Bluelinx Holdings Inc (BXC) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the BlueLinx fourth quarter conference call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS).

I will now turn the conference over to James Storey, Vice President Investor Relations. Please go ahead, Sir.

Thank you operator. Welcome, everyone, to the BlueLinx fourth quarter 2006 conference call. With us this morning are Steve MacAdam, Chief Executive Officer, George Judd, President and Chief Operating Officer and Lynn Wentworth, Chief Financial Officer.

The press release was issued 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 dramatically 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 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 would 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 you to view them during our remarks. Additionally this slide package contains an appendix of supplementary tables available for your review.

During the course of this call, you'll hear us talking about 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, molding, insulation, hardwood, plywood, vinyl siding, metal fasteners, specialty lumber, roofing and so on.

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

Thank you, Jim, and thanks to everyone for joining us this morning for the BlueLinx fourth quarter earnings conference call.

I would like to start the call by welcoming Lynn Wentworth as our new Chief Financial Officer. Lynn comes to us from BellSouth where she served as CFO of the Company's domestic wireline operations. We are just simply thrilled to have Lynn as a member of the team. She has been with us now for about three weeks and before we start I want to ask her to just say a few words.

Thank you, Steve.

I'm still getting grounded here at BlueLinx but I believe we have a unique and compelling opportunity to create value in the marketplace as an independent national building product distributor. This Company operates from a centralized platform that would be difficult for any other organization to replicate.

It has a strong talent pool of engaged, enthusiastic professionals and a management team that is executing a compelling growth strategy. I am very excited to be a part of this team and I'm looking forward to meeting and speaking with our analysts and investors over the next several days and weeks.

With that, let me turn the call back over to you, Steve.

Thanks, Lynn.

I will start by reviewing some of the highlights of the quarter and the year; and then George Judd will walk you through the operating results after which Lynn will review the financials. I will then close our prepared remarks and open the call to your questions.

The fourth quarter was one of the most challenging operating environments related to new home construction that we have experienced in decades. Housing starts continued the steep decline that began late in the second quarter and prices for key grades of wood-based Structural Products remained at or below estimated manufacturing costs through much of the quarter.

As a distributor of building products we continued to experience the sharp drop in demand that began earlier in the year. We believe the negative impact on our fourth quarter was heightened by our customers also reducing inventories to adjust to their own falloff in demand. These conditions, combined with the normal seasonal slowdown associated with our fourth quarter, negatively impacted our financial results.

We experienced a 29% decline in revenue from the same period a year ago, resulting in a net loss of $5.9 million or $0.19 a share. Comparisons with year ago results are somewhat distorted by the fact that our 2005 fourth quarter benefited in part from stronger-than-expected demand in the aftermath of Hurricanes Katrina and Rita.

Overall, our business was depressed by the sharp slowdown in the supply chain for building products related to new home construction. As we have said in the past, we estimate that approximately 50% of our business is directly tied to new home construction. The other 50% of our end use markets -- those that are not as tied directly to home construction -- demonstrated mixed results during the quarter. A 47% decline in manufactured housing from the Katrina-inflated levels of a year ago, combined with mixed results from industrial applications, nonresidential construction, and repair and remodeling to result in an overall 3.6% decline for these other end use markets during the quarter.

As a result our overall weighted end use markets contracted by approximately 16% while the Company's overall unit volume fell by 17%. The unit volume decline, combined with sharply lower year-over-year prices for key grades of wood-based structural products, accounted for the 29% decline in revenue.

I think it is important to pause here and remind ourselves that we do business in a cyclical and seasonal industry. The financial foundation of our Company has been structured to facilitate the ongoing pursuit of our strategic objectives throughout these cycles. Our debt structure is flexible, allowing us to use cash generated during slow periods to pay down debt and to borrow more to build inventories and grow the business in periods of increased demand. Our dividend policy was established, recognizing this cyclicality and as you know, in January, we declared our regular quarterly dividend of $0.12.5 a share for the fourth quarter.

In short we are positioned to continue pursuing our growth strategy environments just like the one we are experiencing now. The home building industry is in the midst of a significant cyclical correction but we believe the longer-term outlook for new home construction remains promising. In response, BlueLinx is moving forward in 2007 with our growth strategy intact, along with a strong commitment to continue aggressively managing cost.

We continue to pursue our three-pronged strategy. First, to grow Specialty Products to more than 60% of total sales. Second, to profitably manage our structural business and, third, to outgrow the overall market over time.

So in the fourth quarter we focused on growing Specialty Products by adding premium brands and partnerings with world-class manufactures. We held gross margins at 9.8% in a challenging demand and pricing environment; and we demonstrated our commitment to aggressively manage costs and working capital.

Expenses in the fourth quarter declined approximately 13% from same period a year ago. While part of this was due to reduced costs associated with the slowdown of our business, the improvement also reflects the cost reduction initiatives we launched in the second half of the year.

Also, we significantly readjusted and reduced certain inventories to reflect current demand and to focus on specialty opportunities. We generated additional cash and paid down our outstanding revolver credit debt by $100 million from the end of the third quarter.

Lastly, despite this challenging environment, we continue to make appropriate investments in people and processes to help ensure our success as we move forward in 2007 and beyond. We are making key investments in inventory, sales, financial management systems and we are focusing resources on Specialty Product growth initiatives. Our strategy as we move forward remains focused on providing dependable service to our customers and vendors. We are positioning BlueLinx for the long-term as a company that can deliver value-added through product introductions in sales support, logistics services, and business solutions.

Over time we believe our customers and suppliers will continue to recognize BlueLinx as a company whose value extends beyond distribution.

Now George Judd will walk you through our operations in more detail. George.

Thanks. I will review our operational performance for the quarter. As Steve has just described our Company faced a very challenging environment in the fourth quarter 2006. We responded by managing costs aggressively -- repositioning our inventory, refining our Specialty Product offerings and managing our structural business for profitability. We continued to execute on our long-term growth strategy.

For those following along with the slides I will began on slide 7. BlueLinx's structural unit volume for the quarter contracted 18.3% from the same period a year ago compared with 16% for our end use markets. Structural unit volume for the 12 months ended December 30th was down 11.8% compared with a 6.9% decrease for our end use markets. Our structural unit volume decline was due to the drop-off in demand, resulting from a 25% decrease in housing starts as well as our strategy to focus on profitability.

Prices for key grades of wood-based Structural Products ended the year about 27% below last year and traded at or below manufacturing costs through much of the fourth quarter. Prices trended lower through much of the quarter with the average price for key grades falling as much as 12%. However when you compare the end of the fourth quarter to the end of the third quarter, you see an 11% increase in these prices due to a price jump in the final few weeks of December which was a holiday season and very little business was transacted.

BlueLinx continued to manage our Structural business by focusing on margin and on adding value to our customers and suppliers.

As Steve noted, the negative impact of the sharp housing start slowdown was amplified by customers' inventory destocking. Our customers focused on working down their own inventories and had no pressing need to restock, due to lack of demand and readily available supply. This heightened the impact of the slowdown of BlueLinx. We're seeing some signs that this supplies chains destocking has run its course, though we are not seeing evidence that customers have a need to stock up in anticipation of business expansion.

Continuing on the same slide, Specialty unit volume in the fourth quarter declined by 15.4% just slightly outperforming the estimated end use market which decreased 16%. We have consistently said that the spread between our Specialty unit volume performance and our end use markets is an important indicator engaging our market share progress over time as we look to shift our business to predominantly Specialty Products.

As you can see on slide 8, for all of 2006 Specialty unit volume outperformed the market by 7.9 percentage points. Organic growth accounted for about 6 points and our acquisitions comprised the remainder.

Turning to sales on slide 9, Specialty sales represented 48% of total sales for the quarter versus 40% a year ago. The 15% decline in Specialty sales for the year from a year ago was due to unit volume which offset a slight increase in overall prices. The unit volume contraction was due in part to declines in fiberglass insulation and hardwood plywood as well as to decrease the (indiscernible) lumber. A product line that is directly tied to new home construction.

Structural siding and particle board experienced positive sales comparisons for the prior year.

Regarding fiberglass installation and hardwood plywood we transitioned suppliers in the fourth quarter and have aligned ourselves with strong brand names and world-class manufacturers in Johns [Mansfield], [and] CertainTeed and Columbia Forest products, which we believe bodes well for growing the future business in these categories. We currently are working to ramp up sales of these and other new products over the next several months and believe they will positively impact Specialty product unit volume growth in 2007.

Looking at our Structural business, revenue decreased 38%. About one-half of the decline was due to volume and the balance was due to lower selling prices.

Turning to slide 10, overall gross margin of 9.8% for the fourth quarter compares with 10.6% a year ago when our margin benefited in part from the inflationary effect of hurricanes. We believe our ability to hold overall gross margin at 9.8% in this environment indicates successful execution of our margin strategy.

Our fourth quarter performance compares with 10% for the third quarter and resulted in a full year gross margin of 9.8% which is a 70 basis point improvement over 2005. Specialty gross margin for the quarter was 13.8% compared with 14% in the third quarter and 14.3% a year ago. Structural gross margin was 7%, unchanged from the third quarter and down [at] 130 basis points from a year ago.

On slide 11, our overall dollar inventory position of $411 million for the quarter reflects the 13% decrease from both the year ago level and from the end of the third quarter. It represents the lowest quarterly dollar level since the December quarter of 2003. Specialty dollar inventories rose 4% from a year ago but contracted about 13% from this year's third quarter while Structural dollar inventories were reduced by 24% from a year ago and 11% from the third quarter.

During the fourth quarter, we continued to reposition our Specialty and Structural inventories to align with our Specialty growth strategy and to adjust to market conditions. In Specialty, we were able to reposition the inventory to reflect the addition of new higher margin products including hardwood plywood from Columbia Forest Products, our private labeled Tanza Trim and Hitachi power tools.

Looking at other key indicators of our performance on slide 12, working capital turn days totaled 54 during the quarter with inventory above desired turn days, accounts payable under historical days and accounts receivable in line with historical levels. This compares with working capital turn days of 37 days for the same period last year. On a trailing 12-month basis working capital turn days were 46 compared with 40 a year ago.

Logistics productivity, excluding fuel cost showed fourth quarter delivery costs per unit load equivalent up 7.9% from a year ago while the material handling costs per ULE increased to 1.9%. Amid the quarter's ongoing inventory destocking, our average order size fell in number of stock stops per truckload increase.

Slide 13 shows the five key initiatives we are pursuing in support of our strategic objectives. First, we are continuing to focus on growing our Specialty business while managing our Structural Product business for margin and to mitigate the potential negative impact of pricing volatility.

Despite the challenging environment we are making strategic progress in the fourth quarter. We made strategic progress in the fourth quarter. Augmenting our Specialty Product lineup with brand names I've already mentioned -- Hitachi power tools, John Mansfield and CertainTeed fiberglass insulation and hardwood plywood from Columbia Forest Products. We are very encouraged that our long-term business proposition is recognized by these world-class manufacturers who are committed to the product research and development.

Second, we continued to invest in the people and process that we believe will support the long-term growth of our Company. Executing in our growth plan requires that we have the financial, sales and inventory management systems necessary to support accelerating growth. We are moving forward with specific projects on these fronts in 2007.

Third, to support our Specialty growth initiative it is crucial that we increase our presence in under represented business segments and continue to focus on targeted growing accounts that serve high-growth markets. As part of this initiative, we are focusing additional resources to grow our industrial business -- an important but highly fragmented segment that aligns well with our Specialty growth strategy and that offers strong growth potential for BlueLinx.

Fourth, we continued 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 in the supply chain. In 2006 this initiative translated to additional business from Louisiana Pacific, as we began stocking its Smart Side OSB siding products and were able to expand our partnerships with other manufacturers to grow our own BlueLinx branded offerings. Including our steel links line of metal products and fasteners and our Tanza PVC Trim.

Let's look at Tanza Trim for a moment. We introduced this BlueLinx brand in early 2006 and by the end of the year we had more than 100 stocking locations. Our current plan is to approximately double our stocking dealers in 2007 as we expand our Tanza Trim program into all of our geographic regions. Again we believe this shows that we are making progress in executing our Specialty growth strategy even in this difficult environment.

Our last initiative supporting our organics growth objective is acquisitions. We continue to actively look for acquisition opportunities that would fit well with our growth strategy.

The current environment remains extremely challenging. Demand remains weak across most of our geographic markets as new home construction continues its correction and our other end use markets remain pressured by weakness in manufactured housing and a sluggish repair and remodel market. Despite these challenges, we believe we can continue to execute on our long-term growth strategies.

Now I'd like to turn the call over to Lynn Wentworth.

Thanks, George. I'm going to walk you through the financial statements. Let's start with slide 15 which presents quarterly sales.

Sales for the quarter ended December 30, 2006, were $940 million, down 29% or $389 million from last year's fourth quarter. The sales decrease was a result of lower unit volumes combined with lower structural prices.

Turning to slide 16, BlueLinx generated $93 million in gross profit for the quarter, down $48 million from last year or 34%. As we have already said last year's fourth quarter benefited in part from stronger-than-expected seasonal demand in the aftermath of Hurricanes Katrina and Rita. Historically our fourth quarter results are negatively impacted by the seasonal slowdown in construction.

Gross margin for the quarter was 9.8% compared with 10.6% last year. Despite the year-over-year decline, we consider 9.8% a respectable margin performance, considering the price and demand challenges we faced in our market.

As shown on slide 17, operating expenses for the quarter totaled $92 million, a decrease of $14 million or 13% from a year ago. The decline primarily reflects decreases in variable compensation, lower payroll related to head count reductions and other fixed cost components not directly related to head count reductions.

Operating income for the fourth quarter totaled $600,000 compared with $35 million a year ago reflecting the decline in gross profit that was partially offset by the improvement in operating expense.

Moving to slide 18, interest expense for the quarter was $11 million, down $400,000 from the prior year due to lower debt levels. We recorded a tax benefit of $4.5 million for the quarter compared to a tax expense of $9 million last year. The net loss of $5.9 million or $0.19 per share compares with net income of $14.5 million or $0.48 per share a year ago.

Now let's review the full year on slide 19. Full year sales were down 13% from the prior year, primarily reflecting declines in Structural prices and structural unit volumes that were slightly offset by a 1% increase in Specialty unit volumes.

On slide 20 gross margin for the full year increased by 70 basis points to 9.8%, reflecting growth in Specialty sales and in improved gross margin percent per for both Structural and Specialty products. Gross profit decreased $33 million due to the overall sales declines that were partially offset by higher gross margins.

Slide 21 shows full year operating expenses of $402 million, an increase of $6 million or 1%. The increase primarily reflects approximately $9 million in ongoing expenses associated with acquisitions and $4 million in severance and other related expenses partially offset by reductions in variable compensation and consulting costs.

Operating income declined 33% from a year ago, a result of the 6% decrease in gross margin dollars and the slight increase in operating expenses.

Moving to slide 22. Interest expense for the full year was $46 million, an increase of 9% from year ago levels reflecting higher interest rates. For the full year, net income was $15.8 million or $0.51 a share compared with $44.6 million or $1.46 per share a year ago. Full year earnings before charges related to the mortgage refinancing totaled $18.8 million or $0.61 a share. In addition net income for the full year includes an after-tax charge of $1.4 million or $0.05 a share related to the cost reduction effort.

Now let's review the balance sheet on slide 23. Assets at year end totaled $1 billion compared with $1.19 billion at the end of the third quarter, reflecting declines of $128 million and $61 million, respectively, for receivables and inventories associated with the sales decline. Total liabilities of $815 million include $246 million in accounts payable and bank overdrafts and debt of $532 million. Total debt during the fourth quarter decreased by $100 million, reflecting reductions in accounts payable and -- I'm sorry -- in accounts receivable and inventory partly offset by decreases in accounts payable.

Moving to cash flow on slide 24. Fourth quarter net cash generated by operations was $127 million, reflecting the changes in working capital just discussed. For the full year, cash generated by operations totaled $63 million primarily reflecting a $94 million decrease in receivables and a $67 million decrease in inventories, which was partially offset by a $132 million decrease in accounts payable. The accounts payable decline reflects the reduction and inventory purchases during the third and fourth quarters. In addition the year end 2005 accounts payable balance included a higher level of participation and winter buy activities and payables associated with rebuilding inventories after they were significantly reduced following Hurricanes Katrina and Rita. The resulting cash balance at year end was $27 million compared with $24 million a year ago.

In summary, let me point out that we managed costs very well in the tough environment. We generated $127 million in cash from operations. We reduced debt. And we declared our regular quarterly dividend. This concludes my prepared remarks.

Now I'll turn the call back to Steve for closing comments.

Thank you Lynn. I would like to share a few observations before turning the call over to the operator for questions.

As we move forward in 2007, we remain focused on providing dependable high-quality service to our customers as the home construction industry works its way through this cyclical correction. We expect that our business related to new home construction will remain challenging through the first quarter and throughout much of the year.

Historically business in our first quarter is typically slower than in the second and third quarters, due to seasonal factors. The outlook for some of our other end use markets is mixed with continuing declines forecast for manufactured housing and repair and remodel with moderate growth predicted for industrials and nonresidential construction markets.

While the industry works its way through this challenging environment, we are encouraged by certain economic forecasters who point to a favorable longer-term outlook for household creation and new home construction. And despite the challenging environment we expect in 2007, we are seeing some signs of stability in pricing and demands.

Wood based Structural Product prices, the key grades of which fell approximately 27% in 2006, appear to have found a bottom. However we do not expect any substantial price recovering until the housing sector begins to show signs of a sustained recovery. As for the housing sector the decline in housing starts seem to have leveled off in some of our geographic markets but as I've said before we are not in the business of economic forecasting. Forecast we monitor include those by Research Information Systems and the National Association for Homebuilders.

They currently put housing starts in the range of $1.5 to $1.6 million for 2007.

In summary the environment remains weak and the housing market currently is showing no significant signs of improvement. Our 2007 operating plan is based on expectations that our sales will decline from 2006 levels as the overall market for the products we distribute continues to contract, pressured by the housing start situation and significantly lower year-over-year prices for structural products.

Our plan is to improve our overall gross margin performance in this environment by continuing to shift our product mix to Specialty and by effectively managing our Structural inventory in what we expect to be a lower but generally stable pricing environment.

In 2006, we achieved a 70 basis point improvement in Specialty gross margin and a 10 basis point improvement in Structural. We believe we can continue this trend in 2007. In addition we will continue the stringent cost controls that we put in place in the second half of the year last year and seek to drive down 2007 operating expenses without diminishing our ability to achieve our longer-term growth objectives.

Strategically, our shift to Specialty products remains our No. 1 strategic imperative as we move forward into 2007. Specialty offers higher margin, less price sensitivity and is well suited to our unique centralized distribution platform, national sales force, our high service and solutions-based value proposition. We intend to proceed as the market leader operating from the business platform that we believe is unique and compelling.

With that we will open the call to the questions.

Operator, would you please instruct everyone how to ask the questions one more time?

(OPERATOR INSTRUCTIONS) Edings Thibault with Morgan Stanley.

It's actually [Evan Kurtz] filling in for Edings today. Just a couple of questions. First in this tough operating environment, what do things look like on the acquisition front? Have you seen any more opportunities because of the housing downturn?

Actually we have -- as we've said before -- a very active M&A team internal. We've looked at a number of things and we continue to proceed as a disciplined requirer. So we don't want to overpay. We've seen a fair bit of activity in terms of looking at things.

Would you expect any future acquisitions to be in the same size range as the ones we've seen in the past couple of years?

Yes. I think our strategy to continue to acquire Specialty focus regional or local distributors is consistent with what our strategy has been in the past. So we haven't changed our acquisition posture.

The other question was on Specialty. It seems like over the past few quarters that the Specialty volumes were a little bit less correlated with housing starts [than] Structural. That kind of did not happen in 4Q. I was wondering if you could provide some more color of what actually, what happened this quarter versus the last few quarters and how should we look at that going forward?

Yes. I think there's two things. Let me start here and then I'll let George jump in as well.

There's two things you have to always remember when we report our spread versus the market. The market numbers that we calculate, because they are the only numbers available in the industry, are based on the [end] demand. So any destocking in the supply chain is not reflected in that delta.

The corollary is, any restocking of the supply chain is not going to show up in that number. So we will tend to outperform the market, if you will. We will tend to have wind at our back in a growing environment where our customers are also building inventory and will have more wind in our face on that metric with things, when our customers are going the other way leaning down inventories.

Now we really have no way of separating or isolating that effect. So you just have to look at it over a period of time.

And the second thing that affected the fourth quarter is, as George mentioned, we had a couple of reasonably significant Specialty product codes that we were going through a transition of suppliers on, which affected those fourth quarter's -- that delta.

And is that transition now mostly complete or will that bleed into 1Q?

That transition is for the most part complete.

Thanks, Steve. The transition is complete but we have to convert our customers' brands to our brands. So you just don't flip the switch and all of a sudden have our previous brands replaced by our new brands. But we're confident that we made the right decision, long-term and throughout 2007, to grow that business.

Really it's hardwood plywood where we have a strategic alliance with Columbia which is a world-class hardwood plywood producer -- global in scope -- and our CertainTeed and John Mansfields fiberglass insulation programs which are both world-class manufacturers and premium brands and are investing in that business in R&D. And we'll be continuing to do that in the future. So we are excited about what that means for BlueLinx Specialty sales going forward.

Thanks. That's it for me.

Mukul Kocchar with CIBC World Markets.

Just want to get an idea and follow-up on that Specialty question. If you exclude the impact of the last product for this quarter, have you done the calculation of how much your outperformance would have been had you done that?

Yes. We have that but we don't report by product group. And we don't do that simply because we don't want to share our sales by product line [to all]. But we have done that and it does affect and prove that our growth strategy on specialties is continuing to work.

And if you factor that out, Mukul, it would indicate that our overall trend is generally in line with the outperformance of the market in third quarter.

Second question on the operating expenses side. I thought you did a great job. Just wanted to actually get an idea of how much is left for 2007 and what should be expected and (inaudible) going forward?

We had in place by the end of the year essentially all of the reductions on a run rate basis. Now I guess to do your math you'd have to know, to that was impacted in the whole quarter. I don't know that we have done that actually. I just know that we were at the run rate at the end of the quarter. So, look, the headcount reductions were all done going into the quarter. So (MULTIPLE SPEAKERS) we've talked about those so you can kind of quantify that. And then just assume that the rest kind of came in on a straight line basis. I think you'd be pretty accurate. You follow me?

So 5 to 7 million straight lines for the quarter? Again on the Specialty product side, right? I'm not sure you guys probably won't break it down by revenue by product, but you mentioned in your press release that you expect to expand Specialty products through 2007. Should we take that as a sign that you may be able to grow Specialty products in 2007?

We will grow it relative to the end use markets. And you know I think we've shared with everybody how we calculate our weighted end use markets half of it housing starts and then the other mix is the other drivers. If you look at most forecasts for next year it's going to be the same kind of weighted -- in the order of magnitude, it's the same kind of weighted end user drop in '07 that we saw in '06. Call it with the seven handle on it anyway.

So that's the kind of wind that is going to be in our face. So we expect to be able to outgrow the market next year on the order of magnitude at the same pace that we did this year.

So we are going to be depending on what the end use markets actually shape out to be. That would either put you in just under 0 or just slightly positive.

Thank you very much for your help today.

Yuri Krapivin with Lehman Brothers.

Typically, you build inventories towards the end of the March quarter, ahead of the construction season. Given this huge uncertainty in the housing market how are you going to manage this inventory process this year?

We will have to build our inventories going into the seasonal building cycle, even though the seasonal building cycle is forecast to have a lower peak than it had in a couple of previous years. So we will have inventories where -- our inventories are in pretty good shape right now which we talked about it last quarter, that we were on target with our inventory planning. And we had fallen behind probably 30 to 60 days as the market contracted faster than we expected. We are online now. We have invested in our new product lines.

So we added Hitachi brand power tools in the whole Western part of United States and we've added John Mansfield CertainTeed insulation and we've added Columbia Forest Products and we've added Tanza into new geographic markets, all while reducing our inventories. So we really managed aggressively our structural inventories and as we shared in the prepared comments we don't see a lot of reason why our structural prices will increase substantially.

So we haven't -- we are playing those inventories very tightly and we are investing in Specialty products. We expect to continue to do that through the spring season.

My second question has to do with the pricing environment in the Specialty markets. You mentioned that on a year-over-year basis specialty prices were up modestly. How do prices compare on a sequential basis and where are Specialty prices headed in general?

A lot of the Specialty price products had an increase after the storms because they were petroleum-based. We shared that in the first and second quarter calls. Most of that has shaken out and will continue to shake out in 2007. So Specialty prices are stable and we expect them to remain fairly stable throughout 2007. There is pricing pressure in some product lines as there's more people competing for a smaller amount of business and that is why I stated that we were happy with our margin performance on both our Structural business and our Specialty business because we maintained our specialty margins in spite of that very, very competitive landscape.

Thank you.

Keith Hughes with SunTrust.

Within the Specialty business can you give us an update on where you are in terms of your top three or four products?

What do you mean in terms of where we are?

Just what would've been the top three or four biggest sellers by revenue within Specialties category? I mean, is it siding? Is it insulation?

Yes. It's product lines, [engineerial] lumber is one of our top Specialty product lines. That is directly tied to new housing constructions where some of our product lines can be more heavily weighted towards some of the remodel businesses and industrial businesses. Our other big Specialty businesses are our molding and millwork products and our metal products.

And all of those products are product lines that cross into -- with the exception of engineerial lumber the other two crossed into our industrial focused business tremendously and they are all -- both of them are global businesses where molding and millwork and metal products are in many cases produced offshore. It's why we talked last year in depth about increasing our global sourcing office and why we were happy to add [Dwayne Goodwin] to our team and he has since built a real nice global sourcing team for BlueLinx so that we can procure those Specialty products from the right markets and move that product efficiently through the supply chain.

you've announced a lot of agreements over the last really couple of years and I assume to get to where you want to be those are going to have to ramp up in revenue within Specialty. How do the margins compare on some of your new agreements versus the three you mentioned here?

In other words the price structure in our new programs versus our price structure in our old (MULTIPLE SPEAKERS)

Better, worse, the same?

They're better. We wouldn't have changed them if they weren't.

I don't mean in terms of programs. I mean as you get more and more product.

(MULTIPLE SPEAKERS)

Yes is the mix going to be shifting up, shifting down?

I wouldn't say the mix is going to be a whole lot richer in total. I mean it might be a little bit but it's not going to fundamentally be higher margin stuff than our current mix.

Because you have been running about 14% margin.

Yes.

That -- kind of what you are looking a couple of years down.

Well I would say, the new stuff you might be -- it might be 100 or 200 basis points higher as it comes in, but it is not going to be 500 or 600.

The thing there is that we get deeper into product lines. So the deeper you get into product lines there tends to be some higher margin opportunities. And quite honestly, that balances out with the slower moving product line in the inventories. So we have that modeled, so it negatively affects our turn days and positively affects our gross margin dollars.

And the volumes of some of them as we go deeper in the [co.'s], the volumes of some of the stuff George is talking about are not like with the big commodities. So when you weight it altogether I think 1 or 2% might be a reasonable way to think about it.

Just on inventory, down a lot year over year. As we move sequentially into the first quarter, will we see a similar inventory number to what we saw at the year end at the end of the first quarter?

As I mentioned earlier, we have to build a little inventory going into the spring season and we will do that. We are not betting on that commodity business because we don't see the prices. We don't see a reason why the prices are going to accelerate. So it will be on the Specialty businesses as we -- in the northern market, northern parts of the country our inventories are very lean right now and that's a good thing. And we will have to increase the Specialty business -- Specialty inventories in the northern half of the United States.

Thank you.

(OPERATOR INSTRUCTIONS). At this time, Sir, there are no further -- actually you do have one in queue. Stuart Benway with Standard & Poor's.

I was just wondering, given what you see now for the first quarter given a declining sales environment, how likely is it that you'll return to profitability in the first quarter?

We don't give guidance as a policy for the Company. So you are going to have to figure that out.

But what we have seen is our markets, the destocking effect that George talked about stabilize and price on commodity stuff has stabilized. So that was a very significant wind in our face in the second half of last year -- those factors.

Thank you.

At this time there are no further questions.

Let's wrap it up. Thank you, everyone, for joining us today. I want to leave you with four thoughts. First, we remained committed to our Specialty product growth strategies. It is our primary strategic focus and in the fourth quarter we continued to align people processes and products to achieve this growth.

Second, we are and will remained committed to Structural products but intend to achieve profitable growth in this segment through disciplined inventory and margin management.

Third, we are committed to aggressively managing costs and working capital in this economic environment.

And fourth, over the long-term we believe our Specialty product strategy will help BlueLinx outgrow the market.

Thank you for your time and we will talk with you again next quarter.

This concludes today's conference. You may now disconnect.