made the next several weeks uncertain and yet we are confident in the foundation we are creating to provide a strong future for BlueLinx. We will continue to work on areas that we can control.

We have made great strides in recapturing market share in overlap markets and we have made significant progress in initiatives that will help us grow further organically. We have turned the organization's complete focus on profitably growing the business, which is our most important priority in 2020. Our plan is to take advantage of our position as a leader in the wholesale distribution industry, while ensuring that we always provide both great value and great service to our customers and our suppliers. Finally, want to thank the BlueLinx team. It is difficult to clearly articulate how challenging the integration in 2019 was to our daily routine.

Our associates have weathered the storm and made fundamental changes to our business that will serve us well in the months and years ahead. Truly, truly great work. Thank you. And now Nora, we'd like to open it up for any questions we may have.

Speaker 0

Your first question comes from the line of Alex Rygiel of B. Riley FBR.

Speaker 4

Congratulations.

Speaker 3

Thank you. Thank you, Alex.

Speaker 4

A couple of random questions here. First, Mitch, thanks for the update on the volume growth year to date, up 14. That's fantastic. Could you comment on sort of the aggregate impact of lumber and panel prices year to date on the business so far?

Speaker 2

Yes. So obviously, we've seen a bump in both lumber and price lumber and panel during the first part of the year. And when you see some escalation in commodity wood prices, it tends to have a short term impact on demand. It's very difficult for us to assess how much is the actual market growing and how much is some demand being created by incremental increases in commodity prices. But we certainly think that has had some effect.

Speaker 4

And would you characterize that sort of in the single digits? Or is that also in the double digits as well year over year?

Speaker 2

As far as the demand created by the increase in commodity wood based prices, it would be Alex, just really challenging for us to kind of break that out by your requested percentage.

Speaker 4

Okay. SG and A seemed a little high in the fourth quarter, could be my modeling. But if you could comment on SG and A and how you think about SG and A in 2020 relative to 2019 that would be

Speaker 3

Alex, certainly we came in a little bit higher than we thought. Although again we're pleased that we were down almost $5,000,000 So we said we're going to take action and we did. But we were very thoughtful with those actions. As you can see, our focus has been on turning the ship on sales and you've seen the positive impacts on volumes that we lifted up for you. And we think there's a correlation there.

We're making the right investments in the right places, but still being thoughtful about taking cost out. We know there's still an opportunity to lean out this business and we still see those opportunities ahead of us. But first thing on the plate has to be taking care of customers. And if that means incremental delivery expenses like we've spent, we think it's a wise investment. Over the course of time though, we still believe there's opportunity to lean out.

And if we look back at our previous run rate of delivery costs and SG and A costs, know we can get lower. But right now when you think about it, just always remember that it's of course it's a numerator and a denominator and we're working on lowering our costs while we make sure we take care of those sales. So we look to see improvements in the coming year.

Speaker 4

And lastly, as it relates to the 13 remaining properties, can you help us appreciate sort of the timeline of when those properties could be liquidated?

Speaker 2

So we're actively pursuing the three dark properties that we've talked about in the past. So we're not in a position to be able to comment on where we are there, but we're certainly actively looking at that. And then we're being thoughtful and selective as it relates to potential sale leaseback opportunities for the remaining properties as we look at those locations and specific properties in relation to the long term strategic value of the locations, whether those are the right properties. So I'd say very quickly on dark properties and certainly assessing a few of the properties that we might do sale leasebacks with.

Speaker 4

Very helpful. Thank you.

Speaker 2

Okay. Thank you. Thank you.

Speaker 0

There are no further questions. I'd like to turn the call back to the presenters.

Speaker 2

Okay. Well, thank you very much. We certainly appreciate your continued interest and support of BlueLinx, and we look forward to updating you on our continued progress during our May call. Thank you.

Speaker 0

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