Builders FirstSource Inc (BLDR) 2012 Q3 法說會逐字稿

Good morning and welcome to the Builders FirstSource third-quarter 2012 earnings conference call. Your host for today's call is Mr. Floyd Sherman, Chief Executive Officer.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without written authorization of Builders FirstSource.

And as a reminder, this conference call is being recorded today, October 19, 2012. The Company 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, financial results, business strategies, and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks.

The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided reconciliations of non-GAAP financial measures to their GAAP equivalents 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 would like to turn the call over to Floyd Sherman.

Thank you and good morning. Welcome to our third-quarter 2012 earnings call. Joining me today from our management team is Chad Crow, Senior Vice President and Chief Financial Officer. After giving a brief recap of the third quarter, I will turn the call over to Chad for a more detailed discussion of our financial results. Then, after my closing comments regarding our outlook, we will take your questions.

Sales for the third quarter of 2012 were $291.8 million, an increase of 34.3% when compared to the third quarter of 2011. Our top-line growth continued to exceed the increase in residential construction activity, as actual single-family housing starts in the South region increased 27.7% over the same time period and single-family units under construction increased only 12.4%.

For the second consecutive quarter we reported positive adjusted EBITDA, finishing with $3.0 million for the current quarter as compared to an adjusted EBITDA loss of $700,000 in the third quarter of 2011. On a year-to-date basis our adjusted EBITDA has improved from a loss of $11.7 million in 2011 to a positive $3 million in 2012.

We are seeing stronger sales trends in the housing market as it continues to recover, and our recent market share gains have also contributed to our improving sales. At our current sales pace we are poised for 2012 to surpass $1 billion in revenue and believe we will be adjusted EBITDA positive.

The last time we achieved similar levels of revenue was fiscal 2008, at which time single-family housing starts were 622,000, or 100,000 more starts than the current forecast for 2012. Our gross margin was 21.7% and our adjusted EBITDA was a loss of approximately $32.4 million.

So while we are still faced with a challenging housing environment, our improved operational efficiencies are certainly contributing to a much improved financial performance. For the current quarter, our sales per South region single-family start increased to $3,703 from $3,522 in the second quarter of this year.

As noted in our earnings release yesterday our gross margins were again negatively impacted by inflation on commodity lumber and lumber sheet goods within the quarter and our limited ability to adjust intra-quarter customer pricing. While we were able to pass on some price increases as part of our third-quarter pricing, we once again experienced a rising commodity market during the quarter. Commodity prices increased on average 14% from the end of the second quarter through mid-September before falling back somewhat by quarter end.

I also think it's important to note that on a year-to-year -- year-to-date basis, commodity lumber prices are up on an average of 20% to 25%. Specifically, framing lumber is up 14%; panels are up 27%; and 7/16ths OSB is up 34%. Combined lumber prices have risen to levels not seen on a consistent basis since 2005 and 2006.

As we have stressed in the past, we prefer an environment of higher, stable commodity lumber prices. However, in a rising environment like we have seen most of this year, it does create pricing challenges for us, given fixed intra-quarter pricing arrangements we have with our customers.

Prices can't go up forever. And we still believe that, assuming prices stabilize at higher levels, we will see an improvement in our margins. I will now turn the call over to Chad, who will review our financial results in more detail.

Thank you, Floyd. Good morning, everyone. For the current quarter, we reported sales of $291.8 million compared to $217.2 million in the third quarter of 2011, an increase of $74.6 million or 34.3%. We estimate sales increased approximately 27% due to increased sales volume and 7% due to price.

Breaking down our sales by product category, prefabricated components were $56.1 million, up 36.8% when compared to $41 million in the third quarter of 2011. Windows and doors were up approximately 20.5% to $61.8 million. Lumber and lumber sheet goods were $97.3 million up $35.4 million.

Our millwork category increased $5.9 million to $28.1 million. And other building products and services increased 18.8% to $48.5 million when compared to the same quarter last year.

From a sales mix perspective, lumber and lumber sheet goods were 33.4% of total sales, up from 28.5% of total sales in the third quarter of 2011 due primarily to commodity price inflation. All other categories were fairly consistent between periods from a mix standpoint.

Our gross margin percentage was 19.8%, down from 20.5%, a 70 basis point decrease. We estimate price negatively impacted gross margins by 150 basis points largely due to commodity lumber inflation during the quarter relative to fixed customer pricing commitments, and was offset by an 80 basis point improvement due to increased sales volume. On a sequential quarter basis, our gross margin increased from 19.7% to 19.8%.

Selling, general, and administrative expense was $58.7 million for the current quarter. This is up $8.5 million or 16.8% from the same quarter last year despite a 34.3% increase in sales. As a percentage of sales, SG&A expense decreased to 20.1% in the current quarter from 23.1% in the same quarter last year.

For the third quarter of 2012, our salaries and benefit expense, excluding stock compensation expense, was $35.6 million or 12.2% of sales, compared to $28.8 million or 13.3% of sales in the third quarter of 2011. The $6.8 million increase is primarily related to higher sales commissions and additional staffing needs to service our increased sales volume.

We recorded $700,000 of facility closure costs in the third quarter of 2012. These costs were primarily related to revisions of sub-rental income estimates on two previously closed facilities in South Carolina and Tennessee. During the third quarter of 2011, we recorded $100,000 of facility closure costs.

Interest expense was $10.6 million in the current quarter, an increase of $5.3 million from 2011. This increase is primarily due to interest associated with our new term loan, combined with a $700,000 non-cash fair value adjustment related to stock warrants issued in connection with the term loan.

We recorded $33,000 of income tax expense in the third quarter of 2012 compared to $268,000 in the third quarter of 2011. We recorded an after-tax non-cash valuation allowance of $4.6 million and $4.7 million in the third quarters of 2012 and 2011, respectively, related to net deferred tax assets. Absent the valuation allowance, the effective tax rate would have been 37.6% and 39.2% in 2012 and 2011, respectively.

As of the end of the quarter, our gross federal income tax NOL available for carryforward was approximately $226 million.

Loss from continuing operations in the current quarter was $12.3 million or a $0.13 loss per diluted share, compared to a loss of $11.5 million or $0.12 loss per diluted share in the same quarter last year. Excluding the fair value adjustment for stock warrants, facility closure costs, and the tax valuation allowance, our loss from continuing operations was $0.07 per diluted share for the current quarter. For the same quarter of 2011 our loss from continuing operations was also $0.07 per diluted share, excluding facility closure costs and the tax valuation allowance.

Adjusted EBITDA was $3 million in the third quarter of 2012 and represents a $3.7 million improvement compared to a loss of $700,000 in the same quarter last year.

Our cash used for the current quarter was $14.4 million. Of this amount $9.5 million was cash used for interest; $5.2 million related to capital expenditures; and the balance was due to an increase in working capital, offset somewhat by positive EBITDA during the quarter.

We ended the quarter with cash of $90.7 million and net liquidity of $55.7 million, after giving effect to the $35 million minimum cash requirement contained in our term loan agreement. In addition to the $90.7 million of cash, we also had $12.8 million of restricted cash in September 30, 2012, of which $1.8 million was included in long-term assets. Restricted cash consists of $11.9 million used to collateralize letters of credit outstanding under our letter of credit facility and $900,000 used as collateral for other casualty insurance obligations.

Our cash usage for fiscal 2012 is expected to be at the high end of original guidance due to the increase in working capital necessary to support our higher than forecasted sales volume. As a result, we expect to end the year with approximately $90 million of unrestricted cash and $55 million of net liquidity.

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

Thank you, Chad. We are pleased with our results for the third quarter, especially given the commodity price inflation and extremely competitive pricing environment we experienced. We expect that the momentum that we have achieved from the improvement in the housing industry and our recent market share gains to continue to positively impact our operating results.

We remain focused on growing market share and improving our margins in order to drive profitability as the market continues to recover. I will now turn the call over to the operator for Q&A.

(Operator Instructions) Seth Yeager, Jefferies & Company.

Hey, good morning, guys. Thanks for taking my questions. So, another solid top-line improvement here.

Just on gross margins, obviously getting squeezed a little bit on the commodity side. You guys can't control the price of lumber, but is there something structurally in your industry -- I mean I know you have certain pricing conventions and contracts. But is that something that over time you would be able to pass prices through a bit more quickly? I guess, what is the overall thought there?

You know, structurally, I don't think things have changed. In my opinion it is still an extremely competitive market out there. You are always going to have a lag, given our position in the supply chain and in the pricing agreements that we have in place with the customers. You're always going to have a little bit of a lag.

And like we said, we were able to pass along some price increases in the third quarter. But unfortunately again we were chasing a rising commodity market. So between the inflation and the fact that there's still too much supply out there for still too little demand, the reality of it is we are pacing towards about 520,000 single-family starts this year. It is likely going to be the fourth worst year on record for housing.

So while things are getting better, it is still a very tough environment. So between the inflation and the -- still what I would say the excess demand, it is just a slow process. But eventually yes, I think margins will recover. And when commodity prices do stabilize I really feel like we are going to be able to get our margins up and pass on price increases.

Yes, I think another thing that we have seen, Chad, we have seen volatility that we really haven't -- to the extent that we haven't seen it occur in the past, not nearly to this extent. The volatility is really occurring right before the end of a quarter and slightly after the beginning of the next quarter. And this is when most of your pricing is done to your customers.

The market flattens out and it gives you the appearance that it is stabilizing, and then we have seen just some unbelievable run-ups in the price. We look at OSB, our OSB over the quarter was about a 16% increase. But if you looked at it from a few weeks after the start of the third quarter, until I think it was around September 8, we saw an increase of 41.2%; and then it fell off 18% during that period of time that you begin doing your pricing. So whatever replenishment you did during the course of the quarter you were doing at real exaggerated prices.

I have been in the business a long time and I have never seen the type of volatility and the points of where it is occurring to the extent that we have seen this year. Very unusual year in that regard. And I think this is what has really created problems for us and the rest of the industry.

I appreciate the insight there. Now, one thing that you have been hearing from just about every builder out there is labor is really starting to become a governor on growth in many markets out there. Obviously you are seeing improvement in your prefab business. Is that an area where you're starting to see some momentum in pricing and margins?

I know historically that was a pretty high-margin business for you guys. Just in the environment where builders are trying to quickly turn inventories, is that something that you can look forward to a little bit of pricing there?

Yes, I think that is certainly the case. Labor is tight in some markets, which bodes well for the fact that we can supply labor to frame houses. And given that environment it also allows us to push our truss and panel products as we are doing the work on those houses. So yes, you are right on both counts, that we have seen an increase in sales of truss and panel, and we are also seeing margin improvement.

Okay, great. Then just lastly can you just talk us through the trends in DSOs. A little bit elevated over the last couple of years. Just in general, given the improvement in top line, where you see working capital going into the beginning of next year. Thank you.

From an AR days standpoint, the most significant trend we have seen recently is I think just the fact that a lot of the large national builders, their business has ramped up so much that they are just -- they have fallen a little bit behind on the back office side. So there has been a little slippage of days there.

I think everybody is a little gun-shy to add full-time employees, and they are hanging on to the lower headcount as long as they can. So from our standpoint it really doesn't look like a liquidity issue with our customers; it is more of an administrative backlog at the moment. But I think we will see that settle out in when we get into the slower building season.

Your other question on working capital in general, I think we are still going to trend around 10% of sales, like we have historically. Going into next year, that's a good question, something we are certainly keeping an eye on right now.

If our sales continue to grow at the rate they have, 30% to 40%, that would put us in the area of $1.3 billion in revenue next year, which would certainly require additional working capital build next summer. So I don't expect as a percentage of sales it's going to get much different than 10%, but certainly the build in general is something we are keeping an eye on as we go into next year.

Thanks a lot. Good luck, guys.

Richard Paget, Imperial Capital.

Good morning, guys. I realize this has to do with end-market mix and customer mix, but what do you think is the potential of your revenues per start? Is there going to be a natural cap on this, just given your potential market penetration? Or where do you think this could potentially go? Because it's definitely much higher than last peak right now.

I get asked that question a lot, and it's really hard to predict. We have really never been at levels this high nor have we been through a housing recession like this. And it's hard to predict what it's going to look like coming out the other side.

A lot of it is going to depend on our customer mix and what mix of houses they are building to the overall fill. It's also going to depend a lot on what happens with our competition.

So I am confident that if we can keep doing what we need to do and serve our customers the way we can, we can certainly hold on to that and I certainly think there is probably some more upside there. But it is just really hard to predict.

Then, with the market obviously coming back relatively strong, how is the competition doing? I know you still say it is competitive out there. But are some of your larger competitors still getting in better financial shape, and there might not be some more fallout in the overall industry?

Certainly from a large competitor standpoint there is probably truth to that. There is obviously more optimism in general with housing. So that is going to create opportunities for some of the larger guys, maybe from a refinancing perspective.

I think you may see more smaller guys struggle in the next year or two as business grows. And especially at the rate it's been growing, it is going to squeeze a lot of people from a liquidity standpoint and the need to grow working capital. So I think that could be an area where we might see some additional fallout.

Okay, thanks. Then just one more, and just to be clear. So that 7% pricing, that is all in lumber and lumber sheet goods, correct?

That's correct.

And when is Q going to come out?

Probably end of next week.

All right, thanks. That's all I got.

Jack Kasprzak, BB&T.

Thanks, good morning, everyone. A little bit of follow up on the question about labor shortages. Just curious. Do you guys see land as a limiting factor on homebuilders right now?

Some of the press releases we read about housing data, housing sales, and this commentary about it's tough to find lots or there is a shortage of lots out there, I mean is that a -- have you guys seen that as a limiting factor out there?

We hear a lot about that, Jack. I can't really say that we are in a position to really -- that we can say we are experiencing it, or -- and we really can't say that we are seeing difficulties at this point. Typically, your lot development is a number of years ahead of what is actually taking place in current construction.

So what is happening in the land acquisition boat -- all we have is hearsay conversation. Right now, doesn't seem to be affecting the pace of building in the markets that we are involved with.

Okay. Obviously the housing start number that came out Tuesday was a big upside surprise. Were you guys surprised by that number, given the activity you had been seeing on the ground and with your customers? Was it getting pent up to where we were going to surge a little bit to the upside, inflect a little bit in terms of starts?

It was pretty much in line with what my expectations in what we had been seeing on a sales per day basis.

Okay. On margins, from where you guys stand today or what you know today, how do you think fourth-quarter gross margin looks compared to the third quarter? Pretty similar? Would you expect a little bit of an uptick? If you could give us any kind of guidance there it might be helpful.

Right now, Jack, we are looking for it to be an uptick. We are just tracking on a daily basis our margins and seeing what's taking place. Right now it is looking favorable.

We were able to do a certain amount of buying prior to going into the fourth quarter, and we got some attractive cost positions and we were able to get pricing in. That was an improvement over what we saw in the third quarter. So at this point, we feel that we are going to be seeing an uptick in margins. Chad, you might --

No, that's consistent with my thoughts as well. Obviously it is early in the quarter, and we will wait and see what commodity prices do.

Sure. Okay, great. Thanks a lot, everyone.

Robert Kelly, Sidoti and Company.

Good morning, gentlemen. Just a question on pricing. It sounded like you were able to get some pricing, not enough just given how commodities moved during 3Q. Have you been able to recover some more price as we set up the 4Q contracts?

And what happens if lumber stabilizes or drops off? Are you able to hold pricing a little bit better if commodity prices were to slowly decline? What is the situation if commodities are not running against you?

Yes, in that environment I think you would certainly favor our margin for the border. If we do sell through our inventory and we are out having to replenish, and the market has fallen a bit, than that is certainly going to help.

I think in general -- and Floyd might add some color to this. I think in general I would say we were slightly more successful in Q4 with pricing. And so far, the lumber market has been in our favor as far as inflation or deflation.

Okay. So you are able to still get a little bit more price as you move into Q4?

Yes.

As far as the competitive situation, are there strategies other than just waiting for some of the competitors to go away that you can investigate, where you are partnering up with someone out there that has got a ton of excess capacity? I know you don't want to go the buy and close down somebody route.

Are there opportunities to address the excess capacity issues through like a JV or a partnership? Other than -- it seems like the strategy is to just hang on and wait for a shakeout.

I haven't really seen any strategies, JV-type strategies out there. And you're right, certainly not looking to go buy someone just to close them. We are still very focused on our liquidity.

I think the best thing we can do right now is just to keep providing the customer service, and pushing our various product lines, and keep hoping that the construction is going to continue to improve. It is still very tough out there, and you've still got a lot of people hanging on.

Understood. One final one. You did a little bit of geographic expansion in the current year. Anything on the board as you look out into '13 for new geographies or locations?

The expansion we did this year was really into adjacent markets that we were already serving and just some really nice opportunities to expand our footprint and at a relatively low cost. So certainly if we have opportunities like that next year we could do it.

I wouldn't look for any brand expansion by any means. But if some opportunities like that came along we would certainly look at it. But right now I don't know of any that are on the table.

Nothing imminent? Okay. Thanks, guys.

Howard Weinberg, UBS.

Hi, guys. Just regarding the volatility of the lumber pricing and how that has been impacting your margin, have you guys given any consideration of increasing some of your safety stocks? So coming into the quarter, I think last quarter you came in with around 75% of your lumber purchased. I just wasn't certain of whether or not sales -- and I think, Chad, you mentioned that sales sort of came in line with what you guys had anticipated.

So how do you maintain that margin, for us to have some better handle that margins will be in that ideal range of 21% to 23% gross margin that you have talked about in the past?

I think I said starts came in line with expectations, so that was kind of an after the fact. I'd already pretty much knew what sales were going to be, so it gave me a barometer of what starts were going to be.

Like Floyd said earlier, it has just been a very, very strange year on the lumber side -- the pricing, and then the inflation, and the timing of the inflation. So it just creates challenges for us.

One option is to go out and you could attempt to take a position of 125% of forecast, if that's what you wanted to do. It takes up a lot of liquidity. It eliminates any benefit you might get if pricing falls. And lastly you've got to have somewhere to put it all.

That is a hell a lot of inventory; and quite frankly, I am not sure all our locations could handle that much on the ground. And then you've got the issue with weather and leaving lumber out in the weather if you don't have covered storage for it all.

So it's just been an interesting year. It is certainly not one that I would expect to see again; but you never know. Certainly don't want to see again.

But, no. I think if we can get prices to stabilize and demand to continue to improve, those margins will come back. It has just been a very unusual year for us.

Great, that's helpful. Then could you talk a little bit about where some of this growth is coming? I'm assuming it's mostly single-family, but maybe if you could just talk about some of your initiatives on the multi-family growth.

Yes, our multi-family, we very carefully manage our involvement with multi-family. Several factors come into play.

A lot of your multi-family is direct-ship. They buy direct from the mills, the contractors, really no place for us in it.

Others, pricing is extremely competitive and usually much longer price guarantees. Many of the large projects, they are looking for one year or more in price guarantees. We certainly are not -- we have a difficult time enough getting 90-day price quotes than getting involved with one-year quotes. So we stay away from that.

Then there is also -- many of the projects require bonding. We don't like to bond. We do on occasion, but it's too severe a limitation on our liquidity.

So we look at the jobs where we feel we can do it and make some money. Our multi-family is still staying about the same percent of our overall business that it has been. So I guess that would say we are growing the business about as fast as we are growing the balance of our business.

But we are probably -- if you look at market share in multi-family we are losing market share in multi-family because multi-family has been expanding faster than single-family has. But we are going to continue to very carefully monitor the projects that we get involved with, and we are going to do -- go after those projects that we feel really suit our needs.

With respect to market share, who do you sense you are gaining your market share from? Is it through some of the other larger professional or pro-build distributors? Or is it coming from some stick framers that they just can't compete in the public builders, and your larger customers just prefer your quality? Or how does that work out?

Our market share gains is pretty much uniform across large builder as well as the regional and smaller builders. We slightly increased our share with the top 10, top 100; but we are getting a good cross-section of all builders with our -- as we can determine, for the market share gains that we have been achieving.

Great. Well, thank you and good luck.

Rob Hansen, Deutsche Bank.

Hey, thanks, guys. What do you look at it as longer-term normalized operating margins? And given that -- the cost take-outs that you've done over the course of the downturn, could you be looking at higher normalize margins compared to the last up-cycle? I just wanted to get your longer-term thoughts on that.

Certainly longer-term we have taken a lot of costs out of the business. So historically when we were at the last peak an 8%, 8.5% EBITDA company on 25%, 26% gross margin, I certainly think from an operational standpoint we can do better than we did back then. So assuming you get back to similar levels of gross margin, I see no reason we couldn't be a 9%, 9.5% EBITDA company.

Okay. Then I just also wanted to get a little more details about the purchase of your Chelsea, Alabama, location and just your general outlook for CapEx.

That was a situation where the lease was up for renewal. The landlord was selling the property, so we really -- we had the choice of finding a new location or buying the real estate. Just looking at the two options it made more sense to buy it.

CapEx for the remainder of this year should be very minimal. Really right now we're still in the process of evaluating CapEx for next year. Obviously that depends a lot on our forecasted sales volume. But for the balance of the year it should be minimal.

All right. Thank you very much. That's all I had.

Philip Volpicelli, Deutsche Bank.

Good morning. When you guys talk about 2013, I think you mentioned that if sales maintain their current pace you get to about $1.3 billion of revenue. I think in the past you have implied that that would get you to a breakeven level it.

I am just trying to parse apart that breakeven. That breakeven is assuming just CapEx and interest expense; it is not assuming working capital. Is that right?

Right.

Okay. So I guess you guys have probably started thinking about '13. Are there any large CapEx catch-ups that you guys will need to do? Or will you be able to keep it in this, let's say, $8 million to $9 million range?

At that type of sales level we will certainly be adding to our fleet. That will be our biggest need. That will be a -- primarily most of that would likely be leased as opposed to buying it.

So I think in that type of revenue range we would see an increase in our lease expense. But as far as actually buying or CapEx, like I said we are still in the process of evaluating that. You might be looking at something closer to $10 million of CapEx and then an increase in your lease expense.

Okay, great.

On a long-term basis [bit], this business we traditionally would anticipate somewhere between 1% to 1.3% of sales would go into CapEx.

That's right.

Great. Okay, great. That's helpful. Thank you, guys.

Matthew Dodson, Edmunds White Partners.

I have two quick questions for you. Can you talk about your liquidity needs for next year and if you guys are thinking about either going after the high-yield market or having to raise equity?

Yes, I touched on it earlier. We are certainly looking at what our sales forecast will be next year. Obviously a 30% to 40% increase in sales will create a working capital build, especially next summer. So we are currently evaluating what that means from a liquidity perspective.

Obviously we have the minimum cash requirement of $35 million. That is something we have to make sure we consider in the evaluation.

So it is just something we are looking at right now. If sales continue to grow at that pace, it could squeeze our liquidity somewhat. It is a great problem to have, but something we need to deal with nonetheless.

But I think if that is the type of growth we are still seeing at that point, there is going to be opportunities for us to manage that liquidity need. I just don't know exactly what that will look like. That is just something we are keeping an eye on.

One follow-up to that. Can you just -- can you address a little bit with your debt structure currently, when does it make sense potentially from a make-whole to take out those high-yield bonds?

The make-whole with Highbridge right now is -- well, at year end I think it will be around $30 million to $35 million. Certainly it's a pretty big number to cover in a refinancing.

It all just depends on the terms of a refinancing and what type of improvement you're going to get on your rate, how much additional liquidity it is going to add. Certainly as the quarters tick by and that make-whole comes down --

It drops about $5 million --

It drops about $5 million a quarter as we pay interest, obviously. Then it becomes more manageable. So it really just depends on what type of refinancing we are being offered.

Okay. Thank you for the insight.

Jeffrey Matthews, Ram Partners.

(technical difficulty) I'm interested in the competitive (technical difficulty). Are there other, are there guys in (technical difficulty) Is that going away at this point in the cycle?

Could you repeat that? You were cutting out quite a bit at the beginning.

I'm sorry. (technical difficulty) who are weak being irrational in the marketplace?

I would say yes, there is still quite a bit of irrational pricing out there. It never ceases to amaze, some of the pricing we are seeing. So yes, I would say it is as irrational as it has ever been throughout this downturn right now.

Shawn Boyd, Next Mark Capital.

Just a couple real quick. Congratulations on the sales growth. Jumping down into operating expenses for a second, your year-over-year increase is a little higher than what I would have thought, given what we've talked about in terms of the 35% variable nature in the past. Is there anything in there that may be a one-off this quarter, or any kind of outliers that drove that higher here in the September quarter?

You know, the biggest thing we have seen has been the overtime and the temp labor that we are using. Sales have ramped up so quick this year that to some degree you are reacting, and the quickest way to plug those holes as far as a labor standpoint in the yards is the use of overtime and temp labor.

So that has certainly been higher than I would have expected. But as we continue to backfill with full-time employees and can bring that cost down, then I think we are going to see an improvement from that standpoint.

Yes, the other thing that has created problems for us in controlling the labor cost as close as you would like to control it is just the variability that we are getting on a day-to-day basis across our markets. Tremendous fluctuations in the demands that are placed on our operations, and it really creates problems for our people trying to anticipate what the next day's business is going to be and being able to react to it.

We find ourselves -- for the most part the business is strictly almost on a day-to-day basis. Very, very difficult to really get any advance look at what the demand schedule is going to be.

Floyd, from your experience, how long would you expect in the recovery here for that to remain unsettled?

How long would I expect what?

How long would you expect that to remain so volatile, where you can't plan around it?

I think as the housing continues to improve, and builders get more confident, and they start putting in more spec buildings to -- which evens out the flow, I think we are going to continue going through this. But typically in the past, once the market started to improve it moved pretty quickly from the bottom back to a normal state.

This is unlike anything that I have ever been through and I think anything that the housing has ever been through. My feeling is that we are starting to see a little bit more uniformity on a day-to-day basis. September, for whatever reason though, was really unusual for us. That was our highest sales per day average that we had all year. And when I say high, it was 15% higher, better than any other month that we have experienced.

That really was surprising to us, and it's continuing on into October, which is a good thing. But again suddenly we found ourselves having to react on a labor controlled basis to something that was very unusual for us. Typically September doesn't have that big an improvement over, for instance, August or June or some of the better building months.

So hopefully we will begin to see more stabilization and be able to plan out better than what we have been. But I guess we will just have to take it day by day and see how that comes around. Chad, you talk with the guys in the field. Do you see any difference in that?

No. It's still you still don't get a whole lot of visibility on a day-to-day basis. So you are constantly struggling to adjust your workforce. It just creates the additional challenges that Floyd talked about of trying to manage day-to-day, and you end up using more overtime and temp labor than maybe you had intended.

Got it. I appreciate the color there. Given that backdrop, is there any kind of absolute level of quarterly SG&A that we should be thinking about now? Or do you want to update your feeling on what -- how much of this is variable at this point?

I don't think so. You know, I still think in a normal environment, if we had the visibility we needed, the 35% variable is probably a good number.

Now, like I said, once we blow past $1 billion in revenue then we are going to become more variable. That is just the nature of it. We start adding certainly more delivery expenses when we get to those types of revenue levels.

So I have said all along that once we got past $1 billion and beyond that we would probably start migrating more towards the 50-50. I don't think -- in the next few quarters I think we should do better than that. But once we get up to $1.3 billion, $1.4 billion that might be closer to what you are looking at.

Got it. Hey, thanks for the color and congrats on the revenue growth.

Matthew Dodson.

You guys have talked about how this housing recovery is not very normal. Can you talk about -- usually your fourth quarter drops down from your third quarter. And because this is a-normal, could you see yourself growing sequentially into the fourth quarter?

I think for our sales to grow sequentially in Q4, that would be very unlikely. I think it is certainly possible that we may not see as large a seasonal slowdown, since starts are trending upwards. So from that standpoint we might see a stronger Q4 than we typically would.

But sequentially to grow? I think that would be unlikely.

But I think if we look at it, I think our growth in the fourth quarter as compared to the fourth quarter of last year will be very similar to what we have had on that comparison all during the year, so --

But I'm not signing up for $290 million of revenue in Q4.

Oh, no. No, we are not going to do as well dollar-wise in the fourth quarter as we did in the third quarter.

Okay. Thank you very much.

Rob Hansen, Deutsche Bank.

Thanks. You mentioned that you were plugging the gap with temporary workers and overtime and stuff like that. What level of starts or what do you look for to take that from temporary to -- okay, we need to hire a few more people full-time? I guess, what are you looking for confidence-wise to take that responsibility on?

You know, I think we are there. At the beginning of the year everyone had the same question. Wow, housing activity sure is picking up. Is this sustainable? And everybody was wondering the same thing, as were we.

So you are just a little slow to add full-time people. The last thing you want to do is hire full-time people and then have to let them go two months later. Our workforce has seen enough of that the last six or seven years.

But I think with the build we have seen, the activity we have seen this year, I think we are really there now and are in the process of trying to backfill with the full-time employees. But it's just you can't flip a switch and all of a sudden have the full-time staff you need. It's obviously a process of going through the interview process and hiring the right people.

But from a confidence level that the housing recovery is at least sustainable in the near term, I would say we are there and are in the process of doing that.

, Yes, and I think one good example is the -- our Houston window plant. We got up to where we had 40-plus temp laborers, and that is back down now to where our temp laborers are less than 10. And we have been able to bring in and have BFS employees filling those slots.

And this is typical of what happens throughout the Company. We have always used temp labor to take care of seasonal changes in the business and/or temporary spikes in the business. But this year has been very unusual as far as the usage of our temps go.

Great, thanks. That's all I have.

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

Okay. We really appreciate your listening in on the call. If there is any further questions that you care to discuss, don't hesitate to give Chad or Marcie Hyder a call, and we will hopefully be able to answer your questions. Thanks and have a good day.

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