BlueLinx Holdings Inc. (NYSE:BXC) Q1 2024 Earnings Call Transcript May 1, 2024
BlueLinx Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by and welcome to the BlueLinx Holdings’ First 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.
Tom Morabito: Thank you operator and welcome to the BlueLinx first quarter 2024 for earnings call. Joining me on today’s call are 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 first quarter news release and Form 10-Q were issued yesterday after the close of the market, along with our webcast presentation. These items are available in the Investors section of our website, bluelinxco.com. We encourage you to follow along with the detailed information on those slides during our 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 context for investors evaluating our business. Reconciliations to the closest GAAP financial measure can be found in the appendix of our presentation. Now, I’ll turn it over to Shyam.
Shyam Reddy: Thanks Tom and good morning everyone. We are pleased with our first quarter 2024 results, especially as we recover from challenging weather conditions in January. I’m extremely proud of my teammates for their continued grid and teamwork and an uncertain housing market and challenging interest rate environment and for their dedication to serving our customers and our suppliers at the highest levels despite the market industry headwinds. I am also excited about aligning my executive leadership structure with our corporate strategy to accelerate our strategic commercial growth initiatives. Mike Wilson, previously our Chief Product Management Officer and 30-year industry veteran with significant sales leadership experience, has been appointed into a newly created Chief Commercial Officer role that is focused on driving profitable sales growth through our regional, local, and national account teams.
Before turning to the first quarter results, I want to briefly remind everyone of our corporate growth strategy and our vision to become the most technologically-advanced two-step distributor of building products in the U.S., so that we can become the provider of choice for both our customers and our vendors. We are focused on growing our core business in five key specialty product categories that are sold into multiple layers of a home’s construction cycle from start to finish, they are engineered wood, siding, industrial products, millwork, and outdoor living. By making investments in people, value-added services, and working capital to name a few, we are more effectively positioning the company to grow our specialty product business with existing customers and new customers nationally and in strategic markets across the country.
These categories which are valued by our customers and tend to be two-step distribution friendly are expected to generate sustainable higher net sales and gross profits over the long-term. We are also committed to allocating capital to M&A and greenfield to expand our geographic reach and to support our specialty product sales growth initiatives. While we continue to evaluate acquisition opportunities and pursue those that meet our valuation expectations, we are moving forward with our greenfield initiative and expect to start our first one by the end of the year. In addition, our growth strategy will continue to be supported by three strategic enablers; operational, business, and digital excellence, all of which are designed to enhance the customer experience.
Now, turning to our first quarter results. We generated net sales of $726 million and $39 million in adjusted EBITDA for a 5.3% adjusted EBITDA margin. Adjusted net income was $19 million or $2.14 per share. And as Andy will detail in a moment, adjusted EBITDA and net income were favorably impacted on a net basis by a couple of notable import duty items. But even after removing this favorable impact, we were pleased with our results. Specialty products accounted for approximately 70% of net sales and just over 80% of gross profit for the first quarter. We also delivered solid gross margin performance with specialty products coming in at 20.7% inclusive of the import duty items and structural products at 10.6%. Excluding this favorable impact, our gross margin performance with specialty products came in at 19.4%.
Our continued focus on business and operational excellence contributed to these positive results. During the quarter, we experienced deflation in specialty product sales that accounted for the overall sales decline with both categories. Volumes were adversely impacted by the extreme weather patterns experienced in January when nearly half of our locations were closed for between one and five days, during the month due to unusually cold weather and winter storms. Volumes recovered in February and March as business ramped back up with particular strength in our specialty products. Lastly, our financial position remains strong and our significant liquidity leaves us well positioned to execute on our corporate growth strategy as well as maintain the flexibility to opportunistically return capital to shareholders.
Now turning to, our perspective on the broader housing and building products market, while industry sources had initially been indicating a renewed sense of optimism for the overall market especially in the second half of the year. Headwinds remain meaning for building products due to the Federal Reserve’s current posture regarding rate cuts. In the meantime, the US housing market remains volatile, as reflected by March housing starts sliding to an adjusted annual rate of $1.32 million down 15% from February. Single-family housing starts dropped roughly 12%, while large multi-family starts fell 21%. Permits also fell about 4%. In addition, after four months of sequential improvement, builders confidence in April was 51 and remained flat compared to March.
Interest rate cuts also seeing further out, some mortgage rates that are currently over 7%, may remain stubbornly high throughout the year. 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 buy-sell activity for housing. Repair and remodel spending continues to be lower than the elevated levels of 2022 and 2023 when a lot of projects were pulled forward and is expected to decline further in 2024. At the same time existing home sales are at their lowest level in nearly 30 years, which is problematic because a significant amount of repair and remodel activity occurs when family sell their homes and buy new homes.
It is important to note, that while single-family housing starts have been showing strong numbers the past few months, that strength has mostly been driven by the large builders that can use their size and scale to buy down mortgage rates offer more attractive deals to consumers and buy direct from manufacturers to support their production schedules. Two-step distributors like BlueLinx, tend to correlate more closely with smaller and custom homebuilders and therefore do not participate as much in the large production builder market. Given the macroeconomic environment we described, we expect this pattern to continue for the remainder of 2024. Although the near-term outlook remains uncertain and muted, we clearly believe in the long-term prospects of the Housing and Building Products sector which underlies our growth strategy.
The shortage of homes, supported demographic shifts, aged housing stock, necessary repair remodel activity and high-levels of home equity should continue to benefit the Building Products Industry and BlueLinx. Now, I’ll turn it over to Andy, who will provide more details on our financial results and our capital structure.
Andy Wamser: Thanks Shyam, and good morning everyone. Let’s first go through the consolidated highlights for the quarter. Overall, we delivered solid first quarter results highlighted by strong margins in both our specialty and structural product categories. Net sales were $726 million down 9% year-over-year. Total gross profit was $128 million and gross margin was 17.6%, up 90 basis points from the prior period. As Shyam mentioned, we experienced a net positive impact of different import duty related items in the quarter. The impact was related to positive changes in the retroactive rates for antidumping and countervailing duties for certain products we imported. This was partially offset by classification adjustments for certain goods imported by the company, as separately entered shipments.
These items netted out to a benefit of approximately $7 million for our adjusted EBITDA, while the items are separate and not considered one-time, we do not expect them to be as material in future periods. More details on these items are available in our 10 Q. SG&A was $91 million, consistent with last year’s first quarter. Net income was $17 million or $2 per share and adjusted net income was $19 million or $2.14 per share. Tax expense for the first quarter was $5.6 million or 24.1%. For the full year 2024, we anticipate our tax rate to be in the range of 24% to 28%. Adjusted EBITDA was $39 million or 5.3% of net sales, following our normal seasonal patterns and includes the favorable tariff and duty adjustments, not including these adjustment items, adjusted EBITDA would have been $32 million or 4.4% of net sales.
As a reminder, we tend to have higher adjusted EBITDA margins in the second and third quarters, but relatively lower margins in the first and fourth quarters of the year. Turning now to first quarter results for specialty products. Net sales were $504 million, down 11% year-over-year. This decline was driven by price deflation across several specialty product categories. Given current market conditions, we expect price deflation in our specialty products to continue with a view that they will moderate on a year-over-year basis as we move through 2024. Gross profit from specialty product sales was $104 million, down 2% year-on-year, specialty gross margin was 20.7%, up 190 basis points from last year primarily due to the duty related items, not including these benefits specialty gross margins were a strong, 19.4% in the first quarter through the first four weeks of Q2, specialty product gross margin was in the range of 18% to 19% with daily sales volumes sequentially higher when compared to the first quarter of 2024 and higher than the equivalent period last year.
As a reminder, it’s important to note that industry driven price deflation in our specialty products should continue to have an impact on both our top line and cost of goods sold during the year. So far this year we’ve seen average specialty pricing down roughly 10% compared to the same time last year. And even though margins are stable, gross profit dollars are lower. This dynamic creates a near-term market headwind and we hope to see this improve as the year progresses. Now moving on to structural products. Net sales were $222 million, down 3% compared to the prior year period. This decrease was primarily due to framing lumber volumes when compared to the elevated levels from last year. Gross profit from structural products was $24 million, a decrease of 12% year-on-year.
And structural gross margin was 10.6%, down 110 basis points from the same period last year. In the first quarter of 2024, average lumber prices were about $403 per thousand board feet and panel prices were about $615 per thousand square feet, a 2% decrease and a 23% increase respectively compared to the averages in the first quarter of last year. Sequentially comparing the first quarter of 2024 with the fourth quarter of 2023 these prices were both up 5%. Our strong structural margin continues to reflect a tremendous job our team does in managing commodity cost volatility risk by leveraging consignment and utilizing centralized purchasing and pricing to keep inventory levels low through the first four weeks of Q2, structural products gross margin was in the range of 10% to 11% with daily sales volumes consistent with the first quarter of 2024.
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 $481 million, a decrease of $40 million from year end due to normal seasonal patterns in working capital. When considering our cash on hand and undrawn revolver capacity of approximately $347 million available liquidity was $828 million at the end of the quarter. Total debt excluding our real property financing leases was $348 million and net debt was a negative $133 million. Our net leverage ratio was a negative 0.8 times 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 first quarter, we used operating cash flow of $31 million and had free cash flow of negative $37 million. The use of cash was primarily driven by normal seasonal patterns for working capital, which increased during the period. Turning now to capital allocation. During the quarter, we spent approximately $5 million in CapEx, primarily to improve our distribution facilities and our fleet. We also entered into finance leases for $8 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.
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. During the first quarter, we did not purchase any shares under our repurchase program, but we remain committed to our share repurchase efforts by continuing to be 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 target net leverage of two times or less.
Overall, we’re pleased with our first quarter results, highlighted by our strong margins especially in light of January’s challenging weather conditions, and uncertain housing environment and the market deflation on specialty products. Our strong balance sheet and liquidity, positions us well to execute on our strategy and provide returns for our shareholders. Operator, we are now ready to take questions.
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