Q2 2019 Earnings Call
This call is being recorded today Tuesday August six 2002 non chain.
Carey Phelps Vice President of Investor Relations sit back and say well now provide the companys I playing Roma.
Thank you.
Good morning, and welcome.
After my opening statement safe, let met our Chief Executive Officer, and Jim Major our Chief Financial Officer will discuss our key priorities at our operating results for the second quarter of 2019.
In addition to our prepared remarks, a slide deck is available on our website at IR dot filled with B.M.C. dot com.
This is also where you can find today's press release, which was issued earlier this morning.
The results discussed in 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 in isolation from the most directly comparable GAAP measures.
The reconciliation of these non-GAAP measures to the corresponding GAAP measures and a discussion of why we believe they are useful to investors can be found at the back of the press release and the slide presentation.
Our remarks in the press release Powerpoint presentation and on this call contain forward looking and cautionary statements within the meaning of the private Securities Litigation Reform Act.
And projections of future results.
Please review the forward looking statement section in today's press release and in our FCC filing for various factors that could cause our actual results to differ in a material way from forward looking statements and projections.
As noted in our earnings release issued this morning, our results for the second quarter include the impact of an out of period provision for bad debt of $44.3 million.
We have determined that the cumulative impact is not material to the current period or any previously issued financial statements.
We are also reviewing certain internal control deficiencies, which is likely to result in the reporting of a material weakness in internal controls over financial reporting.
We are implementing corrective actions to remediate such internal control.
With that I will turn the call over to Dave.
Thanks, Gary Good morning, everyone and thank you for joining us.
We are pleased to report another quarter of strong results driven by the successful execution of our strategy.
Highlighting the resilience of our business model, regardless of market conditions, where the margins we achieved through our improved product mix.
Our ongoing lean six Sigma based productivity efforts.
And through the focused actions of our pricing and sourcing teams.
As well as our significantly improved cash flow.
Specifically for the quarter, we delivered nearly 9% growth in millwork doors and windows.
Mid single digit organic growth in our value added product categories.
Continued volume growth in excess of 20% in our newest ready frame market.
Increased gross profit.
And a strong 200 basis point improvement in gross margin.
$35.7 million of net income.
Adjusted EBITDA of $73.3 million or $77.6 million, excluding the one time out of period item.
Adjusted EBITDA margin of 8.2%, excluding the one time out of period item.
And then 86% increase in cash flow from operation.
$51.6 million.
Our team is making significant progress on each of our strategic pillars.
Which is outlined on slides five and six.
Our pillar one.
Organically grow our value added products services and higher margin segment.
While single family starts declined to 5.4% in our markets.
We are gaining share and outpacing those trends in our value added product categories, with 4.5% organic growth and structural components, and 5.3% organic growth and millwork doors and windows.
In addition, we delivered strong 8.2% organic growth in our multifamily customer segment.
Pillar two.
Drive efficiencies and enable outstanding customer service through the BMC operating system.
In our operational excellence initiatives.
Introduced less than two years ago. The BMC operating system is achieving exactly what we had hoped.
Labor efficiencies.
Promoting a safer work environment.
Process improvement.
And enhanced customer service as were able to reduce lead time and increase our capacity.
As a result, the BMC operating system and our operational excellence efforts delivered in excess of $6 million in EBITDA benefits during the first half of the year.
And are expected to provide $12 million to $15 million for the full year.
As we've highlighted on previous calls we have to automated trust location up and running in Atlanta, and Austin with two more under development in Salt Lake in Seattle.
As a reminder, salt Lake, we'll start up this quarter and Seattle is expected to begin operations in time for the 2020 spring building season.
Over the next several years, it's likely we will find it compelling enough to add this technology in an additional five to 10 markets.
However.
Even if a facility isn't selected for the more fully automated solution. We are upgrading equipment to provide more efficient timesaving and capacity boosting equipment in a number of our door trust and eat W.P. manufacturing facility.
In addition to upgrading our equipment, we are utilizing the tenets of lean manufacturing to improve productivity and the efficiency of our processes.
During the second quarter, we completed more than 20 lean events companywide.
Advancing our local capabilities in areas such as order to cash cycle time, Youre layout truck turn around inventory management and warehouse utilization and lay out.
In addition, we improved our on time in full metric by 170 basis points over last year.
And finally as evidenced by our strong margin performance. So far this year, our pricing and sourcing teams are successfully adding rigor to their process.
While working to price competitively with all of our product lines. We are utilizing value based pricing to ensure we are adequately paid for the service and value we provide.
Meanwhile, internally our managers are benefiting benefiting from increased transparency and insight provided through improved tools and analysis that are now provided consistently to the field.
Moving onto pillar three.
So at a high performance culture with additional training incentives, including enhance management training sales training and lean six Sigma boot camp.
Since the inception of these efforts we have hired 58 management trainees.
Graduated 250 of our employees from our leadership development program and develop best practice Council.
Each of which focuses on a particular specialty such as structural components ready frame installed services and millwork.
These councils are facilitating idea sharing and implementation across our markets.
To enhance our customer experience and drive growth in our higher margin value added products and categories.
And finally pillar for pursue the right acquisitions to help us expand our geography increase our capacity and enhance our value added offerings.
We were pleased to announce the closing of Kingston lumber last week.
Which at $24 million in annual revenue expands our footprint to the relatively more affordable west side of the Puget sound.
And brings an enhanced customer mix of remodeling and custom builders through our Pacific Northwest operations.
All of the investments, we're making in our equipment processes people and tuck in acquisitions are in support of our efforts to grow our value added products and higher margin customer categories. While also ensuring we are efficient operators.
The BMC operating system and operational excellence is now part of our culture and an important part of the way we do business.
As we are investing to develop the leadership talent and organizational capabilities to execute our strategy over the long haul and ensure we deliver shareholder value.
I'd like to thank the 9000, plus associates that make up our BMT team for their commitment to these efforts their drive to deliver strong results and their continued execution of our strategy.
Before passing the call over to Jim I'd like to highlight one of our valued longtime associates, who truly embodies the BMC value.
Jason ACO Guard was recently promoted to the role of outside sales Rep in Orem, Utah and achieved its first million dollar sales month in June .
After joining the company in 2015, Jason has not only worked his way up here.
But he has also served 24 years in the army reserves and National Guard.
Deploying to both Iraq and Afghanistan.
He described as most rewarding experiences, helping a child in Iraq receive a much needed heart surgery.
Back home. He continues his community service as the leukemia and lymphoma Society, Chairman for BMT Salt Lake City market.
One of his coworkers described Jason is the hardest working and most customer service oriented person he knows.
Truly the best of the best.
We are exceptionally proud to call Jason a member of our BMC team.
With that I will turn the call over to Jim for a detailed look at our second quarter results and our full year outlook.
Thanks, Dave before I review, our second quarter results I want to comment briefly on the out of period bad that item. We described in this mornings press release.
During the second quarter, we determined that one of our local credit managers, who has since been terminated.
Violated the company's credit policy by manipulating certain opened customer invoices to prevent them from agent properly.
As a result, we did not pursue more vigilant collection activities in a timely manner.
And these invoices, which still appeared to be within agreed terms were not included in our provision for bad debts.
We recorded $4.3 million of out of period bad debt expense in our second quarter results and have determined that this amount is immaterial to the current quarter and all previously reported periods.
We've seen no evidence that this issue existed beyond the local operation an individual employee in question.
And we do not expect this matter to have an impact on future periods.
Our management and our board take this matter very seriously we will learn from it and we are working diligently to remediate the underlying control weakness as quickly as possible.
After more than 20 years with the company I've not seen a situation quite like this one it's extremely disappointing and in no small part because it distracts from the tremendous results we delivered in the second quarter.
So on that note I'd like to move forward and talk about those many highlights starting with our strong gross margins.
With a 200 basis point year over year improvement, our 26% gross margin helped us deliver substantial EBITDA margin and cash generated from operations during the quarter.
Following record high lumber prices a year ago net sales for the second quarter decreased 5.2% to $946.4 million as shown on slide seven.
We estimate that net sales decreased 8.9% from commodity related price deflation of which 8% related to the impact on our lumber and lumber sheet goods product category, while 0.9% related to our structural components product category.
In addition to the impact of commodity price deflation net sales also decreased year over year by 1.1% due to the disposition of our Coleman for business in 2018.
These decreases were partially offset by an increase of 2.8% from our acquisitions in the Charlotte market and an increase of 2% from other organic growth.
While 2% organic growth in the second quarter, and 2.7% year to date organic growth is below our longer term goals. We believe it represents a significant outperformance to market as single family starts across our footprint were down approximately 8% in the first half of 2019 as compared to the prior year.
Looking at our results by product category, given the significant year over year decline in commodity prices, our sales of lumber and lumber sheet goods declined 23.4% during the second quarter.
Meanwhile, demand for our value added products continue to increase.
Millwork doors and Windows was our fastest growing product category up 8.8% as compared to the prior year in large part due to continued strength in our multifamily business and the acquisition of Barefoot and company in February .
Other organic growth within structural components totaled 4.5% as adoption of prefabricated solutions continues to gain traction.
Ready frame recorded $60.3 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, and the Pacific Northwest.
Excluding those markets organic volume growth and ready frame increased over 20% versus the prior year.
And we continue to see increasing customer adoption in many of our markets.
Despite the deflationary impacts on our top line gross profit increased 2.6% to $245.8 million for the second quarter, while gross margin improved 200 basis points to 26%.
This result reflects a 320 basis points year over year improvement in gross margin within the lumber and lumber sheet goods category and a 300 basis point improvement within structural components as we have maintained pricing discipline and captured benefits from our sourcing and manufacturing productivity initiatives, including the increasing use of automation and equipment upgrades within our structural component and millwork operations.
As DNA expense during the second quarter rose $11.6 million to $181.4 million. However, much of this increase was either onetime in nature or related to our recent acquisitions.
$4.3 million of the increase related to the out of period item I mentioned earlier.
While $4.4 million of the increase related to expenses at our recently acquired companies.
Excluding both of these items, our underlying SGN was up 1.7% or $2.9 million, primarily related to higher health care costs and employee wage inflation.
For the quarter SGN as a percentage of sales was 19.2% or 18.7%, excluding the out of period item compared to 17% a year ago.
This increase was primarily due to lower revenues caused by commodity price deflation.
Net income decreased to $35.7 million or 53 cents per diluted share as compared to 60 cents per diluted share in the same period last year.
The estimated after tax impact of the out of period item was $3.3 million or five cents per diluted share.
Adjusted net income increased or decreased to $39.4 million or 59 cents per diluted share compared to 64 cents per diluted share in the prior year.
Adjusted EBITDA decreased 7% to $73.3 million compared with $78.8 million a year ago as the impact of commodity price deflation and the out of period items recorded during the quarter was partially offset by strong gross margins organic growth and acquisitions. Adjusted EBITDA margin was a solid 7.7% for the quarter were 8.2% excluding the out of period item.
During Q2, we delivered another quarter of strong operating cash flow up 86% to $51.6 million as compared with a year ago. As we saw significant benefits from the decline in prices for lumber and lumber sheet goods.
And saw improved inventory turns.
Year to date, we have generated $129.3 million in operating cash flow more than doubling last year's level.
In addition in late May we successfully increased the size of our bank revolver by $50 million to $425 million and extended its maturity by four years to 2024, thereby unlocking additional liquidity to fund our strategic growth opportunities.
Total liquidity, which also includes excess availability on our revolver was $528.2 million at June Thirtyth.
This included cash and cash equivalents of $160.5 million.
With a net debt to LTM adjusted EBITDA ratio at June Thirtyth of just 0.7 times, our balance sheet remains one of the strongest in the industry and provides us with significant flexibility as we pursue our growth strategies.
Capital expenditures during the second quarter net of proceeds from the sale of property equipment and real estate totaled $28.7 million. As a reminder, we expect to spend between 80 and $90 million of Capex in 2019 and over the longer term are targeting approximately one and a half to two and a half a percent of sales in total capex annually.
Since the beginning of the year and including the Kingston acquisition, we have invested over $100 million into our capital asset and acquisition programs. This higher level of investment combined with a strong pipeline of future opportunities and a recent improvement in our share price led to a slower pace of share repurchases in the second quarter.
As of today, we have $55.7 million of capacity remaining under our repurchase authorization and we will continue to utilize that opportunistically.
Turning our attention to our full year expectations for 2019, which we've outlined on slide nine.
While starts in the first half of 2019 registered year over year declines. We continue to believe that second half housing start comparisons will become more favorable.
Given these assumptions and our expectation that we will continue to drive growth in our value added products. We expect to achieve full year 2019 organic net sales growth in the low single digits, excluding the impact of commodity deflation.
In addition to organic growth, we expect our recently completed acquisitions, including shown barefoot Locust and now Kingston and net of the Coleman for disposal to deliver between one and three quarters and two in one quarter percent growth in our total net sales.
And based on full year lumber, our full year lumber price assumption of $340 to $365, we expect a 7% to 8.5% headwind from commodity price deflation to our total net sales for the full year and an 8.5% to 11.5% negative impact for the third quarter.
Taken together these assumptions are expected to result in full year 2019, net sales of three and a half billion to $3.65 billion, which is unchanged from our prior earnings call.
Our productivity efforts pricing discipline and improved product mix have allowed us to maintain gross margin well above recent averages we still expect modest sequential declines in gross margin for the remainder of 2019, but less than we indicated on our prior earnings call.
As a result, we are raising our expected full year gross margin to the range of 25.5% to 26.2%.
Combining our outlook for both net sales and gross margin and with a continued focus on expense management and productivity. We are increasing our outlook for the full year 2019, adjusted EBITDA, the $238 million that $258 million.
I am excited about the way our team is executing July sales trends remain healthy and we are making progress with our productivity initiatives as we head into the back half of 2019, we remain poised to deliver solid results for the year and are well positioned for longer term growth.
So with that let me turn the call back over to Dave.
Thanks, Jim.
Im very pleased with our progress to date executing against our strategic pillars.
As our customers are increasingly recognizing us as a leader in innovation and as a solutions provider, we are gaining share in our value added product categories and outpacing the broader market.
Over the long term, we expect to continue this outperformance in our value added categories.
We also believe that the underlying fundamentals such as employment levels low mortgage rates continued growth in household formation and improving homebuilder order trends should continue to support growth in housing for sometime to come.
Our team is driving both financial and operational improvements throughout the business.
We are investing in our people to develop and retain our talent.
As well as to assist in the integration of the BMC operating system and operational excellence into our culture.
And finally as we have highlighted on slide 10, and 11, we are significantly ramping up our efforts on our fourth pillar two complete strategic tuck in acquisitions in order to enhance our market position or geographic footprint.
Provide additional capabilities and improve our product and customer mix.
Excluding our large merger.
Since the beginning of 2015, we have completed eight tuck in acquisitions that are now producing annualized revenue of approximately $500 million and adjusted EBITDA of approximately $40 million.
We've identified more than 400 peer companies define potential acquisition targets and categorize them. According to annual revenue ranging in size from $25 million to just over a dozen peers with revenue over $1 billion.
Specifically approximately 300 potential acquisitions were identified to have between $25 million to $100 million of annual revenue.
68 potential companies to acquire have $100 million to $250 million in annual revenue and another 48 larger peers have annual revenue ranging from $250 million to over $1 billion.
During the past 18 months, we've assigned priorities to each peer company and made nearly 100 outbound inquiries to assess interest level and potential fit with BMC.
While also receiving approximately 50 inbound inquiries during that same time period.
With this level of ongoing dialogue, we feel confident that we have a solid pipeline of opportunities.
And we'll remain disciplined to ensure we make intelligent buying decision.
Acquisition growth is a large and very important opportunity for us.
We continue to expect to add between $100 million and $250 million on average in topline sales from tuck in acquisitions annually.
While maintaining our discipline and the flexibility to complete a larger deal should the right opportunity arise.
Successful execution of our strategy has been driving our strong strong results this year.
During the first half of 2019, we delivered volume growth well above single family starts.
Produce meaningfully higher gross margins as compared with a year ago.
Drove significant productivity in inefficient efficiency improvements through our operating system.
And have now added over $129 million in annualized topline revenue from tuck in acquisitions with a solid pipeline of additional opportunities.
As a result, our underlying EBITDA margin for the second quarter was above 8%.
I am confident that our momentum will continue our team is energized and focused and I look forward to reporting our continued progress and achievement on our next call.
With that I. Thank you again for joining us today, and we'll ashenfelter, please lead us into Q on it.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press Star then one on your telephone keypad.
The consummation Titan will indicate your line is in the question queue. You May Press Star then today, if you would like from a few questions from the key.
For participants using speaker equipment, it may be necessary to pick up your handset for pressing the star case.
One moment, please follow we poll for questions.
Thank you. Your first question comes from Matthew Bouley Barclays Go ahead. Please.
Hi, Good morning. This is actually Chris you know two on for Matt I just wanted to ask on gross margins. What do you think is a normalized gross margin at the stage and how do you expect margins to progress in the back half.
Yes. Thanks, you know as we said on the call we expect some moderate sequential.
Declines in gross margin over the back two quarters of the year and for the full year.
I expect that to put us somewhere in the 25.5% to 26.2% range.
Yes, I think if you think longer term and assuming.
Lumber prices continue to stay somewhere in the mid three hundreds as they've been trading over the course of this year.
That that longer term margin.
Prior to any additional sales mix improvement in our business would probably be around 25% to 26%.
Okay. Thanks.
And then can you also expand a bit on the.
Out of period cost of 4 million that you had in the quarter do you think that you identified as a material weakness that will result in any cash cost stemming from the remediation.
We're still finishing that assessment and so.
But if it is ultimately determined to be immaterial weakness, obviously, we'll talk a little bit more about our remediation plans in the upcoming quarterly filing.
At this point, though we don't think it will result in any significant cash costs to remediate that issue.
Got it thank you.
Thank you. Your next question comes from Trey Morrish.
Evercore ISI go ahead please.
Hey, Thanks, and great job.
Dave and Jim on the quarter Fantastic, a really really good to see.
That's correct.
Wanted to ask about the gross margin a little bit differently. The structural component segment. It was a 300 bips a year over year improvement as you said in the margin. That's that's a bit down from last quarter's 570, I'm just wondering the sustainability of that.
ER segment, specifically is there something underlying going on in that structural components business that you're able to see a structurally higher margin or is it kind of getting the benefit mostly from the lumber deflation it that the lumber and she could segment it as well.
Yeah, I'd say a couple of points. There I think you know number one the year over year improvement is going to start to decelerate. If you will because we're coming up against some more difficult comps were just now lapping kind of the peak lumber prices are lumber index costs from last year. So so we started to see those improvements in the back half of this year and therefore the year over year improvement is going to continue to decelerate, but but sequentially. Those margins remain certainly a quite healthy and improved relative to the multi year averages.
And we do see that both as a structural benefit.
Higher demand for structural components generally.
As more and more builders adopt those those practices into their building processes.
And then certainly some of the some of the commodity cost benefits have been helpful as well.
Okay.
And then thanks for giving all the color on the potential M&A targets out there I was wondering if you could talk about the potential and likelihood of a larger deal relative to to several smaller deals and do you favor one over the other.
Well good question for him and let me just add a little bit more color to my comments on the call I think.
And specifically that's kind of why we outlined the pond in which we're pushing at the moment. If you look at the number of opportunities that we have.
It's certainly in that $25 million to $100 million range, you look at the nature of the acquisitions that we've done over the past several years and they tend to be in that range.
I love the ones that we've done this year.
We've added capability in Charlotte and now with key has been out in the Pacific Northwest I think we're finding the right opportunities.
A large deals come along on a rare occasion.
What I like our position for the right thing happened, but we're focused on the many opportunities that we have that tend to be smaller in nature right now.
Okay got it thank you very much guys.
Thank you. Your next question comes from Trey Grooms Stephens go ahead. Please.
Good morning. This is actually no former Costco on for Trey grooms.
No.
So.
Just looking at the structural component sales it looks like.
They were down 40, bips in the quarter, but up organic if you can maybe talk about that is that just the impact.
From inflation and then maybe if you could just give a little bit of color on what you're hearing from the homebuilders that are using.
Some of these value added.
Products and services.
Yeah, no you're correct that that sort of the difference between the.
Total change in sales dollars and structural components and what we broke out in the release of sort of the other organic changes basically deflation.
We are starting to see because of the amount of would that goes into some of those product categories at least a little bit of a.
Price decline relative to last year's higher higher prices, but as we noted still still love the better gross margins overall.
In terms of just builder adoption generally I mean labor still tight.
So I think thats actually going to I think some of the underlying fundamentals that we see in the market. We've commented on time and time again like.
Labour just the the challenges around labor I think thats going to persist for a long time to come the shift we've seen in the company across the last couple of years relative to structural components. We're confident that's going to continue.
We are continuing to invest in things like automation as you've heard.
And importantly in we broke out that organic growth.
And structural components, I think we're well outpacing the minus 5%.
That we've seen in terms of housing starts across.
Across our footprint and I think that just speaks to the rate of adoption that we're seeing in some of these value added categories, particularly.
Structural component.
And I would actually add one more thing that we brought on talk about enough as we continue to invest in the manufacturing equipment and the design software than under under scores that stuff the quality of the product continues to get better and better as well. Thanks Ella.
I think that resonates with builders.
To help them get the maximum benefit from from adopting those products.
Thanks, Thanks that that's definitely helpful. And then just one quick follow up.
Given your expectations for Lumberton.
Maybe try.
Trade within that mid $300 price range, how should how should we be thinking about the SG and expense in the back two quarters of the year do you also given that.
The the way wages are paid with lumber inflation.
Should we expect a sequential decline in ESG anyway.
Well generally you won't see a sequential decline from Q2 to Q3 those quarters tend to.
Tend to be pretty soon learned a tweak to each other but as you move into the fourth quarter than you certainly see some seasonal sequential decline in variable costs.
Alright, Thanks Thats it from me.
Thank you. Your next question comes from Steven Ramsey Thompson Research Group go ahead. Please.
Good morning.
Thinking about what you said on.
I want to get the what you said on July trends.
Being healthy can you maybe clarify here are they better than what you saw in Q2 or similar levels in any thoughts on.
Clarifying the July activity.
Sure I mean, I think a typical as I said with respect to ask DNA generally holds true on sales as well typically Q3 is is either flat to maybe slightly down from Q2.
Just by nature of kind of how seasonally the building season unfolds.
And certainly July trends are very much in line with that that normal seasonality and remain healthy.
Great and maybe to dig in on pricing as a pillar of improvement can you discuss.
Where you're working to drive better pricing discipline are there certain products or services, where the gap is bigger than others and is this.
Inclusive of of lumber or seize opportunities outside of the lumber products.
I think we've got I'll start and Jim can add some color I think we've got opportunities broadly across the business and as we've ramped up our visibility to the field around pricing opportunities over the last several quarters, we're getting traction and action really across all product categories and that was really the intent.
Just providing that extra visibility and where those opportunities might be and I think we've got a lot of good momentum, we're still learning and rolling out processes, but we're ramping that effort up.
And I think we have a lot of opportunity that are ahead.
Yeah, I would just add that most of what we sell is on kind of a big quote basis. So.
Improving the.
The accuracy the speed with which we can deliver those bids in quotes to our customers not only has some pricing benefit but hopefully has some benefits in terms of the percentage of business that we all win.
Great. Thank you.
Thank you I'll just take the opportunity to remind everyone that it is star then one to register for a question today.
Your next question comes from David Manthey from Baird Go ahead. Please.
Thanks, Good morning, everyone.
Good morning.
First off.
Jim maybe if my notes are right here you have an extra selling day in the third quarter is first is that the case and then second if you could just remind us talk generally about what that might mean for the.
Inflection of that quarter.
You're right. Dave you are on a year over year basis, we'll have one more day in Q3 than we did in the prior year, which is making up for a day that we lost back in the first quarter. So year to date will be sort of back to back to even by the by the end of the third quarter I think.
Maybe off a day here, but I think theres it falls down to something like 63 days instead of 62 or 64, instead of 63 selling days, so you're talking about a one and a half.
Per cent impact.
Right. Okay. Thank you for that and also Jim we haven't talked much about contribution margin lately, just given the dynamics of Wattenberg.
Right.
Yes.
If prices stabilize here like they have been.
We could get to a point by the fourth quarter, where the year to year comps or are more normal and I'm just wondering.
Is there any change to your 10% to 15% contribution margin view are you still comfortable with that range.
I think on a longer term basis, and assuming prices stay more in what is now the longer term averages for lumber. Then then 10% to 15% is still something we're comfortable with I don't know that you'll necessarily see that work in the fourth quarter, though because.
I believe our gross margin in that quarter was pretty much the high watermark at 26.7% so.
So we'll start to comps and so much more.
Difficult numbers on the gross margin line at least here in the short term.
Right right right, Okay, Thats, all Thats all incorporated into our 2019 guidance, obviously and is I said longer term as you start to think about 2020 and beyond than then hopefully we get back to those more normal a more normal ways of thinking about incremental margins and still feel good about that 10% to 15%.
Okay sounds good.
And finally, if you could remind us on.
How high you'd be willing to take your leverage ratio at this point in the economic cycle.
I mean, we said two to two and a half times for quite a while now and obviously, we're well below that target range, which gives us a a good bit of dry powder to do the tuck ins we're talking about.
But really no change in that longer term view.
Got it all right thanks very much.
Yes. Thank you. Your next question comes from Jay Mccanless Wedbush go ahead. Please.
Hey, good morning, everyone.
I'm wondering first first question I had is.
It looks like you guys are taking some pretty meaningful market share from from other players in the distribution business and just wanted to get your thoughts on.
What do you think you're taking the share from and is there going to be any kind of blow back.
As it looks like probably starts as you guys said starts are probably going to rebound in the back half of this year, just a little conversation about what's competitive environment looks like.
Yeah I'll start here I think the competitive environment is the same as it's always been I think it's a very competitive market out there and and.
You've heard and understand we're squarely focused on adding value to our customers.
Whether its millwork, whether it's our structural components ready frame and we're getting great traction really broadly.
Across our geography, and we expect that to continue I don't think theres any one pocket of competitor that share is coming our way from I think it's pretty broad based and across most of our major geographies and Thats clearly where our team is focused.
It's really.
Stepping on the gas relative to where we think we can add the most value for our customers help them solve their productivity challenges and become more efficient in the entire homebuilding process and I feel good about our momentum.
Great and then the other question I had with mortgage rates continuing to move lower over the last couple of months what has happened with private market valuations.
Are you guys, having to walk away from more deals or and or is this.
People seeing this is probably the maybe the last big.
Push down in mortgage rates are they better sell I'd be interested to get your take on that.
Yes, I'm not sure we see a whole lot of impact from from that.
Yes, it's not a particularly liquid Barton I kesten and not one that tends to react, particularly quickly to those types of things that are generally speaking the conversations we're having are similar to conversations we've been having in recent years and and I think a lot of.
A lot of who wins, a particular opportunity really balls down the strategic fit and cultural fit in addition, the dollars and so we like.
We like where we sit in that regard because of all the effort and all the guys kind of sweat equity we've been putting into this process over the last 18 months to build those relationships.
Okay sounds good thanks for taking my questions.
Thank you. Your next question comes from Kurt King.
I Davidson go ahead please.
Yes, Thank you and good morning, everyone wanted going on.
Can you just talk about how you would typically think about a year, one and to ramp for a new trust facility and then as you look at.
The potential five to 10 would that be more greenfield or kind of similar to what I believe you Didnt Atlanta, where you were kind of building on to an existing facility.
Yes, I think it really depends upon the market I think the the four markets that we've got in play we've got a combination of greenfield activity as well as retrofitting of existing Trust Trust manufacturing lines and it really depends on where those we're going to go to where the opportunities are.
Where we think we've got the opportunity to drive that structural component into the market we've got.
Probably already a good presence in terms of market share and ample opportunity to continue to drive growth.
And the ramp up on those is.
It probably takes us six to nine months to get things fully from startup to operation when we're talking about automated capabilities.
But it's just part of the natural natural progression. So we're real pleased with the investments we've made so far we're excited about the opportunities. We have ahead and that's an area, we're fully committed to continuing to invest in.
Got it Okay, and then do you guys when you.
If you look at the three acquisitions you've done this year I mean are there any synergies from you being able to supply those businesses with some of the manufacturing capabilities you would have in those markets already or how do you think about.
What you bring to those businesses.
Yes, I think for sure that is one of the benefits of sort of adding to our local scale with Seattle acquisition and that Charlotte acquisitions.
We will be able to leverage their cells salesforce over time to sell more dresses sell more millwork kind of bar.
Out of our production facilities in those markets.
Okay, and then just lastly, how should we think about sort of ready frame growth between more mature markets and newer ones and do you think it's getting easier sort of in those new markets given.
The scale of that business and your marketing push.
I wouldn't say, it's getting easier I would say that our team is getting more confident where they've got the experience with it.
And as we continue to play out that value proposition in front of the customers were continuing to get traction over time and as we said here on the call.
20% growth in the quarter and those less mature markets that's exciting, but it's also what we expect based on the amount of effort and energy as you point out that we're putting behind it. So we're pleased with it we think there's a lot more to do.
As we go forward.
Okay, well, thanks for taking my questions and good luck for third quarter.
Thanks.
Thank you. Your next question comes from Mike Dahl Basi capital markets go ahead. Please.
Good morning, Thanks for taking my questions.
Good morning, Mike or Mike.
So I wanted to just.
Talk high level expectations, I think has as you noted and we've.
All seeing in builder orders have inflicted pretty nicely on to positive territory.
But you guys are impacted with a bit of a lag there so given that and some of the Choppiness also and.
Home improvement spend can you help us frame what your market growth expectations are for the back half like your guidance is reflecting.
Yes, I think to your point, Mark or Mike, there's always a bit of a lag there in terms of starts and I think weve by caution people in the past to think more in terms of trailing nine or 12 months start numbers as opposed to any particular month or quarter.
And because of that even though as you said orders are starting to pick back up nicely and hopefully that translates into into a stronger starts in the back half of the year I think our guide for the balance of the year is somewhat steady state in terms of a few points of organic volume growth.
In the back half, we wouldn't necessarily expect that inflection in orders to have a meaningful impact until maybe we get into into the early part of next year.
Okay and within that do you think theres potential for structural to re accelerate more towards high single digit or you think it should it's really for for the next couple of quarters going to remain from a volume standpoint.
Something more in the mid singles.
You know, we're closer to 5% this quarter and I guess, we're right at 5% year to date, so again, hopefully steady state in that regard as well.
There's some seasonality to components and number two you don't have quite as many starts starting up in the back.
Back a month of the year as you might in the spring and so that would be a little bit of a challenge perhaps to accelerate in the back half, but again I think all these orders.
And improvements if they continue to the back half of the year should set us up really nicely for the for the first part of next year.
Okay and then my on my last question, just shifting gears back to M&A helpful. In terms of outlining some of the processing and pipeline. It seems like step one is really just identifying based on based on revenue bucket.
But obviously, there's a lot more layers that you then go through to narrow down the target list. So can you give us a little more color on as you as you work down the list what your remind us what the criteria.
Our and then when you get to the 100.
Or even now down further or what the realistic kind of pipeline is based on based on all those other fit.
Criteria.
Yes, I'll, just I'll start and is going to sound like I am dodging your question, but I'm not but theyre unique right. Each market is unique each of these opportunities is unique.
Many of them are family owned multi generational businesses and they are concerned about the future there their associates, we're thinking about the capability.
As an earlier question asked that we can take into those spaces, but importantly also the value that the acquisition target food can bring into our company, whether its footprint or additional capability, but as Jim said earlier I think the the biggest factor in many of these being successful is the cultural fit.
You know, they're concerned about the future of something that they might have built over couple of generations and their families. We are also concerned because we when we target an acquisition, we really look for strong management teams, we want them to stay we're buying them for a big part of what they've built not only with our own associates.
But importantly, what the customer relationships as they worked hard to gather over a number of years, that's really really important for us and so it's a number of those sort of factors and there is no no. There's no magic checklist sure. There's a few things that we look at but I would put a lot on that cultural fit and what we bring each other in terms of added capabilities over time.
Okay, Thanks, Dave and Jim.
Sure.
Thank you. Your next question comes from Keith Hughes Suntrust Robinson Humphrey go ahead. Please.
Thank you just wanted to I guess clarification on the ready for a numbers of what you said it was up 20% excluding commodities taking out some of the difficult geographies can you just kind of give us what geography, those were and kind of relative growth rates between the two.
Yes, I think it is you'll probably recall Keith our most established markets were ready frame because it's where the product was originated are out in the coastal west coast markets, California, and the Pacific Northwest and so.
We've got a little bit of a math problem. If you will with the fact that those happen to be the markets where starts have declined the most here in the first half of the year. So we've seen seen some pullback in those markets and obviously, we've been hit by deflation as well, but when you take out those two factors a balance of our have already frame business is up over 20% on a on a pre deflation basis.
And you say, what your talk in Seattle, which is where the started Seattle, that's right Seattle and then couple of our California markets. Obviously, we've seen starts down in the teens in those areas.
And is that now is that still over 50% of what ready for him does is in those western markets.
Oh no. It's it now we've got a broader business than that today, but but obviously it's still.
Theres still among the leading markets and so with the starts being down more than the company average and it being a higher mix of the overall ready frame sales that it made the overall sales dollars closer to flattish. In addition, the deflationary impact.
All right. Thank you.
Thank you your last question comes from Alex Triangle, if they.
<unk> Company go ahead please.
Good morning, This is min Cho for Alex.
Just a quick question.
On your re modeling business I'm, obviously revenues are down, but if you could talk little bit about what the volume trends have been kind of in the second quarter and in the first half the first half of the year expectations going forward and if there any specific geographic trends or anything you can talk to on the modeling side. Thank you.
Sure Yeah, I think if I refer you back to the press release, we tried to take out the deflationary impact on all of our customer segments and so we're modeling in the second quarter was was pretty close to flattish.
Which is actually an improvement in trend from the first quarter.
Here in the first half we've actually Ben.
Challenged with some comparisons in the Houston market in the first half of last year, we saw real bump and sort of spike and remodeling sales in Houston following the Harvey.
Hurricane there and so as that spike is starting to starting to get lapped we saw a little bit of an improvement there in in trend in the second quarter and would hope to get back to at least some level of volume growth in the back half of the year I would say remodeling growth generally is kind of in the low to mid single digits from a macro perspective Salah.
It's not quite as strong as perhaps it was a in years prior but still it's still a good healthy part of the market for us.
Excellent and then just quickly I mean, obviously given the.
The good expectations for the second half of this year and your and your guidance sounds like backlog is trending pretty positively, but if you can provide any additional details about backlog.
[noise] backlogs, a little squishy I assume you just talking generally.
Around business I mean backlog is always a little squishy.
For us just because it's a relatively short cycle business in terms of what we participate in but but again based on what we see in order trends based on conversations that we have with our customers.
We expect a good healthy a third quarter and kind of the normal progression of seasonality here over the balance of the year and hopefully those higher orders.
Translate into a a little stronger growth going into next year.
Great. Thank you and good luck with the question.
Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.