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Edited Transcript of BXC earnings conference call or presentation 9-Aug-18 2:00pm GMT

Q2 2018 BlueLinx Holdings Inc Earnings Call

ATLANTA Aug 27, 2018 (Thomson StreetEvents) -- Edited Transcript of BlueLinx Holdings Inc earnings conference call or presentation Thursday, August 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mary Moll

* Mitchell B. Lewis

BlueLinx Holdings Inc. - President, CEO & Director

* Susan C. O'Farrell

BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Mitchell Scott

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Presentation

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Operator [1]

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Good morning. My name is Heather, and I will be your conference operator today. At this time, I would like to welcome everyone to the BlueLinx Second Quarter 2018 Investor Relations Conference Call. (Operator Instructions) Ms. Mary Moll, you may begin your conference.

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Mary Moll, [2]

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Thank you, Heather, and good morning, everyone. We appreciate you joining us for our second quarter 2018 earnings conference call. The earnings release and presentation slides for this call can be found in the Investor Relations section of the company's website at www.bluelinxco.com.

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, including statements about our future operations and financial performance. These statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those provided, included, but not limited to, those identified in our press release and discussed in our filings with the Securities and Exchange Commission.

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

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

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [3]

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Thanks, Mary, and good morning. We are pleased to report that we had another very good quarter at BlueLinx, a quarter in which we closed on our transformative acquisition of Cedar Creek, immediately began the integration of the 2 businesses, enjoyed a pro forma net sales improvement by approximately 12%.

And once again, we posted another quarter, our 11th consecutive quarter, in which adjusted EBITDA, this time on a pro forma adjusted basis for the acquisition, improved from the prior year's quarter.

We're also pleased to update you today on the progress of our integration. We're now just over 100 days into the merger of the 2 companies. And having deeply assessed opportunities afforded by the combination, we're even more convinced that the rationale for bringing these companies together will be proven in the days ahead.

As you may recall, some of the key attributes of combining our businesses include the breadth of geographic presence, with an extended reach and footprint east of the Rockies; significant sales coverage, with over 700 sales associates calling on customers every day, which is likely the largest sales force among our direct competitors; a comprehensive product portfolio that we can utilize across our expanded geographic platform providing the opportunity for accelerated growth; a diversified and extensive roster of high-quality national and regional customers; significant cost-saving opportunities, anticipated to be at least $50 million annually, and improved financial flexibility to support growth and long-term deleveraging.

Our dedicated integration team has been busy since April, helping to integrate the companies as well as identifying and then executing on opportunities to reduce our costs. And I'm pleased to let you know that we made a great deal of progress in the short period of time. As we've indicated, we are generally identifying our cost-savings opportunities into 3 main categories: supply chain, G&A and procurement.

We're making great progress on our supply chain efficiency efforts. We've quickly begun the process of consolidating facilities in our overlapping markets. We have consolidated the legacy Cedar Creek facility into one Atlanta location.

Consolidated legacy BlueLinx facility into one Des Moines location, recommissioned an idle BlueLinx distribution center in Lubbock and moved various fabrication equipment between facilities in Dallas-Fort Worth to enhance efficient supply chain operations.

We expect to consolidate an additional 3 facilities in the next 60 days and to have consolidated approximately 10 facilities by the end of the year. We're also diving into the process of route optimization, which we expect will yield millions of dollars in [savings.] This effort is basically the realignment of our trucks that go to customers to reduce the overall miles our fleet travels on the road. A typical example of this type of opportunity is the savings we expect to realize between Little Rock and Memphis.

Little Rock, which is a legacy Cedar Creek location, was delivering products to our customers in Memphis. Similarly Memphis, a legacy BlueLinx location, was delivering products to customers in Little Rock. We're now in the process of realigning our trucks and the necessary inventory to support their respective markets.

We're not closing either facility, but we will realize significant savings from reduced mileage on our fleet, while more importantly offering our customer base an enhanced service proposition.

We've also identified and are acting on numerous opportunities to reduce our G&A cost, including converting multiple HR systems into one, consolidating our insurance spend, taking advantage of administrative economies of scale and rationalizing our senior leadership organizational structure.

We made the decision to integrate our ERP platform into the legacy Cedar Creek system, and have begun moving to this system as we consolidate facilities.

We expect to have the conversion for one ERP system completed by the end of 2019. Over the last several weeks, we've also had individual meetings with over 25 of our key strategic suppliers, and are appreciative that many of our supplier partners are working with us to share in the opportunity our consolidated spend offers us both.

This includes the ability to accelerate sales growth, as we're beginning to distribute key products and brands in geographic markets where we previously did not have a presence. We announced in March that we expected to achieve at least $50 million in annual savings from synergies that we would realize over an approximate 18-month period.

Our efforts to date, as we dive more into the details of potential synergy opportunities, make us increasingly confident that we will be able to achieve this goal. We also indicated earlier that we would exit 2018 with an annual run rate savings of $15 million. We are ahead of schedule on this timing, and I am now very confident that we will achieve this $15 million target by the end of the year.

The other good news is that it appears that the cost to achieve these synergies are lower than we originally estimated. So we have lowered our original range by $15 million. We now expect the cost to achieve these synergies to range between $25 million and $40 million.

The BlueLinx team has done a great job of maintaining relative market stability during our integration process. Susan will dive into the details of our financial performance in a few minutes. But as we continue to execute on our integration strategy, we are pleased that we have not seen any significant attrition in our customers, suppliers or associates. In fact, our associate attrition in the second quarter of 2018 was actually lower than the combined attrition of the 2 independent companies in 2017 during the same period.

I think our associates as well as our customers and suppliers generally understand the value and opportunity BlueLinx affords all of us in the days ahead.

I wanted to spend just a few moments discussing our view of current market conditions. We remain optimistic regarding the long-term prospects for housing in the United States. Many prognosticators are looking for high single-digit growth for single-family housing starts in 2018, and we concur with this view.

BlueLinx has historically been correlated with single-family housing starts. And these starts were up again in the second quarter, but saw a softening in June. The June numbers were somewhat inconsistent with our customers' sentiment, which remains generally bullish regarding housing for the next few months.

For the long term, it's important to remember that the annual level of single-family housing starts would have to increase from current levels by approximately 20% just to meet the average annual single-family housing starts over the past 50 years. So the long-term prospects for single-family housing appear to remain strong.

As you would expect, announced tariffs and potential trade wars are having an impact on pricing in some of our product categories. While the uncertainty may ultimately impact consumer demand, as a distributor, we generally pass on price increases to our customers. So product inflation typically provides a short-term benefit for BlueLinx as we move through lower-cost inventory.

Susan will discuss the impact of material price increases in our second quarter performance in more detail.

I want to emphasize that we believe the second quarter of 2018 will prove to be an inflection point for BlueLinx. The combination with Cedar Creek has been transformative for our organization. Our geographic footprint, our expanded product offering across the entire company and our strong supply chain expertise positions us well to provide increasing value in the markets we serve.

The BlueLinx team will continue to work hard every day to earn our customers' businesses, while we fully engage the scale and strength of our sales associates to help drive volume and profitability for our supplier partners.

And now, I'd like to turn it over to Susan, who will provide you more color on our financial performance for the quarter.

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [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 second quarter business results.

With the completion of the Cedar Creek acquisition in April, the second quarter was pivotal for BlueLinx. As Mitch previously touched on, one of our main areas of focus over the past quarter has been integrating our 2 companies. We've made great progress with our consolidation initiatives, and we are on track to achieve at least $50 million in run rate synergies within our 18-month time frame.

With the annual run rate synergies of at least $50 million and our second quarter and year-to-date adjusted EBITDA performance, we expect to remain on track to reduce our leverage profile to 2.5 to 3x by the fourth quarter 2019, representing significant improvement on preacquisition levels of 6.4x.

One of the key attributes of combining our businesses is the improved financial flexibility that will support our growth and long-term deleveraging. I am excited to share with you now our combined financial results for the quarter.

Net sales were $893 million, up $419 million or 88%. Pro forma net sales, which take into account the acquisition of Cedar Creek, as if it had occurred on January 1, 2017, were at $949 million, up $100 million or 12% versus the same period last year.

During the quarter, we were able to capitalize on increased commodity pricing, coupled with volume increases across our structural product categories. Gross profit and margin of $104 million and 11.6%, respectively, include a onetime acquisition-related inventory step-up charge of $11 million.

Excluding this charge, our gross margin rate of 12.8% is equal to the prior year. When we look at the second quarter results, we incurred a net loss of $9 million for the quarter, which was impacted by significant onetime expenses. The onetime expenses include acquisition-related expenses of $23 million and stock-based compensation expense adjustments of $4 million due to the increased stock price during the quarter.

Without these onetime expenses associated with the acquisition, we would have reported considerable net income for the quarter. Adjusted EBITDA, which continues to be our primary indicator of how our company is performing, was $37 million for the quarter, up 189% or $24 million.

The strong adjusted EBITDA performance is the highest second quarter adjusted EBITDA since 2006, making this our 11th consecutive quarter of improved adjusted EBITDA. And we're pleased to share that we ended the quarter with excess availability and cash on hand of $134 million. As we move to Page 11, we'll highlight our year-to-date performance.

Net sales were $1.3 billion, up $428 million or 47%. On a pro forma basis, net sales were $1.7 billion, up $114 million. Gross profit and margin of a $159 million and 11.9%, include the onetime acquisition-related inventory step-up cost of approximately $11 million.

Excluding this charge, our gross margin was up 10 basis points from the prior year at 12.8%. We recorded a net loss of $22 million that included $39 million of acquisition and stock-related charges. Again, adjusting for these expenses, we would have significant net income for the first half of the year. Adjusted EBITDA and pro forma adjusted EBITDA were both up year-over-year at $45 million and $57 million, respectively.

Now moving to Page 12, we'll highlight our pro forma net sales and gross margin performance. Increased lumber, panel and rebar prices experienced during the quarter, along with higher warehouse volume sales, helped drive the $100 million in pro forma sales growth.

Our pro forma gross margin was in line with last year. Structural gross margin was up by 60 basis points, offset slightly by our Specialty gross margins, which were somewhat impacted by less favorable product mix.

Moving to Page 13, I want to highlight a few items related to our real estate and tax assets. In the first quarter, we were able to monetize $110 million of real estate through sale leasebacks, which enabled us to pay off our old CMBS mortgage in its entirety. As we have shifted our immediate focus to integration and realization of synergies, we still believe our real estate is one of our most valuable assets that provides additional opportunities to delever our company.

With our remaining owned properties, we estimate the value of our real estate to be $150 million to $160 million, which is approximately 4x the book value. These values are supported by recent third-party appraisal.

And as we think about opportunities for growth, we should be well positioned to offset gains from ordinary income as well as real estate sales with our remaining federal NOLs, which totaled approximately $92 million at the end of the quarter.

Our year-to-date effective tax rate of 2.6%, decreased in the second quarter, primarily due to certain nondeductible acquisition-related expenses.

The amount of cash taxes we will be required to make will be significantly reduced due to our NOLs and our continued ability to use them against certain real estate gains and ordinary income.

In conclusion, we are pleased with the second quarter and year-to-date financial performance of the company as well as the integration progress we have made in a little over 100 days since completing the acquisition of Cedar Creek.

And before we open the line for questions, Heather, I'd like to thank Natalie Poulos for all of her contributions to BlueLinx Investor Relations. Natalie is staying with the BlueLinx team, but will now be fully focused on leading our internal audit activities. She has begun to transition her Investor Relation responsibilities to Mary Moll. Mary is a seasoned finance executive with more than 20 years of experience at BlueLinx. We wish Natalie continued success and know that we're in capable hands with Mary. You can reach Mary at investor@bluelinxco.com.

I would like to thank our entire BlueLinx team for their hard work and efforts, the outstanding results we are able to share today are a testament to your many contributions. And, of course, special thanks go out to our customers and suppliers for their continued partnership.

And Heather, now I'd like to open up the line 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) And your first question comes from the line of Mitchell Scott with Choice Equities.

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Mitchell Scott, [2]

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It looks like really good work there, getting to work on the synergy case very quickly and in line with what we were thinking originally. So that's great to hear. And particularly, the lack of attrition as well. It's great to hear that people want to stick around.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [3]

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Thank you.

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Mitchell Scott, [4]

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I thought I would just kind of start sort of a big picture question that might help sort of frame some of the synergies that you guys are going to work on. You touched on a little bit in the script. But as we think about some of these deals that we've seen in the building products space, other distribution companies, et cetera, the synergy target look pretty similar on a sort of percentage of sales basis. But thinking about the 2 entities and their relative size and the total synergy capture targeted, $44 million versus $60 million versus the $50 million, they're quite large. So I was wondering, if you could just take a minute to sort of describe what it is, in particular, may be about BlueLinx or Cedar Creek, or the way 2 come together that has allowed for such great synergies to be realizable?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [5]

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Okay. So the first thing I would say is, I think if you compared -- if you're doing a comparison to baseline against other companies, the first obvious thing is, if you look at the overlap markets that we have. So from a distribution platform, we're sitting at 19 -- approximately 19 geographic locations, where we have large major facilities within a 60-mile radius of each other, right? So that creates tremendous opportunities. Obviously, as a wholesale distributor perhaps compared to a dealer distributor [one step,] our facilities are very large from a scale perspective, and that creates opportunity. Similarly, the size of the fleets from an overlay perspective creates a lot of opportunities. So if you start there, that's clearly a differentiator. The second is, which I alluded to, which was this whole route optimization. We had -- we were competitors. Obviously, very good competitors with each other. And we were going to similar customers, our trucks were passing all the time. So it's a tremendous opportunity, obviously, to fill up the trucks, where you get maximum value for the sale that you have, because you have very small incremental variable costs associated with that. So that creates a significant opportunity. Then you have, what I would say, the general everybody's got them in major combinations like this where you do have G&A costs that make a lot of sense. One of the things that I think you have to consider as well is the fact that generally the EBITDA margins of the -- of both businesses and wholesale distribution because we are challenged every day by our customers and our suppliers, the level that you have it on a percentage basis is actually enabling more than you would otherwise see for the total EBITDA. So I think you have to consider that as well.

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Mitchell Scott, [6]

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Okay. That's very helpful. So thinking about the synergy case, it sounds like things are perhaps even maybe a little better-than-expected, little lower cost to achieve. And I guess, there was a comment on the second slide about perhaps incremental opportunities. Now I'm wondering if you could just kind of walk through sort of time to achieve across the various buckets? Think about a little bit more granularly from that perspective.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [7]

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Yes. So I think, generally what we've laid out is, I mean, there are some things that are very quick, for example, in each of the buckets and some that take time in each of the buckets. So just an example, a G&A cost. We had a wonderful CFO for Cedar Creek who elected to retire, he has now left the organization. So that's quick. However, we talked -- as we talked to that, we won't be integrating ERP system until the end of 2019, so that's slower. So everywhere you look, for example, in the G&A bucket, you would have from a timing perspective different times. Similarly when you look at the supply chain opportunities, the ability to move faster on, let's say, route optimization where you can lay out where your ship-to points are across the company might be a faster activity than -- to the extent you have as we talked about 10 major facilities that -- or locations that are going to be consolidated together. That takes time. So while I would like to give you much more color, it's all -- it's kind of all over the place. And that's why what we wanted to do was really focus on the run rate of $15 million by the end of the year and focus on the full $50 million that we say we would have in 18 months. And just keep you focused on those numbers. Rest assured, as always, I mean, Mitchell, you know us, we work really hard to do what we say we're going to do. And always try to overperform what we said we're going to do.

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Mitchell Scott, [8]

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That's been consistent with my experience thus far. So that's great to hear that it continues to be the case. Susan, sort of housekeeping items, and I'll hop off. But just -- can you help us out thinking about sort of the run rate of the business going forward from an interest expense and capital lease perspective? Maybe on like an annualized kind of high level?

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [9]

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Yes. So if we think about interest, we think about our revolver as well as our term loan and then, of course, our leases and the interest that goes in there. So from a tax point of view, I think you can see, we've got some nice shields there but the interest comes through. So on the term loan, it's a $180 million. We have minimal payments that we're making as we go on the principal. But that runs at a LIBOR plus an adder that we had filed previously, so think approximately 9% at this point in time. And then our revolver runs anywhere from $380 million to $450 million depending on the time of the year. And so that runs right at 4%. It could have some fluctuation in that as we think about interest rates coming up. But it's certainly a favorable interest rate. And then capital leases as we look at over the course of the year, about $20 million. And I think the other thing to contemplate is, we are a low CapEx business overall. So our capital investments in our facilities don't require a lot because they are T-sheds on large amounts of land. So CapEx could be $5 million or less up to depending on the years, we'll make investments in additional facilities, could be up to $10 million. So it's still fairly low CapEx for the size of the business that we have overall.

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Mitchell Scott, [10]

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Okay. Well, that -- you beat me to it. CapEx was my next point. So I'll hop off.

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Operator [11]

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(Operator Instructions) Your next question comes from the line of [Maya Kenya] with [I. B. Capital Management.]

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Unidentified Analyst, [12]

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(technical difficulty) on the acquisition of (technical difficulty) the pro forma sales growth was 12%, do you know how much (technical difficulty) sort of volume growth?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [13]

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[Maya] unfortunately, we could not hear or understand your call. I don't know if maybe you can dial in from a different line or try again, sorry.

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [14]

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All I heard is there's a question about gross margin. I'm sorry, we had a little background noise on the line, I think.

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Unidentified Analyst, [15]

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Sorry, can you hear me now?

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [16]

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We can hear you, lovely. Thank you.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [17]

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Lot better.

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Unidentified Analyst, [18]

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Sorry, about that. So I guess, the question was regarding performances sales of 12%. How much of that was from price inflation, if it's possible to answer that?

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [19]

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Yes, I mean, overall price inflation certainly on the structural side was very favorable. You've seen the stories in the markets about the run-up we are able to pass on, on that price inflation. That's our every effort every day. So we had that more so in the structural space of price increases and the commodity prices as well as volume increases. On the Specialty side, we also saw price increases, too.

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Unidentified Analyst, [20]

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Okay. But is it possible to quantify that at all, percentage wise?

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [21]

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Yes. The challenge that we have where we quantify it in specific areas, for example, the structural product because it's easy from a unit basis. Where we get kind of tied up is from a Specialty standpoint. So you have lots of different products that are being sold in different units. You may have a piece of vinyl siding, you may have a carton, you may have a unit. So we can really [can't] have -- struggle to give exact volume versus price numbers on the consolidated business.

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Susan C. O'Farrell, BlueLinx Holdings Inc. - Senior VP, CFO & Treasurer [22]

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And specifically, as we bring the businesses together, we're adding together different product mixes, which makes the volume analysis a little more complicated. So as we get into it and have a more consistent run rate, we should have better information on that over time. But for now, it's challenging as we bring together a variety of different products that might weight in to that, the unit volume calculation.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [23]

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Yes, and so maybe to just give you an illustration, we generally don't go into details. But for example, perhaps, the most highly correlated product category that we have of the family housing starts is kind of a commodity lumber grouping that we have. And that volume, for example, in about 10% range gain relative to an 8.5% single-family housing start gain. So again, there is a lot of noise in there, but if that helps a little bit.

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Operator [24]

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(Operator Instructions) There are no further questions at this time.

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Mitchell B. Lewis, BlueLinx Holdings Inc. - President, CEO & Director [25]

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Okay. Well, that's -- thank you, Heather. We certainly appreciate your continued interest and support of BlueLinx. And we look forward to sharing our third quarter results with you later in the year. Have a terrific day.

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Operator [26]

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