Builders FirstSource Inc (BLDR) 2008 Q4 法說會逐字稿

Hello and welcome to the Builders FirstSource 2008 fourth-quarter and year-end 2008 financial results conference call. Your host for today's call is Mr. Floyd Sherman, Chief Executive Officer.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

Any reproduction of this call in whole or in part is not permitted with or without written permission and authorization of the Builders FirstSource. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Miss Katie Murphree, Director of Investor Relations and Financial Reporting who will begin the call. Please go ahead ma'am.

Good morning and thank you for joining us to discuss our fourth-quarter and 2008 year-end financial results. We issued a press release after the market closed yesterday. If you don't have a copy, you can find it on our website at BLDR.com.

Before we begin, I would like to remind you that during the course of this conference call, management may make statements concerning the Company's future prospects, business strategies and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations.

Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

We have provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanations of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are available on our website. At this time, I'll turn the call over to Floyd Sherman.

Thank you Katie. Good morning and welcome to our fourth-quarter and 2008 year-end earnings call. Joining me from our management team is Charles Horn, Senior Vice President and Chief Financial Officer.

I'll start with a recap of 2008 and I will then turn the call over to Charles who will discuss our fourth-quarter financial results in more detail. After my closing comments regarding our outlook, we will take your questions.

2008 was very difficult year. In fact, the housing environment was worse than most expectations. Total housing starts declined 33.2% during 2008, while single-family housing starts declined 40.5%.

We felt the impact of these difficult conditions on our 2008 results, although we were able to partially limit it through our action plan. Our action plan principally consisted of growing market share, reducing fiscal capacity, adjusting staffing levels, implementing cost containment programs, managing credit tightly and most importantly, conserving cash.

Overall we feel these efforts were successful. We estimate that market share gains reduced our sales decline year-over-year by an estimated 10%. We were able to achieve these gains by largely holding share with out Builder 100 customers and expanding our presence in the multi-family and light commercial segment.

From a capacity standpoint, we closed or mothballed 14 facilities during 2008. These closures reduced our fixed operating cost and allowed us to redeploy sales to other locations to gain efficiencies.

Because of these closures and other job reductions, our headcount was down over 2100 to 3274 by year-end 2008, a decrease of 39.3% from the beginning of the year. The reductions of payroll cost from our headcount reductions coupled with other cost reductions allowed us to reduce our selling, general and administrative expenses excluding non-cash and non-recurring charges by 19.5% or 65% variable with our sales volume decline of 30.4%.

Our bad debt expense as a percentage of sales increased only 24 basis points while our cash used for 2008, our most important measure, was only $30.7 million. Because we have been prudent in executing these measures, they will benefit us not only for the short-term, but also enable us to be a more efficient organization in the long-term. I will now walk you through our 2008 results.

2008 sales were $1.34 billion, a decline of 32.4%. Our sales volume dropped an estimated 30.4% compared to an estimated 42.5% decline in housing activities in our markets, signifying a contribution from market share gains of an estimated 10%.

Our gross margin percentage fell 300 basis points to 21.6%. Specifically, our gross margin percentage decreased by 190 basis points due to price, 90 basis points due to volume, which is representative of the fixed cost within the cost of goods sold, and 20 basis points due to a shift in sales mix towards installed product sales which carry a lower gross margin percentage than distributed sales.

Our SG&A expenses decreased $66 million or 18.4%. We continued to reduce our headcount very well with the decline of sales volumes for the year. Our average full-time equivalent employed for 2008 were 25.2% lower than 2007, resulting in a $49.3 million decline in salaries and benefit expense excluding stock compensation expense.

Offsetting the decline in SG&A was a $1.5 million increase in stock compensation expense at $2.8 million and transaction costs associated with canceled acquisitions. We recorded asset impairment charges of $51.1 million before tax or $0.97 per diluted share net of tax.

We recorded goodwill impairment charges of $44 million related to our Ohio and Florida business units. The impairment charges are the result of a continued decline in housing starts in these specific business units and the effect of this decline on the expected short and long-term operating performance for the business units.

We no longer had goodwill on the balance sheet for these business units as of December 31, 2008. We also recorded pretax asset impairment charges of $7.1 million which consisted of $4.4 million of other intangible assets, $2.3 million of fixed assets and $400,000 related to land held for sale.

During the protracted decline in economic conditions that affect our industry, we evaluate the current operating performance as well as long-term expectations of our locations. Based on this evaluation, we closed nine facilities in 2008 excluding our New Jersey locations.

On these facilities, we recorded $4.8 million of facility closure cost or $0.08 per share net of tax in 2008. Our New Jersey location facility closure costs are included in loss from discontinued operations and amounted to $3.7 million.

We recorded a tax break of $18.9 million or a 12.5% tax benefit rate during 2008 compared to a tax benefit of $12.1 million or a 44.8% tax benefit rate in 2007. Our benefit for 2008 was reduced by an after-tax, non-cash valuation allowance of $35.5 million or $1.00 per share related to our net deferred tax assets. The 2007 tax benefit rate was affected by tax legislation that was enacted in one of our filing jurisdictions.

Subsequent to the third quarter of 2008, we announced our exit from the New Jersey market. We are treating this exit as a discontinued operation for accounting purposes. The loss from discontinued operations for 2008 was $7.7 million or $0.21 loss per diluted share compared to $8.9 million or $0.25 loss per diluted share for 2007.

Loss from continuing operations in 2008 was $131.8 million compared to a $14.9 million in 2007. Included in the loss from continuing operations in 2008 were after-tax non-cash charges of $73 million related to impairment of goodwill, fixed assets and other intangibles, facility closure costs and a valuation allowance on primarily all of our deferred tax assets.

Loss from continuing operations per share for 2008 was $3.70, including $2.05 related to the non-cash charges I just mentioned. Adjusted EBITDA was a loss of $36.2 million compared to income of $51.1 million for 2007.

The difficult conditions were definitely reflected in our 2008 results, but through executing our action plan, we were able to limit the impact on this unprecedented downturn. These efforts will not only benefit us in the short-term, but will allow us to be a more efficient organization in the long-term. I will now turn the call over to Charles who will review the fourth quarter financial results in more detail.

Good morning everyone. As Floyd indicated, I will walk you through our fourth quarter results.

We reported sales of $201.3 million compared to $290.2 million last year, a year-over-year decline of $88.9 million or 30.6%. Our sales volume dropped an estimated 27.9% compared to an estimated 45.6% decline in housing activity within our markets, indicating a contribution from market share gains of about 15%.

Breaking down our product categories, prefabricated component sales declined 34.3% from the fourth quarter of 2007 due to a combination of lower volume and prices. Windows and doors sales were down 30.4%.

Lumber and lumber sheet goods sales declined 35.7% to $45.6 million, again due to a combination of lower volumes and prices. Millwork sales declined 34.2% and other building products and services sales declined 19%.

Our sales mix between years was consistent with the exception of other building products and services which increased to 23.1% of total sales. This category grew due to the expansion of our installed services and the multi-family and light commercial segments.

Our gross margin percentage was 21.3% for the fourth quarter of 2008, down from 23% last year, a 170 basis point decline. Specifically our gross margin percentage declined 80 basis points due to price, 60 basis points due to volume and 30 basis points due to a shift in sales mix toward installed products sales which carry a lower gross margin percentage than distributed sales.

Our selling, general and administrative expenses decreased $15.1 million or 18.7% to $65.8 million. As a percentage of sales, SG&A expense increased from 27.9% last year to 32.7% in 2008.

This is reflective of fixed cost becoming a larger percentage of our selling, general and administrative expenses. Within SG&A, salaries and benefits expense including non-cash stock based compensation declined $11.3 million or 24.6% from the fourth quarter of 2007. This decline was roughly 88% variable with our decline in sales volume.

Delivery expenses decreased $2.5 million to $11.8 million during the quarter. This 17.8% decline is primarily due to a $1.2 million decrease in fuel cost. Our bad debt expense actually declined $0.2 million for the quarter when compared to last year, but increased as a percent of sales to 80 basis points from 60 basis points last year.

Offsetting the declines in SG&A expenses were a $1.1 million increase in stock compensation expense and a $2.8 million in costs associated with canceled acquisitions. During the quarter we recorded asset impairment charges of $36.8 million before tax or $0.72 per share net of tax.

We recorded goodwill impairment charges of $36.4 million related to our Florida business unit. The charge was the result of a continued decline in housing starts in this market and its effect on both our short-term and long-term expected operating performance. After the goodwill impairment charge in the fourth quarter, our Florida business unit no longer house any remaining goodwill on the balance sheet.

We also recorded a pretax asset impairment charge of $0.4 million related to lands we have held for sale. Again, this is located in Florida.

We recorded a tax benefit of $13.4 million or a 20% tax benefit rate during the quarter compared to a tax benefit of $10.3 million or a 37.7% tax benefit rate last year. Our benefit for the quarter was reduced by an after-tax non-cash valuation allowance of $9.0 million or $0.25 per share related to our net deferred tax assets.

Our loss from continuing operations for the fourth quarter was $53.4 million or $1.50 per diluted share compared to $16.9 million or $0.48 per diluted share in the same period last year. Excluding the asset impairments, facility closure costs and the tax valuation allowance, our diluted loss from continuing operations was a $0.52 in diluted loss per share for the fourth quarter of 2008 compared to a $0.36 diluted loss per share for the fourth quarter of 2007.

As announced subsequent to the third quarter of 2008, we exited our New Jersey markets which we were treating as a discontinued operation for accounting purposes. As such, our loss from discontinued operations for the fourth quarter of 2008 was $5.4 million or $0.15 loss per diluted share compared to $3.4 million or $0.10 loss per diluted share last year. Included in the discontinued operations in the fourth quarter of 2008 was $3.7 million in facility closure costs.

Adjusted EBITDA for the fourth quarter of 2008 was a loss of $12.1 million compared to a loss of $5.2 million in the year-ago quarter. Adjusted EBITDA as a percent of sales decreased to negative 6% compared to a negative 1.8% for the fourth quarter of 2007.

Now we will turn to liquidity and capital resources. During the fourth quarter of 2008, we repaid $20 million of our borrowings under our revolving credit facility, reducing the balance to $40 million at December 31, 2008.

Subsequent to year-end, we reduced our revolving credit facility commitment from $350 million to $250 million as allowed by the revolving credit facility. Our available borrowing capacity was not affected by this reduction as our borrowing base which consists of eligible accounts receivable and inventory balances used to calculate the available borrowing capacity do not support $250 million in borrowings.

Additionally, we do not anticipate this reduction will have an effect on future availability as we do not anticipate our borrowing base will grow to support in excess of $250 million of borrowings at any point during the remaining life of the credit facility. This reduction does allow us to save about $45 million in interest expense per year related to commitment fees. As a result of this reduction, we wrote off $1.2 million of deferred financing cost in January of 2009.

Our total cash used during the fourth quarter was $4.3 million, leaving a cash balance of $106.9 million at December 31, 2008. Our net borrowing availability at December 31, 2008 was 0 due to a drop in our eligible borrowing base coupled with lower seasonal advance rates set forth under our credit agreement.

Our available cash at December 31, 2008 was $94.1 million as approximately $12.8 million of cash on hand supported a shortfall in our borrowing base at year-end. We anticipate this shortfall in borrowing base will dissipate by March 2009 when our advanced rates increase in accordance with our credit facility.

Our working capital percentage excluding income tax receivables actually improved to 13.1% from 13.5% in the fourth quarter of 2007. However, our cash conversion days worsened from 54 days last year to 61 days this quarter.

The increase in our cash conversion days was primarily due to an increase in inventory days and a small decrease in accounts payable days. Our accounts receivable days actually improved slightly.

Inventory days increased about five days as managing inventory levels at this level of housing is problematic. The need to replenish in economic order quantities in order to achieve best (inaudible) from our suppliers is pressuring our inventory days.

Our accounts payable days decreased by about two days. This decline is due to an increasing amount of outside contract labor supporting our installed product sales.

These subcontractors generally require payment on terms from daily to weekly. We are in the process of negotiating better terms with these vendors and hopefully this will improve our payable days in 2009. I will now turn the call back over to Floyd for his closing comments.

According to Harvard University Joint Center for Housing Studies, the current housing start levels, new home sales and existing home sales rival the worst downturns in the post-World War II era. And the home price declines and mortgage defaults are the worst on record that dates back to the 1960s and 1970s.

These statements were based on a report dated in June of 2008. We have seen a further decline in these metrics. Actual fourth quarter housing starts dropped to 103,600 from 188,300 units in the same period of 2007, or a 45% decline. Fourth quarter percentage decline was the largest year-over-year change since the housing correction began in March 2006.

For the year, actual single-family housing starts fell to 622,400 units from 1,046,100 last year. And the seasonally adjusted annualized housing rate for single-family housing starts at the end of 2008 was 398,000. This level suggests that 2009 will likely be worse than 2008.

We anticipate the first six months will be the most difficult, with some improvement in the third and fourth quarters of 2009. We believe our action plan in 2008 was instrumental in limiting the impact of the difficult conditions on our results.

We have gained efficiencies in 2008 through effective implementation of our action plan. We will continue to execute our strategy of implementing cost containment programs, managing credit tightly, rationalizing physical capacity and growing market share in 2009 in order to conserve liquidity.

This continued strategy execution coupled with $94.1 million in available cash and $35 million in expected income tax refunds in 2009 should provide the liquidity to weather yet another year in these unprecedented industry conditions. I will now turn the call over to the operator for our Q&A session.

(Operator Instructions) Rob Hansen, Deutsche Bank.

Just wanted to see if you could elaborate a little more on the drop in accounts payable and as well as the accounts receivable (inaudible)

In the accounts payable I think we saw about a two-day decline. What you're seeing there is again, as we go out and expand into more of installed product sales, there is a large component of our sales that are being driven by the actual subcontract labor which are not employees.

The subcontract labor expense for 2008 was somewhere in the area of 50 to $60 million. That does process through our accounts payable system, and what that does if it has terms of pay now or pay within a week, it obviously depresses what we're seeing in the overall payable days.

From an actual product standpoint, our days were stable or slightly up. But really what depress it was this increasing amount of subcontract labor flowing through.

From accounts receivable days, we're seeing continued pressure. What you're seeing within the industry's many smaller customers are struggling. Many of them are basically heading to what I would call orderly liquidation.

As such, that does pressure a little bit in the payment and it has increased some of the delinquency. Year-over-year if you look at what's happened in terms of our delinquency, we have seen about 5% increase in the amount that has slipped into our greater than 60-day bucket and that's what you're really seeing going through with the AR days.

Okay and then just on the revolver, you had mentioned that you would pay it off once the Wells and Wachovia deal went through?

Yes.

I just wanted to see what the rational was behind only paying 20 of it off and why not the full amount.

What we did is we did a forecast for the year and based upon the forecast for 2009 and coupled with our forecast for the borrowing base, we thought one, there would be no requirement to pay it off; two, we would be able to keep it and treat it as long-term. Our proclivity at this point in the cycle is to keep cash rather than just relying upon an undrawn revolver. And that's what we chose to do so.

Scott Ciccarelli, RBC Capital Markets.

A follow-up question on the payables. You said that payable days were relatively steady. So are you suggesting vendors have not tightened terms at all?

I can't say I have really seen any tightening of our terms. Our major suppliers are very cooperative. They want to work with us. We are all in this housing environment together. And, Floyd, if you want to add anything there -- we have not really seen much coming through that.

No, I think we -- due to our very good relationships with the suppliers, I think the suppliers also view us as a survivor in this business, and one that will be a really critical customer and strategic customer to them down the road. They are continuing to work with us very well and they very, very comfortable with our financial condition and relative to what else they see going on in industry.

And we really don't anticipate any substantive changes in this relationship going forward. I will also add something to -- Charles indicated that one of factors that dropped our average days payable was the terms in which we pay our subcontract labor.

We're talking with the primary labor suppliers in an effort to expand and get better pay terms, especially for the pay now (inaudible) week. We're attempting to move these pay terms up to as much as 30 days.

I don't know how successful we will be in this area but this is an area that has our attention and we obviously -- it has real implications for us. And we think we will be able to be successful in improving over the position where we are now. But it will be taking a lot of work and it will be occurring over the next 30 to 60 days.

You did mention you thought you gained market share during the quarter. Can you just describe to your knowledge -- I know it's pretty fragmented, a lot of privates out there -- but what you see going on on the competitive front? Because obviously as you mentioned, it's tough for everybody.

What we definitely see is from your smaller builders up to your regional builders, there is quite a bit of distress. What you're seeing is that the largest builders are continuing to be fine. They have good liquidity. They do not have any current debt. They're going to be survivors.

I think what you're going to see as a result of this pronounced decline is that the major builders are going to grab substantial share and definitely come out dominant toward the end of this cycle. What we definitely see is more regional and smaller builders moving to what I would call an orderly liquidation.

What they're doing in many cases, they're making a decision -- are we better off alive or dead? In some situations, they are set up in a very tax advantaged situation which means that any income tax refund coming through to them can pass directly through to the owners versus going into the Company.

Many of them are now looking at that and saying -- do I want that money to stay in the company or do I want to take it it and just wind down? And I think you're going to see more of that in 2009. And from a credit perspective, it's something we're very focused on because I think you'll see more and more smaller builders decide I'm going to take the refund and just wind down operations.

I think to add to that also, Charles, we are seeing (inaudible) building at all. What is being built is where the builder (inaudible) have a contract that's good, will go through and they will be able to close the house out.

The level of building activity uniformly through just about all of our areas are reflecting this same position by the builders. Some of it is due to the fact with the smaller builders, the banks are just squeezing down on them, they're not advancing anymore.

They're not allowing them to build any specs. In fact in many cases, they have set targets they have to get inventory, a certain amount of reduction in inventory before they will even talk to them about advancing on a good contract. So we're going to continue to see some really diminished building activities we think over the next several months.

Keith Hughes, Suntrust Robinson Humphrey.

Thank you. I have a couple questions. I guess first on working capital, as a source of cash here again in the year, much more modest than the prior year. Given we're headed into a tough 2009, is there really significantly more dollars you can pull out of working capital?

Keith, it's going to be a challenge. As we talked about on AR, I think our challenge in AR will be to try to keep basically the AR days from moving up slightly.

Inventory, again we're getting to a housing level that it's very difficult to replenish economic order quantities, it's really hard to pick up our turns. If we do try to break -- to increase our turns, it will have to be through consignment programs or buying in some very, very small quantities which can be efficient. So it will be a challenge.

Looking at working capital, the biggest opportunity could be AP. As Floyd talked about, we do have opportunities with the subcontractors. We do have opportunities with our [timp] labor firms.

We do have opportunities with our professional services. So there's things we can do to try to actually increase AP, even though DSO will definitely be moving against us and likely we will be looking to maintain inventory turns and inventory days.

Are manufacturers open to consignment relationships at this point?

I think there's some product categories that would still be possible. But overall, it is difficult. The ones that have excess inventory and do not have storage, it could work. Certain specialty categories, it could work. I don't know if it's a huge opportunity but it's a possible opportunity.

I think, Keith, I think we are working with our suppliers. Obviously we would like to be able to increase our days and we're talking to every one of our suppliers to see what we can do to get more favorable terms and yet not impact our pricing.

We have also -- really are looking hard at all purchases that are made outside of our preferred vendors in an effort to say if we are going to buy outside of our vendors, it's got to be done on terms that are equal to our preferred vendors and at a price that is attractive to us. There is probably in our business about 18 to 19% of our purchases fall into that category and I think there is an area of opportunity that we can get an improvement in turns because typically those purchases are not carrying the same quality terms that we're getting with preferred vendors and we are hard at work at paring this parity down.

As of the end of the year, what was the breakdown of fixed and variable and SG&A? Round numbers is fine.

I would say you're probably looking somewhere in area of Q4, 60% fixed, 40% variable.

Final question. You talked a lot in the financial discussion about the shift to installed service. What specific traits have you -- are you doing more than you would have, say, a year or two ago in that business?

In terms of what type of projects?

What projects, yes.

We've done a number. We did a large -- basically it is campus housing. We have done some military housing. We're trying to look for projects that are not quite as immune to the cycle in terms of financing.

So they tend to be multi-layered, multi-product jobs where we are basically turnkeying very large construction projects that we have not done before. These are projects that can last 12, 18 months.

Whereas I can tell you candidly before, we were looking at projects that would last up to three months. So we really pushed out the scope and duration of the projects that we will take versus what we did before.

Doing the prefab components (inaudible) the windows and doors and that sort of work with them?

Trim, it could be any number of things that we do -- we spec out. They tend to break it down based on package and it's just whatever quotes come in as being the most advantageous to the general contractor.

Alan Weber, Robotti & Co.

I guess my general question was can I (inaudible) thought process in the markets that you kind of closed down? Was it just a function of market position, the real estate and -- I guess that was my general question.

Definitely market position is one. If we're not number one or two in the markets, then we would be more inclined to leave it.

The other thing that we tend to look at is does the operation make a contribution toward its fixed cost. So we look at it -- does its gross profit dollar minuses its variable expenses at least make a positive contribution to fixed cost.

So it could be losing EBITDA, but [if they add the positives] so let's say the fixed costs are $1 million, yet it's generating $100,000 of cash toward it, then we're not going to be inclined to shut it down. But conversely, if it's not covering variable cost, we're not even trading dollars with our customers and it's a market long-term we don't feel we have very good potential in, then those would be the ones we target.

Our overall goal is not to shut down facilities. We want to keep a broad footprint. We want to have a presence for recovery. Our proclivity would be to go through and to try to scale it back, pull out as many people as we can, operate more of a skeleton crew and get into a contribution breakeven or positive contribution. That's really what our target is.

I guess really on the flip side of that, is -- can you talk about in some of your markets, are you seeing just as you have gotten out of New Jersey, are you seeing some of your competitors -- I mean we know the situation for the builders. Are you seeing many competitors in your markets actually leaving the market or is that what you would expect or --?

In New Jersey?

No, not in New Jersey. In the markets you are still in.

A number of our markets you're seeing closures. Some of our big competitors have shut down anywhere from 86 for one competitor to over 100 for another competitor and those are companies bigger than us.

In terms of smaller competitors, if you go into Florida, your small independents especially in your trusts and panel manufacturing are just shutting down, trying to sell off their real estate for whatever the real estate value is. So the reduction in capacity is pronounced at all levels of the supply chain.

And we saw in Georgia in the Atlanta market area alone, close to $700 million of sales at the height of two competitors that have shut down and liquidated.

We have definitely seen that. We have one smaller market in Florida where a year ago there were three competitors with us and now we're the only person standing. Now we are the only person there with two housing starts but again, we are seeing that capacity shrink out.

Okay and then I guess my last question is, does the shutting down of the markets, does it change your relationship with the suppliers? Does that enter into kind of the thought process or not really?

I don't believe it really impacts our relationship with our suppliers. Our suppliers are still looking for volume. Something an employee taught me a long time ago, they're still looking for customers as well. So in a difficult environment, they're still going to need customers. They're going to be looking for customers with good liquidity. Overall we're toward the top of that heap and so they're going to continue to work with us.

We've had a number of occasions where some of the major forest products producers have come to us with excess inventory or some mill balancing needs that they had because they knew that we could buy in a much larger volume than they were getting through their typical customer base. And we frequently shopped and looked for those type situations because it helps us in the marketplace with more competitive pricing.

And we're still a very, very important customer overall to the forest products producers. And they view us, as I said earlier, I think to our supplier base and in general, the suppliers to the building products industry are viewing us as a long-term survivor and somebody who is going to become even more strategically important to them as we go down the road and into the future.

I guess my final question was when you look out over the next -- at some point we'll have a better environment and obviously the competitive landscape has changed. Can you just in your own minds think about kind of how you think the products will kind of play out as a percent of what you currently do? Would you expect any to be smaller, larger as a percent? Just curious on that.

In terms of our mix, in terms of adding products, reducing products we carry?

Just overall mix of what you currently have, how you expect that to change or if any of it's been kind of a surprise to you?

I don't think there will be substantial changes. There could be some further opportunities to expand mix in the future. Perhaps it could be a case where some specialty distributors fall out during the part of this process that we're going through.

Likely it's going to be a very consistent mix. But I think, again, what we said earlier, I think it's going to be directed to fewer and fewer big customers versus the broad base of customers that we currently have had over the last decade in terms of the building environment.

If I were to look at the two parts of our business where I think we will see an improvement in our percentage of mix but not major change, one is in the installed services area. We are continuing to build up our expertise, certainly our reputation.

And if you look at the sales to that sector, each quarter it is growing pretty dramatically with us. I think that will increase and I think the other area will be in manufactured components.

A lot of capacity has been taken out of the market. We clearly were the leader in this area. We have retained a very high percentage of our engineering group so that we can expand this business quite rapidly.

All of the component manufacturing plants with the exception of two which are mothballed are still operating and so we can gear up quite quickly. I think we will be increasing our share of the market for those components as housing improves.

Jay McCanless, FTN Equity.

I wanted to ask first about bad debt reserves. Could you tell us again where it was at the end of the year and give us some sense of how much or how little you've had to increase it with all of the bankruptcies and orderly liquidations you've talked about over the last six weeks?

At the end of the year, it's $6.2 million on an $85 million balance. Gross, it's a little over a 7.2% reserve. The end of last year, it was $7.2 million on a $126 million balance, a little over 5%. So at the end of the period, it's about 2% higher. In terms of bad debt expense for the year, it's about $1.5 million higher in 2008 than what was in 2007.

What type of growth have you seen the beginning of first quarter 2009?

In terms of the bad debt expense?

Yes.

I think it's a little bit early to really know where we stand. I can tell you that the [aging] in January didn't look any different than December. So I can't think of any specific event in January that makes me feel any differently than '08.

I wanted to ask, you had talked in earlier conference calls about banks keeping competitors open to try and collect the AR as best they could. Is that trend starting to slow down? Are you starting to see more of these liquidate and finally go away? How are things looking there?

I can tell you on the customer base, it definitely seems that there's more of a tendency towards just letting the customers orderly wind down, finish out homes and sell them off. There doesn't seem like a great willingness to lend, even though it does seem once companies go into the workout groups, they do seem to work with them a little bit.

I think the way we look at it, it comes down in many cases is the company worth more alive or dead. And that's the evaluation that the credit people within the banks make. But we definitely are seeing with the smaller customers, banks are pushing them more toward liquidation.

And on the competitor side? Same holds true for competitors as well as customers?

Hard to say. I don't probably have as much insight into that as what I do with our customer base. They definitely seem to be working with our big competitors. Hard to say with the smaller suppliers.

Many of them are failing. Is that a result of their banks? I'm not sure. It just could be just a case of the family deciding they no longer wanted to operate the business in this environment. I can't be very specific on that one.

I would have to think from all that we hear, Charles, wouldn't you agree that everyone is on a very, very tight leash? Anybody who is on an ABL is continually having the quality of their assets reviewed and adjustments made.

The banks have a much tougher attitude and in many respects, I think financial institutions are really running scared of any exposure that they have in the home building construction sector. They're just really maintaining the pressure on all of the companies, on all of the exposures that they have.

Then my final question, what is your outlook for the lumber market this year and what are some of the things you're seeing right now in terms of price and --?

Our outlook is is that we thought and had projected that we think there will be a slight increase in the cost of commodity products. We saw it looked like the market in January and February, early part of February was starting to move up. But that -- and a lot of mill closures have been announced.

The financial reports coming out of the forest products industry both domestic as well as Canadian are extremely grim. But a number of companies have tried to set a floor on their pricing and said they will not sell below this and the floor was above what current market pricing was.

That is beginning to crumble because I think there still is not enough capacity that has come out. There still has to be some more capacity taken out both on the Canadian as well as on the American side and we're starting to see prices are beginning to slip back down.

I think still by the end of -- I think when we look at the year in total, I think we're going to end up seeing a slight increase in cost, but nothing dramatic that obviously has tremendous effects on us. We would love to be able to see a lot stronger commodity pricing market. But you know, I don't think it's going to be a great deal different than what we're seeing right now.

Brian Taddeo, Broadpoint Capital.

A question -- given all your cost cutting initiatives, trying to get a sense what level of revenue do you need given your cost structure now to basically get EBITDA back to a positive number?

That's a tough one to answer. I can tell you six months ago, we thought it was $100 million and I think with the things we have done now, it's much lower than that. But given a more defined answer (multiple speakers) $100 million a month. That was -- six months ago we felt that. Obviously with the changes we've made now, we have taken it down. But I don't know if we really can provide much more insight than that.

Given '08 levels of $1 billion of topline, if that number stuck for '09 -- obviously '09 is looking to be worse. But if that number stuck for '09, would you be comfortable thinking that EBITDA gets back into positive territory?

If we could see the same level of revenues in 2009 as what we saw in '08?

Yes.

I think that it is conceivable, yes.

From a liquidity standpoint, obviously with the revolver being -- or the ABL going down, are you having discussions with any such equity holders or are you exploring any additional method of bringing some additional availability or liquidity at this point? Or in your view you think you have enough to get through this year and next year and get through the downturn?

It is the latter. At this point we're not exploring any further equity or liquidity to come into the business. We're always looking for ways from our own operations we can generate more. If there's non-core assets we can divest, we will consider it.

If there are things we can do internally to improve cash, that's what we're looking for. At this point obviously we're not looking to do anything that could be dilutive to shareholders.

We do feel we have more than enough liquidity to ride through 2009. And candidly, Floyd and I are looking at making sure we have enough for 2010 even if we see no improvement in housing and that's what we're working on now. So versus having a twelve-month outlook, we do everything more on a 24-month outlook in terms of managing liquidity.

Gotcha. Do you -- is there planned or slated right now in terms of asset sales? Have you identified some things you're looking to part with this year?

We definitely have ideas, yes.

Anything you could share in terms of regions or what types of things you're looking to -- you may look to liquidate?

Not this point.

How about even in terms of size of dollars? Are you talking single digit millions or are these larger sales?

I can't give you a reasonable estimate at this point.

Michael (inaudible) Credit Suisse.

[Inaudible question - microphone inaccessible]

[Operator Instructions]

I was wondering if you had any maintenance covenants you could (inaudible) over the course of the next 12 to 18 months.

The key covenant that we have, we talk about in the press release and that is the $35 million minimum availability threshold. That is the part that basically it takes our eligible borrowing base, it subtracts from it any outstanding borrowings and that resulting sum has to exceed $35 million.

If we do not have enough to cover the $35 million, then we would move into a testing environment (inaudible) fixed charge coverage ratio of one-to-one, which clearly if you look at our trailing twelve-month results, we could not meet. So if you go through and pierce through the press release, what you will see is our cushion above that $35 million is about $95 million at year-end and we think that will actually go up a little bit at the end of the first quarter when our credit agreement allows for an increase in our seasonal advance rates.

Now (inaudible) advance rate come back down again in the second half of the year or do they stay up (multiple speakers)

What they do is they increase in March through August and then they drop from September through February. (multiple speakers) the other part from a liquidity standpoint, we also talked about in the press release is we do have an anticipated $35.6 million income tax refund. We're targeting May 2009 to receive it, even though we're working to get it earlier than that if possible.

(Operator Instructions) Kevin Starke, CRT Capital.

I think you might use some of that tax refund to buy back the second lien notes given that they are trading at $0.16 on the dollar.

You know, it's always a consideration. We look at that everyday.

You could practically buy back the whole issue.

It goes back to our two-year outlook, how we're trying to always look ahead in terms of liquidity to cover 24 months. As time goes forward, our visibility looks better and we feel comfortable with our liquidity.

That would be the first place we would look. Conversely right now with still the muddiness in the water, the uncertainty, we're going to sit on liquidity and try to increase it versus doing anything at this point to decrease it. But you're right. It's very attractive.

Forgive me if you've mentioned this, but did you give past due receivables percentage?

I did not. I do not have that in front of me. It seems like the greater than 60 is around 12%.

Okay and that is up from about 7% at the end of the third quarter, is that right?

That's correct.

The mechanics of your revolver credit agreement are a little tricky, but they mentioned a compliance period and I'm wondering if you triggered that by virtue of falling below the minimum liquidity coverage.

No, we didn't fall beneath it. If you go -- if you have our credit agreements, if you look at the definition of how that calculation works, there is a concept of qualified cash, meaning that any cash we have on deposit with the agents can count against any shortfall in the borrowing base.

Okay so you triggered none of that compliance period (multiple speakers)

We did not trigger a compliance period, yes.

By the look of it, you can only do that twice, right?

No, actually we're not restricted on just leaving qualified cash over at the agent. So that is not a trip-up. What you're referring to is if we actually could [fault] on it, we can cure it. In terms of the cures, we're limited. But this would not have been deemed a cure.

I get a lot of interest from fixed income investors who think that you have a very long runway with your very slow cash burn and your pretty good cash position. But it's hard to look ahead to what normalized sales might be, normalized EBITDA. I know you are not prepared to give that information but I'm wondering if you have a view point of what maybe normalized housing starts might be in this economy and what rough sales level at Builders FirstSource might correspond to that?

It depends on your time frame. We spend a lot of time thinking about that. If you go back to the peak of housing in 2005, you saw over 2 million starts in total. I think we believe that in the normal cycles going forward, you're going to see probably 1.5 million in terms of total starts, not this 2 million level that you saw during the boom years.

Having said that, we still believe that that can be very beneficial for us with the capacity that has dropped out of our markets, with the fact that we have been able to maintain broad presences. We've only really exited one market. We feel that will play into our hands.

So while maybe our sales will not get back to what they were at the peak level, we feel we can actually be more profitable. The employees spend a lot of time talking about things we're doing to be more efficient and I think that again, we've always focused on market share and being the largest within our markets. And I think it actually plays into our hands in that regard in terms of the ability to be more profitable, more efficient and have a larger share within our markets but at a new reset lower level of housing across the cycle. Floyd?

I think also another way you can also look at it, Charles, is our sales dollar generated per housing start has really continued to increase as we've increased our market share. That's not going to go away when housing returns to a more normalized state and I agree.

I think that the range of housing probably on a normalized basis is 1.5 to 1.7 million housing starts. I think all the demographics and all the studies that have been done certainly support that.

I think our penetration is definitely going to be better as we go. I think with our efficiencies that we are producing now, they're not going to go away as business conditions improve. And so I look for a better future even than what we have had in the past as we get to a more normalized position.

(Operator Instructions) It appears there no further questions in the queue. Mr. Sherman, I'll turn the conference back over to you for closing remarks.

Thank you for joining us today. If you have any further questions, please feel free to contact Charles. Have a good day.

This concludes the Builders FirstSource conference call. Thank you for your participation. You may now disconnect your lines.