Q3 2019 Earnings Call
Good morning, and thank you for standing by you are joining BMC third quarter 2019 earnings Conference call. This call is being recorded today Tuesday November 5th 2019.
Carry Phelps Vice President Investor Relations for B and C will now provide the company's opening remarks. Please proceed.
Thanks, Stephen Good morning, and well go after my opening statement, Dave Letterman, our Chief Executive Officer, and Jim Major our Chief Financial Officer will discuss our key priorities and our operating results for the third quarter of 2019.
In addition to our prepared remarks slide deck is available on our website at <unk> IR site built with B.M.C. Dot Com. This is also where you can find today's press release issued earlier this morning.
The results of Stephens. This call will include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered an isolation from the most directly comparable GAAP measure.
The reconciliation of these non-GAAP measures to the corresponding GAAP measure and a discussion of why we believe they are useful to investors can be found in the back the press release and in the slide presentation.
Our remarks in the press release Powerpoint presentation and on this call contain forward looking at a cautionary statement within the meaning of the private Securities Litigation Reform Act and the projections of future results.
Please review the forward looking statements section in today's press release, and then our assay filing for various factors that could cause our actual results to differ in a material way from forward looking statements and projections.
With that I'll turn the call ever today, Thanks, Gary Good morning, everyone and thank you for joining us.
Our efforts to execute our strategy are paying off and we are driving consistently improving results. This year.
In our press release. This morning, we reported core organic growth of 3.6%.
We continue to outperform single family starts in our markets, which were up 1.1% in the quarter, but remained down 6% year to date.
Sure gains our value added product categories, even stronger and led to 7.4% core organic growth in structural Oh is it.
5.9% organic growth and millwork doors and windows.
Combined our value added products services and higher margin segment currently contribute approximately 47%.
Our net sale.
With an improved product mix and accelerating success of the B.M.C. operating system gross margin improved 200 basis points from a year ago 26.4 per se.
Net income was $33.6 million for the quarter.
Adjusted EBITDA was $74.7 million.
Despite commodity price deflation impacting our topline adjusted EBITDA margin improved 20 basis points year over year to 7.7%.
And finally cash flow from operations grew 16% to $69.1 million for the quarter as our cash generation.
Fine with our already very strong balance sheet underpins, our flexibility as we drive strategically.
In fact, so far we've added nearly $200 million an annualized net sales from acquisitions completed in 2019.
With the vast majority of these sales coming from value added offerings.
The purchases of these companies were funded entirely from the operating cash flow generated by our business.
As our leverage ratio has improved to 0.6 times, our trailing 12 month EBITDA.
Now moving to slides five and six let me take a minute to briefly discuss each of our four strategic pillars as they remain the key focus areas to drive our growth.
First pillar one.
To organically grow our value added products services and higher margin segments.
As I mentioned, a moment ago, we had strong mid to high single digit core organic growth in our components are nowhere categories, which outpaced the single family starts in our markets and reflected another quarter Oh sure Dave.
Adoption rates of our structural components products continue to ramp up nicely.
Even in markets that have historically been reluctant to adopt these offerings such as some parts of Texas, We're seeing significant volume growth in our manufactured components as builders are realizing the valuable time and labor savings these offerings provide.
There were two.
Drive efficiencies and enable outstanding customer service, who the B.M.C. operating system in our operational excellence initiatives.
Applying lean principles degree best practices to approve service an increase efficiencies in our processes is helping us deliver the strong financial results. We've seen this year.
Specifically, the BMC operating system and our operational excellence initiatives have contributed benefits in excess of $10 million to operating income in the first three quarters of the year and we are reaffirming the expectation, we set last quarter of $12 million to $15 million for the full year.
Among the benefits provided by the DMC operating system is the introduction of automation into some of our manufacturing process as.
Well, we are automating wizard cables equipped with auto PUC systems that are cross facility.
Quickly drive efficiencies reduce our cycle times and improve safety.
Where it makes sense, we're taking a step further and upgrading to a more fully automated solution that also encompasses the lumber pooling cutting and marketing stages of the process.
Significantly reducing the labor needed the manufactured crosses the.
Improving product quality and increasing capacity.
Atlanta Austin in Salt Lake are currently up and running with this technology, while another automated trust facilities under development in Seattle.
We're also pleased to announce today that our fifth facility to feature this more fully automated solution is now slated for the Charlotte market in 2020.
As we said on our last call given the significant opportunity for productivity improvements, resulting from deploying this technology.
We expect that will make sense to continue to invest in this advanced capability and additional markets.
Beyond automation the B.M.C. operating system is our guidebooks implementing lean manufacturing processes, and keeping our workplaces safe and efficient with the utilization of success.
We have trained lean leaders across the company to champion these efforts in the field and at corporate.
Every day, there are projects underway to make improvements at the local level and our field teams fight it out to win the prestigious battle of the Bill which recognizes one location each quarter that has done an outstanding job, creating an environment of continuous improvement.
While using the tenants of lean six that.
In fact for the third quarter as a result of these efforts we improved our on time in full metric by 240 basis points as compared to a year ago.
Whether working to better our truck turnaround time yard layout order to cash cycle times inventory management lumber pulling processes or other items. Our teams are eager and focused on doing what they can to make our business better.
There is an excitement you can feel when you visit our location and that excitement is contagious.
Along those same winds as our third strategic pillar to build a high performance culture with additional training and incentives and to create an expectation of continuous improvement across the organization.
Over the last couple of years, we've rolled out training company wide on the BMC operating system and the use of lean success in our workplaces as I. Just highlighted these efforts are resulting in real savings and productivity enhancements in our creating a more efficient and safer operation.
Beyond this we are identifying early career high potential associates.
Hiring new management trainees and bolstering the knowledge base of our current leaders through the BMC leadership Academy.
Through the training we offer our local leaders are improving their financial acumen communication skills.
Pricing and logistics practices customer service and their ability to execute well through the continued use of the DMC operating system.
While our market leaders are enhancing their knowledge of negotiation skills benchmarking.
So see its development and working capital management.
This is targeted training has been very well received companywide and we'll continue to help us achieve a high performance culture as we develop the talent necessary to lead the company well into the future.
Finally, our fourth pillar is to pursue the right acquisitions to help us expand our geography increase our capacity and enhance our value added offerings.
Progress here is evident.
After completing only three acquisitions in 2017 and 2018 combined.
So far during 2019, we have added five businesses to our portfolio.
To that helped us jump to a leading market position in Charlotte.
One that provides useful local scale in an area west of the Puget Sound, where we previously did not have a present.
And another very strong provider of millwork and doors in the Sacramento market.
In addition in late September we also Opportunistically picked up a small fastener provider in the Denver market.
In all during the third quarter, we added a total of nearly $100 million it projected annualized net sales from the acquisitions of Kingston.
It is one and Colorado faster.
I'm exceptionally proud of the efforts of our team this year.
The consistent and solid execution of our strategy is driving outstanding results and is key to achieving sustainable long term growth and shareholder value.
Before passing the call over to Jim as I have done on previous calls I'd like to highlight one of our many valued employees.
The only Mcdermott a credit services coordinator and solving southern California is recognized by her co workers as someone that elevates BMC business and company culture.
Our ability to remain focused and patient issued deals with contracts of all sizes is invaluable.
She ensures a smooth process for both our B.M.C. associates and our customer.
Importantly, though julie not only in bodies, the BMC culture with or can do attitude overall work ethic and diligence but.
But she is also a champion for the leukemia and lymphoma Society in Southern California.
She has led multiple BMC paint night.
Where she exhibits for arch skills and features are room full of people how to recreate one of her pain.
If I step as a fund greater razor for LLS.
Whatever coworkers commented Julius played an integral part in helping US fund raise for LLS.
Whether working donation boost at golf tournaments, or exchanging raffle tickets for LLS donations accompany a bit.
Julie always finds a way to make it fun and is a real pleasure to work with.
We're thankful to have or on the be FCC.
With that I'll turn the call over to Jim for a detailed look at our third quarter results and our full year outlook.
Thanks, Dave I'm exceptionally pleased with the results we reported so far this year. Our team is executing at an extremely high level, which for the third quarter resulted in a 200 basis points year over year improvement in gross margin, a 20 basis point improvement in adjusted EBITDA margin and a 16% increasing cash generated.
From operations.
During the third quarter, we saw strong core organic growth in our value added product categories and increasing benefit from our acquisition program.
While total net sales declined 2.6%, we estimate that net sales decreased 10.5% from commodity related price deflation and 1.1% due to the disposition of the Coleman for business in November 2018.
These decreases were partially offset by an increase of 3.9% from our recent acquisitions, 1.5% from an additional selling day versus the prior year and an increase of 3.6% from core organic growth.
Looking at our results by product category, we continued to gain share and see strong demand for our value added products no work doors and windows was our fastest growing product category up 13.6% as compared to the prior year in large part due to continued strength in our multifamily business and our acquisitions completed this year.
Core organic growth from this category was a strong 5.9%.
Total net sales in structural components rose, 5%, including commodity related price deflation, while core organic growth. This value added category totaled 7.4% as we continue to see expanded use of prefabricated solutions.
Ready frame recorded $64.4 million in sales, which was up slightly from a year ago as volume gains were offset by commodity deflation and lower starts activity in California.
As Dave mentioned adoption rates are shoring in some areas with ready frame, excluding California ready frame volumes are up more than 20% with exceptionally strong growth in Texas, Utah, Colorado and the Carolinas.
Trust volumes in total were up nearly 10% year over year with double that level of growth in Texas. This is encouraging as builders rarely choose to go back district to traditional stick framing once they see the advantages that structural components provide.
Moving onto our gross profit for the quarter and despite the deflationary impacts on our topline gross profit increased 5.6% the $254.8 million, while gross margin improved 200 basis points to 26.4%.
The stronger than expected performance resulted from the combination of improved product mix strong pricing discipline and the success of our sourcing and manufacturing productivity initiatives.
This includes a 210 basis point year over year improvement in gross margin within the lumber and lumber sheet goods category and a 160 basis point improvement within structural components.
DNA expenses during the third quarter rose $13.1 million the $189.3 million.
Proximately $6.7 million of the increase related to expenses and our recently acquired companies $5.2 million of the increase related to employee wages and benefits and $2 million that'd be increase related to gains on the sale of property equipment and real estate during the prior year period.
These increases were partially offset by decrease of zero point $8 million across our remaining SGN a expense categories.
For the quarter SGN AG as a percentage of sales was 19.6% compared to 17.8% a year ago. This increase was primarily due to lower revenues caused by commodity price deflation.
Net income decreased to $33.6 million or 50 cents per diluted share as compared to 53 cents per diluted share in the same period last year.
Adjusted net income was $38.8 million or 58 cents per diluted share compared to 58 cents a year ago.
Adjusted EBITDA of $74.7 million was also relatively unchanged from the prior year period as the solid execution in our strategy helped to offset the impact of commodity price deflation and has led to improved adjusted EBITDA margins of 7.7% 20 basis points higher than a year ago.
Cash flow has been strong throughout the year and is helping to fuel the strategic investments, we've made and automation improved equipment and tuck in acquisitions that enhance our value added offerings.
For the third quarter operating cash flow increased 16% the $69.1 million while year to date operating cash flow is up 79% the $198.4 million through September .
Total liquidity, which also includes excess availability on our revolver was $541.1 million at September Thirtyth.
This included cash and cash equivalents of $173.3 million.
The net debt to LTM adjusted EBITDA ratio at September Thirtyth of just 0.6 times, our balance sheet remains one of the strongest in the industry.
And allows us to Opportunistically flex our spending in support of our growth strategies.
Capital expenditures during the third quarter net proceeds from the sale of property equipment and real estate totaled $21.4 million and we continue to expect to spend between 80 and $90 million of Capex. This year.
Looking ahead to 2020, we see numerous high return opportunities to reinvest in our business, particularly around our value added products and in technology, which means that our level of capex spend is likely to remain steady or modestly increase as compared to the current year.
Over the longer term, we continue to target approximately one and a half the 2.5% of sales in total capex annually.
Given the level of investment in our capital asset and acquisition programs. This year, along with a rise in our share price recently, we did not complete any share repurchases during the third quarter four to date in the fourth quarter as of today, we have $55.7 million of capacity remaining under our repurchase authorization, which are.
Board of directors recently extended until November of 2020.
Turning our attention to our full your expectations for 2019, which are outlined on slide nine.
As expected year over year starts comparisons are improving as we move through the back half of the year.
And given our results to date, we just a couple of months left in the year, we expect to achieve full year 2019 organic net sales growth in the low to mid single digits, excluding the impact of commodity deflation.
Our recently completed acquisitions net of the Coleman for disposal should deliver two and a half the 3% growth in our total net sales.
And we expect a 7% to 8.5% headwind from commodity price deflation to our total net sales for the full year with a somewhat smaller negative impact for the fourth quarter.
Dimensional lumber indices have averaged $353 year to date three last week, which is just a bit higher than what we saw during the fourth quarter of 2018.
However, the indices for oriented Strand board and other bumper sheet goods remain below prior year levels lumber sheet goods comprised about one third of our lumber and lumber she gets product category or approximately 10% of our total net sales and we expect to continue to see year over year deflation within that sub category as we finished 2000.
As a 19 and look into the first quarter of 2020.
So taken together these assumptions are expected to result in full year 2019, net sales of 3.58 billion that $3.65 billion.
Our teams intense efforts this year to improve our productivity and add automation to our processes to introduce additional disappointed in our pricing in sourcing activities and to improve our product mix and customer mix have resulted in gross margins well above recent year levels. As a result, we are raising our full year gross margin expectation.
To a range of 26% to 26.25%.
Combining our outlook for both net sales and gross margin. We're also increasing our outlook for full year 2019, adjusted EBITDA, the 248 million the $260 million.
I'm very pleased with how well our team is executing this year. The success of our operational excellence initiatives is driving improved customer service metrics above market growth and substantially higher gross margins are focused on continuous improvement has really changed the culture of this company as we work as one team to drive the best possible results.
Our momentum combined with accelerating order growth reported by most of the country's largest homebuilders provides me with great confidence as we close out 2019 and look into the first half of 2020.
While we still expect some normalization of gross margins in the near term at today's commodity prices and with our current product mix, we estimate that our gross margin should level off and that 25 and a half the 26% range.
Plus with most of the year over year impact from commodity price deflation behind us the improved starts outlook, our bolt on acquisitions and continued share gains in value added products should help us better leverage operating expenses in the new year.
Our team is energized and poised to deliver solid results as well as longer term growth and so with that let me turn the call back over to Dave. Thanks, Jim having recently passed my one year Mark here at Vmc I am excited about our growth prospects and our underlying business momentum.
Joining the company I've seen firsthand the tremendous commitment to excellence exhibited by our associates nationwide and I want to thank each of them for that commitment.
We are gaining share in our value added products reinforcing our position as the market leader and innovation and value added solutions.
Ravi, both financial and operational or proof improvements throughout the business, while identifying strategic tuck in acquisitions to enhance our market positions with better capabilities higher margin products and enhance customer mix.
Over the past year, we have successfully turned our focus to our longer term path to growth.
We are ramping up investments to support our value added portfolio of offerings and are committed to one investing in innovation to provide meaningful solutions with tangible benefits to our customers.
Two building upon the foundation created by our ready frame offerings work directly with our builder customers to discover and develop new ways to provide value in the building process.
Three expanding our trust and millwork capacity and capabilities with automation and investments in more efficient equipment.
And finally continue our focus on strategic tuck in acquisitions.
Excluding our merger since the beginning of 2015.
We have now completed 10 tuck in acquisitions that we expect to produce annualized revenue of approximately $570 million and adjusted EBITDA of approximately $45 million and we do not intend to slow down.
As we highlighted on our last call there are plenty of opportunities, including around 300 potential companies to acquire with annual revenues between 25 at a $100 million plus about 100 companies even larger than that.
Our efforts to achieve organic and inorganic growth of our value added products and services and higher margin customer segments, along with our efforts to invest in our people and achieve operational excellence with the BMC operating system will continue.
The underlying industry fundamentals support a continued rise in housing and we feel very good about our momentum for 2020 as well as our runway to create significant long term growth and shareholder value.
I look forward to reporting what I expect we'll be outstanding achievements by our team in the years ahead.
Thank you again for joining us today and now as Steven the operator to please lead us into acuity.
Thank you at this time, we will be conducting a question answer session.
If you would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question Q.
The press Star too if you would like to remove your question from the Q.
Participants using speaker equipment, it may be necessary to pick up your handset before pricing Sarkies. Please limit yourself to one question and one follow up one moment. Please while we poll for questions.
And our first question comes from Matthew Bouley with Barclays. Please go ahead.
Good morning, guys. Thank you for taking my questions.
Thats on the results.
So I wanted to start off on the structural components side obviously.
Still showing some pretty strong organic volume growth there. So I guess beyond just the market simply coming back you actually seen any kind of incremental build our labor tightness, perhaps since the market has improved.
Or actually seeing on the other side, just seeing some of that entry level strength as kind of enhancing the increases and adoptions just just any any color on the growth drivers. There. Thank you, yes, I think math, it's it's a combination of actually all what you just said there I think.
The entry level level homes are growing quite significantly that obviously plays to our strength.
In structural components for sure, but I also think our team's ability to execute as we as we take structural components in areas like Texas. They committed to converting certain markets. You heard me mentioned this morning that where you were going to automate our manufacturing facility here in Charlotte, That's a complete and total reflection of our teams have been.
Due to execute here.
In that market. So I think it's just the combination of all that going on.
And Matt I'd add that even a fourth factor obviously as we invest in these trust plants and add capacity just capacity generally in some of the structural component categories are tight and so our ability to invest and add capacity allows us to gain share with we'd better lead times better quality.
Within that category.
Got it perfect. Thank you for that color and then secondly on the on the gross margin side I think Jim you just mentioned that that 25 five to 26 is kind of the normalized level.
Obviously, some puts and takes between lumber no SP is you are mentioning but.
If the direction of commodity prices is trending higher.
Sure.
I guess any any guesses as to how quickly that margin would normalize.
Is it sort of a Q1 event or kind of more gradual through 2020, obviously, depending on where commodities go but just any color on the speed of reaching that normalized level. Thank you.
I mean, I think we'll still will start to see some normalization even here in Q4, right and obviously what happens in Q1 and beyond as you know probably depends on how the lumber market wraps up the year and and obviously that things are always hard to predict.
But we do expect a little bit of normalization in Q4, and that's obviously implied in the updated full year margin guidance.
And obviously Q4 of the prior year, what's kind of a high water Mark in terms of gross margin in the prior year, even over the last four or five quarters. So it'll be a little more challenging comparison year over year as well.
Alright, thanks for the detail sure.
Our next question comes from Mike Dahl with RBC capital markets. Please go ahead.
Hi, This is actually Chris on for Mike Thanks for taking my questions.
First question.
I heard correctly it sounds like already frame was very same growth for this kind of flat year over year.
Do you have to break out what the deflationary impact was from from lumber there and what the core organic growth was as well as what the factors were driving the weakness in California.
Yes, so as we said on the call.
Deflation.
On ready frame is frankly pretty similar to what we would see in the lumber category generally thats kind of.
General somewhere in the teams in terms of overall deflationary impact on the ready frame product.
As we also said on the call when when you take out California. The underlying volume growth was was north of 20% and a lot of strength.
Pretty much across the remainder of our markets.
California, and I'd say, just sort of the Pacific has generally has been.
The states that we serve that have had the greater decline in housing starts. So far this year I think we mentioned on the call that overall year to date starts are down single family starts are down about 6% year to date across our.
Our markets.
But california, we'd be down more in the double digits.
And while it's we've seen some stabilization here of late I'd say on a relative basis that still out.
Still has not had quite as much for every dollar improvement as you might have seen in some of our other markets.
Got it thanks and makes sense.
And then just for my second question is on gross margins, obviously very strong performance. This quarter I think in the press release, you highlighted you highlighted about 210 160 basis points improvement and lumber and structural products.
But I think where your consolidated numbers came out would suggest that there's some gross margin gains in your other categories as well so.
I will provide a breakout of that and what's driving the improvement there.
As you know Theres some modest less notable improvement in the other categories, but I think certainly the mix shift that helps us as well, whereas in the prior year.
Lumber and lumber she gets were around 36% of our sales.
Now that they're down below 30% and lumber being the lowest gross margin category that that mix shift helps to improve the overall number as well the overall margin number.
Got it appreciate the color.
Sure.
Our next question comes from Trey Grooms with Stephens. Please go ahead.
Good morning, Thanks for taking my questions and congrats thanks, Brian right.
So on the.
I guess on on value added with.
You mentioned another plant that you guys have slated for automation and 2020 of thinking in the Charlotte market.
And you.
You mentioned also that you expect to to add additional markets to that.
We expect that rollout.
To be more in 2020, so in other words or do you expect to announce additional markets next year. In addition to Charlotte or is that a longer term mix expectation there.
I think on the last call, we said that.
Beyond the four we were working on at that time, we saw away clear to the AD that capability and maybe five depend more markets overtime.
With the momentum I mentioned earlier, that's happening for us in that market. It made sense for Charlotte I think we'll take these as we come but we look pretty aggressively towards an opportunity.
The automate where we can get a good return on that investment, which means we have a good base of volume today, and we see our way cleared a continued growth over time, so more to come on that in the future is we look for opportunities here that makes sense.
Okay.
And so five to 10 over time.
One slated for next year, thus far that you can announce but stay tuned I guess is that kind of the summary.
That's fair.
Okay, and then given the lower labor associated with these plants can you talk any specifics about the kind of cash cost at the automated plants versus more traditional.
Kind of facility trust facility or component facility.
Yes, I'm not sure we put specific dollar terms on it but generally you are talking about.
Her line headcount savings of five to 10 folks.
And.
From the cash benefit of that these are positions that are often very hard to fill and have relatively high turnover rates. So.
The ability to automate a good chunk of that process certainly improves our our capacity in our overall quality.
Okay, and just deficiency generally.
All right well that's helpful.
And then lastly, Dave.
Value added has nearly doubled in revenues over the last five years or so and you guys to continue to outpace the market and gain share.
The outlook for housing to improve in 2020 is there any reason why you.
And continue to outpace starts in your markets and in that kind of environment.
Certainly our goal for sure and I feel very confident about the momentum that we have in the penetration that we have in some of the markets. We've been focused on expected momentum to continue.
Alright, Thanks for taking my questions I'll pass along good luck.
Thanks.
Our next question comes from tray Morrish with Evercore ISI. Please go ahead.
Hey, guys. This is actually Joe on for Trey.
Thanks for taking my questions. Just just wanted to ask what your thoughts are maybe on why lumber prices haven't risen a little bit more in recent months.
Being seen some of the mills being taken offline how's the data housing data appears to be bouncing back.
What do you think is keeping a ceiling on the price here despite the to supply demand forces.
Yes, there's probably an element of seasonality there right as we get towards the end of the.
Building season folks generally reduce their inventory levels.
And just obviously don't need as much as we go through kind of the November December timeframe, but.
As you noted some capacity has come off and then.
Housing data and fundamental demand continues to improve somewhere in the coming months it wouldn't be uncommon to see a little bit of of a seasonal pickup.
At some point in the next few months, but obviously time will tell.
Okay got it thanks.
And then also last year, you mentioned are you announced the the $75 million repurchase authorization looks like you've used about a little less than the third of that how should we think about the cadence of that remaining activity could it be more on a regular schedule or do you think it would be more opportunistic. Thanks, yes, no we still view that very opportunistic.
The repurchase as we did do or have done under that authorization to date were primarily late last year in in the first quarter. When obviously that the shares were trading at the end up considerably lower multiple and I think importantly, we didnt have quite the pace of opportunity on capex and and acquisitions at that point in time that we've had here and.
More recently and so.
We view the repurchases opportunistically, but the primary.
Uses for our capital are directed towards our Capex program and our acquisition program.
All right, Thanks again, great quarter.
Thank you.
Our next question comes from Stephen Ramsey with Thompson Research Group. Please go ahead.
Good morning.
I wanted to get a little more detail. If you can share on the fastener acquisition in Colorado, just more lots you get the deal in markets that are served.
Margins of this business and I guess.
Kind of the second step of that would be.
Let's just say product category that is.
Very separate from what you already do and could you make a bigger play in this product category over time.
Yes, I think fasteners are admittedly a bit of a niche product in certain markets in Colorado, specifically, obviously, we deal with a lot of framing contractors and and others that.
By a lot of fasteners and this particular business.
Was very complementary to what we do in that market already and so something that our local team.
Built a relationship with over time and and something that if it's successful there probably are other markets, where we get coffee this playbook overtime, but but.
Yeah, that's something that generally speaking is probably a little bit smaller in terms of total sales opportunity than than some of our larger product categories.
Excellent and then I guess would speak about just your branches broadly just another viewpoint into operating performance being strong.
Well.
That kind of the margins in the ROI of various branches what is kind of.
The median range I guess and then how many branches or would you say or operating below what you are targeting.
And is there potential improvement just from certain branches underperforming the company.
Hi, good results.
I mean, obviously, but I'd like to any distributed business. There is a variation in performance across our territories.
Certainly we had a minimum threshold need people to return above their cost of capital and would have few if any locations that aren't.
Cheating those hurdle rates.
But certainly as we go through local operating plans and whatnot, we do we do a fair bit of benchmarking across our network and use that as a means to target different initiatives and different improvement opportunities.
Going into going into a new year looking looking over a three to five year horizon. So.
I would just to add to that is as Jim said, we've got a lot of opportunity everywhere across the company and as you heard us they were gaining good momentum with our BMC operating system I would still say we're in the early innings of that worked and I'm pleased with the ramp up but theres plenty more to do across the company.
Excellent and then and then last question I guess as you continue to gain experience in the trust facility.
Ramp up of automated trust facilities.
Our new facilities ramping up faster than in the past just given.
The increase on the experience curve in potential customers being more receptive to these offerings.
I'd say I'm pleased with the ramp up and as we said in the past Stephen we.
With each successive implementation here, we've got a little smarter, rather technology and how we deploy it is certainly depends on your size and scale the facility in or we're putting in multiple lines are one in terms of the the ability to get that ramped up but I would say generally a broadly yes, we've gotten better with each one of these as we learn and.
Get to get more capable at our ramp up on the backend it's going well.
Great. Thanks for the color.
Q.
Again, if you have a question. Please press Star then one on your telephone keypad.
And our next question comes from Megan Mcgrath with Buckingham. Please go ahead.
Good morning.
You asked a little bit about share gains in the quarter.
Maybe in the category is no good deed goes unpunished, but.
It seems like in terms of your volume.
And your organic growth, while you did coming ahead of housing starts maybe a little less of an outperformance this quarter than in prior quarters. So maybe you could just talk about the different categories of organic growth or are there any tough compares are you talked about California, a little bit regional differences.
And talk about did anything decelerate during the quarter or do you feel like you are sort of on track and maybe it's just getting caught up and mix.
Yes, I would say broadly we're on track and I felt really good about our momentum as I highlighted on the call their Megan starts.
In our geography, given our 18th state footprint or a little different than what you see for the national numbers in the starts were up just a shade over 1%.
Three and a half over 3.5% outpacing the market by more than three times I feel very good about obviously the weakness in the west as Jim spoke about while it improved sequentially, it's still the weak as part of our geography.
It is obviously puts a bit of a damper on your ability to drive drive growth broadly.
I'd say here and there we had a bit a softness in other markets, but we have that every quarter right. That's just the reality of the business in the breadth of our footprint.
Broadly I feel very good or better momentum and our continued share gains.
Now I'd, just remind everyone Megan that obviously theres a bit of allied there between the start date and when we get the rep start as just the first day on which we could have some of them increase revenue and so while were very encouraged to see starts turned positive again here in Q3.
Now what the builders are saying in terms of order growth all those things are leading indicators that.
As they hopefully continue through the remaining months of the year set us up for for a stronger start to the first half of 2020.
Great. Thanks.
M&A.
Now that housing starts have started to improve and we're hearing good things about orders.
How are you are you sensing.
And improvement in terms as possible candidates or our sellers may be thinking how the market is turning around maybe I'll, maybe I'll stick it out a little bit how is the environment for M&A changed at all.
I would say the environment is just as good as it was a quarter ago, we really havent seen a change in it as you know we've put a lot of effort inside the company to the have outbound outreach.
Thats going really well and it takes takes a while as we said to make sure. We've got the right cultural fit for these organizations and strong management teams that want to stick around those are the kind of things that we look forward and.
Through our diligence effort, so I'm quite pleased with what the ones that we've done and I think our pipeline remains strong.
Great. Thank you very much.
Our last question for today comes from current Yinger with da Davidson. Please go ahead.
Good morning, everyone and thanks for all the details.
I wanted to approach gross margin slightly differently. If we look at the building products gross margin that started to come and perhaps as expected. But then you had this big jump in construction services.
I was wondering if there's anything worth calling out within that.
The revenue on cost recognition, there's different as well.
Yes, nothing notable there obviously that reflects.
Construction services reflects where we're doing some of the installation of the product a lot on that that can span.
Pretty large swaths of our product categories generally.
So.
Yes, likely some improved mix within that category as well.
Got it okay. Thanks, and looking at the Opex benefits could you help us with what the biggest buckets are within the 12 to 15 million improvement that you're looking for this year and how those might accrued between cost of goods and SGN.
Yes, I mean, the majority of that hits up in cost of goods and to some extent some of our pricing initiatives are enveloped in that as well.
Yeah, obviously, when you look at our PNM, we're spending what 74% of sales and cost of goods in less than 20% SGN I. So as a general matter, we're always going to have more opportunity within cost of sales.
And then SGN AG.
And as such a lot of our productivity efforts and focus is up in those categories.
Okay. Thanks, and then growth in the multifamily end market was quite strong Im just curious what kind of visibility you have there and your expectation.
For kind of that end market going forward is that something you expect to continue to be strong or perhaps have an outsized benefit this quarter.
I would you say you know as we've messaged in the past we have a very.
Concentrated focus the multifamily in an extremely strong team that has executed really well.
I would say our orders remained strong for the future and.
We'll continue to to stay focused on outpacing the market in ways that makes sense for our business feel good about our momentum.
Great. Thanks for the color and good luck in the fourth quarter.
Thanks, a lot.
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