Bluelinx Holdings Inc (BXC) 2016 Q3 法說會逐字稿

Good morning. My name is Teresa and I will be your conference operator today.

At this time I would like to welcome everyone to the third-quarter 2016 investor relations call.

(Operator Instructions)

Ms. Natalie Poulos, you may begin your conference.

Thank you, Teresa. Good morning everyone. We appreciate you joining us for the BlueLinx third-quarter 2016 earnings conference call.

This call is being webcast on the Company's website at 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 for the call today are Mitch Lewis, Chief Executive Officer, and Susan O'Farrell, Chief Financial Officer.

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

With that I will turn the call over to Mitch.

Thanks, Natalie, and good morning. We are very pleased to report another good quarter at BlueLinx. We had net income for the quarter of $15 million, our best quarterly performance in well over a decade.

In addition, we had another solid quarter with our adjusted EBITDA at $11.1 million. Our third quarter was our fourth consecutive year-over-year quarterly improvement in adjusted EBITDA. Our adjusted EBITDA improved by approximately $1.5 million or 16% from the third quarter last year when excluding our strategic operational niches. Our adjusted EBITDA for the year is now $30.7 million, an improvement of $10.1 million from 2015.

During our last two quarterly calls we discussed our strategic priority to reduce our leverage. Our operational initiatives have been closely aligned with this strategy. It's great to see our team execute on these initiatives, which have resulted in significantly reduced debt while we continue to improve our operating performance.

The emphasis on our debt reduction continues as our debt declined by $87.2 million from the end of third-quarter 2015. This is primarily a result of actively managing our working capital, eliminating certain underperforming SKUs, rationalizing our distribution footprint and selling certain unoccupied real estate. Susan will go into more detail in a few minutes regarding our third-quarter and year-to-date financial results.

We are also pleased that we were able to announce last week the extension of our ABL facility through mid-July 2018. I'd like to thank our ABL group for their continued support of BlueLinx.

With this extension of our ABL and our real estate loan not being due until July 2019, we now believe we have the runway to clearly focus on enhancing our day-to-day operations while we continue to execute on our deleveraging strategy. As part of that strategy we continue to aggressively market our unoccupied facilities for sale. In addition, we are in negotiations for several of our operating facilities to enter into sale-leaseback transactions.

These transactions should enable us to reduce our real estate debt to under $100 million by the second quarter of 2017. This reduction would represent a decline in excess of $60 million from our balance as of the end of March. And we look forward to sharing the progress with you on our real estate sales in the weeks ahead.

While our performance in the third quarter was solid the markets were not particularly robust. The residential construction market actually is performing well for all of 2016 when compared to last year. Single-family housing starts through September are up 8.6% year to date.

However, the third quarter continued the quarterly decelerating trend we have seen since the beginning of the year. Single-family housing starts were up only 2% for the quarter. And if you exclude the Western United States where we now only have a small presence, single-family housing starts were actually down 0.5% compared to the third quarter of 2015.

The relative flatness in single-family housing starts in the third quarter was somewhat surprising because the mood of our customer base has generally been optimistic with an expectation for continued modest growth. As we discussed on our last call we do believe there has been some market angst associated with the presidential election. This may have created some drag on demand. And with the election now behind us we look forward to seeing whether our customers' optimism is warranted.

Putting our financial house in order has enabled us to focus more clearly on both our customers and our supply base over the past quarter. We now have renewed emphasis on garnering profitable market share and have invested in the sales excellence team to help drive the organization's customer experience and sales development. We are already seeing results and look forward to sharing our success in the days ahead.

The third quarter was another improving quarter at BlueLinx. And at the risk of using an obvious metaphor for BlueLinx we do recognize that there is still a lot of wood to chop.

While I am really proud of our team for the execution of our strategy that has led to the great results we are able to report today, I'm even more proud of their willingness to embrace our core philosophy of continuous improvement. We continue to make progress, and yet our team knows we are just beginning. I'd like to personally thank all our BlueLinx associates, customers and suppliers for their continued efforts and support of BlueLinx.

And now I will turn it over to Susan who will walk you through our financial performance for the third quarter in greater detail.

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

On page 7, let's review some of our highlights before we get into more detailed of our results. As Mitch just mentioned, we continue to focus and advance on our strategic initiatives: executing on our facility optimization and real estate and monetization efforts. With the sale of four previously closed facilities during the quarter we have made great strides towards paying down our mortgage debt.

Given the impact of strategic initiatives net sales are $476 million for the quarter. When excluding our strategic operational efficiency initiative, our net sales were up $16.5 million or 3.6% from this period a year ago, led by volume growth seen in our structural wood products offset by lower rebar material cost.

When we look at our third-quarter performance we had net income of $15 million, our highest quarter of net income since 2004 with earnings per share of $1.68. Adjusted EBITDA was $11.1 million, which is up from the same period a year ago.

Our debt principal balance is down $87.2 million from third-quarter 2015. This is significant progress on our deleveraging initiatives. Our mortgage principal was down $26.7 million and our ABL debt balance was down by $60.5 million from a year ago. With the property sales we executed during the quarter and the additional properties currently being marketed, we expect to significantly reduce our mortgage debt by the end of first-quarter 2017.

Moving to page 8 I'll highlight our year-to-date performance. Sales for the year were $1.46 billion. When excluding our strategic operational initiatives net sales were up $57.7 million or 4.5% from 2015 levels. Additionally, gross margin was 12% or 12.6% when excluding closed facilities and our SKU rationalization effort.

We are also very pleased to report adjusted EBITDA year to date of $30.7 million, an increase of $10.1 million or 49% for the first nine months ended 2015. When excluding our strategic operational initiatives, our adjusted EBITDA improved by approximately $13 million from the same period a year ago.

Moving to page 9, we will discuss the improvement we have seen in our adjusted gross margin. GAAP reported gross margin was 12.6% for the quarter or 11.8% unused accounting reserves for strategic initiatives. We executed more favorably against these initiatives.

The final closeout of the products we exited proved to be more profitable during the third quarter than anticipated. We released unused reserves during the quarter that were previously booked as part of these initiatives. Adjusted gross margin increased by 40 basis points for the quarter compared to third-quarter 2015 and 100 basis points year to date when compared to the same period in 2015.

On page 10, with our strategic priority on reducing our leverage we are pleased to share the benefits we have reaped for our real estate monetization plan. With the sale of four closed facilities during the quarter, not only did we enjoy real estate gains but we also significantly reduced our debt with additional principal payments in excess of $16 million for the quarter and now $17.2 million year to date. We are actively marketing additional unoccupied facilities for sale and other operating facilities for sale-leaseback opportunities and we look forward to sharing these results with you in the very near future.

Turning to page 11, our trailing three-month cash cycle for the fiscal third-quarter 2016 totaled 55 days, a seven-day improvement compared to the third-quarter 2015. Our operating working capital improved by $71.5 million when compared to Q3 2015. This improvement primarily reflects our improvement in working capital components including a decrease in inventory of $47.1 million and a decrease in receivables of $24 million. We have been working hard on improving our working capital processes and we are seeing the benefits.

As mentioned in our most recent earnings call, our strategic operational efficiency initiatives are key to delevering BlueLinx. Due to the strategic initiatives to exit markets and certain local assortments, we've previously announced that we expect these initiatives to impact annual revenues by approximately $200 million and adjusted EBITDA by approximately $2 million.

Through our mortgage principal payments and our more efficient working capital we expect to strengthen our balance sheet. We anticipate a leaner, more capital-efficient BlueLinx and we are beginning to see those results.

To wrap it up, I'd like to thank our BlueLinx team who strive to continuously improve, to drive operational excellence and to provide outstanding customer service. And, of course, special thanks go out to our customers and suppliers for their continued partnership.

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

(Operator Instructions) Alan Weber, Robotti Advisors.

Good morning. When you spoke about the initiative and you talked about it, I think you said $200 million of revenue from facilities that you are going to be leaving or areas. I was a little confused, how much of that has already taken place and let's say for next year?

Yes, thanks for asking, Alan. So the way to look at it is we have already closed all those facilities and those activities happened really through the end of the second quarter. So at this point what you will see as we go through the coming four quarters will be anniversarying having those closed facilities.

So we will continue to talk about our strategic initiatives and give you some math that helps you understand the impact of those. So we are one quarter through that, so Q3 was the first quarter without those facilities have now been closed. We will have three more quarters where we will be reporting the results where we compare the differences.

Okay, so the third quarter that you just reported, that's kind of the set revenue going forward?

Yes.

Okay --

And there will be a little bit of impact in Q2. And we spoke to it, all of this is the first time we've had a whole quarter with those closed facilities.

And can you talk about as you look out, let's say, towards next year if you have this level of facilities, what the SG&A, is there anything in SG&A that was higher or lower this quarter than it should be going forward? I only ask that because it was relative to the decline, again I realize it is not apples to apples, but relative to third-quarter 2015 the SG&A was down a little bit but not as much as the revenues would have shown being down.

So we continue to make sure we are running a lean organization, Alan. And so we did take out some corporate SG&A cost, as you might imagine, related to those revenues and we continue to look at all of our processes and ways to continue to keep our cost structure appropriately in line with where the revenues are, but certainly there are impacts to SG&A as it relates to the reduction in revenue.

Okay, great. My last question was can you talk about the impact in the quarter on inflationary pricing or deflationary?

Yes, so I would say in volumes it was a solid market maybe in a structured wood products. The place where we saw the biggest impact on pricing would have been in raw material goods as it relates to rebar. And so those volumes, the volumes fell, particularly the pricing of rebar, fell quite a bit during the quarter. So that's something that had an impact on us as we looked at our structural products which include rebar.

Okay, great, thank you very much.

Mark Kaufman, LPS Partners.

Good morning. My questions just really pertain to the general events in the industry itself.

Are you finding your customers or your customers' customers having issues with finding employees, finding workers? Do you think there is any reduction in activity because of stresses like that? And, in addition, do you ever engage in any hedging on lumber prices in the future or at least take leads and get ideas about where pricing might be heading?

Okay. So on the first question as it relates particularly to labor trends, it has been for the last 18 months a consistent concern really in all manufacturing associated with building products distribution and then our customers, as well, as it relates to labor.

It was clearly as the industry was accelerating more in the second quarter you heard it a lot more than you have in the third quarter. But it continues to be a topic that is consistently discussed by leadership in the industry.

It's interesting if you talk to pure economists they'll tell you it's pretty simple supply and demand. Just raise wages and you will get all the people you want. Obviously, there's some issues associated with that.

But generally there is a lot of, I would say, relatively innovative activity going on to attract people, to retain people in all areas of the supply chain for the industry. So it is clearly something that we are all thinking about.

As far as hedging, the legacy of the business, certainly prior to when I got here, is there was a lot more, what I would say, speculative buying trying to buy commodities where you can hedge in situations where the organization felt, for example, that pricing was low and that it would be going up. We discontinued that well over two years ago with the thought being that our value proposition as a wholesale distributor could not be we time the market well.

We've had discussions with, I would say, some sophisticated instrument traders, actually even in the last two weeks, talking about where there may be opportunities where you have a fixed sale on track. And that would tend to show up more in multifamily than it would in our core single-family business. But you may have a fixed contract and based on potential backwardation or something else going on in the underlying markets you actually can take a position and lock in your margin.

But generally for us we try to drive the organizations, get your inventories low, not to the point that it would negatively impact the customer base. And let's make sure that we are just getting value for what we provide which is great service.

The final question that you did ask was do we have internal knowledge expertise do we talk about? The answer to that is yes. We have certainly from the legacy of this business I would say very, very experienced, knowledgeable, smart traders in the base and core commodities and we exploit that.

We recently brought the teams together under district leadership. As opposed to having the more dispersed, we have weekly calls, for example, with our lumber and panel traders to discuss market trends and what's going on and what their views are towards the market.

Okay. One follow, if I may, just a follow-up on the labor issue, the field, are you seeing it, other competitors, other players in the industry have been saying it, that it's been a constraint on supply of homes basically to customers out there?

It clearly has, and the homebuilders would tell you this, that it has impacted the duration in which they can get shovel in the dirt to selling the home. So it's extended the production of homes. But, again, there's a lot of activity that has taken place to help mitigate that including manufacturers working on innovative products that reduce the labor time.

So that's a very top of mind for a lot of our good suppliers that they are working on innovations to help mitigate that concern. So I would say it's not -- it's risk for the industry going forward, but we are all actively working that.

Thank you.

(Operator Instructions) There are no further questions in the queue at this time.

Okay, thanks, Teresa, and thank you all, again, for your time and your continued interest in BlueLinx. We, of course, look forward to sharing our fourth-quarter and full-year results with you in the months ahead. Have a great day.

Thank you, ladies and gentlemen, for your participation. You may now disconnect.