Builders FirstSource Inc (BLDR) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to Builders FirstSource 2008 first quarter earnings results conference call.

Your host for today's call is Floyd Sherman, 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 either in whole or in part is not permitted without prior written authorization of Builders FirstSource; and as a reminder, today's call is being recorded.

At this time I'd like to turn the call over to Ms. Katie Murphree, Director of Investor Relations and Financial Reporting who will begin the call. Please go ahead, ma'am.

Good morning, and thank you for joining us to discuss our first quarter 2008 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 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 10K 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 non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanations of non-GAAP financial measures in our Form 8K 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 first quarter 2008 earnings call.

Joining me from our management team is Charles Horn, Senior Vice President and Chief Financial Officer. I'll start with an overview of the first quarter. I'll then turn the call over to Charles, who will discuss our first quarter financial results in more detail. After my closing comments regarding our outlook, we'll take your questions.

The macroeconomic conditions that affect our industry have deteriorated for eight consecutive quarters. From the peak in March 2006, housing starts in our markets are down 48%. In the quarter housing starts were down 39.1% compared to the first quarter of 2007 . We are having a difficult time maintaining margins as pricing becomes more competitive, as conditions continue to deteriorate. We are also seeing a decrease in fixed cost absorption as our manufacturing facilities are below optimal utilization. As a result of these pricing pressures and deleveraging of fixed costs, we experience a 310 basis point decline in margins. Despite these challenges, we grew market share by 4.1% in the quarter; had incremental sales from new operations of 1.5%; and reduced salaries and benefit expense, including stock compensation, by 22.3% and selling general and administrative expenses by 18.4%.

I'll now turn the call over to Charles who will review the financial results in more detail.

Thank you, Floyd. Good morning, everyone.

We reported sales of $270.5 million in the first quarter of 2008, a decrease of 34.2% compared to $411.1 million for the same 2007 period. Breaking down our sales drivers for the quarter compared to the year ago quarter: First we estimate that housing starts within our markets declined approximately 39% compared to the same period in 2007. We lag permits within our markets one month to an assumed start. Second, lower pricing on lumber and lumber sheet goods have minimal impact on our sales during the quarter. Third, conversely market share gains contributed approximately 4 percentage points to our sales and new operations added an estimated 1.5%.

We felt pricing pressure and the negative impact of decreased housing starts across all of our product categories. Breaking down our product categories: Prefabricated components declined 36% from the first quarter of 2007 due to a combination of lower prices and lower volumes and also declined to 19.9% total sales for the quarter; windows and doors were down 26.3% and represented 25.2% of total first quarter sales, up from 22.5% last year; lumber and lumber sheet goods declined 43.7% to $64.5 million and fell to 23.9% of sales from 27.9% of total sales in the year ago quarter. We estimate that $44.5 million of the decrease is due to lower volume and $5.6 million due to lower prices. Mill work declined 27% and represented 10.6% of sales, up from 9.5% last year. Finally, other building products and services decreased 31.3%, and represented 20.4% of sales, up from 19.6% in the first quarter of 2007.

Gross margins. Turning to gross margins, the $44.2 million decline in gross margins was across all our product categories. Our gross margin percentage was 22.3% in the first quarter of 2008, compared to 25.4% for the first quarter of 2007. Of the 310 basis point decline, approximately 157 basis points is attributable to the deleveraging of our lower sales volumes against our fixed overhead within costs of goods sold; the balance of the decline is primarily related to lower pricing on all products. As market conditions continue to create increased competitive pressure, we expect further pressure on our gross margins.

Our selling general and administrative expenses were $79.6 million, down $17.9 million from the first quarter of 2007, and down $5.8 million on a sequential quarter basis. We continue to manage our operating cost structure well. Excluding stock compensation expense, we reduced our salaries and benefits by almost 24% from Q1 2007 on a sales volume decline of 32.8%, or about 73% variable. We've reduced our full-time equivalent head counts by almost 40% from the peak in March 2006 and 23.6% from the first quarter of 2007. At this point, we are beginning to reach a core level of staffing given the number of locations and operations we have.

From first quarter 2007, we were able to reduce our professional fees by over $1.5 million, and delivery costs by about $1 million; however, as a percentage of sales, delivery costs were up 170 basis points, primarily due to increased fuel cost. Our occupancy expense was higher than the first quarter of 2007 slightly because of the acquisitions of Bama and Wheeler late in 2007. Our interest expense was $6.5 million for the first quarter, down about $200,000 from year ago quarter . The decrease was primarily attributable to a decrease in the debt balance from March 2007, as we paid off our term loan in the fourth quarter of 2007.

Offsetting the decline in interest expense, we had a decline in interest income due to lower interest rates and a lower cash balance in the first quarter of '08 compared to last year. We had an income tax benefit with an effective rate of 38.2% for the first quarter of '08, compared to an income tax expense with an effective rate of 37. 1% for the first quarter of '07. Our net income for the first quarter--is a net loss for the first quarter (slip) was negative $15.8 million or $0.45 per diluted share compared to net income of $0.2 million or $0.01 per share for the same period last year . Adjusted EBITDA for the first quarter of 2008 was negative $11.1million, compared to $14.7 million in the year ago quarter. Adjusted EBITDA as a percentage of sales decreased to a negative 4.1%, compared to 3.6% a year ago.

Our balance sheet remains healthy and our liquidity is still strong with $81.8 million in cash and $129.5 million of available borrowing capacity. This strong financial footing allows us to continue to invest in our company during this challenging operating environment. From a cash flow and working capital standpoint, we used cash and operating activities during the quarter due to a slide built in our inventories in march as our sales per day increased to 6.7%. An increase in another receivables as a result of a $10.9 million increase in income taxes receivable on the first quarter of '08, and the payment of the 2007 annual bonuses in February of '08, which reduced our accrued liabilities by $5.9 million.

Anticipated tax refunds should improve our liquidity during 2008. We anticipate receiving a total of 12 to $17 million in tax refunds in the second and third quarters of this year. We did see some improvements in day sales outstanding from the fourth quarter of 2007. We went from 42 days in the fourth quarter of '07 to 40 days in the first quarter of '08. Our credit testimony has done a good job managing our accounts receivable. We also had a 1.7 day improvement in our accounts payable days from the fourth quarter of '07. Our inventory turns dipped slightly to just below 9 turns in the first quarter of '08 as we took strategic inventory positions in certain lumber, roofing, and gypsum products to protect against potential price increases. This was about $6.5 million.

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

Thank you, Charles.

Housing starts in our markets are down 48% for the peak in March 2006. The housing market has continued to worsen, due in part to the increase in foreclosures and the tightened credit standards in the mortgage industry. Although we cannot predict how long this downturn will last, we generally expect these difficult operating conditions to last at least through the first half of 2009. We will continue to provide updated housing permit and commodity price data on our website each month to help guide you through the market uncertainties. This data is summarized and based on publicly available information.

This quarter was a difficult quarter. We are not pleased with the outcome, but we did see some improvement late in the quarter since we were nearing break even adjusted EBITDA for March. We will continue to stay focused on our strategy and do all we can to continue to increase market share, reduce headcount, drive operational improvements, rationalize physical capacity, and restructure underperforming locations.

In addition we will strive to maintain our market leadership and financial strength during this downturn, which takes the commitment of our employees, which I am confident we have. Our employees continue to seek new business opportunities and find opportunistic ways to flex our cost structure in this very difficult operating environment.

We'll now take your questions and so we'll open the session for questions and answers.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

And we have our first quest from Michael Rehaut at JPMorgan. Please go ahead.

Hi it's Jennifer Consoli on the line for Mike. Good morning.

Good morning, Jennifer.

My first question is the last comment that you made regarding the breakeven EBITDA levels in March. Can you talk about what was the driver of that, and what you are seeing in the market?

I think the key thing is, we saw a slight seasonality ourselves per day in March. We picked up about 6.7% compared to December. So I wouldn't attribute it to anything more than just a slight seasonal pickup. You add these sales volumes--our cost structure is very sensitive to just marked small changes in revenues; and so I think that revenue pickup with some of the cost reductions we made contributed to that March getting close.

Okay.

My second question was regarding the share gains that--they accelerated this quarter versus last quarter which is the first time in several quarters that it has. I think on your last conference call you had mentioned that you were pulling the credit in on some of your customers, and that you suffered or you gave up some market share gains as a result of that. Can you talk about that, and maybe what you are seeing and what drove that sequential acceleration in share gains?

I think that we continue to be somewhat tight on our credit. We want to be very prudent I imagine during this downturn so I think that holds true. But I think what we are seeing more so in the first quarter of this year than last year is we are seeing more competitors start to leave the market, more capacity dropping out of the markets; and I think that gives us a little bit better ability to increase share and maintain our tight credit standards.

Okay, great. Thanks

Our next question goes to Nishu Sood at Deutsche Bank.

Thanks, good morning, guys.

First question I wanted to ask was you mentioned that in terms of your staffing levels, I imagine out at your branch locations and your headquarters, you are kind of approaching a core level. There is still the potential here though as I'm sure you are planning for as well for starts to continue to fall even further than they have already. So how would you adjust the scaling of your business further if conditions do continue to deteriorate? I imagine would that involve, for example, more facilities closures, or what's your plan to kind of deal with that type of environment?

I think what we'll have to do as we watch conditions develop--should we see further deterioration, which is likely, we'll have to look to mothball more facilities, more operations. So the first thing you'll do is look within your four walls your facility and say do I need this door shop within this facility or can I ship from somewhere else? So the first thing you'll do is rationalize operations within your facilities. Then you'll look to mothball more facilities if you're in a market like Florida is there an ability to mothball a facility?

Or long term if it's a market you don't feel very good about, and this is the third piece of the chain. You could look to maybe exit. I know Floyd and I are not at that point at this point, but you would do all three. So you'd look to shut down operations within your markets; then you'd look to shut down a few facilities, maybe mothball them; and then if conditions get really bad an issue then you would look maybe to--do you exit a market.

And there is still room to take out employees, to reduce our headcount; although the reductions won't be on the same basis of what we have had in the past. We also would look to start running shorter work weeks. The--you would move to 32 hour shifts, and then even less if required to do so.

Were there any mothballings or market exits this quarter?

No.

Second question I wanted to ask was I wanted to understand the timing and the kind of triggers of the tax refunds you are receiving, it's obviously an important supplement to the liquidity position that you have built already. So I was wondering, Charles, if you could just help us to understand the amounts that you would expect to receive, the kind of source, what level of deferred tax assets you still have on your balance sheets and the kind of increments we are seeing here; I think you said five to seven, in the next quarter seven to 10, what is kind of driving the timing of those?

Well, I think it's primarily due to--this relates to our 2007 year. It's primarily one, you have to file your 2007 return, which we are in the process of doing. Once you do that, that will trigger the first round of refunds in the five to seven range and then you'll go back and amend previous returns to claim your tax refunds by carrying back, and that will be your third quarter recoveries.

From a deferred tax asset standpoint we don't have a great deal. We have been able to trigger receivables at this point, that is what you see in the build and other receivables. As we move into '09, you'll see the DTA starts build because--if we're still in a net operating loss standpoint, but currently our deferred tax assets are not appreciable.

Got it, and just a final quick question on the significant substantial rise in diesel or fuel prices, I was wondering if you could talk recently about the dynamics of that on your relationships with your customers how you are passing that through; and how that is impacting the sales process and how that is flowing through your numbers?

We have not been able to pass the increases through. We have attempted to do so, but abandoned it when we just saw the charge building up on our AR. And so the customers that we have in the building community have just refused to take any form of increase. And the majority of our competitors, apparently, have not seen fit to try to pass the increase through because they may have already rationalized that they weren't going to be able to get it, and so why try? But the increase on diesel fuel is up from a little over $3.00 a gallon in the first quarter of '07 to where we are now paying $4.37 a gallon on average. We have national fuel contracts, but still it hasn't been able to offset the tremendous increase that we have seen in fuel costs. If you did it on a flex basis to '07 on a first quarter and taking-- using first quarter '07 fuel cost, the net effect was over $1.54 million.

Great. Thank you very much.

And we'll go next to Nitin Dahiya from Lehman Brothers.

Good morning.

Hi Nitin.

When you look at your receivable ARDs, even after adjusting for the one-time items you had mentioned, it seems to have gone up on a year-over-year basis by almost--I don't know, 8, 9 days. Is that--are you seeing (inaudible) changing or is that just a function of timing?

I don't think it's up that much. If you go back in the page where we break out trade receivables from other, you have to look at the trade receivables, which were actually down. Our overall days--DSO, I believe, is up about three days year-over-year, but down on a sequential quarter basis. It is not that we are changing terms, we still stay very consistent with what were before.

I see.

But I think--what it is is just people, again, trying to extend out payment as much as they can. Many of our customers are going through liquidity issues on their own accord, and so it is making it very, very difficult. Now I was very pleased with our credit department that we were able to pull it in on a sequential quarter basis from 42 days to 40; but I think year-over-year, it definitely was a decline and drop off in sales; and the difficulty our customers are going through, it was not unexpected.

Yes, the other thing was investing was your allowance for the account hasn't necessarily gone up. So you are not seeing that as a big pressure just yet?

Again I think you need to look at it as a percentage of total trade AR. It's almost identical as a percentage of trade AR, so it stayed very flexible. So then you look at what is the currency of your portfolio. If you look at our greater than 60 days, it is only about 6.5%. So we have a very small greater than 60 days past due compared to many of our peers. So what we'll do is we'll look at a percentage of total portfolio and then we'll look at it as a percentage of our agings; and so you're going to see it be consistent because it is holding pretty true.

We also do a credit assessment on the quality credit of every individual account and then use that if we see any potential problems developing, it will be reflect.

Yes, and looking year-over-year, last year in March of '07, our DSO was 37 days versus 40. So they are up about three days.

Okay, yes, I think I probably just calculated it, but no that is actually good. In terms of obviously you are seeing some customers have problems, are there some sales that you are kind of saying well we (inaudible - highly accented language) simply because we're not sure that the customer can actually service it?

Sure. There are some customers that previously we would have sold or that we would like to continue to sell but we can't because of credit decisions.

I see, but then are they getting product elsewhere, or is it, I mean essentially I think what I'm getting to is the next question is around margin. I mean obviously some of the customers are having problems and as you pointed out pricing is kind of tough. But as the smaller guys kind of fight for their survival, does that reduce some of the margin pressure, or the pressure from customers kind of keeps margins low?

I think to your point, obviously if capacity drops out of the market over time I think that will help mitigate some of the pressure on our gross margins, yes. But to your earlier point, do customers when we cut them off for credit go and buy somewhere else? Yes. We saw that very recently with a--you saw a company file bankruptcy just the other day. We had pulled our credit lines on them and they started buying from someone else right before they filed. So there is suppliers within the market still willing to sell. Customers will jump over and buy from them where they can until they end up actually filing bankruptcy.

I see. And then lastly, when you look at working capital for the year and again without getting very specific on guidance, obviously the number of one time items; but from a year perspective, would you expect to end the year on a somewhat consistent basis in terms of days versus the last year?

I think our AP days when you look at where we were about 31 days. I think we can hold pretty steady there, maybe a slight improvement. Our goal on DSO will be to hang in that 40 to 42 range, and then it gets into the inventory turns. We intentionally dropped a little bit in the first quarter because w are seeing price increases coming through in certain areas like gypsum, roofing, and certain lumber products. So we bought a position to protect ourselves. We didn't have to, but we thought it was a prudent course of action. So we depleted our inventory turn a little bit on purpose. But we can see that improving in Q2, Q3, Q4 and I think that is the biggest opportunity we have to improve working capital percentages.

Great. Thank you very much.

Thank you.

We'll next go to Walter Branson at Regiment Capital. Please go ahead.

Yes, following actually on that a bit regarding cash flow and working capital. Can you give us a little color on your outlook for cashflow exclusive of the tax refunds over the next couple of quarters and in particularly, your outlook for working capital, will it be a source or use over the next couple quarter, again, exclusive of the tax refund?

I'll preface it by saying we still continue to expect it to be a tough year in terms of overall housing start. So I'll preface my comment that's in a range of a million starts for the year. I think we'll generate some working capital in flow. Our goal for the year is at that level of housing starts about a million to be cash flow neutral.

Is that cash flow from operations minus CapEx?

That's correct.

That would be excellent. And also regarding acquisitions given your outlook now for the market to be tough through the first half of '09, are you kind of focusing on conserving cash or are you still looking at making acquisitions this year.

We are still obviously very, very conscious about conserving our cash, but at the same time we are looking at acquisitions. I have a number of them right now on my desk. I still have not seen the pricing drop to what I think is a realistic level, given the conditions of our industry. I think it's going to take probably another three to six months before we really start seeing pricing for the businesses get in line with where the--where values should be reflected; and we are not just going to spend money for the sake of spending money. When--if we do an acquisition, we expect it to contribute a significant value to this company on the rebound; and so I think there is another three to six months to go before anything meaningful will develop, at least from our standpoint regarding acquisitions.

Okay. Very good. Thank you.

And we'll go next to Michael Cox at Piper Jaffray.

Good morning.

My first question is on lumber prices. I was wondering if you could provide an outlook as to where you see lumber prices trending through the balance of the year. We're hearing--at least indications of some of the mills going out of business or taking capacity off line?

Yes, Michael, we--we really started to see prices firming up for SPF lumber. Pine is still you know pretty flat. OSB has shown some signs of gaining a little bit of strength. The lumber markets in the past week to week and a half really are starting to weaken again; and the--we really at this point don't know quite what to make of it.

There are a number of mill close-downs that have been announced. This goes for both lumber and OSB. LP has just announced in the OSB side some very significant shutdowns for maintenance, overhaul, upgrading, so forth, that I think has created a little spark of interest in the OSB pricing; but we still think over the course of the year that there will be a slight improvement in lumber . We think that OSB will stay relatively flat through the year, and we really don't see any significant improvements taking place until probably mid-'09.

Okay, that's very helpful.

Are there specific geographic regions where you may be encountering more irrational behavior from competitors?

I can't say I'd point to any specific geography, no.

Okay, and then from a credit perspective, I know this has been a key focus point for your company. Could you just touch a little bit on how you are able to manage the credit profile and just a general comment on the health of your core customer base?

The first thing you always keep an active dialog with your customer. You want to have a good dialog. When they quit having a dialog that is when you need to get worried. You always try to keep your receivable within your lien rights, and then when you see a customer that you know is struggling, you try to find a way to get collateral to support the AR, which we have done in certain cases. Usually what we'll do is we'll try to work with them, we'll try to work out payment plans; if we see an issue, we try to get collateral. But where a customer quits being cooperative and doesn't want to pick up the phone and talk to us, that is usually when we are going to protect our lien rights and then we'll quit shipping.

Okay, thanks.

We'll go next to Keith Hughes at SunTrust.

Thank you.

The inventory, we talked about that a little bit in this call, it was down about 20% year-over-year versus the 34% sales decline. As we look forward, whatever the decline ends up being this year, is that the kind of spread you think we'll see in terms of an inventory reduction for the year or there were some extenuating factors that make it better or worse?

Again, I point back to, Keith, the fact that we bought about $6.5 million of inventory in the first quarter. We didn't really need but it was more against price increases. We are seeing certain categories that are starting to get price pressures where suppliers are trying to push through increases. Generally what we'll do in advance is go through and take a position to protect against it to protect our existing order base; and I think what you'll see is we did do that in Q1, Floyd, I don't know if you have any plans really in Q2 or Q3; but we always have to look at it and be opportunistic to protect our open order file.

Yes, and I think that's going to continue, Charles. We don't have anything on the board right now, with the exception in the area of some of the steel products. We are attempting because there are very significant increases have been stated to the industry, roughly 13%, 13.5%, and so we are trying to protect ourselves regarding those particular products.

And I think from an inventory standpoint case, the more you keep shrinking it and pulling it back, especially with the number of SKUs that we have, it gets tougher and tougher to really turn levels up because of economic quantities on reorder quantities and so forth. Just managing a 300,000 plus SKU inventory is really tough under these conditions. I think we can get back up, and I think we can get our turn levels back up in the high nines and maybe even as much as 10 times, but it's going to be tough to do so.

The inventory buys will be where we really, as Charles said, it's necessary in order to protect a position. It is not going to be just a gamble on inventory because we just don't believe in that tactic. But where we see opportunities to really protect ourselves, we are going to use our cash position to do so.

Second question. You had talked about not exiting geographies earlier. Is the primary goal there to be effectively the last man standing in some of those geographies to soak up market share, and incur the losses until that happens?

I think that's part of it, but you also have to do a trade-off, Keith. We'll tend to look at a market on a cash on cash return. So let's say that the market is for an example this is losing a $1 million to EBITDA; and we think over the next two years it will do a million per year, so negative $2 million. If we look at shutting it down and exiting the market, it's going to cost us a negative $3 million in cash between severance, lease obligations, and so forth. That may not be a very wise use of our money. So we tend to look at it, what is the long term benefit, what is the cash on cash return. If it's a two year return or better it may make sense, if it's a three year return, four year return, it may not make sense.

Okay, final question.

Charles, you have a table in the press release with--showing the trade receivables for the first quarter of '08. Can you tell me what those were for the first quarter of '07?

Let me see. I don't have that directly in front of me.

You can give it to me later, if you can.

Yes, I can.

Okay. Thank you.

Thanks, Keith.

We'll go next to Robert Manowitz at UBS.

Good morning.

Hi Rob.

Most of my questions are answered. But if I could go back to the beginning of the call or the beginning of the Q&A session where we talked a little bit about March, and I don't want to belabor March because I understand it is a fickle month. But two questions there. One is how did the performance in March of '08 breakeven EBITDA compare to March '07? And then the second piece of that is, if you look back historically, not at March '08 but in a more normalized market, what might March represent as a percentage of the first quarter revenues?

I guess a number of questions there what I would normally expect for March is to be historically up 10% to 15% over January/February average. In this situation we saw a little over 6% increase plus the 7% increase. So again if you go back and chart it historically, there is always a little seasonality. This year was only about the seasonality. In terms of comparing March of '08 to March of '07 the housing start are so different it is hard to get a good correlation.

What we were trying to indicate there is that because we are now getting to a sales volume that is fairly low and it is--now our profitability is so sensitive to it, even a 6% increase in sales per day in March compared to January/February took us to almost breakeven EBITDA for March and you can see for the quarter we were negative 11%. So all we were trying to indicate is there is a little seasonality, our sales volumes are now very, very tight in terms of profitability and how much they can move and how it impacts us.

Understood, and maybe I could just follow on one last question. And that is, if you think about the comments you just provided on January to February to March, what would those normal percent changes look like going from March to April to May?

I think what we are expecting is that you will see April, May, June be very consistent with March. We are not seeing any pickup on a sales per day basis. It is basically flat.

Yes, as starts continues to fall away, it is really eroding and taking away any from what you would normally expect in seasonal improvement and on a sequential basis there was just a very, very slight improvement in March versus February; and I suspect we are going to see the same type of numbers, April versus March.

Yes.

So I'll say it another way we are not for the looking for a big, seasonal bump. We saw a little seasonal pickup, about half of what you would normally expect. We don't expect that trend to really continue on sequential level increases in April, May, June.

All our internal planning are really bing based on consistent sales per day through the second quarter as compared to March.

Great. Very helpful. Thanks and good luck. Thanks, Rob.

And we'll go next to David Manthey at Robert W. Baird.

Hi. Good morning.

Hi Dave.

In terms of the answer that you just gave, if you are expecting the next three months to be roughly flat with March, what would that typically look like? I know it's a little hard to gauge what a typical sequential pattern was over the past few years, but you would expect it to ramp normally, right?

Yes.

And by low single digits each month, or how would it ramp?

Typically your second quarter has been 20% plus better than the first quarter okay.

That's good, thank you.

And then in terms of the markets that you are competing in, along the line of the previous question in terms of being the last man standing, do you think in most of the markets you compete in, you are the low cost producer?

It's hard to say because we compete against so many private companies. I don't really know the--the answer. I would think that we're fairly low because we have fewer facilities than many of our competitors so we have fewer fixed costs in a down environment, but I don't have an exact answer.

From all the proformas that we have seen from acquisition targets that we have looked at, we haven't seen anybody beat our financial results.

But in the markets where we have overlap with big competitors like ProBuild and Stock, they are very strong liquidity-wise. They are not going to go anywhere. It is primarily your smaller local regional suppliers that are suffering and going out of business.

Okay, great.

And then final question here, are you seeing any change in average order size? I don't know if you gauge this sort of thing, the number of trusses you are supplying per house or anything like that that would indicate that houses are getting smaller, and then have you seen any differences, again, I don't know if you track this, but are there any differences between the custom builders and the tract builders as it relates to this downturn?

I don't have that data in front of me, Dave. I don't know the answer.

When we talk to our people in the field when we look at--the house patterns are still pretty much the same as what they have been. There hasn't been a great move on the parts of our builder customers to downsize their homes. We have seen them taking out a lot of higher cost amenities and so forth, trying to get a more targeted price point home; but as far as square footage we haven't really seen it start coming down.

And the trusses, we are still seeing a consistent use of trusses for those builders who have traditionally used trusses. In the area of the custom builders and high end semi-custom, that building activity did not ratchet down nearly as quick as what the large national builders pulled their activity level down; but we are now beginning to see some real slowdown in the higher end builders, and we are also starting to see where we have credit exposure. We are having to watch the credit in this area a lot closer than we have been in the past. And I think they are beginning to get really--they are being cut back from their financing sources, and they are beginning to reflect the same problems that we've seen in the housing market with the national builder.

Okay. Thank you very much, guys.

We'll go next to Jay McCanless at FTN Midwest.

Good morning, everyone.

I wanted to ask first on the goodwill side. I know there were goodwill impairments last year and we have a further deterioration in the markets, how defensible do you think the goodwill position is now?

I think if we do see further deterioration, Jay, we'll have to address it in each quarter that we see it. The way the accounting standards work, any time you have any type of event that could signal that you have an impairment, you are required to go and the test. So to answer your question specifically, if we see further erosion in the second quarter and we don't see a pickup where we are generating closer to an operating plan in the Q2, then I think that you'll see us go in and do the test.

Okay and then getting back to the level of core staffing at your operations now, since you have indicated that you are either at or very close to that core level, could we see the same percentage decrease in SG&A for the remaining quarters in this year roughly an 18% decrease, or should we expect that to tighten up? How should we look at that going forward?

I think if we have further declines in year-over-year sales, you are going to see it tighten up. Again, we are seeing around--a little over 5,000 full-time equivalent employee. We have not really shutdown any further operations or locations. And so again, absent going through and pulling out capacity, it is going to get increasingly difficult to pull out people.

We flexed what, Charles, 72% on our salaries and benefits? And that was much better than what we had anticipated. The one thing I will have to say is that our people have really worked hard. They are looking at every way they can to take cost out of the operation, do it more efficiently. We continue to improve our processes which also have--and streamlined a lot of our processes, which have helped us gain more efficiency. So I'll never say never, but that really surprised me. It exceeded my expectation and so I'll say we are going to continue to look at it and see if we can't continue to achieve this type of efficiency gain.

Okay, and then my last question I think you have answered this in one form or another with the other questions, but what is the pace of not only customer bankruptcies that you are seeing but also competitor bankruptcies?

No. We are seeing customers starting to file bankruptcy . We know of a number of customers that potentially could be entering bankruptcy . From a supplier base, we have previously talked about the one large in Atlanta Wheelers . We have rumors and innuendo of other fairly large regional who are preparing to file bankruptcy in the supply chain. I think you are going to see that pace accelerate in Q2 and Q3 of this year.

Probably we have seen more truss plants shut down in Florida, for instance. There seems to be an unusually high number of truss operations that have gone out of business in Florida and also up in the mid-Atlantic area.

Okay, and since you mentioned Wheelers, I think that begs another question. How many, when these ones that are being shut down, etc., how many are reopening fairly quickly under new names and still selling product at well below what everyone else's cost is?

Well we saw where Wheelers the former owners stepped in and bought some of the assets out of bankruptcy along with the name and they plan to open three. I guess we'll just have to sit back and evaluate how successful they are doing that in terms of how much money do they have where they can put into the business because I wouldn't think banks are going to over the minimum to lend them; and then how successful they are with suppliers. The suppliers got crammed down fairly abruptly in that bankruptcy, so we'll have to see how successful they are in getting it back up and going.

Okay. Thanks, gentlemen.

Next to [Rob Joseph] at Van Kampen Investments.

Good morning, guys.

The questions that have been touched on, but in looking at--you mentioned in your press release that you are getting margin pressure from both your customers and then your competitors with competitors going out of business, as customers, too. Are you seeing any of that pressure diminish?

Not yet.

I think at this point it would be premature . I think it is going to take several more quarters before that can work through the system. It is a competitor that gets into issues and they are trying to survive they are going to convert their inventory for whatever price they can get . They're just trying to convert to cash, and we're in the midst now of many competitors converting to cash; and again these are more your smaller regional and local type suppliers.

Okay. Kind of a related question, as you see prices say lumber commodities falling, do you experience any benefit from that; or is the competition so intense that you have to reduce prices right away to meet those falling costs?

Actually when it gets into the commodity products like lumber, the reciprocal is true, you want a higher market price because that's the way the market tends to work. We prefer to have higher lumber prices, higher OSB prices than lower procurement prices.

Okay. Thanks.

And we'll go next to Russ Steiber at Raymond James.

Good morning, guys.

Few questions this morning. Your CapEx is now down to a very low level . Can you remain at that level indefinitely, or how long can you go before you need to put a little more money into the plant and equipment?

I think we can go another two years if the level we are at, which you'll agree, 7 to $10 million per year. If you look, we really--in the good years, we refurbished our fleet, we upgrade our facilities, we have a lot of new facilities, so I think we can go to closer to a maintenance level for the next one or two years.

Okay. You alluded to pulling the credit lines from Kimblehill . Can I infer from that that you don't have any AR exposure to them?

We have a small exposure, very small.

Okay, and finally your bonds are trading at a significant discount. Is it possible for you guys to start buying those bonds in the open market?

It's always the consideration that we keep in the back of our mind. I think, again, we want better visibility into the downside of the housing market before we use liquidity to do so.

Great. Thank you very much.

Thank you .

And we'll go next to Seth Harvey at UBS.

Good morning.

Most my questions have been answered. I just kind of want to go back to inventory question . I know you just kind of talked about as you had been more opportunistic about purchasing this quarter; but if you look at generally where the activity level now is in the industry, do you feel like you can take that down from current levels to be more kind in line; or are you kind of at that point now where you are very much in line with what the activity level is?

No. Again, we took the $6.5 million position because we had existing orders to customers we needed to cover, and before these price increases went in. Had we not done that, our turns have been about 9.5 for the quarter. And that is about right where we thought they would be. Again, absent further price increases coming through, where we have to take an equivalent position in Q2 or Q3, I think you'll see some improvements in turns going back closer to the 9.5 range.

Okay, great . Thanks a lot.

And we'll go next to Jim Wilson at JMP Securities.

Thanks . Good morning, guys.

Good morning, Jim.

Couple of questions I guess, one, you said you are looking at a lot of acquisitions; but I was wondering if strategically there is target areas of the country you would actually consider as soon as you think the pricing is attractive, are you going to try to take advantage of this downturn and spread west, for instance?

I don't think we are predisposed to any geographic region. The right opportunities in the west would make sense, but again it would have to be a large scale. But I think we are pretty open to anywhere that makes sense. Probably the midwest would be the least opportunistic for us, but throughout our core states and going into other states, we think long term we feel good about sure, we are going to look at opportunities. The key differential is if we go west, we are going to be looking for scale. If you go into a new market you don't want to just have one or two locations.

Right, okay, that makes sense.

The second thing is just, I was wondering, you talked a little bit about what big builders have done and how they obviously cut--accelerated inventory but cut production faster than the small guys, but I was wondering if there is any kind of strategic effort you now see that probably that big deal is with cash and liquidity you are going to be the survivors of proactive moves on your part or on their part of trying to partner--drive more share toward you and other big players or any--is the industry going that direction, and are you kind of proactively seeking it?

We are proactively working with a number of the large national builders, and we will continue to do whatever we can to enhance our position, and to encourage them to do as much business as possible with us. The--the large builders are continuing to work on their purchasing programs; and it seems like they are trying to align themselves with fewer suppliers, and with more controls coming out of the central office as relating to purchasing actions . And that benefits us very well, as it does some other large national players .

So, I think the activity in this area will continue and I think the national builders will look to, to increase or enhance their positions with people like ourselves. Especially when they view the long-term market, and they know that this market is eventually going to turn; and I think the belief is when it turns, it is going to have a very sharp up turn and supply is going to be critical.

Okay. Great. Thanks.

And we'll go next to Ken [Schlemmel] at Wolf Point Capital.

I had a couple of questions going back to the sequential change from first quarter to second quarter you said typical was about 20% and it looked like last year it was about 13%. Would you expect this year to be a smaller increase versus that 13% last year?

Oh, yes.

Much less?

Yes.

Okay.

Again if we just go back and look December of '07 versus March of '08, we were up about 6.7% on a sales per day. I wouldn't extrapolate anything beyond that Q2 to Q1.

But obviously you don't expect a 13% increase sequentially?

No.

Okay, and do you feel though that there probably isn't going to be a seasonality this year, or what do you--I mean you can't look out too far, but the third quarter as well?

It goes back to what Floyd said, there's going to be very slight seasonality but it's going to be tempered by the fact that starts are continuing to go down.

And the tax bill running through Congress that would help home builders to look back a couple of years, are you guys included in that, or you're not considered--?

We would be considered. The Senate bill still includes it, the House bill has removed the four year carry back. So depending upon if the Senate goes through, we would receive a benefit for that especially with our 2009 years where it's really [germain].

So if the bill that was in the Senate passed as it existed today, what would be the rebate you'd get or have you factored--?

What it would allow us to do is for '09, right now the way the law is structured if we generated a net operating loss in '09, we would not be able to carry it back. We would have to carry it forward to future years. Still a benefit, but it's a forward-looking benefit. If the Senate bill goes through any loss that we generated in '09 we could carry back to '06 and '05 and reclaim immediate cash refunds.

What would that look like do you think, or it would depend on--?

It would depend on the loss, but the potential would be up to $130 million because that is how much we paid in tax in those years.

This would be a '09 event payable in 2010?

That's correct. It would be mid-2010 infusion of cash.

Okay. That's down the road. And then letters of credit outstanding at the end of--?

About $17 million.

Same as it was before?

Yes.

Thank you.

And e'll go next to Ray Lemanski at BB&T Capital Markets.

Good morning guys. Most of my questions have been answered, but we've talked a lot about working capital this morning and spoke mostly about the left hand side of the balance sleet . Just in looking at it, it looks like payables look fairly normalized, what did liabilities look like, they came in a little bit; is there anything exceptional that went on there? Was it seasonal or something which is likely to provide you with cash in the next quarter?

There's a couple of things, we pointed out one of them actually in our release where we talked about the payment of '07 bonuses which took place in the first quarter of '08. That would have been included within that accrued liabilities number at year end. So that would have dropped it about 5.8. The other thing that you're seeing there is that as we continue to pull back our staffing levels, our accrued liabilities for salaries and wages are going down . That is the biggest pull back you are seeing in the accrued liabilities.

Thanks.

Second question just is, we have talked a fair amount about credit issues with your customers. Just wondering if there are any issues worth talking about up the other direction of the supply chain which might have impact on your business over the next couple of quarters?

We are not dependent on any one supplier, we are very diversified who we buy the product from. Floyd, are there any suppliers that you can think of that you were concerned about?

No.

Okay, thank you very much.

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And we'll go next to Michael Rehaut at JPMorgan. Please go ahead.

Hi, just a quick follow-up.

Regarding your geographic exposure can you just go into a little detail particularly in Texas and the Carolinas; are you seeing any type of stabilization there, or do things continue to worsen in those markets as well? Because they had been holding up a little better.

No, they continue to worsen. If you look at North Carolina, it is still probably the best of most of the states in terms of how much it's fallen to this point. South Carolina is moving pretty much with overall overall housing starts. Texas, in certain areas of Texas are moving pretty much with overall starts. It is pretty well affecting all of our markets.

Okay. Thanks.

And at this time there appear to be no more questions. Mr. Sherman, I'd like to turn the call back to you for any closing comments, sir.

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

Thank you, everyone, that does conclude the Builders FirstSource conference call. You may now disconnect. Thank you.