Good morning. My name is Mary, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2019 Earnings Call. [Operator instructions] I'll now turn the call over to Mary Moll, Director of Investor Relations. Please go ahead..

Thank you, Mary, and good morning, everyone. We appreciate you joining us for the 2019 first-quarter earnings conference call. Our earnings release and the presentation materials that we will be referring to on this call can be found in the Investors section of our 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 remind you that this presentation includes forward-looking statements, which include statements about our future operations and financial performance.

These statements are subject to risks and uncertainties, including those risks and uncertainties identified in our press release and discussed in our filings with the Securities and Exchange Commission. These risks and uncertainties could cause our actual results to differ materially from the forward-looking statements.

Forward-looking statements speak only as of the date of this presentation, and we disclaim any 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..

macroeconomic factors and transaction-related dissynergies. Instability in the macro environment certainly impacted our revenue in the first quarter. In the past few quarters, we have discussed the unique collapse in commodity panel and lumber prices in 2018.

Today, these commodity prices are substantially below first-quarter 2018 levels and remain below the five-year historical averages. We estimate that the deflationary pricing in our wood-based commodity products alone accounted for approximately 30% of the year-over-year quarterly decline in our revenue.

This comparative market pricing decline significantly impacted our revenue for the first quarter, and we anticipate that it will continue to impact us in the second quarter as well, which Susan will discuss in more detail.

The second macroeconomic factor impacting our sales for the quarter was the performance of single-family housing starts, potentially accounting for approximately 25% of the quarterly sales decline when you consider the high historical correlation between our sales volume and single-family housing starts.

I suspect most of you are aware of the current state of housing. As the management team of a two-step distributor, we tend to take a longer-term view of the overall market. Over the first quarter, housing starts were down 10%, compared to 2018 levels while single-family housing starts performed modestly better, but we're still down 5%.

This included a drop of approximately 10% in single-family housing starts in March, which typically has higher daily selling averages during the quarter than January and February due to improved weather patterns. We remain optimistic for the longer-term prospects for homebuilding in the United States.

We were pleased to see the builder confidence index turn upward during the period. Builder confidence remains favorable according to the latest National Association of Home Builders Wells Fargo Housing Market Index. The April index reading was 63, in March it was 62. At 51 or higher, the general outlook is positive.

We believe that the builder's confidence bodes well for recovery in second half of 2019, and our customers tell us that they generally share this confidence as well. While macroeconomic factors likely accounted for more than half our sales change, there are also factors that have impacted sales volume in the short term that are specific to BlueLinx.

We have previously discussed our decision to not include any sales synergies in our thesis for the Cedar Creek acquisition. Our rationale was that in bringing the companies together, they are likely to be dislocations with certain products and markets that could have a short-term impact on the gains we ultimately believe we'll realize.

While we remain confident that there will be a sales benefit to the enhanced geographic size and presence of BlueLinx, we are seeing our volumes in the short term impacted by two contributing factors.

In light of challenging negotiations, we were not surprised when the legacy Cedar Creek siding brand began to move their business from BlueLinx in the first quarter. While this move certainly has had an impact, it's important to note that no one supplier provided any specialty product category that exceeded 7% of our net sales in 2018.

We believe this is a short-term disruption, and we will continue to solidify and expand existing relationships with superior manufacturers with strong siding and trim brands, such as Allura, Royal, Ply Gem, and MiraTEC to help mitigate this loss.

In addition, we believe there are opportunities to take advantage of new distribution relationships with excellent manufacturers. To that end, we recently signed a distribution agreement with James Hardie for siding products in six markets throughout the Midwest.

Our goal in the coming quarters and years is to continue to partner with exceptional manufacturers, serve as a strong distributor for their products, and help them grow their market share while expanding these products into new markets.

We remain confident that our geographic scale and platform with approximately 700 customer-facing associates will provide the best wholesale distribution option to drive our suppliers' products in the market. The final factor impacting our volume in the first quarter was related to potential short-term market share loss and overlapping markets.

As we analyzed our sales decline during the first quarter, it became apparent that certain geographic territories, in which we previously had both legacy Cedar Creek and BlueLinx locations, were underperforming compared to locations that had only one facility in the territory.

Our stand-alone markets were generally performing to our expectations in light of current market conditions, but we needed to improve the volume and coordination across those overlapping markets. The bottom line is that the speed and complexity of certain consolidations came at the expense of our operational performance.

Our emphasis on quickly integrating facilities under one ERP system and consolidating into one location impacted our customer service in certain locations. We have already seen that this issue can be quickly remedied. BlueLinx excels at operations and logistics, and our singular focus is on exceptional customer service.

Following our assessment of these overlapping locations, we identified certain priorities that we felt would better optimize volume and performance. With close senior-level oversight, we've already begun seeing improved operating performance in the current quarter.

As we discussed last quarter, a key strength for BlueLinx is that we have a level of operating variability that helps us flex costs as volume declines. During the quarter, we reduced nonessential costs and eliminated additional fixed salaries in the business.

This effort, coupled with the synergy benefits that we are now realizing, significantly helped our adjusted EBITDA during the quarter. More importantly, we believe it demonstrates the upside potential of increased sales as we enjoy the benefit of our operating leverage.

Rest assured that we will continue to aggressively manage all aspects of the business to help reduce the impact of volume declines in the short term.

Overall, we were pleased that given all the various factors impacting our market, that we produced solid margin expansion and remain on track with the goals we outlined upon announcing our Cedar Creek acquisition. We're confident that our strategic initiatives are gaining traction and will ultimately lead to expanded market share.

In the coming quarters, we expect to capitalize on any rebound in the housing and remodeling markets going into the busy seasonal spring and summer periods. Ultimately, we believe that BlueLinx is well positioned to deliver solid bottom line performance and cash flow generation as we unlock the value created from the Cedar Creek acquisition.

Finally, let me take a moment to thank all the BlueLinx associates for their talent and hard work. Our company has over 2,200 associates managing over 10,000 customers that cover the entire country. It's a result of this effort that we believe we can execute on the initiatives we have in place.

And now, I'd like to turn it over to Susan, who will provide details on our financial performance..

specialty products, such as cedar products, molding, insulation and engineered lumber; and structural products like lumber, OSB, plywood and rebar. Specialty products make up approximately 69% of our sales in the first quarter, and structural products, which are typically more sensitive to commodity pricing, represented 31% of our sales.

We are pleased with the margin improvement we realized compared to our 2018 Q1 pro forma results. Our first quarter overall gross margin rate was 13.5%, up 80 basis points on a pro forma basis. Pro forma gross margin for specialty products was 15.6%, up 90 basis points over the prior-year period.

Structural gross margin was 9.5%, up 20 basis points from last year and significantly up from the fourth quarter. These improvements reflect the procurement synergies we have been able to realize, coupled with a stabilizing commodity market.

As Mitch noted earlier, we do expect to realize at least $50 million in annual synergies from the Cedar Creek acquisition ahead of schedule and substantially complete by the end of 2019. For those of you following along on our slide presentation, this is outlined on Slide 11.

In addition, we expect to spend no more than $30 million to achieve these synergies, well below our original $40 million to $55 million estimate. Moving to our deleveraging initiatives. It's important to be able to dissect the elements impacting cash utilization and free cash flow potential with greater scale following the integration.

In our slide presentation, on Slide 12, we illustrate this deleveraging potential at varying levels of operating scale. Our annual cash costs, not accounting for any working capital changes, include interest; financing leases; CapEx; state taxes, which remain a cash item; and a few smaller items.

With our current capital structure, these items total approximately $70 million annually. In other words, our low capital requirements and low interest rate ABL debt create a significant platform to deleverage the company by paying down debt.

There are also elements where we believe there is further upside cash flow potential to unlock, particularly through our real estate. Our own real estate remains an opportunity, given the flexibility for our amended term loan earlier this year. Let me take a moment to walk you through the optionality these real estate investments afford BlueLinx.

BlueLinx has 33 owned properties. Our unencumbered real estate was appraised by a national real estate appraisal firm near the end of 2017 to be worth $150 million to $160 million, which is approximately four times the book value. During the period, we've been actively marketing seven properties that we exited as part of the Cedar Creek transaction.

These are held on our balance sheet, and we intend to sell these properties and utilize those proceeds to pay down debt. We estimate these locations have an approximate value of $25 million.

We are in active contract negotiations for a few properties and anticipate being able to update you regarding our progress of these potential sales in the coming weeks.

In addition to our ability to sell certain specified properties, we believe there is a considerable deleveraging potential in sale leaseback opportunities, which was enhanced following our recent amendment of our term loan facility.

This amended loan allows us to monetize up to $50 million of properties through sale leasebacks from 2019, and provides additional flexibility with our covenants and reporting requirements.

We've made significant progress with potential sale leaseback opportunities to monetize certain owned properties and are also expected to be able to update you on developments during the second quarter. As a reminder, the first $30 million of any of these proceeds will pay down the term loan, with the remainder reducing our ABL balance.

So in total, we see up to $75 million from real estate that we could utilize to deleverage this business this year. We are pleased with our progress on the real estate front, and we expect to update you soon. We also expect to have federal NOLs that we can help shelter the tax impact from selling real estate, as well as future earnings.

At quarter end, these NOLs were approximately $100 million. As Mitch noted earlier, our focus remains on taking great care of our customers operationally, including our integration work and maximizing all of the assets we have available at the company.

As we've discussed on previous calls, one of the key attributes of combining our two legacy businesses is the improved financial flexibility that will support our growth and long-term deleveraging.

Finally, over the course of the next few months, we intend to be proactive in speaking with the investment community to highlight our market position and value proposition. And with that, Mary, we'd now like to open it up for questions..

Thank you. [Operator instructions] Our first question is from the line of Alex Rygiel from B. Riley FBR. Your line is now open. .

Couple of questions. First, congratulations on cutting down the overall cost of integration here to $30 million.

Maybe I missed it, but if you could kind of characterize some of the bigger buckets of where you found the savings?.

Sure. I mean, generally, one of the things we did is we stood up an internal team, where we took some of the most talented folks we had in the organization and dedicated to -- them to the IMO group.

That helped with the integration and the consolidation, and so we were well under budget related to third-party costs that we thought we were going to have from a professional standpoint.

We're getting some good news, I think, on some of the lease breakage opportunities that we have from a real estate perspective as we've seen with our own land and -- that we actually own, as well as the leased facilities. The properties that we have seem to be pretty desirable.

So we're getting some good news on the ability to sublet or get out of this leases as well. That would be two areas right off the top of my head that I would say will be contributing to that..

And as it relates to some of the dissynergies that have occurred following consolidation, you've got seven remaining overlapping markets, so I suspect there are some future dissynergies that could develop.

But from the 13 that have already played out so far, can you help us to sort of understand how long did those dissynergies linger for?.

Yes. So I talked about it in two buckets. One was dislocation from a supplier standpoint. I mean, that will take some time to recover because we have to bring in new inventory, we have to, obviously, promote new brands, we have a lot of confidence in our ability to do that.

But when you lose the -- that sales revenue quickly and you try to recover, it just takes a little bit of time. The second piece though as it relates to bringing the facilities together and causing a disruption in the local market, those we should be able to fix and are already seeing enhanced benefits from just attacking it quickly.

So we actually sent out about a dozen of our senior operation leaders to various locations to help. And part of that is training associates locally.

For example, on products, so they can be more efficient as they pull on products, outsourcing for example, logistics short-term that enable us to get rid of backlogs that has enhanced lead times -- that have hurt lead times for customers.

So that I would say is much quicker, I think about we should be primarily complete with that activity by the end of the second quarter. And I'd say the other thing -- and then the final thing, is just the final point, would be potential of these remaining overlapped markets and the potential dissynergies.

I can tell you we've learned a lot as a team in a year. And we will be very thoughtful about how we bring those remaining facilities together. It's one of the reasons we basically have said, hey, mission accomplished. And that's additive going forward because we want to make sure we do it exactly right without negatively impacting our customer base..

Sure. And then as it relates to real estate assets that can be monetized, $75 million in 2019 is a very attractive number.

Post or after 2019, could you maybe put a range on what other real estate might be remaining to monetize over 2020, 2021?.

Yes. So we think about it, we've said there is $150 million to $160 million, which includes the $75 million that we're going after this year. So we have the balance remaining after that. And I think we'll look at it market by market, so there's still another $80 million or so remaining that we could choose to monetize.

And that's a very market-by-market decision as far as what we think the position is in the real estate and the attractiveness but we have optionality on that, that we can certainly pursue..

And then lastly, housing starts in March, you mentioned, were down.

How did the cadence look in April and May?.

It definitely looked increased relative to the first quarter. We felt some optimism. It dried out particularly later in the month from a volume standpoint.

Again, I -- and I'm sure you've heard, there are -- the second quarter as we mentioned clearly will be tough comps compared to the 2018 levels, which were robust, both from a demand perspective as well as escalating commodity price perspective. But certainly relative to the first quarter, we've seen it improve..

[Operator instructions] Your next question is from the line of Alan Weber from Robotti Advisors. Your line is now open..

Good.

So a quick question on, Mitch, when you talked about the dissynergies or dislocations, I know you can never really know if the bulk are behind you, it's hard to really -- you can't guarantee that, I understand, but do you think the bulk of these dislocations are behind you?.

Yes, I would say. When we say behind me, I think we have experienced the bulk of them, yes. So -- I mean, they will -- again, particularly as it related to the supplier dislocation, and that's -- that will continue going forward until we recover from that.

But as far as these operational stub our toes, I feel very good that by the end of this quarter, we should be in a position to put most of that behind us..

And when do you become -- even though if you think about it, you look at your press release or on the calls, you talk a lot about dissynergies. You're doing a great job.

When do you become more proactive in terms of trying to get the positive sales synergies that you talked about at one point? When does that really start to happen? And do you think that opportunity is better or worse than you originally felt when you did the deal?.

Yes. So that's happened. I mean, as we -- one of the things that happened and -- so for example, I was out in several markets talking individually to sales teams as well as customers. And one of the consistent themes from our customer base is that they realize the value that we bring into the markets. So we feel really good about that.

In markets that are not -- where we don't have the overlaps, we are farther along with the ability to move forward and start getting sales synergies because they have enhanced products, brands that we're starting to sell and we're starting to get -- make some good progress.

I would say the focus still in locations where we have these overlapped markets is making sure that we serve our existing customer base well with the products that we have and we want to make sure that we have some stability there before we get very aggressive from a growth standpoint.

But I can tell you, the top line of this business is a conversation that for the last 60 days has been first and foremost on the executive team and the entire organization. And it's something that we're focused on and will emphasize.

As far as the long-term opportunity, we've stated consistently and I still believe that this market will continue to consolidate. And that enhanced geographic locations and products creates operating efficiency that's good for our customer base, the ultimate consumer, and provides opportunity the bigger you are in a fragmented market.

So I continue to believe that we have significant sales synergy opportunities. But as we've said from the outset, we didn't make any of that into the acquisition thesis for Creek..

We have no further questions over the phone, presenters..

OK. Well, thank you, Mary, and we certainly appreciate you joining us today and your continued support and interest in BlueLinx. We look forward to speaking with you on our second-quarter conference call in August. Thank you so much..

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