Updated: Nov 12, 2018
America’s two biggest full-service LBM operations are betting on no more than a temporary slowdown in home building over the next 18 months as well as enough continued demand to justify continued investment into their component plants. Those are two of the key points that executives from Builders FirstSource (BFS) and BMC made to analysts after releasing their third-quarter reports. Here are the highlights:
“In early quarters, we could see some negative comps for starts just because we had such a strong start to 2018,” BMC chief financial officer Jim Major said. “But I think for the entirety of 2019, we still feel like the market should have some room for at least modest growth, particularly in the single-family segment. … We're also encouraged that we saw some rebound and some stabilization with multifamily as well. Those starts were down last year and have actually recovered a little bit this year. And now that those starts have rebounded, we are starting to see that pipeline improve.”
At BFS, CFO Peter Jackson said his best guess is that single-family starts will rise 4% to 5%. “It still feels like more of a pause, a speed bump, whatever you want to call it,” he said of recent housing reports that hint of a slowdown.
As for the CEOs, BMC’s David Flitman said the current market will continue into 2019 because of the strong economic fundamentals. “There are some near-term headwinds that have to be absorbed in the industry, but the outlook is still robust,” he said.
Major said he expects builders to adjust their floor plans and price points as well as sell off some of the higher-priced homes in their inventories so that they can focus on building houses at desirable price points.
Investing in Components
BFS’ plans to invest in 25 new components facilities—typically truss and panel plants—over the next four years, including three already under way, CEO Chad Crow said. He said those investments can be found “largely in the Western part of the country where we feel like we're under-represented in our footprint.”
BMC’s COO, Mike McGaugh, used the analyst call to announce the company will install an automated truss facility to serve the central Texas market. This one will follow a plant already running in Cumming, Ga., that BMC produces 50% more volume with 33% fewer workers. Another plant in Salt Lake City also is under development.
These investments spring in part from a revived trend toward building components off-site and then trucking them to the job site. Credit the labor shortage for some of this movement; builders lack the crew to do stick-building. You also can cite the buzz involving off-site specialists like Katerra and Entekra as a nudge toward components.
McGaugh said 13 of the company’s top 15 home builders are adopting or already using BMC’s Ready-Frame system, in which framing components are pre-cut and labeled so that framers can work faster, safer, and with less mess. At the same time, he said, “What we continue to hear from our large production homebuilder customers is that [off-site construction] may be a little bit of a bridge too far. The Ready-Frame approach that we've got is the right in-between approach.”
At BFS, “I do think the long-term trend is going to be less labor, less construction on the job site, and more done in plants or factories,” Crow said. “And so, as we look further down the road, I also think that labor is going to remain a challenge for the foreseeable future. So we're constantly investing in our truss and panel capacity, for example. And anywhere we can take some of that labor off the job site, I think that's where we're going to create the most value for our customers and create the most stickiness with our customers, and obviously that's going to result in higher margin.”
Getting More Efficient
BFS touted a dispatch and delivery optimization initiative that has been rolled out to over 100 locations. The result has been less engine idling time and a higher percentage of time spent on the road.
At BMC, meanwhile, McGaugh said most drivers are working under a performance-based pay program that rewards them for improved safety, while improving delivery performance. “As a result of this program, driver productivity has increased 10% or more in most markets,” he said. The company also is reorganizing warehouses such as its Cedar Park Millwork facility in Texas.
“The result was a reduction in the time it takes to find and pull a finished house pack from 6 minutes down to 45 seconds,” McGaugh said. “We typically pull 30 to 50 house packs at that facility per day, so this one change saves us 200 minutes of labor per day or 1,000 minutes per week.”
Both BFS and BMC have rolled out computerized pricing models. “It's really a tool we've built to make it easier and quicker for GMs to do pricing,” Crow said. “[It] puts a little more discipline around it, provides us better exception reporting when pricing goes outside of some predetermined levels that we set and does some customer stratification for us.”
Only BMC talked about buying companies. “On the M&A front, we have executed several letters of intent for several tuck-in prize acquisitions,” Major said. “We are progressing through diligence and contract negotiations and hope to complete one or more of these deals during the first quarter of 2019. As we've consistently stated, we remain focused on opportunities that either enhance our capabilities and value-added products, higher-margin customer segment, improve our position in existing markets and/or provide a leading position in a new metropolitan area.”
Flitman said he sees BMC as being “well-positioned to be an aggregator over time. I like our balance sheet, I like our momentum and our growth and the core strength we're building in the company—but we're not going to overpay.”