Builders FirstSource Inc (BLDR) 2015 Q4 法說會逐字稿

Good day and welcome to the Builders FirstSource's fourth-quarter and fiscal 2015 earnings conference call. Today's call is being recorded and will be archived at www.bldr.com.

It is now my pleasure to introduce Ms. Jennifer Pasquino, Senior Vice President, Investor Relations. Please go ahead, ma'am.

Thank you. Good morning and welcome to the Builders FirstSource fourth-quarter 2015 earnings conference call. Joining me on the call today is Floyd Sherman, Chief Executive Officer of Builders FirstSource; and Chad Crow, President and Chief Financial Officer.

A copy of the slide presentation referenced on this call is available on the investor relations section of the Builders FirstSource website at www.bldr.com. (Operator Instructions) As a reminder, this conference call is being recorded today, March 4, 2016.

Builders FirstSource issued a press release after the market closed yesterday. If you don't have a copy, you can find it on our website at bldr.com.

Before we begin, I would like to remind you that during the course of this conference call, we may make statements concerning the Company's future prospects, financial results, business strategies, and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which can cause actual results to differ materially from expectations.

Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

The acquisition of ProBuild closed on July 31, 2015, the closing date. As a result, ProBuild's financial results are only included in the Company's GAAP financial statements from the closing date forward and are not reflected in the Company's historical financial statements. We have therefore provided supplemental financial information of the combined Company in this press release that is pro forma or adjusted to include ProBuild's financial results for the relevant periods prior to the closing date.

The Company will discuss these pro forma adjusted results on this call. We've provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanation of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are available on our website.

At this time it is my pleasure to turn the call over to Mr. Floyd Sherman.

Thank you and good morning. Welcome to our fourth-quarter and fiscal 2015 earnings call.

Before I give a brief recap of the 2015 results, I want to provide an update on the integration and progress against the cost savings initiatives outlined when the acquisition of ProBuild was announced. Then I'll give a brief recap of 2015 and turn the call over to Chad, who will discuss our financial results in more detail. After my closing comments regarding our outlook, we'll take your questions.

Let's begin our discussion on slide 4, with an overview of the key benefits of the ProBuild combination. On July 31, 2015, we completed the acquisition of ProBuild, one of the largest distributors of building materials to professional builders, contractors, and project-oriented consumers in the United States. The combination creates a clear industry leader with expanded growth and margin opportunities. We believe that the benefits of the acquisition include increased scale and diversification, enhanced cross-selling opportunities for value-added products, better customer penetration, and projected $100 million to $120 million of targeted annual cost savings before one-time expenses.

Now that we're few months past the acquisition close, I'm eager to share with you an update on our integration efforts. We are very pleased with the progress of the integration efforts thus far. We're making great strides in combining our organizations in one Company. All aspects of the integration including, system conversions and facility consolidations, are in full swing and progressing as planned.

Management and the operating teams are collectively driving our business goals. The Company has achieved several key milestones to date in the integration process, including closing 12 of the planned 18 overlapping locations; completing ERP conversions at 16 locations, including our Dallas-Fort Worth market, with seven more in process this month; and transitioning all associates to the new benefit plans.

We all have a strong focus on customer service to sustain and grow local market relationships. So far employee and customer attrition has been very minimal.

Moving to slide 5, we believe that we will deliver the $100 million to $120 million in annual run rate cost saving synergies that were outlined when the deal was announced. Synergies are expected to be captured through network optimization, procurement, and general and administrative costs, with a breakout of about 20%, 30%, and 50% targeted for each area, respectively.

Within five months of the acquisition close, we've already implemented cost savings initiatives that are projected to yield almost $45 million in future run rate savings. These include $12 million in projected procurement initiatives, $9 million in projected network consolidation savings, and $24 million in projected overhead and SG&A savings. Additionally, benefit plans were put into effect January 1, 2016, which are projected to yield approximately $20 million in annual savings. We expect that our ongoing cost-saving initiatives will benefit fiscal 2016 by $60 million to $70 million.

As part of the integration process, we expect to incur $90 million to $100 million in one-time costs to achieve the synergies. Approximately $43 million of these one-time costs were incurred in 2015, and $30 million are expected in 2016.

Our integration efforts and cost savings realization are the highest priority for us. I remain convinced that the combination of Builders FirstSource and ProBuild will create value for our shareholders and customers alike in the years to come.

Please turn to slide 6. Through the acquisition of ProBuild, we have created a more diversified company, with enhanced scale and an improved geographic footprint. We are the leading distributor of building products to the professional building channel. This allows us better customer reach and less exposure to any one market.

Our national scale facilitates strategic partnerships with customers and suppliers. We are leveraging our presence in 40 states and 74 of the top 100 MSAs to become the national supplier of choice for large-production homebuilders. We believe our scale improves our purchasing leverage.

Our national footprint and end-market diversity reduces our dependency on any one market or segment. By way of example, sales in Texas accounted for 17% of our 2015 pro forma sales, with sales split roughly evenly between the Dallas-Fort Worth, Houston, and San Antonio/Austin markets. Dallas-Fort Worth and San Antonio/Austin markets have very strong growth trajectories, while Houston has been impacted by falling oil prices, most notably in the higher-end homes.

However, Houston represents only about 4.5% of our 2015 pro forma sales. No other state accounts for more than 8% of our sales. Other states showing strong growth, including California, Florida, the Carolinas, and Georgia are top markets for us.

As a result of the acquisition, 23% of our sales now come from the repair and remodel customers. This business has proven historically to provide a more stable revenue base, with strong growth profit margin and good returns. We feel the geographic diversity and enhanced customer base has added both stability and value to our business model.

Turning to slide 7, I'm pleased with the growth in sales over the prior year, despite the negative impact of commodity deflation on our 2015 sales. Average market prices for framing lumber have fallen approximately 13% in 2015. As a result, our full-year 2015 lumber and lumber sheet goods sales were down 5% versus 2014.

However, our value-added sales of manufactured products -- windows, doors, and millwork increased 6% versus 2014. We believe our Company is well positioned to help homebuilders mitigate the impact of well-publicized labor shortages and increased cycle times through our manufactured and value-added products across our national footprint.

Before turning it over to Chad, I'll give a brief recap of our 2015 results. We ended 2015 with pro forma sales of $6.1 billion, up 1% as compared to last year excluding the impact of closed locations, but grew adjusted EBITDA by 22% or $56 million.

I am pleased with the growth and profit over the prior year, despite the negative impact of commodity deflation on our 2015 sales. Excluding the impact of deflation, our new residential volume sales grew 6% in the year, and repair and remodel grew 5% versus prior year. Lumber prices have stabilized a bit since the low point in September of 2015, but still represents a headwind for us in the first half of 2016 at current levels.

I'll now turn the call over to Chad, who will review our financial results in more detail.

Thank you, Floyd. Good morning, everyone. I will first discuss the current-quarter pro forma adjusted sales results on slide 9. As a reminder, we have reflected pro forma adjusted figures to include ProBuild's financial results prior to the closing date and normalized for one-time integration, closure, and other costs.

For the fourth quarter we recorded pro forma net sales of $1.46 billion, down 1.1% compared to pro forma sales for the fourth quarter of 2014, excluding the impact of closed locations. Total sales volume grew 7.1% over pro forma sales for the fourth quarter of 2014, but was offset by 8.2% as a result of the negative impact of commodity price deflation on our sales.

Sales volume grew 8.1% in the homebuilding end market and 3.8% in the repair and remodel end market. This growth was largely in line with new single-family construction and repair and remodel market growth.

Immediately following an acquisition of this size, concern exists that either integration distractions or customer reaction could impact sales in the short-term. I am pleased that has not been the case, as our volume growth kept step with market growth this quarter. From a product mix standpoint, our value-added product categories made up a higher percentage of overall pro forma sales, as our prefabricated components, windows, doors, and millwork categories accounted for 38.6% of adjusted sales in the current quarter compared to 37.6% in the fourth quarter of last year.

Our lumber and lumber sheet goods declined as a percentage of sales, from 33.8% in the fourth quarter of 2014 to 31.7% this quarter. Our other building products and services categories were up slightly compared to last year.

Our pro forma gross margin percentage was 26.3%, up approximately 150 basis points from 24.8% last year. Our gross margin percentage increased largely due to improved customer pricing, commodity price deflation, and a higher mix of value-added sales. Our procurement saving initiatives have just begun to materialize.

Interest expense was $43 million in the quarter, and in February 2016 we entered into debt exchanges which reduced our long-term debt by $14.8 million and reduced annual cash interest expense by approximately $9.9 million. Adjusted net loss was $0.3 million or zero cents per diluted share compared to a loss of $14.5 million or $0.14 per diluted share in the fourth quarter of 2014.

Adjusted EBITDA in the fourth quarter of 2015 was $76.3 million or 5.2% of sales compared to $67.1 million or 4.5% of sales for the fourth quarter of 2014. This represents 14% growth on a year-over-year basis. We have provided an EBITDA reconciliation on slide 13.

I will now move to the annual results on slide 10. Pro forma net sales were $6.1 billion for fiscal 2015, an increase of 1% compared to pro forma sales for 2014, excluding the impact of closed locations. Total sales volume grew 5.8% over pro forma sales for fiscal 2014 but was offset by 4.8% as a result of the negative impact of commodity price deflation on our sales.

Sales volume increased 5.9% in the homebuilding end market and 5.3% in the repair and remodel end market. Breaking down our 2015 pro forma sales by key product categories, excluding the impact of closed locations, manufactured products were $997 million, up 4.3% from 2014. Windows, doors, and millwork were $1.27 billion, up 6.8%.

Lumber and lumber sheet goods were $1.99 billion, down approximately $100 million or 5.2% from approximately $2.1 billion in 2014. From a product mix standpoint, our value-add product categories made up a higher percentage of overall pro forma sales as our prefabricated components, windows, doors and millwork categories accounted for 37.3% of adjusted sales in 2015 compared to 35.7% last year.

Our lumber and lumber sheet goods declined as a percentage of sales 35% in 2014 to 32.8% this year. Our other building products and services categories were up slightly compared to last year.

Pro forma gross margin percentage was 25.6%, up 130 basis points from 24.3% in 2014. Our gross margin percentage increased largely due to improved customer pricing, commodity price deflation, and a higher mix of value-added sales. Pro forma interest expense was $180.9 million in 2015, excluding certain one-time financing costs and normalizing for the incremental debt issued to finance the ProBuild acquisition.

Adjusted net income was $17.8 million or $0.16 per diluted share compared to an adjusted loss of $69.4 million or $0.64 adjusted loss per diluted share for 2014. Due to accelerated depreciation and amortization being taken on assets acquired, the pro forma presentation shifts approximately $21 million of pro forma D&A expense from 2015 to 2014. We expect depreciation and amortization to be approximately $115 million in 2016.

Adjusted EBITDA in 2015 was $313.3 million or 5.2% of sales compared to $257.2 million or 4.2% of sales for 2014. This represents 22% growth on a year-over-year basis.

Turning to slide 11, total liquidity at December 31, 2015, was $684 million, consisting of net borrowing availability under the revolving credit facility and cash on hand. As of December 31, the Company had reduced the amount outstanding on the revolving credit facility to $60 million. While we expect to borrow under our revolving credit facility for seasonal working capital and other operating needs, we expect to pay down additional debt in 2016.

In February, the Company exchanged $282 million of aggregate principal amount of our 2023 notes for $268 million of our 2021 notes to reduce its annual cash interest expense by approximately $10 million. We have provided interest reconciliation to provide a normalized ongoing few of our interest expense and current debt levels. We have about five years until our first debt maturity. We are intent on making significant strides in delevering the balance sheet between now and then.

We intend to primarily do this through cash generation and paying down debt, although we may from time to time enter into opportunistic transactions that lower our interest expense or otherwise address or capital structure, allowing us to even further delever the balance sheet. We expect free cash flow generation will enable us to meaningfully reduce the absolute level of debt over the next several years.

We believe this will be driven by EBITDA growth, including projected annual cost savings realization of $100 million to $120 million by the end of 2017; and a focus on working capital efficiency, which we believe will run between 9% and 10% of incremental sales. We will invest in our business through capital expenditures at approximately 1.5% of sales. We plan to utilize our approximate $260 million of NOLs to shelter us from paying federal cash taxes through 2016 and much of 2017.

In 2016, we expect one-time integration costs of approximately $30 million and cash interest of $155 million. If you factor all these items in, we expect to generate approximately $75 million to $85 million in cash flow in 2016. We are focused on reducing debt and are optimistic about our cash flow generation opportunities. Should market conditions unexpectedly accelerate or decelerate, we have the ability to quickly adjust our capital spending working capital accordingly.

As we move to slide 14, we have provided a quarterly review of 2015 pro forma and adjusted sales, gross profit margin, EBITDA, and net income. This presentation assumes the ProBuild acquisition closed on January 1 of 2015 and should provide investors a baseline the model our business and its seasonality.

As we are now two months into the year, I would like to provide some color on the first quarter of 2016. We expect sales to grow 6% to 7%, with gross profit margins in the 25% range, approximately 90 basis points over first quarter of 2015. Adjusted EBITDA is expected to be in the $50 million to $60 million range versus $20.8 million in the first quarter of 2015. We expect synergies to benefit the quarter by approximately $15 million and EBITDA conversion on incremental sales for the base business, so excluding synergy savings and one-time costs to implement, in the 15% to 20% range.

I'll now turn the call back over to Floyd for his closing comments.

Thank you, Chad. I remain very positive about the future of Builders FirstSource. While global macroeconomic unease has recently weighed on the homebuilding outlook, I believe our industry remains on a trajectory of steady but positive growth. We expect to grow profitably and realize our synergy cost savings. Our Company is well positioned to be the building supply Company of choice for builders around the country, thanks to our geographic reach, enhanced product offerings, national manufacturing capabilities, and superior customer service.

Our focus will be to leverage our national scale and sales capability to grow faster than the market, with a focus on profitable growth and value-added products. These strengths, our scale, and the potential leverage provided by the synergy savings combines to make a Builders FirstSource that is greater than the sum of the parts. We've demonstrated our ability to reduce debt again this quarter and are committed to continuing to reduce leverage through annual cash flow generation.

Our integration efforts with ProBuild are progressing as expected, and I attribute this success to the great associates I have the pleasure to work with every day. To all the associates, I say thank you. I remain convinced that the combination of Builders FirstSource are ProBuild will create value for our shareholders and customers alike in the years to come.

I'll now turn the call over to the operator for Q&A.

(Operator Instructions) Andrew Casella, Deutsche Bank.

I guess, you know, within two parts of this question -- can you talk about the genesis of the exchange offer? You know, was this Company-led, or was this led by bondholders?

And the second part of the question would be: why do the exchange versus potentially use some of what looks to be a pretty big sum of liquidity to potentially buy back bonds in the open market and just reduce cash interest overall instead of just [ARBing] a few percentage points on cash carry?

To answer your first question, it was Company-generated, and really just looking to take advantage of where the bonds were trading and the arbitrage between those two. To your second question, we were able to do this fairly quickly without using any liquidity, and got a little bit of interest savings, and brought the debt down some. But to your point, as we get deeper into the year, we might very well look to reduce debt in other manners, which could include paying down debt with cash flow and the liquidity that we have.

Got it. And when you think about total liquidity, $700 million seems to be higher than what you would need for working capital swings. I mean, what's kind of the way you think about minimum liquidity and, therefore, kind of that dry powder to go after, whether it's market mispricings on your bonds or whatnot for debt reduction?

Yes, and that's a good question and a subject that gets bandied around here a lot. I do feel very comfortable with the amount of liquidity we have. To some degree, everyone in the industry is still licking their wounds from what happened over the last five to seven years. And so it's hard to know -- you never really know how much liquidity is enough, right?

But I do feel good about our liquidity level. I do think we have some excess liquidity to play with to improve our capital structure, but we are probably going to wait until we get deeper into the year in the spring selling season before we take any action that would use up some of our liquidity.

Got it. And then just -- again, just housekeeping. How much left of that basket do you have left to do those exchanges?

Well, we didn't use any baskets. We really just used the 4 times secured debt ratio as part of the secured notes. But as far as that calculation goes, I think there's maybe another $50 million or so.

Great. That's helpful. And then just thinking about synergies -- this is a question on slide 5 -- when we look at that $45 million of incremental cost savings, how should we think about that, you know, running through the numbers during the year? Is it going to be front-end loaded? How should we kind of model that?

The $45 million should be spread fairly evenly, because a good chunk of that was changes that went into effect January 1.

Got it. And then to your comments, opportunistic transactions, if you could just elaborate a little bit -- what would that be? What would that constitute size-wise? What would you be comfortable kind of taking down if the opportunity presents itself?

Well, that goes back to how much base liquidity do we think we need; and to be honest, I just don't have the answer for that yet. That's still kind of a work in process.

All right, got it. And then just final question; I apologize if I missed it: what is the CapEx expectations for the year? And then if you could just repeat what you had said on the integration costs and when those are expected to be realized?

The CapEx this year will probably be somewhere around $90 million to $100 million. The one-time integration cost that we expect to incur in 2016 is about $30 million.

Got it. Thanks so much, and good luck. I'll get back in the queue.

Drew Lipke, Stephens.

First question I had -- on your gypsum, roofing, and insulation sales, we did see those down 2.6% for the second quarter in a row. That's in a bit contrast to some trends that we've seen from others. I'm just curious; what do you guys attribute that to, and sort of what's going on there?

I think some of it -- some of it we saw some softening in the pricing in the marketplace for us. A lot of the commercial projects -- I think a lot of people started getting concerned whether there was going to be a gradual slowing down in that particular area. The competitiveness, I think, really affected some of the pricing. We're seeing that coming back.

In roofing, we didn't have any really good hailstorms to help us that we had in previous years. And I know that sounds a pretty callous way to put it, but hailstorms are very, very good for our roofing business. And particularly in the areas that we have very strong roofing sales, it definitely affected the year-over-year comparison. Those are the main reasons.

Okay, that's helpful. And then as it relates to ProBuild sales specifically, in the overall you guys are tracking pretty in line with the end markets. I'm curious: what are you seeing with ProBuild's stand-alone specific sales? How are they tracking? And what steps are you guys taking to allow ProBuild to better compete in the market?

I think they're tracking pretty close to ours. I think we've discussed in the past, prior to us acquiring ProBuild, their strategy was more going after margin and maybe walking some of the lower margin business, which is in some ways in contrast to some of our strategies. As you know, our mix of large national builders was historically higher than ProBuild's.

And so we've -- since we've acquired them, we've loosened the reins little bit and told them, hey, with the changes we're making to their cost structure, we should be able to sell the large homebuilder profitably. So we have loosened the reins a little bit to let them go after some of that business that, prior to us acquiring them, they may have passed on.

Yes, I think you can really see the effects of that. We've been accelerating since the acquisition was closed. The fourth quarter in particular we saw a really good improvement in the sales on the ProBuild side.

And you know, we were able to overcome a very, very tough commodity deflation effect. And we look at on a quarterly basis the -- our -- the commodity effect we had was negative, 100 -- cost us about $121 million in sales. So that will give you some indication of the strength that came back in the other parts of our business, and certainly the ProBuild locations are contributing strong to that.

Okay, that's helpful. And then just last one for me. You know, we've yet to see it in the census data, but it sounds like the unseasonably warm and dry weather that we've seen year to date has allowed a lot of builders to close the gap on starts versus completions. I'm curious; are you guys seeing that year to date? I appreciate the initial Q1 commentary that you gave. But just curious what you're seeing there. And then as a follow-on to that, what are you seeing in terms of the competitive environment around sort of pricing as we kick off the spring season?

I think we are seeing that so far in our first quarter. As I said, I think our sales are going to be up 6% to 7%, and that's facing another pretty stiff commodity deflation headwind. And so that should be a good indication that we have seen some acceleration this quarter.

We're really pleased with the way -- you know, as things are progressing in the quarter. A lot of -- we're seeing good activity out on the jobsites, still very active in homebuilding. The biggest problem issue that we still face is labor out on the jobsites. Probably if you look at completions versus starts, you can really see that. So, you know, that's the only thing that's really -- that I can see that's holding anything back. But we are really pleased to see the way the quarter is going right now.

And on your second question, about pricing, pricing is still tough. It's still very competitive out there. When you look at where we are from a starts level, we are still well below, you know, any sort of normal building environment. So it's still pretty tough from a pricing standpoint.

All right. Well, that's helpful, guys. I appreciate it. Thanks and best of luck.

Mike Dahl, Credit Suisse.

Hi, you have Anthony Trainor filling in for Mike. Thanks for taking my question. Congrats on the quarter and congrats on the progress.

My question -- on slide 5, you have the estimated run rate cost savings. So relative to, I think, the expectations you laid out at 3Q, it looks like the actions taken to date are probably running $5 million light versus -- 4Q versus what you were expecting last quarter.

And then on the flipside, it looks like your year-one expectations are now $90 million versus $80 million last year. So I was wondering if you could talk a little bit about where the -- maybe the sources of the change, and how much time you played a role in this?

Well, as you can imagine, there's a lot of moving parts. We've got a lot going on from an integration standpoint. And so, yes, I think we said in the third quarter it might be around $85 million. We're being probably a little conservative. We got the rates back at the 90 to 100, where we had had it originally. The biggest moving parts is largely on the ERP conversion efforts, the costs associated and with that; and then a little bit of give-and-take on the some of the employee-related costs of relocation, severance, retention bonuses, things like that.

Thanks, that's helpful. And as a follow-up on the ERP, could you talk a little bit about what the result is of -- once you switch over to the new ERP systems, and kind of how much of a difference that -- how much of a change that makes to your ability to manage the cost savings?

Well, the $100 million to $120 million cost savings that we laid out were for the most part independent of ERP conversions. Now, as we get deeper into the conversion process -- and as we said before, this is going to be a -- could be a four- or five-year process to get through all of these.

And we went through a similar process of builders over the years, as we grew through acquisitions. But as you get everyone closer to being on one ERP system, the savings you can generate and the efficiencies you can gain just by really having real-time access to consolidated information to manage your inventory, to manage your credit, to manage your payroll and your overtime costs, and then reduce headcount in the back office -- as you get everyone on one system, just as far as the AP, payroll, all the back office functions are much more efficient.

So some of those savings we will realize beyond that two-year window as we get more and more of the Company onto the same ERP system. But it's really just an overall efficiency and having real-time consolidated information at your fingertips to run the Company.

Great, that's helpful. And then shifting gears here a little bit to the value-add penetration. Nice progress there.

Could you talk about -- is this still coming -- the increased penetration, is this still coming on the legacy FirstSource side of the business? Or how is the sales synergies as far as applying those -- the techniques on the ProBuild side of the business. How is that progress going?

Still progressing well on both fronts, and I think we will continue to see that. Labor is still an issue out on jobsites, and so I think the builders will continue to demand the prefab components. A lot of our capital spend that we have slated for 2016 involves expanding that opportunity on the ProBuild side. We've got some facilities that we are increasing the capacity on through additional equipment and automated equipment.

We are relocating some facilities to increase capacity, and opening a couple of new truss and panel facilities. So it's something we'll continue to work on. It's not something you can turn around in a month or two. But we're putting a lot of effort into that, just like, from the Builders FirstSource side, we've done for the last decade.

Great, thanks.

Rob Hansen, Deutsche Bank.

Thanks. I just wanted to kind of return to the leverage topic here. How much of a seasonal draw should we expect to see in 1Q and 2Q? And then how much debt you want to pay off in 2016? I think you mentioned $80 million of free cash flow. Should we expect all of that to go straight towards debt repayment?

I think we may peak out at maybe $150 million, $175 million out on the revolver at its peak during the year. And then obviously we'll see that come back down towards the end of the year as the building season slows. The answer your second question, I don't know if I would say all of the $80 million to $85 million of cash flow, but it's certainly a significant portion of it I would expect to be used to take some debt off the balance sheet.

Got it, okay. And can you just give us maybe some sort of stats or something that we can kind of -- you could maybe quantify in terms of being able to sign up new builders onto the value-added products side of the business, or maybe some sort of anecdotes or something like that?

We don't have anything like that handy, Rob. I can work on pulling something together for you. We don't have anything like that at our fingertips right now.

Okay. Then just on the 8% volume increase, obviously aside from lumber, what other categories feel that the most on that volume piece?

That's going to be your manufactured products and probably the millworks out of the business I would say would be the top two.

Okay. And then you mentioned the new truss and panel facilities. Where are those going to be? I know you guys have been thinking about the California market as an opportunity. Is that -- are you kind of looking there more, too?

Yes, that's where one of them is going in.

And then there's another one up in the Northeast that we are -- got a pretty good expansion project underway.

All right. Well, appreciate it guys, thanks.

You bet.

Matt McCall, BB&T Capital Markets.

So let's see. Chad, you talked about the Q1 guidance [held] up 6% to 7% in the face of a pretty stiff commodity headwind. Can you quantify what that expectation is from a commodity headwind perspective?

Yes. Bear with me here one second. If prices stay where they are today, we estimate that that could be somewhere around a 6% or 7% negative impact on our sales in the first quarter. And then that comparison gets easier as we go on through the year. If pricing stayed where it was today, I think by the end of the year it would be somewhere around a 2% or 3% negative impact on full-year sales.

2% to 3% per year. Okay. And so you talked about in the deck commodity price deflation, but then in the gross profit commentary you talked about improvement in pricing. So when you think about -- you have quantified the commodity price, but can you talk about pricing and the net impact in other categories? I think Floyd answered that the Q4 -- the gypsum, roofing, insulation -- the pricing was softer. But can you put some numbers behind the impact? And where does that show up in the bridge on page 10? Or I'm sorry -- not page 10. Yes, page 10.

I'll speak from a quarterly standpoint for the fourth quarter in our margin. I estimate that the commodity deflation obviously impacts our top line. And so it robs some gross margin dollars from us.

Now, we do get a rate improvement as prices are falling, as you know. So I estimate the net impact on gross margin due to commodity deflation was about $15 million to the negative, if you're trying to bridge from Q4 last year. And then all the other non-commodity-related products added about $28 million of gross profit dollars. So the net of those two would get you to your $13 million change in margin quarter over quarter.

Okay, okay. Let's see, the D&A number you gave was a little bit lower than we expected. Has something changed there, or did we just model it poorly? We had $98 million in depreciation, $32 million in amortization; we were at about $9 million a year for new CapEx. What did we -- where did we go wrong?

No, you didn't model it poorly. But we -- after the hand-to-hand combat of going through all the purchase accounting for the year-end audit and getting it all finalized, we ended up putting more to goodwill than the amortizable intangible asset than we had thought. So that's probably where your difference is coming from.

Okay. And then a similar modeling question: the share count was a little bit lower at 109 million -- is that the right way to look at it going forward?

No, I think it's going to be a little higher than that. Let's see here.

It's going to be almost 113 million.

Yes, I think on a fully diluted basis, it'll be somewhere around 113 million, 114 million.

Okay. That's it for me. Thank you.

You bet.

John Baugh, Stifel.

Thank you. And Floyd, Chad, Jennifer, great start to the integration and year. I was wondering -- there was a comment in there about incrementals I think you made, Chad. It would be 15% to 20%. I guess two questions on that. One, how is deflation playing with that number in the first quarter? And how do you think about that for the balance of the year?

It seems like a fairly high number overall; or, at least, I have seen ProBuild would be lower incremental than that. Was that just a bad assumption that -- maybe you could discuss incrementals between ProBuild's and Builders FirstSource? Thank you.

Well, I'll discuss incrementals in total. Yes, when you're in a period of commodity deflation, your incremental is going to be higher, because you're generating more margin dollars on a lower sales number, essentially. So just the way the math works, your incrementals are going to be higher.

And so that's the primary driver of why that's in the 15% to 20% range and not in the typical 12% to 15%. And then I also think we'll probably get a couple million dollar benefit in the quarter from lower fuel prices. So that's adding to it as well.

So, Chad, you think more 12% to 15% as commodity deflation evens out or gets closer to breakeven for the balance of the year?

That's right.

Great. Thank you, good luck.

Nick Coppola, Thompson Research Group.

Just to start with a high-level question, can you just talk more about your expectations for end markets in 2016, particularly given economic uncertainty out there? What are customers telling you, and what you looking for for the year in terms of new construction and R&R activity?

Was your first question on margin? Markets?

End-market expectations.

Okay. You know, in my opinion, I think we're going to see more of the same. I think we're going to see somewhere in that 8% to 10% growth in single-family starts. I think repair and remodel will still hang in in that 3%, 5% range.

You know, the oil will impact some markets. But we've got plenty of other markets that are not impacted by oil that are showing some great strength. So in my opinion it's going to be more of the same; it's probably similar to what we saw last year. I don't know what your perspective is, Floyd?

Yes, I think we're also going to be seeing, I think, more movement to the starter home. Certainly, Horton with their Express line is definitely showing a lot of strength in this area. I think there are other builders who are following along in the same line.

You know, right now I think we are seeing a steady improvement. We've got -- the traditional markets in the Southeast are still going very well. The Texas market is still very healthy for us. Houston, while it's down 10%, 12% right now, but that's mainly in the upper-end home. We are seeing still a healthy growth in the lower-priced/middle-priced homes in Houston. The Dallas-Fort Worth market, San Antonio/Austin market, they're really, really going strong.

The other parts of our country -- the West Coast, Northwest, looking very healthy at this point, as is the Northeast. So I don't see all the pessimism that seems to be prevalent in the press. I think job growth is looking well. And I think we are seeing certainly more jobs being created in the middle- to higher-income levels. And so we feel good about this year.

As Chad said, 8% to 10% improvement in housing -- I'll take that every year. And I see nothing out there, even on the horizon, that causes me to feel that we're not going to see that again this year in the improvement in housing.

Okay, that's helpful. And then second question here: you guys have closed some branches post-acquisition. So if you could just add some color about what those markets have looked like? How have volumes trended in those markets? Were there any disruptions and that kind of thing?

I've heard of minimal disruption.

No disruptions.

Yes.

I know people look at us and kind of would cock their eye when we say minimal to no disruption, but that's the truth of it. We are operating very well. Our people have come together extremely well. We did a very good job of preplanning and then the execution of our integration plans and go-to-market plans. So from our viewpoint things couldn't be going better.

Yes, it's a credit to the guys in the field in the markets where we overlap. They have really come together and are working as one unit to making sure there's no customer disruption, whatever we are doing, whether it's an ERP conversion or a facility consolidation. The guys out in the field have really done a great job.

And really worked well at supporting the customer from the best and closest location, which is working out extremely well for us. And so we been able to provide and keep up a very high level of service to our customers.

Okay. That's great to hear. Thanks for taking my questions.

You bet.

Will Randow, Citigroup.

Good morning and congrats on the progress. I guess these points have been hit on, but just a couple more pointed follow-ups. When you look at regional demand, what markets are you seeing, I'll call it, incremental strength versus weakness? And kind of implicitly, what I'm asking is: Texas has kind of allowed the builders or building companies in general to outperform relative to the new home sales pace. How do you think that trend shakes out as we go forward? And again, what are kind of the strong regions versus the weak regions?

I really can't say that we have any weak regions. All of our regions are -- at this point are meeting or exceeding my expectations and for what we have set for our budgets this year. I guess you could say if Houston as strong as it was last year, no, but it's far from being a disaster or a problem area. The other markets in Texas, very good. Northeast, very good.

The Florida markets, Georgia, the Carolinas, all operating well. Some -- we are having some issues in the Bakken with the -- in the Dakotas. But they are also very close to budget, so -- not enough below it to make me have any real heartburn.

Our business in Alaska, still strong. California, going very well, as in the Northwest. So, you know, there's always going to be -- and when you have 450 locations, you're always going to have some that are lagging for one reason or another, might be a little behind, but then other locations within that general geographic large market/state makes up for it.

So I would say Florida and the Carolinas probably are the strongest areas in terms of building health right now. But Colorado certainly would fall in that classification as well. Our business in Colorado looks really, really good at this point. So that's the best way I can answer you. I wish I could tell you that I had problems, but I don't.

And just more pointedly, in terms of the California locations you do have -- particularly in SoCal -- there's been some concern about Builders's absorption rates or, if you will, same-store sales falling. You haven't been seeing any sort of slowness in activity in those markets. Is that what I'm hearing?

No. I guess maybe our people aren't reading the press or whatever, but we are -- things are going very well right now in the California market for us.

And then on operating leverage, it's been asked a couple of different ways, but you talked about a 15% to 20% conversion to EBITDAR rate for the first quarter. Excluding some of the headwinds you might get from either lumber inflation or deflation through the year, and excluding synergies, how should we be thinking about modeling operating leverage through the year? And then obviously you have provided the synergy piece, and we can figure out where lumber runs.

Yes. I think excluding all that, and just on the base business, you're going to be somewhere in that 12%, 14%, 15% range.

And just lastly on free cash flow conversion -- I mean, from net income down to free cash flow conversion: what pieces should we be thinking about outside of the standard working capital incremental run rate? I think you had, actually, room to tweak down the ratio as a percentage of sales and obviously gave CapEx guidance.

Yes.

Anything else we should be thinking about in terms of a drop-down to free cash flow?

Probably just $3 million to $5 million or so of taxes. And then make sure you've got the one-time cost in there of about $30 million.

Okay, perfect. Thank you and congrats again.

You bet, thanks.

Jay McCanless, Sterne Agee.

The first question I had: on that 6% to 7% sales growth target that you gave for Q1 2016, could you tell me, one, which number you comp it against in the prior year? And also does that 6% to 7% include the effect of lumber deflation?

If you look in the presentation deck, we're comping it on the $1.284 billion Q1 2015 sales. And yes, that includes the expected impact of deflation.

Okay, it does include it. The second question I had: on stock comp, what should we model for the year?

That's a good question. I'll have to get back to you on that. It's still a work in process for Q1.

Okay. And then the last question I had, and I apologize if I missed it: did you guys give a target for 1Q 2016, what we should expect for an SG&A ratio?

No, but I think we probably gave you enough to back into it.

Okay, all right. Thanks, guys. Appreciate it.

Okay. Thanks, Jay.

And due to time constraints, that was our last question. I would like to turn the call back to Mr. Sherman for any additional or closing comments.

Okay. We appreciate everyone joining the call today, and we look forward to updating you on the progress of the integration and of our business initiatives in the months ahead. If you have any follow-up questions, please don't hesitate to give Chad Crow or Jen Pasquino a call. And thanks for joining us today.

And that does conclude today's conference. Thank you again for your participation.