Good morning, and welcome to Builders FirstSource 4th Quarter and Full Year Conference Call. At this time, all participants are in a 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.bl dr.com. It is now my pleasure to introduce Mr.
Bennett Songhvi, Vice President, Investor Relations. Please go ahead, sir.
Thank you, Carrie. Good morning, and welcome to the Builders FirstSource 4th quarter and full year 2019 earnings conference call. With me on the call today are Chad Crow, Chief Executive Officer and Peter Jackson, Chief Financial Officer. A copy of the slide presentation referenced on this call is available on the Investor Relations section of the Builders FirstSource website at vldr.com. Before we begin, let me note that during the course of this conference call, we may make statements concerning the company's future prospects, financial results, business strategies and industry trends.
Such statements are considered forward looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10 ks filed with the Securities and Exchange Commission and other reports filed with the SEC for more 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 ks filed yesterday, both of which are available on our website.
I will now turn the call over to Chad Crow.
Thank you, Bennett. Good morning and thank you for joining us. In January, we announced my planned 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 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, but we will keep you updated as appropriate. Moving to full year highlights. We delivered another strong financial performance and further built on our record of success. Our 16,000 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 $516,000,000 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 continue to make strategic investments in our growth capacity and align our services with customers to streamline their construction processes. Our exceptional team accomplished these results while implementing working capital initiatives that helped generate a record 391,000,000 dollars of free cash flow for the full year. We were especially pleased to have funded our acquisitions while reducing our net leverage by more than half a turn to 2.5 times as of year end.
We completed 5 tuck in acquisitions in key growth markets including Las Vegas, Phoenix, Florida and the Carolinas, which have added approximately $240,000,000 in annual value added revenue to our business. Turning to Slide 3, 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 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 continue to realize the growth and margin expansion benefits of our strategic investments and value added products, capacity and services by 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 5 tuck in acquisitions completed since mid year 2019 have brought 6 additional truss manufacturing and millwork facilities to the Builders FirstSource family for a total of 64.
In addition, we are investing in door facility expansions as well as new machinery and systems and 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 off-site fabrication end market. Our ongoing operational excellence initiatives continue to gain momentum contributing $25,000,000 to adjusted EBITDA in 2019 alone, which was well ahead of our $14,000,000 to $16,000,000 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 and process include investments in distribution and logistics software, pricing and margin management tools, back office processes, process efficiencies and information system enhancements.
The rollout of our pricing optimization has been particularly successful and is showing tangible results. Where 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 16,000 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 and 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 Q4 financial results in more detail.
Thank you, Chad. Good morning, everyone. I'm proud of our team's work in delivering another quarter of strong results and focusing on the controllable aspects of our business. Stellar 4th quarter performance built on our full year's 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 $1,800,000,000 in net sales in the 4th quarter, down 2.9% due to anticipated commodity deflation, with decreased sales, which decreased sales by 10.6%.
The 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 Q4 of 2019, reflecting the execution of our strategic plan and the emphasis of our business on those key products. Gross margins of $476,600,000 decreased by $16,200,000 or down 3.3 percent due to the impact of lower year over year commodity prices on net sales. Our gross margin percentage remained strong at 27% as a direct result of an improved product mix, driven by our team's continued focus on delivering higher margin value added solutions to our customers. Year over year pricing and commodity cost dynamics impacting the 4th 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 Q4 of 2018. In the second half of twenty nineteen, this benefit did not recur. Commodity prices remained essentially stable relative to our fixed priced contracts in the Q4 of 2019, producing a gross margin percentage closer to our long term normalized levels. Our SG and A 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 increase as our sales team achieves 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 $27,500,000 compared to $23,400,000 in the prior year, an increase of $4,100,000 Excluding the net impact of one time items related to debt extinguishments, interest expense was down by $2,600,000 on a lower outstanding debt balance year over year.
4th quarter EBITDA declined by $15,700,000 to $109,300,000 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 4. The strength of our business, driven by our national scale and strong local customer relationships, was again evident in the 4th quarter results as U. S.
Housing starts continued to improve. Higher margin value added products improved to 42% of total sales in the quarter, led by an estimated volume growth of 11% in manufactured products, followed by the estimated volume growth of 7% in windows, doors and millwork. Excluding deflation, our lumber and lumber sheet goods product category also achieved solid growth of 11% in estimated sales volume. On Slide 6, our 4th quarter sales volume grew an estimated 7.5% in the single family new construction end market. A common thread throughout all parts of the country is that we grew value added products in the single family market.
Our sales volume in R and R and other 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 6, for the full year of 2019, we generated $391,000,000 in free cash flow, representing well over 100 percent 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 shareholder value.
For the year, we invested approximately 25% of our capital expenditures in our value added growth initiatives. In addition, we deployed $93,000,000 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 2.5 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 and A. In 2020, we plan to expand our manufacturing and value added capacity. We're adding 2 new truss and millwork plants, several new truss lines in existing plants, and new machinery and systems in a dozen more locations. In total, we expect to begin invest around 1 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 who have listened to our prior calls, you have heard us speak about the ways in which our value added products help builders manage 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 align with this strategy.
A 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. Rainy supplies value added products and then partners with subcontractors to install these products to its professional production builder customers across Florida. Rainey's holistic view of the construction process from design, manufacturing, logistics to trades management and material handling has leveraged technology to improve cycle times by nearly 1 third by effectively combining off-site and on-site 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 the long term, let's turn to slide 9 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 home buyer demand remain intact and we continue to see steadily improving buyer activity. Due in large part to the execution of our team, we were able to generate approximately $35,000,000 of EBITDA in 2019 from what we call our core business and fairly modest growth in single family housing starts.
This improvement was more than offset by roughly $100,000,000 of deflationary and fixed cost headwinds. Within the more controllable aspects of our business, our team's 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 $55,000,000 of incremental EBITDA above the 2019 core market growth. This amount is well in excess of the long term target and we continue to see significant ongoing opportunities to increase the market penetration of our higher margin products. Operational excellence contributed an additional $25,000,000 in EBITDA 19, led by the successful rollout of our pricing initiative and the results from our delivery optimization initiative.
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 record another year of progress against our long range plan and influence the trajectory of our bottom line amidst 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 focus on controlling the trajectory of our EBITDA growth, we intend to further supplement organic growth with targeted acquisition with the targeted acquisition strategy that we discussed earlier.
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 product hold in our core value creation. Accordingly, our target framework now calls for capturing an incremental $190,000,000 to $210,000,000 in 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 $30,000,000 to $40,000,000 in cost benefits, while further differentiating our service levels and strengthening our value proposition with customers.
The enhancements to our long term value creation plan, 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 $750,000,000 in EBITDA in 2022. This translates to EPS between $3.50 Cash flow remains a priority and we intend to achieve greater than 85 percent 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 2.5x and 3.5x. Moving to Slide 11, and looking forward to our Q1 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 Q1 of 2020 versus the prior year, so our guidance will be provided on a sales per day basis.
We expect Q1 net sales per day to increase between 6% 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 basis points to 100 basis points sequentially versus the Q4 of 2019 as we return to our normalized margin range of 26% to 26.5%. First quarter adjusted EBITDA is expected to be between $90,000,000 $100,000,000 supported by continued focus on cost discipline and efficiency improvements. We expect an effective tax rate in the Q1 slightly below our long term rate of 23%.
For the full year of 2020, we expect a single family customer segment growth in the mid single digits range, R and R growth in the low single digits range and the multifamily end market to remain flash. We anticipate adjusted EBITDA to be in the range of $550,000,000 to $580,000,000 Similar to prior years, we expect the Q1 to be our smallest EBITDA quarter followed by our seasonally stronger second and third quarters, which are deeper into the homebuilding season. Capital expenditures are expected to total approximately 1.5 percent of full year sales. Regarding cash taxes, we expect to have cash taxes in the $50,000,000 to $55,000,000 range commensurate with our 23% long term effective guide. Cash interest is expected to be approximately $90,000,000 to $95,000,000 Interest expense is also expected to be around $90,000,000 to $95,000,000 plus approximately $25,000,000 in call premiums and fees related to the redemption of debt transacted in the Q1 for a total interest expense of approximately $110,000,000 to $115,000,000 The continued execution of our strategic plan amid a firm macroeconomic environment puts us on firm footing to achieve our full year 2020 goals, while moving us ever closer to 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 in 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 our 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 especially like to thank our 16,000 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 beyond.
Operator, we can now open up the call for Q and A.
Thank Our first question will be from Matthew Bouley with Barclays.
Hi. This is actually Christina Hsu on for Matt this morning. My first question is on kind of
the outlook for value added product sales growth in
the Q1. I know you had mentioned 6% to 10% net sales per day growth, but how much of this is going to be from the value added segment?
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 it 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. Makes sense. And then just on the future pipeline for kind of more tuck in acquisitions in 2020, I know you had mentioned a framework. Can you provide any more details in terms of how those acquisitions are expected to track throughout the year? And then geographically, if there are 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 of 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 an advantage for us in the growth of our value add, particularly in markets where maybe we either haven't played at all or haven't played as much in the past. Around the country, we're in 77 of the top 100 MSAs, but clearly some MSAs 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 the desire to grow with the available capacity in the market. We're not interested in coming in and adding a bunch of unneeded capacity. We don't think that's healthy for us or the market. So, like we've talked about in the past, we certainly like markets where there are a lot of starts. We've engaged in Florida, Phoenix, Las Vegas.
I think those are healthy markets, but we're certainly not limited to those. Unfortunately, the timing is pretty tricky. We they sort of come as the opportunity presents itself and the desire to be thorough in our due diligence and thoughtful we're continuing to hunt those down. Thank you. Thank you.
Thank you. Thank you. 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. Good morning. First question is just first question is on SG and A. So based on the 1Q guide, it still looks like you may not be leveraging SG and A year on year.
And just wanted to get a sense of how we should think about the moving pieces. It seems like there's a lot going on between the new acquisitions layering in, maybe the commodity based gross margin incentive being a little lower this year, some of your underlying initiatives, kind of blend it all up, how should we think about SG and A leverage for the year in those pieces?
Yes. No, fair question. I think that probably the most important thing to point out is that, that 4th quarter number, I know it from a percentage basis, it shows a deleveraging. But if you look at it on a year over year expenditure basis, we did quite well. It's a flat number.
And going into Q1, certainly another healthy performance. It will move, of course, year over year. We'll 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. What we're still working through and what I think is everyone is seeing is the lapping of the deflationary tailwind that we experienced in the Q4 of 2018 and then in the Q1 of 2019.
I'd say that's the biggest part of the story. Core business running great, excited about the growth. I think we're in a position to continue our outperformance. But that outperformance, that exceptional margin from the benefit of that deflation in Q1 of 2019 will be lapped. There's no way around it.
It was good news then and 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. In our estimation, that will be in the rearview mirror after Q1. So going Q2 forward, we're looking at more normalized performance.
Okay. And I assume that last comment related to gross margin, but I guess just back to the SG and A for a second. So should we still think about this then with everything normalizing out that you're still roughly 70% variable, 30% fixed?
Yes, that's a fair estimate. Yes, that's a good forward.
All
right. My other question, you mentioned taking Rainy to the next level. And so just wanted to get a little more color on that about how much 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?
I would say we're still kind of in 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 going to work out smoothly. But the longer term plan, as you mentioned, is certainly to continue to evaluate whether it's expanding the Rainey model or through other tuck in acquisitions, adding to the to our value add product and services offering which would likely include some sort of vertical integration like we saw with Rainy. I would say the next step with Rainy would be to expand it just to a broader geographical area 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 expand that model into Jacksonville in the near term. But it's not something that's going to happen overnight and we want to make sure we're thoughtful about it.
Okay. Thanks. And Chad, enjoy the retirement.
Yes. Thanks.
Thanks. Our next question will be from Trey Morrish with Evercore.
Thanks very much guys. I guess the first place I want to start is, back into your 1Q organic volume guide, it seems like it's a number like around 2.5% or so at the midpoint of your range, which seems a bit low, considering all the housing tailwinds we're seeing from macro front, from builder order front. So I'm just wondering, is there something going on in 1Q that makes that number seem a little bit low, or just how to, in general, think about all the high demand we're seeing elsewhere and you putting out a number that seems a little bit light?
Yes. I guess I'm a little bit off. I mean, our guide of mid single digits is, think, the right underlying number. There is some offsetting impact there. We do account for the shrinking size of the home.
A couple of points on deflation for commodities sorry, inflation for commodities. So, I think there's 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're 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 going to be we'll be participating in it fully and then some.
Our, I would say, rollout 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. It's one of the smaller, obviously, quarters of the year. So we're going to start with a reasonable point, and then we'll grow from there as the market shows itself. And then
clearly it was a pretty easy comp year over year on the housing starts number Q4 'nineteen versus 'eighteen and a bit of a head scratcher. To me, there seems to be a little bit of 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 of that. There's no reason we wouldn't. But I think this time of year, especially is the slower time as far as the pace of construction given the typical weather delays.
So I would expect that, as Peter said, that's a great indicator of things to come and we'll get our fair share when those do become units in construction.
Okay. Well, I'll turn and follow-up more on that on a later call. On the gross margin front, clearly a big another big benefit this quarter from lumber and you ended up 40 bps above the high end of your previous guide. So I'm just wondering what kind of drove that improved delta in 4Q? And is the entire step down from 4Q to 1Q entirely due to lumber the lumber deflation falling away?
Yes. So, I wanted to be careful about sort of breaking this into 2 pieces. On a year over year basis, the EBITDA dollars and the margin change is certainly because of that deflation tailwind we had last year and not seeing this year. In terms of the level of margins where we are today, 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's still happening in the market place as it comes to when it comes to certain categories of product and prices and we do see it returning to a more normalized level.
That's why we keep talking about this sort of 26% to 26.5% being a more normalized level assuming commodities don't move in a material way. Now we've seen some indications that there could be some pretty interesting moves in terms of commodities going up. Saw that over the past few weeks. Just to reiterate, we like higher prices in commodities. We think that's a benefit to us.
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 it.
Okay. Thank you very much.
Thank you.
Thank you. Our next question will be 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, Trey. I'm not out of here yet. You may not like done with me just yet.
Well, we've enjoyed working with you over the years. So the longer the better you stick around.
It's mutual.
Okay. Well, so first off, I want to touch first on that comment, Peter, that you just made. So you've been saying over the last several quarters you've seen some pricing disciplines. And I guess the question I have is, you just mentioned something about things kind of returning to more normal. Not sure if you were kind of pointing to those the market maybe not being as disciplined on some of these things as it had been before.
I guess is the has that pricing discipline continued or has it kind of gotten to reverting back to a little bit more competitive market out there?
I would say it's uneven depending on where you are in the country. But there have been certain markets that have gotten more aggressive again and more competitive again. I would say it's the question has never been what is the market likely to do, it's when is the market likely to do it. And so in our mind, in the Q4, it hung on a little longer than we thought. So, we felt good about it.
I think our guidance in the Q1 indicates what we've seen as we've moved into the 2020 bids. People have tried to make sure they got their fair share. I know it's not a shock to anybody on this call that when you take as much share as we did in 2019, people fight back and we're in the trenches every day bidding it out. And I 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 a fair one.
Got it. Let's not lose sight of the fact that 26% to 26.5% is well above our long term average margin. And as you know, Trey, that has a lot to do with our investment and value add products and services. So I think we guided pretty well along the way that this is where we were going to bottom out. And I think it took a little longer than we thought to bottom out, which was nice, but 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 the new kind of normal of 26 percent to 26.5 percent, as you mentioned, still well above what we've seen historically as a normal. But the 1Q guide kind of puts you towards the lower end of that range of 26% to 26.5%, not by much.
But just as we look through the rest of the year with the guidance that you've given, the EBITDA guidance 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 is the kind of lower end of the range the place we should be thinking about for the full year?
Yes. So, I think it's fair to say that as we get into the busier months, our leverage and our capacity utilization increases, which is good it's a good result for us on that gross profit margin line. So I think it's fair to say there is some seasonality to that number with the winter months being the lowest capacity and the lowest margins as a result.
Yes. Okay. Understood. Okay. And then
Yes. And I think the other question is just working through the commodities. We'll have to wait and see what that does.
Right. Absolutely. Okay. And then last one for me. I know there's been some outside of lumber, there's been increases announced with other products that you guys sell.
I know gypsum has got a big piece for you guys, but wallboard had an announcement out there. The door industry and players there looks like they're pushing for increases as well. Can you give us an idea of kind of what you're seeing out there for kind of the other products outside of lumber, and what your expectation is for inflation there and how you expect to push that through or how that's going to work out?
Well, certainly on the high end of the spectrum would be the price increases on doors. I do think all or substantially all of that is going to stick. You mentioned wallboard, who knows that's always a bit of a wildcard and as you said not a big part of our business. In between there, it's really just been kind of normal price increases that we've come to expect and our customers have come to expect and you get a bit of an advance notice when those are coming and you communicate them and pass them on to your customers and they're typically a non event.
Got it. All right. Thanks a lot guys. Great work in the quarter and best of luck as we go through 2Q.
Thank you. Thanks, Trey.
Thank you. Our next question will be from John Baugh with Stifel.
Thank you. Good morning and my congrats as well, Chad. Well deserved.
Thank you, sir. Thank you, sir.
I think you mentioned, Chad, I don't know whether it was more attractive acquisition opportunity or 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 that's making you more excited as more just your internal capacity?
Well, certainly we're in a better place now than we have been in recent years just from a balance sheet flexibility standpoint. So that's encouraging. We've always been an acquirer. And so I would I'd lie if I'd say we weren't getting a little antsy over the years to 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.
Just as far as the pipeline though, there is a lot of companies out there, but I will say most of them are very small. You're talking $50,000,000 in revenue and less typically. But nonetheless, those are there's some good value add opportunities out there. And so we've always got a handful of them we're looking at. Some are going to work out, some won't.
But I think just in general, we're really pleased with the deleveraging we've accomplished in the past few years and it's fun just to be able to look at the pipeline again and take some of these serious.
Yes, for sure. I guess what I was trying to get at a little bit is, are you seeing in some cases targets you're approaching recently or maybe you approached them a long time ago where they're maybe a little more willing to acquiesce because of what you've been able to do with the ones you buy or they view as an increasing threat if they don't partner up with you? Is there any examples of that?
Well, there's a handful of those. A decent chunk of the ones we did in 2019, we had been kind of cultivating those relationships for a while. And clearly, we had to wait until our balance sheet was in 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
we've noticed is it appears that there were some pretty frothy valuations out there for a period of time. And I think people were quite excited about what they might potentially get for their business, even small tuck ins. And that seems to have settled down a little bit. I think there seems to be a little bit more rationality in terms of valuation. So that part is exciting for me at least.
And you mentioned some noise in the latest housing numbers. And of course, we're in a seasonally low period and we're going up against some year over year easy compares as you mentioned. I wonder if you could I'm a little worried that some investors just look at these percentages and of course some of the units are smaller as you've talked about. I just wondered if you could put into a real context of what you mentioned single I think mid single digit increase for single family. So I guess we're going to see completions up pretty nice year over year in the first half of the year and then I guess the back half is a little bit unknown.
But I wonder if you could put any more color around the housing data and the backdrop for 2020? Thank you.
For me, it's a bit of a head scratcher because at the end of 2018 we saw some year over year decreases. And 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 now you're coming off that, you've got an easy comp this year. And 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 a little noise in there and of course you've always got the lag you have to deal with. We don't sell to a start, we sell to a unit under construction. And so there is 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 beat considerably for the full year 2019 and I think looking over a broader period tells a better story. When you try to isolate it down to a couple of months or a quarter, you just drive yourself crazy.
Amen. Thanks and good luck.
Thank you.
Thank you. Our next question will be from Keith Hughes with SunTrust Robinson Humphrey.
Thank you. I've got a couple of questions. Just a clarification,
there was some discussion of gross margin beyond the Q1, which you've given us discrete guidance on. What rough range are we looking for in this guidance for 2020? I think our 26% to 26.5%
Yes. I mean, I would say the broad guidance for us is, yes, that's the best range at this point. Somewhere in that range would be the number for the year. Okay. Yes.
And if we look specifically the Q1, with we've seen frame and lumber
move up here in the last really couple of months, although at a fairly orderly pace. Is there any kind of pass through lag that you've assumed in that the Q1 guidance? Yes. Well, I mean, I'd say always. The nature of the business is that we don't the prices don't move the day that the Random Lengths quote changes.
So I think what we said in the past is it takes about a quarter or 2 for those prices to work through depending on the market. Some markets, it's within 30 days. Other markets, it might take to the end of the second quarter out depending on the price lock. So it will 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, we'll perform like we have, right? We'll continue to increase prices. We'll get that gross margin dollars. And during that intervening exposure period, we'll have a little bit of pinch on that gross margin percentage line. Okay.
And then switching a
little bit longer term on the guidance or the numbers you talked about on Slide 10, we've seen those for a while now.
If you look at 2020, you've done some acquisitions. I assume you expect value added to grow faster than the rest of the business as was the case in 2019. Do you think that's going to accelerate in 2020, 2020 the faster number or will it be more orderly in 2020 beyond?
Is the question about the rate of acceleration? Yes. Or the rate which value added is outperforming?
Yes. Is there like a tipping point where you hit where you can all of a sudden grow that even faster as you particularly given all the capacity you're adding and things of that nature? Is that just
a little too much to expect?
My gut would say it's going to grow as fast or slightly faster. It should grow a little faster given the investments we're making in both our internal capacity and the acquisitions that we've made. So that's where I'd put my bet as faster 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 for the question. So you guys saw some pretty impressive market share wins in 2019. I understand some of that 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 starts wind up exceeding your mid single digit outlook, how comfortable are you from a capacity and labor standpoint that you could efficiently scale alongside this type of growth?
Yes. I think we feel really good about it. Looking at the capacity numbers internally, aligning that with the investments we're making and the CapEx investments in the year as well as the new facilities and the acquisitions, I think we're lined up very well to take advantage of the market growth. I think our teams have been 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 means that we're going to keep gaining share, kind of go on a limb and give you a point prediction on it, but we feel good about it.
I think there's every reason to believe we're going to be able to grow with the market in 2020. And like I said, we've got a mid single digits number there in starts and happy to have the market prove us wrong. I think we've been pretty well served at taking a rational and reasonable forecasting approach 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 more quickly.
Okay. That's helpful. Thanks. And then you talked a lot about just the shrinking footprint of homes and how that impacts, 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 and windows isn't as linear as something like lumber.
So could you just give a little bit color on the relationship there?
Sure. Yes. I mean, what we've talked about in the past is really around the sort of the obvious variables. I think you hit the nail on the head. If the Census Department says we're down 1% in the average square footage of the home, you'll have a mix of impacts depending on what it is that you're selling.
Generally speaking, there is a fairly linear number when it comes to linear board feet of lumber. However, there are oftentimes offsets in terms of the amount of value add used,
the
amount of prefabricated or off-site components used. There are some step function changes,
and I
think you hit the nail on the head again. It's that windows and doors depending on it's more dependent on rooms rather than necessarily the square footage. So it's a little inconsistent in that regard. And in many cases, the the economics are changing. So you may have a bit less millwork.
Obviously, some of the finishings may be a bit less high end. But generally for us, we feel pretty good about it. I mean, we want more starts. We're firm believers that that's the leg of this recovery that is still lagged. We certainly don't see the expansion or the increase in single family starter homes as being somehow detrimental to the rest of the market.
We think it's certainly an addition. So feeling good about it overall.
Yes, 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 1,000,000 single family start number.
Yes, okay. That makes a lot of sense. I appreciate the questions.
Thanks, guys.
Thank you.
Thank you. Our next question will come from Steven Ramsey with Thompson Research Group.
Good morning. I wanted to think about the long term plan, just about how much of the plan depends on overall sales growth, how much of it depends on stronger value added growth? And does it contemplate acquisitions?
So, yes. There you go. Question answered. The reality is, as we look at the business, it's become so integrated in terms of the impact value add and the opportunities sort of represented by the acquisitions. And any time you do these acquisitions, clearly, there's a focus on the value add, but almost inevitably you end up with a standalone business.
So, 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 and 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. And so, the 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 the $750,000,000 number is 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 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 the product portfolio, does that mean you would contemplate making acquisitions of distributors that focus on more specific product categories outside of your more broad product category focus? Maybe just go into a little deeper color on that initiative.
I would say we're that's not an assumption we have baked into our long range model. Could it happen? Sure. But that's not kind of the underpinnings of our longer range model. It's more hey, where there are markets where we may have already have a presence, but we don't offer our full So again So again, not to say it couldn't happen, but that's not part of that growth strategy that we've outlined.
Great. Thank you, guys.
Thank you. Our next question will be from Ryan Gilbert with BTIG.
Thanks guys. Good morning. First question, just a point of clarification on the Q1 2020 guidance. I understand that the 6% to 10% sales growth is a sales per day number. So excluding the impact of the extra sales that you're getting, is the $90,000,000 to $100,000,000 of adjusted EBITDA inclusive of the extra sales per day or is that also excluding the extra day you're getting?
Yes, that is all in.
That's all in. Okay, great. And then I hear what you're saying about the housing starts growth during the Q4, but we did see new home sales accelerate in the Q4 and public builder orders were good as well. And I think in particular December, January, the strength of demand for housing caught a lot of people by surprise. And maybe the production capacity hadn't ramped up to meet that demand yet.
Are you as you look at the quarter, so January, February, we're 2 thirds of the way done with the quarter here. Are you seeing builder production ramp in the field? Or is that something you think is still to come in the months ahead?
Well, I mean, this time of year, you're always starting to see the ramp in the markets where you can. The problem is you're not building houses where there is snow on the ground. And the reality is while there's been healthy performance and I would say all the markets have been 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 off-site manufacturing earlier this year. Can you talk about just what that means for your business in Florida?
And are other builders considering vertical integration versus buying off-site components directly from you?
I'll answer that a couple of ways. One, I think it validates our thesis that investing in off-site manufacturing is something that should pay off and something our customers 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 when it's 1 homebuilder getting into say truss manufacturing for example, at some point it's hard to sustain that long term, because at some point if that plant is dependent on only one builder's production needs, at some point the market gets saturated or built out and all of a sudden you're delivering these trusses a really long way and it makes it become less economical.
So we'll see how
it plays out. It doesn't surprise me. And again, it's I think that's where the industry is heading to more vertical integration off-site manufacturing. And if it doesn't work out for them, then 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 will be from Reuben Garner with The Benchmark Company.
Thanks. Good morning, everybody. And congrats, Chad. Good luck in retirement if we don't hear from you again.
Appreciate it. Okay.
So most of my questions
have been answered. Just a quick clarification for me and then a question. So the clarification on Q1, going back to that question about your volume embedded in that guidance is the way I'm reading it is more of a it looks like 2% at the midpoint for inflation and then it would be 6% volume growth embedded in the Q1. Is that am I seeing that correctly or did I miss another piece?
I think you got the gist of it. Yes.
Okay. And so your outlook for the full year, I know you didn't guide specifically, but it looks like somewhere in the low to mid single digits is 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 is the way to think about that seasonally that you guys may do a little better than that in the first half, your comparisons are a little easier, but as we move into the back half barring some sort of acceleration in the end markets that it might slow a little bit just because you're up against such difficult comps, you guys had a great second half of this year.
That's a good question. I think that the performance throughout all of 2019 was pretty solid. I think that once we lap past the last of the deflation, things are going to stabilize, obviously, depending if assuming commodities doesn't do anything kooky, but the overall performance and the results of the starts coming through this year, I think there's reason to believe we see pretty stable performance as we get through 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 2019 was pretty solid throughout the year as well.
Okay, great. And then I'll sneak one more in. That's Slide 9, where you guys break down the 2019 EBITDA kind of contributors. I know you're combining 2 of them, but can you give us any color on what's 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 business growth? For 'twenty?
Yes, for 'twenty.
Yes, we're in that 'fourteen to 'sixteen band again. That's what I think is the right number for 'twenty.
Thank you. At this time, Mr. Crow, 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 Q1 results. And if you have any follow-up questions, please don't hesitate to reach out to Benoit or Peter. Thank you.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.