Builders FirstSource Inc (BLDR) 2006 Q2 法說會逐字稿

Hello and welcome to Builders FirstSource second-quarter 2006 earnings results conference call. Your host for today's call is Floyd Sherman, President and Chief Executive Officer. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without prior written authorization of Builders FirstSource. As a reminder, this conference is being recorded today, July 28, 2006.

I would like to turn the call over to [Marci Hyder], Director of Financial Reporting who will begin the call. Please go ahead.

Good morning and thank you for joining us today for the Builders FirstSource conference call to discuss our second-quarter 2006 financial results. We issued our financial results after market closed yesterday. If you do not have a copy the press release can be found on our website at www.bldr.com.

Before we begin, I would like to remind you that during the course of this conference call management may make statements concerning the Company's future prospects, business strategies and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from our expectations. Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports we have filed with the SEC for more information on those risks.

We undertake no obligation to publicly update or revise any forward-looking statements. We have provided reconciliations of adjusting items and non-GAAP financial measures in our earnings press release and detailed explanations of our non-GAAP financial measures in our Form 8-K filed yesterday, both of which are available on our website.

At this time I would like to turn the call over to Floyd Sherman, our President and Chief Executive Officer. Floyd?

Thank you, Marci. Good morning and welcome to our second-quarter 2006 earnings call. Joining me from our management team are Kevin O'Meara, Senior Vice President and Chief Operating Officer; and Charles Horn, Senior Vice President and Chief Financial Officer. Following my review of the highlights and achievements during the second-quarter, I'll turn the call over to Charles to discuss the financial details of our operating results. I would then like to take the opportunity to provide additional comments on our market environment and our outlook for the second half of our fiscal 2006 year. We will then open the call up for questions.

We had another outstanding quarter posting sales of $642.4 million versus $618.6 million in the 2005 second quarter. Despite decreased housing activity and lower commodity prices, this represents a 3.8% increase in sales versus last year as a result of market share gains across our regions. I'm also very proud to report our highest quarterly net income in the Company's history of $28.4 million, an increase of 40.8% or $0.79 per diluted share compared to $20.2 million or $0.72 per diluted share in the same quarter last year.

Adjusting the 2005 second quarter for items related to our IPO, net income was $23 million or $0.66 per diluted share. So the 2006 net results represented increases of 23.6% for adjusted net income and 19.7% for adjusted earnings per share respectively.

I would also like to point out that second-quarter 2006 GAAP and adjusted net income both included $1.1 million of stock-based compensation expense as we adopted statement of financial accounting standard 123(R) at the beginning of this year. An additional metric we are also proud of is our return on net assets which on an annualized basis was 39.9% for the second quarter, a significant improvement from 36.5% in the 2005 quarter.

We continue to grow our sales through strong market share gains which contributed an estimated 11.5 percentage points of our sales increase during the quarter. Our superior marketing and sales management initiatives continue to drive this increased customer penetration through our expanded offering of value-added products and services. As we are all aware this quarter was marked with extensive news coverage indicating a weakening national housing market. While we are not experiencing the rapid pace of last year's housing starts, our stronger markets in Texas, Georgia and the Carolinas alleviated some of the downward pressure on our sales results.

We maintain strict adherence to our business model which allowed us to quickly respond to market conditions and we executed well on all fronts during the quarter. Additionally, we were able to mitigate declining commodity prices through our pricing management and product mix. Charles will quantify this in more detail later in the call. Of significance, our sales gain during the quarter was predominately organic and broad-based with market share gains in all major product categories.

I'm also very pleased to announce that we closed the Freeport acquisition and the results are included in our consolidated financial statements from the acquisition date of April 28, 2006. Freeport will strengthen our geographic footprint in the fast-growing Florida Panhandle market. We have completed the integration process and we still expect this operation to be accretive to earnings per share for fiscal 2006.

Lastly, we at Builders FirstSource pride ourselves on employing best practices in our financial, liquidity and corporate governance standards, which have recently been recognized by NASDAQ Global Market, formally the NASDAQ National Market. We are pleased to be included in the new NASDAQ Global Select Market tier, a tier of the NASDAQ Global Market with the highest initial listing standards and financial and liquidity requirements of any exchange in the world.

Additionally, we recently announced the election of Craig Steinke, President and Chief Executive Officer of Eagle Family Foods to our Board of Directors. He is also serving on our audit committee, giving the Company an audit committee made up of all independent directors.

This quarter's performance is another testament to the hard work and dedication of our employees and we could not continue to meet new milestones without their tireless efforts as we strive to reach new levels of performance and standards of excellence.

I will now turn the call over to Charles to review the financials in more detail.

Thank you, Floyd. As Floyd mentioned, we had a record second quarter. Looking at our financial highlights, we reported sales for the 2006 second quarter of $642.4 million, an increase of 3.8% compared to $618.6 million for the same 2005 period. Notably our sales for the top 10 homebuilders in the country were up 4% during the quarter, outpacing our overall sales growth.

The following is a breakdown of our sales growth for the quarter, market share gains exceeded our expectations and added an estimated 11.5 percentage points to our sales growth. Adjusted for commodity price deflation, we grew market share in all product categories.

An unfavorable housing market had an overall negative impact on sales of approximately 6.5%. Continued weakness in portions of the Mid-Atlantic, Midwest and Florida markets were mitigated by strength in some of our larger markets in Texas, Georgia, and the Carolinas.

Nationwide commodity lumber and lumber sheet good prices declined approximately 15% compared to the second quarter last year, negatively impacting our sales by 3.1%. Commodity prices decreased beyond our expectations during the quarter but as Floyd mentioned, we did a good job of mitigating the negative impact on our sales through pricing management and product mix.

Lastly, new operations had a positive impact on our sales growth of 1.9% and this would include Freeport. We continued to improve our sales mix during the 2006 second quarter as we transitioned from commodity items to higher margin, value-added products and services. Our sales breakdown is as follows. Lumber and lumber sheet goods declined 8.7% from last year's second quarter. This product category declined 33.5% of our total sales in the second quarter of 2006 and it's down from 38.1% in the 2005 second quarter. The decrease was primarily due to lower commodity pricing which had a negative effect of $18.3 million in addition to the lower unit volume impact of $2.2 million.

Prefabricated components increased 4.6% from the prior year quarter and increase of 21.4% of total sales. Increased sales of prefabricated components are allowing us to continue to grow our top line, reduce our exposure to commodity price fluctuations and driving growth in our other product lines. Our window and door category increased to 17.2% and it now represents 20.4% of total sales. Millwork also increased 10.4% and now represents 8.8% of total sales. And lastly, other building products and services increased 15.4% and represents 15.9% of total sales.

Please refer to the table included in our press release for complete details on sales data by product category.

Our overall gross margin for the quarter was 26.5% compared to 25.1% last year. Total gross margin was positively impacted by higher sales levels and favorable product mix. The margin expansion was in all but one product category which was Millwork which had a very nominal decline with prefabricated components in windows and doors product categories contributing to most to our improvement.

Our SG&A expense was $117.8 million in Q2 2006 compared to $109.5 million in Q2 2005. Expressed as a percentage of net sales, SG&A expense was 18.3% in 2006 compared to 17.7% and 2005. In evaluating the percentages, it is important to note that negative sales impact of $18.3 million from lower lumber and lumber sheet good prices inflated SG&A as a percentage of sales by approximately 50 basis points for the quarter.

Salary and benefits expense increased $4.7 million during the quarter largely resulting from an $8.8 million increase in selling expenses; a $1 million increase in group health expense; and a 6.3% increase in average headcount related to our sales growth.

Salaries and benefits for the quarter also included $1.1 million in stock compensation expense related to the adoption of FAS 123(R) on January 1, 2006 which was not present in the second quarter of 2005. In addition, handling and delivery expenses increased $1.9 million primarily for fuel costs and professional fees increased $0.6 million primarily related to services required in connection with being a public company.

We had record net income for the second quarter. It increased to $28.4 million or $0.79 per diluted share compared to $20.2 million or $0.72 per diluted share in the same period last year. Adjusting for prior year items related to our IPO, net income for the 2005 second quarter was $23 million. Accordingly, year over year our adjusted net income increased a significant 23.6% with GAAP net income increasing 40.8%.

Adjusted net income per diluted share increased considerably by 19.7% year-over-year from $0.66 in the second quarter of 2005. GAAP net income per diluted share increased 9.7%. Diluted weighted average shares outstanding for the quarter were $36.1 million compared to $28.1 million in the same quarterly period last year. The higher share count was primarily due to our June 2005 IPO. Adjusting the prior year for incremental shares related to the IPO, diluted weighted average shares outstanding for the second quarter of 2005 were $34.9 million.

Interest expense was $7.3 million for the second quarter down $5.0 million. The decrease was primarily attributable to a $3 billion write-off of previously deferred loan cost as we repaid a portion of our long-term debt during the 2005 second quarter with the net proceeds from our IPO. In addition, lower average debt levels attributed to interest expense decreasing approximately $3.2 million. These decreases were partially offset by approximately $1.5 million of additional interest expense resulting from higher interest rates during Q2 2006.

Our effective tax rate dropped to 37.1% in Q2 2006 compared to 40.1% in Q2 2005. The decrease was primarily related to benefits received from various job creation and manufacturing tax credits and the new Texas state income tax legislation.

EBITDA for the 2006 second quarter was $57.8 million, a 14% increase compared to $50.7 million in the prior year quarter. EBITDA as a percentage of sales increased from 8.2% to 9% in the second quarter.

Turning to our balance sheet, our average working capital for the second quarter improved to 9.1% of sales from 9.6% in 2005. The improvement was in all facets of working capital. We continue to believe we have the best working capital management in our industry.

I will reiterate what Floyd previously mentioned. Our return on net assets on an annualized basis increased to almost 40% for the quarter, up significantly from 2005. Our focus on asset management coupled with our steadily improving profitability continues to drive this key metric for us.

As of June 30, 2006 our cash on hand was $25.7 million and funded debt was $315 million. Due to our acquisition strategy we did not reduce our total debt during the quarter and our leverage ratio defined as funded debt to EBITDA, is approximately 1.5 times.

I will now turn the call back over to Floyd for his comments.

Thank you, Charles. We are entering a more challenging national housing market and we see this housing environment continuing for at least the next several months. Housing starts have slowed from the rapid pace we enjoyed last year; commodity lumber and lumber sheet good prices have continued to decline. While we can't control these macroeconomic factors, we have confidence in our business model and believe we can execute our strategy and deliver solid results even with the contracting national housing market and declining commodity prices.

We believe we can continue to grow marketshare which will allow us to grow 8 to 10 percentage points faster than our underlying markets. We also expect that our geographic diversity and presence in market that remain healthy will continue to mitigate our overall exposure to weaker housing markets. Additionally, our acquisition pipeline is robust and we're actively seeking strategic candidates.

As we have indicated on previous earnings calls, we screen for acquisition candidates that are manufacturing focused, leaders in their respective markets and that can quickly be made accretive to earnings. We plan to continue enhancing our product mix with a bias toward value-added products and services in order to maintain or improve margins.

We will also continue to focus on working capital management in order to generate cash flow and we plan to use our cash flow to grow via acquisitions when the right opportunity presents itself and to retire debt when appropriate.

During the first half of this year we demonstrated our ability to deliver exceptional results in a mixed housing environment and we believe we have a proven strategy that was designed to not only grow our business but also maintain our marketshare sales growth during moderate, cyclical declines in housing markets.

In closing, I'm very proud of our second-quarter results made possible by our dedicated employees. We remain committed to delivering outstanding customer service and maximizing shareholder value.

I will now turn the call over to the operator to facilitate questions and answers.

(OPERATOR INSTRUCTIONS) Jack Kasprzak from BB&T Capital Markets.

Thanks. Good morning and congratulations on the results. I just wonder if you could tell us your geographic breakdown? If you have some numbers behind your exposure to your major markets, say Texas, Florida, Georgia, Carolinas? Just some of your bigger areas?

Good morning, Jack, we don't give specifically to breakdown by markets. But I can tell you by state, South Carolina is our biggest state; North Carolina is our second-biggest state; Florida is our third; and Texas is our fourth. And then they drop off to be much smaller percentages. So you can see three out of our top four states still tend to be in markets where you have a little bit more robust housing going on.

Yes, okay, that is helpful, thanks. Lastly, I guess with regard to Florida it's obviously a very controversial subject right now with regard to housing. What are you guys seeing there right now as far as activity? It's obviously slower over the last six months. Does it appear to be getting worse, stabilizing? How would you characterize it?

Jack, this is Floyd. We see a very mixed market in Florida. There are parts of Florida, Jacksonville, West Palm and South, certain parts of West Coast Florida appear that housing -- it's hard for me to say or believe that it can get any worse than what it is with some of these markets are down anywhere from 30% to 50%. However in areas like Orlando, Tampa, and some of the in between areas we see a fairly stable housing market. And we are not seeing the same type of situation that we see in other markets that have really taken some hits over the past six months. So it's a mixed picture as we see it.

Okay, great. Thanks a lot.

David Manthey from Robert W. Baird.

Good morning. I was wondering if you could help us understand the share gains? And would you believe that share gains should be greater when markets are weaker than when they are stronger? And then maybe anecdotally in your markets that you compete in, did you see that effect geographically?

Dave, we've seen pretty broad-based market share gains even in the markets that tend to be more declining. We do believe it is probably true that in a down market you have the opportunity to gain more marketshare. When the markets are running hot, your facilities are at capacity and it's very difficult to go out and prospect for new customers. So it does allow for a greater opportunity to grow sales through market share gains.

I would also add to that, Charles, during the downturn we really believe we're the most efficient provider. We have a very, very good, a well balanced mix of products and services going to the customer. These are market sales management programs and so forth. We believe gives us an advantage over our competitors during these times and I think this is when your values as a supplier can best be exploited. And I think that is exactly what we're doing and we're seeing a very broad-based market share gains. In fact, I believe in all of our markets maybe with the exception of one, we had strong marketshare gains.

Okay, thank you. And in terms of the segments that were stronger or weaker than we expected, services and other building products were fairly strong. I was wondering if you could talk about the trends in services and then if you could define what other building products were strong this quarter?

David, this is Kevin O'Meara. I think the biggest driver there is continuing interest in builders buying on an installed basis, because as you know we put our install labor in that other products and services category. I don't think there was any other product category that really stood out as being stronger than the others. It was really driven by the install labor and that continuing trend.

Okay, and that would be a gross margin driver too, right? Or an EBIT margin driver?

It's more of an EBIT margin driver. It tends to have a little bit lower gross margin because it is an A service. It's not an item you have to inventory or deliver so it tends to have a little bit lower gross margin. But it can generate a very good EBIT percentage.

Right, okay. And then last question here, I think -- did you mention that you improved your margins within each of the segments in addition to increasing percentage of mix of higher margin products? And do you think that that's sustainable in the current environment having margins, gross margins higher across the board if we continue to see pressure on lumber and starts? Can you maintain the levels of margin that you are seeing?

The only category that was very slightly down was the millwork category which tends to be a very high gross margin category. As we talked about in previous conference calls, the one category that can experience a little bit more pressure is the lumber and lumber sheet goods. So I think it is possible we could get some compression in that in the second half. But again, you would expect the changing sales mix to help mitigate it more than offset that.

Right. Okay, thanks very much.

Keith Hughes with SunTrust.

Yes, I wanted to drill on a little bit on the prefabricated components part of the business. Was there something going on in that quarter that -- your other value-added products did very well in the quarter, this one seemed to lag behind. Could you give us any kind of update possible there?

Keith, this is Kevin. The biggest driver of that is the fact that we're very strong in components in the mid-Atlantic, Washington D.C. market. That's one of the markets that we've said on past calls has been experiencing some softness and that's why you saw that translated into that product category.

And offsetting that, Keith, we've had very strong sales in the Texas market which for us has really not been up to this date -- we'll soon be changing that -- but has not been a prefab component market.

Are you seeing, starting to see more prefab component in terms of the building process in places like Texas, Georgia and North and South Carolina?

Yes, and we are responding to it.

Is that driven just because of the migration of that building technique from the West and the Northeast or is there something going on with the slowdown in housing that is causing that to change?

I think one thing that the slowdown in housing does is it gives builders especially markets that have been very overheated, time to really analyze how they do business and think about making changes. When you get into markets where they are just worried about getting houses built and just getting closed, people don't have a lot of time to really look inward and explore how do they do things and should we do something different. And so a slowing market does give you the opportunity to go and work with people on the benefits of building with components when they haven't in the past.

And I think we're also starting to see, wouldn't you agree, Kevin, that a number of the national builders are now mandating that they want to see component built homes all the way throughout all of their building areas?

No, that it's true. And one of the markets that you didn't mention where we're seeing an increased component demand is also in Florida.

Interesting, okay. Finally or speaking of weak markets, if you look at your margins and the weak markets you mentioned earlier, did you see compression year-over-year or were you able to manage those flat?

We didn't see gross margin compression. In fact we were able to expand them somewhat in the weaker markets and some of that is due to a change in sales mix. Prefabricated components tend to be a little bit stickier products category so you tend to retain that a little bit more on the lumber side.

So the sales mix has allowed us to actually increase our gross margin in those markets and in many of those markets, we've been very effective at trying to maintain our EBITDA percentage, but what you are still fighting against, it's still a lower sales volume.

Right, okay. And final question, within the acquired business what is the breakout between lumber and other products?

That business is probably about 60% to 65% lumber with the remainder trusts.

Steven Fisher with UBS.

Good morning. The windows and doors category was a little bit stronger than I expected. Was there anything kind of going on there? Any types of new products you are working on? Any new markets for that product?

The only change that we have made is in certain markets we've brought in a different high-end window line. I don't know that that made a material difference but that was the only change in terms of how we are operating the business going forward. Part of it too is as you are doing more components and as you are doing more installs, you can use it to drive your windows and door sales.

Okay. And then again on the margins, did you see any incremental pressure from builders on pricing in the quarter that you were maybe able to offset by better purchasing? Or was it really just the mix?

You know, Steven, in this business as we have said many times, builders are always tough on their suppliers. And I guess I would put it and say what characterize our industry, if you don't like the smell of napalm in the morning, you don't deserve to be in this business. We continued to offset the pricing pressure. We are responsive to our customer needs but we are able to offset with changes in product mix, in getting more component sales into the mix, driving other higher margin products to the customer.

I think we very definitely feel that we are the best, most cost-effective supplier, time efficient supplier to the job site and these values are also recognized. And so I think it's a combination of all those factors including pricing management that has enabled us to maintain or increase our margins in all of the product groups.

Okay. Lastly, can you just comment on how your capacity utilization changed in the second quarter from the first quarter? And if that affected any margins? And then can you comment on your new capacity expansion plans for the rest of the year?

Well, I think as it relates to capacity utilization obviously in some of the markets that we're softer, it did come down. It did not have a material impact on margins; we were able to manage through that. But certainly in the DC market particular is a market where historically we've been very capacity constrained. Our utilization levels there have declined. I think I'll let Floyd respond to walk you through what some of our new locations are that we have on track.

Yes, we've got a number of new locations that are coming on line. First of all we've got a San Antonio truss and panel plant that will be operational in the fourth quarter of this year. We've set up a panel plant in Jacks to serve the Jacksonville market; that will be coming online probably in late September, first part of October. We have a distribution center in Yulee Florida which is really going to serve and open up the North Jacksonville market for us. We've got a truss plant that will be in the [Laurus] North Carolina that will be serving the grand strand primarily the grand strand market area for us. That is under construction now as we speak. Hopefully by the first quarter of next year that will be operating and open up more capacity for us in the growing market in that area.

We've relocated and increased the capacity of a distribution center that serves the West Knoxville, East Tennessee market area. We've opened up another distribution center in Cambridge, Maryland which will be opening up in about another week or two. We've opened up a distribution center in Indianapolis which opens up a really large market for us in that area and that is really delivering some good component sales already. As well as we've relocated but substantially increased the capacity for Millwork in our [Greenville] operation.

So we are active in a number of different fronts from the component side of the business, the Millworks side of the business as well as the standard distribution side of the business. So that is eight projects that are coming due to complete within the next six months.

Great, thank you very much.

[Jay McCanlist] with FTN Midwest Securities.

Good morning, got a few questions for you. First one you may have said it, but what was your overall permit penetration number this quarter?

We estimate that housing was down about 6.5% during the quarter.

Okay. What was in your best markets, where do you think you came in at the permit penetration level?

Talking more from a market share penetration?

Yes.

You know, I don't have that off the top of my head, Jay.

Okay. And then on working capital management, what -- do you all have any kind of goal in mind or anything else said publicly before going forward where you'd like to see that come in?

We've not given specific targets but we do anticipate it would continue to lower it. We were at 16% if you go back to 1999 and each year since that timeframe we've been able to make some improvements in it. At 9.1%, again we believe we have the lowest in the industry but we will continue to look to improve that every quarter. And if you look sequential quarters, we've been able to do so. So there will reach a point where there is not a lot of opportunity but we're not there yet.

Okay. And then I wanted to ask a question on the prefab components. As the price of commodity lumber fluctuates up and down, will that affect your pricing for things like trusses which your raw materials goes into it? Will that affect that quarter to quarter?

To a much lesser degree than the lumber and lumber sheet goods, we do tend to price the trusses and little bit longer, we do tend to truss them on subdivision basis. We tend to lock in the raw materials on a long-term basis to cover our position. So it is a much smaller impact than what you would see in the lumber and lumber sheet goods category.

Okay. And finally just wanted to see if I could get a comment from you on Texas? Talk about what some of the market drivers are down there because it's kind of come out of nowhere, in our opinion, and I'd just like to get some more color on it if I could?

I think several drivers. I think land has been plentifully available throughout Texas for a long period of time. Because of that you didn't see the big ramp up in housing values. So you didn't have a lot of speculators and a lot of the builders really aggressively attacking the market. So there wasn't any artificial demand that has just gone away, is kind of the first point.

The second point is is in a lot of the markets you've got very strong job creation which is always the fundamental driver to housing starts. San Antonio has got the new auto plant that is going in which has added obviously the suppliers that come down there as well. That has been a very strong driver of job creation among other things. Houston, obviously, is very much an oil and gas based economy and with oil prices where they are that really has spurred the housing market both in terms of people's job creation as well as just network and income coming out of the oil and gas business.

And I think the other part of it too, Kevin, is the state has really seen a large influx -- the immigration has really affected the population of this state. And as you know from a number of studies, people who immigrate into this country tend to become a homebuyer at a more rapid rate than people who were born here.

Okay, great. Great quarter, thanks.

Scott Goldsmith with ING.

Hi, guys. Switch gears a little bit here to the balance sheet. And in your press release you talked about a robust pipeline for acquisitions. I know you've talked about acquisitions in the past but saying there is a robust pipeline is sort of a change for you guys. Can you talk about the acquisition strategy as a change? And then as it relates to your leverage, you said you'd be comfortable sort of in a 3, 3.5 times area. And maybe the most recent acquisition of Freeport, is that sort of what you are looking at doing a lot of Freeports?

Well I think nothing has changed in our acquisition strategy. We're still being very consistent in terms of what we're looking for in terms of market leaders either number one or number two in the market that either have a strong manufacturing platform that we can help to improve or a market that lends itself to doing manufacturing so that we can introduce trusses and panels there in a fairly rapid basis.

And it has to be accretive.

And it clearly has to be accretive in the first year. One of the benefits of the smaller acquisitions and smaller markets is you can create a very nice market position. There are just not as many competitors as there are in some of the bigger markets. And you have more opportunity for improvements as well in terms of what you can bring on the expense side and other best practices techniques. I think I'll let Charles answer the question as it relates to leverage targets.

I mean currently we are sitting at a debt to EBITDA of about 1.5 times. I think even in the environment we see today we're very comfortable going up to over 3.3 to 3.25. And so we do feel we have quite a bit of dry powder. We have over $25 million in cash; we do have an unfunded revolver of $110 million as well as the cash flow that we are generating to really go out and focus on acquiring the Freeport, as Kevin said -- we do like the Freeports, there is more opportunity, more ability to get accretion from them and so we will target them going forward.

Okay. And then soft of I guess if you see a lot or maybe more than one Freeport at the same time, as you look at -- you are sort of lugging this big coupon with the floaters and I think it becomes callable in about six months. How do you view that or the opportunity to sort of take those out and lower your interest -- overall interest cost?

At this point we are not looking to do that. Again, we have the majority of them swapped. We have a very good swap rate on them. The effective rate is blended to around 8.3% and so we are not in any hurry to necessarily call them and take them out.

One of the things, following up on the answer as it relates to the acquisition target, I want to make sure that we are clear. In terms of size, and we really need to be opportunistic. When we find something that meets our acquisition criteria and we went to pursue it fairly aggressively. Irrespective of size, obviously something that is very small and kind of out the way we are not going to pursue but don't want to mislead folks into thinking that we're only looking at small acquisitions. That is not true. Wherever we can be opportunistic and find something that meets our criteria, and we are going to pursue.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) Michael Rehaut from JPMorgan.

Good morning. Just a question on the decline in the market. It was surprising given that your top three states are both -- are all having some good expansion yet the overall is down 6.5%. And I'm wondering if it is just, that's just the way the math works or is it just -- or kind of speculating if that -- with the high capacity that you are perhaps working out of in some of your plants in Carolina and Texas that you are just not able to get the full upside and the benefit of the incremental strength in those market?

Well, I think the 6.5% number that you quote, Mike, was an overall decline in permits. That wasn't anything to do with our results. Our results were up over 3% and that is concluding headwind with lumber deflation.

And Mike, this is Floyd, in 30 out of our 31 markets we had net market share gain. And so we had strong market share gains in every one of our markets with the exception of one and I'm not sure on the one, we have even had it there. So our market share gains are broad-based over both in the states we're doing well in and the states that we've had warehousing activity has been slowed significantly.

Okay. And the markets that you said in several that were weaker that you were able to actually gain some gross margins due to mix and I think one of the biggest concerns out there is aside from the slowing housing market is that the builders are going to go back and kind of beat you guys up on margin. But it seems like that is not the case up until this point. So I was wondering if you could comment on how that relationship is evolving in this type of market? And maybe just go into a little bit more detail in terms of how you are getting to those better gross margins in this type of environment?

I think, Mike, it really goes back to the value proposition we bring and the efficiencies we try to provide. We've all seen what the top 10 homebuilders have announced over the last several months, yet we looked at what we did and the second quarter and we were still up 4% so we're the top 10 homebuilders. So what those tend to do is to reduce their supplier base, really focus on the ones where the feel they are getting the best service and the best value proposition and that is what we can offer. And then also we look to drive our efficiency to lower our cost and again maintain margins.

And I think you also have to be creative. I mean as we always say the pressure is always there and now is no different. But you have to be creative. For instance, if somebody calls up and says I just want an across the board price decrease. The first thing is let's talk about how you are building your houses? What is your cycle time? What are you call backs looking? Are you using trusses and panels? Is there a smarter way to do it? Say they are using trusses and panels from a competitor, let's have a look at your plans and see if we can value engineer them, see if we can be more efficient and gain your business.

And then you also try in situations where a customer says, look, I absolutely have to have a price reduction. That's fine. You buy a lot of components from us, how about you start buying from us in an adjacent market where it you haven't historically bought from us so that net net our profit from you as a customer both on a dollar and a percentage basis is higher. So it you just have to be creative in terms of how you manage the relationship.

Okay. Thank you. One more question in terms of the positioning of builder in the different markets. When you guys came out of the box a year -- last year and you talked a lot about how you felt you were out of your roughly 30 plus markets a leader with over 20% share in more than half of those. I was wondering if you could give us an update on that and in terms of the market where it you don't have that 20% plus share, what are the competitive dynamics in those types of markets?

You know, Mike, there is very few markets where we've not achieved the 20%, we have very few what we would consider laggards. In those market what you really focus on is expanding your offering, expanding your offering and prefabricated components. One of the major things that you see in a market that is hard to [fill up] to the 20% is a high number of competitors within the market where there is no clear leader. And I'll give you an example, Dallas Ft. Worth is a market where we cannot get the marketshare we like. We have not been able to do so. And primarily it's a unique market in the fact that all of the major competitors are here, Stock is here; Probuild, Lanoga. I mean everybody is in the market.

So when you have that many competitors it's very difficult to gain share because you need a market leader, you need the 800 pound gorilla. So what we need to do is to increase, as Floyd talked about, our offering in prefabricated components, again improve the value of the proposition so that we can grow and maybe at some point get some of our competitors to retreat from the market.

When you talk about the crowded market more from a lumber and lumber sheet goods distribution perspective rather than kind of taking up the bigger part of the prefab side?

I would say that is true. The more of the competition is in the lumber and lumber sheet goods.

All right. Okay, great.

Also, Charles, I'd also like to say on the in the DFW market, this is probably the most competitive market we have in the company yet through our people's efforts, the pricing programs and I think bundling a product, bundling of services other than components, they've been able to really increase their profitability and really improve their rates of return to where now it's a very nice operation for us. So they are making headway and in fact in the -- they have also grown their market share in this marketplace consistently now for the last several couple of years and for sure this year.

Great.

We're making good headway.

Thank you. And just one last thing on the tax rate, what do you expect for the back half of the year for '07 now?

For '07 or '06?

Well for the 2H '06?

I think it will remain in that 37 to 38% range.

37 to 38. And that is a good number for '07 as well?

I think so. I mean we are still evaluating the Texas franchise tax but I would say it's going to be close to that area.

Great, thank you.

At this time there appear to be no more questions. Mr. Sherman, I will turn the call back over to you for any closing remarks.

Okay, thank you for joining us today. If you have any further questions please feel free to contact Charles Horn.

This does conclude Builders FirstSource conference call today. Thank you for your participation. You may now disconnect. Have a good day.