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BFS tightens credit to survive downturn

NEW OPPORTUNITIES Builders FirstSource is moving into light industrial and commercial construction to help move the company forward during the downturn.

The fourth quarter was especially brutal on pro dealers in the southeastern region of the country, where single unit housing permits dropped, on average 73 percent in Florida, 62 percent in Georgia and 44 percent in the Carolinas during the last three months of the year.

These four states are where Builders First Source, the LBM industry’s sixth largest player, has the bulk of its locations. The sharp declines in housing starts put even further pressure on the Dallas-based pro dealer, which ended the quarter with a $20.4 million loss and $302.3 million in sales, a 31.1 percent decrease compared to the previous year’s quarter.

These numbers dragged down the 2007 year-end figures, which posted a net loss of $23.8 million. Sales were $1.59 billion, a 29 percent decline. Calling 2007 an “extremely challenging year,” Builders First Source CEO Floyd Sherman outlined various measures the company has undertaken to survive the down turn during the company’s fourth-quarter earnings conference. Builders First Source reduced its head count—measured by “full-time equivalent positions”—by 18 percent in fiscal 2007 and 36 percent since March 2006.

Although it held off closing locations earlier in the year, Builders FirstSource eventually found it necessary to close three branches and idle 11 production facilities, such as door shops, that are located at distribution yards. Company executives did not give the locations of the closed facilities, one of which has been put up for sale.

Because of rising bankruptcies among home builders, Builders First-Source is tightening its credit standards. “We have been very active in trying to manage our credit policies,” said senior vp and CFO Charles Horn. “We pulled in lines with several customers.” On the flip side, Builders First Source has also lengthened its accounts payable days. “We continue to work with our vendors to negotiate favorable payment terms,” Horn said.

Horn outlined the terms of the company’s new $350 million revolving credit facility, which was entered into during the fourth quarter. The new loan released the company from some restrictive covenants and, combined with its cash on hand, boosted the company’s available capital to nearly $220 million.

“This strong liquidity will help us better manage our business during the downturn and afford us the ability to take advantage of opportunities, should they arise,” Horn said.

One such opportunity was Bama Truss, a Shelby, Ala., manufacturing plant acquired in August. Along with wood components, Bama Truss makes steel roof trusses, which will help Builders First Source diversify into industrial and light commercial. Approximately 2 percent to 3 percent of the pro dealer’s sales are in the light industrial and commercial markets, according to the company. Add multifamily, and the number grows to nearly 5 percent.

“We are leveraging what we do at Bama Truss into one of our other market areas, and it is really helping us gain a lot of new customer base in that particular market,” Sherman told analysts.

While acquisitions would fast track plans to gain overall market share, Sherman said that bargain- basement prices have yet to surface. Although he alluded to a bankruptcy-related purchase in the Atlanta area—“We bought one of the small locations out of the companies that filed bankruptcies,” Sherman said—valuations are still too high. “We still believe that the most opportunities will be further down the road, anywhere six to nine months before most valuations really meet the criterion we are looking for,” Sherman said.

As always, investors pressed the LBM executive for an insider’s view of the down turn. “We’re probably getting near the bottom,” Sherman said, adding that “things [won’t] substantially improve or get worse through 2009.” But when the recovery comes, Sherman said, “it’s going to come very quickly, a lot quicker than it has in pervious down cycles.”

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