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BlueLinx Holdings Inc  (BXC -2.60%)
Q4 2018 Earnings Conference Call
March 13, 2019, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:


Good morning. My name is Mary, and I'll be your Conference Operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2018 Investor Relations call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I will now turn the call over to Mary Moll, Director of Investor Relations, Ms. Moll, you may begin.

Mary Moll -- Director of Investor Relations

Thank you, Mary and good morning, everyone. We appreciate you joining us for the fourth quarter 2018 earnings conference call. The earnings release and presentation slides for this call can be found in the Investors 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.

Mitchell Lewis -- President, Chief Executive Officer, Director

Thanks, Mary, and good morning. We would like to update you today on our fourth quarter's performance. Our continued efforts on integration. The recent amendment to our term loan and what we're seeing in our markets in the first two months of the year. Before I dive into our business performance, I'd like to let you know that D. Wayne Trousdale will be leaving his full-time role with BlueLinx in April. D. Wayne has agreed to continue collaborating with BlueLinx on a part-time basis for the next three years.

As many of you know was, D was one of the founders of Cedar Creek and he has been instrumental in bringing our two companies together culturally while also helping to realize the synergies we have achieved. D. Wayne has decided to spend more time with his family and alternative business interests, and I want to personally thank him on behalf of the entire BlueLinx organization for not only his contributions in the past, but also the value we know it will bring to our team in the years ahead.

We are rapidly approaching the one-year anniversary of the Cedar Creek acquisition and are pleased with the progress of the integration. The initial enthusiasm we felt at the time of the announcement of the transaction has only increased as we have seen firsthand the likely commercial benefits to the combined entity. We remain confident that we will exceed the promised $50 million in synergies as we exit 2019. And we are pleased to once again reduce our estimate of the cost to achieve synergies. Our new estimate of the cost associated with achieving our synergies is between $25 million and $30 million well below our initial $40 million to $55 million range.

In addition, we are firmly ahead of our initial integration schedule and expect most of the integration efforts associated with the synergies to be completed by the end of the third quarter. We've now consolidated 11 locations and expect to consolidate two additional locations by June. At that point, we will have five remaining overlap locations which may require significant capital investment to consolidate. We will be assessing these remaining locations over the next several months, but will likely not make any additional consolidations until at least 2020. No incremental synergies from the consolidation of these locations are included in our projected $50 plus million of annual synergies nor are any of the associated costs included in our cost to achieve these synergies. We're also ahead of pace in our ERP implementation. As of this past weekend, we now have 46 of our 62 locations on the same ERP platform and anticipate having all of our facilities on one ERP system by the end of June.

As you would expect, it has been both challenging and disruptive to drive this ERP implementation and a little over one year. We fully expect that having the business on one system will help propel continued efficiencies, but more importantly, enable the organization to utilize harmonized information to deliver results in the months ahead.

When faced with the headwinds experienced in the fourth quarter, we accelerated our previously planned reduction in G&A costs. We now anticipate that synergies associated with G&A reductions will exceed $20 million annually, which is approximately $10 million higher than we reported during our Q3 earnings results.

In order to take advantage of the combined strength of the larger BlueLinx, our relationships with some suppliers have necessarily been affected. While we are confident that our combination enhances our value to our supply base, we anticipated short-term disruptions and costs as we recast many of our commercial arrangements. We remain confident that BlueLinx provides an excellent distribution channel for our supplier partners while enhancing their revenue potential with our approximately 700 associates who call on our customers everyday. This strength, coupled with our distribution excellence, should enhance our sales synergies in the years ahead.

While we made great progress in integrating Cedar Creek, the fourth quarter was another challenging period for two step building products, distributors. The continued deterioration in commodity panel and lumber prices once again negatively impacted our results. In fact, the decline from mid-summer through December was the worst price collapse that we've experienced in these markets and at least the last 20 years.

The composite framing lumber index declined by about 41% from June through the end of the year, while the composite structural panel index dropped by approximately 36%. During the same period, OSB prices dropped by about 50%. This level of decline over a three to six month period is highly unusual and has not occurred in over two decades. And we certainly don't anticipate that this historic pricing collapse will repeat itself in the future. Susan will discuss the impact of this decline that this decline had on our fourth quarter performance in detail, but I do want to reiterate that the impact to our margins from the declining commodity lumber and panel market was not due to speculation in these products. As we discussed during our last call, the inventory in our warehouses, which is typically 30 days or less for our domestic commodity products as well as our in-transit shipments have a higher cost than prevailing market prices in a rapidly declining price environment. This compresses our margins and significantly impacted us in the third and fourth quarters of 2018.

Good news is that our gross margins in these products moved up as we entered into 2019 which correlated with the apparent bottoming of pricing for lumber and panel commodity products toward the end of 2018. While we were fighting through the commodity class, we also saw softening in a single-family housing starts during the fourth quarter. Single-family housing starts declined approximately 10% in the fourth quarter of 2018 compared to 2017 levels. As you would expect this slowdown in the industry impacted our volume as well.

We remain bullish on the long-term prospects of single-family housing starts as the December 2018 seasonally average rate for single-family housing starts was still 27% below the average annual start level over the last 58 years. As I alluded to earlier, one way react -- we reacted quickly to the challenges we faced in the fourth quarter was by reducing non-essential costs and eliminating additional fixed salaries in the business. We're starting to see the impact of these cost reductions in the first quarter and will continue to aggressively manage all aspects of the business to help mitigate the impact of any volume declines we experience.

We also wanted to give you some color on what we're seeing in the markets to the first couple months of this year. We appear to be gaining momentum in the first half of January, but volume drop as we entered into February correlating with a stronger winter than we experienced in 2018. The good news is that, I've been able to talk to many customers over the last 30 days and can report that there remains cautious optimism for 2019. While the expectations for growth are muted in the low to mid single-digit range for 2019, our lumber yard customers generally believe that the slow start to 2019 is primarily a result of weather patterns, which have impacted performance relative to last year rather than an inflection point and the momentum we have seen in single-family housing starts over the last few years.

They are optimistic that the second quarter should improve as the country dries out and warms up. While the current headwinds of the slowdown in housing starts and short-term sales disintermediation will likely impact our short-term revenue performance, our synergy efforts will understandably help mitigate its effect. I can tell you that our organization is excited that we are very close to putting the integration behind us. Integrations of major companies, are by their nature, intrinsically focused exercises. We are pleased that by the end of the summer, we expect to have essentially integrated Cedar Creek. This will be an important milestone for BlueLinx as it will enable the organization to focus more clearly on our remaining key strategic objectives. Utilizing our enhanced service proposition and product offering to ultimately grow market share, enhancing margins in our products and deleveraging the company. We think the recent amendment of our term loan was a good step in our effort to reduce our leverage, our lending partners supported our ability to enter into sale leaseback arrangements of up to $50 million this year. This amount is in addition to an approximate $25 million of specifically identified real estate that we can sell through our consolidation efforts.

We are actively pursuing both opportunities and hope to be able to provide you more definitive information regarding these deleveraging activities by the end of the second quarter, it's been a busy eight months at BlueLinx. We have merged to executive leadership teams, established 10 new general managers in local markets across the country, converted 24 locations to a common ERP platform, consolidated 11 facilities, negotiated key new strategic supply partnerships, integrated our entire compensation and benefit programs and stayed focus and our commitment to excellence in distribution and customer service. It's truly been a great effort by the team. I'd like to personally thank our BlueLinx team for their hard work during this transition period. We clearly understand that we're just getting started and that the best is yet to come.

And now, I'd like to turn it over to Susan, who will provide details on our financial performance.

Susan O'Farrell -- Chief Financial Officer, Senior Vice President and Treasurer

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 2018 business results. As Mitch discussed, last year was a transformative year for BlueLinx with the acquisition of Cedar Creek in April 2018. We are excited about the great progress we have made to date with our integration efforts. We are ahead of schedule and exceeded our 2018 exit run rate synergy objectives obtaining over $30 million in cost savings that we expect to realize in 2019. This is double our original 2018 end-of-year run rate estimate of $15 million. The integration results that we achieved in 2018 give us continued confidence that we will achieve at least $50 million in annual run rate synergies by the end of 2019.

And now that we're further along in our integration actions, we also continue to refine our cost-to-achieve objectives. We now estimate the cost to achieve these synergies to be $25 million to $30 million, a range that is $15 million to $20 million lower than what we shared with you right after the acquisition, and an even tighter range, then we shared with you in our third quarter call. As we've discussed on previous calls, one of the key attributes of combining our two legacy businesses is the improved financial flexibility that will support our growth and long-term deleveraging.

Real estate remains a key strength of our business, a hidden asset on our balance sheet. We have 33 properties owned with an estimated market value of $150 million to $160 million and approximately four times the book value. That's why we are so pleased with our recent term loan amendment. In addition to our ability to sell certain specified properties, the amended facilities allows us to monetize up to $50 million of properties through sale leasebacks in 2019 and provides additional flexibility with our covenants and reporting requirements. We are now beginning to move forward with potential sale leaseback opportunities to monetize certain owned properties and deleverage the company. To the extent we enter into any sale-leasebacks, the first $30 million of these proceeds will pay down our term loan with any remainder reducing our ABL balance.

I'm now pleased to share with you our financial results for the fourth quarter and full year. Starting on Page 10 in the presentation, I'll touch on some highlights for the quarter. Net sales were $673 million, up $239 million or 55%. Pro forma net sales, which take into account the acquisition of Cedar Creek, as it has occurred on January 1, 2017, were $673 million, down $104 million or 13% versus the same period last year. The volume decline we experienced during the fourth quarter is in line with the 10% decline in single-family housing starts during the quarter. We delivered gross profit of $81 million, up $26 million over the same prior year period. Included in gross profit is the impact of commodity deflation. s Mitch shared, commodity wood prices continue to decline significantly during the fourth quarter, impacting gross profit by $14 million.

The impact to gross profit was offset by the reversal of $5 million at the lower of cost or net realizable value reserve from the third quarter. Gross margin for this quarter was 12.1% when you add back the third quarter LCNRV reserve. For the quarter, we had positive adjusted EBITDA of $7 million. This is our fifth consecutive year with positive adjusted EBITDA in the fourth quarter. And we are pleased to share that we ended the fourth quarter with strong liquidity averaging $132 million during the quarter and excess availability and cash on hand.

As we move to Page 11, we'll highlight our full year 2018 performance. Net sales were $2.9 billion, up $1 billion or 58%. On a pro forma basis, net sales were $3.3 billion, up $27 million over the prior year. Full year gross profit was $332 million, up $101 million. Commodity price deflation experienced in the second half of 2018 impacted gross profit by $26 million for the year, offset by the reversal of substantially all of the LCNRV that was booked in the third quarter. Full year gross margin was 11.6%, which was further reduced by the one-time acquisition-related inventory step up charge of approximately $12 million. Excluding the acquisition related inventory step up charge, full year gross margin was 12%.

We recorded a net loss of $48 million for the year, which included $38 million of one-time acquisition and stock appreciation right charges as well as the previously mentioned one-time acquisition related inventory step up charge of approximately $12 million. In addition to this $50 million impact to net income, as part of our continuing strategy to de-risk pension liability, we negotiated a partial withdrawal from our multi-employer pension plan at four consolidated locations during the third quarter of 2018. This withdrawal had an additional $7 million reduction to net income for the year. The long-term benefits for our company greatly outweigh the accounting charge as it mitigates the risk of future assessments from multi-employer pension plans, while having an immaterial impact on our annual cash pension obligation. We are pleased with the way we managed expenses in late 2018, especially during the macro environment that we experienced in the second half of the year.

Given the embedded cost of integration on the P&L, it's a bit tricky to see, but we are working hard on creating a leaner operation while staying committed to our investment in sales personnel. With our core value of continuous improvement, we have found ways to run the business more efficiently together especially in back office costs. Heading into 2019, we are well positioned with our cost structure. Year-to-date, adjusted EBITDA was $68 million, up $25 million year-over-year. This is our highest full-year adjusted EBITDA since 2006. Pro forma adjusted EBITDA was $80 million, the historic decline the panel and lumber commodity prices and it's resulting negative consolidated impact to our gross profit in the third and fourth quarters of approximately $26 million significantly impacted our performance for the second half of 2018.

Moving to Page 12, on our third quarter earnings call, we discussed with you the impacts of the declining commodity prices on our gross margin and volumes. Page 12 indicates the impact of continued decline in our fourth quarter performance. In addition to reducing net sales by approximately 11% for the quarter compared to 2017 levels, we saw commodity and lumber and panel sales volumes in the fourth quarter remain correlated to the decline in single-family housing starts. The gross profit impact for the quarter was $14 million, we reversed $5 million from the LCNRV reserve we took at the end of the third quarter, which reduced the EBITDA impact to $9 million.

We certainly do not anticipate this historical level of price decline and wood-based commodities will occur again in the near future. Commodity prices have remained relatively stable since December and have recently begun to tick up ending February at 374 and 377 for lumber and panels respectively. As we are now in March, we can see this relatively stable -- stability has impact and alleviate the gross margin pressure on commodities that we experienced in the back half of 2018.

Moving to Page 13, we think it's important you understand the potential post integration uses of cash on an annualized basis. As an illustration, if you assume $120 million in estimated annual adjusted EBITDA and then take into account the major estimated annual cash outlays including interest and capital leases CapEx, state taxes which remain a cash item and a few smaller items that could be $50 million or more in cash available to deleverage the company by paying down debt. This of course does not include changes in working capital which are seasonally funded through our ABL.

Consistent with our third quarter presentation on Page 14, we show you some ways to think about our annual cash generation attributes and our real estate and then see how either or both could be meaningful factors in deleveraging BlueLinx. Our term-loan balances are $179 million at year-end implying term loan leverage of only 1.5 times, when including the $40 million in unrealized expected run rate synergies with our annual pro forma adjusted EBITDA. Our revolver balance was $333 million as of the end of the fourth quarter 2018. Remember that our revolver supports our working capital and is the day in, day out part of our business, enabling us to serve our customers with supply chain financing.

The revolver seasonally expands and contracts to the building seasons and we secured with our high quality inventory and receivables. In fact, at the end of December, our inventory and receivables were approximately $200 million higher than the ABL balance. On Page 15, our real estate remains a valuable asset that provides unrealized value on the balance sheet as well as additional opportunities to delever the company. Our unencumbered real estate was appraised by a national real estate appraisal firm near the end of 2017 to be worth $150 million to $160 million, which is approximately four times the book value. In addition to sale leaseback opportunities, our real estate team is now proactively marketing seven properties that we exited in connection with our consolidations.

We estimate the value of these properties to be disposed off approximately $25 million. These industrial properties are desirable for their location as well as access to rail service. The industrial property market remains strong and we have received substantial interest in these properties including unsolicited offers. As a matter of fact, we are in active contract negotiations for a few properties and anticipate being able to update you regarding our progress of these potential sales in the second quarter. I would also like to highlight our tax assets. Due to our sale leasebacks that occurred during the first quarter of 2018, we currently have estimated taxable income of approximately $68 million to the fourth quarter. We anticipate using our federal NOLs to offset this income, leaving approximately $91 million in NOLs available for use in the future.

As we think about our market opportunities for organic and inorganic growth, we are well positioned to offset gains from ordinary income and real estate gains with our remaining federal NOLs. 2018 was a historical year for BlueLinx for many reasons, but most importantly, as we welcomed Cedar Creek at BlueLinx family. We exceeded our integration goals for 2018 on navigating through a challenging commodity market in the second half of the year.

I would like to sincerely thank our entire BlueLinx team for their hard work and efforts. The results we share today are testament to your many contributions. And of course, special thanks throughout to our customers and suppliers for their continued partnership. We look forward to the year ahead. And now, Marie, we'd like to open it up for any questions that we may have at this time.

Questions and Answers:


(Operator Instructions) Your first question is from the line of Alan Weber from Robotti Advisors. Your line is open.

Alan Weber -- Robotti Advisors -- Analyst

Good morning.

Mitchell Lewis -- President, Chief Executive Officer, Director

Good morning, Alan.

Alan Weber -- Robotti Advisors -- Analyst

Mitch, can you talk about -- you talked a little about I guess the issues with suppliers. Can you just kind of explain kind of where you are today regarding that?

Mitchell Lewis -- President, Chief Executive Officer, Director

Yes. So we have, from a synergy integration perspective, we had used third-party consulting group to help us strategically approach our supply base and our product categories. And we have gone through the first round of that. But it's an iterative process. So as you would expect, particularly when we started the process which was in May and June of 2018. The commodity markets were very hot. It was difficult getting products. It was a difficult time also, as you would expect to negotiate potential opportunities. So what we're doing now is we're going back through on a product category basis or a supply chain to look at opportunities to rationalize that. The other point I was alluding to was that in connection with some of the rationalizations and discussions that we've had, we definitely have had some disruption from a supply perspective. And so we're realigning to a certain extent some of the brands that we have in the product categories that we have which is natural. You may recall from the outset when we talked about the acquisition, we intentionally did not include any sales synergies from bringing the companies together and that was because of the concern that in the process, we may have supplier disruption, as well as share disruption to local markets as we consolidate facilities, integrate the business and so forth. The confidence that we have as a leadership team as it relates to bringing the companies together and the long-term opportunity that the scale of this business and the breadth that we have in the sales effort that we have for the industry remains unbeatable. We feel very confident and that over the long term, what we're doing now will bode well for this company from a sales perspective. And just a follow-up on that, can you talk about the kind of the positive on sales synergies when that could happen. And I guess, you can't really quantify, but just kind of talk about that?

Well, we're starting to see some of that now. So one of the things we were able to do was take existing product categories or brands that we had in either one of the legacy markets and push those two facilities or -- geographic territories that didn't have the opportunity to sell those products, so that's happening now. We're getting some very good positive response in some of that product that's coming out and that will, we believe, continue to propel relationships we have with key suppliers, the ability to continue to sell and grow both territories in volume for them.

As far as a clear-cut timeframe, it's difficult to say exactly how long that takes. Any time you're trying to move new products into particular location and displace existing market share, it's an effort and typically takes some time.

Alan Weber -- Robotti Advisors -- Analyst

Okay. And I guess my last question is basically, I mean -- when you look at the results in the last half of the year, what really -- I mean obviously, the pro forma numbers are down and you talk about volume and pricing. Is there any part of that kind of surprised you? In other words, given those declines, which you obviously didn't know six months before the quarter began, anything in that actually surprised you or disappoint you?

Mitchell Lewis -- President, Chief Executive Officer, Director

Well, obviously, the way that the market moved was very disappointing. And one of the things, Alan, it's an interesting exercise to do to look at our structural product sales in the back half of the year and then imply, a typical, however you want to use, a two or three-year margin compared to what the margin was we saw there and I think if you did that exercise, you would see clearly $20 plus million of gross profit. Obviously it's the past and the future may be different, but I think from a true understanding, what happened -- the commodity decline was very important and significant to us. I would say, in our calendar we clearly didn't hit a home run in every one of the consolidations. And so we had a -- we had a long-term strategy, as we talked about as it related to some of the multi-employer plans from a pension perspective, which made us move pretty quickly in some locations that was challenging. So, I would say, I think the long-term strategy was terrific, underappreciated probably some of the short-term implications on that. But generally, it really feels like more of a story about what was going on in the market as (inaudible) and anything we've done, and I really feel good and the team should be proud of the way we put together an integration team that was fully dedicated, the speed in which we've integrated, which as you know is critical for the long-term benefits of an integration. So generally we feel really good about it and I think the market's just created some headwinds for us that we did not anticipate.

Alan Weber -- Robotti Advisors -- Analyst

Great, thank you very much. And of course the markets of that product is out your control. So -- OK, thank you.

Mitchell Lewis -- President, Chief Executive Officer, Director

Yeah. Okay, thank you.


Our next question is from the line of Tim Dougherty(ph)the from Welspun(ph)Wealth. The line is open.

Tim Dougherty -- Welspun Wealth -- Analyst

Hey. Just wondering, since we've seen lumber bottom here kind of in November, December time period, can we sort of assume that this $13 million, $14 million a quarter of gross margin headwinds is kind of behind us as we enter this year?

Mitchell Lewis -- President, Chief Executive Officer, Director

I think the short answer is yes. From a gross margin standpoint as we talk about it, it certainly was an anomaly, that we have had an experience the last six months and two decades. So we would expect that. And we're starting to see that (inaudible).

Tim Dougherty -- Welspun Wealth -- Analyst

And then do you have an investor presentation here $13 million to $14 million kind of quarterly headwind on the commodity side. Is there any headwinds we've seen from commodity prices in the structural side of the business?

Mitchell Lewis -- President, Chief Executive Officer, Director

So especially interest of yes. No, I mean as we look at the specialty partners, we feel good about where they were in, they were not certainly no nowhere near the impact that (inaudible) standpoint. So we're not seeing really much bleed over from the pure commodities into our -- our specialty products.

Tim Dougherty -- Welspun Wealth -- Analyst

Okay, that's all I had.

Mitchell Lewis -- President, Chief Executive Officer, Director

Thank you.


(Operator Instructions) There are no further questions at this time. Speakers, I turn the call back over to you.

Mitchell Lewis -- President, Chief Executive Officer, Director

Okay. We thank you Mary. We certainly appreciate your time and everyone's continued interest in BlueLinx and we look forward to sharing our progress with you during our next call.


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

Duration: 32 minutes

Call participants:

Mary Moll -- Director of Investor Relations

Mitchell Lewis -- President, Chief Executive Officer, Director

Susan O'Farrell -- Chief Financial Officer, Senior Vice President and Treasurer

Alan Weber -- Robotti Advisors -- Analyst

Tim Dougherty -- Welspun Wealth -- Analyst

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