Bluelinx Holdings Inc (BXC) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the BlueLinx Second Quarter Conference Call. [ OPERATOR INSTRUCTIONS ] I will now turn the call over to James Storey, Vice President, Investor Relations. Please go ahead.

Thank you, Operator, and welcome everyone to the BlueLinx second quarter 2006 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 you do not have a copy, it is available in the Investor Relations section of the company's web site, www.BlueLinxCo.com.

Before starting the call I'm going 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 included all statements regarding 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 of the Company's annual report on Form 10-K for the year ended December 31st, 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'd like to remind our listeners that we have posted our slides of our presentation that we will be referring to during this call. They are on our website. We encourage you to view them during our remarks. Additionally, the slide package contains an appendix of supplementary tables available for your review. During the course of this call, you'll hear us talking about the two basic product categories of our business: Structural products and specialty products. As a reminder, our structural products business consists of plywood, lumber, OSB, also known as oriented strand board, and rebar remesh. Our specialty products business is basically everything else, including Engineered lumber, moulding, insulation, hardwood, plywood, vinyl siding, ,metal fasteners, specialty lumber, roofing, and so.

Now let me turn the call over to our Chief Executive Officer, Steve Macadam.

Thank you, Jim, and thank you to everyone for joining us this morning for the second quarter earnings conference call. I will start with a preview of the quarter's highlights as they pertain to our growth strategy and then George Judd will walk you through operations and David Morris will provide the financial review. I'll then add some final perspective before opening the call to your questions.

In the second quarter, BlueLinx managed our business very well, remaining on course and executing our strategy in an environment characterized by deteriorating structural product prices and a softening housing industry. Against these headwinds, we made measurable progress towards out long-term strategic objectives, which are to grow our Specialty Product revenues to more than 60% of total sales, to manage our structural products business for profitability while reducing exposure to commodity price volatility, and to outgrow the market.

Let me give you the financial highlights for the quarter. Net income, excluding our previously announced after-tax charge of $3 million, or $0.10 a share associated with our mortgage refinancing that we completed during the quarter, totaled $12.6 million, or $0.41 a share, up 62% from second quarter a year ago. GAAP net income, which included the charge, was 9.6 million, or $0.31 a share, up 24% from last year. Revenue declined 7% to 1.38 billion, overall gross margin for the quarter improved to 9.9% versus 7.8% a year ago, and compared with 9.4% for this year's first quarter.

Specialty unit volume increased 9.6% from a year ago as we continued to focus on growing the specialty products category. Structural unit volume declined 11.3% as we focused on maintaining margin in a falling price environment, which saw the prices of key grades of lumber, plywood, and OSB decline approximately 12% from the end of the first quarter. By effectively managing inventory and pricing, we increased our structural gross margins to 7% from 5.3% a year ago and from 6.8% in the first quarter. So we managed our structural business very well, considering the price deterioration pressures and the 9.5% housing start slowdown registered for the quarter from a year ago. This compares with a 6.7% increase in housing starts for the second quarter last year, when structural prices were also falling.

In the quarter, we also maintained our focus on specialty product growth, generating a unit volume gain of 9.6% and a gross margin of 14.4%. Margins also increased from a year ago and from first quarter. The 9.6% specialty unit volume increase compares with an estimated 1.8% contraction of our overall end-use markets. When you look at the point spread between our specialty performance and the market, we outgrew the overall end-use market by about 11.5 percentage points. You believe this spread between specialty unit growth and overall end-use market growth represents an important indicator to gauge our market share progress over time as we execute our revenue shift to predominantly specialty products.

Regarding total revenue growth, the shortfall from a year ago was primarily a result of our structural strategy, which emphasized margin over unit volume. Our strategy in a declining structural product price environment is to preserve margins and profitability, and the second quarter results show this strategy worked well. We also are continuing to invest in our future. We took two steps during the quarter and one subsequent to the quarter that illustrates what we are doing to support our long-term growth strategy. First, we coordinated a series of financial actions to lower our ongoing interest costs and provide protection against future rate increases, something we've been working on since January. These actions, which included a mortgage refinancing, accomplished our objectives and also resulted in some additional liquidity. David Morris, our CFO, led this initiative and he'll tell you more about this in a few minutes. This is a very positive move for us. As we reported, prepayment fees and other expenses associated with the mortgage refinancing produced a charge of $0.10 a share for the quarter.

The second step we took during the quarter was the introduction of additional new products, which, as you know, is an ongoing initiative for driving future growth. Specifically we expanded inventories for new specialty product programs, including our SteelLinx line of specialty metal products and LP SmartSide, an engineered exterior siding and trim product. We also added inventory at the national distributor for Georgia-Pacific's new Plytanium DryPly plywood subflooring product. While classified as a structural products, DryPly is clearly a higher end offering within our plywood product category.

At some time, we continued to bolster our sales, marketing, and product procurement staffs, particularly in the specialty products area. We also injected fresh talent into our Western region to help stimulate the growth initiatives currently underway there. We remained committed to making the appropriate investments in people, processes and products to execute our strategy. We continue to make these investments in a disciplined and systematic manner as we move forward.

This morning we also announced the acquisition of Austin Hardwoods, which supports our strategy to grow in the specialty arena by further penetrating key geographic and product market segments. Austin Hardwoods operates four the facilities in Texas, providing hardwood materials to manufacturers of products like cabinets, furniture, and mill work. This acquisition fits nicely with our efforts to grow in the Southwest, to further penetrate the industrial segment, which we define as customers who use building products in their manufacturing process, and also to grow specialty products. We are making a very concerted push into the industrial segment, evidenced in part by the fact that our industrial and manufactured housing business contributed approximately half of the $21 million second quarter increase in total gross margin dollars.

George Judd will talk more about Austin Hardwoods in a few minutes, but I want to take this opportunity to publicly acknowledge that we are excited to have the Austin Hardwoods team of employees as part of BlueLinx and to welcome them to our Team.

In summary, we believe the second quarter performance demonstrates that our strategy is working. Our number one objective is to grow specialty products to more than 60% of our total sales and we progressed towards this goal during the quarter, focusing on those markets, like industrials, repair and remodeling and manufactured housing that are not as dependent on new home construction. It is important to keep in mind that a full 50% of our end-use markets are not directly tied to single-family home construction. Our number two objective is to manage our structural business for profitability. In the second quarter, this meant effectively managing the business to mitigate the negative impact of falling wood-based structural product prices. We believe we managed our structural business very effectively in the second quarter, increasing gross margins in a steadily deteriorating price environment.

And our third objective is to outgrow the overall market over time. As we transition the majority of our sales to specialty over the next few years, we believe an important indicator of our progress in market share growth will be specialty product unit volume growth relative to the growth in our overall end-use market. Our objective is to maintain a healthy spread there and we believe it is a valid indicator of our progress in this area. Also, Austin Hardwoods represents the addition of approximately $22 million per year of specialty products sales based on its 2005 report of sales.

Now I'd like to turn the call over to George Judd, our Chief Operating Officer, who will walk you through the quarter in more detail.

Thank you, Steve. Good morning. I'll review our operating performance for the quarter. In the second quarter we continued to execute our strategy despite an increasingly difficult operating environment. The second quarter business climate was characterized by the continued erosion of prices for wood-based structural products as the housing slowdown began to materialize. Let's keep in mind the overall housing slowdown to date has been moderate, coming off last year's pace of 2 million plus starts and is generally what we anticipated. We managed accordingly, operating our structural business to preserve margins and profitability while focusing our growth efforts in the specialty products area. For those following along on the slides, I will begin on slide 7, which shows that our overall unit volume growth for the trailing 12 months ending July 1st was 2%, compared with 2.2% for the markets we served.

We under performed the market due to our second quarter slowdown in structural product unit volume. Our overall unit volume for the quarter shrank by 3.8%, negatively impacted by the 11% decline in structural unit volumes. This was our strategy, to preserve margin in an environment of falling prices. We could have sold more product and generated more unit volume but we did not want to chase volume down in a down-pricing environment. We managed the business based on margin, not on volume.

Continuing on the same slide, specialty unit volume in the second quarter grew by 9.6% compared with the estimated weighted end-use market, which shrank by 1.8%. Slide eight shows that our specialty products unit volume outgrew the market by 11.4 percentage points. Similarly, on a trailing 12-month basis, specialty unit volume grew 10.7%, or about 8.5 percentage points above the end-use market growth rate of 2.2%.

During the second quarter, about 2.6 percentage points of the specialty unit volume growth was from Lane Stanton [Advance.] Specialty unit volume growth was driven by several product categories, including engineered lumber, vinyl siding, specialty lumber, and moulding.

Turning to slide 9, specialty sales were the primary growth catalyst for the quarter as they were in our first quarter. Specialties sales climbed 11%, or $61 million from a year ago, driven largely by unit volume growth. Specialty sales represented 43% of total sales for the quarter versus 36% a year ago. Second quarter structural product sales decreased 17% from a year ago with about two-thirds of the decline coming from unit volume contraction and the other third coming from pricing.

Turning to slide ten, gross margin performance in the quarter shows significant improvement from the year-ago for both specialty and structural. Keep in mind that last year's gross margin performance occurred during a period when housing starts were above two million and when structural prices were also declining. This year's improvement in gross margin reflects strong unit volume growth in specialty, combined with improving product procurement and management processes. Specialty gross profit increased by $17 million from a year ago to $87 million, producing a 14.4% gross margin, while structural increased $5 million translating to a gross margin of 7%. The performance boosted total gross margins for the second quarter to 9.9% from 7.8% a year ago.

On slide 11, our overall dollar inventory position for the quarter reflects a 9% increase from year-ago levels and an increase of 6% from the first quarter. The dollar inventory increase is due largely to our focus on specialty inventories to support both higher sales levels of existing products and the introduction of new products. It is also important to point out that the general characteristic of the specialty products category include a longer supply chain, broader and deeper SKU assortment, and higher turn days, all of which help to explain the increase in inventory turn days to 5 for the quarter.

The complex characteristics of the specialty supply chain also are why we're focusing our people and process investment in this area.

Structural dollar inventories declined slightly from the first quarter, but were down nearly 12% from year-ago levels, again reflecting both lower prices and our strategy to manage our inventory more effectively in a declining price environment.

As a reminder a breakout of OSB, plywood, lumber, and rebar inventories is provided in the appendix, as is a slide showing OSB, plywood and lumber's historic price trends, through Friday, August, 4th.

Looking at other key indicators on slide 12, working capital turn days totaled 43 during the quarter compared with 41 during the same period a year ago. The increase was primarily the result of the increased inventory. However, on a trailing 12-month basis, working capital turn days were 40, a two-day improvement over the trailing 12-month figure a year ago, reflecting overall improvements implemented in accounts payable and inventory management.

As for logistics productivity, excluding fuel costs, we achieved a 5.6% reduction in second quarter delivery costs per unit load equivalent compared with a year ago while material handling costs per ULE increased 1%. As we have noted in past calls, since 2005 we've been working with a logistics performance tool in our distribution facilities that allows each branch to pinpoint errors for potential improvement. This system is providing each facility which information that can be used to improve processes and against which we can measure performance differences amongst our facilities on an equivalent workload basis. In general, this system is providing a branch managers essential information for making timely business decisions relative to local market conditions.

Slide 13 shows five other key strategic initiatives that are underway. First we're continuing to focus efforts on specialty growth while managing our structural product business for margin and to mitigate the potential negative impact of pricing volatility. As our second quarter results show, we're making good progress. We have been able to service our customers while at the same time reduce inventory exposure and generate gross margin improvements.

Second we continue to invest in people and processes that we believe will support the long-term growth of our company. In addition to marketing, logistics, and procurement, we're also focusing on people and process improvement in our Western region, which has been performing below its potential. We appointed a new leader there in February and since then have made a number of additional leadership changes in that region. Denver and the West represent a great opportunity for BlueLinx and we believe the new leadership team in Denver is beginning to make a difference.

Third, we're executing on plans to further penetrate underrepresented segments like industrials. For example, we're focusing on delivering specialty level to the cabinet, furniture and fixture customer segments. We have added new suppliers and new products to this business. To further add value to this product group, we're installing finishing machinery in certain facilities that enables us to provide additional services for our customers. Our most recent edition is in Fort Worth, Texas.

Fourth, we continue to expand relationships with existing vendors whose business needs align well with our value proposition. One recent example is our relationship with Georgia-Pacific as a national distributor for their new Plytanium DryPly plywood subflooring product.

Lastly we're continuing as a patient disciplined acquirer. This morning we announced our acquisition of Texas-based Austin Hardwoods which operates four facilities. Austin Hardwoods is our second acquisition and it illustrates our growth strategy on a number of fronts. First the company does business in a high-growth geographic area. Expanding our presence in Texas and the economically vibrant Southwest has been a key initiative for us -- key objective for us. Second, it provides us with the opportunity to expand our business in an attractive underrepresented segments, like industrials. Austin Hardwoods supplies hardwoods to small businesses that made cabinets, millworks and furniture. These manufacturers require high-touch service and solutions-based approaches to their inventory management needs. Third, Austin has great expertise in the hardwood lumber category. We believe the opportunity exists to leverage that expertise across BlueLinx, while at the same time using Austin as a platform for further growth in the Southwest So let me reiterate Steve's welcomed Austin Hardwoods. We look forward to our future together.

Before turning the call over to David, let me briefly review the current business environment. As we move forward into the second half of the, we're operating in a softening housing market and a weak structural pricing environment. The Northeast and Midatlantic were hit hard by rain and flooding earlier in the summer, but business has continued to be solid in many areas like the Southeast in general, including the Carolinas, metro Atlanta, as well as Texas. Business remains slow in the Midwest and has cooled in certain speculative real estate markets. We now have more than 70 distribution facilities doing business in North America, so our large geographic footprint helps reduce the impact of regional slowdowns.

As Steve pointed out, home building represents 50% of our end-use markets. We believe that deeper penetration of the other 50% through focused specialty product growth combined with structural products strategies centered on gross margin all operating from our centralized national platform provide us with growth opportunities despite the second half slowdown in housing. More importantly, we're well positioned for long-term growth.

Now I'd like to turn the call over to David for a review of our financial results.

Thanks, George. I'll review BlueLinx' second quarter financial results, then comment on the improvements we've made in our debt position. Let's start with slide 15, which presents quarterly sales. For the quarter ended July 1, 2006, BlueLinx reported sales of $1.3 billion, down 7%, or $108 million from last year's second quarter. The sales decrease reflects lower structural product unit volume end prices, partly offset by a 9.6% increase in specialty unit volume.

Turning to slide 16, BlueLinx generated $136 million in gross profit for the quarter, up $21 million or 18% from last year. Gross margin for the quarter was 9.9% compared with 7.8% last year, reflecting the strong growth in specialty and our focus on improving gross margins in structural.

This favorable margin performance was accomplished despite declining plywood, lumber, and OSB prices and the slowdown in housing starts. As shown on slide 17, operating expenses for the second quarter totaled $103 million, an increase of $11 million or 12% from a year ago. The increase primarily reflects approximately $4 million in ongoing operating expenses associated with Lane Stanton Vance, which was acquired last July. Other expense increases include $2 million in payroll, reflecting increases in both staffing to support the growth of the business, and salary and wage increases, $2 million for increased sales incentives and commissions associated with higher specialty sales and profits, and approximately $1 million for higher fuel prices. Operating income increased by $10 million to $33 million reflecting increases in gross profit partially offset by increases in operating expenses.

Turning to slide 18 and moving down the income statement, interest expense for the quarter was $12 million, up $2 million from the prior year due to rising interest rates that were partially offset by lower debt levels versus a year ago. A tax expense of $8.4 million for the quarter reflects a 40% effective tax rate compared with 37% last year. Last year's tax rate reflected various tax credits.

Net income totaled $9.6 million or $0.31 a share, up 24% from net income of $7.8 million or $0.25 a share year ago. 2006 second quarter net income included an after-tax charge of $3 million, or $0.10 a share associated with our mortgage refinancing. Including the charge, net income totaled $12.6 million or $0.41 per diluted share, up 62% from a year ago.

Looking at slide 19, for the six months ended July 1, sales were down 3% from last year, reflecting declines in structural prices and structural unit volumes that were partially offset by a 12% increase in specialty unit volume.

On slide 20, gross margin for the year to date increased by 13% or $31 million, reflecting growth in specialty sales and improved gross margin percent for both structural and specialty products.

Slide 21 shows year-to-date operating expense at $206 million, an increase of $17 million, or 9% from the same period a year ago. The increase primarily reflects approximately $8 million in ongoing expenses associated with OSB. Other expense increases include $5 million in payroll, reflecting increases in both staffing to support growth of the business and salary and wage increases, $3 million for increased sales incentives and commissions associated with higher specialty sales and profits, and approximately $2 million for higher fuel prices. Operating income increased 30% from a year ago, driven by improved gross margin dollars partially offset by increased operating expenses

As shown on slide 22, year-to-date interest expense of $23 million was 17% above year-ago levels, reflecting higher overall interest rates partially offset by lower debt levels.

Year-to-date net income was $19 million, or $0.63 per share, up 20% from a year ago. Earnings before the $3 million second quarter charge totaled $22 million, or $0.73 a share. That's up 38% from last year.

Now let's turn to slide 23, which shows the balance sheet. Assets on July 1, 2006, totaled $1.29 billion compared with $1.16 billion at the end of 2005. Accounts receivable of $469 million were up $70 million from year end, reflecting the seasonal increase in sales. Inventory of $532 million was up $59 million from year end and primarily reflects investments to support seasonal increases in sales and investments in specialty inventory to support sales of new product and new customer and regional programs.

Total liabilities of $1.09 billion include $373 million in accounts payable and bank overdrafts and debt of $676 million. Total debt during the second quarter increased by $51 million reflecting increases in inventory and reductions in accounts payable and bank overdraft. The relatively high level of accounts payable at the end of the previous two quarters reflected long dated payables associated with winter season buys.

Moving to cash flow on slide 24, second quarter net cash used by operations was $47 million, reflecting the changes in working capital just discussed. This compares with cash flow from operations of $25 million in the year-ago quarter, when BlueLinx was reducing inventories from relatively high levels at the end of last year's first quarter. Additionally, accounts payable at the end of last year's first quarter included less of a benefit from wintertime extended buys.

Cash from financing activities of $49 million primarily reflects the changes in working capital just discussed. This compares with cash used by financing activity for $13 million in the second quarter of 2005. The resulting cash balance at the end of the quarter was $27.1 million compared with $27.2 million a year ago.

Before I turn the call back over to Steve for closing remarks, I'd like to review the progress we made in the second quarter to lower our ongoing interest rates and protect our company from future rate increases. As announced on June 13th, BlueLinx entered into a $295 million 10-year fixed-rate mortgage with an interest rate of 6.4%, which replaced our existing $165 million floating rate mortgage, which was then at 7.4%. We used $125 million of the net proceeds from the mortgage refinancing to pay down a portion of our outstanding revolving line of credit and we entered into a $150 million five-year interest rate swap to convert floating-rate LIBOR interest rates portion of our current revolving line of credit to a fixed-rate of 5.4%.

These actions significantly reduced our exposure to increases in short-term interest rates, reduced our projected annual interest rate by approximately $1.6 million after-tax, or $0.05 per diluted share, compared with our previously existing interest rates, and increased our liquidity. As part of this refinancing the Company reported an after-tax charge of $3 million or $0.10 per diluted share associated with the early termination of the previous mortgage.

The resulting debt instruments supporting the business now are as follows. First, BlueLinx has an $800 million asset-based revolving line of credit that expires in May, 2011. At the end of second quarter 2006, the total draw on this line was $381 million with excess availability of approximately $309. The interest rate on this facility is generally LIBOR plus a spread of 100 to 250 basis points. The interest rate at the end of the quarter was approximately 6.9% or LIBOR plus 150 basis points.

Second, BlueLinx is substantially protected from changes in LIBOR associated with the current revolver balance by a $150 million LIBOR swap at 5.4% and a $165 million 6% LIBOR cap. The cap expires in November, 2007, while the swap expires in 2011, consistent with the revolver. And third, BlueLinx has the previously mentioned $295 million, 6.4% fixed-rate mortgage maturing in June, 2016. These instruments, taken together, helped support our growth strategy. We had very competitive borrowing costs and our financing costs are relatively insulated from increases in short-term interest rates.

This concludes my prepared remarks. I'll turn the call back to Steve for closing comments.

Thank you, David. Our second quarter demonstrates that BlueLinx continues to execute well on our strategic growth initiatives. We are pursuing specialty product growth with a continuing sense of urgency and we're managing our structural products business for overall profitability, not for volume or market share.

Let me reiterate a few key points. In the second quarter, as prices were key wood-based structural products fell 12%, we improved gross margin for structural by 170 basis points from the same period a year ago, a period when structural prices also were falling. We also improved structural gross margin by 20 basis points from the first quarter. At the same time, we continued to grow our specialty products business, achieving a 9.6% unit volume growth at a 14.4% gross margin, very solid growth in a declining demand environment.

As we enter into the second half of 2006, we continue to pursue our strategic shift to specialty products. This is our number one strategic imperative. Specialty products offer higher margin, less price sensitivity, and are well suited to our unique centralized distribution platform, our national sales force, and our high-service solutions based value proposition. Successful execution of this strategy should keep us on course towards our long-term goals through the cyclical ebbs and flows of the economy.

We move forward with a long-term view as the market leader operating from a business platform that we believe is unique, compelling and highly defendable. Looking at the second half of 2006, demand in the housing sector continued to be slow in July. The benchmark grades of wood-based structural product prices fell to their lowest level in more than two years. Our expectations continue to be the hosing starts for the year will be down 8 to 10% from 2005. This translates to starts for the second half declining about 8% from the first half.

As we have noted, home building represents about 50% of our end-use markets. The other 50% comes from industrial applications, repair and remodeling, manufactured housing and nonresidential construction. We believe the second half housing decline will be partially offset by strength in some of these segments, resulting in a decline of our total end-use market demand of approximately 3 to 4% relative to the first half.

In terms of structural product pricing, we believe that most of the price declines are behind us, as pricing is currently at or very near variable manufacturing costs. But given the housing environment, we also believe it's unlikely the market will experience any substantial price increases in wood-based structural products through the remainder of the year. This may be partially offset by increases in a some specialty product prices due to raw material costs, particularly those that are petrochemical based.

At BlueLinx our objective in the second half environment continues to be to meet these head winds by focusing on specialty unit volume growth while managing our structural products business with a disciplined profit oriented focus. I'm confident in our ability to continue making progress in executing our long-term strategy in this environment.

With that, we'll open the call to questions. Operator, would you instruct everyone again, please?

[ OPERATOR INSTRUCTIONS ] Your first question comes from the line of [Evan Carson] with Morgan Stanley.

Hi, good morning, gentlemen. Just a couple of quick questions for you here. I was hoping you could maybe provide a little bit more detail about how the residential slowdown is affecting the product mix in each of the two segments.

George, you want to take that?

Yes, the housing -- the 50% of our revenues that comes from housing make up both structural products and specialty products, with a heavy emphasis on structural products. That helps explain some of our volume declines in our structural products. But as I mentioned in my prepared comments, the business was there. There's still activity in the markets in housing. We just chose not to have inventory positions that required us to move product in a declining market, which would have had a really negative affect on margins. So in fact we made more gross margin dollars selling less than we did previously selling more. And that's directly related to the housing related to structural products, the exterior shell of a home.

You get into repair and remodeling type of the business and industrial business, it tends to be more appearance product, less structural, and tied more heavily to the specialty products group.

Just another quick question, maybe for David. Could you provide us with the pretax amount of the financing charge?

Yes, it was $4.9 million.

Great. Thanks so much.

You're welcome.

Your next question comes from the line of Keith Hughes with Robinson Humphrey.

Yes, I have a question on structural and on specialty. On the structural side, the stance you took in the second quarter that gave us these good margins, is it fair to say that you'll probably keep that stance through the third and fourth quarter of this year?

Well, Keith -- this is Steve, I'll take that. What we saw in the first -- in the second quarter is plywood pricing was down 12.7%, OSB was down 21.5% and lumber was down 6%. So when you kind of weighted average those together based on our mix, that's the 12 % decline we mentioned in the second quarter. In July, those prices for plywood and OSB dropped another 16% and lumber dropped about 9% so today, as we sit here and kind of current week 31, if you will, per Random Linx, plywood is at 258, OSB is at 190 and lumber, you know 2 x 4 #2 or better, is at 272. Those prices are all very, very close to null variable cost. So the downside risk, keep in mind, for us to grow unit volume, we have to put stuff in our warehouse or at least. in transit, right, so what we wanted to do was we didn't want to get stuck holding this inventory in this massive price decline. But at this point, the downside risk is very minimal.

Now, we don't think there's a whole lot of upside potential but we would expect while we still want to manage it for profitability, we would expect to be able to re-enter some positions with customers safely because there's no downside risk on the inventory.

Has that stance just began in the last couple of weeks or is that something you started towards the end of the summer?

The prices really didn't bottom out until the end of July.

They bottomed out at the end of June. The decline's in July. so it's really surprising me.

As much or on average across those three products, more than the second quarter. Of course, most of the second quarter happened in June. So June and July basically took all of the pricing above variable cost essentially out of the market. George, you do add anything?

Yes, Keith, an important thing to note is that this is really what be shared with you that we were going to do last year in the third quarter.

When pricing -- we didn't see a sustainable market line and we started to manage our structural inventories very, very aggressively. We've continued that. We continue it today. We shared our inventory positions with you. Just right now, we would expect to be a little more aggressive with our sales pace because of the downside risk is minimized.

Okay, that answers it. Thank you. And on the specialty side, was there any one product category there that's sticking out as doing well with the nice sales growth you've had, either this quarter and the first quarter, as well?

No, not really. I mean, we've had a pretty balanced view -- or pretty a balanced performance across them. You know, of the 9.6% unit volume growth, I think we said LSD was about 2.6% of that and, you know, the 9.6 -- year-to-date it's 12.1%, but year-to-date in the first quarter, it was stronger than that but we had end-use market growth. In the second growth, we had actual end-use market the kind of a couple of points, so net, in terms of gain versus the market was 11.5% in Q2. And that has been across a number of product cut. But not any one particular one has stood out as dominating that.

One area [INAUDIBLE] that's been a nice addition for you is in the composite decking arena? How has that launch gone? Your supplier reported some very poor numbers in the second quarter. What's been your experience in your composite decking sales?

Yes, I'm going to let George address that.

Keith, of course we ramped up our inventories early in the year and went out there and sold composite decking. Composite decking is running behind its industry forecast for taking share and we think that's due to a couple of things. Number one, being the drop in lumber prices, with lumber being more affordable and composite actually increasing in cost, as the cost of oil has increased. There is a wider gap there. But BlueLinx has executed along with LP, our supplier, we have brought 600 stocking locations -- over 600 stocking locations -- of Louisiana-Pacific WeatherBest product to the market, which was our plan. So we're happy there. But quite honestly our sales per unit of those 600 is not what we wanted to be.

What do you think it's going to take to improve that? Lumber prices to come up or is there something internally?

No, we're still focused very heavily on builder pull-through because it's still a product that we have to get converted in builders. Certainly the price gap that George talked about is being incurred on both sets because of resin prices that go into the product as well as lumber coming down. So as that trend, over time, narrows -- we believe in the product. We believe in LP's product. It's still a great product. We've still gotten wonderful feedback on it. It's performing well in the field. When we do get builders to use it, they tend to stick with it, so we think it's going to take longer than we thought.

Now, we've said in previous calls that we thought by the end of '07 that this would be about $100 million run-rate addition to our company -- product line addition. And now we would kind of revise that and say that's going to be more like 80 million by the end of '07. So it's still very positive for us and we're still working very, very hard to pull it through. And as George said, we've got a bunch of stocking dealers out there, most of which are new to LP. So we think there's going to be a bit of a shakeout, as well. It's a crowded space, there's a lot of suppliers in it, and we believe that we're partnered with the best guy out there. Committed to it and, you know, it's a better product. So we're still bullish over the long term.

Al right, that answers it. Thank you very much.

Your next question comes from the land of Yuri Krapivin with Lehman Brothers.

Good morning. How should we think about your inventories for the balance of the year? And specifically, do you expect to continue to build inventories in specialty products to support growth in that segment? And secondly, typically you see a substantial inventory reduction in Q4 driven by seasonality. Do you think this seasonality may be less pronounced this year because your inventories in structural products are already relatively lean?

Yuri, this is George. We've built inventories as we enter specialty business and we will continue to do that. And we're still adding some specialty businesses. However, our overall specialty inventories are falling. As you build to the season, the season is here, and we're selling off the inventories that we have. But we still are adding some new lines. Part B of the question, what'll happen in Q4. Our structural product inventories are aggressively managed now so you would be right to think that there's not a huge opportunity there to take structural inventories down in Q4. But I believe that was the case in most of our product lines in Q4 of last year, as well, as we started to manage our inventories aggressively earlier in the year on structural. We always have seasonality in Q4 as our winter markets enter [INAUDIBLE].

You could model it, Yuri, just based on structural, the turn days will be fully consistent.

Okay, thank you, and then my second question, what percentage of your structural sales are you currently moving through the direct channel?

Give us one second. I think that's in the Appendix on what page, David?

It's on page 32. If you look at page 34, structural on a direct basis was 39% in the second quarter.

Thank you.

Those numbers are all on page 34 in the document, Yuri.

[ OPERATOR INSTRUCTIONS ] Your next question comes from a line of Steve Chercover with D.A. Davidson.

Morning everyone. There's a lot of data in here, thanks. I guess the first question, you clearly did a great job managing the margins on structural. I might have missed it, was there any write-down whatsoever that impacted you during the quarter?

No.

Okay, so we are close to the bottom, it could be a protracted trough, so I guess there's not a lot of risk there.

Right.

Switching gears, do you expect Austin Hardwoods to be accretive and how soon?

Yes, immediately.

So in the current quarter even?

Yes.

And are there a lot of other opportunities similar to that? I mean, you've done two in the last year. I would almost think in this environment, it's going to be easier to find transactions because, you know, I guess in a really robust market, anyone can make money but now it's going to be a bit tougher.

Yes, I think that's a good point. We've always said that on our acquisition program. We've always said that we felt like if and when we into a slower time period around housing, that folks would be more reasonable with valuations that are interested in doing something with our company. So yes, we share that view. That said, we're going to continue to be a very disciplined acquirer. With the refinancing that David went through with our mortgage, obviously we've got a lot of availability that we can spend, but we're not going to do that without getting things at a very good price. We understand where we are in the cycle very, very well. We understand what the regional demand looks like and so we're not going to buy things on LPM numbers when we're in a different environment. But yes, I agree with you. We agree with you that in general, the sense that folks are going to be reasonable on valuations, we believe that's a reasonable assumption.

And Steve, there are a lot of companies out there that are similar. That was the beginning of the question. I think it's important to understand that this is exactly what we said we would do with our acquisition strategy, which was get deeper into product lines and get deeper into our specialty customer groups, industrial customer groups. So both our Lane Stanton Vance acquisition and Austin Hardwoods businesses are areas that we're learning from and we can take the learnings to our national footprint. We can take those product offerings to our national footprint and that's our intention.

Are the end customers the cabinetmakers and whatnot? Do they tend to be regional businesses or can you kind of as you infiltrate these accounts, follow them?

No, they tend to be regional.

That's what I thought.

Yes, which is good and bad, right? Far less price sensitive than a big national player typically is. But they all have a little bit different look and feel regionally based on what the local market uses and requires.

Just a quick follow-on, are folks actually approaching you or are you just looking at the product lines in the geographic areas you want to go in?

It's both. We are being approached. You know, when we launched our M&A effort 18 months ago, two years ago, we did an initial kind of calling, contacting, visiting a bunch, telling folks that as we've said to you all along, we're obviously in this for the long term and we wanted to let folks know that acquisitions are going to be part of our growth strategy and if they aren't ready to sell now, down the road if they change their mind, to call us. And so we've actually gotten, here in the last couple of months, several inquiries. So we have an active function inside the company that is proactively looking at what we think are the right opportunities, but we also respond to folks calling, us so it's a combination.

Okay, final question. Typically it seems that repair and remodeling is somewhat counter cyclical to new housing starts. Is there any reason to believe that that's changed or it should continue to do well even if new construction is a little bit weaker?

Well, I don't know if I want to predict it will change. The second quarter bears that out. Starts were down 9.5% and repair and remodeling was up 12.1% quarter to quarter in Q2. So the trend certainly continued in Q2. We don't know of anything that would suggest that consumers are going to behave any differently than have in the past.

Part of it there is just labor. In many markets of the country, repair and remodeling, to get a qualified contractor in the last few years, with over two million housing starts, has been very difficult. So as housing has slowed a little, there has been some some labor so now people can get some things done.

That's a good point actually. I experienced that myself. Okay, thanks, guys.

Your next question comes from the line of Robert [Newick] with Paragon Capital.

Good morning, guys. Just a real simple housekeeping one. The acquisition is going to be reported in which segment?

it's specialty products.

Okay, but it's sort of structural type products but you're going to put it in specialty products because it's the hardwoods?

No, no, it's all specialty products.

Okay, that was it.

Thank you, Robert.

And at this time there are no further questions.

Okay, well thank you everyone for joining the second quarter call. We appreciate it. I'd like to leave you with just a few thoughts briefly. First, we're aggressively pursuing specialty product growth, which is our primary strategic focus. We believe BlueLinx is ideally positioned to deliver value in specialty products, both to our vendors and customers. And our second quarter performance demonstrates continued progress towards this long-term objective.

Second, we are and will continue to be committed to structural products as a category, but intend to focus on profitability as we've mentioned. And then over the long haul, we believe we outgrow the market with our growth been driven the specialty products.

So thank you very much for your time and support and we'll talk to you again next quarter.