Builders FirstSource Inc (BLDR) 2007 Q4 法說會逐字稿

Hello and welcome to Builders FirstSource Fourth Quarter and year-end 2007 Earnings Conference Call. Your host for today's call is 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, and as a reminder this conference is being recorded.

I would like to turn the call over to [Katie Murphry], Director of Financial Reporting. Please go ahead.

Good morning and thank you for joining us to discuss our fourth quarter and year-end 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 reconciliation of non-GAAP financial measure to their GAAP equivalent 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, Katie. Good morning and welcome to our fourth quarter and fiscal year 2007 earnings call. Joining me from our management team is Charles Horn, Senior VP and Chief Financial Officer.

I'll start with a recap of fiscal year 2007. I will then turn the call over to Charles who will discuss our fourth quarter financial results in more detail. After my closing comments regarding our outlook, we'll take your questions.

Fiscal year 2007 was an extremely challenging year. The year started with housing starts slightly over 1.6 million units on a seasonally adjusted annualized basis and ended with housing starts slightly over 1 million units, a 37.5% decrease. In addition, market price of the lumber and lumber sheet goods in 2007 were on average 14% lower than 2006. In response, we have actively expanded into the light industrial and commercial segments in an attempt to mitigate the decline in single family housing activity.

We are seeing success of certain markets and hope to grow this business for the long term. In addition, throughout the continued deterioration in the housing market, we maintained a clear focus on reducing operating costs, improving operating efficiencies and maintaining positive cash flow. We have reduced our SG&A expenses by almost 15% in 2007. The largest component of the decrease in SG&A has been from a reduction in salaries and benefits as a result of an 18% decrease in full-time equivalent headcount this year and 36% since March 2006 when the housing correction began.

The reduction in headcount has not been reactionary, but a thoughtful flexing of workforce in response to lower sales volumes as well as a deployment of best practices creating a more efficient organization. We are being careful to not cut so deep that we impair our long-term value by not being able to quickly respond to improved home building condition when the recovery occurs. We also understand that strong liquidity is important in difficult times.

We maintain positive cash flow throughout the year and ended the year with almost $100 million in cash even when paying $40 million to permanently retire our term loan. We also closed on a new $350 million revolving credit facility late in the fourth quarter with available borrowing capacity under this facility at the end of the year of approximately $120 million; we had a combined liquidity of almost $220 million. This strong liquidity should help us weather the current downturn and to take advantage of opportunities to grow the Company as they arise.

I will now walk you through our fiscal year 2007 results. Our fiscal year 2007 sales were $1,592.5 million down 28.9%, while housing activity in our markets decreased 34.1%. In addition, lower market prices for commodity lumber and lumber sheet goods reduced our total sales by approximately 2.7%. And for controllable sales drivers, we continued to gain market share, which added an estimated 6.1 percentage points to sales for the year. Also new facilities contributed an incremental 1.8%, which includes the acquisition of Bama Truss. The acquisition of Bama Truss expanded our presence in multifamily and commercial construction and added steel roof truss manufacturing capability.

Our gross margin fell 170 basis points to 24.5%. We felt margin compression across all of our product lines, but the declines were primarily due to the de-leveraging of lower sales volumes to fixed costs of sales, lower lumber and lumber sheet good prices and a rising percentage of installed sales, which carry lower gross margins. Net loss was $23.8 million compared to net income of $68.9 million in 2006. Included in the net loss were after-tax non-cash charges of $18.8 million related to the impairment of goodwill and fixed assets and the write-off of deferred loan costs.

Net loss per diluted share was $0.68 including $0.55 related to goodwill impairment, asset impairments, write-off of deferred finance costs and incremental stock compensation expenses. Adjusted EBITDA, which has been adjusted for stock compensation expense was $46.6 million compared to $173.1 million. The difficult market environment is definitely reflected in our results for 2007, but we have implemented numerous operating efficiencies and strengthened our liquidity throughout the year, which will make us stronger in the long-term. I am impressed as always with the level of dedication and commitment of our employees, they have risen to the challenges of the current market downturn with continued focus and diligence.

I will now turn the call over to Charles who will review the fourth quarter financial results.

Thank you, Floyd. Before I speak to our fourth quarter results, I wanted to highlight that we closed in a new $350 million revolving credit facility during the fourth quarter. This new facility releases us from some of the restrictive financial covenants under our previous agreements and strengthens our liquidity. The borrowing capacity under the new facility at December 31, 2007 was approximately $120 million and it is determined under a borrowing base formula. When coupled with our cash on hand, our overall availability was nearly $220 million. This strong liquidity will help us better manage our business during the downturn and afford us the ability to take advantage of opportunity should they arise.

Now I will address our fourth quarter results. Beginning with sales, looking at our fourth quarter results, we reported sales of $302.3 million, a decrease of 31.1% compared to $438.6 million for the same 2006 period. Breaking down the year-over-year change in the fourth quarter sales, we estimate that housing starts for our markets declined by 34.7% compared to the same period in 2006. Florida and Atlanta, Georgia have been particularly hard hit by the decline in starts. Of our markets, Atlanta seems to have been affected the most by rising foreclosure rates particularly in the third and fourth quarters.

Compared to the fourth quarter last year, nationwide commodity lumber and lumber sheet good prices declined approximately 1.5%. The impact on our net sales was less than 1% for the quarter. Commodity prices have been at a stable low level for the majority of 2007. As such we expect the year-over-year impact on sales and profitability in 2008 to be nominal.

Market share gains offset our sales decline by an estimated 2.4 percentage points. We believe our value added products and services give us a competitive advantage and help us to gain new business and maintain our current customer base during the downturn. However our time credit standards has limited our ability to actively pursue certain new customers. Finally, new operations offset our sales decline by 1.5% for the fourth quarter.

We continued to improve our sales mix during the quarter, transitioning from commodity items to higher margin value added products and services, but we also the felt negative impacts of decreased housing starts across all of our product categories. Lumber and lumber sheet goods declined $48.7 million, about 40% and declined to 24.5% of our total sales.

The decrease was attributed to lower unit volumes and prices, which negatively affected us by $43.2 million and $5.5 million respectively. Pre-fabricated components decreased 29.3% from the prior year quarter, due to a combination of lower volume and lower raw material prices. This product category represented 20.1% of total sales for the quarter. Windows and doors were down 27.9% and represented 24.6% of total sales.

Millwork decreased 26% and represented 10.5% of total sales. Other building products and services decreased 26.7% and represented 20.3% of total sales. The sales decline was partially mitigated by our continued growth in our installation services. Please refer to the table included in our press release for additional fourth quarter and fiscal year sales data by product category.

Gross margins, our overall gross margin decreased to 23% for the quarter from 26% in the fourth quarter 2006. The decline was in all major products categories. The de-leveraging of fixed cost within our manufacturing operations against lower sales volumes lowers gross margins by approximately 113 basis points. Lower prices on commodity lumber products added 70 basis points to the decline. In addition, the continued growth of our installed services business, which carries lower gross margin percentages, lowered our overall gross margins. We are experiencing an increased competitive pressure within our markets, which will likely lower gross margins in 2008 absent an improvement in market conditions.

Our SG&A expense was $85.4 million for the fourth quarter 2007, down $14 million compared to Q4 of 2006. We continue to tightly control our operating cost reducing our SG&A by 14.1%. Our salaries and benefits expense fell $11.8 million or 19.3% from the fourth quarter of 2006 due primarily to a reduction in our average full time equivalent headcount of 21%.

Part of this reduction in headcount was from closing some of our regional headquarters and idling production in certain facilities in order to optimize utilization across our organization. As market conditions improved, we will increase our production when it is warranted. We will continue to evaluate end-market consolidations based upon specific market conditions. I will note that also included in SG&A expense was $2.1 million in severance and other charges during the quarter.

Interest expense was $7.9 million for the fourth quarter, up almost $1 million from the fourth quarter of 2006. The increase was primarily attributable to the $1.6 million write-off, a deferred loan cost due to the permanent retirement of the term loan, and the cancellation of the $110 million revolving credit facility and the $15 million pre-funded letter of credit facility. These items were partially offset by lower interest expense due to lower debt balances during Q4 2007.

Our effective tax rate decreased to 37.3% in the current quarter. The difference from Q4 2006 is primarily due to the fact that we established approximately $900,000 of additional reserves in the fourth quarter of 2006 in connection with various tax audits.

Net income for the fourth quarter was $20.4 million -- was a loss of $20.4 million or $0.58 per diluted share, including $0.20 related to goodwill and impairment assets -- of assets and the write-off of deferred loan cost, and another $0.04 related to severance and other charges in the quarter compared to net income of $3.9 million or $0.11 per diluted share in the same period last year.

Diluted weighted average shares outstanding for the quarter were 35.1 million compared to 36.1 million in the same quarterly period last year. Adjusted EBITDA for the 2007 fourth quarter was a loss of $8.1 million compared to income of $21.9 million in the prior year quarter.

Average working capital for the fourth quarter was 13.8% of sales compared to 11.6% in 2006. We continue to be very focused on working capital management. However, the continued decline in market conditions had negatively impacted our day sales outstanding by almost 4 days. As the economic conditions continue to deteriorate, we anticipate the day sales outstanding to continue to worsen. We are doing everything we can to mitigate any increase in DSO and have tightened our credit standards in response. We have seen a slight decrease in our inventory turns as we endeavor to timely respond to declining sales levels. We have slightly increased our accounts payable days as we continue to work with our vendors to negotiate favorable payment terms.

As of December 31, 2007 cash on hand was $97.6 million and funded debt was $275 million. During the fourth quarter, we permanently repaid $40 million of term loans in connection with our new credit facility. Our keen focus to conserve capital by increasing operating efficiencies and reducing expenses allowed us to maintain a healthy operating cash flow of $71.5 million for the year.

Capital expenditures were $10.1 million for the year, over $17 million less than 2006. The combination allowed us to generate free cash flow, defined as operating cash flow less capital expenditures of $61.4 million for 2007.

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

Thank you, Charles. While the homebuilding industry has experienced an unprecedented decline in demand, I still believe that the long-term outlook for the housing industry is very positive due to the growth in the underlying demographics. Until housing demand stabilizes, we will manage our business day-to-day in order to meet customer needs, and to help you through the market uncertainties, we will continue to provide updated housing permit and commodity price data on our Web site each month. This data is summarized and based on publicly available information.

We believe our market leadership, financial strength and industry leading scale affords us the ability to manage through the downturn and outperform our peers. We have fortified our balance sheet by continuing to generate cash and improving our liquidity, further strengthening our financial position. We are leveraging our deep industry knowledge to diversify our product offering and broaden our customer base as evidenced by the recent acquisition of Bama Truss. We are operating more efficiently without sacrificing quality and customer service.

We will continue to work diligently and thoughtfully to achieve the appropriate balance of short-term cost reductions while maintaining the expertise to grow the business when market conditions improve. We want to take -- avoid taking steps that will limit our ability to compete and create long-term shareholder value.

Finally, and perhaps more importantly, I continue to have a great deal of confidence in the abilities of the entire Builders FirstSource team and we will continue to work hard on improving all facets of our business. I will now turn the call over to the operator for Q&A.

Thank you. (OPERATOR INSTRUCTIONS). We will take our first question from Nishu Sood with Deutsche Bank.

Thanks. Good morning, guys.

Good morning.

Good morning.

First question I had was on cash flow, in 2007, you folks certainly did an impressive job of sustaining cash flows. However, if you kind of look at what's happened in 2007, you obliviously were able to reduce your working capital. But, as of the fourth quarter, you are now in a negative EBITDA position. So, just looking ahead, if absent a recovery in demand, do you think you will be able to sustain positive cash flow going forward in 2008?

Well, Nishu, if we break it down even to Q4, even though it was negative EBITDA, it was positive free cash flow and if you break down the quarter. I think our focus will be to try to mitigate the declines to EBITDA, while at the same time trying to monetize the assets we have on the balance sheet still try to stimulate free cash flow. We will be very focused on pulling back our CapEx. I think we are targeting anywhere from $7 million to $10 million for 2008 and we will respond and pull that down as needed. So, even though '04 was -- Q4 was very difficult, we did generate good free cash flow, and I think we will endeavor to try to do so in 2008 as well.

Okay. Second question I had was, while you were mentioning the increased emphasis on the light industrial, the commercial markets, I know a lot of that expertise you have been gaining from your acquisition of Bama Truss, so how much of your sales percentage wise is that end-market now and how much would you target it for over the next year or two?

Right now, on a current basis, it probably is somewhere between 2% to 3% of our sales, and we are also leveraging what we do at Bama Truss into one of our other market areas and it is really helping us gain a lot of new customer base in that particular market. And if I probably take those sales and add in, I would guess our light commercial multi-family business, Charles would probably now getting up close to 5% of our sales in total and growing, and we are also attempting to take and apply -- use the same leverage in our other operating groups.

Okay. And just final question, you mentioned that you've been mothballing a couple of facilities. I was just kind of wondering if you could give us some numbers, maybe I just missed them, on the number of facilities you have mothballed and/or if you have actually just shut any down outright?

For Q4, we had mothballed three, one of which we are actually trying to sell at this point. We have actually idled 11 operations, which is where we have the (inaudible) facility, something within the location where the location exists but the operation no longer does.

So, that's three in the fourth quarter and then 11 cumulatively or am I --?

No, the 11 are where we have actually idled a function within a facility, such as a [Moore] door shop within a facility. The facility would still exist and have lumber and other products, but would not have a door shop any longer.

And what we would do is then consolidate a number of similar locations and make one efficient operation that can supply multiple locations. So, in the fourth quarter, they were 11 of those and 3 mothballs.

Got it, and what is total to date through the downturn on those two?

That basically -- we really started an honest -- in the fourth quarter, there where a couple of others earlier in the year but --

Probably about four previously.

Okay great. Thanks a lot.

Our next question comes from Robert Manowitz with RBS.

Yes, hi, Good morning.

Good morning.

I was wondering if you could share with us your experience [competitive] pricing pressure side of things, when does that typically reverse itself cycles, is it when the volumes actually come back or is earlier than that as participants adjust to levels of activity?

Rob, I believe if the current conditions extend out into 2009 and we see a substantive loss of capacity in the industry, then I think prices may begin to firm up. We are starting to see some indications of prices firming up in the commodity in the SPF market. The OSB market is still awash in capacity and some additional new capacity coming online. I don't think that we will see a lot of improvement on the panel side of the business, but -- and a lot of our other products that we manufacture, if capacity really begins pulling out, I think we will start seeing improved margins on the components side of the business. But, the real substantive change will occur once the building gets back to a more normal state. And when I say normal, I think that's in the -- above the 1.5 billion housing production basis.

Great. And as I look at the revenues in the fourth quarter by segment, the sheet goods, which are obviously used earlier in the construction process were weaker than your other categories. Is it fair to read into that, that the other three categories will start to see comparable declines as the fourth quarter starts to progress into the first and second quarters of '08 or is that not the right view?

Rob, I think it is probably more of a case. You will have more competition within that category, more suppliers of that particular type product.

Okay, so you just didn't pickup market share there, where your market share gains were actually allocated to the different sort of three other categories, is that the way to think about it?

It tends to be our lowest gross margin category, so there is a limit as to how far we will chase the pricing on the category for not picking up the other products sales.

Okay, fair enough. And then, my last question is, as you look at your cash balance and your debt load and the bonds trading at a fairly deep discount to par, obviously there is four years left before maturity, but how would you gauge your interest in allocating some of that cash towards debt repayment?

Rob, this is something we consider. If we look at it from a waterfall basis, we still look at maintaining liquidity to protect during the downturn. The second thing we look at is legitimate acquisitions if they make sense. The third in that waterfall would be, do we want to be opportunistic and take advantage of buying some of the bonds back? And then the fourth would be more, do we use some of our liquidity to buy back shares? So that would be the order of priority I placed that.

Okay. And there is one addendum to that question, is there anything that prevents you from using the ABL line to pay off funds at a discount?

There are a lot of flexibilities built into the ABL agreement. We would have to significantly reduce our liquidity before we would have any restrictions preventing us from doing so.

Right. Well, thank you and good luck.

Thanks, Rob.

We will go next to Walter Branson with Regiment Capital.

Thanks. Actually I had a couple of things. In your pre-announcement a couple of weeks ago, you had indicated a net loss within the range of what you had actually reported, and actually you were slightly towards the high end of that, but you would indicate in the 11 million impairment charge, payment is only 8.7 million. So, I guess my question is, did you offsetting the lower impairment charge, higher expenses than you had anticipated, and aside from severance charge, were there any other one-time items or unanticipated accruals?

Actually, Walter, it came in exactly the same. We just broke it out separately. I think you were looking at the goodwill and fixed assets and the deferred loan cost. If you add those two together, so we came in exactly as what we said in the pre-announcement.

All right, thanks. And I wanted to ask you about share gains, share gains were the lowest of the low level in the fourth quarter compared to what you had in the past. Are you seeing capacity going out of the market yet because I would think that would improve your share gains, or was that still not there yet and why are the share gains kind of not what you --?

Now, we really haven't seen any appreciable loss of any capacity where there is a lot of conversation and we are starting to hear of people considering shutting down operations haven't really started taking place yet, but I would anticipate we will see that going forward. I think probably the most limiting factor in our taking market share is our willingness to give our product away and manage our credit. I think that probably has affected our market share gain more than anything else, and Charles, you may want to add to that, but the two factors of price management and credit management is really, really important in this type of environment and you got to look at those things very carefully, because as Charles said, we are going to look at maintaining liquidity and making sure that we operate a business that provides us good financial stability as well as flexibility.

I mean, Walter, you have seen bankruptcies for homebuilders are going up, we expect that trend to continue, so we have been very active in trying to manage our credit policies. We pulled in credit lines with several customers, and in doing so, we do forgo some market share gains in the trade off of not wanting to take a credit risk.

And then my last question regards cost reduction, you did a good job pulling dollars out of SG&A in 2007, kind of consensus for housing starts in 2008 nationally is further decline of 25% or more. Can you offset -- partially offset initial impact on your revenues from that kind of a decline with a similar SG&A reduction in 2008, or are you kind of reaching the end of your ability to [do that]?

I think there is always the ability to flex SG&A commensurate with volume declines. I mean as sales volume goes down, it is less variable and more fixed in nature. If you look at our fourth quarter, our SG&A was about 45% variable about 55% fixed. I would expect that trend to be somewhat consistent for '08 maybe slightly less variable, but we will continue to endeavor to pull back on obviously salaries and wages where appropriate. What we don't want to do is to pull back too much on our fixed costs, which is occupancy. We want to keep facilities, we want to keep the ability to respond when the market comes back. We don't want to be premature and exit market that costs us more to get out of than they may be losing from an EBITDA standpoint. So, we are going to be very cognizant to hold capacity to make sure we idle where appropriate, but not impair our ability to respond to recovery.

Yes, and one of the other things, Charles, that is really beginning to affect our SG&A is the difference in the rising fuel costs. Fuel cost was a major cost item for us and that is an SG&A expense on our delivery side and the -- we are really not anticipating any decrease in fuel costs throughout '08, in fact, what we are seeing is that we can anticipate another 10% increase or so going forward.

Thank you.

We will take our next question from [Mitun Daia] with Lehman Brothers.

Hi good morning.

Good morning.

Good morning.

On DSOs, I mean obviously they increased you said is partially because of competitive pressures. Is it just a competitive response or is it also that some of your customers are having problems paying on time?

Obviously, the payment on time, we have slipped our DSO about four days and that has in some cases made us respond by pulling back on our credit lines sort of the way to mitigate that. So, that's part of it, but a lot of the margin compression just coming through pure competitive pressures. When you get into a situation where the starts are down so much and many smaller competitors are struggling for liquidity, they start converting their inventory for cash to survive. So, on categories such as lumber that really puts a tremendous amount of pressure [as they tell] almost for variable cost.

No, I mean I think I was more focused on the increase in DSOs, is that like a competitive response from you or is it that terms have not changed but just that people are not paying?

That is correct. We have not changed our terms. That is just a response where people are trying to extend our payment days.

I see. But is it a bad debt expense associated with that that we have to be worried about?

We have increased, our provision our bad debt expense increased to 30 basis points in 2007 versus about 15 basis points in 2006. So, we have responded and that has reflected in our results that we have the higher bad debt expense.

I see. And also the increase in inventory days, is there a -- that is also just for a slow -- because of the slowdown, but do we expect that to come back down?

On the AP days?

I am sorry, inventory days.

Well, primarily the issue there is we struggle to get ahead of these declining sales volumes. You could get an order in from a customer you order, the material and then the PO from the customer gets canceled. So, to a certain degree you have to assume at certain order cancellation rates to try to get ahead of the declining sales volume. And it took us a while to get ahead of it, I think we are doing a good job. We have centralized many of our purchasing functions and I think that's allowing us to pull that back into check.

Fair enough. Charles, from a 2008 perspective, I mean with all -- with DSOs and AP days moving, and obviously sales being down, what should we be looking at from a working capital cash flow point of view for '08?

I think, Mitun, what we are trying to do is maintain the working capital percentage, maybe slightly improve it, and then it would be based upon what your assumption is for the sales levels.

Fair enough. But, okay, so no major changes in that sort?

Correct.

Just moving on to the right sizing of the business, if you like. I mean you have taken out some capacity or shuttered some. What would you say your biz and what kind of starts level is your business sized for today? And where do you kind of want to be at?

I'll say, we have fiscal capacity to do over $2 billion in revenues. I mean it's a situation where you can do end-market consolidations, but exiting the market doesn't improve your utilization anywhere else. So, if it's a market that's underperforming, just to close it with a high cash cost doesn't really help us because it doesn't improve us anywhere else. So, we do have a lot of capacity. Our utilization levels are in 60s now. We would like to see that improve, but again like I said earlier, we want to be prudent in where we downsize and what we do.

Which reads me, so from a fixed cost basis, I mean obviously if you are not taking out the plant, but I am sure we can lay off some people and can -- not obviously invest more, but what kind of order of magnitude savings on the fixed cost side can we be looking at considering the fact that we are not really exiting markets.

At this point, we haven't identified any additional mothballing or closures for 2008. So, I don't know, Mitun, if there is a really a number I can give you on that.

Fair enough. And lastly, on acquisition opportunities, are you already seeing some if you like really good deals where you can by someone for probably even a discount to assets or something or add assets or do you think stage is still going to come six months out?

Yes, I think it is still further down the road. I think still people, many people want to go back in average three to five years worth of trailing EBITDA to come up with evaluation. I think the market will need to get a little bit worse before it becomes more of a net tangible asset or a discount to net tangible asset buy environment.

And we saw that, Charles.

I am sorry.

And we did recently do one small acquisition where we paid a substantial discount to net tangible assets.

And on the previous question as well around between waiting for such acquisitions versus buying back bonds, I have gathered that you would be much more inclined to wait for these acquisitions than buy the bonds at a 25% discount.

I would say at this point, yes. I mean, we will evaluate that we do think it's an opportunity. But we would like to see where prices go or how many companies come on the market, are they good quality and what can we buy them for before we make that decision.

Okay, thank you much.

Thank you.

We will go next to Trey Grooms with Stephens.

Good morning.

Good morning.

So with the commentary that you gave on the price management and credit management that you guys have in place or getting more aggressive on, in looking into 2008, do you expect that market share gains will continue to contribute positively to revenues in the year?

Yes.

Yes.

Okay. And can you quantify that at all? I mean in the past we looked at an 8 to 10 number, and then obviously things are getting a little bit tougher. Is there anyway you can quantify that a little bit for your expectations?

Obviously, we don't anticipate it's going to be at historical levels. So, I think it's going to be at much lower level. It's more consistent with what you saw in Q4 than what you've seen previously.

Okay, that's very helpful, thank you. And then also, Floyd, I guess just kind of getting back to your expertise and been through many of these cycles, can you give us kind of your take on where you see the market or the housing market, where do you think it bottoms out and as far as timing and so forth, because I know every day that we go on, the outlook seems to get darker and darker, I guess the light at the end of tunnel continues to recede. But if you -- could you just give us kind of your thoughts on what you see the housing market doing over the next two years?

I guess my observations and my feelings are that we probably are getting near the bottom. I think that it just seems to feel over the last several months that we are staring to maybe get close to the bottom. I think we are going to go through a period, well through this year and into next year at a low level. I don't really anticipate or doesn't seem to, right now, I don't have the feeling that things are going to substantially improve or get worse through 2009, but that's -- I think that's -- we are a business that's really a reactionary business. Should conditions improve and I think when the turn comes, it's going to come very quickly, a lot quicker than it has in previous down cycles, it's -- I think the buyers are there and I think they are -- that once they see that they can get the that they have the availability of mortgage money that prices have stabilized that they are going to return to the market and the market will reflect and move up quite rapidly. It is just my feeling about it.

That's helpful, thank you guys.

We will go next to [Rob Joss with Danske Investments].

Thanks guys. I was wondering, just a quick question on your debt structure, could you give me a breakdown of the revolver, any letters of credit and then the bond balances?

The revolver is a $350 million asset backed line of credit. Currently, the borrowing availability is $120 million based on the borrowing base.

Okay.

We have standby letters of credit currently at $17.2 million and that is netted out of the $120 million availability I gave you. And then, we have the $275 million of floating rate notes due in 2012. We currently have swapped about $100 million notes of that $275 million.

So, what's actually drawn then on the RC?

We had nothing drawn under the revolving credit facility.

Got you. Okay, about $120 million, I am sorry when you said $120 million was available, you said net of the $17 million.

Yes, and I think we got $100 million in cash, correct.

Got you, great thanks.

We will take our next question from Keith Hughes with SunTrust.

Actually, this is Judy Merrick for Keith Hughes. Just sort of actually in the acquisitions, and you mentioned strength in balance sheet looking for opportunities, and then there are some recent news items at least in the Greater Atlanta area, some bankruptcy filings and other dealers, is this is the type of opportunity that you are looking for or would you see this as more of like an opportunity for share gain?

It would be -- Judy, you are out in the background of an area that is really hurting quite a bit in Atlanta, and to that scenario, we are seeing a number of companies hurting, you saw one file bankruptcy, a number of them are closing facilities, and I think we will be looking for -- in fact, we bought one of the small locations out of the companies that filed bankruptcy. So, we always are going to look for opportunities but it needs to be where it fits our profile, fits the market, it's a good tuck in, but again we are looking at it to be a discount to net tangible assets. At this point, we are not very interested in paying off of the trailing EBITDA number. And so, we will look at that. We still believe that the most opportunities will be further down the road anywhere six to nine months down the road before most valuations really meet the criterion we are looking for.

Okay, great thank you.

We will go next to Michael Cox with Piper Jaffray.

Yes, good morning, this is Tom Hayes for Michael. I was just wondering if could give a little more color as to what you see as the opportunities in the installed sales business?

I think the installed sales business is a continually growing business. More and more of our operations are getting into installation. I think the growth would be pretty much consistent with what we have seen over in 2007. The problem or the thing that we have to be very careful about is to make sure that we have the structure in place so that we can properly control the installation process that we control our costs and we know how to bid the labor component of the job and be able to leverage off of the locations that are doing a successful job at installation. But it's now literally involving the majority of the products that we carry.

Okay great. Just another follow up, you had mentioned that as far as the Bama acquisition that you had kind of rolled the experiences from that into another market, do you have plans to expand that at the present to other markets throughout the 2008 year?

Yes.

Okay great, thank you.

Your next question comes from Seth Harvey with UBS.

Good Morning.

Good Morning.

I just had a question, just one kind of housekeeping, you said there was -- I believe you said $2.1 million restructuring charge and SG&A, is that correct?

That's correct.

Okay. And then, the second was kind of regarding CapEx, I think you had given $7 million to $10 million '08, how flexible is that?

I think we are getting closer to maintenance CapEx level, there is some flexibility in there, which is why I give the range. Not a great deal of expansion CapEx, we are not looking to Greenfield any new facilities. So, I think the bottom-end to the range would be $7 million and the top end of the range would be $10 million.

And then, kind of finally, we have kind of heard some other kind of suppliers saying that especially in the southern markets that they have been point -- they have seen projects pushed back that kind of in December had a kind of hard stop. Are you seeing any type of pick up in the first quarter or is that kind of behavior continuing?

I wouldn't say we have seen any pick up in the first quarter, but I think we have seen some consistency in the first quarter, at least in terms of the sales per day and that's where we get a little bit of comfort, at least we are seeing a little consistency there rather than the continued downward trend that we saw previously.

And we are not seeing the tremendous fluctuations on a day-to-day basis that we had been seeing prior to this.

So, are you seeing kind of more as people kind of announce their intent to start in a community that they are falling through with that and not actually kind of as you were saying before, you are kind of trying to keep track of inventory, seeing some -- seeing what kind of fall through at this point?

It's hard to answer that. We don't really track meaningful backlogs. In reality, from the time we receive the PO, it could be 30 days to ship or one day to ship. So, we don't really track a backlog. So, it's difficult for me to say how we are performing against that and the quantity of orders being shipped out. What Flyod alluded to is we are not seeing the starts -- the spurts in starts that we had before, it seems to be more consistent, but I can't really answer the detailed question you are asking, Seth.

That's it, thank you.

Our next question comes from [Brian Tadeo] with Bank of New York.

Hi, Good morning.

Good morning.

Just the one item of confirmation, just wanted to -- first on the new credit facility, is it 100% asset backed or are there any coverage ratio covenants embedded within that?

It is a 100% ABL. The only ratio that's embedded is a [springing] fixed charge coverage ratio of one-to-one if our minimum availability under facility drops below $35 million, and the $35 million would obviously be covered by our cash of close to $100 million and then close to the $120 million borrowing capacity we talked about. So in that scenario we would have to draw from $220 million to $35 million of minimum before the springing fixed charge coverage ratio kicks in.

Great. Okay, thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS). We will go next to James Mccanless, FTN Midwest.

Hi, good morning.

Good morning.

Good morning, James.

Got two or three questions for you. The first one I want to ask was when you were discussing the cost of fuel, what does that make up of our cost to get sold on average.

It's in SG&A.

It's in SG&A.

And it's about 1% of sales.

Okay. Do you have any ability to make that up with fuel surcharges in this environment?

No, any attempts that we have made have ended up being a collection problem, and so we no longer are even attempting it.

Okay. And then I wanted to dig down on the capacity question a little bit more. If I remember correctly, prefabricated products is your highest margin category, what are you seeing in terms of a competitor capacity in that specific product category is it increasing, decreasing?

It's decreasing, it's more on a market-by-market basis. If you look at Florida, the number of truss plants that are going out of business are substantial. We are seeing a number of truss plants that are closed now the real property is coming on the market. So, it's really a more of a market-by-market driven issue.

And some of the market, Florida, as example, as Charles said, we are seeing people taking business literally at variable cost and barely above it, just trying to keep the doors open. And so, you have to respond to that in the market or -- and it certainly has an effect on the pricing of the product in those markets.

Okay, all right, that helps. And now, would you assume that it's going to continue the -- they are going to continue close going forward?

I believe that, yes, that's the case and now if -- at what point in time did they try to open, re-open, I can't tell you, but I think a number of the plants will end up not reopening, hopefully just permanently retired. So, ultimately I think that would be very good for us in the component business.

Okay. And then looking through the downturn, I got a couple of questions for one of things that start to get better. And the first one is for acquisitions, would you prefer to do acquisitions with either cash or do you think your cost of equity is low enough to where you consider doing potentially share deals?

I think it would depend on the deal but I think we consider both.

Okay. Do you have a preference for either one?

Clearly any type of smaller type acquisition, we prefer cash. But if they were something of a more meaningful size, I think we would have to consider a combination of both.

Okay. And then in listening to the home builders report over the last couple of months, they have all indicated, well, not all of them but the majority of them have indicated that they are trying to produce lower price product. They have done it through discount so far in respect with inventory, but they have indicated that going forward they want to have less SKUs and an overall lower price point. What effect has that had on your business to-date and what do you think the effects would be over the next two to three years in terms of gross margin for Builders FirstSource and then also in terms of what new markets or areas you want to expand into?

I think what you are probably hearing is that the builders would like to be able to, as you say streamline, reduce the number of SKUs that they offer have a more efficient supply channel, and ultimately result in lower costs of the product to the consumer. That's fine with us. Certainly we are in a business, we have over 300,000 active SKUs in our product line. So if they are successful in reducing their product offering, it means we can get a lot more efficient in from an inventory standpoint and the ability to provide a better package to our suppliers and hopefully then bring about an improved cost structure. So, I think the fact that builders want to lower the price to the customer and how they are going about doing it is they do it through a more efficient product, fewer SKUs, I don't think that in of itself is going to lower our gross margins. I think the competitive pressures that we are having and the amount of capacity that exists in the industry is going to be the major contributor to margin erosion. Charles, you may see it differently.

Okay, great, thank you guys.

We will take our next question from Michael (inaudible) with (inaudible).

Good morning guys. I want to go to a comment that you had made earlier on the call that you are going to try to be cash flow positive in 2008. I want to make sure I understood that correctly, I mean looks like your CapEx and interest are going to be around $25 million this year, it doesn't sound like you expect working capital to be a huge source of cash. Sort of looks like the run rate that you are on is to be a big improvement in housing starts, your EBITDA should be maybe slightly positive. Is there some other item that they should be taking into account, are you expecting the EBITDA should improve from the current run rate?

I think to keep in mind, is again, if we keep our percentage of working capital, percentages of sales the same and you assume the sales volume comes down which is what is driving the lower EBITDA, is you should monetize some of your cash from your working capital. So, that would be one of your offsets towards your cash, interest is at about $22 million, assume about $7 million of your CapEx and that's what we will try to work on, just to try to make sure we can try to achieve positive free cash flow or positive cash flow.

Okay. Are you expecting any tax refund of any significant size?

We will; probably in mid-2008 a tax refund of close to $15 million.

Okay, great. Okay, thanks.

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

Okay, 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.