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Edited Transcript of BMCH earnings conference call or presentation 27-Feb-20 1:30pm GMT

Q4 2019 BMC Stock Holdings Inc Earnings Call

RALEIGH Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of BMC Stock Holdings Inc earnings conference call or presentation Thursday, February 27, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David E. Flitman

BMC Stock Holdings, Inc. - CEO, President & Director

* James F. Major

BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer

* Michael D. Neese

BMC Stock Holdings, Inc. - SVP of IR

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Conference Call Participants

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* James A. Morrish

Evercore ISI Institutional Equities, Research Division - Analyst

* Jay McCanless

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Kurt Willem Yinger

D.A. Davidson & Co., Research Division - Research Associate

* Matthew Adrien Bouley

Barclays Bank PLC, Research Division - VP

* Michael Glaser Dahl

RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products

* Reuben Garner

The Benchmark Company, LLC, Research Division - Research Analyst

* Ryan Christopher Gilbert

BTIG, LLC, Research Division - Director & Homebuilding Analyst

* Steven Ramsey

Thompson Research Group, LLC - Senior Equity Research Analyst

* Trey Grooms

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and thank you for standing by. You are joining BMC's Fourth Quarter 2019 Earnings Conference Call. This call is being recorded today, Thursday, February 27, 2020. Michael Neese, Senior Vice President of Strategy and Investor Relations for BMC, will now provide the company's opening remarks.

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Michael D. Neese, BMC Stock Holdings, Inc. - SVP of IR [2]

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Thank you, Sachi. Good morning and welcome to our 2019 fourth quarter and full year earnings call. After my opening statement, Dave Flitman, our Chief Executive Officer, and Jim Major, our Chief Financial Officer, will discuss our 2019 accomplishments in our fourth quarter and full year results. We will also discuss our 2020 priorities in certain first quarter and full year guidance. In addition to our prepared remarks, a slide deck is available on our website at ir.buildwithbmc.com. This is also where you can find today's press release, which was issued earlier this morning.

The results discussed during this call will include GAAP and nonGAAP results adjusted for certain items. We provide these nonGAAP results for informational purposes and they should not be considered in isolation from the most directly comparable to GAAP measures. The reconciliation of these nonGAAP measures to the corresponding GAAP measures and the discussion of why we believe they are useful to investors can be found at the back of the press release and in the slide presentation.

Our remarks in the press release, PowerPoint presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statement section in today's press release and in our SEC filing for various factors that could cause our actual results to differ in a material way from forward-looking statements and projections.

With that, I'll now turn the call over to Dave.

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [3]

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Thanks, Mike. Good morning, everyone, and thank you for joining us. I'd like to provide an overview of our performance in 2019, briefly discuss our full year financial results, and provide an update on where we stand on our 4 strategic pillars. Jim will dive into the fourth quarter financial results and our 2020 outlook, and then I'll return to wrap up and take your questions.

2019 was a year of significant accomplishment, leveraging our strong culture in our approach to innovation and continuous improvement aimed at enhancements and safety, customer service, pricing and productivity. I'm proud of our team's execution of our strategic initiatives during the year, especially in the phase of significant commodity deflation. We continue to invest in innovation to provide meaningful solutions to our customers. Our Ready-Frame offering continues to show great strength and a long runway of growth as we work directly with our builder customers to discover and develop new ways to provide value in the building process. In fact, the number of homes built with Ready-Frame were up by 33% in 2019.

We also expanded our truss and millwork capacity and capabilities through investment in automation and more efficient equipment. We are adding capacity at the markets that need it, and we are delivering double-digit productivity as measured by board feet per hour work where we have made these investments. Because of our success, we will continue to make investments in these areas in 2020. At the same time, we continue to focus on strategic tuck-in acquisitions that enhance our geographic presence and capability. Last year, we completed 6 acquisitions totaling approximately $275 million in annualized revenue. I also want to welcome the nearly 200 new associates from DeFord Lumber in Dallas to the BMC family.

Turning to our 2019 full year results, net sales for the year were $3.6 billion. The 1.5% decrease compared to 2018 reflects commodity price deflation, which we estimate impacted our top line by 7.5%. However and importantly, we did see an increase in net sales of 3.9% from recent acquisitions and 3.1% from core organic growth, partially offsetting the commodity deflation impact. One important item to note; in 2019, our millwork, doors and windows segment was larger than our lumber and sheet goods segment and exceeded $1 billion in total sales for the first time since our merger was [stocktified] in 2015.

I was quite pleased with our 3.1% organic growth for 2019, which continue to outperform single family starts in our market which were down by 2.4%. Importantly, our Q4 organic volume growth was the strongest of the year at 3.9%. So we exited 2019 with very strong momentum. Share gains on our value-added product categories were even stronger and led to 4.6% organic growth in structural components, and 6% organic growth in millwork, doors and windows.

We were able to grow our gross profit dollars despite the 7.5% commodity price deflation. Our gross profit grew 4.6% in 2019 to a record $951.3 million and our gross margin was up 150 basis points to 26.2% versus 24.7% for full year 2018. Adjusted EBITDA declined 2.4% to $259.4 million due primarily to impacts from commodity price deflation.

Now let me take a minute to give a brief update on each of our 4 strategic pillars, as they remain the key focus areas that drive our growth. First, pillar 1: to organically grow our value-added products, services and higher margins segment. We had strong mid-single-digit organic growth in our components and millwork categories, which outpace the single family starts in many of our markets and reflected another quarter of share gain. In 2020, we believe we will have another year of strong organic growth in both our components and millwork category.

As mentioned, we experienced a strong year with our Ready-Frame house volume and we expect to have another strong year in 2020 with our Ready-Frame innovation delivering strong double-digit growth once again. We are also continuing to make investments in manufacturing process automation. We currently have 3 automated truss facilities in Atlanta, Austin and Salt Lake City.

We are upgrading to a more fully automated solutions that encompasses the lumber pulling, cutting and marking stages of the process, while significantly reducing the labor needed to manufacture trusses. We have 2 automated truss facilities under development in Seattle and Charlotte, which should be up and running later this year. We will continue to make these high-return short-payback investments in the appropriate market across our footprint.

Pillar 2: drive efficiencies and enable outstanding customer service for the BMC operating system in our operational excellence initiative. These efforts contributed approximately $15.2 million in operating income benefits during 2019. We also significantly improved our customer service levels as indicated by our higher on-time and in-full or OTIF results, which improved by a 190 basis point.

By improving this metric, we provided our customers additional value enabling them to reduce cycle times and increase their efficiency, while reducing their total cost. As we continue to accelerate our focus on operational excellence improvements, we anticipate our 2020 results to accelerate and we expect $16 million to $20 million in benefits.

Our third pillar is to build a high-performance culture with additional training and incentives, and to create an expectation of continuous improvement across the organization. We continue to invest in our BMC Leadership Academy, where we identify and develop our top talents throughout the organization. Through the training we offer, our local leaders are improving their financial acumen, communication skills, pricing and customer service. We plan to bring 150 associates through this important program in 2020.

We also plan to hire 50 additional trainees which will continue to bolster our succession planning. Through these enhanced learning and development programs, we continue to build our leadership capabilities within our sales and management team. In addition, we are continually looking at new and efficient ways to recruit new employees into the BMC family as well as retain our existing workforce, including an emphasis on recruitment of military veteran. We are also continuing to make investments in programs and resources for our associates in support of our culture, engagement and succession planning to ensure we have a deep talent bench throughout the organization.

And finally, our fourth pillar is to pursue strategic acquisitions to help us expand our geographic reach, increase our capacity and enhance our value-added offering. As we mentioned, we completed 6 acquisitions in 2019 and we have a strong pipeline of acquisition candidates going into 2020.

I am extremely pleased with our 2019 results, and I'd like to thank our associates for their focused execution during the year, and I'm excited about our momentum. Looking ahead to 2020, we have underlying strength on our core business segments, which coupled with our strategic acquisitions and record cash generations positions us well for 2020 in what we expect will be a year of solid revenue and earnings growth.

Before passing the call over to Jim, as I have done on previous calls, I'd like to highlight one of our many valued employee. [David Beneson] began his career with BMC in 2004 and is an inventory control specialist in our LA market. He is described by his colleagues as one of the hardest working people they know who is focused on safety, and is well respected and trusted by not only customers, but fellow associates. There are numerous examples of David going above and beyond, but one that really sticks out highlights David's focus on safety.

A customer came into our Thousand Oaks, California location to buy casing and baseboard from our stock inventory. David pulled the material for the order. When he went to load the moldings, the customer pulled up in a pickup truck requesting it be loaded into the vehicle's bed. Because of the long material length, David knew that the easy, simple solution -- just stacking them -- was not going to be the safest solution. David was clearly focused on safety, which is a core value here at BMC. He used his engineering skills by grabbing an old palette and banded the moldings to the structure to offer support. He then shrink wrapped the bundle end-to-end, so nothing would slide out and marked the extended load with a red flag.

Thank you, David, for your focus on safety and exceeding our customer's expectation. As a result of David and thousands of our associates' focus on safety, we reduced our recordable injury rate by 13.5% in 2019. We still have plenty of work to do in this area, but I am very pleased with our results last year.

With that, I'll turn the call over to Jim for a detailed look at our fourth quarter results and our 2020 outlook.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Dave. I echo Dave's confidence in our business strategies and underlying momentum. Despite the commodity deflationary headwinds we experienced during last year, our team overcame several obstacles and delivered solid gross profit dollar growth.

I'd like to discuss our fourth quarter results which came in near the high end of our previous EBITDA outlook. We saw a strong core organic growth in our value-added product categories and an increasing benefit from our acquisition program. We estimate that net sales increased 6.1% from acquisition and 3.9% from core organic growth. While total net sales increased 3.6% to $890.6 million, we estimate that net sales decreased 5.9% from commodity related price deflation and 0.5% due to the disposition of the Coleman Floor business in November of 2018.

Sales of our millwork, doors and windows segment led our sales growth for the quarter with an increase of 21.2%. This is an area where we continue to be encouraged by the strong growth and enthusiasm in our markets. We continue to gain share and see strong demand for our value-added products. Our Millwork, doors and windows accelerated during the quarter in large part due to our continued strength in our multi-family business and our acquisitions completed this year. Core organic growth from this category was a strong 10.5%.

Total net sales in structural components rose 0.5%, including the impact of commodity related price deflation, while core organic growth of this value-added product category totaled 3.4% as we continue to see expanded use of prefabricated solutions. As Dave mentioned, our volume in Ready-Frame houses is growing significantly. Adoption rates continue to increase each year and we expect another double-digit volume growth year for our Ready-Frame business in 2020.

Moving on to our gross profit for the quarter. Despite the commodity related deflationary impacts on our top line, gross profit increased 2.4% to $234.6 million, while gross margin was 26.3%. The decrease in gross margin was primarily due to a decrease in gross margin within the lumber and lumber sheet goods, and structural components product categories, which benefited from unusually high commodity price related gross margins in the fourth quarter of 2018.

Remember that inflation and deflation will impact our gross margins periodically throughout any specific quarter. It's important to remember that we are focused on growing gross profit dollars, which we believe translates into growing EBITDA dollars and margin. Clearly, we expect to grow gross profit and EBITDA dollars this year.

SG&A expenses during the fourth quarter increased $12.9 million, to $187 million. Approximately $11.6 million of the increase is related to expenses at our recently acquired companies; while $1.9 million of the increase is related to healthcare cost. Excluding SG&A increases related to acquisition and healthcare costs, our fourth quarter SG&A would have been down compared to the same period last year. For the quarter, SG&A as a percentage of sales was 21% compared to 20.2% a year ago.

Net income decreased by $7.9 million to $20.2 million. Adjusted EPS was $0.37 per diluted share compared to $0.48 a year ago. Adjusted EBITDA of $57 million declined $8.5 million versus a year ago and adjusted EBITDA margin in the quarter was down 120 basis points to 6.4%, but for the full year was flat at 7.2%.

Another highlight within our 2019 results was our record full year operating cash flow, which increased approximately 17% to $245.9 million for the full year. Our strong operating cash flow helped fuel strategic investments in automation, enhanced equipment and operation and tuck-in acquisition to increase our value-added offering.

As a result of this improvement, we ended the year with $165.5 million of cash on hand and $527.8 million in total liquidity, which includes availability under our revolver. As of year-end, our net debt was 0.7x our 2019 adjusted EBITDA, which we believe places our balance sheet among the strongest and most flexible in the industry. It also allows us the capability to flex the balance sheet if a larger M&A opportunity presented itself.

As Dave mentioned, we acquired 6 companies in 2019 with approximately $275 million in annualized sales. Roughly half of that annualized sales volume contributed to our 2019 sales growth, while the remainder will contribute to our 2020 sales growth. From a cash flow perspective, we paid approximately $133 million for the 6 companies.

Capital expenditures during the fourth quarter totaled $21.8 million and $89.4 million for the full year. Looking ahead to 2020, we see numerous high return opportunities to reinvest in our business, particularly around our value-added products and in technology, which means that our level of CapEx spend is likely to be in the range of $80 million to $100 million which is in the same neighborhood as our 2019 spend.

We are also excited about our investments in automation. The combination of labor productivity and additional production capacity from these investments can drive a payback period that is as little as 3 to 4 years and clearly exceeds our hurdle rate. Over the longer term, we continue to target approximately 1.5% to 2.5% of sales in total CapEx annually.

Given the level of investment in our capital asset and acquisition programs this year, we did not complete any share repurchases during the fourth quarter. As of today, we have $55.7 million of capacity remaining under our repurchase authorization, which our Board of Directors recently extended until November of 2020. We will monitor all of our financial programs throughout 2020 in determining where we can efficiently and economically deploy capital.

Looking ahead, we believe the macro backdrop remains very constructive and strong as we start 2020. Builders generally enter the year with healthy construction backlogs and we believe we are well positioned to grow our top and bottom line results for this year. For 2020, we expect net sales to grow to a range of $3.85 billion to $4 billion or approximately 6% to 10% over our 2019 net sales of $3.63 billion. We also expect adjusted EBITDA growth resulting in a range of $280 million to $295 million or approximately 8% to 14% over our 2019 adjusted EBITDA of $259.4 million.

This outlook is based on several assumptions, including the following. Single family starts growth across our geographies in the mid-single digits, but also a continuation in the recent trend of smaller average home sizes. Trying to predict lumber pricing can be quite challenging and especially given the price fluctuations we have experienced over the last several years. However, our 2020 net sales forecast range is based on the assumption that the Random Lengths dimensional lumber index will trade in a range of $360 to $400 as compared to the 2019 full year average to $356, and that we will also see similar increases in the structural panel index.

While the dimensional lumber index has recently traded above $400, I would remind you that seasonal increases, as we move into the spring building season, are common and there is a lighter commodity inflation, which typically is 45 to 60 days. As a result, we do not expect meaningful inflationary benefits to our net sales in the first quarter, but could see increasing benefits in the second quarter and beyond.

Given the tough comparison to 2019 where we experienced record high gross margin percentages in our commodity categories, particularly in the first half of the year, we expect gross margin for the full year to be in the 25.5% to 26% range. We believe our productivity initiatives and pricing activities should result in solid gross margins for the year. We expect full year 2020 interest expense to be in the range of $23 to $24 million, our effective tax rate to be in the range of 24% to 25%, and depreciation and amortization expenses to be in the range of $78 million to $83 million.

Turning to the first quarter of this year, the months of January and February to date are tracking in line with our expectations from a top line perspective. We should see solid top line growth in line with our full year sales growth outlook of 6% to 10%, and driven by organic value-added product growth and acquisitions. We expect our gross margins will be lower by approximately 50 to 75 basis points in the first quarter of 2020 versus 26.2% in the first quarter of 2019. The decline is due to the tough comparison we experienced in the first quarter of 2019 as gross margins on commodity products were at near record levels.

We expect first quarter adjusted EBITDA in the range of $49 million to $53 million. While this represents a modest year-over-year decline in EBITDA, our first quarter outlook is approximately 17% to 18% of our full year outlook and in line with the more typical seasonal progression of results which we experienced in 2016, 2017 and 2018. The momentum we have built in 2019 combined with the optimism expressed by the builder community provides me with great confidence as we head into 2020.

Plus with most of the impacts from commodity price deflation behind us, the improved starts outlook and our expected share gains should help us better leverage expenses this year. Our team is highly motivated to continue delivering value to our customers. I believe we are poised for solid growth this year. 2020 is off to a solid start and we have strong momentum in driving the financial and operational improvements that are within our control.

So with that, I return the call back over to Dave.

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [5]

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Thanks, Jim. I'm now nearly 18 months into my tenure at BMC with my first full year in the book. I couldn't be more excited about our company, associates, customers, and our outlook for growth setting into 2020. I am confident we have the right strategies to grow this business for many years to come and our runway of growth is long. Staying focused on accelerating execution of all of our strategic pillars, including making strategic organic investments to enhance our value-added products and services as well as growing our most profitable customer categories, remain among our top priority.

We are gaining share in our value-added products, reinforcing our position as the market leader in the innovation and value-added solutions, driving both financial and operational improvements throughout the business, while identifying strategic tuck-in acquisitions to enhance our market positions with better capabilities, higher margin products and an enhanced customer mix.

2020 will be a year of exciting growth for our company. Our strong high point of M&A target coupled with our accelerating organic growth gives me the confidence that this year and the next several years will be a period of solid top and bottom line growth. I remain excited and bullish for our future.

Thanks again for joining us today. Sachi, please lead us in the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Matthew Bouley of Barclays.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [2]

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Maybe a question on organic volumes. It sounded like, Jim, you are mentioning January and February to date sort of in line with the full year 6% to 10%. Presumably, I guess core organic volumes might be in the mid-single digits there, assuming there's still some acquisition contribution. And I guess I'm not quite sure were you assuming around commodity inflation or what you're seeing around commodity inflation in there. So maybe that's part 1 in the question, just kind of how that's breaking out.

And really the broader question is, as housing start task continue to accelerate, is there a scenario where maybe in the first half of the year, we should be seeing a kind of a greater acceleration on the volume side? Or is that kind of underlying pace of construction a lot more even for you guys such that the volume growth ends up being a lot more constant?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [3]

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Sure. I think we had a breakdown in Q1 a little bit I think from an inflation deflation standpoint. As we said earlier, we're pretty much flat the deflation. So I think it will be very nominal impact, could be a little bit of a plus, a little bit of a minus, but generally be a very nominal impact relative to what we've seen in relative quarters -- sorry, recent quarters. On the acquisition side, we do not start to lap some of the Charlotte acquisitions that we did in January and February of last year. So that acquisition impact, at least from the completed acquisitions, will be a little bit lower than lower than what you saw in Q4. And that does leave you kind of with mid-single-digit core organic growth, if you will, across the business.

As far as acceleration, obviously as everybody can see, the starts outlook, the order books, the pipeline that's out there for folks appears very, very health these days. And so as long as that continues to follow through into the spring selling season for home builders, then certainly the outlook for organic growth over the course of the year would continue to be good and certainly could see some acceleration.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [4]

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Okay. That's perfect. Thank you for that detail. And then secondly, the incremental margin guidance. It looks like around 9% to 10%. A bit below normal, but obviously there is some moving pieces here. Gross margin is normalizing. Maybe still some SG&A from acquisitions. But then, I guess you've also got the $16 million to $20 million in operational savings. Are those kind of the 3 big buckets to be aware of? Is there anything else on the investment side or otherwise in SG&A that might be impacting that incremental margin expectation?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [5]

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Yes. No big investments in SG&A. Certainly, I think, yes, you captured it well in terms of the different moving pieces, acquisitions. Because of the fixed cost, you bring on with additional locations that have incremental margins in the mid-to-high single digits. The pressure on the gross margin percentage, just from some normalizing that impact within commodities, are a bit of a headwind. But we expect it to more than offset. That was some improvements in the SG&A percentage as a percent of sales such that EBITDA margins overall are still are stabled up some.

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Operator [6]

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The next question is from Trey Morrish of Evercore ISI.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [7]

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The first question I want to ask is on the gross margin. I thought you've given the change in the gross margin in lumber and sheet good, and structural components. I was wondering if you could give that to us this time.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [8]

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I'm sorry. Do you mind repeating that?

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [9]

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The change in gross margin in lumber and sheet goods and structural components.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [10]

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Yes. So are you asking just within Q4?

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [11]

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Yes, within Q4 year-over-year, something that you had given I think at least over the last several quarters, if not…

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [12]

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Yes. So within Q4 year-over-year, we were down about 260 basis points within lumber and lumber sheet goods, and around 300 basis points within structural components. And fundamentally, that's just as the market has, did start to increase a little bit on the cost side here in Q4. As we said in the call, there is a bit of a lag there in terms of how that flows through the P&L on pricing of 45 to 60 days and cost some of that normalization in gross margin here in Q4. We'll have a similar difficult comparison in Q1 as we mentioned earlier. But then once you get past Q1, that's when we should fully lap some of those unusual prior-year comparisons and see a little more normal progression, if you will, of improvement on a year-over-year basis.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [13]

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Okay. Got it. And then your SG&A spend in acquisitions seemed a bit high relative to what it had been running at. Specifically in the quarter, it's about -- SG&A is about 22% of your acquisition spend compared to -- and it's 16%, 17% over the last several quarters. I'm wondering was that because you put a little bit more money into those acquisitions or does some of the things you acquired late in the year like Colorado Fasteners or DeFord Lumber have a higher SG&A cost structure?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [14]

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Yes, I'd say it's more of the latter, but -- it's not of the latter really, but also has a higher gross margin percentage. So DeFord being very custom builder oriented. The Heritage would be another one I'd call out being very millwork oriented. They generally have higher gross margin percentages. But then just to -- you give a little bit of that back in terms of a little higher cost to serve on the SG&A line.

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [15]

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Just like in our base business.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [16]

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Yes. It's no different than our base business when you're moving into those more custom builder or millwork oriented lines of business.

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Operator [17]

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The next question is from Trey Grooms of Stephens.

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Trey Grooms, Stephens Inc., Research Division - MD [18]

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For me, I guess given the guidance that you've given, Jim, on for EBITDA and then kind of looking at some of the other puts and takes here, how should we be thinking about cash flow? I mean, you guys put up a very impressive cash flow generation in '19. Understanding some of the deflation that's out there on the commodity may have been a little bit of a tailwind on working capital. But if you kind of look into '20 just based on kind of what you've outlined here, what are your thoughts around cash flow for the year?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [19]

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Yes. As you said, cash flow in 2019 certainly benefited from the fact that you started the year with some higher commodity prices and investments and maybe ended the year with a little bit lower average cost basis. But within that year, even aside from those inflationary changes or deflationary changes, we still improved our overall cash conversion days by 5 or 6 days. And then going into 2020, obviously we'll as always be impacted a little bit good or bad in dollar terms based on what the lumber market does over the course of the year. But certainly our goal is to continue to make improvements on sort of a total working capital days basis of at least a couple of more days, so…

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Trey Grooms, Stephens Inc., Research Division - MD [20]

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Well, so I guess with that said, are there any other I guess cash kind of things we should be thinking about as far as things that could impact the cash flow as we look through the year? I mean, we can kind of maybe back through your EBITDA and kind of what you just mentioned on working capital to maybe try to get the…

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [21]

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Yes. Certainly nothing unusual, as you said. I mean, it fundamentally boils down to EBITDA, certainly our interest which should be stable there in that $23 million to $24 million range tax rates stable. And so CapEx, as we said, will be $80 million to $100 million. And so yes, really the only variable there should be just for working capital investment. Obviously, the faster sales growth, the more we got to invest in working capital, but that's a investment we're happy to make.

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Trey Grooms, Stephens Inc., Research Division - MD [22]

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Yes. Okay. And on the millwork in the quarter kind of going back to that. The millwork strength was pretty impressive, also multi-family. Was that more acquisition-driven or was there something going on with your organic business there? I'm sorry if I missed the comment there.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [23]

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Sure. Yes. No. In the fourth quarter, certainly the 21% overall growth, about half of that was acquisitions, primarily Heritage, the Barefoot back in January and the board has a nice mix of millwork business as well. But that's still left about 10.5% organic growth or core organic growth in that category, which was led by multi-family. We've seen a little bit better pickup in remodeling as well. The single family business is solid as well. But as we said before, with the mix towards smaller hems, that's a bit of a headwind for millwork within the single family segment. But we did a nice job growing, growing in all those ways.

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [24]

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Trey, we've been outperforming in multi-family for a few quarters now. And as you've heard me say, we've got a very focused approach to that. We have a very strong team. And I got a lot of confidence that we'll continue to grow there as well.

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Trey Grooms, Stephens Inc., Research Division - MD [25]

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All right. Thanks for that. And then last for me is on some of the operational excellence initiatives that you guys have there, I think you mentioned something in the ballpark of $15 million impact for '19. And then now you're looking at another $16 million to $20 million I think in '20. So I know it's too early to be talking about '21, but what kind of tail do you guys see this having as we kind of look out over the next couple of years with that specific pillar, strategic pillar of improvement that you're seeing?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [26]

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Good question. And we've been working at this for a couple of years now. And the first time we quantified the benefit was second half of last year. And we kind of hit the higher end. I think we were guiding around $12 million to $15 million as you saw us hit that upper end. And I think as you heard me say before, we're in the second or third inning of this game. We're ramping up our capabilities. We're quantifying benefits. And as expected, we're ramping up our expectation for 2020. And I would expect that momentum to continue throughout the year.

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [27]

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And I'd just also remind everybody, not all of that $15 million to $20 million is SG&A, right. A lot of the initiatives are targeting manufacturing, labor and other things that help to benefit our cost of sales.

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Trey Grooms, Stephens Inc., Research Division - MD [28]

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Got it. So still fairly early days in this process it sounds like?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [29]

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That's the way I'm thinking about.

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Operator [30]

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The next question is from Keith Hughes of SunTrust Robinson Humphrey.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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You had talked about I think earlier what Ready-Frame was in terms of volume. What were the actual revenues from Ready-Frame in the quarter? I know there's been lumber impact.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [32]

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Bear with me, Keith. Let me put my hands on that one.

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [33]

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Hold on just one second.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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Let me ask another question while you're looking that up. Maybe something actually…

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [35]

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It's $53 million, Keith.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [36]

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[Just] $53 million?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [37]

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Probably $53 million. And so yes, total revenue dollars for the year we ended up about flattish. But again, the deflation in lumber, that significantly impacts that on a year-over-year basis as we said that as a how…

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [38]

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What was the units for the year? How did you want to measure that? What was the…

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [39]

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We are a little over 20,000 units that were built with Ready-Frame.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [40]

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Yes. So you think about it, we're approaching 2% of starts with Ready-Frame. And as you further stay here for a while, we're gaining momentum. 33% increase in home penetration and the momentum continues.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [41]

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And so that 20,000 starts, what kind of growth will that be year-over-year?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [42]

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Just a little over 30%.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [43]

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30%. Okay. And I guess second question, the -- you gave us the EBITDA for the first quarter and kind of a gross margin view. It looks like in that scenario, you'd have flattish mostly down SG&A leverage. As you progress for the year, is SG&A is going to be a source of margin gain? It seems you're going to have a pretty good year because that's an area you can get some gains from?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [44]

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Yes. That's our expectation. Obviously, the gross margin percentage is a bit of a headwind, but we expect to offset that or even little more than offset that with SG&A percentage improvements or SG&A as a percentage of sales.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [45]

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Do you think they will grow during the year?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [46]

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I'm sorry. When you say grow, do you think -- you mean the improvements will accelerate?

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [47]

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The leverage. The leverage will grow during the year?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [48]

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It should. I mean, I'm part of that too. It's just the further away we get from deflation, as everybody prior recalls, right. When you got deflation, it helps the gross margin percentage and hurts the SG&A percentage. And when you start to lap back and have the potential for inflation in commodities, then it hurts the gross margin percentage a bit, but it's an accelerant to our improvements on the SG&A percentage.

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Operator [49]

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The next question is from Steven Ramsey of Thompson Research Group.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [50]

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Another strong quarter growth multi-family commercial. About 6 straight quarters of strong growth. How much of this is the market coming to you? How much of it is the internal focus and strategies that you discussed and with this particular in market, would it be better then the company projected growth of 6% to 10% or would it -- do you expect it to be below that number?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [51]

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Well, I think our momentum continues. I think a lot of our performance is based on the strength of our team and the focus that we've had across the country. As you guys know, those starts can be a little choppy from time to time. But the thing I'd continue to keep in mind though is we've been growing at double digit for several quarters now. And that's always going to be a tough comparison as we go forward, but our backlogs remain strong and our team continues to stay focused.

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [52]

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Yes. In multi-family starts overall, we're up in pretty nicely in 2019. There's a much longer life between those starts to when we ship products. And so that starts to certainly sets us up well and we see good backlogs here, at least through the first half of the year.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [53]

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Excellent. And as single family starts and continue to heat up and you come into that process with newer products, is pricing holding up well or is the competitive environment increasing? And I guess just more broadly, but then secondly, is there increased competition on the value add in automation side of things as more and more players play in that particular product category? Is that…

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [54]

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So I think we operate in a competitive environment all the time. And so I don't necessarily see that changing at the moment. But I will say, we're off of quite a nice runway here of taking share, really geographically across our footprint, particularly in our value added areas, and people obviously respond to that when that happens. But given our continued focus and the relationships we have with our customers and the strength of our total offering, not just in any one product category, I think things will continue to grow in a profitable way for us. And we'll continue to fight it out with our competitors in the marketplace every day.

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [55]

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And I think you made a comment that more and more competitors are earning the marketplace. I mean, we certainly don't see any meaningful number of new entrants or what not. Certainly, the competitive set is pretty stable in terms of who we're slugging it out against.

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Operator [56]

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The next question is from Mike Dahl of RBC Capital Markets.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [57]

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First question, just want to circle back on structural. So I guess if we back out Ready-Frame, the non Ready-Frame structural volumes seem a little bit soft in the fourth quarter. So can you talk about just the dynamics at play in the quarter? And then within your guide, how to think about beyond the Ready-Frame guidance that you gave? How to think about the balance of structural?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [58]

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As you say in the fourth quarter end, that's a great observation. I'm not concerned about that performance. We did experience a little bit of weather across our western geographies in the fourth quarter, particularly in the inner mountain states where that, if you go back a year back in Q4 of '18, we had a relatively dry fourth quarter. And Mike, as you recall, our Ready-Frame offering as well as our structural components are more mature in those western geographies across the company. So when you have a weather impact or those sort of things, it tends to -- they impact short term. But as you heard Jim say, as we flip the calendar here, you only feel like we got solid growth in the quarter here at the start for Q1. And we're about where we expected to be at this point. So I'm not generally concerned about any of that.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [59]

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Okay. And I guess just so would be clear, within the 2020 guide, should we expect that structural gross above the overall core mid-single digit volume as seems to be implied?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [60]

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We expect to continue to take share in our component area, yes.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [61]

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Okay. Thanks. And then with respect to the inflation, thanks for all the color here around the moving pieces and the timing. And I appreciate that no one has got the best crystal ball, but just curious with the guide on lumber and also if we think about OSB, are you having conversations with the mills or how would you characterize those conversations that you're hearing in terms of just what to expect because clearly, yes, there is a seasonal component, but there was also a lot of capacity that came offline last year and some analysts that side of thing, certainly would have the viewpoint that these lumber prices, these OSB prices will potentially continue to move higher. So I guess what have your conversations been like there? And if we think about the impact on the guidance, would that effectively be higher sales, higher EBITDA dollars, but lower end of the gross margin percentage range?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [62]

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Yes. I mean, as I think I probably said on many calls previously that I don't like to predict lumber prices. But certainly the $360 to $400 is sort of the underlying assumption. And when emphasized, it's an assumption, not a prediction. Having said that, as you noted, there has been a bit of capacity that's come out of the market particularly in OSB but also in dimensional lumber. And clearly with the strong level of current demand and anticipated demand, clearly ourselves and I'm sure most folks in our industry are out there stocking up for what they expect to be a good strong spring season. So that certainly led to some pretty sizeable increases here in recent weeks. Obviously, whether that sustains at the same level or even goes higher is yet to be determined. But the supply demand dynamics are certainly very strong for us to see some level of inflation year-over-year as we go through 2020.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [63]

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Got it. And last one from me. I guess kind of the obligatory question these days. I think you're fairly well protected from a supply chain standpoint, but just any comments on coronavirus and whether there are anything, any products or areas that you're watching from a supply chain standpoint?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [64]

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Well, first of all, our hearts go out to those who have been affected by the virus for sure. The tragedy all across the several countries here. But by and large, obviously there is potential supply chain effect for those things that come out of China, in particular that are manufactured there. Thankfully, that's a very small percentage. We're working closely with our suppliers, don't anticipate any major supply chain disruptions at this point, but certainly we're going to stay close to it.

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Operator [65]

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The next question is from Reuben Garner of The Benchmark Company.

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Reuben Garner, The Benchmark Company, LLC, Research Division - Research Analyst [66]

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So on the gross margin front, the 25.5% to 26% guide for this year, is that -- is the right way to think about that, that's kind of your new sustainable run rate knowing you had a little bit of a benefit from lumber price movement last year? It's still -- you're still maybe 100 to 200 basis points above where you're running a few years ago? Is the step up just all the mixed improvement and the cost efficiencies that you had and this is kind of the new normal?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [67]

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Yes, I think that's the right way to think about it. And we have done a lot of work to improve the mix and continue to do that. We've also put a lot of process discipline in place in how we think about pricing. The conversations we've been having here this morning on the phone and reactions to changes in what's going on in the lumber and OSB markets, and we feel really good about the fact that we have lifted our capability here over the last couple of years with our focused efforts.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [68]

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Yes. I've described it less as a new normal, more as just sort of a normalized baseline, right, that we'll continue to build off of as we continue to improve the mix and obviously get more efficient in our processes around pricing and manufacturing, et cetera. So -- and I appreciate you pointing out that even at 25.5 to 26, it's a few 100 basis points higher than it was back in 2015-'16, when we last saw similar level of lumber price. And, as you said, that is because of how much we moved to next year over the last several years relative to where we were when we first did the merger back in 2015.

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Reuben Garner, The Benchmark Company, LLC, Research Division - Research Analyst [69]

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Yes. Thanks for that. Very helpful. And then, let's see. On the -- so ignoring the commodity or the wood product side for a second, the other products that you sell -- I know the door price increases have been highly publicized. What are your thoughts on I guess those increases and in any other product categories. Are you seeing anything jump out, whether it'd be windows, roofing, drywall? I know you don't do a ton of some of those, but just anything that jumps out of you in the broader space from a inflation or deflation standpoint?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [70]

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All right. I'd say generally there is some upward pressure, but nothing significant outside of doors. That's the big one right now. And I think, overall, generally those price increases are going to stick in the market from what we're seeing in early.

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Operator [71]

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The next question is from Kurt Yinger of D.A. Davidson.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [72]

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I just wanted to start off on the structural component side. Could you just talk about what you're seeing from a capacity utilization perspective across your markets? Does it yield pretty tight? And if so, I mean do you see an opportunity to kind of leverage your investment to win a greater share of your customer's wallets and sort of other product categories?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [73]

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Yes. I would say generally, we have the capacity to supply our customers. But what we've had that eyed towards automation for the last couple of years as you know to gain capacity, to improve our productivity in the markets that you've seen us make those investment in are exactly where we needed to make them because we are getting increased traction from our customers and may have had some capacity constraints in some of those local markets. And again, our components business is more mature in the West and less mature in the East. So we except continued growth in ramping that up over time, and as you heard me say in my prepared remarks, we will continue to invest appropriately in both capacity and automation of our manufacturing facilities to stay ahead of the growth curve.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [74]

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Right. Okay. That's helpful color. And I guess just sticking with that point, I mean it sounds like you feel like you have a nice runway for organic expansion on the component side. But could you talk about how you're thinking about sort of the build versus buy decision? And is buy the route you would most likely take, if you wanted to expand into markets you don't currently have much of a footprint in?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [75]

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Yes. I think, we -- first of all, I love our footprint, right. It's where the starts are. It's where population growth is and all that. And so what you've seen us do systemically here and we will continue to do is like invest in our existing geographies, and also through acquisitions. Those fixed acquisitions you saw us make last year were all in our existing footprint, and they were all aimed at particularly our value-added areas that strengthen our position in either millwork capabilities and/or the component side of the business.

And so there's still plenty of opportunities to do that. And obviously, we will invest in those markets where we have, first, a combination of good market position today and solid share, but also with an eye towards the future of where we see additional growth. And what you've heard me say before, and I'm still going to think this way for a long time, is you won't see us go into a new geography that we're not in by making a small acquisition. That's not the right way to think about it. That local scale really matters for us. We think that's the winning play. And so that's why we continue to invest where we have the strength and the market position and the customer relationships today.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [76]

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Okay. That makes sense. And then just lastly on the CapEx guide, you called out that certain net of asset sale proceeds. Does that relate to -- I thought I saw something around an exit from the Arkansas market and if there is any color around that you could provide, that would be very helpful.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [77]

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Yes. I guess they are somewhat related. Yes. We -- I guess 2 points. Number 1, we did exit our location in Arkansas in the fourth quarter of the year. It was a leased facility. And so there's not any real estate that would be disposed of in that scenario and most of the equipment we want now is just redeployed into other locations. But having said that, as we retire trucks or do different things, you get a little bit of proceeds over the course of the year from those types of normal disposals. And we just turn around and reinvest that right into replacement and other capital needs.

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Operator [78]

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The next question is from Ryan Gilbert of BTIG.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Director & Homebuilding Analyst [79]

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First question on structural components. With the margin down 300 basis points, is that just all a function of lumber or is that -- is there I guess some element of market share gains that's kind of showing up in the gross margin decline?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [80]

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I think I'd say it's primarily lumber related. And again, against just a very extraordinary comparable in the prior year when costs were abnormally low relative to some of the pricing commitments that have been out there from early on the year. The margins we're at now are still very strong and very healthy, just not quite as healthy as they were a year ago.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Director & Homebuilding Analyst [81]

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Got it. And then the second question on Ready-Frame on targeting double-digit growth in 2020. Can you just talk about the markets that you expect to lead this growth rate? And then maybe specifically in the West, have you seen demand for what Ready-Frame pick up? And then if you're able to just talk about increasing penetration in the Southeastern markets where you introduced Ready-Frame?

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David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [82]

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Yes. So I would say in the West, to your point -- and we had a little bit of weather, like I mentioned earlier, and that that affect that I described around structural components also impacted Ready-Frame. But I'm really excited about Ready-Frame and even in the West where we have a very strong market share, we continue to see customers coming to us and wanting that offering. And then we're less penetrated on the legacy stock footprint in the East. We talked a lot last year about the growth that we're seeing in places like Texas and the Southeast here in the mid-Atlantic region or I would we're grossly underpenetrated with the offering. And we're seeing our customers turn an eye towards that.

And so I'm very excited. I'm very bullish. I'm highly confident in that double-digit growth that we talked about here on the call. And we'll continue to penetrate all our markets because we believe Ready-Frame is the right solution for our customers at the right time, to help them drive efficiency, reduce waste, improved safety at the job site. And we're very bullish about the future. And obviously, with 33% house penetration last year, we've got great strength to build from this year.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Director & Homebuilding Analyst [83]

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Great. Thank you. Just one more quick one. I believe you said first quarter revenue was tracking at the around the full year growth rate 6% to 10%. Would that include the extra selling day that you should have in the first quarter of '20 or is that excluding the selling day?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [84]

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No. That would include an extra selling day that will get here in March (inaudible).

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Operator [85]

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The next question is from Jay McCanless of Wedbush.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [86]

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I apologize, but I jumped on like -- did you want to talk about what your expectations are for 1Q again?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [87]

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You're asking if we did or you're asking us to repeat it? We did talk about earlier in the call.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [88]

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Okay. So what are you guys looking for 1Q in terms of sales and EBITDA?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [89]

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Sure. Yes. We are looking -- for sales gross around 6% to 10% and EBITDA on the range of $49 million to $53 million.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [90]

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And just on the SG&A front, I know there has been a couple of questions about it. But have you all broken out what the ongoing SG&A from the 6 acquisitions were in 2019? Maybe it's a way to help us to think about the right way to model SG&A as when move into '20.

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [91]

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I don't believe we have, but you can probably go back to the quarterly bridges that we provide and just get a pretty good sense.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [92]

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And do you think there is opportunities to maybe bring the dollars down on that SG&A front this year for those acquisitions, but not including any new ones that you might do in '20?

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James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [93]

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When we have acquired these businesses, we're not closing locations or doing any footprint consolidation. So certainly overtime, there may be some productivity opportunities in SG&A. But for the most part, we're looking to get the synergies on acquisitions more and sort of the revenue and cost of goods launched.

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Operator [94]

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We have reached the end of the question and answer session. I will now turn the call over to Michael Neese for closing comments.

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Michael D. Neese, BMC Stock Holdings, Inc. - SVP of IR [95]

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Thank you for participating on our call today. We look forward to presenting at the [Evercore] conference in New York City next Wednesday. Have a great day. Thank you.

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Operator [96]

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This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.