Bluelinx Holdings Inc (BXC) 2005 Q3 法說會逐字稿

Welcome to the Bluelinx Holdings third quarter financial results conference call. At this time all participants are in a listen-only mode. Following management's prepared remarks we'll hold a Q and A session. To ask a question please press star followed by one on your touchtone phone. If anyone has difficulty during the conference, please press star, zero for operator assistance. As a reminder this conference is being recorded today November 8, 2005. I would now like to turn the conference over to Jody Burfening. Please go ahead ma'am.

Thank you, operator, and welcome everyone to Bluelinx third quarter 2005 earnings conference call. With us this morning are Stephen Macadam, Chief Executive Officer, George Judd, President and Chief Operating Officer and David Morris, Chief Financial Officer. A Press Release was issued earlier this morning. For those of you who do not have a copy it is available on the Investor Relations section of the Company's Web site at www.bluelinxco.com. Before starting the call I would like to remind everyone that on toady's call management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including all statements concerning future or unexpected events or results. Actual results could differ materially from those projected in the Company's forward-looking statements due to known and unknown risks and uncertainties including among other factors the risks and uncertainties described in the Risk Factors section in the Company's Annual Report on Form 10-K for the year ended January 1st, 2005 and in its periodic reports filed with the Securities and Exchange Commission from time to time. Given these risks and uncertainties management cautions you not to place undue reliance on forward-looking statements. Bluelinx undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise except as required by law. With that requirement completed I would now like to turn the call over to Stephen. Good morning, Stephen.

Good morning. Thank you, Jody, and good morning to everyone. Thank you to everyone for joining us this morning for our third quarter earnings conference call. As the new CEO of Bluelinx I want to use this introduction as an opportunity to discuss a few of my thoughts about the Company and opportunities before us. Then I'll hand the call over to George Judd who will provide the third quarter overview of what gives you our operational performance. He will be followed by David Morris who will take you through our financial results in more detail. Then I'll come back and conclude with a few brief closing prepared remarks before we open it to questions. We should have plenty of time for Q and A.

I've been the CEO of Bluelinx now for a little less than three weeks but I've served on the Board for the past eighteen months so I have arrived here at the Company with a good working knowledge of the place, its team, its business strategy and our potential. Since arriving I've spent a lot of time meeting and talking with people throughout all parts of our Company, learning more about the systems, the processes and culture that drives the Company. The experience has really done nothing but reinforce the reasons I've joined the Company and I thought I might share those with you this morning.

First, Bluelinx is a powerful national building products distributor that utilizes a centralized platform that cost hundreds of millions of dollars to put in place and would be very difficult to replicate today. This platform gives Bluelinx the ability to manage account information, enhance freight logistics, maximize revenues by utilizing real-time pricing inventory market data and with it I believe we have a distinct advantage as a building products distributor. The result is that we have the opportunity to accelerate our profitable growth long-term growth by providing high value supply chain management solutions. We are ahead of other building products distribution companies and we intend to extend that lead.

Second, Bluelinx had developed the expertise, talent and processes required to grow in the less price sensitive higher value specialty products segment of our business. I know we've talked a lot about that before. I want to be clear that we're not intending to de-emphasize structural products from an absolute volume standpoint but we do intend to intend to greatly accelerate the growth of specialty over the next three years or so so that it becomes a much larger portion of our business. The growth of specialty requires developing solutions based and value added approaches with close alliance, in close alliance with our suppliers and customers. It takes time to build this momentum but I am confident that Bluelinx has the talent and expertise and systems in place for us to make this happen.

My third and final point is that as an independent company Bluelinx has already unlocked a lot of value and what really excites me is the potential to unlock even more value. We can do this by providing unmatched national distribution solutions for vendors and customers both existing and new, many of whom would not have been our customers or suppliers if Bluelinx were still part of Georgia-Pacific. As an independent company we're positioned to succeed. These are the three main reasons I'm excited about the future of Bluelinx. What that goal boils down to is the ability and desire to do the right thing for this business, to serve our customers well and grow our specialty products business. We will fund growth so long as that growth exceeds our cost to capital and we plan on maintaining our dividend. As we do these things we will build shareholder value. Now as we work towards these goals it's important to understand that a large portion of our business continues to be influenced by cyclical and volatile pricing. Since Bluelinx went public last December prices in our industry have generally trended lower with significant short-term volatility within this trend. This translates to short-term quarter-to-quarter earnings volatility. As noted in our conference call last quarter, we are accustomed to managing the business in both up and down cycles and as George will discuss in a minute our third quarter performance clearly demonstrates this. Bluelinx has the opportunity to capitalize on our leadership position in this growing and vital industry. We have the opportunity to organically grow our business and consolidate the industry by making smart accretive acquisitions. These are our opportunities. They are also the goals against which we will judge our progress going forward so now let me turn the call over to George who will review the quarter operationally in more detail. George?

Thank you, Stephen. Good morning, everyone. We're going to review our operational performance for the quarter starting with a brief overview of the numbers and I will discuss the factors impacting our quarter and provide an update on our initiatives to grow our business. I'll wrap up my discussion with an assessment of the current quarter's environment. For the quarter sales totaled $1.45 billion, down 3.7% from $1.51 billion last year. The sales decline reflects a 1.6% unit volume increase offset by a 5.3% decrease in pricing. Net income for the third quarter was $13.9 million or $0.46 per diluted share. This compares with $20.1 million or $0.67 last year.

Before I get into a more detailed discussion of our performance I want to take a few minutes to discuss the impact of hurricanes Katrina and Rita. As everyone knows, these storms were devastating to people and communities in their path. Our thoughts and prayers are with those who continue to suffer in the aftermath of these storms. For Bluelinx our distribution facility in New Orleans was heavily damaged and remains closed. All Bluelinx employees in the region are safe. The storm's most obvious impact on our industry and our business was the immediate sharp rise in structural product prices. We believe this reaction was largely emotional as the demand occurred outside of the storm impacted areas in a supply chain that before the storms hit had been reducing on hand inventories in the face of continued price deterioration. The result was that the entire country excluding the hurricane affected areas bought wood. This created an inventory build across the supply chain. Since then structural product prices, many of which hit their highs for the year in September, have been declining. At Bluelinx we were managing inventories during the quarter as we always do in a weak pricing environment that is heading into its slower winter season. The storms allowed us to accelerate our inventory reduction in structural products. The result is that we ended the quarter with historically low inventories and entered the fourth quarter well positioned for the slower season. We expect to manage our structural product inventories at or near these levels for the remainder of the year but we will react accordingly if pricing opportunities present themselves.

For specialty inventories the storms created some supply disruptions and price increases for many of our petroleum based products including vinyl siding, roofing and insulation. Our customers generally have understood the circumstances surrounding the situation and we have been successful in passing through the price increases. To sum up the storms had a temporary but dramatic positive impact on structural product pricing and demand. The region impacted by the storms will be rebuilt over a period of years. That has just now started and even with the loss of our New Orleans facility, we are well positioned to participate in this rebuilding from our facilities in Shreveport, Baton Rouge and Pensacola.

Now let me turn to our presentation. As a reminder the slides that I will be referring to are posted in the Investor Relations Section of our Web site. These presentation slides accompany our operational and financial review. We invite you to view them during our remarks. I will begin our review of the third quarter's operational performance on slide three. On a trailing twelve-month basis our unit volume grew 4.5% relative to the estimated end market growth of 3.3%. Our value added supply chains solutions approach continues to drive unit volume growth.

Turning to slide four year-over-year sales variance by geographic region produced overall unit growth of 1.6% for this quarter. The trend from earlier in the year continued with good growth in the southeast and mid-Atlantic regions with the west, northeast and central regions lagging. We are disappointed with our performance in some regions, particularly the west where we are taking actions to improve performance. This slide also illustrates the benefit of operating a national platform in that many regions contribute to overall results, the result being that we are not overly exposed if one area of the country slows.

Looking at slide five, which shows the year-over-year sales variance by product segment you can see the third quarter unit volume in specialties increased 1.7% from a year ago as sales revenue rose 0.7% to $647.8 million. The results maps a 10% unit volume gain in products such as engineered lumber, insulation and specialty lumber offset by a 5% unit volume decline in rebar, re-mesh [ph] and other metal products. Also, when the contributions from our Lane Stanton Vance acquisition is included, specialty products unit volume increased 3.7% from the same period last year. Looking at structural products sales revenue declined 9.5% to $809.6 million as weak pricing in OSB and lumber offset a 1.5% gain in the unit volume. Plywood unit volume continues to be eroded by OSB across the country and this trend is reflected in these numbers. In OSB we experienced increased business from a number of suppliers including Hubert [ph], Louisiana Pacific in addition to our ongoing business with Georgia Pacific.

Moving to slide six we present price trends of our three structural products, OSB, plywood and lumber. As you can see, structural product prices spiked toward the end of the quarter after declining for the first two months. We also have included prices through last Friday on these charts so you can see pricing trends for the first month of the current quarter. OSB and lumber, which both hit their lows for the year in August, jumped 69% and 22% respectively with their September peaks in the wake of the hurricanes but as you can see in the charts, have since given up almost all of these gains. Through November 4th plywood prices were also down to near pre-Katrina levels after rising 59% in September from their August lows. As a reminder, Bluelinx has both the processes and experience in place to deal with the shifting with the shifting price scenarios. In the last four to five weeks of the third quarter we managed our business against a rapidly rising price environment selling on hand product into a price increase without rebuilding inventory with higher cost product because we believe the seasonal slowdown was right around the corner.

If you turn to slide seven, you can see our strategy resulted in overall gross margins that trended towards our normalized trend rate. Slide eight shows the third quarter channel mix continued basically unchanged from the first two quarters of the year. For structural products you see some shift to warehouse and away from direct for the quarter reflecting our ability to channel some of that business through the warehouse in the final four weeks as prices increased. Additionally we did not chase prices by adding new high-priced inventory, the end result being that we reduced risk as prices turned lower again going into the slowest season of the year.

Turning to slide nine you can see that we reduced total inventory during the third quarter by $67.2 million from the second quarter as average on hand turn days declined to 40 from 42, reflecting our success in managing inventory. During the period we made a concerted effort to reduce specialty products inventories. Through the end of the third quarter specialty product dollar inventory down about $35 million or 13% from the second quarter and $52 million or 18% from the end of 2004. As we roll new specialty products into our markets we expect to add inventory and anticipate that year-end specialty products inventories will be slightly above where we ended the third quarter. We maintained good working capital velocity in the third quarter with total working capital turn days on a thrilling twelve-month basis at 42, unchanged from the second quarter. As you know, working capital is a critical performance measure in our business and it is one of the productivity initiatives that we are pursuing.

Among the other initiatives are margin improvement, labor productivity and logistics productivity. Let me briefly review these. Regarding margin improvement we have completed two quarters using our new pricing systems with our experienced increased utilization of the system which increases overall pricing efficiencies. Currently this system is primarily used for transactional orders but we also are beginning to use the system for our program business. Labor productivity, which is the difference between unit volume growth and the change in average head count on a rolling twelve-month basis, was 1.1% at the end of the third quarter. Over this period we have grown unit volumes by 4.5% with a 3.4% increase in head count. About one-half of this increase was directly related to additions needed to support Bluelinx as a public company. As for logistics productivity, delivery costs per ULE, unit load equivalent, during the third quarter rose only 3.9% from a year ago despite a 48% increase in fuel costs.

Now I want to review the four pillars of our strategic growth strategy and highlight the progress we're making on each of these to our value added solution selling's approach and by continuing to allocate resources towards these. First, we are focused on targeting growing accounts that serve attractive high growth markets. On a year-to-date basis target accounts, which contribute 42% of sales revenue, grew 3% faster than the balance of our business. We continue to be successful in adding new customer programs for specialty products such as Louisiana Pacific composite decking, engineered lumber and vinyl siding.

Second, we are increasing volume at our under represented segments, particularly industrials. On a year-to-date basis industrial and manufactured accounts, manufactured housing accounts, grew 4% faster than all other accounts. These accounts make up 24% of total revenue for the quarter.

Third, as you know, growing specialty products into a larger portion of our overall business is a strategic imperative. In the third quarter Bluelinx entered into an agreement with Louisiana Pacific to serve as the national distributor for LP's weather brand composite decking and railing and its crystal white railing systems. This is our first specialty products distribution agreement with LP and we believe Bluelinx won the business because we were able to delivery the best value proposition including a national solution and generally managed platform-- and centrally managed platform; excuse me. We are very excited about this opportunity. Louisiana Pacific is an industry leader and is investing in next generation lines of specialty products. Our program with LP is in its early stages but we've already trained all 1,000 of our sales employees and initially stocked our warehouses. We believe this single program has the potential to generate annualized revenues in excess of $100 million over the first two years. It represents a strong step towards our objective of expanding into additional specialty programs with LP and other major vendors over the next several years.

Our fourth and final strategic growth pillar is acquisitions. We will pursue acquisitions to both augment organic growth and/or to grow the specialty products business. In July we closed on our first acquisition, Lane Stanton Vance, a California based distributor or specialty products. This acquisition augments our specialty expansion into the west where we have identified and are executing on opportunities to grow LSV business with Bluelinx customers. LSV was accretive in the third quarter.

In summary, we continue to make good progress in driving the growth of high margin specialty products. Growing specialty products requires both cultivation of and close interaction with our customers and suppliers in order to understand their needs and develop value added specialty product programs. The process requires an investment of time and expertise but we believe Bluelinx is uniquely positioned with the right value proposition to grow specialty business relationships evidenced in this LP agreement I just described. Response from both specialty product vendors and customers continues to bode well for future success.

Now I would like to comment on our current market assessment. Looking at housing starts they remain robust on a national basis and that's reflected in most of our markets with some signs of weakness in parts of the Midwest and northeast. Also the hurricane-affected areas are just beginning the rebuilding process

Now as for pricing, structural prices have been declining since the September peaks. In light of the approaching winter we are prepared for continued price weakening and we believe our inventories, both structural and specialty, are well positioned. At this time we are continuing to aggressively pursue specialty and industrial business while diligently managing costs. Now I would like to turn the call over to David for a review of our financial results.

Thanks, George. Before reviewing the third quarter's financial performance I'd like to remind everyone that for purposes of comparative analysis I will discuss prior year's results on a pro forma basis, the full explanation of which is included in the beginning of this presentation. An appendix accompanying this presentation includes the reconciliation of the as reported statements of operation to the pro forma results.

I'll start my presentation with slide eleven, which presents the quarterly sales analysis. For the quarter ended October 1st, 2005 Bluelinx reported sales of $1.45 billion, down 2.7% or %55.4 million from last year's third quarter. The sales decline was due largely to lower structural product pricing as George explained, partially offset by a 1.6% increase in unit volume.

Turning to slide twelve you will see that Bluelinx generated $137 million in gross profit in the third quarter, down 3.7% or $5.2 million from last year. Gross margin for the quarter was 9.4%, unchanged from the same period last year.

As shown on slide thirteen, operating expenses for the quarter totaled $102.9 million, an increase of $4.7 million or 4.8% from a year ago. This primarily reflects the addition of operating expenses from LSD and higher fuel costs partially offset by lower sales promotion support. Operating income for the quarter was $34.1 million versus $44 million for the third quarter of 2004.

Now turning to slide fourteen and moving down the income statement, the interest expense for the quarter was $11.2 million up $1.2 million from the pro forma prior year. Net income was $13.9 million or $0.46 per diluted share compared to a pro forma net income of $20.1 million or $0.67 last year.

Now let's turn to year-to-date results starting with slide fifteen. For the nine months ended October 1st, 2005 Bluelinx reported sales of $4,29 billion versus $4.35 million last year. Structural product sales fell 5.3% during the nine months to $2.43 billion while sales for specialty products increased $3.9 million-- 3.9% to $1.9 billion. Year-to-date unit volume rose 3.1% while pricing was a negative 4.4%.

Turning to slide sixteen you will see that Bluelinx generated $372 million in gross profit year-to-date, down 19.5% or $90.3 million from last year. Gross margin year-to-date was 8.7% down, from 10.6% last year. As shown on slide seventeen, total operating expense for the nine months was $291.1 million, down $12.6 million or 4.1% from the prior year's results. Reduction in expense was primarily the result of lower sales commissions, reduced incentive compensation expense and lower sales promotion support. Operating income for the nine months was $80.9 million versus $158.6 million last yeas reflecting the decline in gross profit partially offset by lower variable operating expenses.

Turning to slide eighteen in the year-to-date income statement interest expense was $31.2 million, up $3.5 million from the pro forma prior year number, primarily as a result of higher interest rates. Net income for the nine months was $30.1 million or $0.99 per diluted share compared to a pro forma net income of $77.3 million or $2.56 lasts year.

Now let's turn to slide nineteen, which shows the balance sheet at the end of the third quarter. Assets on October 1st, 2005 totaled $1.24 billion compared with $1.29 billion at the end of the second quarter. Total liabilities of 1.06 billion included $369.3 million of accounts payable and bank overdrafts and debt of $654 million consisting of $489 million outstanding on our $800 million revolver and a $165 million mortgage note. In the third quarter we reduced our total debt by $60.7 million from second quarter, primarily as a result of our inventory reduction. As George noted, our inventories at the end of third quarter were managed to near year-end levels.

Moving to slide twenty you see third quarter and year-to-date cash flow for Bluelinx. For the quarter Bluelinx generated $85 million in cash from operations. Year-to-date net cash provide by operations totaled $28.3 million. Bluelinx spent $3.7 million in property plant and equipment during the quarter and $10 million year-to-date, mainly for mobile equipment consisting of trucks, trailers, forklifts and sales force automobiles. Additionally other investing activities primarily reflect the acquisition of LSV. This concludes my prepared remarks. I'll turn the call back to Stephen.

Thank you, David. Bluelinx performed well during the third quarter. Our performance demonstrates that we have both the strategy and process for managing through shifting pricing environments like those that characterized the quarter. As George noted, structural prices have pulled back from their September peaks and we anticipate they will continue to trend downward as our industry enters the slow season. As a result, we expect continued pressure on gross margins during the fourth quarter and are managing our business accordingly. The quarter also showcased our long-term growth strategy in action. The specialty agreement with Louisiana Pacific and our LSV acquisition are great examples of the progress we're making to grow unit volume, gain share and expand into the higher margin, less price sensitive specialty products. I'm confident as we move forward in the fourth quarter and into 2006 that Bluelinx is positioned to execute on our strategic growth plan. As I said earlier, we will make the right decisions to profitably grow our business over the long term. So in closing I'm extremely excited to be here, a part of this team. We are very excited about the opportunities ahead for Bluelinx and in the weeks and months ahead I look forward to meeting with more of our employees as well as customers, vendors and investors. With that we will open the call up to questions. Operator, if you can instruct everyone on how to do that, that would be great.

[Operator Instructions] Our first question comes from Edings Thibault with Morgan Stanley.

Stephen, congratulations to you on the new role, sounds pretty exciting.

Yes I'm excited.

You're getting that one through. Just looking at these variance to trends as you look at-- this is always a helpful analysis for me in trying to understand the impact sometimes of price and volume on your business relative to historical trends. I was wondering if you would spend a little bit more time walking through why on the various products in the delivery channels you may be above or below your trend margins.

Trend gross margins?

Yes.

Would you rather deal with them on third quarter of this year versus last year or year-to-date?

I'm thinking more third quarter of this year versus the trend.

Okay the third quarter of this year the margin was 9.4 versus last year or I'm sorry, versus trend which we've always said is 10.1. 0.1 of that is rate, 0.3 of that is channel mix and 0.3 of that is product mix. That's the difference between what we had in the third quarter and what the trend is that we kind of look at.

0.1 is rate. 0.3 is channel mix. I'm sorry 0.3 is-- ?

Product mix.

Product mix?

Yes.

And just looking at some of the individual segments, looking at some of these bigger variances here it seems as if structural warehouse was actually pretty strong, which would foot with my understanding of the impact of higher prices through at least through the end of the quarter, but any reason why you know some of these other elements reload, etcetera, would be lower?

George, you want to address that?

Yes, the reload business is namely or mostly the lumber business and the lumber business did not get affected as strongly as the other portions of our structural business and the other thing, Edings, was that we foresaw the market up tick as being short lived as the activity was happening outside of the storm impacted areas. And Katrina didn't create suddenly a huge demand in the rest of the country simply because there was a hurricane in the Gulf so we expected that that was the inventory build so we made a deliberate management decision to move our products, to continue to move our products through the direct channel so that we did not build inventory at the higher prices, which did reflect in margins on the direct channel as we were spinning that wood off every day. So we sold our existing inventories. We did not rebuild those inventories so we kept that product flowing into the marketplace as the market went up and again as the market went down.

Got it and just touching on perhaps the longer term impact from Hurricane Katrina, clearly there's a massive rebuilding process underway. Can you talk about the types of products and how well you guys are positioned to take advantage of the rebuilding process?

Well, let me start with that and then, George, you can pile on. First of all, our belief, which is I think pretty much industry accepted is we think it's going to be about 50,000 incremental starts per year for the next five years. So that's kind of what we think the demand will be and we think we're ideally positioned even though we lost our New Orleans distribution center. It's a very small facility and we're kind of positioned all around that region, Baton Rouge and Shreveport and Pensacola, much, much better than our competition so we are already geared up and we're in very good shape to support that rebuild activity. Do you want to add anything to that?

No. I think that's great, Stephen, and from a share analysis our share in those markets was strong before the storms and we expect that to continue to expand as they do rebuild those markets.

Okay so I mean just as you think about how that could affect your seasonal skew or excuse me, geographic skew of your business I mean you're seeing this as a real source of long-term strength?

Well, I mean 50,000 incremental starts a year I mean it's significant but in the context of 1.8 plus or minus starts it's not-- I mean it's still a pretty small percentage. But yes we think from, as George mentioned, from a share standpoint we think it will be positive for us.

Edings, the other impact is that we do a substantial business with the manufactured housing industry and the manufacturing housing industry has seen signs of strength and as FEMA has ordered units and as some long-term replacement units are being moved into that market, so manufactured housing is very, very robust right now and we participate in that industry as well. That being said, the RV business is slow because of the escalation in price of fuel so certainly that's the increase in the FEMA units has helped more than balance that decline in RV business.

Okay so manufacturing houses is bigger than mobile housing or RV business then nationwide?

Yes.

Rick Skidmore with Goldman Sachs.

A couple of questions, first following up a bit on Edings' question with regards to channel mix on slide eight you have the warehouse channel mix went up, direct went down, which seems to go against with what George just said if I understood him correctly and how would you expect that to play out in the fourth quarter? Would you expect direct to go up and warehouse come down given that prices have come down?

Yes, Rick, it's George. We did move our inventories that we had in inventory, okay, which was in our warehouse that shows up as warehouse sales in the third quarter so that did have an increase as I mentioned in my prepared comments. What we did not do was rebuild those inventories, which balanced out the direction. My answer on the previous question was trying to explain the direct margin and the big gap between the direct margin and the warehouse margin. And then with regard to fourth quarter, we do not intend to rebuild our inventories. We intend to manage our inventories, as I said in the prepared comments, at or slightly above where they ended the third quarter unless something that we do not foresee happens in the market between now and the end of the year.

Okay and how would that ultimately affect the channel mix if inventory essentially stays flat through the quarter? Does that mean the channel mix essentially stays similar to what the third quarter is or do you expect that direct would actually go up?

Yes I think it would return back to the levels that we had previous in the year, the first two quarters of the year.

So similar to first quarter, second quarter?

Right.

And can you remind us-- I guess if we look at the prior slide on slide seven, the gross margins, that's reflective, the 2.9% direct gross margin in the third quarter? So we would expect-- that corresponds to your comment about compression in the gross margin into the fourth quarter or at least the margin being under pressure in the fourth quarter.

Well that really is probably more a function of the fact that the first two months of the quarter were under pressure. Remember the third quarter had two months of declining price trends and one bounce because of the storms so I don't know. I don't what we would think our fourth quarter would look like on that line but it's probably a--

The fourth quarter, our fourth quarter forecast as I mentioned in the prepared comments was that we expect prices to continue to trend down. However, that's at a reduced rate from where we were much earlier in the year because we're starting at a lower rate and our trend margin in the direct channel is 3.4% and if we are slightly trending downward, then our margin would be in that range or slightly below.

Okay different topic, how much of the hurricane was-- how much cost did you actually see roll through the P&L as a result of the hurricane and did you have to write down that inventory in New Orleans? And then second question would be did you have to write up any inventory given the price spike at the end of the quarter?

Well, let me take a stab at that in the beginning. First of all, we were insured. We're insured. We have a $250,000 deductible and New Orleans was completely destroyed. All the inventory is worthless and the building is destroyed so we're fully covered for that and our deductible is $250,000 so that's the direct hit from that particular location. Other than that we didn't incur a ton of additional freight costs for moving stuff around because we're well served in other DCs down there. But the last part of your question, which is really the fuel impact, the impact on ethylene and polyethylene that come through in some of our products, the asphalt for roofing, George, let me let you address that.

Yes, and we didn't have any inventory write down and write ups. And we had some other non-material expenses where we relocated employees and we got all of our employee's positions in the other markets so that we could continue to operate and serve those markets from Shreveport, Baton Rough and Pensacola but certainly fuel costs affect us with the size of our fleet. As I've mentioned in the previous two calls that we do attempt to pass the fuel increases along in the form of cost of goods. We sell most of our product delivered and fuel is included in that price but our fuel expense did increase by $1.6 million and we passed on our estimates probably 80% of that $1.6 million.

Okay so just to be clear on the New Orleans center, because there was insurance you had to-- you essentially took the loss but also recouped on the insurance and that all rolled through in the third quarter. Is that right?

David, is that right?

We recorded the deductible of 250 as Stephen mentioned. We removed the inventory and the buildings and equipment from the books, $2 to $3 million and we set up an insurance receivable of the same amount that's in other current assets.

Okay so there wasn't any P&L impact other than the 250?

That plus the operating expense impact that George mentioned.

[Operator Instructions] Yuri Krapivin with Lehman Brothers.

Steve, congratulations on your new responsibilities. My first question has to do with the SG&A expense. On a sequential basis it went up about $10 million even as your sales declined. Could you please elaborate on that?

Yes, 3.4 of that was due to the acquisition of LSV and 1.6 of that was fuel. Those are the two big drivers of it and the rest is just kind of some odds inside that were ups and downs that were offset by several things. If you look at it on a year-to-date basis it was up 3.6 million of which 3.4 was LSV.

Okay, thank you. My next question has to do with your volume growth for the first nine months Bluelinx posted volume growth of about 3% as you noted. I think the actual housing starts during this period were up about 6%, so it appears that your volume has been under shooting the end markets this year. Do you have any comments on that?

Yes, Yuri-- this is George. In Q3 Bluelinx took the approach that we were going to manage our outflow even well before Katrina, that we were going to manage our outflow and try to manage our margins up, so we did pass on some business throughout the quarter when prices were falling. Then when Katrina came we did not rebuild our inventories and we did not buy into that escalation when the markets were increasing dramatically, so we had to manage our outflow and that certainly cost us revenue. You know, we managed our outflow to our program customers and our contract customers and most of our transactional business was very, very, limited from Katrina through the end of the quarter and that was a direct result of us managing our inventories down and then having a big surge in that demand when our inventories were already well positioned.

Okay, so what you are saying essentially it was a trade off between sales and profitability?

Yes, we made the decision to manage our inventories down throughout the quarter and not to rebuild.

And how did the December quarter start in terms of volume? As you look at the month of October how are volume trends year-over-year?

Business in October is pretty good all across the country with the exception of Michigan, and Ohio, and parts of Pennsylvania, and then a little sliver of New England that just deluged with weather, but business continues to be pretty good and the weather is holding up very nicely across most of the country, so we're so far so good with regard to volume and activity.

And finally, in terms of the acquisition pipeline. Do you believe you are ready at this point to make your next move or are you still digesting the LSV acquisition?

Well, George you could pile on here too. Based on what I've seen so far in the first couple of weeks, Yuri, the LSV acquisition has actually gone quite well. The Company is basically on plan for-- from pro forma profitability. We haven't lost any customers or any employees or any suppliers that we didn't plan on losing going into it and so I'd say the integration so far has gone quite well. We have an active process where we've got several others in the pipeline. I don't think we'll be prepared to announce anything in the fourth quarter, but I wouldn't be surprised early next year for us to be ready for us to do number two. George, you want to add anything to that?

Yes. The reason, Yuri, the reason that we haven't made an acquisition is not because of LSV. It's because we told you that we're going to be a diligent buyer and we're working on that, but we have not changed our strategy with regard to acquisitions.

It makes sense. Thank you.

Your next question comes from Steve Chercover of D.A. Davidson.

A couple of my questions have been answered, but just what might be helpful to me would be to as opposed giving the volume growth in percentage terms, is it possible to give us the actual units for OSB, plywood and lumber either for the third quarter or from some base?

We certainly have that information and can do that. We need to think about it, but we've got your request.

That would be great if we could follow up offline.

Yes, I think we should follow up offline because I think that from our-- the reason we're kind of scratching our heads on the structural products the units of measure are pretty standard and if we give you a volume growth it's measured by per 1,000 board feet or per 1,000 square feet. That should get you, I think, where you need to be for your models.

Once you get into specialty it's impossible.

Yes, specialty things everything's got a different unit of measure and it becomes a much more cloudy from a-- you really have to go into it by product code.

Yes, I recognize that, so just for the three commodities that we can track in random lengths, that would be helpful to me at least and then we'll have to be a little bit more diligent on what's going on in the specialty products, but I'll follow up offline. Thanks.

We'll get you where you need to be.

Our next question is a follow up from Edings Thibault with Morgan Stanley.

Thanks. Just a few points and George and Stephen I think it's interesting to kind of follow up on this post Katrina decision making process that you guys went on because it doesn't strike me as necessarily a tradeoff between sales and profits. It strikes me as a tradeoff between cash and profit, as counter intuitive as that may seem. Is it fair to say that if you'd gone and executed on the sales that potentially were out there in September buying to support those sales that you would have been more profitable in the third quarter?

I guess. We may have been more profitable in the third quarter, but I would say that we would more than make up for that in the fourth quarter on the other way.

No and I mean and that's exactly my point. I mean I'm not-- it's just part of an interesting way to measure it. I mean you definitely left, arguably, some short-term profits on the table at the expense of actually dramatically reducing inventory and generating $80 million in operating cash flow.

I don't know if I agree with that. I think it's an interesting thing to look at, but again I've only been here a couple of weeks, but what I've seen and George you can pile on here as well, but what I've seen the organization doing, which folks tell me is actually relatively unique because our inventories are so low today going into the fourth quarter we're actually not under the normal type of margin pressure that we would be under if we had more inventory in the slow fourth quarter, so the teams are not faced with a situation where they basically have to move product and that's-- I don't know, that feels pretty good to me because we're maintaining margins at a level that we haven't in this time period.

I think, Edings, the one thing that we really need to understand is that when Katrina hit and prices escalated mill lead times go out and on-time deliveries from the mills go out, so we were and I think rightly so, did not buy because that wood wouldn't have showed up when the prices were still high. It would have showed up when the prices were still falling and we would have bought it at higher prices and we would not be happy that we chased that volume. We wouldn't be happy going into Q4. And then with regard to Q4, last year we started off we told you that we had to make some changes in the way we managed our inventories, both structurally and specialty. We've done that. We've made organizational changes. We've made management changes. We've implemented systems and so our inventories are in very, very good shape, but are in service, which our in service is our ability to meet our customer demand on our product, is also very, very good and we have the right amount of inventory for the business conditions that we have today. And now on structural products if the market all of the sudden started going way up and our customers all wanted to buy three times as much as they bought from us last week, then we wouldn't be able to fulfill that need but we don't want to fulfill that need.

All right, right. Okay and just some housekeeping questions regarding the fourth quarter. You ran through kind of-- I mean you've made the point on inventory levels particularly for your commodity product. Sounds like specialty's going to be a little bit higher, but structural should be more or less flat and by that you're probably talking about unit basis, right?

That's correct.

And still, last year accounts receivable was a huge positive for you in the fourth quarter. Do you anticipate that same level of change there as you guys collect into seasonally slow period?

Yes, we certainly do.

Okay and finally, capital spending for the year. What are your plans, David?

It continues to be on track. We've talked about previous calls the 10, $12 million range is kind of a normalized replacement level and that's what we expect for the year.

And you've spent 10, right?

Right, yes, which most of that was trucks and that's done.

Okay, so it'll be pretty minimal. Got it, thanks very much, good luck.

That is all the time we have today. Please proceed with your presentation or any closing remarks.

All right, well, thank you everyone for joining the call. Let me leave with just a few closing things, kind of repeating what I said before. First, we think Bluelinx has the ability to profitably grow the business utilizing the centralized platform that we have to deliver high value supply chain solutions across the entire country. Second, we think this team has the expertise and talent to grow our specialty products business, which requires very close collaboration with suppliers and customers in this value added solutions arena and as an independent Company, finally, we have already unlocked a lot of value and considering our national scope and the fact that we're the market leader in a very fragmented industry we think we have the potential to unlock a lot more value, so thanks again for joining us and we look forward to speaking with you again next quarter.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.