Building Materials Holdings Corporation Q4 2007 Earnings Call Transcript

Buildings Material Holdings Corporation (BLG)

Q4 2007 Earnings Call

March 6, 2008 5:00 pm ET

Executives

Robert Mellor- Chairman of the Board, Chief Executive Officer

Stanley M. Wilson- President, Chief Operating Officer

William Smartt- Chief Financial Officer, Senior Vice President

Lisa Balcony

Analysts

Presentation

Operator

Good day ladies and gentleman, and welcome to the Building Materials Holdings Corporations fourth quarter year-end review conference call. If at any time during the call you require assistance, please press star zero, and our coordinator will be happy to assist you.

I would now like to turn the presentation over to your host of today’s call, Ms Lisa Balcony. Please proceed.

Lisa Balcony

Thank you. Good afternoon, and thanks for contacting us to hear BMHC’s management commentary on the fourth quarter and full year of 2007 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.

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 on this conference call, may constitute forward-looking statements within the meaning of 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 of forward- looking statements.

These factors include, but are not limited to the risk 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 filing 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 Mr. Robert E. Mellor, Chairman and Chief Executive Officer of BMHC. Rob?

Robert E Melllor

Thanks Lisa, Good afternoon and thank you for taking the time to listen to this commentary on our fourth quarter, and year end financial results.

We decided to change quarterly call from the traditional interactive format, to this prerecorded format because we are in a process of formulating plans to implement a numbers of significant operational and management changes. Until this process is complete we are not able to provide details about those plans. Nevertheless, we recognize the importance of providing information about our financial results at the earliest opportunity.

We believe that the level of detail that we are providing in the quarterly financial results press release and in this commentary should address the majority of investor’s questions and concerns. Which we have tried to anticipate as we prepared these remarks. We expect to file our 2007 form 10-K within the next several days, which will provide additional details on our financial results.

In the weeks ahead as our business realignment are further developed, we expect to provide additional information to you, and to schedule an interactive tele-conference to discuss those developments, and answer analysts, and investors questions.

To begin, I will offer some comments on our views on the current state of the home building industry, which will be followed by a review of our business, and transfer the fourth quarter end year. I will then discuss some of our recent initiatives to better align and size the business to the current operating environment. Bill Smart, our Senior Vice- President, and Chief Financial Officer, will then provide details of our financial results, and after Bill’s commentary, I will offer a few additional remarks on our outlook for 2008.

The home building industry 2007 was one of the most difficult years in decades. As markets across the country deteriorated. In the fourth quarter, this downward trend accelerated, and this industry experienced, what was perhaps the most difficult quarter it has ever faced.

To date, public home builders has written down approximately, $20 billion dollars. New and existing and unsold homes inventories remained at elevated levels. New homes stocks continue to declined, and mortgage availability is worsening. I think it is fair to say market equilibrium has not yet been reached.

Reflecting the decline in the home building market, single family building permits in the month of December, plunged 41 percent from a year earlier with an annual pace of $692,000. Additionally, single family stocks declined 36 percent from December of 2006, to an annualized rate of $794,000, and BMHC’s regional market quarterly building permit activities for single family home was down by 40 percent year over year, while the US overall was down 35 percent.

Like other participants in the home building industry our results for the fourth quarter reflected the steep downturn in the sector. Our revenue declined sharply, and we recorded a net loss, and a substantial impairment charge for goodwill, and customer relationships. Bill will cover these points in detail later.

In the face of these challenging market conditions, we embarked on a number of initiatives to aggressively manage our business in the industry downturn. Reduced our overall employee count from almost 25,000 in July 2006, to 14,000 in December in 2007, this reduction of more than 40 percent overall includes a more than 50 percent reduction in the SelectBuild side of the business. We continue to consolidate and streamline operations in both the BMC West, and SelectBuild operations, and in this regard we have more work to do, in order to respond to the unanticipated duration and severity of the housing downturn. We will discuss more about this later.

The second quarter, we sold our Austin Texas property, as part of our relocation plans, and what has continued to be a good market and made a nice profit. In the third quarter, we sold three non-strategic business units, in Western Colorado, and in the fourth quarter we were able to separately sell the Aspen real estate for a significant profit, which we have previously recorded.

By the end of the first quarter, we expect to have vacated and subleased multiple SelectBuild facilities in Northern and Southern California, Nevada, and Arizona. We have also tentatively identified more than a dozen additional facilities in these markets as well as Florida, and Virginia that we expect to close, sell or sub lease in the months ahead. We subleased about a third of our San Francisco office space in 2007, and we are expecting to sublease another third of the space in the coming months. And we currently have 18 people in our San Francisco office.

Importantly as we announced March 3^rd, we renogiated our credit facility with our lenders. Its terms and conditions are reflective of current conditions in the housing industry and the credit markets. As I mentioned earlier, Bill will have some additional comments on this.

All of the measures taken so far have been effective, but there is clearly still more work to be done to respond to the impact of the current environment. Like other companies in the home building sector, we still lack visibility in the recovery phase of the industry cycle. Quite frankly, we do not know if we have seen the bottom yet.

What we do know today is that BMC West continues to perform relatively well in most of its market. And you will recall that BMC West tends to operate in smaller and mid size markets, in addition to large markets. And many of these markets did not become as overheated and overpriced during the boom years of 2004 and 2005. Although, most of these markets have softened somewhat, they have not collapsed. BMC West has continued increased its market share and for the year, actually increased its gross margin. Sales continue to outpace permanent activity in its market, declining less than the comparable decreases in permits.

We viewed BMC West results as quite remarkable, given the commodity wood product price deflation, and permit decreases that took place in 2007, and BMC West also manufactures and supplied a wide range of products and services.

SelectBuilding contrast with BMC West is designed to service the large, high-volume production home builders, and their largest markets. These markets are of course the ones that attracted the most interest from real estate speculators, where prices were driven up the fastest. And where over building and excess inventory became more prevalent. While sales at SelectBuild slightly outpaced permit activity in its region during the fourth quarter, declining less than it declined in permits, home productions levels in most of the SelectBuild markets have collapsed, as large builders worked to reduced their inventory of unsold homes.

In some of these situations others contractors desperate for work are taking jobs below our cost. Builders continue to rebid work increasing the downward pressure on prices. In response we are diversifying from an almost complete concentration on single family home building to a broader revenue base that includes increasing contributions from both multi family and light commercial construction.

In this continuing challenging environment, our short term focus will be on managing our business for cash flow, and our longer term focus will be on creating a cost efficient scaleable infrastructure, that will make us very lean and strong for when growth returns to the market.

Another significant action was the Board of Directors appointment of Stan Wilson of new position of President and Chief Operating Officer of BMHC. As President, and Chief Executive Office of BMC West since 2004, and one of the original founding managers of BMC West since 1987, Stan has extensive experience in the building materials distribution and construction services industry.

In his new capacity, Stan has direct responsibility to all our operations, including both SelectBuild and BMC West. We expect to see a flattening of the SelectBuild management structure, as well accelerated centralization integration, and coordination of SelectBuild. Stan and I have been visiting the SelectBuild operations.

To address the continued market uncertainty, we have plans in development to further realign BMC to better position the company to work through and emerge from this deep and prolong downturn. We continue focus on reducing SG&A expenses and have identified additional back office position that will be eliminated as we proceed to fully centralize our key administrative support operations, such as Information Services, Accounts Payroll, Payroll, and General Ledger Accounting.

We are proceeding as quickly as possible to close facilities that are not required in the current environment, and to further consolidate operations. All of our operations are under review and specific market realignment plans are being prepared for execution in the coming months. In the weeks and months ahead of us, we will provide additional details of our plans, along with estimates of projected cost savings and time frames to accomplish these tasks. We believe it is very important that we establish targets and provide metrics to measure our progress, and we will share this information with you as soon as it becomes available.

Now, I’ll turn things over to Bill who will review the financial results.

William Smartt

Thanks Rob. As Rob noted, our results continue to be impacted by the deterioration of the home building market. Overall however, our quarterly and annual sales decreases continue to be less than the comparable decreases in permits.

Consolidated sales for the fourth quarter of 2007 decreased 30 percent to $419 million from $597 million in the same quarter a year ago. Sales for the year were $2.3 billion down 29 percent from $3.2 billion in 2006.

That lost for the 4^th quarter was $331 million for $11.44 per share compared to net income of $4.5 million or $.15 per share in the 4^th quarter of 2006. For the year net loss was $313 million or $10.86 per share compared to net income of $102 million or $3.45 per share for 2006.

Our operating results for the 4^th quarter of 2007 included an impairment of $337 million or $10.82 loss per share the caring amount of goodwill and certain customer relationships, principally at our construction services operations. As of December 31, 2007 all of the good will at SelectBuild has been written off. As of the end of 2007, only $14.2 million dollars of good will remains in our financial statements, and it is principally related to the Texas operations of BMC West.

Also, included in the 4^th quarter results were income from discontinued operations, which included a net gain of $10.3 million or $.35 per share. Consolidated gross margin was 18.3 percent the quarter, compared to $22.1 percent in the 4^th quarter of 2006. This 380 basis point decrease compared to the prior year, reflects the impact of lower margins on construction service sales. Primarily due to the harsh competitive pricing environment, characterizing 2007.

For the year as a whole, our gross margin was 19.4 percent down from the 21.4 percent reported in 2006. This 200 basis point decline is relatively modest given the current operating environment, continued deflation, and commodity wood product prices. We attribute this primarily to a shift in sales mix between building materials and manufactured products which have relatively higher gross margins, and construction services, where gross margins are generally lower. Consolidated selling and general administrative expenses were down $13.7 million, as we continue to tightly manage head count and payroll costs, sales and distribution costs, and other variable overhead costs.

The percent of sales SG&A costs increased to 25.1 percent from 20 percent in the 4^th quarter of last year, an increase of 510 basis points. This increase is also largely attributed to the shift in mix between materials and products which have relatively higher SG&A costs, and construction services where SG&A are generally lower. Corporate, general administrative expenses were down $11.7 million for the quarter and $23.8 million for the year. These reductions were primarily due to lower compensation expenses including incentives.

Additionally, when compared with fiscal 2006, SG&A was down $24.7 million in SelectBuild, and down 13.6 million at BMC West. I will have more comments on the segments SG&A costs, as I discuss the results of our individual segments.

Excluding impairments and discontinued operations net loss was $28.1 million or $.97 per share for the quarter, compared to net income of 3.5 million or $.12 per share in the same quarter a year ago.

For the year, excluding impairments and discontinued operations net loss was $13.8 million or $.48 per share compared to net income of $99.1 million or $3.35 per share in 2006.

I’ll now turn to our two business segments the MC West and SelectBuild. As discussed, previously in the current home building market, diversification that are two business segments provide us is more than important than ever.

I will start with BMC West where we recorded sales for the 4^th quarter of $250 million a decreased of $54 million or 18 percent from the $303 million reported in the same quarter a year ago.

Sales for the year, was $1.2 billion a decreased of $294 million or 20 percent, from the $1.5 billion in 2006. Overall, the percentage decreased in sales at BMC West for the quarter is less than the comparable percentage decline in permits, in the regions in which its operates. In BMC West markets single family permits were down 34 percent for the quarter, and 29 percent for the year, while sales were down only 18 percent for the quarter, and 20 percent for the year.

We continue to be encouraged by BMC West performance despite industry conditions. A decline in sales of only 18 percent relative to the prior year has actually quite notable when consider with the permit decline of 29 percent in BMC West markets compounded by an approximate 20 percent drop in our lumber and panel price index.

When we adjust BMC West sales for the impact of commodity deflation, we estimate that they gain market share by approximately 18 percent in a quarter, 15 percent in a year. BMC West has aggressively managed its sales mix, resulting in a gross margin of 26.9 percent, which compares to 27.6 percent in last years 4^th quarter. SG&A expenses on an absolute dollar basis were lowered by $3.5 million quarter over quarter, and 13.6 million year over year. As BMC West continued to carefully control spending in all areas.

BMC West SG&A costs are largely driven by volume rather than price. We believe that the volume of materials that move through BMC West manufacturing and distribution channel was approximately equal to its volume in 2006.

Combination of downward pressure of revenues and upward pressure on cost, such as wages, deliberate and handling these are productivity improvements, are the most valuable source of additional SG&A reductions. BMC West maintains flat organization structure; leverages centralized services, and continuously seek out ways to enhance its productivity. Nevertheless, SG&A as a percentage of sales increased to 24 percent from 20.9 percent in 2006 for the 4^th quarter, and increased from 17.9 percent from 21.2 percent on an annual basis.

BMC West operating income for the 4^th quarter was $1.4 million a decrease of $18.8 million or 93 percent from the $20.3 million in the same quarter of last year. For the year, BMC West operating income was $64.7 million a decrease of $55.1 million or 46 percent from the $119.7 million from in the fiscal year of 2006.

I will now move to SelectBuild where we recorded sales for the 4^th quarter of $169 million, a decrease of $124 million or 42 percent from the $294 million reported in the same quarter last year. For the year, SelectBuild recorded sales of $1.1 billion, a decrease of $625 million, or 36 percent from the $1.7 billion in 2006.

As a reminder, SelectBuild’s primary markets are located in California, Arizona, Nevada, and Florida. When we hear of SelectBuild’s results, it is important to also consider significant ongoing reduction in single family starts and permits in SelectBuild’s markets.

For the quarter, single family permits decreased these markets; and it ranged from 4 to 59 percent, an average 46 percentage. For the year, they ranged from 29 percent to 56 percent, averaging 41 percent.

The gross margin at SelectBuild was 6.2 percent in the 4^th quarter of this year, compared to 17.6 in last years 4^th quarter. SelectBuild experienced particular pressure on its margin during the fourth quarter, as a result of extreme pricing pressure from production home builders.

For the year, SelectBuild’s gross margin was 12 percent compared to 17.8 percent in 2006, which has reflected of the 57 percent decrease on a annual basis in the absolute dollars. For the year SelectBuild’s expense reductions efforts decreased SG&A expenses to $24.7 million from 2006. These expenses were lowered due to reductions and the number of employees and related expenses, and sending compensation based on operating performance, and operating performance payment for recent acquisition.

SelectBuild operating results for the quarter, included an impairment $330.4 million for good will, and certain customer relationships in our markets, excluding this impairment, loss from operations was $26.6 million, compared to income of $18.3 million in the same quarter a year ago.

For the year, loss from operations, excluding impairment was $4.9 million, compared to income $148.4 million in 2006. The lost from operations was due to a sharp decline in sales and lowered gross margins from competitive bidding on construction contracts.

Before I continue, I like to provide some additional comments about the process we use for impairment testing. As we’ve noted in previous calls, we conduct quarterly impairment reviews to identify possible triggering events that would indicate the need for a more in depth analysis, prior to the normal end of year testing. At the end of the second quarter, and third quarter of 2007, no triggering event had occurred. During our annual impairment testing in the fourth quarter, however, a major sources of economic and housing data published updated quarterly forecast that projected significant reductions in 2008 and beyond. The rapid deterioration in the housing forecast, and in our own operating performance, especially during the latter half of the fourth quarter resulted in significant revisions to our operating expectations. Under pending the assumptions of recoverability, the carry amount of customer relationships in good will.

Additionally, our enterprise value reflected a large and continuing reduction of the company’s market value, as the equity markets further marched down the stock prices of housing related companies. More impairment testing that fair values were determined based on estimates of enterprise value, as well as the present value of estimated future operating cash flows.

As a result of this process, we determined that the carry amount of certain customer relationships and goodwill exceeded their respected estimated fair values. We recognized the impairment of SelectBuild of approximate $330 million for good will and customer relationships, and at BMC West we recognized approximately $7 million dollars for good will.

In addition, the income tax benefit related to the impairments was limited by accounting rules to $24 million dollars. To the extent that we generate taxable income in future periods, we may be able to take additional tax benefits, thus reducing our effective tax rate in those future periods.

For the quarter, operating cash flow was approximately $47 million, for the full year operating cash flow was approximately $67 million, quarterly purchases of property and equipment increased to $11.2 million from 5.1 million in the 4^th quarter of 2006, and cash outlays for acquisitions increased to $4.5 million from $1 million in the prior year of the 4^th quarter.

Importantly, as Rob noted, we recently renegotiated our credit facilities. Key elements of the amended agreement include the following; the revolver is reduced from $500 million to $200 million, the term loan maturity is shortened by 2 years, and now coincides with the revolver maturity in November 2011, pricing on both the revolver and term loan is live work plus 450, Financial covenants include a minimum network test, a minimum EBITDA test, and minimum interest coverage ratio, letters of credit continue to count as usage under the revolver, and borrowing capacity is further limited by a borrowing based calculation, and a reserve for outstanding surety bonds. Capital expenditures are limited annually, and no dividends, stock buy backs, or acquisitions are permitted. Additionally, monthly reporting requirements are much more extensive than in the past.

We believe the terms and conditions of this facility are representative of the current lending environment and market conditions.

To summarize, it is clear that the current home building environment will remain challenging for the foreseeable future. To address these challenges, we are focused on several key initiatives. First, we have been focused for the past year on SG&A cost reductions to up the company. These efforts will continue, as we reduce staff levels, consolidate facilities, and curtail spending.

Second, we will continue to emphasize gross management through the careful evaluation of all projects and material bids, and through leveraging buying power. Third, our capital spending programs has been cut back to maintenance levels, and we raised our internal hurdle rates for all project evaluations. Finally, we will continue our discipline management on our balance sheet, with particular emphasis on a working capital.

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

Robert Miller

Thanks Bill. Heading into the spring, which has been traditionally been the selling season. Buyer traffic levels remain low, and there continues to be an excess supply of home as foreclosure levels rise. Mortgage availability is limited, and the risk of continue price declines persists. In the near of term, analyst expect increasingly stringent lending standards to cause further capital constraints among smaller builders. While this will likely force consolidation, and may add to the near term instability, should create greater stability in the home building industry over the long term. I’ll sentiment in the home building industry continues to be pessimistic in the near term, and the timing of a market recovery remains unknown, the long term outlook for the industry remains positive, due the growth of the underlying demographics, such as household formations.

In fact some industry experts believe that likely path for housing turnaround is growing clear. Other thing, affordable has continued to improve as interest rates remains low, and home prices decline. However, affordable does remain an issue in a number of markets. Several policies initiatives, and the federal government economic stimulus plan, may also aid the home building industry in its recovery.

In summary, we are doing and will continue to do what is necessary to realign our business to withstand the ongoing challenging dynamics, and position a company to reemerge stronger when an industry recovery does occur. We will continue to focus intently on cost management, cash flow, and managing our balance sheet.

As we begin the 21^st year business for BMHC, we thank all of our employees for their continued dedication, as all of you can appreciate this is a tough environment, and everyone at BMHC is working very hard to see the company successfully through this period. The outstanding efforts of all of our people, during these challenging times are invaluable to the ongoing success of the company. As a team, we all continue to work diligently to improve our business.

We also thank our shareholders, customers, and suppliers for their continued support as each group has felt the effects of this environment. As I mentioned at the start, we look forward to updating you in the weeks ahead, through an interactive tele-conference.

We appreciate the time you have taken this afternoon, and thank you

Operator

Thank you for your participation in today’s conference, this concludes the presentation. You may now disconnect.

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