Logo of jester cap with thought bubble.

Image source: The Motley Fool.

BMC Stock Holdings, Inc.  (NASDAQ:BMCH)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and thank you for standing by. You are joining BMC's Fourth Quarter 2018 Earnings Conference Call. This call is being recorded today, Thursday February 28th, 2019. Carey Phelps, Director of Investor Relations for BMC will now provide the Company's opening remarks.

Carey Phelps -- Director, Investor Relations

Thank you. Good morning and welcome. After my opening statement, Dave Flitman, our Chief Executive Officer; Mike McGaugh, our Chief Operating Officer; and Jim Major, our Chief Financial Officer will discuss our key priorities and our operating results for the fourth quarter of 2018. 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 for 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 and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projection -- 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.

Dave Flitman -- Chief Executive Officer

Thanks, Carey. Good morning, everyone and thanks for joining us. I am pleased to share with you today, the strong results our team delivered for 2018. Specifically, we grew our total sales by 9.4% to 2 -- $3.7 billion, driven in part by strong growth in Structural Components of 19%. Increased sales of Ready-Frame by $62.3 million, up 36.4% to 2 -- $233 million -- $233.5 million, more than doubled our annual net income, grew adjusted EBITDA by 33% and expanded adjusted EBITDA margin by 130 basis points to 7.2%. As a result of these successes, we more than doubled the cash provided by operating activities to $210 million, up from $94 million a year ago.

I commend the entire BMC team on a job very well done in 2018. A year in which we delivered record results. Hoping to drive our success in 2018 was the progress that we made advancing our strategic pillars, which, as a reminder are; One, organically grow our value-added product offerings; Two, drive efficiencies and enable outstanding customer service through the BMC operating system and our operational excellence initiative; Three, build a high performance culture; and Four, pursue the right acquisitions to expand our geography, increase our capacity and/or enhance our value-added offering.

I'm going to hand the call off to Mike for a couple of minutes to highlight the progress we've made on the first three of these pillars. And then, I'll briefly discuss pillar number four before Jim discusses our fourth quarter results in detail.

Mike McGaugh -- Chief Operating Officer

Thanks, Dave. What a great year for BMC. In addition to the clear financial success we achieved during 2018, we took key steps forward in each pillar of our strategy. Starting with pillar one, our goal of organically growing our value-added product offerings. During 2018, we more closely aligned our field compensation practices with our focus on value-added category Grow. In addition, we made key investments throughout the year to further strengthen our value-added capabilities and Structural Components, Millwork and Doors.

As we highlighted last fall, our first of its kind automated truss facility in Cumming, Georgia, has been a tremendous success. We not only added capacity in a market that needed it, but we also delivered 40% more board foot per man hour than our traditional truss line did on average for the fourth quarter. Because of its success we're -- quickly moving to expand the use of this technology. Previously we announced the automated truss line investments in Austin and Salt Lake City. These lines are progressing well and we expect the start-up of Austin in the second quarter and Salt Lake City in the third quarter.

Innovation on our value-added production activities is not limited to just truss manufacturing, where it makes sense, we're upgrading other pieces of equipment to increase our production level and reduce cost. Whether it's a saw in Denver that can precision cut entire bunks of wood to stead links in only minutes compared to nearly half an our when done in the old way or a state-of-the-art door machine in Dallas that nearly doubles our door production as compared to the machine that replaced, we're identifying opportunities making capital investments to improve speed, efficiency and reliability in our processes.

With increased flexibility and lead times and better service levels, our customers win making us a more attractive partner for builders and contractors. And in hand with these efforts is the second pillar of our strategy. Using the BMC operating system and our operational excellence initiatives to deliver improved customer service and drive higher margins across the Company. During 2018, we significantly improved our customer service levels as indicated by our higher On-Time and In-Full or OTIF result.

By improving this metric, we provided our customers additional value, enabling them to reduce cycle time and increase their efficiency, while reducing their total costs. In addition, our rigorous and analytical approach to both pricing and purchasing certainly benefited our margins in 2018 as we saw our commodity cost quickly rise in the first half of the year. Now as we face commodity cost deflation, continuing this intense focus on pricing and purchasing excellence will be key to our success.

One of the key deliverables of the BMC operating systems to drive a larger wedge between price and cost and improve margin performance. On the price side, we aim to deliver exemplary service, which provides value to our customers. On the cost side, we create value for our suppliers by aiming to be a low-cost to serve our partner. In addition to price and cost, the BMC operating system also focuses on the elimination of waste using the elements of 5S, sort, straighten, shine, standardize and sustain, plus our newly added 6S for safety.

During 2018, we completed over 100 lean events throughout the Company with each delivering either savings and/or productivity improvement. 6S and 7 Wastes have now been rolled out into 80% of our market with full introduction expected later this year. The relentless efforts on operational excellence -- the operational excellence pillars feed right into the goals for our third strategic pillar, building a high performing culture focused on execution.

To this end, we've increased training opportunities in both the sales and management level and we brought a number of new associates onboard, hiring 42 trainees during 2018. We're continuing to make investments in our leadership development, culture, engagement and succession planning. The BMC operating system in our commitment to achieving continuous improvement has changed how we operate the Company. It's a part of our culture and it's here to stay. I provided an overview of the progress we've made on our first three pillars.

Let me turn the call back over to Dave to cover our fourth pillar, which relates to strategic acquisitions. Dave?

Dave Flitman -- Chief Executive Officer

Thanks, Mike. Subsequent to year-end, we were pleased to announce two acquisitions in the Charlotte market. The additions of the highly respected Barefoot & Company and Locust Lumber, make us one of the top players in the building products space in Charlotte and provide us with additional value-added capabilities in that important market. These acquisitions were both the result of our proactive efforts to build relationships with our internally identified key targets.

Completing acquisitions that enhance our value-added capabilities and/or enhance our footprint are high on our priority lists. Our Head of Business Development, Drew Whitcomb started with the Company in January 2018 and has done a terrific job identifying a solid pipeline of opportunities and formalizing our outreach efforts. He deserves a lot of credit for working with our local management team to help cultivate the recent deals in Charlotte. And since his arrival, we've identified well over 300 potential tuck-in targets in the $25 million to $250 million revenue range. We believe our pipeline is solid, and we look forward to announcing a more consistent cadence of deals going forward, while still maintaining a disciplined approach to our investment analysis and transaction pricing. I believe BMC has the right strategy and we are continuing to build strength and momentum in executing each of our strategic pillars.

Before passing the call to Jim for a detailed look at our fourth quarter results, I'd like to recognize one of our teammates who has demonstrated tremendous long-term commitment to the Company, as he recently celebrated a remarkable milestone. In January, Lynn Connolly (ph), a retail sales manager in our Cedar Park lumber yard in Austin, Texas celebrated his 50th anniversary with BMC. Lynn has obviously seen considerable change over the years in the housing industry, as well as inside BMC. But he has remained steady force, helping us to drive the Company's success. Lynn, I appreciated the opportunity to meet you last week on my tour of Central Texas and I want to thank you for your contributions to BMC through the years. We're thankful to have you on our team and we look forward to celebrating your future work anniversaries with you.

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

Jim Major -- Chief Financial Officer

Thanks, Dave. We ended the year with another quarter of very solid results. Net sales in the fourth quarter increased 2.2% to $859.5 million. We estimate that our net sales increased 1.6% as a result of an extra selling day during the quarter as compared to the prior year, 1.9% from the acquisition of Shone lumber and a 0.6% from other organic growth, partially offset by a 1% decline due to commodity price deflation and a 0.9% decline as a result of the disposal of our non-core Coleman Floor business on November 1st.

Sales of our Structural Components category led our sales growth for the quarter with an increase of 17.4%. This is an area where we continue to be encouraged by the strong growth and enthusiasm in our markets as more builders realize the value we can provide with our time and labor saving offerings, such as roof trusses, floor trusses, wall panels and engineered wood products. We are increasingly recognized and sought out by builders as a leader in innovation within our space.

Ready-Frame continues to gain traction and grew nicely in the fourth quarter to $58.2 million in sales, up nearly 30% for a year ago. We estimate the Ready-Frame volume growth in 2018 was approximately 21% and we believe we can continue to grow Ready-Frame volumes at a double-digit rate in 2019, even if overall growth in housing starts is somewhat muted.

Gross profit increased 16.9% to $229.2 million for the fourth quarter as a result of a rapid decline in commodity costs, which began during the summer of 2018 and bottomed out in the last two months of the year. We recorded an extraordinary 340 basis point improvement in overall gross margins from 23.3% a year ago to 26.7% this quarter. As we noted in our press release this morning, this result reflects a 630 basis point year-over-year improvement in gross margin within the lumber and lumber sheet goods category and a 550 basis point improvement within Structural Components.

Selling, general and administrative expenses during the fourth quarter rose to $174 million compared with $154.7 million a year ago. $8 million of this increase related to variable compensation such a salesperson commissions, stock-based compensation and profit-based incentives, resulting from our strong performance this year. $3.9 million of the increase related to other increases in employee compensation benefits and other employee-related costs and $3.5 million of the increase related to SG&A at the recently acquired Shone Lumber business. $2 million related to a gain on the sale of property in the prior year and $0.5 million related to increased diesel fuel costs.

For the quarter, SG&A as a percentage of sales was 20.2% compared to 18.4% a year ago, but this was primarily the result of the increase in variable compensation, the prior year asset gain and the decline in commodity selling prices which reduces the total sales dollars we can leverage against our fixed costs. Our strong performance drove net income higher by $10.5 million to $28.1 million for the quarter or $0.41 per diluted share as compared to $0.26 per diluted share in the same period last year. Adjusted net income for the fourth quarter increased $17 million to $32.3 million or $0.48 per diluted share, which is more than double the $0.23 per diluted share we realized in the prior year.

Adjusted EBITDA improved $17.9 million compared to the prior year quarter. The $65.5 million as organic growth, increased gross margins, acquisitions and other operational improvements produced $23.5 million of net incremental benefits. These were partially offset by a $1.6 million reduction to adjusted EBITDA from commodity deflation, a $2 million decline from our disposed Coleman Floor business and a $2 million reduction from the prior year asset gain on the sale of excess real estate.

Another highlight within our 2018 results was operating cash flow, which more than doubled to $99.4 million in the fourth quarter and $210 million for the full year. As a result of the significant improvement, we ended the year with $150.7 million of cash on hand and $460.2 million in total liquidity, which also includes excess availability on our revolver. As of year-end net debt declined to 0.7 times our 2018 adjusted EBITDA, which we believe places our balance sheet among the strongest and much flexible in the industry. We're proud to note that BMC does not have a single dollar of long-term debt due within the next five years.

Dave will talk in more detail about our longer-term capital allocation strategy. But one new element is a $75 million share repurchase authorization that we announced in November. Since inception we have repurchased a total of 0.9 million shares at an average price of $16.63 per share including 200,000 shares that were repurchased at an average price of $15.91 in the fourth quarter of 2018.

Turning our attention to 2019, and so far so good. Despite the pause homebuyers took in late 2018, builders generally entered 2019 with healthy construction backlogs. During the fourth quarter we saw wetter than usual weather in Texas and our Southeast and Mid-Atlantic regions, which resulted in some pent-up demand heading into the first few weeks of 2019. Conversely, we have seen our fair share of winter weather and precipitation in our Western markets so far in 2019, since we enjoyed a very mild winter out west in the early months of 2018, this resulted in a more challenging comparisons in those regions, but we believe the pipeline remains solid once we enjoy better weather.

Just as many of our public company peers have done, we're going to hold off on providing a full year 2019 sales and profitability outlook until there's more clarity around buyer behavior during the crucial spring months. However, with respect to the first quarter of 2019, we are far enough into the period to provide our outlook based on the trends we have seen to-date. Despite the regional variations I noted a moment ago, overall construction backlogs have remained stable and we expect 1.5% to 2% of sales growth from recent acquisitions, net of the impact from our Coleman Floor disposition.

We expect our total first quarter sales to be negatively impacted by 5% to 7% as the Random Lengths Lumber Index has averaged $350 so far in 2019, after averaging $484 in the first quarter of 2018. The first quarter of 2019 will also feature one less selling day than the prior year, which is expected to negatively impact first quarter revenue by 1.7%, although we will recover that day in the third quarter.

Putting all these pieces together, we expect first quarter net sales to range between $780 million and $820 million. Gross margins in the first quarter of 2019 are expected to decline from the extraordinary results we delivered in the fourth quarter of 2018, but remain above the level we produced in the first quarter of 2018. This year-over-year improvement in gross margins and our continuing focus on expense productivity is expected to yield first quarter adjusted EBITDA between $42 million and $50 million.

While we are unable to provide a full year sales and profitability outlook at this time, we remain confident in our opportunity to realize volume growth in 2019 from the combination of our investments in value-added products, bolt-on acquisitions and the potential for housing starts to reaccelerate over the course of the year. However, one area that is likely to be a comparative headwind in 2019, is lumber and lumber sheet goods pricing.

While commodity pricing is nearly impossible to predict, if lumber indices hypothetically were to continue to average in the range of $350 to $400 throughout 2019, and assuming constant sales volumes, we would expect our full-year total net sales to be negatively impacted by 4.5% to 8.5% as compared to 2018 with the most difficult year-over-year sales comparisons occurring in the second and third quarters of 2019. In addition, we would expect growth -- gross margins within the lumber and lumber sheet goods and Structural Components product categories to normalize toward more historical levels during the first half of the year.

Beyond that in the investor materials posted on our IR website, we have provided certain other full year expectations to assist our investors including our CapEx plan. In 2019 we expect to spend between $80 million to $90 million on capital expenditures to make necessary fleet replacements and invest in automation and other productivity enhancements.

This increase is the result of both the exciting opportunities we have to further automate our manufacturing operations, as well as the fact that we experienced extended lead times on many of our planned purchases in 2018, which pushed those cash flows into 2019. All in all, and despite some uncertainty in the market, 2019 is off to a good start and we have strong momentum in driving the financial and operational improvements that are within our control. Our team is highly motivated and we look forward to reporting continued progress in the coming quarters.

So with that, I'll turn the call back over to Dave.

Dave Flitman -- Chief Executive Officer

Thanks, Jim. Accelerating our growth strategies, including making organic and inorganic investments to enhance our value-added products and services as well as growing our most profitable customer categories remains among our top priorities. And it is the strength of our operating cash flow and balance sheet that underscores our confidence in our ability to make these crucial investments. Our strong liquidity position of $460 million along with the low 0.7 leverage ratio at year end provides us with significant flexibility to execute against our growth strategy. Opening up many avenues to create long-term shareholder value within an appropriately aggressive capital allocation strategy.

First, as Mike highlighted, we will continue to make investments to drive organic growth in our value-added products and services, and are targeting to spend approximately 1.5% to 2.5% of sales annually on CapEx. We believe we are a leader in automation and innovation in the building materials space and we intend to remain so. It sets us apart and we'll continue to be a primary driver of our success.

Second, bolt-on acquisitions provide an attractive way to augment our value-added capabilities and offerings as well as enhance our geographic footprint. With over 300 opportunities identified, including many with very strong reputation and attractive pools of customers, I feel very good about our ability to execute on this aspect of our strategy. Going forward, we intend to add an average of approximately $100 million to $250 million to our top line annually from bolt-on acquisitions, while still keeping the flexibility for larger opportunities should they arise.

And finally as Jim noted, our $75 million share repurchase program remains an important element of our capital allocation strategy and provides yet another way to return value for our shareholders. This authorization demonstrates our continued confidence in the strength and long-term growth prospects of our Company. Our balance sheet and cash flow provide us the flexibility to opportunistically return capital to our shareholders, while continuing to invest in our other organic and inorganic growth priorities.

BMC's performance for 2018 was exceptional as we delivered results our entire team should be proud of. This momentum positions us well as we head into the heart of the 2019 homebuilding season. Despite some market uncertainties, we will remain 100% focused on what we can control. This year enabled by the BMC operating system and our solid balance sheet, we will strengthen and capitalize on our key differentiators, including our high level of automation and innovation, our size and scale, our value-added capabilities and continued improvement in our customer service levels. Our team is energized and we're all very excited about the opportunity we have to drive long-term shareholder value.

With that, I'll ask Michelle to take us into the Q&A.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up. (Operator Instructions) One moment, please while we poll for questions. Our first question comes from the line of Trey Morrish with Evercore ISI. Please proceed with your question.

James Morrish -- Evercore ISI -- Analyst

Hey, guys. Thanks very much and great quarter. Very impressed by the gross margin and your ability to keep your sales up. The first thing I want to touch on was the surge in multi-family sales that you guys reported on. I'm wondering here what drove such a big, 12% year-over-year gain in the quarter? Was there something, a big project you guys picked up? Was there just generally better improvement in the markets that you're in?

Dave Flitman -- Chief Executive Officer

Good morning, Trey, this is Dave. I would just comment that multi-family has been a focus of the Company for a long time. Over the course of, particularly in the back half of 2018, we saw a significant improvement in our pipeline that should carry over into 2019. But it's a key focus for the organization and we're gaining momentum.

James Morrish -- Evercore ISI -- Analyst

Okay, got you. And then just thinking about the gross margin, such a big benefit in the quarter. And clearly you've been buying as lumbers been coming down and so you have different prices of lumber in your inventory. So I'm just thinking you said how 1Q should still see a bit of a benefit from this massive drop in lumber. But I'm wondering, how long do you think a benefit from the fall in lumber will last, will only last through 1Q or could some that sneak into 2Q or maybe even 3Q?

Jim Major -- Chief Financial Officer

Yeah. Hi Trey, this is Jim. I think kind of the peak gross margins for us probably occurred in the last couple of months of Q4 and probably carried into the first month or so of Q1. The margins are starting to decline a bit, they're still above historical levels as we sit here today. But as we said on the call, we would expect those to continue to gradually normalize over the coming months and probably run their course here by sometime in the second quarter.

James Morrish -- Evercore ISI -- Analyst

Okay, got it. Thanks very much, Jim and Dave. Appreciate it.

Jim Major -- Chief Financial Officer

Sure.

Operator

Thank you. Our next question comes from the line of Matt Bouley with Barclays. Please proceed with your question.

Marshall Mentz -- Barclays Capital -- Analyst

Good morning. This is Marshall on for Matt. Congrats on the results and thank you for taking my questions.

Dave Flitman -- Chief Executive Officer

Thank you, Marshall.

Marshall Mentz -- Barclays Capital -- Analyst

I wanted to start first, on your first quarter sales outlook. Taking into account the moving pieces with lumber prices, your net acquisitions, the selling day difference, it looks like you're only expecting a modest volume decline even at the low end of the range. Could you maybe provide some additional context around what you're seeing in the market or recognize these comments about weather and some of the backlog that you saw in 4Q pushed into the first quarter?

Dave Flitman -- Chief Executive Officer

Yeah, I think Marshall that, as Jim made the points in his formal comments here, we did have some weather effects in Q4 that pushed some of the backlog into Q1. But I would just say broadly, while we've seen different effects across various geographies, our backlog and our pipeline is still solid as we entered Q1 and certainly to Jim's point, what we've seen so far in the quarter.

Marshall Mentz -- Barclays Capital -- Analyst

Great, that's helpful. And then a follow-up on the gross margin, specifically in fourth quarter, hardly see a lot of price discipline. On that, could you talk about the selling dynamics in the quarter? Are you having to walk away from some sales in order to get that margin performance and maybe said in other way, how do you think your volume in the quarter compared to the overall market?

Mike McGaugh -- Chief Operating Officer

Hi, Marshall, this is Mike McGaugh, I'll take that one. We are being more selective with the business we pursue. We are being very disciplined in how we manage price as we've talked about in prior calls. We still see a very healthy backlog as Dave mentioned and that allows us to be more selective on which pieces the business we pursue and you're seeing that in our gross margin.

Dave Flitman -- Chief Executive Officer

Yeah. And I would just add, obviously, the level of price competitiveness or intensities obviously varies depending on the product category. I mean lumber and commodities are always very price-driven and to Mike's point, we continue to be pretty selective in what commodity business we want to take on and obviously you can see the positive results of that in our gross margins here both in the fourth quarter and for the full year, certainly when you move into more the value-added products, it's much more of a service-driven relationship. And as Mike called out to the operating system, where we're working very hard to continue to improve our service levels and then that helps us to do well and obviously gain the business based on the high level of service that we provide.

Marshall Mentz -- Barclays Capital -- Analyst

Great. That's all very helpful and congrats again.

Operator

Thank you. Our next question comes from the line of Jay McCanless with Wedbush Securities. Please proceed with your question.

Jay McCanless -- Wedbush Securities -- Analyst

Hi, good morning. Thanks for taking my questions. The first one I had, before thinking about the Charlotte acquisitions, it looks like you guys are guiding with the EBITDA to roughly 24% gross margin and maybe about an 18% SG&A number are those in the ballpark?

Jim Major -- Chief Financial Officer

Are you just talking that Q1 specifically?

Jay McCanless -- Wedbush Securities -- Analyst

Yeah, the Q1 sorry. Yeah, Q1.

Jim Major -- Chief Financial Officer

Well I think that's a little low, because as you heard us say, low in both regards in the sense that obviously we expect the gross margin to be higher than Q1 of last year, which was 23.9% and as we said, we still expect a little bit of lingering benefits from the higher gross margins bleeding in from Q4 to Q1. So it probably a little low on both counts. SG&A percentage is generally higher than most quarters in Q1, just because it's our seasonally lowest quarter historically speaking and so as a percent of sales the SG&A is usually the highest in Q1 and obviously comes down considerably as you get into the stronger parts of the season.

Jay McCanless -- Wedbush Securities -- Analyst

The second question I have on the multi-family business, if that's going to be a bigger part of your sales went into '19. Is there -- well how does the gross margin profile look for the -- that business versus your single-family business?

Jim Major -- Chief Financial Officer

Gross margins in multi-family is fairly close to the Company average. We do mix a little more toward mill work and some higher value-added products with our multi-family business. And as such, even though they are larger jobs and larger volumes that we're selling on any in particular product or any particular job that we capture, the gross margin still average out to be about normal.

Jay McCanless -- Wedbush Securities -- Analyst

And then the last one, just staying with multi-family, in terms of customer interest or request for quotes, how's that trending in multi-family now versus last year and do you guys expect a bigger pickup as moving through the year?

Mike McGaugh -- Chief Operating Officer

Yeah, this is Mike. The backlog we have for multi-family has improved versus same period last year. We're seeing multi-family get more healthy and we're optimistic about our involvement with multi-family. We've also made multi-family as well as the value-added products, a key focus of our Company, we've instituted some best practice council across the Company to drive growth in both multi-family and value-add. Leveraging best practices across our whole grid, that's something new we've been doing in the last year and you're seeing the results of it.

Jim Major -- Chief Financial Officer

Yeah, just to follow up, there is also a much longer lag, if you will, between multi-family starts and when that turns into revenue relative to a single-family start, obviously the projects are much larger and more complex. And so as we saw starts decline multi-family starts decline some in 2017 that sort of hit us late '17 early '18 as the starts recovered in 2018. We're now seeing those benefits here in the back half of '18 and heading into '19. So as we said, the backlog remains very good.

Jay McCanless -- Wedbush Securities -- Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Michael Dahl -- RBC Capital Markets -- Analyst

Good morning. Thanks for taking my questions and nice results in a volatile period I believe. Had a follow-up question first, in terms of the overall market thoughts and thinking about your comments in a question earlier. Just to follow up on -- what you're seeing on the builder side, that's clearly the builder order trends have been falling call it, mid single-digits to high single-digits in aggregate.

So the backlogs are weakening. I guess what I'm trying to understand, part one is, is -- are you saying that this is just kind of a timing difference in terms of when that's going to impact you or do you think you're just exposed to different geographies, different builders then another public set?And part two, if I could ramp one into it is, obviously you're also taking share as you've discussed with some of the initiatives around truss and Ready-Frame. So here for the sake of argument, if we were saying starts would be kind of flattish for this year, can you help us think about from a volume standpoint, how much you expect to gain in market share?

Dave Flitman -- Chief Executive Officer

Sure, Mike. I would just -- this is Dave, I would just say a couple of things to that. First of all, a lot of the growth that we're seeing is from the entry level buyer and as you've heard a lot in public comments from the builders, they've been spending a lot of time in the fourth quarter and so far this year adjusting their offerings.

I think to your point as footprints of home shrink, it really placed to our strength around Structural Components and things like trusses and Ready-Frame, as we've spoken about and obviously our key objective here is to take market share in those specific areas of our business. On the flip side of that, the smaller footprint hurts millwork, in windows and doors, they tend to have less of all that. So -- but I think on balance we're not concerned about our ability to grow and take share really in any environment that we see going on right now.

Mike McGaugh -- Chief Operating Officer

If I can follow on to Dave's comment, what we're seeing is, the overall sentiment of our customer base, which is some of the big publics but also some of the mid-sized custom -- is -- it's an improved sentiment versus 90 days ago clearly. And so I think that sentiment gives us confidence going forward.

Michael Dahl -- RBC Capital Markets -- Analyst

Okay. That's helpful color. My second question is really around thinking through kind of as you've rolled out the first automated truss facility and you're progressing toward the next couple, what I'm curious about is, if you've seen a difference in uptake in terms of what type of customers you're selling to from that versus as you've rolled out Ready-Frame and so I think, and correct me if I'm wrong, but Ready-Frame some of the earlier adopters, I believe where some of the smaller builders and I'm just curious about whether there is a real difference in kind of customer mix as you're rolling out the trusses versus Ready-Frame?

Mike McGaugh -- Chief Operating Officer

That's a good question. Now what we're seeing is, a more aggressive adoption from some of the larger builders who are getting a bit of pressure on the modular approach, Ready-Frame trusses and panels are a good balance between the stick-built and then also the fully -- the full modular approach. And so what we're seeing is -- and we've got a number of pilots under way. We've discussed with some of the larger production builders on finding a way to scale Ready-Frame and trusses.

As Dave mentioned, it lines up very well with these entry level homes and town homes from a lower cost and lower -- labor approach. We're seeing strong subscription to our automated facilities and we talked before about Austin and Salt Lake City, we got additional cities in the pipeline that we're planning to rollout, that I won't disclose at this time. But that automated capacity on our truss facilities, Ready-Frame panels. And then also even automated -- automation in some of our door line we think it's going to be a real value-adder to our Company going forward.

Jim Major -- Chief Financial Officer

And Mike, one other point of clarification, obviously the automation in a truss plant -- the truss plants building the roof system and the floor system whereas Ready-Frame is effectively the wall system. So the two work in conjunction, and obviously the better we get at both the more the uptake we can hopefully drive with all of our customers across those different pieces of the house. And when you put those two pieces together, that's basically what you're seeing in the overall Structural Components category which as we highlighted, grew 19% last year and topped over $600 million of revenue in total. So tons of growth there through all these initiatives.

Michael Dahl -- RBC Capital Markets -- Analyst

Right. Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Susan Maklari with Credit Suisse. Please proceed with your question.

Susan Maklari -- Credit Suisse -- Analyst

Thank you. Good morning.

Carey Phelps -- Director, Investor Relations

Good morning.

Dave Flitman -- Chief Executive Officer

Good morning.

Jim Major -- Chief Financial Officer

Good morning.

Susan Maklari -- Credit Suisse -- Analyst

My first question is just around, you talked about the progress you're making with 6S and 7 Waste some of these other efficiencies. Can you just give us some more color on how we should be thinking about what else you can do there in terms of LEAN techniques. And as the demand environment does shift a little, is it giving you more opportunity or more space to perhaps pull some of these forward a bit?

Dave Flitman -- Chief Executive Officer

Yeah, this is Dave, Susan. I would just say one of the things that impressed me when I joined the Company about six months ago was the culture that the organization have been building around productivity. And I think great Companies drive growth and they fuel a lot of that growth and reinvestment in the organization through productivity. And as Mike said, we are continuing to build momentum around that and the culture continues to accelerate. We're about 80% of the way through in terms of rolling out those tools and techniques. I would expect that we're in the early innings of ramping up the impact of that over time, but I feel very good about the momentum here and as you heard some of the comments, we intend to fuel a lot of our growth from that internal productivity drive.

Susan Maklari -- Credit Suisse -- Analyst

Okay. And then my next question is, have you seen any maybe early signs of change in the M&A environment as the demand environment has changed are you seeing anything where people are perhaps thinking about making a change, getting out of things and could that perhaps accelerate things as we think about 2020?

Dave Flitman -- Chief Executive Officer

I don't think we've seen any -- this is David again. I don't think we've seen any major change in terms of tone in the market. As you heard me say, I feel very good about our pipeline and the work that's been done over the course of the last 12 months to 15 months to build our internal capability, to do that outreach and build relationships with some of these potential targets. As you know, a lot of these are family owned multi-generational businesses and it takes relationship building, it takes truss, it takes time to cultivate what could potentially happen there, but I haven't seen any major shift in terms of tone or expectation at this point.

Susan Maklari -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Trey Grooms with Stephens Inc. Please proceed with your question.

Trey Grooms -- Stephens, Inc. -- Analyst

Hey, good morning.

Dave Flitman -- Chief Executive Officer

Good morning, Trey.

Mike McGaugh -- Chief Operating Officer

Good morning, Trey.

Trey Grooms -- Stephens, Inc. -- Analyst

So I guess, really going to ask about M&A, I think you're definitely ramping that up and you said, I think, Jim, that you could or maybe Dave that you could expect a more consistent cadence of deals. So definitely it sounds like you're committed to doing more acquisitions, but how do we think about or how do you think about leverage targets with this outlook, kind of weighing the -- going after deals with buybacks and timing of the acquisitions given where you think we are in the housing cycle at this point?

Jim Major -- Chief Financial Officer

Sure. Thanks, Trey. This is Jim. I'll take that. I mean, our overall leverage target hasn't changed any. I think we're comfortable up to 2 times, 2.5 times leverage. The beautiful thing about the bolt-ons right now is number one, we've got such strong cash flow we're obviously generating a lot of internal cash that we can reinvest. And as Dave highlighted in the capital allocation priorities, we're going to first and foremost put that back into the business in form of CapEx and all the exciting productivity opportunities that we have within the business. But that still leaves cash left over to continue to do bolt-ons.

And you never -- you're never going to time the cycle perfectly in terms of acquisitions, which is frankly the other nice thing about just having a more steady stream of bolt-ons is, we'll obviously average in over a number of years at different points in the cycle and we think in the long-term we'll create a ton of value by finding the right companies with the right cultures and the right capabilities to join the BMC business. So we think we can do that very prudently, maintain the leverage as I said, that no more than 2 times to 2.5 times and frankly would just bolt-ons and some repurchases that still leaves us some flexibility to think about the larger opportunity here from time to time should that come about.

Trey Grooms -- Stephens, Inc. -- Analyst

Okay, that's helpful. And then also kind of sticking with M&A, if you could just maybe talk directionally about what you've been seeing with valuation multiples out there, what's being sought after versus maybe what it has been over the last year or two years. Also any change with the number of potential suitors that that may be at the table as you're looking at acquisitions?

Jim Major -- Chief Financial Officer

Yeah, I think on the multiple side, obviously we've seen public multiples contract over the last year. Private multiples don't react quite as quickly, good or bad, frankly, over time, they tend to be fairly static. And so, no huge change in that regard, continue to be generally in the mid single digits. I can't remember the second part of your question, Trey?

Trey Grooms -- Stephens, Inc. -- Analyst

The second part was just, you guys are definitely being more over the last year or so, more active. What do you see and as far as other folks at the table, are you seeing the number of potential suitors for these deals increased, decreased about the same?

Jim Major -- Chief Financial Officer

Yeah, I'm not sure the entire landscape of sellers has changed all that much, but as you know, I think both through our proactive outreach efforts increasing, as well as the fact that again as we continue to move further away from the merger date and all the work that that took over the first couple of years clearly, we have more management time to engage with different targets as those opportunities do arise. So that that is leading to a stronger pipeline of conversations, which ultimately will hopefully lead to -- we believe will lead to a stronger completion rate of deals.

Trey Grooms -- Stephens, Inc. -- Analyst

Okay. And last one for me, and I think, Jim you touched on kind of a range of lumber prices earlier in the comments. But is that kind of $350 to $400 range where you guys are a lot closer to what's going on kind of in the field and seeing what's going on with as far as supply and everything. Is that kind of the -- your outlook is for things to kind of settle down in that range, best we can tell from today and any input you could give us on just what you're seeing in the market from...

Jim Major -- Chief Financial Officer

I've been here way too long to try to predict lumber prices but, certainly that's where we are today, we're right around $370, $375 the last couple of weeks and so we provided that hypothetical just to give people the sense of the order of magnitude and a couple of different points, obviously we'd prefer prices to continue to recover some that's certainly better for us in the medium-term and long-term. But it is a commodity.

Trey Grooms -- Stephens, Inc. -- Analyst

Understood. Well, great job and congrats on the quarter and we'll talk again soon. Thank you.

Operator

Thank you. Our next question comes from the line of David Manthey with Baird. Please proceed with your question.

David Manthey -- Robert W. Baird & Company -- Analyst

Hi. Good morning. My question is on SG&A, you obviously have the impact of acquisitions coming in your net of divestiture. And as you look at 2019, is there any reason to think that your core SG&A should be significantly higher than 2018?

Jim Major -- Chief Financial Officer

As you say, we did a couple of deals early in the year and so the SG&A based across that $100 million of revenues is somewhere in the $15 million to $20 million range on a full year basis, so that will come in relative to 2018's baseline and there'll be a few million of savings from the Coleman business going out. The biggest, I guess, the core way we think about SG&A is obviously there is some cost pressure out there right now, particularly around wages, it's a full employment market and so that we are seeing some wage inflation.

The flip side, as we look to offset the vast majority of that, if not all of it through our productivity initiatives in the BMC operating system, and then the only other comment which certainly we called out in the earnings release, but for the fourth quarter and the full year is a lot of our associates, whether it's salespeople, managers, et cetera, they have a pretty high level of variable compensation, our salespeople are obviously living off the commissions and what they produce in terms of gross profit dollars. Many of our managers and executives will not have a high degree based on the overall profitability of the business.

So in 2017, it was a far less robust year and those incentives were much lower. In 2018, obviously as we announced record results and therefore those incentives and commissions are much higher. All that resets for 2019 with the new plan and new outlook that transpires. And as such the variable comp could be a little lower in 2019 versus '18.

David Manthey -- Robert W. Baird & Company -- Analyst

All right. Thanks, Jim.

Jim Major -- Chief Financial Officer

Sure.

Operator

Thank you. Our next question comes from the line of Keith Hughes with SunTrust. Please proceed with your question.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. You'd highlighted a pretty aggressive capital spending program, lot higher as a percentage of sales that you receive from distributors and you talked a little bit about the uses. Can you kind of prioritize kind of 1-2-3 where all that money will be going in the next couple of years?

Jim Major -- Chief Financial Officer

Right, I guess that we tried to give that in the investor deck obviously, our number one priority is the CapEx...

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

I don't have access to that so...

Jim Major -- Chief Financial Officer

No worries, no worries. I mean, yeah but -- the 1, 2, 3 is number one, CapEx, right just investing back into the business. Continuing to drive productivity in the organic growth, without question that's the highest return that we can deliver for our shareholders here over the near-term and medium-term. Number two is the bolt-on acquisitions, because those two are certainly great opportunities in the medium-term and long-term to strengthen the business and our overall scale. And then number three is the repurchases, which we really do opportunistically certainly over the last number of months we felt like the share price was significantly undervalued and stepped into the market to buy about 900,000 shares and as long as we -- at different points in the future where we think the share price is undervalued, and don't have enough opportunities that I guess by way of CapEx or bolt-on acquisitions then repurchases remain something that we'll evaluate from time to time.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. A couple of quick ones. D -- particularly with the new acquisitions coming in what will D&A look like for quarter in 2019?

Jim Major -- Chief Financial Officer

I mean it should be pretty stable by quarter and to the right page here, in total, depreciation expense and this is both what's down below cost of goods as well as in cost of goods, depreciation expense in total, we're looking to be $50 million to $55 million and amortization expense primarily related to our acquisitions of $16 million to $18 million.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. And then finally, what was the aggregate price paid for the deals that you've done of late here?

Jim Major -- Chief Financial Officer

Between the two deals in total, it was just a little bit over $50 million.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

$50 million. Okay, thank you very much.

Jim Major -- Chief Financial Officer

Sure.

Operator

Thank you. Our next question comes from the line of Steven Ramsey with Thompson Research Group. Please proceed with your question.

Brian Biros -- Thompson Research Group -- Analyst

Hey, good morning. This is actually Brian Biros on for Steven. Thank you for taking my questions. I want to ask about the repair and remodel and it seems like demand fell recently after some strong growth prior to that, and the general feedback we've been hearing is that our repair and remodel activity has been better than new construction. So I just want to hear what you guys are seeing on that and kind of reconcile that with the outlook that we've heard from any of the repair and remodel would show better growth in 2019?

Mike McGaugh -- Chief Operating Officer

Yeah, hi Brian. This is Mike. You're looking at a fourth quarter to fourth quarter comp which is a little bit of a difficult headwind. We had a lot of exposure to the Houston market in pro remodel in Hurricane Harvey in fourth quarter '17, that was a tough comp on a quarter-over-quarter basis. On an annual-over-annual basis you can see that the growth is 12% and we believe that's going to continue. So just as I talked about our refreshed approach to multi-family and millwork, we also have a refreshed approach to pro remodel, those are our three areas where we're driving growth.

We've made some key hires, one of which we've announced recently to run that part of our Company and we've got a very targeted approach on some key markets we're going to -- where we have a competitive advantage. We're going to continue to build out our pro remodel presence. I agree with your approach that pro remodel is incrementally more healthy than single-family at this point. Our target is to outgrow the market by a reasonable margin then there's every reason to believe we'll do so.

Brian Biros -- Thompson Research Group -- Analyst

Got it. One more on the acquisition side, both prior kind of and expected. Do you expect any kind of material shift in the mix you have due to acquisitions and maybe going after M&A with a more specific end market demand? And thoughts on kind of mix impact from acquisitions would be helpful.

Jim Major -- Chief Financial Officer

I mean, certainly the acquisitions that we are most drawn to are those that have the higher -- high mix of value-added products and/or as a higher mix of remodeling contractors. So certainly that's been the case. If you look at the last -- the average anyway the last five or six deals that we've done, we will on occasion find somebody that's a little bit more of a traditional LVM dealer, which was the case with Locust Lumber, but that was a great opportunity to just add some local scale within the Charlotte market, and we think that'll continue to pay dividends and add some customer relationships that that we can sell more millwork and trusses and other things to going forward. So, over time certainly we want the mix of our lumber sales to decline as a percent of the total.

Brian Biros -- Thompson Research Group -- Analyst

Yeah. Appreciate the color. Thanks.

Operator

Thank you. Our next question comes from the line of Matt McCall with Seaport Global Securities. Please proceed with your question.

Matthew McCall -- Seaport Global Securities -- Analyst

Thank you. Good morning, everybody.

Mike McGaugh -- Chief Operating Officer

Good morning.

Matthew McCall -- Seaport Global Securities -- Analyst

So maybe start with the -- I think it was slide seven, you talked about the revenue and earnings bridge, $23 million in incremental EBITDA. Can you kind of break out the operational improvement component to that line. I think, Jim over your question you referenced some SG&A savings, but I'm really getting at what the opportunity is as we move out into 2019 from an operational improvement perspective?

Jim Major -- Chief Financial Officer

Yeah I mean obviously the vast majority of what's on the bridge there was the gross margin improvement and obviously the great work that our sales team did to hold price and the sourcing team did to minimize our cost on materials. But also embedded in that is some of the productivity benefits we get whether that's manufacturing labor and our manufacturing plants which benefits cost of sales or different things we've done around distribution costs and selling costs and things of that nature which help SG&A. So as I think we said earlier, our main goal, our overriding goal here for 2019 is to offset as much of the cost inflation that's out there through our productivity initiatives and obviously that's many millions of dollars of opportunity as we think about next year.

Mike McGaugh -- Chief Operating Officer

If I can build on Jim's point, we talk a lot about in our Company about the wedge between price and cost, and our whole objective here is to get our service levels up, and that allows us a little more traction on pricing, get our cost to serve down to our suppliers and that gives us more leverage on our call. And so we've talked about this now for about a year in the context of the operating system and you guys are now seeing the results and Dave mentioned it's really in the early innings of those results. But I want to just continue to stress the work we're doing, the focus we have on pricing excellence in a robust approach on purchasing and then also just the overall productivity improvements, waste elimination that comes with the operating system.

Matthew McCall -- Seaport Global Securities -- Analyst

Okay, Mike. Now that actually is a nice segue into the next question I have. And, Jim I think last quarter we talked about a target of 10% to 15% kind of decremental from lumber, if our math is right, it looks like it was a little higher than that. I -- what we're trying to figure out is the impact there what Mike just talked about the pricing efforts, the purchasing efforts. How does that change the math around falling lumber prices '19 versus '18 versus what we would normally see?

Jim Major -- Chief Financial Officer

Yeah, I think the normal kind of inherent incremental, decremental around lumber price changes is that 10% to 15%. Clearly as Mike and our teams do the work that he is describing, hopefully we would look to minimize that negative impact in an environment where lumber prices are likely to be down year-over-year.

But as you can also tell from our commentary around the first quarter, there's a lot of moving pieces in the business right now, whether it's lumber prices or acquisitions or a little bit of a disposal or a change in sales days. So we'll put some finer points on that I'm sure in the future calls here as we get into the spring and have a little better sense of exactly where volumes and backlogs are heading into the more important months of the year.

Matthew McCall -- Seaport Global Securities -- Analyst

Okay and I know we're late but can I sneak one more in. Mike you made a comment that you've seen improved sentiment over the last 90 days. Can you just expand on that what's driving the improved sentiment? Is there a traffic story there? Is it -- just give me more detail on what you're referencing?

Michael Dahl -- RBC Capital Markets -- Analyst

Yeah, sure. So it was a number of industry events, industry conferences where we just take the pulse of the overall community and that's a custom homebuilders as well as your larger production builders. And if you look back to where we were in October, September, November, I think there was a concern on the interest rate. There was a concern on the outlook for '19. I will say that directionally it's better across the board. We feel that as well and that's reflected in our optimism today on the call, hopefully you guys continue to see that from your other -- from the other Companies you follow. So I think it's a little bit of -- interest rate abatement but just overall more optimism in the custom home and then also the production market.

Dave Flitman -- Chief Executive Officer

And I would just add that we see nothing that any of the fundamentals have changed in terms of demographics, population growth, the need for housing, as we talk about the positives happening in Q4. I think to Mike's point some of them meeting of the interest rates. Some of the adjustments the builders are making in terms of size and scale, I think all that is going to work its way through and those fundamentals at some point are going to take over.

Matthew McCall -- Seaport Global Securities -- Analyst

Okay, thank you all.

Mike McGaugh -- Chief Operating Officer

Thank you.

Operator

Thank you. Our final question comes from the line of Kurt Yinger with DA Davidson. Please proceed with your question.

Kurt Yinger -- DA Davidson & Company -- Analyst

Yeah. Thank you and good morning, everyone and congrats on the quarter.

Dave Flitman -- Chief Executive Officer

Thanks, Kurt.

Kurt Yinger -- DA Davidson & Company -- Analyst

Jim you had mentioned as you move through the year, moving to maybe more of a normalized gross margin, could you kind of give us a sense of a band of reasonable expectations and just based on your commentary, it seems like the first quarter of '19 should still see pretty good year-over-year gross margin expansion. Is there any way to bucket that between maybe the benefits of the trend in lumber versus commodities declining as a percentage of revenue or your other productivity initiatives?

Jim Major -- Chief Financial Officer

Sure, Kurt. I guess there is probably two things to keep in mind as you think about our gross margins. I mean that number one is, what are the more normal gross margins within each of our four product categories and as I think we've certainly pointed out before I mean, the commodity lumber and lumber sheet goods category is the lowest gross margin category of our four historically and those are usually in the mid teens to high teens. So certainly over the last couple of quarters we've seen extraordinarily high gross margins within that category and that's what we think will start to come back toward a more normalized level over the coming months. So that's point one, is what are the margins doing within each category.

The second thing to keep in mind obviously then kind of flip to what's our sales mix. And if there is some offsetting benefit, if you will, around the overall gross margin, it's that when prices come down, lumber becomes a smaller percent of our overall mix in 2018. That was around 35% of our total sales, because prices were so elevated, you could see by fourth quarter it was all the way down to 32% and that could continue to fall if lumber prices are lower and therefore it's a smaller part of our mix. And that means that at least the overall gross margin percentage isn't as negatively impacted. All else being equal, our gross margin is better when lumber is a smaller part of our mix and that's certainly the expectation for 2019 versus '18.

Kurt Yinger -- DA Davidson & Company -- Analyst

Okay. Thanks, Jim. And would you expect that same sort of dynamic to play out in Structural Components. I mean, have those gross margins been extraordinarily high similar to the commodities?

Jim Major -- Chief Financial Officer

They are certainly elevated. I wouldn't say they're as extraordinarily high and obviously that's a part of the business where as we said earlier it's much more of a service equation and obviously as we invest in automation as we do other things as we talked about those are other opportunities to improve those margins within the business. So certainly could be some comparative headwind I guess, but I think over the medium-term and long-term those are margins in a category that we would look to continue to expand.

Kurt Yinger -- DA Davidson & Company -- Analyst

Okay. And lastly, a lot of commodity producers have described lean inventories through the distribution channel. I'm wondering if that aligns with kind of where your own inventories are or how comfortable you feel with your level of volume that you have?

Jim Major -- Chief Financial Officer

I mean we're -- we were running and had been running our inventories are relatively lean here in the latter part of 2018 just waiting to see where costs may bottom out and we continue to do so as we sit here today. So we'll obviously have some seasonal build as we get little further into the spring, but nothing out of the ordinary.

Kurt Yinger -- DA Davidson & Company -- Analyst

All right. Thank you very much.

Operator

Thank you. We have reached the end of our question-and-answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 62 minutes

Call participants:

Carey Phelps -- Director, Investor Relations

Dave Flitman -- Chief Executive Officer

Mike McGaugh -- Chief Operating Officer

Jim Major -- Chief Financial Officer

James Morrish -- Evercore ISI -- Analyst

Marshall Mentz -- Barclays Capital -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Michael Dahl -- RBC Capital Markets -- Analyst

Susan Maklari -- Credit Suisse -- Analyst

Trey Grooms -- Stephens, Inc. -- Analyst

David Manthey -- Robert W. Baird & Company -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Brian Biros -- Thompson Research Group -- Analyst

Matthew McCall -- Seaport Global Securities -- Analyst

Kurt Yinger -- DA Davidson & Company -- Analyst

More BMCH analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.