GMS Inc (GMS) 2019 Q1 法說會逐字稿

Greetings, and welcome to the GMS First Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lynn Ross, Chief Accounting Officer and Corporate Controller for GMS. Please go ahead.

Yes, good morning, and thank you for joining us for GMS's earnings conference call for the first quarter of fiscal 2019 ended July 31, 2018. I am joined today by Mike Callahan, President and CEO; and Doug Goforth, CFO. In addition to the press release issued this morning, we have posted presentation slides to accompany this call in the Investors section of our website at www.gms.com.

Turning to Slide 2. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today.

As a reminder, forward-looking statements represent management's current estimates and expectations. The company assumes no obligation to update any forward-looking statements in the future.

Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC, including the Risk Factors sections in the company's 10-K and other periodic reports. Today's presentation also includes a discussion of certain non-GAAP measures.

The definitions and reconciliations of these measures are provided in the press release and presentation slides. Also note that references on this call to first quarter and fiscal 2019 relate to the quarter ended July 31, 2018, and the fiscal year ended April 30, 2019, respectively.

With that, I will turn the call over to Mike Callahan. Mike?

Thanks very much, Lynn. Good morning, everyone, and thank you for joining us today. We will begin today's call with a review of our operating highlights and then Doug will cover our first quarter financial results in more detail. We will then open up the line for your questions.

We delivered a solid first quarter, highlighted by organic sales growth across each of our product categories. I am pleased to report that we delivered 2.5% year-over-year growth in organic wallboard revenue, which represents our first quarter of year-over-year growth in organic wallboard revenue since the second quarter of last year. Even though our industry continues to face inflationary pressures, we delivered adjusted EBITDA of $75.3 million, an increase of over 42%, compared to last year. The contribution of Titan, changes to lease accounting and hard work by all of our GMS colleagues to increase our profitability contributed to achieving these record results.

We're also very pleased with the performance of our recent acquisition of Titan, which advances our goal of being the premier building products distribution platform in North America. We are working closely with many of our key supply partners to leverage our enhanced scale while continuing to look for additional operational cost savings and cross-selling opportunities through the combined business.

And while smaller in nature, we're also pleased to announce on August 7, the acquisition of Charles G. Hardy in Paramount, California, which expands our presence in Southern California, and in particular, the Los Angeles metropolitan area, which is the second-largest metropolitan area nationwide.

We also opened 2 new greenfield locations in Philadelphia, Pennsylvania, and Frederick, Maryland this quarter, which keeps us on pace with our expectations of opening 3 to 5 greenfields per year. And lastly, we have made significant progress on our plan to rightsize the organization and reduce cost to generate approximately $20 million in future annual savings.

Given the timing of the rollout of these initiatives, we expect to see significant cost reduction savings begin to flow through our second quarter results, with full run rate savings coming in Q3.

Now before turning the call over to Doug, I would like to provide our point of view on what we are seeing in the industry. We believe that demand conditions remain healthy across our product categories as well as the end markets that we serve. While we continue to face inflationary pressures, we have been able to realize meaningful price increases and are executing our cost reduction initiatives to offset these inflationary headwinds.

The competitive dynamics in the wallboard market continue to persist as they always have, but with the backdrop of healthy demand, we have begun to see signs of stabilization. Furthermore, we expect industry conditions to remain stable throughout fiscal 2019.

Excluding Titan, we believe that our wallboard market share remained relatively flat during the quarter. However, our wallboard volume improved sequentially versus the fourth quarter of fiscal '18, and we were pleased to once again see strong, organic revenue growth across all of our other product categories this quarter, with organic revenue in our ceilings, steel framing and other products increasing by 8%, 16% and 5%, respectively.

Looking ahead, we feel very good about our business, and remain committed to profitably growing revenue, both organically and through bolt-on acquisitions. We will also continue to focus on improving our cost structure, increasing our adjusted EBITDA and generating free cash flow to execute on our initiatives and to delever our balance sheet. And with that, I will turn the call over to Doug for a detailed review of our financial performance. Doug?

Thanks, Mike. We appreciate everyone joining us a little earlier today. Let's turn to Slide 4. We were pleased to deliver a strong first quarter highlighted by solid top line growth, strong adjusted EBITDA performance and good progress on our margin enhancement initiatives. Starting on the top line, we grew net sales 21.2% to $778.1 million, and increased base business sales during the quarter by 6.1% year-over-year. Wallboard net sales increased 11.6% to $318 million in the first quarter, compared to the same period last fiscal year, including 2.5% growth on an organic basis. This consisted of 3% increase in price, partially offset by a slight decline in organic volumes.

Our ceiling sales increased during the quarter by 16.2% year-over-year to $116 million. This includes an 8.1% increase in the base business, driven by continued strength in ceiling volumes and pricing improvement.

Steel framing increased during the quarter by 23.4% year-over-year, to $129 million, driven by a 16.1% increase in the base business, mainly driven by stronger volumes and higher prices.

We typically view steel framing as an indicator of future wallboard performance. So we're pleased to see an increase in volume of approximately 3% in this product category this quarter. Other product net sales increased 40.7% during the quarter to $215 million, including base business sales up 4.6%, highlighting the success of our continued efforts to grow complementary products. The recent addition of Titan further expands the breadth of our product portfolio, which we believe is a major competitive advantage and continues to highlight the strength of our customer relationships and the pull-through effects of wallboard, ceilings and steel framing.

Adjusted gross profit increased over 21% to $249 million, while margins increased slightly on a year-over-year basis. They declined by approximately 40 basis points on a sequential basis. Mix was responsible for the 20 basis points of decline from the fourth quarter, but we had a lower cost to serve on the other products that the impact on adjusted EBITDA is usually neutral.

The balance of the decline mainly related to metal products impacted by the tariffs, but our margins improved in those product categories throughout the quarter. We reduced our adjusted SG&A as a percentage of net sales by 130 basis points year-over-year to 22.5% in the quarter. 70 basis points of this improvement was related to the changes in lease accounting. The remaining 60 basis points of improvement reflect the contribution of Titan and early benefit from many of our initiatives to improve our operational efficiencies and streamline our cost structure, which also drove 140 basis points improvement sequentially over the fourth quarter of fiscal 2018.

As discussed on our last call, in the first quarter, we converted the majority of our operating leases to capital leases. This has enabled us to accrue an accounting benefit that favorably affects our adjusted EBITDA without changing our cash economics. This change provided an SG&A benefit of approximately 70 basis points or $4.8 million during the first quarter and we expect it to favorably impact our fiscal 2019 adjusted EBITDA by approximately $23 million.

We delivered $75.3 million in adjusted EBITDA in the first quarter, up year-over-year from $52.8 million. Adjusted EBITDA margin was 9.7% as a percentage of sales, or 9.1%, if you exclude the lease accounting change, reflecting strong performance from our Canadian operations as well as improvement in our organic operating leverage.

As Mike detailed, we are well underway on the previously stated margin enhancements and expect to realize $15 million to $16 million in savings this fiscal year as a result of the strategic cost reduction plan that we implemented in late June.

Turning to Slide 5. As of July 31, and after the Titan acquisition, our net debt to LTM pro forma adjusted EBITDA stood at 4.2x, up from 2.8x pre-transaction. We're comfortable with our current leverage, given our track record of cash flow generation and ability to quickly pay down our debt. Our current leverage ratio post-Titan compares favorably to 2014, when our leverage ratio was 6x, as well as just before our May 2016 IPO, when it was 4.3x.

Our balance sheet remains healthy, with $36.8 million of cash on hand and $200 million of availability on our ABL facilities. Before I turn the call back over to Mike, I want to take a few seconds to thank everyone here at Tucker as well as the Titan integration team for all of their extraordinary efforts this quarter, particularly the finance, HR and legal teams who've worked countless nights and weekends leading up to this call. We hope all of you have a great and very relaxing Labor Day weekend. Mike?

Thanks, Doug. In closing, we had a solid start to the year, which keeps me confident in our ability to deliver another year of record sales and adjusted EBITDA in fiscal 2019.

As Slide 6 indicates, we feel very good about our position in the industry as one of the leading wallboard and ceilings distributors in North America, with significant scale advantages and a very well-balanced portfolio that's built for growth. We remain confident in the health of our end markets, which we believe will continue to support our top line revenue growth and allow us to properly position our business for the long term. We will continue to invest in our business and remain committed to our previously stated objective of expanding margins.

We have managed our prices appropriately, continuing to provide our customers with superior service and proactively implemented cost-saving actions to support profitable growth. These initiatives, coupled with positive margin mix associated with our acquisition of Titan, and anticipated synergies, will help drive our margins higher over time. And operator, with that, we are ready to open up the call to questions.

(Operator Instructions) Our first question today is coming from Trey Grooms from Stephens.

So my first question is, you mentioned seeing signs of stabilization, I think, in the competitive landscape. Is that -- can you kind of talk about the timing there? Is that something that you witnessed in your fiscal first quarter? Or is this -- has it improved since then? And do you feel like it's in response to some of these additional increases that have come from the manufacturer? Or just a little more color around the competitive landscape there would be helpful.

Yes, so I think throughout the first quarter, I mean, obviously, that we have experienced the price increase as of July, and I think the competitive environment is -- I mean, it's always been competitive. We're going to compete, we've been doing it for 47 years, so there's nothing new in that regard. But I think in the face of rising costs in terms of wallboard pricing, as well as rising operating costs, I think the markets have stabilized a bit and everybody wants to get a return for what they're doing, so -- and it kind of ran throughout the quarter, frankly.

Okay. So that's encouraging. And then on the topic of additional pricing, with this midyear increase that you mentioned, coming from the manufacturers, what's your approach been to this and kind of the thoughts around traction here? I know it's still early days, but just any kind of initial thoughts around that midyear price increase?

Well, right now, I would say that prices are up pretty much throughout all of our divisions. The price is holding. It varies, as you know, from region to region, based on just the current pricing environment, market to market. But fundamentally, I would say generally the prices are up and seem to be holding, but it's going to take a while to finally settle in at a set number.

Right, okay. And that was -- that comment was across all of your product lines or was that specifically for wallboard or ceilings?

Well, specifically, I was referencing wallboard, because I assumed that's where you were headed, but in general, prices are up across all products as well, frankly.

Yes, okay, just clarifying there. Lastly, on that note, there was some prebuy, obviously, in the industry, going into these midyear price increases from the manufacturers. Can you talk about inventory levels, whether it be wallboard or ceilings? And with that prebuy that everybody witnessed there, just kind of talk about your inventory levels, where you want it at this time of year? And just how that compares to -- is it about in line? Is it a little heavy, light, just anything you could give us on that?

Trey, its Doug. Our inventory levels are up. You can see that in our balance sheet numbers and our cash flow numbers, so we did -- do some prebuying for various products, including wallboard. So that's reflected in the results. This is a, and particularly for wallboard, this is an unusual time of year, it's been quite some time since you saw an increase in the middle of the calendar year, so that's a little unusual. I do expect those inventory levels to come down pretty rapidly throughout the balance of the year. So it's not a level that we're uncomfortable with.

Got it. Yes, and I think it's -- correct me if I'm wrong, but just the nature of wallboard distribution, I mean, it's kind of limited the amount of inventory you can actually have in place at any given time. And because it's tough to stack this stuff outside, right? So is that the right type of thinking, is it's fairly limited on what you can prebuy anyway?

Well, I would say we were actually able to do a little bit more prebuying than we have historically, and that's partly the result of our wallboard volumes were pretty much flattish for the quarter, so that did enable us to do that. You can store product outside for a reasonable length of time and we also have a number of sheds in our facilities that also provide some excess storage. I mean, you were recently at one of our yards and you actually saw how busy they were and just how quickly they were running through that, and that's actually one of our larger facilities, particularly in moving board in this part of the country. So you saw for yourself what was going on there. The sales pace in August is about the same as it was in July, and as Mike referred to, prices are actually up in August and again, you were there, you saw how busy they were. So that, we feel really good about what's coming up. This current quarter is historically one of our strongest quarters and the same thing for the team up in Canada.

Right, okay. I've got a few more, but I'll pass it on and jump back in queue.

(Operator Instructions) Our next question is coming from Keith Hughes from SunTrust Robinson Humphrey.

To come back to your comments, Mike, on you think you maintained share during the period, kind of implying a flattish industry, as you reported organically. I guess my question, it's a little surprising, given that we've still seen generally good volume gains, really all your end user markets, if you could just sort of characterize what you think is going on, on the end user demand in the last couple of months?

Generally speaking, the demand levels have been solid. It's interesting, Keith, some of the -- in one of our recent divisional calls, our backlogs are very, very strong, but some of the work still seems to be getting pushed out. And I frankly don't know whether that's labor constraints or what. But the reality is, is that the volumes in our backlog position is very strong, demand conditions are strong, and as Doug said, we're very bullish about the outlook here. But it seems that getting some of the work through the pipeline and taking it out of backlog into current work is just a little slower than we would've liked, frankly. And yet, with that, we still had a record quarter. So I hope that -- I think -- hopefully, that answers your question.

Okay. Second question. On Slide 4, you have, then, the EBITDA margin graph, you have the breakout of your margin in this quarter versus prior year, excluding the change in higher financing the fleet, it shows 90 basis points of improvement. I do believe that includes Titan, which traditionally has done a higher-margin business. If we take Titan out of that, how did the historic GMS EBITDA margin do in the quarter versus prior year?

It actually improved slightly.

Okay, okay. And was that gross margin, SG&A, what helped the improvement?

It was both. It was actually more SG&A than gross margin. We started to see some benefits from the cost reduction efforts as well as some of the other operating initiatives that we had going on, although that was fairly minimal, less than $1 million in the quarter, because we initiated that late in the quarter. But we definitely feel really good about the trajectory that we are on in terms of leverage.

Our next question is coming from Mike Dahl from RBC Capital Markets.

This is actually Mike Eisen on for Dahl. Just a quick question, first on the framing business. I think on the last call, you guys spoke in length about working with your partners around pricing in this segment given volatility in the steel market. There's been a lot more volatility, I think your comments imply that there was double-digit pricing benefits in the quarter on the core business. Can you help us think about how we should think about price moving forward and what this means on gross margins from this segment?

Well, that's a good question. It's a tough one to answer. I mean, as we've said, volumes were up about 3%, so that's a really good indicator for wallboard and other complementary products coming forward after that. Pricing as of late has stabilized, but we had a number of price increases throughout the first half of the year, particularly, not only in steel framing, but also ceiling grids. Ceiling grid has probably been the more challenging one to deal with because a lot of our commercial jobs were set for the balance of this year and going into next year. And so we've had some compression on the ceiling side of things that we're currently dealing with. And also getting into freight and transportation, that's been particularly difficult, probably more so on the ceiling grid -- ceilings in general than steel and other products, because the manufacturers have been rolling out freight surcharges, et cetera. They are shipping it from different parts of the country. So that's been more difficult to manage, but the guys have been doing a really good job of getting ahead and kind of restoring those margins going forward. I know that was a long-winded question, but right now, in terms of steel, I'd say prices are stable. We still have transportation challenges around that, but anything can happen, tariff-wise or tweet-wise, that could impact that.

Got it, that's helpful. And just on demand trends in general, I think you guys talked to May being stronger on the last call and continued mid-single-digit pace. Can you talk about how the trend actually played out through the quarter? And then if you've seen any indication, as we're coming to the end of August?

Well, the August volumes continue to be strong relative to the quarter, and so I mean, in terms of the industry overall, I think our expectation is we're probably looking at low single-digit growth rates, I think, overall. That's kind of how we're looking at the world from here.

Yes, I would add onto that. Wallboard volumes were actually pretty consistent on a daily basis throughout the quarter. Steel, again, as we talked about, accelerated as you got -- the volumes there accelerated as you got towards the end of the quarter. So again, that's a good indicator leading into the upcoming months. So and then other products were up as well. So that's certainly positive in that regard, in -- so.

Our next question is coming from David Manthey from Baird.

I'm wondering, when you say that the market is stabilizing, does that imply that next quarter, we could see both price and volume growth in wallboard? And when you look at wallboard, are you assuming that the market is going to improve or just the competitive landscape?

Well, specifically, I think I was just addressing the competitive landscape, based on the question earlier. I think it's kind of steady as she goes. I mean, we anticipate that the volume or the market will remain strong and we will really tend to go with the growth rate in the industry, kind of even with it going forward, maybe a little bit better.

Yes, I'd probably say that over the next -- we believe that the first quarter, that we're, that volumes were essentially flat in wallboard, that we'd hit a trough or an inflection point and that we're got -- we're going to see upside momentum moving forward. And over the next few quarters, we would expect to get right back to market levels, so the market is going to be up 3% over the next few quarters. We believe that our volumes will be right in line with that 3% number. And then in addition to that, we expect to see some price appreciation.

Okay. Then second, thinking about Canada specifically, the market up there seems to be experiencing some interest rate and stress test risks, on the residential side anyway. Do you expect slowing up there for Titan? And when you look at Titan specifically, has there been any change in the product offering that they are currently distributing, and/or have you translated or have any plans to translate their product set to the core GMS business?

Well, I would say, generally, David, the Canadian market, actually, I think, is still in a very good position. We are very, very pleased with the performance and the strength of the Titan organization and that goes from the West Coast all the way to Toronto. I think all of their companies, all of their markets are experiencing solid performance. In terms of kind of cross-border product sharing, it's early on in the process. We closed June 1. But there's no question that there are some opportunities and we are exploring those daily, what we can do and what they can do to perhaps help collaborate, to leverage products, perhaps even introduce new products into our respective mixes, because they do some things differently, and on a different scale than what we do and vice versa. So we're already experiencing some pretty solid collaboration. We've had a number of discussions and a couple of meetings to discuss that, and that continues to go forward. But yes, there's definitely some opportunity there.

Yes, I would add, Dave, that their sales and margin are trending right where we expected.

Right, right.

Our next question is coming from Truman Patterson from Wells Fargo.

First question. I believe you guys made some comments earlier in the call, but could you just talk about the pricing versus the product cost for each of your segment lines? Is pricing pretty much offsetting cost? Or are there any laggers? I believe you guys mentioned steel framing might've been a headwind to gross margins.

Right. Well, we talked about, about 20 basis points of the margin degradation particularly from fourth quarter was mix-related. And then other products, particularly, not only steel framing, but steel grid, we did see some compression there, but it's improved, our margins improved on that product throughout the quarter. Again, the steel framing and the ceiling ones are the toughest ones to deal with transportation-wise, because when it comes to wallboard, we've done a lot of things to help with transportation on there when it's tough getting trucks underneath them or maybe not cost-effective, we've been able to utilize, not only our own fleet, but also the fleet of some of our supply partners, non-wallboard supply partners, to kind of help pick up product on a backlog basis, plus we've got a number of our facilities that are rail-served, so we're also able to bring in a lot of wallboard product via rail. You can't do that with ceilings for the most part, so when you start to get those surcharges, transportation surcharges and stuff like that, that makes it tough on the margins. But our guys are out there proactively doing whatever they can to try to offset that, whether it's implementing our own surcharges, where we're doing those in certain markets and some other pretty good initiatives that the guys have come up with to try to increase our margins, in addition to flat-out price adjustment. So I think we've done a good job passing the majority of those inflationary increases along to our customers and you see that in the bottom line. I mean, based on how we performed in the first quarter, our expectation moving forward is we're back to -- we're going to be putting up double-digit incremental EBITDA margins moving forward.

Yes, and I would emphasize, too, what Doug alluded to and that's the rail capacity. That really is a very strong asset, particularly in this environment right now, because I'm sure you guys hear it all the time, transportation pressures are unbelievable. So the ability to get large volumes on rail to our facilities and offload it in non-peak times and that kind of thing is very advantageous. And we have a large number of facilities that either have rail directly or have got reload centers where we operate out of. So that's a big asset for us.

Okay. And then jumping over to Titan, I know you guys said that it was performing in line with your expectations, but what exactly was that performance? Could you break out both the top line growth and then how maybe the change in the core EBITDA margin? And maybe on that top line growth, could you possibly break out between both core revenue and maybe some of the acquisitions that Titan has made in the past year? And then finally, just following up, just some clarity on one of your prior comments on the wallboard backlog being strong or being strong, could you maybe just quantify that, what your backlog is up year-over-year?

Okay, that's a big question.

That's a lot of questions, a lot of comments in those questions. So let me start with Canada. So we're one reporting segment and company. So that's how we're going to be reporting our numbers. Their sales, obviously, we've disclosed that the majority of our acquisition-related sales in our supplemental materials here are obviously Titan. In our 10-Q, which we'll file no later than tomorrow, their reported sales for 2 months for June and July is about a little over USD 87 million. But we're not going to get into specific numbers on their EBITDA performance, et cetera, just like we don't do it with our other divisions here in the U.S. They -- we all do the same thing throughout North America. So that's how we are going to do there. But again, their performance is strong. It definitely aided our EBITDA for the quarter and just as we presented when we did the acquisition, that we were going to get that tailwinds, because they do have an exceptional operation, good strong margins, operating expenses. They do a good job of managing those, so it's a very positive contribution, and we'll be even stronger over the next 9 months. And we're going to have them in each quarter for the full period. In terms of, I think you also asked about product specifics overall, the other product categories. Ceilings, volumes were up about 2% to 3% on the base business and the balance of that was price. And then steel we already talked about, 3%. Other products, there's such a variety of other products that's kind of tough, but we believe that the volumes -- that volumes were up in other products as well. So we're probably looking at a 50-50 split on that business. In terms of volumes and the backlog, I'll let Mike talk more about that.

Well, in terms of the backlog, I mean, as I said earlier, we feel like the backlog across the country is strong right now. Commercial activity is very robust in most of our major metropolitan markets and I think, frankly, the steel sales is an indicator that there is good to come, because the wallboard tends to follow that steel volume. So based on where we're sitting now, we're bullish about the outlook on the backlog. So looking forward to next quarter, frankly.

And Truman, I do want to go back, and again, while we are not going to get specifics on EBITDA, et cetera, by Canada and the U.S., I do, just as Keith kind of asked on his questions, I do want to make it clear that both here and in the U.S. and Canada, those margins improved on a year-over-year basis, and that's adjusting for the lease accounting change.

Our next question is coming from Kevin Hocevar from Northcoast Research.

Wondering, just on Titan, I believe you are expecting $10 million synergies annualized. And I think you were looking for $8 million or so this year. So wondering how that's tracking compared to expectations? And when you talk about the collaboration between GMS and Titan and opportunities there, does that suggest that maybe there's some upside to that synergy number?

Well, Kevin, yes, that process and finding synergies, we're working diligently, I mean, we just closed the deal June 1, so it's a work in progress, but we're working aggressively and actively and have found already some significant opportunities to leverage our combined platform, and with the ability to achieve the synergies in the current fiscal year, keeping in mind that the company will not be with us the entire year, it's only 2 months' activity. So we're confident in achieving the $10 million, but frankly, our hope is that we could achieve more than that as we dig deeper and deeper into the process. So there's a lot of cross-border opportunities, and we feel like there's a lot more meat on the bone, so to speak, as we go into it, but we're going to make sure that we presented a realistic number. But we're optimistic about that.

That's okay. And then wanted to dig a little deeper in wallboard, so your -- in terms of pricing, the July price increase was only in effect for a month, but your price per thousand square feet moved up $4 sequentially from the April quarter to the July quarter. So does that suggest -- is most of that improvement from the July increase? Is there some mix in there from Titan or anything? And how did the exit rate of price compare to the quarterly average and -- sorry, a lot of questions here, but then when I look at the -- compare it to the results of January increase this year, when you look at the January quarter, very similar to where the price increase took us back in the last month of that quarter, the pricing was stable sequentially, whereas, again, like I mentioned, it was up $4 per thousand square foot here. So does that suggest that the July one might be having more success than the January one?

Kevin, are you and Truman together?

Sorry, a lot there.

The price, the sequential increase in price, definitely is impacted by Canada being in our number for 2 months. That's a market, just like we have markets here in the U.S., that tend to have higher prices, so that's one of them. So we were aided by that in the first quarter. So but here in the U.S., most of our increase really came through in really the July month. We were up a little bit in May, but the biggest part of the increase was in July. And again, as I said earlier, we're up again so far in August, so on wallboard price here in the U.S. Canada's prices, again, aided us and their prices were up year-over-year. I think I probably missed this on Truman's previous set of questions, but one thing I should share on Canada is their sales pace is actually running, particularly on their base business, is actually running ahead of what we're seeing here in the U.S. Again, we expected that, but it's actually running, I would say, about a point, 1% to 1.5% faster up there in Canada than it is down here in the U.S. right now.

Our next question is coming from Matt McCall from Seaport Global Securities.

This is actually Reuben on for Matt. Just one from us. So you mentioned profit and some free cash flow, that you'll be able to delever the balance sheet. Can you walk us through the components, any puts and takes, for what to think about for free cash flow over the next year or so? And how quickly you think you can get that 4.2x down to maybe 3x or less?

We think the same thing we said on the Titan call, within 2 years, we would expect to generate enough cash, operating cash less CapEx, which will be, remain well below 1% of revenue, to get it back down to about 3x within 2 years. And then longer term, Mike and I both believe the appropriate place to operate is less than 2.5x. So that's our long-term target.

Okay, and then there are no specific puts and takes, investments or anything like that to think about for this year in particular from a free cash flow standpoint?

Well, as you're modeling it, keep in mind that we've got a very attractive tax rate now, with the Jobs Act, so we're telling people to model in their cash model for tax probably about, call it, 24% on adjusted pretax income, and we provide a table in the back of our earnings release to kind of help through that. But it's the same as always, you take the EBITDA and take out cash taxes, our cash interest this year with the result of Titan will run a little under $70 million. CapEx will run, I would say, probably somewhere between $12 million and $17 million, this year, cash CapEx. And then working capital, while our turns were down and our working capital as a percent of revenue was elevated this latest quarter because of -- mainly because of prebuy as well as some other payments, settling up that foreign currency exchange we did, et cetera, that will, we expect that to be back down to around that normal, call it, 16% of incremental revenue. And then again, cash taxes, if you assume the 24% tax rate, should get you pretty close to what we should do free cash flow-wise.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

I just want to thank everybody for joining us on our call today. We're very excited about where we are today and we look forward to updating you on our progress in the coming quarters. Have a good Labor Day weekend.

Thank you.