Caroline Lowden, Director Finance Mitch Lewis - President and CEO Susan O'Farrell - Chief Financial Officer.

Tristan Thomas - Sidoti & Company Jim Fowler - JMP Securities.

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx Holdings’ Second Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period.

(Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, August 7th. Thank you. I would now like to introduce Caroline Lowden, Director of Finance with BlueLinx. Ms. Laurence, you may begin your conference..

Thank you, Amy and good morning everyone. Thank you for joining us for the BlueLinx second quarter 2014 earnings conference call. This call is being webcast on the company's website at bluelinxco.com. The earnings release and presentation slides for this call can be found in the Investor Relations section of the company's website.

This presentation includes statements about our expectations for future operational and financial performance as well as our credit agreement, liquidity position and capital structure that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are subject to a number of risks, uncertainties and assumptions that could cause our actual results to differ materially from those provided, including, but not limited to risks and uncertainties with respect to economic, governmental and technological factors outside of our control and changes in the supply and/or demand for products we distribute particularly as a result of conditions in the residential housing market.

These and other factors that could cause actual results to differ materially from forward-looking statements are discussed in greater detail in our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date of this presentation. We undertake no obligation to revise them in light of new information.

Finally, we undertake no obligation to review or confirm analyst's expectations or estimates that might be derived from this presentation. This presentation includes references to adjusted net income and adjusted EBITDA, which are non-GAAP financial measures within the meaning of the Securities and Exchange Commission's Regulation G.

Reconciliations of GAAP net income to adjusted net income and GAAP net income to adjusted EBITDA are included as an appendix and are posted on our website at bluelinxco.com. Our speakers this morning are Mitch Lewis, President and Chief Executive Officer; and Susan O'Farrell, Chief Financial Officer.

Mitch will begin the call this morning with comments on the current results and a review of the business, then Susan will review the financial statements before opening the call to your questions. With that, I'll turn it over to Mitch..

Thanks Caroline. Good morning. I wanted to walk you through a few of our recent activities as well as our performance in the second quarter before turning it over to Susan to dive into the financial highlights.

The second quarter was a solid quarter for BlueLinx with adjusted EBITDA of $10.6 million; this is an improvement of $14.1 million over last year. And that’s our best quarter of adjusted EBITDA in the last five years. We’re also pleased to announce net income for the quarter of $3.2 million.

These results continue the momentum we experienced in the first quarter and are a testament to the efforts of our associates who are executing our key initiatives as we work closely with our customers to drive our improving performance.

We believe our second quarter results bode well for the future, particularly when you consider that we did not have significant overall market improvement propelling our results. As we’ve discussed before, while multi-unit housing starts drive a proportion of our business, we’re much more reliant on single-family housing starts.

In fact, we recently reanalyzed the correlation between single family housing starts and our revenue over the last nine years and found them to be highly correlated, approximately 95%. While there certainly has not been robust growth in single family housing start so far in 2014, the first half of the year was up by about 1.2%.

Reaction has come out of the blocks in the third quarter relatively strong. Our customer base remains optimistic that there will be modest growth over the second half of 2014 and we have not seen any indicative trends that conflict with this view.

In the second quarter, single family housing starts in the United States were a little better and up by about 3.5% from 2013 levels while our same center revenue was down 6.9%. This bags the obvious question of why, what happened. Slide six indicates the primary culprit, the sales of our structural products.

Our structural product revenues were down 15.3% compared to 2013 levels. 11.2% of this decline was attributable to volume. While typically volume declines are not good news, in this case, we anticipated the year-over-year degradation.

As you may recall, in quarter two of 2013, we were chasing market share very low prices in many of our structural products and we elected not to replicate the strategy this year. The second major issue that impacted our top-line was market pricing degradation within some of our structural base product categories.

This resulted from a drop in the underlying cost of these products which we estimate reduced our net sales in the quarter by $12 million or approximately 4.4%. The really good news is that even with the sales decline, our adjusted EBITDA in the second quarter significantly improved from last year’s levels.

Our actual EBITDA was up $25.6 million but we believe the fairer comparison is our adjusted EBITDA which still improved by $14.1 million compared to our second quarter of 2013.

The certainly good momentum for the organizations to have EBITDA over $10 million for the quarter as well as positive net income and the fact that we achieved these results without significant tailwinds from the single family housing market certainly bodes well for the future.

But we still have a lot of opportunities as well as work to do to continue the recent improvement in our operating performance. There were a couple of main factors which drove our $14.1 million improvement in adjusted EBITDA in the second quarter.

Our gross margins rose in both of our two major product segments while our mix also improved towards an increasing blend of higher margin specialty products.

We are avoiding taking significant long term positions in our structural products which helps mitigate the risk of a pricing collapse like the one in 2013 that had a material impact on our business.

More importantly, we stopped chasing unprofitable business to drive volume and we’re moving towards an even more collaborative approach with our customers to add value while providing support to improve their performance as well. We also continue to realize the benefit of the significant fixed costs, we took out of the business last year.

As we discussed during our last two calls, we anticipated that the fixed costs we eliminated in 2013 would have a material positive impact on our performance this year and this certainly has been the case.

Same-center cost for the second quarter associated with fixed sales procurement and administrative expenses declined by about $4.8 million compared to the same quarter in 2013 for the first half of 2014 we've saved $8 million in SG&A costs.

This year-over-year favorable comparison will begin to decline in the third quarter as we began the significant cost cutting at the end of the second quarter in 2013. Slide eight, addresses a few key activities that are ongoing at BlueLinx. We remain focused on several key initiatives, we started earlier in the year.

We continue to make progress in our inventory process at BlueLinx. Our inventory value as of the end of the second quarter was $50.8 million less than at the same time last year. We will work to lower our days of inventory as we move forward, but not at the expense of our customers.

We are initiating now sales inventory and operational planning process that not only helps to minimize excess inventory, but also an even more importantly ensures we have sufficient inventory as needed to continue to provide great service to our customers. Our emphasis on improving our logistics and operations continues as well.

We're beginning to see traction in several key operation activities such as fleet optimization, fuel efficiency and maintenance expense. We are also investing in our fleet of tractors, which will have an immediate accretive impact to EBITDA as we replace antiquated high cost tractors with their modern equivalents.

While, we continue to closely monitor our overall cost structure, we also are increasing our focus on growth opportunities.

This includes taking a more local approach to our business to capitalize our markets and opportunities at a local level we will increase our emphasis on the multifamily market which currently represents only about 4% of our sales.

We are also targeting opportunities within the industrial markets that enabled BlueLinx to take advantage of our large footprint and economies of scale. This emphasis on growth necessitates an increased partnership with our supplier base and we will be working hard to continue to develop these relationships for our mutual benefit.

As we have discussed on previous calls, we are closely monitoring our liquidity at BlueLinx and we are pleased that we ended the quarter with $82 million in excess availability and we have been very active over the last few months in investigating opportunities to change our current debt structure, to provide even additional liquidity for the housing market recovery we anticipate in the years ahead.

We’ve talked in the past about significant excess capital we believe we have in our own real estate portfolio, you may recall from our last call that we mentioned that the 2006 appraisal of these properties was approximately $329 million, even after the sale of our Portland facility that number is still around $324 million and as of the end of the second quarter we had reduced the principal on our real estate debt portfolio to under $180 million which we believe creates a significant opportunity for financing.

While we recently received proposals to refinance our real estate in excess of our existing balance under favorable terms we elected to hold off on this option for now because the prepayment penalty for an early termination of our existing real estate today could be as much as $17 million. This penalty goes to zero on December 31, 2015.

We expect utilizing the excess fair market value of our real estate to enhance our liquidity even more over the next 12 to 18 months, it just doesn't makes sense to enter into this transaction right now. I'm very pleased to announce that we anticipate extending our existing 20 million tranche A loan with our existing lenders through June of 2015.

This extension in light of our improved performance and projected results should provide BlueLinx with plenty of liquidity over the next few quarters and enable the company to be opportunistic in taking advantage of several refinancing alternatives in the future.

So, in summary, we continue to make good progress on the initiatives we outlined earlier in the year. The second quarter reflects this effort as we had another solid quarter for the company.

As I have said previously, it's a good quarter, but we know we have a lot of work to do unleash the tremendous potential we have at Bluelinx and rest assured we are getting after it. With that said, I would like to turn it over to Susan to fill you in on the financials..

Thank you Mitch and good morning everyone. It's a pleasure to speak to you about our business and our second quarter results. For those of you following along I will begin with slide 10. Revenues for fiscal 2014 second quarter decreased 12.1% to 531.5 million from 604.6 million in fiscal 2013 second quarter.

On a same center basis, 2014 second quarter revenue decreased $39.4 million or 6.9% compared to fiscal quarter of 2013. The sales decline was mainly due to an impact on structural unit volumes as well as certain product price declines relative to year ago levels that Mitch walked you through.

Gross profit for the fiscal second quarter totaled $62 million, an increase of $6.8 million or 12.4% from $55.2 million in the year ago period. Gross profit on a same center basis for 2014 fiscal second quarter increased $9.9 million or 18.9% compared to the year ago period.

The gross margin rate for the 2014 fiscal second quarter improved to 11.7% compared to 9.1% for the same period a year ago. Overall 2014 fiscal second quarter gross margins were favorably impacted by the improved structural margins and the improved sales mix to the relatively higher margin specialty products.

Total operating expenses were $52.3 million compared to $70.7 million for the same period a year ago. We’re delivering on our restructuring expense reductions initiated last year and are tracking slightly ahead of our $13 million annualized cost reduction plan.

Overall, operating expenses were down 26.1% versus the same period last year driven largely by payroll and payroll related costs as well as travel entertainment and supply reductions. These were difficult changes for the organization to make last year but it helped us become more efficient and well prepared for the future.

On the bottom half of slide 10, you can see that GAAP net income was $3.2 million for the quarter that’s $0.04 per diluted share in Q2 as compared to a net loss of $22.3 million or $0.27 in Q2 a year ago.

Because we believe same center adjusted EBITDA is a good way to understand our business let me highlight a few adjustments as we walk from GAAP net income to adjusted EBITDA. Key items to note in the 2014 second quarter include a $5 million gain on the sale of our Portland, Oregon property.

Additionally we had a $2.8 million charge related to changes in executive leadership, of this approximately $1.5 million related to stock compensation expense and the remaining balance of $1.3 million was related to severance.

In the year ago quarter we had special items and operating expenses including $7.3 million in restructuring and severance costs. Additionally, losses in the year ago period from closed distribution centers were $1.6 million.

Looking at in total adjusted EBITDA for the 2014 fiscal second quarter improved to $10.6 million from an adjusted EBITDA loss of $3.5 million from the same period a year ago an improvement of $14.1 million.

Turning to cash flow on slide 11, during the quarter we used approximately $22 million in cash from operating activities, mainly reflecting increases in primary working capital components compared with a net cash used by operations of approximately $38 million second quarter 2013, we're pleased to see our seasonal tax usage improve in Q2, typically a very cash intensive quarter for our business.

On slide 12, our trailing 12 month cash cycle days are at 66 days; in dollars, we're are $53 million lower from the second quarter 2013. You may note the change in inventory days. As the penetration of our specialty sales has increased, there is an impact of almost one and half days on inventory.

As we’ve discussed on prior earnings calls, we plan to tightly manage our working capital items on a going basis. As always, we expect to consume cash in the first half of the year as our working capital increases toward the normal seasonal increases of our business as well as again the increased penetration in specialty products.

Moving to slide 13, at approximately $82 million in excess availability under our asset backed revolving credit facilities at the quarter end that’s approximately $49 million above our minimum requirement of our U.S. revolving credit facility as of July 5, 2014.

The combined debt, balance in our mortgage and revolving credit agreement was $463.4 million. Net debt at the fiscal second quarter 2014 was approximately $454.7 million and is down 7.3% compared to the second quarter last year. As Mitch alluded to, we're anticipating extending our $20 million tranche A loan through summer next year.

We certainly appreciate the strong support of our lender group as we anticipate getting those details to you in the next few weeks. Finally, I’d like to take a moment to thank Board, Mitch and the entire leadership team that has welcomed me into BlueLinx.

I’ve been on the job for almost three months now and I appreciate the dedication of all of our associates. I am honestly working with so many people who have deep industry experience. That are able to continue look at the business with the new eye.

We're questioning everything we do at BlueLinx and we expect to continue to improve our business and our results in the months ahead. That concludes my remarks. So, with that Annie, we’d like to open up the lines to any questions we might have..

(Operator Instructions). Your first question comes from Tristan Thomas..

Good morning.

How are you?.

Good morning..

Couple of questions. First, regarding what really your outlook for the second half of the year in single family housing. I know based on the Wells Fargo and HB index, really jumped 53 in July.

I mean, are you saying this confidence is going to actually translate to starts for the first time this year?.

Yes, generally relying on what we’re hearing from the customers, I think I alluded to this in my talk is that we feel that there will be modest improvement on the back half of the year. I’ve had some discussions with some senior executives of supplier as well as customers and even some homebuilders.

And I would say generally, it feels like the sentiment is a modest improvement in the back half of the year. I’m certainly not as optimistic as a lot of the analysts were expecting earlier in the year, but single, mid-single-digit kind of growth is I think what I would say generally what people are thinking about right now..

Okay, got you.

And then, could you comment on the mix between structural and specialty? I mean is this where we should, a little more what we should expect moving forward as you are not really chasing volume for the sake of chasing volume?.

The answer to that is, I mean is I would say closed. I mean if you think about the percentages, they’re within generally 5% to 6% from a mix standpoint. We are not strategically backing away from our structural products or trying to grow the business profitably everywhere, more we're touching our customer base.

So what's happened, I think as you look at the mix short-term is a function of the disparity from what happened last year. So, we’re strategically going to get after growing profitably both our strategic, our structural business and our specialty business..

Okay. Just kind of following question to that.

Can you maybe provide a little insight on how some of your own private label products are doing or how they did in the quarter?.

Yes, they continue to do well and are certainly profitable for the business and remain a strategy for the business to grow. So, I would say they continue to improve and it’s something that we will continue to emphasize going forward..

Okay.

Any new products to release there, anything planned?.

Nothing material that I would say; I mean obviously with all the products that we have we’re releasing new products all the time. But there is no new huge product code or category released that has taken place in the last quarter or so..

Okay. Jumping directions a little bit, you mentioned optimizing your fleet.

Could you maybe provide a little color on that? Is that something along the lines of some type of mobile research management program or something else?.

Yes.

So, one of the things that we did, and I am not sure that we talked about this in detail before, but in the first quarter we changed the operational organization to ensure that we had good alignment throughout the organization relating to A, bringing in experts for operational efficiency and making sure that we had good dialog and enhancements throughout the organization.

So, we now have completed that thing. So part of what we are doing is having a segregated look at efficiency, utilizing some of the investments that we’ve made in software for example to enhance that. So, we have a team, right now, I have to say we are just putting together with the full team now but we are already starting to see improvement to that.

So it’s a team based approach to look at basically the customer base that we have, the efficiency of the routes that we have and we continue to work to drive down those costs. .

Okay.

And final question because you didn't mention IT, maybe an update on some of the initiatives, some of the online kind of sales programs you have set up?.

Sure, Tristan this is Susan. And so as we look at it in our IT space, we've got some major initiatives going on, certainly are investing in our phone systems and upgrades. As you might imagine that’s the lifeblood of our business to make sure we are in constant connection with our customers.

And we are making solid progress in that with our deadlines still on track for the end of this year, kind of in full redundancy in our phone system. So, right now we are tracking well of that.

In addition, we've got our mobile order sales application that we're working to provide tools to our sales folks, so as they are with customers they have all the information they need at their fingertips.

And we're in pilot mode in that right now getting some really good preliminary feedback, but we're going to till the end of the months to see what we are in the that and see how we tweak that or fine that, before we continue to roll it out. So again preliminary feedback is a very favorable on that. So those are two things we are very excited about..

Okay, great. Good for me right now. Thanks..

Your next question comes from Jim Fowler..

Good morning Jim..

Good morning. Thank you for taking the question. I apologize I am going between a couple of calls. Could you just and I know you made these comments, but I'm just wondering if you might repeat your activities relative to debt refinancing and real estate and non-real estate. Thank you very much. .

Sure. So basically what I said is that we would have been very active looking at opportunities. And one of the obvious areas to pursue was the excess fair market value we believe we have on our real estate portfolio.

So, over the last months, we were looking at that and we’ve got to the point when we looked at what that value was and had an opportunity we believe to pull the trigger on that and thought was that the yield maintenance or prepayment penalty for doing that today just made no sense.

So, that’s still out there either to utilize with traditional kind of mortgage-based structure or to utilize security perhaps with some other kind of capital financing.

What we have and I think we announced today and certainly announcing in our discussions today that we have discussions with our existing FILO $20 million tranche group and our confident and are looking forward to cheering the details with you in the very near future about the extension of that $20 million through June of 2015.

So, we’ll continue to look at opportunities I mean we, as you know we feel pretty good about the way that we’re managing our liquidity.

We’re certainly looking forward and projecting the business out and we’re comfortable, we’re comfortable with the management team where we are and we know we have a lot of bullets in the gun to able to pull the trigger when we need to..

Got it. And just one clarification question.

I believe I took a note that you’re -- the prepayment penalty is currently estimated around $17 million, that’s zero at the end of 2015, correct?.

Correct. I would answer that a little differently and I would say that it could be as much as $17 million. So kind of the maximum that it could be $17 million and when we looked at the transaction well, I said that was a potential we decided just didn’t make sense.

So, to the extent that goes down, obviously we might rethink about when and how we want to refinance the real estate that's approach that we ultimately take..

And then the slide 13 comment on the appraised value of the properties, approximately $322 million that's excluding the Portland property, correct?.

Yeah, correct. We just wanted to do a apples to apples comparison for you as it lowers the outstanding mortgage balance so we just flowed that through for you..

Great. Thank you both very much. I appreciate it..

Okay..

There are no further questions at this time.

Presenters do you have any closing remarks?.

We just want to thank you for continue interest and support in the company. And we look forward to talking to you in a few months with some more positive news. Have a great day. Thank you..

Thank you for participating in today's teleconference. At this time you may all disconnect..