BlueLinx Holdings Inc.
Q1 2019 Earnings Call Transcript

Published: 9 May 2019

[Operator:]

Good morning. My name is Mary, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2019 Earnings Call. [Operator instructions] I'll now turn the call over to Mary Moll, Director of Investor Relations. Please go ahead.

[Mary Moll:]

Thank you, Mary, and good morning, everyone. We appreciate you joining us for the 2019 first-quarter earnings conference call. Our earnings release and the presentation materials that we will be referring to on this call can be found in the Investors section of our 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 remind you that this presentation includes forward-looking statements, which include statements about our future operations and financial performance. These statements are subject to risks and uncertainties, including those risks and uncertainties identified in our press release and discussed in our filings with the Securities and Exchange Commission. These risks and uncertainties could cause our actual results to differ materially from the forward-looking statements. Forward-looking statements speak only as of the date of this presentation, and we disclaim any 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.

[Mitch Lewis:]

Thanks, Mary. Good morning. Today, I'd like to discuss BlueLinx's operating performance, review key milestones, and share our perspective on the current status of macroeconomic factors surrounding our industry. Susan will review our first-quarter 2019 results and financial position in detail, and then we'll be happy to take any questions you may have. It's now been a little over one year since we closed the acquisition of Cedar Creek. At the time of the acquisition, our company had successfully navigated numerous cyclical changes in our markets and repositioned the business to where our major strategic imperative as a two-step distributor was to gain enhanced scale. There were efficiencies that we knew we could capture through the acquisition and our increased size could be used to improve margins and enhance financial performance. We are pleased to confirm that we will realize on schedule at least $50 million in annual synergies from this acquisition. In addition, we expect to spend no more than $30 million to achieve them, well below our original $40 million to $55 million estimate. These results exceed the projections we forecasted during the announcement of the Cedar Creek acquisition. Overall, we knew that there would be substantial commercial benefits from combining with Cedar Creek. And as a combined company, we now possess one of the largest product offerings in the building products industry and are a market leader with a broad geographic footprint. When we acquired Cedar Creek, we made clear that there were three steps to be completed over the next 18 months

[Susan O'Farrell:]

Thanks, Mitch, and good morning, everyone. I'll go through the financial results and then discuss our financial position. I'll be brief, and we certainly welcome any questions from investors that would like to discuss our results in greater detail following our prepared remarks. Starting with Slide 8, net sales were $639 million, up $201 million or 46% as a result of the Cedar Creek acquisition last year. It's important to note that the one-year anniversary of the transaction was April 13th, so we will see a partial quarter of combined financial results through our second quarter. Pro forma net sales, which take into account the acquisition as if it occurred on January 1, 2017, were $639 million, compared to $784 million in the first quarter of last year. The revenue decline we experienced during the first quarter was largely due to the housing market decline, commodity deflation, and the sales dissynergies that Mitch noted earlier. We delivered gross profit of $86 million, up $31 million over the same prior-year period, and gross profit was down $14 million on a pro forma basis. Gross margin improved to 13.5% from 12.6% from the prior-year period. That's up 90 basis points, a terrific improvement. For the quarter, we had positive adjusted EBITDA of $17 million, up $9 million from the prior year and down only $2 million on a pro forma basis. Given the top line, we are pleased with this relative performance. Cash on hand and excess availability under the amended ABL as of March 30, 2019, was approximately $114 million. This is an increase from the $92 million at year-end 2018. Moving to Slide 9. As we think ahead to the second quarter, we will continue to see an effect on the top-line revenues as structural commodity wood prices continue their return to more normalized historical levels. For example, the composite lumber index was an average of $540 in the second quarter of 2018. We exited April 2019 with a composite -- lumber composite price of $351, slightly below the five-year average. While we don't know what lumber prices will do in the future, if the prices remain the same for the second quarter, that would be a 35% decline in lumber pricing independent of volumes. Composite panels were in a similar situation running an average of $549 in the second quarter of 2018, while we exited April 2019 with panel pricing at $354, a 36% decline. Lumber and panels make up the majority of our structural business. On Slide 10, as a reminder, our business is largely split between two types of building products

[Operator:]

Thank you. [Operator instructions] Our first question is from the line of Alex Rygiel from B. Riley FBR. Your line is now open.

[Alex Rygiel:]

Couple of questions. First, congratulations on cutting down the overall cost of integration here to $30 million. Maybe I missed it, but if you could kind of characterize some of the bigger buckets of where you found the savings?

[Mitch Lewis:]

Sure. I mean, generally, one of the things we did is we stood up an internal team, where we took some of the most talented folks we had in the organization and dedicated to -- them to the IMO group. That helped with the integration and the consolidation, and so we were well under budget related to third-party costs that we thought we were going to have from a professional standpoint. We're getting some good news, I think, on some of the lease breakage opportunities that we have from a real estate perspective as we've seen with our own land and -- that we actually own, as well as the leased facilities. The properties that we have seem to be pretty desirable. So we're getting some good news on the ability to sublet or get out of this leases as well. That would be two areas right off the top of my head that I would say will be contributing to that.

[Alex Rygiel:]

And as it relates to some of the dissynergies that have occurred following consolidation, you've got seven remaining overlapping markets, so I suspect there are some future dissynergies that could develop. But from the 13 that have already played out so far, can you help us to sort of understand how long did those dissynergies linger for?

[Mitch Lewis:]

Yes. So I talked about it in two buckets. One was dislocation from a supplier standpoint. I mean, that will take some time to recover because we have to bring in new inventory, we have to, obviously, promote new brands, we have a lot of confidence in our ability to do that. But when you lose the -- that sales revenue quickly and you try to recover, it just takes a little bit of time. The second piece though as it relates to bringing the facilities together and causing a disruption in the local market, those we should be able to fix and are already seeing enhanced benefits from just attacking it quickly. So we actually sent out about a dozen of our senior operation leaders to various locations to help. And part of that is training associates locally. For example, on products, so they can be more efficient as they pull on products, outsourcing for example, logistics short-term that enable us to get rid of backlogs that has enhanced lead times -- that have hurt lead times for customers. So that I would say is much quicker, I think about we should be primarily complete with that activity by the end of the second quarter. And I'd say the other thing -- and then the final thing, is just the final point, would be potential of these remaining overlapped markets and the potential dissynergies. I can tell you we've learned a lot as a team in a year. And we will be very thoughtful about how we bring those remaining facilities together. It's one of the reasons we basically have said, hey, mission accomplished. And that's additive going forward because we want to make sure we do it exactly right without negatively impacting our customer base.

[Alex Rygiel:]

Sure. And then as it relates to real estate assets that can be monetized, $75 million in 2019 is a very attractive number. Post or after 2019, could you maybe put a range on what other real estate might be remaining to monetize over 2020, 2021?

[Susan O'Farrell:]

Yes. So we think about it, we've said there is $150 million to $160 million, which includes the $75 million that we're going after this year. So we have the balance remaining after that. And I think we'll look at it market by market, so there's still another $80 million or so remaining that we could choose to monetize. And that's a very market-by-market decision as far as what we think the position is in the real estate and the attractiveness but we have optionality on that, that we can certainly pursue.

[Alex Rygiel:]

And then lastly, housing starts in March, you mentioned, were down. How did the cadence look in April and May?

[Mitch Lewis:]

It definitely looked increased relative to the first quarter. We felt some optimism. It dried out particularly later in the month from a volume standpoint. Again, I -- and I'm sure you've heard, there are -- the second quarter as we mentioned clearly will be tough comps compared to the 2018 levels, which were robust, both from a demand perspective as well as escalating commodity price perspective. But certainly relative to the first quarter, we've seen it improve.

[Operator:]

[Operator instructions] Your next question is from the line of Alan Weber from Robotti Advisors. Your line is now open.

[Alan Weber:]

Good. So a quick question on, Mitch, when you talked about the dissynergies or dislocations, I know you can never really know if the bulk are behind you, it's hard to really -- you can't guarantee that, I understand, but do you think the bulk of these dislocations are behind you?

[Mitch Lewis:]

Yes, I would say. When we say behind me, I think we have experienced the bulk of them, yes. So -- I mean, they will -- again, particularly as it related to the supplier dislocation, and that's -- that will continue going forward until we recover from that. But as far as these operational stub our toes, I feel very good that by the end of this quarter, we should be in a position to put most of that behind us.

[Alan Weber:]

And when do you become -- even though if you think about it, you look at your press release or on the calls, you talk a lot about dissynergies. You're doing a great job. When do you become more proactive in terms of trying to get the positive sales synergies that you talked about at one point? When does that really start to happen? And do you think that opportunity is better or worse than you originally felt when you did the deal?

[Mitch Lewis:]

Yes. So that's happened. I mean, as we -- one of the things that happened and -- so for example, I was out in several markets talking individually to sales teams as well as customers. And one of the consistent themes from our customer base is that they realize the value that we bring into the markets. So we feel really good about that. In markets that are not -- where we don't have the overlaps, we are farther along with the ability to move forward and start getting sales synergies because they have enhanced products, brands that we're starting to sell and we're starting to get -- make some good progress. I would say the focus still in locations where we have these overlapped markets is making sure that we serve our existing customer base well with the products that we have and we want to make sure that we have some stability there before we get very aggressive from a growth standpoint. But I can tell you, the top line of this business is a conversation that for the last 60 days has been first and foremost on the executive team and the entire organization. And it's something that we're focused on and will emphasize. As far as the long-term opportunity, we've stated consistently and I still believe that this market will continue to consolidate. And that enhanced geographic locations and products creates operating efficiency that's good for our customer base, the ultimate consumer, and provides opportunity the bigger you are in a fragmented market. So I continue to believe that we have significant sales synergy opportunities. But as we've said from the outset, we didn't make any of that into the acquisition thesis for Creek.

[Operator:]

We have no further questions over the phone, presenters.

[Mitch Lewis:]

OK. Well, thank you, Mary, and we certainly appreciate you joining us today and your continued support and interest in BlueLinx. We look forward to speaking with you on our second-quarter conference call in August. Thank you so much.

[Operator:]

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