U.S. Markets closed

Edited Transcript of BMCH earnings conference call or presentation 5-Nov-19 1:30pm GMT

Q3 2019 BMC Stock Holdings Inc Earnings Call

RALEIGH Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of BMC Stock Holdings Inc earnings conference call or presentation Tuesday, November 5, 2019 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Carey Phelps

BMC Stock Holdings, Inc. - Director of IR

* David E. Flitman

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

* James F. Major

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

================================================================================

Conference Call Participants

================================================================================

* Christopher Frank Kalata

RBC Capital Markets, Research Division - Assistant VP

* Kurt Willem Yinger

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

* Matthew Adrien Bouley

Barclays Bank PLC, Research Division - VP

* Megan Talbott McGrath

The Buckingham Research Group Incorporated - Director

* Steven Ramsey

Thompson Research Group, LLC - Senior Equity Research Analyst

* Trey Grooms

Stephens Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and thank you for standing by. You are joining BMC's Third Quarter 2019 Earnings Conference Call. This call is being recorded today, Tuesday, November 5, 2019. Carey Phelps, Vice President of Investor Relations for BMC, will now provide the company's opening remarks. Please proceed.

--------------------------------------------------------------------------------

Carey Phelps, BMC Stock Holdings, Inc. - Director of IR [2]

--------------------------------------------------------------------------------

Thanks, Steven. Good morning, and welcome. After my opening statement, Dave Flitman, our Chief Executive Officer, and Jim Major, our Chief Financial Officer, will discuss our key priorities and our operating results for the third quarter of 2019. 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 in this call will include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. The reconciliation of these non-GAAP measures to the corresponding GAAP measures and a discussion of why we believe they are useful to investors can be found at the back of the press release and 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 statements section in today's press release and in our SEC filings 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 turn the call over to Dave.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Carey. Good morning, everyone, and thank you for joining us. Our efforts to execute our strategy are paying off and we are driving consistently improving results this year. In our press release this morning, we reported core organic growth of 3.6% and continued to outperform single-family starts in our markets which were up 1.1% in the quarter but remained down 6% year-to-date.

share gains in our value-added product categories were even stronger and led to 7.4% core organic growth in structural components and 5.9% core organic growth in Millwork, Doors and Windows. Combined, our value-added products, services and higher margin segments currently contribute approximately 47% of our net sales. With an improved product mix and the accelerating success of the BMC Operating System, gross margin improved 200 basis points from a year ago to 26.4%. Net income was $33.6 million for the quarter and adjusted EBITDA was $74.7 million. Despite commodity price deflation impacting our top line, adjusted EBITDA margin improved 20 basis points year-over-year to 7.7%. And finally, cash flow from operations grew 16% to $69.1 million for the quarter as our cash generation combined with our already very strong balance sheet underpins our flexibility as we drive strategic growth.

In fact, so far, we've added nearly $200 million in annualized net sales from acquisitions completed in 2019 with the vast majority of these sales coming from value added offerings. The purchases of these companies were funded entirely from the operating cash flow generated by our business as our leverage ratio has improved to 0.6x our trailing 12-month EBITDA.

Now, moving to Slides 5 and 6, let me take a minute to briefly discuss each of our 4 strategic pillars as they remain the key focus areas to drive our growth. First, pillar 1, to organically grow our value-added products, services and higher-margin segments. As I mentioned a moment ago, we had strong mid to high-single-digit core organic growth in our components and Millwork categories which outpaced the single-family starts in our market and reflected another quarter of share gain. Adoption rates of your structural components product continue to ramp up nicely. Even in markets that have historically been reluctant to adopt these offerings, such as some parts of Texas, we are seeing significant volume growth in our manufactured components as builders are realizing the valuable time and labor savings these offerings provide.

Pillar 2, drive efficiencies and enable outstanding customer service through the BMC Operating System and our operational excellence initiatives. Applying Lean principles to create best practices to improve service and increase efficiencies in our processes is helping us deliver the strong financial results we've seen this year. Specifically, the BMC Operating System and our operational excellence initiatives have contributed benefits in excess of $10 million to operating income in the first 3 quarters of the year, and we are reaffirming the expectation we set last quarter of $12 million to $15 million for the full year. Among the benefits provided by the BMC Operating System is the introduction of automation into some of our manufacturing processes where we are automating Wizard cables equipped with auto truss systems at our truss facility to quickly drive efficiencies, reduce our cycle times, and improve safety. Where it makes sense, we are taking it a step further and upgrading to a more fully automated solution that also encompasses the lumber pulling, cutting and marking stages of the process, significantly reducing the labor needed to manufacturer trusses, improving product quality and increasing capacity. Atlanta, Austin and Salt Lake are currently up and running with this technology while another automated truss facility is under development in Seattle. We are also pleased to announce today that our 5th facility to feature this more fully automated solution is now slated for the Charlotte market in 2020. As we said on our last call, given the significant opportunity for productivity improvements resulting from deploying this technology, we expect it will make sense to continue to invest in this advanced capability in additional markets.

Beyond automation, the BMC Operating System is our guidebook to implementing Lean manufacturing processes and keeping our workplaces safe and efficient with the utilization of success. We have trained Lean leaders across the company to champion these efforts in the field and at corporate. Every day there are projects underway to make improvements at the local level and our field teams fight it out to win the prestigious Battle of the Belt which recognizes one location each quarter that has done an outstanding job creating an environment of continuous improvement while using the tenets of lean success. In fact, for the third quarter, as a result of these efforts, we improved our on-time in full metric by 240 basis points as compared to a year ago. Whether working to better our truck turnaround time, yard layout, order to cash cycle times, inventory management, lumber pulling processes or other items, our teams are eager and focused on doing what they can to make our business better. There is an excitement you can feel when you visit our locations and that excitement is contagious.

Along those same lines is our third a strategic pillar to build a high-performance culture with additional training and incentives, and to create an expectation of continuous improvement across the organization. Over the last couple of years, we have rolled out training company-wide on the BMC Operating System and the use of Lean Success in our work places. As I just highlighted, these efforts are resulting in real savings and productivity enhancements and are creating a more efficient and safer operation. Beyond this, we are identifying early career, high-potential associates, hiring new management trainees, and bolstering the knowledge base of our current leaders through the BMC Leadership Academy. Through the training we offer, our local leaders are improving their financial acumen, communication skills, pricing and logistics practices, customer service and their ability to execute well through the continued use of the BMC Operating System. While our market leaders are enhancing their knowledge of negotiation skills, benchmarking, associate development and working capital management. This targeted training has been very well received company wide and will continue to help us achieve a high-performance culture as we develop the talent necessary to lead the company well in to the future.

Finally, our fourth pillar is to pursue the right acquisitions to help us expand our geographies, increase our capacity and enhance our value-added offering. The progress here is evident. After completing only 3 acquisitions in 2017 and 2018 combined, so far during 2019 we have added 5 businesses to our portfolio, 2 that helped us jump to a leading market position in Charlotte, one that provides useful local scale in an area west of the Puget Sound where we previously did not have a presence, and another very strong provider of millwork and doors in the Sacramento market. In addition, in late September we also opportunistically picked up a small fastener provider in the Denver market. In all, during the third quarter we added a total of nearly $100 million in projected annualized net sales from the acquisitions of Kingston, Heritage I and Colorado Fasteners. I'm exceptionally proud of the efforts of our team this year. The consistent and solid execution of our strategy is driving outstanding results and is key to achieving sustainable long-term growth and shareholder value.

Before passing the call over to Jim, as I have done on previous calls, I'd like to highlight one of our many valued employees. Julie McDermott, a credit services coordinator in southern California, is recognized by her coworkers as someone that elevates BMC's business and company culture. Her ability to remain focused and patient as she deals with contracts of all sizes is invaluable. She ensures a smooth process for both our BMC associates and our customers. Importantly though, Julie not only embodies the BMC culture with her can-do attitude, overall work ethic and diligence, but she is also a champion for the Leukemia & Lymphoma Society in southern California. She has led multiple BMC Paint Nights where she exhibits her art skills and teaches a roomful of people how to recreate one of her paintings step by step as a fundraiser for LLS. One of her coworkers commented, Julie has played an integral part in helping us fundraise for LLS. Whether working donation booths at golf tournaments or exchanging raffle tickets for LLS donations at company events, Julie always finds a way to make it fun and is a real pleasure to work with. We are thankful to have her on the BMC team.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Dave. I'm exceptionally pleased with the results we've reported so far this year. Our team is executing at an extremely high level which for the third quarter resulted in a 200-basis point year-over-year improvement in gross margin, a 20-basis point improvement in adjusted EBITDA margin, and a 16% increase in cash generated from operations. During the third quarter, we saw strong core organic growth in our value-added product categories and an increasing benefit from our acquisition program. While total net sales declined 2.6%, we estimate that net sales decreased 10.5% from commodity-related price deflation and 1.1% due to the disposition of the Coleman Floor business in November of 2018. These decreases were partially offset by an increase of 3.9% from our recent acquisition, 1.5% from an additional selling day versus the prior year, and an increase of 3.6% from core organic growth.

Looking at our results by product category, we continue to gain share and see strong demand for our value-added products. Millwork, Doors and Windows was our fastest-growing product category, up 13.6% as compared to the prior year, in large part due to continued strength in our multifamily business and our acquisitions completed this year. Core organic growth from this category was a strong 5.9%.

Total net sales in structural components rose 5%, including commodity-related price deflation, while core organic growth of this value-added category totaled 7.4% as we continue to see expanded use of prefabricated solutions. Ready-Frame recorded $64.4 million in sales, which was up slightly from a year ago, as volume gains were offset by commodity deflation and lower starts activity in California. As Dave mentioned, adoption rates are soaring in some areas with Ready-Frame. Excluding California, the Ready-Frame volumes are up more than 20% with exceptionally strong growth in Texas, Utah, Colorado and the Carolinas. Truss volumes in total were up nearly 10% year-over-year with double that level of growth in Texas. This is encouraging as builders rarely choose to go back to traditional stick framing once they see the advantages that structural components provide.

Moving onto our gross profit for the quarter, and despite the deflationary impacts on our top line, gross profit increased 5.6% to $254.8 million while gross margin improved 200 basis points to 26.4%. This stronger than expected performance resulted from the combination of improved product mix, strong pricing discipline and the success of our sourcing and manufacturing productivity initiatives. This includes a 210-basis point year-over-year improvement in gross margin within the lumber and lumber sheet goods category, and a 160-basis point improvement within structural components.

SG&A expenses during the third quarter rose $13.1 million to $189.3 million. Approximately $6.7 million of the increase related to expenses at our recently acquired companies, $5.2 million of the increase related to employee wages and benefits, and $2 million of the increase related to gains on the sale of property, equipment and real estate during the prior year period. These increases were partially offset by a decrease of $0.8 million across our remaining SG&A expense categories. For the quarter, SG&A as a percentage of sales was 19.6% compared to 17.8% a year ago. This increase was primarily due to lower revenues caused by commodity price deflation.

Net income decreased to $33.6 million or $0.50 per diluted share as compared to $0.53 per diluted share in the same period last year. Adjusted net income was $38.8 million or $0.58 per diluted share compared to $0.58 a year ago. Adjusted EBITDA of $74.7 million was also relatively unchanged from the prior year period as the solid execution in our strategy helped to offset the impact of commodity price deflation and has led to improved adjusted EBITDA margins of 7.7%, 20 basis points higher than a year ago.

Cash flow has been strong throughout the year and is helping to fuel the strategic investments we've made in automation, improved equipment, and tuck-in acquisitions that enhance our value-added offerings. For the third quarter, operating cash flow increased 16% to $69.1 million while year-to-date operating cash flow is up 79% to $198.4 million through September. Total liquidity, which also includes excess availability on our revolver, was $541.1 million at September 30. This included cash and cash equivalents of $173.3 million. With a net debt to LTM adjusted EBITDA ratio at September 30 of just 0.6x, our balance sheet remains one of the strongest in the industry and allows us to opportunistically flex our spending in support of our growth strategies.

Capital expenditures during the third quarter, net of proceeds from the sale of property, equipment and real estate totaled $21.4 million and we continue to expect to spend between $80 million and $90 million of CapEx this 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 remain steady or modestly increase as compared to the current year. 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 assets and acquisition programs this year, along with a rise in our share price recently, we did not complete any share repurchases during the third quarter or to date in 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.

Turning our attention to our full year expectations for 2019, which are outlined on Slide 9. As expected, year-over-year starts comparisons are improving as we move through the back half of the year. And given our results to date, with just a couple of months left in the year, we expect to achieve full year 2019 organic net sales growth in the low to mid-single digits, excluding the impact of commodity deflation. Our recently completed acquisitions, net of the Coleman Floor disposal, should deliver 2.5% to 3% growth in our total net sales. And we expect a 7% to 8.5% headwind from commodity-price deflation to our total net sales for the full year with a somewhat smaller negative impact for the fourth quarter.

Dimensional lumber indices have averaged $353 year-to-date through last week which is just a bit higher than what we saw during the fourth quarter of 2018. However, the indices for oriented strand board and other lumber sheet goods remained below prior year levels. Lumber sheet goods comprise about 1/3 of our lumber and lumber sheet goods product category or approximately 10% of our total net sales and we expect to continue to see year-over-year deflation within that subcategory as we finish 2019 and look into the first quarter of 2020.

Taken together, these assumptions are expected to result in full year 2019 net sales of $3.58 billion to $3.65 billion. Our teams' intense efforts this year to improve our productivity and add automation to our processes, to introduce additional discipline in our pricing and sourcing activities, and to improve our product mix and customer mix have resulted in gross margins well above recent year levels. As a result, we are raising our full year gross margin expectation to a range of 26% to 26.25%. Combining our outlook for both net sales and gross margin we are also increasing our outlook for the full year 2019 adjusted EBITDA to $248 million to $260 million.

I'm very pleased with how well our team is executing this year. The success of our operational excellence initiatives is driving improved customer service metrics, above market growth, and substantially higher gross margins. Our focus on continuous improvement has really changed the culture of this company as we work as one team to drive the best possible results. Our momentum combined with accelerating order growth reported by most of the country's largest homebuilders, provides me with great confidence as we close out 2019 and look into the first half of 2020. While we still expect some normalization of gross margins in the near term, at today's commodity prices and with our current product mix, we estimate that our gross margin should level off in the 25.5% to 26% range. Plus, with most of the year-over-year impact from commodity price deflation behind us, the improved starts outlook, our bolt-on acquisitions and continued share gains in value-added products should help us better leverage operating expenses in the new year. Our team is energized and poised to deliver solid results as well as longer-term growth. And so with that, let me turn the call back over to Dave.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Jim. Having recently passed my one-year mark here at BMC, I am excited about our growth prospects and our underlying business momentum. Since joining the company, I have seen firsthand the tremendous commitment to excellence exhibited by our associates nationwide and I want to thank each of them for that commitment. We are gaining share in our value-added products, reinforcing our position as the market leader in 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. Over the past year, we have successfully turned our focus to our longer-term path to growth. We are ramping up investments to support our value-added portfolio of offerings and are committed to one, investing in innovation to provide meaningful solutions with tangible benefits to our customers. Two, building upon a foundation created by our Ready-Frame offering or directly with our builder customers to discover and develop new ways to provide value in the building process. Three, expanding our truss and millwork capacity and capabilities with automation and investments in more efficient equipment. And finally, continuing our focus on strategic tuck-in acquisition.

Excluding our merger, since the beginning of 2015, we have now completed 10 tuck-in acquisitions that we expect to produce annualized revenue of approximately $570 million and adjusted EBITDA of approximately $45 million and we do not intend to slow down. As we highlighted on our last call, there are plenty of opportunities, including around 300 potential companies to acquire with annual revenues between $25 million and $100 million, plus about 100 companies even larger than that. Our efforts to achieve organic and inorganic growth of our value-added products and services and higher-margin customer segment, along with our efforts to invest in our people and achieve operational excellence with the BMC Operating System will continue. The underlying industry fundamentals support a continued rise in housing and we feel very good about our momentum for 2020, as well as our runway to create significant long-term growth and shareholders value. I look forward to reporting what I expect will be outstanding achievements by our team in the years ahead.

I thank you again for joining us today, and now ask Steven, the Operator, to please lead us in the Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Matthew Bouley with Barclays.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Congrats on the results. So I wanted to start off on the structural component side. Obviously still showing some pretty strong organic volume growth there. So I guess beyond just the market simply coming back, are you actually seeing any kind of incremental builder labor tightness perhaps since the market has improved? Or actually seeing, on the other side, just seeing some of that entry level strength as kind of enhancing the increases in adoption? Just any color on the growth drivers there. Thank you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, I think, Matt, it's a combination of actually all of what you just said there. I think the entry level homes are growing quite significantly. That obviously plays to our strength in structural components for sure. But I also think our teams' ability to execute as we take structural components in areas like Texas, stay committed to converting certain markets. You heard me mention this morning that we're going to automate our manufacturing facility here in Charlotte. That's a complete and total reflection of our teams' ability to execute here in that market. And so, I think it's just a combination of all of that going on.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And Matt, I'd add even a fourth factor obviously as we invest in these truss plants and add capacity, just capacity generally in some of the structural component categories are tight, and so our ability to invest and add capacity allows us to gain share with better lead times, better quality within that category.

--------------------------------------------------------------------------------

Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [5]

--------------------------------------------------------------------------------

Got it, perfect. Thank you for that color. And then secondly on the gross margin side, I think Jim, you just mentioned that 25.5% to 26% is kind of the normalized level. Obviously, some puts and takes between lumber and OSB as you were mentioning. But if the direction of commodity prices is trending higher here, I guess any guess as to how quickly that margin would normalize? Is it sort of a Q1 event or kind of more gradual through 2020? Obviously depending on where commodities go, but just any color on the speed of reaching that normalized level? Thank you.

--------------------------------------------------------------------------------

James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [6]

--------------------------------------------------------------------------------

I think we'll start to see some normalization even here in Q4, right? And obviously what happens in Q1 and beyond, as you know, probably depends on how the lumber market wraps up the year. And obviously, those things are always hard to predict. But we do expect a little bit of normalization in Q4 and that's obviously applied in the updated full year margin guidance. And obviously, Q4 of the prior year was kind of a high-water mark in terms of gross margin in the prior year, even over the last 4 or 5 quarters, so it will be a little more challenging comparison year-over-year as well.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question comes from Michael Dahl with RBC Capital Markets.

--------------------------------------------------------------------------------

Christopher Frank Kalata, RBC Capital Markets, Research Division - Assistant VP [8]

--------------------------------------------------------------------------------

This is actually Chris on for Mike. Thanks for taking my questions. So my first question, if I heard correctly, it sounded like Ready-Frame was, Ready-Frame growth was kind of flat year-over-year. Would you be able to break out what the deflationary impact was from lumber there and what the core organic growth was as well as what the factors were driving the weakness in California?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [9]

--------------------------------------------------------------------------------

Yeah, so as we said on the call, deflation on Ready-Frame is frankly pretty similar to what we would see in the lumber category generally, so kind of a general somewhere in the teens in terms of overall deflationary impact on the Ready-Frame product. As we also said on the call, when you take out California, the underlying volume growth was north of 20% and a lot of strength pretty much across the remainder of our markets. California, and I'd say just sort of the Pacific Coast generally has been the states that we serve that have the greater decline in housing starts so far this year. And I think we mentioned on the call that overall year-to-date starts are down, single-family starts are down about 6% year-to-date across our markets. But California would be down more in the double digits. While we've seen some stabilization here of late, but on a relative basis, it still has not had quite as much rebound or improvement as you might have seen in some of our other markets.

--------------------------------------------------------------------------------

Christopher Frank Kalata, RBC Capital Markets, Research Division - Assistant VP [10]

--------------------------------------------------------------------------------

Got it, thanks, that makes sense. Then just for my second question, on gross margin, obviously very strong performance this quarter. I think in the press release you highlighted about 210 and 110 basis points improvement in lumber and structural products. But I think where your consolidated numbers came out, it suggests that there were some gross margin gains in your other categories as well. So would you be able to provide a breakout of that and what's driving the improvement there?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [11]

--------------------------------------------------------------------------------

As you know, there's some modest, less notable improvement in the other categories, but I think that certainly the mix shift helps us as well. Whereas in the prior year, lumber and lumber sheet goods were around 36% of our sales, now that they're down below 30% and lumber being the lowest gross margin category, that mix shift helps to improve the overall number as well, the overall margin number.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question comes from Trey Grooms with Stephens.

--------------------------------------------------------------------------------

Trey Grooms, Stephens Inc., Research Division - MD [13]

--------------------------------------------------------------------------------

Congrats. So on the, I guess on value-added with you mentioned another plant that you guys have slated for automation in 2020, I think in the Charlotte market. And you've mentioned also that you'd expect to add additional markets to that. Do you expect that rollout to be more in 2020? So in other words, do you expect to announce additional markets next year in addition to Charlotte? Or is that a longer-term expectation there?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [14]

--------------------------------------------------------------------------------

Trey, I think on the last call we said that beyond the 4 we were working on at that time, we saw our way clear to add that capability in maybe 5 to 10 more markets over time. And with the momentum I mentioned earlier that is happening for us in that market, it made sense for Charlotte. I think we'll take these as we come, but we look pretty aggressively towards an opportunity to automate where we can get a good return on that investment. Which means we have a good base of volume today and we see our way clear to continued growth over time. So more to come on that in the future as we look for opportunities here that makes sense.

--------------------------------------------------------------------------------

Trey Grooms, Stephens Inc., Research Division - MD [15]

--------------------------------------------------------------------------------

Okay. So 5 to 10 over time, 1 slated for next year thus far that you can announce, but stay tuned, is I guess the kind of the summary?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [16]

--------------------------------------------------------------------------------

That's fair.

--------------------------------------------------------------------------------

Trey Grooms, Stephens Inc., Research Division - MD [17]

--------------------------------------------------------------------------------

Okay. Then given the lower labor associated with these plants, can you talk any specifics about the kind of cash costs at the automated plants versus the more traditional kind of facility? Truss facility or component facility?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [18]

--------------------------------------------------------------------------------

I'm not sure we put specific dollar terms on it, but generally, you're talking about per line a headcount savings of 5 to 10 folks. Aside from the cash benefit of that, these are positions that are often very hard to fill and have relatively high turnover rates, so the ability to automate a good chunk of that process certainly improves our capacity and our overall quality and just efficiency generally.

--------------------------------------------------------------------------------

Trey Grooms, Stephens Inc., Research Division - MD [19]

--------------------------------------------------------------------------------

All right, that's helpful. Then lastly, Dave, value-added has nearly doubled in revenues over the last 5 years or so and you guys continue to outpace the market and gain share. With the outlook for housing to improve in 2020, is there any reason why you shouldn't continue to outpace starts in your markets in that kind of environment?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [20]

--------------------------------------------------------------------------------

That's certainly our goal for sure and I feel very confident about the momentum that we have and the penetration that we have in some of the markets we've been focused on. So expected momentum to continue.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from Trey Morrish with Evercore ISI.

--------------------------------------------------------------------------------

Unidentified Analyst, [22]

--------------------------------------------------------------------------------

This is actually Joe on for Trey. Thanks for taking my questions. Just wanted to ask what your thoughts are maybe on why lumber prices haven't risen a little bit more in recent months having seen some of the mills being taken offline. Housing data appears to be bouncing back. What do you think is keeping a ceiling on the price here despite the supply/demand forces?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [23]

--------------------------------------------------------------------------------

There's probably an element of seasonality there. As we get towards the end of the building season, folks generally reduce their inventory levels and just obviously don't need as much as we go through kind of the November/December timeframe. But as you note, some capacity has come off and as housing data and fundamental demand continues to improve some here in the coming months, it wouldn't be uncommon to see a little bit of a seasonal pickup at some point in the next few months. But obviously time will tell.

--------------------------------------------------------------------------------

Unidentified Analyst, [24]

--------------------------------------------------------------------------------

Okay, got it, thanks. And then also, last year you mentioned or you announced the $75 million repurchase authorization. Looks like you've used about a little less than 1/3 of that. How should we think about the cadence of that remaining activity? Could it be more on a regular schedule or do you think it would be more opportunistic? Thanks.

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [25]

--------------------------------------------------------------------------------

No, we still view that very opportunistically. The repurchases we did do or have done under that authorization to date were primarily late last year and in the first quarter when obviously the shares were trading at a considerably lower multiple. I think importantly, we didn't have quite the pace of opportunity on CapEx and acquisitions at that point in time that we've had here more recently. And so we view the repurchases opportunistically, but the primary uses for our capital are directed towards our CapEx program and our acquisition program.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question comes from Steven Ramsey with Thompson Research Group.

--------------------------------------------------------------------------------

Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [27]

--------------------------------------------------------------------------------

Wanted to get a little more detail if you can share on the fastener acquisition in Colorado. Just more logic of the deal, end markets that are served, margins of this business. And I guess kind of the second step of that would be is this a product category that is very separate from you already do? And could you make a bigger play in this product category over time?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [28]

--------------------------------------------------------------------------------

I think fasteners are admittedly a bit of a niche product in certain markets. In Colorado specifically, obviously we deal with a lot of framing contractors and others that buy a lot of fasteners and this particular business was very complementary to what we do in that market already. And so something that our local team built a relationship with over time and something that if it's successful, there probably are other markets where we could copy this playbook over time. But you know, something that generally speaking is probably a little bit smaller in terms of total sales opportunity than some of our larger product categories.

--------------------------------------------------------------------------------

Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [29]

--------------------------------------------------------------------------------

Excellent. And then I guess I wanted to think about just your branches broadly, just another viewpoint into operating performance being strong. Kind of the margins and the ROI of various branches, what is kind of the median range, I guess? And then how many branches would you say are operating below what you're targeting? And is there potential improvement just from certain branches underperforming the companywide results?

--------------------------------------------------------------------------------

James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [30]

--------------------------------------------------------------------------------

Obviously, like any distributed business, there's a variation in performance across our territories. Certainly, we have a minimum threshold and need people to return above their cost of capital and would have few if any locations that aren't achieving those hurdle rates. But certainly, as we go through local operating plans and whatnot, we do a fair bit of benchmarking across our network and use that as the means to target different initiatives and different improvement opportunities going into a new year and looking over a 3 to 5-year horizon.

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [31]

--------------------------------------------------------------------------------

I would just add to that as Jim said, we've got a lot of opportunity everywhere across the company. And as you heard us say, we're gaining good momentum with our BMC Operating System. I would still say we're still in the early innings of that work and I'm pleased with the ramp up, but there's plenty more to do across the company.

--------------------------------------------------------------------------------

Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [32]

--------------------------------------------------------------------------------

Excellent. And then last question, I guess, as you continue to gain experience in the truss facility ramp-up of automated truss facilities, are new facilities ramping up faster than in the past just given the increase on the experience curve and potential customers being more receptive to these offerings?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'd say I'm pleased with the ramp-up and as we said in the past, Steven, with each successive implementation here, we've gotten a little smarter around the technology and how we deploy it. It certainly depends on the size and scale of the facility and are we putting in multiple lines or one, in terms of the ability to get that ramped up. But I would say generally and broadly, yes, we've gotten much better with each one of these as we learn and get more capable on our ramp-up on the backend. It's going well.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Megan McGrath with Buckingham.

--------------------------------------------------------------------------------

Megan Talbott McGrath, The Buckingham Research Group Incorporated - Director [35]

--------------------------------------------------------------------------------

I wanted to ask a little bit about the share gains in the quarter. This may be in the category of no good deed goes unpunished, but it did seem like in terms of your volumes and your organic growth, while you did come in ahead of housing starts, maybe a little less of an outperformance this quarter than in prior quarters. So maybe you could just talk about the different categories of organic growth. Were there any tough compares or, you talked about California a little bit, regional differences? And talk about did anything decelerate during the quarter or do you feel like you are sort of on track and maybe just getting caught up in the mix?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [36]

--------------------------------------------------------------------------------

I would say broadly we're on track and I felt really good about our momentum. As I highlighted on the call there, Megan, starts in our geography, given our 18-state footprint, are a little different than what you see for the national numbers and the starts were up just a shade over 1%. With over 3.5% outpacing the market by more than 3x, I feel very good about that. Obviously, the weakness in the west that Jim spoke about, while it improved sequentially, it's still the weakest part of our geography. And it's obviously putting a bit of a damper on our ability to drive growth broadly. I'd say here and there we had a bit of softness in other markets, but we have that every quarter. That's just the reality of the business and the breadth of our footprint. But broadly, I feel very good about our momentum and our continued share gain.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And I'd just remind everyone, Megan, that obviously there's a bit of a lag there between the start data and when we get the rest. The start is just the first day on which we could have some increased revenue. And so while we're very encouraged to see starts to turn positive again here in Q3, what the builders are saying in terms of order growth, all those things are leading indicators that as they hopefully continue through the remaining months of the year set us up for a stronger start to the first half of 2020.

--------------------------------------------------------------------------------

Megan Talbott McGrath, The Buckingham Research Group Incorporated - Director [38]

--------------------------------------------------------------------------------

Great, thanks. In terms of M&A, now that housing starts have started to improve and we're hearing good things about orders, are you sensing an improvement in terms of possible candidates? Or are sellers maybe thinking, oh, the market is turning around, maybe I'll stick it out a little bit? How is the environment for M&A? Has it changed at all?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I would say the environment is just as good as it was a quarter ago. We really haven't seen a change. And as you know, we put a lot of effort inside the company to have outbound outreach. That's going really well. It takes a while, as we said, to make sure we've got the right cultural fit for these organizations and strong management teams that want to stick around. Those are the kind of things that we look for and through our diligence efforts, I'm quite pleased with the ones that we've done and I think our pipeline remains strong.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Our last question for today comes from Kurt Yinger with D.A. Davidson.

--------------------------------------------------------------------------------

Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [41]

--------------------------------------------------------------------------------

Thanks for all the details. I wanted to approach gross margin slightly differently. If we look at the building products gross margin, that started to come in perhaps as expected, but then you had this big jump in construction services. I was wondering if there is anything worth calling out within that? I think the revenue and cost recognition there is a big difference as well.

--------------------------------------------------------------------------------

James F. Major, BMC Stock Holdings, Inc. - Executive VP, CFO & Treasurer [42]

--------------------------------------------------------------------------------

Nothing notable there. Obviously, that reflects construction services reflects where we're doing some of the installation of the product and whatnot. That can span a pretty large slough of our product categories generally. So likely some improved mix within that category as well.

--------------------------------------------------------------------------------

Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [43]

--------------------------------------------------------------------------------

Got it. Okay, thank you. Then looking at the OpEx benefits, could you help us with what the biggest buckets are within the $12 million to $15 million improvement that you're looking for this year? And how those might accrue between cost of goods and SG&A?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yeah, the majority of that hits up in cost of goods and to some extent some of our pricing initiatives are enveloped in that as well. Obviously when you look at our P&L, we're spending what, 74% of sales in cost of goods and less than 20% SG&A. So as a general matter, we're always going to have more opportunity within cost of sales than SG&A. And as such, a lot of our productivity efforts and focus is up in those categories.

--------------------------------------------------------------------------------

Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [45]

--------------------------------------------------------------------------------

Okay, thanks. And then growth in the multifamily end market was quite strong. I'm just curious what kind of visibility you have there and your expectation for kind of that end market going forward Is that something you expect to continue to be strong or perhaps have an outsized benefit this quarter?

--------------------------------------------------------------------------------

David E. Flitman, BMC Stock Holdings, Inc. - CEO, President & Director [46]

--------------------------------------------------------------------------------

I would just say as we've messaged in the past, we have a very concentrated focus in multifamily and an extremely strong team that is executing really well. I would say our orders remain strong for the future and we'll continue to stay focus on outpacing the market in ways that make sense for our business. Feel good about our momentum.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

This concludes our question and answer session. This also concludes today's conference call. You may disconnect your lines at this time and thank you for your participation.