Building Materials Holding Corporation Q3 2008 Earnings Call Transcript

Building Materials Holding Corporation (BLG)

Q3 2008 Earnings Call Transcript

November 6, 2008, 5:00 pm ET

Executives

Lisa Laukkanen – The Blueshirt Group

Robert Mellor – Chairman & CEO

Bill Smartt – SVP & CFO

Stan Wilson – President & COO

Analysts

Keith Hughes – SunTrust

Steve Chercover – D.A. Davidson

Jim Wilson – JMP Securities

Presentation

Operator

Good day ladies and gentleman, and welcome to the BMHC conference call. (Operator instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Lisa Laukkanen with The Blueshirt Group. Please proceed.

Lisa Laukkanen

Good afternoon and thank you for joining us for today’s BMHC conference call to discuss the third quarter of 2008 financial results. The company issued a press release this afternoon detailing its results. If you do not have a copy, the release can be found on BMHC’s website at www.bmhc.com or feel free to call The Blueshirt Group at 415-217-4961 and a copy can be sent to you.

Before we begin, I would like to make a brief statement regarding forward-looking remarks that you may hear on today’s conference call. Certain statements made in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Statements that are not historical or current facts, including statements about our expectations, anticipated financial results, and future business prospects are forward-looking statements. While these statements represent our current judgment on what the future may hold and we believe these judgments are reasonable, these statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements.

These factors include, but are not limited to, the risks and uncertainties cited in our press release. Additional information regarding these risks is contained in our latest Annual Report on Form 10-K and in our periodic filings with the SEC. Undue reliance should not be placed on such forward-looking statements as such statements speak only as of the date of this conference call. We undertake no obligation to update forward-looking statements.

At this time, I would like to turn the call over to Robert E. Mellor, Chairman and Chief Executive Officer of BMHC. Rob?

Robert Mellor

Thanks Lisa. Good afternoon and thank you everyone for joining us. Today, with me on the call are Bill Smartt, our Senior Vice President and Chief Financial Officer; Stan Wilson, President and Chief Operating Officer; and Mark Kailer, Vice President, Treasurer and Investor Relations Officer.

First, I will provide a few remarks on our views of the homebuilding industry and our business trends for the third quarter followed by an update on the progress we have made in our restructuring efforts. Bill will then provide details of our financial results. After Bill’s commentary, I will offer a few additional comments on our outlook, and we will then be open for questions.

Reflecting the increasingly challenging homebuilding market, single-family starts declined approximately 42% from September of 2007 to an annual pace of 544,000, reaching a 26-year low. BMHC’s market areas permits for single-family homes were down approximately 42% while permits for all US markets were down 39% from a year earlier for the three month period. New and existing unsold home inventories remain at historically high levels, even as they have been declining in many cities.

Record foreclosures on existing homes are complicating homebuilders’ efforts to bring down supply to meet sluggish demand. The unprecedented economic turmoil and the uncertainty in the credit and financial markets worldwide have added a new layer to the downturn on the homebuilding sector. While these conditions have further deteriorated the homebuilding industry and continued to impact our financial results during the third quarter, we remain committed to our operating strategy.

As a company, we were able to accomplish a number of goals we have set and made significant strides in reducing our operating and administrative costs while improving our liquidity.

Revenue for the third quarter declined 39% year-over-year and 5% sequentially from the second quarter. We recorded a net loss for the quarter partially attributable to underperforming business units and the costs associated with the closure and consolidation of those units.

As Bill will discuss in more detail, our analysis of our ongoing operations in the third quarter demonstrates that these businesses are showing signs of stabilization and are generating operating income.

As planned, we have taken a wide range of operational and financial actions to date to restructure our organization. By taking these steps, we have reduced operating costs and improved efficiencies. Some of the important initiatives taken in the third quarter include the following.

We re-negotiated an amendment to our $540 million credit facility. In addition to the enhanced liquidity, this amended agreement provides, we believe, it reflects more reasonable expectations for operating performance under the current market conditions.

The amended agreement continues to provide a $200 million revolving line of credit and a $340 million term loan maturing in November 2011. We further reduced SG&A costs by $11.8 million during the third quarter compared to the prior quarter and by $51.2 million for the nine-month period compared to a year ago.

As part of the continued restructuring plan to align our business to the current environment, we made the difficult decision to close several additional facilities. We are relocating a distribution operation in one of our Puget Sound, Washington locations. We are winding down our concrete operations in Northern California, and we are consolidating our millwork and wall panel operations in Fort Collins and Greeley, Colorado, to nearby facilities.

We have entered into negotiations to sell our Southern California concrete business and expect these negotiations to conclude during the fourth quarter. If these negotiations are unsuccessful, we will close this operation. We have also decided to close our Southern California lumber reload center and expect to complete this process in the next 30 days.

We have reduced our workforce by 14,000 or 57% from a peak level of almost 25,000 in July 2006 to less than 11,000 in September of this year. We have completed on schedule our centralization of all of our back office operations including accounts payable, payroll, and general ledger accounting.

Additionally, our initiatives to increase cash flows over the next two to three quarters are progressing as planned and are expected to result in non-recurring cash proceeds of approximately $90 million. We recently announced the trading of BMHC’s common stock move to the OTC Bulletin Board as a result of the company no longer meeting the minimum market capitalization standard of the New York Stock Exchange.

We were disappointed that the New York Stock Exchange has not followed the lead of NASDAQ and suspending the listing requirements during these economically turbulent times. The delisting does not constitute a default under the company’s credit agreement nor does it affect the company’s business operations.

While we will continue to evaluate all possible alternatives over-the-counter to Over The Counter trading, we do not anticipate a quick remedy to this situation. Meanwhile, we remain committed to implementing the appropriate operational and structural changes to improve our company’s financial results over time.

We continue to take the necessary actions to restructure or eliminate underperforming business units based on not only the short-term, but also the long-term prospects for those businesses. At the same time, we continued reducing our direct, indirect, and SG&A costs to be in line with the current and expected market conditions.

We believe that as we further consolidate and streamline our operations, we also maximize our operating efficiencies and enhance our liquidity thereby better positioning the company for the future.

We look forward to keeping you updated on our process and I will now turn the call over to Bill to review our financial results.

Bill Smartt

As Rob noted in his remarks, in light of the recent macroeconomic developments, we anticipate that challenges will continue to permeate the homebuilding industry. The severe contraction of the housing market is evidenced by single-family permits reaching a 26-year low in September.

New home inventories remain elevated. Foreclosures have reached record levels and lending standards remain tight as a result of the turmoil in our financial markets. We continue to believe; however, that long-term favorable demographics and increasing core demand combined with the gradual reduction in new home inventories will eventually drive a rebound in the housing market.

We remain committed to taking all the steps necessary to realign our business to continue to weather the current downturn. We are pleased with the significant progress we have made in reducing our operating and administrative costs and streamlining our operations. We remind you that as a result of the restructuring program that we announced in the second quarter, we now report our results as a single operating segment organized into six geographic regions.

For external financial reporting purposes, we continue to break out sales and cost of goods sold for building products and construction services. BMC West and Select Build are now integrated into one company and operate under common management with a flat organization reporting to one Chief Executive Officer.

Additionally, for financial reporting purposes, our Select Build operations in the Mid-Atlantic and Florida regions are reported as discontinued operations. The impact of these discontinued operations are shown separately in the financial statements included in our press release and our Form 10-Q. Primary focus of my comments on our operating results will be on our continuing operations.

Sales for the third quarter of 2008 were $364 million, a sequential increase of $21 million or 5% from the $385 million in the second quarter and a decrease of $230 million or 39% from $594 million in the third quarter of last year, the third quarter decrease from the second quarter as we continued to experience weakness in all the markets we serve.

Gross margin was 17.1% for the quarter compared to 18.8% in the second quarter of 2008 and 19.4% in the third quarter of 2007; a 170 basis point decrease from the previous quarter reflects the continued margin pressure as a result of the fiercely competitive environment. We continue to aggressively realign and re-focus both our building products and our construction service offerings and believe that our restructuring efforts will enable us to strengthen our margins over the longer term.

Selling, general, and administrative expenses were $86.9 million, down from $98.7 million in the second quarter and down from $106.2 million a year ago. As a percent of sales, SG&A decreased to 23.8% from 25.7% in the second quarter and increased from 17.9% in the third quarter of last year. We are pleased to see a sequential quarterly decline as we continue to aggressively reduce SG&A costs, particularly our back office payroll costs to our centralized shared services model and restructuring programs.

During the quarter, we recorded additional charged associated with our restructuring efforts. Included in SG&A were $2.1 million in charges related to the consolidation and closure of underperforming business units. Excluding these non-cash restructuring charges, SG&A would have been $84.8 million or 23% of sales, down sequentially from 25.7% in the second quarter of this year.

Loss from continuing operations for the third quarter was $46.1 million or $1.58 a share compared to a loss of $41.3 million or $1.42 per share in the second quarter of 2008, and income from continuing operations of $1.6 million or $0.05 per share in the third quarter of 2007. The third quarter 2008 loss from continuing operations included $3.9 million of impairment charges related to assets held for sale and customer relationships.

Including the impact of discontinued operations, our net loss was $45.2 million or $1.55 per share compared to a net loss of $31.9 million or $1.10 per share in the second quarter of 2008 and a net income of $4.2 million or $.014 per share in the third quarter of 2007. Net loss was partially attributable to underperforming business units and the costs associated with the closure and consolidation of those units.

Our analysis of our ongoing operations in the third quarter demonstrates that these businesses are showing signs of improvement and importantly that they are generating operating income.

At September 30, our consolidated earnings before interest, taxes, depreciation, and amortization or consolidated EBITDA totaled negative $20.3 million. Adjusted EBITDA as calculated under the terms of our credit agreement was a negative $1.7 million, well within our negative $10 million covenant limits.

Adjusted EBITDA excludes certain costs related to restructuring, facility closures, impairments, and other non-recurring charges, specifically enumerated in the credit agreement.

Now, I would like to comment briefly on the results of our two business categories, building products and construction services.

First, some comments on building products where we recorded sales for the third quarter of $185 million, a decrease of $13 million or 7% from the $198 million reported in the second quarter and a decrease of $81 million or 31% from the $266 million reported in the same quarter a year ago.

Building products were 51% of total sales for the quarter compared to 45% a year ago. The third quarter sales mix was approximately 55% lumber and materials, 35% millwork, 10% truss versus 57% lumber and materials, 32% millwork and 11% truss in the third quarter of 2007.

In BMHC markets, single-family permits were down 42% while sales were down 49% for the quarter which compares to a 39% decrease in single-family permits nationally. Continued decline in permits reflects the ongoing correction of inventory levels.

Our building products gross margin was 24.4%, down from 26.5% in the second quarter and 27.4% in last year’s third quarter as the competitive environment continues to pressure our pricing flexibility, while our costs for some suppliers were impacted by uncertainty of our credit quality and liquidity during our recent credit negotiations.

I will now make some comments about construction services where we recorded sales for the third quarter of $180 million, a decrease of $6 million or 3% from the second quarter sales of $186 million, and a decrease of $149 million or 45% from the $328 million reported in the same quarter a year ago.

As a reminder, our primary construction service markets are located in the West and Southwest and are focused primarily on large regional and national production homebuilders. We continue to share the pain being experienced by all of our customers as they aggressively negotiate and revise their pricing.

For the third quarter, our construction service gross margin was 9.7% as compared to 10.6% in the second quarter of this year and 13% in last year’s third quarter. The 90 basis point sequential decline is related to the impact of extremely competitive industry pricing. The impact of reduced margins at non-performing business units currently in the process of being sold or closed, which was offset in part by a shift to multi-family construction where the market downturn has been less severe.

For the third quarter, operating cash used was $3.5 million, a decrease of $25 million from the second quarter, when we recorded a substantial increase in accounts receivable and the income tax receivable related to the expected carry back of operating losses.

Quarterly purchases of property and equipment decreased to $3.2 million from $4 million in the second quarter of 2008 and from $5.8 million in the third quarter of 2007. Cash used for acquisitions was $5.9 million, up from $0.2 million in the prior quarter, and $4.2 million in last year’s comparable quarter primarily related to a deferred payment for the buyout of our Select Build Illinois business.

Our cash conversion cycle was 56 days, flat to the second quarter of the year, but up from 47 days in the third quarter of 2007. Our cash conversion cycle for the third quarter reflects the following

Day sales outstanding in receivables or DSO improved to 44 days from 46 days. Inventory turns increased to 13 times from 12 times in the prior quarter, days of payable outstanding, or DPO, significantly shortened to 15 from 20 as we paid particular attention to the needs of our suppliers in this challenging environment.

Especially important on the cash flow side was our change in net debt which was a favorable $21.2 million decrease for the quarter. Net debt is defined as all bank debt, net of cash.

As Rob mentioned previously, we successfully negotiated and completed a permanent amendment to our $540 million secured credit facility during the quarter. As of September 30, there was $29 outstanding under the revolver and $329 million outstanding under the term loan.

As explained on our call last quarter, we expect to enhance our liquidity or reduce debt through a number of initiatives that will resolve in non-recurring cash inflows. We continue to identify and sell excess vehicles and equipment, and we received approximately $4.2 million in net proceeds in the third quarter.

As a result of our business unit closures and consolidations, we have excess real property in various states. These properties are being aggressively marketed, and we expect that they will produce net cash proceeds of approximately $25 million [ph] during the next 24 months.

We expect to remove restrictions on approximately $38 million in cash currently held in our captive insurance subsidiary and will make these funds available for debt reduction and general corporate purposes in the fourth quarter of this year.

We expect to receive in the second quarter of next year, a net tax refund of approximately $50 million related to net operating loss carry backs.

I will now turn the call back to Rob for some additional comments.

Robert Mellor

Thanks Bill. We continue to make progress in the reorganization and restructuring initiatives that we have described to you. In a relatively short period of time, we have successfully wound down unprofitable operations, sold unprofitable business units, sold excess assets and real estate, and streamlined our operations to realize cost savings throughout the organization.

In these challenging times, our number one near-term priority for the business is to maintain and improve liquidity. As Bill and I have outlined today, throughout the company, we have been diligent and unwavering in our pursuit of this goal and we have made significant progress by executing the restructuring actions we have described.

Negotiating the amendment to our credit facility, we have enhanced our liquidity improving our ability to weather the downturn. We continue to closely monitor these financing arrangements as well as evaluate other financing options.

Clearly, the ongoing correction in the housing market and worldwide economic turmoil continue to significantly impact our operating performance. We anticipate that industry conditions will continue to be challenging in the near term and it is difficult if not impossible to predict when conditions will begin to improve.

The volume of new home construction is now below the level of household formation; however, and we continue to believe that the combination of favorable long-term demographics such as job growth, household formation, increased demand for senior housing and starter homes should support the long-term growth of the US homebuilding sector.

Despite all the negative sentiment regarding the record breaking housing contraction now spilling over to other key sectors of the economy, there are a few encouraging data points. It has been reported that resale inventory levels peaked in 2007, and have declined significantly thus far in 2008 in many markets.

The pace of existing home sales has been arising over the last several weeks. With substantial price drops in many markets and an active FHA mortgage program, renters are beginning to become homebuyers. In California, first time buyers were about two-thirds of September sales.

As expected, impairment charges taken by homebuilders decline in magnitude in both the first quarter and second quarters, and it is expected this trend will continue. In summary, we have made significant progress in our restructuring plan today. At the same time, we have been careful to keep our comprehensive employee benefits and workplace safety programs firmly in place.

We believe the steps we are taking to streamline and realign our business to withstand the continuing challenging market dynamics will make the company stronger and better positioned for future growth and will enhance shareholder value.

During these extraordinary times when difficult decisions and sacrifices are required to many, we appreciate more than ever the hard work and dedication of our employees. Together, everyone is working to the best of their abilities to position BMHC to be one of the survivors of this downturn and return to profitability as market conditions stabilize and improve.

We also appreciate the support we continue to receive from our suppliers and the loyalty of our customers. We look forward to updating you again next quarter.

Now, we will turn the call back to the operator in order to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Keith Hughes of SunTrust.

Keith Hughes – SunTrust

Thank you. I have a couple of questions, and in prepared comments, you referred to $90 million of non-reoccurring cash proceeds, and Bill you gave us an itemized list of several things, were you talking about the same items there?

Bill Smartt

Yes we are. The $90 million actually refers to the NOL carry back and the liquidation of the insurance subsidiary.

Keith Hughes – SunTrust

NOL and liquidation, I see. And that liquidation of the subsidiary, is that moving from a captive insurance plan to a third-party thus bringing up assets, is that what you are doing?

Bill Smartt

Essentially that is correct Keith.

Keith Hughes – SunTrust

And then the numbers that you had mentioned Bill, of those is the only thing that has been realized through the end of the third quarter, the $4.2 million in vehicle sales?

Bill Smartt

That is correct.

Keith Hughes – SunTrust

And everything else is occurring in the future, right?

Bill Smartt

Yes.

Keith Hughes – SunTrust

Okay.

Bill Smartt

I will say the cash in the cash flow when I spoke about net debt improving by $21 million, that reflects partial liquidation of the insurance company. That – those money, the insurance company was included in marketable securities.

Keith Hughes – SunTrust

Okay.

Bill Smartt

If you look at the old balance sheet, you will see marketable securities, long term and short term, all that was liquidated into short-term cash equivalents as included in the cash balance. So, we have liquidated all the securities if you will of the insurance company and they are sitting there waiting to be transferred back into the accounts from the captive.

Keith Hughes – SunTrust

But on the balance sheet, I would see that in the cash balance and short-term assets, correct?

Bill Smartt

Yes, in long-term marketable securities too.

Keith Hughes – SunTrust

Long-term marketable securities, okay I got it. And I guess finally, one strategic question as you move out of some of the Select Build operations, I know obviously units that are losing money versus the cash cost to get out of the business is a consideration, but is there also a strategic consideration of what you are trying to make Select Build look like in –? Or what will that be?

Bill Smartt

I will let Mr. Wilson answer that question for you. He has a got a very clear view of what you want and we all agree with him by the way.

Stan Wilson

Keith, I think the – what we are trying to do as we have explained over the last period of time, we are obviously operating now as one company developing business plans and as a united front in all those markets. We do see the Select Build business model continuing. We are continuing to refine it, but in most of the markets that we are in, we see those as very important strategic markets to stay in and we are doing everything we can to cut our costs to make ourselves as productive as we can to our customers and also where we are positioning our sales efforts to, particularly in Select Build, to become a more sales oriented operation versus an order taking operation during the good times. We are finding out what our customers’ new purchasing strategic objectives are and we are lining ourselves up with those which a major difference from the way we used to operate, but we will continue with that model and start working together to combine our results with improved results.

Keith Hughes – SunTrust

So you have exited the East Coast operations which you talked about earlier, are there cities in the Western US where you do not plan in the future to do construction services and you do not have to name those, but is there going to be geographic exits?

Stan Wilson

No, at this point, our strategic objective is to stay in the markets we are at to continue to be fine, and consolidate where necessary to adjust to our current periods, but we are not planning on reducing any of the products or services we are currently doing.

Keith Hughes – SunTrust

And you are still looking towards a goal of providing multiple trades to the builders in those geographies in a packaged format?

Stan Wilson

Well, we are reducing those. We are sticking with our core businesses which is framing, lumber products, millwork, and trusses, and some of the other trades that we were in that are not part of that, they need to be contributing to income or we will exit some of those trades, but our core businesses, we are planning to continue it to stay in.

Keith Hughes – SunTrust

All right, thank you.

Operator

Your next question comes from the line of Steve Chercover of D.A. Davidson.

Steve Chercover – D.A. Davidson

Thank you. There is a lot to digest here. My first question is, just can you tell us how much the expense for re-financing was in the third quarter, so we can try and get a run rate of interest expense?

Bill Smartt

Yes, interest expense has going to run about 11% and the costs of all the financing are laid out in the footnote to the 10-Q in excruciating detail, which I am not going to read over the telephone to you.

Steve Chercover – D.A. Davidson

Understood, I can read it. And secondly, probably you do not want to talk about this, just wondering whether those, I think they are – you know that the unions who have been carpet bombing us with literature, are they disrupting things?

Robert Mellor

Well, I would say Steve, at this point, not really. I mean we certainly have recognized their presence in certain locations and they have certainly shown up at some job sites with a number of – not a large number, but of some of their people there and they have contacted obviously some of our customers, but I would not say that it has had a major impact on our business to date.

Steve Chercover – D.A. Davidson

Great, thank you.

Operator

Your next question comes from the line of Jim Wilson of JMP Securities.

Jim Wilson – JMP Securities

Hi, good afternoon everybody. I was wondering if you could talk about kind of the competitive situation a little bit, obviously the big factor is just overall demand and its impact on you and everyone else, but what are the competitors obviously – the competitors are generally – your biggest competitors are private, are they taking share or are they adding facilities or are they kind of heading for the hills also, what does it look and I am trying to get an idea what when all of this shakes out, who is going to have what share and how much competition are you really likely to have left?

Stan Wilson

Jim, this is Stan Wilson, I will answer that if I can. We see a lot of our competitors. There has been a major announcement by Wolseley, which operates the stock in the US by 84 Lumber, others have a major contraction within the US about their businesses, and we are finding a number of other small businesses are having a big difficulty in this time, but the competitive nature that we are all fighting for, a smaller piece of the pie has definitely had an affect to our margins as you would expect, but you know, the one thing our margin has declined some and as you would expect, but the drop in housing, but in every market the one we operate in, we have had a positive penetration this year. We are keeping our service at the very high level and our performance in the very high level in every area, and I think by – we have had some, for example, like in the inner [ph] mountain area, we have got penetration of over 16%, and in Texas about that same amount. So, we have been performing well against our competition and we do see it is very competitive but we will get through this pretty well.

Jim Wilson – JMP Securities

Okay, and let’s say, I guess the – the other thing I was really thinking is – as you look at competitors on their pricing of products and services, I have heard at least early on particularly as things were getting worse that some smaller players just try to generate any cash for pricing way below – you know, could you define cost and is that still the case or are a lot of those competitors have already gone out of business?

Bill Smartt

I see a lot of that from where I – because I keep a track of lot of stuff, and so does Stan of course, but the pricing environment is very, very marginal right now as you might expect. People are still pricing just to generate cash flow, not much sure they generate profit to keep themselves in business. I find it interesting, but the only public confirmation that we get, say on a company that is similar to our distribution business and a building product business, The Builder’s FirstSource, and if you look at their results for the third quarter, their margins – their gross margins are around 20% ours is 24%, so we are in markets that are holding up pretty well relative to what we see in some of our competitors marketplace. I think we are positioned pretty well in key markets and we have good market shares and good reputations for customer service wherever we do our Business, and Stan will add to that.

Stan Wilson

I think there is no question that the pricing has been a major thing we have been facing going out, and it appears that the cash – generating cash has been the primary focus of that, but a lot of people are trying to maintain their market share as well as we are, but we are going to face that for a while longer but and that is a situation we are in right now, but from all of our numbers and again the way we are penetrating markets, our product mix particularly in our millwork side is held up very strong, and we think that that has helped us continue to gain market share.

Jim Wilson – JMP Securities

Okay, great thanks.

Operator

And you have no questions at this time, I would now like to turn the call over to Mr. Robert Mellor for closing remarks.

Robert Mellor

Well, thank you and I thank all of you for tuning in this afternoon and we look forward to keeping you posted. If you have any additional questions, you can certainly call me, call Bill, call Stan, call Mark, and we will be happy to speak with you, but thanks again for tuning in.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect.

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