Builders FirstSource Inc (BLDR) 2013 Q1 法說會逐字稿

Good morning and welcome to the Builders FirstSource first-quarter 2013 earnings conference call. Your host for today's call is Mr. 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 in whole or in part is not permitted without prior written authorization of Builders FirstSource. And as a reminder, this conference call is being recorded today, April 26, 2013. 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 will turn the call over to Floyd Sherman.

Thank you and welcome to our first-quarter 2013 earnings call. Joining me today from our management team is Chad Crow, Senior Vice President and Chief Financial Officer. I will start by giving a recap of the first quarter and then turn the call over to Chad who will discuss our financial results in more detail. After my closing comments regarding our outlook we will take your questions.

Sales for the first quarter of 2013 were $319.7 million, an increase of 45.7% when compared to prior year's first-quarter sales of $219.4 million. In addition, we reported first-quarter 2013 adjusted EBITDA of $5.4 million, a $7.5 million improvement over 2012 first-quarter adjusted EBITDA loss of $2.1 million.

I'm very pleased to have started our fiscal year was such strong financial results. We were able to achieve a top-line growth of greater than 30% for a sixth consecutive quarter. Even adjusted for commodity inflation our current quarter sales increase once again exceeded the increase in residential construction activity as actual single-family housing starts in the South region increased 27.4% and single-family units under construction increased 23.2%.

From a sales-per-start perspective we ended the current quarter with $4,047 per South region single-family start, up significantly from $3,539 per start in the first quarter of 2012.

As mentioned in yesterday's press release, though our sales growth for the quarter was very positive, the commodity lumber price inflation we experienced during the quarter once again placed significant downward pressure on gross margins. Subsequent to setting first-quarter customer pricing in late December, commodity lumber prices increased approximately 20% through the end of the first quarter.

While we were able to attain price increases from our customers during the quarter, they were not enough to offset the continued commodity price inflation. For the quarter we estimate commodity lumber inflation negatively impacted gross margin by 1.8 percentage points. I will now turn the call over to Chad who will review our financial results in more detail.

Thank you, Floyd. For the current quarter we reported sales of $319.7 million compared to $219.4 million for the first quarter of 2012, an increase of $100.3 million or 45.7%. We estimate sales increased 29.7% due to increased sales volume and 16% due to price.

Breaking down our sales by product category, prefabricated components were $60.8 million, up from $43.5 million in the first quarter of 2012. Windows and doors were $63.6 million, up approximately 28%. Lumber and lumber sheet goods were $116.8 million, an increase of $50.4 million. Our millwork category increased $7.7 million to $29.1 million and other building products and services were at $49.4 million, up 29%.

From a sales mix perspective lumber and lumber sheet goods were 36.5% of total sales, up from 30.3% of total sales in the same quarter last year due primarily to the commodity lumber price inflation. Excluding the impact of price inflation lumber and lumber sheet goods were down slightly as a percent of total sales. While prefabricated components and millwork were up slightly windows and doors and other building products and services were relatively flat as a percent of total sales.

Our gross margin percentage was 19.5% in the current quarter, down from 20.6% in the same quarter last year. We estimate price negatively impacted gross margins by 180 basis points largely due to commodity lumber inflation during the quarter relative to fixed customer pricing commitments and was partially offset by a 70 basis point improvement due to increased sales volume.

We estimate that commodity lumber inflation during the quarter, combined with our limited ability to adjust intra-quarter customer pricing, had a negative impact on gross margin dollars of over $5 million.

To give you a specific example of one of our main commodity lumber products, at the beginning of the quarter on average across the entire Company we were selling this product at a gross margin of 14%. By the end of the quarter we had raised our prices on this product 20%. Unfortunately by the end of the quarter market prices for this product had increased 30%.

So in spite of raising our sales prices 20% during the quarter we could still not keep up with inflation and by quarter end were selling this product at low-single-digit margins. We've seen inflation subside in recent weeks but only time will tell if this is just a temporary reprieve.

Our selling, general and administrative expenses were $61.1 million, up $10.2 million or 20.2% from the same quarter last year despite a 45.7% increase in (technical difficulty) sales. As a percentage of sales SG&A expense decreased to 19.1% in the current quarter from 23.2% in the same quarter of 2012.

For the first-quarter of 2013 our salaries and benefit expense, excluding stock compensation expense, was $37.7 million or 11.8% of sales compared to $31.1 million or 14.2% of sales in the first quarter of 2012. This increase is primarily related to higher sales commissions and additional staffing needs to service our increased sales volume. Delivery expense increased $1.4 million and other general and administrative expense increased $1.2 million, both a result of increased sales volumes.

Interest expense was $12.5 million in the current quarter, a decrease of $600,000 from the first quarter of 2012. The decrease was primarily related to a $2.7 million reduction in the non-cash fair value adjustment related to stock warrants issued in connection with our term loan offset by the incremental interest on the additional term loan borrowed in December of 2012.

We recorded $300,000 of income tax expense in the first quarter of 2013 compared to $200,000 in the first quarter of 2012. We recorded an after-tax non-cash valuation allowance of $4.4 million and $7 million in the first quarters of 2013 and 2012 respectively related to our net deferred tax assets.

Absent the valuation allowance our effective tax rate would have been 36.3% in both the first quarter of 2013 and 2012. As of the end of the first quarter our gross federal income tax NOL available for carry forward was approximately $245 million.

Loss from continuing operations was $11.6 million or a $0.12 loss per diluted share compared to a loss of $19.1 million or a $0.20 loss per diluted share in the same quarter last year. Excluding the fair value adjustment for stock warrants and the tax valuation allowance our loss from continuing operations was $0.07 per diluted share for the current quarter compared to a $0.09 loss per diluted share in the first quarter of 2012.

Our net loss for the first quarter of 2013 was $11.8 million, a $0.12 loss per diluted share compared to a loss of $19.2 million or a $0.20 loss per diluted share in the first quarter of 2012.

Adjusted EBITDA was $5.4 million for the first quarter of 2013 and, as Floyd mentioned earlier, is a $7.5 million improvement over an adjusted EBITDA loss of $2.1 million in the first quarter of 2012.

Our cash use for the current quarter was $26.8 million, of this amount $18.9 million was due to a build in working capital related to our higher sales volume. The remainder of cash used was related to $1 million of capital expenditures, $10.9 million of cash interest offset somewhat by positive EBITDA during the quarter.

We ended the quarter with liquidity of $102.7 million, which included $117.7 million of cash reduced by the $15 million minimum cash requirement contained in our amended loan agreement.

During the current quarter we amended and reduced our existing $20 million standalone letter of credit facility to $10 million. In addition, we transferred the $12.4 million of LCs outstanding under the standalone facility to our new $15 million LC sub facility.

This transfer eliminated the cash collateral requirement for our outstanding LCs and thus increased our overall liquidity at the time by $13 million. As of March 31, 2013 we had $12.6 million of LCs outstanding under our sub facility and no LCs outstanding under our standalone facility. I will now turn the call back over to Floyd for his closing comments.

Thank you, Chad. We are excited about the prospects for the home building industry and the outlook continues to suggest favorable opportunities for Builders FirstSource. The National Association of Homebuilders is now predicting a 24.2% increase in single-family housing starts for 2013 and an additional 28.8% increase in 2014.

We believe Builders FirstSource well positioned to take advantage of this recovery. Our strategy remains focused on increasing our marketshare and improving our operating margins as we move into the spring and summer building season. I will now turn the call over to the operator for Q&A.

(Operator Instructions). Trey Grooms, Stephens.

First question is on inventory ticking up a little bit. I guess with the recent pullback in lumber prices, I mean I would expect you guys are probably continuing to maybe build a little bit there. First off, is that an accurate assumption?

And then secondly, if so, how do we kind of think about that as we look forward and the impact to margins that you guys could expect over the next quarter or so, understanding the impact that the higher prices had on your margins here in the first quarter?

I would say inventory levels are up obviously since year end, some of that due to inflation. We are trying to make opportunistic buys as they become available. As you said prices have pulled back a little bit the last couple of weeks. We will see what the future holds as to whether they stay at these levels or start to run up again.

You know, the buys we have made the last few weeks have certainly helped our inventory and cost position. But really it is going to -- our margins in the next couple of quarters are going to be more determined on what lumber prices do over the next couple of months. And we will just have to wait and see.

Okay, appreciate that. And then also kind of on the same topic here, just kind of -- and I know you don't have a crystal ball, but just with a little bit of capacity looking like it is going to come on in the mills here looking out over the next several months, I mean do you think that we could be getting into a situation where we could start to see -- at some point on the horizon start to see lumber prices settle down as a result of that? Or how do you see the kind of supply/demand dynamics within the industry kind of playing out as we look through this year?

We don't really see any new lumber mills coming on stream. We see three OSB Mills that will probably be opening and have already been announced to open and start production this year.

Yes, OSB, that is what I meant, sorry.

It is anticipated that those three OSB Mills this year will probably add somewhere in the neighborhood of 700 -- on a combined basis somewhere around 700 million square feet. If you look at it for every 100,000 new homes that are added it requires over 1 billion square feet of 7/16 OSB to cover the housing increase.

The mills were operating close to capacity last year; the combined output of the OSB was about 17.5 billion square feet. So with the increased housing of this year, the new mills opening really aren't going to have much of an effect that we can see on bringing down the price of OSB.

I think we have seen the major inflation in both OSB and lumber and I think we are starting to get to a point -- and I think both products are trying to find a point to where there can be more stabilization of pricing in the market and I think we are going to see that.

But I think supplies are going to still continue to be tight for the rest of the year. Hopefully those three mills will ease some of that, but I really don't think it is going to have a heck of a -- make a heck of a difference for us this year, anyway. Maybe next year that will begin to get some relief.

Great, thanks for your insight on that, Floyd. And then the dollar per start moved up a little bit it looked like. Is that just a function of higher lumber prices or are you guys seeing more share gains there as well?

No, because we still took marketshare gain; if you look at it even on a straight volume basis and you looked at either from based on the single-family starts in the southern region or if you looked at units under construction.

Probably I will say our marketshare gain we probably slowed down a little from what we had experienced in previous quarters and most of that -- as being due -- we are trying to be more selective in our pricing. We are trying to get better pricing in the marketplace and obviously there is trade off. It is still a very, very competitive market out there.

Housing, while it still is much better than what it was in the past, 2012 was still the fourth worst year on record for housing. So it's still -- pricing is still a very competitive part of the market, but we still have been able to really continue to increase that market share anywhere from I guess depending on what side of it you want to look at, units under construction, which is a true measure for us or starts, it is still single, low-single- to high-single-digit true market share gain.

Great. And then one last one is just kind of a housekeeping for Chad. The SG&A, it ticked down a little bit as a percent of revs. Is that a good run rate or should we expect to see that kind of move back up to the kind of 20% range as we kind of look at here for the balance of the year? Thanks.

I think that is probably a pretty good run rate.

The 19% -- the 19.5% or (multiple speakers)?

Yes.

Okay, perfect. Thanks a lot, guys.

Seth Yeager, Jefferies Investment Bank.

Nice quarter, guys.

Thank you.

So can you give us a sense right now on where your gross margins are maybe across the segments? I understand if you don't want to get into too much detail, but particularly on the prefab business, where are you now versus say the 2006-2007 time period? And have you been able to push pricing on to builders particularly in that segment?

We have made up a lot of ground since the low point which was probably back in 2010, still have some ground to make up in that product category. That category does get impacted a little bit by inflation as well. Not as significant as the lumber -- lumber sheet goods category. But we are starting to get better pricing and then some margin improvement there.

Maybe just at a high level, how, peak to trough, where are you guys kind of sitting right now? Like halfway back, three quarters of the way?

I would say, Chad, we are maybe a third (multiple speakers).

Yes, we are not quite halfway there yet.

Oh, okay. All right, that is helpful then. Appreciate it. Okay and then just maybe to follow up on a prior question. Now that you are close to $1.2 billion in revenue, incremental cash SG&A at this point. And I recall if you guys had some additional lease expense that might run through with some further top-line improvement. Are you going to hit that number and where is that going to run through your P&L if you could maybe just remind us?

Any of that would run through -- it would run through SG&A, but that is a very small number. We don't have that many leases that have contingent lease payments based on rev.

Okay. And just your incremental cash at this point, maybe in SG&A? I know at a certain level it kind of ramps up a little bit, but just to kind of get a sense right now.

Are you referring to the variability of it?

Yes, yes, sorry.

Going forward?

Yes.

On sales volume we are probably going to be somewhere 50% to 60% variable on just sales dollars. It's going to be at less than that if we keep seeing some lumber inflation and our ability to pass on price increases -- obviously we can leverage our SG&A even better in that environment, so --. I would say kind of a blended rate is probably 50% variable.

Okay, that is helpful. And then just on cash flows are you guys going to still spend plus or minus $10 million or $11 million this year? Was first quarter sort of a timing issue on CapEx and is it going to be a little more back-end loaded this year?

Yes, I still think CapEx will be probably in the $8 million to $9 million range for the year.

Okay, perfect. And then just last one. Can you remind us what the make whole on your term loan is currently and just what the schedule looks like going forward? Thanks a lot, good luck.

The make whole right now I believe is about $41 million, $42 million. It comes down around $7 million a quarter. It comes down evenly through the end of December 2014.

Great. Thanks a lot. Good luck, guys.

Daniel Downes, B.C. Holdings.

Good job on the continued progress and your results. I was wondering have you seen any noticeable diversions between buying patterns and large homebuilders versus small homebuilders. It seems kind of the perception that the large homebuilders are taking share and doing much better.

You know, from our standpoint our mix has remained very, very consistent to last year, year and a have between the larger builders and the smaller builders. So while we are growing alongside the large builders, we are certainly adding a lot of new customers and growing our share with the small guys as well. So for us it has been remarkably consistent.

Okay. Your volumes were great, up 30% in the quarter. I was just wondering did you guys see any distinguishable -- was there any cadence in month-to-month activity where January was up and February was not up as much? And also any commentary on how business momentum is and volumes kind of thus far into April?

We continue to accelerate on our average daily shipments all the way starting through January, February was better than January, March was much better than February. And this pace is continuing on through April. So we are seeing a steady escalation in our business.

Would you attribute that escalation just to normal seasonality or was it kind of -- was it escalating as far as the percentage growth on a year-over-year basis, so --?

No, I think it is more than seasonality. So long as we are continuing to take and gain positive marketshare gain I think that -- and obviously seasonality does figure into it, but the -- still on a month-to-month -- month-over-month comparison, a quarter-over-quarter comparison, all of those are up and accelerating.

Okay, thank you very much.

David Williams, Williams Financial Group.

Good morning, guys, great job on the quarter, very nice.

Thanks, David.

I wanted to ask, we had talked a little bit about you seeing some share gains and just your dollar (inaudible) per start. But I wanted to see if you could give us an idea maybe of if you are seeing anything -- any trends in the size of homes or maybe the dollar per maybe a package you guys are shipping out. And is there any contribution maybe from that as opposed to actual market share gains?

I really haven't seen any stats that would say that there has been a significant change in the average square footage of homes being built. Everything we are seeing is still saying it's pretty close to where it was a year ago.

Okay, very good. So you feel pretty confident that that number is moving maybe in lockstep with market share gains and not some other maybe sizing issues or other maybe outside issues?

Yes. And we really haven't seen, David -- we have not really seen a major change. We are hopeful that this will come because we are reading a lot about how builders are starting to sell more upgrades and put a lot of extras into the home. But we haven't really started seeing it that much. And that will certainly impact us favorably as we go forward should that trend take place.

We are still seeing the builders are still very concerned about the pricing of the home, keeping it -- making sure that it is affordable and the -- but there has been a lot of talk that the consumer is again starting to turn and look for a more upgraded home and that will be very positive for us.

Got it, thanks. And then secondly, I wanted to see if maybe you could talk a little bit about what is going on in the prefab component part of the business. You said that it was up a little bit and on an inflation-adjusted basis I guess against the lumber and sheet goods that was down a bit. But what are you seeing as far as trends? Is it maybe increased adoption rates or is it just simply a function of increased volume sales?

Yes, we are definitely seeing an uptick in our component sales and we believe this trend will continue. Right now our backlog for those items is the largest it has been in -- going back to the 2006 -- 2005-2006 period and that is continuing to grow.

So I think there very definitely is one of the factors that impacting that is the labor issues that we have out in our industry and that then helps the component side of the business. And I think the labor situation is not going to rectify itself very quickly and as that particular problem continues I think there will be a conversion more and more to the use of components.

Sure, sure. Thanks for that. And then lastly if I could -- we talked a lot about not being able to change your pricing strategy intermediately during the quarter. But in talking with a few of your peers over the last couple of months, it seems like some of those guys, at least on a regional basis, are doing maybe shorter lock periods, 30 to 45 days, even with their larger customers.

And so, I wanted to see -- are you seeing anything maybe in that trend? Have you been able to bring any of that pricing back or those contract locks into a shorter time frame?

I would like to say that I believe what they are saying. We certainly are not seeing it. But we compete with all of the majors especially for the business with the large national builder. And I can say we have not seen that taking place.

Hopefully it will, because in these highly inflationary times that certainly is the better approach to pricing than extended pricing. And we certainly have been trying to get it and we have really been -- put a lot of effort into it. But unfortunately many of our competitors didn't go along with it and we ended up having to change our approach. So with that said I will leave it at that.

That is very interesting. Like I said, it was really more of a regional I guess phenomenon where there were a couple of folks that we talked to that said, yes, we are really targeting 30 to 45 days and on extreme cases (technical difficulty). So I didn't know if that was anything you were seeing or maybe that was very specific cases and very general markets. So (multiple speakers).

Yes, I haven't seen it in any of our regions.

All right. Well, thanks so much, guys, I appreciate it. Good luck.

Okay.

Robert Kelly, Sidoti Research.

A question -- a point of clarification. Someone had asked earlier about the SG&A run rate and you kind of okayed it. Was it the percent of sales run rate or kind of like the year-over-year increase? Or was it the dollar level? I guess that wouldn't make sense.

He was asking the percent of sales.

Percent of sales in the 19% range for the full year?

Right.

You would be in the 19% range?

I certainly think that is achievable, yes.

Right. I would just think it would be -- just given what you have in 1Q and what you probably have coming in 2Q that you could probably do better than that on the full year.

There is a possibility of that too.

We will certainly be trying to do that.

I don't think it's going to go higher, let's say that.

Okay, fair enough. As far as the 90-day price locks, were you able to secure additional pricing when you went to your customers at the end of 1Q? Basically have you caught up to the inflation you saw thus far in 2013?

We have certainly put a big dent in it. With a lot of the pricing you do have some bleed over into the next month following the quarter especially if a customer turned a PON say at the end of March and we didn't ship until April. So you do have some bleed over pricing. But we certainly put a dent in it.

Okay, some of the builders in the 1Q calls were talking about intentionally kind of slowing down the pace of sales to focus on price and margin. It seems like they have been doing a great job getting their selling prices up, which would help you guys get your pass through. Has the conversation changed at all as far as them being accepting of price increases?

I would say it is never easy getting price increases, but we are having success. And it's a battle; every time you go out there to price it is still a battle. Like Floyd said, it is still a very competitive environment. We are still building at historically low levels of housing. So I am not going to sit here and say it's easy by any means, but we are having some success and we will keep pushing.

Okay. Floyd, you were about to say something?

Yes, I was going to say you are always going to have -- in a competitive pricing environment you are going to have some people who think the market is going to fall and work to their favor. And you will have other people who believe otherwise. And it affects then obviously your pricing strategy. So you are continually contending with those forces out there.

And I do believe that the -- as the commodities are beginning to maybe level out to where it becomes a more predictable level of pricing and that certainly will help us as we go forward in a quarter. We set our pricing at the beginning of the quarter and we obviously take into account what we think replacement costs are going to be and what our costs in inventory are and then set that pricing.

And hopefully the inflation that occurs during the next quarter doesn't exceed what has been -- from what we set in our pricing like it did in the first quarter. These have been very, very unusual times. I have never experienced anything like what we have gone through over the last several quarters as far as market inflation.

But it is becoming now more predictable and I really think it is going to be a lot more controllable and I think we are going to have a lot better pricing success and I think our margins are going to reflect it in the coming quarters.

So based on all that, should we expect gross margin compression year over year for the balance of 2013 or should we be thinking more along the lines of the 19.5% you booked in 1Q, will we start to see expansion off that rate as we move forward into the year?

I would certainly like to think that is going to be our low watermark for the year.

Right.

That is a good place to think about 2013 being in -- assuming lumber stays where it is.

I would expect to see improvement on that in subsequent quarters.

Okay, okay, fair enough. And then just as far as the CapEx that you are spending this year, I believe you said $11 million was the number. What exactly are we talking about for CapEx? Is it just retooling? Is that your maintenance CapEx?

It's probably going to be $8 million to $9 million and it's going to be primarily related to expanding our delivery equipment.

Right, okay. But there is no expansion of footprint or --?

No, there are no new facilities in that number.

At what point do you need to do capacity expansion -- with sales level?

We could push $2 billion in revenue with our current footprint.

$2 billion with the current footprint and with the current fleet, delivery fleet?

Not with the fleet, but with the facilities.

What is the next step up for the fleet as far as your revenue level?

It's going to be every year.

It's going to grow, as long as our revenues grow and it will keep growing.

Okay, thanks.

To the extent we can we generally lease that equipment. But there is some specialized equipment and some situations where it just makes more sense to buy. And that is the part you are seeing on the CapEx side.

Okay and just one final one. The assumption is that the lumber inflation -- you kind of get hurt from a timing perspective in the commodity products. But there is a detriment to the prefab product, right? That is a set price kind of product. What is the competitive pricing landscape in prefab?

I mean, we have heard for so many years now excess capacity and kind of predatory pricing from the guys at the lower end trying to hang onto business. Is that still the case or has the rising tide of lumber costs instilled a little more discipline in the components business?

It has instilled a little more discipline, but there is still -- it still is a very competitive environment. But we are not seeing -- some of the craziness that we saw a year or year and a half ago. And I think that the industry is no longer, especially with the labor situation, is no longer fighting that -- the issue that you had when you had low material costs and low labor costs it -- it made it very, very difficult.

And people like ourselves -- you had to put so much business through your plants in order to absorb the fixed costs that you had in the plants. And so, there were some very, very aggressive pricing. But that certainly is -- has improved noticeably over the last six months in particular.

Great, very helpful. Thank you.

Matthew Dodson, JWest LLC.

Congratulations on a great quarter. Just one quick question for you. On your prefab, can you talk about your utilization right now? And then talk about your backlog being as big as it is, how that will kind of matriculate through the year?

Right now I would say across the board we are probably operating at about 60% of our capacity or utilization of our facility. In one particular area we have had to open one of our mothballed facilities in order that we could take care of the demand and that has already been put in place and we have now opened that facility and ramping it up. But across the board we are probably about a 60% utilization.

And as you get to say 80% utilization can you kind of help us understand the incremental margins?

I think on an overall basis you would probably be looking at anywhere from 50 basis points to 150 basis points margin expansion.

The vast majority of our margin enhancement is going to come from pricing.

Right. For that particular product category it will be greater obviously but on a consolidated basis that's probably a good estimate.

Thank you, congratulations again.

(Operator Instructions). Ethan Steinberg, SG Capital.

I just -- I'm a little confused on a couple of things and I want to make sure I understand. If you set the price at the end or at the beginning of the month a lot of these prices have come down at least in the spot market in this past month. I guess as you cycle through the rest of April I assume May will start to see a cleaner sense of what your gross margin should be?

That is correct.

Okay, so I think through 180 basis points of pressure that created in the first quarter, which was sort of a perfect storm if you look at what lumber input costs did, this is the first time in a couple years it seems like lumber has started to stabilize. And listening to a lot of the folks that make it this quarter they seem to think it is leveling out, whether it bounces a little from where it is now.

I guess I want to understand a little more what that gross margin for you all should do as we start -- if we do see that input level out. It seems like there is quite a bit of room from the 19.5% or 20% level.

Yes, there is and there are obviously other factors that impact our margin -- the competitive landscape and the pricing competition. But if you look at the first quarter, our margins were relatively strong the first two months of the quarter and then we got slammed in March because of the inflation and we were out having to replenish inventory.

As I said earlier, we had the bleed over pricing in April, so April started out rough as well, but it has started to improve. And so, in your scenario of if lumber prices stay relatively flat the rest of the quarter then we should see some very nice margin improvement in May and June.

And so, given the fact that the first quarter had one bloody month in it and the second quarter is starting out that way and should recover, then you could look at that math and say well if it costs us 180 basis points in Q1 maybe we can recover the majority of that in Q2. We will just have to wait and see how things play out.

And I guess can you help us understand if let's say prices held where they are today, where do you think a normal gross margin would be for you?

If we were selling the commodity lumber products at what I would call a normal historical margin if you go back over the years in a healthy housing environment, what we could expect to get on those products, I think we could have been around 22% margin in Q1. There are a lot of what if's in that, but in a normal environment, a normal pricing environment that is what I would have expected.

Yes. And I guess on -- okay. And if lumber is down now then you might actually swing above that for a little -- for a month or two as you get the other side of that pendulum?

Well again, I wouldn't call this a normal environment. We are still at very low levels and it is still very competitive. So I wouldn't go out on a limb and say it is going to get that strong that quick. We still need help from the overall housing environment.

Okay. In today's environment you don't think it could be a 22% run rate by the end of this quarter just on stuff that you are buying and I guess selling?

No, I think that would be a tad optimistic.

Okay, and then I just jumped off the Weyerhaeuser call and I think they said that the engineered wood products business saw the most improvement I guess in pricing or strength through the quarter. It was coming off a pretty weak point. Does that have implications for you guys or does that -- does it feel like that is happening for you as well?

That certainly is a major product item for us and we are a very good Weyerhaeuser customer. They have been able to push through some price increases, but unfortunately they don't sell to the builder. And we have to sit and sell the product to the builder and fight with, whether it be Boise or LP, and competition for that business.

And while Weyerhaeuser may be doing a lot better with a product, we aren't. And it's -- we have been able to get some of that price increase, but when you are divorced from having to deal with a builder and when it is a -- when you're in a position to take it or leave it and it's -- you have so much of your sales program built around the product, that makes it a lot tougher.

Ultimately I expect that we are going to be able to get it. But we can't move as quick as Weyerhaeuser does.

Okay. And sorry, just last question. That volume being 30% I thought was great in the quarter. And it sounded like a gentleman asked a cadence of that was some acceleration on a year-over-year basis sort of through the quarter or through today?

Yes.

Okay, great. Thanks, guys.

Shawn Boyd, Next Mark Capital.

Just two and, if I could, I want to go back to comments, Floyd, that you made earlier. Can you elaborate a little bit on -- it sounded like you said you did test a different pricing strategy and it kind of didn't work too well and you had to reverse that. Was that in a particular region, was it just a small point in time? Just tell us a little bit more about that.

Yes. It was -- if we wanted the business we were going to have to give a 90-day price. And we tried to go and we had been hearing that the competition in the field were going with shorter pricing and 30- and 45-day pricing. We obviously didn't find that to be the case and we had to make adjustments in that.

And we lost, in fact, to some of the people who are claiming that they are doing 30- and 45-day, we walked away from some business because the pricing just wasn't acceptable to us and it was still 90 days and they were still insisting that they are only giving 45. So I have a little bit of a [joined] dispute when it comes to listening to what people say versus what they do.

I got it, okay. And so that is where the market is. Is that where you are seeing -- is that what the large public builders and the smaller privates are demanding or is it really dependent upon scale (multiple speakers)?

For the most part it is the large national, large regional builders who are looking for longer pricing periods. We do I guess probably a third of our business -- 30% of our business probably is on less than that 90-day and we always have done a lot of 30-, 45-day pricing.

There are some large builders who still will price on 30 days and always have because they feel that they can catch enough variations in the commodity markets that over the long term that works to their advantage. And I would have to agree with them. I personally think that the 30-day pricing is the better pricing strategy for all of us in the industry. But you have to react to what the customers want and try to accommodate the customers and we do that.

I got it, okay. And the only other question on that is has there been any sort of -- I want to say like a test program or you could pick a particular region of the country or even a particular state and sort of say, okay, I know I am going to give up ex-amount, 20% to 25% of the business. What am I going to see in margins though and what am I going to see from a cash flow standpoint? Have you (multiple speakers)?

We look at that -- almost all businesses continually, you are continually evaluating what your walkaway points, what are the trade-offs and so forth. I can tell you in the first quarter we walked away from in excess of $20 million worth of business because the pricing was just not acceptable to us.

I suspect from what I have seen already in the second quarter that that number will probably be closer to $30 million worth of business. But you can -- as business conditions improve you can be more price selective and you do have an ability to get better pricing.

But we look at it by individual markets and across regions when we are making those determinations. But I can't -- had we taken that business, almost all of that business would have been low-single-digit margin for us as the quarter played out had we taken it. So I can't say well what would the margins have been had we taken it. You can go back and calculate that, but it would have cost us probably somewhere between close to 70 basis points if not 100 basis points.

Right, right, okay. And going back to the comments about the OSB capacity. You went through some real helpful math, Floyd, in terms of the incremental capacity that is coming on from the three mills and what that is relative to the improvement in housing starts kind of on a per -- I think you said a per hundred thousand basis.

We are seeing those prices level off to correct -- lumber prices level off to come in a little right now. But to be quite frank with you, given that math that you laid out, it sounds like you don't really expect them to stay down that long, (technical difficulty) that fair?

Yes, that's fair. I do not expect the prices -- right now there have been some conditions because of bad weather in the Midwest, bad weather in the Northeast, it really has slowed down the pace building in certain parts of the country, extreme wet weather in the Southeast has also affected it.

And some of the mills have temporarily built up an inventory, you had people starting to sit on the sidelines who normally would have been ordering on a regular basis were kind of waiting because they were saying, hey, I can't get the prices at where the -- from my customer where the market pricing is so I am going to sit and see what happens.

And the mills have -- finally have to get to a point where they have got to move that excess out. And that is when you get this temporary full on pricing as they attempt to do that. And I think that has been done. I really anticipate that we are going to see the prices come back up to somewhere near the level of where they were, but I think that will be on a more stable basis and it's comparable to where we were back in 2005 and 2006.

And it's, from all of our research and we do very close research on both the lumber industry as well as on the OSB history, right now these industries are operating at current level of housing. They are in that 80% to 90% capacity range. They have taken a lot of mills off stream and they are going to be very slow to add them. And what they are trying to do I believe is get to a stable pricing environment. And I think we will see that during the summer months.

Got it, okay. Last question from me -- Chad, in terms of the cash usage, the $26 million that we saw -- I think it was $26 million in the quarter. It was certainly a bit of an eye opener. I understand the working capital constraints. Do you expect to burn a similar amount this quarter and does this pull in your thinking at all in terms of doing something longer term on liquidity? And I guess we have to caveat that with the issues of the make whole that -- anything you can give us on that would be helpful.

It's really hard to predict what lumber prices are going to do and how much our working capital is going to grow. And our sales continue to increase at a rapid pace. I don't think we will see as much burn in the second quarter or the third quarter. I'm hoping that the working capital build will start to slow. But we will see.

In any event I still think we have ample liquidity in the near-term. I would still expect to end the year with at least $90 million of cash, maybe closer to $100 million. So from a liquidity standpoint we have no immediate concerns. As far as a refinancing, certainly the refinancing market is still very favorable and we continue to take a hard look at our options there and what might be available. But for the near-term I am not concerned about our liquidity needs.

Got it. Good enough, gentlemen. Good luck.

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 appreciate your dialing in and following our Company. And we certainly are looking forward to a continuation of the improved financial performance for the Company, so --.

This concludes today's conference. Thank you for your participation.