Floyd F. Sherman - Chief Executive Officer, President and Director M. Chad Crow - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Member of Proxy Committee

Richard S. Paget - Imperial Capital, LLC, Research Division Patrick Cliggett Robert J. Kelly - Sidoti & Company, LLC David Neil Williams - Williams Financial Group, Inc., Research Division Matthew Dodson Philip Volpicelli - Deutsche Bank AG, Research Division

Good morning, and welcome to the Builders FirstSource Fourth Quarter and Fiscal Year 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. And as a reminder, this conference call is being recorded today, February 22, 2013. The company issued a press release after the market closed yesterday. If you do not 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'll turn the call over to Mr. Floyd Sherman. Floyd F. Sherman: Thank you, and good morning. Welcome to our Fourth Quarter and Fiscal Year 2012 Earnings Call. Joining me today from our management team is Chad Crow, Senior VP and Chief Financial Officer. I'll start with a recap of the fourth quarter and fiscal year, then I'll turn the call over to Chad, who will discuss our financial results in more detail. After my closing comments regarding our outlook, we'll take your questions. Our sales for the fourth quarter 2012 were $287.6 million, an increase of 49.3% when compared to the fourth quarter of 2011, which helped generate our first quarter of positive operating income since the third quarter of 2007. As a comparison, actual single-family starts in the South Region increased 25.6% during the quarter, while single-family units under construction increased 20.2% over the same time period, indicating we're continuing to grow our market share. For fiscal year 2012, we ended the year with close to $1.1 billion in sales, up 37.4% over fiscal year 2011, and we reported full year adjusted EBITDA of $6.4 million, a $21.5 million improvement over 2011. Since 2007, our company, through hard work and sacrifice and with the unwavering support of our shareholders, has weathered the worst housing recession in our nation's history. To say I'm proud of what our employees have accomplished in recent years would be an extreme understatement. The housing industry continues to strengthen. Our sales per ship day in the fourth quarter exceeded that of the third quarter, which is highly unusual, given the seasonality of our business. And our Q4 adjusted EBITDA of $3.4 million was our strongest quarter of the year. On a sequential quarter basis, we were able to improve our gross margins by 40 basis points, in spite of a commodity inflation of over 20% during the current quarter. From a U.S. single-family housing starts perspective, 2012 ended with 534,600 actual starts, up 24.2% over 2011, although that is still well below the historical average of 1.1 million single-family units per year. I'll now turn the call over to Chad, who will review our financial results in more detail. M. Chad Crow: Thank you, Floyd. Good morning, everyone. For the current quarter, we reported sales of $287.6 million compared to $192.7 million for the fourth quarter of 2011, an increase of $94.9 million or 49.3%. Our quarter-over-quarter top line sales growth was driven by an estimated 38% increase in volume and an 11% increase in price. Breaking down our sales by product category. Prefabricated Components were $52.9 million, compared to $35.6 million in the fourth quarter of 2011. Windows & Doors were up 32% to $62.3 million. Lumber & Lumber Sheet Goods were $96.4 million, an increase of $42.1 million. Our Millwork category increased $8.2 million to $28.3 million. And Other Building Products & Services increased 34.2% to $47.7 million. From a sales mix perspective, Lumber & Lumber Sheet Goods were 33.5% of total sales, up from 28.2% of total sales in the fourth 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 20.2%, down from 20.4%, a 20 basis-point decrease. We estimate price negatively impacted gross margins by 120 basis points, largely due to commodity lumber inflation during the quarter, relative to fixed customer pricing commitments, and was offset by a 100 basis-point improvement due to increased sales volume. On a sequential quarter basis, our gross margin increased from 19.8% to 20.2%, despite another quarter of commodity inflation. Our selling, general and administrative expenses were $57.8 million, up $10.7 million or 22.8% from the same quarter last year, compared to a 49.3% increase in sales; included as a reduction to SG&A expense, the $600,000 of proceeds from a litigation settlement during the current quarter. As a percentage of sales, SG&A expense decreased to 20.1% in the current quarter, from 24.4% in the same quarter of 2011. For the fourth quarter of 2012, our salaries and benefit expense, excluding stock compensation expense, was $36.8 million or 12.8% of sales, compared to $27.1 million or 14.1% of sales in the fourth quarter of 2011. This increase was primarily related to higher sales commissions and additional staffing needs to service our increased sales volume. Delivery expense increased $1.3 million as a result of the increased sales volume. Interest expense was $11 million in the current quarter, an increase of $2.9 million from the fourth quarter of 2011, primarily due to the issuance of our term loan in December of 2011. We recorded $200,000 of income tax expense in the fourth quarter of 2012, compared to $300,000 in the fourth quarter of 2011. We recorded an after-tax noncash valuation allowance of $3.6 million and $6.5 million in the fourth quarters of 2012 and 2011, respectively, related to our net deferred tax assets. Absent devaluation allowance, the effective tax rate would have been 31.3% and 38% in the fourth quarters of 2012 and 2011, respectively. As of the end of the year, our gross federal income tax NOL available for carryforward was approximately $237 million. Loss from continuing operations was $11 million or a $0.12 loss per diluted share, compared to a loss of $16.6 million or $0.18 per diluted share in the same quarter last year. Excluding facility closure costs, the litigation settlement, the fair value adjustment for stock warrants and the valuation allowance, our loss from continuing operations was $0.08 per diluted share for the current quarter. For the fourth quarter of 2011, loss from continuing operations per diluted share was $0.09, when excluding facility closure costs, debt issue costs write-offs and the fair value adjustment for stock warrants and the tax valuation allowance. Loss from discontinued operations was $1 million or a $0.01 loss per diluted share, compared to a loss of $100,000 for the fourth quarter of 2011. Loss from discontinued operations in the current quarter was primarily related to an adjustment to record held for sale real estate at its fair market value. Our net loss for the fourth quarter of 2012 was $12 million or $0.13 per diluted share, compared to a loss of $16.7 million or $0.18 per diluted share in the fourth quarter of 2011. Adjusted EBITDA was $3.4 million, our strongest quarter of the year, and represents a $6.7 million improvement when compared to a loss of $3.3 million in the fourth quarter of last year. We did not experience the seasonal reduction in working capital we had anticipated, given the robust sales performance we saw during the last 3 months of 2012. This strong sales performance, combined with commodity price inflation, resulted in our working capital actually increasing during the quarter by approximately $12 million. Components of working capital continued to be healthy, however, as our accounts receivable days for the quarter were 36, an indication our portfolio is strong to quite strong. Inventories' turns improved to 9.2 turns, compared to 8.7 turns for the fourth quarter of 2011, and accounts receivable days were 30. Our cash usage for the current quarter was approximately $18.9 million, excluding the net effects of our recently completed term loan amendment. Of this $18.9 million, $12.2 million was attributable to increased working capital needs and $1.2 million related to capital expenditures. The remaining $5.5 million was used for cash interest, offset somewhat by cash provided from operations. On December 17, 2012, we amended our $160 million first-lien term loan agreement to enhance our liquidity position, to support both current and anticipated increases in sales volume. Terms of the amendment, including increasing the principal by $65 million, reducing the minimum cash requirement from $35 million to $15 million, adding a new $15 million letter of credit facility, and increasing the minimum specified collateral value to $225 million, contingent upon maintaining certain levels of qualified cash. These amendments to our term loan increased our year-end liquidity by approximately $80 million. We ended the year with unrestricted cash of $131.4 million and net liquidity of $116.4 million, after giving effect to the $15 million minimum cash requirement contained in our amended term loan agreement. In addition to the $131.4 million of cash, we had $14 million in restricted cash at December 31, 2012, of which $1.9 million was included in long-term assets. Restricted cash consists of approximately $13 million used to collateralize outstanding LCs and $900,000 used as collateral for other casualty insurance obligations. In conjunction with the revisions to our LC facilities made subsequent to year end, we freed up an additional $13 million of liquidity by eliminating the cash collateral requirement on our outstanding LCs. I'll now turn the call back over to Floyd for his closing comments. Floyd F. Sherman: Thank you, Chad. The momentum we gained in 2012 appears to have carried over into 2013. We believe the housing industry will continue to recover even further in 2013 and that Builders FirstSource is well-positioned to take advantage of this recovery. The recent amendment to our term loan gives us substantial additional liquidity to continue growing our business at an accelerated rate. We look forward to building on what was a very successful 2012. I'll now turn the call over to the operator for Q&A.

[Operator Instructions] And we'll take our first question from Richard Paget with Imperial Capital. Richard S. Paget - Imperial Capital, LLC, Research Division: I wonder if you could talk a little bit more about pricing. Is most of that on the Lumber side? Or are you getting it across the board? Floyd F. Sherman: We are seeing increases just about on -- in all product categories, but by far and away, the most inflationary part of the -- of our businesses is coming from the Lumber side. Richard S. Paget - Imperial Capital, LLC, Research Division: Okay. And then, I mean, whether you look at it on revenues per single-family housing starts in the South or just in general, your sales per start is -- has been growing pretty substantially. Is there kind of an upper limit to this? Or do you think that fourth quarter level, you guys can continue to achieve that level? Floyd F. Sherman: Well, I think that as long as we continue doing the job of servicing the market, servicing our customers, ensuring that we have adequate inventories to support our sales, that we can continue growing our market share and increasing our -- the sales per start.

Next, we'll hear from Trey Grooms with Stephens.

This is actually Patrick Cliggett sitting in for Trey this morning. Just my first question, with the price of lumber rising so quickly, I would imagine it can be difficult to kind of pass that pricing along to end customers, in time to recoup that margin, particularly this quarter. That said, how should we think about your ability over time to kind of recapture that margin through price increases? And what level of success do you guys have in, say, today this quarter 1Q, in terms of passing along additional price increases? M. Chad Crow: That's been the biggest challenge for us for the last 4 or 5 quarters. It's like we've been swimming upstream for over a year now. If you look at last year, from the beginning of 2012 to the end of '12, on average, the prices were up over 50%. And so far, in the first quarter of this year, they're up another 8% to 10%. So we're obviously giving price increases pass-through, or we wouldn't even be able to hold our margins flat, much less improve them slightly on a sequential quarter basis. But it's going to continue to be a challenge, as long as we're seeing this inflation, because you're always lagging behind a bit on giving your price increases pass-through, and then if the prices are continuing to -- continue to rise on you, you're constantly chasing that number. But we're still confident once these prices level off, that we're going to -- we'll get caught up on pricing and we'll see margin improvement. But so far this quarter, it's still been a challenge. Floyd F. Sherman: But I'd like to point out, Chad, in the fourth quarter, we did increase our margins on the commodity side of the business. As slight as it was, it was still, in spite of horrific inflation in the fourth quarter, which exceeded -- was over 20%, we still -- we managed to be able to slightly improve on our margin on the commodity products.

Okay. And just a follow-up question. How should we think about working capital needs going forward? You mentioned that they were up $12 million this most recent quarter, but you also had that -- the substantial improved liquidity. I just want to get your thoughts, how we should think about this going forward, given that, again, the continued rise in lumber combined with your strong volume performance? M. Chad Crow: Well, historically, our working capital trend's at about 10% of sales. So I would expect whatever incremental sales we can generate this year, that working capital is probably going to grow at about 10%.

Next, we'll hear from Robert Kelly with Sidoti. Robert J. Kelly - Sidoti & Company, LLC: Question on -- you talked about in the release, the momentum continuing into '13. And it seems like what the public builders are saying, especially for 4Q, points to a pretty big percentage increase again in 2013 for single-family construction. When you talk about momentum spilling into 2013, I mean, do you see another year of 25%, 30% unit growth? M. Chad Crow: I think that certainly -- that could certainly be the case. Yes. Robert J. Kelly - Sidoti & Company, LLC: Okay. And then as far as, not only the builders, your customers are starting to see volume pickup, they've also been benefiting from higher selling prices. At what point does the pass-through of inflation get a little bit easier for a supplier like yourselves? M. Chad Crow: Well, 2 things would certainly help that cause. One would be for the inflation to settle down so we can get caught up, and then second, we're still at a relatively low level of housing starts and so obviously, the more construction activity we can see, that should help lessen the pricing pressure as well. Robert J. Kelly - Sidoti & Company, LLC: Okay. And then just one final one. Part of the issue with margin is inflation, but part of it is to the competitive angle. Your competitors are still pricing to win market share. I mean, is that kind of a fair assumption? M. Chad Crow: Yes, they're still very competitive. Floyd F. Sherman: Yes, I think one of the things that you have to look at in our side, and especially on the commodity side of the business, everybody views the market in a different way. It's very, very -- when you're having the type of inflation we're having and you're giving longer-term pricing 60-, 90-day forward pricing, everybody has a different view of where they think that market's going and what the cost structure's going to be and where they bid. And it's still a highly competitive market. We still have more supply than there is demand, and I think that's what really is creating the issues that we've had on improving the margins on this side of the business. I think that we, or at least we would hope, that we're going to begin seeing this issue and this problem begin to subside some as -- at -- because at these higher levels, you just can't afford to make a mistake. And I think people are going to start getting more cautious and being less aggressive in their pricing, in order to prevent that catastrophe from hitting them on -- as they look out and price further and further out. Robert J. Kelly - Sidoti & Company, LLC: Right. I mean, that is kind of where I was going with this. $400 lumber on the commodity side, another potentially 30% increase in volume for the industry in '13 after a big year in '12. I mean, at what point have you started to see some of the competitive conditions ease? Is that what we should read into the sequential gross margin improvement during 4Q? Floyd F. Sherman: Yes, we are beginning to see some signs of it. We're beginning to hear some -- certainly, some improving pricing conditions in a number of our markets. I think what we're going to probably find and I would hope to be able to -- that we will see, is we're going to see less and less of long-term pricing, 60- and 90-day pricing gets extremely risky under these conditions, and especially on the distribution side, the margins aren't there to really support this type of risk-taking. And I would think that many others are going to begin looking at it at the same way we do and begin looking at shorter-term pricing. Robert J. Kelly - Sidoti & Company, LLC: So one more, if I could sneak it in. Has the sequential gross margin improvement, has that continued in the first couple of weeks of your 1Q? Floyd F. Sherman: Yes, I would say that the margins are looking pretty much like what we saw in the fourth quarter.

David Williams of Williams Financial Group has our next question. David Neil Williams - Williams Financial Group, Inc., Research Division: Ask a little bit about the SG&A and can you maybe... Floyd F. Sherman: We can't hear David's question. David Neil Williams - Williams Financial Group, Inc., Research Division: I wanted to ask you a little bit about the SG&A line and what kind of leverage you think may be available as we get to more normalized building starts. And I realize that we're away from that, but what kind of real leverage do you think that you can extract from the SG&A line as we go forward here? M. Chad Crow: Well, we've taken a lot of costs out of the business, so long-term, I think, we should be able to leverage our operating expenses pretty well. I've said all along that we would certainly be more fixed than variable, up to about $1 billion in revenue, and once we got past the $1 billion, which is where we are now, we will, certainly, are going to become more variable, especially on the delivery side of the business. So long-term, I would probably say we'd be in the neighborhood of 50% to 60% variable. And assuming we can get caught up on pricing, I still think that our goal, as a company, is to get somewhere around 13% to 15% EBITDA flow-through on incremental sales. And that's the goal. It's not going to happen every quarter, but if we're not facing the commodity inflation headwinds and the competitive landscape continues to improve, and that's what we're shooting for. David Neil Williams - Williams Financial Group, Inc., Research Division: Great. Secondly, I wanted to ask -- I know that we're ways away from this issue, but if you think about your lock of pricing today on -- in an escalating environment, do we have the same types of issues, maybe in a downwards trend in lumber prices? Can you continue to pass your set pricing that you booked maybe 60 or 90 days out? Can you continue to get that same pricing going forward, if lumber prices were to fall? Or is the competitive environment today situated in a way that maybe you'd put some downward pressure on your pricing, if we saw some trends downwards there? M. Chad Crow: For the most part, I think we stand by our pricing commitment as do our customers. And so in an environment like that, you could have some customers that want to price-shop you. But I think for the most part, they understand you win some, you lose some. And in an environment like that, I think we could be able to hold our pricing and see some margin improvement. David Neil Williams - Williams Financial Group, Inc., Research Division: All right. One more, if I could. Have you seen any signs yet that maybe some of the capacity that some of the producers have talked about bringing back on? Have you seen any incremental movement, maybe in pricing? I don't know if we're still running high today, but what are your thoughts maybe as we head into the second and third quarter for pricing? M. Chad Crow: On the Lumber side? David Neil Williams - Williams Financial Group, Inc., Research Division: Yes, on the commodity lumber. Floyd F. Sherman: I think we're going to continue to look at a very slow increase on the Lumber side. OSB, there are some -- a couple of mills slated to come onstream late spring, meaning April, May, that I'm not sure that they're really going to hit as quick as everybody would hope to see the -- that production come online. And I really think it will be later summer before we start seeing good board coming out of those mills. Right now, the OSB, the -- on the panel side, they're running at near capacity, so once those mills come on, I think we'll see some more stabilization on the OSB side. Lumber is -- the mills are -- they're running at, from everything that we can gather in all the research that we've done, would indicate that you're mills are running in the high 80s as a capacity and there are no more -- no new mills slated to come on. China, is still staying as a regular buyer from the West Coast and West Coast of Canada, as well as the U.S. That's going to continue. Markets in India are opening up. So I think we're going to continue to see a very, very tight lumber market all through 2013. And I think there will probably be more upward inflation on lumber than on OSB panels. But both of them we'll be seeing -- for the next couple of quarters, we're going to be seeing, I think, increased prices.

Next, we'll hear from Matthew Dodson with JWest LLC. Matthew Dodson : Can you guys kind of talk about what you see in the first month of January? Has the trend continued from December? It was your highest sales month has it continued in the January, and do you think you can grow sequentially from the fourth quarter? Floyd F. Sherman: Our trend going into January, very much the same as what we saw in the fourth quarter. Matthew Dodson : And then can you kind of help us understand margins going forward? It seems like you guys are doing a better job in getting in front of lumber. Can we expect the same sequential increase, with the 40 basis points in margin kind of going forward as well? Or is that a little too high to bake into our models? M. Chad Crow: That's a real tough question. A lot of it depends on what the commodity prices do, how high the inflation is that Floyd just discussed, and the competitive landscape. I certainly think we can see sequential margin improvement. 40 basis points a quarter, I would say, might be a tad optimistic. Matthew Dodson : Can you kind of -- excluding lumber, are you able to get in front of the other inflationary prices? M. Chad Crow: For the most part, yes. A little bit tougher... Floyd F. Sherman: And they've run a little bit tougher with the component parts but very definitely, we're improving our margins on those products as well. But it's -- there's a lot of lumber relationship, obviously, in wall panels and roof trusses and floor trusses. So -- but the -- we are able and we're getting cost increase passed on, and we're doing the same on all other products. Matthew Dodson : And then finally, on the mills business, it seems like that should accelerate from here and that should really help benefit your gross margins. Can you kind of help us understand kind of what you're seeing in the part of the business, and how that -- if does accelerate, how that can help your margins? M. Chad Crow: What do you mean by mill business? Matthew Dodson : The trusses business, I'm sorry. M. Chad Crow: Trusses? Matthew Dodson : Yes. M. Chad Crow: Well, that's certainly the product category that has been most impacted there in this downturn. And certainly, as construction activity picks up, we feel like those products will be in higher demand and that those -- that product category has the most room for growth and improvement... Floyd F. Sherman: And we also feel that that's going to come about from -- because of the labor shortages that are beginning to show up, in the install process, as well as all parts of all construction-related aspects. So as the labor tightens, that means the components of the trusses, panels, become more of a cost factor for the builder, and I think we'll be able to continue to move our margins up on those products. And that's where we're anticipating. Matthew Dodson : And that is a positive mix shift, correct? M. Chad Crow: Yes. Floyd F. Sherman: Yes. Matthew Dodson : And then one last question. On that, have you seen that -- you said it was hit most in the downturn, but have you seen that pick up and reaccelerate? M. Chad Crow: Yes, we're already starting to see that. Matthew Dodson : And finally -- I'm sorry, I do have one more question. With your stock up so much and you have -- we're not going to expect some equity raise up here, are we? M. Chad Crow: We're constantly evaluating our capital structure and hope sometime in the next year or so, to be able to do some refinancing to improve that. Will it include equity or not, that's -- it's really hard to say at this point, but I can say right now that that's not on the table. Matthew Dodson : And then, what is the make-whole on the bond this year? M. Chad Crow: Well, on the term loan, we have a make-whole on the interest through December of '14. So if we pay them down any time before then, we have to make them whole in the interest. As of year end, the make-whole was about $50 million, which is essentially 2 years worth of interest. Floyd F. Sherman: And it drops about $5 million a quarter.

[Operator Instructions] Next, we'll hear from Philip Volpicelli with Deutsche Bank. Philip Volpicelli - Deutsche Bank AG, Research Division: Actually, the last question just asked my question. So just to make sure I'm clear, the term loan, there's no premium that you would have to pay, you just simply need to make them whole on that $50 million of interest and that drops $5 million a quarter? M. Chad Crow: That's right. It's -- that's 2 years of interest, so it's really about $6.5 million a quarter a drop. That's correct. Philip Volpicelli - Deutsche Bank AG, Research Division: And then the bonds, right now, they're currently callable at par? M. Chad Crow: That's correct.

At this time, there appear to be no more questions. Mr. Sherman, I'll turn the call back to you for closing remarks. Floyd F. Sherman: Hey, we appreciate your joining us today. And if you have any further questions, don't hesitate to call Chad or Marcie Hyder. Thank you.

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