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Edited Transcript of BXC earnings conference call or presentation 8-Nov-18 3:00pm GMT

Q3 2018 BlueLinx Holdings Inc Earnings Call

ATLANTA Nov 12, 2018 (Thomson StreetEvents) -- Edited Transcript of BlueLinx Holdings Inc earnings conference call or presentation Thursday, November 8, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mary Moll

* Mitchell B. Lewis

BlueLinx Holdings Inc. - President, CEO & Director

* Susan C. O'Farrell

BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Colin King

* Frederick Tucker Golden

Solas Capital Management, LLC - Managing Partner and Portfolio Manager

* Kyle Mowery

GrizzlyRock Capital LLC - Managing Partner and Portfolio Manager

* Mitchell Scott

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Presentation

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Operator [1]

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Good morning. My name is Beth, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2018 investor relations call. (Operator Instructions)

Mary Moll, Director of Investor Relations, you may begin your conference.

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Mary Moll, [2]

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Thank you, Beth, and good morning, everyone. We appreciate you joining us for our third quarter 2018 earnings conference call. The earnings release and slides for this call can be found in the Investor Relations section of our website at www.bluelinxco.com.

Joining us today on the call are Mitch Lewis, Chief Executive Officer; and Susan O'Farrell, Chief Financial Officer.

Please note that this presentation includes forward-looking statements, including statements about our future operations and performance. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those provided, including, but not limited to, those identified in our press release and discussed in our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date of this presentation, and we undertake no 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.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [3]

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Thanks, Mary. Good morning. This morning, I'd like to spend some time updating you on the progress of our integration as well as providing you with an overview of our wood-based commodity markets and their impact to BlueLinx.

We've made great progress during the third quarter, even as we fought through challenging headwinds in certain product categories. We're now about 7 months into our merger with Cedar Creek, and we remain confident that the rationale for bringing these 2 companies together is sound.

As we've indicated before, some of the key attributes of combining our businesses include the breadth of geographic presence with an extended reach and footprint east of the Rockies. Significant sales coverage was at -- with over 700 sales associates calling on customers every day, which is likely the largest sales force among our direct competitors. A comprehensive product portfolio that we can utilize across our expanded geographic platform, providing the opportunity for accelerated growth. A diversified and extensive roster of high-quality national and regional customers; significant cost-saving opportunities, which we remain confident will be at least $50 million annually by the end of 2019; and improved financial flexibility to support growth and long-term deleveraging.

Our dedicated integration team continues to drive synergies, and we remain on schedule with our integration efforts. We've now consolidated 7 locations, including recommissioning an idle BlueLinx distribution center and a major equipment move in Texas. We expect to consolidate 3 additional facilities by the end of the year, which will be 10 facilities in 9 months. While many of these consolidations are providing immediate benefits from an operating cost perspective, they've also helped mitigate risk for the long term, by allowing us to exit certain multiemployer pension plans in the process. This led to a $7 million noncash reduction in our third quarter net income, but it should have an immaterial impact on annual cash flow, while eliminating the tail risk of a troubled multiemployer pension plan for these locations.

Our G&A reductions have also been meaningful. We're pleased to announce that we currently have reached an annualized run rate of over $7 million from reductions in G&A. This covers a broad range of cost savings, including executive and administrative redundancies, insurance and professional expenses as well as travel and expense reductions. And we're confident that there are additional cost-saving opportunities in the months ahead. One obvious example is a reduction in the cost of our ERP systems, which we should begin to enjoy later in 2019, as we complete the integration of duplicative systems by the end of next year.

We're also continuing our dialogue with many suppliers, and are now beginning to evaluate the rationalization of suppliers to take advantage of lower cost opportunities. This effort will begin in earnest over the next month as we look to manage our product spend over smaller supplier base that wants to grow with BlueLinx.

The aggregate synergies from our integration efforts should provide annual run rate synergy savings of over $25 million by the end of 2018, which is well ahead of our original plan of $15 million. These savings should reduce our expenses in 2019, while, of course, improving EBITDA. We remain confident that we will exit 2019 with an annual run rate of at least $50 million in savings from synergies. You may recall that we have not included any sales synergies in these numbers, as we assume that they would be offset by potential market share losses associated with the merger.

We also continue to take great pride in the relatively low attrition rate of our associates compared to last year. Since the beginning of May, our attrition rate remains lower than the combined attrition of the 2 independent companies in 2017 during the same period. Even our headcount is now down by approximately 6% from September 2017 levels. Our associates are close to the integration process and truly understand the opportunity BlueLinx will provide in the months ahead as a market leader in the industries we serve.

As we look at the third quarter in more detail, we were certainly disappointed with the impact rapidly declining commodity panel and lumber prices had on our results. This decline appeared to be a confluence of several events, including the easing of transportation constraints, an increase in European competition, a modest fire season out west and the leveling of single-family housing starts over the summer.

The composite structural panel index dropped approximately 17% during our fiscal quarter, while the composite framing lumber index declined by about 24%. This level of price decline over a 3-month period is highly unusual. There are only 4 periods over the last 15 years in which both structural panel and lumber prices dropped by more than 20% in a 90-day period. The 24% decline in lumber we saw in the third quarter was the largest 90-day decline we've experienced since 2010. As you would expect, this price degradation materially impacted our results for the third quarter.

I think it's important to remember that BlueLinx is not in the speculation business. Our value proposition is to provide our customers with competitive products, excellent service and short lead times, and we typically manage our lumber and panel commodity inventory to under 30 days. So generally, the absolute price levels for our wood-based commodities do not drive our profitability. Unfortunately, the reality of a rapidly declining price environment means that during this period, the inventory in our warehouses as well as in transit shipments from our commodity suppliers are typically at costs higher than the replacement costs. And in a deflationary environment, volume can also decline, which exacerbates the margin impact. This is exactly what happened in our third quarter.

We think it's important to look at the recent commodity pricing environment in the context of the overall fundamentals of our company. On a historical basis, a quarterly decline of this magnitude is clearly an anomaly, having occurred on average approximately only once every 16 quarters since 2003.

While Susan will discuss the impact to our third quarter in more detail, we believe our relative performance during this atypical collapse in wood-based commodity pricing actually indicates the strength of our company's size, diverse customer base and product portfolio.

The gross profit decline we experienced in the third quarter should be taken into context for the roughly $150 million pro forma 2017 adjusted EBITDA, including $50 million of synergies. When you consider that this level of wood-based commodity price decline generally occurs only once every 4 years, the long-term impact to BlueLinx due to the third quarter's gross profit decline would only be about 2% of the 2017 pro forma adjusted EBITDA with synergies during that 4-year period.

Please understand that this does not mean that we are acting without a sense of urgency. We are monitoring all nonessential expenses, scrutinizing additional headcount and managing our working capital closely. Rest assured that we will continue to aggressively manage all aspects of our operations to help mitigate the impact of any continued margin erosion.

There are a few signs that we may be nearing the end of this decline. Some suppliers have announced curtailments as well as long winter shutdowns. Reduced supply will likely impact pricing and may portend the end of this deflationary environment. In fact, late last week, lumber futures started to rise and pricing is somewhat stabilized this week, which may indicate that prices have finally begun to level off. We certainly cannot predict commodity markets, but rest assured that we will continue to monitor these markets closely and react accordingly.

As you're likely aware, the U.S. housing market's growth has moderated over the last few months. We agree with most prognosticators who have forecasted that the single-family housing market will generally continue to improve at a minimum to its mean annual production rate over the last several decades. This suggests that significant growth opportunity remains for the industry in the days ahead.

At BlueLinx, we will remain focused on three key strategic objectives: utilizing our enhanced service proposition and product offering to grow market share; enhancing margins in our products; and integrating the businesses while realizing at least $50 million in annual synergies. We're in the process of expanding our portfolio with strategic suppliers and opening up new markets. This should lead to long-term growth as our footprint and product offering provide significant value to both our customers and suppliers. We're also now refocused on enhancing pricing in all of our product categories. This includes assessing anomalies where we have opportunities to improve margins and developing our local leadership with pricing analytics and tools. And our focus on realizing synergies is relentless while our confidence in achieving the annual synergies we've committed to remains high. Our progress in these three key areas in 2019 will propel our success for years to come.

I'd like to personally thank our BlueLinx team for their hard work during a particularly challenging environment. I am confident that their commitment as well as the partnership of our strategic supply base will ensure we provide great value and service to our customers in the months ahead.

And now, I'd like to turn it over to Susan, who will provide you with more color on our financial performance for the quarter.

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [4]

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Thanks, Mitch, and good morning, everyone. It's a pleasure for me to speak with you today and to review our third quarter business results.

As Mitch discussed, our third quarter was positive in many ways, including the great progress we made in our integration efforts. The third quarter was also an uncharacteristic quarter for our industry due to the volatility in the commodity markets. We'll talk through that in a few minutes.

We remain focused on our strategic objectives, making significant progress with our integration efforts and delivering solid financial results, despite the headwinds of commodity markets. We've made great progress in the third quarter with our consolidation initiative, and we are now $10 million ahead of our 2018 plan to achieve $15 million of annual run rate synergies. We remain highly confident that we will achieve at least $50 million in annual run rate synergies by the end of 2019. Additionally, we estimate that we will likely generate approximately $25 million in gross proceeds from the sale of owned real estate in overlapping markets as we continue ahead with our strategic plan. And we still see our cost to achieve synergies in the $25 million to $40 million range, a range that is $15 million less than what we shared with you in March this year.

One of the key attributes of combining our company and two legacy businesses is the improved financial flexibility that will support our growth and long-term deleveraging. I think this quarter illustrates that the financial strategy of the company is going well.

I'm excited to now share with you our financial results for the third quarter. Starting on Page 11 of the slides, I'll touch on some highlights from the quarter. Net sales were $860 million, up $380 million or 79%. Pro forma net sales, which take into account the acquisition of Cedar Creek, as it if occurred on January 1, 2017, were $860 million, up $19 million or 2% versus the same period last year.

We delivered gross profit and margin of $92 million and 10.7%, respectively. As Mitch shared, commodity wood prices declined significantly and quickly during the third quarter. We experienced an impact of $17 million in wood commodity deflation, or 190 basis points to our overall gross margin rate. The $17 million also included a lower of cost or net realizable value or NRV adjustment of $5 million or 50 basis points. We would expect to recover most of that adjustment in the fourth quarter as the inventory net of NRV adjustments are sold through our system.

We kept our inventory velocity turning quickly, but the market fell faster than we could move off our inventories, impacting our weighted average cost of inventory. In the second quarter of 2013, the last time when commodity markets drastically fell, our second quarter adjusted EBITDA was a loss of $3.5 million. Now 5 years later in the third quarter of 2018, we had positive adjusted EBITDA of $17 million for the quarter. That demonstrates how we are better positioned to ride out market disruptions in times like these.

As part of our continuing strategy to derisk pension liability, we negotiated a partial withdrawal from our multiemployer pension plan at 4 consolidated locations during the third quarter. This was a great result as the partial withdrawals mitigate the risk of future assessments from the multiemployer pension plan. This withdrawal, along with commodity price impact, were the major drivers of the net loss of $10 million in the third quarter.

Despite falling commodity prices in the third quarter that impacted margins, we were still able to achieve an adjusted EBITDA of $17 million for the quarter, up 19% or $3 million. This strong adjusted EBITDA performance is the highest third quarter adjusted EBITDA since 2007.

Over the past several months, we've been assessing the private company accounting methodology for Cedar Creek, specifically, we reviewed the complex treatment for lease accounting standards and made an adjustment to the percentage split of capital and operating expenses for the Cedar Creek leased tractors. This accounting change has an approximate annual impact that decreased Cedar Creek's 2017 adjusted EBITDA by $1.9 million.

We're pleased to share that we ended the quarter with excess availability and cash on hand of $123 million, with daily average for the quarter being $142 million of excess availability. An additional source of untapped liquidity is our unencumbered real estate, which has an appraised value of $150 million to $160 million. One of the many positive characteristics of our company is that we are a low CapEx business. This, along with other factors, gives us the ability to generate cash that can be utilized to pay down debt.

As we move to Page 12, we'll highlight our year-to-date performance. Net sales were $2.2 billion, up $808 million or 59%. On a pro forma basis, net sales were $2.6 billion, up $133 million. Gross profit and margin of $251 million and 11.4% include the onetime acquisition-related inventory step-up costs of approximately $12 million and an NRV inventory adjustment of $5 million. Excluding the effect of the onetime acquisition-related inventory step-up costs, gross margin would have been 12%.

We recorded a net loss of $32 million for the first three quarters. That includes $34 million of acquisition and stock comp-related charges as well as the previously mentioned onetime acquisition-related inventory step-up costs of approximately $12 million.

Year-to-date, adjusted EBITDA was $62 million, up $28 million year-over-year. Pro forma adjusted EBITDA was $73 million, down $9 million versus the same period last year.

Additionally, our balance sheet remains strong. The book value of our receivables and inventories significantly exceeds the balance on our ABL. This is more than a $270 million cushion.

Now moving to Page 13. Pro forma sales increased $19 million or 2% from the same quarter last year. While lumber volumes increased, the market prices increased even more, 830 basis points. The pricing story is familiar for panels and OSB, with pricing increases of 380 basis points. And so, while overall specialty margin rates were similar to Q3 last year, structural margins were 5.6%, unseen in our business since the second quarter of 2013.

Moving onto Page 14, we think it's important that you understand the post-integration uses of cash on an annualized basis. When you look at our pro forma trailing 12-month adjusted EBITDA, assuming the $50 million of synergies and then take into account the major annual cash outlays, including interest, capital lease payments, CapEx, state taxes, which remain a cash item, and a few other smaller items, we expect there to be approximately $75 million in cash available to deleverage the company by paying down debt. This, of course, does not include changes in working capital, which are seasonally funded through the ABL.

As a matter of fact, as you review Page 15, we show you some ways to think about our annual cash generation attributes and our real estate. And then see how either or both could be meaningful factors in deleveraging BlueLinx. Our term loan balance is currently $179 million, implying leverage, including the $50 million in synergies on a trailing 12-month pro forma adjusted EBITDA basis of only 1.3x. We also share with you our revolver balance as of the end of the third quarter 2018. Remember, this debt supports our working capital and is the day in and day out part of our business, enabling us to serve our customers with supply chain financing. The revolver seasonally expands and contracts throughout the building seasons, and we secure it with our high-quality inventory and receivables. We believe our real estate remains a valuable asset that provides unrealized value on the balance sheet as well as additional opportunities to delever our company. As I mentioned earlier, our unencumbered real estate value was appraised less than a year ago at $150 million to $160 million, which is 4x the book value.

Our real estate team is now proactively marketing 4 properties that we exited in connection with our consolidations: Des Moines, Grand Rapids, Minneapolis and Springfield. These industrial properties are desirable for their location as well as their access to rail service. We've received substantial interest on these properties, including unsolicited offers for each of these properties.

I would also like to highlight our tax assets. Due to our sale leasebacks that occurred during the first quarter of this year, we currently have estimated taxable income of approximately $47 million through the third quarter. We were able to use our federal NOLs to fully offset this income, leaving approximately $112 million of NOLs to use in the future. As we think about opportunities for growth, we are well positioned to offset gains from ordinary income in real estate with our remaining federal NOLs.

BlueLinx continues to improve and evolve. It was just over a year ago we were a controlled public company with $1.8 billion in revenues. Roll the clock forward, and we're are now $3.3 billion in company with no controlling shareholder. That means we also want to evolve in how we share our stories publicly. We've increased our investor communications and outreach, and will continue to engage investor opportunities to get our great story out into the market. In a challenging and volatile quarter, I'd like to thank our entire BlueLinx team for their hard work and efforts. These results that we were able to share today are a testament to your many contributions. And, of course, special thanks go out to our customers and suppliers for their continued partnership.

And now, Beth, we'd like to open it up for any questions we might have at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Kyle Mowery, GrizzlyRock Capital.

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Kyle Mowery, GrizzlyRock Capital LLC - Managing Partner and Portfolio Manager [2]

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A couple if you may. First on Slides 14 and 15, very clearly stated free cash flow implying 30% free cash flow with equity currently. My question relates to the term loan payoff. With the $25 million of real estate and $75 million of free cash flow, you have substantial room on your ABL. Am I thinking about this in a correct manner?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [3]

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Yes, you're clearly thinking about it in a correct manner. We expect to continue to have availability on the ABL. And then I think as we've talked about in the past, Kyle, then we have to decide what we want to do with the excess liquidity going forward.

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Kyle Mowery, GrizzlyRock Capital LLC - Managing Partner and Portfolio Manager [4]

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Makes sense. And then, Susan, can you go through the -- you referenced a $270 million number, I didn't catch that on the -- on your prepared remarks. Can you just go through that again, really quick?

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [5]

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Yes, absolutely. So when you look at our inventories and receivables on the balance sheet, and then net out the -- in essence the debt against that, the ABL revolver debt, that creates that cushion, that differential. And so while people certainly look at ABL debt as a leverage, we think it as differently as a way to operate our business. And over and above, we know we've got value substantially beyond that. So if you're looking at leverage ratios, we just think it's important to understand how much value is still on the balance sheet with those assets.

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Kyle Mowery, GrizzlyRock Capital LLC - Managing Partner and Portfolio Manager [6]

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So as of the Q, and I don't think the Q is out, but the delta on your ABL versus the 6/30 Q was about $150 million. Are you telling this increased to $270 million?

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [7]

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I'll go back and just reference that and make sure we're tying out the same items, Kyle. We'll get back to you on that one.

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Kyle Mowery, GrizzlyRock Capital LLC - Managing Partner and Portfolio Manager [8]

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Okay, great. My second question relates to the impact of hurricanes. Can you run through any impact that you've seen from Florida or any other areas affected?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [9]

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Yes, we clearly saw, as you would expect during the week or two, that they materially impacted those locations decline from a volume standpoint. As we look at it, Kyle, we think it's going to provide over the long term benefit to the company as we have the repair and remodeling that will take place as folks try to dig out from that. But from a short-term, we don't have it exactly quantifying from those locations. It did have an impact, but we wouldn't call it a material impact across the company for the entire quarter.

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Kyle Mowery, GrizzlyRock Capital LLC - Managing Partner and Portfolio Manager [10]

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Okay, great. And then last one for me. You previously referenced $25 million of real estate sales. The 4 properties that you now referenced that are now being marketed. Would that be in addition to the $25 million?

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [11]

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No, Kyle. The subset of that is a little less than half. And then the substantial interest that we're receiving will make it interesting to see the actual realizations of those because there's more interest than, I think, we originally thought. So we'll see how those offers come in versus those estimates, but right now signs are really positive on where those realizations will come in.

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Kyle Mowery, GrizzlyRock Capital LLC - Managing Partner and Portfolio Manager [12]

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Got it. So with the $25 million referenced against two DCs that were closed, and now you have two more being marketed. Is that accurate?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [13]

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Yes, we have four properties on the market. We just put them on the market, let's say, in the last 30 days. And we have a lot of interest, particularly in 2 or 3 of them. And so as you think as a likely closing for some of them will probably the first quarter of next year. So basically what happened is, these are real properties that in the context and the process of the consolidations, we now have free land and buildings that we moved out of that we're marketing. So the idea is, of course, to time that as we consolidate facilities and have open properties. And of course, as you look at the $25 million, and Susan talked about a $150 million to $160 million fair market value when we're done with that process, we're still going to be sitting with assets for the company in that $125 million range.

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Operator [14]

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Your next question comes from the line of Mitchell Scott, Choice Equities.

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Mitchell Scott, [15]

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It looks like more good progress on getting the deal integrated, in not necessarily the lumber price environment you wanted. So thank you guys for the extra color on the historical patterns. Before I get into the structural gross margin, I thought I'd just ask maybe a quick question about specialty gross margin. It looks like that was relatively immune to lumber price decline. Is that accurate? And is that something we should probably expect to continue?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [16]

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Yes, it is relatively immune to the commodity prices. As I mentioned, I mean, we really haven't as you may know for any long-term holder for BlueLinx, I mean, we believe that there is a lot of opportunity related to doing a good job at understanding our pricing and margin across the company. So as it relates to your question, is this what we would expect? I mean, our goal, of course, from a continuous improvement perspective is to continue to improve that. But clearly, as you can see by relatively flat margins in specialty products, when you have such a decline from a commodity standpoint, it didn't overlay into the specialty segment.

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Mitchell Scott, [17]

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Okay. That's good to hear. On the structural commodity side, I guess, what I want to get a feel for is maybe what sort of the outlook upcoming might suggest? So I think, just looking through the company slides from before in 2013 and the last episode looks like a pretty dramatic fall-off, but then 2 quarters later, structural was again approaching the prior gross margin levels. Is that a decent proxy for how we should be thinking about this going forward?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [18]

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Yes. Mitch, I'd say the first thing we'd have to do is make an assumption that we stabilize, right. The prices have stabilized. And so to the extent you have pricing that's stabilized from a business standpoint, then you have to work through the higher cost inventory. We talk about trying to keep our inventory less than 30 days. So if it's stabilized and the demand is as you would expect, we should run through that -- we should run through this and start seeing some uptick in the first quarter of next year.

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Operator [19]

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Your next question comes from the line of Tucker Golden, Solas Capital.

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Frederick Tucker Golden, Solas Capital Management, LLC - Managing Partner and Portfolio Manager [20]

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Congratulations on managing through that period. I thought it would be worse, frankly. Having followed the company for a long time, I'd echo your sentiment that it's massively improved in terms of structure and management since 2013. This would have been a whole different story. I guess, let's see, a couple of questions. Can you just -- I think you already touched on it the previous caller. Can you just take us through at a high-level the portfolio? So starting with 70 properties operating at the closing of the deal. Where we are today and where we expect to be after the movements you mentioned? And then also just kind of some basis breakdown, which are owned and operated and where that will end up as well-- sorry, owned versus leased, where that will end up?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [21]

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Yes, so as we've talked about, we expect by the end of the year to have consolidated 10 locations. We didn't anticipate in connection with those actually closing locations other than through consolidations. Where it gets tricky, Tucker, is predicting where we're ultimately going to end up. So we have facilities that we were evaluating. And obviously, the value of the property is a consideration of the cash we could get from that, but we're also looking at the overall operating impact from a facility standpoint. And then we've talked about the incremental consolidations we expect to happen in the first half of the year. But there are also some very large facilities that are very busy that we have to -- and that we cannot easily close one and move into the other, that we have to make longer-term decisions about whether realignment of the shipping -- the customers that are shipping from make sense or whether it makes sense to double the size of the facility in greenfield. So it's really hard to project, ultimately, how many properties at the end of the day that we'll own. There is an assumption that the remaining 4 or 5 properties that we have will get to this $25 million in total with the properties that we have on the marketplace.

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [22]

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And so just to add also some color. As you mentioned, Tucker, we started out with the 70 properties. We've talked about 18 to 20 overlapping markets. And so as Mitch said, we've to grow through each of those and work through the timing on that. So I think, overall, directionally, you can think about that. So those are some high-level numbers that we've shared.

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Frederick Tucker Golden, Solas Capital Management, LLC - Managing Partner and Portfolio Manager [23]

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That's good. That's helpful. I didn't understand at first when I looked at the deck this morning and then your color on the -- in your opening remarks helped clear it up a little bit. Slide 7 talked about the $17 million hit to gross profit in the quarter and referenced to this 2% of 4-year aggregate, 2017 pro forma adjusted EBITDA. So I think, what you're saying, let me see if I've got this right is that you are generally seeing this sort of volatility once every 4 years, and so also you're sort of trying to show on a smoothed-out basis what kind of a hit is over kind of a longer term or a cycle, I guess? Is that the tie-in there?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [24]

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Yes, Tucker, that's it exactly. I mean, obviously, we're comparing gross profit to EBITDA as well so that would be a higher percentage as you would expect. But that's it exactly. I want to make sure that if you look at on a historical basis that this is not an everyday occurrence. And of course, the business is more susceptible to rapid declines in the velocity that declines as opposed to the absolute on that cost of the underlying commodity.

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Frederick Tucker Golden, Solas Capital Management, LLC - Managing Partner and Portfolio Manager [25]

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Yes, that makes sense. And then with that framework, can you speak to -- just as shouldn't this work both ways and shouldn't you benefit when you have volatility in the other direction or maybe not? And also can you provide any color as to what sort of benefit you might have recognized in the first half of the year, when you didn't have as dramatic an increase as there was a decrease in these indices, but there was pretty substantial rise?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [26]

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Yes, that's a great question. And this year, in particular, when we saw the rise, it was a big rise in the second quarter. I have to tell you, it's challenging for us to get arms around that quarter because that was the middle of the acquisition and the integration from a data standpoint. The way that I kind of look at it is this: as you say, well, the gross margin for the second quarter of this year was about 9.5%. And then if you go back 5 quarters, it was 9.9%, 8.9%, 9.4%, 9.2%, 10%. So as you look backwards that 9.5% is clearly towards the higher end of the margin that we experienced, for example, all through 2017. And I would say for sure, we got tailwinds during the second quarter that helped us. But obviously, that kind of increase on a percentage basis with gross margin is nothing like the decline that we've experienced now in the third quarter.

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Frederick Tucker Golden, Solas Capital Management, LLC - Managing Partner and Portfolio Manager [27]

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Okay. That makes sense. And now just trying to look at what I can see in October, you said indices -- and commodities have been less volatile. Are we back to normal as of September 30? Or is there sort of a residual hangover effect that bleeds into fourth quarter?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [28]

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Yes, so what I would encourage -- there's public data I think you can easily get from Random Lengths that gives you a composite commodity of wood prices. And if you jumped on that, you would see basically from the end of our fiscal quarter through basically now, there's kind of another -- there's a continued decline on the major composites in the 10% to 15% range. What we have seen, though, is, what certainly gives us some optimism is, about 2 to 3 weeks ago, we saw some smaller European players exiting. We started hearing some large manufacturers talking about long maintenance shutdowns, curtailment. And just last week, the futures actually improved significantly. And in this week, it's been flat. So it's long-winded to say, post the quarter, it was still declining. And then generally, we just have to continue to manage our inventories close, move out the higher cost product, and so I would expect if we stabilize from here, as I mentioned before, we should start seeing some return to normalcy in the first quarter. Yes, I mean, I guess, the other point I would -- the one other point I would make, which I think is important that Susan talked about is this whole, I think of it LCM, but NRV now I guess is the appropriate accounting, is that there was a little north of a $5 million hit that we took in the quarter that if we moved that inventory out in the fourth quarter, we would expect to realize that during the fourth quarter as well.

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [29]

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Absolutely. And in essence that $5 million lower cost or net realizable value is timing. So it's pulling forward the decline in commodity prices for the first month in the fourth quarter and placing it in the third quarter.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [30]

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And really the -- and if you think about it, the public data that you would see that shows a decline in October, actually might influence the fact that you have to take an NRV hit.

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Frederick Tucker Golden, Solas Capital Management, LLC - Managing Partner and Portfolio Manager [31]

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Yes, that makes sense, that makes a lot of sense. Great, I mean that's all I have. I think it's helpful that you went through a lot of hoops to try to simplify a complicated in the mix situation, but I appreciate the deck today. I think that showing the $75 million of discretionary cash flow and the obvious ramifications there are important when you have results that are necessarily as messy as they are for the time being and for the near term.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [32]

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Thank you, Tucker.

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Operator [33]

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(Operator Instructions) Your next question comes from the line of Colin King, LEV Capital.

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Colin King, [34]

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This Slide 14, does this reflect your views on working capital for this pro forma period? And how do you think about that for 2019 and beyond?

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [35]

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Yes, so first of all, we really did a very simple average of looking at the quarter and then extrapolating it by 4. So it's a simple way to think about it. But as the price of inventories come down with the commodity markets, it's actually a favorable impact to cash on the revolver. So our focus is going to keep the inventory velocity on our products, which then lowers the overall ABL balance along with the market pricing. That has an impact on the ABL interest. So that's the thing we're focused on. But as the notes describe on the page, it's really a simple average to kind of put in context what we see as an illustrative way to look at it.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [36]

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And we -- and I would add -- just calling qualitatively, I mean, we're -- we have opportunity, we think, as you look at the days of inventory that we have a from a business perspective that will continue -- we'll continue to work on going forward. So you get the benefit. So '14 does not have any cash impact of changes in working capital. And we do expect relative to '18, the commodity market certainly appear to be that they may be less on average, which would give some opportunity from a working capital standpoint as well as making sure we're managing the business well from a working capital perspective.

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Colin King, [37]

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Makes sense. And on the cash taxes side, that's something where maybe in 2020 you would look at becoming a full cash taxpayer, maybe earlier depending on some of the real estate transactions. Is that how you're thinking about that?

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [38]

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Well, so we don't give forward guidance on where we see that to be. But you can think about how we see the business coming together, I think make some extrapolations there. Our NOLs have some limitations on the change of control, but actually, I mean, it's very -- it's got a long time frame on that. So for NOLs, we have about $50 million we could use for real estate up until 5 years after the change of control, which is another 4 years. And then beyond that, we still have from that 5-year time frame about $8.5 million a year we can use to offset ordinary income. And then for another 13 years beyond that it's another $1.5 million. So that's a nice amount of protection on the tax side.

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Operator [39]

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There are no further questions. I will turn the call back to our presenters for closing remarks.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [40]

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Thank you, Beth. So we appreciate your time and your continued interest in BlueLinx. And we certainly look forward to sharing our progress with you during our next call. Have a great end of the week -- weekend and a good holiday season. Thank you.

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Operator [41]

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