BXC - NYSE

Ladies and gentlemen, thank you for standing by, and welcome to the BlueLinx Holdings Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode and today's call is being recorded. We will begin with opening remarks and introductions. At this time, I would like to turn the conference over to your host, Investor Relations Officer, Tom Morabito. Please go ahead.

Thank you, operator, and welcome to the BlueLinx second quarter 2024 earnings call. Joining me on today's call is Shyam Reddy, our President and Chief Executive Officer; and Andy Wamser, our Chief Financial Officer. At the end of today's prepared remarks, we will take questions. Our second quarter news release and Form 10-Q were issued yesterday after the close of the market along with our webcast presentation, and these items are available in the Investors section of our website, bluelinxco.com. We encourage you to follow along with the detailed information on the slides during the webcast. Today's discussion contains forward-looking statements. Actual results may differ significantly from those forward-looking statements due to various risks and uncertainties, including the risks described in our most recent SEC filings. Today's presentation includes certain non-GAAP and adjusted financial measures that we believe provide helpful contexts for investors evaluating our business. Reconciliations to the closest GAAP financial measures can be found in the appendix of our presentation. Now I'll turn it over to Shyam.

Thanks, Tom, and good morning, everyone. Our second quarter 2024 results demonstrated solid gross margins of approximately 19% in our Specialty Products business despite the impact of continued price deflation relative to prior year comps. Volume growth in key specialty product categories such as millwork, engineered wood products, and siding helped offset declining lumber prices and weaker structural volumes during the quarter. I am proud of my teammates for their hard work to deliver these results in spite of challenging market conditions. Before turning over to our second quarter results, I would like to note BlueLinx's 20th anniversary as a public company this year. While our origins date back to 1954 as a division of Georgia Pacific, we spent the last 20 years building the largest pure-play two-step building products distributor in the U.S. In so doing, we are playing a vital role in the building products supply chain while providing an outstanding place to work for all of our associates. In fact, nearly 400 of our roughly 2,000 employees have been with us for more than 20 years, which is a testament to their commitment to BlueLinx. Many of our suppliers and our customers have been with us during that time as well, and for that loyalty, we are sincerely grateful. Looking ahead, we have begun the initial work to modernize our business with new technology, with the first phase focused on re-architecting our data, launching an e-commerce solution, and implementing a world-class transportation management system. Subsequent phases will further enhance our operational and commercial capabilities. Our continued focus on modernizing the business with new technology will ultimately enable us to differentiate ourselves in the markets we serve so that we can accelerate our strategic profitable sales growth objectives. We remain focused on growing our key specialty product categories at a higher rate than our structural product business so that our product mix shifts over time. We also continue to execute successfully on our local and national market strategies as evidenced by our expansion of product lines with key national accounts, our expansion of branded product lines into new geographic markets, and launches of new product lines, just to name a few. We also continue to explore and evaluate M&A and Greenfield's opportunities to expand our geographic reach and to support our specialty product sales growth initiatives. Now, turning to our second quarter results, we generated net sales of $768 million and adjusted EBITDA of $34 million, 44.5% adjusted EBITDA margin. Adjusted net income was $15 million, or $1.68 per share. Specialty Products accounted for approximately 70% of net sales and about 85% of gross profits for the second quarter. Specialty product revenues declined 6% year-over-year due to continued price deflation when compared to the prior year. However, our average specialty product prices through the first half of the year generally remained at the same level. We expect to see a reduced year-over-year impact from pricing as we move into 2025. Now, as I mentioned earlier, we had solid volume growth in key specialty product categories such as millwork, engineered wood products, and siding. We also delivered solid gross margin performance of 19.3% in specialty products due to our continued focus on business and operational excellence. Structural product revenues declined 7% due to lower lumber pricing as well as lower lumber panel volumes. The lower lumber prices are now at levels we have not seen in a few years. Panel prices, although better than last year, experienced an especially meaningful decline as well. For example, OSB prices fell 31% over the course of the quarter. The contraction in lumber and panel prices put pressure on demand as customers kept their purchasing at minimal levels and on our gross margins, given the natural lag on inventory costs coming down. For the quarter, structural product margins came in at 7.9%. However, we are optimistic that pricing will stabilize and eventually improve as manufacturers adjust their supply and the oversupply of wood in the channel draws down. At the same time, we believe that lower interest rates in the future will help fuel a more far-reaching industry recovery that is expected to create higher demand for structural products. On a positive note, and despite market challenges for structural products, our days of sales of inventory or DSI for lumber and panels remained consistent throughout the quarter due to our strategic management of structural product inventory. Lastly, on the quarter, our financial position remained strong and our significant liquidity leaves us well-positioned to achieve our vision and execute on our growth strategy, as well as to maintain the flexibility to return capital to shareholders. During the second quarter, we repurchased $15 million in BlueLinx stock, bringing the total amount repurchased to over $120 million since the beginning of 2022, once again demonstrating our commitment to returning capital to shareholders. Now, turning to our perspective on the broader housing and building products market. Earlier this year, industry sources indicated a renewed sense of optimism for the overall market, especially for the second half of 2024. More recently, however, due to continued headwinds resulting from the Federal Reserve's positioning regarding rate cuts, low existing home turnover, and home affordability issues, just to name a few, any sort of significant rebound now appears to be pushed out into 2025. Mortgage rates are currently around 7% and although they are lower than the 8% peak last year, they are still well above the 20-year average and back to the levels last seen in the fall of 2023. More importantly, they haven't stabilized, which is critical to accelerating repair and remodel activity and new housing starts, especially for the private builders. Also, many homeowners are in low-interest-rate mortgages, so although we expect interest rate cuts to initially jumpstart the housing recovery, we believe that sustained reductions in interest rates over time are necessary to continue the recovery. Now, the U.S. housing market remains volatile, as reflected by June total housing starts coming in at an adjusted annual rate of $1.35 million, up 3% for May but still down 4.4% year-over-year. Seasonally adjusted single-family housing starts were at their lowest level since October 2023. Large multi-family starts improved month-to-month, but were still down 23% year-over-year. In addition, after five months of sequential improvement, builders' confidence flattened out in April at 51 and dropped to 45 in May. It then dropped to 43 in June and 42 in July. All of these drops reflect negative broad-based builder sentiment tied to anticipated building activity, which evidenced the volatile and uncertain market conditions we're currently in. Looking at the components, present sales condition was 47, down from 62 last July. Expected sales in the next six months was 48, down from 59 last July, and traffic of prospective buyers was 27, down from 40 last July. Repair and remodel spending continues to be lower than the elevated levels of 2022 and 2023, years during which pull forward and expansive R&R occurred due to pandemic-related conditions driving more time in homes. Also, as interest rate increase impacts began accelerating in 2023, existing home sales sank to their lowest levels in 30 years, a phenomenon that has continued into 2024. As a result, a significant amount of repair and remodel activity that occurs when families sell their homes and buy new homes isn't happening due to current anemic sales velocity dynamics. Also, as we have noted before, we believe that most of the single-family housing starts are being driven by the large public builders because they can use their size, their scale, and their balance sheet to buy down mortgage rates, offer more attractive deals to consumers and buy directly from manufacturers to support their production schedules. Two-step distributors like BlueLinx, however, tend to correlate more closely with smaller and custom homebuilder activity and therefore do not participate as much in the large production builder market. We expect the single-family start trend to continue for the remainder of 2024. Although the near-term outlook remains uncertain and muted, we certainly believe in the long-term prospects of the housing and building products sector, which drives our growth strategy. The substantial shortage of homes supported demographic shifts, aged housing stock, necessary repair and remodel activity, and high levels of home equity should continue to benefit the building products industry and BlueLinx in the years to come as interest rates and home prices come down. Now, I'll turn it over to Andy who will provide more details on our financial results and our capital structure.

Thanks, Shyam, and good morning, everyone. Let's first go through the consolidated highlights for the quarter. Overall, our Specialty Products business delivered strong gross margins despite the impact of price deflation. However, structural product margins were negatively impacted by contracting lumber and panel prices in the quarter, as well as challenges in the housing and building products industry affecting demand. Net sales were $768 million, down 6% year-over-year. Total gross profit was $122 million and gross margin was 15.9%, down 70 basis points from the prior period. As we noted in our last call, first quarter 2024 results for specialty products reflected an estimated net benefit for import duty-related matters incurred in prior periods. During the second quarter of 2024, the estimate was updated, resulting in an additional benefit of $2.7 million. We currently do not expect further material changes and estimates for future periods. More details on the matters are available in our 10-Q. SG&A was $89 million, up $1 million from last year's second quarter. The increase was mainly due to higher technology expenses and legal expenses associated with the duty-related matters, partially offset by lower logistics costs and share-based compensation expense. Net income was $14 million, or $1.65 per share and adjusted net income was $15 million, or $1.68 per share. Tax expense for the second quarter was $4.7 million, or 25%. For the third quarter of 2024, we anticipate our tax rate to be in the range of 24% to 28%. Adjusted EBITDA was $34 million, or 4.5% of net sales and includes the favorable duty-related matters. Not including these matters, adjusted EBITDA would have been $32 million, or 4.1% of net sales. Turning now to second quarter results for specialty products. Net sales were $539 million, down 6% year-over-year. This decline was driven by price deflation across specialty products. As Shyam mentioned, given current market conditions, we expect to see a reduced year-over-year impact from pricing as we move into 2025. Gross profit from specialty product sales was $104 million, down 4% year-over-year. Specialty gross margin was 19.3%, up 20 basis points from last year, primarily due to the duty-related item. Not including this benefit, specialty gross margins were still solid at 18.9% in the second quarter. Through the first four weeks of Q3, specialty products' gross margin was in the range of 18% to 19%, with sequential daily sales volumes slightly lower when compared to the second quarter of 2024 and higher than the equivalent period last year. Now moving on to structural products, net sales were $229 million, down 7% compared to the prior year period. This decrease was primarily due to lower lumber pricing as well as lower lumber and panel volumes when compared to last year's levels. Gross profit from structural products was $18 million, a decrease of 33% year-over-year, and structural gross margin was 7.9%, down from 11% in the same period last year. In the second quarter of 2024, average lumber prices were about $383 per thousand board feet and panel prices were about $599 per thousand square feet, a 6% decrease and nearly a 13% increase, respectively, compared to the averages in the second quarter of last year. Sequentially, comparing the second quarter of 2024 with the first quarter, lumber prices declined 5% and panels were down nearly 3%. Through the first four weeks of Q3, structural products' gross margin was in the range of 8% to 9%, with daily sales volumes improving from the second quarter. Given the supply-demand dynamics in structural products, we would expect margins to be pressured through the end of the year. Looking now at our balance sheet. Our liquidity remains excellent due to the strong execution of our strategic initiatives and effective management of working capital. At the end of the quarter, cash on hand was $491 million, an increase of $10 million from Q1, largely due to normal seasonal patterns in working capital. When considering our cash on hand and undrawn revolver capacity of approximately $346 million, available liquidity was $838 million at the end of the quarter. Total debt, excluding our real property financing leases, was $348 million and net debt was a negative $143 million. Our net leverage ratio was a negative 0.9 times given our positive net cash position and we have no material outstanding debt maturities until 2029. Our balance sheet and liquidity remains strong and when combined with our solid EBITDA generation, we are well-positioned to support our strategic initiatives, including our digital transformation efforts. These include investments in our highest return opportunities such as organic and inorganic growth initiatives and opportunistic share repurchases. Now moving on to working capital and free cash flow. During the second quarter, we generated operating cash flow of $36 million and free cash flow of $29 million, primarily driven by net income and improved working capital. Turning now to capital allocation. During the quarter, we spent $6.5 million in CapEx, primarily to improve our distribution facilities and our fleet. We also entered into finance leases for $3 million for fleet upgrades as well. For 2024, we expect capital investments to be approximately $40 million, focusing on facility improvements, further upgrades to our fleet, and the technology improvements previously discussed. As a reminder, our digital transformation will also have at least a $5 million impact on operating expenses this year related to software licenses, as well as increased headcount associated with this initiative. As Shyam mentioned, during the second quarter, we repurchased $15 million of stock and we had $76 million remaining at quarter end on our current repurchase authorization. We are committed to our share repurchase efforts and plan to remain opportunistic in the market. Our guiding principles for capital allocation remain consistent. We intend to maintain a strong balance sheet, which enables us to invest in our business through economic cycles, pursue a disciplined M&A strategy, and expand our geographic footprint, as well as return capital to shareholders. We also plan to maintain a long-term net leverage of 2 times or less. Overall, we are pleased with our specialty product results despite continued deflation, which were able to offset some industry-related challenges in structural products within an uncertain housing environment. Our strong balance sheet and our liquidity positions us well to execute on our strategy and continue to opportunistically return capital to shareholders. Operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from the line of Jeffrey Stevenson with Loop Capital. Your line is open.

Hi. Thanks for taking my questions today. Could you provide any more color on the cadence for specialty products' volume growth as we move through the second quarter? In particular, did you see any volume pickup in June as weather became more favorable? And then also just wanted to touch on what's driving the sequential volume improvement at the start of the third quarter as well.

Sure. So when we think about the volumes, I'd say on a sequential basis, specialty is down probably low-single-digits, but we're seeing really good volumes on structural, so - and the structural volumes are up, I'd say, double digits, I would say, as we start the quarter. So the dynamic, at least as we think about volumes in Q3 is a little bit softer in specialty and certainly stronger on the structural.

Yes. And I would just add that the seasonality of the business contributes to the volume increases. If you recall, back in Q1, we had a very slow start to the year. We started to see some pickup and some lag, and then it picked up in Q2, and then we're seeing some continuation through the early days of Q3.

Got it. No, that's helpful. And then what was specialty products pricing in the second quarter? And how should we think about the cadence of segment year-over-year price deflation as we move through the back half? Could segment pricing get closer to flat by the fourth quarter or do you think year-over-year declines will spill in the early next year?

Yes. I mean - so we think about the, just say specialty sort of just gross profit, it was minus 6% in the quarter, so volumes were up single digits, so that would sort of imply that pricing was, I'd say, still high-single - high-to-mid-single-digit in terms of price deflation. So we would expect that deflation. In Shyam's comments and my comments, we mentioned that we'd expect to see improvement as we move into '25, but I'd still expect negative specialty pricing comps as we go into Q3 and Q4 as well.

Yes. So if you think about it, it's a simple supply-demand problem, right? We've got softness in the market. As I mentioned earlier, when we talked about builder sentiment, builder sentiment has had sequential drops throughout the quarter and we haven't seen any indication that will necessarily improve in a meaningful way. So I would expect deflation to generally be consistent and carry through until the early days of 2025.

Okay, no, that's helpful. And then just lastly, on the M&A pipeline for specialty bolt-on acquisitions, any update there and any progress on the new Greenfield initiatives as well?

Yes, so from an M&A standpoint, we have a robust pipeline of targets that we are actively talking to and discussions with or otherwise nurturing, and as I've said before, we're always looking for - we're specifically focused on opportunities that can help us - help support the strategy from a specialty, sales growth, geographic expansion, et cetera. And until we have a meeting over the minds as it relates to valuation, which I think will become more and more the case the further removed we are from pandemic years, the more likely there will be an opportunity to announce another deal. As it relates to - but it is part of our investment thesis in terms of growing the business and will be an incredibly important prong of the three-prong strategy. Moving on to the third prong, which is greenfields, we have a number of markets where we are - that we are actively exploring first and foremost with real estate evaluations, and in some cases, we have active real estate lease negotiations underway. So more to come in the future, but it is an important priority of the company and will definitely be - will be part of the strategy over the coming years as we look to grow net sales and volumes in the consolidated business.

Great to hear. Thank you.

And your next question comes from the line of Greg Palm with Craig-Hallum Capital Group. Your line is open.

Yes, thanks. Good morning, guys. I know you talked about sort of the - maybe the more the recovery shifting from second half to calendar '25, but just given what's happened to rates in the last few months and really last few weeks, how are those conversations recently progressing with customers in terms - I mean, are you seeing any green shoots? Are you seeing maybe better visibility into sort of that recovery happening? I'm just curious to get your thoughts.

Yes, so I would say that there's general agreement that the remainder of this year will kind of be soft, with '25 becoming the first year of meaningful recovery. But at the same time, we all recognize that an initial rate cut is good to jumpstart the housing recovery, but it will take subsequent rate cuts to quite frankly season the recovery and address the lock-in rates that we - the lock-in effect that we see from low interest rates or 30-year mortgage rates that many people have. Of course, as the interest rates come down, the home equity or the HELOC rates come down, which then will be a positive - will have a positive impact of repair and remodel activity. But the point is, between the lock-in effect, affordability issues, and other drags, if you will, you need to see not only the first that we were all expecting to happen in September, but who knows, and then subsequent rate cuts in 2025 that I think will, quite frankly, accelerate the housing recovery and kick off a multi-year cycle. But generally, from a customer standpoint, we're all in the same boat. There's a view that the remainder of the year will be a continuation of what we're seeing now with seasonality taking effect in Q4 and then things really starting to take off in '25.

Yes, that's helpful. And do you envision that recovery happening initially better within R&R or your new home construction customers, which I know are a little bit sort of different than maybe the publicly traded production builders that we all know about?

The third-party data - I mean, the third-party providers would suggest that the repair and remodel market will be kind of flat to a little bit up next year, and then, of course, single-family housing starts, we're all seeing that same data as well. But at the same time, it's - so that's all I have to go on. But intuitively speaking, if you see the rates rapidly come down and your cost of remodeling coming down as a result, it's possible that you might see some pull forward there. But I think it's just going to take time for it to all really start kind of seasoning. So I'm not entirely sure what's going to come first, Greg, but that seems to be an easier pill to swallow than an expensive new construction.

And Greg, this is Andy, I'd say just one thing to add, as Shyam mentioned, maybe R&R could be relatively muted, maybe next year, maybe it's up low-single-digits, but single-family could be up mid, and then I think the big change that you're going to see next year, I think, which everyone would agree on, is that the multi-family should see a big improvement given the material drop off that we've had this year. So, we think '25 will certainly be a better year.

Yes, I do - And Greg, one last point on the repair remodel that could be a difference next year versus, let's say, this year is with the HELOC rates coming down. People might be more willing to do larger remodel projects than they were this year because up until now, you might do a kitchen, but you're just going to do your cabinet, and then you'll do your countertops next year, and so on. But next year folks may actually take on the bigger project if the rates come down.

Yes, okay. And - I mean, just in light of this sort of macro discussion, does this - and mostly, as you know, as a result of hopefully a looming recovery, I mean, does it change the timeline in terms of how aggressive you want to be in terms of, a, either implementing some of this technology, the digital initiative, and also the Greenfield activity, does that change your timeline in terms of what you want to accomplish before the recovery takes hold?

It doesn't change the timeline now per se, but I will say our timeline is based on the investment strategy and the cadence for it are such that we want to put ourselves in a position to participate in the ultimate cycle when it does begin because we do think it's a multi-year journey, right? And so at the end of the day, it's positioning ourselves for above market growth when the time comes. As it relates to the digital transformation journey, we're in the early stages, and as we continue to progress to the extent, there are opportunities to accelerate that because we're moving faster than we would have expected, then obviously we would, we would take that into account. But right now we're in the early stages, so we haven't really done enough yet for me to say one way or the other. But we are on schedule, and as it relates to the Greenfield strategy, we're also on schedule there. And look, after we do one, two, three, then I can then look, in an ideal world, I'd love to accelerate, but until we get started, it's hard to say definitively.

Yes, okay, fair enough. I will leave it there. Thanks.

Thanks, Greg.

And your next question comes from the line of Reuben Garner with The Benchmark Company. Your line is open.

Thanks. Good morning, everyone.

Good morning, Reuben.

Just one question. I had some technical difficulties, so I don't want to get repetitive. I was wondering if you could kind of update us on what your - how you're thinking about the balance between M&A opportunities, share repurchases, and the greenfield side. What kind of the economics look like relative to each other for each and do you have any kind of fix yet on what the kind of greenfield economics look like in terms of the cost to - the cost to expand, what the return profile is, and kind of the payback period?

Yes. So we're not yet in a position to provide specific details, although we expect to as we get the machine going. But I'll tell you from - as I'm thinking about M&A versus Greenfield and the characteristics of the investments made, that's not an either or right. There's not a trade-off. I mean, there are Greenfield opportunities we are actively pursuing in markets that have different drivers relative to potentially - to M&A - specifically M&A opportunities that we're exploring. And then I'll turn it over to Andy to talk about it from a capital allocation standpoint, how we think about that in the context of, let's say, share repurchases versus M&A and other investments we made.

Sure. So, I mean, at the end of the day, we always want to invest in the highest returning opportunities. But that being said, let's say, on the share repurchase, you saw us more active, certainly in the second quarter than we were in the first quarter. And as we've talked about previously, if you think about the last - the original first $100 million authorization, that took about seven quarters to execute from beginning to end. I'm not saying that that's going to be the same for this, but for this program that we're in the middle of, but I think that's a reasonable sort of, I would say, guidelines, if you will. We'll continue to be opportunistic on the share repurchase front. We have a very strong balance sheet where I think, frankly, we can afford, frankly, Greenfields M&A and share repurchase, and we'll continue to be balanced in terms of how we allocate.

One last point, just to add on the Greenfield, so just as a reminder to everyone, the CapEx requirements for BlueLinx, and in particular two-step distribution, are relatively low, especially when you compare to manufacturing and other types of businesses. So from a Greenfield standpoint, the initial CapEx investments, the working capital investments, et cetera, are relatively light. You're generally - you've got to find the real estate, and even there you have some flexibility, you invest within the initial staffing requirements, which you ultimately grow into overtime, and then the working capital and equipment, et cetera, are relatively reasonable and you can mix and match between locations as well. So we feel pretty good about the investment thesis for greenfield, which is why it's so core to our strategy.

Okay. And I said I only have one, but I'm going to sneak in just one clarification question, and if you answered this already, I apologize, but I think you said that daily sales volumes were up sequentially, down in specialty, up in structural, that's kind of counter to what is normal, right? Like the third quarter is typically lower than the second on a volume perspective. It's kind of been difficult to gauge that the last handful of years with the commodity and other pricing moving so much. But I just wanted to kind of ask that question. Thanks.

That not necessarily, I mean, the second and third quarters are obviously the seasonal parts of the business, right, with first and fourth, if you throw out the proceeding years. But if you go back to historical norms, the second and third quarter, and typically the busy part of the - you've got people taking holiday, of course, and that sometimes leads to slowdowns in our industry, hunting season also sometimes has an impact. But at the end of the day, the season will continue, quite frankly, up through the early part of November, and then after that, that's when you start having, whether it's the holiday period or whether starting to have an impact in certain markets more so than others.

Great. Thanks, guys. Good luck going forward.

Great, thank you.

Your next question comes from the line of Kurt Yinger with D.A. Davidson. Your line is open.

Great, thanks, and good morning, everyone. Not to beat a dead horse, but in terms of the commentary on kind of daily sales volume, Andy, in the prepared remarks, I thought I might have heard you say that volume, yes, down sequentially, Specialty was kind of up on a year-over-year basis, is that right, or did I mishear?

I mean, for the second quarter - if we kind of think about the second quarter, volumes were up, I'll call it, low-single-digits, but there's still the pricing sort of overhang. When you think about, for this quarter, but for Q3, in terms of what we're seeing, yes, it's up a little bit. Materialist specialty is up, but sequentially it's down low-single-digits. Sorry for the comparison or confusion between year-over-year and sequential.

Okay, got it. And you talked about the conversations you're having with customers and generally that people seem like they've kind of written off the back half of the year, we know where builder confidence is, I guess, could you talk to what that means in terms of what you're seeing from an overall kind of competitive environment and how that kind of ties into what you might expect to see in terms of specialty margins going forward?

Yes. So let me start. Of course, you're going to see the market be more competitive, although, at the same time, I would point out that our efforts around certain business and operational initiatives that we have underway allow us to compete more effectively. So whether it be with respect to our centers of pricing and procurement excellence, or some of the work we're doing operationally to help support better than what they would otherwise be EBITDA margins, and then on the business excellence side, doing things that I think makes sense for the business to support solid gross margins as well. So I feel like we have a good - and especially as we think about our inventory management, I've highlighted that before in the past, we're very strategic about managing our - especially our structural inventory, but even with respect to our specialty inventory, we've got aggressive turn day targets that we have all teams focused on throughout the year, with people not taking their eye off the ball. So that's how we generally deal with what's otherwise a very competitive market. At the same time, as we think about growth, we talked about some highlights as it relates to millwork and EWP, but we've been very intentional about working with our existing suppliers and expanding product lines with them, which allows us to pick up more share or expanding our private-label. We just launched a CEDAR program under our private-label brand that is actually starting to bear fruit. We're expanding into new markets with LP and Huber and Allura. And so as I think about both our private-label as well as our branded products, we're being very intentional about either expanding geographically, expanding the product lines within a specific supplier, and also with intentional efforts in multi-family international accounts like the home centers, even deepening or expanding our product mix within those channels in order to either gain share or otherwise grow the business and improve in what's otherwise a tough, challenging, soft or declining markets year-over-year, so that's how we're managing through it.

Yes, maybe just to add on this on the margin point. I mean, we still think specialty margins are going to hold in that 18% to 19%, that's consistent with where we've been. So we feel confident in that. There was a modest, I'd say, downshift, I'd say in the structural margins, and that's because of the deterioration you've seen in just, let's say, lumber and panel pricing that we've had over the last six weeks. Our guide there is 8% to 9% and I think the expectation is, while we have - we're really fishing our inventory, we're low 20-day supply on the structural side, so we don't have maybe the same off-sized positions that others would have. But that being said, that market, it feels heavy from a supply, and I think that's due to the expectations that a lot of the manufacturers are expecting a busier season this year, and there's this, I think, a lot of inventory in the channel, and that's why we're just being a little bit more prudent with where we think structural margins will be for the balance of the year. We do think they will improve in '25 as that supply-demand dynamic becomes more, say, at a more, I guess, reasonable balance. But we do think it's going to be a little bit structural, be a little bit pressured for the balance of the year.

Well, also during the pandemic, there was so much demand, a lot of mills were put under construction, they came online in anticipation of continuation or the housing recovery starting early, and so that has also contributed to more wood being in the channel, which has obviously made the environment more competitive and depressed pricing.

Right. Okay, that all makes sense. And I mean, to your point, it feels like you've kind of proven out that high-teens specialty margins are kind of sustainable or can persist even in kind of this softer demand backdrop with more competitive activity. I guess if we look forward 18 months, and you were to kind of envision a blue sky scenario in terms of how those could inflect in a positive way, outside of volume, what do you think could potentially be some drivers of improvement?

Well, obviously - are you just talking about, I mean, if you're talking about margins in particular, continuing to be focused on value-added services and also improving on the delivery proposition whether it be continuous next-day delivery, job site delivery, obviously expanding within our cutting capabilities. So, for example, we have some markets where we've added saws to support local market dynamics and as a result have picked up share. In others, we've expanded our capabilities within an existing distribution site, such as adding new buildings, which has given us the ability to expand within a particular specialty product category and drive, when I say expand, adding a new building, covered space, and basically generating more - putting the land to better use, if you will, to generate more gross profit per new square foot or overall square foot, which will allow us to grow our specialty sales. So as a result of all that, we continue to shift the mix, and over time, as we continue to shift the mix, a greater percentage of our gross profit will come from those specialty sales, and then with the value-added services and the better value proposition around the delivery and other capabilities, the gross margin should hang in there. So that's how we compete.

Got it. Okay, thank you. And just lastly, you talked about the commodity side maybe being a little bit heavy from kind of an inventory perspective, are there any specialty product categories where you see inventory levels either in your own system or at the customer level that you feel may be a little bit elevated? And can you just talk to, I guess, the overall appetite from customers to kind of put inventory on the ground here heading into the fall?

Yes, Kurt, just to be clear on one point, we don't have - we have really efficient inventory right now in structural, so we're low-mid-20 day supply. I think in general, the channel is heavy, so I'm not going to - so when we look at specialty, I would say, when we look at our key categories, we don't see that there's heavy inventory in the system, so we don't see any sort of channel issues where we think that margin could be pressured on the specialty side. I was talking about the volume checks is more on the structural side in terms of just lumber and panels.

But to your point, or maybe this isn't exactly what you were asking, but we have, again, with the softness in the market and the temp of demand, we have seen less buildup in inventory with our customers than we would have otherwise expected, but when you combine that with how we manage our inventory and how we are very, very close to it at the highest levels, but even throughout the business, I think that's been one of our, quite frankly, our differentiators around managing or ensuring solid margins, if you will. And then, of course, in the declining market, minimizing the downside impact.

Right. Okay, well, appreciate all the color, guys. Good luck here in Q3.

Thanks, Kurt.

And there are no further questions at this time. I will now turn the call back over to Tom Morabito.

Thanks, Kayla. Thank you again for joining us today. And we look forward to speaking with you in late October as we share our third quarter 2024 results.