Bluelinx Holdings Inc (BXC) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Tina, and I will be your conference operator today. At this time, I like to welcome everyone to the BlueLinx fourth-quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, February 12, 2008. Thank you.

I would now like to introduce Mr. Russ Zukowski with Investor Relations. Mr. Zukowski, you may begin your conference.

Ladies and gentlemen, please stand by. Today's conference will resume momentarily.

Thank you, operator, and welcome, everyone, to the BlueLinx fourth-quarter 2007 conference call. With us this morning are Steve Macadam, Chief Executive Officer, George Judd, President (technical difficulty) Operating Officer, and [Mike Ryan], Corporate Controller.

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 Web site, 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'd like to remind our listeners that we have posted slides on our Web site. We will be referring to these slides during the call, and we encourage you to view them during our remarks. Additionally, the slides 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, Russ, and thank you, everyone for joining us this morning for the BlueLinx fourth-quarter earnings conference call.

Before we discuss the fourth-quarter results, I'd like to take a moment to address our announcement on February 1 regarding Lynn Wentworth's decision to resign her position as Chief Financial Officer of the Company effective Friday, February 15. This was a decision Lynn made based on her family commitments and desire to be more active in civic organizations in the community. I have an extremely high regard for Lynn as she has made a very positive impact at BlueLinx during her time here, and she will be personally missed by our team.

I am, however, very excited to announce that Doug Goforth will be joining BlueLinx as Chief Financial Officer and Treasurer effective Monday, February 18. Doug will lead our accounting, finance, treasury and investor relations functions. He brings over 20 years of broad and deep accounting, finance, treasury, acquisition and administrative experience in distribution and manufacturing companies. His experience includes a combined four years with Georgia-Pacific and BlueLinx as Controller and Corporate Controller, so he is very well versed in the cyclical, seasonal nature of our business and will make an immediate contribution to our company. While previously at BlueLinx, Doug played a key role in the Company's 2004 IPO. Most recently, Doug was Vice President and Corporate Controller, as well as a member of the senior management team of Armor Holdings, a multi-billion dollar publicly held company. It was extremely fortuitous that Doug was available as a result of the recent acquisition of his former employer. Doug was well liked and well-respected during his prior experience at BlueLinx by both his colleagues and our Board of Directors, which enabled us to move very quickly on hiring Doug. Doug is a CPA and holds a B.S. in Accounting from Marshall College in North Carolina.

For today's call, Mike Ryan, our Corporate Controller, will discuss our financial results. Mike has been with BlueLinx for four years and has been our Controller for the past year and a half. Mike has extensive public accounting and SEC reporting experience and recently earned his MBA from Emory University.

For this morning, I will provide an overview of the quarter and then Mike will walk you through our financial results, followed by George, who will review operations. I will close our prepared remarks with an assessment of current conditions, and then open the call to your questions.

The erosion of our business environment, which began in the second quarter of 2006, continued to intensifying the fourth quarter as a result of the well-publicized problems in the credit and housing markets. Prices for wood-based structural products also weakened slightly compared with prices in the third quarter of 2007. Prices of some key grades are now at a slightly below their estimated variable manufacturing costs.

We continue to operate in the depths of an historic cyclical housing correction, which at this point is widely expected to extend through all of 2008. During the fourth quarter we took a number of actions, as we have in the past, to reduce costs and right-size our company to remain competitive and generate cash through this extended downturn.

Specifically, during the fourth quarter, we took the following actions. First, we implemented approximately $30 million in annualized cost savings that we intend to achieve through certain actions and initiatives, including headcount reductions that were completed during the quarter. As part of the headcount reductions, we reorganized our regional and district reporting structure down from 7 to 5 regions and from 47 districts to about 23 districts. We believe this change positions us to operate more effectively and allowing for streamlined decision-making.

Second, we consolidated the Company's leased Atlanta headquarters and Atlanta sales center into one building from two buildings, as the decline in headcount over the past 18 months has provided the opportunity to consolidate our physical space. We estimate this action will save us between $1 million and $1.5 million annually in operating expenses.

Third, the Company undertook a stock keeping unit or SKU rationalization initiative during the quarter. Through this initiative, we identified specific SKUs on a branch-by-branch basis which were not providing desired returns and aggressively sold this inventory during the quarter. It's important to note that we're not exiting any product lines, just underperforming inventory within product lines at certain branches. Mike will discuss the impact of the SKU rationalization later in this call.

I want to continue to emphasize that our company is structured to able to continue executing our business strategy through this housing downturn. We diligently managed cost and working capital in the fourth quarter. We generated $98 million of cash from operations during the quarter and ended the period with more than $220 million in excess availability on our revolving credit facility.

Our strategy in this challenging environment remains consistent. Our business objectives remain to grow specialty products to more than 60% of total sales, to properly manage our structural business, and to outgrow the market over the long term. As we move forward, we will continue to adjust our business to this environment, while at the same time ensuring that we continue to serve the needs of our customers and suppliers. I'm confident that we will continue to execute our strategy throughout this downturn and emerge from it well positioned to capitalize on our industry rebound when it occurs.

Now, Mike Ryan, our Corporate Controller, will walk you through our financial results for the quarter.

Thanks, Steve, and good morning, everyone. Let's start with quarterly sales on Slide 7.

Overall sales for the quarter ended December 29 totaled $779 million, down 17.2% or $161 million from last year. Specialty sales declined 17% from the same period last year with the majority of the decline coming from decreased unit volume. Structural products sales declined 20%, also largely a result of lower unit volumes. Specialty products comprised 48% of total sales, 1% higher than the prior-year period.

Turning to Slide 8, BlueLinx generated approximately $66 million in gross profit for the quarter, which included a negative impact of approximately $10 million as a result of the SKU rationalization initiative. Despite the deteriorating operating environment, we generated gross margins of 8.5%, which we estimate were unfavorably impacted by 130 basis points as a result of the SKU rationalization initiative. Excluding the estimated impact of SKU rationalization initiative on fourth-quarter results, gross margin would have been consistent with the prior-year period. During the quarter, we remained focused on maintaining gross margin through our ongoing management of structural product pricing and, to a lesser extent, from channel mix.

Specialty gross margin of 10.6% compares with 13.8% a year ago. We estimate the impact of the SKU rationalization program on specialty gross margins was approximately 260 basis points. Structural gross margin of 7.1% is in line with the 7.0% margin generated in the prior-year period.

As we have previously discussed, more customers are managing their inventories by ordering smaller, [breakable] quantities through our warehouse rather than full truck loads that often ship through the direct channel. The warehouse channel typically offers higher gross margins and a higher cost to serve. This channel mix analysis is available on Pages 28 and 29 of the Appendix.

As shown on Slide 9, operating expenses for the quarter totaled $111 million and include restructuring charges of $11.5 million for the headquarters consolidation, which was predominantly a non-cash charge, and $5.6 million for severance and outplacement. Excluding these restructuring charges, operating expenses increased slightly from the prior-year period, which included a $700,000 severance charge, primarily as a result of increased reserves for bad debt expense and for consulting expenses. It is also important to note that fourth-quarter operating expenses do not reflect the full benefits of the reduction in force and other cost-cutting initiatives which were implemented during the quarter.

During the fourth quarter, the Company had an operating loss of $45 million, which included a $10 million estimated impact of the SKU rationalization program, the $11.5 million charge for the headquarters consolidation, and a $5.6 million charge for severance and outplacement services.

Turning to Slide 10, we recorded a fourth-quarter net loss of $34.1 million, or a loss of $1.10 per share, compared with the year-ago net loss of $5.9 million or $0.19 per share. The net loss (inaudible) interest expense of $9.9 million, which decreased by $750,000 from the prior year, and a tax benefit of $21.1 million, compared with a tax benefit of $4.6 million a year ago. The estimated after-tax negative impact on net income of the SKU rationalization restructuring charges was $16.5 million or $0.54 per share.

(technical difficulty) year results on Slide 11, sales for the twelve months ended December 29 totaled $3.8 billion, down 22% from the same period last year. Gross margin of 10.2% showed a 40 basis point improvement over a year ago. The estimated unfavorable impact of the SKU rationalization program on gross margin was approximately 30 basis points. We reported a decline in operating expense of $8.6 million for the full year, compared to operating expense for 2006. Excluding restructuring charges, we reduced ongoing annual operating expenses by approximately $20 million. As discussed in our previous call, we anticipate the cost-cutting initiatives undertaken in the fourth quarter will reduce go-forward annualized operating expenses by approximately $30 million over 2007.

For the full year, we reported a loss of $0.91 per share compared with income of $0.51 per share a year ago. We estimate that the net negative impact EPS of the SKU rationalization initiative, restructuring items, and unusual gain related to Hurricane Katrina insurance settlement was $0.50 per share for the year.

Moving to cash flow on Slide 12, during the quarter, receivables decreased by $108 million in accordance with the sales slowdown during the period, and inventories decreased $89 million, driven by year-end seasonality, improved inventory management, and the SKU rationalization initiative. These decreases were partially offset by a $60 million decrease in accounts payable, which reflect reduced purchasing activity during the quarter. Fourth-quarter net cash provided by operations of $98 million.

Investing activities used approximately $1 million, as we continue to invest in programs designed to improve and fine-tune our capabilities and inventory, management and forecasting and product marketing, and the expansion of BlueLinx's hardwoods. As we have previously said, we believe these are necessary investments to support our go-forward business strategy.

Cash used in financing activities was $107 million for the quarter, driven by a $102 million decrease in outstanding borrowings under our revolving credit facility. We also paid a third-quarter cash dividend of $0.125 per share, or $3.9 million. The resulting cash balance at December 29 was $60 million compared with $27 million a year ago.

We had $222 million available on our revolving credit facility as of year-end. The combined debt balance on our mortgage and revolving credit facility was $479 million, down $54 million from a year ago.

Now, let's look at inventory on Slide 13. Our year-end inventory position of $336 million was down approximately 21% from the third quarter and 18% from a year ago levels. We continue to balance the inventory levels with the weakening demand environment while also continuing to support new product vendors as part of our ongoing focus on specialty product growth. We made steady progress reducing inventory in the quarter through a combination of tightened inventory management and the SKU rationalization program.

Turning to Slide 14, working capital turn days for the quarter totaled 56. That compares with 52 days for the third quarter and 54 days for the same period a year ago. As AR days increased slightly and given the current state of the industry, we continue to monitor our AR portfolio and our credit approvals. We continued to have a heightened focus on our customers' ability to pay, and on prudent credit and collection policies.

Steve will now further highlight our fourth-quarter financial achievements.

Thank you, Mike, and let me highlight our fourth-quarter achievements as outlined on Slide 15.

We remain focused on gross margin and achieving overall gross margins -- and achieved overall gross margins of 8.5%. Excluding the impact of the SKU rationalization initiative, gross margin would have been consistent with year-ago period despite increased competitive pressures.

We adjusted our cost structure in the fourth quarter and have adjusted our inventory levels that we believe are appropriate in this environment and refined our analytics related to inventory management. We continue to make selective investments in support of our specialty growth strategy. We continue to generate cash from operations in this environment.

Finally, I want to remind everyone to that our flexible debt structure allows us to continue to pursue our business plan even through an extended downturn. Our debt structure consists of a mortgage secured by our company-owned distribution centers and a revolving credit facility secured by inventory and receivables. As noted earlier, we currently have excess availability of $222 million on that facility.

Now, let me turn the call over to George Judd, our President and Chief Operating Officer.

Thanks, Steve. I will review our operational performance for the quarter. Our objective remains consistent while our specialty products business over time doing a larger portion of our total business, and operate our structural business for profitability. 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. So our number one strategic objective remains to Group specialty to greater than 60% of total sales.

In the fourth quarter, we continued to focus on cultivating relationships with new and existing customers based on long-term value creation. At the same time, we maintained price discipline even as our business environment slowed further and price competition increased. As we previously have stated, our value proposition is based on customer service, on timely deliveries of the right products, and on partnering with our suppliers and customers to find the best solutions to their supply chain challenges.

Industry participants are keeping inventories at low level throughout the system. In general, we've seen our number of orders increase with a corresponding decrease in order size. I believe this difficult environment helps us underscore our value to our customers and our vendors and furthers building long-term relationships. BlueLinx will succeed in the long-run by continuing to add value to our customers and their vendors businesses while getting paid for that value.

Looking at fourth-quarter unit volume performances on Slides 17 and 18, our total estimated unit volume contracted 19% in the fourth quarter from a year ago, compared with an end-use market decline of 13%, based on our current methodology for estimating our end-use markets. Our structural unit volume was down 22.7%, and specialty unit volume declined by 15.1%. As I've noted, we're focusing on building long-term businesses with customers and suppliers. However, the benefits of these arrangements won't necessarily be reflected in our financial performance until the business of our customers begins to improve. Nevertheless, we believe we are pursuing the right strategy, given our long-term value proposition.

Slide 19 illustrates the five initiatives we are continuing to pursue in support of our strategic objectives. First, we remain focused on improving gross margin, both by managing our structural products business and by increasing our mix of specialty products over the long run. Our track record throughout this cyclical downturn shows that we have performed well in sustaining gross margins in this increasingly competitive environment.

Our second key initiative involves making the necessary investments to support our specialty growth strategy. These ongoing investments include the development of an online catalog, a more sophisticated inventory management and demand-forecasting tools, and better order tracking and visibility capabilities.

Initiative three focuses on developing underpenetrated markets. We have invested in new distribution facilities specifically serving the industrials business. We recently moved and expanded our Austin, Texas BlueLinx hardwoods facility, and we opened a BlueLinx hardwoods operation in our facility in Charleston, South Carolina, in order to service that area's industrial customer base. This will be the third addition to our BlueLinx hardwoods segment, with the previous additions being West Palm Beach, Florida and Lubbock, Texas. We continue to assess opportunities to grow and invest in businesses that are not as heavily tied to residential home construction.

Our fourth initiative involves expanding relationships with existing vendors and developing relationships with new vendors whose business needs align well with our value proposition, such as establishing premium brands and products. Our relationship with Owens Corning allows us to offer premium roofing products. Our relationship with CCA continues to be a success for both BlueLinx and CCA in the flooring arena. We now have a new and growing relationship with CertainTeed on their maintenance free, exterior trim and related products. We continue to work with our existing vendors to explore new ways to mutually increased value in our relationships.

Our last initiative is acquisitions and we continue to explore. However, we will continue to be a disciplined acquirer.

That concludes my prepared comments. 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 continue to operate in a challenging environment. We have and will continue to take the necessary steps in order to both focus on our business strategy while keeping tight controls on our cost structure. Our priorities are to aggressively manage cost, defender core business, provide quality service to our customers and suppliers, and selectively pursue growth opportunities as they present themselves.

We continue to generate cash in this downturn and we have a flexible capital structure that provides us the liquidity necessary to continue to execute in an extended cyclical downturn while positioning the Company to be the supply chain solution of choice once the housing correction has run its course.

Most housing forecasters still point to a strong, prolonged rebound of the housing market based on population demographics and other factors. It certainly is our intention to participate in that rebound as the largest specialty building products distributor in the United States.

With that, we will open the call to your questions. Operator, would you please instruct everyone on questions?

(OPERATOR INSTRUCTIONS). Keith Hughes, SunTrust.

(technical difficulty) difficult year pulling cash out of working capital. Given that 2008 is -- at least at this point looks like it's going to being as bad if not worse, are you still going to be able to pull cash from working capital on a same percentage rate to sales decline in the near-term?

Keith, I don't think it's going to be on the same rate as the sales decline, because of the extensive nature of our footprint. Our goal for this year is, if it's as bad as we think it's going to be and everybody thinks it's going to be, is to try to be in positive cash territory.

Cash from operations territory?

Yes.

Okay. Onto the quarter, you talk about, in the SG&A line, I guess $17.1 million related to the headquarters consolidation and outplacement, but there's also an increased reserve for doubtful accounts and consulting expenses. Can you give us an idea of kind of what the amounts were for those two, and what specifically are the consulting expenses?

Well, the consulting expenses helped us exit -- we did a lot of stuff in the second half of last year, Keith, and everybody on the phone. I mean, we implemented an aggressive SKU rationalization program; we were moving the office; we were getting our plan together for this year; we took a number of salaried positions out; we were downsizing our hourly workforce. We implemented over 150 different specific ideas related to cost savings throughout the quarter. So, we used some help in that.

Also, quite frankly, we wanted to make sure we were focused on the right external growth markets that were not as housing-related. So that's really what we used that for. That ended at the end of the fourth quarter, so we don't have any ongoing consulting expense. You know, we don't go into specific line items and there will be more clarity when we file the K on changes in the bad debt reserves.

Okay. The reason I ask is that you had started making some progress on SG&A year-over-year. If I make an assumption for these reserves, it seems as though SG&A was not down significantly year-over-year, so if I'm a little (multiple speakers).

Yes, I think you'll see that change in Q1.

Was there some timing expenses in the fourth quarter or --?

No, the increase in reserves (multiple speakers).

Okay, reserves, I hear you then. I guess final question -- given that you're done with the consulting work, is there any strategic change to report as a result of that, or is it still the same plan that it would have been six months ago?

No, I think it's the same plan; I think it's just more aggressive on growth in the non -- as George mentioned, on the non-new housing-related markets. That had been a focus for us but really the key show (inaudible) coming out of that was really diverting more of our resources into that arena with several different growth initiatives. So, we're not going to be funding it with any more SG&A. We're going to be reallocating some of it just because the dealer business is just so weak because there's nothing happening in new housing.

All right, thank you.

Steve Chercover, D.A. Davidson.

Good morning. The first question -- could you go through any covenants that you might have on your revolver or on your debt? Because just didn't see any specifics; I'm sure they exist though.

Do you want to address that, Mike, or do you want me to address it?

Yes. (LAUGHTER)

Steve, we are all kind of hesitating because the covenants are, number one, very, very light, and the only one that really -- the first one that would kick in and the only one that is really relevant is if we drop below -- we can't drop below $70 million of excess availability on our revolving credit line. As I mentioned, we are at over $220 million now. So really we're not encumbered by any significant covenants.

Because it seems like the availability, if my memory serves, went from around $270 million to $222 million, so what was the difference there?

Well, as inventory and AR falls, what we can draw falls as well.

Okay, so they are kind of viewed as collateral against what you can borrow, is that --?

Oh, absolutely; it is the collateral! Yes, so we have an advance rate of 60% on inventory, and something like 80% on AR. It varies because it depends on a bunch of different factors, but roughly that's what it is. So, as we take inventory down, that generates cash but it also reduces the top end of that availability. Likewise, when we get into a growth mode and we need to add inventory, it really expands that facility for us as well.

So that's kind of what we mean when we call a flexible debt structure; it's designed intentionally and was put in place for our company to kind of flex up and down as the working capital needs of the Company change based on the environment both throughout the year and then over time.

Okay, that makes sense, and that's actually a good segue into my second question, which is you still have growth objectives and presumably this market will turn at some stage. Do you still think that you've got the flexibility financially, and perhaps in terms of management bench strength to resume an aggressive growth strategy and I guess the ultimate objective is to be a consolidator in a very fragmented market?

Yes, I think we do. I don't know. I mean we could argue about the word "aggressive" and how aggressive that would be. I think, look, we're trying to be very, very prudent in this time. My view is that it will very quickly become known as the worst housing correction that we've had since World War II. Anybody who studies the industry will tell you that it has already tied for one of the worst two or three, and the facts are, when you look at the numbers, we are already the worst. So it's the worst correction.

Our business is built to be a high-throughput, and we have a national platform, we have the centralized platform, so our system is designed to have very accretive operational leverage for incremental volumes and growth, right, which is very hard to come by in today's market -- which is why we can't match reductions in gross margin dollar generations by cost on a dollar-for-dollar basis. That's why our profitability goes down in these time periods. That's pretty straightforward. So we can't ignore those economics and start going out in any kind of crazy way investing in growth, because this could be an extended downturn. That said, we don't want to change our long-term focus or change our business strategy, so that's just making us very, very selective in deals that we look at it and growth initiatives that we invest in.

So I would say we are continuing to do it. In some cases, it's just not as much resource applied to it as we have had in the past. We're trying to look for the right opportunities, not just any opportunity.

Thank you. And just final question, just to I guess reaffirm the response to Keith, you don't think you'll be able to extract substantially more cash from inventories and working capital in '08, given kind of another year of really weak demand, but you think you'll be cash flow positive from operations?

That's right. Look, we ended the year with $336 million in total inventory, okay? That's down from where we ended Q4, which was $410 million. So we are in that $80 million, $90 million of -- $90 million of inventory reduction in the system and on hand, okay? So first of all, we feel like that has been a really, really good performance, in terms of the cash that we've taken out of working capital. That's number one.

Number two, you've got to remember the most of our inventory supports our warehouse business. I mean, we do have some in transit and we do have some inventory at reloads, but the vast, vast majority of our inventory supports our warehouse business. That business, that portion of our channel, when you look at the appendix numbers, is not down nearly to the same percentage of our total business because our customers have stopped buying direct full trucks and reload full trucks because they don't want to hold the inventory. So when you look at the percentage reduction in our warehouse business, it's not off as much as our overall business, and so we need the inventory to support that.

Third, we've introduced a number of new specialty products over the past year and a half, as you guys know; we talk about them every call. We've just entered a very exciting relationship with Owens Corning to do roofing across the country. It's off to a great start, but to participate in that business, it requires an investment in inventory, right? So if you were to net out all of the specialty programs with new vendors that we've put in place, you know, you would see an even more drastic apples-to-apples difference in inventory.

So that's why, with where we are now -- and also, you've got to remember, we have sized the -- we got the inventory down to the end of the fourth quarter. That's -- obviously Q4 is a weak time during the year, and Q4 was already at 1 million starts, which is kind of where we built our plan in thinking going forward in 2008. So we're kind of already -- we feel like we are already at or close to the bottom in terms of what the pace will be, if you average the year in total, probably weaker in the first half and not quite as weak in the second half although we're certainly not expecting any kind of recovery in the business in the second half of the year.

Understood, thanks. I will get back in the queue.

(OPERATOR INSTRUCTIONS). Bob Trout, Goldman Sachs.

The first question, just on the quarter, would it be possible for you to break out that $10 million impact of the SKU rationalization by segment?

It's almost all specialty products.

It's almost all specialty?

Yes, in the prepared remarks, we had noted that was (multiple speakers) was about 260 basis points.

It's 260 basis points on this specialty, and it was 99% specialty products.

Okay, got you. Thank you.

Then about your cost structure, I'm wondering if you could either remind us or give us either a percentage of your cost or an absolute dollar level that kind of sticks, where if things were to get a whole lot worse you probably couldn't squeeze a whole lot more out of.

Well, you know, it's kind of -- we've never talked about that, you know, in terms of what those percentages are. I think I have to leave that up to you to be specific on, because obviously a big portion of our cost structure is personnel, and personnel falls into two big buckets. One is our material handling and driver labor, which is hourly labor out in the field. That does kind of move up and down because we hold our branches accountable for hitting to specific productivity targets that have to do with the volume that they move per man hour, so that flexes. It doesn't flex perfectly, but it flexes pretty good over time because we're holding them accountable to those productivity targets.

Then there's salary, and a good 60% of our workforce is salespeople, of which we pay commission. So the commission portion is somewhat variable, but again, we're not going to chase all our good people away just because the housing has dropped 60%. We've still got to be able to -- they've still got to be able to live, so the commission doesn't even flex directly. It flexes generally over time, so to take costs out, we have to downsize those folks. Then you've got all the indirect costs of the office and what not; that's pretty easy to separate.

So you'd have to kind of go through and kind of just say, okay, this hourly workforce, we can make this assumption and what not. But we'd rather not just put a number out there because we don't want to be chasing and explaining against that number in all future calls.

Okay, fair enough.

On the demand side, if you could maybe give us any color as to what you might be seeing or hearing from your customers on the spring building season. I mean, understand it's going to be challenging, but can we at least expect to see or are you hearing that we may at least see a similar magnitude of seasonal improvement?

Well, let me let George address that.

Bob, we're not expecting a strong seasonal rebound and really the markets that we've relied on in the past were a large number of housing starts. So California, Arizona, Denver, Florida, those housing markets are still very, very, very overbuilt. In some of the other markets, (inaudible) our customers our plan activity for (inaudible) lumber business, which is the first thing that happens, it is pretty consistent. It's starting to show a little uptick, a little seasonal uptick -- certainly not any robust activity. Don't read too much activity into it, but there's certainly some housing starts that are happening, but those are in traditional, lower housing-start markets.

You know, as I mentioned in my prepared comments, our out-of-warehouse activity is pretty solid. You know, we expect that to continue. Our customers are relying on distribution to help them manage their costs through this very, very difficult market, and that's a good thing for building products distributors. Unfortunately, you know, our average order size falls and our costs to process those orders, to load those orders and deliver those orders doesn't fall. So that's one of the tie-ins to the previous question, was how much [flexes] of warehouse business remains where it is, then our ROE workforce isn't going to go down substantially. And we have to balance our margin, our margin strategy, which we've been very, very focused on through 2006 and 2007 and we've executed well against -- taking care of our important customers, and moving our core suppliers' products into market. So we're not expecting a huge rebound, but certainly we expect things to get better in December (multiple speakers) seasonally slow month.

Okay. Did you say that you think that 1 million level is at least where you're expecting kind of the bottom at, at least that's where you building your own forecast around?

Well, that's what we've built our forecast on for the year, and quite frankly we did that in the October-November time frame, and that was the average for the year. If you ask our view today, we would say that, in the first half of the year, on a seasonally adjusted basis, we will probably be trending under 1 million. But again, you've got to look at the bottom of the previous cycle. The monthly number, in terms of seasonally adjusted, actually, historically in the bottom, across the bottom, across the trough, moved quite a bit from month to month obviously with low numbers, and when they do the seasonal adjustment it has a pretty big impact on the overall number. So, I would expect, in the first half of the year, to see numbers, again, on a seasonally adjusted basis down of 1 million starts.

Okay, thanks very much, guys.

We have no further questions at this time.

Okay. With that, thank you, everyone for attending and we will talk to you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.