Q3 2019 Earnings Call
It is now my pleasure to introduce Mister bin It sent me Vice President Investor Relations. Please go ahead.
Thank you <unk> good morning, and welcome to build her superstores third quarter 2019 earnings conference call.
With me on the call today are Chad Crow, Chief Executive Officer, and Peter Jackson, Chief Financial Officer.
Copy the slide presentation reference on this call is available on this investor Relations section of the builders first source website at D.L.D.R. Dot com.
Well, we began let me note that during the course of this conference call. We may make statements concerning the company's future prospects financial results business strategies and industry trends.
Such statements are considered forward looking statements under the private Securities litigation Reformat.
1995.
Subject, a certain risks and uncertainty, which could cause actual results to different materially from expectation.
Please refer to our most recent form 10, K. file the Securities and Exchange Commission and other reports filed with the S.P.C.
More information on those risks.
The company under six no obligation to publicly update more revised any forward looking statements.
The company will discuss adjusted results on this call. We have provided reconciliations of non-GAAP financial measures to their gap equivalent.
<unk> press release, and detailed explanations of non-GAAP financial measures in our foreign eight K. filed yesterday, both of which are also available on our website.
Through the call over to chat Crow.
Good morning, and thank you for joining us.
I will start on slide too.
Our team delivered an impressive performance in the third quarter building on our your today progress to produce above market growth expand margins and generate outstanding cash flow.
I'm proud to say that we recorded the 13th Street quarter of your over your increases and adjusted either Dom and achieve it all margin of 8.1% of sales are highest quarterly percentage since our 2015 acquisition of pro Bill.
Ongoing strategic investments in market, leading value added products capacity as provided the targeted gross margin in customer value benefits we anticipated.
Our operational excellence initiatives also continued to gain momentum and are contributing to our results.
And notably are strong cash flow in working capital management continue to find our investments which included an acquisition of three strategic trust manufacturing plants and further pay down of debt.
We were especially pleased to achieve the low end of our long term targeted ratio of net debt to adjust it either.
Two and a half times as that'd be under the quarter.
We believe our success is a direct result of our commitment to our strategic initiatives.
I'm I'm in I'm in sales volume during the quarter continued from the strong first half of 2019 supported by an improvement in our in all of our end markets for the first nine months of the year sales volume, excluding commodity deflation grew by more than 6%.
Once again, our value added product categories led the volume growth increasing in sales volume by an estimated 9% and the first nine months as we continue to realize the benefit from years of strategic investments.
Commodity deflation negatively impacted sales by nearly 13%, which led to an overall decline and reported sales of 7%.
Despite the headwinds we grew adjusted Eva die by 8% compared to the same year to date period last year. Thanks, largely to our teams focus on executing our growth strategy. The drilled a 300 and basis point improvement in gross margin percentage.
Our operational excellence initiatives continue to have a positive impact on our results.
As mentioned on our previous calls we are executing up on key initiatives with specific action plans in four key areas enhance business analytics pricing management tools.
My B.S.S. builder customer portals and delivery optimization technology.
During the first nine months, we saw the benefit of these initiatives, especially with our pricing tool implementation and delivery optimization platform, which is improved our distribution network in terms of speed up time and reliability.
At the same time, we've laid the groundwork to enhance efficiency and other areas such as I'm time delivery and inventory management, which Peter we'll discuss in more detail.
We remain Ontrack and expect the benefit of between 14 and 16 million two are adjusted even dot in 2019 from these initiatives.
Our market leading network is value added offsite component manufacturing facilities has positioned as well to meet the growing demand from home builders for productivity and efficiency and the face of ongoing increases the labor costs and scarcity.
In July 2019, we expanded our presence to the Las Vegas in Phoenix markets by purchasing three trust manufacturing facilities.
Are ongoing organic investments also continue during the quarter and we are on track to have two new Greenfield trust plants and approximately eight new trust lions and existing plants by year end.
In addition, we are investing indoor facility expansions as well as new machinery and systems and they doesn't more of our value added operations.
We will continue to invest in expanding our industry, leading production capacity Salesforce and distribution network.
Our commitment to broadening this competitive advantage is what is led to our above market growth and outstanding track record of performance.
I will now turn to call over to Peter who will share our third quarter financial results in more detail.
Thank you <unk> good morning, everyone.
I'm, especially proud of our teams work in delivering another quarter of improvement in the controllable aspects of our business.
We'd cheap to $2 billion, a net sales in the third quarter down 6.5% versus the prior year period.
We have one additional sales day and the third quarter of 2000, it 19 compared to the prior your quarter. So I will speak to our sales drivers on a sales per day basis for better compare ability.
Net sales per day declined by eight per cent due to commodity deflation, which decrease sales by an estimated 17.4%.
A commodity headwind masked robust sales volume growth of 9.4%.
Rate significantly above the overall U.S. starts market.
The largest contributor to this growth was once again, our value added product categories, which increase 11% over the third quarter of 2018, reflecting the ongoing execution of our strategic plan.
Gross margin of $541.1 million increased by $18.4 million or 3.5% over the prior year.
Oh gross margin percentage increase to its historical high at 27.3%.
Representing a 260 basis point improvement compared to the same period a year ago.
The margin percentage increase was attributable to several factors, including an improved product mix is our team continued to maintain focus on delivering higher margin value added solutions to our customers.
Additionally, the decline in the cost of commodities along with our teams continued focused on pricing discipline contributed favorably to gross margin.
In regards to pricing in commodity costs as we have discussed on prior calls market cost inflation pauses short term gross margin percentage compression when prices rise rapidly relative to the short term pricing commitments, we provide customers.
We experienced this temporary contraction during the third quarter of 2018.
Firstly gross margin percentage expansion occurs when costs rapidly decline.
Quarter commodity prices dipped a bit lower before recovering to levels in line with the beginning at a quarter.
As a result, we believe the tailwind we've experience for most of 2019.
Has concluded as commodity prices remain stable.
Which we expect will return gross margin percentages to more normalize levels and the fourth quarter.
R.S.G.N.A. as a percentage of sales increased by 190 basis points on a year over year basis, driven largely by the impact of deflation on Saturday.
In addition, strong volume growth and higher gross margin led to hire variable compensation in the quarter.
As we mentioned in prior borders are incentives increase is our sales team achieves higher margins. Accordingly are strong gross margin percentage games more than funded the higher commission expenditures in the quarter.
Interest expense for the quarter was $27.8 million compared to $29.1 million in the prior year decrease at $1.3 million.
Excluding a 3.1 million dollar charge related to a debt financing transaction executed in the third quarter of 2019 interest expense declined by $4.4 million largely due to lower outstanding debt balances.
During the quarter, we use she didn't additional $75 million a note that mature in 2027.
The net proceeds we're used to repay a portion of our 2024 notes.
This is another step in prudently managing our balance sheet by extending existing maturities watch while simultaneously, reducing our overall leverage ratio.
[noise] adjusted net income for the quarter was $84 million or 72 cents per diluted share compared to $77.8 million or 67 cents per diluted share in the third quarter of 2018.
Do you over your increase of $6.2 million or five cents per share was primarily driven by the improved operating results combined with lower adjusted interest expense.
Thirdquarter, either <unk> grew by $5.5 million or 3.5% to $160.3 million highest in our history driven by the growth in gross margin mentioned previously.
Turning to slide for.
The strength of our business driven by our national scale and strong local customer relationships was again Abbott and and the third quarter results as U.S. housing starts improved.
Our team grew net sales across started value added and non commodity related product category categories.
Excluding deflation are lumber in lumber she goods product category also achieved solid wrote an estimated sales volume.
We are committed to the expansion of our components manufacturing network strategically located across the country.
We continue to build upon the strength of our existing network and as chat mentioned, we're pleased to have added sunstate components to the builders for source family along with its three additional trust manufacturing facilities, bringing our total to 61.
Turning the page five our third quarter sales volume per day group over nine per cent in the single family, new construction and market compared to an increase of 4% in overall U.S. single family stars.
<unk> strengthen parts of the east an improvement in Texas as well as the Pacific Northwest contributed to our outperformance.
A common thread throughout all parts of the country is that we grew value added products across our footprint.
Our sales volume in our in our another and markets increased by 11% driven by solid home improvement activity in southern California.
Multi family sales volume improved by 5.8% largely due to the timing of projects compared to the prior year.
Starting to page six.
First point now that we now define free cash flow as cash provided by operating activities less purchases property plant and equipment or <unk>.
Quarter, we have updated the metric to exclude acquisitions, another cash investments for better compare ability to peers and some more clearly delineated delineate between our discretionary free cash flow and our strategic capital allocation priority.
But the first nine months of 2019, we have generated $282 million in free cash flow, representing well over 100 per cent of adjusted net income.
Although our business typically uses cash in the first half of the year and generates cash in the second half due to seasonal working capital needs. The exceptionally strong cash flow performance. So far in 2000 in 19 is due to the impact of commodity deflation and our operational excellence initiatives driving work in <unk>.
Little improvements.
We continue to allocate our capital district, Dziedzic priorities, which include growing our value add capacity.
Funding strategic acquisitions, and further improving our balance sheet degenerate shareholder value.
We remain on track to invest approximately 25% of our total 2000 in 19 capital expenditures in our value added growth initiatives and expansion of our production capacity.
During the third quarter, we funded Iraq were acquisition with approximately $34 million in cash.
We were especially pleased to make these investments while at the same time preserving ample liquidity and further improving our net leverage ratio.
Quarter end, our net debt to trailing 12 month adjusted eat at our ratio was 2.5 times.
Is represented a 1.4 times reduction from the prior your quarter and at the low end of our target range of two and a half to three and a half times, improving the strength of our balance sheet and providing capacity and flexibility for future business development and <unk>.
Moving to slide seven.
The roll out of our operational excellence initiatives is driving greater working capital efficiencies through our discipline framework designed around systems tools and processes that are directly aligned with our cash flow performance objectives.
Catalyst here is that these initiatives are not only of benefit to builders first source, but also significantly benefit our customers.
For example, the implementation of our delivery optimization systems improves the reliability and efficiency of our outbound, but just sticks network, while minimizing transport in storage costs.
By ensuring efficiency throughout the distribution process, we improve inventory days through higher returns and reduce the cycle times, our customer also benefits from increase on time delivery, which in turn drives higher satisfaction rate.
Similarly adoption of our customer portal my B.F.S. builder is supporting increased online payments hung for faster and more efficient cash collections well. This the cheese faster cash collections for US customers also received the benefit of having 24 seven access the key business information like orders glitch.
<unk> invoice isn't statements.
The speed benefiting convenience of the portal a perfectly aligned with the dual goal of efficient capital management and enhanced value to the customer.
Are approaches systematic and plans to achieve these improvements are measurable implementation is rooted in changing the process routines and tools used across our 400 locations. We have regular progress checks to ensure successful execution and that'd be approved improvements are sustainable.
Includes annual targets monthly follow ups training and corrective action plans is needed above all performance towards achieving the desired results are directly tied to compensation at the local level in order to provide the proper alignment of incentives.
Approximately 60% of our locations have working capital improvements. This year, we expect working capital as a percentage of sales to improve by approximately 1.4 percentage points in 2019 contributing to incremental free cash flow.
We are demonstrating success at implementing structural changes throughout our organization consistent with our long range plans to achieve sustainable cash conversion improvement as we grow net income.
Moving to slide eight.
Looking forward to our fourth quarter and full year 2019 expectations, we remain confident in our teams ability to execute on market opportunities mitigate commodity costs dynamics and deliver on the initiatives within our control.
We expect fourth quarter net sales per day to decrease between 2% to 5% over the prior year driven predominantly by the impact of commodity price deflation between seven and 10%.
Gross margin is anticipated to be down 50 to 70 basis points versus the fourth quarter of 2000 and he as we return to a more normalized margin.
Fourth quarter adjusted either Dot is expected to be between 100 $110 million supported by canoed focus on cost disciplined and efficiency improvements.
We expect an effective tax rate in the fourth quarter slightly below our long term guidance of 24%.
For the full year, we anticipate adjusted EBITDA to be in the range of 570 $517 million.
Capital expenditures are on plan and expected to total approximately 1.5% for yourself.
Guarding cash taxes, we expect to be a federal cash taxpayer again in the fourth quarter of 2000.
<unk>.
Cash interest in interest expense are both expected to be approximately $100 million.
As we compete complete our systems integration work to support our operational initiatives, we expect one time costs $15 million to $20 million for the year.
Consistent with our previous lead disgusted definition, we expect our full year free cash flow to be in the 300 to 320 million dollar range.
Now Chad will provide an update regarding our strategic priorities and out.
Thank you Peter.
As we enter the end of the home buying season. The overall market outlook continues to improve on builders are increasing link catering.
Didn't do demands of buyers with the more affordable and right size product.
Our market, leading investments in value added products and ongoing growth initiatives.
Enable us to provide productivity solutions to help our customers meet the changing demands of home buyers.
And this environment. We are confident that we can continue to continue our positive momentum to generate growth in our fourth quarter sales volume.
In the mid single digit range led by single family activity.
Moving to slide nine.
Based on our meaningful progress today, it against our longer term targets.
We remain confident that are on mass scale market diversity and value added product leadership provides us with substantial opportunities to generate strong returns in our business.
Our value creation framework begins with capturing incremental benefits from core business growth as the fundamentals of homebuyer demand remain intact and starts to continue to move towards historical averages.
In addition customers are accelerating the adoption of our labor labor saving high efficiency value added products, providing significant ongoing opportunities to increase our market share.
To meet this demand we will continue to invest in value added products facilities.
The execution of this plan can be seen it in our results with the five additions we are making this year.
See the market opportunity for these higher margin products, only increasing s. customers recognize the value of these devalue these products provide and accelerate their adoption.
As we discussed today are value creation plan also includes a set of operational excellence initiatives that are well underway.
It includes there were a lot of our distribution on logistics software.
Pricing and margin management tools back off his process efficiencies an information system enhancements.
When fully rolled out across our roughly 400 locations. These initiatives in operational excellence in value added products are designed to deliver a cost benefit and margin expansion equally important we will further differentiate our service levels and strengthen our connectivity an overall value proposition with our customers.
The execution of our long term valuation playing combined with favorable demand tailwinds, but just on track to achieve.
Our goal.
200 to 270 million and incremental.
Representing a 50 per cent increase as compared to the full year 2018 as housing starts reach historical averages. This translates the E.P.S. between $3 had $3.50.
Our focus on cash will remain a key to delivering shareholder value and we intend to sustain greater than 85 per cent conversion up our adjusted net income to free cash flow.
Substantial cash we generate will be used to fun, both our high return both investments.
And to farther improve our financial flexibility.
Our national footprint on match manufacturing scale and exceptional sales force provides us with a platform to cap for a larger share of the growth tailwinds in the coming quarters in years.
<unk> with our ongoing investments in operational excellence in value added capabilities. These strategic initiatives continue to give me confidence that we will achieve our goal.
More broadly I am confident that are discipline strategic execution and implementation of the systems tools and processes as curator day durable platform that will allow us to consistently great value for our customers and shareholders.
I would especially like to thank our 15000 team members across the country for their hard work and the part they each played in achieving our record profitability.
Operator, we can now open the call, but few an eight.
Thank you very much ladies and gentlemen, I'm at this time, we would like to open to fly for questions.
You would like to ask a question you may I'll start fine I'm your telephone keypad tomorrow.
Questions, we'll be taking in the order in which the I received.
Again, if you would like to ask a question. Please pass star one on your telephone keypad now.
I first question will come find that tray Grins Stevens, Inc.
Egg morning, Congrats on a good quarter.
Hi, <unk> morning.
And the the outlook here for the for Q. also equally impressive.
You know and and looking at the gross margin guide that you've given US here 20, 626, six I think painter you mentioned that a lot of the tail wind from commodity.
Commodity price deflation has concluded.
And you expect it to normalize in the four Q. So it's 26 426 six is that kind of the I'm sure. It's a lot closer but is that the normalize gross margin we should be targeting there is there any anything else going in there that might be helping it out.
Well.
We certainly have seen.
Stable commodity prices over the last few quarters. So you know it'd be it'd be disingenuous to talk about the near term in <unk> as it relates to our pricing commit.
What we have seen it I think is is important to know is is this sense that there is value in the delivery of the product and the commodity side and and that is paid off quit slightly higher <unk> value has declined so I think there's been some.
Some sticky notes do a little bit of those higher margins, probably a bit more than we anticipated. We think will still stay above 26, but but I think there's room for that to drift down a little bit.
As we go into the the upcoming year in years, but we certainly feel good about keyboard.
And I'll just add trade that we've seen a little bit better expected results in our in our pricing initiatives that are part of the operational excellence initiative. So that's been a really good to see as well and it is contributing to some of that.
Right right.
Okay, and then just just for clarity.
Changed how you calculate free cash flow I think he he made mention of that but.
The free cash flow that you're guiding too for full year that 300 to 320 is that how does that compare to the to the prior.
Goals that you headset, maybe in that kind of I think it was 180 that to 10 <unk>, how does that compare relative to that they prior number.
Yeah, So I mean, it declares a.
And I guess have as the calculation from pairs at the same or is it different.
It is clearly and increase you know when we talked about it last time, we were around that 200 range.
Accounting for the money that we were we we're anticipating or do we had announced we were going to invest in in Sunstate component. So there were $34 million to them in a plus the 200, we were about 234 pretty substantial increase obviously from that point we've continued to.
The strong results in our working capital initiative, and we've not seen a bit of the recovery in pricing of lumber commodities that we bought would happen. So I think for the year, we're absolutely you calling up cash.
Yeah. Okay. So that's a that's kind of the comparable number the 234 roughly is kind of the comparable number to the three to 320.
Yes, okay perfect.
Wow, that's pretty awesome. So looking at last thing for me before I pass it on.
You know you've got the the leverage now at two and a half times the low end of the range.
So that's what should we expect maybe pick up in M.A. since you're kind of at the low end or a pick up in you know you know maybe push and accelerate a little harder at the end greenfield's and maybe the the outlook for Greenfield's in 20 years is.
Elite onto that too.
Mm.
Well I'll answer the D.N.A. side, there's a there's a lot of opportunities we're seeing out there right now.
So I guess they answer would be yes. It does clearly give us more financial flexibility to do in an a., we are still going to be very disciplined about it.
And and make sure that we we we do deals that makes sense strategically from a long term perspective, but yeah. You could you could see you pick up like I said there are a lot of deals out there were looking at some we'll see how they shake out but we're we're not going to go crazy. We're we're going to be disciplined about what we're doing but it's nice to have that floods.
<unk> again.
It is funny.
It started as far as the Greenfield. We're we're looking at two to three Greenfield's next year that we think will come on line. In addition, we'll do of course, our our.
Renewed investments in expanding and enhancing the capacity of existing facilities.
Yeah, Alright, well, thanks for taking my questions I'll pass it on and good luck with the current quarter.
Thanks, right. Thanks right.
Thank you I next question will come find Matthew bowling bike race.
Ah morning. Thank you for day my questions in congrats again on on the corridor I I wanted to ask a bit about the the pricing tools. You know obviously lumber prices you know, perhaps creeping back a bit you know I I guess around the better single family market. So can you kind of disgusting.
Seen over the past few weeks with lumber bottoming and moving hire a bit if that kind of provides a bit of a task you know it. If you guys can you know kind of point to any tangible improvements you've seen a as a result of your pricing initiatives you know, perhaps relative to past years, reflecting these efforts taken.
Yeah, <unk> lumber has moved a little bit it hasn't moved significantly most of the.
Most of the pricing initiatives, we'd done today are really focus more outside of the lumber products.
And really what we're doing there is creating a lot more structure on a market level basis, and more of a market level pricing concept and and making it easier on our operators of the local level to do pricing more accurately and quicker and just taking some of the manual process out of it so no I wouldn't say.
The the little bump we've seen in in lumber has been.
As you described date test on our on on our initiatives because most of those are focused on the categories outside of lumber today.
Okay Gotta, Thank you for clarifying that.
Then I just wanted to ask about the the queue for guide we just looking at the revenues I I guess number one is there I didn't hear if there's anything we need to be aware of around selling days. There and then just you know looking at the at the implied volume numbers relative to the third quarter, if I'm doing the math right. It's it would seem year guiding.
Into a bit of a deceleration and correct me if I'm wrong. There did you see anything in October that's driving that are are you guys just kind of layering and some conservatism any detailed there. Thank you.
Yeah, So that mean, the fourth quarter forecast is always tricky given the weather patterns. The normal seasonalitys. It's it's you know a challenging quarter as is teams really focus on preparing themselves for the Celine Monson preparing for the <unk>.
Yeah, well, we will have one last selling day and a quarter. So that's a factor as well, but we we certainly feel good about the performance coming out of the fourth quarter we.
We're certainly not a pessimistic at this stage, where we are seeing.
The expected increases as the customers are for seeing how the orders coming in so we feel good about that and and and feel pretty optimistic about how things are shaping up for both fourth quarter, but also for 2020.
Mm.
Alright got it thanks, a bunch and congrats again on the corner.
<unk>.
Mmm.
Thank you very much I next question will come from Mike Doll RBC capital markets.
Morning, Thanks for taking my questions.
What am I <unk>.
I ask a question about Oh S.B.. So you know O.S.P. prices have have started move higher and I think the industry has taken off about 10%.
Capacity over recent weeks, so there's no expectation from from the analyst covering those stocks that you're going to see a material move higher.
You know S.B. pricing can you remind us how how much well what percentage of that because of your business would O.S.B. represent either and a lumberton. She cuts category are also if it's part of manufactured.
Products and just any color around what you're seeing hearing and and how you.
How are you thinking can manage that.
Sure I I can baseline it and but chat maybe talk about is is censor the market, but the.
The commodities broadly speaking represents right around 40%.
Just about the same as the value add of our total sales.
Within that category O.S.B. is roughly 30%.
So overall, maybe 12% of sales Oh, it's b. is not.
Not a substantial part of the manufacturing components, obviously longer is but not a substantial part is it only comes in to play when we've got.
A wall panels with apply cheating.
Yeah, and I'll, just I'll just comment on some of the curtailments that have been announced.
Long term as we've talked about over the years is we prefer higher prices and so if if it does if some of these court curtailments does lift prices.
That's a good thing is you know we will see a little bit of margin compression in the interim but longer term that that's a good that's a good thing for US. We we we've used some of the court curtailments more as I'm, taking off some of the incremental capacity that's come on line there last year or two so our view is yes, it will help from prices.
But I think a lot of it is still going to depend on the demand did we see especially going into the spring building season next year, but.
In my mind Curtailments is a good thing because we we prefer the higher prices and as far as managing through it I'm not worried about that my gosh look what we managed through back in in 2018, and I think we did an outstanding job doing that so as far as managing through the the fluctuations that doesn't concern me.
Okay. That's how full color thanks for that and I I guess, maybe just to to follow on it for thinking out into 2020, and obviously the results. This year, it's been excellent <unk>. If it is there a way to ballpark kind of it from the 2019 guide how much of that was.
You know I don't want to say totally non recurring benefits, but effectively just the benefits of.
Of the favorable price cost and then for my baseline standpoint.
Seemed like volume growth should be sufficient offset whatever you lose their but <unk> <unk> any preliminary thoughts on how you're thinking about you.
<unk> the bit a dollar growth.
Potential next year, given you likely lose some of that tell went from a price cost.
Yeah. So no question you, you're you're absolutely correct that we received some to the benefits from the tail Windows deflation hit we were pretty open about that as we went through the year there'll be some of that next year, we agreed growth will be obviously a tail.
When for US next year, we feel good about both the markets and our competitive position. So I think those were positives not ready to give a specific guys on that but we do you anticipate having that for our next Cosby roll out our 2020 numbers for the two four calls so oh, absolutely intend to break that down for you.
Mm.
Yeah.
Okay. Thanks for that.
Thank you My next question Mark I'm from Alex Bagging on line the F.B.I.
Thank you good morning European across in a quarter was a very very strong, particularly with regards to your value added products.
The home builders are seeing incredible demand over the last three months in in the month of October .
Talk a little bit about your ability to keep up with their demand in the coming months talk a little bit about your ability to add labor and maybe highlight what you're a utilization rate of your facilities is right now.
[noise] keeping up with demand not aiming labor is a challenge and it has been for years.
Especially in a in areas driver's has gotten a little better, but still yard personnel and and and folks working in our our manufacturing facilities Labor's tough but.
I'm confident that our facilities can handle the demand whatever the the builders throw at US we could we could struggle at times with with employees, but you know we've got a lot of temp agencies that we use and we call on them and we need to so from my standpoint, you know bring on bring on the demand because we've got the we've got the foot.
Went to handle it I'm not too worried about our capacity.
That's great and as you reengaging them in a can you comment on seller price expectations. These days in what kind of competition, you're seeing out there.
You know some of the deals. We we look at are are auctions. Some of them are some of them come from relationships that we've.
Kind of been a.
Cultivating over the years those are are preferred right. So you're not in the bidding process, but overall I would say sellers expectations are pretty much in line with.
With what buyers want to pay these days the last I would say over the last couple of years, they seem to have come down a little bit the settlers expectations. So it's and my opinion, a pretty good time to be a buyer out there.
Thank you.
Thank you Ma'am I next question will come from keep his soundtrack.
Oh, Thank you some of the comet you're on the call here on the good order broken Rebuilders fair amount of that's coming towards a blow into the market.
I would assume that would be a positive for you on giving your push into trust manufacturing, but would love to kind of hear your opinion on that in any other impacts that would have either positive or negative on your business.
Well.
You're right a lot of the the incremental demand. We're seeing is in some smaller homes and really to meet somebody affordability issues. That's that's facing home buyers. You know my opinion is always the more houses we build a better word distribution company to a large degree in in we need volume in in my belief is it forever.
Are going to get back to that normal one to 1.1 million and single family houses you've got to have a higher contribution from the lower end homes. So to me. It's just all about let's build homes and do your comment on it playing do our vantage yes, we.
Obviously have a very large.
Manufacturing footprint and when you're building some of these column starter homes, a lot of the especially the national builders, we will use repeat home designs and so we can be very efficient in our trust plants. When we're building those houses there's just not as many changes to the first line set up so yes, there are some incremental efficiency.
For us there.
But clearly as homes get smaller you'll lose in other parts of the home you may have a few more or a few less windows a few less doors, but again net net.
It's all about building more homes for us.
Okay. Thank you.
Thank you.
Thank you My next question <unk>.
Yeah, Thanks, guys and yeah, just what I had my a great job in the corridor.
Oh I wouldn't talk about the the value added products a little bit you highlight held out there definitely a tail wind in definitely or something and it seems like builders are looking to more and more <unk>, but could you just talk about how you think builders are are going to continue to shift more.
Towards the use of those value added products over time, given labor constraints in given your your abilities to to continue to make more as you either require or build out greenfield locations for those.
Yeah, well you know I look at it.
Mmm.
It's a circle business ride and and there there's times when Labor's tight and there's times when housing slows them and Labor's readily available. This has been the longest streak I can ever remember uptight labor and there's there's many reasons for that but I just don't see it.
Solving itself anytime soon and I think as the years ticked by the builders.
Are starting to see that as well and sell a big driver for them is the labor shortage the cost of framing labor and they're looking for ways to to mitigate that and and improve their cycle times, especially the national builders they're under.
Earnings pressure just like every other public company out there and so they're continually looking for ways to build houses quicker and more efficiently and in my opinion, that's what's driven a lot of them to the product and then history is also proven that as they switched to these products very seldom.
Well, they switch away from that because they <unk> they they realize the benefits and the and the cycle time and the cost savings. So it's just overall an environment is that's pushing more and more builders in that direction.
<unk> and do you see anything that would that would accelerate that that moved to two more value added products or do you think it's gonna be more pay it can a gradual shift in that direction.
Well.
Typically it's been a slow to change industry. So my gun, what's a it's it's going to be gradual now if we see a a really big surgeon in housing demand. For example, next year that could push more and more builders to that because obviously labor framing liberal would become even more scarce, but.
In general I would say gradual barring some.
Unexpected increasing demand.
Yeah, and and then just thinking about about your falling or if that you've done this year <unk> very well in in a challenging housing environment to say at least and it just thinking out to next year. It's any reason to think why in a better housing market your volume improvement should be lower.
Then what you've done so far this year.
Now everything else being equal light.
I don't I wouldn't anticipate a changing significantly I'm, a pretty conservative guy so I.
Our our volume gains have been pretty damn impressive this year, so I'm always a little hesitant as they were going to keep doing that but.
Generally speaking now with everything else stays the same and.
And demand is.
Better than expected next year, I guess I think it's certainly possible that we can hang onto those volume gains.
Great. Thanks very much.
Okay.
Thank you Sir our next question will come from Megan Mcgrath Buckingham Research.
Thanks good.
Good morning.
Just on.
On that conversation around lumber prices.
In the sense of if we think about a time when that commodity deflation reverses or at least stabilizes and we get some topline revenue growth.
Hi.
Think about two things your ability to sort of got or for us to see more clearly s. DNA leverage from your operational initiatives as well as you mentioned cashflow benefiting from the lower lumber prices. So how do you feel about your ability to kinda continue to generate.
Strong cash flow.
If and when that lumber reverses.
Yeah. So the.
The thinking around SGN, a we certainly do we expect to get asked DNA leverage as the sales increase you saw de lever. This year, we generally think about our EPS DNA.
As being 70% variables of some leverage associated with that.
We do have internal initiatives that relate to.
That relate to the operational excellence initiatives, we will call those out.
To give you a chance to to get it.
Clear understanding about what we're up too but.
Certainly, we'll see that in there.
As far as the.
Overall growth as a business you know, we certainly think that the increases in.
The increases in.
However, in commodities, given where prices are.
Or more likely than decreases from here, we think that our ability to.
To grow the business into leverage off of those is consistent I mean, obviously we've got.
Through open it down.
Down cycle and commodity so we feel like Weve as Jack mentioned feel very good about our ability to manage through it and to be able to leverage that.
Kind of both directions pressure for hit.
Both of your questions if any thoughts on cash flow.
Yes, I mean, I think the cash flow side is.
It is is.
There's no question that as the values of commodities increase for both.
And well for the value of both lumber and no SB, we will see correlating increases in the values of a our inventory in a p. on our side so.
No question that a fair share of the the benefit both at the end of last year and through the first half of this year from a cash flow perspective has been because of that deflation will well app will absolutely be investing cash as we go the other direction.
That said there is a component of.
This that really is attributable to.
I would say enhanced focus and discipline.
Enhanced processes and procedures internally, so we feel good about holding on to that but.
Yes, I'd be crazy to tell you, we it wasn't going to cost us some money if if things reinflate.
Right, Okay, and then just a quick follow up on.
The repair remodel and multifamily segment.
As you pointed to.
Improvements in I think southern California for repair remodel and.
It sounded like maybe some pent up demand in multifamily running through so any more color on that and weather.
That was sort of onetime me in the quarter or if you think it allows another quarter Kate out would be helpful.
Yeah. It's a great question I think that when it comes to the our and our component of our and our another we've seen some stabilizing we've seen so while still down more stable on a year over year comp.
Basis in the Midwest for example.
We've seen the some stabilization and even some modest improvement in Alaska and some improvement in southern California. The area that's probably.
The more volatile component is the other so we do a fair amount of.
I will then.
Industrial yes, you called out we have a multifamily businesses that's doing well.
But that other is a lot of project driven business been very good to us this quarter.
Some parts of the country that have competed very well taken advantage of.
Stumbled for competitors.
So I think we feel good about that.
For the quarter it say.
It's obviously a win I don't think I'd want to extrapolate that forward, but we do feel good about at least lapping the negatives from the prior year in terms of the impact of tariffs and really the hard turn.
In that southern California market.
Got it thank you very much.
Thank you. Our next question will come from Matt Mccall.
Report Global Securities.
Okay.
Thanks, Good morning, everybody.
Hey, Matt about.
So.
Oh.
The I just want to better understand a couple of things. So if I try to look at volume by product category. I think you said value add overall was up 11% I know, there's plenty of their 17 points of Oh, let's commodity pressure, but if I. If I just look at the I'm trying to better understand the impact.
On.
Manufactured products products from from the commodity news and I guess I'll tell you the way I thought about it is did you see revenue pressure, but maybe there is a profitability benefit from a lower input costs am I thinking about the directional nature those two items the right way.
Okay.
Not entirely sure I understood I'd say I think what I can say is that we did see growth both in volume and margins.
We certainly oh, the on adjusted growth for for manufactured components is less.
Because of the substantial headwind that we've seen from commodities, but.
You know manufactured products grew solidly in the double digits.
Some of the other value add.
Grew I would say high singles.
To get that average about 11% in the total value add component.
Does that help.
It helps it helps I'm just trying to make sure I think about.
I don't know what percent of that 360 360 million impacted your lumber lumber she goes versus manufactured products.
Maybe I should that don't have.
Have you ever broken that out or is it easily.
Easy to calculate.
Hi.
I don't think we have.
Okay, all right I know you help on the other time Peter Yes. So does this question I want to go back the technology in the I definitely understand the.
The benefits that you discussed it can you put any numbers to that I know the.
Is there a way to look at market share gain margin impact you talked about cash collection and.
In the improvements there can you put any numbers to that and maybe quantify any benefit that you're seeing and what would be some of the expected benefits from a from a numbers perspective as we move out in 2020.
Okay.
Yeah, So I.
I mean, a couple of factors I guess, we look at our total working capital metrics. We've got some pretty substantial improvements there are two components to that obviously and.
Different.
The two different drivers operational versus deflation.
Where you will see the benefit is in reduce inventory you will see it in.
So lower D. I O were days inventory on hand, lower D. Asimow in days sales outstanding the our metric.
You see it in a.
Lower SGN as a percent to sales as we go through the.
The.
Aspect of the efficiency generated by utilizing online tools, having automated interfaces that allow us to be more efficient from the administrative side.
And there's a there's an efficiency also associated with.
Anytime you're applying cation and trying to work with a customer utilizing labor resources to do that customers doing it themselves. Obviously, it's always right because they're doing it themselves. So.
We havent called out.
Dollar amount, we were planning to roll that into the.
Into the operational excellence update as we get into the full year, we'll update the full year.
But we'll definitely called that out now I I think it's fair to say that we're not looking at doing this is a labor.
You know basis for restructuring like some companies do I think what we're really focused on his.
Filling in for attrition and really looking at how do we continue to grow the business and leveraging the resources, we already have on hand, because it's hard to get good people and we want to make sure. We we take advantage of the once we have on staff.
Yes, I'll just add real quick some of the operational excellence initiatives are easier to measure than others like customer engagement on our website kind of hard to pin down a dollar benefit to that but but some of them or a little easier than the margin expansion and the logistics initiatives those are much more.
Tangible and easier to measure we've guided to $14 million to $16 million of benefit in 2019, I think we have a chance to do a little better than that but if it helps that's a pretty even split between margin and SGN a right now those savings.
In the the as DNA portion really is.
As itself is.
More efficient yard labor and more efficient are more efficient running of our trucks in and less fuel cost, but if that helps that's.
Pretty even split between margin and SDMA on those two items.
And then you'll give an update on that that the 2020 expectations next call.
Yes.
Okay. Thank you all.
Thank you.
Thank you Sir our next question will come from Jon Block Stifel.
Thank you good morning, and my congratulations as well great execution.
Thanks, John a question.
To to remind us of your long term goal on the percentage value add number one in just the timing to get there change with some of these acquisitions, adding to the Greenfield strategy and.
It does that long term goal.
May be rise a little bit from your original thinking gate seeing what's your the labor shortage in the success and seemingly the demand pull youre getting.
From your customers. Thank you.
Yes ill from my standpoint, the higher our value add.
Is the better.
And clearly the acquisitions were making could help get us there sooner should help get is there sooner I guess are kind of our near term goal is more of a 50 50 mix between lumber and are distributed product in value added product, but I certainly would not be.
Wouldn't be heartbroken, if we hit that number and continue to blow past.
It's it's clearly the.
The most profitable part of our business I think it helps differentiate our company versus some of our peers and so yeah. The near terms 50, but longer term. If we can we can get past dental.
Well certainly shoe for I think it's worth pointing out that this quarter our value add business is a greater percentage of our total sales in our commodities.
Got it yes.
And then.
Thanks for that period, and then maybe a high level how should we think.
Maybe a reflection.
Several years post Probuild it seems from my seat at one successful I know, it's a lot of work.
How do we think about where we are in the housing cycle, where your balance sheet is and what your appetite me may or may not be then.
Entertainers another big deals in the next several years. Thank you.
Uh huh.
Always open to entertaining.
The larger deals you know, maybe maybe something could happen. If it was a combination of debt and equity depending on the size of the deal maybe.
Maybe an all cash deal.
We never try to be close minded, we're certainly open to opportunities that make sense in or strategic from a long term perspective.
But right now I don't see any of those on the near term horizon. Most of the deals. We're seeing now were are smaller to mid sized deals that could fit in.
Nicely from a strategic standpoint as well.
Okay, great. Congrats good luck Q4 RMBS. Thank you.
Thank you Sir thank you.
Thank you and last question will come from Kirt Gardner D.A. Davidson.
Yes, good morning, everyone.
All the details.
Okay.
I just wanted to go back to volumes and maybe take it in a bit of a different direction, obviously really positive trends on the value add side, but.
The other categories have grown pretty well.
Two and so I'm wondering I'm wondering whether you think you can.
Share take are going forward and those non value add categories and if so what do you think is really separating kind of builders firstsource versus your competitors.
Hi that.
Yes, we can be a share take or another categories, but to me, it's a lot of it boils down.
On to pricing and margin expectations and return on investment and.
We've always said over the years you can take all the share you want if you're prepared to drop your drawers lower your prices, but we we tend not to do that we try to be very very thoughtful about.
How we allocate our capital and return on investment and.
So yes, if the returns are adequate.
So we're we're more than happy to grow share there as well but.
The the ill call to distribute inside of our business is the most competitive and so clearly that results in a in lower margins on average.
So most of our folk focus over.
Over the years has been on the value add side of the business better margins better ROI C and that's where we will continue to to focus our efforts.
There's no question that the portfolio that we're able to offer based on the our scale in our product for us has been.
Mutually beneficial I mean, as we do a really.
Good job with our with our customers we partner with them on value add really makes a lot of sense just ease of doing business to work with us on the other products that they purchase as well as lawsuits a fair price. It's it's been a fun way for us to continue to grow the business.
Great. Thanks for the color and good luck in the fourth quarter.
Thank you.
Thank you at this time there appear to be no further questions sinister grow I will turn the call back over to you for any closing remarks.
Yes. Thank you again for joining our call today, and we look forward to updating you on our fourth quarter and our full year results in February .
And.
If you have any follow up questions in the meantime, please don't hesitate to reach out to benatar Peter Thank you.
Thank you very much ladies and gentlemen at this time. This now concludes our conference you may disconnect your phone lines and have a great rest a week. Thank you.
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