BlueLinx Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 8 speakers on the call.

Operator

A reminder, this conference is being recorded. It is now my pleasure to introduce your host, Guy Nobel, Vice President of Finance and Treasury. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to BlueLinx Holdings Second Quarter 2023 Earnings Call. Presenting today are Shem Reddy, President and CEO of BlueLinx Kelly Jensen, our Chief Financial Officer. Also present on the call is Andy Wamsor, Senior Vice President and Chief Financial Officer Elect. Our Q2 news release and Form 10 Q were issued yesterday after the close of the market along with our webcast presentation.

Speaker 1

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 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.

Speaker 1

Reconciliations to the closest GAAP financial measure can be found in the appendix of our presentation. At the conclusion of our prepared remarks, we will open the line for questions. And with that, I'll turn the call over to Shyam.

Speaker 2

Thanks, Guy, and good morning, everyone. We appreciate you joining us today. Before we discuss the Q2 results, I want to reemphasize our commitment to generating profitable sales growth in a challenging housing In building products environment by driving our corporate strategy into every facet of the business. By focusing on our strategic priorities, We are well positioned to meet stakeholder expectations and live up to our potential to be the leading building products distributor in the United States. First, we remain focused on growing our 5 high value specialty product categories: engineered wood, siding, millwork, Industrial and Outdoor Living Products to generate higher net sales and gross profit results.

Speaker 2

In fact, Specialty products represented about 70% of our net sales and 80% of our gross profit dollars in the 2nd quarter. We're growing our specialty categories by being more strategic, not just by making more customer calls and visits, although that's important. Specifically, we're leveraging our scale, national reach, selling capabilities and product depth To expand our offerings in key markets to support both new and existing customers. For instance, we recently leveraged our proven track record With 2 key specialty product suppliers to expand certain siding and specialty panel brands in new markets. We're also making key investments in equipment and value added service offerings to strengthen our value proposition position us to be more competitive along with investing in commercial excellence initiatives to generate more profitable sales.

Speaker 2

2nd, we are driving operational, pricing and procurement excellence into the DNA of the organization By continuing to leverage our corporate capabilities in these specific areas for the benefit of the entire company, These efforts enhance the go to market strategies of our local and national market leaders while providing their branch managers with corporate expertise To strengthen their local market operational capabilities. Our levers of excellence, operational, pricing and procurement Have translated into specialty margins in the range of 18% to 19%, strong structural product margins as compared to previous norms and a cost structure that continues to be in line with current levels of demand. At the same time, we've been very intentional about adjusting our to reflect current market conditions without compromising our growth capabilities. In fact, Our adjusted EBITDA margin year to date is 6% of net sales, a solid result considering inflation and current market conditions. 3rd, we remain disciplined in our approach to capital allocation so that we can reinvest in business initiatives That are designed to generate greater profitable sales, improve productivity and provide better service.

Speaker 2

3 important levers that will drive organic growth while giving us the flexibility to return capital to shareholders. During the Q2, we invested $5,000,000 in capital expenditures to improve our business and we returned $12,000,000 to shareholders through share repurchases under our existing $100,000,000 share repurchase program, Of which we currently have about $22,000,000 remaining. Now moving on to our 2nd quarter results. Although spring would normally generate more robust new residential housing construction and repair and remodel activity, Certain macroeconomic conditions such as a rising mortgage rate environment and home affordability issues Resulted in the continuation of a soft market. We are still experiencing headwinds in our business, while housing starts began to recover.

Speaker 2

Fortunately, however, improving builder sentiment, high home equity levels, low unemployment, Along with other key market dynamics suggest that the housing market will continue improving. With that said, We generated net sales of $816,000,000 $24,000,000 of net income. This resulted in $2.91 per diluted share on an adjusted basis and $49,000,000 in adjusted EBITDA were 6% of net sales. We also generated $64,000,000 of operating cash flow, driven by earnings and our continued focus on working capital management. We specifically reduced our total inventory by another $30,000,000 this quarter And by $105,000,000 from the beginning of the year, most of it specialty products.

Speaker 2

Our liquidity is excellent due to strong execution of our strategic initiatives and effective management of working capital. As of the end of the second quarter, cash on hand reached a record level of $418,000,000 an increase of $42,000,000 from Q1 to Q2. When considering our cash on hand and undrawn revolver capacity of $346,000,000 available liquidity was $765,000,000 at the end of the second quarter, also a record. We delivered solid margin performance in both Specialty and Structural Products during the Q2, 19.1% for Specialty Products and 11% for Structural Products. As Kelly will discuss in further detail, year over year and similar to Q1, We experienced deflation and volume declines in specialty products, particularly in engineered wood products, industrial products and siding.

Speaker 2

That said, as compared to the Q1, average daily volumes of specialty products have increased about 5%. Although net sales for the structural product category declined due to wood based commodity price deflation, volumes were slightly ahead of the Q1. Overall, I am pleased with the financial performance this quarter and I am proud of our commercial leaders and teammates for successfully executing our commercial excellence initiatives and delivering these results. Now turning to our perspective on the current market. Although we believe that single family housing starts for the year will be down compared to 2022, we continue to see positive signs for the building products market.

Speaker 2

Inflation is receding and interest rates are leveling. Single family housing starts increased during the quarter compared to the beginning of the year and Builders confidence has continuously improved for the past 7 months. However, spending on repair and remodel continues to come down from the elevated levels of the past 2 years. That said, home equity levels are high, allowing owners to fund repair and remodel projects, albeit smaller ones. Through the 1st 4 weeks of Q3, we have maintained solid margins for both specialty and structural products.

Speaker 2

Both are up slightly when compared with Q2 With average daily volumes that are relatively consistent with what we saw during the recent quarter. Although the outlook for the back half of twenty twenty three remains uncertain, we still believe in the long term prospects of the building products industry. The fundamental undersupply of homes, supportive demographic shifts, aged housing stock, necessary repair activity and high levels of home equity will continue to fuel the housing industry and BlueLinx as a 2 step building products distributor. In summary, we delivered solid quarterly financial results despite operating in a challenging housing and building products market. We're also making progress on our strategic priorities as evidenced by our gross and adjusted EBITDA margins, cash generation and capital allocation initiatives.

Speaker 2

Now before I turn it over to Kelly, I want to spend a moment discussing our ongoing CFO transition. As announced 3 weeks ago, Kelly will be leaving the company to pursue other opportunities at the end of August and Andy Wamser, who is here with us today, we'll assume the role of Chief Financial Officer this August 4th. Andy is a proven public company CFO with significant financial expertise and unique capital markets experience within the broader industrial sector. He has more than 20 years of global financial, Commercial and Operational Experience, and I'm thrilled to welcome Andy to the BlueLinx team. I want to thank Kelly for her leadership and stewardship for her many contributions to BlueLinx over the past 3 years and for her support ensuring a smooth transition through the end of August.

Speaker 2

That concludes my opening remarks. I'll now turn the call over to Kelly for a detailed discussion of our financial results and capital structure. Following that, I'll provide closing remarks before we take your questions. Kelly?

Speaker 3

Thanks, Sham, and good morning, everyone. I'll start with the Q2 results. We delivered a solid financial performance highlighted by strong margins across both our specialty and structural product categories. Net sales were $816,000,000 down 34% year over year. Specialty product sales were down 28% Compared to the last year due to a combination of deflation and lower volumes.

Speaker 3

Structural product sales were down 46% Due to significant year over year declines in wood based commodity prices, total gross profit was $136,000,000 and gross margin was 16.6%, up 30 basis points from the prior year period. When reviewing the year over year comparisons, it's important to point out that in the Q2 of 2022, We experienced historically high levels of demand and significant price inflation across the business. Thus, While the variances are quite significant, we are pleased with the financial results we generated this quarter considering the recent market condition. Turning now to the Q2 results for Specialty Products. Net sales were $571,000,000 Down 28% when compared to last year.

Speaker 3

This decline was driven by a combination of deflation and lower volumes, Especially in categories that are tied to new residential construction like engineered wood and siding. Gross profits Specialty product sales were $109,000,000 down $71,000,000 due to the net sales decline. Specialty gross margin was 19.1%, a strong margin, but down 380 basis points from last year when prices were near their peak, Given most of the supply was still on allocation. Through the 1st 4 weeks of Q3, Specialty Products gross margin was in the range of 18.5% to 19.5% with daily sales volumes consistent with the 2nd quarter. Now moving on to Structural Products.

Speaker 3

Net sales were $207,000,000 down 46% compared to the prior year period. This decrease was primarily due to the significant year over year declines in average composite lumber and panel prices. Per random length, the average price in the Q2 of 2023 for framing lumber was $408 per 1,000 board feet, down 49% from $7.97 per 1,000 board feet in Q2 of 2022. And the average price for panels was $5.32 per 1,000 square feet, down 39% year over year from $8.74 per 1,000 Square Feet. Gross profit from Structural Products was $27,000,000 An increase of 27% year over year and structural gross margin was 11% as compared to 4.7% in the same period last year.

Speaker 3

The prior year's gross profit was impacted by rapid wood based commodity price Deflation and Allure of Cost or Market Adjustment that was not repeated during the current period. As of the end of the Q2 of 2023, lumber prices were up to around $4.38 per 1,000 board feet and panel prices increased to about $5.55 per 1,000 square feet, a 6% and 4% increase respectively, Company compared to the average prices observed in the Q1 of this year. These prices have improved in the 1st 4 weeks of the 3rd quarter and are now at $4.63 per 1,000 board feet and $6.48 per 1,000 square feet. Our strong structural margin continues to reflect the excellent job our team does to manage commodity price volatility risk Through leveraging consignment and utilizing centralized purchasing and pricing decisions to keep structural inventory levels low. Through the 1st 4 weeks of July, Structural Products gross margin was in the range of 12% to 13% With daily sales volumes relatively consistent with the Q2 of this year.

Speaker 3

This excludes any net impact that could arise from inventory adjustments. For the Q2, SG and A was $89,000,000 about $3,000,000 lower than the prior year period and about $2,000,000 lower than the Q1 of 2023. We have been deliberate in our approach to managing costs to match current Demand. And as such, we have reduced our year over year variable costs such as commissions, incentives and logistics expenses. Our headcount has also decreased since the beginning of the year through attrition and intentional rightsizing actions.

Speaker 3

These reductions were partially offset by inflationary impacts on compensation and benefits. As we move forward, We will remain focused on continuing to align our cost structure to meet market demand. Net income was $24,000,000 and diluted EPS was $2.70 per share. On an adjusted basis, net income was $26,000,000 and diluted EPS was $2.91 per share. The 2nd quarter tax rate was 24%, in line with our expectations.

Speaker 3

And for the Q3 of 2023, we anticipate our tax rate to be in the 25% to 29% range. Adjusted EBITDA was $49,000,000 or 6% of net sales, a good result. Now moving on to cash flow and working capital. During the Q2, we generated operating cash flow of $64,000,000 and free cash flow of $59,000,000 Our 2nd quarter cash generation was supported by earnings and a $30,000,000 reduction in inventory, Reflecting our focus around working capital management. We intentionally adjusted our specialty inventory to reflect current market conditions.

Speaker 3

Specifically, we ended the 2nd quarter with $379,000,000 of inventory, down $105,000,000 or 22% Sequentially from the beginning of the year. We have also continued to invest in the business. During the quarter, we spent approximately $5,000,000 in capital expenditures, which were primarily for enhancements to our distribution branches. For the year, we still expect capital investments to remain around $30,000,000 focusing on facility improvements and further upgrades to our fleet. Also, during the Q2, we purchased approximately $12,000,000 of the company's common stock through open market transactions Under its $100,000,000 share repurchase program, of which we have about $22,000,000 remaining.

Speaker 3

As a reminder, 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 As of the end of the Q2, cash on hand was $418,000,000 a record level. Total debt was 571,000,000 Debt Relief, and net debt was $153,000,000 and we have no material outstanding debt maturities until 2029. Net leverage was 0.6 times consistent with where we've been the last 6 months. When considering our cash on hand An undrawn revolver capacity of $346,000,000 available liquidity was $765,000,000 at the end of the second quarter.

Speaker 3

Our balance sheet is in excellent shape and when combined with our strong EBITDA and cash generation, we are well positioned to support our strategic initiatives. These initiatives include capital allocation projects and investments in high return opportunities such as organic and inorganic growth investments As well as share repurchases. In the near term, we expect the demand will continue to be lower relative to last year. Our focus will continue to be on executing our strategy, maintaining a strong financial position and delivering long term value to our shareholders. Now I'll turn the call back over to Sham for closing remarks.

Speaker 2

Thanks, Kelly. In closing, we are pleased with our 2nd quarter results and our ability to maintain both our price and cost discipline along with proactively managing our working capital. As a result, we have a strong balance sheet That allows us to invest in the business and position us for long term success while providing us with flexibility to return capital to shareholders. Looking ahead, we will continue to focus on our strategic priorities, specifically growing our 5 high value specialty product categories, Driving operational pricing and procurement excellence and retaining discipline in our approach to capital allocation By investing in profitable sales growth initiatives, pursuing accretive acquisition targets that support our growth strategy, Making capital investments that strengthen our ability to grow the business and returning capital to our shareholders. Our financial position remains strong with ample liquidity and no material outstanding debt maturities until 2029 and And we repurchased $12,000,000 of shares remaining under our current share repurchase program during the period.

Speaker 2

I am proud of our associates contributions during Q2 as they enabled us to achieve solid results during challenging market conditions in a normalizing environment That historical grit, resilience and competitive spirit continue to shine through in everything our associates do. I'd also like to thank our customers and suppliers for their support and faith in us. Without them, there is no BlueLinx. I'm excited about our future in continuing to deliver what matters so that we can be the leading building products distributor in the United States. That concludes our prepared remarks.

Speaker 2

At this time, we are open to answering any questions.

Operator

Thank you. We will now be conducting a question and answer a confirmation tone will indicate your line is in the question our first question comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.

Speaker 4

Yes, thanks. Good morning, everyone. Thanks for taking the questions. I guess maybe just starting off, can you give us a little bit more sense for the Cadence of the quarter. And I think you talked about volumes on a year over year basis.

Speaker 4

But can you talk about how volumes were versus Q1 Specifically as well per segment?

Speaker 2

Yes. Thanks, Greg. Really appreciate the question. So I would say With the cadence, we're continuing to see volume improvement quarter over quarter. July has shown To keep maintain that trend from June into July.

Speaker 2

So we feel really good about where we're heading in Q3.

Speaker 3

Yes. And I'll just add on to that. So Greg, from a cadence perspective, certainly April was our softest month. We continue to improve week over week From there on out through the quarter, with May June being nice solid month for us. And when you think about it sequentially, As it relates to obviously, the year over year, as you point out, is relatively big variances.

Speaker 3

But sequentially, We are seeing some definitely seeing improvement. Specialty is up 5% on volume and a big piece of that is EWP, which is that volume is up over 10% Quarter over quarter from the Q1. We're still seeing competition out there as it relates to price, etcetera, but we've been able to hold margins As we saw, so I think we're cautiously optimistic as we continue to move forward. And I think we're seeing some nice trends here.

Speaker 2

And also just to finish up on that point, we're doubling down our strategy to drive those organic volume growth initiatives. So Focusing on those key specialty product categories. As we talked about earlier, we've expanded a couple of key strategic supplier relationships and signing a specialty panels. In fact, I've spent some time with these key suppliers to help drive that expansion and we'll continue to do that going forward.

Speaker 4

Yes, understood. And then so specialty just specifically, so total revenue in the June quarter basically flat Sequentially, but it sounds like that was more pricing that offset higher volumes. Is that right?

Speaker 3

That's right. And again, we had like I said, April is a bit soft for us as we were coming out of the Q1 and when we got the momentum going from then. So I think there's a little bit Impact from that, if we from a timing perspective. And I do want to point out that, we're as the markets are improving, but we are a 2 distributor run a lag. So we usually see, as the builders start to improve and start to come back, We typically can see our impact come 60, 90 even a little bit after that.

Speaker 3

We could be up to a quarter lag. So we haven't talked a lot about that in more recent times, but that is definitely our business model works that way. So I want to I would say that as Things have been coming back and from market perspective in the last few months, we're starting to feel that too. It's just a little bit behind of what the builders say.

Speaker 4

Yes, that makes sense. Maybe just a quick follow-up on that because we have heard from a couple of distributors and I think they're seeing much more robust growth sequentially than kind of what you're talking about. And I'm just curious if there's any Kind of just differences you want to point out whether it's inventory or whether it's certain product lines, but why would you be seeing a bigger Jump or maybe it's just a little bit of a lag and we're just going to wait to what you talked about maybe 60 to 90 days until you start seeing some of that acceleration as well.

Speaker 2

Yes. Look, I'd like to reemphasize the lag. We are seeing We're seeing that flow through the P and L in Q3 now with volumes being up. But at the same time, historically speaking, There has generally been a 60 to 90 day lag between when the starts start posting and when we actually start seeing it Flow through our sales. That said, we're really optimistic or feel good about what the builders are doing to reduce their cycle times, Thus pulling forward some of that or reducing some of that lag time.

Speaker 2

So again, we're feeling good in light of builder sentiment and Housing starts continuing to improve over the course of the year.

Speaker 3

And just to add on that a little bit further to your point, Greg. Although there are distributors that are similar to us, we all have different mixes. We have a very broad array of product lines, some are up, some are down, that diversity Sometimes it can be a little soft for us. So I would say there's just not one that's exactly like us. And our goal is to continue to Make sure the entire portfolio is strong.

Speaker 3

And sometimes they could have differences in what they did in Q1 versus we did, etcetera. So I would just say that we see strengths coming back in our key categories. We have a bit of a We're seeing really nice margins and continued execution on our structural business as well to support. And I think overall, We put a nice EBITDA margin on the Board. So all we can do is work on what we can control.

Speaker 4

Yes. That makes sense. Okay, great. I will leave it there. Thanks.

Speaker 3

Thank you.

Operator

Our next question comes from Kurt Inger with D. A. Davidson. Please go ahead.

Speaker 5

Great. Thanks and good morning everyone. It seems like the disciplined approach to pricing, I mean, is showing through In terms of specialty margins, but I'm curious if that's holding back volumes at all in terms of you guys walking away from any business. And Can you just talk about the overall competitive environment and your willingness to protect volumes if some peers or competitors continue to be more promotional on the pricing front?

Speaker 2

Yes. I mean, look, we're absolutely committed to driving pricing excellence Into the business, it's not at the expense of good volume. We're trying to grow the business with profitable sales and And really has strategic relationships with our customers that are stickier. But to the extent there is very profitable transactional business Makes sense. We're not running away from it.

Speaker 2

But holistically, we're trying to grow the business. And given our volumes and And how they're trending from Q1 to Q2 and into July, I feel pretty good about finding the right balance between our Pricing initiatives and our volume growth. We are absolutely committed to growing this business in the right way.

Speaker 5

Okay. Thanks for that. And then I guess in terms of the specialty year over year pricing deflation, EWP has been down sequentially, but is kind of flattish year over year. Is the pressure primarily kind of Treated products, metal, maybe some millwork. Could you just help us kind of understand what the big drivers of that were in the quarter?

Speaker 3

Yes, sure. Look, I mean, I think everybody's we're seeing pricing deflation across the board and really all of our categories. And And certainly, and you point out the specialty other, certainly in that, that's one of the bigger categories we are seeing given that we do have some sensitivity To the commodity markets, obviously, the margins are much higher than our structural business, but there is some sensitivity as it relates to the treating treated lumber panels as you mentioned. So certainly that's there. I mean, but in general, prices last year were definitely at their peak.

Speaker 3

And And we have seen some deflation as it relates to that, but we've also seen deflation on our cost side, which I think is showing why we're seeing still The good normalized margins that we said we would expect to see.

Speaker 5

Okay. That makes sense. And then Go ahead.

Speaker 6

Yes, I

Speaker 2

was just going to make a final point to follow-up on what Kelly said. Look, to the There's deflation. This is one of those levers that we can absolutely put our mind to as it relates to Keena, the procurement and pricing excellence initiatives that we're driving into the DNA of the organization, whether it be training our sales force on targeted selling or Strengthening our processes with respect to supplier and customer onboarding, to using data driven analytics to make that we are pricing appropriately in the markets that we serve. So again, it's something that we are absolutely taking control of and And doing our best to maximize the margins in light of competitive pressures.

Speaker 5

Right. Okay. Thanks for that, Sham. And then as you think about, I guess, at a high level, the second half versus the first half, We're seeing the improving volume trends. The data on the new resi side is pretty good.

Speaker 5

Repair and remodel seems to be holding in. Commodity pricing improved a bit. I mean, is there anything that gives you pause that The second half shouldn't be at least a little bit better than the first half or how do you think about that?

Speaker 2

That's a great way to ask the question. There's nothing that gives me pause other than the general uncertainty of This year following an unprecedented 2 years, I feel good about the efforts we've undertaken to grow the business To normalize to operate competitively in what's otherwise a normalizing market. And again, taking ownership of the levers at our disposal, whether it be operational pricing or procurement to really execute against our 5 specialty growth area categories, I think gives me comfort. So there's not anything other than some existential risk that materializes that gives me that we don't know about that gives me pause, especially in light of The underlying fundamentals of the housing industry on top of 7 months of increasing builder sentiment, in addition to some other indicators out there that suggest good runway over the course of the year.

Speaker 3

Yes. And I'd just add, we're cautiously optimistic. Of course, to Shyam's point, there is definitely some uncertainty out there. There's varying ups and downs as it relates to some of those macro factors. So I would just say we're happy with where we are right in the last few weeks.

Speaker 3

And if That continues for the second half. It will be it should be slightly better.

Speaker 5

Okay. That's helpful. And then just lastly, you guys have Kind of a host of capital allocation priorities, but I mean the stocks I think trading at 8 times kind of annualized first half earnings, The cash balance is at an all time high. Can you just help us frame where share repurchases are in terms of Kind of the priority set at this stage.

Speaker 2

Sure. Yes. We have look, it is a priority. We've already proven that commitment already $78,000,000 of share repurchases and our intent to repurchase $22,000,000 of shares to complete the current $100,000,000 program at point in the near future. As we've said before, we are committed to exploring, investing our capital and initiatives that absolutely contribute to shareholder value such as accretive M and A transaction, sales growth initiatives, etcetera.

Speaker 2

But at the end of the day, returning capital to shareholders in the most efficient effective way possible in light of all the other priorities is an absolute Priority at the company as evidenced by the demonstrated efforts so far.

Speaker 5

Got it. Okay. Well, thanks for the color and good luck here in Q3.

Speaker 3

Yes. Thanks, Kurt. Thank

Speaker 2

you, Kurt.

Operator

Next question comes from Jeff Stevenson with Loop Capital Markets.

Speaker 7

Tech. Hi, thanks. It's actually Gerrick Schmois on for Jeff. Thanks for having me on today. I wanted to follow-up first on What you're seeing on the R and R side, I think you mentioned that the demand is still Positive, but it was maybe slowing.

Speaker 7

So any additional color on R and R would be great.

Speaker 3

Yes. You want to go ahead?

Speaker 2

Sure. I'll kick it off Kelly and then turn it over to you. So thanks Garrett for the question. Really appreciate it. Look, I mean, When I think about R and R, I really feel I think about the underlying fundamentals that drive R and R activity.

Speaker 2

The indices out there suggest that R and R will be down through the first half of twenty twenty four. That said, with home equity values, Yes, strong customer sentiment, etcetera, and also a lack of inventory on the housing side And coupled with the fact that we have a very strong presence with the home retailers or the national on our national account side of the business, We believe that we have an important role to play in the R and R world because folks will be still doing repair and remodel work, Albeit maybe smaller projects. So again, I think it will be an important part of our business going forward precisely because of those underlying fundamentals and the fact that we have a customer base that supports the R and R market, good diversification on our part.

Speaker 7

Okay. Thanks for that. I wanted to follow-up on the specialty product margins that continue to hold kind of in this 19% range. It seems like the outlook for the Q3 is positive relative The more normalized levels. I'm just curious what your views are moving forward.

Speaker 7

Do you have increased confidence here that specialty margins are sustainable? And just curious if the housing market does start to recover recognizing You do operate with a lag. What does it speak for the margin outlook longer term?

Speaker 3

Yes. Well, I mean, we've As you saw, we went from last quarter, we were a little under 19 or 19.1. Now we gave a range of a little bit between 18.5 and 19.5 For where we are in July, so I mean, I think margins are we've been saying normalized specialty margins right around 19% and that's Kind of exactly where we're landing. As I said, the trend run rate is slightly above 2019 at this point. So I feel really good about where we are.

Speaker 3

I continue to say the 18% to 19% range because There is a it is a recovering market and there are a number of things that we work through as we continue to to ensure that we are being competitive. So, and then we have a diverse mix as well that impacts that 2. So that's something we're managing. We've mentioned before that managing that mix, we have some up, some down, etcetera. So I feel good about as we move into the next quarter, That being the range that we're running into that we're chasing.

Speaker 3

And I think for the foreseeable future that makes sense. Certainly every quarter we're going to update you on if we see any changes there.

Speaker 2

Okay. Yes. I'd like to actually just and I'll take it from a business perspective. So look, I mean, again, I've Mentioned this a few times. I truly believe in our pricing excellence and commercial excellence initiatives.

Speaker 2

From our centralized pricing team is working with those local market leaders To apply these data driven approaches to ensure we're preventing gross margin leakage, we're valuing our service appropriately in the markets in which we serve. And And so even though it's a declining market or we're in normalizing times, the fact is given our diverse product mix and other We can do things like sell mixed truckloads of products to achieve higher blended margins. We get bundled products. We can think about dynamic pricing. We're just trying to apply a sophisticated approach to making sure we're finding the right balance between really trying to achieve The right sales approach when working with our customers and suppliers to grow the market and grow our share and And do right by our stakeholders.

Speaker 7

Okay, understood. Thanks for the color. Last question is just on inventories and You've done a good job of working down inventory since the last several quarters, frankly. I was curious, sequentially, how much of the Inventory reduction was deflation versus volume. And then moving forward, how do you view your inventory levels Here as we're moving into maybe a cautiously optimistic volume environment.

Speaker 3

Yes. The primary amount of Inventory that came down from really the beginning of the year is actually volume. We've made a very conscious effort to reduce our inventory as a whole To right size it and align with normalized demand and where we are expecting to go forward as well as we just want to manage inventory better and And do have strong working capital rigor. So certainly, there's a little bit of price in there, but the majority is just really good execution by the team to reduce inventory.

Speaker 7

Okay. Thanks very much. I'll pass it on.

Operator

Next question comes from Reuben Garner with Benchmark Company. Please go ahead.

Speaker 6

Thank you. Good morning, everybody. Most of my questions have been answered. I want to ask one on your warehousing versus the direct Business. I don't think I saw the Q2 mix.

Speaker 6

Sorry, we had several reports this morning. Are you seeing continued increase in the use of the warehousing pieces. And can you discuss maybe your margin difference between those 2? Is that helping Kind of margins sustain at these 6% EBITDA type levels?

Speaker 3

Yes. We're not seeing a material change Between what our percentage of warehouse and directs are, as well as related to margin, Similar, directs generally a little higher than structural and then you've seen our warehousing going in higher than that. It's certainly something we watch. That mix of warehouse and direct is important as it relates to our blended margins and it's something we actually about quite a bit internally on ensuring that when we get business, we are being cognizant of the impact of that. But really, I wouldn't say there's been a material change in either the amount coming out of warehouse nor the margin impact Recently.

Speaker 2

That's right. And I'll use that question. I'm sorry, go ahead. I'm sorry. I was just

Speaker 6

going to say, so do you We've heard consistently that the dealers are pretty hesitant to carry kind of normal levels Inventory just with risks with the consumer and the economy and everything else. Like is there risk to the downside that if they do get more comfortable and they Carry their own inventory and use you guys more direct that that would be a mix drag for you and I guess how big of a drag could that be if it happened?

Speaker 2

That's a great segue into the point I was going to make earlier, which is, as Kelly said, we are as we think about our Strategic growth initiatives, we are focused on obviously growing our specialty product categories and driving out of warehouse sales and Making sure that mix is appropriate. But as it relates to this market and the point you just made, 2 step distribution and in particular a pure play 2 step distribution like BlueLinx plays a vital role in helping our customers manage their inventory. As you think about kind of our warehouse layouts and what we have, we have lots of outdoor storage given the acreage On our premises, we're rail served. We have large warehouses. So our customers by and large do not have the space Carrie, a lot of material.

Speaker 2

What you're seeing in this normalizing market probably is in some cases, Some folks have gone from, let's say, buying direct for manufacturers with railcars and they've shifted to managing their inventory more Tightly in buying truckloads of materials, which is very, very good for our business. So it allows us to really help them manage their working capital, Provide just in time delivery and do other things that help them manage their business in light of the current conditions, but also serve their customers Better. We've also expanded to do more job site delivery. We've invested in more Moffets on our fleet and so on and so forth. So I feel really good About where the market is heading and the value proposition that BlueLinx is a 2 step distributor plays with our customers.

Speaker 6

Great. That's very helpful. And then my only other question is just a follow-up. Kelly, you mentioned Pricing declined sequentially, I think, in the specialty category. I just want to clarify there.

Speaker 6

I mean, I understand the EWP and The treated lumber piece of that where there's a little bit more commodity tied to it. What about some of the other categories that you guys serve, whether it's Decking or siding or doors or some of the things that are less commodity tighter, those prices stable Sequentially or are you seeing pressure on them as well?

Speaker 3

Yes. Well, I think I might have been referring to a little bit more with a year more of a year pricing declines in my earlier comments versus sequentially. But as it relates to so just to clarify that, We obviously saw some pretty significant deflation year over year. But sequentially, I mean, we're really where we're seeing if there's any little bit We're also seeing relevant cost reductions as well, so we're holding those margins. So a little bit on the top line.

Speaker 3

Certainly, we saw a little bit of commodity impact, not just in the structural side, but also a bit on the specialty other sequentially as well. We saw a little bit of softness and now we're starting to see that pickup With improvements in the commodity markets in July. So it's not it's really not it wasn't a big story really sequentially, It's more the year over year.

Speaker 6

Got it. Thanks guys. Good luck going through the rest of the year.

Speaker 3

All right. Thank

Operator

you. There are no further questions at this time. I would like to turn the floor back over to Guy Nubel for closing comments.

Speaker 7

Thank you, operator. That concludes our call today. So should you have any questions, please reach out to our Investor Relations department. You may now disconnect. Have a good day.

Operator

Concludes today's teleconference. You may disconnect your lines at this time.

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Earnings Conference Call
BlueLinx Q2 2023
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