Good morning. My name is Adrienne, and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx second quarter 2019 investor relations conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to your host, Mary Moll, Director of Investor Relations. Please go ahead.
Thank you, Adrienne, and good morning everyone. We appreciate you joining us for the BlueLinx 2019 second quarter earnings conference call. The earnings release can be found in the Investors section of our company's website at www.bluelinxco.com. In addition, at points throughout our commentary, we'll be utilizing an investor presentation. This presentation is also available on our website. Joining us on the call today are Mitch Lewis, Chief Executive Officer, and Susan O'Farrell, Chief Financial Officer. I'll also remind you that this presentation includes forward-looking statements, including statements about our future operations and financial performance. These statements are subject to risks and uncertainties that can cause our actual results to differ materially from those provided, including, but not limited to, those identified in our press release and discussed in our filings with the Securities and Exchange Commission.
Forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to revise them in light of new information. Today's presentation also includes references to non-GAAP financial measures. With that, I'll turn it over to Mitch.
Thanks, Mary. Good morning. I would like to begin our call this morning with an overview of our operating performance for the quarter and the first half of the year. Susan will then review our financial performance, and I will finish our remarks with a discussion on our view for the remainder of 2019, the macroeconomic factors we are seeing throughout our industry, and their likely impact to BlueLinx. We are pleased to confirm that the integration of Cedar Creek has been substantially completed. We achieved this key milestone ahead of schedule and well under our original budget. This was a result of our team's hard work over the past 15 months to combine two industry leaders.
This challenging undertaking required a consolidation of systems and processes, an assessment and plan to address numerous overlapping markets, and last, but certainly not least, the merging of two employee bases and cultures. I'm proud of the dedicated commitment by our associates to achieve this significant milestone. We feel that the organization is well-positioned to build on our strong market presence east of the Rockies. We've begun to see trends where our combined business platform is now benefiting BlueLinx and feel this will materialize further as our integration activities season over time. Going forward, we will communicate to investors about our business as a fully integrated entity. As we discussed during our first quarter call, we understood that we would be facing tough year-over-year comparisons in the second quarter due to the significantly higher commodity wood product prices that occurred in the second quarter of 2018.
The year-over-year comparison was further amplified as second quarter 2019 commodity wood-based prices actually declined during the quarter. For the second quarter of 2019, net sales of $706 million were down approximately $187 million from last year. We estimate that approximately 40% of the year-over-year quarterly decline in net sales was due to the deflation in commodity panel and lumber prices. This year-over-year deflationary comparison should moderate as we head into the end of the summer season. Sales volume during the second quarter was also impacted by softer-than-expected single-family housing starts. Current general macroeconomic indicators and demographic trends, including the Federal Reserve's reduction in interest rates last week, point to what should be a strengthening housing market in the back half of the year. These factors, however, did not help single-family housing starts in the second quarter, which were down 6.2% compared to 2018 levels.
We estimate that the lower-than-expected number of single-family housing starts accounted for approximately 30% of the difference in year-over-year net sales that we experienced. Transaction-related dissynergies led to the balance of the decreased volumes in the second quarter. We noted on the first quarter call that a legacy Cedar Creek siding supplier moved its siding business from BlueLinx, which accounted for approximately 20% of the reduction in net sales that we experienced in the second quarter. To help mitigate this impact, we are pleased to have sourced siding products from James Hardie during the second quarter in certain markets and also have expanded our distribution network and commitment to Allura, MiraTEC, Ply Gem, Royal, and other premium siding and accessory manufacturers. While we will continue to develop and expand these relationships, this effort will take some time to ramp up.
Finally, in certain territories where we had overlapping legacy facilities following the merger, our sales volumes continued to be temporarily affected in the second quarter. Our teams have been working diligently to improve our operating performance as well as the level of our customer service at these locations over the last several months, both of which have improved considerably. We recently established a center for operational excellence at BlueLinx to augment our local facilities' performance. We view the operational challenges we experienced in these markets during the first half of the year as transitory in nature and believe that we're now in a position to begin to regain the ground we lost during our integration of these locations. I am pleased to report BlueLinx was able to drive gross margin improvement in the second quarter, which was led by our specialty products category.
We validated key components of our merger rationale as we generated measurable gains from procurement efficiencies. We also continued to assess our cost structure, and we were able to reduce or eliminate additional costs. As a result, in the second quarter, we maintained the SG&A cost level that we experienced in the first quarter of 2019, even though our sales increased by over 10% during the second quarter, which highlights the opportunity we have to leverage our operating costs as the business expands. We're also pleased to have made significant progress in our debt reduction by executing four real estate transactions in the second quarter. While Susan will provide additional details in her remarks, these transactions generated aggregate gross proceeds of $57 million, which were used to pay down our term loan and revolving credit facility.
We will continue to evaluate similar transactions to potentially augment the operational de-leveraging we expect from our business. Combination with Cedar Creek made BlueLinx one of the largest building products distributors east of the Rockies, possessing one of the most comprehensive product offerings and a broad geographic footprint. While we undertook this transformative event during an incredibly volatile operating environment, the core of our business, our product breadth, our service offering, and our position in the marketplace have not changed. The rationale for this merger still holds true. Over the past 15 months, we have demonstrated the flexibility of our business model, maintaining a lean operation and ensuring that costs align with the level of sales. We are confident that as conditions stabilize, and we're optimistic that they will not just stabilize, but will improve, that BlueLinx will be well-positioned to reap the benefits.
Now I'd like to turn it over to Susan, who will provide details on our financial performance.
Thanks, Mitch, and good morning, everyone. I'll briefly review the financial results and then discuss our financial position. For any questions, we welcome investors to take part in the Q&A following our prepared remarks. Starting with slide seven, net sales were $706 million compared to $893 million in the second quarter last year. As discussed by Mitch, sales were impacted from a softer-than-expected housing market, historical commodity deflation year-over-year, and the short-term transaction-related sales dissynergies. Year-over-year comparisons were particularly challenging this quarter as commodity wood product prices reached their peak in the second quarter of 2018 and remained lower than normalized levels in the second quarter of 2019. We delivered gross profit of $94 million, compared to $104 million in the prior year period.
Gross margin improved 170 basis points to 13.3% from 11.6% from the prior year period, which included an acquisition-related inventory step-up charge of approximately $11 million. For the quarter, we had adjusted EBITDA of $25 million, compared to $37 million. Cash on hand and excess availability under the ABL as of quarter-end was approximately $101 million, up $9 million from year-end 2018, which should provide ample liquidity to meet our working capital and other cash needs. Debt under our term loan and revolving credit facility was reduced by $113 million over the prior year period as we continue to make significant progress on reducing our bank debt. Moving to slide eight, in the first half of 2019, net sales totaled $1.3 billion, equal to the first half of 2018. Gross profit was $180 million, compared to $159 million in the prior year period.
Gross margin improved by 140 basis points to 13.4%, from 11.9% from the prior year period. The prior year period includes the previously mentioned impact of the acquisition-related inventory step-up charge of $11 million. For the six-month period, we had adjusted EBITDA of $42 million compared to $45 million in the prior year period. Moving to slide nine, as we look at the second half of the year, we anticipate a continued stabilization in wood-based commodity prices. We do not expect the historical decline in wood-based commodity pricing that we experienced in the second half of 2018, which should favorably impact our comparable structural products' gross margins. We faced peak year-over-year declines in commodity wood prices in the second quarter of 2019.
The composite lumber index was an average of $540 in the second quarter of 2018, which decreased 36% to an average of $344 in the second quarter of 2019. Composite panels continue to trend the same way, running an average of $550 in the second quarter of 2018, compared to an average of $350 for second quarter 2019, also declining 36%. As we look at slide 10, lumber and panels make up the majority of our structural products. These products, such as lumber, OSB, and plywood, tend to be more sensitive to commodity pricing. Our structural products accounted for approximately 32% of our sales in the second quarter. The remainder of our sales are in specialty products, such as siding, engineered lumber, cedar products, molding, and insulation. Specialty products made up approximately 68% of our sales in the second quarter.
We are pleased with the margin expansion we achieved during the quarter, despite the challenges from commodity pricing. Our second quarter overall gross margin rate was 13.3%, up 170 basis points. The prior year period includes the impact of an acquisition-related inventory step-up charge of $11 million. Specialty gross margin was 15.9%, up 100 basis points over the prior year period. This reflects the benefit of our leadership in wholesale distribution and the purchasing power it affords. Structural gross margin was 7.7%, down 90 basis points from last year.
This level was impacted by second quarter demand and continued pricing pressure, given the recent wood-based commodity price product stabilization, we have seen a nice uptick in our structural gross margin rate in July, signaling a return towards the second quarter 2018 levels. Moving to the company's strong de-leveraging potential on page 11, debt reduction remains one of our top priorities. Given our relatively low capital requirements and low working capital financing costs through our ABL, BlueLinx is well-positioned to be able to pay down debt. We are pleased that on a year-over-year basis, debt reduction under the term loan and revolving credit facility was reduced by $113 million. Our continued real estate monetization efforts contribute to this significant reduction as we completed four real estate transactions during the quarter.
Gross proceeds from the two sale leasebacks and two outright property sales totaled approximately $57 million and were used to pay down the term loan as well as our revolving credit facility. Following the closing of the four transactions, BlueLinx still owns 29 properties appraised at approximately $115 million. We are actively marketing the five remaining properties that we exited as part of the Cedar Creek transaction. These properties have an estimated aggregate market value of approximately $13 million, and proceeds from the sales would go to further debt reduction. BlueLinx also retains Federal NOLs, now totaling approximately $53 million that should help us optimize the tax impact of future earnings as well as additional income from selling real estate. The cash flow characteristics of BlueLinx continue to provide an excellent platform to generate cash and to reduce debt.
Slide 12 indicates our current estimated uses of cash on an annual basis. These costs, including interest, finance lease payments, capital expenditures, state taxes, and a few other small items, total about $70 million annually. Now I'll turn the call back over to Mitch.
Thanks, Susan. We would like to provide additional color today on our expectations for the second half of 2019 and into 2020 and beyond. Looking ahead to the second half of the year, as Susan mentioned, we have recently seen improvement in the gross margins of our structural wood-based products. While we acknowledge that we certainly cannot predict commodity prices, we do believe that the historical decline we experienced over the last 12 months is not likely to repeat itself in the near term. We expect that our structural gross margins for the remainder of the year are likely to approach the more normalized averages we saw through 2016 and 2017. The gross margins we are seeing early in the third quarter support this view.
We also anticipate that the improved gross margin we experienced in specialty products in the second quarter will likely continue through the rest of the year. The good news is that even if we conservatively assume that single-family housing starts will be flat for the remainder of 2019, and that we do not regain any of the dissynergies we've experienced this year until 2020, as a result of these gross margin improvements, we still anticipate a stronger EBITDA performance in the second half of the year relative to the first half. In addition, we also expect to see efficiency gains in the second half of the year, adding an additional $5 million-$8 million in operational cost savings when compared to the first half of 2019. As we look ahead into 2020 and beyond, we remain focused on the long-term opportunity BlueLinx affords its stakeholders.
We have challenged our sales teams to grow our revenues from current levels by at least 10% in 2020 and another 10% in 2021. This growth, based on our operating leverage, should continue to enhance our EBITDA and cash flow. We believe this growth is an achievable target in light of our consolidated strength and the early dissynergies that have occurred. We also expect to receive additional assistance as our overall markets improve from current levels. Finally, our EBITDA should be further enhanced as we are confident that there remain additional cost-saving opportunities that we intend to realize from logistics optimization, expense rationalization, and the continued utilization of the advantage that our combined business platform affords us. To be clear, while the team made good progress, we are simply not satisfied with our performance in the second quarter. We can, we will do better.
We do believe that the second quarter will prove to have been an inflection point for our company, that the hard work we have done and remain committed to do have set the stage for significant value creation for BlueLinx in the years ahead. We plan to visit with investors in the coming months at both investor conferences and on roadshows and hope to speak with several of you before we report the next quarter. With that, Adrienne, we'd now like to open it up for any questions that we may have.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one. That is star one for a question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Alex Rygiel.
Thank you. Good morning, and congratulations on your debt reduction actions and the completion of the Cedar Creek integration.
Great. Thank you, Alex.
Couple questions. First, you're currently marketing five properties valued at $13 million, but you've got a total of 29 properties with a total value of $115 million. Have you started to do some work on additional properties over and above the five that are currently being marketed? In any way you could kind of bracket what that opportunity is maybe in 2020 for further sales?
We definitely have begun looking at alternatives that we have. Obviously, we've gotten pretty good at sale leasebacks on properties in areas that we anticipate staying for a long period of time. We are having some dialogue about that. We are not in a position right now to let you know what that actual gross amount potentially could be in 2020.
Fair enough. It's exciting that you've completed the integration, and I suspect you're going to, at some point, sort of switch gears from a cost-cutting organization to a sales and market share and regain market share kind of organization. At what point do you think that kind of switch plays out? Is it sort of happening today, or should it happen maybe in early 2020?
Yeah. We actually kind of turned the page a couple of weeks ago. We had, in the last six weeks or so, we've had the senior regional vice presidents and senior executive leadership team together to talk about moving forward from a share gain perspective. In the last couple of weeks, we had 50 plus of our sales management leaders, our general managers, come together in Atlanta and spent two and a half days talking about opportunities that we have locally and on a consolidated basis to grow the top line of the business and establish clear-cut goal deployment execution plans by location to help drive the top line of the business. Organizationally, we've turned that page. We're focusing now on the business going forward. Obviously, we will continue to emphasize opportunities that we have from an efficiency perspective.
As we look at the time it takes to start realizing the share enhancements to the organization, it will take some time. That's why we talk about a growth of 10% in 2020 and also talk about what we believe to be strong characteristics of the business, even if we don't grow in the back half of this year, which of course, is not what our target is. We will challenge the organization to continue to grow.
Obviously, your opportunities for organic growth are pretty significant. Longer term, obviously, additional M&A opportunities, I suspect, are very fruitful. How should we think about M&A in your future? I suspect it's more of a later 2020 event. If you comment on that, and is there any possibility of M&A that actually works towards de-leveraging the organization as well?
Yeah. We're focused on de-leveraging. We certainly will be opportunistic if there appears to be an acquisition that makes sense for the company and is de-leveraging at the same time. We clearly believe in the thesis that long term, the wholesale distribution channel is too fragmented, that there will be, over the next several years, less competitors in the marketplace, and we believe we will be one of the strongest, if not the strongest supplier of wholesale distribution at that time. It's clearly on our radar. We want to be very thoughtful about incremental capital coming into the system through debt or otherwise to pay for acquisitions. Right now we clearly have the organization continue to focus on the debt reduction that we have.
Thank you very much.
Okay. Thank you, Alex.
Again, if you would like to ask a question, press star, then the number one. That is star one for questions. The next question comes from the line of Kyle Moyer.
Good morning, and thank you for your time. I was hoping you could maybe go back through the second half thoughts and maybe expand a little bit. You went through it a little bit quick for me to jot it all down.
Okay.
Going back through the expectations for the second half of the year, Kyle?
Correct.
Okay.
I think where we're trying to give guidance towards is looking at for structural margins, gross margins, more of what we saw in line of 2016 and 2017. From a specialty perspective, the enhancements that we've seen and that were evidenced in the second quarter of 2019, we expect that to continue at a similar level. We talked about incremental operational efficiency from the first half of another $5 million-$8 million. That's making an assumption as it relates to the overall sales market being relatively flat.
What sort of operational leverage could we think about? Obviously, it's positive. It starts to tick up in any way. Is there any numbers you can frame that out with?
Yeah. For sure in the back half of the year, that $5 million-$8 million is part of what we expect from an efficiency standpoint. As far as growing the top line of the business, as you look at the SG&A as a component of the total cost and what that is from a fixed versus variable perspective, it tends to be depending on timing and quarters in the 50% of those cost range. You can have a nice healthy debate on whether your variable costs are all variable. An example would be, where you would typically think of freight cost as variable. If you have a truck that has 80% utilization and you take that truck from 80% to 95% utilization, that incremental 15% certainly is going to be a lot cheaper, although it is a variable cost in the first 80% of the truck.
Excellent. Very helpful. Then one for Susan, just with respect to, I don't think the 10-Q is out yet. On slide 11, you talk about the ABL with $369 million. Do you have the book value of the assets that are offset against that ABL, the $369?
We'll go through. I'll get that for you offline, Kyle, or we'll share that in some way with everyone. The receivables, if we think about it, we've got the receivables and the inventory. Let me slow down here for a second. We've got $366 million on inventory and $262 million on receivables. If we add that together, $628 million, $630 million or so against that. It's a nice healthy cushion over and above what we borrow against it. Really, lots of ample room there over and above.
Great. Thank you very much.
Again, if you would like to ask a question, press star, then the number one. That is star one for questions. We have a follow-up question from the line of Alex Rygiel.
Thank you. You had some positive comments with regards to margin improvement in July. I believe it was in your specialty segment. Could you comment on the overall strength of the business in July relative to maybe trends in April, May, and June?
The overall enhancement we talked about was that we expect both the specialty margins to stay at the level we saw in Q2, and we're seeing that certainly in July. I think specifically talked about the structural margins being in that range of 2016 and 2017 that we saw. We're seeing that. Again, a lot of that has to do with a relative stabilization on commodity prices. We saw a decline again in commodity prices in the second quarter of 2019. What we're experiencing now is not as much predicated on demand, but more of a relative stability from an underlying cost standpoint.
Just to add a little color to that, Alex, at the end of July, lumber was at $357, which was up about $21 from the end of the quarter. Panels was $344, up modestly, $6 from the end of the quarter. As you think about our structural gross margin rates, recency of the cost for the last 30 to 60 days changes that gross margin trajectory. As we reported 7.7% for structural for the second quarter, with those increase in rates, what we see is certainly an increase in that gross margin rate.
Again, looking back to more historical or levels that we experienced in 2016 and 2017, when we went back and looked at those numbers, they ran anywhere from, I'll call it 8.8%-9.2%, would be kind of fairly typical levels over the course of time, and we're certainly enjoying those as we see margins stabilize.
Perfect. Thank you.
Sure.
Again, if you would like to ask a question, press star, then the number one. That is star one for questions. That is star one for questions. There are no further questions.
Well, thanks, Adrienne. Thank you for your time today and your continued interest in BlueLinx. We certainly look forward to sharing our third quarter results with you in the months ahead. Have a great day.
This concludes today's call. You may now disconnect.