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Edited Transcript of BXC earnings conference call or presentation 2-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 BlueLinx Holdings Inc Earnings Call

ATLANTA Oct 13, 2017 (Thomson StreetEvents) -- Edited Transcript of BlueLinx Holdings Inc earnings conference call or presentation Thursday, March 2, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Natalie Poulos

BlueLinx Holdings Inc. - IR

* Mitch Lewis

BlueLinx Holdings Inc. - President and CEO

* Susan O'Farrell

BlueLinx Holdings Inc. - SVP, CFO, Treasurer and Principal Accounting Officer

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Conference Call Participants

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* Mark Stern

North Fork Investors LLC - Analyst

* Alan Weber

Robotti & Co. - Analyst

* Mitchell Scott

Choice Equities Capital Management - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Teresa and I will be your conference operator today. At this time I would like to welcome everyone to the BlueLinx fourth-quarter Investor Relations call. (Operator Instructions). Thank you.

Ms. Natalie Poulos, you may begin your conference.

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Natalie Poulos, BlueLinx Holdings Inc. - IR [2]

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Thank you, Teresa, and good morning, everyone. We appreciate you joining us for BlueLinx fourth-quarter 2016 earnings conference call. This call is being webcast on the Company's website at www.bluelinxco.com. The earnings release and presentation slides for this call can be found in the Investor Relations section of the Company's website. Joining us on the call today are Mitch Lewis, Chief Executive Officer; and Susan O'Farrell, Chief Financial Officer.

I'll also remind you that this presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our future operations and financial performance. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those provided, including, but not limited to, those identified in our press release and discontinued in -- excuse me, and discussed in our filings with the Securities and Exchange Commission.

Forward-looking statements speak only as to the date of this presentation, and we undertake no obligation to revise them in light of new information. And today's presentation includes references to non-GAAP financial measures.

With that, I'll turn the call over to Mitch.

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [3]

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Thanks, Natalie. Good morning. We're happy to be able to report another good quarter at BlueLinx. We had net income for the quarter of $10.4 million which is our best fourth quarter since 2009. Our net income for the year was $16.1 million, representing our best financial performance since 2005. Our adjusted EBITDA also reflected our continued progress in the fourth quarter as we made $5.7 million, a $1.5 million improvement from 2015 levels.

Our full-year adjusted EBITDA of $36.4 million was $11.6 million better than our 2015 performance. Our progress continues at BlueLinx as the fourth quarter of 2016 was our sixth consecutive year-over-year quarterly improvement in adjusted EBITDA.

In addition, when you consider the lost sales associated with the facility closures and product exits that took place earlier in the year, our same-center sales revenue improved in the fourth quarter by 12.9%. This tracks relatively close to the single-family housing starts which improved in the United States by 12.5% for the quarter.

We also feel good about our continued progress with our strategic priority to reduce the Company's leverage. Our team has been relentlessly focused on this strategy, and I want to thank them for their fantastic execution in 2016. The reduction in our debt from the end of 2015 by approximately $84 million, while improving our adjusted EBITDA by over 45% from 2015 levels, facilitated the extension of our ABL in the fourth quarter and also helped provide the economic stability we now enjoy so that we can focus on the day-to-day management of our business.

Susan will discuss in detail our efforts to reduce debt in 2016, as well as the continued deleveraging activity that we are undertaking.

As I discussed on our previous call, we began to significantly invest in enhancing our sales and marketing efforts in the fourth quarter of 2016. In addition to the electronic tools implemented in 2015 which enable our sales teams to proactively support our customer base, we established a sales excellence support team late last year. This team has begun to train all of our approximate 400 sales associates on a contemporary best selling practices. We're determined to provide the tools to elevate our salesforce as we enhance our value-added selling capabilities while partnering with our customers to maximize their profitability and returns.

Our sales excellence team also has several associates who are dedicated to analyzing our pricing throughout the organization to support the local decisions we make relating to product choices, delivery decisions, and customer support. We continued to gain momentum in this area, as evidenced by the improvement in our gross margins that we enjoyed in 2016.

We are also now relentlessly focused on improving and enhancing our supplier relationships. We recognize that our success is predicated on the success of the suppliers we support. We have elevated our commitment through enhanced communication, time, and resources. We are committed to growing the business of our key suppliers and partnering with them to ensure that they achieve their volume and profitability objectives.

Many of you may be aware of the increase in commodity prices we have seen over the last several weeks. The uncertainty regarding the political landscape and its impact on potential tariffs appears to have influenced an inflationary trend in certain product categories. We have recently seen price increases in several core categories, including lumber panels, rebar, and engineered wood products. The uncertainty regarding the Canadian softwood lumber agreement, in particular, has helped fuel a 13% increase in the US lumber composite index since the end of December.

While inflationary pressures typically result in higher margins in the short term, the BlueLinx team closely monitors inventory levels to minimize the impact of a rapid deflationary environment in the event product pricing quickly falls.

2016 was a year in which we saw significant improvement at BlueLinx in several key areas. While we've made great progress, our team understands that it is still early in our transformation. Over the last two years, we have successfully executed our strategy to move towards a local market emphasis. 2.5 years ago, approximately two-thirds of our general managers who were responsible for the local P&Ls across the country were located in either Atlanta or Denver. Today, over 90% of our general managers reside in their local markets.

We've also worked hard and executed on our initiatives to improve the balance sheet. And we've made difficult decisions relating to products, customers, associates, and locations that have helped our adjusted EBITDA improve dramatically since we began this journey in early 2014.

Now we are pivoting the Company to strengthen our partnerships with our customers and suppliers while deploying additional resources to focus on opportunities in markets where we are underpenetrated. I am convinced that scale will increasingly matter in the building products wholesale distribution channel.

BlueLinx is fortunate to be one of the largest wholesale distributors in the markets in which we compete. It makes us more valuable to both our customers and our suppliers, as we can provide comprehensive solutions to reduce their supply chain costs. And, of course, it affords internal economies of scale that we will continue to capitalize on.

2016 was a much improved year for BlueLinx in many ways, but we are just getting started.

With that said, I'd like to turn it over to Susan who will walk you through our financial performance for the fourth quarter in greater detail.

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Susan O'Farrell, BlueLinx Holdings Inc. - SVP, CFO, Treasurer and Principal Accounting Officer [4]

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Thanks, Mitch, and good morning, everyone. It's a pleasure for me to speak with you today and to review our fourth-quarter and year-to-date business results.

So on page 7, let's review some of our highlights before we get into the more detailed review of our results. As Mitch just mentioned, we continue to focus and advance on our strategic initiatives and we're very pleased with our results today. In 2016, we closed certain facilities and rationalized our inventory, which we refer to as our operational efficiency initiative.

In addition, we've executed well on our real estate monetization efforts. With the sale of three previously closed facilities during the fourth quarter, we continue to make terrific progress towards paying down our mortgage. Even with the impact of our strategic initiatives, net sales were $421.7 million for the quarter. When excluding our operational efficiency initiatives, our net sales were up $47.7 million or 12.9% from this time a year ago.

Additionally, our adjusted sales volume increased 12.4% from the prior fourth quarter, led by double-digit volume increase seen in both our specialty and structural product categories. When we look at fourth-quarter performance, gross margin increased by 40 basis points to 12.4%. As Mitch previously shared, we continued to execute on our local market strategy, and, as a result, we are realizing higher gross margins.

We also had net income of $10.4 million, with earnings per share of $1.14. Adjusted EBITDA was $5.7 million, which is up 36.7% from the same period a year ago. We are delighted to see these continued year-over-year improvements in our fourth-quarter adjusted EBITDA results.

Our debt principal balance is down $84 million from the fourth quarter 2015. This is significant progress on our deleveraging initiative. Our mortgage principal balance is down $41.4 million. And our ABL debt balance is down $42.6 million from a year ago, mainly driven by our working capital efficiencies, which we will discuss in further detail in just a moment.

Moving to Page 8, we'll highlight our year-to-date performance. Sales for the year were $1.88 billion. When excluding our strategic operational efficiency initiatives, net sales were up $107.8 million, or 6.6% for the year; and our adjusted sales volumes were up 8.4% from 2015 levels. Additionally, gross margin was 12.1%. That's our highest year-to-date annual growth margin on record for BlueLinx. And when excluding our closed facilities and inventory rationalization efforts, adjusted gross margin was even higher: 12.5% for the entire year.

We're very pleased to report net income is $16.1 million, our highest year of net income since 2005, with earnings per share of $1.77. Additionally, adjusted EBITDA for the year was $36.4 million, an increase of $11.6 million or 47% from fiscal 2015. This is our best full year to date of adjusted EBITDA since 2007.

Our trailing three-month cash cycle days had seen an improvement as well. For the fiscal fourth quarter 2016, our cash cycle days totaled 53 days, an 11-day improvement compared to the fiscal fourth quarter 2015, and a 16-day improvement from fourth quarter 2014.

Our operating working capital also improved by $57.5 million. This improvement primarily reflects our improvements in working capital components, including a decrease in our inventory of $36 million and a decrease in receivables of $12.7 million. We continue to work hard on improving our working capital [processes], and are pleased with the progress we've made. All the while, we're staying keenly focused on our inventory stock, and ensuring we have the just-in-time inventories our customers need.

With the working capital efficiencies we've gained to date, we are pleased to share we've had over $63 million in excess availability under our revolver, which is up 20% from the year prior, and based on the qualifying inventory and receivables levels at year end. With lower working capital on our revolver and an interest-only mortgage, not only did we incur less interest expense of $2.4 million during the year; but we continue to pave the way for a leaner, more capital-efficient BlueLinx.

Moving to Page 9, we'll now discuss the improvement we've seen in our gross margin. GAAP reported gross margin was 12.4% for the quarter, an increase of 40 basis points from the prior-year quarter, and 12.1% for the year, an increase of 50 basis points from 2015 levels. When excluding our closed facilities and inventory rationalization efforts, adjusted gross margin increased 70 basis points for the year when compared to 2015.

On Page 10, with our strategic priority on reducing leverage, we are pleased to share the benefits we continue to reap from our real estate monetization plan. With the sale of several closed facilities during the fiscal year, we generated over $36 million in gross proceeds. We were able to significantly reduce our mortgage debt in 2016. At the end of our fiscal year, July 2017 mortgage obligation payment remaining was $27.2 million, and we are now well on our way.

Since December 31, we've already generated an additional $8.9 million in proceeds from three real estate deals to pay down that mortgage. That includes, just yesterday, closing on an unoccupied facility located in Virginia Beach, Virginia, with additional proceeds of $3.1 million.

Furthermore, we are now under contract of sale or sale-leaseback of additional properties that will enable us to fully meet our July 2017 obligation. And while there are always risks in any deal closings, we are very excited about getting this ball over the goal line.

In conclusion, I'd like to thank our BlueLinx team for their hard work and efforts which resulted in record results. And, of course, special thanks go out to our customers and suppliers for their continued partnership.

And now, Teresa, we'd like to open it up for any questions we may have at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Mark [Stern], North Fork Investors.

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Mark Stern, North Fork Investors LLC - Analyst [2]

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Guys, congratulations on a good quarter. I was wondering if you guys are counting on a one-time accounting gains from reversing the write-downs on defunct properties held for sale?

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [3]

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So just to make sure I understand the question, you're saying the differential on the book basis of the real estate versus the sales we've had from properties that we have exited. Is that the question?

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Mark Stern, North Fork Investors LLC - Analyst [4]

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That's the question, yes.

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Susan O'Farrell, BlueLinx Holdings Inc. - SVP, CFO, Treasurer and Principal Accounting Officer [5]

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Mark, so thanks for the question. No, we're not anticipating that. So we plan to move through these properties in short order, and you won't see a reversal. We don't anticipate one, at this time.

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Mark Stern, North Fork Investors LLC - Analyst [6]

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Okay. My second question is on the SG&A is up $2 million, quarter-to-quarter comparison. Can you provide me with a better description of exactly what adjustments were made to the real numbers, excluding the effects of the operational efficiency initiatives?

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Susan O'Farrell, BlueLinx Holdings Inc. - SVP, CFO, Treasurer and Principal Accounting Officer [7]

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So as we look at SG&A, we look at things as it relates to operating with our volumes. So we have within SG&A includes our logistics expenses. So as our volume increases, we also have our operational expenses to within there. Additionally, we also have our short-term incentive programs accrued within there. As you might imagine, with a record and banner year like we've had, we're also reporting for additional expenses for our team. So the operational logistics costs for the increased volumes that we are serving, as well as the banner year that we've had.

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Mark Stern, North Fork Investors LLC - Analyst [8]

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Okay. Excellent. And, finally, are you guiding us to project significant gains, profit improvements for 2018? For example, in the line of $6 million?

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [9]

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Mark, we don't give any guidance. I'm sorry about that. But we don't give forward guidance.

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Mark Stern, North Fork Investors LLC - Analyst [10]

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I tried.

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [11]

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I remember that from previous calls (laughter).

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Mark Stern, North Fork Investors LLC - Analyst [12]

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I gave it a shot. Give me some credit; I gave it a shot. It was sort of a Trump question, right?

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [13]

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We were waking up this morning, so you didn't catch us.

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Mark Stern, North Fork Investors LLC - Analyst [14]

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Yeah, listen -- I tried to catch you sleeping.

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Susan O'Farrell, BlueLinx Holdings Inc. - SVP, CFO, Treasurer and Principal Accounting Officer [15]

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We'll tweak you later today.

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Mark Stern, North Fork Investors LLC - Analyst [16]

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At least he accepted the call; right? Okay. Thank you guys very much, and congratulations.

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [17]

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Thank you.

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Susan O'Farrell, BlueLinx Holdings Inc. - SVP, CFO, Treasurer and Principal Accounting Officer [18]

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Thank you.

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Mark Stern, North Fork Investors LLC - Analyst [19]

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You take care. Bye-bye.

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Operator [20]

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(Operator Instructions). Alan Weber, Robotti Advisors.

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Alan Weber, Robotti & Co. - Analyst [21]

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Good morning. You made a comment about scale being more important. Can you just talk about that? Because actually the Company, in a sense, is smaller today than it was a few years ago. So if you could just talk about that comment, and why you think it becomes more important going forward.

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [22]

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I think the reason I have a lot of conviction that that's important is because of the consolidations that are taking place in the marketplace. And so the supply basis has consolidated tremendously after the economic downturn. We're seeing more of that happen in the traditional customer base for BlueLinx, which is the independent lumber yards. And so what we are starting to see now is consolidation that's taking place at the wholesale distribution level.

So for example, a company was sold in 2016. There's certainly rumors out in the marketplace that there are two or more of our competitors that are for sale. And so my view is that there's a good probability that as we look back three years from now, we're going to see a much more -- a much smaller and less fragmented supply chain. So I think the fact that we're at the scale we are now gives us the gravitas within the industry, both from a customer standpoint and a supply standpoint, to compete effectively.

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Alan Weber, Robotti & Co. - Analyst [23]

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Okay. Great. And then just because you've had the sale of facilities, you've gotten out of markets, are you expecting working capital to be a source of cash again this year?

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [24]

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That sounds like a forward [timing] question again. Let me answer it this way, Alan: it is something that we are -- it is a strategic emphasis of this Company that we're deleveraging the Company. And the organization understands what that means, and that's reducing debt and that's increasing EBITDA of the business. So we have a much better processes in place than we certainly had two years ago as it relates to managing our working capital. It is a key emphasis for the business. And we also operate under a core value of continuous improvement, so we look at everything we do. And we certainly feel like there remains significant opportunity at BlueLinx really in every way that we operate the business.

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Alan Weber, Robotti & Co. - Analyst [25]

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And then I my last question was if you continue to have some improvement in gross profit percent -- again, at some point, it becomes an apples-to-apples; there's less discontinued. When you're in that spot, how do you think about the incremental SG&A relative to a growth of gross profit?

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [26]

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So our view is that from a -- if you look at the fixed cost aspect of the overall business, what we have now is scalable. So that would mean that my expectation would certainly be that we did enhance the efficiencies on incremental volumes and margin that the Company has. And you get that on the fixed overhead costs. Then you also get incremental efficiencies on some of the variable costs, obviously as you -- for example, your fleet becomes more efficient; your operation at the facilities becomes more efficient. So the expectations would certainly be that we would not be ramping up SG&A at anywhere close to the pace that we would ramp up either our volume or incremental gross margin improvement.

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Alan Weber, Robotti & Co. - Analyst [27]

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And I ask that only because if you look at -- again, it's hard to really make the comparison because of the closed facilities and the selling of some facilities. But if you look at the incremental gross profit, 2015 to 2016, and then you look at the SG&A, the truth is the SG&A went up more than the gross profit in absolute dollars. And that you are saying should really -- that position not be going forward, the case?

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [28]

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That absolutely should not be the case, going forward. And again there's a lot of noise in those numbers with the initiatives that we had that you acknowledged.

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Alan Weber, Robotti & Co. - Analyst [29]

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Right. Okay. What's most important is that you get going in the right direction. Okay. Great. Thank you very much. And great on the debt reduction, thank you.

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Operator [30]

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(Operator Instructions). [Michael] Scott, Choice Equities Capital Management.

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Mitchell Scott, Choice Equities Capital Management - Analyst [31]

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Good morning, everybody. Congrats on a nice quarter -- starting to really see the balance sheet initiatives coming through on the financial statements.

I guess I had a question mostly on the volumes -- looked really good, particularly in comparison to recent reports from your peers. Just wanted to know if you could kind of characterize what was driving that perhaps in relation to single-family starts, but also if there was anything in terms of a price impact in there as well?

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [32]

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So from an overall market perspective, as I indicated, it was actually -- as has been the case with the business -- pretty highly correlated to single-family housing starts again. There was some modest price across the board, and Susan has those numbers. There's some modest price appreciation. But it was primarily, I would say, a result of the market.

As I've talked about, we are, in my view, just beginning to get very proficient at fighting back now from some of the share losses that we had had over the last 3 to 5 years, as the Company was really focused on the balance sheet and getting our financial house in order. And we're investing in that, and I would expect us as an organization to outperform certainly going forward in the future. But I would say the fourth quarter is much more just correlative to what was going on in the general marketplace.

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Mitchell Scott, Choice Equities Capital Management - Analyst [33]

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Along those lines, maybe could you provide a little color on the return you are seeing on having the general managers in the local areas and closer to their end customers?

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [34]

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Well, the EBITDA was up a lot in 2016 versus 2015. The margins were up a lot in 2016 versus 2015. And so I think the economic performance objectively is somewhat a result of that. But again it's still early days in that where we have -- it was one of the things when we looked at the business early, when I came in, was you could see a higher correlation of profitability and return on invested capital for those facilities that tended to have local management, which is intuitive; right?

And so we're starting to see, I'd say, penetration in better relationships at the customer level. I think we're getting enhanced confidence at the supply level, as at a local level all the stakeholders understand that we understand the market and that we're going to address the market being there. So where we have -- certainly 2016 where we have local general managers that were not there, for example, in 2014, the performance was generally very much improved.

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Mitchell Scott, Choice Equities Capital Management - Analyst [35]

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Okay. And last one for me, and then I'll drop off is just on the interest expense which continues to come down and reflect lower leverage in total. Is that approximating sort of a decent go-forward rate? Or would you expect for it to continue to come in from kind of the $5 million and change on the quarter, going forward?

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Susan O'Farrell, BlueLinx Holdings Inc. - SVP, CFO, Treasurer and Principal Accounting Officer [36]

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Well I think, Mitchell, if you think about the things we have talked about, which is we are still selling through some of the real estate; so we have talked to you before out our mortgage is a 6.35% mortgage. So as we sell through some of the real estate that implies lower mortgage interest rates. And then as we continue to work on our inventory efficiencies, we've shared with you in the past some of our revolver balance interest rates, we'll get more efficient there too. So I think you can pencil through for yourself what you might see that coming down for. But we'll continue to give you progress reports each quarter on that.

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Mitchell Scott, Choice Equities Capital Management - Analyst [37]

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Okay. Great.

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Operator [38]

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(Operator Instructions). And there are no further questions in queue at this time.

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Mitch Lewis, BlueLinx Holdings Inc. - President and CEO [39]

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Thank you, Teresa. And thank you; we certainly appreciate your continued interest in BlueLinx. And we look forward to sharing our first-quarter results with you in the months ahead.

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Operator [40]

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Thank you, ladies and gentlemen, for your participation. You may now disconnect.