Bluelinx Holdings Inc (BXC) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the BlueLinx fourth quarter fiscal year-end 2005 conference call. [OPERATORS INSTRUCTIONS] Thank you. I will now turn the conference over to James Storey, Vice President Investor Relations. Please go a head.

Thank you, operator and welcome everyone to the BlueLinx fourth quarter 2005 earnings conference call. With us this morning are Steve Macadam, Chief Executive Officer, George Judd, President and Chief Operating Officer, and David Morris, Chief Financial Officer. The press release was issued earlier this morning. For those who do not have a copy, it is available the the investor relations section of the company's website www.BlueLinxco.com.

Before starting the call I am going to take a moment to read the Safe Harbor Statement. I would like to remind everyone that on today'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 1, 2005, and in its periodic reports filed with the Securities and Exchange Commission.

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 like to remind our listen that's we have posted slides on our web site, which we will be referring to during this call. We encourage you to view them during our remarks.

Additionally, the slide package contains an expanded appendix of supplementary tables available for your review. Acting on your recommendations we have expanded the appendix to include three-year history of revenue, unit volume growth, end use market growth, gross margin, and inventory. Expanding the appendix also allow us us to focus the presentation portion of this conference call on the components that we believe are most relevant to our performance for the fourth quarter of 2005.

Lastly, our investors also have asked us for a better view of our specialty products business. In response, we have moved rebar remesh out of specialty and reclassified it as a structural product. For corresponding financial information for rebar remesh now is presented in the same fashion as plywood, OFB, and lumber. We also have included the sales end margins of Lane Stanton Vance, the specialty hardwood distributor we acquired last July in our third and fourth quarter specialty products results. Previously, LSV was included in the other category. Where relevant in today's discussion, we will note the contribution of LSV to specialty results. We do not, however, intend to continue to break out LSV results in the future.

Additionally, we have restated product margins for all periods presented to include all applicable rebates. Previously these rebates were included in the other category. Now let me turn the calling over to our Chief Executive, Steve Macadam.

Thank you, Jim, and thank you everyone for joining us this morning for our fourth quarter earnings conference call. BlueLinx performed well in the fourth quarter of 2005. We continue to gain traction in our specialty products business. We demonstrated our ability to effectively manage structural product inventory the face of a very volatile pricing environment, and we demonstrated the commitment to add the people, processes, and systems necessary for further growth as a distributor of specialty building products.

With our first full-year as a public company completed, I am confident that we are well positioned to pursue continued growth in 2006. Let me briefly discuss the business objectives we are pursuing, then I will review our fourth quarter high-lights in the context of these objectives. After that, I'll turn the call over to George Judd who will discuss our fourth quarter performance in more detail.

Let us start with the specialty products business. Our primary strategic objective has not changed, and is to grow specialty products to more than 60% of our total sales over in the next three to five years. It is an aggressive goal that we are focussed on achieving. Specialty production accounted for 41% of our total sales in the fourth quarter, but 55% of our total gross margin. Our growth objectives for specialty is based on two key facts.

The first is that specialty building products generally are less volatile and carry higher margins than structural products, which translates to more stable earnings growth is higher profit margins. The second is that our focus on the specialty category distinctly differentiates BlueLinx in the supply chain by positioning us to create significant value both for our manufacturers of these products and our customers. Let me explain that a little bit further. BlueLinx is the only nationwide independent distributor that, A, poses a centralized scalable platform. B, has the ability to marshall a sales force of 1,000 professionals to help manufacturers create markets for early life cycle products, just like we're doing with Louisiana Pacific on the weather vest composite decking line, and C, offers a high touch customized distribution services on a national scale that specialty product vendors and customers require.

So specialty products distribution is our sweet spot, and we believe our value proposition is highly attractive to specialty manufacturing companies. It's where we have the most significant opportunity to profitable grow.

Now let's look at the other part of our business, structural products. As we grow specialty, we do not intend to walk away from structural, quite the opposite, it's a good business capable of producing solid profits, our plan is to continue to grow in this area, focusing on profitable growth. We are focusing our initiatives in structural and reducing our exposure to the volatility inherent in structural commodity prices through better more sophisticated inventory management, higher program sales, greater dependence on the direct channel, and use of consignment inventory. We will continue to explore better ways to manage volatility while increasing profits. Our long-term plan also calls for outgrowing the market. We did not do this in the fourth quarter, primarily because we traded structural product volume for higher margins, due to the volatile pricing environment. We made the right decision, and we believe we will outgrow the overall market over the long term.

Now let me briefly review our fourth quarter highlights. For the fourth quarter of 2005, net income totaled 14.5 million, or $ 0.48 a share, compared with a pro forma net loss of 2.7 million, or $0.09 a share for the same period a year ago. Revenue totaled 1.33 billion, a 10% increase from the same period last year. Gross profit margin for the quarter was 10.6%, compared with 8.4% a year ago. The revenue gain and improved gross margin were driven in large part by the 12.7% specialty unit volume growth achieved during the quarter.

Additionally, gross margin benefited from effective inventory management in structural products. Which achieved an 8.3% margin in the quarter, which was characterized by steeply falling prices during the first six weeks. So we believe our fourth quarter demonstrates that our strategy is beginning to show results. Before I turn the call over to George, I just want to make one other point. Unseasonably mild weather and the dramatic pricing cycle relative to the September hurricanes certainly positively impacted our fourth quarter performance. We managed our structural inventory well during this period, and we continue to execute on our structural growth strategy -- our specialty growth strategy. Events beyond our control can impact our results positively or negatively in any given quarter. Our plan is to effectively manage through these events, mitigating negative forces while leveraging positive ones. While we continue to pursue our long term objectives. We did that in our fourth quarter, and we plan to do it again effectively and efficiently in the future as events occur. With that said, I'll now turn the call over to George Judd, our Chief Operating Officer, who will discuss our quarter in more detail.

Thank you, Steve. Good morning. I'm going to review our operational performance for the quarter as it relates to strategic objectives that Steve just highlighted. For those following along with the slides, I'll begin my review with operational performance on Slide 6, which shows that our overall unit volume growth for 2005 was 3.9%, or slightly below the market growth rate for 2005. Unit volume growth for both the full year and fourth quarter was positively impacted by continuing strength of our end use markets.

In the fourth quarter, for instance, estimated end use market growth was at 6.7%, driven primarily by housing starts. The 6.7% figure represents the strongest year-over-year quarterly increase of 2005. Another point to keep in mind is that we made the deliberate decision in both the third and fourth quarters not to replenish structural product inventories during the price surge and subsequent retreat that occurred over the third and fourth quarter. We could have bought and sold more structural products, but we would have done so at margin risk, due to the short duration of the pricing surge leading into the winter season.

Instead, as we noted in the last conference call, we used the September price run up to accelerate our reduction of structural inventories to near year-end levels. The result, is that we're able to preserve margins in the sharp structural price decline that occurred during the first six weeks of the fourth quarter. At the same time, we focused on our longer term initiative of improving structural profitability by identifying and cultivating the profitable portions of our business, while passing on some less attractive businesses. Our ongoing initiative to grow specialty into a larger portion of our overall business is evident on Slide 7. Which shows unit volume growth at 12.7% for the quarter. Contributing to that gain were solid double-digit increases in lumber, insulation, and specialty lumber.

As mentioned earlier, our specialty unit volume growth also includes LSV, which added 3.1 percentage points, and is part of the 12.7% number for the fourth quarter. Turning to sales revenue on Slide 8, our efforts in the fourth quarter produced a 14% gain in specialty, up $66 million from a year ago. Most of it coming from unit volume growth. Specialty, comprised approximately 41%s of total sales in the fourth quarter. Structural product sales revenue increased 8% from a year ago, primarily a result of higher year-over-year plywood prices. Now let's look at gross margin performance. On Slide 9, you see the specialty product gross profit increased by about $13 million to $77 million, while the gross profit margin increased by 70 basis points to 14.3%. The specialty margin improvement reflects robust unit volume growth, and also illustrates one of the benefits of our initiatives to improve product management processes by making them more effective and efficient. Our [pros] revenue management program is a good example of this, and has been in place now for three quarters. That program continues to drive more efficient transactional and program pricing. In structural products, we purchased a strong 8.3% -- we produced a strong 8.3% gross margin for the fourth quarter against sharply falling prices that characterized the first six weeks. This compares with a historic trend of 8.1%.

Fourth quarter gross margin increased 350 basis points, and contributed an additional $32 million from the same period a year ago. As I noted earlier, our strong margin was helped by the successful implementation of our pricing -- of our inventory management strategy during the quarter. Our inventory position for the quarter on Slide 10, illustrates that we are managing inventories much more effectively relative to a year ago. We achieved improved fourth quarter financial results with approximately 5% less dollar inventory than last year, while average on hand turn days improved to 42 from 47 a year ago. Within this overall inventory reduction, structural declined approximately 18%, while specialty declined less than 2%. Again, this shows we are aligning inventory with our initiative to grow specialty products into a larger part of our overall business.

Looking at the quarter sequential, we took the opportunity to replenish structural inventories in the fourth quarter after structural prices had declined to prehurricane levels. In specialty, during the quarter we added stock to launch our new Louisiana Pacific weather best composite decking program, sales for which we are now just getting under way for the spring decking season.

Additionally, we made opportunistic seasonal buys in several other specialty product lines. As a reminder a break out of OSB, plywood, lumber, and rebar inventories is provided in the appendix, as is the slide showing OSB plywood and lumber price trends for the fourth quarter through Friday, February 10. We maintained good working capital velocity in the fourth quarter with total working capital turn days at 37, compared with 45 for the same period a year ago. On a trailing 12 month basis, working capital turn days were 40 for 2005, compared with 39 for 2004. As for logistics productivity, excluding increases in fuel costs, we achieved a 7% reduction in fourth quarter delivery costs per unit load equivalent, a 3% reduction in material handling costs per ULE, compared with the same period a year ago. These improvements are primarily being driven by our focused improvement initiative that we introduced into our warehouses in 2005. This initiative is being supported by a sophisticated logistics performance tool that aligns even branch to pin point errors for potential improvement. As these figures show, this initiative is beginning to pay dividends, and we will continue to implement it and fine tune it in 2006.

Now, I would like to address some other business improvement efforts as well as our strategic growth initiatives. In the business improvement area, we intend to achieve ongoing gross margin improvement by increasing the mix of higher margin, less price sensitive specialty products, and by managing the volatility of commodity structural product prices on our business. Secondly, we are working to insure that the people and processes are in place to support our objective to grow specialty sales. In the area of process, our transactional and program pricing improvements are continuing. Facilitated in part through increased utilization of our proprietary review management program, I described earlier.

In the area of people, since our last conference call, we have added individuals with focused expertise in the areas of supply chain management, specialty product procurement, strategic development, and marketing. Looking at our strategic growth initiatives, first we continue to focus on targeted growing accounts that serve attractive high growth markets. For 2005, targeted accounts contributed 42% of total sales revenue, and grew about 2% faster than our other business. Second, we are working to realize continued growth in specialty product mix and gross margin by first deepening our existing relationships with existing vendors who recognize our value proposition. Second, by adding new vendors, and third by growing market share of existing markets. For instance, we are in the process of working with Louisiana Pacific to grow its composite decking business. We continue to be pleased with the progress of this joint new product rollout, and we believe that success with this program will lead to additional business with Louisiana Pacific, and with other major vendors in 2006.

Third, we continue to increase volume in under represented segments, particularly industrials, which include manufactured housing, cabinet makers, and box and pallet manufacturers. For 2005, industrial and manufactured housing accounts grew 7% faster than all other accounts. These accounts comprise 25% of total revenue for the quarter. Our fourth quarter performance in this area was helped by strong demand in manufactured housing. Fourth, we continue to pursue acquisitions to augment organic growth. Our first acquisition occurred last July with the acquisition of Lane Stanton Vance a California based distributor of specialty products. We are working to leverage this acquisition to grow LSV's business, with both existing and new customers. And we are using LSV's category expertise in hardwood to attempt to grow overall market share this area. As we move forward in 2006, we will constantly review acquisition opportunities, but we will do so as are a patient disciplined buyer.

In summary, we believe our fourth quarter performance demonstrated that we are executing on our strategy to grow the high margin specialty products segment of our business. Growing specialty products requires both cultivation of, and closed interaction with our customers and suppliers in order to understand their needs and develop value-added specialty product programs. The process demands that we invest the time and expertise necessary to build productive relationships. We are making these investments, and they are beginning to show tangible results, evidenced in both unit volume sales growth and increased vendor interest. Just last month we were at the international build showing in Orlando, and we met with more than 70 vendors, who expressed interests interest in our capabilities. We will evaluate all of these vendors, and prioritize all potential product rollouts based on anticipated return, people, and inventory commitment. While we will vigorously pursue new vendor opportunities in 2006, we believe our biggest opportunity for the year remains in building the BlueLinx organization programs and processes around expanding business with existing customers in existing categories.

Now let me briefly review the current market. Looking at our first quarter, we continue to operate our structural business with inventory levels that reduce our exposure to price sensitive materials. Structural product prices in January have been flat to declining slightly, as indicated in the charts in the appendix. We believe our overall inventories are well positioned, giving us the operational agility to efficiently manage our business against market fluctuations. Housing starts appear to have slowed somewhat in some parts of the country, but offsetting that to some extent has been the mild January weather.

So for BlueLinx, the year is off to a good start, and we are executing on plan. Steve, will provide more information on our outlook for the year in a few minutes. Now I would like to turn the call over to David for a review of our financial results.

Thanks, George. Before we reviewing the third quarter performance, I would like to remind everyone that for purposes of comparative analysis, I will discuss provide year results on a pro forma basis, a full explanation of which is included at the beginning of this presentation. The appendix accompanying this presentation includes the reconciliation of the as reported statement of operation for 2004 to the pro forma results. I'll start my presentation with Slide 14, which presents the quarterly sales analysis.

For the quarter ended December 31, 2005, BlueLinx reported sales of $1.33 billion, up 10%, or $122 million from last year's fourth quarter. The sales increase was due largely to increased unit sales volume in specialty products, and favorable plywood and OSB pricing relative to a year ago. Turning to Slide 15, you will see that BlueLinx generated $140 million in gross profit for the fourth quarter, up $39 million, or 39% from last year. Gross margin for the quarter was 10.6%, up from 8.4% last year, reflecting the factors previously discussed.

As shown on Slide 16, operating expenses for the quarter totaled $106 million, an increase of $9 million, or 9.4% from a year ago. The increase includes approximately $4 million in ongoing operating expenses associated with LSV, as well as various increases for commissions, incentives, and leadership change, partially offset by decreased sales promotion expenditures. The increase in commissions and incentives reflect strong operating results. Operating income increased by $30 million to $35 million, reflecting increases in gross profit, partially offset by increases in operating expenses.

Turning to Slide 17, and moving down the income statement, interest expense for the quarter wars $ 11.1 million, up $1.2 million from the pro forma prior year due to rising interest rates. In January, we negotiated amendment to our revolver that reduced our interest rates spreads over LIBOR by approximately 50 basis points.

Tax expense of $9 million for the quarter represent at 38% effective tax rate for the period, compared with 41% last year. The improvement reflects utilization of tax credits related to headquarter and job training credits. Net income was $14.5 million, or $0.48 per diluted share, compared with a pro forma net loss of $2.7 million, or $0.09 per share, last year.

Now let's turn to year-to-date results, starting with Slide 18. For the full year ended December 31, 2005, BlueLinx reported sales of $5.62 billion, up $64 million, or 1% from 2004, reflecting a $216 million -- reflecting an increase of $216 million in unit volume, partially offset by lower product prices. Specialty product sales of $2.14 billion increased 9% from a year ago, and accounted for 38% of total sales. Structural product sales accounted for $3.55 billion of the total, down 3% from a year ago. As a reminder, rebar remesh sales have been reclassified as structural products for both periods. Rebar remesh sales totaled $389 million in 2005, and $431 million in 2004. The sales break out by product group along wait three-year history is provided the appendix.

Turning to Slide 19, you will see that BlueLinx generated $512 million in gross profit for the year, down 9% from last year. Gross margin for the full year was $9.1%, down one percentage point from last year, primarily the result of lower margins in lumber and rebar.

As shown on Slide 20, operating expense for the year was $397 million, down 1% from the prior year. Operating income for the full year was $116 million, versus $164 million last year, reflecting a decline in gross profit partially offset by lower operating expenses. Turning to Slide 2, and the remainder of the full year income statement, interest expense was $42.3 million, up $4.6 million from the pro forma prior year, primarily as a result of higher interest rates. Full year tax rate was 39% compared with 41% for 2004, reflecting various tax receipt credits, some of which will be on going, lowering our go forward tax rate to approximately 40%. Net income was $45 million, or $1.46 per diluted share, compared with a pro forma income of $75 million, or $2.47 per share last year.

Now let's turn to Slide 22, which shows the balance sheet as of the end of the year. Assets on December 31, 2005, totaled $1.16 billion, compared wit $1.24 billion at the end of third quarter, and $1.14 billion a year earlier. Accounts receivable of $399 million were up about $35 million from the prior year, reflecting an increase in year over year December sales. Total liabilities of $974 million include $389 million in accounts payable and bank overdraft and debt of $541 million consisting of $376 million outstanding on our $800 million revolver and would be $165 million mortgage note. The $87 million increase in accounts payable from a year ago reflects increased volume of sales and purchases and improvements in terms. The total debt during the fourth quarter declined by $113 million, reflecting the quarter's strong operating results and a normal seasonal reduction in working capital requirements. Total debt for the year declined by $111 million, reflecting improvements in working capital management and favorable operating results.

Moving to Slide 23, you see fourth quarter and full year cash flow for BlueLinx. For the quarter and full year, BlueLinx generated $97 million, and $125 million respectively, in cash from operations. BlueLinx spent $2.7 million on property, plant and equipment during the quarter, and $12.8 million for the full year, mainly from mobile equipment. This concludes my prepared remarks, and I'll now turn the call back over to Steve.

Thank you, David. Our fourth quarter performance demonstrates that BlueLinx performed well in our two critical focus areas. First, we executed on our initiative to grow specialty products producing double digit increases in unit volume in this category. We believe we will continue to build traction in this area in 2006. Second, we effectively managed our structural inventories during the pricing volatility that carried over into the fourth quarter. We successfully managed the margin risk inherent in such volatility and we believe we are managing our inventories with the skills and efficiency to continue to reduce that risk.

As we look to 2006, we're facing some headwinds in the form of an anticipated 10% slowdown in housing starts, which we believe will be partially offset by strength in manufactured housing and industrial production. The result is that we expect an overall decline in end use market demand of approximately 1% to 2% for 2006. In terms of pricing, we expect structural product prices to be generally lower in 2006 than 2005, reflecting decreased demand and some increase in supply. This may be partially offset by expected increase in specialty product prices due to raw material costs.

Also please keep if mind as we enter 2006 our structural product inventory position as shown on Page 34 in the appendix, is $41 million, or 18% lower than the level we had -- that had we had when we entered 2005. We believe we condition offset these headwinds by continuing to improve product mix and gain market share. specifically, we expect to continue accelerating specialty product growth as we did in the fourth quarter. As I said earlier, specialty offers higher margin, and less price sensitivity, and it is also well suited to our unique centralized distribution platform is sales force. I can't emphasize enough the sense of urgency with which we are pursuing this strategic direction here at BlueLinx, and the resources we're marshalling to support it.

We believe we can be successful with the BlueLinx value proposition in this area, and we're encouraged with our progress to date. We do not intend to de-emphasize structural products, structural is and will remain an important part of our business. In closing, I remain confident as we move forward into 2006 that BlueLinx is well positioned to execute on our strategic growth plan.

Our company has rapidly evolved since we went public just over a year ago, and are evolving still by putting the people, processes and systems in place to facilitate our growth objectives. We're striving to more forward as a solutions based, value added distributor of specialty building products that is managed to create maximum value in the supply chain. With that, we'll open the call to questions. Operator, would you please instruct everyone how to make a question.

Thank you. [OPERATOR INSTRUCTION] We'll pause for just a moment to come pile the Q&A roster. Your first question comes from Yuri Krapivin with Lehman Brothers.

Good morning, everybody.

Good morning, Yuri.

Thanks. First of all, thank you for providing this expanded disclosure. Big picture question on inventory management. Overall, do you believe you are getting better at gauging the trends in the underlying commodity markets? It certainly looks like you made the right call on commodity prices in the September quarter, and and again in the December quarter, so, relative to a year ago, do where have more robust processes and models in place that allow you to react more, faster to changes in the underlying commodity markets?

Well, let me address that first, Yuri, and then I'll let George comment, as well. As we mentioned in our last call, and the visit that we had in December to a bunch of investors and a bunch of analysts, having lower inventories helps us in two ways. One is that we're just flat less exposed to the changes because we're holding less, but second, it allows to us to be a little bit more selective in the business that we go after and what we chase. And so part of what you saw in the fourth quarter was the impact of both of those. We are always trying to get better at understanding where commodity prices are going, but I don't believe we have a crystal ball that's fundamentally better than anybody in the market, frankly. We look at it frequently, we look at it all the time, but our game plan is to continue to try to manage inventories as lean as we can, unless we feel that there's a pretty likely opportunity to have more of a strategic buy where we might raise inventories a little bit. George, do you want to comment?

I agree with you. I also want to point out that the influencing factor of the sharp run up that we had in Q3 in pricing was, of course, the storms. And that was fairly predictable that when you have a very, very sharp, short run up that you will have a sharper shorter price decline. So it was fairly easy to call, in our opinion, that we did not have a sustained momentum in a market to keep the prices high. We did make the strategic decision to bring our inventories down and to manage them aggressively and to pass on some business, and we knew that would reduce some revenue opportunities, but we felt that it would minimize any market risks due to the short, predicted short cycle of the market, which did come true, but that was not a system call, that was really informational and historical. We have a lot of people here that have been doing this for long time, and it was fairly predictable.

Okay. Thank you. My second question is on the difference in volume growth rates that you saw in the December quarter between specialty and the structural products. Was it all by design, or did it reflect some broader trends in end markets, perhaps?

No, I don't think it was all by design. I don't think it reflected the fact that we saw a separation in those markets in terms of historical growth rates. I think the markets behaved like they always have, and because of what George indicated, we continue to build moment in our specialty unit volume growth, and as we've said in the past, that's what our strategic focus is, and I outlined why, and that, frankly we were very pleased with those numbers throughout the whole fourth quarter.

Okay. And finally, on again on inventories, do you expect to see some seasonal build up towards the end of the March quarter, and ahead of the summer construction season?

Yes, we would anticipate that, just so we can service our customers.

We expect to continue to grow our business, and to do that, we would have to continue to grow our inventories, both on the specialty side and somewhat in the structural side.

Okay. Thank you.

Operator are there any other questions?

Your next question comes from Richard Skidmore with Goldman Sachs.

Thank you. Just a couple of questions. First, in the specialty products business, historically, How do prices move in that business when the overall market for housing is moving lower? Should we anticipate that those prices are relatively sticky, or should we anticipate that those prices have some downward draft to them?

George, why don't you answer that.

Okay. Thank you. Good question. The prices are sticky, certainly, than structural products. They tend to increase or decrease through longer cycles and slower cycles. So I would not predict huge or volatile declines or increases in any of our specialty prices. We did have some price increases after the storms, just due to petroleum based products that we did talk about in the last quarter, but as you can see in our results, our unit volume growth was the largest contributing factor by far in our growth. We expect those prices to remain fairly high, as the oil cost remain fairly high.

And then moving to the growth in the market, and you've talked about the strategy to grow faster than the overall market, but it looks like on one of the slides in three of the four quarters in 2005, growth was actually lower than the market, and you talked about the fourth quarter a bit, and I think it sort of had the similar reasoning for the third. Is that fair to characterize the first quarter growth like that and how should we think about your view to manage inventory and the ability to grow faster than the market?

The first quarter we'll break it out quarter by quarter. First quarter of 2005, we were negatively impacted by weather. And we spent a lot of time talk about that, as did most of the other building products companies that publicly report after the first quarter last year. We also talked about Q4 that one of the things that helped drive the total market growth was the favorable weather in Q4 of 2005. So we were impacted by weather, both positively and negatively. I guess the good news there is that we did talk about that in Q1, and we said normally this comes out, you have some bad weather quarters and some good weather quarters, and it comes out in the wash in the cycle, so that did happen.

In Q3 and Q4, we did not grow our business by plan, as we were focusing on growing our margins and our earnings, and we were still trying to make sure that we grew our business with our targeted customers, as I outlined in my prepared comments. However, we did not chase business on some of the more price sensitive items, which did slow our growth rates and our structural products areas.

So would it be -- as you think about going forward and the strategy, I would assume that the strategy would still to be focus on growing margins and earnings versus growth, and maybe a little bit slower demand environment, if one chases volumes, that could potentially lead to less price, how do you balance that, and should we think of that over at least the next couple of quarters, or through 2006 that you would be growing with the market, or will you hold back and really try to focus on the margin side?

Well, let me jump in here, and then, George, you can add on this as well. Rick, I think it depends. You've asked the way we think about it. We disaggregate in our minds, specialty versus structural, because the way specialty moves is it's much more longer-term commitments from customers, it's much more program sales, as you know concentrated heavily. The industrial segment has a higher percentage of specialties, so when you grow there, it's a -- when you have sustainable growth there, you can trace it back to new products, new vendor relationships, new programs, penetration of key accounts, et cetera, and it's very sustainable going forward. On the structural side, you have to disaggregate it underneath that depending on the type of customer you're talking about.

We have a lot of customers in the structural business that come and go throughout the market that are very, very price sensitive buyers, that will buy it from whoever they're going to going to bet get the best price from, and it's those guys we kind of look and say, okay, is it pricing where we're comfortable with today, and we're not going to sacrifice price if we don't believe it's the right thing to do. And so, we think about balancing, and we always allocate our structural inventory when we're lean we allocate it and service our customers that are on contract, that are buying specialty, that are buying a reasonable percentage of specialty mix from us, and that we have programs with with longer-term, and we walk away from the folks that inner and out with us, and that are just pure price buyers. So --

And lastly, Steve, if I might ask, you made the comment about urgency to grow the specialty products business. How do you balance the urgency with what could be a slower or actually a declining demand environment as a whole with housing that you've outlined?

Well, I mean, it -- we don't think -- first of all, it's going to be slower, but it's not going to be that much slower and we're still talking about a -- we believe we're going to still be in the housing start environment that's 1.8 million starts, so by historical basis, that's still successful. Number 2, two some of the specialty growth that we're seeing that we expect to see going forward is for new products in the marketplace, or at least early life cycle stage products, that are displacing more traditional products. The wood composite decking product is a good example. It's growing 35% a year, and cannibalizing treated lumber, and so, I think that 30 to 35% growth will continue to happen in any housing environment as more and more new decks are being built with that product. So that -- I mean, George, you want to add to that in

No, that's a good answer. I just want to make one point, Rich. Through the third and fourth quarter, with product shortages and sharp price increases, sharp decreases in the structural side of the business, customers constantly ask us how they can -- how we can help them solve their solutions, and their supply issues, and we did not sell our product to everybody. We sold our product to those customers that, as Steve said earlier, are every day for us and that have programs. So what that's done, quite honestly, is because we did play it closer to the vest in the there structural products in my terms, we didn't have the need to sell. Okay? We were able to take care of all of our customers that needed our product that reward us every day with program business, and we're able to pick and choose selectively some other business. Since we were able to articulate that to our customers, that has turned into new program opportunities for the future. Because next time this happens, I want to be one of the customers who gets it, to get yours service, your sales time, your logistics capabilities as that other guy did this past year. So there's a silverlining in that cloud of Q3 and Q4 for all the customer where they say, wow look BlueLinx really can execute on on time deliver and 98% fill rates during product shortage times, and that's what we did. So were outgrowing our specialty business, we're growing our program business, and were growing our focused account group by improving our value every day.

Great. Thank you.

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

Thanks and good morning. First, could you just give us a little more insight in the, what your looking for as your grow the specialty business, is it moldings or what kind of value added products.

Yes. Moldings is one. There are some national products that we are under penetrated in, and molding is a good example. Obviously, we talk about our LP composite decking, we talk about fasteners. They're really products that need to be sold, and at the beginning of their life cycle, versus products that are sold that are at the end of their life cycle that tend to be transacted on, transactional business, or with price. So we have almost a thousand sales people. We believe that BlueLinx partnered with our customers and our vendor partners can create markets for products. So when we look at our market share by product, by geography, and by facility, those are the products that we're focused on. In some markets, we're the number one, by far, share holder in molding. In other markets, we're almost insignificant. So we roll that molding product into those lower share markets. We're also focused on siding products, on insulation products, on roofing and roofing accessory products.

If you looks at our warehouse and our truck, and you think of our infrastructure for our sales organization, it aligns with products that need to be sold, need to be delivered on time, and are difficult to manage. And one of the things that we didn't talk about in these prepared comments, as much as we have in the past, is to import products. So many of the products that we sell are being imported today, and that makes the supply chain longer, more difficult to manage, and really plays well into BlueLinx strength. And we have added some folks to our management team that have expertise in international procurement and supply chain.

Great. Now, maybe you could just tell us a little bit, since you've got such good real-time information systems, what have you actually seen in terms of order flow in December and January? We've all read the headlines how the sky is falling in housing, but did you actually see that? Does your 10% decline in housing come from reading the papers, or from the feedback you get from your systems?

Well no well we -- we basically had that view. I, we talked about that 10% in the third quarter, so that's not a new view relative to to where it was before, and frankly, December and January, from a volume standpoint, were both very good for us, compared to the normal season, just because of the weather. So, you can't pinpoint it month to month, particularly in the winter months, because it's a smaller base anyway, typically, and changes in the weather can have a dramatic impact. So I don't know that we can draw any conclusions. Obviously in February, just in the first two weeks of February, with the storm in the northeast, et cetera, we have seen a little bit of slowdown, but I don't think we could track back and say, okay, we're starting to see --

December was a good month. I did share that January, in BlueLinx's first quarter is off to a good start. We're executing on plan. We're very happy with it. Our customers, in most markets in the country, are still very, very busy. There's a few exceptions to that. Michigan and the Auto States are a little slower, but we talked about that in the last call, too. That has not changed. Overall, I was at the builders show, as was Steve. I was very, very pleased with the outlook for builders across the country, which I talked to hundreds of them, and their order files are good. But you're coming off of a 2.1 million housing start year. Anything is going to sound bad. So[inaudible] historic is really good, and I think people are managing their businesses throughout the supply chain that well, as are we, with our inventory positions and our value added strategy. So I feel very comfortable with 2006, it is going to, all indications are it's going to be slower from a housing start perspective than 2005, but on the industrial side of the business, we're seeing very, very strong demand.

Great. Well, I hear you there. And final question, then, please. If you see total end use demand down 1 to 2%, and you've got your initiatives to manage costs and move the higher margin items, is it reasonable to think that you could have, from an earnings standpoint, a year, similar to '05?

We usually don't give earnings guidance, so we're trying to give you as much information. We've provided I think all of the information that everybody has asked us for so far in our slides and in our appendixes, and everybody has to run their model, so I don't think we're going to start giving earnings guidance at this point.

Got you. Well, we do appreciate the incremental information. Thanks.

Your next question comes from Keith Hughes with Sun Trust.

Thank you. Had a couple of questions. First in specialty, you broke out for us your acquisition and how much it contributed. Was there any channel fill associated with weather best that inflated the numbers a little bit for a quarter that we won't see in subsequent quarter or should it be continuing to run at kind of a level base.

Actually, what we did in the fourth quarter was primarily put inventory in our facilities. We saw very little active sale in December from weather best. Those sales, as George mentioned in his comments, are really starting to occur now in the first quarter.

In invoiced sales.

Yes.

We have a lot of sales. We haven't countered it yet, it's not in the revenue slides that you're looking at for Q4.

Right.

It would be realistic to see high single digit or low double-digit, or something like that in specialty for the rest of the year?

That's our plan.

Yes.

I mean, whether you hit it or not, don't know, but is that kind of a range you're hoping to grow?

Well, we have not given, any of our targets out. Certainly the fourth quarter, certainly when you look at the last three or four months of the year, we believe that that trend is encouraging, Keith, and we would like to continue to be able to perform at that level or better.

Okay. Great. That is answers it. On the structural business, if we look at the breakout you provided on, hang on, on the channels, channel mix, the direct channel was up above, pretty significantly above what you consider trend. Begin your inventory position on the structural products, would we see that above trend going into -- for most of 2006?

We are managing our structural inventories are really on panels, that's really what that is, and, our contract purchases with Georgia Pacific and other suppliers, and when we're uncomfortable with market direction, then we sell that product direct. In this case, we presold, most of that -- most of those contracts direct and we bought very little wood open market. So, we didn't really have a lot of wood on the ground, we didn't want to put wood on the ground. We wanted to just have enough inventory on panels to supply our program customers out of warehouse. The rest of those sales on the direct side were program customers on the direct side. Oka. So that mix is really program business, we didn't have a lot of transactional business in the fourth quarter.

Okay. But given your view of some moderating prices on the structural side, as you talked about in the release, would we not keep inventories at the the minimum amount on the ground moving forward?

Again, that's the general long-term trend, Keith, as the year goes, obviously there will be, short time periods where that the market, we don't believe the market will just have, it's still a volatile business, so we're still going to see some fluctuations throughout the year, but I think your assumption for the full year in general value probably right.

Okay. That's fine. And final question on the initial slides and the longer term goals, you talk about getting specialty revenues to 60%. You are speaking specifically of sales there, right?

That's correct.

So obviously with a higher marked business, it would be more eventually of the gross profit dollars?

That's correct.

Okay. That cleared that up. Thank you very much.

Your final question comes from Edings Thibault with Morgan Stanley.

Thank you very much, and congratulations on a strong quarter, guy.

Thank you Edings.

Your CapEx number is a little bit higher than we anticipated. Can you, what's kind of the outlook for the year, and can you talk about why the increase in capital spending in the fourth quarter?

Higher than now you expected for the year or the quarter?

For the year, not by a couple of million, and the quarter was, I think, high, as you guys spent some capital, if my numbers are correct.

First of all, that includes the property, plant, and equipment portion of LSV, which is a million dollars and some change, and then we spent just slightly more on other things than we expect expected.

What was the range we gave early wish David?

Ten to eleven, I think.

Because I don't think a 12 plus or minus a couple of million bucks is out of line. I think that's what we're going to be look at going forward for the existing system that we have, excluding acquisitions. And, frankly, excluding any Greenfield expansions as well. It's possible that we would do a Greenfield expansion that would change that, but for the basis I think we're talking 12 million bucks, plus of minus.

I apologize, I add mistaking your acquisition number. Looked like it spiked to 17, which would have been a big concern. So apologies for that. Also, within one of things that -- one of the big sources of cash for you guy this we're has been the payables side, although most of that came early in the year. Should we be think without a that you guys fully intend to keep that payables number to the 30 days range?

David?

As we rebuilt some of the structural inventories, as we said we did after pricing returned to pre Katrina levels, and as we purchased some launch stock for the decking, and as we made some opportunistic buys, all of those moved payables up a little bit above what you consider trend, so, no, I would haven't expect it to be that high.

More in the mid-20s to low 20s?

Yes, mid-20s.

Mid-20s?

Yes.

Okay well appreciate. and congrats. Good luck this upcoming quart they were there are no further questions at this time.

Would like to turn it pack over to BlueLinx management for closing remarks.

Okay. Thank you everyone for joining us. We appreciate it. I want to leave you with three thoughts. First, we are aggressively persuing the specialty product growth. You've heard us talk a lot about that, and you'll continue to hear us talk about that, as that is our primary strategic focus. We are ideally positioned to delivery value for both our vendors and our customer, in this segments, and our four quarter performance demonstrates encouraging progress.

Second, we are and we will remain committed to structural products, but intend to achieve profitable growth in this segment through disciplined product inventory management. And third over the long hall, we believe we will continue to outgrow the market in general, if you look at long-term trends. So in closing, we have taken and will continue to take the steps necessary to insure that the talent is on board to execute these strategies and drive BlueLinx to future success. So thank you for your time, and we'll talk to you again next quarter.

This concludes today's BlueLinx fourth quarter physical year end 2005 conference call. You may now disconnect.