BlueLinx Holdings' (BXC) CEO Mitchell Lewis on Q1 2018 Results - Earnings Call Transcript

BlueLinx Holdings, Inc. (NYSE:BXC) Q1 2018 Earnings Conference Call May 3, 2018 10:00 AM ET

Executives

Natalie Poulos - Head of Investor Relations

Mitchell Lewis - President, Chief Executive Officer and Director

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

Analysts

Alan Weber - Robotti & Company Advisors, LLC

Mitchell Scott - ‎Choice Equities Capital Management, LLC

Operator

Good morning and welcome to the Q1 2018 financial results. My name is Rochet, and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. [Operator Instructions]

At this time, I would like to turn this show over to Ms. Poulos, Director of Investor Relations. You may begin.

Natalie Poulos

Thank you, Rochet, and good morning, everyone. We appreciate you joining us for our first quarter 2018 earnings 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.

Mitchell Lewis

Thanks, Natalie, and good morning. We are pleased to report that we had a strong first quarter, in which we were able to grow our top-line, executed on a $110 million of sale-leaseback transactions, entered into an agreement to acquire Cedar Creek and are able to announce our best first quarter and adjusted EBITDA in over a decade.

First, I'd like to reiterate how excited I am about our strategic acquisition of Cedar Creek. On April 13, we closed the transaction, positioning the combined company as one of the largest wholesale distributors in the industry, with more than 50,000 branded and private label SKUs, a broad distribution footprints servicing 40 states, and approximately 700 associates calling on customers every day.

The integration began immediately following the closing and we're making good progress. We're beginning to realize the significant strategic and financial benefits that I discussed when we first announced this transaction. Some of the key attributes of combining our businesses include the breadth of geographic presence, with an extended reach and footprint east of the Rockies, significant sales coverage with likely the largest sales force among our direct competitors, a comprehensive product and service portfolio that provides the opportunity for accelerated growth, a diversified and extensive roster of high quality national and regional customers, a stronger position to capitalize on a continued recovery in the U.S. housing market, significant cost savings opportunities anticipated to be at least $50 million annually, and improved financial flexibility to support growth and long term deleveraging.

I know that I'm speaking for our BlueLinx associates, including those who recently joined from Cedar Creek, when I say that we look forward to the opportunities that now lie ahead for our company.

As we indicated previously, we expect this combination to generate significant cost savings and margin expansion over the next 18 months. As you may have seen, Wall Street reacted favorably to the announcement of the Cedar Creek transaction. In fact, due to the company's rapid stock price appreciation, our stock compensation expense increased significantly. And coupled with other non-recurring transaction expenses, we took a hit to net income for the first quarter.

Of course, the Cedar Creek transaction and the resulting improvement in our stock price are both positive events, helping lay a strong foundation for the company's future.

We believe that the continued likely demand for the U.S. housing market positions BlueLinx well for continued growth and enhanced value creation for shareholders. Leading economic indicators paint a favorable picture for building products and their distribution, enabling our combined company to continue to prosper as demand for residential construction as well as repair and remodeling increases.

Furthermore, we continue to expect that at least $50 million in annual run-rate synergies will be achieved from the Cedar Creek acquisition within the next 18 months, through network and fleet consolidation, G&A expense reduction and procurement of goods and services. We continue to develop a clear path to achieve these cost savings and have a dedicated team and third-party support working to execute the integration plan.

Looking ahead, we have developed a three-pronged strategic approach for the company's continued transformation. The first step is to complete our successful integration of BlueLinx and Cedar Creek. We have dedicated teams diving into opportunities we have identified to achieve the anticipated annual cost savings.

It is early as we are just into our third week after closing the transaction, but early indications give us confidence that we can achieve our goal. We look forward to sharing our observations and results in more detail when we report our second quarter results.

We've been moving quickly to integrate our two businesses. Our integration teams, which include talented leaders from both legacy companies who are dedicated fulltime to integrating the two companies, are moving quickly to further identify and execute on cost-saving opportunities.

We have already announced our executive and regional leadership teams to provide clarity to our customers, our suppliers and our associates. Over the last 10 days, I was joined with members of our executive team, as we collectively visited over 30 locations to meet with our associates to communicate the opportunities and vision we expect to realize from our combination.

I am pleased to inform you that at the local level, our associates have generally embraced this merger and have already begun to utilize our respective expertise and breadth of product and inventory, to provide even greater service to our customer base. And every day, we continue to identify more opportunities to leverage our combined company to drive efficiency through our organization.

The second step of our strategic initiatives is to continue focusing on our sales growth. We are embracing a local market strategy that will be augmented by our ability to provide compressive products and service to our national customers. We intend to execute on this strategic imperative by utilizing customer interaction with approximately 700 sales associates to grow market share, while implementing best practices among our sales teams.

In addition, our collective product portfolio offers expanded opportunities to both our customers and suppliers, as we're able to provide even more products to the markets we serve.

The third critical strategic initiative is to enhance our margins by retaining our focus on sales excellence that has helped drive higher margins at BlueLinx over the last several years. We will do this by continuing to develop our sales teams, while providing analytical support for our local teams to enable them to drive margin enhancement in their local markets.

We have tremendous knowledge and experience across BlueLinx regarding the products we distribute, and we will leverage this strength across the organization to enhance margins across our product portfolio. We are confident that our differentiated offerings and disciplined approach to pricing will help us hit our future margin goals.

Before I turn it over to Susan, I want to emphasize that the first quarter of 2018 was perhaps the most productive quarter in the history of BlueLinx. As you would expect, our leadership team was somewhat focused on the Cedar Creek transaction, and yet, we recorded our 10th consecutive quarter with year-over-year adjusted EBITDA improvement. And this was during a quarter with challenging weather conditions in several of our large markets.

Today, we're inspired by the momentum following our acquisition of Cedar Creek. We fully expect to continue executing on our strategic initiatives as we work hard to provide enhanced value to our customers, suppliers and shareholders, and anticipate even greater opportunities for our talented associates.

As we look to the future, with the combined company's facilities and our expanded product offerings, we are taking a transformative next step in our strategy, and believe BlueLinx is well-positioned in the markets we serve.

And now Susan will provide you more details on our legacy BlueLinx financial performance for the first quarter.

Susan O'Farrell

Thanks, Mitch, and good morning, everyone. It's a pleasure for me to speak with you today and to review our first quarter business results. As Mitch mentioned, the first quarter was certainly transformative for BlueLinx. In early January, we executed on a $110 million of sale-leaseback transactions.

We shared this with you two months ago on our fourth quarter earnings call. With these transactions, the entire remaining $98 million mortgage principal was retired in the first quarter of 2018, well ahead of the scheduled maturity dates in 2018 and 2019. After the January sale, we still have $150 million to $160 million in remaining real estate value at the end of the first quarter, which is approximately four times the net book value.

Late last year, we engaged in nationally renowned real estate firm to help us with the evaluation of our remaining real estate portfolio, so these are fresh appraisals. This $150 million to $160 million in appraisal value demonstrates the meaningful value as well as the potential of the real estate still on our balance sheet. This real estate transaction was enabling. As we paid down our mortgage debt, we were well-positioned to pursue the Cedar Creek acquisition, as Mitch discussed.

We announced the transaction on March 12, and were able to quickly make it through the regulatory approval process. With that, we were able to consummate and announce the closing just over 30 days later. While we know this was an incredibly fast time line, the Cedar Creek business last year generated adjusted EBITDA of over $1 million per week on average, so our goal was to capture that value as quickly as possible. We are incredibly excited about the opportunities this brings to BlueLinx.

On or before June 29, we anticipate sharing the pro forma financials of the combined company, so you can see more historical financial information about our new business. For the remainder of this call, though, we'll keep our comments on the legacy BlueLinx business that existed in the first quarter of 2018. We look forward to sharing our consolidated financial results next quarter.

Starting on Page 11, I'll touch on some of the highlights from the quarter before moving into a more detailed review of the financial results. Net sales were $437.5 million for the quarter. Even with the adverse weather conditions in certain markets, revenue was up $8.9 million, when compared to the prior year first quarter. The snow and ice storms in January resulted in approximately 30 facility closure days. We also generated an improved gross profit of $55.3 million, up $900,000 versus the prior year, with a gross margin of 12.7%.

When we look at our first quarter performance, we incurred a net loss of $13.4 million. This included significant accounting charges related to the major changes we initiated. And investors have responded favorably, first, the sale leaseback transactions, and then, again, to the Cedar Creek acquisition announcement. The stock market responded to these actions, increased our market cap threefold during the fiscal first quarter. The stock climbed from $9.76 at the end of the fourth quarter to $32.59 at the end of the first quarter.

Accordingly, we incurred charges associated with compensation expense from stock appreciation rights of $8.9 million in the quarter. These charges were incurred during the quarter that any cash will be paid out in equal amounts in the third quarter of 2018 and by the end of the third quarter of 2019.

Additionally, we incurred one-time charges of $3.6 million in professional fees related to the Cedar Creek acquisition and interest charges of $2.2 million in debt modification fees under the CMBS mortgage payoff in the first quarter. Of course, we're delighted to have entered into both of these transactions. And then when you adjust for the costs associated with the sale leasebacks, Cedar Creek and stock appreciation rights, net income would have been $1.3 million for the quarter.

Adjusted EBITDA was $8.1 million, up $700,000 or 10% from this period a year ago. This was our best first quarter adjusted EBITDA since 2007 and the 10th consecutive quarter in which we enjoyed year-over-year improvement in our adjusted EBITDA. We're delighted to see these improvements in our first quarter results.

On the balance sheet, we retired our mortgage debt completely. The revolver balance was $223.3 million at the end of the fiscal first quarter. And overall, we decreased our operating working capital by $2.4 million to $258.9 million, even with our sales growth.

Now moving to Page 12. I'll highlight the rest of our first quarter performance. As previously stated, net sales for the quarter were $437.5 million, with a gross profit of $55.3 million. Structural products were the main drivers of our sales growth due to strong commodity markets. Gross margins were up for both specialty and structural products categories by 50 and 10 basis points respectively.

With the shift in product mix during the quarter, structural products contributed to 47% of the sales for the quarter, up approximately 2.5% from the year ago period. Even with this mix change, the overall gross margin rate remained at 12.7%. While we enjoyed pricing increases from rising commodity markets, we are also proud of our focus on driving gross margin rate across all product categories.

Moving to Page 13. We'll take a closer look at the financial benefits of our Cedar Creek acquisition. This is a compelling transaction for BlueLinx shareholders not only because of the expanded facilities and product offerings, which would support the combined company's long-term success, but because the transaction is accretive to the company's EPS.

We purchased Cedar Creek for $413 million, $345 million in cash and approximately $68 million as the agreed upon value of capital leases. And we were able to fund this transaction through $180 million term loan as well as using our amended $750 million ABL revolver, inclusive of $150 million uncommitted accordion feature. As you can see, the 27 combined financials show great opportunity for us.

We're also pleased to share that we had $157 million of cash and excess availability at the time of closing, based on the qualifying inventory and receivable levels. With lower working capital balances and a complete elimination of our mortgage during the first quarter, we continue to pave the way for a leaner, more capital efficient BlueLinx.

In conclusion, beginning of 2018 was a busy and productive time for us, and we're excited to see what the rest of the year has in store as we continue our integration with Cedar Creek. I'd like to thank our entire expanded BlueLinx team for their hard work and efforts. The outstanding results we're able to share today are a testament to your many contributions. And, of course, special thanks go out to our customers and suppliers for their continued partnership.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Alan Weber.

Alan Weber

Good morning. Can you talk about, with the acquisition kind of how you expect somewhat the timing of the cash payments to integrate the businesses, and then when you actually start to see the cost savings and like that?

Mitchell Lewis

Yes, Alan, thanks for the question. I would say, it's front-ended as it relates to the actual expense going out. And then we've talked about 18 months to fully realize on a run-rate at least $50 million of synergies that we've talked about.

Alan Weber

Okay, and then, can I...

Mitchell Lewis

We haven't given specific guidance as to when the cash is going to be paid or where the cash will go out upfront for the integration costs relative to the synergies coming in.

Alan Weber

Right, okay. And then in terms of not next core synergy, in terms of kind of cross-selling opportunities and like that, when do you hope to see any benefits there?

Mitchell Lewis

Yeah, I'd tell you, what is incredibly enlightening is how - as you know, culture matters when you're doing acquisitions like this. And what's been incredibly enlightening is how quickly our teams are communicating. So we've seen on a modest scale already benefits where two facilities close to each other, their sales teams are communicating, or perhaps one of the facilities didn't have product and the other one did. And they're picking up the phone and calling. So I would say, in a minor way it's already happening.

As we look at opportunities going forward, we're systematically looking at products and brands that we have and that will be a longer exercise, again probably taking several months as we go through our product category. But as indicated in my talk, the excitement that we have as far as the ability to take products that either of the legacy businesses didn't have and the excitement generated at the local level is palpable.

Alan Weber

And I guess with the stock having appreciated, giving you optimism, you're not looking to raise capital by issuing shares, are you?

Mitchell Lewis

Yes, we have not. Right now, all we're doing is focused on integrating these businesses. As you would expect, to the extent there are financial opportunities from a capitalization standpoint, we would approach them in the manner that we thought was best for the company and our shareholders.

Alan Weber

Okay. Great. Thank you very much.

Mitchell Lewis

Sure, thank you.

Operator

[Operator Instructions] Your next question is from the line of Mitchell Scott.

Mitchell Scott

Good morning, Mitch and Susan. How is it going?

Mitchell Lewis

Going well. Thank you. How are you?

Susan O'Farrell

Good morning, Mitchell.

Mitchell Scott

I'm doing well. Congratulations on getting the deal closed and quickly.

Mitchell Lewis

Thank you.

Mitchell Scott

Yes. I guess if you could, just maybe from a high level give us and everybody else a bit of perspective on the major differences as you see them between the two companies. And any color you can provide on how that bleeds through into the different margin profiles of the companies would be I think very interesting and helpful.

Mitchell Lewis

Okay. Again, one of the things that we're finding is that, certainly at the local level the two businesses are very similar actually in a lot of ways. I mean, the primary one being the focus on the customer and the desire to make sure that we're servicing our customers well. I would say, when you look back at the businesses, one of the things we found very attractive to Cedar Creek is they were outperforming BlueLinx from a legacy perspective as it relates to organic growth.

And there was more of that entrepreneurial - there is more of an entrepreneurial feel and spirit in the field. And as you know, having followed us for a while, that was where we were taking the company strategically. We removed our general managers from a centralized location, and were pushing them out into the field to get closer to the customers and the products in the markets that we serve. So I would say that's an enhanced benefit for the company that we're seeing.

From a general margin perspective, the goal is to take the best of both worlds. Some of the things that legacy BlueLinx team brings to the table is a very strong and decades-long knowledge on, for example, commodity purchasing. We have imports in the legacy Cedar Creek business that is not an expertise - I'm sorry, in the legacy BlueLinx business that's not an expertise for Cedar Creek.

So there is a lot of opportunity as it relates to the first - both the purchasing of the products, the supply chain of the products and, of course, understanding the products going out in the marketplace that we think will enhance the margins of the combined company.

Mitchell Scott

Okay. Great, very helpful. And then, I guess from a distribution-center-footprint perspective, I mean, I think we all understand that you guys own most of your real estate currently. What does it look like for Cedar Creek? And what is the - I guess, the greater flexibility of the two distribution center network?

Mitchell Lewis

So Cedar Creek primarily leased their facilities. They have I believe one owned facility. And what we're doing is, where we have overlapped markets we have a team that's 100% dedicated in assessing the businesses on a comprehensive basis. And obviously, one of the factors that you look at is owned versus rented.

But as you can imagine, if you had a very small facility that you owned and a very large facility that you leased, that might enter into the equation of whether you would take the owned facility and move it into the leased facility or vice versa as well as just a myriad of alternatives.

So we're just getting started. We've committed to - internally to the organization that by July 4, we will tell them, when we'll tell them, how we're assessing the facilities. So it will take, as you can imagine, a lot of data as we evaluate it. But we're committed, obviously, to move forward as quickly as possible. But I would not assume that the ownership of real estate is dispositive as it relates to the decision between facilities, because it's not.

Mitchell Scott

Okay, very helpful. And I'll jump off. I guess, just last thing I would add is it's nice to see Mr. Averitt as well incentivized to quickly capture and exceed the synergy target out there, so kudos to the board for again getting the incentives right. Look forward to seeing the financials when they come out later this summer. So thank you.

Mitchell Lewis

Sure. Thank you.

Operator

[Operator Instructions] Your next question is from the line of [Chris Colwen] [ph].

Unidentified Analyst

Thanks for taking my question. And congrats on getting the transaction done. Just two quick questions. One is, how much does your revenue benefit from lumber pricing? It's being up, what, 30%, 40%, 50% year-over-year?

Susan O'Farrell

So we certainly benefit from that. But I'll say, Chris, one of the things we do is we make sure we're taking positions. So we keep in stock what we need to take care of our customers and keep spending that. So that means when markets rise or decrease, we actually don't feel it as widely as some other folks might if they're trying to play those markets. So it's one of the things we do. And certainly, as the prices increase, there's a cost that flows through on that one.

But in general, we keep our commodities fairly tight and spinning, so it has a muted impact on our business versus if we had gone longer on the product.

Unidentified Analyst

So I guess, if - I guess, what I'm getting to is if lumber prices were flat from last year, what would the revenue look like? I assume, would it be down X percent or...?

Susan O'Farrell

Well, there's certainly an impact too. As prices rise, some customers sit on the sideline to see where the market might settle. So you have some impact on volume as it relates to increasing and decreasing product prices. But certainly, overall, when we look at it, it was the pricing on commodities that led the way for our growth.

Mitchell Lewis

Yeah. Chris, the other thing I think to think about is we report specialties and structural. And structural is less than half of the business, and lumber is just a piece of that. So when you're thinking about lumber across the entire platform of the product portfolio that we have, while we don't disclose what that is, you need to - I think it's important to consider, it's not like we're a lumber distributor. I mean, that is an important component of what we do, but it doesn't drive the entire top line of the business. It doesn't at all.

Unidentified Analyst

Okay. And then my second last question is just gross profit or gross margin being down a little bit year-over-year. What was the main driver for that?

Susan O'Farrell

Actually, the gross margin dollars are up year-over-year.

Unidentified Analyst

Gross margin - yes, I mean, gross profit margin, I guess, is what I'm referring to. Is it percent or...?

Susan O'Farrell

The gross margin rate was flat year-over-year at 12.7%.

Mitchell Lewis

Yeah, and one thing to think about as you raised this pointer on lumber, just the math, if you hold on to your per unit profit in a rising inflationary environment as it relates to the product, your actual margin percentage will go down. So we're actually pretty proud of the team in light of what you indicated before, which was an escalating inflationary environment on lumber, for example. We were able to hold on to that gross margin percentage, it's actually a pretty good job from our team.

Susan O'Farrell

Absolutely, and to add to that, I mean.

Unidentified Analyst

That's what I was kind of alluding to. Without that quick rise, I assume you probably would have seen some gross margin expansion. Is that fair?

Susan O'Farrell

Well, could have. And actually, so our structural gross margins were up 10 basis points and our specialty gross margins were up 50 basis points. So we think it's nice work across the board.

Unidentified Analyst

Great. Well, I appreciate it.

Mitchell Lewis

Okay, sure. Thank you for the questions.

Unidentified Analyst

Thank you.

Susan O'Farrell

Thank you.

Operator

[Operator Instructions] And your next question is from the line of [James Liu] [ph].

Unidentified Analyst

Hey, Mitch. Hey, Susan.

Susan O'Farrell

Good morning.

Unidentified Analyst

With regard to your messaging prior to the acquisition around shifting toward same center of growth later in the year, has that - has the focus now changed with the Cedar Creek acquisition? Or is that still something that is very sort of mixed into how you think about the remainder of the year? Thanks.

Mitchell Lewis

Yeah, it's definitely mixed in. As I talked about when I was going through my prepared remarks, it's one of the key pillars of our strategy, short-term. And it's one of the attractive attributes that we love about Cedar Creek is that they have demonstrated organic growth through their history. And so, yes, absolutely.

In fact, just in the last couple of days, we've had the Regional Vice Presidents as new leadership team, who's really going to be driving the P&L of the business for a day-and-a-half. And we're talking a lot about top line and how we grow top line. And I can assure you, Alex's - that's front of mind of what he's going to try to accomplish.

And we intentionally set aside, and I alluded to it, leaders of the business, I mean, very talented people in the organization to be dedicated to the integration so that we could have the business leaders focused on running the business and growing the top line of the business as well. So that remains a key strategic initiative and imperative for the company going forward.

Unidentified Analyst

Terrific. Thank you.

Mitchell Lewis

Okay, sure.

Susan O'Farrell

Thanks.

Operator

[Operator Instructions] And there are no other questions at this time.

Mitchell Lewis

Okay. Well, thank you, Rochet. And we certainly appreciate your continued interest in BlueLinx and look forward to sharing our second quarter results as we're - as well as the progress of the integration later in the summer. Thank you, again. Have a great day.

Operator

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