Good morning, and welcome to the Builders FirstSource Second Quarter 2012 Earnings Conference Call. Your host for today's call is Mr. Floyd Sherman, Chief Executive Officer. [Operator Instructions] Any reproduction of this call, in whole or in part, is not permitted without prior written authorization of Builders FirstSource. As a reminder, this conference call is being recorded today, July 20, 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'd like to turn the call over to Floyd Sherman. Please go ahead.

Thank you, and good morning. Welcome to our second 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 second quarter, I'll turn the call over to Chad for a more detailed discussion of our financial results. After my closing comments regarding our outlook, we'll take your questions. We delivered our best operating performance in nearly 5 years, reporting positive adjusted EBITDA of $2.1 million for the second quarter and improving to breakeven adjusted EBITDA June year-to-date. Our second quarter sales grew 31.7% to $271.9 million compared to sales of $206.4 million for the second quarter of 2011. Over the same time period, actual single-family housing starts in the South Region increased 21.3% while single-family units under construction increased 1.5%. Our top line growth far exceeded this increase in residential construction activity, indicating we continue to grow market share, and we met our primary goal for the quarter of getting back to positive EBITDA. Our sales in the current quarter were our highest of any quarter since 2008 and represented our fourth consecutive quarter-over-quarter sales increase of greater than 20%. And our sales for South Region single-family start was $3,513, down just slightly from $3,539 in the first quarter of this year. However, as Chad commented on in our earnings release yesterday, it was a challenging quarter for gross margins, as the higher-than-expected sales volume combined with roughly 16% price inflation in lumber and lumber sheet goods during the quarter forced us to replace inventory during the latter half of the quarter at a higher cost. Given our limited ability to adjust intra-quarter pricing with many of our customers, we experienced gross margin compression on our commodity and lumber sheet good products.…

Thank you, Floyd. Good morning, everyone. For the current quarter, we reported sales of $271.9 million, compared to $206.4 million for the second quarter of 2011, an increase of $65.5 million or 31.7%. We estimate sales increased approximately 29% due to increased sales volume and 3% due to price. Breaking down our sales by product category, prefabricated components were $51.2 million compared to $40.2 million in the second quarter of 2011; windows and doors increased approximately 27% to $59.3 million; lumber and lumber sheet goods were $87.9 million, an increase of 44.8%; our millwork category increased $4.8 million to $26.4 million; and other building products and services increased 26.2% to $47.1 million when compared to the same quarter last year. From a sales mix perspective, lumber and lumber sheet goods were 32.4% of total sales, up from 29.4% of total sales in the second quarter of 2011, due primarily to increased volume, which is indicative of more homes being in the early phase of the construction process. All other categories were fairly consistent between periods from a mix standpoint. Our gross margin percentage was 19.7%, down from 20.7% in the second quarter of 2011. The 100-basis-point decline was, as Floyd mentioned, primarily attributable to commodity lumber inflation. We estimate gross margin decreased 170 basis points due to commodity lumber inflation relative to customer pricing, but was offset somewhat by a 70-basis-point improvement due to increased sales volume. Selling, general and administrative expenses were $55 million for the current quarter. This is up only $6 million or 12.2% from the same quarter last year, despite a 31.7% increase in sales. As a percentage of sales, SG&A expense decreased to 20.2% in the current quarter from 23.7% in the same quarter last year. In the current quarter, our salaries and benefits expense,…

We were -- thanks, Chad. We were very pleased with our results for the second quarter. We made significant strides during the first half of 2012, a result of our employees' efforts over the past several years, positioning the company to take advantage of the improved housing environment we are finally seeing. We believe we'll be able to continue -- we'll continue to see housing gradually recover, which should drive further financial improvements in our business. Throughout this downturn, we have not wavered from our commitment to grow market share, improve operating efficiencies and conserve capital. It is extremely gratifying to see the hard work and dedication of all of our employees translating to improved financial results. I'll now turn the call over to the operator for Q&A.

[Operator Instructions] We will take our first question from Jack Kasprzak with BB&T.

With regard to the higher prices of lumber, do you guys expect and -- that you'll be able to pass those along ultimately to the customers, given that the environment is still somewhat competitive?

Yes. I think, Jack, I really think that we'll be able to do that. We initially were able to pass on increases from the -- going from the first quarter into the second quarter. We've also put out increased pricing in the third quarter. What really caught us in the second quarter was that we overshot our budgets in terms of the sales. We really didn't think that we would produce the sales revenue that we did, and that caused us to go in and do a replacement set while the market was on a spike up. It since has fallen back. It's now looking like it's stabilizing. And I think the -- we will continue to be able to put legitimate increases through, and we'll be able to get those increases.

Okay. You're referring to the price of lumber when you said stabilizing, I assume?

Yes, lumber and lumber sheet goods. Yes.

Yes, okay. The macro statistics on housing, homebuilder sentiment index, housing starts, housing permits, if anything, in the last month or so, have gained momentum, I would say. Your sales performance has obviously been very good for a few quarters here in a row, but are you seeing that on the ground in your business now? Two units under construction have turned positive, single-family have turned positive. So despite very good sales performance so far, it seems like it's early on with the market-building momentum. Is there any reason to think we can't continue to see this kind of robust growth?

No. I think that we'll be able to continue that growth. The only thing that possibly could cause us to pull back, other than a major fallback in construction activity, is if we saw that we were unable to pass on legitimate cost increases that would cause us to say the margins were unacceptable and we're just -- would just not be a profitable business for us. But I really don't anticipate that taking place. And right now, we definitely are still continuing to see a very much improving construction activity out there.

Jack, you make a good point. We've been very pleased with our sales the last few quarters, and that's been primarily, when you look at the statistics, driven by starts. We just now, this past month, saw units under construction turn the corner and started improving, and so that gives us even more to look forward to, I think, as these starts begin to turn into units under construction. So I think you make a good point there that we're still on the front end of what we feel like is a wave of construction coming through.

We'll take our next question from Seth Yeager with Jefferies & Company.

So just following up on Jack's question, as far as the growth in starts versus units under construction, is it fair to say that maybe over the next couple quarters, we'll start to see a mix shift away from the lumber and lumber sheet goods and more towards some of the other products? Or is that not -- you don't really expect that to be the case at this point?

No, I think the -- we should see the rest of the product lines following the lumber, lumber sheet good sales. And so I think that, that will be an improving part of the mix in our business. But typically, the lumber and lumber sheet goods are what you're going to see in a trend of -- an improving trend of the housing activity. If the housing activity stays as robust as what we've seen up to this point, then I think you're going to see, until it stabilizes, still a little bit heavier tilt towards the lumber and lumber sheet good category.

Yes. If we see -- keep seeing starts like we've seen recently, the units under construction will continue to lag a little bit. And then you've also got to factor in commodity lumber inflation. If that continues, then that obviously can impact your mix as well. But you're right, Seth. I mean, if we're starting houses, eventually the other products have to follow.

Yes. And typically, as we go into the winter months, you'll see then the housing activity starts slowing down and then as you're finishing the house, closing it in, you'll see then a pickup in the mix of the other products.

Appreciate it. I think, in the last couple of quarters, you've said that you've noticed a bit of a more elongated lag between homebuilders breaking ground and actually waiting to see before they actually start construction. Is that starting -- is that lag starting to compress a bit?

Yes. We're seeing that starting to take place now.

Okay, that's helpful. And then just I get the sense you guys are continuing to grab share. Can you maybe provide the number of new customers that you guys added? And just maybe talk a little bit about trends in the Carolinas versus Florida and Texas. I know you added some capacity to your windows in Texas. It seems like a pretty strong market. If you can maybe just give some additional detail on that?

Yes. In the second quarter, it was a record quarter for us as far as new customers opened there. Then that also produced the record sales for new customers in the quarter. So we're still seeing a very healthy trend as we are adding new customers, and those customers are producing meaningful dollars for us. So it's a good trend going for us.

And from a market standpoint, you're right. Texas has still been very strong for us. And really, if you look at a quarter-over-quarter sales perspective, most of Florida has shown some really nice improvements for us as well. And then you've got pockets of The Carolinas that are really strong, and you've got other pockets that aren't as strong.

Yes. And I will have to say we are seeing indications for the first time that some of the builders are actually starting to put in spec inventory or trying to get spec inventory on the ground.

Okay, that's helpful. And then just a last question, if I can. At one point you mentioned maybe pulling back a little bit on sales growth to maintain margins. How do we think about when you guys start to, in a way, up the accelerator on the top line? And then just, as far as going forward, thoughts around concern on the liquidity front as far as financing the working capital to sort of continue to fund that top line growth. How should we think about that?

Well, we have indicated in the past that our goal, the next step is to get cash flow breakeven. In order for us to get cash flow breakeven with our current penetration, it's going to be somewhere in the $1.250 billion to $1.3 billion in top line to generate the type of results, financial results that we need. So we're going to continue driving our sales. We obviously have to be very, very conscious of the margins, and I think we have been and will continue to be. But our -- we need to get to cash flow breakeven, and it's going to take sales dollars to do it. And that's how we're going to be directing the company.

And if we keep our, like you say, our foot on the accelerator and continue to grow sales, you're right, that's going to chew up more cash and working capital. And you've seen the last week or 2, there's been a lot of money coming into home building with some of the refinancings we've seen with the homebuilders. So we're just constantly striving for EBITDA improvement, and we just keep evaluating our liquidity and what options might be out there. But I really feel like if we can continue to show the financial improvement that we have, that there will be opportunities come along.

And we'll take our next question from Howard Weinberg with UBS.

Want to go back to the inventory question and try to understand what you felt was sort of an appropriate level. And are you going into the third quarter with an appropriate level of inventory, given what you expect for sales in the third quarter?

Yes, the -- as far as going into the third quarter, again, we have tried to estimate what our requirements are going to be to serve the business that we see in front of us or feel will be in front of us. We're in that position that, right now, we've covered 75% of what we feel the need will be, and we'll always -- we never cover 100% because we always feel there's opportunities to take advantage of certain situations that may arise. And that's -- we're in a, what we think is a good position for the third quarter. Only time will tell. I certainly am not going to tell our people to slow down their selling efforts. But we'll be monitoring it very closely, and we'll do what we have to do to ensure that we have the inventory to back up our commitments.

And Floyd, regarding the 75% number, is that similar to what you had going into the second quarter as the sales just exceeded, compounded by the fact that the price of lumber went up so rapidly on you?

Well, we weren't able to really get as much coverage as what we have right now, and we really missed estimating what our sales were going to be. So it was a combination of the 2. I would say more of it was driven by our underestimation of the top line growth that we got.

Yes. And just on -- last question on this topic. To the extent that lumber prices were to fall over the next several quarters, and given your inventory levels, how are your contracts set up that you'd be able to protect your margin in that event?

Well, typically, most of our contracts are either 60-day or 90-day forward pricing. Most of them have a 30-day tail so that you're really, in effect, covering 120 days or 90 days, whatever the situation may be. So that's what our inventories are designed to cover. And so then we -- then out on a repricing at the end of a quarter, then it'll take into account whatever the market costs look like at that time for the lumber, lumber sheet good products. So it's -- we don't get -- on a downturn, we don't really get hurt because most in -- very, very rarely have we had it to where people don't honor the commitments that they have with us. So we don't really have much downside risk in the inventory.

Great. That's helpful. And then on the -- just want to switch over to liquidity. Chad, I think you talked about $45 million the $55 million of usage for fiscal 2012. Year-to-date, I think cash was down about $42 million. Should we be implying for the rest of the year that you're going to be, call it, negative $3 million to negative $13 million for the rest of the year? Is that the right way to think about guidance?

That's correct.

Okay. And then just finally on the CapEx spending done on the window facility, how much additional CapEx is going to be needed to bring that up to meet demand?

At the window plant?

Yes.

We pretty much made that investment already.

Right.

[Operator Instructions] We will go next to Philip Volpicelli with Deutsche Bank.

My question's regarding contribution margins. If I give you guys the $4 million that you say got hit on EBITDA from the higher lumber prices, that gets you to a change year-over-year, or about 11% contribution margin in terms of your growth over $65 million of revenue. As we move forward, how much faster or how much higher does that contribution margin get as you near that $1.25 billion to $1.3 billion target that you guys suggest gets you to free cash flow breakeven?

You're right. Adding back -- obviously, your math is right. And then another thing that we struggle with this quarter was just the rapid ramp-up in sales volume and our increase in overtime and use of temp labor. So had we been able to control that a little better and anticipate a little better, that contribution margin, I think, would have been more in the 12% to 15% range. Long term, a lot of it will depend on how well we're able to increase gross margins, obviously. And if we can get commodity inflation and pass along those price increases, we get incremental flow-through there as well. Long term, I would love to be 15% to 20% EBITDA flow-through, and I think we can if everything falls right for us in a particular quarter. Obviously some things didn't go our way this quarter, but I think, over the long haul, I think anywhere from 15% to 20% is our goal.

Got you. And as you get closer to that $1.25 billion to $1.3 billion, that contribution margin should accelerate, right, because you've got more volume going through what should be a relatively fixed-cost base?

Yes, you'll obviously have some variable components to delivery as volumes grow. But yes, I would anticipate that we get additional gross margin. Commodity inflation always helps. So yes, I would agree with that statement.

Okay. And then with regard to the facility, the $35 million availability block, have you had any discussions with the lender there on whether or not you can reduce that number? And why was it set at $35 million? Can you just give us some context as to why is it set there?

We have not had any discussions to this point. And I think the block from their standpoint was just to make sure -- if we get down close to the block, it triggers some additional reporting requirements that we have to do to Highbridge. And I think it's just a -- it's a point where they just want to be closer to the business and just making sure that, obviously, that their assets are protected.

Okay. All right. And I guess one last question. What target EBITDA margin -- I mean, if I do the math to get to $50 million, which is roughly your breakeven at $1.25 billion and $1.3 billion, it's roughly a 4% EBITDA margin, which historically you guys have been able to achieve that pretty easily. What margin are you targeting, kind of, let's say, a year out?

Oh, gosh. There's a lot of variables that go into that question.

I mean, do you think you can get back to the 6%, 7% you had in the boom years? Or is that reflective of what it was at boom?

Can we get back to that in a year?

No. Over time.

Oh, absolutely. We...

We will be...

Back at the peak, we were 8%, 8.5%.

And with the permanent costs that we've taken out of the business...

We should do better than that long term.

We'll be better than that.

Okay. I guess there's too many variables to kind of go through it. But I appreciate the information.

We will take our next question from Sean Boyd with Westcliff Capital Management.

Just a couple, and I think I'm coming back to the same topic, but maybe coming at it from a different way. If I heard you correctly, the year-over-year change in gross margin was actually a little bit worse than the drop because we had scale that gave us about 80 bps to the positive.

Right.

So if we hadn't had the issues on lumber pricing, our gross margin would have been around 21.5%.

Right.

That's correct.

Okay. And of course, that's kind of a theoretical exercise, but the scale is definitely kicking in. So to your other comment about so far in the quarter, the price has been stable, and that's allowed you to improve gross margins in the quarter. Does that mean that we -- on a year-over-year basis, you're not seeing any impact so far in the quarter?

Well, as Floyd mentioned earlier, we do have, in a lot of cases, a 30-day tail on the pricing commitments. So said another way, if Builders had submitted a PO prior to quarter end, then we give a 30-day grace period to carry over that pricing. So to sit here and tell you thus far, through July, we're not seeing an impact, would be incorrect, because we still have some of that tail coming through. But to answer the question a little more broadly, yes, we should see margin improvement this quarter, assuming a stable commodity environment.

Okay. And just last thing on the gross margin, again, barring any issues such as the -- we had in this quarter. Can we target a particular gross margin, a particular level of revenues? So going back to that $1.25 billion to $1.3 billion cash flow breakeven, is that a 22% gross margin? 23%? How do you look at that?

I would say you're in the ballpark, yes. I'm not going to get into forecasting gross margins. There's just too many components. But yes, you're in the ballpark, I think.

Okay. Last one from me is on the SG&A, that being up the last 2 quarters year-over-year. We've talked about that having, I think it's about a 35% variable component. And so I'm at the point of just trying to grow that at sort of 35% of the overall revenue growth rate. Is there anything coming down the pike that would change that? Any sort of expansion or contraction that would step change it so that I'm not looking at the growth [ph]?

I think I've said that up to about $1 billion in revenue, we should be about 35% variable. Once we blow past $1 billion in revenue, we will become more variable. We've got to start adding fleet, we've got to start adding drivers to keep up with the incremental volume. So I think once we get past $1 billion in revenue, you'll see that migrate down closer to a 50-50 split.

We will take our next question from Rob Hansen with Deutsche Bank.

I just wanted to see -- you mentioned that you had a record number of new customers. I just wanted to see what that number was? And then how many -- how much of that was related to the 2 new market entrances that you had over the past couple quarters? And also, what percentage is -- how much sales have you got in the last quarter from those 2 markets?

I'm not going to start giving sales dollars by the new markets. I think we've stayed away from that. One of them certainly has been -- has had more meaningful numbers. The other one hadn't even really opened until well into July. So it would be -- that number would be -- wouldn't mean anything. As far as the number of new accounts that we opened, 562, and if – and they are unique new customers for us. The new location in Austin, Texas, certainly was part of that number, very small piece of that, because we were already selling a certain amount of product into Austin, and they picked up part of that business. So they had less than -- probably not much more than 5% of that total.

Okay. And then you mentioned that sales generally exceeded your own kind of internal forecasts. What parts of the country were -- exceeded your forecast?

Texas, Florida, Baltimore, Washington.

Okay. And just one last one was, you've kind of talked about this in the past, I just wanted to kind of see if you could remind us, kind of refresh us in terms of the permanent cost that you've taken out of the business that should help you going forward.

We estimate that to be $20 million to $25 million annually.

At this time, there appears to be no further questions. Mr. Sherman, I'll turn the call back over to you for closing comments.

All right. Well, we appreciate everyone's participating on the call today. Any questions that you may have, that you'd like to follow up on from what you've heard today, don't hesitate to give Chad a call. That will conclude our presentation for today.

This concludes the Builders FirstSource Conference Call. You may now disconnect.