Building Materials Holding Corporation Q2 2008 Earnings Call Transcript

Building Materials Holding Corporation (BLG)

Q2 2008 Earnings Call

August 14, 2008 5:00 pm ET

Executives

Lisa Laukkanen – The Blueshirt Group

Robert E. Mellor – Chairman of the Board, Chief Executive Officer

William M. Smartt – Chief Financial Officer, Senior Vice President

Stanley M. Wilson – President, Chief Operating Officer

Mark R. Kailer – Vice President - Investor Relations, Treasurer

Analysts

Steve Chercover – D.A. Davidson

Judy Merrick – Keith Hughes

Presentation

Operator

Welcome to the second quarter 2008 Building Materials Holdings Corporation conference call. Your host for today’s call is Lisa Laukkanen. (Operator Instructions) I would now like to hand the program to your host for today’s call, Lisa Laukkanen.

Lisa Laukkanen

Thank you for joining us for BMHC’s conference call to discuss second quarter 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’d 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 facts 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 the conference call. We undertake no obligation to update forward-looking statements.

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

Robert E. Mellor

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. As in the past on these calls first I’ll provide a few remarks on our views of the home building industry and our business trends for the second quarter followed by an update on the progress we’ve made in our restructuring efforts. Bill will then provide details of our financial results. After Bill’s commentary, I’ll offer a few additional comments on our outlook and we’ll then open the call for questions.

Reflecting the challenging home building market single-family starts declined approximately 43% from July of 2007 to an annual pace of 647,000 units. In BMHC’s market areas permits for single-family homes were down 49% while permits for all US markets were down 43% from a year earlier for the three month period ending in May. New and existing unsold home inventories remain at elevated levels although they have stabilized in recent months and have been declining in many cities. While tighter lending standards have continued to constrain demand recent actions by the Fed and the Treasury are expected to have a positive impact on the lending environment over time. We view this as a key factor because a number of those who follow and report on the industry have stated that stability in the mortgage market will be an early indicator of a recovery in the housing market.

The ongoing decline in housing starts and macro economic factors affecting the home building industry continue to impact our financial results for the second quarter. We have however completed the consolidation of our operations into six regions and eliminated significant costs from our P&L. While revenue for the second quarter decline 41% year-over-year we experienced a sequential improvement of 12% from the first quarter. We recorded a net loss for the quarter partially attributable to under performing business units and the costs associated with the closure and consolidation of those units. Sales of building products continued to outpace permit activity in BMHC markets during the second quarter declining less than the comparable decreases in permits. As we have continued to shift our sales mix toward value added products such as millwork and trusses we have maintained margins and gained market share.

Sales of construction services continued to be negatively impacted as home production levels further declined and pricing pressure has escalated. We implemented our restructuring plans announcing the closure of several facilities during the second quarter and as recently announced have begun the shutdown of our Florida operations. As planned we have taken significant actions to date to restructure our organization. By taking these steps we have reduced operating costs and improved efficiencies. Some of the important milestones we’ve achieved so far include the following, we reduced employee headcount by 55% from a peak level of almost 25,000 in July of 2006 to just over 11,000 in June, 2008. We realigned our organization to function as one operating company with two established brands. We’ve created a new management structure and appointed Stan as President and Chief Operating Officer. After extensive evaluations of all our business units we closed our operations in the Mid-Atlantic region, in Tucson, Arizona we closed our framing and concrete operations, in Bakersfield and Merced, California we closed our distribution operations and as previously mentioned we are closing our Florida operations.

We sold our Phoenix windows operation and signed an agreement for the sale of the Merced property. We are winding down our HVAC operations in Arizona and Nevada and our trim operations in Nevada and our plumbing operations in Nevada and Southern California. We’ve completed our centralization of information technology, human resources, purchasing and marketing and are more than 80% complete on centralizing all of our back office operations including accounts payable, payroll, credit and general ledger accounting. The remaining portions of this project will be complete by the end of September of this year. Importantly as Bill will discuss further we have continued to focus on increasing our liquidity. We secured a waiver from our lenders as we work toward a permanent amendment of our credit facility. Additionally we’re taking significant actions to increase cash flows over the next three to four quarters.

If business conditions continue to decline we will take the appropriate actions necessary to eliminate or restructure under performing business units. We continue reducing our direct, indirect and SG&A costs to be in line with the current and future market conditions. As we consolidate and streamline our operations we also maximize our operating efficiencies and as a result BMHC is better positioned for renewed top line growth. We look forward to keeping you updated on our progress and I’ll now turn the financial review over to Bill who will review our financial results.

William M. Smartt

As Rob noted in his remarks our results continue to be impacted by the severe contraction of the housing market as single-family permits continued to decline and months’ supply of new home inventory remained elevated. Despite the challenging market conditions we believe that over the long term favorable demographics and increasing core demand combined with a gradual reduction in new home inventories will eventually drive a rebound in the housing market. As a result of our restructuring which we announced in the second quarter we now report our results as a single operating segment that is organized into six geographic regions.

For external financial reporting purposes we will continue to break out sales and cost of goods sold for building products and construction services. BMC West and SelectBuild are now integrated into one company and operate under common management with a flat organization reporting to one chief operating officer. Additionally for financial reporting purposes our SelectBuild operations in the Virginia and Florida regions are reported as discontinued operations. The impact of these discontinued operations is shown separately in the financial statements included in our press release and our Form 10-Q. The primary focus of my comments on our operating results will be on our continuing operations.

Sales for the second quarter of 2008 were $385 million a sequential increase of $42 million or 12% from the $343 million in the first quarter and a decrease of $271 million or 41% from $656 million in the second quarter of last year. The second quarter increase in sales from the first quarter was across all regions and was attributable in part to normal seasonality. Gross margin was 18.7% [inaudible] compared to 17.9% in the first quarter of 2008 and 20.3% in the second quarter of 2007. The 90 basis point sequential increase from the first quarter reflects a favorable change in our margins from construction services as we continue to aggressively realign and re-focus our construction service offerings. On the other hand a 150 basis point decrease from the same quarter a year ago reflects the lower margins we continue to endure on construction service sales which is primarily due to the extremely competitive pricing environment and the leverage wielded by home builders.

Selling, general and administrative expenses were $98.7 million up from $84.3 million in the first quarter and down from $107.2 million a year ago. As a percent of sales SG&A increased to 25.7% from 24.6% in the first quarter and 16.3% in the second quarter of last year. As previously mentioned the company recorded a number of charges associated with restructuring during the second quarter. Included in SG&A were $5.8 million of charges related to termination of certain operating leases and other costs. Excluding these non-cash restructuring charges SG&A would have been $93 million or 24.1% of sales down sequentially from 24.6% in the first quarter of this year. Compared to the second quarter of last year SG&A increased as a percent of sales due to a sharp drop in construction service sales volumes and a shift in the sales mix to building products which carry higher SG&A costs.

Loss from continuing operations for the second quarter was $41.3 million or $1.42 a share compared to a net loss of $33.8 million or $1.17 per share in the first quarter of 2008 and income from continuing operations of $18 million or $0.61 a share in the second quarter of 2007. The second quarter 2008 loss from continuing operations included $8.5 million of impairment charges related to customer relationships and leasehold improvements principally associated with construction services operations in California and Arizona. Including the impact of discontinued operations our net loss was $31.9 million or $1.10 per share compared to a net loss of $33.9 million or $1.17 per share in the first quarter and net income of $19.4 million or $.066 per share in the second quarter of 2007.

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 second quarter of $198 million an increase of $18 million or 10% from the $180 million reported in the first quarter and a decrease of $81 million or 29% from the $279 million reported in the same quarter a year ago. Building products were 52% of total sales for the quarter compared to 42% a year ago. The second quarter sales mix was approximately 54% lumber and materials, 37% millwork, 9% truss versus 58% lumber and materials, 31% millwork and 11% truss in the second quarter of 2007.

In BMHC markets single-family permits were down 49% through May while sales were down 41% for the quarter which compares to a 43% decrease in single-family permits nationally. A continued correction of inventory levels is reflected in the steep decline in permits. Our building products gross margin was 26.5% only down slightly from 27.2% in the first quarter and 27.4% in last year’s second quarter as pricing continues to be under great market pressure.

I’ll now make some comments about construction services where we recorded sales for the second quarter of $186 million an increase of $23 million or 14% from the first quarter sales of $163 million and a decrease of $191 million or 51% from the $377 million reported in the same quarter last year. As a reminder our primary construction services markets are located in the West and Southwest and are focused primarily on large regional and national production builders. We continue to share the pain being experienced by all of our customers as they aggressively negotiate and revise their pricing. For the second quarter our construction services gross margin was 10.6% as compared to 7.7% in the first quarter of this year and 15% in last year’s second quarter. The 290 basis point sequential improvement is related to focusing on our core trade service offering and winding down or selling our non-core services and businesses. The 440 basis point gross margin decrease year-over-year is largely attributable to increased competitive pricing pressure applied to us by the production home builders as compared to a year ago.

For the quarter operating cash used was $28.5 million due to an increase in accounts receivable and the income tax receivable recorded as a result of our restructuring plan. Quarterly purchases of property and equipment decreased to $4 million from $7.2 million in the first quarter of 2008 and from $7.3 million in the second quarter of 2007. Cash outlays for acquisitions were $100,000 down from $2.5 million in the prior quarter and $10.6 million in last year’s comparable quarter. Our cash conversion cycle was 56 days down from 62 days in the first quarter of this year but up from 47 days in the second quarter of 2007. The sequential reduction in the cash conversion cycle reflects the following, inventory turns improved to 12 times from 10 times in the prior quarter, days sales outstanding in receivables, or DSOs, improved to 46 days from 49 days, days payables outstanding, or DPOs, actually shortened to 20 days from 22 days as we paid particular attention to the needs of our suppliers in challenging market conditions.

Due to our lower than planned operating performance as of June 30^th we were not in compliance with two of the financial covenants in our credit facility. Operating results particularly net income are a primary driver of covenant compliance. The significant and ongoing correction in single-family starts has negatively impacted our operating performance. Very importantly however we obtained a temporary waiver of our financial covenants on August 8^th. The agreement allows us to borrow up to $60 million until September 30^th, 2008 while we work to reach an agreement on a permanent amendment to the facility. While we anticipate that productivity improvements, cost control and careful investment management will improve our operating performance going forward we are working with our lending group to amend the credit facility to better reflect the current operating environment. As of August 13^th, 2008 there was $29 million outstanding on the revolver and $340 million outstanding on the term loan. We continue to closely monitor these financing arrangements as well as evaluate other financing options.

Over the next several quarters we expect t enhance our liquidity or reduce debt through a number of initiatives that will result in one time cash inflows. The expected cash inflows are as follows, through the sale of excess vehicles and equipment we expect to receive approximately $3.5 million in net proceeds in the third quarter of this year, we are aggressively marketing various parcels of real estate located in Nevada, California, Florida and Arizona. The sales of these properties should produce net cash proceeds of approximately $40 million during the next 24 months. Additionally we believe that it is possible to remove the current restrictions on our investments and marketable securities and other cash of approximately $45 million and generate additional cash flows in the second half of this year.

We also expect a tax refund of approximately $50 million resulting from a 2008 net operating loss carry back due to the closure of Florida operations, other restructuring activities and the company’s 2008 forecast results of operations. This cash tax refund is expected to be received in the second quarter of next year. In summary and in the aggregate we anticipate receiving proceeds of approximately $45 million in the second half of this year, $50 million to $55 million through the second quarter of 2009 and $40 million of additional proceeds from the sale of real estate over the next 24 months.

As Rob outlined and as I have quantified we have made a considerable amount of progress on our reorganization and restructuring initiatives in a relatively short period of time. Actions we have taken to preserve and enhance value include wind down of unprofitable operations, sales of business units, sales of excess real estate, cost cutting programs and restructurings throughout the organization. We believe that the company is on the right track to operate effectively and efficiently through the remainder of the cyclical downturn. We also believe that we can significantly reduce our leverage and return to positive cash flow and profitability over the next six quarters.

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

Robert E. Mellor

While we anticipate that industry conditions will continue to be challenging in the near term we believe the long terms prospects for the home building industry and BMHC remain positive. The achievements we’ve made so far and those we’ll accomplish in the weeks and months ahead are resulting in greater operating efficiencies and growth opportunities in our core businesses. Favorable underlying demographics such as job growth, household creation, increased demand for senior housing and starter homes should continue to support the long term growth prospects for the US home building sector. It has been reported that inventory levels of new and existing homes have stabilized over the last six months and are beginning to decline in some of our markets. Resale inventories appear to have peaked last year and have declined significantly in 2008. As expected impairment charges taken by home builders began to decline in magnitude in the first quarter and it is expected this tend will continue. As of July cumulative impairments have averaged 30% of peak inventory and it estimated that approximately 30% to 40% of peak inventory will be eventually impaired.

Housing affordability has continued to improve across many markets with prices down 25% to 30% on average across many markets. Analysts have stated that the affordability index should continue to improve. According to the latest forecast by the National Association of Realtors some improvement is projected for existing home sales in the months ahead with broader gains seen by the fourth quarters as buyers take advantage of new provisions provided through the recently passed housing stimulus bill. Additionally there was a broad based increase in pending home sales which rose 5.3% in June. While mortgage capital availability remains restricted there are positive signs such as the increase of 2.8% in weekly mortgage applications reported last week by the Mortgage Bankers Association. A combination of interest rate cuts, increases in loan limits and investing capacity as well as government programs for encouraging assistance to troubled borrowers should help to address the housing market’s issues over time.

It’s clear that the home building industry continues to face strong headwinds and that the timing of a market recovery remains unknown. While some industry observers have suggested that the housing market shows signs of bottoming we must stay focused on dealing with today’s circumstances and making BMHC as lean and efficient as it can possibly be.

In summary we have made major progress in our restructuring plan to date. We believe the steps we’re taking to streamline and realign our business to withstand the continued challenging market dynamics will make the company stronger and better positioned for future growth and will enhance shareholder value. Importantly particularly when working through the difficult conditions which we face today a great deal of credit goes to our employees for their continued hard work, achievements and dedication. As a team we all remain committed to working diligently to improve our business. We also appreciate the support of we continue to receive from our suppliers and the loyalty of our customers. BMHC has been in this business for over 20 years and the relationships which have been forged over those years serve us well in this period of extreme challenge. We look forward to updating you again next quarter.

We will now take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Steve Chercover – D.A. Davidson.

Steve Chercover – D.A. Davidson

First of all could you recap those sources of cash? Did you say $40 million from real estate sales?

William M. Smartt

About $3.5 million from the sale of excess vehicles and we have two auctions going on for vehicles this month, we expect that the net proceeds will be about $3.5 million. We have about $40 million of excess real estate that we expect to put on the market, the flow from that we’re anticipating would be about $1 million in the second half of this year, $26 million in 2009 and $13 million in 2010. We also believe that we can remove the restrictions on some marketable securities that we have that are related to workers’ comp insurance and other types of insurance and that we should be able to generate about $45 million in the second half of this year. We expect a tax refund probably in the second quarter of next year but if we move quickly we might get it right at the end of the first quarter of next year, that’s about $50 million and in the aggregate this year we’d be looking at somewhere around $45 million to $50 million and $50 million to $55 million next year and the balance of the real estate sales in 2010.

Steve Chercover – D.A. Davidson

Do you still have any unprofitable segments or what you closed in Florida and elsewhere is that the bulk of it?

Robert E. Mellor

That was a major piece of the challenge that we had. We continue to look at every one of our operating units very, very carefully at a level that is more granular than the six operating units tat we have right now. We’ll look inside of those to see where we believe that we have operations that are not EBITDA generating and to the extent that they are not doing that and they’re not able to fix that in the very, very near term, they’re candidates for consolidation, restructuring or shut down.

Steve Chercover – D.A. Davidson

I’ve been getting things from Leona, your union and they’re making some pretty sordid allegations and can you just comment on that?

William M. Smartt

Those are sordid allegations. I think we’ll let Mr. Mellor handle that.

Robert E. Mellor

They have approached of course our operations in Arizona and Las Vegas and also Southern California, but I think, Steve, you’ve known the company for a long time and we certainly an employer of choice and we certainly believe in that. Our employees all have healthcare coverage. 80% of those costs are covered by the company. We’ve got a 401k plan for all of our employees and our salaries are certainly competitive and I would say equal or greater than anyone else in the industry.

They’ve also of course talked about safety in their materials that they’ve sent out and I think again the history you have with the company, safety has always been of paramount importance since 1987 when the company was founded. We’ve got 12 full time regional safety coordinators, we’ve got over 100 additional safety coordinators throughout our field operations and we participate in various industry safety groups, our coordinators are provided all kinds of opportunities to achieve professional safety designations including OSHA training.

Our coordinators have designations including certified safety professionals, registered safety officers and other designations and we also participate in the high volume production of The Builders’ Safety Council and the National Safety Council and Voluntary Protection Participants’ Association. So it’s a move by the union group to approach the company and push their agenda, if you will, and there’s certainly a whole other side to that story and we take second to no one as far as safety or benefits. Certainly if you want more information on that either I or Stan or Paul Street who you know can provide you with that information.

Steve Chercover – D.A. Davidson

If they were looking to extract blood from a stone isn’t it the worst possible time to be trying to get any concessions either monetary or benefit fashion? Am I wrong?

Robert E. Mellor

You’d have to ask them but certainly it’s trying times for the industry and it’s a difficult period for many but we’re not shirking or going second at all to anyone with regard to safety or benefits for our people. That’s one area we’re not cutting back in.

Steve Chercover – D.A. Davidson

Putting it all together you’ve got the extension through the end of September, you’ve laid out for all of us what your cash infusions ought to be over the next 18 months, do you feel that the dialog with the lenders is constructive and they are going to let you operate until the cycle ultimately turns, which it will?

Robert E. Mellor

Steve, we have a long and certainly Mark and Bill can jump in on this but we have a long relationship with most of our senior or major lenders, they’ve been in this credit facility for a long time. Our lead lender, again with us back in 1987 so they know the industry pretty well, they know the company pretty well and I would say our relationships with those long term banks are very good and have been and they certainly understand where we are and I think it speaks well obviously of the time we have on the recent waiver. So I think we have good relationships with them, we’ll just have to negotiate the amendment and see where we come out on that.

Steve Chercover – D.A. Davidson

I suppose in retrospect they wouldn’t have extended the credit to you for all of the acquisitions that perhaps in the rear view mirror should not have been done had they not also been bullish on the prospects so hopefully they give you the time to work it out.

Operator

Your next question comes from Judy Merrick – Keith Hughes.

Judy Merrick – Keith Hughes

The sequential improvement that you saw for building products from the last quarter, you mentioned improvement in millwork, is there any more you can elaborate on or what were the areas that you saw improvement from last quarter?

Stanley M. Wilson

Probably the strongest thing that we’ve had that continued to remain at a high level is our millwork operations. They’re contributing the most income as a business unit operation to and it has maintained very steady even in the last year, year and a half so we’ve definitely see an improvement there. The other areas of lumber and truss and construction have definitely seen pressure more related to the downturn but in every market that we’re in our business segments our sales are not down as far as the building permits are down. We show penetration virtually in every market and significant penetration overall for the company. But millwork has definitely been a stalwart for us through this last year, year and a half.

Operator

There seems to be no further questions.

Robert E. Mellor

We appreciate all of you attending and tuning in today and certainly as I mentioned before if you have any further questions you can call me, you can call Bill, you can call Mark or even reach out for Stan and we appreciate very much the support all of you have shown and we look forward to speaking with you next quarter, if not before. Thank you.

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