Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

BlueLinx Holdings Inc (NYSE:BXC)

Q4 2007 Earnings Call

February 12, 2008 10:00 am ET

Executives

Russ Zukowski - Investor Relations

Stephen E. Macadam - Chief Executive Officer and Director

George R. Judd - President and Chief Operating Officer

Mike Ryan - Corporate Controller

Analysts

Keith Hughes - Suntrust Robinson Humphrey

Steven Chercover - D. A. Davidson & Co.

Bob Trout - Goldman Sachs

Operator

Good morning, ladies and gentlemen. My name is Tina and I will be your conference operator today. At this time I would 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 speaker's remarks there will be a question 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.

Russ Zukowski

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 and Chief 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 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’d like to remind our listeners that we have posted slides on our website. We will be referring to these slides during the 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.

Stephen E. 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 1st regarding Lynn Wentworth’s decision to resign her position as Chief Financial Officer of the company effective Friday, February 15th. 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 18th. 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 multibillion dollar publicly held company. It was extremely fortuitous that Doug was available as the result f 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 BS 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 intensify in the fourth quarter as a result of the well-publicized problems in the credit and housing markets. [inaudible] wood-based structural products also weakened slightly compared with prices in the third quarter of 2007. Prices of some key grades are now at or 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 head count reductions that were completed during the quarter. As part of the head count 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 corporate headquarters and Atlanta sales center into one building from two buildings as the decline in head count 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 are not exiting any product lies, 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 be able to continue executing our business strategy through this housing downturn. We diligently managed costs 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.

Mike Ryan

Thanks, Steve, and good morning, everyone. Let’s start with quarterly sales on slide 7. Overall sales for the quarter ended December 29th and totaled $779 million down 17.2% to $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 product 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 includes the 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 the 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% compared 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, [inaudible] quantities through our warehouse rather than full truckloads that often ship to the direct channels. 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 the restructuring charges, operating expenses increases slightly from the prior year period which include a $700,00 severance charge primarily as a result of increased reserves for bad debt expense and consulting expenses. It is also important to note that fourth quarter operating expenses. It’s 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 includes a $10 million estimated impact of the SKU rationalization program. The $11.5 million charge for the headquarters consolidation and $5.6 million charge for severance and outplacement services.

Turning to slide 10, we reported a fourth quarter net loss of $34.1 million or a loss of $1.10 per share compared with a year ago net loss of $5.9 million or $0.19 per share. The net loss is after 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.

Looking at full year results in slide 11, sales for the 12 months ended December 29th 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 of EPS, 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 slow down during the period and inventories decreased $89 million driven by a year end seasonality, improved inventory management, and the SKU rationalization initiatives. 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 were $98 million.

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

Cash used and financing activities was $107 million for the quarter driven by $102 million decrease in outstanding borrowings under our revolving credit facility. We also paid a third quarter cash dividend of $0.125 per share of $3.9 million. The resulting cash balance on December 29th 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 third quarter and 18% from a year ago levels. We continue to balance inventory levels with the weakening demand environment while also continuing to support new products and vendors as part of our ongoing focus on specialty product growth. We made steady progress reducing inventories 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 increase slightly and given the current state of the industry, we continue to monitor AR portfolio and our credit approvals. We continue to have a heightened focus on our customer’s ability to pay and on prudent credit and collection policies.

Steve will now further highlight our fourth quarter financial achievements.

Stephen E. Macadam

Thank you, Mike and let me highlight our fourth quarter achievements as outlined on slide 15. We remain focused on gross margin 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 cross structure in the fourth quarter and have adjusted our inventory level 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, and finally I want to remind everyone that our flexible bed structure allows us to continue to pursue our business plan even through an extended down turn. 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.

George R. Judd

Thanks, Steve. I’ll review our operational performance for the quarter. Our objective remains consistent for our specialty products business over time due to a larger portion of our total business and operate our structural business for profitability. Specialty offers higher margin and 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 grow specialty to greater than 60% of total sales.

In the fourth quarter we continue to focus on cultivating relationships with new and existing customers based on long term value creation. At the same time, we maintain price discipline even as our business environment slowed further and price competition increased. As we previously 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 for their supply chain challenges. Industry participants are keeping inventories at low levels throughout the system. In general we have 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 our 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 comparative to the 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 are 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 the 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 tool, 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 hardwood 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 hardwood 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 profits. 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, and 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 increase value in our relationships.

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

That concludes my prepared comments and I’d like to turn the call back to Steve.

Stephen E. Macadam

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 costs, defend our 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 and it certainly is our intention to participate in that rebound as the largest specialty building products distributor in the United States.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Keith Hughes with Suntrust.

Keith Hughes - Suntrust Robinson Humphrey

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

Stephen E. Macadam

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, to try to be in positive cash territory.

Keith Hughes - Suntrust Robinson Humphrey

Cash from operations territory?

Stephen E. Macadam

Yes.

Keith Hughes - Suntrust Robinson Humphrey

Okay and on to the quarter, you talk about in the SG&A line like a $17.1 million related to the headquarters consolidation and outplacement but there’s also an increased reserve for doubtful accounts 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?

Stephen E. Macadam

The consulting expenses helped us... 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 work force, and we implemented over 150 different specific ideas related to cost savings throughout the quarter, so we used some help in that, and also, quite frankly, wanted to make sure we were focused on the right external growth markets that were not as housing related and 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 and we don’t go into specific line items. There will be more clarity when we file the K on changes in the bad debt reserves.

Keith Hughes - Suntrust Robinson Humphrey

Okay. The reason I ask is that you had started making some progress on SG&A year over year and if I make an assumption for these reserves it seems as though SG&A was not down significantly year-over-year which I find a little --

Stephen E. Macadam

I think you’ll see that change in Q1.

Keith Hughes - Suntrust Robinson Humphrey

Was there some timing expenses in the fourth quarter?

Stephen E. Macadam

No, the increase in reserves --

Keith Hughes - Suntrust Robinson Humphrey

Reserves? Okay. 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 would have been six months ago?

Stephen E. Macadam

No, I think it’s the same plan, I think it’s just more aggressive on growth as George mentioned in the non-new housing related markets that had been a focus for us but really the key so what 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 deal in business is just so weak because there’s nothing happening in new housing.

Keith Hughes - Suntrust Robinson Humphrey

All right. Thank you.

Operator

Your next question will come from the line of Steve Chercover with D. A. Davidson.

Steven Chercover - D. A. Davidson & Co.

Good morning. First question, could you go through any covenants that you might have on your revolver or on your debt? Because I didn’t see any specifics. I’m sure they exist though.

Stephen E. Macadam

Do you want to address that Mike or do you want me to address it? Steve, we’re all kind of hesitating because the covenants are, number one, very, very light, and the only one that really... the first one that we kick in, the only one that’s really relevant, is if we drop below, we can’t drop below $70 million of excess availability on our revolving credit line and as I mentioned we’re over $220 million now. So really we’re not encumbered by any significant covenants.

Steven Chercover - D. A. Davidson & Co.

It seems like the availability, if my memory serves, went from around $270 million to $222 million. So what was the difference there?

Stephen E. Macadam

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

Steven Chercover - D. A. Davidson & Co.

Okay, so they’re kind of viewed as collateral against what you can borrow?

Stephen E. Macadam

Absolutely. It is the collateral. 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 and 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 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.

Steven Chercover - D. A. Davidson & Co.

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, presume an aggressive growth strategy and I guess the ultimate objective is to be a consolidator in a very fragmented market.

Stephen E. Macadam

Yeah, I think we do. I don’t know, I mean, we could argue about the word aggressive and how aggressive that would be, but I think 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 is already tied for one of the worst 2 or 3 and the facts are when you look at the numbers we’re 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 volume and growth 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 and growth initiatives that we invest in. So I would say we’re 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.

Steven Chercover - D. A. Davidson & Co.

Thank you; and just a final question, to reaffirm the response to Keith. You don’t think you’ll be able to extract substantially more cash from inventory 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?

Stephen E. Macadam

That’s right. Look, we ended the year with $336 million in total inventory, and that’s down from where we ended Q4 which was $410 million so we are, what is that, $90 million of inventory reduction in the system and on hand so first of all, we feel like that has been really, really good performance in terms of the cash that we’ve taken out of working capital. That’s number one. Number two, you have to remember that most of our inventory supports our warehouse business. I mean, we do have some in transit and we do have some inventory 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, so when you look at... If you were to net out all the new specialty programs with new vendors that we’ve put in place, 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 have to remember, we got the inventory down to the end of the fourth quarter, that’s obviously Q4, 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’re 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 but we’re certainly not expecting any kind of recovery of the business in the second half of the year.

Steven Chercover - D. A. Davidson & Co.

Understood. Thanks. I’ll get back in the queue.

Operator

(Operator Instructions) Next we will hear from the line of Bob Trout with Goldman Sachs.

Bob Trout - Goldman Sachs

Good morning, guys. 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?

Stephen E. Macadam

It was almost all specialty products.

Bob Trout - Goldman Sachs

It was almost all specialty.

Stephen E. Macadam

Yes. In the prepared remarks we had noted that. We thought it was about 260 basis points on just specialty and it was 99% specialty products.

Bob Trout - Goldman Sachs

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

Stephen E. Macadam

We’ve never talked about that in terms of what those percentages are. I think I have to leave that up to you to be specific on because we’ve 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, and that does kind of move up and down because we hold our branches accountable for hitting specific productivity targets that have to do with the volume that they move per man hour, and 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, and then there’s salary and it’s 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 housing has dropped 60%. They’ve still got to be able to live. So commission doesn’t even flex directly. It flexes generally over time and 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 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.

Bob Trout - Goldman Sachs

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 fees, and I understand it’s going to be challenging, but can we at least expect to see [inaudible] or are you hearing that we may at lease see a similar magnitude of seasonal improvement?

Stephen E. Macadam

Let me let George address that.

George R. Judd

Bob, we’re not expecting a strong seasonal rebound in the markets that we’ve relied on in the past for 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, our customers are planned activity for engineered lumber business which is the first thing that happens. It’s pretty consistent. It’s starting to show a little uptick and a little seasonal uptick, certainly not any robust activity, but don’t read too much into it. But certainly there are some housing starts that are happening but those are in traditional lower housing start markets. As I mentioned in my prepared comments, our out of warehouse activities are pretty solid and 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, 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 with how much flexes if warehouse business remains where it is then our hourly 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 core customers, and moving our core suppliers’ products into market. So we’re not expecting a huge rebound but certainly we’re expecting to get better than December which is seasonally a slow month.

Bob Trout - Goldman Sachs

Okay and did you say that you think that 1 million is at least where you’re expecting kind of the bottom at, at least that’s where you’re building your own forecast around?

Stephen E. Macadam

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’ll probably be trending under 1 million but again you have to look at the bottom of the previous cycles. The monthly number in terms of seasonally adjusted actually historically in the bottom across the trough moved quite a bit from month to month. Obviously with low numbers, when they do the seasonal adjustment, it has a pretty big impact on the overall numbers, so I would expect in the first half of the year to see numbers on a seasonally adjusted basis south of 1 million starts.

Bob Trout - Goldman Sachs

Okay. Thanks very much, guys.

Operator

And we have no further questions at this time.

Stephen E. Macadam

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BlueLinx Holdings Inc Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts