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Edited Transcript of BXC earnings conference call or presentation 6-May-20 2:00pm GMT

Q1 2020 BlueLinx Holdings Inc Earnings Call

ATLANTA Jun 5, 2020 (Thomson StreetEvents) -- Edited Transcript of BlueLinx Holdings Inc earnings conference call or presentation Wednesday, May 6, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kelly Cunningham Janzen

BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer

* Mary Moll

BlueLinx Holdings Inc. - Director of IR

* Mitchell B. Lewis

BlueLinx Holdings Inc. - President, CEO & Director

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Conference Call Participants

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* Alan Wayne Weber

JB Capital Partners LP - Chief Compliance Officer

* Alexander John Rygiel

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Investor Relations Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

Thank you. I would now like to hand the conference over to your speaker today, Ms. Mary Moll. Please go ahead, ma'am.

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Mary Moll, BlueLinx Holdings Inc. - Director of IR [2]

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Thank you, Annie, and good morning, everyone. We appreciate you joining us for the BlueLinx 2020 First Quarter Earnings Conference Call. The earnings release is posted in the Investors section of our website at www.bluelinxco.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 Kelly Janzen, 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.

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

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Thanks, Mary, and good morning. I want to start today by first thanking our nation's healthcare professionals and first responders. They're taking risks every day to help minimize the devastating impact the COVID-19 pandemic has had on so many families. And our hearts go out to those who have lost loved ones during this terrible period. I also want to thank our BlueLinx associates who have truly stepped up over the last 6 to 8 weeks. We are fortunate that our business has been deemed essential in every state that we operate, and that our supply chain has remained intact. We've been able to continue our day-to-day operations during the COVID-19 pandemic through the dedication and commitment of our associates. Their safety and well-being have been and will remain our top priority as we continue to serve our customers and work with our trade partners to support our nation's housing infrastructure. In late February, we formed a cross-functional COVID-19 emergency preparedness team responsible for implementing new policies and procedures to protect our associates, their families and our communities. The primary mission is to prioritize employee health and safety with respect to all business decisions through the duration of the pandemic. Like many other companies, we immediately instituted sanitation and social distancing guidelines when recommended by health officials for our employees. We also instituted work-from-home policies as well as implemented new procedures regarding visitors, deliveries and business-critical services for locations where essential employees were required to be present. I am pleased to report that our core operations are functioning effectively as we uphold these new policies during this time. And thankfully, to date, we have no reported cases of COVID-19 among our 2,200 BlueLinx associates.

Our first quarter results demonstrate the momentum we were building this year through early March, during which we were successfully executing on our sales strategies and processes, realizing operational efficiencies and enhancing our existing relationships with key customers and supplier partners. We've discussed in detail over the last several earnings calls the challenges that we faced in the first half of 2019 and our response to those events. We addressed those issues beginning in the second half of the year, and exited the fourth quarter of 2019 ready to capitalize on the initiatives we undertook. Our first quarter results are a reflection of the significant progress we made during that time. And yet, we are acutely aware that our results in the first quarter of 2020 had little bearing on the business environment we are now facing as a result of the pandemic.

We did move quickly and took several actions earlier in the first quarter that contributed to putting BlueLinx in a solid position for the business environment that we're currently facing. We continued executing on our strategy to monetize our own real estate to delever our balance sheet. We have reduced our term loan by $78 million since the end of fiscal year 2019, primarily through the completion of sale-leaseback transactions earlier this year on an additional 14 properties. In connection with the pay down of the term loan, we were also able to amend its terms to eliminate the leverage covenant when the principal balance reaches $45 million, which we could now achieve by paying down an additional $24 million.

Our remaining owned real estate which consists of 13 properties, is valued at approximately $40 million and is still available for future monetization. While we recognize that the real estate market is currently in a state of disruption, the historical market value of these properties is still about 65% over the amount that would be needed to eliminate the term loan's leverage covenant. We actually have several potential near and longer-term sources for term loan repayment, including additional real estate monetization, generating operating cash flow through both our operating results as well as a constriction of our balance sheet and drawing on our ABL facility.

In anticipation of the short-term challenges in our markets, we were also able to amend our term loan in late March to significantly increase our leverage covenant ratio to 8.75 for both the second and third quarters of 2020. And in addition to the work we did on our term loan, we also favorably renegotiated our ABL to provide additional liquidity as we navigate through a turbulent second quarter.

We realized by early March that COVID-19 would likely have a disruptive impact to the overall U.S. economy and the building products industry. In addition to enhancing our term loan and ABL terms earlier in the year, we anticipated that curtailing our operating expenses would also be necessary. This realization, coupled with the economic impact that I anticipated would soon be felt by many on our BlueLinx team, compelled me to inform our Board that I would be reducing my base salary to $1 for 6 months. And I'm proud to be part of an executive management team that then voluntarily took their base salaries down by 10% for the same period and a Board that unanimously voted to take its cash compensation down by 20% for the next 2 quarters. In addition to these actions, we also initiated a hiring freeze, have delayed almost all capital expenditures, deferred certain benefits and furloughed approximately 15% of our salaried workforce. The furlough of these salaried associates was heavily scrutinized to mitigate the impact to our customers and our revenue. We also were able to redeploy several associates to functional areas that require heightened attention during times of market disruption, such as daily detailed accounts receivable review and assessment, inventory analytics, centralized payment authorization and forecasting.

In light of a highly uncertain demand environment, we also implemented a rigorous daily variable cost analysis to react quickly to market changes across our geographical footprint. We will continue to monitor both our operating efficiency and our fixed costs so that we can react quickly if needed, given the potential for adverse market conditions in the days ahead.

On a positive note, we were pleasantly surprised to see how our sales volume held up relatively well in April despite seeing downward pressure towards the end of March. Our revenue during our fiscal April, which ended on May 1, was down about 11% over the prior year period and only down about 8% when you factor in lost sales from the discontinued siding product line that we've previously discussed. From a sequential perspective, and when excluding the siding impact, the first 2 weeks of April were down about 12% in revenue compared to the same period in 2019, while the remainder of the month was down around 6%.

We believe our relatively modest decline in revenue is reflective of existing homebuilding contracts that were completed during the month, and our volume may decline more significantly if single-family housing starts continue a rapid steep decline or remain negatively impacted over a protracted period. Of course, the extent to which the U.S. economy and the housing market will be affected by the pandemic remains uncertain. What we do know today is that single-family housing starts declined dramatically in March compared to the February positive momentum that we were seeing. March was down about 17.5% from February levels on a seasonally-adjusted basis, and we expect to see a further decline when the results come out for April. Another data point that we track is the Builders Confidence Index, which experienced a 42-point decline from March to April.

While certain areas of the country are slowly reopening their economies, it is still too early to tell when and at what rate we will see a reemergence of strong housing activity, especially considering the historic unemployment levels we now face. There is, however, growing sentiment that while the pandemic will have a short-term negative impact on the single-family housing market, it may have a long-term positive effect if it drives potential homeowners, particularly millennials, away from living in apartments or multifamily complexes in large metropolitan markets, to a safer environment in the suburbs.

In this COVID-19 environment, we know that operational improvements have become more critical than ever, and we must remain nimble and adapt to rapidly changing market conditions. The current environment has compelled us to go even further in finding and driving efficiencies and improving processes, and we expect that once we are past this crisis, we will continue to reap the benefits of these improvements as we emerge an even stronger company. Our long-term strategies, which we have discussed at length in previous calls remain intact. In the short term, we will navigate our liquidity and operations through this tumultuous business environment. We believe we are doing all the right things to drive the company to the next level and as a leader in our industry. We will continue to pursue profitable growth in sales and are doing everything in our power to position the company to successfully manage the coming weeks and months ahead and to be ready when the economy begins its recovery.

We are joined today by our new Chief Financial Officer, Kelly Janzen. Kelly started with the company on April 13 and has joined BlueLinx during one of the most interesting and challenging times in our company's history. Kelly has jumped right in and joins BlueLinx after holding financial leadership positions at major industrial companies, including more than a decade with General Electric. She was most recently Chief Accounting Officer for WestRock, an $18 billion corrugated and consumer packaging company, and prior to that, for the oil field services company, Baker Hughes. Kelly brings to BlueLinx a wealth of technical and financial expertise that will help us drive even greater process and operational efficiencies within our organization. The BlueLinx team is fortunate to have someone with Kelly's experience and background joining our company. And now, I'd like to turn it over to Kelly.

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Kelly Cunningham Janzen, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [4]

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Thanks, Mitch, and good morning to all of our stakeholders who are with us on the call today. I am very excited to have joined the BlueLinx team. It is an understatement to say that during the best of times, stepping into such a new role is a challenge. But needless to say, in the current environment, it is even more so. Yet I am confident that together, our team will be able to weather the storm, and I am eager to contribute and lead right away. I look forward to getting better acquainted with all of you soon.

Now I will recap the financial results and our financial position for the quarter. We were pleased with the first quarter's results despite the fact that we began to see some impact of COVID-19 during the last couple of weeks of March. As you will see on Page 9, the first quarter of 2020, we reported net sales of $662 million compared to $639 million last year. We generated gross margin of 14.1%, an improvement of 60 basis points year-over-year. This gross margin improvement continues a year-long trend and contributed to $19.9 million of adjusted EBITDA for the first quarter, up approximately 20% as compared to the first quarter of 2019. The increase in net sales for the quarter was offset by the continued comparative effect of the discontinuation of a key siding product line, which contributed approximately $32 million in the first quarter of 2019 as well as some lingering transaction-related dissynergies in overlap markets. Commodity price levels during the quarter generally moved higher relative to 2019, and the effect on net sales, though relatively minimal, was positive for the first time since 2018. We recorded higher gross profit on a year-over-year basis, generating $93 million compared to $86 million last year. The increased profit was driven by the higher gross margin of 14.1% compared to 13.5%, and this is the highest our gross margin has been in over 15 years. This improvement was a result of gains in both Structural and Specialty Product categories, with Structural gross margin improving to 10.1% from 9.5% last year and Specialty gross margin increasing to 16.4% compared to 15.2% last year. For the first quarter, we delivered adjusted EBITDA of $19.9 million compared to $16.6 million last year. SG&A for the quarter was $77.8 million, which was 11.7% of sales compared to $74.4 million last year, which was also the same percentage of sales for that quarter.

Mitch alluded to the fact that we have reduced fixed costs in reaction to the COVID-19 pandemic. The voluntary reduction in salaries, coupled with the savings from furloughed associates and temporarily reducing benefits, yields a reduction in SG&A on an annualized basis of approximately $13 million. Additionally, we have generated savings in areas such as professional services and nontrade supply contracts as well as through general operating efficiencies. We will continue to evaluate further cost reduction opportunities during the coming weeks. As we are still in the process of implementing some of the actions we have started as well as evaluating these opportunities, it is certainly difficult to assess their total impact. However, we do expect that we could have meaningful additional cost savings from further actions.

Cash on hand and excess availability under the ABL was approximately $97 million at quarter end, and we were pleased to have this level of liquidity as we look ahead into the second quarter. We are particularly focused on maintaining and preserving our liquidity during this time and we will closely monitor inventory levels, the strength of our receivables and all expenditures at every level of the company.

Turning to Slide 10. For the first quarter of this year, we saw commodity prices higher than last quarter and last year and in fact, higher than their respective 5-year averages. These higher prices were likely driven in part from the fact that the year started off with a strong housing market. Looking ahead, it is unlikely this trend of higher prices will continue throughout the year based on current expectations for the U.S. housing industry. The pandemic definitely cooled off the commodity market as composite lumber and composite panel price -- panel indices dropped by 18% and 16%, respectively, from their peaks in early March as compared to the April monthly average. We have seen recent improvement and relative stability in the commodity wood-based market as the current pricing has come off their mid-April lows.

On Slide 11, we show that through the first quarter of 2020, we continued our trend of gross margin improvement, driven by gains in both Structural and Specialty categories. We generated 10.1% gross margin in the Structural category, which is the highest quarterly Structural gross margin we have seen since the first quarter of 2011, and 16.4% gross margin in the Specialty category, an increase of 30 basis points from the fourth quarter last year and an improvement of 120 basis points from the prior year quarter.

Moving to Slide 12. Our borrowings under the ABL were $382 million at quarter end compared to $394 million for the same quarter last year. Our term loan balance was $77 million at quarter end compared to $178 million at the first quarter end last year. As such, debt under our term loan and revolving credit facility was reduced by $113 million over the prior year period. During 2019, we were able to reduce the term loan by $32 million. And this year, through April 1, we've reduced the term loan by a further $78 million for a total of $110 million repaid over this time using proceeds primarily from the various real estate transactions that we have announced. Accordingly, our term loan debt balance is currently standing at $69 million. As we previously announced, we also amended our term loan to proactively increase the leverage covenant ratio from 8.75 -- to 8.75, excuse me, from 6.5 for the second quarter and 6 for the third quarter of this year to provide us with greater financial flexibility in the current environment. Furthermore, as Mitch mentioned, we have positioned ourselves well and that we will no longer be subject to a leverage covenant ratio should the principal balance of the term loan be less than $45 million.

In terms of our owned real estate portfolio, we now have 13 remaining owned properties valued at approximately $40 million that are available to monetize. Three of these properties valued at approximately $8 million are considered dark properties and are available for sale, while the other 10 are still operating. We view our owned real estate, which is appraised at approximately 4x the current book value as another good resource available for debt reduction. We exited the first quarter with $97 million in excess availability under the ABL, and the higher seasonal advance rates that were put in place in the first quarter will provide ample near-term liquidity to meet our daily cash requirements. When we amended the term loan leverage ratios to 8.75 for both the second and third quarters of 2020, we also said that we were highly confident that we would meet our first quarter leverage ratio covenant of 6.25 and ended the quarter with a leverage ratio below 6. As we enter the second quarter, we know that the changes that we made to enhance our capital structure and liquidity earlier this year will help to mitigate some of the uncertainty that the pandemic brings to our industry.

And with that, Annie, we would like to open it up for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Presenters, we do have a question from the line of Alex Rygiel from B. Riley FBR.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [2]

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Nice quarter. Mitch, can you help us to better understand the balance of the asset sales and sort of the cadence that we can expect over the next year or 2?

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

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I would have been able to answer that question a lot better about 2 months ago, right, when we had anticipated -- and I think on the last call, we may have talked about the fact that we were having good dialogue, particularly on the dark properties, and we're looking at opportunities for continued sale leasebacks. Right now, just because of the uncertainty that we're facing in the real estate asset value markets as well as the credit markets associated with that, we've kind of hit the pause button on that. I would say if we return to -- we don't know what the new normal is going to look like, but if the valuations appear to be in the same ZIP code, we will continue the continued view on taking down the term loan through real estate monetization.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [4]

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Helpful. And then also kind of on that topic, can you give us a little bit of color on the cadence of paying down that term loan to decrease it below that $45 million level?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [5]

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Yes. So when we amended the leverage ratio up to the 8.75, that was with an intent to give us a lot of runway. Not knowing, obviously, what was going to happen in the second quarter or the third quarter of the business. So as I think I alluded to in my notes, there are different avenues to do that. I mean one of the things that we have focused on is working our working capital hard. And we will continue to look at opportunities to generate cash off of the working capital. As you know, and as Kelly talked about, I mean we do have availability under the ABL and then we have the real estate as well. And again if we -- as we continue to look at the business and run more efficiently with a recovery in the market, our expectation certainly would be that we're earning more than our cash cost, of course, and we can utilize that as well to pay down debt.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [6]

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And then your organic growth, that's pretty strong in the first quarter. Can you comment on or quantify how much of that was from new product lines that were kind of added to sort of backfill the lost siding business, and just broadly kind of more update us on those activities?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [7]

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Yes. So we were -- we actually felt like we had good momentum. As we've talked about in the past, we were looking at it, and I think we gave these numbers in 2019 alone, it was in the neighborhood of $160 million of lost sales for the year. And so while we're making good progress, it will take a while to come back on that, but we talked about picking up a couple of new brands, marquee brands that have helped, and we certainly are garnering market share. But it's not going to be -- and it will take a while for us to recover that particular product line with the new products that we've had.

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Operator [8]

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(Operator Instructions) We do have another question from the line of Alan Weber from JB Capital.

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Alan Wayne Weber, JB Capital Partners LP - Chief Compliance Officer [9]

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So Mitch, can you talk about -- I mean I realize there's a lot of uncertainties, how do you think about kind of the cash flow for the balance of the year, the business, and also like if there's been any changes in terms of credit to some of the customers?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [10]

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Okay. So as we think about the cash flow for the rest of the year, we are closely monitoring, watching and reducing our working capital as we see volume decline and becoming more efficient. We've put in place, in fact, an inventory analytics team on a centralized basis that is reviewing all purchase orders. And there's a team that is communicating with folks out in the field to make sure that we're bringing in inventory that we need, understanding that as a wholesale distributor, we will carry inventory to service our customer base effectively. So the balance sheet clearly is an opportunity from a cash flow standpoint. I mean we have, of course, received some benefit on the interest rate environment that's lowering our costs as we talked about deferred capital as well. So our actual cash outlays, fixed cash outlays, have declined from numbers that we've presented in the past, but it's still a moving target. There also have been some opportunities to push back some payments, as I'm sure you're aware, with some of the federal legislation that has taken place. So we've been able to push back payments that we would otherwise have to make, which certainly helps for 2020 from a cash flow perspective.

On the receivables side, and what we're seeing from a customer standpoint, is similar to what we did putting together a very strong team that's daily reporting on the inventory side. We did the exact same thing on the receivables side. And this, Alan, probably goes back a month ago or so. And so we've also -- when I talked about redeploying before some of our best people into that group, we're now looking at that very closely. And I would say for now, the credit characteristics of the business seem good. We haven't seen any major disruption. Our industrial customers appear to have been hurt more early on. Some of the markets closed down but it has not evidenced yet from a receivable standpoint. So at the moment, everything seems to be okay from a receivables perspective. We will watch it very closely and understand that if the market remains diminished over a longer period of time that it will flush out potential issues, but I can tell you we're on top of it.

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Operator [11]

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(Operator Instructions) There are no further questions from the line, presenters. You may continue.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [12]

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Okay. Well, thanks, Annie, and thank you for joining us, and of course, your continued interest and support of BlueLinx. We look forward to speaking to you again in August. Thank you very much.

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Operator [13]

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