Good morning, and welcome to Builders FirstSource Fourth 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.bldr.com. It is now my pleasure to introduce Mr. Binit Sanghvi, Vice President, Investor Relations. Please go ahead, sir.
Thank you, Carrie. Good morning, and welcome to the Builders FirstSource Fourth 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 bldr.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-K 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-K filed yesterday, both of which are available on our website. I will now turn the call over to Chad Crow.
Thank you, Binit. Good morning. 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 talent 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. While the board is making great progress, there is nothing significant to report as of yet. 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 million, up 3% year over year. Our unrivaled platform showed its strength throughout the year as value-added sales volume grew by an impressive 9%. We continued to make strategic investments in our growth capacity and align our services with customers to streamline their construction processes. Our exceptional team accomplished these results while implementing working capital initiatives that helped generate a record $391 million 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 2.5x as of year-end.
We completed five tuck-in acquisitions in key growth markets, including Las Vegas, Phoenix, Florida, and the Carolinas, which have added approximately $240 million in annual value-added revenue to our business. Turning to slide three, I would like to spend a few minutes highlighting several of our strategic achievements in 2019. We continued 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 continued to realize the growth and margin expansion benefits of our strategic investments in 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 five tuck-in acquisitions completed since mid-year 2019 have brought six 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 in 12 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 million to adjusted EBITDA in 2019 alone, which was well ahead of our $14 million-$16 million target. These best practices are being implemented throughout the organization to make our company more agile and easier to do business with while generating strong financial returns. Key initiatives in process include investments in distribution and logistics software, pricing and margin management tools, back-office 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 fourth quarter 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 fourth 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 $1.8 billion in net sales in the fourth quarter, down 2.9% due to anticipated commodity deflation, 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 fourth quarter of 2019, reflecting the execution of our strategic plan and the emphasis of our business on those key products.
Gross margins of $476.6 million decreased by $16.2 million or down 3.3% 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 fourth quarter were consistent with what we have discussed on our prior calls. Commodity cost deflation causes short-term gross margin percentage expansion when prices drop rapidly relative to our short-term pricing commitments that we provide customers. We experienced this benefit during the fourth quarter of 2018. In the second half of 2019, this benefit did not recur. Commodity prices remained essentially stable relative to our fixed-priced contracts in the fourth quarter of 2019, producing a gross margin percentage closer to our long-term normalized levels.
Our SG&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. 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. Our strong gross margin percentage gains more than funded the higher commission expenditures in the quarter. Interest expense for the quarter was $27.5 million compared to $23.4 million in the prior year, an increase of $4.1 million. Excluding the net impact of one-time items related to debt extinguishments, interest expense was down by $2.6 million on a lower outstanding debt balance year-over-year.
Fourth quarter EBITDA declined by $15.7 million to $109.3 million, representing the higher end of our guidance. Our strong sales volume growth, particularly in the value-added product categories, partially offset the adverse factors mentioned previously. Turning to slide four, the strength of our business, driven by our national scale and strong local customer relationships, was again evident in the fourth 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 six, our fourth 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&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 six, for the full year of 2019, we generated $391 million in free cash flow, representing well over 100% of adjusted net income. The exceptionally strong cash flow performance in 2019 was attributable to the added benefit of commodity deflation on inventory and the impact of our operational excellence initiatives driving working capital improvements. We continue to allocate our capital to strategic priorities, which include organically growing our value-add capacity, funding strategic acquisitions, and maintaining the strength of our balance sheet to generate shareholder value.
For the year, we invested approximately 25% of our capital expenditures in our value-added growth initiatives. We deployed $93 million of cash on acquisitions. We were especially pleased to make these investments while at the same time preserving ample liquidity and improving our net leverage ratio. At quarter end, our net debt to trailing 12 months adjusted EBITDA ratio was at the low end of our target range at 2.5x. This represents a 0.6x reduction from the prior year quarter. We ended the year with exceptional capacity and flexibility for future business developments and M&A. In 2020, we plan to expand our manufacturing and value-added capacity. We're adding two 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 again invest around one-third of our total 2020 capital expenditures in our value-added growth initiatives and the expansion of our production capacity. In 2019, we successfully added tuck-in acquisitions as another avenue to advance our growth strategy. The acquisition landscape for our company is very attractive right now, and we have a framework dedicated to accelerating our next generation of growth. For those of you 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 Raney Components in December. For more than 20 years, Raney has been pioneering a vertically integrated manufacturing and installation model, which significantly improves productivity and speed for customers. Raney supplies value-added products and then partners with subcontractors to install these products to its professional production builder customers across Florida. Raney'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 one-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 nine and look at our long-range plan. During 2019, we executed on our priorities through ongoing initiatives while overcoming adverse market factors to further extend our record of EBITDA growth. As a backdrop for core business growth, the fundamentals of 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 million of EBITDA in 2019 from what we call our core business in fairly modest growth and single-family housing starts. This improvement was more than offset by roughly $100 million 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 million 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 million in EBITDA in 2019, 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 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 products hold in our core value creation.
Accordingly, our target framework now calls for capturing an incremental $190 million-$210 million 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 million-$40 million 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 million in EBITDA in 2022. This translates to EPS between $3 and $3.50. Cash flow remains a priority, and we intend to achieve greater than 85% conversion of our adjusted net income to free cash flow over time.
We expect to use the substantial cash that we generate to both fund our high return investments and to maintain our long-term target net leverage ratio between 2.5 and 3.5x . Moving to slide 11, looking forward to our first quarter and full year 2020 expectations, we remain confident in our team's ability to execute on market opportunities, mitigate commodity cost dynamics, and deliver the initiatives within our control. We will have one additional selling day in the first quarter of 2020 versus the prior year, our guidance will be provided on a sales per day basis. We expect first quarter net sales per day to increase between 6% and 10% over the prior year quarter, led by value-added products. This includes the impact of commodity inflation of approximately 2%.
Gross margin is anticipated to decline 80-100 basis points sequentially versus the fourth quarter of 2019, as we return to our normalized margin range of 26%-26.5%. First quarter adjusted EBITDA is expected to be between $90 million and $100 million, supported by continued focus on cost discipline and efficiency improvements. We expect an effective tax rate in the first quarter slightly below our long-term rate of 23%. For the full year of 2020, we expect a single-family customer segment growth in the mid-single digits range, RNR growth in the low double digits range, and the multifamily end market to remain flattish. We anticipate adjusted EBITDA to be in the range of $550 million-$580 million. Similar to prior years, we expect the first quarter to be our smallest EBITDA quarter, followed by our seasonally stronger second and third quarters, which are deeper into the home building season.
Capital expenditures are expected to total approximately 1.5% of full-year sales. Regarding cash taxes, we expect to have cash taxes in the $50 million-$55 million range, commensurate with our 23% long-term effective guide. Cash interest is expected to be approximately $90 million-$95 million. Interest expense is also expected to be around $90 million-$95 million, plus approximately $25 million in call premiums and fees related to the redemption of debt transacted in the first quarter, for a total interest expense of approximately $110 million-$115 million. 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 and beyond. Operator, we can now open up the call for Q&A.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask an audio question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. Our first question will be from Matthew Bouley with Barclays.
Hi, this is actually Christina Xu on for Matt this morning. My first question is on kind of the outlook for value-added product sales growth in the first quarter. I know you had mentioned 6%-10% net sales per day growth, but how much of this is going to be from the value-added segment?
Yes. 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. 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? Geographically, if there are any markets that you're targeting specifically?
Yes. I won't get too specific, to be honest. I want to be able to keep a little bit of surprise factor for the future, and for obvious competitive reasons. 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 home building 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. 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. They sort of come as the opportunity presents itself, and the desire to be thorough in our due diligence and thoughtful in our valuation sort of spreads those out to a degree. We certainly have a significant pipeline. We're very pleased with the opportunities that are being presented at this point, and we're continuing to hunt those down.
Thank you.
Thank you.
Thank you. Our next question will be from Mike Dahl with RBC Capital Markets.
Morning. Thanks for taking my questions.
Morning.
First question is on SG&A. Based on the 1Q guide, it still looks like you may not be leveraging SG&A year-on-year. 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 base gross margin incentive being a little lower this year, some of your underlying initiatives kind of blended all up. How should we think about SG&A leverage for the year in those pieces?
Yeah. No, fair question. I think that probably the most important thing to point out is that fourth quarter number, I know from a percentage basis, it shows a deleveraging. 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'll move, of course, year-over-year. We'll see increases in terms of wages and inflation that you would expect to see. 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 everyone is seeing, is the lapping of the deflationary tailwind that we experienced in the fourth quarter of 2018 and in the first quarter 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. 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'll be in the rear view mirror after Q1. Going Q2 forward, we're looking at more normalized performance.
Okay. I assume that last comment related to gross margin. I guess, just back to the SG&A for a second. Should we still think about this then with everything normalizing out, that you're still roughly 70% variable, 30% fixed?
Yeah, that's a fair estimate. Yep. That's a good call.
Okay. All right. My other question, you mentioned taking Raney to the next level, and so just wanted to get a little more color on that about how much is expanding Raney 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 Raney acquisition. As you know, we already had a pretty healthy footprint in the Orlando area. 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. The longer-term plan, as you mentioned, is certainly to
Continue to evaluate, whether it's expanding the Raney model or through other tuck-in acquisitions, adding to our value-add product and services offering, which will likely include some sort of vertical integration like we saw with Raney. I would say the next step with Raney 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. I think there's going to be opportunities to expand that model into Jacksonville in the near term. It's not something that's going to happen overnight, and we want to make sure we're thoughtful about it.
Okay, thanks. Chad, enjoy the retirement.
Yeah, 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. 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 a macro front, from builder order front. I'm just wondering, is there something going on in 1Q that makes that number seem a little bit low? 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.
Yeah, I guess I'm a little bit off. Our guide of mid-single digits is, I think, the right underlying number. There is some offsetting impact there. We do account for the shrinking size of the home, a couple points on deflation for commodities. Sorry, inflation for commodities. I think there's some maybe puts and takes there. What I'll tell you, though, is at this stage, we are absolutely excited about what the market is indicating. We'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. I guess my takeaway on that is whatever the market brings, 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. We're going to start with a reasonable point, then we'll grow from there as the market shows itself.
Clearly it was a pretty easy comp year-over-year on the housing starts number, Q4 2019 versus 2018. A bit of a head scratcher. To me, there seems to be a little bit of noise in those numbers. As Peter indicated, as these starts, assuming they are real, roll over into units under construction, I fully expect we're going to get our fair share of that. There's no reason we wouldn't. I think this time of year especially is the slower time as far as the pace of construction, given the typical weather delays. 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 try and follow up more on that on our later call. On the gross margin front, clearly another big benefit this quarter from lumber. You ended up 40 basis points above the high end of your previous guide. I'm just wondering, what kind of drove that improved delta in 4Q? Is the entire step down from 4Q to 1Q entirely due to the lumber deflation falling away?
I wanted to be careful about sort of breaking this into two 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. I think we've been pretty open about our expectation that there's a certain amount of normalization that's still happening in the marketplace 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%-26.5% being a more normalized level, assuming commodities don't move in a material way.
We've seen some indications that there could be some pretty interesting moves in terms of commodities going up. 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. While there might be a near-term pinch on some of our gross margin %, 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'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. First off, Chad, yeah, I want to congratulate you on your retirement as well.
Appreciate it, Trey. I'm not out of here yet. You may not like dealing with me just yet.
Well, we've enjoyed working with you over the years. The longer, the better you stick around.
It's mutual.
Okay. First off, I want to touch first on that comment, Peter, that you just made. You've been saying over the last several quarters, you've seen some pricing disciplines. 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 the market, maybe not being as disciplined on some of these things as it had been before. I guess, 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. There have been certain markets that have gotten more aggressive again and more competitive again. I would say the question has never been, what is the market likely to do? It's when is the market likely to do it? In our mind, in the fourth quarter, it hung on a little longer than we thought, so we felt good about it. I think our guidance in the first quarter indicates what we've seen. 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.
We're in the trenches every day bidding it out, and it's a competitive market out there, and I'm proud of our team. I think we're doing a great job. 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%-26.5% is well above our long-term average margin. As you know, Trey, that has a lot to do with our investment in value-add products and services. 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. 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%-26.5%, as you mentioned, still well above what we'd seen historically as a normal. The 1Q guide kind of puts you towards the lower end of that range of 26%-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? Is the kind of lower end of the range the place we should be thinking about for the full year?
Yeah. I think it's fair to say that as we get into the busier months, our leverage and our capacity utilization increases, which is a good result for us on that gross profit margin line. 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.
Yep. Okay.
Yeah. I think the other question is just working through the commodities. We'll have to wait and see what that does.
Right. Absolutely. Okay. Last one for me. I know outside of lumber, there's been increases announced with other products that you guys sell. I know gypsum's not 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 kind of what you're seeing out there for kind of the other products outside of lumber and what your kind of expectation is for inflation there and how you expect to kind of 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 wild card 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.
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, or is it more just your internal capacity?
Certainly, we're in a better place now than we have been in recent years, just from a balance sheet flexibility standpoint. That's encouraging. We've always been an acquirer. I'd lie if I'd say we weren't getting a little antsy over the years. 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. That part is exciting. Just as far as the pipeline, though, there's a lot of companies out there. I will say most of them are very small. You're talking $50 million in revenue and less typically. Nonetheless, there's some good value add opportunities out there. We've always got a handful of them we're looking at. Some are going to work out, some won't.
I think just in general, we're really pleased with the de-leveraging 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.
Yeah, for sure. I guess what I was trying to get at a little bit is, are you seeing, in some cases, targets you've approaching recently or maybe 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 you as an increasing threat if they don't partner up with you? Is there any examples of that?
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. Clearly, we had to wait till our balance sheet was in order, and those worked out. We have a few of those, no, beyond that, I wouldn't say the landscape has changed all that much.
Okay.
The one thing we've noticed is that it appears that there was some pretty frothy valuations out there for a period of time. I think people were quite excited about what they might potentially get for their business, even small tuck-ins. That seems to have settled down a little bit. I think there seems to be a little bit more rationality in terms of valuation. That part is exciting for me, at least.
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'm a little worried that some investors just look at these %, 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've mentioned mid-single digit increase for single family. I guess we're going to see completions up pretty nice year-over-year in the first half of the year, then I guess the back half's a little bit unknown. I wonder if you could put any more color around the housing data and the macro 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. Now you're coming off that, and you've got an easy comp this year, and as we said earlier, business feels good. Right now, I don't see a 15% surge in volume coming because of the starts numbers we saw in Q4. 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. There's just different ebbs and flows throughout the year. We try not to get too hung up on it.
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'll 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. Got a couple of questions. Just a clarification. There was some discussion of gross margin beyond the first quarter, which you've given us discrete guidance on. What rough range are we looking for in this guidance for 2020? I think around 26%-26.5%.
Yeah. I would say for the broad guidance for us is, yeah, that's the best range at this point.
Somewhere in that range would be the number for the year?
Yeah.
Okay.
Yeah.
If we look specifically at the first quarter, 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 the first quarter guidance?
Well, I'd say always. The nature of the business is the prices don't move the day that the Random Lengths quote changes. Like what we said in the past, it takes about a quarter or two 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 blocks. It'll take time to work through. Like you said, it's been fairly orderly, which we like. 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 the gross margin percentage line.
Okay. 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 to an even faster number, or will it be more orderly in 2020 and beyond?
That's a great question.
Is the question, will the rate of acceleration?
Yeah.
The rate of which value added is outperforming?
Yeah. Is there 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. That's where I'd put my bet, as fast or slightly faster. I don't see it shrinking at this point.
Okay. Thank you.
Thank you. Our next question will be from Seldon Clarke with Deutsche Bank.
Hey, thanks for the question. 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, how are you thinking about market share wins relative to starts on a go-forward basis? 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?
Yeah, 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. I'm not going to 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.
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. We think we can do quite well in that market, and even better if it accelerates more quickly
That's helpful. Thanks. 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. Could you just give a little bit of color on the relationship there?
Sure. Yeah. We've talked about it 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, it's more dependent on rooms rather than necessarily the square footage. It's a little inconsistent in that regard.
In many cases, a movement to a starter home may make a few things, a few components in the home simpler or indicate that the economics are changing. You may have a bit less millwork. Obviously, some of the finishings may be a bit less high-end. Generally for us, we feel pretty good about it. 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.
Yeah. That's just a natural progression to get back to the historical building averages, in my opinion. You're going to have smaller homes in order to get back over that 1 million single-family start number.
Yeah. Okay. That makes a lot of sense. I appreciate the questions. Thanks, guys.
Thank you.
Thank you. Our next question will come from 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?
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 of value add and the opportunities sort of represented by the acquisitions. Anytime you do these acquisitions, clearly there's a focus on the value add, but almost inevitably, you end up with a standalone business. 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. 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. 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 number is real. We have a line of sight to it, candidly, there are a couple of different pathways we can take to get there. We feel good about whichever way we get to that's a number that we feel good about putting out there for you to anchor us on.
Great. Thinking about, a goal to penetrate deeper into existing markets and expand the product portfolio. 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? Just go into a little deeper color on that initiative.
I would say that's not an assumption we have baked into our long-range model. Could it happen? Sure. That's not the underpinnings of our longer range model. It's more, hey, where there are markets where we may already have a presence, but we don't offer our full offering of products and services, it's enhancing that. It's picking up additional truss capacity or additional millwork capacity. 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. Morning. First question, just a point of clarification on the first quarter 2020 guidance. I understand that the 6%-10% sales growth is a sales per day number, so excluding the impact of the extra sales day you're getting. Is the $90 million-$100 million 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. I hear what you're saying about the housing starts growth rate in the fourth quarter, but we did see new home sales accelerate in the fourth quarter, and public builder orders were good as well. I think in particular December, January, the strength of demand for housing caught a lot of people by surprise. Maybe the production capacity hadn't ramped up to meet that demand yet. As you look at the quarter, January, February, we're 2/3 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, 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's 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. Last one for me. We saw a large public home builder 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 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 one home builder 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's 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. We'll see how it plays out. Doesn't surprise me.
Again, I think that's where the industry is heading, to more vertical integration, off-site manufacturing. If it doesn't work out for them, then maybe we buy that business in a couple 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. Congrats, Chad, good luck in retirement if we don't hear from you again.
Appreciate it.
Most of my questions have been answered. Just a quick clarification for me and then a question. 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 first quarter. Am I seeing that correctly, or did I miss another piece?
No, I think you got the gist of it. Yep.
Okay. 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. 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. 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, assuming commodities doesn't do anything kooky. 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 I think our performance in 2019 was pretty solid throughout the year as well.
Okay, great. I'll sneak one more in. That slide nine where you guys break down the 2019 EBITDA kind of contributors. I know you're combining two 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 2020?
Yeah, for 2020.
Yeah, we're in that 14-16 band. Again, that's what I think is the right number for 2020. Had a great year in 2019.
Great. Yes. Thanks, guys. Congratulations and good luck this year.
Thank you.
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 first quarter results. If you have any follow-up questions, please don't hesitate to reach out to Binit or Peter. Thank you.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.