Builders FirstSource Inc (BLDR) 2015 Q2 法說會逐字稿

Good morning and welcome to the Builders FirstSource second-quarter 2015 earnings conference call. Your host for today's call is Mr. Floyd Sherman, Chief Executive Officer. (Operator Instructions)

Any reproduction of this call, in whole or in part, is not permitted without prior written authorization of Builders FirstSource. As a reminder, this conference is being recorded today, July 24, 2015.

The Company 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, management 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 could 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.

We have provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanations of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are available on our website.

At this time, I would like to turn the call over to Mr. Floyd Sherman. Please go ahead.

Thank you and good morning. Welcome to our second-quarter 2015 earnings call. Joining me from our management team is Chad Crow, President, Chief Operating Officer, and Chief Financial Officer, as well as Marcie Hyder, Vice President and Controller. After I give a brief recap of the current quarter, I'll turn the call over to Chad, who will discuss our financial results in more detail. And after my closing comments regarding our outlook, we'll take your questions.

Builders FirstSource made good strides in the second quarter of 2015. The Company was able to grow top-line results despite the negative year-over-year impact from commodity price deflation and the abnormally wet weather conditions we experienced in many of our markets. We increased our gross profit margins to levels that we haven't seen since the third quarter of 2007, thanks to great execution by our people in the field and a higher percentage of sales coming from our value-added segments.

We also exceeded our stated goal of 15% adjusted EBITDA flow-through on incremental sales by delivering flow-through of 21% in the quarter, resulting in our highest adjusted EBITDA since the third quarter of 2006, when single-family starts were more than two times what they are today. The results reinforce our belief that we are continuing to benefit from a strengthening of the housing market and that Builders FirstSource is well positioned to take advantage of this improving condition.

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

Thank you, Floyd. Good morning, everyone. For the current quarter, we reported sales of $461.5 million compared to $426.5 million for the second quarter of 2014, an increase of $35 million or 8.2%, which includes a 2.4% negative impact of commodity price deflation. We estimate sales volume increased approximately 10.6%, of which 4.3% related to recent acquisitions and 6.3% related to volume growth at legacy locations.

Breaking down our sales by product category, prefabricated components were $102.6 million, up 12.8% from $91 million in the second quarter of 2014. Windows and doors were $100.6 million, up 10.7%. Lumber and lumber sheet goods were $140.3 million, down $3.6 million from approximately $143.9 million in 2014. Our millwork category was $48.6 million, up 21.4%, and other building products and services were $69.4 million, up 14.3% from last year.

From a product mix standpoint, our value-add product categories continued to make up a higher percentage of our overall sales, as our prefabricated components, windows and doors, and millwork categories accounted for 54.6% of overall sales in the current quarter compared to 52% last year. Our lumber and lumber sheet goods declined as a percentage of sales, while our other building products and services category was 80 basis points higher.

Our gross margin percentage was 24% in the current quarter, up 200 basis points from 22% last year. Our gross margin percentage increased largely due to improved customer pricing and a higher mix of value-added sales.

For the current quarter, our SG&A expense increased $18.1 million. Of the $18.1 million increase in SG&A, $6.4 million related to expenses associated with the recently announced ProBuild acquisition, $1.5 million related to an increase in depreciation and amortization, and $700,000 related to an increase in stock comp expense.

As a percentage of sales, SG&A expense increased to 20.5% compared to 17.9% for the second quarter of 2014. Of this 260 basis point increase, 140 basis points related to acquisition expenses and approximately 50 basis points related to increases in stock comp expense and depreciation and amortization.

Excluding these expenses, our SG&A expense expressed as a percentage of sales was 18.6% in the current quarter compared to 17.9% last year. This remaining increase was further affected by negative impact of commodity price inflation on our sales.

Interest expense was $12.6 million for the second quarter of 2015, an increase of $6.1 million from last year. This increase was primarily related to a $5.9 million increase in the non-cash fair value adjustment related to stock warrants issued in connection with our 2011 financing. During the second quarter of 2015, all of the remaining stock warrants were exercised and there were none outstanding as of June 30, 2015.

We recorded a $200,000 income tax benefit compared to $200,000 of income expense in the second quarter of 2014. We recorded a reduction of the after-tax non-cash valuation allowance on our net deferred tax assets of $1.3 million and $4.1 million in the second quarters of 2015 and 2014, respectively. As of June 30, our federal gross income tax NOL available for carryforward was approximately $257 million.

Income from continuing operations for the second quarter of 2015 was $3.6 million or $0.03 per diluted share compared to $10.6 million or $0.09 per diluted share last year. Adjusted income from continuing operations for the second quarter of 2015 was $14.3 million or $0.14 per diluted share compared to $9.4 million or $0.09 per diluted share last year.

Adjusted EBITDA was $27.6 million or 6% of sales compared to $20.4 million or 4.8% of sales in the second quarter of 2014. Adjusted EBITDA flow-through on our incremental sales for the current quarter was approximately 21%.

Operating cash flow was $7.7 million in the second quarter compared to negative $13.1 million in the second quarter of last year, the difference largely due to a higher working capital build in the second quarter of 2014. Capital expenditures were $5.2 million for the second quarter of 2015 compared to $6.8 million last year.

Total liquidity at June 30 was $143.8 million, including $40.2 million of cash and $103.6 million in borrowing availability under our revolver. We had $55 million in outstanding borrowings and $16.4 million in outstanding letters of credit under our revolver as of June 30, 2015.

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

In summary, I think I'm very pleased with the results this quarter. We were able to grow top-line results in spite of the negative impact from commodity deflation and wet weather conditions and reached a level of profitability that we haven't seen in years.

The future of our Company looks very bright indeed. And given the trends that we see in the business today and our positioning within our markets and recent improvements in the fundamental drivers of our business, such as job growth, consumer confidence, suggests that new home construction activity should continue to improve. With the acquisition of ProBuild scheduled to close in early August, Builders FirstSource stands ready to benefit from this increase in construction activity as the nation's largest building supply company.

And lastly, I'd like to express my gratitude to the hardworking men and women of this Company. Preparing for the eventual integration of ProBuild while maintaining a focus on the day-to-day responsibilities is no easy task, but based on our results this quarter, it is clear that our people were up for the challenge. I am very appreciative of your efforts.

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

(Operator Instructions) Trey Grooms, Stephens.

Congrats on a good quarter, especially given the tough weather backdrop.

Appreciate it.

First off, could you guys talk a little bit about what you're seeing -- Floyd, you mentioned the trends are positive, but could you go into a little bit more color about kind of the demand trends you're seeing since the weather has started cooperating through the end of June and into the third quarter in your different markets?

Yes, Trey, we are definitely seeing an accelerated pace as the builders are making up for the time that was lost due to the weather and waiting for jobsite conditions to dry out so that they could get the homes construction process started.

Definitely seeing that, but we're also seeing what I think is very encouraging is definitely an upbeat feeling among our customer base. They are looking for the second quarter -- I mean, the second half to be a lot stronger than the first half and it's not just weather-related.

They are gaining; they are seeing good attendance through their model home programs. I think the interest is definitely out there. There's a lot of optimism that we haven't -- I haven't personally seen or felt in quite some time.

So I think there is a positive feeling about where housing is going. I'm not saying anyone expects a hockey stick recovery, but I think it's still a good solid 5% to 7%, 8% increase on an ongoing basis. And so I think that is very healthy.

The other issue that we definitely continue to face out on the jobsite really plays into our strengths is the labor shortage. Labor shortage problems are still extreme and I think that is definitely helping move and a reason for a nice increases that we've seen in our component products.

When you look at where our business is coming from, the prefabricated components, those sales were up almost 13%. The windows and doors up almost 11%. Millwork up over 21% and the other products install, up 14%. The only negative was in the lumber/lumber sheet good category and a lot of that is due to price deflation, which we continue to face, and that was down about 2.5% over the second quarter of last year.

So the trends of our business are very, very good. Obviously, the healthy trend is being accelerated by the labor conditions and the tight labor conditions. And the builders about are definitely looking for ways to reduce the labor content at the jobsite and we are in a very good position to serve it.

We are seeing very strong -- our backlogs are continuing. I think I mentioned on previous call about how in our truss operations, we were seeing record backlogs. That's continuing and so that means we've got a lot of new business coming in as well as stepping up the deliveries for on an outgoing basis.

So I feel really good about what's happening in our building markets. This seems to be what we are hearing the same type of story from the ProBuild people and I think that's reflected in their business as well.

That's very encouraging. Thanks for that. And I know you guys have a lot of boots on the ground in Texas, specifically. Given the pullback in the energy markets and things like that, can you talk about what you're seeing specifically in Texas now? Because I understand it was a very difficult quarter from a weather standpoint in the June quarter.

Are you guys seeing any slowdowns across Texas anywhere or can you just comment on that please?

No, in the beginning, in the first quarter, Houston was the most impacted market that we had because of oil and gas issues. Definitely the Houston market was off 12%, 14%. By the end of the second quarter, the Houston building market has gotten themself almost even with last year.

All of our customers are telling us -- and we see this especially through the window operation, where the builders are very, very sensitive to making sure that they are going to have their needs covered by windows that get those openings closed. They're really -- would indicate based on what we're seeing is that by the end of the year, they are looking to have their overall market up 3% to 5%. So good recovery is taking place in the Houston market.

As you said, the water and rain -- in fact, it was estimated that with all rains that we had, the entire state of Texas was -- would've been under seven inches of water. So record rainfalls really affected us, but towards the end of June, as things started drying out, you could get on a jobsite and boy, the work pace really accelerating.

The San Antonio market, Austin market, DFW market, very, very solid -- really hot markets. We are not in West Texas, so we have very little exposure. I think the Midland/Odessa/Lubbock/Amarillo areas have been more impacted by the oil and gas, but I really can't comment on what's going on in those operations.

And ProBuild also has very little exposure to the West Texas market, so you'll have to find what's going on in those markets from somebody else who does operate in those areas.

Got it. And then I'm going to sneak one more in, then I'm going to jump back in queue. Chad, this might be for you. Obviously, you guys did a great job on the margins.

How should we be thinking about margins in 3Q and kind of the back half? I know you're putting up some good incrementals, but with the moving pieces of where you guys are kind of expecting the demand level to be, the product mix as well as the move that we've seen here in lumber, what are you thinking or how should we be thinking about margins as we look out into the next quarter or two?

I think Q3, the margins will look very similar to what we just saw in Q2. Somewhere in -- gross margin somewhere in that 24% range, give or take 50 bps either side. And I think from an EBITDA margin perspective, it should look pretty similar as well.

Nice. Okay, great. Keep up the good work, guys. I'll jump back in queue.

John Baugh, Stifel.

Thank you. Good morning and terrific results. I wanted to -- you mentioned the labor tightness and I'm just curious on this whole value-add mix shift, which is significant. Has been going on for a while, but if anything, it seems to be accelerating and it's certainly helpful to margin.

Is the labor shortage really driving that? Any color, Floyd, on maybe what inning of that game we're in -- not just for Builders FirstSource, but I know ProBuild has dramatically less exposure here. So I'm just trying to get a sense for tailwind of margin over time, if you could continue to drive this higher?

Yes, very definitely, the labor issues out at the construction sites being tight is definitely helping drive the component business and other forms of value-add products -- whether it be in install millwork and so forth.

I won't say it is the only driver, because we've also put a lot of focus on increasing the sale of our value-add products and have put a lot of emphasis -- our people are really responding to that. And so also our pricing discipline. Most of the business you walk from today is in the area of lumber pricing and commodity pricing and so you've got to start driving those other parts of your business.

We -- while it's tough to find truck drivers and the qualified CDL license holders, the -- people to work in the operations, it's a lot easier to do that. We don't have the same problem that's out on the job site, where you have the building skills required.

So it's a labor replacement, obviously, for us. I think it's a good combination of the labor issues on a jobsite and our people's focus on selling more of the value-add products.

Floyd, I know it's something you are going to work on with ProBuild. Is that something that just has to wait post merger? Or are there things underway there to influence that currently?

No, I think they definitely have had a number of very good programs that are underway. I think the -- under Rob Marchbank and their management group, they've been focused on many of the same things that we've been focused on. And there will be a continuation of those programs, but I think they are seeing the same benefits for the same reasons that we are.

And my last two questions quickly. One: any color on kind of how lumber deflation might influence numbers in the second half of the year? And then secondly, as you look at permit starts and project completions in the regions that matter to you, how that number kind of looks year over year in the second half? Thank you.

John, I really anticipated that we would begin seeing a slow but steady improvement in commodity pricing. By my count and the way I've done it, I think potentially, it affected our sales by almost -- a little over $8 million.

If you look at what that means, almost 90% of that floods right to the bottom line. So our EBITDA would have been significantly improved with any type of pricing similar even to what we had last year.

I think the commodities, it is going to be a slow recovery. I don't look for a lot of change. In fact, maybe a little bit more deflation in this third quarter. I think as we go into the fourth quarter, I think hopefully, we're going to start seeing some pickup.

I definitely believe that -- and the mills are trying. We really are seeing, especially the OSP guys, there's a lot of adjusting now of their output schedules. We're getting some of that with the lumber guys.

I think a big issue is going to be what's the Canadian lumber guys going to do, especially with the dollar exchange difference between our currency and theirs. Are they going to push a lot of excess material into the US just to make up for that and also to cover some of the weakness in the China market?

I don't know, but I know everyone on the commodity-producing side is experiencing financial results that are not long-term acceptable, so they got to start changing. They just have to get their supply more in line with the demand.

I think the industry is trying and we desperately need to see inflation come into this side of the business. And it would make such a huge difference in our operating results. I think 2016, we will begin to see really see that trend. I don't really think we're going to get it lot of help out of it the rest of this year.

And the starts completions, by region, how do you see that in the second half? Thanks.

I'm really -- in our region -- ProBuild region right now, I think we're going to see that good stead of recovery. And the Midwest is maybe a little bit flatter than other parts of the country, but for the most part, I think it seems to be a uniform recovery all over the country.

Thanks.

Matt McCall, BB&T Capital Markets.

Good morning. This is Reuben Garner in for Matt. I just wanted to -- if we look at the combined entity of ProBuild and Builders over the last couple years, on a pro forma basis, revenue per housing starts kind of been increasing low- to mid-single digits. What's your outlook for that post the close of the deal?

I think it will be similar trends. As Floyd mentioned earlier, both companies have in recent quarters really been focused on profitable sales and not necessarily as much on market share gains and I think that trend will continue. We're both certainly going to go after the more profitable business and at times, that may be at the expense of some share gains. But I think those trends will be pretty similar to what you've just quoted.

Okay. And then this is sort of a follow-up to Mr. Baugh's question. The builder -- excuse me, the higher-margin products. What level do you think you can get the ProBuild locations to? I know it's about 55% of your business now and it's I think roughly a third less, I saw, for ProBuild.

Is it something that you can get that closer to 50%? And how quickly do you think you can do that?

I think it's not going to happen overnight. Definitely, it's where you place your focus and your emphasis. We'll be starting on that obviously right out of the gate.

It took us five, six years to really build our business and I think we will see noticeable changes in our first year. But I think it will be one of those things that takes a little bit to get going and then as you gain the momentum, you're going to move in that direction.

They've got good facilities. They certainly have the really good people, that everything is in place for. And I think a lot of it is where you place the direction and the emphasis and how you structure the sales force to sell it.

All those things we'll be working on and obviously that's one of the real keys and one of the things that we really liked about this -- the combination of our two businesses is the ability to bring in some of our skill sets to match up with also their skill sets in other areas. So I think we over time, we're not going to get it up to right away up to 54% of the business, but I think you'll see noticeable improvements.

Okay. Great. And then my last question is now that you are getting a little closer to closing on the deal, how confident are you in those initial synergy projections you gave? I know you kind of gave a timing for the synergies as a whole. Is there different timing for each of the three buckets you gave and is there a particular area -- whether it's procurement or the SG&A -- that have more risk than the others?

You know, the work we've continued to do and the planning that we've done has been extensive. And I would say if anything, it's increased our confidence in being able to achieve those numbers. I think the majority of them, as we've stated, will be achievable in the first 12 months. I don't really think our picture on that has changed from what we've previously announced.

The biggest risk -- there's a lot of people involved any time you bring two companies together like that. From a personnel standpoint, I think that's where the most risk is. But you know, I feel like we've done a good job of identifying those areas and we have plans in place to address those risks.

But if I had to point to one particular area that I would say would contain the most risk, it's more on the G&A side and the people management side of things.

Okay. Perfect. Thanks a lot, guys.

Jay McCanless, Sterne, Agee CRT.

Good morning, guys. Thanks for taking my questions. The first one I had, I wanted to pick up on what Floyd was saying with Canada. With the dollar strength, is that giving you guys the ability to maybe go in and buy -- do some larger buys in Canada and help protect some of the gross margin?

Because again, is it part of the reason why the overall market is priced where it is? I'm sure it is, because they are trying to push as much of their product into this country as they can.

And I think it's still going to come down if we want to get an improvement, we've got to start getting the demand and supply in balance. And the lumber side is a lot further from getting this done I think right now than the panel guys are.

Got it. And then the second question I had is on ProBuild and Builder post transaction. If you think about the seasonality and how we should be modeling the combined company, is there going to be a dramatic shift for how Builder and ProBuild look post deal versus the way that we model Builders FirstSource as a stand-alone company?

I think there will be an increase in seasonality just because of their footprint versus ours. To what degree, I'd probably say an incremental 15% or so of seasonality would be my best guess right now.

Okay. That's good to know. And then in terms of -- all right. So seasonality, I asked that. And then the lumber, are you seeing any curtailments? You said, Floyd, that people were changing production schedules a little bit. Are we seeing actual shutdowns in the lumber producing market yet or are people just try to put a little less product onto the market?

No, I think what we're seeing is shorter schedules. I know with a number of the panel producers, they've started reducing the number that they will be on four, off four. Working a reduced number of hours -- 32 hour shifts and that type of thing. I think that's how they are bringing it in.

The lumber guys -- we don't have as much visibility and we don't hear as much what they are doing, other than some of the US producers. We definitely have heard that they have been adjusting their production schedules. The Canadians, we don't have as much of the insight into that, but I got to believe they are starting to do the same thing.

I don't think anybody is going to walk away from any of the mills that have been opened. I think especially some of the new mills that were opened in -- towards the end of 2012, 2013, there's such great investment that went into the startup of those operations and that certainly contributed to a lot of the excess that we're seeing. But I don't think we're going to see any mill shutdowns. I think it will all be adjusted work schedule.

Okay. Okay, sounds good. Thanks, guys.

Paul [Carrolls], Whitebox Advisors.

Hi, guys. Most of the questions actually I had were answered. Can you just step through just on the timing? What is left to get done and the timing again on the deal? What is left, if anything, to get completed before the deal does get closed?

Well, we expect to price our bonds this afternoon. We still hope to close around the end of the month, first week of August. So between now and then, we would have to go out and raise the additional equity. That should be it.

Between now and then, get out and raise -- say that again?

Go out and raise the additional equity that we've disclosed that we will be raising prior to closing the transaction.

Okay. Great. Has that been sized up yet?

In our original projections, it was $100 million additional a new equity.

Okay. Thank you.

(Operator Instructions) Justin Bergner, Gabelli & Co.

Congratulations on getting to this point; exciting time for the Company. I do have a few questions -- some of them are just quick factual questions. On the quick factual questions, do you have the quarter-end share count, basic and diluted?

I do not have that handy. Are you talking other than what's in the press release already?

Well, that has the average share count. I know you mentioned all the warrants were exercised. I'll wait for the Q, then on that.

Secondly, in terms of the synergies and the timing, when you say that the majority are expected to be realized in the first 12 months post close, you are referring to kind of the run rate of the synergies 12 months post close, right? You're not referring to the total synergies in year one?

I still think from a majority standpoint, we'll be able to achieve probably more than half. But you are correct, on a run rate basis, that's probably going to be closer to 75% or so we will achieve on a run rate basis. But I still think even on an actual basis, we'll be able to grab a significant amount in year one.

Okay. Great. Thank you. And then in terms of the SG&A, if we pull out all the factors that you called out, I guess SG&A still increased 70 basis points year on year. Is part of that tied to just a slightly higher SG&A composition for value-added sales or how should we think about that remaining 70 basis point increase in SG&A?

I think 40 basis points or 50 basis points was due to commodity price deflation and the impact it had on our top line. The only other real outlier was a little bit higher on the group health expense -- that was another 30 basis points or so. I don't really think the increase in prefab will have an impact on the OpEx.

Okay. Great. So SG&A over sales shouldn't be impacted by the value-added mix materially?

No.

Okay. And then finally, I'm not sure if you can answer this question, but in the 8-K that you put out a week ago, you offered some preliminary results for ProBuild. And the margins looked good, but I guess the sales pattern was a little weak, I guess -- down 1.5% to 3%, excluding facility closures, but some commodity price deflation there.

It seems like ProBuild might be sort of undergrowing the housing start pace a bit. And I was just curious if there's anything you could offer to provide perspective around that.

They -- as you mentioned, they did have an impact on a year-over-year basis from the closed facilities. The commodity price deflation impact for them is a little greater than it was for us.

So I think by the time you factor those two in, you are probably looking at somewhere around 2% sales growth for them. And then combined with that, as we've discussed from the Builder standpoint, a continued focus on really going after the more profitable business and walking away from some of the lower margin business.

So when you take those three things into consideration, their numbers came in right about where I would expect them to.

Okay. Great.

I think you also have to look behind at -- there's no question the ProBuild operation is a higher cost operation than we are. And the large builder segment is a segment that obviously is a larger piece of our business than it is of theirs. Their higher cost of operations has really pushed them away -- and not entirely (technical difficulty), but most of their direction now is towards the smaller builder, the custom builder.

They really have done well, because their method of operation and their cost of operation says that that's a more profitable business for them to go after than the large-scale builder. And I think a lot of what you are seeing is really the result of their concentrated efforts to improve their margins and they have been dramatically improving their margins. And a lot of that is driven by -- you got to go after the type of business that fits your business model.

We obviously are looking to change that and put them into a position where they can be more fully competitive in the major builder area. And that is obviously one of the really strong points that we're looking to gain in this -- the combination of the business.

But I think they've done a really good job in highlighting and working on the areas of business that will improve their profitability. And their profitability has definitely shown dramatic improvement.

Thanks so much for the color and congrats on shortly, hopefully, closing the deal.

Jay McCanless, Sterne, Agee CRT.

Hi, guys. Just one follow-up question. On the value-add sales, could you remind us how much or what you all have given in the past in terms of how much of those sales are done on a fixed-price basis, where -- and what I'm getting to with that is if lumber prices continue to move down and you guys can hold the pricing on there, it seems like gross margin certainly could stay at current levels or level in Q2 and maybe go higher. How much of your sales are done on a fixed-price basis for those value-add items?

Probably on the prefab components on our trusses, we probably -- 40% to 50% of that business is on 60- and 90-day pricing. The rest of it is done on 30-day pricing. So it's very similar to what you do when quoting a lumber package. And we have to make sure that we cover our costs, which we've been able to do either through inventory or arrangements with mills, etc.

And so it still is a business that you have to really stay on top of and make sure that you cover whatever price period you are quoting for. Millwork and so forth, because those prices tend to be much more stable, they typically for us -- you're going to be looking at 90-plus days in a lot of that pricing. But we don't any -- you don't have the same issues in those -- in that area that you do with lumber.

Okay. Yes, that's very helpful. All right. Thanks, guys.

Justin Bergner, Gabelli & Co.

Thanks, again. Just want to perhaps delve a little bit deeper. I guess six months ago, it seemed like there was too much supply in the market, and now things have tightened up a bit in terms of your industry.

I realize that labor is an issue, but it was sort of an issue to a certain extent for Builders six months ago. So what really changed over the last six months to improve the pricing environment that you are seeing?

I think a lot of it, as we said, was our shift in the -- to more of the higher mix of the value-add products. And any time you can go to a builder with a more complete package of both the commodity lumber and the value-add products, it's just overall a better value to the builder. And I think gives us more leverage from a pricing standpoint.

Now, it is still a very competitive market. From our standpoint, there's still too much supply out there chasing a relatively low level of demand still. So while things have gotten better and as they do get better, it gives us a little more opportunity to get a little bit better pricing.

I feel like there's still a lot of upside to that. I think you're going to continue to see as homebuilding continues to improve, this kind of steady improvement in our gross margins.

Great. I'm inferring from your comment, then, that part of the pricing improvement is sort of an industry phenomenon and part of it is sort of a Builders FirstSource-specific phenomenon? Is that -- how else do you think --

I think that's a fair statement. Certainly, as I said, the higher mix of our value-add products, you become a more desirable supplier to the customer, which should give you a little bit better opportunity for pricing.

Great. Thank you.

Phillip Pennell, Mariner Investment Group.

Thanks for taking my call. You mentioned that the footprint obviously doesn't exactly overlap, which is a good thing, because it gives you some --

We can't hear. Can you get a better connection?

Good. Can you hear me now?

Yes.

Okay. Great. You guys had mentioned that the footprints really don't overlap much on obviously the ProBuild versus Builders First. And that gives you white space to move into. I guess I'm curious if you're trying to -- the ProBuild guys don't have the prefab kind of value-added products, so who has been supplying those products in the areas in which they operate?

I guess my point is how do you then move into those areas and take that business from somebody else without, say, having to negatively impact margins on a competition for sales?

Well, they -- obviously, they have truss and panel operations and they are involved in those products. It's not as large a percentage of their overall mix as it is with us.

There are many truss operations out there and we have the same thing as we take business away -- a lot of it is the quality of your service, the dependability of your service, the aggressiveness of your sales force in getting the business. And as Trey had said, tying it in with a lot of other products.

We're not just a truss manufacturer. And so the more you can bundle a package for a builder, then the more important you become as a supplier. It's a matter of really just saying I want to sell trusses, I want to sell panels, instead of taking the easier approach sometimes, which is selling a stick framing package.

Any time you are competing to take somebody's business away and you say there's going to be price competition, but it is not only decided on price with components; not nearly as much as what you get into lumber. I don't see us -- I don't see (technical difficulty) a more concentrated approach on components as deteriorating the price schedules.

The other thing is is that you have a lot of builders. This is a real growing part of the building material supply industry. There are many builders that have been conventional stick framers that are turning to the use of components to alleviate some of the labor issues that they are having out on a jobsite. So you also have a building market and certainly -- and I don't see any new truss plants being built and I don't see a lot of people going into the truss business who are not already in it.

So from that standpoint, the demand and supply are going to becoming more in balance. That's why I can answer that for you.

All right. Do you see that that move that you have with ProBuild then basically increasing the penetration in those areas that they previously were in by themselves? Increasing that penetration in terms of the trusses, etc.?

Right. And I'd say it becomes more of a substitution of lumber with components.

Got it. Okay. So do you guys view -- I know there's been some dislocation in the high-yield market. Has what's going on in the market -- and I know you mentioned earlier in the call that you expected to price the bonds. And I guess there's a bank loan component of this financing as well.

Has what you've been led to believe where pricing is going to be, has that changed the return profile in this acquisition at all for you?

No. From our standpoint, this is great for Builders FirstSource. I think it's going to be great for ProBuild. I think is going to be very good for the industry. So, no, the value creation I can see coming out of this I still feel like is quite significant. And no, nothing we've seen in our financing efforts to date would lead me to believe that's going to be significantly different.

Okay. So pro forma, we're still on the same schedule in terms of the sources of funds for the acquisition as before. We don't expect to have to up the share component of it at all?

No, I don't expect that.

Okay. Great. Thanks for the answers.

And with no further questions in the queue, I'd like to turn the conference back to you, Mr. Sherman, for any additional or closing remarks.

Okay. We appreciate everyone joining the call today. If you have any follow-up questions, don't hesitate to give Chad or Marcy a call here in Dallas.

Again, that does conclude today's presentation. We thank you for your participation.