BlueLinx Holdings, Inc. (BXC) CEO Mitch Lewis on Q3 2018 Results - Earnings Call Transcript

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About: BlueLinx Holdings, Inc. (BXC)
by: SA Transcripts

BlueLinx Holdings, Inc. (NYSE:BXC) Q3 2018 Earnings Conference Call November 8, 2018 10:00 AM ET

Executives

Mary Moore - IR

Mitch Lewis - CEO

Susan O'Farrell - CFO

Analysts

Kyle Mowery - GrizzlyRock Capital

Mitchell Scott - ‎Choice Equities

Tucker Golden - Solas Capital

Colin King - LEV Capital

Operator

Good morning. My name is Beth, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2018 Investor Relations Call. [Operator Instructions] Thank you. Mary Moore, Director of Investor Relations, you may begin your conference.

Mary Moore

Thank you, Beth, and good morning everyone. We appreciate you joining us for our third quarter 2018 earnings conference call. The earnings release and slides for this call can be found in the Investor Relations section of our Web site at www.bluelinxco.com. Joining us today on the call today are Mitch Lewis, Chief Executive Officer; and Susan O'Farrell, Chief Financial Officer. Please note that this presentation includes forward-looking statements including statements about our future operations and 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.

Mitch Lewis

Thanks, Mary. Good morning. This morning I would like to spend some time updating you on the progress of our integration as well as providing you with an overview of our wood-based commodity markets and their impact to BlueLinx. We made great progress during the third quarter, even as we fought through challenging headwinds in certain product categories.

We are now about seven months into our merger with Cedar Creek. And we remain confident that the rationale for bringing these two companies together is sound. As we have indicated before, 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 over 700 sales associates calling on customers every day, which is likely the largest sales force among our direct competitors, a comprehensive product portfolio that we can utilize across our expanded geographic platform providing the opportunity for accelerated growth, a diversified and extensive roster of high quality national and regional customers, significant cost saving opportunities which we remain confident will be at least $50 million annually by the end of 2019 and improved financial flexibility to support growth and long-term deleveraging.

Our dedicated integration team continues to drive synergies and we remain on schedule with our integration efforts. We have now consolidated seven locations including re-commissioning an idle BlueLinx distribution center and a major equipment move in Texas. We expect to consolidate three additional facilities by the end of the year which will be 10 facilities in nine months.

While many of these consolidations are providing immediate benefits from an operating cost perspective, they have also helped mitigate risk for the long term by allowing us to exit certain multi-employer pension plans in the process. This led to a $7 million non-cash reduction in our third quarter net income, but it should have an immaterial impact on annual cash flow, while eliminating the tail risk of a troubled multi-employer pension plan for these locations.

Our G&A reductions have also been meaningful. We are pleased to announce that we currently have reached an annualized run rate of over $7 million from reductions in G&A. This covers a broad range of cost savings including executive and administrative redundancies, insurance, and professional expenses as well as travel and expense reductions. And we are confident that there are additional cost saving opportunities in the months ahead.

One obvious example is a reduction in the cost of our ERP systems which we should begin to enjoy later in 2019 as we complete the integration of duplicative systems by the end of next year. We are also continuing our dialog with many suppliers and are now beginning to evaluate the rationalization of suppliers to take advantage of lower cost opportunities. This effort will begin in earnest over the next month as we look to manage our product spend over a smaller supplier base that wants to grow with BlueLinx.

The aggregate synergies from our integration efforts should provide annual run rate synergy savings of over $25 million by the end of 2018, which is well ahead of our original plan of $15 million. These savings should reduce our expenses in 2019 while of course improving EBITDA. We remain confident that we will exit 2019 with an annual run rate of at least $50 million in savings from synergies.

You may recall that we have not included any sale synergies in these numbers as we assume that they would be offset by potential market share losses associated with the merger. We also continue to take great pride in the relatively low attrition rate of our associates compared to last year. Since the beginning of May, our attrition rate remains lower than the combined attrition of the two independent companies in 2017 during the same period even though our headcount is now down by approximately 6% from September 2017 levels.

Our associates are close to the integration process and truly understand the opportunity BlueLinx will provide in the months ahead as a market leader in the industries we serve. As we look at the third quarter in more detail, we were certainly disappointed with the impact rapidly declining commodity panel and lumber prices had on our results. This decline appeared to be a confluence of several events including the easing of transportation constraints, an increase in European competition, a modest [indiscernible] season out west and the leveling of single family housing starts over the summer.

The composite structural panel index dropped approximately 17% during our fiscal quarter, while the composite framing lumber index declined by about 24%. This level of price decline over a three-month period is highly unusual. There are only four periods over the last 15 years in which both structural panel and lumber prices dropped by more than 20% in the 90-day period. The 24% decline in lumber we saw in the third quarter was the largest 90-day decline we have experienced since 2010.

As you would expect, this price degradation materially impacted our results for the third quarter. I think it's important to remember that BlueLinx is not in the speculation business. Our value proposition is to provide our customers with competitive products, excellent service, and short lead times. And we typically manage our lumber and panel commodity inventory to 130 days.

So generally, the absolute price levels for our wood-based commodities do not drive our profitability. Unfortunately, the reality of rapidly declining price environment means that during this period, the inventory in our warehouses as well as in transit shipments from our commodity supplier are typically a cost higher than the replacement cost. And then in deflationary environment, volume can also decline which exacerbates the margin impact.

This is exactly what happened in our third quarter. We think it's important to look at the recent commodity pricing environment in the context of the overall fundamentals of our company. On a historical basis, a quarterly decline of this magnitude is clearly an anomaly having occurred on average approximately only once every 16 quarters since 2003. While Susan will discuss the impact to our third quarter in more detail, we believe our relative performance during this atypical collapse in wood-based commodity pricing actually indicates the strength of our company's size, diverse customer base, and product portfolio.

The gross profit decline we experienced in the third quarter should be taken into context with a roughly $150 million pro forma 2017 adjusted EBITDA including $50 million of synergies. When you consider that this level of wood-based commodity price decline generally occurs only once every four years, the long term impact of BlueLinx due to the third quarter's gross profit decline would only be about 2% of the 2017 pro forma adjusted EBITDA synergies during that four-year period.

Please understand that this does not mean that we are acting without a sense of urgency. We are monitoring all non-essential expenses, scrutinizing additional headcount and managing our working capital closely. Rest assured that we will continue to aggressively manage all aspects of our operations to help mitigate the impact of continued margin erosion. There are a few signs that we may be nearing the end of this decline. Some suppliers have announced curtailments as well as long winter shutdowns. Reduced supply will likely impact pricing and may portend the end of this deflationary environment. In fact, late last week, lumber future started to rise. And pricing is somewhat stabilized this week which may indicate that prices have finally begun to level off.

We certainly cannot predict commodity markets but rest assured that we will continue to monitor these markets closely and react accordingly. As you're likely aware, the U.S. housing markets growth has moderated over the last few months, we agree with most prognosticators who have forecasted that the single family housing market will generally continue to improve at a minimum to its mean annual production rate over the last several decades.

This suggests that significant growth opportunity remains for the industry in the days ahead, at BlueLinx, we will remain focused on three key strategic objectives utilizing our enhanced service proposition and product offering to grow market share, enhancing margins in our products and integrating the businesses while realizing at least $50 million in annual synergies. We are in the process of expanding our portfolio with strategic suppliers and opening up new markets, this should lead to long-term growth as our footprint and product offering provides significant value to both our customers and suppliers.

We're also now refocused on enhancing pricing in all of our product categories. This includes assessing anomalies where we have opportunities to improve margins and developing our local leadership with pricing analytics and tools and are focused on realizing synergies as relentless, while our confidence in achieving the annual synergies we have committed to remains high.

Our progress in these three key areas in 2019 will propel our success for years to come. I'd like to personally thank our BlueLinx team for their hard work during a particularly challenging environment. I'm confident that their commitment as well as the partnership of our strategic supply base will ensure we provide great value and service to our customers in the months ahead.

And now I'd like to turn it over to Susan who will provide you with more color on our financial performance for the 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 third quarter business results. As Mitch discussed, our third quarter is positive in many ways including the great progress we've made in our integration efforts, the third quarter was also an uncharacteristic quarter for our industry due to the volatility in the commodity markets, we'll talk to that in a few minutes.

We remain focused on our strategic objectives making significant progress with their integration efforts and delivering solid financial results despite the headwinds of commodity markets, we've made great progress in the third quarter with our consolidation initiatives and we are now $10 million ahead of our 2018 plan to achieve $15 million of annual run rate synergies.

We remain highly confident that we will achieve at least $50 million in annual run rate synergies by the end of 2019. Additionally, we estimate that we will likely generate approximately $25 million in gross proceeds from the sale of owned real estate in overlapping markets as we continue ahead with our strategic plan.

And we still see our cost to achieve synergies in the $25 million to $40 million range, a range that is $15 million less than what we shared with you in March this year.

One of the key attributes of combining our company on two legacy businesses is the improved financial flexibility that will support our growth and long-term de-leveraging. I think this quarter illustrates that the financial strategy of the company is going well, I'm excited to now share with you our financial results for the third quarter.

Starting on Page 11 of the slides, I'll touch on some highlights from the quarter. Net sales were $860 million up $380 million or 79%, pro forma net sales which take into account the acquisition of Cedar Creek as it occurred on January 1, 2017 or $860 million up $19 million or 2% versus the same period last year. We delivered gross profit and margin of $92 million and 10.7% respectively.

As Mitch shared, commodity wood prices declined significantly and quickly during the third quarter, we experienced an impact of $17 million in wood commodity deflation or 190 basis points to our overall gross margin rate.

The $17 million also included a lower cost or net realizable value or NRV adjustment of $5 million or 50 basis points. We would expect to recover most of that adjustment in the fourth quarter as the inventory net of NRV adjustments are sold for our system.

We kept our inventory velocity turning quickly but the market fell faster than we could move off our inventories impacting our weighted average cost of inventory.

In the second quarter of 2013, the last time in commodity markets drastically fell, our second quarter adjusted EBITDA was a loss of $3.5 million. Now five years later in the third quarter of 2018, we had positive adjusted EBITDA of $17 million for the quarter that demonstrates how we are better positioned to write out market disruptions in times like these.

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. This was a great result, as the partial withdrawal mitigates the risk of future assessments in the multiemployer pension plan. This withdrawal along with commodity price impact with the major drivers of a net loss of $10 million in the third quarter.

Despite following commodity prices in the third quarter that impacted margins we were still able to achieve and adjusted EBITDA of $17 million for the quarter up 19% or $3 million. This strong adjusted EBITDA performance is the highest third quarter adjusted EBITDA since 2007. Over the past several months we've been assessing the private company accounting methodology for Cedar Creek; specifically we reviewed the complex treatment for lease accounting standards and made an adjustment to the percentage split of capital and operating expenses for the Cedar Creek lease tractors.

This accounting change has an approximate annual impact that decreased Cedar Creek's 2017 adjusted EBITDA by $1.9 million. We're pleased to share that we ended the quarter with excess availability and cash on hand of $123 million with daily average for the quarter being $142 million of excess availability and additional source of untapped liquidity is there unencumbered real estate which has an appraised value of $150 million to $160 million. One of the many positive characteristics of our company is that we are a low CapEx business this along with other factors gives us the ability to generate cash that can be utilized to pay down debt.

As we move to page 12 we'll highlight our year-to-date performance. Net sales were $2.2 billion up $808 million or 59%. on a pro forma basis, net sales were $2.6 billion up $133 million. Gross profit margin of $251 million and 11.4% percent include the onetime acquisition related inventory step up costs of approximately $12 million and NRV inventory adjustment of $5 million.

Excluding the effect of the onetime acquisition related inventory step up costs gross margin would have been 12%. We reported a net loss of $32 million for the first three quarters that includes $34 million of acquisition and stock comp related charges as well as the previously mentioned onetime acquisition related inventory step up costs of approximately $12 million. Year-to-date adjusted EBITDA was $62 million up $28 million year-over-year. Pro forma adjusted EBITDA was $73 million down $9 million versus the same period last year.

Additionally our balance sheet remains strong the book value of our receivables and inventories significantly exceeds the balance of on our ABL. This is more than a $270 million question. Now moving to page 13, pro forma sales increased $19 million or 2% from the same quarter last year while number of volumes increased the market prices increased even more 830 basis points. The pricing stories familiar for panels and OSP with pricing increases of 380 basis points and so while overall specialty margin rates were similar to Q3 last year.

Structural margins were 5.6% unseen in our business since the second quarter of 2013. Moving on to page 14, we think it's important that you understand the post integration uses of cash on an annualized basis. When you look at our pro forma trailing 12 month adjusted EBITDA assuming the $50 million of synergies and then take into account the major annual cash outlays including interest, capital lease payments, CapEx, state taxes which remain a cash item and a few other smaller items we expect there to be approximately $75 million in cash available to de-leverage the company by paying down debt.

This of course does not include changes in working capital which are seasonally funded through the ABL. As a matter of fact as you review page 15, 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 de-leveraging BlueLinx. Our term loan balances currently $179 million implying leverage including the $50 million in synergies on a trailing 12 month pro forma adjusted EBITDA basis of only 1.3 times.

We also share with you our revolver balance as of the end of the third quarter 2018, remember this debt 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 throughout the building seasons, and we secure it with our high quality inventory and receivables.

We believe our real estate remains a valuable asset that provides unrealized value on the balance sheet as well as additional opportunities to delever our company. As I mentioned earlier, our unencumbered real estate value was appraised less than a year ago at $150 million to $160 million, which is four times the book value. Our real estate team is now proactively marketing four properties that we exited in connection with our consolidations, Des Moines, Grand Rapids, Minneapolis, and Springfield. These industrial properties are desirable for their location as well as their access to rail service. We have received substantial interest on these properties, including unsolicited officers' breach of these properties.

I would also like to highlight our tax assets. Due to our sale leasebacks that occurred during the first quarter of this year, we currently have estimated taxable income of approximately $47 million to the third quarter. We were able to use our federal NOLs to fully offset this income, leaving approximately $112 million of NOLs to use in the future. As we think about opportunities for growth, we are well positioned to offset gains from ordinary income in real estate with our remaining federal NOLs.

BlueLinx continue to improve and evolve. It was just over a year ago we were a controlled company with $1.8 billion in revenues. Roll the clock forward, and we are now $3.3 billion in company with no controlling shareholder. That means we also want to evolve in how we share our stories publicly. We have increased our investor communications and outreach, and will continue to engage investor opportunities to get our great story out into the market. In a challenging and volatile quarter, I'd like to thank our entire BlueLinx team for their hard work and efforts. These results that 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, Beth, we'd like to open it up for any questions we might have at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Kyle Mowery, GrizzlyRock Capital. Your line is open.

Kyle Mowery

Good morning, Mitch and Susan, and thank you for taking my question. A couple if you may. First, on slides 14 and 15, very clearly stated free cash flow -- flying [ph] 30% free cash flow to equity currently. My question relates to the term loan payoff. With the $25 million of real estate and $75 million of free cash flow, you have substantial room on your ABL. Am I thinking about this in a correct manner?

Mitch Lewis

Yes, you're clearly thinking about it in a correct manner. We expect to continue to have availability on the ABL. And then I think as we've talked about in the past, Kyle, then we have to decide what we want to do with the excess liquidity going forward.

Kyle Mowery

Makes sense. And then, Susan, can you go through the -- you referenced a $270 million number. I didn't catch that on your prepared remarks. Can you just go through that again really quick.

Susan O'Farrell

Yes, absolutely. So when you look at our inventories and receivables on the balance sheet, and then net out, in essence, the debt against that ABL revolver debt, that creates that cushion, that differential. And so while people certainly look at ABL debt as a leverage, we think it differently is a way to operate our business. And over and above, we know we've got value substantially beyond that. So if you're looking at leverage ratios, we just think it's important to understand how much value is still on the balance sheet with those assets.

Kyle Mowery

So as of the Q, and I don't think the Q is out, but the delta on your ABL versus the 630 Q was about $150 million. Are you telling me this increased to $270 million?

Susan O'Farrell

I'll go back and just reference that and make sure we're tying out the same items, Kyle, and we'll get back to you on that one.

Kyle Mowery

Okay, great. Thank you. My second question relates to the impact of hurricanes. Can you run through any impact that you've seen from Florida or any other areas affected?

Mitch Lewis

Yes, we clearly saw, as you would expect, during the week or two that they materially impacted those locations, a decline from a volume standpoint. As we look at it, Kyle, we think it's going to provide, over the long-term, benefit to the company as we have the repair and modeling that will take place as folks try to dig out from that. But from a short-term, we don't have it exactly quantified from those locations. It did have an impact; I wouldn't call it a material impact across the company for the entire quarter.

Kyle Mowery

Okay, great. And then last one for me, you'd previously referenced $25 million of real estate sales. The four properties that you've now referenced are now being marketed, would that be in addition to the 25?

Susan O'Farrell

No, Kyle, it's a subset of that. It's a little less than half. And then the substantial interest that we're receiving will make it interesting to see the actual realizations of those because there's more interest than, I think, we originally thought. So we'll see how those offers come in versus on those estimates. But right now signs are really positive on where those realizations will come in.

Kyle Mowery

Got it. So with the $25 million referenced against two DCs that were closed, and now you have two more being marketed. Is that accurate?

Mitch Lewis

No, we have four properties on the market. We just put them on the market, let's say, in the last 30 days. And we have a lot of interest particularly in two or three of them. And so as you think as a likely closing for some of them, it would probably be the first quarter of next year. So basically what happened is, these are real properties that in the context and the process of the consolidations, we now have free land and buildings that we moved out of that we're marketing. So the idea is, of course, to time that as we consolidate facilities and have open properties. And of course, as you look at the $25 million and Susan talked about a $150 million to $160 million fair market value, when we're done with that process, we're still going to be sitting with assets for the company in that $125 million range.

Kyle Mowery

Got it. Thank you very much. Thank you for taking my questions.

Mitch Lewis

Okay, thanks, Kyle.

Susan O'Farrell

Thank you.

Operator

Your next question comes from the line of Mitchell Scott, ‎Choice Equities. Your line is open.

Mitchell Scott

Good morning, Mitch. Good morning, Susan.

Mitch Lewis

Good morning.

Susan O'Farrell

Good morning.

Mitchell Scott

Thank you, guys, for taking my question. Looks like more good progress on getting the deal integrated, and not necessarily the lumber price environment you wanted. So thank you guys for the extra color on the historical patterns.

Mitch Lewis

Yes, sure.

Mitchell Scott

Before I get in to the structural gross margin, I thought I'd just ask maybe a quick question about specialty gross margin. It looks like that was relatively immune to the lumber price decline. Is that accurate, and is that something we should probably expect to continue?

Mitch Lewis

Yes, it is relatively immune to the commodity prices.

Mitchell Scott

Okay, great.

Mitch Lewis

So, yes, as I mentioned, I mean we really haven't in, as you may know, for any long-term holder for BlueLinx. I mean we believe that there is a lot of opportunity related to doing a good job at understanding our pricing and margin across the company. So, as it relates to your question, is this what we would expect. I mean our goal, of course, from a continuous improvement perspective is to continue to improve that. But clearly as you can see, by relatively flat margins in specialty products when you have a decline from a commodity standpoint, it didn't overlay into the specialty segment.

Mitchell Scott

Okay, that's good to hear. On the structural commodity side, I guess what I want to get a feel for is maybe what's sort of the outlook upcoming might suggest. So I think just looking through the company's slides from before and 2013 and the last episode, it looks like a pretty dramatic falloff, but then two quarters later structural was again approaching the prior gross margin levels. Is that a decent proxy for how we should be thinking about this going forward?

Mitch Lewis

Yes, Mitchell, I'd say the first thing we'd have to do is make an assumption that we've stabilized, right, the prices have stabilized. And so to the extent you have pricing that's stabilized from a business standpoint, then you have to work through the higher cost inventory we talk about, trying to keep our inventory less than 30 days. So if it's stabilized and the demand is as you would expect, we should run through this and start seeing some uptick in the first quarter of next year.

Mitchell Scott

Okay, thank you. Have a good day.

Mitch Lewis

Okay, thank you.

Susan O'Farrell

Thank you.

Operator

Your next question comes from the line of Tucker Golden, Solas Capital. Your line is open.

Tucker Golden

Thanks for taking my question. Congratulations on managing through that period, I thought it would be worse, frankly, so.

Mitch Lewis

Thanks, Tucker.

Tucker Golden

Having followed the company for a long time I'd echo your sentiment that it's massively improved in terms of structure and management since 2013, this would've been a whole different story. I guess, let's see, a couple of questions. Can you just, I think you already touched on it with the previous caller, but could you just take us through, at a high level, the portfolio, so starting with 70 properties operating at the closing of the deal, and where we are today and where we expect to be after the movements you mentioned. And then also just on a sub basis breakdown which are owned and operated, and where that will end up as well -- sorry, owned versus leased, and where that will end up.

Mitch Lewis

Yes, so as we've talked about, we expect by the end of the year to have consolidated 10 locations. We didn't anticipate in connection with us actually closing locations other than through consolidations. Where it gets tricky, Tucker, is predicting where we're ultimately going to end up. So we have facilities that we're evaluating and obviously the value of the property is a consideration of the cash we could get from that, but we're also looking at the overall operating impact from a facility standpoint.

And we've talked about the incremental consolidations we expect to happen in the first-half of the year, but there are also some very large facilities that are very busy that we have to -- and that we cannot easily close one and move into the other, that we have to make longer-term decisions about whether realignment of the shipping -- the customer that are shipping from makes sense, or whether it makes sense to double the size of a facility in greenfield. So it's really hard to project, ultimately, how many properties at the end of the day that we'll own, there is an assumption that the remaining four or five properties that we have will get to this $25 million in total with the properties that we have on the marketplace.

Susan O'Farrell

And so just to add also some color, as you mentioned we started out with the 70 properties, I mean we've talked about 18 to 20 overlapping markets and so as Mitch said, we have to go through each of those and work through the timing on that, so I think overall directionally you can think about that. So those are some high level numbers that we've shared.

Tucker Golden

That's great, that's helpful, thank you. I didn't understand it first when I looked at the deck this morning and then your color in your opening remarks help cleared up a little bit. Slide 7 talks about the $17 million hit to gross profit in the quarter and in reference to this 2% of four-year aggregate 2017 pro forma adjusted EBITDA.

So I think what you're saying let me see if I get this right is that you're generally seeing this sort of volatility once every four years and so you're sort of trying to show on a [indiscernible] basis, what kind of a hit it is over kind of a longer term cycle I guess, is that the time there?

Mitch Lewis

Yes, Tucker that that's exactly, I mean obviously we're comparing gross profit to EBITDA as well, so that would be a higher percentage as you would expect but that's it exactly, we want to make sure that if you look at on a historical basis that this is not an everyday occurrence and of course the business is more susceptible to rapid declines in the velocity of that declines as opposed to the absolute cost of the underlying commodity.

Tucker Golden

Yes, it makes sense. And then with that framework, can you speak to just this shouldn't work both ways and should you benefit, when you have volatility in the other direction or maybe not and also can you provide any color as to what sort of benefit you might have recognized in first half of the year when you didn't have as dramatic increases, there was a decrease in these industries but there was a pretty substantial rise?

Mitch Lewis

Yes, that's a great question and this year in particular when we saw the rise was a big rise in the second quarter, have to tell you it's challenging for us to get our arms around the corner because that was in middle of the acquisition and the integration from a data standpoint.

The way that I kind of look at it is this, they say well the gross margin for the second quarter of this year was about 9.5% and then if you go back five quarters, it was 9.9%, 8.9%, 9.4%, 9.2%, 10%, so as you look backwards that 9.5 is clearly towards the higher end of the margin that we experienced for example through 2017. And I would say for sure, we got tailwinds during the second quarter that that helped us but obviously that kind of increased on the percentage basis with gross margin is nothing like the decline that we've experienced now in the third quarter.

Tucker Golden

Yes, okay, it makes sense. And now just trying to look at what I can see in the October in the season and commodities have been less volatile, are we back to normalize of September 30 or is this sort of a residual hangover effect that depletes into the fourth quarter?

Mitch Lewis

Yes, what I would encourage is public data, my thinking you can easily get from random lengths that gives you composite commodity, wood prices and if you jumped on that you would see basically from the end of our fiscal quarter through basically now, there's kind of another, there's a continued decline on the major composites in the 10% to 15% range.

What we have seen though is it certainly gives us some optimism is about two to three weeks ago, we saw some smaller European players exiting, we started hearing some large manufacturers talking about long maintenance shutdowns, curtailment and just last week the future has actually improved significantly.

And in this week it's been flat, so it's long winded to say post the quarter, it was still declining. And then generally we just have to continue to manage our inventories close, move out the higher cost product and so I would expect if we stabilize from here as I mentioned before, we should start seeing some return to normalcy in the first quarter.

I mean, I guess the other point, the one other point I would make which I think is important that Susan talked about is this whole I think of it as LCM but NRV now I guess is the appropriate accounting is that there was a little north of a $5 million hit that we took in the quarter that if we move that inventory out in the fourth quarter we would expect to realize that during the fourth quarter as well.

Susan O'Farrell

Absolutely, in an essence that $5 million lower cost or net realizable value is timing so it's pulling forward the decline in commodity prices for the first month in the fourth quarter and placing it in the third quarter?

Mitch Lewis

And really that the and if you think about at the public data that you would see that shows a decline in October actually might influence the fact that you have to take that NRV hit.

Susan O'Farrell

Yes.

Tucker Golden

Yes, that makes sense. Great, well I mean that's all. I have I think it's helpful and you enter lot of groups to try to simplify a complicated in the mix situation but I appreciate the deck to that I think showing the $75 million of discretionary cash flow and obvious certification that ever important when you have results that are necessarily as mass as they are for the time being and for the near term, so thanks for that and good luck.

Mitch Lewis

Thank you.

Susan O'Farrell

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Colin King, LEV Capital. Your line is open.

Colin King

Hey guys this Slide 14 does this reflects your views on working capital for this pro forma period and how do you think about that for 2019 and beyond.

Susan O'Farrell

Yes, so first of all we really did a very simple average of looking at the quarter and then extrapolating it by 4. So it's a simple way to think about it but as the price of inventories come down with the commodity markets, it's actually a favorable impact of cash on the revolver, so our focus is going to keep the inventory velocity on our products which then lowers the overall ABL balance along with the market pricing that has an impact on the ABL interest so that's the thing we're focused on but as the notes described on the page it's really a simple average just kind of put in context what we see as an illustrative way to look at this.

Mitch Lewis

Just calling qualitative way I mean we're we have opportunity we think as we look at the days of inventory that we have from a business perspective that will continue, will continue to work on go forward so you get the benefit, so 14 does not have any cash impact of changes in working capital and we do expect relative to 18 the commodity markets certainly appear to be that they may be less on average which would give some opportunity from a working capital standpoint as well as making sure we're managing the business well from working capital perspective

Colin King

Makes sense and on the cash taxes, that's something where maybe 2020 you would look at becoming full cash tax payer maybe earlier depending on some of the real estate transactions that you're thinking about that?

Susan O'Farrell

Well, so we don't give forward guidance on where we see that to be but you can think about how we see the business coming together and I think makes extrapolations there. Our NOLs have some limitations in the change of control but actually I mean it's very, it's got a long time frame on that so far and NOLs we have about $50 million we can use for real estate up until five years after the change of control which is another four years and then beyond that we still have from that five year time frame about $8.5 million a year we can use to offset ordinary income and then for another 13 years beyond that it's another $1.5 million so that's a nice amount of protection on the tax side.

Colin King

Got it, that's helpful. That's all I had. Thanks guys.

Mitch Lewis

Great, thanks.

Operator

There are no further questions. I will turn the call back to our presenters for closing remarks.

Mitch Lewis

Thank you, Beth. So we appreciate your time and your continued interest in BlueLinx, and we certainly look forward to sharing our progress with you during our next call. Have a great end of the week, weekend, and a good holiday season. Thank you.

Operator

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