BLUELINX HOLDINGS INC BXC
July 23, 2018 - 9:33am EST by
deerwood
2018 2019
Price: 34.12 EPS 8.13 0
Shares Out. (in M): 10 P/E 4.3 0
Market Cap (in $M): 329 P/FCF 0 0
Net Debt (in $M): 580 EBIT 0 0
TEV ($): 918 TEV/EBIT 0 0

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  • housing bull market just getting started
  • it's a self-help thesis
  • trades at 3x free cash flow
 

Description

BlueLinx Holdings, Inc. (“BXC” or the “Company”) is a two-step home building products distributor with a
footprint concentrated in the eastern and central US. In January zzz007 posted a solid write-up on the
Company. Subsequent to that BXC has undertaken a highly attractive acquisition, currently trades at just
4.3x pro forma LTM EPS with a +20% FCF yield and thus warrants revisiting. This valuation disconnect
primarily stems from investor confusion, limited IR, lack of sell-side coverage and chart anchoring/
investors thinking they have “missed it.” Erratic trading around the recent Russell 2000 reshuffle and
headline housing concerns have likely also contributed to recent price weakness. We believe the risk-
reward profile now is arguably as appealing as it has ever been despite the stock’s appreciation since
October 2017. There are a number of near-term catalysts that should lead to +100% upside with
downside protection derived from the Company’s large asset base and strong free cash flow profile. In
June there were material insider purchases at the level close to where the stock is presently trading.
 
CATALYSTS
Near and medium-term catalysts to value realization include: 1) reporting of combined Q2 financials and
an update on the integration process in August; 2) continued monetization of its 33 owned warehouses
illuminating the value of its assets and going toward debt paydown (targeted leverage ratio reduction
from 4x to 2.5x over the next year); 3) increased institutional awareness from expanded corporate
communication and sell-side initiations by Wells Fargo, BTIG and likely others; and 4) ongoing
operational improvements converting to financial performance.
 
CEDAR CREEK ACQUISITION
BlueLinx’s acquisition of Cedar Creek changed the entire setup and is worth discussing up front. BXC
paid $413M in cash equating to 6.9x and 3.8x 2017 pre-synergy and post-synergy EBITDA, respectively.
The transaction was announced March 12 and closed on April 13. Due to its overlapping footprint, BXC
was uniquely well positioned to bid on this business, precluding some peers from participating. This
transaction is highly accretive, doubles the size of the business and increases its scale which will improve
margins and delevers the balance sheet on a pro forma basis.
 
With the transaction, management announced it expects that at least $50M in annual cost savings will
be realized within 18 months. These saving represent a 50% increase in EBITDA and will be derived from
fleet consolidation, procurement and G&A reduction. We were initially skeptical of the magnitude of
this guidance, however, subsequent research led us to conclude that these levels will likely prove to be
conservative. First, $50M represents 1.5% of combined revenue. This is in-line with those of the BLDR-
ProBuild and BEC-Allied deals yet BXC’s geographic overlap is significantly greater than that of those
entities (see map). Conversations with industry participants further indicated that BXC goals were
attainable. Second, the former CEO of Cedar Creek’s new employment agreement as COO of the
combined business includes an incentive performance bonus tied to achieving a minimum of $50M in
annual integration synergies. Presumably he would not have agreed to this baseline if he did not believe
it attainable. Third, these cost savings estimates assume 100% retention of the combined sales teams.
They have publicly stated this to avoid disruption in the ranks but it is pretty clear there is going to be a
reduction here as well. Fourth, the guidance comes from a well-informed position as going into the
transaction these companies knew each other well, had been in discussions for a while and is supported
by synergy analyses undertaken by McKinsey. These estimates also do not include revenue synergies nor
any continued margin improvement from the overhaul completed last year (more below). The
transaction was de-risked somewhat when Cedar Creek reported a clean audit from PwC in late June.
 
 
 
LEGACY PROFILE & INDUSTRY OVERVIEW
BlueLinx operates 39 distributions centers (“DCs”) totaling 9.4M square feet of warehouse space in the
eastern and central US. It distributes over 10,000 SKUs of structural (45% of revenue, 33% of GP) and
specialty products (55% of revenue, 66% of GP). Indicative structural products are rebar, plywood,
lumber and specialty products include molding, siding, roofing and paneling. Sales volumes are driven by
residential housing starts and to a lesser extent R&R. BXC sells its products to commercial builders,
manufactured housing companies and home improvement retailers. None of its customers represent
greater than 5% of revenue. This is a localized industry where proximity to the end-user is critical. It is a
very fragmented space with competitors being captive distribution arms of lumber companies and
building products manufacturers (such as Boise Cascade and Weyerhaeuser) and a host of small local
mom-and-pop operators. The closest publicly-traded peer is Huttig Building Products (HBP). Private
competitor LBM has filed an S-1 and is intending to pursue an IPO later this year.
 
COMPANY BACKGROUND
BlueLinx was formerly the internal lumber distribution arm of Georgia Pacific. In 2004, Cerberus Capital
acquired these assets and was subsequently taken public later that year (with Cerberus selling 47% of its
stake to the public). The Company struggled during the downturn due to the obvious market conditions
and some management missteps/ high leadership turnover. Cerberus did provide financing through
PIPEs in 2011 and 2013 following an ill-fated speculative bet on lumber prices by the former CEO, but
other than that BXC was, by all accounts, an after-thought to the major shareholder. Until its existing
management team came onboard three years ago, BXC was essentially run as a volume-focused
business with limited attention to returns and margins.
 
Last October Cerberus sold its shares, ending its involvement in the business. As it was an insignificant
last position in its 2004 vintage fund, the sale price was indiscriminately low at $7 per share. The
removal of that overhang opened up the float, improved the stock’s liquidity, expanded the potential
shareholder base/ index inclusion and enabled the Company to use its stock as a currency for
acquisitions and management incentives.
 
OPERATING IMPROVEMENTS LED BY STRONG MANAGEMENT TEAM
The Company’s CEO previously ran another building products business (Euromax Holdings) from 2008
through 2013--no doubt an inauspicious time to take over a housing products company. He successfully
completed that company’s restructuring (over-levered by sponsor) and a refinancing while also
stabilizing performance and driving growth. BXC’s CFO was formerly head of finance for Home Depot in
North America. The existing management team took over in 2014 and has undertaken steps to
significantly improve the business operationally and financially. These include divesting less profitable
locations, implementing of pricing based on return, eliminating low margin/ low return SKUs,
decentralizating sales to better connect with its local customers, delevering the balance sheet and
optimizing of working capital. Below lays out the financial performance and improvements management
has made since taking over.
 
 
 
Management has publicly stated they thought they were in the third inning of improvements that they
believe they can realize. This position is substantiated by the fact that peer Huttig is generating 20%
more revenue per square foot and over 20% gross margins versus BlueLinx at 12.6%. Per management,
every 1% increase in pre-Cedar Creek BXC gross margin equates to $16-18M in incremental EBITDA, so
clearly the upside potential is significant. The below table contrasts the margin structure of BXC and
Cedar Creek (CC) with that of other distributors. If the combined BXC were able to attain 6% EBITDA
margins it would generate $200M in EBITDA on its existing revenue base.
 
 
It should be noted that Cedar Creek’s CEO, Alex Averitt, is going to be assuming the role of COO,
bolstering the ranks of the combined company. By all accounts Averitt is a highly effective operator that
drove growth and efficiency at Cedar Creek. His cost cutting abilities should be put to good use in the
integration process and ongoing improvement of BXC. As noted, his employment agreement from June
includes an incentive performance bonus tied to achieving at least $50M in annual integration synergies.
 
REAL ESTATE
BlueLinx presently owns 33 DCs or 5.3M square feet of warehouse space from Minnesota south to Texas
and eastward. In 2016 the Company began selling assets in the form of sale-leaseback transactions with
the proceeds being used to meet required mortgage amortization payments and reduce its debt. Cedar
Creek leases all its facilities presenting the potential for BXC to outright divest of its locations. These are
highly desirable assets so this process should be orderly. As it continues, the value of these holdings will
be illuminated. Management stated that they were targeting the first week of July to decide which
locations will be retained so clarity on this should be forthcoming.
 
Growth in ecommerce has led to increased demand and higher multiples for the category of industrial
real estate with valuations ranging from sub-5% capitalization rates for major market class A industrial
to 7.6% for secondary class B with replacement costs of $30-80 per square foot. Over the last two years
the Company has sold 19 sites, realizing $131M in proceeds or 4x net book value. Based on trading
comps, BXC’s 10 largest remaining facilities are worth $172M. If the rest of the DCs are included at a
depressed $20 per square foot, the implied value is $200M. The four locations BXC SLB’ed in January
sold for an implied $47 per square foot. It should be noted that the Company has $89M in NOLs it will
use to shield capital gains taxes on a good portion of these future real estate sales. Those NOLs begin to
expire over the next three years.
 
 
VALUATION
Lack of awareness of the merits of the Cedar Creek acquisition, the fact that BXC does not presently
screen well (unadjusted numbers show a high multiple and leverage ratio) and investor aversion to the
Company’s low margins lead to the overlooking of its asset base. Meanwhile, the aforementioned
improvements have created a sightline to margin expansion and higher returns. The market has given
them little credit for these endeavors but shareholders should be rewarded as these factors manifest
themselves further in the financials. While the Company does generate low margins, it has an attractive
FCF profile primarily due to low maintenance capex (with ample existing capacity available).
 
 
BXC is currently trading at 6.0x pro forma LTM EBITDA. Its closest publicly-traded peer HBP trades at over
12x adjusted EBITDA while almost all building products companies are trading above 10x EBITDA. 8-10x
EBITDA equates to $65-100 per BXC share or 75-160% upside from current. Regardless of peer
valuations, BXC’s 4.3x pro forma LTM cash EPS multiple (over a 20% FCF yield to the equity) is way too
low. These current multiples also do not factor in any margin improvement, revenue growth or ascribe
any value to its real estate assets. Investors derive downside protection from BXC’s relatively large asset
base.
 
RISKS
- Housing and Lumber Exposure: BXC’s revenue is approximately 90% correlated with US single family
housing starts so a downturn in the building industry would impact the business. However, in the event
of such a decline the Company can rapidly reduce inventory (inventory is liquid and typically turned
every month) and increase FCF. The current management team’s level of experience should serve as a
mitigant. During the financial crisis while at the helm of Euramax, CEO Lewis actually managed to
expand margins despite the challenging environment. At BXC’s current depressed multiple investors are
not paying for any upside in starts. The Company seeks to minimize its exposure to commodity lumber
and turn inventory as fast as possible. DSOs have improved to 30 days so BXC does have some exposure
to price fluctuations but it is relatively modest. A single-name building products or housing ETF short
could be used to offset housing exposure.
- Merger Integration: All indications so far suggest the integration is on-track as anticipated. Earlier this
month Cedar Creek’s audit came back clean. Even if they only realize a fraction of the cost synergies, the
stock is cheap.
- Leverage: BXC will have four turns of pro forma leverage. This is down from a leverage ratio of 8x at the
end of 2017. While optically still high, it will get paid down in fairly short order through FCF and asset
sales. The structure of the debt is also worth noting as the ABL is secured by liquid inventory thus is
somewhat more akin to a payable than for instance term debt.
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1) Reporting of combined Q2 financials and an update on the integration process in August

2) Continued monetization of its 33 owned warehouses illuminating the value of its assets and going toward debt paydown (targeted leverage ratio reduction from 4x to 2.5x over the next year)

3) Increased institutional awareness from expanded corporate communication and sell-side initiations by Wells Fargo, BTIG and likely others

4) Ongoing operational improvements converting to financial performance

1       sort by    

    Description

    BlueLinx Holdings, Inc. (“BXC” or the “Company”) is a two-step home building products distributor with a
    footprint concentrated in the eastern and central US. In January zzz007 posted a solid write-up on the
    Company. Subsequent to that BXC has undertaken a highly attractive acquisition, currently trades at just
    4.3x pro forma LTM EPS with a +20% FCF yield and thus warrants revisiting. This valuation disconnect
    primarily stems from investor confusion, limited IR, lack of sell-side coverage and chart anchoring/
    investors thinking they have “missed it.” Erratic trading around the recent Russell 2000 reshuffle and
    headline housing concerns have likely also contributed to recent price weakness. We believe the risk-
    reward profile now is arguably as appealing as it has ever been despite the stock’s appreciation since
    October 2017. There are a number of near-term catalysts that should lead to +100% upside with
    downside protection derived from the Company’s large asset base and strong free cash flow profile. In
    June there were material insider purchases at the level close to where the stock is presently trading.
     
    CATALYSTS
    Near and medium-term catalysts to value realization include: 1) reporting of combined Q2 financials and
    an update on the integration process in August; 2) continued monetization of its 33 owned warehouses
    illuminating the value of its assets and going toward debt paydown (targeted leverage ratio reduction
    from 4x to 2.5x over the next year); 3) increased institutional awareness from expanded corporate
    communication and sell-side initiations by Wells Fargo, BTIG and likely others; and 4) ongoing
    operational improvements converting to financial performance.
     
    CEDAR CREEK ACQUISITION
    BlueLinx’s acquisition of Cedar Creek changed the entire setup and is worth discussing up front. BXC
    paid $413M in cash equating to 6.9x and 3.8x 2017 pre-synergy and post-synergy EBITDA, respectively.
    The transaction was announced March 12 and closed on April 13. Due to its overlapping footprint, BXC
    was uniquely well positioned to bid on this business, precluding some peers from participating. This
    transaction is highly accretive, doubles the size of the business and increases its scale which will improve
    margins and delevers the balance sheet on a pro forma basis.
     
    With the transaction, management announced it expects that at least $50M in annual cost savings will
    be realized within 18 months. These saving represent a 50% increase in EBITDA and will be derived from
    fleet consolidation, procurement and G&A reduction. We were initially skeptical of the magnitude of
    this guidance, however, subsequent research led us to conclude that these levels will likely prove to be
    conservative. First, $50M represents 1.5% of combined revenue. This is in-line with those of the BLDR-
    ProBuild and BEC-Allied deals yet BXC’s geographic overlap is significantly greater than that of those
    entities (see map). Conversations with industry participants further indicated that BXC goals were
    attainable. Second, the former CEO of Cedar Creek’s new employment agreement as COO of the
    combined business includes an incentive performance bonus tied to achieving a minimum of $50M in
    annual integration synergies. Presumably he would not have agreed to this baseline if he did not believe
    it attainable. Third, these cost savings estimates assume 100% retention of the combined sales teams.
    They have publicly stated this to avoid disruption in the ranks but it is pretty clear there is going to be a
    reduction here as well. Fourth, the guidance comes from a well-informed position as going into the
    transaction these companies knew each other well, had been in discussions for a while and is supported
    by synergy analyses undertaken by McKinsey. These estimates also do not include revenue synergies nor
    any continued margin improvement from the overhaul completed last year (more below). The
    transaction was de-risked somewhat when Cedar Creek reported a clean audit from PwC in late June.
     
     
     
    LEGACY PROFILE & INDUSTRY OVERVIEW
    BlueLinx operates 39 distributions centers (“DCs”) totaling 9.4M square feet of warehouse space in the
    eastern and central US. It distributes over 10,000 SKUs of structural (45% of revenue, 33% of GP) and
    specialty products (55% of revenue, 66% of GP). Indicative structural products are rebar, plywood,
    lumber and specialty products include molding, siding, roofing and paneling. Sales volumes are driven by
    residential housing starts and to a lesser extent R&R. BXC sells its products to commercial builders,
    manufactured housing companies and home improvement retailers. None of its customers represent
    greater than 5% of revenue. This is a localized industry where proximity to the end-user is critical. It is a
    very fragmented space with competitors being captive distribution arms of lumber companies and
    building products manufacturers (such as Boise Cascade and Weyerhaeuser) and a host of small local
    mom-and-pop operators. The closest publicly-traded peer is Huttig Building Products (HBP). Private
    competitor LBM has filed an S-1 and is intending to pursue an IPO later this year.
     
    COMPANY BACKGROUND
    BlueLinx was formerly the internal lumber distribution arm of Georgia Pacific. In 2004, Cerberus Capital
    acquired these assets and was subsequently taken public later that year (with Cerberus selling 47% of its
    stake to the public). The Company struggled during the downturn due to the obvious market conditions
    and some management missteps/ high leadership turnover. Cerberus did provide financing through
    PIPEs in 2011 and 2013 following an ill-fated speculative bet on lumber prices by the former CEO, but
    other than that BXC was, by all accounts, an after-thought to the major shareholder. Until its existing
    management team came onboard three years ago, BXC was essentially run as a volume-focused
    business with limited attention to returns and margins.
     
    Last October Cerberus sold its shares, ending its involvement in the business. As it was an insignificant
    last position in its 2004 vintage fund, the sale price was indiscriminately low at $7 per share. The
    removal of that overhang opened up the float, improved the stock’s liquidity, expanded the potential
    shareholder base/ index inclusion and enabled the Company to use its stock as a currency for
    acquisitions and management incentives.
     
    OPERATING IMPROVEMENTS LED BY STRONG MANAGEMENT TEAM
    The Company’s CEO previously ran another building products business (Euromax Holdings) from 2008
    through 2013--no doubt an inauspicious time to take over a housing products company. He successfully
    completed that company’s restructuring (over-levered by sponsor) and a refinancing while also
    stabilizing performance and driving growth. BXC’s CFO was formerly head of finance for Home Depot in
    North America. The existing management team took over in 2014 and has undertaken steps to
    significantly improve the business operationally and financially. These include divesting less profitable
    locations, implementing of pricing based on return, eliminating low margin/ low return SKUs,
    decentralizating sales to better connect with its local customers, delevering the balance sheet and
    optimizing of working capital. Below lays out the financial performance and improvements management
    has made since taking over.
     
     
     
    Management has publicly stated they thought they were in the third inning of improvements that they
    believe they can realize. This position is substantiated by the fact that peer Huttig is generating 20%
    more revenue per square foot and over 20% gross margins versus BlueLinx at 12.6%. Per management,
    every 1% increase in pre-Cedar Creek BXC gross margin equates to $16-18M in incremental EBITDA, so
    clearly the upside potential is significant. The below table contrasts the margin structure of BXC and
    Cedar Creek (CC) with that of other distributors. If the combined BXC were able to attain 6% EBITDA
    margins it would generate $200M in EBITDA on its existing revenue base.
     
     
    It should be noted that Cedar Creek’s CEO, Alex Averitt, is going to be assuming the role of COO,
    bolstering the ranks of the combined company. By all accounts Averitt is a highly effective operator that
    drove growth and efficiency at Cedar Creek. His cost cutting abilities should be put to good use in the
    integration process and ongoing improvement of BXC. As noted, his employment agreement from June
    includes an incentive performance bonus tied to achieving at least $50M in annual integration synergies.
     
    REAL ESTATE
    BlueLinx presently owns 33 DCs or 5.3M square feet of warehouse space from Minnesota south to Texas
    and eastward. In 2016 the Company began selling assets in the form of sale-leaseback transactions with
    the proceeds being used to meet required mortgage amortization payments and reduce its debt. Cedar
    Creek leases all its facilities presenting the potential for BXC to outright divest of its locations. These are
    highly desirable assets so this process should be orderly. As it continues, the value of these holdings will
    be illuminated. Management stated that they were targeting the first week of July to decide which
    locations will be retained so clarity on this should be forthcoming.
     
    Growth in ecommerce has led to increased demand and higher multiples for the category of industrial
    real estate with valuations ranging from sub-5% capitalization rates for major market class A industrial
    to 7.6% for secondary class B with replacement costs of $30-80 per square foot. Over the last two years
    the Company has sold 19 sites, realizing $131M in proceeds or 4x net book value. Based on trading
    comps, BXC’s 10 largest remaining facilities are worth $172M. If the rest of the DCs are included at a
    depressed $20 per square foot, the implied value is $200M. The four locations BXC SLB’ed in January
    sold for an implied $47 per square foot. It should be noted that the Company has $89M in NOLs it will
    use to shield capital gains taxes on a good portion of these future real estate sales. Those NOLs begin to
    expire over the next three years.
     
     
    VALUATION
    Lack of awareness of the merits of the Cedar Creek acquisition, the fact that BXC does not presently
    screen well (unadjusted numbers show a high multiple and leverage ratio) and investor aversion to the
    Company’s low margins lead to the overlooking of its asset base. Meanwhile, the aforementioned
    improvements have created a sightline to margin expansion and higher returns. The market has given
    them little credit for these endeavors but shareholders should be rewarded as these factors manifest
    themselves further in the financials. While the Company does generate low margins, it has an attractive
    FCF profile primarily due to low maintenance capex (with ample existing capacity available).
     
     
    BXC is currently trading at 6.0x pro forma LTM EBITDA. Its closest publicly-traded peer HBP trades at over
    12x adjusted EBITDA while almost all building products companies are trading above 10x EBITDA. 8-10x
    EBITDA equates to $65-100 per BXC share or 75-160% upside from current. Regardless of peer
    valuations, BXC’s 4.3x pro forma LTM cash EPS multiple (over a 20% FCF yield to the equity) is way too
    low. These current multiples also do not factor in any margin improvement, revenue growth or ascribe
    any value to its real estate assets. Investors derive downside protection from BXC’s relatively large asset
    base.
     
    RISKS
    - Housing and Lumber Exposure: BXC’s revenue is approximately 90% correlated with US single family
    housing starts so a downturn in the building industry would impact the business. However, in the event
    of such a decline the Company can rapidly reduce inventory (inventory is liquid and typically turned
    every month) and increase FCF. The current management team’s level of experience should serve as a
    mitigant. During the financial crisis while at the helm of Euramax, CEO Lewis actually managed to
    expand margins despite the challenging environment. At BXC’s current depressed multiple investors are
    not paying for any upside in starts. The Company seeks to minimize its exposure to commodity lumber
    and turn inventory as fast as possible. DSOs have improved to 30 days so BXC does have some exposure
    to price fluctuations but it is relatively modest. A single-name building products or housing ETF short
    could be used to offset housing exposure.
    - Merger Integration: All indications so far suggest the integration is on-track as anticipated. Earlier this
    month Cedar Creek’s audit came back clean. Even if they only realize a fraction of the cost synergies, the
    stock is cheap.
    - Leverage: BXC will have four turns of pro forma leverage. This is down from a leverage ratio of 8x at the
    end of 2017. While optically still high, it will get paid down in fairly short order through FCF and asset
    sales. The structure of the debt is also worth noting as the ABL is secured by liquid inventory thus is
    somewhat more akin to a payable than for instance term debt.
     
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    1) Reporting of combined Q2 financials and an update on the integration process in August

    2) Continued monetization of its 33 owned warehouses illuminating the value of its assets and going toward debt paydown (targeted leverage ratio reduction from 4x to 2.5x over the next year)

    3) Increased institutional awareness from expanded corporate communication and sell-side initiations by Wells Fargo, BTIG and likely others

    4) Ongoing operational improvements converting to financial performance

    Messages


    SubjectRe: Tyvm.questions
    Entry07/23/2018 12:43 PM
    Memberzzz007

    I will field this one:

    1. Addressed in writeup near the end. Read carefully.

    2. Services levels, locations.

    3. U.S. Census Bureau releases detailed info monthly.

     


    SubjectTwo questions
    Entry07/24/2018 11:10 AM
    Memberbentley883

    Hi deerwood

    I have two questions: 1) why have the EBITDA margins for both BXC & CC been well below the other comp's (what is fundamentally different about the businesses) and if they hit their object of $50m in cost reductions, what do you believe their margins will be, & 2) can you provide a link to the document outlining the incentive performance bonuses for senior management tied to achieving the $50M in annual integration synergies, as I could not find this in the June 5th filings on the sec.gov website?

    Thanks

    Bentley


    SubjectRe: Two questions
    Entry07/24/2018 11:58 AM
    MemberTallGuy
    Re: Incentive Performance Bonus
    Integration Incentive Plan
    On April 18, 2018, in connection with the Cedar Creek Acquisition, the Compensation Committee approved the BlueLinx Corporation Integration Incentive Plan (the “Plan”). Pursuant to the Plan, certain employees of the Company may be eligible to receive cash bonuses based on the achievement of certain integration synergy targets relating to the integration of the Cedar Creek operations, as will be specified in each such Plan participant’s participation agreement (each such agreement, a “Participation Agreement”), during the performance period. The performance period for the Plan commenced on April 16, 2018 and will end on October 16, 2019. There are two possible tranches of cash bonuses payable under the Plan: a base integration bonus and a supplemental integration bonus, each of which will be payable based on separate, specified integration synergy targets set forth in the applicable Participation Agreement.
    Pursuant to the Plan, any base integration bonus will be paid in two installments with 50% paid within sixty (60) days after the fiscal month end in which the initial integration performance target is met, and the second 50% installment paid six (6) months following the fiscal month end in which the initial integration performance target is met, but in any event no later than April 30, 2020. In addition, any supplemental integration bonus will be determined within a reasonable time after the expiration of the performance period and paid on or before March 15, 2020. Unless specified otherwise in a Participation Agreement, a Plan participant must be employed by the Company at the time of the payment of any bonus pursuant to the Plan in order to receive such bonus. In addition, no bonus will be paid unless and until the Company achieves a threshold level of adjusted EBITDA as determined by the Committee, and if such threshold level of adjusted EBITDA is not achieved prior to October 16, 2019, no bonus will be payable under the Plan.
    ..................
    1.Participation. The Participant is hereby eligible to receive a Base Integration Bonus and a Supplemental Integration Bonus in accordance with and subject to the terms and conditions of the Plan and this Agreement.
    (a)    Upon the realization of at least $50 million in Net Synergies (the “Initial Integration Performance Target”), the Participant’s Base Integration Bonus shall be equal to the product of (A) the Participant’s Base Salary multiplied by (B) [____%]. The Participant’s Base Integration Bonus will be reduced to the extent the Cost To Achieve Synergies exceeds $[__] million in an amount equal to [___] for every [___] million in excess of [___] million of Cost To Achieve Synergies.
    (b)    The Supplemental Integration Bonus shall be in an amount equal to [___%] of the Participant's Base Salary for every [__] million of Net Synergies above $50 million up to [__] million of Net Synergies. The Participant’s Supplemental Integration Bonus will be reduced to the extent the Cost To Achieve Synergies exceeds [__] million in an amount equal to [__] for every [_] million in excess of [___] million of Cost To Achieve Synergies.
    (c)    No payment will be made on account of the Base Integration Bonus or the Supplemental Integration Bonus until the Minimum Adjusted LTM EBITDA is at least [___] million. In the event the Minimum Adjusted LTM EBITDA has not exceeded [___] million on or before October 16, 2019, then no Bonus shall be paid under the Plan.
    (d)    No Bonus shall be paid to the Participant if the Participant is not employed on the applicable payment date for such Bonus.

    SubjectPro forma LTM EBITDA?
    Entry07/24/2018 02:58 PM
    MemberValue1929

    New to the situation here, but I'm curious why you would use "pro forma LTM EBITDA ($154mn)" giving them full credit for $50mn in synergies on an LTM basis, it makes this whole situation look much cheaper than it actually is. Using $104mn LTM EBITDA makes things look much more appropriate ~ 9x LTM EV/EBITDA on a combined basis. I understand mgmt. pumped out those numbers, but it is not even close to the current reality.

    There is also a "severely underfunded" pension.. Wondering how you are accounting for that as it looks like possibly a 2018 liability or if mgmt. has discussed a time-line in '18-19 for mitigating the gap?

    Thanks


    SubjectRe: Re: Pro forma LTM EBITDA?
    Entry07/24/2018 04:38 PM
    MemberValue1929

    I'm not saying I wouldn't use pro forma EBITDA of $154mn, but just 18 months out. All I'm saying is using it on a trailing basis as if magically they generated $50mn in synergy EBITDA without any heavy lifting is aggressive. There is a lot that can happen in 18 months. It also looks like it is being comped to current multiples, HBP and other building products companies. 

    I still find it an intriguing idea, the synergies make sense and the incentives align--and yes, it is cheap if they can get $50mn+ in synergies by the EOY '19.


    SubjectRe: Re: Pro forma LTM EBITDA?
    Entry07/24/2018 06:24 PM
    Memberotto695

    I've owned this for a while, but I did cut down my position recently because I do not believe the recent downtick in lumber pricing over the last two months (-20%) will have zero impact on profits.  Even if they hold their 12.5% gross margin +/-, the $-profits will decline due to ASP coming down.  If lumber comes down alot more, it may derail the thesis.  Given that we dont have a sense whether CC can maintain its margins during declining ASPs, I think that is also a near-term risk.  If anyone has any additional information or reason to believe why the ASP decline wont impact BXC or CC much, would love to hear more.

    I also think you need to add in the capital leases into the valuation.  So, valuation is still compelling, but not as much if you adjust for capital leases, which one should do.

    So, I generally agree, but valuation needs adjusting and I think the lumber price risk could be real....Kept  some of my position because could work really well over the medium-term if they get the cost saves and lumber price decline can be managed.

     

     


    SubjectInsider Buying
    Entry07/25/2018 02:26 PM
    Memberbroncos727

    Hi Deerwood, thanks for posting the idea.  You mention material insider purchases in June.  I looked at those form 4s and they seem like the executives were getting granted some RSUs that vest over a certain time period.  Am I missing something?  To me that is not the same as a purchase, but maybe I am not looking at this right...


    SubjectRe: Re: Two questions
    Entry07/25/2018 03:16 PM
    Memberbentley883

    deewood

    Thanks for the response. As a follow up, given the lower margins/returns at the combined BXC/CC after the $50m in cost savings vs. the comp's (due somewhat as you point out to a larger mix of commodity products), what do you believe is an appropiate EBITDA multiple (I assume a discount to the comp's) for the new company? Also assuming some further synergies) after completing the $50m savings in 18 months, what do you think the following 3 year EBITDA CAGR is?

    Thank again for the interesing idea.


    SubjectQ2 update
    Entry08/09/2018 11:41 AM
    Memberdeerwood

    Solid quarter and favorable update regarding the integration of Cedar Creek. Here are the main takeaways so far.

    Revenue:

    • Up 12% Y/Y on a pro forma basis

    • Management noted limited attrition in sales force and accelerating sales into new regions

    • Topline strength would indicate there has been limited disruption or customer loss

    • Expressed optimism of customer base

    EBITDA:

    • 4% margin, a post-crisis high (pro forma, doesn’t include the benefit of synergies)

    Integration:

    • Very positive tone from a typically conservative and measured management team

      • “Even more convinced of the merits of the deal”

    • Reiterated synergy targets and expressed increased confidence that they will reach the $15M run-rate level by year-end. Appears likely they will increase the $50M cost savings guidance over the next couple quarters.  

    • Expect to realize $25M in proceeds from sale (not sale-leaseback) of overlapping facilities with full flow through given the $92M in NOLs remaining

    • Already consolidated 2 locations, expect 3 more this quarter and 10 by year-end

    • Cost of integration reduced from $40-55M to $25-40M

    This update de-risks the setup and improves the sightline to our appraisal of +$75 per share. Upcoming conference presentations, asset sales and potential sell-side initiations should help between now and Q3 earnings.

     


    SubjectRe: Q2 update
    Entry08/09/2018 11:58 AM
    Memberzzz007

    Agreed...positive call.

    Only addl comment I would add is that they reiterated intention to get to 2.5-3x levered by end of 2019. Taking the most conservative view, I am penciling out 3x @ $150mm EBITDA = $450mm debt. That would be $165mm reduction from current. Assume $25mm of that is from the facility sale proceeds, leaves $140mm net reduction. Maybe some of this comes out of working capital...assume 30%. Net of $100mm FCF from business operations over 18-mos = $11/shr (over 18 mos) or $7.35/annum. So stock trading at sub 6x FCF.

    And could presumably be upside to extent they are not penciling out cash inflow from working capital, etc.

    I will update when I have a chance to speak w/Company.

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