Bluelinx Holdings Inc (BXC) 2017 Q4 法說會逐字稿

Good morning, my name is Roche, and I will be your conference operator today.

At this time, I would like to welcome everyone to the 2017 year-end investor relations call. (Operator Instructions)

I would now like to turn the call over to Ms. Poulos. Please go ahead.

Thank you, Roche, and good morning, everyone. We appreciate you joining us for our fourth quarter 2017 earnings conference call. The earnings release and presentation slides for this call can be found in the Investor Relations section of the company's website at www.bluelinxco.com.

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

I'll 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. Today's presentation also includes references to non-GAAP financial measures.

With that, I'll turn the call over to Mitch.

Thanks, Natalie. Good morning. We are pleased to report that the fourth quarter was another good quarter for the company as we logged our ninth consecutive quarter in which we enjoyed year-over-year improvement in our adjusted EBITDA. More importantly, our fourth quarter represented perhaps the most active 3 months in the history of BlueLinx.

We entered into a new 5-year $410 million ABL, completed a successful secondary offering, in which Cerberus sold its share position in the company, and negotiated $110 million in sale-leaseback transactions that closed in early January.

It was truly a transformative quarter for BlueLinx and continues our multi-year progression as a company. Our emphasis on improving our EBITDA, while deleveraging the company was demonstrated again in the fourth quarter, as our adjusted EBITDA improved to $9.8 million. We ended the year with $43.9 million in adjusted EBITDA, which was our best performance since 2006.

Susan will go into the financial details, but I do want to emphasize the great work our team has done focusing on margin enhancement. Our gross margins were up another 40 basis points in the fourth quarter compared to Q4 2016, even as the sales mix of our lower gross margin structural segment increased by 5% from Q4 2016 levels. Our full year gross margin of 12.7% was up 60 basis points and, again, reflects the emphasis and investment we have made on margins at BlueLinx.

Our third-party bank debt was also materially down in the fourth quarter compared to last year. The consolidated debt on our ABL and mortgage was down by $22.5 million compared to December 2016.

As you know, we subsequently paid off the remaining principal on our mortgage in connection with the sale of 4 properties in January, further strengthening our balance sheet.

Our sales revenue for the quarter improved by 3.5% on a same-center basis. As an organization, we continue to balance the desire to grow our top line without negatively impacting the great progress we have made on enhancing our variable contribution margins. As we discussed on our last call, we're now pivoting to focus on many of the sales growth objectives we identified in our strategy session in the fourth quarter of 2017. We are making investments in equipment, inventory and new sales team members in areas of the business where we feel we have significant market share opportunities.

As I mentioned on our last call, these organic growth initiatives to enhance our market share will take time. While we are making good progress executing on many of these initiatives, I still do not anticipate that the organic growth initiatives we established during the fourth quarter will result in meaningful market share improvement until the second half of this year. Most of these opportunities were identified and will be executed at a local level. We remain committed to the operating philosophy that we began 3 years ago. The best structure for our continued success, including growing our market share, is to take a local approach to our markets and the customers and suppliers we serve.

As you know, we have experienced inflation in several of our product categories over the last few months. While commodity price escalation is generally creating some inflation pressure, in a few product categories, inflation is clearly more pronounced. In late December, the U.S. Department of Commerce issued its final ruling on softwood lumber imports from Canada, which average around 20%. Since then, the framing lumber composite price index has risen by approximately 17%.

Rebar and really steel markets, in general, have also been somewhat chaotic. Lastly, Secretary Wilbur Ross recommended to the President that he not only consider a global tariff on steel imports in the mid-20% range, but that he also impose significant quotas. Not surprisingly, the imported rebar products that we purchase have risen by about 15% since the end of the year.

There are a few points to remember when assessing the impact inflation may have on BlueLinx. First, our broad product lines help mitigate product concentration risk, and that no one particular product category puts the company at significant risk from targeted import restrictions or tariffs. We also generally offer substitute products that could garner market share from products whose costs are escalating rapidly. And finally, an inflationary environment often reflects product scarcity, which can increase demand through wholesale distribution due to the short lead times we offer to our customer base. For BlueLinx, rising prices are typically good for business.

As I mentioned previously, we completely paid off our mortgage by selling some of our properties over the last 18 months. Even with these real estate sales, we still have significant real estate assets whose fair market value is not fully reflected on the balance sheet. We estimate that our remaining owned real estate, which is currently unencumbered, is in the $150 million to $160 million range. This value is based on independent third-party real estate appraisals that were conducted on all of our owned properties. The aggregate value of these appraisals is consistent with the fair market value we have estimated in the past. We continue to view our real estate as a valuable resource for additional capital, liquidity and potential strategic initiatives for the company.

It's been another productive quarter for BlueLinx. We are pleased with our continued momentum following the Cerberus exit of its ownership position in BlueLinx. We've executed on our multi-year strategy to get our financial house in order to enable this company to invest in our growth and take advantage of opportunities we see in our markets. We fully expect our organization to continue to execute well on our strategic initiatives as we work hard to provide opportunity and value for our stakeholders.

And now, Susan will provide you with more details on our financial performance for the quarter.

Thanks, Mitch, and good morning, everyone. It's a pleasure for me to speak with you today and to review our fourth quarter and full year business results. Before we get into the more detailed review of our financial results, let's first review some of our highlights.

Our primary focus over the past 2 years has been our strategic initiative to delever the business. In 2016, we rationalized our local inventory assortments, closed underperforming facilities and began monetizing select real estate properties, which collectively we refer to as our operational efficiency initiatives. We are pleased with the successful completion of these initiatives, which is evident in the financial results we are sharing with you today.

Since announcing our deleveraging plan in April 2016, we have sold closed facilities as well as entered into 3 sale-leaseback transactions in 2017. As a result of these efforts, we reduced our mortgage principal balance by $61.6 million in that time frame through the end of fiscal 2017.

Additionally, we kept the momentum going in January 2018. As Mitch just mentioned, the 4 additional sale leasebacks have now paid off the entire remaining $98 million mortgage, well ahead of the scheduled maturity date. After the January sale, we still have $150 million to $160 million in remaining real estate value, and that value is approximately 4x the net book value. This demonstrates the meaningful value and potential of the real estate still on our balance sheet.

Starting on Slide 9. Net sales were $433.6 million for the quarter, up $12 million compared to last year. When excluding the effects of our operational efficiency initiatives, our adjusted same-center net sales grew $14.7 million or 3.5% from prior year period. This was largely led by our structural products, which continue to benefit from strong commodity markets. We continue to use variable contribution margin as our North Star for our focus in driving incremental, profitable sales.

We also generated an improved gross profit of $55.5 million, with a gross margin rate of 12.8%, our best fourth quarter gross margin in company history. Gross margins were up for both specialty and structural products categories by 30 basis points and 110 basis points, respectively, which contributed to the 40 basis point improvement experienced in our gross margin percentage from this period last year.

While we enjoyed pricing increases from rising commodity markets, we are also proud of our focus on driving our gross margin rate through our sales excellence initiative.

Net income as reported for the quarter was $53.5 million, which did not include any real estate gains, compared to $10.4 million from the prior year fourth quarter, which included $13.4 million in real estate gains. We also experienced income tax benefits of $54.2 million during the quarter, which I will touch on in more detail in the next slide. This is our best fourth quarter net income on company record.

Our adjusted EBITDA of $9.8 million for the fourth quarter was up $4.2 million from last year, again another highlight for BlueLinx, as this is our best fourth quarter adjusted EBITDA on record.

We're also pleased to share that we had $63.6 million in excess availability under our revolver at the end of the year based on the qualifying inventory and receivable levels. With lower working capital balances on our revolver and a lower balance outstanding in our mortgage at year-end, we incurred lower interest expense during the fourth quarter and the year of $390,000 and $3.7 million, respectively from prior year amounts. With the working capital efficiencies we've gained to date, we continue to pave the way for a leaner, more capital-efficient BlueLinx.

And now that we've successfully entered into a new 5-year revolving credit facility, effective October 10, 2017, additional interest rate savings will be obtained over the life of the loans as compared to the previous credit facility. This new facility has improved economic terms, including LIBOR margin improvements of 75 to 175 basis points, depending on excess availability levels and also more favorable terms overall.

Using a trailing 12-month average revolver balance of $220 million, that would translate into approximately $2 million of interest savings per year.

Moving to Slide 10, we'll discuss the tax matters that were meaningful to us during the fourth quarter. In October, when Cerberus sold the majority of their shares during its secondary offering, a change of control occurred under IRS Section 382. This event had no impact to our financial statements as we believe we will be able to fully utilize all of our federal net operating losses of approximately $158 million that existed at the end of fiscal 2017. This is based on the calculation of various amounts allowed under Section 382, including the realization of any built-in gains on assets during the first 5 years during a change of control.

As a result of the tax reform passed on December 22, 2017, the company revalued all of our deferred tax assets, including the related offsetting valuation allowance. This resulted in a reduction of our growth-deferred tax assets from $93.1 million to $64.3 million, with an offsetting adjustment to the valuation allowance of $28.6 million, which resulted in a $200,000 tax expense.

One provision of the tax reform act made AMT credits refundable. Therefore, we released the valuation allowance on the AMT credit of $800,000, and we recorded a corresponding $800,000 tax benefit.

Lastly, due to our improved financial performance and the recent momentum experienced in our net income, we were able to release a significant amount of our deferred tax asset valuation allowance during the quarter, resulting in an income tax benefit of $53.5 million.

We evaluated the positive evidence and the negative evidence that existed at the end of the year. We determined that the positive evidence exceeded the negative evidence, mainly as it relates to our historical as well as our future net income. This resulted in a reduction of our valuation allowance from $63.9 million to $10.4 million. The remaining deferred tax asset valuation of $10.4 million relates mainly to state NOLs. For more information on tax matters, please refer to the appendix of today's slide presentation.

Now we'll move to Page 11, where we'll highlight the rest of our full year performance.

Net sales for the year were $1.82 billion, and on an adjusted same-center basis sales increased by $63.7 million or 3.6% from 2016. We generated a gross profit of $231 million, with a gross margin rate of 12.7%, a 60 basis point increase from this period last year. This was our highest full year gross margin on record for BlueLinx.

Additionally, our adjusted same-center gross profit, which excludes the effects of our operational efficiency initiative, increased to $11.2 million or 5.1% from prior year.

Our selling, general and administrative costs were down by $5.8 million when compared to 2016. This reduction was primarily related to decreases in payroll and payroll-related costs, third-party freight costs and general and other maintenance costs. We are also pleased to report income taxes -- income before taxes and the effect of our deferred tax asset valuation allowance of $9.6 million for the fiscal year ended 2017.

Net income for the fiscal year was $63 million, our highest full year of net income on record, with diluted earnings per share of $6.81. We also experienced income tax benefits of $53.4 million during the year.

Additionally, adjusted EBITDA for the year was $43.9 million, an increase of $7.5 million from fiscal year 2016. This is our best full year adjusted EBITDA since 2006. On a same-center basis, adjusted EBITDA for the full year increased $9.5 million or 27.4% from the fiscal year ended 2016.

On slide 12, we report our fourth quarter adjusted same-center net sales increased $14.7 million from the prior year period. This quarter-over-quarter increase was largely led by our structural products, which continue to benefit from strong commodity markets. We also experienced a $63.7 million increase in revenue during the year compared to 2016. Our operational efficiency initiatives are now complete.

As we move to slide 13, we want to reiterate that over the past couple of years, the organization's goal has been to restore the company's financial strength and to finally rebound from The Great Recession that so many in our industry faced. Since then, we significantly improved our profitability with record gross margin results quarter-over-quarter and year-over-year. We've previously discussed some of our initiatives we have underway, and we continue to gain traction on our margin enhancement opportunities. And while we've improved, we strive to continuously raise the bar every day.

On slide 14, we take a look at our historical adjusted EBITDA and net income growth over the past 5 years. Our adjusted EBITDA and net income have trended favorably due to our operational efficiency initiatives as well as our continued focus on gross margin growth and variable contribution. In 2017, we experienced our best full year adjusted EBITDA and best full year net income on record, with compound annual growth rates of 141% and 292%, respectively.

In conclusion, 2017 was a great year for us, and we're excited to see what 2018 brings. I'd like to thank our BlueLinx team for their hard work and efforts. Your contributions certainly show in the outstanding results we're able to share today. And, of course, special thanks go out to our customers and suppliers for their continued partnership.

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

(Operator Instructions) Your first question from the line of Mitchell Scott with Choice Equities.

Congrats on the continued progress with the operational efficiency initiatives. Looks like the margin performance, the EBITDA margin, in particular, has been really fantastic since you guys began those. My question, I guess will be, how far along are we in those initiatives, and what sort of levers will you look to pull going forward to continue to drive further margin expansion?

I would think -- I think of us in the third inning, and I can give you examples of opportunities. So from an operational improvement, again, as you know, we've embraced it from an organizational standpoint. But for example, we haven't even really begun the lean journey, which is very common in manufacturing companies and distribution companies. We just started those initiatives and started talking and educating our teams, really in the last 3 to 4 months as it relates to that. Yes, 2 days ago, I sat in on an hour meeting with roughly 15 cross-functional associates across the organization who had dived into opportunities that they view we have from a logistics perspective after analyzing opportunities where we are selling product at below appropriate margins, that we can make some changes to and immediately enhance profitability. So I think it's early days. I mean, everywhere we look -- again the scale matters, as you know. And while we've made a lot of progress, I truly believe there's just a lot more work to be done here. And what's really great is, the associates have embraced a culture of continuous improvement. So everybody is looking for ways to enhance this business.

Sure. Will it involve any more, kind of, adjustment in the real estate footprint? And what is your latest thinking there?

Yes. As we look at it, I mean, we think we've done the heavy lifting. Again, as you would expect, we'll always be looking at opportunities we have to operate more efficiently. But where we are today, we're pretty comfortable with the sales footprint that we have, the markets that we're selling into, which as you know is generally east of the Rockies. And so, if there were opportunities, for example, from an efficiency standpoint between facilities that are close to each other, we'd certainly look at that, but that is not a major emphasis from a company perspective or where we view there's tremendous opportunity.

Okay. And then, last one from me is just as we think about that mortgage is gone. Just thinking about, sort of at high-level, what the interest expense might be for this upcoming year? Can you remind us? I assume it's appropriate to use about $220 million for the revolver balance. But can you remind us about what you guys are paying on that today?

Yes. So on the revolver, you're right. So last year, our trailing 12 months was about $220 million on the revolver. And of course, as we grow sales, you might expect that to grow commensurately as we continue working on our working capital. But -- so on that revolver, at the current availabilities, it's -- LIBOR about plus 225 bps. So you can think about it that way. And then, of course, as we enter into the sale leasebacks, what you might want to think about is, last quarter, we told you a cap rate. That certainly was met or exceeded, and so we shared that with you to be at 9%. So I think, as you look at the sale leasebacks that we enter into, that's a number that you can work from.

(Operator Instructions) And your next question from the line of Alan Weber with Robotti Advisors.

Can you just talk -- when you talk about, Mitch, the initiatives to grow. Can you talk about, are they kind of geared towards the markets where the big dealers are the larger dealers or more towards where you have smaller dealers? Is it across? Is there any difference in terms of the market that you're really looking to grow in?

No. So we -- what we did, just to remind you, is we had a solid week of strategic initiatives where each of the general managers who have responsibility for local P&Ls came in and presented ideas to the executive management team, and we talked through ideas. Obviously, this is an iterative process, and then came up with ideas. Now there were some national, what I would say, initiatives, as it relates to both national dealers and home centers, for example, or specialty -- national specialty distributors. But really, the emphasis was more local. And so, each general manager -- and again, it is very consistent with the strategy we embarked on pretty soon after I got here, was to push decision making out to the local markets, because they're just widely disparate. And so we have a list of 50-plus initiatives, if not double that, by the general managers and some national programs that list of opportunities that they have. So in one market, it might be enhancing relationships with national accounts. In another market, it might be really taking advantage of dislocation in an industrial market, for example. Another it might be bringing in a particular product category that they feel is underserved or strategically taking products to markets a little differently. So a long-winded answer to your question, but basically, it's all over the place, and it's local, generally local in nature.

Okay, great. And then, Susan, I maybe missed this. Can you talk about what are the rent payment -- when you do the sale leaseback, what are the rent payments going to be versus what the interest payments were on the debts?

Yes. So the sale-leasebacks that we've entered into to date, and certainly the ones in January maybe is the better way to think about that one, are, in essence, capital leases under the GAAP accounting guidelines there. So while there is some rent payment, it's actually less than the amount we had modeled in November, because that was on a blended portfolio that could include a combined amount of capital leases as well as operating leases. So under capital accounting treatments there's actually very little that goes to rent, and the majority of it goes to interest expense. So you'll see that it's mostly interest expense on the January transactions that we just completed.

(Operator Instructions) Your next question from the line of [James Lu] with [Jacksmith Capital].

Wanted to understand what your expectations are for 2018 with regards to SG&A, including the nonrecurring items that you would adjust out? And just how you think about that going forward as you start to shift to growth mode?

Yes. So while we don't give forward guidance, certainly, it's our initiative to keep focusing on lean processes that Mitch shared with you. So we'll continue to look at route optimization and those types of things. So as we grow into incremental volume, not all of that means incremental routes. Sometimes there's opportunities to make the particular load that's running a heavier load and run more efficiently on that particular load. So there's some ways that we can be more efficient through growing sales with our existing routes and expenses. But of course, as we continue to focus on growing the top line, you'll expect some amount of those expenses to grow proportionately.

And I guess, more specifically -- although, obviously, this -- you have to take this in context of the aggregated company. As I talked about, the specific strategic initiatives that we have, if you kind of layer up all of the people costs associated with that, I mean, I think you can think of a number of $3 million or less of investment on an aggregate basis on people to help drive those initiatives.

Got it. That makes sense. Would we -- should we expect sort of less, fewer sort of nonrecurring as sort of a number of the big real estate initiatives and refi work has been completed as we sort of look at '18?

I'm sorry. So did you say nonrecurring?

Yes. The things that you would adjust out to get to your EBITDA?

Yes. I guess, I would answer it this way. I mean, if there are opportunities to do things that are nonrecurring, that add a lot of value to the company, we want to do that. And so, I'm not sure exactly how to answer that. I mean, I think from what we've done from a legacy standpoint -- and Susan, you can talk to this better than I can. From a legacy standpoint, what we've done historically, I don't think there's a lot of nonrecurring that we would think of that would roll in.

There's not a lot of noise there that would be going forward. So -- and now that we've completed our operational efficiency initiatives, you won't see any of that at all rolling into 2018. But as Mitch said, if we saw other opportunities in the future, we would assess those at that time. But the operational efficiency initiatives that we announced in April 2016 are now fully through the P&L.

Got it, terrific. And just one last question. You mentioned, I think, in response to one of the prior questions, that the real estate consolidation was primarily done. Is there any thought as to further sale-leaseback work, further work on the ABL? Or just other efforts or other work on working capital reduction? Or are those also predominantly finished?

So on the real estate, Shyam Reddy, who's our CAO, has continued to have dialogue with folks who could potentially transact sale-leaseback transactions from us. And so we'll continue to look at that. As we do look at that, the question is what's the cost of capital? What's the strategic value of the property that we have there? What do we -- how do we view the local real estate market? So we're going to be -- you would expect us to utilize that real estate opportunistically for the best value for the company. From a working capital standpoint, yes, we're -- I think, it goes back to the question I was asked, where I kind of alluded to, it's the third inning. And we have a lot of work to do. An opportunity, in my view, from a working capital standpoint to continue to enhance our sophistication and work, particularly on the industry -- I'm sorry, on the inventory to make sure that we have the right products we need for our markets, but do it in an increasing, sophisticated and efficient manner. So that emphasis is not going to be diminished.

(Operator Instructions) And there are no other questions at this time.

Well, thank you, Roche. We certainly appreciate your continued interest in BlueLinx, and we look forward to talking to you soon. Have a great day.

This concludes today's conference call. You may now disconnect at this time.