Q4 2019 Earnings Call
Fourth quarter and full year conference call at this time, all participants Arnie listen only mode. Following the company's remarks, we will conduct a question and answer session. Today's call is being recorded and will be available at www Dot E.L.D.R. Dot Com is now my pleasure to introduce Mr. Bennett Salveen, Vice President Investor Relations. Please.
Go ahead Sir.
Thank you Gary good morning, and welcome to the builders Firstsource fourth quarter and full year 2019 earnings conference call.
With me on the call today, our Chad CRO, Chief Executive Officer, and Peter Jackson, Chief Financial Officer.
Turning to slide presentation referenced on this call is available on the Investor Relations section of the builders Firstsource web site at be LDR Dot com.
Before we begin let me know said 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 Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations.
Her to our most recent form 10-K filed with Securities Exchange Commission and other reports filed with the FCC for more information information on those risks.
The company undertakes no obligation to publicly update or revise any forward looking statements.
The company will discuss adjusted results on this call.
We have provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release.
And detailed explanations of non-GAAP financial measures in our form 8-K filed yesterday, both of which are available on our website <unk>.
I'll now turn the call over to check growth. Thank you Ben.
Good morning, and thank you for joining us.
In January we announced my plan retirement. This was a very tough personal decision. After 20 years of serving builders firstsource alongside such an extremely talented team.
On the heels of record 2019 results I fully expect this team to continue delivering exceptional performance for many years to come and.
And I'm confident that the combination of our talented employees and value creation initiatives will elevate the company to even greater heights.
I also want you to know that I am assisting the board in the search for my replacement and while the board is making great progress. There is nothing significant to report as of yet. So we will keep you updated as appropriate.
Moving to full year highlights.
We delivered another strong financial performance and further builds on our record of success.
Our 16000 team members once again executed on our strategy and delivered value to our customers. While also generating value for our shareholders. Our gross margin percentage improved 230 basis points, allowing us to achieve record annual EBITDA of 516 million up 3% year over year.
Our unrivaled platform showed its strength throughout the year as value added sales volume grew by an impressive 9%.
We continued to make strategic investments in our growth capacity and align our services with customers to streamline their construction processes.
Our excess exceptional team accomplished these results while implementing working capital initiatives that helped generate a record 391 million a free cash flow for the full year.
We were especially pleased with funded our acquisitions, while reducing our net leverage by more than half a turn to 2.5 times as of yearend.
We completed five tuck in acquisitions in key growth markets, including Las Vegas, Phoenix, Florida, and the Carolinas, which have added approximately 240 million an annual value added revenue to our business.
Turning to slide three I would like to spend a few minutes highlighting several of our strategic achievements in 2019.
We continue to leverage the strength of the platform rigs we created in 2015.
Our national scale and strong local customer relationships allowed us to grow sales volume in all three customer segments and in every region in excess of growth in housing starts total sales volume grew by 7%, which was more than twice the rate of U.S. housing starts as we increasingly partnered with our customers to deliver value.
We continued to realize the growth and margin expansion benefits of our strategic investments and value added products capacity in services like helping our customers solve challenges like increasing cost labor constraints and waste management.
We are committed to the expansion of our component manufacturing network, which is strategically located across the country.
In addition to Greenfield investments the five tuck in acquisitions completed since mid year 2019 at brought six additional trust manufacturing and millwork facilities to the builders Firstsource family for a total of 64.
In addition, we are investing indoor facility expansions as well as new machinery and systems in a dozen more of our value added operations.
The continued ramp up of these facilities will enable us to capture a higher share of the expanding offsite fabrication end market.
Our ongoing operational excellence initiatives continue to gain momentum.
Contributing 25 million to adjusted EBITDA in 2019 alone, which was well ahead of our 14 to 16 million target.
These best practices are being implemented throughout the organization to make our company more agile and easier to do business with while generating strong financial returns.
Key initiatives in process include investments in distribution and logistics software pricing and margin management tools back office processes, a process efficiencies and information system enhancements the rollout of our pricing optimization has been particularly successful and is showing tangible result.
Our implemented we have provided our associates with faster and more accurate pricing information, along with customized market tools and analytics, enabling us to execute our strategy on a local level.
Our 16000 associates are key to our success, ensuring that we hire train and retain the best people continues to be a top priority.
We added or promoted 250, new sales team members in 2019 and invested in leadership.
Succession planning programs to ensure a pipeline of future leaders.
We also rolled out sales training tools to every region to systematically drive productivity in our high caliber sales culture, we are committed to growing and developing talent throughout our organization.
I will now turn the call over to Peter who will review, our fourth quarter financial results in more detail.
Thank you Chad good morning, everyone.
I'm proud of our teams work and delivering another quarter of strong results and and focusing on the controllable aspects of our business.
Stellar fourth quarter performance built on our years.
Full years work to produce above market growth and expand margins and generate outstanding cash flow all in line or ahead of our expectations.
We had a 1.8 billion dollar in net sales in the fourth quarter down 2.9% due to anticipated commodity deflation with decreased sales, which decreased sales by 10.6%.
Commodity headwind offset estimated sales volume growth of 7.7%.
Our value added product categories again led the way with a 9% increase over the fourth quarter of 2019, reflecting the execution of our strategic plan and the emphasis of our business on those key products.
Gross margins are $476.6 million decreased by $16.2 million are down 3.3% due to the impact of lower year over year commodity prices on that sales.
Our gross margin percentage remained strong at 27% as a direct result of an improved product mix driven by our teams continued focus on delivering higher margin value added solutions to our customers.
Year over year pricing in commodity cost dynamics impacting the fourth quarter were consistent with what we have discussed on our prior calls.
Commodity cost deflation causes short term gross margin percentage expansion when prices drop rapidly relative to our short term pricing commitments that we provide customers.
We experienced this benefit during the fourth quarter of 2018.
In the second half of 2019 this benefit did not recur.
Commodity prices remained essentially stable relative to our fixed priced contracts in the fourth quarter of 2019, producing a gross margin percentage closer to our long term normalized levels.
Our SDMA as a percentage of sales increased by 60 basis points on a year over year basis, driven largely by the impact of the aforementioned deflation on sales. In addition, strong volume growth and higher gross margins led to a higher variable compensation in the quarter.
As we have mentioned in prior quarters, our incentives increased as our sales team achieved higher margins. This has created a favorable alignment between our sales team and overall operational goals. Accordingly, our strong gross margin percentage gains more than funded the higher commission expenditures in the quarter.
Interest expense for the quarter was $27.5 million compared to $23.4 million in the prior year.
Increase of $4.1 million.
Excluding the net impact of onetime items related to debt extinguishment.
Interest expense was down by $2.6 million on a lower outstanding debt balance year over year.
Fourth quarter, EBITDA declined by $15.7 million to $109.3 million, representing the higher end of our guidance our strong sales volume growth, particularly in the value added product categories, partially offset the adverse factors mentioned previously.
Turning to slide for.
The strength of our business driven by our national scale and strong local customer relationships was again evident in the fourth quarter resulted us housing starts continue to improve.
Higher margin value added products improved to 42% of total sales in the quarter led by an estimated volume growth of 11% and manufactured products.
Followed by the estimated volume growth of 7% in windows stores and millwork.
Excluding deflation, our lumber and lumber sheet goods product category also achieved solid growth of 11% in estimated sales volume.
On slide six our fourth quarter sales volume grew an estimated 7.5% in a single family new construction end market.
Our common thread throughout all parts of the country is that we grew value added products in the single family market.
Our sales volume in our and our another end markets grew by 6.8% on broad growth.
And multifamily sales volume improved by 13.3% largely due to the timing of projects started earlier in 2019.
Turning to page six for the full year 2019, we generated $391 million in free cash flow, representing well over 100% of adjusted net income.
The exceptionally strong cash flow performance in 2019 was attributable to the added benefit of commodity deflation on inventory and the impact of our operational excellence initiatives driving working capital improvements.
We continue to allocate our capital to strategic priorities, which include organically growing our value add capacity funding strategic acquisitions, and maintaining the strength of our balance sheet to generate strong shareholder value.
For the year, we invested approximately 25% of our capital expenditures in our value added growth initiatives. In addition, we deployed $93 million of cash on acquisitions.
We were especially pleased to make these investments while at the same time preserving ample liquidity and improving our net leverage ratio at quarter end, our net debt to trailing 12 months adjusted EBITDA ratio was at the low end of our target range at two and a half times.
This represents a 0.6 times reduction from the prior year quarter.
We ended the year with exceptional capacity and flexibility for future business developments and M&A.
In 2020, we plan to expand our manufacturing in value added capacity, we're adding two new trucks and millwork plants, several new trust lines in existing plants, and new machinery and systems in a dozen more locations.
In total we expect to began invest around one third of our total 2020 capital expenditures in our value added growth initiatives and the expansion of our production capacity.
In 2019, we successfully added tuck in acquisitions as another avenue to advance our growth strategy.
The acquisition landscape for our company is very attractive right now and we have a framework dedicated to accelerating our next generation of growth.
For those of you have listened to our prior calls you refer to speak about the ways in which our value added products helped builders managed labor constraints construction costs waste and quality.
As our customers accelerate their adoption of these labor saving high efficiency products, we intend to accelerate our growth plans by supplementing modest organic growth with a focused acquisition strategy.
We are scaling our geographic reach primarily through additional value add product capacity, while taking advantage of technological advancements to best serve our increasingly sophisticated customers.
All of our acquisitions directly aligned with this strategy. Prime example is our acquisition of rainy components in December.
For more than 20 years rainy has been pioneering a vertically integrated manufacturing and installation model, which significantly improves productivity and speed for customers.
Randy supplies value added products, and then partners with subcontractors to install these products to its professional production build or customers across Florida.
Ramius holistic view the construction process from design manufacturing logistics to trades management in material handling has leveraged technology to improved cycle times by nearly one third by effectively combining offsite and onsite work.
We look forward to taking this model to the next level.
Fortunately, we have a very strong balance sheet and an active pipeline of acquisition opportunities to further scale up our success in many markets, while remaining mindful of our long term leverage targets.
Speaking of long term, let's turn to slide nine and look at our long range plan. During 2019, we executed on our priorities through ongoing initiatives, while overcoming adverse market factors to further extend our record of EBITDA growth.
As a backdrop for core business growth the fundamentals of homebuyer demand remain intact, and we continue to see steady steadily improving buyer activity.
Due in large part to the execution of our team we were able to generate approximately $35 million of EBITDA in 2019 from what we call our core business in fairly modest growth and single family housing starts. This improvement was more than offset by roughly $100 million, a deflationary and fixed cost headwinds.
Within the more controllable aspects of our business our team strategic focus was demonstrably successful.
Our estimated sales volume within the value added products categories grew 9% substantially faster than the market and contributed approximately $55 million of incremental EBITDA above the 2019 core market growth.
This amount as well in excess of the long term target and we continue to see some significant ongoing opportunities to increase the market penetration of our higher margin products.
Operational excellence contributed an additional $25 million in EBITDA in 29 team led by the successful rollout of our pricing initiative and the results from our delivery optimization initiatives.
Our measurable progress proves that we can create substantial strategic and economic value for the organization through efficiencies and through customer service advancements.
Overall, we were pleased to report another year of progress against our long range plan and influenced the trajectory of our bottom line of myth significant commodity related headwinds.
Looking forward, we are confident we can continue to deliver additional value through our initiatives, particularly through the more controllable aspects of our business.
While we continue to believe that the housing starts will march towards historical averages, we have moderated our dependence on underlying market growth to fully accomplish our long range plans.
With our overall focused on controlling the trajectory of our EBITDA growth, we intend to further supplement organic growth with targeted acquisition strapped with the targeted acquisition strategy, but we discussed earlier.
Oh, our emphasis remains on value added products as a key driver for core business growth and for outperformance versus the market as well as our acquisition strategy.
With this in mind, we have combined the expected contributions to EBITDA from core business growth and value added product performance to better align with how we view our business and the central role that value added products hold in our core value creation.
Accordingly, our target framework now calls for capturing an incremental $190 million to $210 million an EBITDA from these two categories. Additionally, our operational excellence initiatives are also on track when fully rolled out across our 400 locations. We expect these initiatives to deliver an additional 30 to 40 million.
In dollars and cost benefits, while further differentiating our service levels and strengthening our value proposition with customers.
The enhancements to our long term value creation plant combined with a supportive macro backdrop not only gives us confidence that we will achieve our goals, but also puts us on track to deliver $750 million in EBITDA in 2022.
This translates to EPS between $3 in $3.50 cash flow remains a priority and we intend to achieve greater than 85% conversion of our adjusted net income to free cash flow over time.
We expect to use the substantial cash that we generate to both fund our high return investments and to maintain our long term target net leverage ratio between two and half in three and half times.
Moving to slide 11.
Looking forward to our first quarter and full year 2020 expectations, we remain confident in our team's ability to execute on market opportunities mitigate commodity cost dynamics and deliver the initiatives within our control.
We will have one additional selling day in the first quarter of 2020 versus the prior year. So our guidance will be provided on sales per day basis.
We expect first quarter net sales per day to increase between six and 10% over the prior year quarter led by value added products.
This includes the impact of commodity inflation of approximately 2% gross margin is anticipated to decline 80 to 100 basis points sequentially versus the fourth quarter of 2019, as we returned to our normalized margin range of 26% to 26.5%.
First quarter adjusted EBITDA is expected to be between 90 $100 million supported by continued focus on cost discipline and efficiency improvements.
We expect an effective tax rate in the first quarter slightly below our long term rate of 23%.
For the full year 2020, we expect a single family customer segment growth in the mid single digits range, our and our growth in the low single digits range and the multifamily end market to remain flattish.
We anticipate adjusted EBITDA to be in the range of $550 million to $580 million.
Similar to prior years, we expect the first quarter to be our smallest EBITDA quarter, followed by our seasonally stronger second and third quarters, which are deeper into the home building season.
Capital expenditures are expected to total approximately one of the half percent of full year sales.
Regarding cash taxes, we expect to have cash taxes in the $50 million to $55 million range commensurate with our 23% long term effective guide.
Cash interest is expected to be approximately $90 million to $95 million.
Interest expense is also expected to be around $90 million to $95 million plus approximately 25 million in call premiums and fees related to the redemption of debt transacted in the first quarter for total interest expense of approximately $110 million to $115 million.
The continued execution of our strategic plan amid affirm macroeconomic environment puts us on firm footing to achieve our full year 2020 goals, while moving us ever closer to de Ville delivering on our long range objectives in the coming years.
Our company is well positioned to be the building supply company of choice for builders. Thanks to our enhanced geographic reach diversified product offerings national manufacturing capabilities and strong partnerships with our customers.
Our market, leading investments and value added products and ongoing growth initiatives enable us to provide productivity solutions to help our customers meet the changing demands of homebuyers.
We are excited about our plans to deliver greater value through our operational excellence initiatives as well as capitalizing on a stronger economy and are accretive acquisition pipeline.
We are growing in the right markets emphasizing the right products in our portfolio and upgrading our capabilities to accelerate our next generation growth strategy.
I would expect actually like to thank our 16000 team members across the country for their hard work and the part they each play in achieving our record results.
Our entire team is excited to continue creating consistent value for our customers and delivering strong results for our shareholders in 2020 and beyond.
Operator, we can now open up the call for QNX. Thank you. If you would like to ask a question. Please signaled by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that star one to ask and audio question well pause for just a moment too.
Hi, everyone the opportunity to signal for questions.
Your first question from Matthew Bali with Barclays.
Hi, This is actually Christine issue on for Matt This morning.
My first question is on kind of the outlook for value added products sales growth in the first quarter. I know you had mentioned, 6% to 10% net sales today growth, but how how much of this is gonna be from value added.
Okay.
Yes, so we don't.
Generally break that out on the guide, but we do expect to see continued outperformance. It's an area. We've committed to we certainly see a growing faster than market.
And it's an area, where we will continue to benefit from both the market growth as well as the additional capacity that we've added.
Okay and then.
And your pipeline for kind of more tuck in acquisitions in 2020, I know you mentioned a framework can you provide any more details in terms of how does acquisition.
Throughout the year, and then geographically if there any markets that you're targeting specifically.
Yes, so I won't get too specific to be honest, I mean, I want to be able to keep a little bit a surprise factor for the future and for obvious competitive reasons, but we certainly have talked a lot about where tuck ins are going to be it advantage for us in a in the growth of bar value.
Particularly in markets, where maybe we either haven't played.
At all or haven't played as much in the past.
You know around the country we're in.
Any seven at the top hundred I'm essays, but clearly some I must say is where we don't play.
There are certainly markets, where we are but we believe that we could be a better competitor a better provider for our homebuilding customers and frequently tuck in acquisitions are a good way to execute growth in those markets.
Particularly when you're balancing that desire to grow with the available capacity in the market, we're not interested in coming in and adding a bunch of on needed capacity.
That's healthy for us or the market so.
Yeah like we've talked about in the past, we certainly like markets, where there are lot of starts we've we've engaged in Florida Phoenix Las Vegas.
I think those are those are healthy markets, but we're certainly not limited to those.
Unfortunately, the timing is pretty tricky.
[music].
They sort of come.
As the opportunity presents itself and that the desire to to be thorough and our due diligence and thoughtful in our valuation sort of spreads goes out to a degree but.
We certainly have a significant pipeline, we're very pleased with the opportunities that are being presented at this point, we're continuing to hunt those down.
Thank you.
Thank you. Our next question will be from Mike Dahl with RBC capital markets.
Good morning, Thanks for taking my questions.
First my first questions just <unk> <unk>.
First question is on SG universe. So based on the once you got it still looks like you may not be leveraging shannay year on year, and just wanted to get a sense of how how we should think about the moving pieces. It seems like theres a lot going on between the new acquisitions layering in maybe that the commodity base.
Gross margin incentive being a little lower this year some of your underlying initiatives says, it's kind of but blend it all up.
How should we think about last year in a leverage for for the year and those pieces.
Yeah, No fair question, I think that I'm, probably the most important thing to point out is that that fourth quarter number I know it it from a percentage basis shows a de leveraging but if you look at a year over year expenditure basis, we did quite well.
It's a it's a flat number and going into Q1.
You know certainly another healthy performance it'll it'll move of course year over year.
It will see increases in terms of wages and inflation that you would expect to see but our performance is far more steady and attributable to volume from a pure spending perspective.
So what we're still working through and I would I think as everyone is seeing is the.
Lapping of the deflationary tailwind that we experienced in the fourth quarter of 18 in the first quarter at night.
I'd say, that's the biggest part of the story.
Core business running great I'm excited about the growth. We're we're in a position to continue our outperformance.
But that outperformance that exceptional margin from the benefit of that deflation in in Q1 of 19 will be will be lapped theres no way around it. It's it was good news that certainly pleased we got it but it's gone.
The good news I would say is that will be pretty much the last of it and our and our estimation that'll be.
Rearview mirror after Q1, so going from Q2 forward, we're looking at more normalized performance.
Okay, and assume that last comment related to <unk> to gross margin, but I guess I'm just back to the yesterday for a second so should we still think about this then with everything normalizing out that you're still roughly 70% variable 30% fixed.
Yeah, that's a fair estimate yep, that's a good okay. Good.
All right. My my other question you mentioned, taking rainy to the next level and.
And so I'm just wanted to get a little more color on that about how much is is expanding rainy within Florida versus rolling out some of that vertical integration.
Framework to some of your other existing markets and businesses, there and a sense of kind of what we should expect from a timing perspective there.
Oh, I would say, we're still kind of in the.
The learning phase on the rainy acquisition as you know, we already had a pretty healthy footprint in the Orlando area and so right now we're still kind of in the integration phase and talking with.
Customers that we both served and making sure that all that's all that's going to work out smoothly, but the longer term plan as you mentioned is certainly too.
Continue to evaluate whether it's expanding the rainy model or through other tuck in acquisitions.
Adding to the two our value add products and services offering which will likely include some sort of.
Oh vertical integration like we saw with rainy.
I would say than this the next step with Ryan you would be to expand it just to a broader geographical area within within Florida.
He doesn't reach up towards Jacksonville, a whole lot for example, and clearly we have a nice footprint there and so I think there's going to be opportunities to to expand that model and Jacksonville in the near term.
But it's not something that that's going to happen overnight and we want to make sure we're thoughtful about it.
Okay, Thanks, and chat enjoy the retirement.
Yeah. Thanks.
Thanks next question will be from train Morris with Evercore.
Thanks, very much guys I guess, the first place I want to started is back into your tier one Q organic volume Guy. It seems like it's a number like from two and a half percentage. So at the midpoint of your range would seems a bit low considering all the.
Housing Tailwinds, we're seeing from macro front from build to order front. So I'm. Just wondering is there something going on in one Q that make that number seem a little bit low or or just how to think about all the high demand were seeing elsewhere in new putting out a number that seems a little bit like.
Yeah, I guess im a little bit off I mean, <unk>. Our guide of mid single digits is I think the right underlying number there is some offsetting impact there we do account for this the shrinking size of the home.
A couple points on deflation for commodities or sorry inflation for commodities. So that I think theres. Some maybe puts and takes there what I'll tell you though is at this stage. We are absolutely excited about what the market is indicating we are confident that we're going to be able to take.
Our fair share and then some in terms of our performance versus the market. So.
I guess my takeaway on that is whatever the market brings we're gonna be will be participating in it fully and then some are I would say roll out of guidance for Q1 is certainly focused on kind of the preliminary numbers that we saw coming into the year, which I think is fairly modest as one of the smaller obviously quarters.
For the year.
So we're going to start with.
A reasonable point and then we will grow from there as the market shows itself.
And then clearly it was a pretty pretty easy comp year over year on on the housing starts number.
Q4, 19 versus 18 in a bit of a head scratcher there to me there seems to be a little bit in noise in those numbers and.
As Peter indicated as these starts assuming they are real rollover into units under construction I fully expect we're going to get our fair share that there's no reason we wouldn't.
But I think this time a year.
Especially as the slower time as far as the pace of construction given the typical weather delays, so I would expect that.
As Peter said, Thats, a great indicator of things to come and.
We'll get our fair share when when those do become units under construction.
Okay, well I'll turn falls more on that or later call I'm on the gross margin front I'm clearly a big another big benefit this quarter from from lumber.
You ended up 40, bips above the high end of your previous guide. So I'm just wondering what kind of drove that improved delta in in a in for Q and is the entire stepped down from fourq you'd one Q entirely due to lumber or that the lumber deflation falling away.
[laughter].
Yes, so so I wanted to be careful about sort of breaking this into two pieces on a year over year basis. The EBITDA dollars in the margin change is certainly because of that deflation sale. When we add last year not seeing this year.
In terms of the level of margins, where we are today.
No I think that that has a lot more to do with the mix that we've seen and sort of the pricing disciplines that we've experienced but I think we've been pretty open about our expectation that there's a certain amount of normalization that still happening in the marketplace as it comes to when it comes to certain categories of products and price.
This is and we do see it returning to a more normalized level.
That's why we keep talking about this sort of 26 to 26 and a half being a more normalized level, assuming commodities don't move.
In a material way, we've seen some indications that there could be some.
Pretty interesting moves in terms of commodities going up so that over the past few weeks just to reiterate we like higher prices in in commodities, we think thats a benefit to US you know we will pass those along as appropriate so while there might be a near term pinch on some of our gross.
Margin percentages, we certainly are pleased with the general trajectory and what commodities have been doing lately.
Assuming they sort of keep on a reasonable pace.
We think we do we'll do well with.
Okay. Thanks very much.
Thank you.
Thank you all our next question from Trey Grooms from Stephens, Inc.
Thank you and good morning, and first off Chad I want to congratulate you on your retirement as well.
Appreciate it right I'm not out of here yet you may not like done with me just yet so [laughter].
Working with you over the years.
Nick around it it's mutual [laughter] okay.
So first off.
I wanted to touch first on that comment Peter that you just made.
You've been saying over the last several quarters, you know you're seeing some pricing disciplines.
And.
I guess the question I have is you just mentioned about things kind of returning to more now I'm not sure. If you were kind of pointing to those the market maybe not being disciplined on some of these things is that had been before I guess is the has that pricing discipline continued.
Kind of gotten.
Reverting back to a little bit more competitive market out there.
I would say its uneven depending on where you are in the country, but there have been certain markets that have gotten more aggressive again in more competitive again.
I would say it's.
The question is never been Ben what is the market likely to do it when is the market likely to do it.
And so in our mind, one though in the fourth quarter. It at home on a little longer than we thought so we felt good about it I think our guidance in the first quarter indicates what we've seen you know as we've moved into the 2020 bids people have.
I tried to make sure they got their fair share I know, it's not a shock anybody on this call that when you take as much shares we did.
In 2019 people fight back in and we're in the trenches everyday fitting it out.
And I you know, it's a competitive market out there and I'm proud of our team I think we're doing a great job and I also think that our guide for Q1 in terms of margins is.
Is it fair.
Got it wasn't like not lose sight of the fact that 26 to 26 and a half is well above our long term.
Average margin and as you know trade that as a lots to do with our investment in value add products and services. So I think we got is pretty well along the way that this is where we were going to bottom out I think it took a little longer than we thought to bottom out, but it was nice, but I'm still a very healthy spot to be right now.
Absolutely and.
I guess that kind of leads to the next question and I don't know if you may have kind of answered this earlier, but.
<unk>.
New kind of north of 26 to 26, and a half as you mentioned still well above what weve seen historically.
But.
One key God kind of puts you towards the lower end of that that range of 26 to 26 not by much but.
But just as we look to the rest of the year, you know with the guidance that you'd given the EBITDA guidance, you've you've given us.
Should we see opportunity to see that kind of creep up a little bit towards maybe the mid or higher end of that range or <unk>.
Kind of lower into the range. The place we should be thinking about you know for the for the full year.
Yeah. So I think it's fair to say that.
As we get into there the bids year months, our leverage in our capacity utilization increases which is good. It's a good result for us on that gross profit margin on.
So I think it's fair to say there is some seasonality to that number with.
Winter months being the lowest capacity in the lowest margins as a result yep.
Okay.
Yes.
Okay, and then yes, I think the other question is just working through the commodity swapped wait and see what that does.
Absolutely.
Okay, and then last one for me I know there's.
In sum.
Outside of lumber Theres been increases announced a you know with other products that she got sale I know you know gypsum's done a big piece for you guys, but wallboard had had an announcement out there.
Yeah.
The door industry players, there looks like they're pushing for increases as well.
Can you give us.
Kind of what you're seeing out there for.
<unk>.
Other products outside of lumber.
What's your kind of expectation is for inflation, there and you know how you expect a kind of push that through or how that's going to work out.
Well certainly on the.
The high end of the spectrum would be the.
The price increases on doors.
I do think all or substantially all of that is going to stick.
You mentioned wallboard, you know who knows that's always a bit of a wildcard and as you said not not a big part of our business.
In between there and you know, it's really just been kind of normal price increases that.
We've come to expect in our customers have come to expect and you know you get a bit of an advance notice when those are come in and you communicate them and pass them onto your customers and they're they're typically a non event.
Got it alright, thanks a lot.
Great work in the quarter and best of luck, we go to Q.
Thank you thanks right.
Thank you. Our next question will be from John Baugh Stifel.
[noise] [noise]. Thank you good morning at like congrats as well Chad well deserved. Thank you Sir Thank you Sir.
Thank you mentioned Oh.
I don't know, where there's more attractive acquisition opportunity. Our I know you as a company are in a better position with your balance sheet. I was curious are you seeing something from the potential targets. It's.
Making you more excited as of March us your internal capacity.
Oh, well certainly we're in a better place now than than we had been in recent years just from a flex the balance sheet flexibility standpoint. So you know that's encouraging we we've always been an acquirer and so I would add life I'd say, we weren't getting a little ANSI over the years to there we've seen a lot of stuff in the pipeline that we really just couldn't.
Even take the time to evaluate because we were busy.
Finalizing the Probuild integration and getting our balance sheet back in order. So that part is exciting you know just as far as the pipeline, though there there's a lot of companies out there, but I will say most of them are very small you are talking 50 million in revenue and less typically but nonetheless those are a there so good value add opportunities out.
There are and so we've always got a handful of them we're looking at.
Some of some are going to work out some won't but I think just in general. We're we're really pleased with the deleveraging we've accomplished in the in the past few years and it's fun just to be able to to look at the pipeline again. It takes some of these series.
Yeah for sure I guess, what I was trying to get out a little bit as you know or are you seeing in some cases targets you approaching recently or maybe you approached them a long time ago, where there maybe a little more willing to acquiesce because of [noise].
What you've been able to do with the ones you buy or they view you as an increasing threat if they don't [noise].
Partner up with you is there any high and they examples of that.
Well, there's a handful of those.
A decent chunk of the ones. We did a 19, we had been kind of cultivating those relationships for awhile.
And.
Clearly we had to wait till our balance sheet was an order and those worked out and so we have a few of those but now beyond that I wouldn't say the landscape has changed all that much. The one thing I noticed as it appears that yeah. There were some pretty frothy valuations out there for a period of time.
And people were quite excited about what they might potentially got for their business, even small tuck ins and that seems to have settled down a little bit think there seems to be a little bit more rationality in terms of valuation so that that part is exciting for me.
[laughter] and he mentioned some noise in the latest housing numbers and of course, we're in a seasonally low period and.
We are going up against them.
A year easy compares as you mentioned I Wonder if you could.
I'm a little worried to some investors just look at these percentages and of course some of the units are smaller as you've talked about.
Just wondering if you put in a.
Real context of what.
Oh, Yeah. He mentioned single I think missing a mid single digit increase for single family. So I I guess, we're gonna see completions up pretty nice year over year in a first half of the year, then I guess the back half a little bit unknown, but I wonder if you put any of our color around the housing data on the macro backdrop for 23.
Thank you.
<unk>.
You know you know for me, it's a bit of the head scratcher because.
At the end of.
Of 18, we saw some year over year decreases and then to be honest, we really didn't feel it in our business our volumes held up and we just kind of powered right through it and and now you're coming off that you've got an easy comp. This year and then as we said earlier business feels good I don't right now I don't see a 15%.
Surge in volume coming because of the starts numbers. We saw in Q4. So it just to me. It just feels like there is little noise in there and of course, you've always got the lag you have to deal with we don't sell to start we sell the unit under construction and so there's just there's just different ebbs and flows throughout the year, we try not to get too hung up on it I mean to me the bigger.
Picture is we'd be considerably for the full year 19, and I think looking over a broader period tells a better story when you try to isolate it down to a couple of months over a quarter you did drive yourself crazy.
Hey, Matt.
Thanks, Good [laughter].
Thanks.
Thank you. Our next question will be from Keith Hughes with Suntrust Robinson Humphrey.
Thank you Scott a couple of questions a perfect clarification.
There were some discussion of gross margin yeah beyond the first quarter, what you've given us discrete guidance on.
Rough range are we looking for in this guidance for 2020, I think our 26 to 26 I have.
Yeah, I would say for the broad guidance for US is yeah. That's that's the best range at this point up somewhere that range would be the number for the year, Okay, Yeah and.
If we look specific the first quarter with we've seen framing lumber move up here in the last really couple of months, although at a fairly quarterly pace is there any kind of pass through lag a that she the same did not so the first quarter guidance.
Ah, yes, well I mean, I'd say always the nature of the businesses or we don't the prices don't move today that the random lengths quote changes so.
What we set into passive it takes about a quarter or two for those prices to work through.
You know depending on a market some markets. It's within 30 days other markets. It might take a you know so the ended the second quarter out depending on the price block.
So it'll take time to work through like you said, it's been fairly orderly, which we like.
But anytime you have a run up in commodities were will will perform like we have right. We'll we'll continue to increase prices will get that gross margin dollars and during that interim eating exposure period, we'll have a little bit of in China gross margin percentage wise.
Okay and.
And then switching a little bit longer term on the got its or the number sorry.
Because for a while now if you look at 20 or 2020.
You've done some acquisitions.
Oh Gee I assume you expect value added to grow fast in the rest of the business.
As was the case <unk> do you think that's going to accelerate in 20.
20, even faster number will be more orderly and 20 and beyond.
[laughter].
Who is the question will the rate of acceleration, yeah or the rate.
It is outperforming yeah, there like a tipping point, where you hit where you could all the sudden.
That even faster as you, particularly getting all the capacity, you're adding and things of that age or is that just a little too much expect.
Yeah, My gut, let's say, it's gonna grow as fast or slightly faster.
It should grow a little faster given the investments we're making then.
Both our internal capacity and the acquisitions that we've made so that's where I'd put my bet as fast or slightly faster I don't see it shrinking at this point.
Okay. Thank you.
Thank you. Our next question will be from Seldon Clarke with Deutsche Bank.
Hey, Thanks, a question. So you guys saw some pretty impressive market share wins in 2019 I understand some of that you know government data may have been unreliable from earlier in the year, but how are you thinking about market share wins relative to starts on a go forward basis and if it starts a wind up exceeding your mid single.
Digit outlook, how comfortable you from a capacity and labor standpoint that you could affectionately scale alongside this type of growth.
Yeah, I think we feel really good about it you know looking at the capacity numbers internally are aligning that with the investments, we're making a you know the capex investments in the year as well as the new facilities and the acquisitions.
I think were lined up very well to take advantage of the market growth I think our teams have been I'm doing a good job competitively I think there's every reason to believe that.
The product offering the product portfolio combined with the quality of our team that we're going to we're going to keep gaining share going to go our way of it and give you a point prediction on it we feel good about it.
I think there's every reason to believe we're going to be able to grow at the marketed in 2020 and.
Like I said, we've got a mid single digits number there and starts and you know I'm happy to have the market fruitless wrong I think we've been pretty well served at taking them.
A rational and reasonable.
Forecasting approach on on starts it's been a slow grind to get back. So we think we can do quite well in that market and even better if it accelerates carpet.
That's helpful. Thanks, and then you talked a lot about just the shrinking footprint of homes and how that impacts or I guess could you talk about how that impacts your volume growth across the various product groups I'd imagine the relationship for things like doors on Windows isn't as linear is something like lumber. So could you just give a little bit color on there.
Relationship there.
Sure Yeah, I mean, what we've talked about it in the past is really around the.
What are the obvious variables I think you hit the nail on ahead.
You know if the census department says were down 1% in the average square footage at home.
You'll have a mix.
Oh impacts depending on what it is it your selling generally speaking there is a fairly linear number and when it turns so when it comes to linear board feet of lumber.
However, there is there are often times offsets in terms of the amount of value add used you might prefabricated or offsite components use there are some step function changes and I think he was an owner had again is that windows and doors, you know depending on its more dependent on rooms, rather than necessarily a.
The square footage so it's a little inconsistent in that regard and in many cases, a movement to a starter home they make a few things a few components in the home simpler or.
Indicate that the economics are changing so you may have a bit less no work.
Obviously some of the finishing is maybe a bit a bit less a high end.
But generally for us we feel pretty good about it I mean, we want more starts were worse firm believers that that's the lack of this recovery that is still lag.
We certainly don't see the expansion of the increase in single family starter homes as being somehow detrimental to the rest of the market. We think it's certainly a an addition, so feel good about at overall this yeah. That's just a natural progression to get back to the historical building averages in my opinion.
You're going to have smaller homes in order to get back over that million single family starts number.
Yeah, Okay that makes a lot of sense I appreciate the questions. Thanks guys.
Thank you.
Thank you. Our next question will come from Stephen Ramsey with Thompson Research group.
Good morning, I wanted to think about the long term.
Plan.
About how much of the plan depends on overall sales grilles, how much of it depends on stronger value added growth and and does it contemplate acquisitions.
[noise], so yes, [laughter] or you go question answered Oh.
The reality is because we look at the business it's become so.
Integrated in terms of the impact of value add and the the opportunity sort of represented by the the acquisitions and anytime you do these acquisitions clearly there's a focus on on the value add but almost inevitably you end up with a with a standalone business are you may have some.
Lumber in there you may have some ancillary parts of the product portfolio that you've added when you've done. This addition.
And you think about the growth of the overall market in the relative expansion of value add just in general faster than starts it becomes really really difficult to carve it out and to give you discrete categories.
As a logic of putting those together is not to be somehow opaque or to hide from you I. Just don't think I serve you well by trying to give you those buckets independently I think that what we've done here by calling out 2022.
Is that we've given you some confidence that this 750 numbers real we have a line of sight to it and candidly there are a couple of different pathways. We can take to get there we feel good about whichever way, we get to that that's a number that that we feel good about putting out there for you to anchor us on.
Great and then thinking about.
A goal to penetrate deeper into existing markets and expand the product portfolio.
Maybe thinking about product portfolio.
That means you would contemplate.
Making acquisitions of distributors that focus on a more specific product categories outside of your more broad product category focus.
Maybe just go into it a little deeper or color on on that a initiative.
I would say when were you know that's not an assumption we have baked into our long range model.
Could it happen sure, but that's not kind of the the underpinnings of our longer range model, It's more hey, where there are markets, where we may have already has a presence that we don't offer our full offering of a products and services. Its enhancing that is it's picking up additional trust capacity addition.
No millwork capacity.
So again not to say it couldn't happen, but that's not part of that growth. This growth strategy that we that line.
Great. Thank you guys.
Thank you. Our next question will be from Ryan Gilbert with <unk>.
Thanks, guys. Good morning, I first question just a point of clarification on the first quarter 20 guidance I understand that the 6% to 10% sales growth as it is the cells per day number so excluding the impact though the extra sales day, you're getting is that 90 to 100 billion of adjusted EBITDA inclusive of the extra.
Sales per day or is it is that also excluding the extra day you're getting.
Yes that is all in.
That's all in Okay, great on and then I hear what you're saying about.
I had the housing starts growth during the fourth quarter, but you know we did see new home sales you know accelerate in the fourth quarter in public builder orders were good as well and I think in particular, you know December January the strength of demand for housing caught a lot of people by surprise and maybe on.
You know that that the production capacity has ramped up to meet that demand. Yet are you as you do you look at at the quarter. So January February you know over two thirds of the way down with it but the quarter. Here are you are you seeing builder.
Production ramp in the in the field or is that something you think it's still to come into month ahead.
Well I mean, it this time a year, you're always starting to see the ramp into markets, where you can the problem is you know you're you're not building houses, where there's snow on the ground and the reality is while there's been healthy performance and I would say all the markets or have.
That's very positive I think the mood is good it's just too soon to say.
Okay, I understand and then last one for me.
We saw a large public homebuilder vertically integrate into Offsite manufacturing earlier. This year can you talk about just you know what that what that means for your business in Florida, and our other builders considering vertical nigger integration for says you know buying I'll say components directly from you.
Oh answer that a couple of days, one I think it it validates our thesis that investing and Offsite manufacturing is it's something that should pay off in something our customers are are looking for we've seen this before as a matter of fact.
Gosh 21 years ago, or so the first acquisition BFS ever made was.
A spin off of a similar situation with pulte homes back in 1998 or so the challenge you see there one is one homebuilder I'm getting into say trust manufacturing for example.
At some point, it's hard to sustain that long term.
Because at some point.
If that plans dependent and only one builders production needs.
At some point the market gets saturated are built out and all the sudden you're delivering these trust as are really long way and it makes it becomes less economical. So we'll see how it plays out you know doesn't surprise me and again as I think that's where the industry is heading to more to more vertical integration Offsite man.
Are you factoring a and if it doesn't work out for him than maybe we buy that business in a couple of years from them I guess, we'll see.
Great. Thanks, guys.
Thank you our next question from Rueben Garner with the benchmark company.
Thanks, Good morning, everybody.
And congrats Chad good luck in retirement, if we don't actually again push it.
So most of my question has been answered just a quick.
Clarification for me in there and then a question. So the clarification on Q1 I'm going back to that question about your volume embedded in that guidance and.
I the way I'm reading it is more it's more of a it looks like 2% at the midpoint for inflation and then it would be 6% volume growth embedded in the first quarter is that am I seeing that quickly or did I Miss Ah I Miss another Pete.
God I think you've got the gist of it.
Okay, and so your outlook for the full year or you know I know you didn't guide specifically, but it looks like somewhere in the low to mid single digit this kind of what you're expecting from a volume standpoint, just given your end markets, maybe a little bit better than that with your outperformance, but it is the way to think about that.
Seasonally that you know you guys made do a little better than that and the first half I'm. Your comparisons are a little easier, but as we move into the back half barring some sort of acceleration.
In the end markets that you know it might slow a little bit just because you're up against such difficult comps you guys had a great second after this year.
Yeah. That's good question I think that the the performance throughout all of 29 team was pretty solid I think that once we lap past the last of the deflation things are going to stabilize obviously, depending it.
Assuming commodity doesn't do anything kooky, but the the overall performance and the results of this starts coming through this year I think there's reason to believe we see pretty stable performance as we get through the.
The back half of the year as well I don't think we anticipate a significant tail off because our I think our performance in 19 was pretty solid throughout the year as well.
Okay, Great and then sneak one more in that that's slide nine where you guys break down the the 2019 EBITDA kind of contributors I know you're combining two of them, but can can you give us any color on what kind of embedded in your full year guidance from an opex.
Perspective.
Operation excellence or savings perspective versus what you're including from just core growth and value added.
That's correct wanting.
Yeah for 20.
Yeah. We're in that 14 to 16 band again, that's that's what I think is is the right number for 20.
Okay, great year not right.
Yeah, Yeah, thanks, guys congratulations and.
Good luck this year.
Thank you. Thank you.
Thank you at this time Mr., Craig I'll turn it back to you for closing remarks.
Thank you really appreciate everyone joining our call today, and we look forward to updating you on our first quarter results and if you have any follow up questions. Please don't hesitate to reach out or to pin the benatar Peter Thank you.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.