BlueLinx Holdings Inc. (NYSE:BXC) Q4 2023 Earnings Call Transcript
BlueLinx Holdings Inc. (NYSE:BXC) Q4 2023 Earnings Call Transcript February 21, 2024
BlueLinx Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the BlueLinx Holdings Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode, and today's call is being recorded. We will begin with opening remarks and introductions. At this time, I would like to turn the conference over to your host Investor Relations Officer, Tom Morabito. Please go ahead.
Tom Morabito: Thank you, operator, and welcome to the BlueLinx fourth quarter and full year 2023 earnings call. Joining me on today's call is Shyam Reddy, our President and Chief Executive Officer; and Andy Wamser, our Chief Financial Officer. At the end of today's prepared remarks we'll take questions. Our fourth quarter and full year news release and Form 10-K were issued yesterday after the close of the market along with our webcast presentation. And these items are available in the Investors section of our website bluelinxco.com. We encourage you to follow along with the detailed information on those slides during our webcast. Today's discussion contains forward-looking statements. Actual results may differ significantly from those forward-looking statements due to various risks 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 GAAP financial measure can be found in the appendix of our presentation. Now, I'll turn it over to Shyam.
Shyam Reddy : Thanks, Tom and good morning everyone. We are pleased with both our fourth quarter and full year of 2023 results, especially in a year when rising interest rates and macroeconomic uncertainty impacted demand in the housing and building product sector. Our margins remain strong in specialty products, which accounted for about 70% of our net sales for both the quarter and the full year and we continue to generate solid margins in our structural products business. During the quarter, we also demonstrated our commitment to returning capital to shareholders by repurchasing shares under our new $100 million share repurchase authorization. For the year, we returned $42 million to shareholders, which includes repurchases under our previous $100 million share repurchase authorization.
Before I jump into the 2023 results, I want to share our vision and that's to become the most technologically advanced 2-step distributor of building products in the U.S. in the coming years. This will enable us to become the first option for suppliers to bring their products to market and the first option for home retail stores, one-step distributors, pro dealers and independent lumber yards to deliver the right products where and when they need them. And in so doing we'll be able to optimize our brand mix in all markets, reduce our cost to serve, manage our business more cost effectively, reduce the number of touch points to meet our customers and suppliers demands and to accelerate our ordering times. And that's just to name a few. In the meantime, we remain committed to our corporate growth strategy to get us there in 2024 and beyond.
First, by focusing on our core business specialty sales growth in five key categories. Second, by pursuing opportunistic M&A, and third, by developing opportunistic greenfields, all of which will be supported by three strategic enablers, business, operational and digital excellence. As it relates to the first prong, we are allocating a substantial share of time, resources and capital to growing engineered wood, siding, millwork, industrial and outdoor living products, our five key high margin specialty product categories in the core business. These product categories and the strategic vendor partners we've aligned with enable us to be a necessary extension of our customers’ business. There are also 2-step distribution-friendly product categories sold at various points of the construction cycle rather than at just the front or back end of a single or multifamily housing project or remodeling job for that matter.
They also drive higher net sales and gross profit, which generates sustainable and durable operating cash flow that can be reinvested back into the business and used to fund opportunistic M&A and greenfield projects. Given our scale, geographic reach, selling capabilities and product depth, we are committed to providing our customers with a total 2-step distribution-friendly product solution that also includes structural products, which our customers want and that we believe complements our specialty product and value-added services offering. From a channel perspective, we see additional opportunity by growing national accounts and multifamily sales while investing in builder pull-through capabilities to drive sales growth with our national account and traditional customer base.
I continue to be excited about our strategic enablers, the fuel that supports our organic sales growth strategy; business, operational and digital excellence. These efforts have continued to support our customer experience, maintain solid margin levels in both specialty and structural products and provide a flexible cost structure that can fluctuate based on seasonal levels of demand. We are also effectively managing our costs, resulting in a solid 2023 adjusted EBITDA margin of nearly 6% despite wage benefits and other inflation on top of challenging market conditions. Now back to the vision, becoming the most technologically advanced 2-step distributor building products in the United States, which I believe will transform BlueLinx and make us the provider of choice for both suppliers and customers.
These technology improvements are designed to enable us to rapidly grow our business at scale with both customers and suppliers by providing an exceptional customer experience in a more efficient and effective manner than today. I would like to offer a few more details. Over the past couple of years, we have taken some preliminary and foundational steps designed to improve our data warehouse and analytical capabilities, upgrade some of our back office tools, expand our EDI capabilities and enhance our general technology, hardware and infrastructure. Beginning in 2024, we are embarking on a multiyear digital transformation journey that starts with architecting our data so that it better supports and advances our strategy, enhancing our transportation management capabilities and launching e-commerce functionality.
As a result, we will be optimizing our management of freight costs, shipment routing, truckload build and logistics which is expected to reduce our cost to serve, implementing more scalable supplier and customer EDI capabilities, enhancing our governance and management of product, customer and supplier master data and piloting an e-commerce platform. We also believe that these digital improvements will further enhance our existing sales, operational, pricing and procurement excellence initiatives. On our digital transformation journey will result in an initial increase in both OpEx and CapEx, which Andy will expand on in a moment. We believe these investments are critical to reducing our operating costs, realizing our vision and enabling us to become the provider of choice for both customers and suppliers, thereby allowing us to execute successfully on our long-term profitable sales growth strategy.
The second and third prongs of our growth strategy reflect our commitment to opportunistic M&A in greenfields. We are strategically targeting acquisition opportunities that are designed to expand our geographic reach and support our specialty product sales growth strategy. We remain committed to buying only companies at valuations that make sense for us that support our strategy and that are in the best interest of our stockholders, hence the opportunistic and measured nature of our approach. On the greenfield front, we have identified several markets that are potentially great opportunities for new market development. Our financial position remains strong with liquidity of $868 million at the end of the year, including a record $522 million of cash on hand.
This strength gives us the flexibility to reinvest in business initiatives that allow us to grow sales, improve productivity, expand our geographic reach and provide better customer and vendor service, an example of which would be our digital transformation. And of course, having the ability to return capital to shareholders remains very important as demonstrated by our share repurchase program. Next, I'd like to offer a few highlights from 2023. First, we delivered solid full year 2023 results, particularly in light of the challenging macro environment. As you know, during the year, higher interest rates and lingering recession risk slowed the rate of housing starts and repair and remodel activity making the business environment very difficult.
However, our teams and supplier partners, combined with the confidence our customers have in BlueLinx helped us to compete effectively in our markets, resulting in our strong financial performance. Second, our fourth quarter 2023 results were also solid. As expected, our revenues declined year-over-year largely given the impact of market price deflation. However, our specialty and structural gross margins came in at 19.4% and 10.6%, respectively, which highlights our team's ability to successfully manage margins despite the macro picture. Third, we continue to focus on expanding our specialty products business, which accounted for approximately 70% of net sales and 80% of gross profit for both the fourth quarter and full year 2023. For example, during the fourth quarter, we announced expanded distribution partnerships with Louisiana-Pacific and Huber Engineered Woods.
Both partnerships will broaden the geographic reach of our specialty product offerings, demonstrating our focus on specialty products growth. Fourth, we continue to execute on our disciplined capital allocation strategy, which includes returning capital to shareholders. Overall, we repurchased nearly 6% of our outstanding shares for $42 million in 2023. Last quarter, we announced a new $100 million authorization after the prior $100 million share repurchase authorization was completed. Of the $42 million of share repurchases in 2023, we bought back nearly $9 million worth of shares under the new program in Q4. Given our recent strong share price performance, the amount of repurchases in Q4 were admittedly less than originally anticipated. However, we will continue to be opportunistic in the market.
Fifth, our financial position continues to be strong as we prudently manage the business with significant liquidity and very little net leverage, we are well positioned to invest in the business to realize our vision and to execute successfully on our corporate growth strategy, all while providing us with the flexibility to return capital to shareholders. Now for a few more details on our full year results. We generated 2023 net sales of $3.1 billion and $183 million in adjusted EBITDA for a 5.8% adjusted EBITDA margin. Adjusted net income was $103 million or $11.41 per share. For the year, we delivered solid gross margin performance with specialty products coming in at 19.3% and structural products at 11.2%. Our focus on business and operational excellence led to effective pricing, strong service levels, procurement opportunities and cost management, contributing to the strong results.
In addition, our continued focus on working capital has generated significant improvements in operating cash flow. In 2023, we reduced our inventory by over $140 million with nearly all of the reduction coming from the specialty products category. We also generated free cash flow of $279 million during the year. Now turning to our perspective on the broader housing and building products market. While industry sources are suggesting a revised sense of optimism for the overall market, headwinds do remain. Builder sentiment has improved in recent months and the industry saw meaningful improvements in housing starts during November and December. In addition, the financial markets are anticipating potential rate cuts in 2024. That said mortgage rates are now around 7%.
And while those are down from the 8% peak last year, they are still elevated. 90% of mortgages are still under 6% and 80% of mortgages are under 5%. Overall, housing affordability remains an issue for many consumers, especially for first-time buyers as prices remain high. Repair and remodel spending continues to be lower than the elevated levels of the past 2 years and is expected to decline further in 2024 due to low existing home sales that would otherwise drive repair and remodel activity on the way out of the home and on the way into a home. However, home equity levels do remain high, allowing owners to refund repair and remodel projects, albeit smaller ones. Through the first 7 weeks of Q1 2024, we have maintained solid margins for specialty and structural products, generally in line with Q4 2023.
However, daily volumes have been impacted by the extreme weather patterns experienced in January and are down compared to our expectations into what we saw during the recent quarter. In fact, we had nearly half of our locations closed for between 1 and 5 days in January due to an unusually cold weather and winter storms. The ramp-up to normal business also took time as the ground needed to find many markets for building activity to commence and sales that flow through our customers and in turn us. During the most recent 3 weeks, specialty and structural volumes have improved. In addition, it is important to note that industry-driven specialty products price deflation continues to have an impact on both our top line and cost of goods during 2024.
Even though margins are stable, gross profit dollars are lower. This adverse impact creates a near-term headwind and we hope to see this improve as the year progresses. Although the near-term outlook remains unpredictable, the industry is improving in many respects and we clearly believe in the long-term prospects of the housing and building products sector, which underlines our strategic and investment focus. The shortage of homes, supportive demographic shifts, aging housing stock, necessary repair and remodel activity and high levels of home equity should continue to benefit the building products industry and BlueLinx. In summary, we delivered solid results for both the fourth quarter and full year 2023 despite the challenging environment for housing and tough year-over-year comps.
We're also delivering on our strategic priorities as seen by our specialty product expansion efforts, margin performance driven by our pricing and cost discipline, strong cash generation and capital allocation initiatives. I'd like to end by thanking my fellow BlueLinx associates for their continued perseverance and can-do attitude during last year's difficult housing market and for their selfless dedication to our customers and our suppliers. Our teams are committed to generating more profitable structural and specialty product sales, while producing solid returns on working capital to ensure that we can position ourselves for long-term success in whatever market conditions we face. That grid gives me tremendous confidence in our ability to realize our vision of becoming the most technologically advanced 2-step distributor of building products in the U.S. and executing on our 3-pronged corporate growth strategy, specialty product sales growth, M&A and greenfields.
We have the purpose to inspire us, the culture to succeed and the values to guide us, along with the intestinal fortitude to make the investments in technology people, infrastructure, working capital and equipment to accelerate our prospects and position us for breakneck growth as our corporate strategy delivers and our digital transformation takes effect each step of the way. Now I'll turn it over to Andy, who will provide more details on our financial results and our capital structure.
Andy Wamser : Thanks, Shyam, and good morning, everyone. Let's first go through the consolidated highlights for the quarter. Overall, we delivered solid fourth quarter results, highlighted by strong margins in both our specialty and structural product categories. Net sales were $713 million, down 16% year-over-year. Specialty products sales were down 18% from the prior year due to a combination of deflation and lower volumes. Structural product sales were down 12% also due to significant year-over-year declines in wood-based commodity prices and lower volumes. Total gross profit was $118 million and gross margin was 16.6%, down 120 basis points from the prior period. SG&A was $85 million down 8% from the prior year period due to a decrease in variable compensation and delivery expenses.
Net loss was $18 million and diluted loss per share was $2.08. In previous filings, we've mentioned that we plan to terminate a legacy defined benefit pension plan. During December, we transferred all remaining financial responsibility for the plan to a highly rated insurance company under an annuity contract. We incurred a onetime charge of $31.4 million and made a final cash payment of $6.9 million. We are pleased to have this obligation behind us as it was a legacy pension plan, which provided no benefit for most of our active employees and was complex to manage. Adjusted net income was $26 million and adjusted diluted EPS was $2.94 per share. Tax expense for the fourth quarter was $10.1 million. Due to our net loss in the quarter as a result of our pension settlement, the effective tax rate was not a meaningful calculation.
For the first quarter of 2024, we anticipate our tax rate to be in the 24% to 28% range. Adjusted EBITDA was $36 million or 5.1% of net sales, following our normal seasonal patterns. As a reminder, we tend to have higher adjusted EBITDA margins in the second and third quarters, but relatively lower margins in the first and fourth quarters of the year. Turning now to fourth quarter results for specialty products. Net sales were $487 million, down 18% year-over-year. This decline was largely driven by price deflation across several specialty product categories. Gross profit from specialty products sales was $94 million, down 24% year-over-year. Specialty gross margin was 19.4%, a strong margin but down 170 basis points from last year. Through the first 7 weeks of 2024, specialty product gross margin was in the range of 18% to 19% with daily sales volumes down 6% compared to the fourth quarter of 2023 given the impact of the January weather.
Over the past 3 weeks, however, specialty volumes were about flat on a year-over-year basis. We are, however, seeing average specialty pricing down about 10% versus this time last year and we expect this to be less of a headwind as we progress throughout the year. Now moving on to structural products. Net sales were $226 million, down 12% compared to the prior year period. This decrease was primarily due to price deflation within framing lumber, partially offset by slightly higher volumes. Gross profit from structural products was $24 million, a decrease of 10% year-over-year and structural gross margin was 10.6%, up 20 basis points from the same period last year. In the fourth quarter of 2023, average lumber prices were about $383 per thousand board feet and panel prices were about $585 per thousand square feet, a 15% decrease and 11% increase respectively compared to the averages in the fourth quarter of 2022.
Sequentially, comparing the third and fourth quarters of 2023, these prices were down 12% and 8%, respectively. During the fourth quarter, lumber prices declined early but rebounded in December, while panel prices increased during the quarter and they finished the last week of December at $395 and $599, respectively. These prices have declined further in the first 7 weeks of Q1 2024 and are now $387 per thousand board feet and $589 per thousand square feet, respectively. Our strong structural margin continues to reflect the excellent job our team does to manage commodity cost volatility risk through leveraging consignment and utilizing centralized purchasing and pricing to keep structural inventory levels low. Through the first 7 weeks of Q1 2024, structural product gross margin was in the range of 10% to 11%, with daily sales volume down mainly in lumber compared to the fourth quarter of 2023 given the impact of January weather.
Similar to specialty, there has been some improvement in volumes over the past 3 weeks. For the year, net sales were $3.1 billion, down 30% from 2022. 2023 results had very difficult comparisons when in contrast to the inflationary environment experienced in 2022. Specialty and structural product sales were down 24% and 40%, respectively from the prior year due to a combination of deflation and lower volumes. Total gross profit was $527 million and gross margin was 16.8%, down 190 basis points from the prior year period. SG&A was $356 million, down 3% versus the prior year period. For 2024, we expect our SG&A levels to increase slightly as a percentage of sales due to the investments in technology that Shyam mentioned as well as our growth initiatives.
Net income was $49 million and diluted EPS was $5.39 per share. Adjusted net income was $103 million and adjusted diluted EPS was $11.41 per share. The full year tax rate was 40.7%, once again impacted by the pension plan termination. For full year 2024, we anticipate our tax rate to be in the 24% to 28% range. Adjusted EBITDA was $183 million or 5.8% of net sales. Looking now at our balance sheet. Our liquidity remains excellent due to the strong execution of our strategic initiatives and effective management of working capital. At the end of the year, cash on hand reached a record level of $522 million, an increase of $52 million from Q3. When considering our cash on hand and undrawn revolver capacity of $346 million, available liquidity was $868 million at the end of the year also a record.
Total debt, including our financing leases was $585 million and net debt was $64 million. Our net leverage is now 0.3x and we have no material outstanding debt maturities until 2029. For the terms of our credit agreement, which does not include real property financing leases, our net leverage ratio was a negative 1.0x. Our balance sheet is in great shape and when combined with our solid EBITDA and strong cash generation, we are well positioned to support our strategic initiatives. These include investments in our highest return opportunities such as organic and inorganic growth initiatives and share repurchases. Now moving on to working capital and free cash flow. During the fourth quarter, we generated operating cash flow of $76 million and free cash flow of $67 million.
For the full year 2023, we generated operating cash flow of $306 million and free cash flow of $279 million. Our full year cash generation was supported by earnings and a net benefit from working capital primarily related to the reduction of more than $140 million of inventory from the beginning of 2023. Turning now to capital allocation. During the quarter, we spent approximately $9 million in CapEx, primarily to improve our distribution facilities and upgrade our fleet. For the year, CapEx was about $28 million. For 2024, we expect capital investments to increase to around $40 million, focusing on facility improvements, further upgrades to our fleet and the technology improvements previously discussed. Our digital transformation will also have at least a $5 million impact on operating expenses in 2024 related to software license implementation as well as increased headcount associated with this initiative.
During the fourth quarter, we purchased approximately $12 million of our company's common stock through open market transactions under our repurchase programs, and we plan to continue to be opportunistic in the market. Our guiding principles for capital allocation remain consistent. We intend to maintain a strong balance sheet, which enables us to invest in our business through economic cycles, pursue a disciplined M&A strategy and geographic expansion as well as return capital to shareholders. We also plan to maintain a long-term target net leverage of 2x or less. Overall, we are pleased with our fourth quarter and full year results, highlighted by our strong margins and free cash flows, especially when considering the difficult housing market.
Our strong balance sheet positions us well to execute on our strategy and provide returns for our shareholders. Operator, we are now ready to take questions.
See also 12 SUVs With the Highest Resale Value in 2024 and 13 Best Chinese Stocks To Buy Right Now.
To continue reading the Q&A session, please click here.
