Bluelinx Holdings Inc (BXC) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the BlueLinx Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After today's presentation there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to James Storey, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator. And welcome everyone to the BlueLinx Second Quarter 2007 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. Our 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 website www.bluelinxco.com

Before starting the call, I need to refer you to our 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. A discussion of factors that may affect future results is provided in the company's filings with the Securities and Exchange Commission. BlueLinx undertakes no obligation to publicly update or revise any forward-looking statements contained in these presentations based on new information 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 website. We will be referring to these slides during this call and we encourage you to view them during our remarks. Additionally, the slide package contains an appendix of supplementary tables available for your review.

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

Thank you Jim and thank you everyone for joining us this morning for the BlueLinx Second Quarter Earnings Conference Call. I will provide a brief overview of the quarter and then Lynn will walk you through our financial results, followed by George who will review operations. I will close our prepared remarks with an assessment of our current conditions and then open the call to your questions.

I would characterize the second quarter generally as a continuation of the challenges we faced in the first quarter. Demand for products related to new home construction remained weak, pressured by the ongoing oversupply in the housing market. For the most part, our customers continued to conduct business with very lean inventories in response to a slow spring and summer construction season.

We did not experience any further large-scale deterioration in business demand during the quarter. And although weak conditions, remained stable. We also benefited somewhat from firming prices for key grades of wood-based structural products, which experienced their first sustained rise after trading at or below estimated manufacturing costs for the past two quarters.

Against this backdrop, we did what we said we would do. We continued to cultivate new customers, added and strengthened supplier relationships. We focused on expanding our Specialty Product pipeline. We focused on profitable long-term relationships and profitable transactions. And as I've said before, we continue to use this environment to invest in the systems and technologies that will help insure our position as a long-term market leader. But last and certainly not least, we're continuing to aggressively manage cost and working capital.

With that said, let me review our long-term objectives. We seek to grow Specialty Products to more than 60% of total sales, to profitably manage our Structural Products business and to outgrow the market over the long term. I'm confident we're taking the appropriate steps in this very challenging environment to achieve these goals.

Now Lynn Wentworth, our Chief Financial Officer, will walk you through our financial results for the quarter.

Thanks Steve and good morning everyone. I'm going to review the financial results with you, focusing on the drivers for our performance during the quarter.

Let's start with quarterly sales on slide 7. Overall sales for the quarter ended June 30th, totaled $1.1 billion, down 22% or $297 million from last year. Specialty sales declined 17% from the same period last year with the majority of the decline coming from decreased unit volumes and about 10% from lower prices. Structural Product sales declined 25%, approximately 2/3 of which resulted from lower unit volumes with the remainder coming from price deflation. Specialty Product sales increased 46%-- to 46% of total sales from 43% a year ago.

Moving to slide 8, BlueLinx generated $119 million in gross profit for the quarter. Despite the challenging operating environment, we improved overall gross margin to 11% compared with 9.9% a year ago. The second quarter gross margin also represents a gain of 20 basis points from the first quarter gross margin of 10.8%.

Gross margin performance benefited during the quarter from our ongoing management of Structural Product prices and to a lesser extent from channeling product mix. Specialty gross margin of 14% compared with 14.4% a year ago due in part to the increasingly competitive pricing environment. Structural gross margin of 9.3% represented a 230 basis point improvement over the prior year driven by pricing management and to a lesser extent channel mix. Structural gross margin increased from a year ago across all delivery channels and revenue generated from sales through warehouse also increased while lower gross margin direct ship revenue decreased.

In the current environment, customers continue to tightly manage their inventories by ordering smaller, break bulk quantities through our warehouse rather than the full truckloads that often ship through the direct channel. Channel mix analysis is available on pages 28 and 29 in the appendix.

We believe our gross margin performance is one of the key indications that BlueLinx is operating effectively in a very difficult environment.

As shown on slide 9, operating expenses for the quarter were $99 million, a decrease of $5 million or 4% from a year ago. This decline primarily reflects lower payroll related to headcount reductions and other expenses not directly related to headcount, partially offset by ongoing expenses of about $1 million associated with the acquisition of Austin Hardwoods last August. In addition, despite the overall decline in volume, our logistics and material handling costs were flat as more of our mix flowed through the warehouse and as our trucks delivered smaller quantities to more locations.

Operating income for the second quarter totaled $21 million compared with $33 million a year ago, reflecting the decline in gross profit that was partially offset by our improvement in operating expense.

Since June of 2006, we've removed significant costs from our business in response to the slowing demand environment brought about by the rapid decline in housing starts. We'll continue to manage our cost structure relative to business conditions. At the same time, we're also continuing to invest in process and program improvements to support our long-term growth. This year we're making a significant investment in a sales process and productivity improvement program designed to increase market share and profitability.

Turning to slide 10, we achieved a second quarter net income of $5.4 million or $0.18 a share compared with year ago net income of $9.6 million or $0.31 a share. Net income is after interest expense of $11.8 million which decreased by $500,000 from the prior year and after tax expense of $3.6 million compared to the tax expense of $6.6 million a year ago.

Looking at year-to-date results on slide 11, sales through the six months ended June 30th totaled $2 billion down 26% from the same period last year. Gross margin of 10.9% showed a 120 basis point improvement over a year ago, reflecting both the growth in Specialty sales relative to Structural and improved gross margin and channel mix for Structural.

Year-to-date operating expenses declined 6.3% from the same period last year while operating income declined 50%, largely driven by the housing-related drop in demand and lower wood-based structural price-- product prices. Year-to-date net income totaled $0.17 a share compared with $0.63 a year ago.

Moving to cash flow for the quarter on slide 12, receivables increased by $28 million due to seasonal sales growth and inventories increased $5 million. These increases were partially offset by a $26 million increase in accounts payable, also associated with a seasonal sales increase. Second quarter net cash provided by operations was $13 million.

We used $4 million in investing activities this quarter primarily for ongoing process and systems improvements in support of our Specialty sales growth strategy. Key initiatives in the first half of 2007 include programs designed to improve and fine tune our capabilities in inventory management and forecasting, in financial budgeting and reporting, in order tracking and visibility, and in product marketing. These all are included in our $14 million capital forecast for 2007 of which about 40% is designated for these strategic initiatives. As we've previously said, we believe these are necessary investments to support our long-term growth strategy.

Cash used in financing activities was $4 million for the quarter driven by payment of our regular quarterly dividend of $0.125 a share or $3.9 million. The resulting cash balance at June 30th was $25 million compared with $20 million at March 31st and $27 million a year ago. We had $309 million available on our revolving credit agreement. The combined debt balance on our mortgage and revolving credit agreement was $627 million, an increase of $16 million from March 31st largely reflecting seasonal increases in working capital but down $50 million from a year ago.

Now let's look a little more closely at inventory on slide 13. Our second quarter inventory position of $470 million was basically flat when compared with the first quarter but was down 12% from a year ago. We continue to support new products and vendors as a part of our focus on Specialty Product growth but we also aggressively managed inventory in light of the generally weak demand environment.

Specialty inventory of $280 million, which represents about 60% of total inventory was flat relative to the first quarter and down 7% from a year ago. Structural inventory of $164 million was up 2% from the previous quarter but was down 15% from the same period a year ago. A more complete look at inventory is available on page 27 of the appendix.

Turning to slide 14, working capital turn days for the second quarter totaled 52. That compares with 53 days for the first quarter and 43 days for the same period a year ago. On a trailing 12-month basis, working capital turn days also totaled 52 compared with 40 a year ago.

As we've noted, our transition to Specialty Products entails higher inventory turn days. However, second quarter inventory turn days remains higher than we'd like due in large part to the ongoing depressed demand. As you can see by the modest change between our first and second quarter dollar inventory positions, we're aggressively trying to manage inventory in this depressed environment while at the same time working to insure we have the product and selection necessary to provide quality service to our customers.

In summary on slide 15, let me point out that we're very pleased with our 11% gross margin, especially in this challenging environment. We're also keenly focused on managing costs and inventory and we continue to invest in the tools we need for future success. Despite this ongoing challenging environment, we have the financial resources necessary to maintain our dividend, pursue acquisitions, and remain on our strategic course.

Now I'll turn the call over to George Judd, our Chief Operating Officer.

Thanks Lynn. I'll review our operational performance for the quarter. Our organization remains focused on growing our Specialty Product business and operating our Structural business for profitability. As we have said in the past, Specialty offers higher margin, less price volatility, and is well suited to our centralized distribution platform, our national sales force, and our solutions-based value proposition. Our number one strategic objective is to grow Specialty's greater than 60% of total sales over time.

During the second quarter, we continued to strengthen our long-term value proposition with customers and vendors by maintaining appropriate margins and declining to participate in less than profitable business. The demand slowdown caused by the ongoing housing correction continues to foster a highly competitive pricing environment for both Specialty and Structural Products. Maintaining gross margin in this environment is crucial to our future growth. Our value proposition is based on customer service, on timely deliveries of the right products, and on partnering with our customers to find the best cost solutions to their inventory management challenges. We believe BlueLinx will continue to win business over the long run as we remain focused on adding value to our customers' and our vendors' businesses.

We are working in this environment to partner with suppliers and customers to develop long-term relationships that drive value. An excellent example of this is the innovative partnership we announced last month with CCA Global, the largest specialty floor cover group in North America. We've worked with CCA for nearly a year to develop a logistics and product management service under which we provide the company's global direct flooring products to more than 2,300 CCA flooring retailers. This agreement truly extends our value beyond distribution. We will provide customer service, manage inventory and accounts receivable and work to create demand for the global direct flooring line. CCA will continue to globally source and own its products but we will be paying for our logistics and product management services.

At the same time, this arrangement provides us with access to more than 2,300 retailers who typically have not been BlueLinx customers in the past. We have the ability to earn ancillary business with these customers by offering products that complement the sale of flooring such as moldings, underlayments, fasteners, tools, etc. We're very excited about this long-term partnership and look forward to working with CCA.

Now let's look at the second quarter unit volume growth on slide 17. Our total estimated unit volume contracted 16.3% in the second quarter relative to a year ago. Compared with the decline of 12.8% for our estimated end use markets, our Structural unit volume declined 17.1% due to demand slowdowns resulting from the ongoing correction in the homebuilding industry and due to our pricing strategy, which is based on making prudent decisions balancing volume with overall profitability and our ability to serve our customers in this environment.

As Lynn just noted, we are able to further improve our gross margin on Structural Products in the second quarter. The average price for key grades of wood-based structural products climbed about 10% in the first quarter but remained down about 8% from year ago levels. Our view on the wood-based structural product prices remains consistent with what we-- and that we expect prices to drift in a fairly narrow range at or above their manufacturing costs until the renewed demand drives a more sustainable rebound in concert with the eventual recovery of the housing sector.

Turning to slide 18, Specialty unit volume in the second quarter declined by 15.3%. Under the formula, our estimated end use markets by 2.5 percentage points. In this difficult business environment, we continue to focus on growing business in markets that are not directly tied to new home construction. As I just noted with the CCA example, we are focusing on developing longer term business with both customers and suppliers, which is the right strategy given our long-term value proposition.

Also as we introduced new Specialty products, we continue to align ourselves with strong brand names and world-class manufacturers. We are expanding our relationships with Owens Corning to complement our current roofing business. I'm very excited to add the Pink Panther to our product portfolio.

In addition to Owens Corning and CCA Global, our recent company and product line addition includes Columbia Forest Products in hardwood plywoods, CertainTeed and Johns Manville in fiberglass insulation, Hitachi in power tools and fasteners, the house and matrix decking products and our own private labeled Tanza PVC trims and [Steel Links] line of metal products.

Now on slide 19, let's review the five key initiatives we are pursuing in support of our growth strategy. First is gross margin improvement, this is-- this has two parts to it. Managing our Structural Products business for profitability and increasing our mix in Specialty Products. Looking at the first part, Structural Products we have focused on reducing the impact of price declines in the Structural markets on our gross margin performance. Our track record over the past six quarters against the significantly deteriorating business environment shows that we have maintained a steady to improving Structural Product gross margin.

Now let's look at the Specialty business. In general it carries a higher gross margin so as we grow the percentage of total sales generated by Specialty, we also improve our overall gross margin. On our new product pipeline in Specialty's is strong. Manufacturers want us to handle their products and we continue to develop distribution agreements and establish new innovative new relationships like those I just described.

Our second and third key initiatives focus on making the necessary investments to support our Specialty growth strategy and developing under penetrated markets. An example that best demonstrates both of these initiatives working in unison is our investment in new distribution facilities, focused on penetrating the industrial business.

As you know, we define industrials as those manufacturers who use our products to make their finished goods, like furniture manufacturers, fixtures, cabinets, containers, pallets, and so on. In May we opened an industrial distribution facility in West Palm Beach, Florida. This facility is smaller than our traditional distribution facilities but offers a full assortment of industrial-oriented building materials and hardware to serve smaller customers. In essence, it is a replication of the successful model operated by Austin Hardwoods, which we acquired last year and re-branded as BlueLinx Hardwoods.

Part of our reason for acquiring Austin was to replicate its business model in other markets. We are opening another BlueLinx Hardwoods facility as an extension to our Lubbock, Texas, distribution facility in September.

Our fourth initiative is expanding our relationships with existing vendors, whose business needs align well with our value proposition. A prime example of this area is our initiative with Georgia-Pacific to grow-- to mutually grow the engineered lumber business. We continue to work with our existing vendors as we explore ways to increase value in our relationships.

Our last initiative is acquisitions. We continue to seek acquisition candidates that fit well with our Specialty growth strategy and we are optimistic about the opportunities that exist in this area.

This concludes my prepared remarks. Now I'd like to turn the call back to Steve.

Thanks George. Before turning the call over to the operator, let me make a few closing remarks.

We're making progress in this very challenging environment and we are positioned to continue to make progress as the housing market works its way through this extended cyclical correction. We have removed costs from the business. We continue to invest in our future in terms of people, processes and systems. We continue to forge long-term relationships with customers and suppliers. And we're focused on making decisions based on long-term objectives not short-term, short-lived opportunities.

As George's discussion of CCA Global demonstrates, we are executing a strategy that we believe will return long-term value to our key constituents by moving BlueLinx beyond traditional customers and products. The CCA partnership demonstrates our ability to unlock value in the areas of business solutions and logistics services, extending our value proposition beyond basic building products distribution.

As we look forward through the second half of 2007, we see no signs of significant recovery in our housing-related business. Based on the wide-range of forecasts that we monitor, the long-term prospects for household creation and new home construction remains solid but the housing sector still must work its way through this inventory rebalancing. And this will take time.

As I have said before, we can't control the external environment. But we can work to insure our company is well positioned in this challenging environment and ready to capitalize on opportunities when business remains-- resumes to a more normal pace.

This means continuing to offer high-quality service and products that our customers expect from BlueLinx. It means continuing to forge and strengthen relationships with vendors and customers. It means diligent management of costs and working capital. And it means continuing to invest in the future. So that's what we're ready to-- so that we're ready to accelerate when business conditions improve.

Looking at the remainder of the year, we remain focused on achieving improved gross margin performance relative to 2006 by continuing to focus on Specialty Product growth, particularly in those areas not directly related to new home construction and on effective management of our Structural Product inventory. We remain focused on managing costs and working capital, on making sure we are appropriately positioned relative to this challenging environment. And finally we remain focused on making the appropriate investments for long-term success.

So with that, we'll open the call up to your questions. Operator, would you please instruct everyone how to ask a question?

(OPERATOR INSTRUCTIONS) Your first question comes Keith Hughes with SunTrust.

Thank you. I had a couple questions. On the Specialty pricing, you had talked about a little bit of weakness in Specialty pricing. I guess really my question moving forward even with the difficulties in housing, is the 14% gross margin, is that something that's still achievable in the-- at least in the near term?

Keith that's kind of what we're thinking. I mean it's under pressure but it's been under pressure for the last year.

It's been about 14 for a while. So that would be a reasonable expectation moving forward.

Right.

And Lynn, can you tell me what the balance on the mortgage is at the end of the quarter?

Balance on the mortgage is $295 million.

$295 and that's secured on 80% of PP&E. Is that correct?

Yes.

Okay. And on the CCA Global, George is-- how do you get paid in that? Is it a markup on the product or is it a service fee? How does that work?

It's a service fee Keith.

Service fee. And is it based on volume I assume?

It's based on deliveries, services provided, you know--

Number of stops.

Number of stops, average order stop, you know, there's a formula that's based on the service that we provide to the individual location.

And in terms of margins, would that be kind of below the company average?

Well would-- say that again?

Would it be above or below the company average in terms of operating margin?

Well it's way above because we don't, on a margin percentage basis because we don't own the product.

Right.

And so it's just service revenue. And George is speaking to the global direct product line which is pre-finished hardwood flooring that's primarily imported. And he's not speaking of the ancillary products that our team will sell along with those products and will ride on the same truck. Those products will be sold in our traditional way. Okay?

Alright. Thank you.

Okay, you're welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from Steve Chercover from D.A. Davidson.

Thanks. Good morning. First of all it appears that you've gotten growth in non-residential construction as a percent of your total sales. Is that a conscious effort or is it due to a decline in your other core businesses?

Well it's both. I mean it's clearly a conscious effort. And it's actually part Steve of our stated strategy from the beginning is to grow our industrial segment. Some of the industrial segment finds its way into directly into new housing starts and some does not and some feeds repair and remodeling and some feeds just completely other segments of the economy that don't have anything to do with housing. So it's very difficult for us to tell how much of our industrial business is actually in terms of demand is actually tied directly to new housing starts. But clearly it's not as directly tied as our primary dealer business and it's been an area where we focus growth. We have a new organization in place that's focused on it. Many of the new product launches that George has talked about in the past and on this call like Columbia Hardwood Forest products, Hardwood plywood goes directly into that segment. And there's also some of that business that's tied to commercial construction which is the kind of concrete and rebar fabrication business.

Got it. Okay switching gears. I guess this is for Lynn. In the last couple of years, the second quarter was the high point in terms of your debt. And then you generated cash in the second half. Do you expect that trend to continue in '07?

Yes I think that this year will definitely continue that trend, particularly given that we're so focused on effectively managing our inventory. I feel very comfortable that that trend will continue.

Okay. Two more quick ones please. With respect to the gross margins in Specialty, was the decline partially a function of mix or is that the pressures that you alluded to just in general?

A lot of it is channel mix Steve and pricing pressure.

Got it. Finally, is there more to come in the benefits of your cost cutting? Or are we basically at a run rate from moves that you took late last year?

Yes I think we're pretty close to the run rate of what we're dealing with. I mean obviously we don't have-- we had in Q2 $1.1 million of incremental costs because of Austin Hardwoods, which goes out of the comps because we bought it in August of last year. But in terms of the run rate--

Thank you very much.

Your next question comes from Edings Thibault with Morgan Stanley.

Thanks very much and good morning.

Morning Edings.

Let me say I'm very pleased with the quarter. I thought that's some strong performance in a tough market. So congratulations on that. Just a few questions if you will. Number one in terms of looking at your Structural business, had some very strong margins in this quarter. And you referenced kind of the boost you've got from pricing. And I know pricing-- particularly directionality of pricing can matter to margins in this segment. Would you expect to be going forward given your forecast for flatting pricing, would you expect some gross margin flattening in that as well? I mean would you expect to be back closer to the 7.5/8% in that? Or do you think (inaudible) stay?

Yes.

Okay. Perfect and then--

As you guys know, even effective the end of last week, published prices for plywood, OSB, and lumber were all down significantly from the second quarter average.

Okay. Playing the warehouse section in particular, right?

Yes.

Yes. And then on the Structural Products or excuse me Specialty Products, I know you guys are still lapping the outright massive declines in housing. And in terms of those product numbers and we would expect this sort of negative, double-digit negative volume growth to continue into the third quarter right, before-- based on what's already happened in the housing starts side?

I think that's accurate. Yes.

And then hopefully it starts to level out in the fourth quarter. I mean I'm not making a prediction on housing but you've weathered the worst of the declines.

Yes late in the third quarter and fourth quarter certainly.

Perfect. And then just looking finally at the-- I just want to clarify your answer to Steve's question on the overhead side. I know the SG&A moves around with sales a little which is of course how we look at some of these overhead signs. But so you're effectively saying you think your SG&A is going to be, give or take, in that mid-90, high 90's range?

I think that's accurate.

Okay. Thank you very much. Good luck going forward.

Thanks.

Your next question comes from Tom [Litcalf] with Value Holdings.

Hi good morning. I wonder if you could just give a little more insight into your exposure to the different end markets? You said that the industrial markets are tied in a lot of ways to residential but can you just kind of breakdown how your sales vary between housing in commercial and industrial markets?

Well we publish in the appendix a table which is our-- what we describe as our weighted end use market effect. And so-- and this has been consistent with how the company has talked about this from the beginning of being a separate company where 50% is directly tied to new starts; 22% in this industrial segment; 15% in repair and remodeling; 8% in the mobile homes or manufactured housing; and then 5% in non-residential construction. That's our best estimate of how it works. That was our best estimate when we went public. And that's the benchmark that we continue to compare our performance against.

All of them are fairly clean except the industrial because it's such a diverse customer segment. It's everything from as George mentioned from cabinet shops to people putting closets in to fixtures that go into retail locations, etc. So-- but that table is in the appendix and we've talked in the past about what we use in terms of published market indicators for how those move.

Right. I'm looking at the table in the non-residential construction, we're talking commercial--

Yes, light commercial like it's still wood-frame construction for the most part. But it's like bank branches and restaurants and shopping malls etc.

And as you execute your strategic initiative to get into more of the Structural or I'm sorry the Specialty Products sales, how is that going to affect your markets? And is that weighting going to shift substantially going forward?

Well that weighting we hope will continue to move. It's operating on a pretty big base. And those segments are typically-- particularly industrials are much more fragmented than the other segments. And so it's tough share to gain. The good thing is when you gain the share, you typically keep it over time. And so I don't think you'll see dramatic moves in those percentages. But we hope that incrementally the non-housing related segments will continue to be a bigger share of what we do. Much of the new product launch that we do is products that are necessary to more effectively serve those segments.

Yes and Tom this is George. And as we-- as I shared in my prepared comments, our investments in new facilities is to grow that industrial business. So our non-- we have key teams working on non-res construction growth. We have a major initiative on industrial growth. And repair and remodel has always been important and our home center business has always been an important focus for BlueLinx.

Okay and then just one last question on the strategic initiatives with the spending and the SG&A and in the Cap Ex, one just kind of when did this get on your agenda? Did you decide to undertake that going into 2007 in light of the weak market or has this been kind of on your table for a few years?

Well the-- no the specific initiative-- I think it varies Tom. Some of them are system improvements that we've had on our radar screen and are sequenced-- have been sequenced with previous work that we've done. And some of them, particularly the process improvement that Lynn and George both mentioned in the sales effort, we kind of kicked that off late last year and early this year because we need a more effective way to grow our market share.

Okay and you gave a little bit of color on exactly what goes into this program earlier in your remarks but perhaps George can you kind of give me a few specifics on what exactly you all are doing in order to increase Specialty sales and what sort of process improvements that entails?

Yes it's utilizing our sales force to focus on the growth opportunities. So making sure that we are hunting for the appropriate account, that we develop the necessary relationship that we add to products at those new customers, in many case new customers need. So for example even this CCA Global, we worked on it for a year. And to work out the program so that it's beneficial for all of us and that we provide the level of service to those 2,300 retailers across the country, we can make and execute those deliveries and that we have the complementary product line to add with the flooring line that we're distributing to them. So it takes a long time to kick off a program that's that national and that's that big of scope at 2,300 locations across the country. So that was a year in work. With cabinet shops, we've always done a good job on the panel side of the business.

We didn't do a good job on the lumber side. So in 2006 we made an acquisition in Austin Hardwoods so we could start to learn the hardwood lumber side of the business better. So we branched that out. We've added equipment into our Kansas City market so that we can add value to the hardwood lumber. We've invested in machinery in Fort Worth, Texas, so that we can add value to the hardwood lumber. And now we've just done that same thing in Florida and we have another one getting ready to open in Lubbock, Texas. So it's-- those are all complementary Specialty Product lines that are focused on the industrial portion of the business.

Great. And just one last quick one, in terms of the Cap Ex, you said that about 40% of the-- for this year would be for these strategic initiatives, can we expect that for next year or will that tail off?

I think it'll tail off.

Yes I think the level will tail off and we actually have not started going through to develop our plan for 2008. I would like to see most of our Cap Ex go to strategic initiatives but we also have a huge fleet of trucks that we need to maintain as well. So we've got to work through what the numbers will look like for '08.

Alright, great. Thank you.

Your next question comes from Mukul Kochhar with CIBC World Markets.

Hi guys, good morning. This is Mukul.

Morning.

Hi, just a quick question on the new products that you signed up with in Specialty this year. When do you see the impact of those flowing through into your revenues?

When do we see them factor into our revenues?

(inaudible)

For example, the insulation season's just kicking off now. So we switched suppliers and added two premium brands on fiberglass. That season just starts in September, October. That's the big season. So we're signing up dealers. We're starting to see revenue growth there today. The Columbia program, we've been growing that throughout the year and expanding it throughout the year. That's in there. Part of that also replaces some existing lines. The Hitachi is a rollout. We've seen those numbers in the West Coast as early as the first quarter of this year and now we're seeing those numbers grow across the country as we expand that product offering into central and eastern markets. So there's rollout plans in place for each one of those. And certainly the Owens Corning relationship that I mentioned, that's brand new. We're expanding our offering with that premium branded company and we're excited about that. And none of that growth is in there yet.

And can we expect out performance versus the end market for the second half or early in 2008?

That's really hard for us to predict. I'd rather not be on record with it with a forecast of that Mukul.

Alright, (inaudible). The second question is inventory days on hand. I mean they've trended up a little bit recently. Is that just a function of the slower environment or is that basically your decision to add new product which overall is a good thing? What I'm just wondering is whether we should start trending inventory days on hand at a little higher number than before?

No, well I think it's a function of three things. One is certainly a bit of increase that we'll see because of the more we grow Specialty Products. Those turn days are just naturally higher. But the second is, it's definitely a function of the slower inventory or sorry slower demand. And third is you're looking at end of Q2 numbers. And as we've said before, the more we grow our Specialty business the more our supply chain is extended and doesn't react. The inventory doesn't react in as timely a way as it does on the Structural side. So when we report the third quarter, you'll see inventory numbers lower than what we had in the second quarter.

The second quarter year over year, the second quarter was down $50 million.

On the-- I know the contribution from WeatherBest hasn't been very substantial so far. But in the light of the LP's recent decision to sell one of their plants, I mean is there any back to you guys or what do you think about that?

Well first of all George actually met with the new owners yesterday. They were in town. So I'll let him speak to that in a second. And quite frankly we'll go and everyone-- I mean the reason that WeatherBest program did not generate as much as we originally hoped that it would is because when we launched it, it was pre-Katrina and when housing starts were still strong. And so structural lumber prices, treated lumber prices were very, very high. And wood composite, decking prices were low. And what Katrina did is it increased the petroleum-based resin feedstock for wood composite decking substantially so the price went up a lot because the cost went up a lot. And obviously the lumber price dropped significantly. And so that made the economics for someone putting a deck much more-- much less attractive for wood-composite, for substituting wood-composite decking than it was before those two things happened.

That said, we've continued to sign up stocking dealers. We've continued to sell. Our decking business is bigger now than it was before we introduced WeatherBest. We believe we continue-- have continued to gain what share is there. And quite frankly we still believe that long term it's still a very viable product line. And we think it's unfortunate that LP chose to get out of it. That's their own-- get out of that business. But it's landed with a good solid owner that's committed to the business, wants us to work with him. And George can comment on the conversation he had yesterday so--

Yes we're going to be in the composite decking business. It's a good business for us. And it's a growing business for us. And it's a distribution-friendly business. We need-- that product needs to be distributed.

If the new owners-- it's exciting because they-- one of the things that they're really wanted to purchase was that premium brand, which is also one of the things that attracted BlueLinx to Louisiana Pacific, that WeatherBest brand and the national marketing that it-- the ability that it had. The new owner plans to continue with that WeatherBest brand. And we're excited about that. And we're in preliminary discussions because the plan has been-- the sale hasn't closed yet with the new owner to expand our relationship potentially with them once the deal is closed. So there is interest from both parties on continuing and growing that mutually beneficial business relationship. We're excited about it. Yesterday was our first meeting with the new owners.

Alright. That's sounds guys. Thanks a lot (inaudible).

Your next question comes from Ryan Levinson with [Drivett] Fund Management. Ryan Levinson, your line is open.

Hi, can you hear me now?

Yes.

Okay hi. Thanks for taking my question. I'm just wondering can you help me connect some of the dots, where is the cash flow generation going to come from in the second half of the year?

Operations and inventory reduction.

Okay so inventory-- how much do you think you can reduce inventory between now and year end?

Well Ryan traditionally the second quarter is our highest inventory positions. You know one of the earlier callers pointed that out. And what happens is in our business because of the seasonal nature of the business never mind the cyclical nature, it's also seasonal. We build inventory in Q1. Q2's usually the high point of our inventory. And then we start to sell to prepare for the next winter season for Q4. So in Q3 we begin to produce cash by bringing our inventories down to target position for the winter. We have to have our inventories in a good position in October before winter starts to set in into the markets. So to do that we-- that means we have to-- normally our inventories start to come down at the end of the third quarter. And that produces cash.

Okay so, is it going to turn maybe one turn faster? You know if I look at it now versus the end of the year, is it going to be-- could it be $50 million less?

Yes if you take last year's inventory trend lines. And lay this year's inventory, is that $50 million lower position today and just take that line right on top of it. Okay--

Okay.

And continue that trajectory. That would be a good way for you to model your inventory position--

Right.

Without turns.

Right so last year, the difference between Q2, total inventory was $532 million and Q3 was $471 million. That's about $61 million last year. Now there were some price deflation on the Structural side but--

Okay and on the receivables side, do you foresee your accounts receivables coming down in line with maybe a seasonal decline in sales into the fourth quarter?

Yes the absolute balance in receivables will definitely come down. The turn days have been pretty consistent throughout this year and last year. So I expect them to be constant.

Okay. Is there going to be an offsetting decline in your accounts payable? I noticed that there was a jump from quarter to quarter. Do you think that that's going to compress as well?

The payables balance will also come down right. But the turn days will be consistent.

The turn days will be consistent with the second quarter or the first quarter?

The payables days are consistent pretty much over time. There's not a big quarterly shift in payables turn days.

Okay and I think I must have missed this. There was a whole discussion on Cap Ex. And I was just wondering if you disclosed a forecast of what your Cap Ex number was going to be for these strategic initiatives for the rest of the year?

No we have not disclosed a forecast this year we're talking-- for next year anyway. This year we're talking about $14 million in total Cap Ex. Historically we've been in kind of the $10 to $12 million range. And I would anticipate we'd be trending back towards that-- more that range for next year. We haven't done any kind of official forecast.

Okay so I just need to clarify that. That $14-- you're trending to $14 for this year and then you're thinking that next year you're going to get back to $10 to $12?

That is what I'm thinking at the moment although we have not officially worked through all of our plans.

And how much of that is maintenance of fleet and facilities?

About 60%.

Okay, alright. Thank you very much.

Sure.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from Richard Skidmore with Goldman Sachs.

Good morning. Just a couple of follow-up questions. First on the revenue side, if you had a stable housing market, what would the partnerships and things that you've added in the recent quarters-- what would you expect that the incremental revenue would be from those new partnerships?

We really don't talk about that level of detail.

Not in the aggregate?

No.

Okay. Second question is just on the growth side, as you think about growth you've done a number of the partnerships that appear not to require a lot of capital but given the pull back in housing, would think that there'd be some opportunities perhaps to be making acquisitions that would require some capital. Can you talk about what you're seeing there? And would you be more inclined to be entering more of the partnership side of things to grow the business or would you be more inclined to be making acquisitions? And if it's more of the latter, how would you anticipate you'd be financing those acquisitions?

Okay well as you know acquisitions has been one of our stated-- one of the stated elements of our growth strategy from the beginning. Since becoming BlueLinx, we've made two acquisitions, one Lane Stanton and Vance on the West Coast which we bought in the summer of '05 and Austin Hardwoods in Texas, which we bought in August of '06. One of the things we've said all along is that we're going to be a consistent but very patient and disciplined acquirer and that's the strategy that we continue to have today. That said we actually have seen valuations for acquisition targets that we look at become more reasonable in the current environment. And we feel like we've got a pretty good pipeline of folks that we're talking to. How we will-- so we see a combination of acquisitions and the customer and vendor strategic partnerships that we've talked about. We see a combination of those two going forward.

In terms of how we will finance the acquisition, we've got almost $300 million of availability in our revolver which we will tap into. And when we buy an acquisition, we typically finance 40 to 60% of the purchase price based on that company's working capital and PP&E.

Great. Thank you.

You're welcome.

At this time, there are no further questions. Management, are there any closing remarks?

Yes thank you everyone for joining us. I just want to leave you with four thoughts. First we remain committed to our Specialty Product growth strategy. It's our primary strategic focus and we continue to align our people, processes, and products to execute on that. Second, we are and will remain committed to the Structural Products business but we intend to achieve profitable growth and manage this segment through disciplined inventory management and margin over time. Third, we're committed to aggressively managing costs and working capital in this challenging economic environment. And fourth, over the long term, we believe BlueLinx is well positioned to succeed as the country's leading specialty products distributor. So thank you for your time and we'll talk to you again next quarter.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.