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Edited Transcript of BLDR earnings conference call or presentation 1-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Builders FirstSource Inc Earnings Call

DALLAS Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Builders FirstSource Inc earnings conference call or presentation Wednesday, March 1, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer Pasquino

Builders FirstSource, Inc. - SVP of IR

* Floyd Sherman

Builders FirstSource, Inc. - CEO

* Chad Crow

Builders FirstSource, Inc. - President & COO

* Peter Jackson

Builders FirstSource, Inc. - SVP & CFO

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Conference Call Participants

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* Rob Hansen

Deutsche Bank - Analyst

* Mike Dahl

Barclays Research - Analyst

* Nick Coppola

Thompson Research Group - Analyst

* Will Randow

Citigroup - Analyst

* Al Kaschalk

Wedbush Securities - Analyst

* Matt McCall

Seaport Global Securities - Analyst

* Keith Hughes

SunTrust Robinson Humphrey - Analyst

* John Baugh

Stifel Nicolaus - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Builders FirstSource fourth-quarter 2016 earnings conference call. Today's call is being recorded and will be archived at www.bldr.com. It is now my pleasure to introduce Miss Jennifer Pasquino, Senior Vice President Investor Relations. Please go ahead.

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Jennifer Pasquino, Builders FirstSource, Inc. - SVP of IR [2]

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Thank you. Good morning and welcome to Builders FirstSource fourth-quarter 2016 earnings conference call. Joining me on the call today is Floyd Sherman, Chief Executive Officer of Builders FirstSource; Chad Crow, President and Chief Operating officer; and Peter Jackson, Chief Financial Officer.

A copy of the slide presentation referenced on this call is available on the Investor Relations section of the Builders FirstSource website at bldr.com. (Operator Instructions). Any reproduction of this call in whole or in part is not permitted without the prior written authorization of Builders FirstSource. And as a reminder this conference call is being recorded today March 1, 2017.

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 SEC and other reports filed with the SEC for more information on those risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

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

The Company will discuss pro forma and adjusted results on this call. We provide reconciliations of non-Financial measures to their GAAP equivalents in our earnings press release and detailed explanations of the 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.

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Floyd Sherman, Builders FirstSource, Inc. - CEO [3]

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Thank you and good morning. Welcome to our fourth-quarter 2016 earnings call. I will start with a brief update on our sales and then turn the call over to Chad who will provide an update on our integration process and our 2017 priorities. And then Peter will discuss our financial results in more detail. After my closing comments regarding our outlook we will take your questions.

Let's begin our discussion on slide 5 with an overview of the macro housing markets. In 2016 the new residential housing market reached almost 1.2 million starts with 782,000 single-family starts. This is well below the historic average just growing to levels that we have historically seen in the recessionary troughs.

We believe the 5.6% growth in total starts for the year, including 9.4% in single-family, is shy of the demand for new housing in the US market. Continued labor shortages have constricted housing growth year over year. We believe there are still several years of growth ahead of us and we are estimating mid- to high-single-digit growth in the homebuilding market in 2017.

Additionally, our involvement in the repair and remodeling market has historically provided a more stable revenue base and diversified our end market exposure. Our sales for the quarter were $1.5 billion. We had two fewer sales days in the fourth quarter of 2016 over the fourth quarter of 2015. Therefore we will discuss the sales per day growth in the quarter.

Sales per day grew 10.1% over the fourth quarter of 2015 and was benefited by approximately 4.4% as a result of the impact of commodity price inflation on our sales. Sales per day excluded, closed locations grew approximately 13.2% in the new residential homebuilding end market and approximately 3.7% in the repair and remodel end market in the fourth quarter.

For the year we grew sales by 5.5% excluding closed locations, including 7.5% sales volume growth in the new residential construction end market. This was a bit shy of market growth. As we have discussed the last couple quarters, our integration efforts have been a major priority for the Company and the EBITDA contribution from these cost savings initiatives was substantial.

As a result I believe the internal focus to deliver on all of the integration priorities impacted our abilities to grow share but believe this was the right long-term strategy for our business. With the ProBuild integration largely complete we are renewing our focus on growth opportunities.

Turning to page 6, one of our key growth priorities is to expand share in the higher margin value added products. Our sales of manufactured products, windows, doors and millwork for the year increased 7% versus 2015 and increased 12% per day in the fourth quarter. The investments we made in our manufacturing facilities in 2016 are really paying off with sales of our manufactured products growing 10% over 2015 and growing 18% per day in the fourth quarter.

We believe our Company is well-positioned to help homebuilders mitigate the impact of well-publicized labor shortages and increased cycle times through our manufactured and value added products across our national footprint. We will continue to focus on growing our value added products faster than our overall sales and capital investments for growth will be targeted towards this opportunity.

I will now turn it over to Chad who will provide an update on our ProBuild integration as well as our 2017 priorities.

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Chad Crow, Builders FirstSource, Inc. - President & COO [4]

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Thank you, Floyd. Good morning. I will begin on slide 7 with an overview of the progress we have made on the acquisition integration and associated savings. The cost savings opportunities we targeted of $100 million to $120 million are largely achieved. Synergies are being captured through network optimization, procurement and G&A costs.

We achieved a run rate savings of $100 million at year end with a breakout of about 15% from procurement, 15% from network consolidations and 70% from overhead and G&A savings. ERP conversions are on track and we now have over 60% of the Company's revenue on our proprietary system.

We have also completed our SOX compliance project, closed all planned overlapping locations and virtually all personnel and benefit plan changes have been actioned. When I reflect back on all we have accomplished over the past year and a half, we have a lot to be proud of. Builders FirstSource acquired a Company three times its size and, while not perfect, the integration has gone extremely well.

Since 2014, the baseline year for measuring our progress, we have grown adjusted EBITDA by $125 million, a 22% CAGR and improved our adjusted EBITDA margins from 4.2% to 6%. Also when looking across both 2015, a year of commodity price deflation, and 2016, a year of commodity price inflation, our adjusted EBITDA flow through on incremental sales was 44% including synergies and 14% excluding synergies, in line with our internal expectations.

None of this could have been possible if not for our talented associates who have come together to create a combined Company which is greater than the sum of the parts. My sincere thank you to all of our hard-working associates. With the ProBuild integration largely behind us we are increasing our focus on profitable market share expansion and improved operational efficiencies.

Turning to page 8, I would like to share our 2017 priorities as we transition away from our focus on integration. First, we are committed to capturing profitable market share and growing faster than the market by leveraging our scale and strong customer relationships as well as continuing our investment in our sales force.

We also believe we have significant opportunities to increase the reach and penetration of our higher margin value added products. These products allow manufacturing and assembly of home building materials off the job site aiding homebuilders with the well-publicized labor shortages and extended lead times.

Additionally, now that the bulk of the integration efforts are behind us, we have the luxury to go back across our operations with a fine tooth comb and spread best practices in order to drive incremental operational efficiencies. With G&A spend in excess of $1 billion we believe the opportunity exists to drive meaningful savings through these initiatives.

Finally, our continued focus on cash generation will allow us to fund these initiatives as well as continue to delever the balance sheet. I will now turn the call over to Peter who will review the financial results in more detail.

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Peter Jackson, Builders FirstSource, Inc. - SVP & CFO [5]

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Thank you, Chad. Good morning, everyone. I will first discuss the current quarter results on slide 10. As a reminder, we have included adjusted figures to normalize for one-time integration closure and other costs.

For the fourth quarter we reported net sales of $1.5 billion, a 6.6% increase compared to the fourth quarter of 2015, excluding the impact of closed locations. This is despite the loss of two sales days on a year-over-year basis which negatively impacted year-over-year revenue comparisons by approximately $46 million.

We are discussing sales per day growth in the quarter for an apples-to-apples comparison. Sales per day grew 10.1% over pro forma sales for the fourth quarter of 2015, benefited by an estimated 4.4% from commodity price inflation. We estimate that our sales per day, excluding closed locations, grew approximately 13.2% in the new residential home building end market and approximately 3.7% in the repair and remodel end market offset by declines in commercial and other.

Our gross margin percentage was 25.3%, down approximately 100 basis points from 26.3% last year, but improved versus last quarter by 30 basis points. The decrease on a year-over-year basis was largely due to the combination of commodity price deflation benefits in 2015 and commodity price inflation in 2016.

Although commodity price inflation generally benefits the Company's operating results in the long term, it can cause short-term gross margin percentage compression when prices are rising and margin percentage expansion when prices are falling. This is due to the short-term pricing commitments we provide customers versus the volatility of the commodity market.

Our SG&A as a percentage of sales, excluding depreciation, amortization, stock compensation and one-time acquisition and integration expenses, decreased by 120 basis points on a year-over-year basis.

Interest expense in the quarter of $44.4 million included $9.7 million of premium paid and non-cash deferred loan costs and debt discount write offs associated with the repurchase of $50 million of principal amount of our 2023 unsecured notes with a 10.75% coupon.

Absent these expenses adjusted interest expense was $34.7 million in the fourth quarter of 2016, an $8.4 billion reduction compared to interest expense for the fourth quarter of 2015 -- attributable to debt repayments and a series of transactions that have reduced the Company's interest expense.

Adjusted net income was $18.3 million or $0.16 per diluted share compared to an adjusted net loss of $0.3 million or $0.00 per diluted share in the fourth quarter of 2015. This improvement was largely a result of the operating synergies realized, revenue growth and interest savings as a result of refinancing and debt reduction.

Our adjusted EBITDA of $84.8 million exceeded our guidance despite the loss of two sales days on a year-over-year basis. Adjusted EBITDA grew $8.5 million to $84.8 million or 5.5% of sales compared to $76.3 million or 5.2% of sales for the adjusted fourth quarter of 2015. This 11% growth versus the fourth quarter of 2015 exceeds the guidance we provided of mid-single-digits growth.

The year-over-year improvement was driven largely by cost savings initiatives and revenue growth offset by commodity driven gross profit margin compression and a reduction of two sales days. We have provided an adjusted EBITDA reconciliation on slide 16.

Moving to slide 11, the Company achieved strong results for fiscal 2016 including 21.8% EBITDA growth, reducing go forward interest by $37 million, reducing net leverage by 1.4 turns, exceeding cash flow guidance and reducing net debt outstanding by $115.9 million in the year. As we move into 2017 cash flow and delevering will continue to be a priority.

Turning to slide 12, we reduced debt outstanding last year by $116 million and we expect free cash flow generation will give us the opportunity to further reduce debt in 2017. We believe this will be driven by EBITDA growth and a focus on working capital efficiency, which is estimated to run between 9% and 10% of incremental sales. We expect to invest in our business through capital expenditures at approximately 1.2% of sales. We expect our current NOL tax asset should shelter us from paying federal cash taxes in 2017.

As a result of opportunistic capital markets transactions executed over the last 12 months, cash interest should be reduced to approximately $127 million in 2017. Cost savings initiatives should benefit 2017 by approximately $25 million over 2016 and we expect one-time ProBuild integration costs of $20 million to $25 million. As a result we expect to generate approximately $145 million to $155 million in cash flow for full-year 2017.

Should market conditions unexpectedly accelerate or decelerate we have the ability to quickly adjust our capital spending and working capital accordingly to help mitigate the impact on our cash flow. As a reminder, our business typically uses cash in the first half and generates cash in the second half of the year.

Turning to slide 13, total liquidity at December 31, 2016 was $681.6 million, consisting of net borrowing availability under the revolving credit facility and cash on hand. The Company has executed multiple capital market transactions in the last 12 months to extend our maturity profile and improve our financial flexibility with a cumulative go forward annual interest savings of approximately $37 million.

We will continue to evaluate opportunistic transactions to lower our expense or otherwise address our capital structure. In February 2017 the Company amended and extended its term loan credit facility to 2024 with an interest reduction of 0.75%, or approximately $3 million annually.

Our weighted average long-term debt maturity is over seven years and our maturity profile allows multi-year runway of EBITDA growth and cash flow generation to reduce debt levels before refinancing is required. We are committed to further debt reduction and the terms of our debt allow the Company to repay our most expensive bonds first benefiting future free cash flow.

We have made progress on our leverage ratio in the year. The net debt to adjusted EBITDA ratio at year end 2016 was 4.8 times, a 1.4 times turn reduction from 2015 benefited by $116 million in debt reduction since December 31, 2015. We believe we should be able to move this ratio to below 4 times by year end 2017.

I'd like to provide color on the first quarter of 2017 as well as how we are currently thinking about full-year 2017. As you remember, growth in the first quarter of 2016 over 2015 was over 16% in total housing starts and over 20% in single-family starts. From a market growth perspective the first quarter is the toughest comparison, therefore we expect all in sales growth of 6% to 8% in the quarter.

From a gross margin perspective we will continue to lap the benefits of commodity deflation last year versus commodity inflation this year in the quarter, which will equate to a gross margin percentage flat to down slightly on a year-over-year basis. Cost savings are expected to continue and this will shake out to an estimated EBITDA of $70 million to $75 million.

Full-year our expectations for single-family starts are in the mid- to high-single-digit range with multi-family and commercial down mid-single-digits and R&R up 3% to 5%. Whether single-family starts can grow at the high end of that range will, in our opinion, depend on the severity of labor constraints. We anticipate a point or 2 of benefit from commodity prices on our sales and a bit of share gain in the single-family end market.

The year-over-year commodity driven gross margin impact should not be nearly as impactful as it was on our 2016 results, allowing us to get back to a more normalized estimated EBITDA conversion ratio of 12% to 15%. I will now turn the call back over to Floyd for his closing comments.

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Floyd Sherman, Builders FirstSource, Inc. - CEO [6]

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Thank you, Peter. Turning to our outlook, I feel great about the future of our Company and all that we accomplished not only in the fourth quarter, but in total for the year. I believe the housing industry remains on a trajectory of steady growth.

Now that the ProBuild integration efforts are largely behind us, we are increasing our focus on growth with value added products and national builders who are capturing share as well as leveraging our strong local relationships and investments in our sales force to grow faster than the market.

Our Company is well-positioned to be the building supply Company of choice for builders around the country thanks to our geographic reach, enhanced product offerings, national manufacturing capabilities and differentiated customer service. Our focus will be to leverage our national scale and sales capability to grow faster than the market with a focus on profitable growth and value added products.

These strengths and our scale and the leverage provided by our cash flow generation and debt reduction plans combine to make Builders FirstSource an industry leader with significant growth opportunities. I believe we will create significant value for our shareholders in the years to come.

Furthermore, I attribute the success of what we have achieved so far to all of our hard-working and dedicated associates. Thank you. And I will now turn the call back over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Rob Hansen, Deutsche Bank.

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Rob Hansen, Deutsche Bank - Analyst [2]

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It's good to see most of the integration behind you. I wanted to ask about how you are going to drive share and win back some of those customers that maybe you weren't able to reach in 2016. And when you talk about share gain, like how much faster are you thinking that you would grow the market compared to the market in 2017?

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Chad Crow, Builders FirstSource, Inc. - President & COO [3]

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I will take the first step at that, Rob. I think as we talked about a lot the last couple of quarters, it is really just there is only so many hours in a day. And so, by getting most of this integration behind us it frees up the folks in the field. They now have more time to focus on customers, to focus on going after that incremental business. So certainly just the allocation of time now will be a benefit for us.

And as we have also talked about the last few quarters, we are going to continue to invest in the value added side of our business. We feel like, especially in the western part of the country, there is a lot of pockets where we have the opportunity to increase our presence in the truss and panel business, for example.

And so, I know it is hard sometimes for folks to imagine the complexity and the time it takes to bring together two companies like we did all the way from just the personnel side of things all the way through getting the ProBuild side of the business SOX compliant. It was extremely, extremely difficult, extremely time consuming.

And so I think the biggest bang we are going to have in 2017 is just the fact that that is behind us and folks can now focus on running their operations and customer service. And I think we started to see a glimpse of that in the fourth quarter and we feel good about what we are seeing so far this year.

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Floyd Sherman, Builders FirstSource, Inc. - CEO [4]

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And I think another very important point, Chad, is certainly the expansion of our sales force. We are really working diligently on increasing the number of salesman that we have in the field. This is an extremely important element in this business in helping to drive market share.

And we have been steadily increasing our sales force since midyear last year -- or in 2016. This has certainly -- we intend to continue accelerating this process throughout 2017. We need to get more feet on the street. There is a lot of opportunities continue to develop in every market.

We certainly will be spending a lot more time on a market-by-market basis looking at our customer mix, looking at those customers that we are selling and products that we are not selling to those customers and how can we increase our sales and get more of the existing pocketbook.

But also at the same time there is a lot of customers out there who we're not selling and we need to find out what it is going to take to do it. In many cases when we started analyzing this we really began to see that we didn't have the salesmen necessary to cover a lot of these opportunities. And we are certainly working hard on that and we are going to continue to expand those efforts.

And I think that, combined with now the increased focus on our business that Chad spoke about, is going to be largely responsible for driving the market share gains that we would anticipate. And I think you can really see how we accelerated in the fourth quarter and I am very pleased to see what we are experiencing to start this year off. So I am feeling very good at this point.

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Rob Hansen, Deutsche Bank - Analyst [5]

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That is good to hear. And just so we are sure -- we're kind of aware. When you are talking about share gains and growing a little bit faster than the market, you are not talking like if housing starts grow 5% you are not talking that you are going to hit like 7%, right? It is just more of a smaller kind of incremental piece there?

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Chad Crow, Builders FirstSource, Inc. - President & COO [6]

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That is right. And we have said before you can always grow share faster if you want to drop your drawers and lower your prices. I think that Floyd Sherman once used that quote. But, yes, I think the key there is profitable market share growth.

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Rob Hansen, Deutsche Bank - Analyst [7]

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Okay, good. And then just one other question on the incrementals that you guys threw out, 12% to 15% for this year. I mean you also have talked about adding in a lot more salespeople. But does that 12% to 15% kind of factor in like, okay, we are going to grow our base overhead by a certain percent?

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Chad Crow, Builders FirstSource, Inc. - President & COO [8]

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Yes, that would be an all in flow through including any extra carrying cost of the sales force.

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Rob Hansen, Deutsche Bank - Analyst [9]

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Got it. And then just last question on CapEx. I mean, it came in a pretty low number in 2016 I thought given everything that is going on. And I think you threw out a number for -- I think you said 1.2% in 2017. So I just wanted to kind of get an idea why it is a little bit lower than I think most people were expecting given the integration and the kind of growth initiatives.

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Peter Jackson, Builders FirstSource, Inc. - SVP & CFO [10]

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Yes, so, in the results for the fourth quarter we did the cash number that we were anticipating, really it is attributable to a few things. The first being the EBITDA [beat], obviously that was worth around $10 million. So we like that.

The other bit was about $5 billion that we benefited from the sale of properties that were held for sale as a result of the combined entity and properties that we were willing to part with. And then the rest of it was really attributable to capital expenditures.

Two real drivers there, the first being timing on some of the projects that didn't come in right when we expected at year end. And the second really a response that we took to tepid market share growth in certain markets where we managed our capital expenditure in a way we thought was appropriate. But that 1.2% expectation, we do maintain that for 2017. That is in our expected cash flow forecast of $145 million to $155 million.

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Rob Hansen, Deutsche Bank - Analyst [11]

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All right, appreciate it, guys.

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Operator [12]

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Mike Dahl, Barclays.

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Mike Dahl, Barclays Research - Analyst [13]

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Wanted to follow up on the sales environment. One of your competitors talked about seeing some more intense competitive activity on the commodity lumber side. Just as prices have ramped up and not everyone has gone through to the market with full pricing, just wanted to get your comments on how you are approaching this. And so kind of what you are seeing and how you intend to compete?

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Floyd Sherman, Builders FirstSource, Inc. - CEO [14]

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Well, I think as we have been all along, we -- you are right, it is a very, very competitive situation out there yet. Typically we find ourselves in the middle probably of pricing and sometimes towards the higher end of pricing. And the -- we will evaluate and continue to evaluate all of the situations in which we are bidding.

And if we feel that we need to get more aggressive we will do so providing we see that it will put more dollars to the bottom line for us. And that is a job-by-job evaluation where you are running into those situations.

Typically the spread is pretty small in a lot of cases and then the builder makes his decision on who he feels can provide him the best service, get the job done in an orderly manner and so that his construction can proceed on a planned basis and meet the time delivery expectation.

Certainly where a builder is primarily interested in price there is a lot of those decisions -- we will make the decision to walk away from it and maybe look at it the next time the bidding situation comes up. But all I can tell you, it is a constant process of evaluating the jobs on the benefits that it produces for the Company.

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Mike Dahl, Barclays Research - Analyst [15]

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Okay, thanks. And it didn't look like, just based on inventory balance, that you were doing anything different than normal seasonality in terms of building inventory ahead of this. But have you -- as prices have continued to run in the first quarter have you done anything to effectively by ahead and stock some additional inventory?

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Floyd Sherman, Builders FirstSource, Inc. - CEO [16]

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Yes. I think we prepared ourselves I think pretty well. We anticipated the run up in the first quarter. You can't cover yourself 100%. But I think we anticipated properly, we adjusted our inventories, then in other aspects of the business we saw where we could take inventory out. And we did that to help offset the additional inventory we were putting in on the commodity fast turn items. So I think we protected ourselves in pretty good fashion in the first quarter.

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Mike Dahl, Barclays Research - Analyst [17]

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Got it, that is helpful. And then shifting gears slightly to some of the capacity investments -- it seems like stepping up some investments this year. Could you give us a little more color on if there is any specific markets or areas that you are working on any larger projects?

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Floyd Sherman, Builders FirstSource, Inc. - CEO [18]

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Yes. We very definitely -- our projects, as we said earlier, really centered around the value add products. California we view as an extremely attractive area for expansion. And we are addressing that. There are areas in what I will say the Rocky Mountain, also Pacific Northwest area that we are expanding.

The Southeast is another area that offers we think still a lot a promise for us. And so, we are putting additional facilities into servicing that area of the country. So I think we are somewhat broad-based I would say. Although most of it is designed specifically to really go after the very large MSA markets. That is where we are really concentrating the asset deployment.

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Mike Dahl, Barclays Research - Analyst [19]

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That is great. Thank you.

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Operator [20]

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Nick Coppola, Thompson Research Group.

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Nick Coppola, Thompson Research Group - Analyst [21]

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So, I understand that you are already at that $100 million cost savings run rate and that by the end of 2017 you are projecting $100 million to $120 million. What is left to do and what would you need to see to get to the higher end of the range?

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Chad Crow, Builders FirstSource, Inc. - President & COO [22]

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I think the areas where we have the most opportunity yet to come will be procurement and then on the G&A side. Most of the facility consolidation efforts are complete. We did negotiate additional rebate programs last year that we'll see more of a full benefit for this year.

And then on the G&A side for example, as we go through 2017 there will be two legacy ProBuild ERP systems that we will be able to sunset and unplug those and there is obviously a cost savings there in getting rid of the support for those systems. And we have still got ongoing back-office consolidation efforts underway that you will continue to see us drive some incremental savings. So those would be the primary areas.

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Nick Coppola, Thompson Research Group - Analyst [23]

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Okay, that is helpful. And then just wanted to touch on the particularly strong performance in manufactured products, so up 18% year over year on a sales per day basis. Can you just talk more about I guess how you are achieving that and then elaborate on maybe labor constraints that out there?

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Floyd Sherman, Builders FirstSource, Inc. - CEO [24]

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Yes, I think in the manufactured products area, obviously the labor conditions that exist in the industry are helping drive the demand for those products. And we have been investing in our facilities, upgrading our facilities, putting ourselves in a position to take advantage of the expanding opportunities in that area.

I think we are very, very focused as a Company on driving value added products. And I think that is one of the things that the legacy BFS approach brought to this -- the integration of our two companies. And which we had stated in previous earnings calls that this was an advantage and an opportunity that we were looking to expand upon and we thought there was a lot of opportunity for it.

We have very good facilities and it obviously in this business requires really good people from the engineering support to the design, the estimating group, the manufacturing group is -- it is got to be able to react quickly to changing market conditions and be able to take on overload that can develop within a marketplace. And you get known for your service and the quality of the product that you put out there.

And very frankly, we are not only the largest by far in this business, I think you will find -- if you audited the field you would find out that our reputation is the best. And we are going to continue to expand and work on that. But this is a real focus of our business. This is what we intend to really continue to strengthen in this business and we have a very aggressive CapEx program to further expand this side of the business. So that is really in a nutshell how we are doing it.

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Nick Coppola, Thompson Research Group - Analyst [25]

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Okay, that makes a lot of sense. Thanks for taking my questions.

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Operator [26]

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Will Randow, Citi.

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Will Randow, Citigroup - Analyst [27]

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You mentioned a handful of guidance items and, if my numbers are correct, operating leverage came in a little light this reported fourth-quarter, likely due to a pinch from lumber inflation. Can you rehash what your expectation for lumber inflation for 2017 is? Meaning are you assuming current spot prices?

How are you thinking about Canadian tariffs the middle of this year? And can you go over explicit revenue EBITDA and free cash flow guidance again and the sensitivity to if we see incremental lumber inflation?

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Peter Jackson, Builders FirstSource, Inc. - SVP & CFO [28]

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That is a few questions put together into one. I will start with the lumber comment. Based on the current look we think it is worth about 2 to 3 points on the revenue line for us for the first quarter. And probably for the year based on what we see today. I think we all sort of acknowledge that the softwood lumber agreement is still a bit TBD and we'll have to work through that as it happens.

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Chad Crow, Builders FirstSource, Inc. - President & COO [29]

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But most of the feedback we are getting from our Canadian suppliers is the market prices you are seeing now have already baked into it the anticipated result of the softwood lumber agreement. So they tend to think that where prices are now they are probably going to trade in a fairly narrow band from this point on through the rest of the year, which, as you know, is very good for business.

The challenge will be and the real question will be when can we get those increases passed through? We will be as aggressive as we can, but you are also at the mercy of what your competitors are doing in any given market.

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Will Randow, Citigroup - Analyst [30]

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And could you go over your explicit revenue EBITDA and free cash flow guidance again and the sensitivity if we see incremental inflation?

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Peter Jackson, Builders FirstSource, Inc. - SVP & CFO [31]

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So revenue, we can talk to that specifically. The commercial and multi-family, we think we will see continued declines there kind of flat to down. On the, R&R we do expect it to be in that 3% to 4% growth range. And then a single-family, the difference kind of in that low- to mid-single-digits in the first quarter that would sort of put us at an all-in number in that 6% to 8% and that was our guidance.

I'm sorry -- at 4% to 5% plus the inflation component of 2 to 3 points puts us in the 6% to 8%. That 2 to 3 points of inflation is a revenue growth number we would expect to see based on where commodity lumber prices are right now.

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Jennifer Pasquino, Builders FirstSource, Inc. - SVP of IR [32]

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And then so gross profit margin on a year-over-year basis is probably going to be flat to down because we are lapping the benefit of commodity inflation last year. So that is all in our number.

And that EBITDA range of $70 million, $75 million will include both our normalized EBITDA conversion, the gross profit -- the revenue increase associated with higher commodity prices, as well as the fact that last year in Q1 we were still lapping this gross profit margin expansion a little bit, so we are going to get a little bit squeezed. So I think all of that shakes out to that $70 million, $75 million for the quarter.

And we only gave cash flow guidance for the year at $145 million to $155 million. We haven't given quarterly guidance, but if you want we are happy to walk through those components. Would that be helpful, Will?

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Will Randow, Citigroup - Analyst [33]

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No, we can definitely catch you on the follow-up. In terms of share, where do you think you are picking up share? Is it in a specific category? And are there any opportunities in partnering with home centers that historically have been competitors for smaller customers or picking up share of some of the private competitors?

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Chad Crow, Builders FirstSource, Inc. - President & COO [34]

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I think most of the share is coming -- the value added products are leading the way. And I think primarily because a lot of our smaller competitors don't even have that capability. And so, as more and more builders are looking for that as a solution to the labor shortages that feeds right into our strategy.

And I also feel like if you continue to see these higher lumber prices I think that is going to start to squeeze some of the smaller suppliers as well who don't have the working capital means to be able to grow their inventory balance and their AR balance in the higher-priced environment.

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Floyd Sherman, Builders FirstSource, Inc. - CEO [35]

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Yes, and I think another factor to add that's very important. When we sell our value add products -- the manufactured products, we not only sell roof trusses and floor trusses and all the engineered lumber that goes with it, but we also will lead and always try to sell panels to the builder before we start selling.

And we do have a framing system, ours is called the BFS system, better framing system, that we can offer as an alternative. But your first directive is always to try to sell panels. Now we are really again not only the leaders in the trust manufacturing but also in panel manufacturing. The majority of the people in this business do not offer panels.

Panels is really the better alternative and cost alternative for a builder in getting his homes built quicker with less jobsite waste and many other advantages structurally. So that is something that gives us an added advantage and opportunity to increase the -- our products sales to that builder with value add.

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Will Randow, Citigroup - Analyst [36]

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Thanks for that, guys, and congrats on the progress and good luck in 2017.

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Operator [37]

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Al Kaschalk, Wedbush.

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Al Kaschalk, Wedbush Securities - Analyst [38]

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I wanted to focus on the regional comments that you could provide. In particular, were there any markets that you saw decline in the fourth quarter? Specifically I'm thinking like California and maybe Texas? And then what is your prognosis here going forward if it is able to rectify short-term?

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Floyd Sherman, Builders FirstSource, Inc. - CEO [39]

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For the most part, I mean we really have seen a broad base of support through all of the markets. In particular the real strength double-digit gains in not only California but also in the Carolinas and Georgia, Florida, the Pacific Northwest.

Really I would say Texas was what I will say a flat -- a relatively flat market performance this year and that was heavily affected by what happened with the fall off in housing in Houston, even though our people did a really good job of adjusting the business to that major change.

And Houston is such a huge part of the overall Texas market. Offsetting that is Austin, San Antonio, very strong for us as well as DFW. So we really don't have any areas that I have any great concerns about or that I see. And just all of the areas we are either flat to up, as I said before, some of the markets well into double-digits.

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Al Kaschalk, Wedbush Securities - Analyst [40]

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Okay, thank you. And then my follow up if I may. I was hoping, and maybe this is one of the questions that we have been getting on the value added product area relative to the BFS that you just mentioned.

I know the longer-term trend is 50 -- I think 50 percentage points of revenue. But can you talk about where you are at say today? And then what is the major drivers to pick up percentage points of the portfolio in that area? Specifically is it sales additions? What's going to drive that benefit? Because on the continuum of a margin perspective obviously this has a little bit better contribution.

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Chad Crow, Builders FirstSource, Inc. - President & COO [41]

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Well, I think the first step is going to be to fill in the holes in the geographies where we don't even offer some of the value add product like truss and panel. And then as Floyd alluded to earlier, making sure you have the sales force to support the sale of those products.

And I think we've talked before, yes, our long-term goal is to get our value add mix back closer to that 50%. If you can move that 100 to 200 basis points a year I think you are doing pretty damn good. So it is not something that is going to happen overnight. But it is a continual investment in the facilities to provide those products in an investment in the sales force.

And in some cases educating the customers on the benefits of it. This has historically been a slow to change industry. And sometimes you really got to take some customers by the hand and walk them through all the benefits and show them how the math works and get them to try it. And 9 times out of 10 you get them to try it they are not going to go back to stick framing. So it is just a process.

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Al Kaschalk, Wedbush Securities - Analyst [42]

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Great, that is all I have. Thanks a lot and congratulations on the strong finish.

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Operator [43]

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Matt McCall, Seaport Global Securities.

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Matt McCall, Seaport Global Securities - Analyst [44]

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Thank you, good morning, everybody. So two questions for you. First, Chad, not to nitpick these savings numbers too much. But I noticed last quarter the G&A bucket was around $50 million to $59 million, now it is $70 million. I think you said that if you were able to get to the high end of the targeted range it would potentially come for procurement or G&A. Am I just reading too much into those dollars would be moving around a little bit or did something occur in the quarter that caused those estimates to get altered?

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Chad Crow, Builders FirstSource, Inc. - President & COO [45]

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No, I would say in general the procurement side of it, and I think we may have talked about this a quarter or two ago, that has proven to be the most difficult. And not surprising, that is the piece that is not really 100% in our control. And so, as we have gone through the process some areas have proven out to be a little more difficult. Some areas we found opportunities we didn't know existed at the time we closed the acquisition.

So, as each quarter goes by you learn a little more, find a little more. And I think -- but all in all we are going to come into that range that we had laid out from the beginning. But, yes, there's probably been a little bit of moving between buckets from time to time.

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Matt McCall, Seaport Global Securities - Analyst [46]

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And then the -- so the $70 million, it is incremental savings that you found and I think an earlier question was where could the upside come from from here. So there is the potential that as you progress through 2017 there is still more to go. I'd just make sure I am not double counting there.

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Chad Crow, Builders FirstSource, Inc. - President & COO [47]

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No, you are correct, there is more to go. And I still feel good about by the end of 2017 we will be somewhere in the middle of that $100 million to $120 million range.

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Matt McCall, Seaport Global Securities - Analyst [48]

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Got it.

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Chad Crow, Builders FirstSource, Inc. - President & COO [49]

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Yes. So it would be an incremental $25 million or so that I would expect in 2017.

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Matt McCall, Seaport Global Securities - Analyst [50]

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Perfect, perfect. Okay and then last question I had. You gave some gross margin commentary I think, Jen, thank you for that. That the SG&A outlook -- just making sure I understand the trajectory of what you are expecting this year. I think you talked about some savings initiatives, but you also talked about more salespeople. And I know it is baked into this incremental EBITDA. I just want to make sure I understand the trajectory of what you expect for SG&A maybe as a percent of sales in 2017.

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Chad Crow, Builders FirstSource, Inc. - President & COO [51]

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Well, typically the way I look at it and try to model it, and it will get you into that 12% to 15% flow-through, is our SG&A usually runs about 70% variable to changes in sales volume. And so, if you are able to manage your SG&A in that manner and you typically need a little bit of gross margin expansion, you are going to fall somewhere in the 12% to 15% EBITDA flow-through.

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Matt McCall, Seaport Global Securities - Analyst [52]

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Okay and just a clarification on the 12% to 15%. That -- is that all in including the incremental savings from synergies or is that 12% to 15% plus the synergies?

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Chad Crow, Builders FirstSource, Inc. - President & COO [53]

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No, that should be from the base business.

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Matt McCall, Seaport Global Securities - Analyst [54]

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Okay, plus the synergies. All right. Thank you.

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Operator [55]

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Keith Hughes, SunTrust.

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Keith Hughes, SunTrust Robinson Humphrey - Analyst [56]

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Just going back to the first-quarter guidance, you talked about some of the breakdown. But as you look at the year, do you anticipate a year where you will see more growth in the second half of the year versus first half given that you do have tough comps in the first half? What sort of shape should we expect from your (inaudible)?

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Chad Crow, Builders FirstSource, Inc. - President & COO [57]

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Boy that -- I wish I had that crystal ball. But yeah, I would say in general --.

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Keith Hughes, SunTrust Robinson Humphrey - Analyst [58]

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Directionally, I don't expect numbers (multiple speakers).

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Chad Crow, Builders FirstSource, Inc. - President & COO [59]

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Yes, yes, the weather comp certainly this year versus last year, this hasn't been a horrific winter but we have actually had a winter where last year we didn't. And so that is going to make the first quarter a little bit tougher comp. Other than that I think it is going to be pretty even. That would be my guess.

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Keith Hughes, SunTrust Robinson Humphrey - Analyst [60]

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Okay. And on the lumber inflation coming (inaudible) very quickly here. If the situation with Canada works out pretty quickly is that something you expect to come right back down or how much of this is just kind of a reaction as much as anything else?

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Chad Crow, Builders FirstSource, Inc. - President & COO [61]

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Well, I think what we heard from our Canadian suppliers is if the agreement gets settled where most think it will you could see lumber prices come down a little bit from where they are today, but generally folks are thinking somewhere in that [360 to 370] range is where it will settle out more in the back half of the year.

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Keith Hughes, SunTrust Robinson Humphrey - Analyst [62]

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Okay, thank you.

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Operator [63]

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John Baugh, Stifel.

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John Baugh, Stifel Nicolaus - Analyst [64]

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Great year. Just a couple of things. One, could you quantify what the inflation impact in calendar 2016 was negatively on EBITDA? And then sort of what you think that is for 2017?

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Jennifer Pasquino, Builders FirstSource, Inc. - SVP of IR [65]

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On full-year 2016?

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John Baugh, Stifel Nicolaus - Analyst [66]

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Yes.

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Chad Crow, Builders FirstSource, Inc. - President & COO [67]

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I did some simple math and it basically just said had we sold our commodity lumber prices in 2016 at the same margin percentage we did in 2015 we would have had $49 million more in gross profit dollars. And if you assume say an 85% flow-through of that to EBITDA you are somewhere around a $40 million EBITDA impact. Now that is everything else being equal, right. I mean that is just a pretty simple analysis. But it does at least give you some idea of what that gross margin erosion in that category cost is.

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John Baugh, Stifel Nicolaus - Analyst [68]

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Okay, that is helpful. And you mentioned an increase in sales force roughly starting I guess midyear last year. Is there any range of magnitude number wise we are talking about there?

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Chad Crow, Builders FirstSource, Inc. - President & COO [69]

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Well, we did talk last quarter about we call it the corporate carry program where we incentivize our guys in the field to recruit salespeople and we agree to carry some of that cost at corporate for a period of time. So far we have hired about 125 salespeople on that program. And if we have our way I hope we get another 100 this year.

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Floyd Sherman, Builders FirstSource, Inc. - CEO [70]

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That is our goal.

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Chad Crow, Builders FirstSource, Inc. - President & COO [71]

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Yes.

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John Baugh, Stifel Nicolaus - Analyst [72]

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And then I apologize if I missed it, but did you break out the value add percentage for the year 2016 in comparing to 2015 and what the delta was?

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Jennifer Pasquino, Builders FirstSource, Inc. - SVP of IR [73]

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The growth in value added products?

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John Baugh, Stifel Nicolaus - Analyst [74]

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Yes.

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Jennifer Pasquino, Builders FirstSource, Inc. - SVP of IR [75]

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We did, hold on just a second.

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Peter Jackson, Builders FirstSource, Inc. - SVP & CFO [76]

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So on slide 6 you can see the 2016 value added component kind of noted by the dotted line.

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Jennifer Pasquino, Builders FirstSource, Inc. - SVP of IR [77]

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10.2%. 10.2% was the growth in the value added products for the year.

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John Baugh, Stifel Nicolaus - Analyst [78]

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Super. Congrats on a great year and good luck going forward.

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Operator [79]

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And now I would like to turn it back to your speakers for any additional or closing remarks.

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Floyd Sherman, Builders FirstSource, Inc. - CEO [80]

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Okay, we appreciate everyone joining the call today and we look forward to updating you on the progress of our business initiatives in the months ahead. If you have any follow-up questions don't hesitate to give Peter Jackson or Jen Pasquino a call. And thanks and have a great finish to the week. And we intend to have a great finish to the quarter.

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Jennifer Pasquino, Builders FirstSource, Inc. - SVP of IR [81]

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Thank you.

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Operator [82]

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And this does conclude today's presentation. Thank you for your participation, you may disconnect.