Bluelinx Holdings Inc (BXC) 2016 Q2 法說會逐字稿

Good morning. My name is Janisha and I will be your conference operator today. At this time, I would like to welcome everyone to the second-quarter investor relations conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

Ms. Natalie Poulos, you may begin your conference.

Thank you, Janisha, and good morning everyone. We appreciate you joining us for the BlueLinx second-quarter 2016 earnings conference call. This call is being webcast on the Company's website at www.BlueLinxco.com. The earnings release and presentation slides for this call can be found in the investor relations section of the Company's website.

Joining us on the call today are Mitch Lewis, CEO, and Susan O'Farrell, CFO.

I will also remind you that this presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements about our future operations and financial 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 the press release and discussed in our filings with the SEC.

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 and today's presentation includes references to non-GAAP financial measures.

With that I will turn the call over to Mitch.

Thank you, Natalie, and good morning. We are very pleased to once again report a good quarter for BlueLinx. While we had a net loss of $3.1 million, it would have exceeded $4 million of net income without the $7.7 million in charges associated with our facility closures and inventory rationalization. Although these charges hurt us in the second quarter, we fully expect our net income to be positively impacted well in excess of these charges in the second half of 2016 as we sell the properties associated with the facility closures.

The good news is that our adjusted EBITDA for the second quarter was $12.7 million, a $2.9 million improvement from the second quarter of 2015. Our adjusted EBITDA for the quarter is actually our best quarterly performance in the last eight years and continues the strong performance we enjoyed in the first quarter.

We were particularly pleased with our ability to maintain the momentum we have enjoyed over the last four quarters in light of the time and energy spent on the important operational initiatives we embarked on in the second quarter.

As we discussed previously, a strategic priority for BlueLinx is to reduce our leverage and over the last few months we have made great progress. We made the decision during the second quarter to close four distribution centers that were generating low returns on invested capital. In addition, we exited our Canadian operation which was basically a brokerage business with a sales office based in Vancouver. All of these facilities have now been closed on schedule and our inventory recovery from these closures exceeded our expectations.

The closings will have an adverse impact on the revenue and EBITDA as they represented approximately $130 million in annual revenue and $2 million in annual EBITDA. Our strategy of course is not to reduce EBITDA. We expect to reduce debt in excess of $45 million from these closures or a multiple of over 20 times the annual EBITDA we received from the closed facilities.

It is important to remember that even after these closures BlueLinx still has 40 operating facilities and one of the most comprehensive wholesale building products distribution footprints in North America.

Another strategic activity that took place during the second quarter was our product rationalization efforts. Our teams identified at the local level underperforming products either on a product category level or by individual SKU. Our decision to enable our local management and their teams to determine which products to exit is consistent with our philosophy that our business is predicated on our customer's preferences in their individual regions.

These preferences are truly local and highly disparate across the country. This product rationalization resulted in the elimination of SKUs that were not core to our local businesses. We recovered approximately $21 million from underperforming inventories during this process at an 85% recovery rate both of which exceeded our expectations. We expect that exiting these SKUs will negatively impact our annual revenue by approximately $70 million while having a small negative impact on EBITDA.

We remain intensely focused on continuing to deleverage BlueLinx. We have previously discussed the significant value we have in our real estate and we have begun to monetize this real estate by selling properties that we have exited. While we already have sold two small facilities we are under contract to sell several more closed facilities and we anticipate closing these transactions by the end of the year for over $30 million. In addition, our remaining properties create a significant opportunity to continue to materially reduce our debt.

We are currently actively marketing several properties for sale-leaseback transactions. These properties are in markets that remain very attractive to BlueLinx where we want to exchange our ownership position for cash to reduce our debt. We anticipate negotiating long-term leases that will enable us to remain in these facilities and continue to serve our local markets. We expect that through the outright sale of the properties in which we no longer operate and the sale-leaseback transactions in certain facilities where we will remain, that we will pay off more than $60 million of our mortgage balance by the end of the first quarter of 2017 as we further delever our Company.

We have not lost sight of our customers or our markets as we continue to reduce our debt. The overall business continued to perform well in the second quarter as Susan will discuss in greater detail in a few minutes.

We believe our customer base remains generally optimistic for the second half of the year and there appears to be continuing modest momentum for single-family housing starts. As you might expect, there is some market angst associated with the upcoming presidential election. This could present some temporary headwinds that might have a negative impact on our demand in the upcoming months.

We also continue to make progress on our growth initiatives in the industrial multi-family markets. In addition, we have established a sales excellence team that will coordinate with our entire salesforce throughout the country to continue to improve the interaction we have with our customers. While we are confident that we currently provide outstanding service to our customer base, the BlueLinx core value is continuous improvement. So we will work hard every day to exceed our customer's product and service expectations.

The second quarter was another improving quarter at BlueLinx and while we continue to make progress, our team is acutely aware that significant opportunities remain and rest assured we will fully intend to capitalize on them.

Now I would like to turn it over to Susan who will walk you through our financial performance in the second quarter in greater detail.

Thank you, Mitch, and good morning everyone. It is a pleasure for me to speak with you today and to review our second-quarter results.

On page 6, let's review some of our highlights before we get into the more detailed review of our results. As Mitch mentioned, we are advancing on our strategic initiatives and are successfully executing on our strategic product assortment facility optimization and real estate monetization efforts. Taking these initiatives into account, this quarter was a pivotal quarter for us and one that we believe will pay long-term benefits.

Although our net sales were down for the quarter, our same center sales were up significantly by $8.3 million from this time a year ago. For same centers, that was also a unit volume increase of 4.1%.

When we look at our second-quarter performance we had a net loss of $3.1 million which is largely impacted by the strategic initiative costs we incurred of $7.7 million. Although we reported a net loss of $3.1 million this quarter, 0we reported more adjusted EBITDA in this quarter than we did since 2008, a really terrific quarter for us.

Adjusted EBITDA was $12.7 million, up $2.9 million from the same period a year ago. Our debt principal balance is down $63.6 million from the same period a year ago. Our mortgage principle is down $10.4 million and our ABL revolver balance is down by $53.2 million. With the property sales to be generated from our real estate monetization efforts previously mentioned, we expect to meet our principal payment reduction obligation of $60 million by July 2017.

Moving to page 7, our revenues for the quarter on a reported basis as well as comparable same center basis we show you on this table. Revenue for the second quarter ended was $509 million with an increase in unit volume of 1.7% for the quarter mainly driven by an increase in specialty unit volume sales within our structural siding, specialty plywood and molding categories.

On a comparable same center basis, total sales increased by 1.8% with an increase in unit volume sales of 4.1%. Structural wood products were up 5.9% which is closely correlated to single-family housing starts.

On page 8, we share with you our quarterly revenues by product and by same center. Our mixture of specialty products increased slightly to 61% while structural pricing and volume units were down slightly compared to Q2 2015.

The chart on the right reflects our quarterly sales for active facilities versus closed. When excluding the closed facilities, our revenues increased by over $8 million.

Moving to page 9, we will take a look at GAAP reported gross margin of 11.3% for the quarter. When taking into account the impact of our strategic initiatives and what they had impact on gross margin specifically our strategic product assortment and facility rationalization efforts, our gross margin rate would have increased year-over-year by 130 basis points to 13.1%.

Mitch just discussed the impact of the sale of our facility closures and our product rationalization efforts. These initiatives are key to delevering BlueLinx and also now bring us to a new normal. After we annualize these initiatives, we anticipate a leaner, more capital efficient BlueLinx. We expect annual revenues to decline by approximately $200 million and adjusted EBITDA to decline by approximately $2 million. Through our mortgage principal payments and our reduced working capital needs, we expect to strengthen our balance sheet.

As Mitch shared while we hate to lose any adjusted EBITDA, the ability to delever the debt at a high multiple of adjusted EBITDA is the right trade-off for us. Going forward, this leaner BlueLinx will be keenly focused on driving sales through sales excellence initiatives. An early sign of our progress in this is our same center unit volume showing an increase of 4.1% from the year-ago period.

On page 10, our total selling, general and administrative expenses were up $1.6 million for the second quarter primarily in restructuring charges related to the facility closures.

Additionally, our incentive expenses were higher than last year due to improved results on key performance measures such as adjusted EBITDA and return on working capital.

Turning to page 11, our trailing three-month cash cycle days for the fiscal second-quarter 2016 totaled 54 days, a nine day improvement compared to the second quarter of 2015. Networking capital improved by $64.5 million when compared to Q2 2015. This improvement primarily reflects our improvement in working capital components including a decrease in inventory of $61.6 million, a decrease in receivables of $15.7 million offset by a decrease in accounts payable of $18.2 million.

We have been working hard on improving our inventory processes and we are seeing the benefits.

In conclusion, I would like to thank our BlueLinx team who strive to continuously improve, drive operational excellence and provide outstanding customer service that is above the rest. And of course, our special thanks go out to our customers and suppliers for their continued partnership.

Now with that, we would like to open it up for any questions you might have at this time.

(Operator Instructions). Mitchell Scott.

Looks like really good progress all across the board. So I just appreciate the color on kind of lumping all of the capital and debt reduction initiatives together. So thinking about that, I want to make sure I heard you guys clearly. So the mortgage principal balance of about $159 million, is it reasonable to think that you could take about $60 million off of that around Q1 of 2017?

Yes, by Q1 of 2017 is how I would describe that.

Okay.

By the end of Q1, I should say.

Sure, okay. Helpful. And then on the revolver, a couple of moving pieces in there and I know that there is going to be some seasonality but when you put the SKU rationalization initiatives together in there and some of the inventory runoff from sold distribution centers, can you sort of aggregate those anticipated effects and sort of give us an estimate of what the revolver might look like around Q4 or Q1 in the winter?

So I will just kind of walk you through some of the numbers we have shared and see if we get you there. But when you think about facility closures, we sold through inventory there that we would have been selling through anyway, maybe at a slightly faster pace. So the benefit there to the revolver is converting the inventory more quickly to receivables so there is a short-term benefit in the timing of that. But if you are looking toward the end of the year obviously there is an overall working capital reduction related to those facilities.

And then the SPA, strategic product assortment and SKU rationalization efforts are ongoing and those efforts will sustain over time so you will see that with our normal seasonality throughout the year. Does that help?

Yes, yes, it does. It is very helpful. Kind of leads me to my next question. So just thinking about the typical seasonality of the business and I know it is very helpful that you guys called out the annualized effects of the DC sales but can you give us a sense for even if it is just first half versus second half what proportion of sales and EBITDA typically come in those periods?

Yes, so we have gone back and looked and as you might imagine there is some variation based on seasonality as well as commodity pricing. But in general and more so looking at EBITDA and the bottom line, you will see about 40% to 50% of our EBITDA in the past few years being in the first half of the year.

Okay, that is very helpful. I will jump back in the queue. Thanks.

Mark Kaufman.

Good morning, nice job. I have a question. I believe and correct me if I am wrong, you had said on the last call or maybe it was the call before that that the DCs were going to be operating through the end of the year. Have you accelerated the closures of those or is it still the same plan? And what I am really thinking about here is how to think about what the back half looks like and or are there any additional write offs that are necessary because they haven't been closed yet?

So I think the way we articulated it was that we expected to have them closed by the end of the last year. We try to under promise and over deliver as much as possible. So we feel good that the teams were able to accelerate that and obviously close in a manner that we were very pleased with.

So as we look at the facilities, this was a major process I think as we described on the last call. And so we don't anticipate certainly today that kind of major change to any of our facilities. We will obviously always assess the remaining 40 facilities that we have and look at the return on invested capital to make sure that they are performing well and it makes sense for the business strategically. But I would not anticipate the same kind of activity that we recently had in the back half of the year.

And Mark, specifically to your question about should you expect further charges. Because those activities are done and the remaining slight follow on charges have already been fully accrued for, so there is no additional impact that you will see on these facilities for the rest of the year.

So would you say that you have been able to basically move as you said -- under promise and over deliver that you have been able to move the whole process forward somewhat advantageously?

Yes, absolutely. It was of course a good thing to exit inventory at a time when the market is actually relatively robust from a seasonal standpoint. It helped certainly from a recovery standpoint so the fact that we were able to move it in the second quarter as opposed to for example the fourth quarter I think in all likelihood helped from a recovery standpoint.

And obviously the goal of the organization is to delever the Company, reduce our debt and the faster we do that the faster we are able to do some more exciting things going forward.

So can I assume operationally then as this third-quarter commences we get a fairly clean look at what the Company looks like going forward not assuming any additional improvements operationally but this is your new baseline and you are working off that at least until the next round?

Yes, I think that is a fair assumption with again the caveat that we are working every day to operate more efficiently and have some initiatives to do that. But I think generally from a baseline standpoint, it will be a good way to look at it.

And Mark, we will continue to give you the comparable center number so that way you can see the operational improvements. So until we fully complete a full-year of these closures you will continue to see the tables that we provide to you to help separate out the noise if you will that comes through of having closed centers in our consolidated results?

Right, as a comparative, is that right?

Yes.

Thank you.

(Operator Instructions). Alan Weber.

Good morning. I have two questions. One is when you look out, you changed the Company, reorganized it more decentralized and obviously delevering. What do think when you look out whether it is a few years if the housing recovery continues, what do you think the operating margins in the business really should be?

On that first question I will say, one, the caveat being that we generally don't give forward-looking guidance. But I guess the way I would couch this would be to say we have historically tracked pretty closely to single-family housing starts and so if you just took a percentage of incremental growth that you saw on single-family housing starts and applied it across the top line of the business looking at the variable cost that we have, it will indicate the leverage that we get on the fixed cost of the business.

So you should get over time an improvement in gross margin assuming the housing recovery continues, your gross profit in absolute dollars once you kind of get out of some of these closing facilities should increase. And then the question really is how much additional SG&A is there to support even if it is 5% of your growth or you pick a number?

So I want to make sure I understand the question on these SG&A piece. Are you asking do we have sufficient SG&A to support incremental growth or will we need to incrementally increase SG&A as the business grows?

Yes, basically once you have kind of like you have what you think is the right footprint, what you think the additional SG&A is needed to support call it 5% or 6% of growth a year?

So because -- and we have done it -- we conducted exercises last year where we looked very thoughtfully at the organizational structure that we have from a SG&A standpoint and made some changes there. And because we have taken out these facilities, we feel pretty good about -- I feel very good about the current SG&A we have for the Company. While we will continue to invest in development opportunities, I don't anticipate a material SG&A increase with the expected modest housing recovery that we are seeing going ahead.

Obviously if housing jumps up by 40% in a year, that will necessitate some pretty big increases in SG&A which would be easily paid for by the incremental volume.

Okay. I guess my other question unrelated is consolidation among some of your customers, what impact is that having on the Company or what do you expect going forward?

It creates opportunities. As you would expect or know when you look at the public documentation from public reporting, from the two large consolidators in the industry they talk about rationalization and trying to save money. So they have come out with line reviews, classic company line reviews where they are trying to reduce costs and it has caused some disruption in the market.

The good news and the bad news for our business, wholesale distribution historically has lower margins and provides a valuable service for the Company. So there is not really a lot of opportunity to squeeze BlueLinx for example in that situation.

So there are situations where you lose some business. What we've actually experienced is we have loss some business and we have gained some business. And the volume of activity that will continue to go through wholesale distribution is certainly sufficient for us to continue to grow share with these large consolidators as we move forward.

Okay. I guess my final question is as you talk about decentralizing the Company, are you satisfied with where you are at the local level with local management of most of the facilities? Has that change taken place?

I would say that again, I alluded to the continuous improvement philosophy that we have at BlueLinx. I feel really good that on a comprehensive basis that we have as experienced a team that exists in the industry. But I would also say that there is always room for improvement and we are constantly assessing not only the performance of the facilities but the performance of each of us as associates of BlueLinx to make sure that we improve and that would include general managers in the field.

Okay, great. Thank you very much.

(Operator Instructions). Mitchell Scott. He withdrew his question. Mark Kaufman.

Just a follow-up. Are you going to make the announcements when the sales of the DCs are completed or when you actually put together a sale leaseback or rather than wait until the end of the quarter if they are meaningful?

I think what we are going to do is be guided by the SEC guidelines and to the extent they are material, we will certainly report that.

Okay, thank you.

There are no further questions at this time.

Thank you and thank you for your continued interest in BlueLinx. Again, we certainly enjoy giving you good news and we look forward to sharing our third-quarter results with you later this year. Thank you very much.

This concludes today's call. You may now disconnect.