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Executives

Floyd Sherman - CEO

Chad Crow - CFO

Analysts

Seth Yeager - Jefferies & Co.

Richard Paget - Imperial Capital

Jack Kasprzak - BB&T

Robert Kelly - Sidoti & Company

Howard Weinberg - UBS

Rob Hansen - Deutsche Bank

Phillip Volpicelli - Deutsche Bank

Matthew Dodson - Edmunds White Partners

Jeffrey Matthews - Ram Partners

Shawn Boyd - Next Mark Capital

Builders FirstSource (BLDR) Q3 2012 Earnings Call October 19, 2012 11:00 AM ET

Operator

Good morning, and welcome to the Builders FirstSource third quarter 2012 earnings conference call. Your host for today’s call is Mr. Floyd Sherman, chief executive officer. [Operator instructions.]

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 statement 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 Floyd Sherman.

Floyd Sherman

Thank you, and good morning. Welcome to our third quarter 2012 earnings call. Joining me today from our management team is Chad Crow, senior vice president and chief financial officer. After giving a brief recap of the third quarter, I’ll turn the call over to Chad for a more detailed discussion of our financial results. And after my closing comments regarding our outlook, we’ll take your questions.

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

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

We are seeing stronger sales trends in the housing market as it continues to recover, and our recent market share gains have also contributed to our improving sales. At our current sales pace, we’re poised for 2012 to surpass $1 billion in revenue, and believe we will be adjusted EBITDA positive. The last time we achieved similar levels of revenue was fiscal 2008, at which time single family housing starts were 622,000, or 100,000 more starts than the current forecast for 2012.

Our gross margin was 21.7%, and our adjusted EBITDA was a loss of approximately $32.4 million. So while we are still faced with a challenging housing environment, our improved operational efficiencies are certainly contributing to a much-improved financial performance.

For the current quarter, our sales per south region single-family start increased to $3,703 from $3,522 in the second quarter of this year. As noted in our earnings release yesterday, our gross margins were again negatively impacted by inflation on commodity lumber and lumber sheet goods within the quarter and our limited ability to adjust intraquarter customer pricing.

While we were able to pass on some price increases as part of our third quarter pricing, we once again experienced a rising commodity market during the quarter. Commodity prices increased on average 14% from the end of the second quarter through mid-September, before falling back somewhat by quarter end. I also think it’s important to note that on a year to date basis, commodity lumber prices are up on an average of 20-25%. Specifically, framing lumber is up 14%, panels are up 27%, and 7/16 OSB is up 34%.

Combined, lumber prices have risen to levels not seen on a consistent basis since 2005 and 2006. As we’ve stressed in the past, we prefer an environment of higher, stable commodity lumber prices. However, in a rising environment like we’ve seen most of this year, it does create pricing challenges for us, given fixed intraquarter pricing arrangements we have with our customers. Prices can’t go up forever, and we still believe that assuming prices stabilize at higher levels, we’ll see an improvement in our margins.

I’ll now turn the call over to Chad, who will review our financial results in more detail.

Chad Crow

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

Breaking down our sales by product category, prefabricated components were $56.1 million, up 36.8% when compared to $41 million in the third quarter of 2011. Windows and doors were up approximately 20.5% to $61.8 million. Lumber and lumber sheet goods were $97.3 million, up $35.4 million. Our millwork category increased $5.9 million to $28.1 million, and other building products and services increased 18.8% to $48.5 million when compared to the same quarter last year.

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

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

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

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

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

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

We recorded $33,000 of income tax expense in the third quarter of 2012, compared to $268,000 in the third quarter of 2011. We recorded an after-tax noncash valuation allowance of $4.6 million, and $4.7 million in the third quarters of 2012 and 2011 respectively, related to net deferred tax assets.

Absent the valuation allowance, the effective tax rate would have been 37.6% and 39.2% in 2012 and 2011 respectively. As of the end of the quarter, our gross federal income tax NOL available for carry-forward was approximately $226 million.

Loss from continuing operations in the current quarter was $12.3 million, or a $0.13 loss per diluted share, compared to a loss of $11.5 million, or a $0.12 loss per diluted share in the same quarter last year.

Excluding the fair value adjustment for stock warrants, facility closure costs, and the tax valuation allowance, our loss from continuing operations was $0.07 per diluted share for the current quarter. For the same quarter of 2011, our loss from continuing operations was also $0.07 per diluted share, excluding facility closure costs and the tax valuation allowance.

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

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

We ended the quarter with cash of $90.7 million, and net liquidity of $55.7 million, after giving [effect] to the $35 million minimum cash requirement contained in our term loan agreement.

In addition to the $90.7 million of cash, we also had $12.8 million of restricted cash at September 30, 2012, of which $1.8 million was included in long term assets. Restricted cash consists of $11.9 million used to collateralize letters of credit outstanding under our letter of credit facility, and $900,000 used as collateral for other casualty insurance obligations.

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

I’ll now turn the call back to Floyd for his closing comments.

Floyd Sherman

Thank you Chad. We’re pleased with our results for the third quarter, especially given the commodity price inflation and the extremely competitive pricing environment we experienced. We expect that the momentum that we’ve achieved from the improvement in the housing industry, and our recent market share gains, to continue to positively impact our operating results. We remain focused on growing market share and improving our margins in order to drive profitability as the market continues to recover.

I’ll now turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator instructions.] We will go first to Seth Yeager with Jefferies & Co.

Seth Yeager - Jefferies & Co.

Another solid top line improvement here. Just on gross margins, obviously getting squeezed a little bit on the commodity side. And you guys can’t control the price of lumber, but is there something structurally in your industry… I know you have certain pricing conventions and contracts. But is that something that, over time, you’d be able to pass prices through a bit more quickly? What’s the overall thought there?

Chad Crow

You know, structurally, I don’t think things have changed, in my opinion. It’s still an extremely competitive market out there. You’re always going to have a lag given our position in the supply chain, and the pricing agreements that we have in place with the customers. You’re always going to have a little bit of a lag. And like we’ve said, we were able to pass along some price increases in the third quarter, but unfortunately again we were chasing a rising commodity market.

So between the inflation, and the fact that there’s still too much supply out there, there’s still too little demand. The reality of it is we’re pacing toward about 520,000 single family starts this year. It’s likely going to be the fourth worst year on record for housing. So while things are getting better, it’s still a very tough environment.

And so between the inflation and what I would call the excess demand, it’s just a slow process. But eventually, yes, I think margins will recover and when commodity prices do stabilize I really feel like we’re going to be able to get our margins up and pass on price increases.

Floyd Sherman

Yeah, and I think another thing that we’ve seen is volatility that we haven’t seen occur in the past nearly to this extent. And the volatility is really occurring right before the end of a quarter and slightly after the beginning of the next quarter, and this is when most of your pricing is done to your customers. The market flattens out, and it gives you the appearance that it’s stabilizing.

And then we have seen just some unbelievable run ups in the price. We look at OSB. Our OSB over the quarter was about a 16% increase. But if you looked at it from a few weeks after the start of the third quarter, until I think it was around September 8, we saw an increase of 41.2%. And then it fell of 18% during that period of time that you begin doing your pricing. So whatever replenishment you did during the course of the quarter, you were doing at really exaggerated prices.

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

Seth Yeager - Jefferies & Co.

Now, one thing that you’ve been hearing from just about every builder out there is labor is really starting to become a governor on growth in many markets out there. Obviously you’re seeing an improvement in your pre-fab business. Is that an area where you’re starting to see some momentum in pricing and margins. I know historically that was a pretty high margin business for you guys. And just in the environment where builders are trying to quickly turn inventories, is that something that you can look forward to a little bit of pricing there?

Chad Crow

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

Seth Yeager - Jefferies & Co.

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

Chad Crow

From an A/R days standpoint, the most significant trend we’ve seen recently is I think just the fact that a lot of the large national builders, their business has ramped up so much that they’ve fallen a little bit behind on the back office side. So there has been a little slippage of days there. I think everybody’s a little gun shy to add full time employees, and they’re hanging on to the lower headcount as long as they can. So from our standpoint, it really doesn’t look like a liquidity issue with our customers. It’s more of an administrative backlog at the moment. But I think we’ll see that settle out when we get into the slower building season.

Your other question, on working capital in general, I think we’re still going to trend around 10% of sales, like we have historically. Going into next year, that’s a good question, something we’re certainly keeping an eye on right now. If our sales continue to grow at the rate they have, 30-40%, that would put us in the area of $1.3 billion in revenue next year, which would certainly require additional working capital build next summer. So I don’t want to expect as a percentage of sales it’s going to get much different than 10%, but certainly the build in general is something we’re keeping an eye on as we go into next year.

Operator

And we will go next to Richard Paget with Imperial Capital.

Richard Paget - Imperial Capital

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

Chad Crow

I get asked that question a lot, and it’s really hard to predict. We’ve really never been at levels this high, nor have we been through a housing recession like this, and it’s hard to predict what it’s going to look like coming out the other side. A lot of it’s going to depend on our customer mix, and what mix of houses they’re building to the overall build. And it’s also going to depend a lot on what happens with our competition. So I’m confident that if we can keep doing what we need to do, and serve our customers the way we can, we can certainly hold on to that, and I certainly think there’s probably some more upside there. But it’s just really hard to predict.

Richard Paget - Imperial Capital

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

Chad Crow

Certainly from a large competitor standpoint there’s probably truth to that. There’s obviously more optimism in general with housing, and so that’s going to create opportunities for some of the larger guys, maybe from a refinancing perspective. I think you may see more smaller guys struggle in the next year or two as business grows, and especially at the rate it’s been growing, it’s going to squeeze a lot of people from a liquidity standpoint and the need to grow working capital. So I think that could be an area where we might see some additional fallout.

Richard Paget - Imperial Capital

Just to be clear, that 7% pricing, that’s all in lumber and lumber sheet goods, correct?

Chad Crow

That’s correct.

Richard Paget - Imperial Capital

And when’s the Q going to come out?

Chad Crow

Probably into next week.

Operator

And we will go next to Jack Kasprzak with BB&T.

Jack Kasprzak - BB&T

Follow up on the question about labor shortages. Just curious, do you guys see land as a limiting factor on home builders right now? Some of the press releases we read about housing data, housing sales and this commentary about it’s tough to find lots, or there’s a shortage of lots out there, have you guys seen that as a limiting factor out there?

Floyd Sherman

We hear a lot about that. I can’t really say that we can say we’re experiencing it. We really can’t say that we’re seeing difficulties at this point. Typically your lot development is a number of years ahead of what’s actually taking place in current construction, so what’s happening in the land acquisition mode is all we have is hearsay conversation. Right now it doesn’t seem to be affecting the pace of building in the markets that we’re involved with.

Jack Kasprzak - BB&T

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

Chad Crow

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

Jack Kasprzak - BB&T

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

Floyd Sherman

Right now we are looking for it to be an uptick. Just tracking on a daily basis our margins and seeing what’s taking place, right now it’s looking favorable. We were able to do a certain amount of buying prior to going into the fourth quarter. And we got some attractive cost positions. And we were able to get pricing in that was an improvement over what we saw in the third quarter. And so at this point, we feel that we’re going to be seeing an uptick in the margins.

Chad Crow

That’s consistent with my thoughts as well. Obviously it’s early in the quarter, and we’ll wait and see what commodity prices do.

Operator

And we will go next to Robert Kelly with Sidoti & Company.

Robert Kelly - Sidoti & Company

Question on pricing. It sounded like you were able to get some pricing, not enough, just given how commodities moved during Q3. Have you been able to recover some more price as we set up the fourth quarter contracts? And what happens if lumber stabilizes or drops off? Are you able to kind of hold pricing a little bit better if commodity prices were to slowly decline? What’s the situation if commodities are not running against you?

Chad Crow

In that environment I think it would certainly favor our margin for the border. If we do sell through our inventory and are out having to replenish, and the market has fallen a bit, that’s certainly going to help. And I think in general, and Floyd might add some color to this, I would say we were slightly more successful in Q4 with pricing. And so far the lumber market has been in our favor as far as inflation or deflation.

Robert Kelly - Sidoti & Company

So you’re able to still get a little bit more price as you move into Q4.

Chad Crow

Yes.

Robert Kelly - Sidoti & Company

As far as the competitive situation, are there strategies, other than just waiting for some of the competitors to go away, that you can investigate, where you’re partnering up with someone out there that’s got a ton of excess capacity? I know you don’t want to go the buy and close down somebody route. Are there opportunities to address the excess capacity issues through like a JV or a partnership? It seems like the strategy is just to kind of hang on and wait for a shakeout.

Chad Crow

I haven’t really seen any JV type strategies out there. And you’re right, certainly not looking to go buy someone just to close them. We’re still very focused on our liquidity. I think the best thing we can do right now is just to keep providing the customer service and pushing our various product lines and keep hoping that the construction’s going to continue to improve. It’s just still very tough out there, and you’ve still got a lot of people hanging on.

Robert Kelly - Sidoti & Company

You did a little bit of geographic expansion in the current year. Anything on the board as you look out into 2013 for new geographies or locations?

Chad Crow

The expansion we did this year was really into adjacent markets that we were already serving, and just some really nice opportunities to expand our footprint at a relatively low cost. And so certainly if we had opportunities like that next year, we could do it. I wouldn’t look for any grand expansion by any means, but if some opportunities like that came along we would certainly look at it. But right now I don’t know of any that are on the table.

Operator

And we will go next to Howard Weinberg with UBS.

Howard Weinberg - UBS

Regarding the volatility of the lumber pricing and how that’s been impacting your margin, have you guys given any consideration of increasing some of your safety stock? I think last quarter you came in with around 75% of your lumber purchase, and I just wasn’t certain of whether or not sales… And I think Chad, you mentioned that sales sort of came in line with what you guys had anticipated. So how do you maintain that margin? And for us to have some better handle that margins will be in that ideal range of 21-23% gross margin that you’ve talked about in the past.

Chad Crow

I think I said starts came in line with expectations. So that was kind of an after the fact. I already pretty much knew what sales were going to be, so it gave me a barometer of what starts were going to be. Like Floyd said earlier, it’s just been a very, very strange year on the lumber side. The pricing, and the inflation, and the timing of the inflation. So it just creates challenges for us.

You know, one option is to go out and you could attempt to take a position of 125% of forecast, if that’s what you wanted to do. It takes up a lot of liquidity. It eliminates any benefit you might get if pricing falls. And lastly, you’ve got to have somewhere to put it all. That’s a hell of a lot of inventory, and quite frankly I’m not sure all our locations could handle that much on the ground. And then you’ve got the issue with the weather and leaving lumber out in the weather if you don’t have covered storage for it all.

So it’s just been an interesting year. It’s certainly not one that I would expect to see again, but you never know. I certainly don’t want to see it again. But no, I think if we could get prices to stabilize, and demand to continue to improve, those margins will come back. It’s just been a very unusual year for us.

Howard Weinberg - UBS

And then could you talk a little bit about where some of this growth is coming from? I’m assuming it’s mostly single family, but maybe if you could just talk about some of your initiatives on the multifamily growth?

Floyd Sherman

We very carefully manage our involvement with multifamily. Several factors come into play. A lot of your multifamily is direct ship. They buy direct from the mills, the contractors. There’s really no place for us in it.

Others, pricing is extremely competitive, and usually much longer price guarantees. Many of the large projects, they’re looking for one year or more in price guarantees. We have a difficult time enough getting 90-day price quotes than getting involved with one year quotes. So we stay away from that.

Then many of the projects require bonding. We don’t like to bond. We do on occasion, but it’s a too-severe limitation on our liquidity. We look at the jobs where we feel we can do it and make some money. Our multifamily is still staying about the same percent of our overall business that has been, so I guess that would say we’re growing the business about as fast as we’re growing the balance of our business.

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

Howard Weinberg - UBS

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

Floyd Sherman

Our market share gains, it’s pretty much uniform across large builder as well as the regional and smaller builders. We slightly increased our share with the top 10, top 100. But we’re getting a good cross section of all of builders as we can determine from the market share gains that we’ve been achieving.

Operator

And we will go next to Rob Hansen with Deutsche Bank.

Rob Hansen - Deutsche Bank

What do you look at as longer term, normalized operating margins? And given the cost takeouts that you’ve done over the course of the downturn, could you be looking at higher normalized margins compared to the last up cycle? Just wanted to kind of get your longer term thoughts on that.

Chad Crow

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

Rob Hansen - Deutsche Bank

And I just wanted to get a little bit more detail about the purchase of your Chelsea, Alabama location, and just your general outlook for capex.

Chad Crow

That was a situation where the lease was up for renewal. The landlord was selling the property, so we had the choice of finding a new location or buying the real estate. And just looking at the two options, it made more sense to buy it. Capex for the remainder of this year should be very minimal. Really right now we’re still in the process of evaluating capex for next year. Obviously that depends a lot on our forecasted sales volume. But for the balance of the year, it should be minimal.

Operator

And we will go next to Phillip Volpicelli with Deutsche Bank.

Phillip Volpicelli - Deutsche Bank

When you guys talked about 2013, I think you mentioned that if sales maintained their current pace you’d get to about $1.3 billion of revenue. And I think in the past you’ve implied that that would get you to a breakeven level. And I’m just trying to parse apart that breakeven. That breakeven is assuming just capex and interest expense, it’s not assuming working capital, is that right?

Chad Crow

Right.

Phillip Volpicelli - Deutsche Bank

I guess you have probably started thinking about ’13. Are there any kind of large capex catch ups that you guys will need to do, or will you be able to keep it in this $8-9 million range?

Chad Crow

At that type of sales level, we’ll certainly be adding to our fleet. That will be our biggest need. Primarily, most of that would likely be leased as opposed to buying it. So I think in that type of revenue range, we would see an increase in our lease expense. But as far as actually buying or capex, like I said we’re still in the process of evaluating that. You might be looking at something closer to $10 million of capex and then an increase in your lease expense.

Floyd Sherman

But on a long term basis, this business, we traditionally would anticipate somewhere between 1-1.3% of sales would go into capex.

Operator

We will go next to Matthew Dodson with Edmunds White Partners.

Matthew Dodson - Edmunds White Partners

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

Chad Crow

Yeah, I touched on it earlier. We’re certainly looking at what our sales forecast will be next year. Obviously a 30-40% increase in sales will create a working capital build, especially next summer. So we’re currently evaluating what that means from a liquidity perspective. Obviously we have the minimum cash requirement of $35 million as something we have to make sure we consider in the evaluation.

So it’s just something we’re looking at right now. If sales continue to grow at that pace, it could squeeze our liquidity somewhat. It’s a great problem to have, but something we need to deal with nonetheless. But I think if that’s the type of growth we’re still seeing at that point, there’s going to be opportunities for us to manage that liquidity need, and I just don’t know what that will look like. It’s just something we’re keeping an eye on.

Matthew Dodson - Edmunds White Partners

Can you address your debt structure currently? When does it make sense potentially from a make whole to take out those high yield bonds?

Chad Crow

The make whole with High Bridge, at year end I think it will be $30-35 million. Certainly it’s a pretty big number to cover in a refinancing. It all just depends on the terms of the refinancing and what type of improvement you’re going to get on your rate, how much additional liquidity it’s going to add. Certainly as the quarters tick by, and that make whole comes down - it drops about $5 million a quarter as we pay interest obviously - then it becomes more manageable. So it really just depends on what type of refinancing we’re being offered.

Operator

And we’ll go next to Jeffrey Matthews with Ram Partners.

Jeffrey Matthews - Ram Partners

Are you seeing players who are weak being irrational in the marketplace?

Chad Crow

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

Operator

And we will go next to Shawn Boyd with Next Mark Capital.

Shawn Boyd - Next Mark Capital

Jumping down into operating expenses for a second, your year over year increase is a little higher than I would have thought given what we’ve talked about in terms of the 35% variable nature in the past. Is there anything in there that is maybe a one-off this quarter? Or any kind of outliers that drove that higher in the September quarter?

Chad Crow

The biggest thing we’ve seen has been the overtime and the temp labor that we’re using. Sales have ramped up so quick this year that to some degree you’re reacting and the quickest way to plug those holes as far as the labor standpoint in the yards is the use of overtime and temp labor. So that has certainly been higher than I would have expected, but as we continue to backfill with full time employees and can bring that cost down, then I think we’re going to see an improvement from that standpoint.

Floyd Sherman

The only thing that’s created problems for us in controlling the labor cost as close as you would like to control it is just variability that we’re getting on a day to day basis across our markets. Tremendous fluctuations in the demands that are placed on our operations and it really creates problems for our people trying to anticipate what the next day’s business is going to be and being able to react to it. And we find ourselves, for the most part, the business is strictly almost on a day to day basis. Very, very difficult to get any advance look at what the demand schedule’s going to be.

Shawn Boyd - Next Mark Capital

Floyd, from your experience, how long would you expect in the recovery here for that to remain unsettled, so volatile that you can’t plan around it?

Floyd Sherman

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

This is unlike anything that I’ve ever been through, and I think anything that housing has ever been through. My feeling is that we’re starting to see a little bit more uniformity on a day to day basis. September, for whatever reason, though, was really unusual for us. That was our highest sales per day average that we had all year, and when I say high, it was 15% better than any other month that we’ve experienced. And that really was surprising to us. And it’s continuing on into October, which is a good thing.

But again, suddenly we found ourselves having to react on a labor control basis to something that was very unusual for us. Typically September doesn’t have that big an improvement over August or June, or some of the better building months. Hopefully we’ll begin to see more stabilization and be able to plan out better than what we have been, but I guess we’ll just have to take it day by day and see how that comes around. Chad, you talk with the guys in the field. You see any difference in that?

Chad Crow

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

Shawn Boyd - Next Mark Capital

Given that backdrop, is there any absolute level of quarterly SG&A that we should be thinking about now, or do you want to update your feeling on how much of this is variable at this point?

Chad Crow

I don’t think so. I still think in a normal environment, if we had the visibility we needed, the 35% variable is probably a good number. Now, like I said, once we blow past $1 billion in revenue, then we’re going to become more variable. That’s just the nature of it. We start adding more delivery expenses when we get to those types of revenue levels. So I’ve said all along that once we got past $1 billion and beyond that we’d probably start migrating more toward a 50-50. In the next few quarters I think we should do better than that, but once we get up to $1.3 billion, $1.4 billion, that might be closer to what you’re looking at.

Operator

[Operator instructions.] And we’ll take a follow up question from Matthew Dodson.

Matthew Dodson - Edmunds White Partners

You guys have talked about how this housing recovery is not very normal, and can you kind of talk about, usually your fourth quarter, it drops down from your third quarter, and because this is abnormal, could you see yourself growing sequentially into the fourth quarter?

Chad Crow

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

Floyd Sherman

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

Chad Crow

But I’m not signing up for $290 million of revenue.

Floyd Sherman

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

Operator

And we’ll take another follow up question from Rob Hansen with Deutsche Bank.

Rob Hansen - Deutsche Bank

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

Chad Crow

You know, I think we’re there. At the beginning of the year everyone had the same question, wow, housing activity sure is picking up. Is this sustainable? And everybody was wondering the same thing, as were we. So you’re just a little slow to add full time people. The last thing you want to do is hire full time people and then have to let them go two months later. Our workforce has seen enough of that the last six or seven years.

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

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

Floyd Sherman

Yeah, and I think one good example is our Houston window plant. We got up to where we had 40-plus temp labor in it. That’s back down now to where our temp laborers are less than 10. And we’ve been able to bring in and have BFS employees filling those slots. And that’s typical of what happens throughout the company. We’ve always used temp labor to take care of seasonal changes in the business, or temporary spikes in the business, but this year has been very unusual as far as usage of our temps goes.

Operator

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

Floyd Sherman

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

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