Builders FirstSource Inc (BLDR) 2007 Q3 法說會逐字稿

Hello and welcome to Builders FirstSource third-quarter fiscal 2007 conference call. Your host for today is Mr. Floyd Sherman, Chief Executive Officer. (OPERATOR INSTRUCTIONS). 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, October 26, 2007.

I would like to turn the call over to [Katey Murphree], Builders FirstSource Director of Financial Reporting, who will begin the call. Please go ahead.

Good morning and thank you for joining us to discuss the third-quarter 2007 financial results. We issued a press release after the market closed yesterday. If you don't have a copy, you can find it 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 expectations.

Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks. The Company undertakes 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 non-GAAP financial measures in our Form 8-K filed yesterday, both of which are available on our website.

At this time I will turn the call over to Floyd Sherman.

Thank you. Good morning and welcome to our third-quarter fiscal year 2007 earnings call. Joining me from our management team are Kevin O'Meara, President and Chief Operating Officer, and Charles Horn, Senior Vice President and Chief Financial Officer.

I will start with an overview of the third quarter. I will then turn the call over to Charles who will discuss our third-quarter financial results in more detail. After my closing comments regarding our outlook, we will take your questions.

We continued to face challenging market conditions during the third quarter which are reflected in our operating results. Housing starts in our markets were down nearly 32%, while market prices for lumber products declined less than 3%. Despite the challenges of the current operating environment, we have profitably grown market share. Market share gains had an estimated 6% positive effect on sales during the quarter and 10% year-to-date.

Going forward, we will have to balance market share gains with maintaining gross margins as we are focused on profitable market share gains, not growth for growth's sake. We have generated incremental sales through new facilities. New facilities added 1.9% sales growth in the current period and 1.4% year-to-date. We have managed margins. Gross margins were 24.1% for the current period. We have also maintained a clear focus on reducing operating costs and improving operating efficiencies. We reduced selling, general and administrative expenses by 15.7% as compared to quarter three 2006. To date we have reduced our headcount by approximately 32% since the housing corrections began. Finally, we reduced capital expenditures by $4.8 million or 76.1% as we endeavor to maximize our cash flow.

Our cash on hand was $132 million at quarter-end, even after acquiring Bama Truss. Our cash flow oriented management approach has given the Company a strong balance sheet, positioning us well for the challenges of the current operating environment.

In addition, we will use our strong liquidity to take advantage of growth opportunities. In this environment we are managing our operations on a daily basis and reacting as quickly as possible to changing customer demand. I'm proud of the ongoing efforts of Company-wide to seek new business opportunities and to operate as efficiently as possible while still providing outstanding customer service during extremely an difficult period in the home-building industry.

I will now turn the call over to Charles who will review the financial details further.

Thank you, Floyd. Good morning, everyone. We reported sales of $413.9 million, a decrease of 27.4% compared to $569.9 million for the same 2006 period. Breaking down our sale drivers for the quarter, first we estimate that housing starts within our markets declined approximately 32% compared to the same period in 2006. We lagged permits within our markets one month to estimate an assumed start.

Second, lower pricing on lumber and lumber sheet goods negatively impacted our sales by 3.5%. This decline in total sales includes a 0.5% negative impact related to lower market prices with the rest attributable to competitive pressures within our markets. Conversely market share gains added approximately 6 percentage points to our sales and new operation added an estimated 1.9%.

We felt the negative impact of decreased housing starts across all product categories. In addition, our lumber and lumber sheet goods and prefabricated components categories were slightly impacted by commodity price deflation. However, our efforts to transition to higher margin value-added products and services continue to be successful as shown by the increased sales percentages in the windows and doors, millwork and other building products and services category. We believe our value-added product mix gives us a distinct competitive advantage to attract new business during this downturn.

Breaking down our sales categories further, lumber and lumber sheet goods declined by 36.5% to $109.9 million and fell to 26.6% of total sales compared to 30.4% of total sales in the year ago quarter. We estimate that $42.9 million of the decrease is due to lower volumes and $20.2 million due to lower prices. Prefabricated components decreased 27.8% from the prior year quarter due to a combination of lower volume and lower raw materials prices and declined slightly to 20.6% of total sales for the quarter. Windows and doors were down 22% and grew to 22.7% of total sales, up from 21.1 last year. Millwork also declined by 21.8%, but grew to 10% of total sales up from 9.3 last year.

Lastly, our building products and services decreased 20.9% and grew to 20.1% of total sales. The sales decline in this category was mitigated by continued growth of our turnkey installation services.

Please refer to the table included in our press release for additional third-quarter sales data by product category.

Turning to gross margins, the decrease of $52.2 million was largely in the lumber and lumber sheet goods category. Overall we maintained a strong gross margin at 24.1% down from 26.6% last year. Of the 250 basis point decline, approximately 80 basis points of the decline between years is due to the deleveraging of lower sales volume against our fixed overhead in cost of goods sold, while lower pricing on commodity lumber products contributed 140 basis points to the decline.

In addition, we experienced gross margin compression in our other building products and services category due to the growth of our installed service business, which carries lower gross margin percentages. If market conditions continue to create increased competitive pressure, we may not be able to maintain our gross margins during the remainder of 2007.

In addition, during the quarter, we recorded a goodwill impairment charge of $18.9 million or $0.33 per share related to certain reporting units. The goodwill impairment charges are the result of a continued decline in housing starts and specific markets and the effect of this decline on their current operating performance as well as our long-term expectations.

Our selling and general and administrative expenses were $93.2 million, down $17.4 million compared to the prior year quarter and $6.4 million from the second quarter of 2007. As a percentage of sales, our SG&A expense increased from 19.4% in 2006 to 22.5% in 2007. Partially bridging the change, lower prices for lumber products increased the 2007 percentage by 100 basis points as many variable costs do not adjust with changes in price, and incremental stock compensation expense added $1 million or 20 basis points.

Again, we managed our operating cost structure very well, reducing our SG&A by 15.7% during the quarter. Compared to the same quarter last year, our average full-time equivalent headcount decreased 16.4%, while our salaries and benefits expense, excluding the incremental stock compensation expense, fell $15.3 million or 21.7% from 2006. This compares to a sales volume decline of 23.9%.

Our interest expense was $6.6 million for the third quarter, down approximately $1 million from the 2006 third quarter. The decrease was primarily attributable to increased interest income related to our growing cash balances. These items were partially offset by higher interest rates during the third quarter of 2007.

Our effective tax rate was a benefit of 39.2% for the three months ended September 30, 2007 compared to an expense of 36.3% for the three months ended September 30, 2006. During the third quarter of 2007, the statute of limitations expired in certain federal and state jurisdictions for the 2003 tax year. As a result, we reduced the reserve for uncertain tax positions by approximately $0.2 million this year.

Net loss for the third quarter was $11.5 million or $0.33 per diluted share compared to net income of $17.3 million or $0.48 per diluted share in the same period last year. The net loss attributable to the non-cash goodwill impairment charge was approximately $0.33 for the quarter. Diluted weighted average shares outstanding for the year were $35 million compared to $36 million in the same quarterly period last year.

EBITDA for the 2007 third quarter was $12.4 million compared to $47 million in the prior year quarter. EBITDA as a percentage of sales decreased to 3% from 8.3% reported in the third quarter of 2006.

Just a note, we had not adjusted EBITDA for non-cash stock compensation expense.

If we look at our balance sheet, it remains very healthy. Our liquidity is strong with cash of $132.4 million and available borrowing capacity of approximately $108 million. Restricted loan covenants in our credit agreement are not currently limiting our availability but could limit us in the future.

Overall we believe our strong financial footing positions us well for the challenging operating environment and for future growth opportunities.

From a debt standpoint as of June 30, 2007, our cash on hand was $132.4 million, reducing our net funded debt to $182.2 million. We are intensely focused on controlling costs and maintaining our cash flow. We are focused not only on controlling our costs but also improving operating efficiencies. These operating efficiencies will help us in the current economic environment, but will also put us in a better position when the industry turns around.

Regarding cash flow, we reduced capital expenditures to $1.5 million from $6.3 million in the year ago quarter. This reduction in capital expenditures, coupled with the reduction in working capital levels, has allowed us to generate strong cash flow. Our operating cash flow less capital expenditures has actually increased for the nine-month period ended September of 2007 to $52.3 million from $51.3 million last year. We anticipate 2007 capital spending to be significantly less than 2006 and range from $8 million to $10 million.

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

Thank you, Charles. National housing starts on a trailing 12-month basis are now down almost 31% from the peak in March 2006. Unfortunately the housing environment continues to worsen, due in part to the tightened credit standards in the mortgage industry. We cannot predict how long the downturn in the housing industry will continue, but we generally do not expect recovery until late 2008 or early 2009.

To help guide you through the market uncertainties, we will continue to provide updated housing permit and commodity price data on our website each month. This data is summarized and based on publicly available information.

We are not pleased with these results and continue to seek opportunistic ways to counteract the noncontrollable macroeconomic factors impacting our business. We will persistently strive to grow our market share and flex our cost structure while still providing exemplary customer service. Our constant goal is to maintain our market leadership and financial strength in order to deliver long-term shareholder value. I have a great deal of confidence in the abilities of our entire Builders FirstSource team to accomplish this goal. I believe our current operating strategy positions us well for the challenges of the current operating environment and to take advantage of growth opportunities.

I will now turn the call over to the operator for Q&A.

(OPERATOR INSTRUCTIONS). Keith Hughes, SunTrust.

The first question, did you say earlier that the gross margin depression was primarily from what occurred in the lumber segment? Is that correct?

That is correct, Keith.

Why are you seeing more pressure do you think on the builders on what is basically a commodity item versus the value-added items that you also sell which they could have some more margin associated with them?

I think it just boils down there is more competitive pressures on that category and more people offering that product offering.

Okay. Now, Charles, you had talked about the revolver availability, that there could be some covenants that come into play if you were to tap the rest of the availability. Is there a certain balance that you have to get above where covenants start to apply, or would the metrics on the covenants just work out that way?

What is happening is, we do have a cash flow credit facility. There is an EBITDA interest coverage provision within it. That is the covenant that is increasingly getting tighter. So, as we move forward, based upon how that covenant calculates, as it gets more restrictive, it could limit the use of our facility.

But before we ever get there, we will look to go out and change the agreement and amend the agreement. We have several good alternatives to make sure we maintain our liquidity. And we will certainly address it before that ever comes into play.

And there are no covenants on the floating-rate notes, is that correct?

That is correct.

And fourth quarter I assume should be a big working capital source of cash quarter.

I would normally anticipate that, yes.

Okay. If you did not tap the $108 million availability you discussed, but you really started bumping up against the coverage, would you just pay off the roughly $40 million on the term loan and just run the floating-rate notes? That would be an option, would it not?

That is one of the alternatives, yes.

Michael Rehaut, JPMorgan.

This is Jen Consoli on the line for Mike. I just wanted to ask a quick question on the share gains. With them coming in at 6% this quarter, it is a little bit below your 8% to 10% goal, and I'm assuming that is because you wanted to hold onto your margins a little bit. But given the more protracted housing downturn, I was wondering if we should be looking more for like a 6% to 8% type growth from share gains? Also, if you could give us a little bit of color on what categories you feel good about your share gains in. You had mentioned multifamily a couple of quarters ago, and perhaps which categories maybe came in a little bit below your expectations.

I would say -- this is Kevin -- to your first question on the growth from market share gains, the 6% to 8%, I think that is fair, and yes, you are correct. It is a balance between market share gains and gross margins, and we are fighting that everyday in the marketplace.

In terms of where we are able to grow, the installed sales certainly is an area that continues relative to the housing starts and to our product mix to continue to grow as builders still seek to use that service. I think that probably is the single biggest area where you can see us continue to increase market share.

Okay. And then given the obviously deeper downturn in the housing environment, have you given any thought to mothballing any facilities, or are there any plans in the works?

That is something that we continue to look at on a regular basis. We do not have any firm plans at this point in time. But just in the normal course of running our business, that is something that we look at from time to time.

Nishu Sood, Deutsche Bank.

A question on the Bama Truss acquisition, this kind of strategic rationale. Was that mainly for the component manufacturing capability translating that into the kind of typical residential end markets, or was that more of a diversification type acquisition because of its light commercial and multifamily exposure?

It is more of the latter. It is really a couple of things. One is, they do steel trusses which we don't do anywhere else in the Company. So it gave us a new competency in a product that historically we have not manufactured. It did open up to a greater extent light commercial and multifamily in greater extent than we have done in the Company historically. Although we have in other parts of our operations done multifamily business.

And then lastly, and this is longer-term, I don't think we will see this anytime soon. It did position us strategically within Alabama, and there is plenty of real estate there if we decide that we want to use it as a jumping point in the future to build a distribution center that potentially can serve Birmingham and potentially even Montgomery.

Will you be pursuing more diversification type acquisitions, or on the other hand, kind of I would imagine there would be a lot more distressed opportunities now as well?

I think it is going to be consistent with what we said in the past. We're just going to be opportunistic. Bama became available; it was an attractive opportunity. It had the strategic rationale that I just discussed, so we went ahead and made the acquisition. It totally depends on what becomes available and what makes sense to the Company.

And longer-term question for Charles, your EBITDA or your EBITDA margins, whichever way you want to talk about them, increased a lot obviously during the housing boom and as you kind of filled out your operating platform 2002 to early 2006. Now obviously with the worst housing recession we have had in a long time and pretty severe contraction, what should we be modeling on a longer-term basis do you think for a normalized margin for Builders FirstSource?

There is really two factors you will have to keep in mind. The first will be what are your expectations for 2008/2009 and what are your expectations for recovery. Obviously fixed costs are still an element within our COGS as well as within our SG&A. It definitely can influence what an EBITDA percentage can be. So that's the first thing you have to consider.

The second thing you have to consider, if you presume that recovery does come in '09, '10, '11, we continue to migrate to a higher value-added product mix which traditionally carries higher EBITDA percentages. So let's assume that we continue on that route, and we do see recovery down the road, which takes some of the pressure off of our fixed costs and the deleveraging of them against the lowering sales volume. I think you could see some upside to the EBITDA percentage long-term.

Are you able to give us any kind of range that you folks tend to look at internally?

No, we tend to avoid doing that. I think right now just with the liquidity and the fluidity of what is going on in housing, I don't think it is very good for us to do that. But we do think that we will continue to migrate the business toward value-add, deemphasize the lower gross margin commodity product and really position ourselves for a very strong EBITDA percentage in the future.

Michael Cox, Piper Jaffray.

My first question is on the SG&A control. I was wondering where you feel you are in terms of managing that down in the headcount reductions? Is there still further room to go, or are we at a point where you start to cut into muscle?

I think we still have opportunity. We continued on in October, and we will continue on throughout the duration of the correction trying to make appropriate adjustments in our stacking levels. That is by far our largest controllable costs, and so we will have to continually look at that and try to stay ahead of the curve.

The other thing goes back to what Kevin alluded to, we will continue to evaluate our fixed costs whether we need to mothball, close, consolidate facilities, and that will be really the second bullet that we will be looking to use in trying to improve operating costs during the downturn, but also position ourselves for going forward to have even better operating efficiencies again when the recovery comes.

I think, Charles, one of the things that we will continue doing on an ongoing basis is evaluating how we conduct our business, what are the processes that are used and where can we become more efficient. And we're moving very aggressively in bringing and promoting these improvements within current operations. And that is going to be going on, going for the foreseeable future.

Okay, that is helpful. And in terms of the sizable cash balance that you currently have, I am curious what type of catalyst it would require to move more aggressively in using that cash either to pay down debt or look more aggressively at acquisitions?

I mean clearly paying down debt is one of the alternatives with a loan covenant situation we discussed earlier. Acquisitions, we will continue to look at them, address them aggressively. As Kevin said, be opportunistic. But conversely we are seeing capacity start to drop out of the markets as well, and we feel that's even more beneficial to us than potentially an acquisition in the short-term.

So we are going to evaluate it on a market by market level, see where capacity is pulling out. If a good acquisition comes our way, we do want to be opportunistic, but we don't want to chase an acquisition if it is not the right fit long-term.

Yes, and we have also seen, Charles, the announcements that have been made stock building materials supply also has taken a number of operations off-line. Certainly we have seen the same with 84. We have seen it with depot supply. We have seen it with a number of other smaller regional players. So the industry is beginning to react now, and we are seeing some significant capacity being pulled. That is a good opportunity for us.

Nitin Dahiya, Lehman Brothers.

Charles, you mentioned the 3.5% feels -- the combative lumber prices. How much of that did you say was material costs versus competitive price declines?

The market impact was somewhat small, about 0.5% on total sales. As you look, market prices are starting to anniversary. They are starting to be basically the same year-over-year. So most of that that you saw come through was just pricing concessions we're giving customers and reaction to a more competitive marketplace.

About 3% of that you're saying was just pricing concessions?

I would say that is accurate.

And is that a conscious decision to gain some share, or is it just that that is basically just for competitors?

No, part of the reason that we're making those adjustments, certainly competitive pressures are part of it. But another part of it is in order to hold the rest of the parts of the package. We often find that if you lose the commodity side of the business, frequently you can anticipate to see an erosion of sales in your other lines of business. So we look very, very aggressively and respond very quickly to what has to be done in order to hold our position on the commodities.

But I mean if I were to extend that argument then, Charles, you mentioned, for example, that most of the gross margin compression you saw was in lumber. But it is fairly linked, right? Because the lumber price decline you are taking only because you want to make sure that you don't lose the other stuff.

That would be correct. I mean that is part of the reason for making a price concession, yes.

Okay. And when do you start -- I mean you're, as you said, almost anniversaried right now. But when do we see it actually -- the lumber prices, if you like, when do they start being ahead as opposed to your competitive actions?

You know, I think that we don't anticipate any appreciable improvement or increase in commodity prices for next year. I think it will be probably 2009 before some support can come into it and maybe help move that market prices up. But we don't see it in the foreseeable future.

But you do not see further declines I would suppose?

At this point we understand it is below variable costs. It would be hard for us to think it is going to go appreciably lower. My guess would be it is going to bump along where it is right now from about the next year, year and a half.

Okay. Fair enough. And switching gears, geographically which markets are you seeing the greatest weakness?

Clearly Florida's status is by far one of the weakest areas. The next would be Georgia. If you look at what is going on in Atlanta, Atlanta is a very tough environment. Permits done over 52% in Atlanta during the quarter is the fourth-largest foreclosure rate markets right now in the US. So I would say Florida obviously being the biggest drain on us and then Georgia being the second.

And then what about Texas? Because you have a couple of builders also talking about Texas being very painful.

Texas is painful. I would not say that there is any market that is not painful at this point. But Texas we do have some diversification in this area in terms of our multi-family, some light commercial businesses that help mitigate some of the pressure coming through here.

Okay. And lastly, on pricing pressure from builders, are you seeing it in one area more than the other, and what magnitude -- I mean a builder this morning we were asking them and they said probably they are seeing 7% to 10%, 15% kind of input cost decline. I don't know if that is what you guys are seeing and if the pricing pressure from builders is one area or another.

I would say that the pricing pressure from the builders is pretty universal. I can't point to any particular area where it is more intense versus others. One of the things that I think you may be picking up, when they talk about their input cost decline, that also includes decline in the market price for lumber. And lumber is the second single largest cost that they have after land in the house. So when the lumber prices decline, that will cause their input prices to decline, even if it does not necessarily mean that our gross margin percentages are being impacted.

I see. Fair enough. And on the storage services, there was some talk with the builders about a focus on that and are you seeing that as well?

I mean it is definitely an area they focus on. They are definitely trying to drive down pricing on labor just due to the abundance of labor within the industry right now. So I will say that that is an area they are being very effective.

David Manthey, Robert W. Baird.

I was wondering if you could address some of the markets that have held up better for you? Last quarter I believe you mentioned North Carolina and Tennessee as being a little bit better than the rest of your locations. Can you talk about the conditions there? Have you seen some further deterioration in those areas?

I would say North Carolina is still holding on the best of any of the states. But I would actually take it to a little bit more granular level in answering your overall question. What we're seeing is some of the smaller markets with more diversified homebuilder bases are holding in better than large markets. And so I think it is almost a small market versus large market-driven type of phenomenon within our business but with the greatest strengths being in North Carolina and the greatest weakness still being in Florida.

Okay. And in terms of new operations adding 1.9%, is that a number we should expect to diminish while the pain continues here, or do you have plans to continue to open new operations even if the market remains weak?

Well, it is conceivable what is driving that 1.9% is our two acquisitions, Bama Truss and Waid Building Supply which we did late last year. That is primarily the sales driver to that 1.9. So depending upon the acquisition pipeline, that could go down or it could go up.

In terms of greenfielding operations, I don't think we plan to spend very much capital on doing that during this downturn.

Okay. Thank you. And then just to put two thoughts together here, Floyd, in your monologue you said that you would seek better gross margin opportunities, that you would not grow for growth's safe. But, Charles, I think you mentioned that if conditions continue, your gross margins could decline. I'm just trying to put those two thoughts together and understand sort of what your view is and how you plan to attack the market from here.

Well, I think there's two parts to that. What I had said, we're not just going to just start dropping prices indiscriminately just to take on business that does not give us an acceptable level of profitability. And I think what Charles was also saying is that we do anticipate there is going to continue to be a lot of competitive pressures on the products we sell. The builders are exerting tremendous pressures on the supply chain to drive down their costs, and obviously we have to react to that.

But I'm not one who believes that just take business for business sake, unless it really gives you a strategic advantage that will quickly pay for itself when the market turns out. And so we are very carefully managing that, and we're really watching that. We don't get overaggressive in trying to take business for business sake.

Very helpful. Thank you.

Jay McCanless, FTN Midwest.

I wanted to ask you first on the builders in your different markets. We saw a fairly large builder out west go bankrupt earlier this week. I just wanted to get your sense of potential bankruptcies in your markets, what you see happening over the next few months.

What we have seen is we continue to evaluate all sizes of builders. What we're seeing is some of the smaller markets, some of the smaller builders are starting to really have problems. In some of our markets -- Dallas-Fort Worth, Atlanta -- we have definitely seen smaller builders starting to go out of business. So we are having to watch that closely, and it is starting to be more pervasive than what it was before.

You probably saw during the quarter we did increase our allowance for bad debt in recognition of this increasing default rate going on among the smaller builders, and I do expect that trend to continue.

But you still have in bankruptcy or slow pay situation, you still have certain rights such as lean rights, etc., correct?

Correct. In many cases we do have lien rights perfected. We would be secured in trying to make sure we get paid. In many cases we get personal guarantees from the smaller builders as well.

Okay. Second question. Great working capital management this quarter, but I wanted to address the cash balance from a different way. What if any cash target do you have or net debt goal, net debt to cap goal do you have in mind right now?

I don't think it is really a net debt ratio. I think we are more focused on total liquidity, which would be cash plus credit availability. We are very focused on cash. We are very focused on cash flow. We are very focused on what I will say is always protecting the head and then making sure we can be opportunistic.

So I cannot give you a specific ratio, but I'm obviously being very tight on cash. We are obviously going to protect our liquidity under a credit agreement through the various alternatives we talked about. And so we do want to have very strong liquidity during this downturn.

Okay. Following on with the downturn question, are there other lines of businesses or potentially other areas that you believe are becoming attractive to you guys as other people either shudder operations like you discussed before or move out of certain markets?

Well, I think really what you try to do is when somebody leaves the market where you participate is try to hire any good people that have particular salespeople and then any quality customers that they have. And so really it is on a case-by-case, market by market basis. I cannot really say there is one market in particular, one segment to the business in particular where we're necessarily seeing it.

Obviously there is more pressure on the commodity lumber side of the business. And so competitors that are highly geared towards commodity lumber, as opposed to the value-added type products, will tend to have financial problems before others. So really it is just a case-by-case basis.

Okay. And then the last question I have in listening to the homebuilder conference calls over the last couple of days, pretty much across the board they indicated that they had lowered their average sales prices to conform to both the FHA and the GSE conforming loan limits. And I'm wondering if that has translated into even stronger pressure on companies such as yourself to deliver better prices for them.

So I guess my question is, has the pricing pressure intensified from the builders over the last 30 to 60 days?

No, I cannot really say that I see any visible or can feel a visible increase in pressure. It has just been just tremendous pressure though that is being exerted, unlike any pressures that I have seen or experienced in over 40 years in the business. But I think it started over a year ago, and they have really continually kept stepping it up. And it is hard to imagine that it can be any more difficult an environment than what we're going through right now.

Steven Fisher, UBS.

Just to follow up on the cost side. Do you think you could take out another 15% of SG&A next year, and what level of sales or market decline would you think you would need to see to take out that kind of level of cost?

You know I think it is conceivable. Again, it is going to be somewhat volume driven, but I do think it is conceivable to take out 10% to 15% should volumes continue to fall.

Now to answer it a different way, if volumes are static, that would be an increasingly difficult thing to do. But our guess is that the market will continue to correct in '08, that we will see volumes fall. And given that scenario, I do think it is likely we can pull down 10% to 15% in our SG&A.

(OPERATOR INSTRUCTIONS). Seth Harvey, UBS.

I just had a question going back to working capital this quarter. It looks like you have been doing a very good job of taking investment out of working capital for a second quarter. This quarter seemed to slow down. I just wanted to see if there's anything happening there specific to this quarter.

I don't think so. I think you will see A/R. Obviously we aged a little bit more than what we have in the previous quarters, part of the reason we increased our allowance. Inventories, I think our turn ratio is about equivalent. We can still get some improvement there. Our Accounts Payable days we have taken up to over 32 days based upon negotiating with suppliers. I think that that can hang in pretty well, even though as Floyd has said in the past, as we increased our installed labor business, that does put some downward pressure on our Accounts Payable because we pay our subcontractors on a weekly basis.

So what I think you will see is AP staying about static. We can get some improvement in inventory turns. It will be difficult to improve our day sales outstanding on an Accounts Receivable during this time. In fact, we will probably see a little bit more creep in that metric.

Okay. In terms of your CapEx, you cut down -- I think guess you're saying 8 to 10. Is that a sustainable number? Would you expect 2008 to be similar?

I think it is sustainable in the short-term, a two to three-year window. I think you will see us take it potentially lower in 2008. And then as conditions improve, we will look to maybe cover some of the deferred maintenance items we're doing now, and that can be in 2010/2011.

So, in the short-term, I think we can definitely take it down, take it down a little bit further than what we anticipated in '07. And again, we are always focused on maintaining cash flow and generating good cash flow.

And then I guess finally going back to the covenants, so it sounds like you have an EBITDA coverage covenant, or is that -- that is for the term loan or the revolver? And when does that actually step down?

It actually will in this situation it steps at the beginning of the year, first quarter of '08. It is an EBITDA interest covenant, and it does cover both the revolver, which is the $108 million of availability as well as the term loan. In terms of the floating-rate notes, the $275 million, they do not have any covenants associated therewith.

So based upon how our financial results develop in the fourth quarter, we will look at one of the many alternatives we have to make sure we maintain the liquidity and address that EBITDA interest coverage.

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

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

This concludes the Builders FirstSource conference call. You may now disconnect.