Buildings Material Holdings Corporation Q1 2008 Earnings Call Transcript

Buildings Material Holdings Corporation (BLG)

Q1 2008 Earnings Call

May 12, 2008 12:00 pm ET

Executives

Lisa Laukkanen - The Blueshirt Group

Robert Mellor - Chairman and Chief Executive Officer

Bill Smartt - Senior Vice- President and Chief Financial Officer

Stan Wilson - President and Chief Operating Officer

Mark Kailer - Vice President, Treasurer and Head of Investor Relations

Analysts

Keith Hughes - Suntrust

Steve Chercover - DA Davidson

Nicole Jacoby - Liberation Investment Group

Scott Mack - AAB Capital

Jim Wilson - JMP Securities

Presentation

Operator

Good day ladies and gentleman, and welcome to the First Quarter 2008, Building Materials Holdings Corporations Conference Call. My name is Karen and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

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

Lisa Laukkanen - The Blueshirt Group

Good afternoon, and thanks for joining us on BMHC’s conference call to discuss first quarter 2008 financial results. The company issued a press release this morning, detailing its results. If you do not have a copy, the release can be found on BMHC’s website, at 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 forward-looking statements. These factors include, but are not limited to 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 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 the 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 Mellor - Chairman and Chief Executive Officer

Thank you, Lisa. Good morning and thanks to everyone for joining us. With me on the call today are Bill Smartt, who is our Senior Vice- President, and Chief Financial Officer; Stan Wilson, President and Chief Operating Officer; and Mark Kailer, our Vice President, Treasurer and Head of Investor Relations.

First, I will offer a few remarks on our views of the homebuilding industry, which will be followed by a review of our business trends for the first quarter. Bill will then provide details of our financial results and after his commentary I will offer a few additional remarks on our outlook. We will then open the call the questions.

During the first quarter of 2008 the home building industry's challenge is persisted, as macroeconomic factors affecting the industry further deteriorated. New and existing unsold home inventories remained at elevated levels, mortgage capital was compressed and new home starts continued to decline.

Reflecting the decline in the home building market, single-family building permits in the month of March plunged 46% from a year earlier to an annual pace of 606,000. Additionally single-family starts declined approximately 44% from March of 2007 to an annualized rate of 680,000. BMHC regional markets quarterly building permit activity for single-family homes was down 48% year-over-year or the US overall was down 41%.

The challenging home building industry conditions continued impact our results in the first quarter. Our revenue declined significant and we recorded a net loss for the period. In spite of the current business environment the distribution side of our business BMC West has continued to increase it’s market share and maintained its gross margins.

Sales continue to outpace permit activity in its markets declining less than the comparable decreases in permits. Sales at SelectBuild unfortunately have continue to be under intense downward pressure as home production levels dramatically declined and private contractors price jobs below our cost. Our SelectBuild sales declined less from the comparable decreases in permits across its markets, but business trends for the construction side of our business had necessitated aggressive steps to be taken to streamline the operations.

In light of the continued challenging market conditions and keeping with the initiatives we outlined when reporting our year end results, we are developing a plan to unify BMC West and SelectBuild and streamline the operations. We believe that the implementation of this plan to right size the organization to reflect current market conditions and improved management's ability to manage the business in the downturn while positioning the company for future growth and value creation. We estimate that the plan will reduce SG&A expenses by 20 to $25 million in aggregate on an annual basis.

The primary components of the plan are as follows: we are flattening and simplifying our organizational structure by reorganizing the 22 markets that BMC West and SelectBuild currently serve and to just seven geographic regions rather than the previous 13 regions. As part of our extensive analysis of our operations, we have also identified a number of business units to be shutdown by the end of 2008. These units were performing below expectations and in aggregate have incurred losses for the full year 2007 and the first quarter of 2008. Another group of business units have been identified for consolation into other operations and we are continuing to conduct detailed performance and market analysis on all remaining units. We expect to realize significant savings and overhead expenses as well as positive cash flow after exit cost as a result of the shutdowns. We are also consolidating administrative functions. SelectBuild's accounting, purchasing, payroll, and IT will be absorbed in the existing corporate support operations, which should result in a substantial reduction in overhead expenses.

We also anticipate significant operational improvements as a result of this plan. Although headcount reductions will occur as we continue to right-size the business, realign our organizational structure and consolidate administrative functions. Cost savings should be realized as we leverage the purchasing power of the unified company's supply chain. We will develop a sharper focus on SelectBuild's inventory management to create a more prudent system with higher turnover model on the proven inventory management systems and procedures used at BMC West.

Our SelectBuild field operations will be able to focus more fully on operations and customer service as we centralize administrative support functions. As we proceed with implementation of the plan, we will maintain the unique brands of BMC West for distribution and manufacturing activities and SelectBuild for construction services. The unified approach to management and support operations, however, should create new opportunities for us to better serve our customers, primarily homebuilders and contractors with our wide range of bundled product services and pricing options. With the consolidation and streamlining of operations, BMHC will be better positioned to focus on top line growth, maximizing operating efficiencies.

We look forward to keeping you updated on our progress and I will now turn things over to Bill Smartt who will review the financial results. Bill?

Bill Smartt - Senior Vice President and Chief Financial Officer

Thanks Rob. As Rob noted in his remarks, the challenging homebuilding market continues to impact our results. However, our quarterly sales decreases continued to be less than the comparable decreases in single family permits. While we have increased our share of multi family light commercial work, our business is still predominantly influenced by single family construction.

Consolidated sales for the first quarter of 2008 decreased 37% to 355 million from 559 million in the same quarter a year ago. Net loss for the first quarter was 33.9 million or $1.17 per share compared to a net loss of 5 million or $0.17 per share in the first quarter of 2007.

Consolidated gross margin was 17.5% for the quarter compared to 19.7% in the first quarter of 2007. This 220 basis point decrease, compared to the prior year, reflects the impact of lower margins on construction services sales, primarily due to the ongoing extremely competitive pricing environment.

Consolidated selling, general, and administrative expenses were down 24.2 million as we continue to tightly manage headcount and payroll costs, sales and distribution costs, and variable overhead costs. As a percent of sales, SG&A decreased to 24.6% from 19.9% in the first quarter of last year, an increase of 470 basis points. From the first quarter a year ago, SG&A was down 9.5 million at corporate, down 8.7 million at SelectBuild, and down 6 million at BMC West.

As I discuss the results of our individual segments, I will provide further insight into the SG&A initiatives associated with the streamlining plans we announced this morning.

Now, I would like to comment on the results of our two business segments, BMC West and SelectBuild. The diversification that these two segments provide us continues to be an important component of our business model in the current homebuilding market.

I will start with BMC West where we recorded sales for the first quarter of 211 million, a decrease of 68 million or 24% from the 279 million reported in the same quarter a year ago. BMC West performance continue to be quite strong relative to current operating environment. Percentage decrease in sale at BMC West for the quarter continued to be less than the comparable percentage decline in permits and regions in which it operates. And BMC less markets single-family permits were down 41% for the quarter, our sales were only 24% for the quarter. This deep decline in permits is further compounded by an approximate drop in our lumber and panel price index. When we adjust BMC West sales for the impact of commodity priced equation we estimate that they gain market share by approximately 20% in the quarter. BMC West has aggressively managed its sales mix resulting in a gross margin of 25.8% equivalent on a percentage basis through last years first quarter.

SG&A expenses on an absolute dollar basis were lowered by 6 million quarter-over-quarter, as BMC West continually continued to control spending in all areas. 5.7 million of this reduction is attributable to payroll benefits and incentives. SG&A as a percentage of sales increased to 26.7% from 22.3% in the first quarter of 2007. BMC West SG&A cost are largely driven by volume rather than by price. The combination of downward pressure on revenue and upward pressure on cost such as wages, delivery and handling means the productivity improvements or the most viable source of additional SG&A reduction.

BMC West maintains a flat organization structure, leverage synchronized service and continuously seeks out ways to enhance its productivity. BMC West operating income for the first quarter was 1.8 million a decrease of 8.9 million or 83% from the 10.7 million in the same quarter of last year.

I will now move to SelectBuild where we recorded sales for the first quarter of a 144 million a decrease of 137 million or 49% from the 281 million reported in the same quarter last year.

As a reminder, SelectBuild's primary markets are located in California, Arizona, Nevada and Florida. I am reviewing SelectBuild's results as it is important to note the sizable ongoing reduction as single-family starts and permits and select those markets. For the quarter single-family permit decreases in these markets for the three months period and the February ranged from 50 to 66% and average 55%.

Gross margin at SelectBuild was 5.3% in the first quarter of this year compared to 13.2% in last years first quarter. SelectBuild continue to experience significant pressure on its margin during the first quarter as a result of the unrelenting pricing pressure in production homebuilders. SelectBuild continued its expense reduction efforts in the first quarter. On a absolute dollar basis SG&A expenses were down 8.7 million compared to the prior quarter of 2007, of which 8.3 million was related to payroll benefits and incentives. SG&A as a percent of sales increased to 17.9 and 12.3 in the first quarter of 2007.

As detailed in our second press release this morning a majority of SelectBuild’s accounting, accounts payable, purchasing, payroll and information technology support will be absorbed into the existing BMHC corporate support operations.

For the quarter operating cash flow was 8.2 million, quarterly purchases of property and equipment decreased to 7.2 million from 8.7 million in the first quarter of 2007, and cash outlays for acquisitions were 2 million down from 62 million in the prior first quarter.

Importantly, we met our financial covenants for amended credit facility in the first quarter. Financial covenants include a minimum network test and EBITDA test and an annual limit on capital spending. We are pleased that our productivity improvements and expense and investment management have enabled us to be our loan covenants despite the extremely challenging market conditions.

As Rob discussed, we expect the operational reorganization now underway along with back office consolidation to significantly reduce our cost structure and improve cash flow and working capital management.

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

Robert Mellor - Chairman and Chief Executive Officer

Thanks Bill. We believe the measures we have taken better position BMHC for greater operating efficiencies and growth opportunities in our core businesses. There is clearly still a lot of work to be done to achieve the anticipated benefits of our streamlining plans. Unlike other company in the homebuilding sector, we still lack visibility into the recovery phase of industry cycle. Some analysts believe that even though there has been no discernible spring selling season pick up, inventory levels of new and existing homes have stabilized over the last six months.

Even though the rise of home foreclosures expected in 2008 could add to the excess supply of homes, some believe those can be absorbed without dramatically increasing net inventory levels. While the homebuilding industry continues to face strong headwinds and the timing of a market recovery remains unknown, some analysts believe the housing market show signs of bottoming. While analysts do expect homebuilders to take additional asset write-downs, the magnitude of these is expected to decrease. And during the second quarter, analysts estimated homebuilder asset impairments to-date in the downturn of average 23% of peak inventory and expected approximately 25 to 30% of peak inventory will be eventually impaired.

Housing affordability has continued to improve across many markets and again some analysts believe the affordability index could reach new high levels by the end of 2008. While financing for home buyers remain challenging, a combination of rate cuts, increase in loan limits, and investing capacity as well as government programs for encouraging assistance to trouble borrowers should help to address the housing markets issues over time.

In summary, we are taking a number of important steps to streamline and realign our business to withstand the continued challenging dynamics. We believe we have positioned the company to reemerge stronger for future growth and enhance shareholder value. Looking ahead, our focus will be on achieving the expected benefits of our streamlining plans, continued cost management, cash flow and managing our balance sheet.

As always, we thank our employees for their continued contributions and their dedication in this very difficult operating environment. As a team, we will all continue to work diligently to improve our business. I look forward to updating you next quarter.

And now, we will be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Keith Hughes with Suntrust. Please proceed.

Keith Hughes

In the plan for SelectBuild, the 120 million sales that you are looking to close down, how long will that take to accomplish and what kind of cash expenditures will be required to accomplish that?

Bill Smartt

I think that the program should be accomplished over the next six months, hopefully in the next three months. We are trying to work around our covenants restrictions that we have with our banks. We would like to do it sooner rather than later but we have to finesse the shutdown of this operation so that we don’t tip on the covenants, Keith.

Keith Hughes

Okay. The other business you are talking about integrating 430 million of sales, what all is involved in integration, is it the back office that you talked about earlier or is there more than that?

Rob Mellor

No, it's not the back-office. The back-office is -- there are really two major projects underway, one is a operational restructuring the businesses and the other is a back office restructuring of the businesses. The back office restructuring has been going on for several months now. We expect to have that completed in September of this year. The operational restructuring began an earnest when Stan was appointed Chief Operating Officer and is comprised several activities. One is the flattening of the organization structure. Two is the consolidation of a number of their operating units into some of the operating entities of BMC West and three is the winding down and shutting down of entities that we think are no longer going to generate near term cash flows for us. In fact I might let Stan elaborate a little bit on what his plan is on the operational side because my belief that that’s the most important that we have going on in the company right now.

Stanley Wilson

I think, the biggest thing in all of this is to really develop a strategy with both business trends to work in unity. And by doing that we will create a lot of cost savings from an administration standpoint, the back office is part of it. That’s in a way kind of a no-brainer, get some things more centralized, more controlled and some things like that. We are going to also be regrinding some of the operations in the SelectBuild side particularly on the distribution side and take advantage of some of the facilities that we have got and better utilize those generated additional income and sales but at the same time be able to grow to our major customers throughout the country and offer them a unified sales programs, whether it be some pricing things, some service things, but really tie ourselves together as a single strategy and develop business plans to support that strategy in each one of our markets.

Keith Hughes

Now, on the latter point, historically there were not been a lot of geographic overlap between SelectBuild and BMC West in California and few other markets. What regions do you think you will have the most operational impact if you will by combining?

Rob Mellor

Well, I really think almost in all of them because by having a unified strategy working together and using our brands to identify distribution from our construction services, I think we are going to see a lot of positive results everywhere. For example, when we can go to some national builders now offer a program in all of our markets; I think that's going to be a very big plus to them because of the pricing and services we can offer. In California, we are going to be able to take some of our distribution centers, open that up to other customers as well as internal supply, and give a tremendous amount of purchasing synergy in both price and inventory management.

And I'm really not discounting that inventory management side because there has been quite a philosophical difference in how to manage inventory in the past between BMC West and SelectBuild. In the future philosophy will be two-fold, one, to maximize the inventory turnover, really look at how we can keep our buying power strong and turn our inventory fast. And by combining the buying power of both organizations, we really can make determination of where to save inventory on almost a minute by minute basis based on per inventory levels versus projected needs. We have developed a ton of new reports that let our buyers know instantaneously or everybody at least what our sales rates are running, what our inventory levels are at, we can zero in on an inventory basis at a group level, SKU level, we can reroute inventory if necessary to do that and keep inventories low.

But the second side of that is even more important particular on the SelectBuild, we are going to take a posture of enhancing margins through our buying power versus protecting margins from contracts that are rewarded. I think we have shown at BMC West over the past that we can enhance margins through buying and I expect us to be able to enhance margins for SelectBuild in that same process.

Keith Hughes

All right. And just final question. You have organization realignment, the press release got very geographic areas, each of those geographic areas will manage the historic BMC West as well as SelectBuild locations, is that correct.

Rob Mellor

That is correct.

Keith Hughes

All right. Thank you.

Operator

Your next question comes from the line of Steve Chercover with DA Davidson. Please proceed.

Steve Chercover

Yes, thanks. Good morning.

Rob Mellor

Hi Steve

Steve Chercover

I was hoping you can talk a little bit more elaborate on the balance sheet and the specific elements of the covenants and you didn’t reach anything in the current quarter, I guess the outlook going forward.

Bill Smartt

Yeah. That's pretty hard for me to do when we don’t give forward looking projections. Clearly we do have a network test. We had a minimum $200 million there. We had a cushion of about 25 million on that. We have an EBITDA test and we had a minimum this first quarter of negative 8 and we had a cushion of about 300,000 on that one and we have an annual max on CapEx of 25 million and we spent some. Next quarter the EBITDA test goes from being a negative 8 to a positive 11. Fortunately, we are looking at some seasonality, significant seasonality in our business and that was reflected in the projections that we worked with the bank. So I am not going to predict one way or another what's going to happen in a quarter going forward but clearly we got over the hurdles in the first quarter, Steve.

Steve Chercover

Sure. Well, I mean, clearly when you are negotiating with them, I am sure that you outlined all of the risks and try to build in as much breathing room as possible?

Rob Mellor

Yes, we did.

Steve Chercover

I am sorry?

Rob Mellor

We had a little disconnect in that we would like to move more aggressively and winding down and selling off some of these non-productive assets that we have and we'd like to do it very quickly because we believe that it would improve our cash flows the sooner we do it and it would help us get restructured and improve our profitability. So we'll probably be having a subsequent conversation with banks next week about perhaps them allowing us to have some kind of bucket in which to put these costs associated with wind down activities so that they can see better cash flow and we can see better cash flow and earnings.

Steven Chercover

As you wind these down, are there assets that could be monetized, some real estate, what not?

Rob Mellor

Absolutely. When we look at these, Steve, we look at the – we do a wind down analysis in great detail. We go in and we look at the accounts receivable and we look at what we think the month by month collections will be and whatever write-offs we think will occur. We look at the inventories. We look at how we could reposition the inventories and use them in other portions of our business and how we could sell them off and use them to complete construction work in process. We look at the tale on leased assets and leased facilities and how we could minimize the impact of that cash flow tale in those facilities and assets so that it does not have a significant negative effect on our cash flows, whether that be subletting or selling off the assets. We look at the employees and how we can gracefully wind down or in some instances sell the operating unit back to the employees, which is actually my preferred method of winding down or getting out of a business because that way you don't impact people and employment, so drastically it's just shutting something down. So we look at all those aspects. We flow them all out by month in great detail, both the cash flow, the P&L and the balance sheet. We have taken teams and put them in place in the locations where we are winding down our businesses. We have assigned responsibilities for managing and controlling that process and we have projections of all those numbers which we will be discussing in more depth with our banks next week. So the process is well in hand, clearly identified business units both for wind down and consolidation and we're all moving as fast as we possibly can on it. But as I say, we have to work with the banks on the timing.

Steven Chercover

Okay. And you also discussed the importance of maintaining relationships with your clients. To what extent have you floated trial balloons or discussed how you're -- the different approach that you're going to take with your key production homebuilders going forward?

Rob Mellor

Yeah, that is something that we're very sensitive to because we do deal with the homebuilders in lots of different markets. And even if you close down one trade in a particular market, you want to make sure that you take care of your customer that you're providing other trades to in that market in a manner in which these don't jeopardize the relationship. So our operating people are very much involved in the evaluation of the timing and the process in which we shut these operations down so that we continue to meet our commitments to our customers so that if we do exit a particular trade or a market, we don't leave a bad taste in anybody's mouth.

Steven Chercover

So you think -- is that something which you're starting now or did they have a heads up?

Rob Mellor

No, that is beginning to start now. This week will be a week of extensive activity on those fronts.

Steven Chercover

Okay. Just last question. The tax rate, I guess I was -- I don't guess. I was expecting a refund and you did pay some taxes. I recognize that's a little bit lumpy but can we expect that you'll still be paying taxes when you're losing money going forward?

Rob Mellor

I expect that we should be generating refunds, Steve. It becomes a matter of us being -- you know, last year we had a very very significant write-off of goodwill associated with the SelectBuild operations and we were not able to get the significant refund back because we had not technically from the IRS's point of view shut down those operations and abandoned those businesses. As we move through this process, if we sell or shut down the operations, we will be able to go back and claim cash tax refunds, but those cash tax refunds will be available to us when we file our 2008 return, most likely in March of 2009. If you were to look at it on an aggregate basis, there ought to be approximately $100 million of cash back to this company if we close down all the SelectBuild operations, which we don't intend to do, but we expect that we'll be able to realize a significant portion of that cash tax back.

Steve Chercover

And clearly your bankers are aware of that I should think, and is there anyway to view an NPV of it and get it now?

Rob Mellor

I think that they are going to wait and see. The operation is actually closed down. If we had closed them down, I think that there might be a little more incline to perhaps offer up the NPV of that cash tax back, but until the event occurs I don’t think that they would want to risk something that just has not happened from the IR'S point of view.

Steve Chercover

Okay. Thank you.

Operator

And your next question comes from the line of Nicole Jacoby with Liberation Investment Group. Please proceed.

Nicole Jacoby

Hi all.

Robert Mellor

Hi Nicole.

Stanley Wilson

Hi.

Nicole Jacoby

I wanted to ask you a couple of questions, the first is you had talked about the gross margin at the BMC West able to maintain through managing a sales mix. How in the current environment are you going to be able to continue that or have you sort of squeezed all the benefit out of that and do you expect declining margins going forward or do you think you will be able to continue that?

Robert Mellor

The person responsible for that outstanding achievement is sitting across the table, Stan. Perhaps you could comment on the margins of BMC West.

Stanley Wilson

Well, that is definitely going to be a more challenging thing as we go on, for at least the next two quarters. We've been very fortunate to have continued to maintain a pretty high level of mill work sales, which is one of our higher margins. And that has become a bigger part of our sales mix, therefore dragging up some of the margins of lumber and truss. However, truss has maintained a pretty strong margin as well. And lumber, as you would expect, being on a commodity basis, has been the lowest. That will be a challenge as to maintain our margin as we go forward on BMC West side. I don't expect it to fall off the table. But it's one of those things we'll continue through our buying practices and through our managing of direct labor, I expect it to remain relatively close. But it’s going to be tough.

Nicole Jacoby

Okay. Thank you. Now, I dropped off the call for about a minute during introductions so I apologize if you already addressed this. But with the 20 to $25 million in SG&A reduction that you are expecting, that's off of what base? Is that 2007 or where's your starting point?

Robert Mellor

That’s of 2007.

Nicole Jacoby

Okay. And then help me out, because I am looking at the -- so the first quarter of 2008 strongly reflects that. I mean if you take the reduction in the corporate G&A, quarter-over-quarter, and annualize that, you more than hit that mark. Am I understanding that correctly?

Robert Mellor

Yes.

Nicole Jacoby

Okay, great. So can you go into a little bit more detail about how much of that SG&A reduction is going to be cash and how much of it is non -- expected to be a non-cash in the form of D&A and whatnot?

Robert Mellor

Yeah. Most of all it, Nicole, is going to be cash. In fact, there have been some headcount reductions in the first quarter, but the more significant reductions will come in the latter part of the year, in the second, third and fourth quarters, as we move staff and functionality up to our corporate processing center in Boise.

Nicole Jacoby

Okay. And you had addressed earlier that you -- I think a three to six-month timeframe. Does that apply also to your SG&A reductions or that's really throughout the year?

Robert Mellor

That’s throughout the year.

Nicole Jacoby

Okay.

Robert Mellor

I expect to have it done by September 30^th but there will be tail on some of the costs of reducing headcount in the filed.

Nicole Jacoby

Okay. Severance and whatnot?

Robert Mellor

Yes.

Nicole Jacoby

Let me just take a look. In terms of the -- well I guess, you already addressed the loan covenants. Is there any more information you can give us about the loan covenants going forward or maybe tell us where we could -- I guess you gave us a little bit of detail on the EBITDA, on how that changes. Will the net worth one or the CapEx one or any others change?

Robert Mellor

The answer is no.

Nicole Jacoby

Let me just take a look. In terms of the -- well, I guess you already addressed the loan covenant is there any more information you can give us about the loan covenants going forward or may tell us where we could -- I guess you gave us a little bit of detail on the EBITDA, how that changes. Will the net worth one or the CapEx one or any others change?

Rob Mellor

The answer is no.

Nicole Jacoby

Okay.

Rob Mellor

The covenants are quite tight. We are on a very short leash year.

Nicole Jacoby

Got it. Okay. Well, thank you very much guys.

Rob Mellor

Our pleasure.

Operator

Your next question comes from the line of Scott Mack with AAB Capital. Please proceed.

Scott Mack

Good morning everyone.

Rob Mellor

Good morning.

Scott Mack

I may have missed this in your answer, but did you give a just a broad estimate in terms of the anticipated cost of the units you hope to consolidate or shutdown and what the estimated payback period would be for those?

Rob Mellor

We did not. That was forward looking information that we at this point in time have not made public.

Scott Mack

Okay. And those -- I was wondering if you can talk a little bit just about the controls on bidding the jobs in SelectBuild, if there has been a change in methodology or control structure just in terms of bidding those jobs?

Rob Mellor

Yes, it has, Scott. One of the things we are looking at is obviously in a market that we are facing is there is no question margins are going to be tight in that area. Everybody is down. Everybody is looking at the lowest price possible. What we try to do obviously is cover our variable cost, contribute to our fixed any time on any job that we can take as far as the tight margin. But we are also looking at other ways to take cost out of the system that will help margin through again as I talked about before improved efficiency in buying and improved efficiency in some operating practices. One of the things I am really excited about that was mentioned earlier is getting our best practices teams together throughout the whole company as we do a lot of construction installed service out of BMC West side as well as the SelectBuild side to gain those two groups together and really dig it into ways to improve our productivity I think will help us in increasing margins. We have got some pretty good history that I could go over and bore you to death with on best practices and how we have applied that and improved results throughout our company and I am pretty excited about that going forward.

Scott Mack

Good. And as a final question, as we think about some of the restructuring of the SelectBuild, I guess just in terms of order of magnitude what contributes most versus least, it maybe between three buckets in terms of outright market exits versus just exiting certain trades within markets or consolidating locations within certain markets. I am just trying to understand just the magnitude of potential savings and where they are coming from?

Rob Mellor

Well, again that's more forward looking than anything else and I think you and I had a conversation about this on the phone once before and I beg off in saying that I did not want to project the component pieces of the go-forward program and these were reasons for that Scott. Not only is it forward looking information but also it's not entirely clear that some of the operations that we initially have looked at as being trades that were going to shut down upon second look and examination by the operating people in the field, won't be better off being consolidated and merged into an existing BMC West operation. So there are some of those things that are still being looked at pretty carefully about whether we should just exit or consolidate.

Scott Mack

Fair enough. Thanks for your time this morning.

Rob Mellor

Sure.

Operator

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

Jim Wilson

Thanks. Good morning guys.

Rob Mellor

Good morning, Jim.

Bill Smartt

Good morning.

Jim Wilson

I will try to frame it into a couple of questions, but the consolidation and integration, I mean, part of your plan all along has been to integrate two businesses in the field as a positive move towards supporting builders. Could you kind of outline outside of the expense part of it, how further consolidation of the two business together, are you going to change the brand name? Do you think this will even actually help your relationship and/or penetration with your large builder clients by this further integration?

Rob Mellor

Most definitely. I think by, again, going to all of our customers, national builder, be it the large regional builders that might cross market lines, et cetera, by being able to offer all of our facilities as a singular presentation to be used anywhere throughout the country in the markets we serve, we'll be able to offer bundled pricing, the best value pricing, the great value proposition to our customers throughout the country. If we need to break it down from that, we'll do that as well by using our facilities in a cohesive marketing effort. So I see a great deal of benefit to that as we go forward.

Jim Wilson

Okay. And I guess one other way to think about costs, try to do, but I was wondering if you could answer how much -- I guess particularly in the construction services side and the SelectBuild side has your field labor base been reduced since the peak 18, 24 months ago?

Rob Mellor

A lot. I don't have the exact number on that, but that's been a significant reduction.

Jim Wilson

Is it over?

Rob Mellor

SelectBuild side labor just because of the volume being down.

Jim Wilson

But how does it work?

Rob Mellor

As well as our direct services like trust and some other things. Even in this last quarter, Jim, we cut our headcount from about 14,000 people down to 11,000 people and about 2,700 of those people were at SelectBuild in the field and about 300 of those people were at BMC West. So is the 20% plus cut just in the last quarter. At one point in time, we had 27,000 employees and the majority of those cuts taking it down to 14 have come on the SelectBuild side.

Jim Wilson

Got it. Okay. That's great. And then just final thing, as you integrate the two businesses and they're sold separately for less if at all in the future, are you going to change the way you report revenues in any way, any thought of that?

Rob Mellor

That's a good question. The answer to that is yes. We will not keep separate BMC West and SelectBuild reporting. They will be merged into one company, reflecting the operational structure of the business. We will break out construction services and distribution as segments, but we won't have sort of this two different cuts of the same business going forward, which has confused everyone for some time.

Jim Wilson

Okay. All right, great. Thanks.

Operator

And your next question is a follow up from the line of Keith Hughes with SunTrust. Please proceed.

Keith Hughes

Thank you. The consolidation we've been talking a lot here today, how long do you think that will take?

Rob Mellor

Well, my guess is it's a six month process. We ought to be looking at it being done pretty close to the same point in time that we have our SG&A initiative completed. September 30 certainly would be a target to have it all wrapped up and done and be in the businesses that we expect to be in going forward in the future.

Keith Hughes

Okay. And the plan we've been talking about today, has that been already discussed with your various lenders and approved by them or are we at the beginning of that process?

Rob Mellor

We have discussed it in some detail with our lead bank, with Wells Fargo, but we have not discussed it with a syndicate. We plan to do that next Tuesday.

Jim Wilson

Okay. Thank you.

Operator

And your final question comes from the line of Nicole Jacoby with a follow up question and she comes from Liberation Investment group. Please proceed.

Nicole Jacoby

Hi thanks. One quick follow up. Can you help me understand, and I apologize if I didn't get this earlier, with the second press release when you were discussing the group of business units that have been identified for consolidation and you broke out the sales SG&A and operating income, number of employees related to those units. Is it anticipated that those sales and costs will be added to an existing other part of the business and cut down slightly or is it -- I'm assuming they don't all go away 100%.

Rob Mellor

That's correct.

Nicole Jacoby

Okay.

Rob Mellor

They will be merged. I can't tell you exactly what the forward-looking number might be. But we put those numbers in there so that they would be indicative of the magnitude of what we're looking to consolidate.

Nicole Jacoby

Okay. So those are -- at least on the cost side, the potential targets and the revenues, the target amount to keep, but you don't really know how it's all going to play out the end?

Rob Mellor

Well, yeah, because we're dealing with the markets going forward, Nicole.

Nicole Jacoby

Okay. Great. Thank you.

Operator

And this concludes the question-and-answer session today. I would like turn to now call over to Mr. Mellor for closing remarks.

Rob Mellor

Thank you very much for attending and we missed the conversation with all of you the first quarter but I hope this helped you understand was we're doing here and gives you an idea of the progress we're making and we'll be back with you at the end of the second quarter and thanks for tuning in this morning.

Operator

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

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