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Housing Slowdown Hits Building Materials Distributors

building products, reported a drop of 17 percent to $1.2 billion for the third quarter. Profit was $2.3 million, compared with $13.9 million in the year-ago period.

The revenue decline reflects a 26.8 percent drop in structural product sales and a 1.1 percent sales decline in specialty products. About two-thirds of the decline in structural product sales resulted from 17 percent decrease in unit volume related to a demand slowdown. (Last year’s September saw strong demand for structural products after Hurricanes Katrina and Rita.) The company has also worked to preserve structural product margins as wood-based product prices deteriorated through the quarter.

Overall unit volume for the company’s estimated end-use markets declined 8.7 percent for the period. Sales were down 7.8 percent for the first nine months, and profit was $21.7 million, compared with $30.1 million for the year-ago period.

BlueLinx CEO Stephen Macadam: “Housing starts for the quarter fell approximately 19 percent from year-earlier levels, while prices for key grades of lumber, plywood and OSB, continued deteriorating, dropping another 20 percent on average from the end of the second quarter.”

Builders FirstSource Inc., Dallas, TX, which experienced an 11.5 percent sales drop in the third quarter, said it expects difficult market conditions through at least mid-2007. Many of the company’s largest markets, including Texas, Georgia and the Carolinas, started to experience year-over-year declines in housing starts after experiencing year-over-year growth during the first half of the year.

Distributors expect housing starts to remain under pressure for at least the next year.

Homebuilders have cut back production as a result of excess inventory, and falling commodity wood prices are hitting distributors’ bottom lines. But macroeconomic factors such as interest rates and unemployment indicate housing starts may not fall far. Here’s a rundown of third-quarter results for several building materials distributors and their outlook through 2007.

The largest public building materials distributors have already been hit by a slowdown in new residential housing. September housing starts were 17.9% below September 2005 levels. Permits were 6.3% below August, and 27.7% below the September 2005 rate.

Each one of these markets where we have issues with respect to excessive’ inventory is different each one of these regional markets is different, every state is different, every MSA (metropolitan statistical area) in each state is different. It’s going to take some time to sort out which markets are going to come back and how fast they are going to come back,” said Bill Smart, Building Materials Holding Corp. CFO.

In a quarterly earnings conference call with investors, Smart was optimistic based on macroeconomic factors. “I can’t be upset with interest rates. I can’t be upset with unemployment, and I can’t be upset with consumer confidence,” he said. “These three variables over the long-term have really been predictors of where housing starts are going to go. All we have to do is work off this excessive inventory in an expeditious manner.

“… We believe that once inventories are normalized the industry will return to very attractive growth rates.”

BMHC, San Francisco, CA, hopes cross-selling and expanding its construction services offering, via its subsidiary SelectBuild, will moderate the downward pressure on its sales and margins. BMHC made two acquisitions in that area in the third quarter.

Sales at BMHC’s distribution arm declined, with the greatest decrease in the Southwest, Colorado and the Northwest. It reported increases in the Intermountain and Texas regions.

Overall, sales increased just 1 percent to $831 million for the quarter. Profit was $35.3 million, compared with $41.6 million in the same quarter a year ago. For the first nine months ended Sept. 30, 2006, sales were up 26 percent to $2.6 billion. Profit for the first nine months, however, was up just slightly, to $97.6 million compared with $96 million a year ago.

BMHC was one of few building materials distributors that reported an increase however small in sales. Huttig Building Products Inc., St. Louis, MO, distributor of millwork, building materials and wood products, reported a sales decline of 3 percent to $294.2 million. Three of Huttig’s four regions experienced sales declines in the 2006 third quarter over the prior-year period. Huttig’s gross margins were negatively impacted by the $4.9 million of charges related to the inventory liquidations and write-downs, and lower margins on commodity wood products and doors.

Sales for the first nine months were $871.6 million, a 4.6 percent increase from last year.

To compensate for the sales declines, Huttig announced it would close two smaller distribution centers in the fourth quarter 2006, one in Albany, NY, and the other in Grand Rapids, MI. In addition, Huttig expects to reduce its work force by an additional 130 positions in the fourth quarter 2006.

After this, the company will have reduced its workforce by about 240 positions or 11 percent from June 30, 2006, levels, including 60 positions at closed branches.

“While no company wants to take these actions, we believe they are necessary to improve our cost structure and operating margins, and ensure that Huttig remains focused and operates at maximum efficiency during the current weakness in the housing market,” said COO Jon Vrabely, who, on Jan. 1, 2007, will become Huttig’s CEO.

BlueLinx Holdings Inc., Atlanta, GA, distributor of

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