Bluelinx Holdings Inc (BXC) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the BlueLinx Third Quarter Conference Call. [OPERATOR INSTRUCTIONS]. After today's presentation, there will be a question and answer session. I will now turn the call over to James Torey, Vice President, Investor Relations. Please go a head.

Thank you, operator and welcome everyone to the BlueLinx Third Quarter 2006 Earnings Conference Call. With us this morning are Stephen MacAdam, Chief Executive Officer, George Judd, President and Chief Operating Officer and David Morris, Chief Financial Officer. The press release was issued earlier this morning. For those of you who do not have a copy it is available in the investor relations section of the Company's web site at www.bluelinxco.com.

Before starting the call, I am 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, 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 of the Company's annual report on form 10-K for the year ended December 31, 2005 and in its periodic reports file with the Securities and Exchange Commission.

Given these risks and uncertainties, management cautions you not to place undo 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 require by law. With that requirement completed, I'd like to remind our listeners that we have posted slides on our web site that we will be referring to during this call. We encourage to you 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 will hear us talking about two basic product category of our business, structural products and specialty products. As a reminder, our structural product business consists of plywood, lumber, O.S.B., also known as oriented strand board and rebar remesh.

Our specialty products business is basically every else including, engineered lumber, modeling, installation, hardwood plywood, vinyl siding, metal fasteners, specialty lumber, roofing and so on. Now, let me turn the call over to our Chief Executive Officer, Stephen MacAdam.

Thank you, Jim, and thank you to everyone for joining us this morning for the BlueLinx's Third Quarter Earnings Conference Call. I will frame up the quarter and review some highlights then turn the call over to George Judd, who will walk you through operations followed by David Morris who will review the financials. I'll close the prepared remarks then open your call for questions.

Before we review the quarter, I want to take a moment to acknowledge both a friend and a colleague. As you know this morning we announced that David Morris is leaving BlueLinx. I know that David is well liked and respected by the investment community, and I want you to know that he's also well liked and respected here at BlueLinx. He has held the financial leadership role here at BlueLinx since the Company's inception and has built a strong solid financial foundation for our Company, which we intend to build upon and to grow. David has served the Company well and he's ready to make a change and take on new challenges so we decided to make the announcement now. We currently expect David to remain with us through the end of the year and a search for a new CFO is underway. David is here with us on the call this morning, and I want to just publicly acknowledge your contributions to BlueLinx and David, thank you again for your many contributions.

Thanks, Steve. Now let's review the quarter. In the third quarter, our industry experienced a rapid steep housing start decline. Housing starts for the quarter fell 19% from a year ago. Their worst quarterly drop in more than 15 years and [inaudible] fell 24%. This decline in housing starts accelerated the ongoing price deterioration for wood-based structural products.

After falling approximately 13% over the course of the second quarter, prices for key grades of lumber, plywood and O.S.B. lost another 20% on average during the third quarter. This decline has resulted in levels not seen since early 2003. Year to date through the end of the third quarter prices of these key grades are down approximately 35%. The overall result is that third quarter business across the supply chain slowed significantly as our customers focused on selling their own inventory amid plentiful readily available supply, declining prices, rapidly slowing demand. This environment contrasted significantly with last year's third quarter when structural demands soared and prices spiked in the wake of Hurricanes Katrina and Rita.

So against this back drop, we worked to both adjust our company to market conditions and maintain course in executing our long-term growth strategy. We continued focusing on our specialty business and as a result, specialty unit volume outperformed our estimated in-use markets. We maintain structural gross margin at 7% which was actually the same level as the second quarter and down only 30 basis points from a year ago. We improved our overall gross margin to 10% from 9.4% a year ago and we took aggressive steps to reduce costs and right size our company to remain competitive throughout this cyclical housing correction.

Over the past few months, we have removed more than $15 million in annualized costs primarily related to head count reductions. These actions eliminated approximately 175 salaried positions and 100 hourly positions across the Company, which equates to about 8 % of our total workforce from the end of the second quarter. The reductions were made with the intent of retaining our ability to continue to execute our long-term strategy and continue to grow our specialty business. We also identified another 5 to $7 million in annualized cost savings initiatives not directly related to head count and implementation of those actions is well underway.

Additionally, we continued making downward adjustments to both structural and specialty product inventories in the face of the abrupt third quarter slowdown but inventory adjustments in this environment particularly related to specialty take time to fully implement and that process is continuing. The steps we have taken and continue to take in this environment are designed to help BlueLinx maintain our leadership, serve our customers and vendors and remain on track to execute our growth strategy.

Now, let's look at the financial highlights for the quarter. Net income was $2.3 million or $0.07 per share, which includes a 1.4 million or $0.05 per share charge related to severance costs. Revenue declined 17% to 1.2 billion from 1.45 billion. Overall gross margin for the quarter improved to 10% from 9.4% a year ago. Specialty product margin increased to 14% from 13.3% a year ago. By effectively managing structural inventory and prices, we also maintain structural gross margin at 7%, the same levels our second quarter but down 7.3% from a year ago.

Specialty unit volume decreased 3.9% compared to an estimated 8.7% contraction of our overall end use markets. When you look at the point spread between our specialty performance and the market, we outperformed the overall end use market by nearly 5 percentage points indicating our continued market share gain and specialty. We 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 look to shift our business to predominantly specialty products. Structural unit volume fell 17% as a result of demand slowdown, supply chain destocking and our ongoing focus on maintaining structural margins in a falling price environment. The structural unit volume decline combined with deteriorating wood based structural product prices accounted for the bulk of our revenue decrease during the period.

As we have discussed in the past, our structural strategy in a falling price environment emphasizes margin preservation over unit volume and our third quarter margin results show this strategy worked well. So given the severity of this environment, we managed our business well as we work to reduce costs and maintain our focus on long-term objectives. These objectives are number one, to grow specialty products to more than 60% of our total sales. We progressed towards this goal during the quarter, focusing in on those markets like industrials or repair remodel and manufactured housing that are not as dependent on new home construction.

Number two, to manage our structural business for profitability in the third quarter. This meant effectively managing the business to mitigate the negative impact of falling prices. We believe we manage our structural business effectively holding gross margins steady in a severely deteriorating price environment. And third, to outgrow the market over time as we work to transition the majority of our sales to specialty products over the next few years. We believe an important indicator of that progress in market share growth will be specialty product unit volume growth relative to growth in our overall end use market.

Our objective is to maintain a healthy spread there and we achieved this in the third quarter. Now I'd like to turn the call over to George Judd our Chief Operating Officer who will walk you through the quarter more detail.

Thank you, Steve. Good morning, everyone. I'll review our operational performance for the quarter. As Steve discussed, the quarter was one of the most difficult operating environments that we've experienced. Except for a few spots primarily in the southeast, our business related to new home construction was weak. We executed our strategy well in this environment.

Operating our structural products business to preserve margins and profitability by continuing to focus our growth efforts in the specialty products area. For those following along with the slides, I'll begin on Slide 7. BlueLinx's structural unit volume for the quarter contracted 17% for the same period a year ago compared with 8.7% for our end use market. Structural unit volume for the 12 months ended September 30, was down 7.7% compared with a 0.7% decrease for our end use market. Our structural unit volume decline was due to both the dropoff in market and our margin preservation strategy.

During the quarter, customers were focused on working down their own inventory with readily available supply from multiple sources at declining prices and with slower end user demand, our customers had no pressing reason to stock up. At the same time, our strategy in the falling price environment was to preserve margin. We were managing our structural business based on margin, not on volume. We will work to earn this business back as structural product prices stabilize. Continuing on the same slide, specialty unit volume in the third quarter declined by 3.9%. But continued to outperform the estimated end use market which decreased 8.7%. This is our strategy. To grow our specialty unit volume relative to our end use markets.

So despite the housing related demand slowdown and falling structural prices, we continue to take share in this category outperforming the market by 4.8 percentage points. Approximately 4 of these points were generated by organic growth and the remainder from our Austin Hardwoods in Lane Stanton Vance acquisitions, for the trailing 12 months, we outperformed the market by 8.7 percentage points. Organic growth accounted for about 6 points and our acquisitions comprised the remainder. Our specialty shared growth for the quarter is spread across several product categories including molding, particleboard board and specialty lumber.

Turning to sales on Slide 9, specialty sales represented 45% of total sales for the quarter versus 38% a year ago. Looking at structural, about two thirds of the sale decline was due to unit volume which as I noted earlier resulted from both demand slowdown and our margin preservation strategy. Deteriorating wood based structured product prices accounted for the other third of the sales decline.

Turning to Slide 10, we believe our gross margin performance demonstrates successful execution of our strategy in this environment. Overall gross margin of 10% compares with 9.4% a year ago. Specialty gross margin, which accounted for 62% of our gross margin dollars, increased to 14% from 13.3% a year ago. While structural was 7%, down 30 basis points from a year ago but even with this year's second quarter, which as you may recall, also experienced significant price deterioration.

On Slide 11, our overall dollar inventory position of $471 million for the quarter reflects a 12% increase from year ago levels but a 10% decrease from this year's second quarter. Specialty dollar inventories were up 28% from a year ago but down about 2% from this year's second quarter while structural dollar inventories were off 6% from a year ago and down 18% from the second quarter. The year-over-year dollar inventory increase is due to our specialty product inventories.

As you know, we have been investing in specialty inventories to support anticipated higher sales levels of existing products and the introduction of new products. However, in light of the abrupt third quarter slowdown in demand, we also have been trying to adjust all inventories accordingly.

In the third quarter, we're able to react quickly to market conditions by continuing to reduce price sensitive structural inventories. We also are in the progress of adjusting our specialty inventory but the general characteristics of this product category require a longer time period to adjust. The process is continuing into the fourth quarter and we are making good progress.

Looking at the other key indicators on Slide 12, working capital turnover totals 50 days for the quarter with the inventory above desired turn days, accounts payable in line with historical days and accounts receivable days slightly above historical levels. This compares with working capital turnover 40 days for the same period last year. The year ago period benefited from the September demand spike created by Hurricanes Katrina and Rita, which reduced inventory to usually low levels. On a trailing 12-month basis, working capital turn days were 42, unchanged from a year ago. As for Logistics productivity, excluding fuel costs, we achieved a 2.2% reduction on third quarter delivery costs per unit load equivalent compared with a year ago while material handling costs per unit load equivalent increased 0.1%. Again we believe this indicates we are improving productivity in this difficult operating environment.

Slide 13, shows five other keys strategic initiatives that are underway. First, we are continuing to focus efforts on specialty growth while managing our structure product business for margin and to mitigate the potential negative impact of pricing volatility. As our third quarter results show, we are making progress. Even in this challenging environment. We are servicing our customers while at the same time removing nonessential costs from the system working to minimize inventory exposure and generating gross margin improvements. Second, we continue to invest in people, products and processes that we believe will support the long-term growth of our company.

Our objective in this environment is to maintain momentum in specialty products growth. This means remaining committed to the people, processes and inventory required for growing this business. At the same time, we are also maintaining our commitment to strengthen our Denver-based regions. Denver and the west represent a great opportunity for BlueLinx and we are maintaining our commitment there to support long-term success.

Third, we are executing on plans to further penetrate under represented segments like industrials which offer good growth opportunities. In the third quarter, our sales for the industrial segment grew 12% from a year ago and was up 13% year-to-date versus last year. We are pursuing a number of our strategies to expand our industrial businesses, one of which is through acquisitions. Our recent acquisition of Austin Hardwoods, for example, offers us successful operating model for penetrating deeper into industrials, a model that can be expanded throughout the BlueLinx system.

Fourth, we continue to expand relationships with existing vendors whose business needs align well with our value proposition. Working with these vendors and our customers, we are providing a significant value-added link to the supply chain. For example, we have joined with Columbia Forest products to roll out a major new domestic hardware program in several markets. This not only expands our relationship with the leading domestic producer of hardwood plywood it also positions us to provide more value to customers who use this product, including the furniture, fixture and cabinet manufacturers that make up a large part of our industrial business.

Lastly, we are actively looking for acquisition opportunities that would fit well with our growth strategy. This challenging operating environment is beginning to translate to more opportunities for acquisitions but we are moving forward as a patient disciplined acquire. Despite the housing slowdown, we believe we are making progress towards our long-term objectives. Now I'd like to turn the call over to David.

Thanks, George. Let's start with Slide 15, which presents quarterly sales. For the quarter ended September 30, 2006, BlueLinx reported sales of $1.2 billion down 17% or $251 million from last year's third quarter. The sales decrease was largely the result of lower unit volumes and lower structural prices.

Turning to Slide 16, BlueLinx generated $121 million in gross profit for the quarter down $16 million or 12% from last year. Gross margin for the quarter; however, was 10% compared with 9.4% last year reflecting improved product mix and our focus on improving gross margins and structural. This favorable margin performance was accomplished despite the sharp decline in plywood lumber and O.S.B. prices and the slowdown in housing starts.

As shown on Slide 17, operating expenses totaled $105 million, an increase of $2 million or 1.8% from a year ago. The increase reflects $2.3 million of severance costs and $0.6 million of ongoing operating expenses associated with Austin Hardwoods, which was acquired in August of 2006. Excluding the severance costs, operating costs for the quarter were down slightly from a year ago. The annualized cost reductions exceeding $15 million that Steve referenced were implemented in September and October. The cost savings will be substantially reflected in the fourth quarter. We plan on fully implementing the additional 5 to $7 million in annualized savings by mid 2007. Operating income of $16 million was $18 million lower than a year ago reflecting the decline in gross profit.

Turning to Slide 18, and moving down the income statement, interest expense for the quarter was $12 million up $800,000 from the prior year due to higher interest rates versus a year ago that war partially offset by lower debt levels. The tax expense of $1.8 million for the quarter reflects a 44% effective tax rate compared with 40% last year. Last year's tax rate reflected various tax credits. Net income totaled $2.3 million or $0.07 per share compared with $13.9 million or $0.46 per share a year ago. This year's third quarter net income included an after-tax charge of $1.4 million or $0.05 per share associated with severance cost, excluding the charge, net income totaled $3.7 million or $0.12 per diluted share.

Looking at Slide 19, for the nine months ended September 30, sales were down 8% from last year, primarily reflecting declines in structural prices and structural unit volume that were partially offset by 7% increase in specialty unit volumes.

On Slide 20, gross margins for the year-to-date increased by 1.1 percentage points to 9.8%, reflecting growth in specialty sales and improved gross margin percent for both structural and specialty products. Gross profit increased by $15 million reflecting higher gross margins partially offset by lower sales.

Slide 21, shows year-to-date operating expenses at $310 million an increase of $19 million or 7% from the same period a year ago. The increase primarily reflects approximately $8 million in ongoing operating expenses associated with L.S.V., $2.3 million in severance expenses and increase in fuel costs and labor rates. Operating income declined 5% from a year ago as a 4% increase in gross margin dollars was offset by increased expenses.

As shown on Slide 22, interest expense for the nine months was $36 million an increase of 14% from year ago levels, reflecting higher overall interest rates versus a year ago partially offset by lower debt levels. Year-to-date net income was $22 million or $0.71per share compared to $30 million or $0.99 per share a year ago. Year-to-date earnings before charges related to the second quarter mortgage refinancing totaled $25 million or $0.81per share.

Now let's turn to Slide 23, which shows the balance sheet. Assets on September 30, 2006 total $1.19 billion compared with $1.29 billion at the end of this year's second quarter reflecting declines of $34 million and $61 million respectively for receivables and inventories associated with the sales slowdown. The liabilities of $1 billion, includes $321 million in accounts payable and bank overdraft in debts of $633 million. Total debt during the quarter decreased by $44 million reflecting reductions in inventory and accounts receivable partially offset by decreases in accounts payable.

Moving to cash flow on Slide 24, third quarter net cash generate by operations was $50 million reflecting the changes in working capital just discussed. Year-to-date cash used by operations totaled $64 million, reflecting a $33 million increase in receivables associated with a seasonal increase in sales revenue more than offset by $75 million decline in accounts payable. The decline in accounts payable reflects reduction in purchase activity associated with the third quarter reduction in inventories.

Additionally, the year end 2005 accounts payable balance includes both a large -- both a number of long dated payables from several vendors in support of the upcoming spring selling season, and payables associated with rebuilding inventory after they were significantly reduced following Hurricanes Katrina and Rita. The resulting cash balance of September 30, 2006 was $24 million compared with $28 million a year ago. This concludes my prepared remarks. I'll turn the call back to Steve, for closing comments.

Thank you, David. We believe the third quarter demonstrates that BlueLinx continues to make good progress towards our strategic growth objectives even in this very challenging environment. Specifically, we are pursuing specialty product growth with a continuing sense of urgency and we're managing our structural products business for overall profitability, not volume or market share.

It's important to keep in mind as we move forward into the fourth quarter and into 2007, that we are in the midst of a normal, albeit significant, cyclical correction in housing starts. This slowdown has resulted in sustained deterioration and wood-based structural product prices pushing prices for key grades of lumber, plywood and O.S.B. to below what many believe or what we believe is their variable manufacturing cost, so let's try to put all of this in perspective.

The third quarter's 18.7% drop in housing starts was the largest housing start decline since the first quarter of 1991 when starts fell from 37%. Of course thats with a time when the nation was in the midst of a recession and the interest rate on a 30-year fixed rate mortgage was hovering at about 9.5%. That's hardly the environment we're in today. Quite the opposite, the economy is healthy, inflation is under control, unemployment is low and mortgage rates are still hovering near their historic lows.

I recently attended a meeting at the joint center for housing studies of Harvard University along with many industry leaders and Eric Bellski, the center's executive director laid out a convincing argument that when this correction runs its course, barring a full-blown recession, demand for housing could be the strongest this country's experienced in decades due to a variety of demographic factors. So the question on everybody's minds is for the short to immediate term is how long this correction will last and how deep it will go? We are not in the business of economic forecasting and we do not have any control over this environment, but we do have significant control over how our company conducts business in this environment. We believe we've taken the appropriate steps to right size our company for a slow are housing start environment without derailing our ability to achieve the objectives that George and I have just outlined.

In the third quarter, we gained market share in specialty products. We managed our overall business to produce an improved gross margin relative to last year and we removed costs from the organization. We expect business conditions in the fourth quarter to remain challenging. Our business related to new home construction remained weak in October and November and December historically have been slow months for our business due mostly to seasonal factors. Looking into next year and beyond, we believe we are well positioned to make progress in an environment that depending on which forecaster you listen to should produce housing starts somewhere in the range of 1.5 to 1.7 million starts through 2007, then return to 1.8 to 2 million starts after that per year.

As we move forward, our shift to specialty products remains our number one strategic impairment regardless of the environment. Specialty offers higher margin, less price sensitivity and well suited to our unique centralized distribution platform, our national sales force and our high service solutions based value proposition. We intend to proceed as the market leader operating from a business platform that we believe is unique and compelling and highly defendable. So with that, we'll open the call up to questions. So operator, would you please instruct the folks on how to ask a question again.

[OPERATOR INSTRUCTIONS] We will pause for just a moment to compile the Q & A roster. Your first question comes from Keith Hughes with Sun Trust Robinson Humphrey.

Thank you. You've done a nice job this year in a specialty in a pretty tough environment. Can you give us a rundown now what the top couple products are in specialty at this point?

Top that we sell now, Keith some.

Yes, just I'm looking for revenue numbers but just in general size.

Yes. George?

Of course, engineered and lumber is a big product line for us. That of course is tied to housing and framing. Specialty lumber, a very large category for us. That's tied to both housing and the industrial segments of our business. And fasteners and metal products are a very, very fast growing area for us.

And how about, I know you've been doing some roofing as well as composite decking. Where do they stand in the greater scheme of the business?

Well, composite decking's our fastest growing but's immature for us. It's been our first year. It's been a tough market for composite decking as I think you know, in that entire industry related to both housing slowdowns and just the raw material costs of petroleum-based composite decking costs rising while lumber prices fell created a squeeze on composite decking for the year. That's a very fast grower and continues to be a major focus for us with our national partner, Louisiana Pacific and a partner in the northeast that we also do business with in composite decking and Dow.

And we expect that to continue for the long-term for 2007 and beyond. The roofing business is a business that we're getting deeper into. It's the most common roofing model's more of one-step and so it's a real specialty into the roofing business that we are focused on not many really just creating truckloads of three-tab shingles or even some architectural shingles in some markets.

Final question on the specialty inventory. Are you going to be able to work that down to flat year-over-year in the fourth quarter or do you actually want to be up given your growth in that segment?

Our inventories have fallen significantly since the end of the quarter. We expect them to continue to be managed tightly. And we'll look at making sure that we can service our customers' demands. We've got to get our turn days more in line. We're at 53 at the end of the quarter, and that's higher than we would have liked. But where we are today, we're comfortable. I'm very satisfied. It just takes us an extra 60 days to get our specialty inventories in line, just because of the longer supply chain.

Just real quickly, have you seen any different behavior in the market pricing in the last couple weeks with this new tariff or the tariff agreement with Canada?

On lumber?

Yes.

We saw a little bump the week it was announced about you the that's pretty much washed through, wouldn't you say, George?

Our view is that the multitude of terrorists and duties and through the last years is always been affected. Always has affected the market but it usually affects the market prior to any announcement, so we think the market's absorbed that. There is still economics, right, demand and supply and there is still too much lumber supply.

Thank you.

But if you just on pricing, Keith, and you didn't ask this, at the end of the third quarter, if you look at at published pricing for the bench mark grade. Lumber's at 248, it was at the close of the third quarter. That's down 17% through the course of the quarter. O.S.B. at 165 for 7/16" and half inch four ply plywood is 225 down 23.7%. So, our view is it's pretty hard to argue that we're not at variable or some cases below mill variable costs, for particularly high cost mill.

Not fair in October. It looks like prices if we just summarize that in general sequentially have flattened out?

Yes. That's right.

Okay. Thank you.

Okay, Keith.

Your next question comes from Eddings Timault with Morgan Stanley.

Hi, good morning. Actually it's Evan Curts sitting in for Eddings this morning.

Morning.

Just a couple questions here. In September there's kind of a small uptick in the housing starts number. I wonder if any of that was reflected at all in your order? Volumes towards the end of the third quarter or currently. I think you said you were having a weak October but did that reflect at all?

Not really. We were pretty surprised to see that number, actually. And, you know, of course, our business because we're selling to dealers, you've always got the destocking effect. The fact of the matter is product is readily available so our customers are just running extremely lean because there's really no compelling reason to have anything on the ground. Particularly going into the fourth quart so we really didn't see in our sales rates, we didn't really see a change in September.

Right. Going back historically, is there somewhat of a lag then between housing starts and when you actually see volumes change or is it not that correlated to notice?

No, there is a change. Sometimes it changes over time because there's different rules around what's called a start.

Mm-hmm.

Depending on the market that you're in and a real hot environment, you'll see a tighter connection between starts and when folks actually start framing and in weaker times you'll see starts will be just when somebody moves some dirt around or puts the foundation in. So that does vary a bit to what that effect is and then you've also got just the statistical accuracy of starts in general. But we're not expecting some big bubble as a result of that that's in effect through October and November that those phantom starts out there, if you will, are going to come through in additional volume.

I just think that it's important to understand on the housing and supply chain there is a change at the -- when there's a material change in the number of housing starts over a period so that as housing starts are slow and pick up materially for a while, then there's an acceleration of outflow of materials because people are short on inventory. Whether there's a deceleration of housing starts, then there's a bubble of inventories that have to flow through the pipeline and that did happen, in the second and third quarters where our customers lowered their inventories. We lowered our inventories, that there's just a total lack of urgency to purchase.

Right, right. Actually kind of thinking about the third quarter. I kind of would like to get an idea of, how much falling prices in the third quarter really impacted earnings versus falling volumes. Is there any way to kind of break out the inventory at a loss so we can get a feel for what if prices were just low and flat throughout the entire quarter? What sort of impact does that have?

We do have our inventory position in detail. You can see what our starting inventory was what our ending inventory was. And Steve just went through the decline of the three major indexes, plywood, half inch pine plywood was down almost 24%, from the start of the quarter to the end of the quarter, 7/16" O.S.B. was down 21% and then lumber 2 by 4 was down 17.3%.

Right.

So if you just lay those against, average inventory through the quarter, you can come pretty close.

Okay.

What you'll see is we performed better than you will calculate. When you look at our margins on page 34 of the appendix, you'll see structural products out of warehouse, they declined slightly but the net of channel mix that was applied to that, we stayed pretty even.

Mm-hmm.

We maintained pricing and margin just as we indicated in our message.

Finally, I was wondering if you could talk a little bit about your CapEx plans. Some people are buying a lot of trucks right now because they are going to be more expense of going forward. Is that something you're dealing with or --

No. Our fleet's in good shape. We have a replacement schedule for all of our trucks. Volume affects how fast that replacement schedule executes because of the number of miles we drive, but we have not adjusted our CapEx due to any of the changes in the fuel needs or the mileage needs or air emissions changes that happened over the last couple of years because that was announced, and we have adjusted our fleet plan accordingly.

Okay. How should we look at CapEx kind of going forward just overall?

I think that our pattern over the past couple of years is indicative in terms of what we need in terms of capital to continue to do the fleet replacement that George talked about for not just the fleet but for rolling stock and maintained in kind of the 12 to $15 million range to do a little bit of work on our facilities here and there and that kind of thing. So I describe that as the normal capital pace.

Okay.

Our footprint, our national footprint of distribution centers is in great shape. There's not a lot of markets that we need to be in that we're not in, and we're going to grow. You know, we've got plans to grow in a couple of the markets that we've looked at over the past year or so. We don't feel any huge hurry to do that in today's environment but we would like to be ready for the next up cycle in a couple of those markets. That's not big numbers. That's not major new Greenfield operation, so 12 to 15 is the range.

Great, thank you. Very helpful.

Uh-huh.

Our next question comes from Steven Chercover from D.A. Davidson.

First of all, I'm inclined to agree with you that structural products are probably below cash costs. Is there any reason for that reason to, take on an inventory, hold on to it and sell it at a gain?

Well, and again, I think I talked in the call, we've talked in the call about our different strategies for managing commodity inventories, and obviously, in a down cycle, we try to be exceptionally lean and manage for margin which you can look at our second to third quarter, that's what we were doing. But now, we can make when we believe it makes sense to make kind of a strategic investment in some inventory and those grades we'll do that because we don't see a down side rest. Now, we still don't really put a lot of O.S.B. on the ground because that's the most commodity of all these categories. But we will make some investment in lumber and plywood from time to time regionally or on certain species or things because we feel like it's a really good investment. We can make some money on it.

There's two things that we do there. One is we slow our outflow of our warehouse to adjust to what our inflow can be. We are at or below cost of production. We have mills curtailing production. Our suppliers don't have a lot of energy, quite honestly to move a lot of product out so we can build inventory at today's levels. They're all trying to manage their outflow and raise prices a bit. There's not a lot of follow through for them to do that. So if we wanted to go out and take a position which really is not the business we're in but if we wanted to go out there and take a position today, most of our manufacturing partners wouldn't want to support that.

Yes. Makes sense but we are at that level where you are actually willing to step in a wee bit more than normal.

Yes. We can have an inflow and if we can't buy as much as we would like to on the market, a good way to start to build in inventory is to make sure everything that goes out is at a higher margin than had been going out.

That makes sense. Here's the other quick question. For modeling purposes, the $15 million worth of cost cutting, is that something that would basically be at a full blown run rate, in '07?

Oh, yes.

And the 5 to 7 million over and above that? Is that something you can attain, call it this quarter or early into the next year so that we should give you benefit of the doubt of almost 20 million cost savings?

Yes.

Great. Okay, thanks, guys.

Once again, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone key pad. Your next question comes from Yuri Krapivin with Lehman Brothers.

Good morning, everybody.

Good morning.

My first question is about pricing environment in specialty products. Generally a prices for specialty products have been higher than last year. I believe a lot of those [inaudible] high price of oil. Now oil is stable or going down. The overall demand for specialty products is probably weakening, so against that background, are there any signs that prices for specialty products may actually go down over the next couple of quarters?

Yes. You're right in the petroleum based product lines, insulation, vinyl, composite and roofing. There were price increases from really right before Katrina and through Katrina that has petroleum price increased. Our inventories are in line there. We're a little more comfortable where we are today. You'll probably see some price declines as both demand slows and all slows down. We already have seen early in the year price declines in many of the other areas that are significant portions of our specialty business like engineered lumber, which are plywood veneer and O.S.B. fall so do those prices.

So there has been price decline in engineered lumber. And there has been price declines on areas of specialty lumber and some metal products. Previously already reported in these quarters.

Okay. And my second question is on the cash flow year-to-date you generated a negative free cash flow of about $71 million. Typically, you have a very strong fourth quarter in terms of cash flow generation so for the full year, would you expect to break even in terms of free cash flow or do you believe you could be in the positive territory?

It'll be approximately break even. We would expect specialty inventories to be slightly higher than last year end and accounts payable to be lower. The accounts payable at last year, year end had a couple anomalies in it. We reduced inventories dramatically during the hurricane time period and then we added about $50 million to inventory in December. That showed up in payables at year end and we don't expect to repeat that performance. But something like break even for the year.

Okay, thank you.

You're welcome.

At this time, there are no further questions.

Okay. Thank you, everyone, for joining us today. I want to leave with you three thoughts. First, we're aggressively pursuing the specialty product growth which is our primary strategic focus. We believe BlueLinx is ideally positioned to deliver valued and specialty products for both our vendors and our customers. Our third quarter performance demonstrates continued progress toward this long-term objective. Second, we are and will remain committed to structural products as a business but we intend to achieve profitable growth in this segment through disciplined inventory management. And third, over the long-term, we believe we'll outgrow the market with our growth being driven primarily by specialty products. So thank you for your time and we'll talk to you again next quarter.

This concludes today's BlueLinx Third Quarter Conference Call. You may disconnect at this time.