Builders FirstSource Inc (BLDR) 2015 Q3 法說會逐字稿

Good morning. Welcome to today's Builders FirstSource's third-quarter 2015 earnings conference call. As a reminder, 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. Welcome to Builders FirstSource third-quarter 2015 earnings conference call. Joining me today on the call 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 sections of the Builders FirstSource website at www.BLDR.com. The presentation was posted this morning.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without prior written authorization of Builders FirstSource. And, as a reminder, this conference call is being recorded today, November 6, 2015.

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. 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 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.

The acquisition of ProBuild closed on July 31, 2015, the closing date. As a result, ProBuild's financial results are only included in the combined Company's financial statements from the closing date forward and are not reflected in the combined Company's historic financial statements. Therefore, we have 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 and adjusted results on this call. We provide a reconciliations to the non-GAAP financial measures to the 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, it is my pleasure to turn the call over to Mr. Floyd Sherman.

Thank you, and good morning. We welcome you to our third-quarter 2015 earnings call.

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

Once again our discussion on slide 5 was 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. Through the -- its lumber yards, component facilities, millworks, gypsum yards and retail stores across 40 states, ProBuild generated approximately $4.5 billion of sales in 2014.

The combination of Builders FirstSource and ProBuild creates a clear industry leader with expanded growth and margin opportunities, enabling a broader, more efficient platform of manufacturing and distribution capabilities going forward. We believe the benefits of the acquisition include increased scale and diversification; a market presence in 74 of the top 100 MSAs and 24 of the top 25 MSAs; opportunity to expand sales of higher-margin products and services; $100 million to $120 million of targeted run rate cost savings before one-time expenses; and certainly favorable timing, given the projected housing market recovery and long-term growth potential.

Now that we are a few months past the acquisition close, I'm eager to share with you an update on the ProBuild integration efforts. We are making great strides in combining our organization into one company. All aspects of the integration, including system conversions and facility consolidations, are in full swing and progressing as we had planned.

Management and operating teams are in place and are driving our joint business goals. All six ProBuild Senior Vice Presidents of Operations joined Builders FirstSource management to run six of our nine large regions, bringing 33 years of average industry experience to the combined Company. Additionally, three legacy Builders FirstSource Senior Vice Presidents of Operations bring an average of 36 years of industry experience to their roles.

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

Moving to slide 6, the combination of Builders FirstSource and ProBuild is expected to generate approximately $100 million to $120 million in annual run rate cost savings synergies in the first two years following the close. Synergies are expected to be captured through network optimization, procurement, and G&A costs, with a breakout of about 20%, 30% and 50% targeted for each area, respectively.

Within two months of the acquisition, we've already implemented changes that are expected to yield over $30 million of annualized cost savings. These initiatives were designed to generate go-forward savings, which we expect to start benefiting our fourth-quarter 2015 financial results. We believe that we are on pace to achieve additional annual run rate cost savings of approximately $50 million within one calendar year of the deal close, bringing the anticipated run rate savings to $80 million by August 2016.

As part of the integration progress, we expect to incur $80 million to $90 million in one-time costs to achieve these synergies. We believe approximately 2/3 of the one-time costs will be incurred in the first year following the acquisition, and the remainder incurred in the second year.

Our integration efforts with ProBuild are the highest priority for us in the coming months. 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.

And now before turning over to Chad, I'll give you a brief recap of our third-quarter results. We ended the third quarter of 2015 with pro forma sales of $1.7 billion, flat as compared to last year, excluding the impact of closed locations, but through adjusted EBITDA, by 19% or $18 million. I am pleased with the growth and profit over the prior-year, despite the negative impact of commodity deflation on our current quarter sales.

Average prices for framing lumber have fallen approximately 22% since the beginning of the year. As a result, our third-quarter 2015 lumber and lumber sheet goods sales were down 6% versus third-quarter 2014. However, our value-added sales of manufactured products, windows, doors, and millwork, increased by 6% versus the third quarter of 2014. And the -- I would also like to point out that the category, the value-added sales accounted for 37% of our Q3 sales, and this compares to the lumber and lumber sheet goods share of only 32.6%.

So, very definitely we continue to expand our offerings and our sales in the value-added category. We believe our Company is well-positioned to help homebuilders mitigate the impact of well-publicized labor shortages through our manufactured and value-added products across our national footprint.

Adjusting for deflation, our new residential volume sales grew 7% in the quarter, and repair and remodel grew 3% versus prior-year. Lumber prices have started to rebound over the last four weeks and we hope that this trend continues. We've also seen 16 straight weeks of improving 7/16 OSB prices and we also hope that this trend continues.

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

Thank you, Floyd. Good morning, everyone. As a reminder we have reflected pro forma adjusted figures to include ProBuild's financial results prior to the closing date.

Turning to slide 8, for the quarter, we reported pro forma sales of $1.7 billion, which were flat compared to the third quarter of 2014. Sales volume grew approximately 7% in the homebuilding end market and 3% in the repair remodel end market, which was offset 6.1% by the negative impact of commodity price deflation on our sales and 0.1% from closed locations.

Breaking down our pro forma sales by key product categories, excluding the impact of closed locations, manufactured products were $284.6 million, up 5% from $270.9 million in the third quarter of 2014. Windows, doors and millwork were $342.7 million, up 6%. Lumber and lumber sheet goods were $554.4 million, down $34.3 million, or 5.8% from approximately $558.7 million in 2014.

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 37% of adjusted sales in the current quarter compared to 35% last year. Our lumber and lumber sheet goods declined as a percentage of sales from 35% in the third quarter of 2014 to 33% this year. Our other building products and services categories were relatively flat compared to last year.

Our pro forma gross margin percentage was 25.9%, up approximately 160 basis points from 24.3% last year. 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 [$43.2 million], excluding certain one-time financing costs, and normalizing for the incremental debt issued to finance the ProBuild acquisition.

Pro forma income tax expense in the third quarter of 2015 was $1.2 million compared to $1.5 million in the third quarter of 2014. Adjusted net income for the third quarter of 2015 was $34.7 million or $0.31 per diluted share compared to $15.9 million or $0.14 per diluted share in the third quarter of 2014.

Adjusted EBITDA in the third quarter of 2015 was $113.6 million or 6.7% of sales compared to $95.9 million or 5.6% of sales in 2014. This represents 18.5% growth on a year-over-year basis. We have provided an adjusted EBITDA reconciliation on page 10 of the presentation.

Turning to slide 9, total liquidity at September 30, 2015 was $686 million, consisting of net borrowing availability under the 2015 revolving credit facility and cash on-hand. We had $135 million in outstanding borrowings under our revolving credit facility as of September 30. In the third quarter, we paid down approximately $160 million on the 2015 credit facility subsequent to the acquisition close.

Given the cyclical cash flow of our business, we do not plan on -- to begin paying down our fixed or term debt before mid-2016. As I stated earlier, pro forma net interest expense was $43 million, excluding certain one-time financing costs, and normalized for the incremental debt issued to finance the ProBuild acquisition. Interest expense, as reflected in our GAAP financials in the quarter, included several nonrecurring items. We have provided an interest reconciliation to provide a normalized or ongoing view of interest expense.

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

Thank you, Chad. We continue to believe the long-term outlook for the housing industry remains positive. Our focus will be to leverage our national scale and sales capability to grow faster than the market, while maintaining a focus on improving overall profitability.

By leveraging our sales expertise and national manufacturing capabilities, we believe our Company is well-positioned to help homebuilders mitigate the impact of well-publicized labor shortages. Specifically, our value-added products provide alternatives to on-jobsite construction and associated labor delays.

I remain convinced that the combination of Builders FirstSource and ProBuild will create significant value for our shareholders and customers alike in the years to come. We are fortunate to now have the industry's largest professionally-trained sales force, the greatest depth and breadth of products in the industry, and state-of-the-art manufacturing capabilities. These strengths, our scale, and the potential leverage provided by the synergy savings, combines to make Builders FirstSource that is greater than the sum of the parts.

This combination represents important opportunities to enhance our growth potential. And we expect to be further assisted by the continued recovery in the housing market, along with the strengthening of lumber and lumber sheet goods pricing. I've never been more excited about the future prospects for our Company as well as our industry.

In my travels over the last few months, I've had the pleasure to meet with so many of the great associates from ProBuild. I am impressed with the exceptional pool of talent we have across our combined organization, and I'm confident that we will, together, form the strongest team in the industry.

I must thank all of our employees, not only for all their hard work and dedication in making the integration a success, but for continuing to produce the solid financial performance that they have in spite of the many headwinds and distractions they've had to deal with.

And now I will turn the call over to the operator for Q&A.

(Operator Instructions). Rob Hansen, Deutsche Bank.

So the first question I wanted to ask about was just the prefabricated business. With a lot of the builders talking about delays and labor shortages and whatnot, what are your salespeople telling you in terms of builders making inquiries to you and possibly increasing that business?

Yes. We are continuing to see an increasing demand for our products. Certainly, the builders are much more receptive to the use of the manufactured components in the construction cycle. This goes for both single-family, multi-family, light commercial. And the -- so, we're seeing a continued increase in interest as well as use of our products.

And I think, in this business, right, you're somewhere around 60% capacity? Can you just kind of talk about where you have a -- you're a little bit lower on that capacity utilization and where you are higher? Does the demand for the prefab business kind of match on a market basis?

Rob, I would say the traditional markets that would use prefab more consistently would be kind of the mid-Atlantic area. It's not a product that has, over the years, at least historically, had a lot of traction in Texas, but we are starting to see that pick up. So, I would say right now our plans at -- or not maximum, but at the most capacity utilization would be more in the mid-Atlantic region. And then maybe some of the lesser utilization would be west of the Mississippi right now.

And you folks aren't seeing any shortage of labor on your end, is that correct?

No, the struggle for us has been drivers, which has eased up a little bit. I would say the biggest issue for us right now was still truss designers. That's where we see the biggest labor shortage right now.

Okay. And then one last quick one is just on the -- just more of a housekeeping question. On the -- what's your LTM pro forma debt -- I'm sorry, EBITDA, on an adjusted basis?

Let me get back with you on that. I don't have the LTMs in front of me.

Okay, thanks.

Matt McCall, BB&T Capital Markets.

Maybe a follow-up on the last one. When we think about the shift that you've seen toward more value-add, away from lumber, and you think about the inclusion of ProBuild, maybe some continued mix shifts in builders, can you talk about how we should think about that number as we head into 2016, what that mix should look like as we exit maybe next year?

I think we will continue to see strengthening in the truss and panel components. I would say by the end of next year, just kind of rough guess, we might be up, as a percentage of total sales, another 2%, something like that.

Yes, I think, long-term, we certainly are looking to get that percentage over 40%. The -- a lot of the percentage, if you look at it, is going to be how strong a recovery are going to see in commodity pricing and what that does then to the --

To the mix on the percentage.

Yes. But certainly on an anticipated commodity basis, I would hope we are up closer to the 40% by the end of next year. 38% to 39%, I think would be a number that we ought to be able to achieve.

Of total value-added, not just truss and panel.

Yes. Millwork.

And maybe tying that into the gross margin improvement, you looked at 160 basis points. I think you broke out some of the benefits, I wrote down pricing deflation and I missed the last one, the last couple. But can you talk about what drove -- maybe break down that 160 basis points -- what drove the gross margin improvement? How much mix moving toward value-add helped? Just some of the components there. And then anything that we should keep in mind as we are modeling the future.

I would say the 160 improvement, you're probably looking about 65 basis points of that was due to commodity price deflation. Because we do get a tailwind from that. And then I would say -- that leaves us 95 basis points, I would probably say, yes, two-thirds of that is more mix-generated. And then you have a little bit of volume in there.

And then also the rest that we have seen concerted effort on the part of the sales force to improve their price and pricing.

Right.

And as the margins expanded, we've also had the ability to get better pricing. So I think those are the combination of those right factors.

Okay. Okay. And then the last one I had, seen a bit of divergence between the growth of starts and the growth of completions. And a lot of that obviously could be tied to the labor issues that were discussed in last question. But are we to the point now where this has become enough of a trend that maybe we should start to look at the combination of these two or the average starts growth, and with the average completions growth, to get an idea of what your growth rate is going to look like?

Because I think your growth rate was 7%. That would be about an average of what we saw from a growth rate from a starts perspective and completions kind of together. Does that make any sense? Is that the way you're starting to look at it? Or is it still starts that you're focused on?

I think the delay in construction is certainly impacting the cycle time. And so I think what you said, what you just said makes sense, because there is definitely an extended time now from a permit to a start to a completion.

Yes, and I think you've got to look -- continue to look at units under construction. That's -- units under construction is really where the building process where most of our products are starting to go on to the jobsite. And then that flows through to a completion and a sale.

Okay, all right. Thank you, guys.

Mike Dahl, Credit Suisse.

Thanks for taking my questions. Just to follow-up on the last line of questioning. I mean, obviously, if we look at some of the homebuilder results, it's -- these delays are really extending to the point where a lot of volume is getting pushed out into at least early next year. And it sounds like the builders are kind of planning for this to continue through most of next year.

So, in that context, I guess, could you give us any color around current trends or fourth-quarter expectations for growth rates? Should we be looking for anything different than what you've just seen? I guess, from a volume standpoint, obviously, some differences in commodity lumber pricing. But any color you can give on more near-term?

I think you'll see volume growth fairly similar to what we saw this last quarter. But unfortunately, I think with the inflation we are facing, that's going to wipe out a lot of the volume growth we get from a topline basis. So, I would say it's probably going to be more of the same.

Got it. And then since so many puts and takes around the margin and mix, and the commodity deflation, I guess same question, I know it was asked, but just any more granularity or color around just in terms of the near-term, what's realistic to think about in terms of just like the go-forward margins? Because there's obviously then also seasonality involved right now.

Right. From a gross margin standpoint, we -- the commodity deflation that we have seen this year, as you know, provides a little bit of a margin tailwind. Although long-term, we would certainly like higher lumber prices. It's much better for business, and then EBITDA growth. So I would say if we continue to see flattening and improving commodity lumber prices, I would say from a gross margin standpoint, we're probably looking at something 50 basis points or so lower than the quarter we just had.

I think below 25's.

Yes. But again, I'll take the short-term margin compression to get strengthening commodity lumber prices any day.

Right. Right. And then final one from me, just housekeeping. Any change to run rates on items like D&A? And also I know you provided the snapshot saying pro forma interest expense would be $174 million for the year. Is that kind of how we should think about that for next year too, since there's no real debt paydown until the second-half?

Yes, I think that's pretty close from an interest standpoint. Go forward D&A on a quarterly basis, you're looking at about $25 million of depreciation and probably $8 million or so of amortization. That looks like where the amortization and depreciation is going to shake out after we do our step-up in our acquisitions accounting.

Okay, great. Thanks a lot.

Just real quick to follow-up on Rob's initial question. I'm running about $305 million of adjusted LTM EBITDA right now. So we can go to the next question now.

Will Randow, Citigroup.

Thanks for taking my questions. In terms of your Texas exposure, can you talk about your experience there in terms of demand? In light of obviously strengthened DFW, it seems like Austin is softening or more soft. And then the latest Houston permits being down 40% for August and September.

So was your question just as far as Texas in general?

Yes. What are you experiencing there in the market? I mean, are there --?

Yes. You know, Dallas-Fort Worth is still very strong. You are correct in Houston seeing some slowdown there. I think through September in Houston, we are showing single-family permits down around 3%. The biggest slowdown so far in Houston has been on the multi-family side. But obviously, overall on a relative basis, Houston is still very strong for us. Maybe some softening in Austin and San Antonio, but from what I am seeing, all in all, Texas is still a very strong market for us.

And what was your total exposure to Texas? I forgot.

About 17% of our sales.

Okay. And then just one follow-up. In terms of synergies, can you talk about the progress you have experienced there since July, particularly with regards to procurement savings?

Well, at the end of the third quarter, we were on about a $30 million run rate. I think by year-end, we will be close to $50 million. Best guess now of that $50 million, it would be about $15 million of procurement.

Okay. Thanks for that and congrats on the quarter.

Thanks.

(Operator Instructions). Kenneth Williamson, JPMorgan.

Thanks for taking my question. I had -- just wanted to get a little bit more detail on what exactly you're seeing in the way of commodity deflation. Is this only affecting your lumber side of the business? Or are there other products that are being affected by deflation?

Primarily with the lumber/lumber sheet goods, we have seen a little bit of back-off in pricing on roofing as well as gypsum, but it's been very small. The rest of our products, we have seen some inflation. The -- so, but the real effects of deflation are all centered around the lumber/lumber sheet part.

Yes, you know, when you go through an extended period of lower prices, it will start to impact your components as well, since you obviously use those same products in your trusses and panels.

Got you, okay. So what do you view as the biggest driver for that? Or what do you view needs to change for prices to start to move the other way?

I think it's strictly a matter of the manufacturers of -- especially now in the lumber category, to get their output closer-matched to what the demands of the marketplace is. I think one of the things, certainly, that has affected our pricing here has been the fall-off of the China market. And that has caused the Canadian mills to push a lot more material down into the US market. And that's -- has really contributed to some of the problems that we've had.

The US mills have done a better job, from what we can see, in trying to get their production matched up with the demand for housing. I think a lot of people got way ahead of themselves. I think some of the forecast for housing led to the mills adding additional shifts and adding people. And they were reluctant to, I think, back away from and absorb those costs that they had for starting up the increased production.

OSB manufacturers have certainly done a much better job of getting their output in line with the demands of the market. And I think we've seen 16 straight weeks of improving OSB pricing. That's very encouraging to us. And it looks like we are all hopeful that we at least hold it and not start back, that we still have a long ways to go to get up to traditional levels of pricing.

But I think that will come as the demand in housing continues to increase, and the mills become and get better at matching up their output to the demands of the market. And a return of -- and certainly, a return of the China market will help pull away some of the excess capacity.

Thanks. That's very helpful. I guess just someone who is fairly new to following your business, just when you look at the supply -- you mentioned Canadian suppliers in particular -- pushing some of that supply down into the US that would normally gone to Canada. What percentage typically from those Canadian suppliers is exported to China?

The -- you really probably should get that number from the Canadian sources. But from what we have been able to see, somewhere close to 30% of the Canadian lumber output was going into the China market.

And what made it really a lot more difficult is that a lot of that material is lower-grade material. And when that got cut off, they really pushed the number three grade into the US, and -- because they had to have a place to go with it. And it really drove the pricing on number three to extremely low levels, half of what it was a year ago. And the -- that was a real major contributing factor to the fall in lumber prices.

Okay, thank you. That's very helpful.

Nick Coppola, Thompson Research Group.

So, any further reading you can provide on expectations for revenue synergies? So, maybe if you can talk about initiatives to get more value-added sales through the ProBuild footprint and maybe any success in getting them into new customers.

Nick, that's just such a soft number, and you'd have to make a lot of assumptions in coming up with some calculations. As we've talked about before, we obviously do feel like there are revenue synergies. But to try to put a number on that, I just wouldn't --.

Is there anything [quantitative] to point to progress there?

We continue to look at ramping up their sales efforts on the trust and panels side, and looking at expanding the -- some of the other product categories, for instance, gypsum and roofing into the BFS side. But we are still so fresh into the acquisition that, so far -- thus far, it's just been more discussions with the sales force and getting them up to speed on some of newer products that they may be required to sell. But I would say, so far, that any progress has been minimal.

Yes, I think all of our focus really has been on retaining our sales force, retaining the customers. That's -- that was a very, very important part of your first six months or so. And that's got to be stabilized. And you want to make sure that your sales force is -- has been retained, and that we haven't lost any bleed-off of customers to competitors.

And after -- once you're through that initial phase, then you begin looking at how do you increase the sale of the value-added products throughout the organization. The -- that's -- is a longer-term proposition, but one in which we have been very successful in the past in Builders FirstSource, as has ProBuild.

We've had a higher concentration of it in our mix, because a lot more emphasis was placed on it, and we will do the same. And that's going to be the direction as we go forward.

Okay. That's helpful. And then also wanted to ask just about regional highlights in the quarter. You talked about Texas a bit, but any other areas of strength or weakness in volumes across your business, especially now with your larger footprint?

Yes. Certainly, North Carolina and Florida continue to be very positive to our business. We've seen from ProBuild, the California market has certainly shown some good strength this year. The Northwest, Alaska, again, we've seen improvement and good sales gains in those areas.

So I think it's coming from a combination of factors. Certainly, the largest states that we do business with, as Chad has said, was Texas and the Carolinas, Florida. They certainly are the largest states.

Okay. Thanks for taking my questions.

You bet.

Trey Grooms, Stephens.

I guess my first question is on -- probably for Chad, on SG&A. How should we be thinking about that with the combined Company now, with any seasonality into the fourth quarter, how should we think about SG&A, I guess, for fourth quarter? And then as we look into next year as a percent of sales, any changes you would expect there?

Well, the business will be more seasonal now, obviously, with a greater presence in the northern regions. So, it will drag our result in Q4 and Q1 a little more than historically it would have at Builders. But we do have a lot of the cost saves that we're going to be putting in as well. So, all in all, I think we are still going to be able to do a very nice job of mitigating a lot of the seasonality with some of the cost-saving initiatives that we're going to put in place.

But as far as SG&A specifically, I understand that there's puts and takes right now with lumber deflation. And that's kind of a headwind as far as leveraging that SG&A. What is -- should we see a sequential change, though -- I think, this quarter, it was -- was it 22% or 23% of sales, somewhere in that ballpark. Should we be thinking about it differently in 4Q or no?

I would say, due to the seasonality, it will probably increase as a percent of sales, but -- with some of that being offset by the cost-saving initiatives that we've put in place.

(multiple speakers) That's got a lot of one-time costs flowing through that, in that number.

Yes. I'm talking on a -- excluding one-time costs, integration-cost basis.

Yes. Because --

Right, right. Okay. Got you.

Do you remember that -- hey, Trey, just remember that ProBuild had a much larger presence in Alaska, in the Midwest, in the Northeast, where there's less building activity. So your fixed costs do drive your percentage of SG&A up a little bit more in the first quarter and fourth quarter than what you would have historically seen in Builders.

Understood. And that shift from, I guess, from the third quarter to fourth quarter, it is going to be more seasonal, but is there -- when you're looking at that, is there other things that are contributing that could help offset some of that seasonality, like the prefabricated components piece? Or anything else that would be a positive as we look into the 4Q -- a positive contributor?

Yes. The cost saves, as they begin to take more effect, will be positive. And then, hopefully, we'll continue to see strengthening in lumber prices, which obviously helps us lever our SG&A even better.

Okay.

And I think we're going to continue to expand the value-add products. They are certainly the higher-margin products for us.

Okay. And thanks for that. And then on the better pricing that you noted, can you just kind of give us a sense of what's going on in the competitive environment? Are you seeing some improvement there that's allowing for better pricing?

I think, really overall, Trey, I think it's the environment is similar to what we experienced back in the second quarter. The -- certainly as the starts improve and there's more work available, the -- it does ease somewhat, and the builders become more concerned as to getting their -- the products that they need and services on time and complete.

The -- I would say there has been a slight improvement in the competitiveness. We are not seeing nearly some of the way-off-the-reservation of pricing that we had been going through. That seems to have abated. And I think that's positive. So, I -- yes, it's certainly better than what it was last year. And I think that is going to continue to improve.

And that certainly has helped us in our ability to increase margins. And I think, at the same time, I think our people probably feel that a little bit more aggressive when they're going into the pricing that they are not going to be just totally shot out of the saddle. So, I would say overall, yes, it's -- the environment has continued to improve.

Chad, you might --?

No, that's consistent. I would agree with that.

That's good. That's encouraging. And then outside of lumber -- windows, doors, gypsum, roofing, all the other siding, the other things that you have now, where you've got, I think, a little more exposure to these other things now with ProBuild -- what are your expectations for pricing outside of lumber going into next year, as far as from your suppliers there, any indication of kind of what to be expecting there as we look into 2016?

Our suppliers, I think everyone is looking to have some increase in their prices, the manufacturers of products. I think we have shown, and we have seen some of that certainly this year, and we have been able to pass those increases on. Where in the past, that wasn't the case when vendors were increasing prices.

But at the same time, we are really -- have already started working very closely with all our suppliers, and certainly the major suppliers, and showing them the attractiveness of our package, and giving people the opportunities to look at increasing their involvement with the Company. And hopefully, we are going to see some benefits that spin out of that. At least that's what we are anticipating.

So, all in all, I think we're going to see higher prices from the vendors. I think we're going to be able to pass it on. And but I -- and I think we're going to be able to negotiate for ourselves some improved programs and so forth that will enable us to really help in the sale of those products. There's a lot of things that vendors can do to help you improve your share of the market and be more aggressive in the marketplace, so.

All right. Make sense. Thanks for that, Floyd. And then my last one is, Chad, I think historically, you've given us kind of what the sensitivity is to lumber on a 10% change. I think you gave it to us on a standalone basis. I don't have the -- or haven't heard the new sensitivity to lumber, so a 10% change equals X dollars of change in EBITDA for the combined Company. Do you have that? Or could you share that with us?

Yes, if you had a 10% change, everything else being equal and that 10% change being in effect for an extended period of time, you'd probably be looking, on a combined Company basis, about a $35 million impact to EBITDA.

Okay. That's all I needed. Thanks a lot, guys. Good luck with the rest of the quarter and have a good weekend.

Yes, you too.

Jay McCanless, Sterne Agee.

My questions have been answered. Thank you.

(Operator Instructions). [Frits de Vries, Rush Global].

Just a quick question. Can you give me any idea of what your cash taxes are going to be like over the next quarter and into 2016?

Cash taxes will be close to zero. We are sitting on a fairly large NOL right now. And so, in any given quarter, you may have $1 million or $2 million in cash taxes. It's going to be small.

Okay. And you had mentioned this on the road show, but can you remind me kind of where your target leverage is kind of? I know you're obviously in delevering mode at the moment, but long-term, what's your target leverage?

I would say 3 to 3.5 times.

And that's net or gross?

Net.

Net? Okay. Thank you very much. That's all. Thank you.

Thank you.

And there are no further questions at this time, so I'd like to turn it back over to our speakers for any additional or closing remarks.

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

And that does conclude today's conference. We thank everyone again for their participation.