Natalie Poulos - IR Mitch Lewis - CEO Susan O'Farrell - CFO.

Alan Weber - Robotti & Company Mitchell Scott - Choice Equities.

Good morning, my name is Anita, and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx Third Quarter 2017 Investor Relations Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] I would now like to turn the call over to Natalie Poulos. You may begin..

Thank you, Anita, and good morning, everyone. We appreciate you joining us for our Third Quarter 2017 Earnings Conference Call. The earnings release and presentation slides for this call can be found in the Investor Relations section of the company's website at www.bluelinxco.com.

Joining us on the call today are Mitch Lewis, Chief Executive Officer; and Susan O'Farrell, Chief Financial Officer. I'll also remind you that this presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our future operations and financial performance.

These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those provided, including, but not limited to, those identified in our press release and discussed in our filings with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to revise them in light of new information. Today's presentation also includes references to non-GAAP financial measures. With that, I'll turn the call over to Mitch..

Thanks, Natalie, and good morning. As you might suspect, we've been a little busy at BlueLinx since our last call in August. We are pleased to report that the third quarter was another solid quarter for the company.

It continues our operational progress and represents our eighth consecutive quarter in which we enjoyed year-over-year improvement in our adjusted EBITDA. In addition, we also continued to improve our leverage position as we reduced our bank debt by about $50 million from a year-ago today.

Susan, will fill you in, on the third quarter financial details. But I wanted to spend a few minutes discussing some of these seminal activities that have taken place over the last 45 days.

First, as you know, last week, we were able to successfully close our secondary offerings in which Cerberus sold about 95% of their shares or 49% of the total shares of BlueLinx. Cerberus had held its controlling position in BlueLinx since 2004, and has consistently supported BlueLinx during this period.

We certainly appreciate their ownership and counsel through the years as well as the professional manner in which they monetized their equity position in the company.

We are confident that our new share ownership is an inflection point for BlueLinx, and the Cerberus' departure and its resulting increased public flow in our stock, sets the stage for a next chapter. We passionately believe that the shareholders who were able to just participate in this offering, have invested in the company at a great value.

Rest assured that this management team, and the entire BlueLinx organization, are committed to working hard to maximize our shareholders' return on their investment. Perhaps even more importantly, we were also able to finance the working capital needs of the company through a new 5-year ABL co-led by Wells Fargo and Bank of America.

We are pleased to have SunTrust, BMO and Citizens, join our lending group as well. The duration of this new ABL should enable the BlueLinx team to now focus on what we do best, running our business.

And the reduced interest rate, we were able to negotiate in connection with the new financing, should save BlueLinx approximately $2 million in cash interest each year, compared to the ABL facility and [indiscernible] we replaced.

During the execution of these 2 critical events, we were also able to maintain our focus on monetizing the company's real estate. We continue to believe that the value of our underlying real estate is important in not only providing back-stock protection for BlueLinx in the event of a downturn, but also in assessing the true leverage of the company.

On slide 5, we've attempted to illustrate this value that our real estate provides. As you can see on slide 5, we were 7.9x levered as of the end of the third quarter. However, what is critical to understand, is that this leverage ratio does not consider the underlying value of our owned real estate.

If we assume that as of the end of third quarter, we had entered into sale leaseback transactions to eliminate our $98 million mortgage debt, our leverage ratio drops to 6.1. If we further assume that we have fully monetized the remaining owned real estate for $250 million in pay-down debt, our leverage drops to approximately 2.3x.

And this pro forma leverage analysis assumes a conservative cap rate of 9% as well as a conservative allocation of 50% of the net proceeds to lease expense. Of course, these pro forma leverage ratios are predicated on the value of our real estate.

We remain confident that our owned real estate currently has sufficient market value to realize at least the $250 million we have assumed. We sold 13 properties over the last 1.5 year. And if you extrapolate the gains relative to net book value on those transactions, the value of our real estate exceeds $250 million.

Additionally, we are currently in discussions regarding sale leaseback transactions with respect to certain properties in which the potential sales pricing similarly extrapolate to a total real estate value in excess of $250 million.

We also have recently received appraisals on 5 properties that yielded an aggregate value of approximately $105 million, and believe these appraisals further support evaluation of our full real estate portfolio in excess of $250 million. Our real estate ownership makes the difference.

And our view is that to understand the true value of BlueLinx, you must simply also understand the significant value our owned real estate provides. Our intent is to quickly monetizing up real estate to pay down, at a minimum, $55 million under our existing mortgage.

We expect to close on these real estate transactions before the end of the first quarter 2018, which will be well ahead of the July 2018 mortgage payment obligation. As we now transition to a renewed focus on our sales growth at BlueLinx, we are pleased with the good progress we've made in the integration of our new sales leadership and investment.

We've brought in specific sales team members in areas of the business where we feel we have market share opportunities. In addition, over the last month, we've held 5 full days of sales growth strategy sessions with our local general managers to identify opportunities in our local markets.

As we have discussed previously, over the last couple of years, we have been very cautious about growing to top line of BlueLinx due to our historical liquidity issues and the inflexibility of our capital structure. We believe those days are behind us.

In these recent strategy sessions, which were dedicated solely to sales growth, with robust conversations about how we drive sales growth at BlueLinx in our local markets, we remained committed to the philosophy that the best opportunity for our continued success, including growing our market share, is to take a local approach to our markets and the customers and suppliers we serve.

I want to be clear, that I believe the investments we are making to focus on the top line of the company, will take some time to generate a meaningful return. Changing our culture to grow the business, while not losing sight of the emphasis we have instilled, to carefully manage both our working capital and our cost, must be thoughtfully implemented.

I anticipate that we will begin to see real market share improvement by the back half of 2018. We continue to enjoy modestly improving end markets in the third quarter, housing starts to improve by little over 1% from third quarter levels. Single-family housing starts fared somewhat better.

The good news is, as you can see on slide 6, that single-family housing starts still need to increase by approximately 30% to hit the median annual start level for the United States experienced over the last 40 years.

While the growth in single-family housing starts may not be linear, we expect the tailwinds from the housing market to generally continue over the next few years. I did want to mention that we still have no clear direction on the resolution of the Canadian softwood lumber tariff.

Wilbur Ross had previously announced that the determination would be finalized by November 14. While negotiations continue in an attempt to resolve the dispute prior to this date, it remains unclear whether these discussions will be successful.

In the interim, while certain species of lumber and areas of the country continue to hold their market pricing we have seen some decline in certain lumber and panel prices over the last few weeks.

We do not take major speculative positions in commodities at BlueLinx, and currently do not anticipate a significant deterioration in our structural margins in the fourth quarter compared to fourth quarter levels last year, due to pricing degradation. It's been a busy and productive quarter for BlueLinx.

We appreciate the support, we have received from our existing shareholders as well as the recent confidence demonstrated by our new shareholders during the secondary offering. We've made good progress at BlueLinx that has enabled us to reach this inflection point, but we still have a lot of work to do here.

Our team clearly understands the opportunities we have in front of us and that we are just getting started. I'd like to personally thank the entire BlueLinx team, who have worked tirelessly to enable BlueLinx to reach this point and put us in a position to excel in the markets in which we compete.

And now I'd like to turn it over to Susan, who will fill you in on our financial performance for the quarter..

our realization on the inventory exit from operational efficiency initiatives was better than anticipated last year. From a timing point of view, we made this reserve in the second quarter of 2016, and then were able to release some of that in the third quarter, which resulted in this favorable impact to our Q3 2016 margin rate of 70 basis points.

Additionally, in the third quarter of 2017, our Structural products also grew from 43% to 47% of our business, 10 to 23 basis point headwind on our overall gross margin rate this past quarter.

Our selling, general and administrative costs for the quarter were down by $2.3 million when compared to Q3 2017, which was, primarily, related to decreases in maintenance expenses, decreased third-party freight expense and payroll efficiencies. We are building a leaner BlueLinx.

Net income as reported for the quarter was $5.7 million, which did not include any real estate gains, compared to $15 million from the prior year third quarter, which included $13.9 million of real estate gains.

And our adjusted EBITDA was up $2.9 million for a total of $14 million for the quarter, again another highlight for BlueLinx as this is our best third quarter of adjusted EBITDA since 2007. And when excluding our operational efficiency initiatives, our same-center adjusted EBITDA results were up $3.3 million from this period a year ago.

Our operating working capital also improved by $7.2 million, in with increased sales from this period last year. Continue to work hard on improving our working capital properties, and are pleased with the progress we've made. We continue to stay focused on inventory in-stock position ensuring we have the just-in-time inventories our customers need.

We are pleased to share that we had $82.7 million in excess availability under our revolver, which is improved $13.8 million from Q3 2016, based on qualifying inventory and receivable levels.

With lower working capital balances on a revolver and a lower balance in our pending mortgage, we incurred less interest expense during the quarter at $435,000 from the prior year, and year-to-date, interest expense is $3.3 million lower from prior year level.

And now that we have successfully entered into new 5-year revolving credit facility, effective October 10, 2017, additional interest rate savings will be obtained over the life of the loan as compared to the previous credit facility.

We have improved economic terms including LIBOR margin improvement of 75 to 125 basis points lower depending on excess availability levels and other more favorable terms too. With a trailing 12-month average revolver balance of approximately $220 million, we expect interest savings of approximately $2 million per year.

Moving to page 10, we'll highlight our year-to-date performance. Net sales were $1.38 billion from first 9 months of the year, and on an adjusted same-center basis increased by $47.5 million or 3.6% from 2016. We generated a gross profit of $175.5 million with the gross margin rate of 12.7%, a 70 basis point increase from this period last year.

Additionally, same-center gross profit, which includes, excludes the effect of our operational efficiency initiatives, increased $5.9 million from prior year.

Our selling, general and administrative costs were down by $8.3 million from the 9 months ended 2016, which is, primarily, related to reductions in payroll and related costs, largely due to reduction in the workforce in connection with facility closures in the prior year, which also have resulted in decreased general maintenance and repair costs.

Net income is $9.5 million for the first 9 months ended 2017, an increase of $3.8 million compared to the prior year. Our diluted earnings per share of the year today, is $1.04, up $0.40 from the same period a year ago.

And we're also very pleased to report that adjusted EBITDA was $34.1 million year-to-date, an increase of $3.3 million from this time last year. And on a same-center basis, adjusted EBITDA year-to-date, increased $5 million, or 17%, from the first 9 months ended 2016.

On slide 11, we reported our third quarter adjusted same-center net sales increased $15.3 million from the prior year period. The quarter-over-quarter increase is largely led by Structural products, which continue to benefit from the strong commodity markets.

Equally as important is the revenue increase we've experienced year-to-date compared to the first 9 months in 2016 of $47.5 million. We're excited to see the emerging trend in our top line growth as we remain focused on sales excellence and garnering market share through our local market strategy.

On slide 12, our debt principal balance is down $49.8 million from the third quarter 2016. As mentioned earlier, this is significant progress on our deleveraging initiative.

Our mortgage principal is down over $44 million and our revolver balance is down $5.4 million from this time a year ago, mainly driven by our working capital efficiencies and successful execution against our real estate monetization plan. At the end of the quarter, we had approximately $164 million remaining in federal NOLs.

As Mitch shared with you, real estate monetization is the key initiative for us, and is offering efficient way for use these tax-deferred assets. We anticipate that we will be able to efficiently use these NOLs through ordinary income and real estate gains in the coming years.

In conclusion, I'd like to thank our BlueLinx team for their hard work and efforts. Your contribution certainly show in the outstanding results we are able to share today. And, of course, special thanks to our customers and suppliers for their continued partnership. And now, Banita, we'd like to open it up for any questions we may have at this time..

[Operator Instructions]. And there is a question from the line of Don Codes [ph] with Codes Investment..

You've done a beautiful job. I'm very impressed here. I mean you've really sort of taken control of this thing and brought the Home Depot mindset to this operation. Tell me....

Well, thank you, so much. We're really pleased with what we're doing here at BlueLinx..

Yes.

Can you give me some color in terms of what, you got 40 operations, if I'm not correct, where do you see better-than-expected growth in sales and where do you, and margins and where do you expect, where are you seeing less-than-expected growth and margin? So where are you sort of seeing how the flow of this is going? I mean, we're getting reports.

We're seeing that the surprise is coming on the upside as many of the companies we're looking at were saying, they're saying, Oh my goodness, things are really moving.

Tell us a little bit about how you're seeing your flow?.

So, Don, this is Mitch. Generally, what I would say is, this year has been a little softer in New England than we would have anticipated.

In general, as you would expect in the third quarter the hurricanes had a, I'd say, short-term negative impact in both the Texas markets and the Florida markets, but generally, we are under the assumption that that will ultimately inure to the benefit of the company over the longer term.

From our perspective, we're still moving down this path of local market strategy, and we've, we now have basic, all but a couple of our general managers local. We view that we have share gain opportunity across the country in this, in the 39 facilities that we operate in irrespective of what's going on with the end markets.

So the way that we look at it internally is that we need to grow on market share and that's really the best opportunity for the company irrespective of what is going on with the, with our end markets..

And, do you have a secret sauce or some kind of, are you able to sort of give your product away for free, but make the money on the fasteners or on the coffee? I mean, you've got a beautiful throughput. Now it's just the matter of getting a nice margin on something they take home with them..

Yes. What we've done is, we've emphasized variable contribution margin of all of our products and also return on working capital of all of our products, right, to ensure we're getting a great return on that.

We, in the exercise that we did last year, we actually evaluated our product categories at the local level, and the local management teams made decisions related to underperforming product categories.

But one of the areas where we view we have a lot of opportunity for share growth, is to use the wide assortment that we have in the company and do a lot better cross-selling in the organization. So there is not, from our perspective, everything is local.

Obviously, we take advantage on a consolidated basis of the economies of scale on the relationships that we have, but we're trying to empower and drive our performance at the local level. And there are unique opportunities, let's say, everywhere across the country..

Your next question is from the line of Alan Weber with Robotti & Company..

So, question regarding kind of, Mitch, that the sales initiatives or growth as you're looking out, did you say the bulk of what we'll see, will start in the second half of, did you say '19?.

No. If I did, I didn't mean to, it was 2018. So, we're just getting our legs under it. So I think our expectations are, particularly, with several of these initiatives that I alluded to in the strategy sessions we had that it will take a little bit of time and then we have some more investment to do in people and products.

And unfortunately, it's not something you just snap your fingers and get that volume. If you want to do it in the manner that continues what we've done, which is enhanced variable contribution margins and return on working capital..

And can you talk about just kind of what the major, like how you make that, how you plan to make those changes over the next year or like that?.

Sure. Well we started with leadership. We may have mentioned before that we brought in a gentleman by the name of John Tisera, who is fully responsible now for the sales efforts of the organization. He ran full P&L responsibility of about $2 billion business for HD Supply. So he's been on board, I want to say, 4 or 5 months.

So he's, I think he understands now enough of our business to be dangerous. We've invested in areas of the business that we feel like we have opportunity for growth, and where we think there are unique opportunities for us to take advantage of these, the product categories we have or the scale that we have from a distribution percentage.

And those would be areas that you would, where we have little share like multi-family, industrial areas. There are special product categories as well that we're investing in where we feel like we have a competitive advantage, and we're investing in that area as well.

And then finally, what I would say is, we've talked about the sales excellent team that we put together.

It's really, we've done that this year as well, really a top-notch team where we have experts at training and developing, and both our inside sales team as well as our outside sales team and an analytical team that help search for opportunities we have whether it's cross-selling, whether it's anomalies in the market.

So you kind of take all that together and then have specific, again, we've made a lot of changes at the local general manager position.

So we have a lot of new folks, certainly, a lot of new people in their markets now that are also learning their markets and products and so you kind of bake all that together, and that's, that will take a little bit of time for us to hit the results we're looking for..

[Operator Instructions] There is a question from Mitchell Scott with Choice Equities..

I just wanted to follow up on what you said on the NOLs, just for the sake of clarification. It sounds like you guys expect to be able to continue to use, what, I think you said, $164 million of federal NOLs.

Is that correct?.

Yes. Exactly. And any time we talk about tax, always there is a lot of nuances that go along with a change of control and limitations. But one of the most efficient ways to use it that works well with our strategy is that gain on sales from real estate.

And so as we've talked about delevering the business and monetizing that real estate, you might imagine we could use, all of that for the next 5 years on real estate alone.

But certainly, over and above that, we have ordinary income as well as the ways we can do the math is looking at some of the factors based on the equity price, the change of control as well as our asset gains which would give us another maybe $7 million, $7.5 million for the next 5 years, another $1.5 million shield for 14 years beyond that.

So we've got a lot of different ways to use it, but front and center is real estate..

Okay. Very helpful.

And then, last one is, just with the potential real estate sales, I mean is that something you guys think you would continue to press release on those and outlooks?.

Yes, I mean, to the extent they're material, we certainly would continue to do that..

[Operator Instructions] And there are no further questions.

Are there any additional remarks?.

Yes. Well, thanks, Anita. We certainly appreciate your continued interest in BlueLinx and we look forward to sharing our fourth quarter results with you in the months ahead. Thanks, and have a great day..

And this concludes today's Third Quarter 2017 Investor Relations Call. You may now disconnect..