BlueLinx Holdings Inc. (BXC) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to do BlueLinx Holdings Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mary Moll, Director of Investor Relations. Thank you. Please go ahead.
Mary Moll: Thank you, and good morning, everyone. We appreciate you joining us for the BlueLinx's 2021 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.
Mitch Lewis: Thanks, Mary, and good morning. The first quarter was a great start to 2021. With historically strong financial results, as the BlueLinx team performed at a high level and capitalized on the continued strength in the residential construction and home renovation markets. It's hard to believe it's only been a year since I opened our quarterly call with a discussion about our response to the pandemic, our focused on the safety and well being of our team and we assuring you that we were an essential business. The changes we made in the second quarter of 2020, along with our emphasis on customer service and efficiency in 2019 have fueled the transformation of BlueLinx and our tremendous first quarter results. These fundamental changes we made to our business, coupled with excellent execution have allowed us to benefit from the robust market conditions we've experienced and led to our performance in the first quarter of this year, perhaps the best quarterly financial performance in the history of the company. Our financial metrics in the first quarter were very strong and substantially better than our first quarter of 2020. Net sales were $1 billion, an increase of 55% over 2020 levels. This is the highest level of first quarter sales we've seen since 2006. Our gross profit was $180 million, and we had a gross margin rate of 17.6%, resulting in record adjusted EBITDA of $107 million. This is the highest adjusted EBITDA quarter we've recorded in the company's history. And our trailing 12 months adjusted EBITDA at the end of the quarter was $257 million. Our profitability and the discipline management of our working capital continue to drive fundamental enhancements to our liquidity. We ended the quarter with excess availability of $238 million under our ABL, which was over $140 million higher than last year, even when you consider that we voluntarily repaid the remaining principal under our term loan of approximately $16 million.
Kelly Janzen: Thank you, Mitch, and good morning, everyone. The first quarter was another record quarter for BlueLinx with significant improvement in our financial performance on a year over year basis. We reported net sales of $1 billion, up $363 million when compared to the prior year period along with a related improvement in gross margin, which was up 350 basis points year-over-year to 17.6%. We also reported adjusted EBITDA of $107million, another record and an improvement of $87 million over last year. We ended the quarter with cash on hand and excess availability under our ABL, of approximately $238million, an increase of $141 million over the prior year period. We reached another milestone for BlueLinx as we paid off the remaining balance on the term loan, eliminating debt which recently had an 8% interest rate, significantly higher than the effective rate of close to 3% we experienced during the last quarter under our ABL.
Mitch Lewis: Thanks, Kelly. What a difference a year can make. I'm proud of how our team is focused on maximizing returns, and executing on our sales, growth and operational initiatives. Our strong balance sheet, ample liquidity, significantly reduced leverage, growth strategies and market tailwinds provide us with the flexibility to improve our performance in the years ahead. Rest assured that we remain intently focused on creating long-term value for our company and our shareholders, and continuing our drive towards the goal of being the industry leader in the markets we serve. As I close, I'd like to thank the entire BlueLinx team for their unwavering commitment to excellence in all aspects of the business that has made the last seven years as CEO of this company some of the best in my career. It has truly been an honor and a privilege to lead BlueLinx as it navigated a path that has led to the strong vibrant company that it is today. I wrestle with my decision to retire, but I know that now is the time to commit more of my energy to my family. And it's great that the Board has asked me to stay on in an advisory capacity for the rest of 2021 and to remain as a non-executive director in the days ahead. So while my role is changing my commitment to BlueLinx remains. You should know that I simply would not have moved forward with my retirement plans without complete confidence in the next leader of BlueLinx. Board asked me to lead a Committee on succession planning last fall and after rigorous consideration of many candidates, we unanimously selected Dwight Gibson to become our next CEO effective, June 7. Dwight is a proven leader, and has a strong track record in both strategy and operational execution. More importantly, he also has a track record for driving growth and innovation. And Dwight embodies our company's core values that we live with BlueLinx every day; teamwork, integrity, and continuous improvement. Dwight simply is the right person to lead the company as we enter into this next exciting phase of profitable growth. And I look forward to working with him for years to come to ensure the success of our company. And now, we'd like to open it up for any questions we may have.
Operator: First question is from the line of Greg Palm from Craig-Hallum Capital. Your line is open.
Greg Palm: Yeah, thanks. Good morning and really congrats on the quarter, just really incredible results here.
Mitch Lewis: Thank you.
Greg Palm: So maybe starting with some commentary and Kelly, I might have missed it, but just wanted to clarify. I think you had you mentioned some trends and what you're seeing in April. So gross margins in structural 14% to 16%, Specialty 22% to 24%. And then you had mentioned something about Foreign 13% and I think that was volume growth in April. But I just wanted to confirm that? I was too busy writing other stuff down.
Kelly Janzen: Yeah, that's correct. We're seeing some trends up on the volume side in those areas, year over year at this point in April.
Greg Palm: And that's based on the averages that you saw on Q1, correct?
Kelly Janzen: That's actually a year over year percentage increase.
Greg Palm: That was a year over year. Okay. In terms of what you saw specifically in Q1, I'm hoping you could derive a little bit more color on what you saw volume versus pricing. And really just curious what parts of the business you're seeing the highest levels of organic growth?
Mitch Lewis: Yeah, so -- we have and we talked about it before and we've continue this approach as a related to the structural commodity products. We're taking a very cautious approach and intentionally being careful about getting hit from a different deflationary impact. So the level of inventory that we carried into the first quarter was, I would say, a cautious level of inventory. A lot of that product has been asked and so we definitely had some volume degradation from a structural commodity side of the business in the wood based products. Again intentional and not something that we're concerned about as far as a long term market share. On the specialty side, it really was a different -- it was a different story. We had some impact from some imports, particularly in our mill ore products that impacted volume. Well, we've talked about certain product categories on the specialty side, where we have intentionally strategically emphasized. And so if you look at, for example our EWP business up double digits, cedar or decking both up over 20% during the quarter from a volume perspective. So we're pretty pleased with the volume that we saw on the first quarter. With one big caveat, a lot of that was from work and activity done in 2020. Because when you have the environment that we have now from a supply constrained environment, you run the risk, not the risk. But you see it's much more difficult to have customers change, as they want the stability of their existing supply base. So garnering market share in this kind of environment is a lot more challenging.
Greg Palm: Yeah. It makes sense. Specifically, on specialty, I mean, the segment sales and the gross margin were obviously really good. It sounds like it took a -- even bigger uptake in April in terms of the margin level. And I'm just curious as we look at how -- what are the largest factors that will impact that level going forward? Just trying to get a sense of how sustainable that is not just for Q2, but also sort of the remainder of the year?
Mitch Lewis: Well, we certainly got a little bit of impact of having inventory at lower costing, but that we were able to take advantage of. It's nothing in comparison to what we typically see on the commodity side. Because generally on the specialty sales, there are a lot of program businesses, there's more lead time on the increase in prices than you would typically see from a commodity based business. So generally, we continue to see a very robust pricing environment in the specialty -- in our specialty product category. So we continue to see inflationary impact, that typically an urge to the benefit of the company. We would expect that -- to the extent the inflation continues -- to continue to benefit the company. However, as we talked about in the past, we've done a lot of work on the pricing and invested a lot in pricing in this company. And we're just getting started, we're investing more and we feel like the company is doing a much better job across our footprint and being thoughtful about pricing. And looking at it from a volume standpoint, from a customer standpoint, so some of the gains that we've experienced, we feel are real, although there are -- there is a little bit of impact for kind of the FIFO impact of having lower cost of inventory.
Greg Palm: Got it. Okay. It makes sense. And then, looking ahead, I know timings a little bit uncertain. But working capital is going to normalize at some point and you're clearly looking at some pretty significant potential and free cash flow generation. So knowing that, are you approaching investments or capital allocation any differently than you might have been looking? I don't know, six or 12 months ago?
Kelly Janzen: Yeah. Well, we are certainly looking at investments, just let's talk about internal investments, we did add some assets on our fleet this quarter. We're continuing to assess the need for those maybe through the rest of the year. We could see some increase in CapEx to the tune of maybe up to $10 million in addition to what we've been typically expensing in the -- adding in the past. We also of course, are continuing to look at other opportunities for capital allocation on the inorganic side, and we'll continue to assess those opportunities as the market becomes more clear around that. And that's what we're just working towards a stronger balance sheet with every improvement that we have to position ourselves well for that.
Greg Palm: Okay. All right. Well, congrats again, and Mitch, congrats on your retirement. Really enjoyed working with you and best of luck to everyone going forward.
Mitch Lewis: Thanks, Greg. It's been great to be on the team.
Operator: The next question comes from the line of Reuben Garner - Benchmark Company. Your line is open.
Reuben Garner: Thank you guys, good morning, and congrats Mitch, again, on your announcement. And Dwight, I'm sure you're listening in. I look forward to working with you. Maybe just to start, and I hate to harp on it. But the specialty segment, the results are just very impressive. And I'm trying to get at, I think you mentioned the relief, a lot of it was priced, what categories within specialty are seeing that price increase year-over-year, if you don't mind sharing at least some high level on that? And then on the gross margin front, is there a new way to think about what’s the baseline?
Mitch Lewis: So on the actual price increases that are running through product categories, we generally don't talk specifically about where we're seeing price increases. Supply base, I would say probably the best way to think about it is if you look across the entire platform, virtually everything is going up to various degrees. I mean, it would be – it's rare. It would be very rare to have a virtually any supplier selling at the same price point today as they were five months ago. So we're seeing widespread inflationary impact across the business and certainly saw that in first quarter and continue to see some of that today.
Kelly Janzen: Yeah, and related to the margin around Reuben, we certainly, as Mitch mentioned in the first question with Greg, we definitely think we had some FIFO impact coming into this quarter as we've seen those prices increase over the last few months. Although we do truly believe that we've been able to gain more price in general given the high demand environment and the robust market overall. So we would expect it to be probably at the levels, we've been seeing that that would be unlikely. At this point, that would not be our view, but maybe higher than what we saw in the second half of last year. So I think it's somewhere in that range. So that that's the best we can tell right now.
Reuben Garner: Okay. That's helpful. And then maybe, on the structural side, the commodity prices, I mean, understanding you guys aren't a mill, maybe just your high level thoughts on what's going on in the market from a supply/demand standpoint? I understand you guys are being cautious at these levels, and rightfully so. And eventually, I think that will pay off. But just folks looking at the market and not understanding $1,200 and $1,400 prices. Can you just talk about what you're seeing from a supply standpoint, what your suppliers are saying? And, obviously, I think most people understand the demand characteristics and any thoughts on maybe what a new normalized market might look like in terms of price if and when we do see a correction?
Mitch Lewis: Great question, of course, if I knew the answer, I would have retired a long time ago. I don't know that anybody could explain it as a $1,200 to $1,400, where we are now, basically what we're seeing is just a dislocation from basic market dynamics, right? So the demand we know is there, it's being pressured by what's happening in the housing market. The mills themselves, intentionally reduce supply when we started, the pandemic got behind and have been racing to catch up. And even -- yesterday, you still see this future -- the future is jumping on limits immediately up and I would say if you look at the market dynamics, the demand, we're hearing from our customer base remains very strong, very robust for residential housing. I think multifamily may be the place that may pause first, as it's more -- it's a more sensitive industry to the margins generally. And so if we see some of that, that might begin to have an impact, but from a demand standpoint, our team is very confident, certainly in the short term, next couple months demand, and our customers are telling us, they're very confident, they're basically for the full year. From a supply standpoint, it doesn't appear that there's the capacity to move -- that there'll be a lot of capacity coming into the marketplace. And obviously for this -- for a lot of this capacity, there's a long lead times that take place. So absent some Black Swan event that we don't see right now, I would say the experts in this company are saying they see and believe it will remain strong, certainly for the next couple of months. And Kelly and I are on calls, three to four times a week, having dialogue about this and I -- we occasionally ask them, okay, when is it going down? When is it going down? And a month ago, it was the end of June, and now everybody's pushing it back into July and hedging their bets. So these are people been in the industry for 30 plus years as the best in the business. And they don't think anything's going to be changing significantly until July. However, as you know, all that is, we just don't know.
Reuben Garner: That's very helpful. Thanks, Mitch. And your inventory levels, obviously you mentioned, the working capital investment that you're having to make and how that's investing free cash flow. Two part question, one, what is your inventory look like in terms of -- I think last quarter, you talked about what it looks like from a volume standpoint relative to normal times or relative to even a year ago? And then secondly, that $115 million investment, what is -- I guess, some scenario analysis, what does that look like if prices kind of move modestly lower through the year, but remain, let's say above $1,000, versus what does it look like if we had some sort of major correction, and it went down to something like, I don't know, 500? I'm just making numbers up here. But what does it look like in kind of a flat versus a declining commodity scenario?
Kelly Janzen: Yes. So, on your first question, as it relates to inventory, we still see from a true volume on the ground perspective, we certainly still have lower inventory than we had last year. Clearly, with relatively flat till your end, and there's inflation built into that. So we're continuing to really manage our inventory, well on the structural side, as Mitch mentioned, and then generally the specialty to some extent where we are impacted by some supply constraints across the various products that we're working through. But overall, we've managed -- we're managing our inventory very closely. And that left us with lower volume on the ground than we were this time last year. And as part of that, structural is about 20% of that. So I know that that is kind of -- when you think about our overall risk for that inventory, it's about 20% of that is on the structural side. As it relates to cash and the investment we have on working capital, that -- we certainly see, a lot of that increase has happened since the end of the year. So if we see, modest decline back to even yearend levels, most of that would be realized this year, that income would come back cash would come through, if we stayed flat, I think then we'd be looking at cash being realized, really equal to our profitability between now and at the end of the year. So that's how we're kind of thinking about it. And so hopefully, we'll see some modest -- we're expecting that we could see some modest decline through the rest of the year, and that we would know that cash would come off the balance sheet sometime in the second half, and we noted that. But of course, we don't know what that's going to happen ultimately. So, if it stayed flat, we would that would be kind of stuck for this year, and we would only be taking cash from the income side.
Reuben Garner: Perfect. Thanks again, guys, and congrats on the quarter.
Mitch Lewis: Okay. Thank you.
Kelly Janzen: Thanks.
Operator: Your next question is from Brett Hendrickson from Nokomis Capital. Your line is open.
Brett Hendrickson: Hey. Mitch congratulations again on your retirement.
Mitch Lewis: Thanks.
Brett Hendrickson: So, I got just a few quick ones. And sorry, if I missed this, Kelly, but I'm looking at your inventory in dollars actually being down year-over-year. Can you give us some color on what the inventory and volume is down year-over-year? I mean, obviously, particularly on the structural side, but maybe in total too?
Kelly Janzen: Yes. We're really kind of down to about 30.
Mitch Lewis: 39.
Kelly Janzen: 39.
Mitch Lewis: Open under 40 versus kind of in the high 50s last year across the business.
Brett Hendrickson: Sorry, the inventory is measured in board feet or how you want to measure it…
Mitch Lewis: No, I'm sorry. You're looking for absolute inventory level?
Brett Hendrickson: Yeah. Could you give us the volume that you're up for April to-date? And I'm curious -- I'd like to pair that with what the inventory when the sell was down.
Mitch Lewis: Yes. So, I'm not sure exactly where you're going after, but a way to think about the structural inventory, as a percentage of our total inventory. Now, at the end of the first quarter is in the 20% range. Okay? The volume that we had from a structural standpoint obviously, was down as we've talked about in the first quarter. So, as far as April actual volume today, I'm not sure that we had that data available?
Kelly Janzen: Yes. We haven't provided the volume details.
Brett Hendrickson: Yes. I mean, I guess my point is, maybe the next question makes sense. I was going to ask, you mentioned you can hazard a guess on. I think I heard Kelly say that, structural volumes up 4% quarter to-date, and especially that 13%. Correct me if I have those backwards, but I think your sales volume that's volume, not dollars, right?
Kelly Janzen: That's correct.
Brett Hendrickson: And so, if your inventory is flat -- hyper inflationary environment year-over-year, your inventory in dollars is flat, your volume available to sell on the ground in your warehouse must have been way down here. And it was just what I was trying to get at trying to figure out.
Kelly Janzen: Yes. In general, our volumes on the ground and inventory are lower than last year. That's true.
Brett Hendrickson: And then you're rightfully playing a conservative, as we've talked about a bunch and you talked about in your opening remarks. And that's right. But could you hazard a guess as to how much better your volume might be, say quarter to-date or last quarter? If you had the amount of kind of board feet and inventory that you would normally have, I mean if you…
Mitch Lewis: Yes, Brett, I would -- Yes I mean, if we're talking structural, we could probably sell out our position -- our entire position in the next five days if we wanted to. I mean, we would have been in a position to have sold a lot more in the first quarter on the structural side, if we’re going to had it. I mean, we're in a situation, particularly on the commodities where it's a scarcity source. And that's why you're seeing the prices run up. So, incremental inventory that we had. And we -- as your point, we made the conscious decision when we were looking at this actually in Q3, we're doing scenario planning, what do we want to do, as we rolled out of Q4, and the first quarter in the event of a drop, and we intentionally lowered our inventory levels, knowing that if we were wrong, we would impact volume, which resulted in the first quarter that we're reporting. So we feel pretty good about that decision, and we continue to monitor very closely. So it's hard to say what it could be, I would just say, it'd be significantly higher had we had more inventory. It's not a function of losing market share. And to a certain extent, now we're seeing the same thing on specialty, where there is some constraint of volume from an inventory standpoint coming in that is hurting our ability to sell. What I would tell you on the specialty side, though, is those are long-term commitments, strategic products, much stickier relationships from a customer standpoint. So we are not approaching our specialty products, the way we're approaching structurally. And part of that is because the specialty side of the business is not fraught with the high volatility, either from a cost side or pricing side that you typically see in the commodity markets.
Brett Hendrickson: Yes. Makes sense. Okay. And then, Kelly, your predecessor used to tell me, I think that maintenance CapEx was 6x. I know you've been bringing up your rolling stock in terms of new tractors. But what made the businesses bigger now you're through a lot of the consolidation. What do you think maintenance CapEx, it's been running about 6 million total CapEx, but I'm curious what you think maintenance CapEx is these days?
Kelly Janzen: Yes, I actually think that's a good question. And that's something we're actually working through right now that we have a little bit of more flexibility. So we did pencil in around that 6 million for this year outside of rolling stock, which I'd mentioned earlier that we could put some significant investment in rolling stock this year as well. So I would say maybe bring that up to seven or eight potentially in the short-term, then we'll see how that goes. But I think we're not that far off. We're still a very low CapEx business as a whole. So I don't think it's different.
Brett Hendrickson: Yes. Good. Sounds like 6 million is the true maintenance like necessary number, and then you might on a discretionary basis not such a better balance sheet…
Kelly Janzen: That's right. I think that's the way to think about it. Yes.
Brett Hendrickson: Perfect. And sorry for all the questions, but the last one is, I was looking through the absolutely interest expense, we've been dealing with this, it's been a good problem to have we've been dealing with sale leasebacks and paying down the term that for five quarters at least. And it's kind of artificially brings up your interest expense, but I was looking through the EBITDA reconciliation, it looks like the exit on the term loan. Congrats on that, by the way, but the exit on the term loan was about 5.8 million. That's what that was showing, right? That's the kind of one-time interest expense in the quarter.
Kelly Janzen: Right.
Brett Hendrickson: Okay, so…
Kelly Janzen: On the balance sheet to a non-cash or just non-cash it.
Brett Hendrickson: Yes. And by the way, if we'd like our manage team to be monitored, I think you guys might be too modest as possible. I mean, on cash tax effect, 26% on tax effect that I get about 4.3 million and you guys only have about 9.7 million shares. That's like more earnings per share, if not for that one-time event, so right? I think I'm looking at that the right way?
Kelly Janzen: Right. Yes. Appreciate adjusted EPS cap. Thank you. That's good.
Brett Hendrickson: Yes. So, all right. Well, Mitch, lot of guys usually retires before their mind and body require it. So I guess that sets, so congratulations on everything. Thank you.
Mitch Lewis : Thank you. Thank you very much.
Operator: There are no further questions at this time. Presenters, I turn the call back over to you.
Mitch Lewis: Well, thank you. Thank you for your time and interest in BlueLinx. As always, I know Dwight, and the rest of our team is really looking forward to share our second quarter results with you on our second quarter call. Thank you very much. Have a great day.
Operator: Thank you presenters. This concludes today's conference call. Thank you for participating. You may now disconnect.
