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Builders Firstsource Inc (NASDAQ:BLDR)
Q3 2020 Earnings Call
Oct 30, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Builders FirstSource Third Quarter 2020 Conference Call. [Operator Instructions] Today's call is being recorded and will be available at www.bldr.com. It is now my pleasure to introduce Mr. Binit Sanghvi, Vice President, Investor Relations. Please go ahead.

Binit Sanghvi -- Vice President, Investor Relations.

Thank you, Stephanie. Good morning, and welcome to the Builders FirstSource Third Quarter 2020 Earnings Conference Call. With me on the call today are Chad Crow, Chief Executive Officer; and Peter Jackson, Chief Financial Officer. Copy of the slide presentation referenced on this call is available on the Investor Relations section of the Builders FirstSource website at bldr.com. Before we begin, let me note that during the course of this conference call, we may make statements concerning the company's future prospects, financial results, business strategies and industry trends.

Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks.

The company undertakes no obligation to publicly update or revise any forward-looking statements. The company will discuss adjusted results on this call. We have provided reconciliations of non-GAAP financial measures to their GAAP equivalent in our earnings press release and detailed explanations of non-GAAP financial measures in our Form K (sic) Form 8-K filed yesterday, both of which are available on our website.

I will now turn the call over to Chad Crow.

M. Chad Crow -- President & Chief Executive Officer

Thank you, Binit. Good morning, and thank you for joining us on our third quarter earnings call. As the pandemic continues, I hope you and your families are staying safe and healthy. Our thoughts continue to be with those affected, and I would like to again recognize our dedicated team members for their commitment to excellence during the challenges of the past several quarters.

The safety of our team members and of the surrounding communities where we operate, remain our top priority. Safety will continue to guide our operating strategy. Before diving into our results, I will start on slide three and spend a moment discussing our recently announced merger with BMC Stock Holdings. This merger is on track to create the nation's premier supplier of building materials and services with combined adjusted EBITDA of approximately $950 million, including run rate synergies.

Together, we will have an expansive geographic footprint and enhanced local relationships in attractive high-growth markets. The combined company will benefit from greater geographic reach and diversity within what is still a very fragmented industry. We will have a strong footprint in many of the nation's largest and fastest-growing regions and will be exceptionally well positioned for long-term growth, supported by resilient housing environment. We expect to continue to deliver above market growth through our share commitment to value-added product offerings, which allow us to closely partner with customers, the street line in the construction process. In addition, larger platform will strengthen our ability to invest in best-in-class innovative solutions that deliver significant benefits to our customers.

During the past months and half, Dave Flitman and I have traveled to many regions of the country, including Texas, the Mid-Atlantic, the Southeast and mountain states and the West Coast among others. In many of these cities, we have held town hall meetings to hear directly from our team members about their local market strengths. It was extremely beneficial to observe both of our companies capabilities and real-time and envision all the ways we will be able to complement each other to do some truly exceptional things for our customers. It was both of us great pride as we are hardworking team members across the country. These efforts are directly responsible for putting them in the successful position we are in today. Both Dave and I enjoyed getting to interact with some many team members and seen their excitement for future opportunities as we take our combined business to new heights.

In terms of timing, thus far the deal is progressing as expected. The merger planning work is happening in the background right now, continues to be very positive. In October, we filed a 30-day extension under the HSR review process with the DHA. Also in October, we filed our Form S-four with the SEC. We are working diligently with both agencies. Once we have completed these two regularity milestones, there will be a required 20 working day notice before Builders FirstSource and BMC request their respective shareholder approvals. This keeps us on track to close the merger in late 2020 or early 2021. At this point, I could not be more pleased with our significant strides toward winning together as one, which is our merger tag line, while continuing to stay focused on customers and delivering exceptional operational performance.

Moving to our results on slide four, I'll highlight the key factors underpinning our excitement about what we accomplished during the quarter. First the momentum we carried into the third quarter continued with performance ultimately being better than we had anticipated. The homebuilding markets have been resilient, improving housing starts, record low mortgage rates and a shift toward suburban living are all positive fundamentals that continue to support demand for our products and services. Since mid-year, activity in our end markets continued to trend positively, resulting in demand improving throughout the quarter. During the quarter, we experienced a steady recovery in sales as we have seen a broad-based improvement across geographies and end markets.

We are back to work in all of our locations around the country and are able to safely and effectively deliver critical products and services to customers, while keeping up with the robust demand in much of the country. Our team delivered strong results all around. For the first nine months of the year, sales increased by over 9% to a record $6 billion. Approximately 3% of growth was from core organic performance, and our five tuck-in acquisitions completed over the past year added more than two percentage points to growth. While housing demand has accelerated rapidly, we have also seen commodity prices reach record heights. Commodity inflation contributed approximately 3% to sales and one additional selling day contributed about 1%, which led to the increase in reported net sales of over 9% year-to-date.

This brings us to our second theme. Through our focused execution, we have remained appropriately resourced to capture rising demand in a disciplined manner. This has produced record adjusted EBITDA of $443 million for the first nine months of 2020. The gross margin just shy of 26% year-to-date is a direct result of our ability to react quickly and effectively to rapidly evolving market dynamics since midyear. In addition, our operational excellence initiatives remain core to our strategy. Alongside the momentum in our markets and our business right now, this set of best practices is being implemented throughout the organization and making our company more agile and easier to do business with. Key initiatives in process include investments in distribution and logistics software, pricing and margin management tools, back-office process efficiencies and information system enhancements.

We launched these initiatives in 2018 and have made significant progress laying the groundwork for what we -- for what will, no doubt, prove to be efficiency enhancing investments as we move into our next generation of growth. And finally, among the many plan merger with BMC to our team members, customers and shareholders, we will continue to expand our network of value-added offsite component manufacturing facilities, which are core to our collective strategy. Post combination, that will continue to be a focus of our combined growth. With a portion of the cash we intend to generate, we will continue investing in value-added growth through both organic and inorganic opportunities. As an example, in October, we commissioned a state-of-the-art greenfield truss plant in Riverside, California, extending our industry-leading position to 66 manufacturing facilities.

Whether through new facilities, new truss lines in existing plants, door facility expansions or other system enhancements, these differentiated offerings offer industry-leading value-add capacity and will remain key to enhancing our geographic footprint, technological capabilities and integrated partnerships with customers. The favorable market conditions we see today should provide growing opportunities for the bigger and better Builders FirstSource. We know customers value our commitment to high-quality service and in particular, our ability to continually invest in our service capabilities throughout the housing cycles. This is a differentiator for Builders FirstSource within our industry. It has been an element of our success in 2020 and will continue to be a core focus after we complete our transformational merger with BMC.

I will now call -- turn the call over to Peter, who will review our third quarter results in more detail.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Thank you, Chad. Good morning, everyone. I would like to start by also recognizing our team's focused execution, including the quick reaction to the sharp rise in both demand and lumber costs. I will review our third quarter results, provide an update on the merger and in the guidance on how we see the market going forward. We had $2.3 billion in net sales in the third quarter with core organic sales increasing 6.7%. Core organic excludes acquisitions and commodity impacts from net sales to give an indication of the underlying performance of the business.

We experienced accelerating demand across the country, as demand continued to be stronger than expected throughout the home-buying season. Our five tuck-in acquisitions completed over the past year added 2% to net sales. Commodity price inflation added another 7.2%. As a result, net sales in total increased by 15.9%. Our value-added product categories continue to perform well within our respective markets.

I will note, however, that the impacts of both commodity inflation and COVID-19 in the hardest-hit regions of the country has had a disproportionate impact on our value-added products despite higher underlying demand in most of the country. Gross margin of $570.7 million in the third quarter of 2020 increased by over $29.5 million over the third quarter of 2019. Our gross margin percentage was 24.9%, which was well ahead of our expectations, though down 240 basis points from the third quarter of 2019. The margin percent decrease on a year-over-year basis was attributable to sharp increases in commodity prices.

The commodity inflation and lumber cost we have experienced since May continue throughout the quarter. So please keep in mind the mechanics of our margins as we have discussed on prior calls. Over the long term, higher prices benefit our business, however, price fluctuations, especially in commodities, can cause significant swings in our results.

Commodity cost inflation causes short-term gross margin percentage headwinds when prices spike relative to our short-term pricing commitments that we provide customers. Additionally, higher prices in commodity products have a negative mix impact on gross margin percentages. As mentioned, I am pleased with our team's ability to mitigate unfavorable impacts this quarter through a combination of focused execution and disciplined pricing. As we neared the end of the quarter, commodity prices started to ease, albeit at a very high level. Although we expect our gross margin percentage to continue to be pressured in the fourth quarter, we do expect to benefit from higher gross margin dollars generated from the higher commodity prices. Interest expense increased by $300,000 to $28 million compared to the same period last year.

Excluding the net impact of onetime items related to debt issuance and extinguishments in the prior year period, interest expense increased by $3.4 million due to a higher outstanding balance as we proactively increased our liquidity and financial flexibility. Third quarter EBITDA increased $24 million from a year ago to $184.3 million, an increase of 15%. This is the highest quarterly EBITDA in our history, driven by the top line growth, combined with the reduction in variable expenses related to commissions as well as lower travel and fuel costs. EBITDA margin held steady at 8% compared to the prior year period. Adjusted net income for the quarter was $96.7 million or $0.82 per diluted share compared to $84 million or $0.72 per diluted share in the third quarter of 2019.

The year-over-year increase of $12.7 million or $0.10 per share was primarily driven by improved operating results. On slide six, the strength of our business was evident again in the third quarter. Our team grew net sales across four of five product categories, led by lumber, given the dramatic escalation in costs. Value-added core organic sales showed healthy growth, increasing by approximately 2% despite continuing to be disproportionately impacted by geographies slower to recover from the pandemic, largely in the Northeast. Excluding this region, value-added product sales grew by mid-single digits in the rest of the nation. With the continuing labor challenges faced by our customers, demand for our labor-saving products is expected to continue to rise.

To meet this growth, we plan to invest approximately 25% of our total 2020 capital expenditures in our value-added growth initiatives and expansion of our production capacity. Core organic sales grew by an estimated 6% in our single-family customer end market compared to the prior year, helped by accelerating demand in the majority of our regions. Market tailwinds and underlying economic conditions continue to be very supportive of demand. Builders are ramping up activity in response to that demand, as evidenced by double-digit year-on-year increases in single-family starts. We expect these starts to provide a long runway for growth as they translate into increasing units under construction and ultimately, completions.

Organic growth in the R&R and other end market grew by 7% as we continue to see relative strength in the Western part of the country. Multifamily core organic increased by 18%, largely due to the timing of large projects. Turning to our outlook on slide eight. Our results in the first nine months demonstrate a positive homebuilding environment that is supporting rising demand across our footprint, which continued into October. Year-to-date results reflect our team's focused execution and ability to stay on top of the extremely dynamic commodities market from both a price and cost management perspective. Our success is in large part attributable to our team's experience in managing through all types of market environments and the trust customers place in us to be their partner of choice.

During 2020, the housing market has proven to be resilient with annualized single-family housing starts rising 17% in the third quarter and up 6% year-to-date. A number of tailwinds point to further strength in the fourth quarter and beyond. The builder confidence index reached an all-time high of 85 in October. We estimate significant pent-up demand from increased household creation and significant underbuilding of single-family homes over the past decade. Mortgage applications continue to decline with mortgage rates also near all-time lows, and existing home inventories also near all-time lows of three-month supply. We are seeing the benefit of residential construction catalysts in nearly all localities where we operate, outside of the Northeast. With this backdrop, we are introducing our outlook for the fourth quarter.

We estimate adjusted EBITDA to be in the range of $190 million to $210 million. We anticipate fourth quarter core organic sales to be in the mid- to high single-digit percent range year-over-year. While we are undoubtedly optimistic, we continue to manage our business with a prudent growth assumption, which accounts for the lag before housing starts translate into units under construction and ultimately, completions. In recent months, factors such as tight labor and material scarcity has extended builder construction cycles. To put that in perspective, over time, completions will approximate roughly 100% of starts, but at the moment, completions represent only approximately 80% of the current level of housing starts.

Keep in mind, our core organic growth outlook reflects our core sales performance and excludes the sales contribution from acquisitions as well as the significant commodity inflation that we expect in the coming quarter. We estimate our fourth quarter gross margin percentages to be consistent with Q3 at around 25%. For the full year 2020, we continue to expect our cash interest will be in the $110 million to $115 million range. With our growth projects under way again, we reiterate our expectation for capital expenditures to be in the $100 million to $110 million range for the full year. Since 2018, we have generated nearly $1 billion of operating cash flow, and we fully expect to build upon that cash generation through year-end 2020.

I'll now turn the call back to Chad for his closing remarks.

M. Chad Crow -- President & Chief Executive Officer

Thank you, Peter. This is an exciting time for Builders FirstSource. We are on path to close out a record year with 2020 adjusted EBITDA expected to be approximately $640 million or 25% above last year at the midpoint of our guidance. This outperformance to prior year comes as we reap the benefits of the structural enhancements we have made as we implement operational excellence initiatives, deepen our presence in high-performing value-added businesses and empower our sales teams to compete wisely in the commodity product market.

I am incredibly proud of the Builders FirstSource team and thank each member for their dedication to our company, customers and communities. Looking ahead, we are all very pleased to welcome the BMC team to the Builders FirstSource family. Our accomplishments to this point have only strengthened my conviction in the merits of this merger. This merger will allow us to deliver solutions that make our customers more productive and efficient through deeper and more integrated relationships than ever before. Value-added offerings will continue to represent the largest portion of our business and the focus of our investments. With our expanded capital resources, we believe we will be uniquely positioned to accelerate our profitable growth through underlying market expansion, supplemented by targeted acquisitions and operational excellence initiatives.

This merger aligns with our shared growth strategies and occurs at an optimal time for both companies to create significant value to a much larger and more efficient platform. We look forward to completing this merger and working closely together with a unified leadership team that has a proven record of successful integrations. I am confident that with the two outstanding organizations coming together, we will be better positioned than ever to be the supplier of choice for building materials and value-added products and services in the years to come.

With that, thank you again for joining us today, and we will now open the call up for your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Matthew Bouley with Barclays.

Matthew Bouley -- Barclays -- Analyst

Good morning. Thanks for taking the question.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Good Morning.

Matthew Bouley -- Barclays -- Analyst

Congrats on the results. So I wanted to start out maybe pressing on the value-add product performance a little bit. The organic is still a little lighter than the rest of the business. And it sounded like you're attributing disproportionate impacts from the Northeast, and I think you said, Peter, mid-single-digit growth elsewhere, if I heard you right. But I think last quarter, there was some underperformance, which you talked about, related more to the West than to Florida. So I guess if you could just kind of unpack sort of what's going on there and maybe how value add is expected to perform within that Q4 revenue outlook? Thank you.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Sure. Yeah. So there are a couple of layers to this. This has been a pretty dynamic year. So as we talked about, the beginnings of COVID's impact on our business, the parts of the country where we were hardest hit, the Northwest, the Northeast and Florida, were those areas, for the most part, that were seeing government shutdowns, right? So everything was shut down or significant parts of the business were shut down. So a lot of exposure to value add in those businesses. So we saw the greater-than-normal or greater-than-average negative impacts on value add.

As we got into this summer and through the back half of the year, the geography impact still true from the perspective that, I would say, the Northeast has been the slowest to recover. The Northwest bounced back pretty quickly after the COVID reopening hit. The entire Northeast corridor has been much more, I would say, gradual in the recovery back to normal, I'd say, still below normal in those markets. And again, that exposure in commodities and -- is different -- I'm sorry, the exposure to value add truly is different in those markets than it is in the rest of the country. Another way to look at it is, if you think about those parts of the country that have grown the most and have the best performance, if you think about the South, Texas is a great example, in many ways, electing not to participate in the downturns related to COVID, that's a market that doesn't have as much exposure to that value-added product.

There are some other factors at play. We talked a little bit about the extended build times. We think that the homebuilder cycle, despite the rapid increase in starts, is extending. We've heard that comment from a few folks, whether it be due to product availability or labor availability. We think that has also shown a bit of an impact, particularly on products that we see toward the back half of the build cycle that's included in value add for us. All in all, we're not concerned about it. We continue to monitor it. I think it's important, obviously, to our strategic vision of the company. But all of our data says we have reason to be confident.

We're positive about our backlogs. We think that the overall environment is very, very positive, and we see it picking up again. But certainly, there have been some speed bumps. We all know how hard it is to run a manufacturing operation in general. And during the age of the COVID, that's certainly a challenge for us. So we'll continue to keep an eye on it and manage it, but certainly optimistic about what we see coming. Backlogs look good. Demand looks good. I haven't seen people moving away from manufactured product. So we think it's just some unevenness in the business.

Matthew Bouley -- Barclays -- Analyst

Okay. Makes sense. I appreciate the thoughts there, Peter. And secondly, I wanted to ask just on the merger. It sounds like the timeline is on track, but you've continued to obviously progress with the merger planning. So I guess I'm just curious if there's any sort of operational updates around how you're thinking about that, some of the things we talked about like overlapping locations in a few markets, maybe any finer points on the synergy potential. Just -- as you've continued to dig deeper, just curious what kind of the latest is on the operations. Thank you.

M. Chad Crow -- President & Chief Executive Officer

Yeah. I would kind of sum it up as expected. Clearly, we're still two separate companies, and so we are doing as much of the planning as we can in the interim. As I mentioned in the prepared comments, Dave and I visited a lot of locations. There's a lot of excitement out there among our team members on the opportunities that we're going to have as a go-forward company. But no real surprises good or bad so far. It's just as expected, which is good. Still feel good about the synergy ranges we've given. One thing that is clear, we're all very busy. So there's not a whole lot of excess capacity sitting around at the moment, which is a high-class problem to have. So yeah, it's going as expected, which is a good thing.

Matthew Bouley -- Barclays -- Analyst

Great. Thank you, Chad. Thank you, Peter.

M. Chad Crow -- President & Chief Executive Officer

Thank you, Mat.

Operator

Thank you. Our next question comes from Mike Dahl with RBC Capital Markets.

Mike Dahl -- RBC Capital Markets -- Analyst

Morning, thanks for taking my questions. Tremendous results, guys. Good way to end the year. First question, just around margins, and this is more thinking toward 2021. So as you noted, lumber has started to move lower and given your lag, would you think about 2021 as being back in that normal 26% to 26.5% range at this point? And I guess, similarly, any thoughts on -- there's always moving pieces around SG&A, but you guys have done a great job keeping costs under control and leveraging the top line. So any thoughts on kind of where we should be thinking on normal SG&A?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Yeah. That's a great question. And you've heard me make this half-joking comment before, if you can tell me what commodities are going to be, I'll tell you what my margins are going to be. It's a really big question mark. That run up that we saw this year in commodities is unprecedented. And while it's turned, it's certainly not back to historical norms. We're quite elevated, and I think the market in some ways is still digesting it. It's certainly still passing through in our pricing. We provide some of the materials that the homebuilders have put out there about what they're doing with their pricing.

Some people have maybe tried to play the game a little bit from what we're reading into their comments, they've tried to slow down or speed up their build cycles. Personally, I think they're missing out in terms of the opportunity and the demand that's out there. We're motivated to build whatever we can and get it out. And I think that dynamic, as it evolves over the next six months, will be impactful on us, no doubt. But the core of the business is where all of our effort is going in terms of being ready to deliver on that demand. The likelihood that we're going to see a return to those really high lumber prices is low.

So I think it's fair to say that we'll see some tailwinds associated with the deflation for a bit of time. But it's so volatile and so dynamic in different, different parts of the country. I'd say at this point, I'm not comfortable putting a normal out there for you. What you're saying doesn't sound unreasonable, but I couldn't point you to a real number at this stage just until things normalize and sort of settle out a little bit. The other big factor is putting our two businesses together and seeing what our -- what the combined entity starts to perform at, that will be a critical piece to that as well.

M. Chad Crow -- President & Chief Executive Officer

Yeah. I would just add nothing has structurally changed with our business, obviously, but it is a very volatile time. And as Peter mentioned, lumber prices has dropped significantly in the past month, but they are still well above any sort of historical averages. The framing lumber composite, the print right now is still 50% higher than a 5-year average, and you go all the way up to OSB, which is still over 100% higher. So still a very healthy environment for us.

As you know, we love high lumber prices. So if they do stay elevated into next year, that's a wonderful environment for us. Could margins be a tick lower? Maybe, but we'll still be reaping the benefit of higher-margin dollars, which we know at the end of the day is the name of the game. So feel good about the business. And the short answer is there's nothing structurally that's changed in our business in the past few quarters that would cause, in my opinion, our margins to vary from what they have historically in a more normal commodity environment.

Mike Dahl -- RBC Capital Markets -- Analyst

Right. Okay. I appreciate that, Chad and Peter. I guess, I'll ask a slightly different way, and this has been more of a hypothetical. But let's say obviously, going into next year, there's still going to be some carryover tailwinds from inflation based on what we're still saying. In an environment where we gradually normalize down to, call it, a $450 million to $500 million lumber, which would still be above normal and OSB kind of normalizes lower. Based on what you're seeing in demand, you guys have the $750 million target out for 2022, but you're exiting 2020 at a really strong rate. Is it possible that you hit the $750 million, actually a year early in '21?

M. Chad Crow -- President & Chief Executive Officer

I guarantee you, we will. We'll have BMC's results under us so...

Mike Dahl -- RBC Capital Markets -- Analyst

I mean on a core basis.

M. Chad Crow -- President & Chief Executive Officer

There's -- I mean, a couple of factors here, right? I mean, as far as I'm concerned, the day we close, that $750 million is sort of in the rearview mirror, and we'll be working on putting a new number out there for everybody. The reality of the impact of commodity prices on that is undeniable, right? Of course, we're going to be able to deliver sooner if we got that tailwind.

But again, our goal is really to focus on the core of the business, which is strong and is growing, and we're going to continue to refine and commodities are going to be what they're going to be. I think if we spend all of our time talking about commodity prices and its impact on the bottom line, we'll have lost the real value in this business. But yes, I do think that could get us there sooner if they stay on it.

Matthew Bouley -- Barclays -- Analyst

Sure. And certainly, didn't mean to focus too much on commodities. Part of the point there was just the underlying strength of the business giving you a path there as well. But yeah, thanks, I will turn it over.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Alright. Thanks, Mike.

Operator

Thank you. Our next question comes from Trey Grooms with Stephens.

Trey Grooms -- Stephens. -- Analyst

Hey, good morning and congrats on the great results.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Thanks, Trey.

Trey Grooms -- Stephens. -- Analyst

So first off, of course, I guess, sticking with lumber, one more question there. It's been pretty tight up until now. And of course, there's been some extended lead times out there. First, did that impact you at all in the quarter? Have you seen that improve at all? And then kind of second to that is how you're thinking about inventory positioning as we enter kind of the slower -- seasonally slower winter months where maybe some supply might loosen up?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Yeah. So I'll try and answer those in order. We certainly did see certain markets, certain products, particularly certain species and lengths, get very, very tight during parts of the year. We, like everybody else, struggled at certain times to get everything that we wanted. I think we feel pretty good about getting what we needed. I think the numbers support that. We have seen, as the fall has started to set in, that some of that product has absolutely become available. And I think that's what you're seeing in the reflection of the prices in the spot for the random lengths coming back down.

I would say it's not back to normal yet. But I would say that we are still running our business based on what we believe to be the right disciplines, meaning we are going to limit our inventory, we're going to keep our inventory tied to our days demand, we're going to bring it down seasonally and then plan to bring it back up as we need to coming into next year. But right now, our -- you've seen a pretty good -- this may come up later in the conversation, you've seen a pretty big increase in the value of our working capital. I'll point to the fact that's basically all driven by the value of the product rather than the quantity of product we have on hand. We intend to stay lean.

M. Chad Crow -- President & Chief Executive Officer

Yeah. Trey, I'll just add, there's definitely been some -- not just in products, we deliver just across the board. As you know, there's been some product shortages and those continue. I've heard instances in the Dallas market where bricks are out 12 weeks, and I know people personally building homes that are waiting on doors and windows. And if you look at the data the last couple of months, this may be the first time it's ever happened and definitely in recent years where new home sales have outpaced starts, and that's -- it's usually the other way around.

So the backlog is very strong, but I do think, as Peter mentioned in the opening comments, the cycle times are going to be extended because of tightness of product and labor. And it's a high-class problem to have, right? And it just extends -- it will extend this backlog and this favorable environment into next year, which isn't a bad thing. But I do think it's important as you think about our business and the industry in general that we will likely see cycle types extended in the coming quarters.

Trey Grooms -- Stephens. -- Analyst

Sure. Makes sense. And then kind of on that, with product shortages you're calling out here, outside of lumber, there have been some pretty sizable price increases announced by some of the manufacturers across most of your product lines. You mentioned doors, but also gypsum wallboard and some of the others. So with that in mind, what kind of inflation outside of lumber are you expecting? As we go into next year, do you think it will be higher than normal given the demand and some of the product shortages out there? Or just any color on other types of inflation outside of lumber.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

You're right. There have been some price increases announced. You'll have to forgive me if I wait to believe the gypsum guys. The impact is certainly inflationary right now. The nature of the demand, the interruptions to the supply, the additional costs required for manufacturers to have to address the whole COVID environment. I certainly think there is an inflationary environment.

The reality, though, is what we've seen in the past in many of these business lines is that the cure for high prices is high prices, and they generally will slow themselves down or they'll begin to add capacity in order to normalize it. I don't think it will get carried away. But at the end of the day, as a distributor, we will pass along those price increases, and we think that makes our business healthier as we better leverage the flow-through.

Trey Grooms -- Stephens. -- Analyst

Great. One last one for me is on the 25% of capex that you're kind of earmarking this year for expansion of the value-added capacity this year. How much should that add to your capacity going forward? I mean, how much does that $25 million or so, whatever the exact number shakes out to, what does that translate into as far as capacity? And is that 25% kind of a good bogey going forward? I know with the combined company, there's still maybe some questions. But is that a pretty decent bogey for that going forward even with the combined company with the outlook that we have for housing?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

You know what, that's a great question. I think that the mix of what we're investing in at any given time, I mean we talked about Riverside and the new truss facility, those are pretty significant investments, sort of onetime. The nature of the capacity expansion related to individual machine lines and expansion of existing facilities is generally a little bit different. So it's kind of hard to give you a hard number, but it certainly has been supportive of the expansion in value add that we've talked about.

That 25% in terms of a future investment, that's an interesting question because on one hand, I would say, yeah, I think that's reasonable based on what we've seen over the past couple of years. But I'll also admit that the demand does seem to be increasing in that value-add space, and we may decide to accelerate our investments in that area just because it's got such a great return. And in certain markets, particularly as we combine these two businesses, I think it's going to really unleash our capabilities to sell a broad swath of the market on value add, and I could see that increasing over time. A little early yet, to be honest, but I certainly wouldn't -- I wouldn't be shy about putting more money into that, given our investment performance, our returns to date.

Trey Grooms -- Stephens. -- Analyst

Yup. Alright. Makes sense. I will turn it over. Thanks a lot, Peter. Thanks, Chad.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Thanks, Trey.

Operator

[Operator Instructions] Our next question comes from Keith Hughes with Truist Securities.

Keith Hughes -- Truist Securities -- Analyst

Thank you. I had some questions on the guidance for fourth quarter, some eye-popping growth there. And given some of the variables, I'm struggling to get to the number. Is there a substantial change coming in SG&A from third to fourth? Or is there anything else you can tell me on how you're getting the number?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Well, the year-end -- the fourth quarter results for SG&A are always a little dynamic as we true-up all of our year-end reserves and sort of do our final cleanup. So there's always a bit of that. Yeah, I mean, I think the big story is not a surprise to anybody, it's the impact of commodities and what that does. As you look at our business, we've got -- 30% to 40% of our products are exposed to that commodity fluctuation. And with those currently being up basically double where they were last year, you've got a pretty significant impact to the business.

And that, of course, is going to reflect in the nature of your SG&A fall through, your percentages. There is an impact, right, the nature of what we've seen in the commission rates going up and down. The leverage has certainly benefited, but you also have the required reserves in the business and the increased commission dollars associated with those sales. So a little bit of flexibility -- a little bit of flexing rather in those numbers, but nothing material has changed where there is some area of concern.

Keith Hughes -- Truist Securities -- Analyst

Okay. The price, 7-ish percent in the quarter, I assume it's going to be substantially higher commodity price in the fourth quarter is playing a role, is that correct?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Oh yeah. Yeah, yeah.

Keith Hughes -- Truist Securities -- Analyst

Yeah. Okay.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Double underline the yesah

Keith Hughes -- Truist Securities -- Analyst

Double underline the yeah, there you go. Second question, looking at it a little bit longer term. You've highlighted in several answers the backlog, and we're seeing that all throughout my coverage. Do you think this is going to be a continued, as you said, high-class problem to deal with all through next year? Is that how long it's going to take to clear this up? Or is that something we could -- early spring, you could get more in -- the lead times could come down?

M. Chad Crow -- President & Chief Executive Officer

No. I would say it should certainly carry us to midyear. You get beyond that, it gets a little fuzzy. A lot can happen, election year, et cetera. But I would say all in all, it's shaping up to be a -- should be pretty good demand for 2021 first half. I wouldn't say it's in the bank, but it's looking really good. But it's just really hard to predict this business when you get beyond six or eight months.

Keith Hughes -- Truist Securities -- Analyst

Okay, thank you very much.

M. Chad Crow -- President & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Steven Ramsey with Thompson Research Group.

Steven Ramsey -- Thompson Research Group -- Analyst

Hey, good morning. On value add, maybe some questions on -- are the supply chain disruptions in the industry, are they pushing more builders to use value-add products? And as you try to expand your value-add product business, are there any supply issues in getting the equipment that would maybe slow down your investment plans to grow that business and maybe slowing capex maybe -- than you would like to go -- like to grow faster?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Well, I think the opportunity for expanding value add and increasing demand in value add is usually around the labor side, right? I mean, in most cases, the supply of the product has not been the big issue. It certainly does limit their ability to sort of do it themselves when they can't get access. We have very good relationships with our vendors. We partner very closely with both the sell-through product vendors, but also the machine vendors.

And being the size that we are, I think they see us as a good customer. And so we work with them to make sure our orders for the equipment that we need are in early and that we have a pipeline that we're ordering each year. So less concerned about our access. Although let's face it, all manufacturing has been pretty disrupted. So that's something that we're going to continue to stay well ahead of in order to make sure we don't have issues in that regard. But value add, it's been a problem this year. Windows and doors, in particular, have struggled. And not to throw stones at them, it's been a very very difficult time. But that is certainly an area where we're hoping for a good, solid recovery because we believe in the demand story.

Steven Ramsey -- Thompson Research Group -- Analyst

Great. And a follow-up on that. In the areas of the country that are doing well, high-demand, high-start activity, but you don't have as much value-add exposure in those areas, do you plan in the next six to 12 months to greenfield or open more -- or expand value-add capacity in those areas? Or does the acquisition of BMC gets you into those areas to maybe a degree that you would like?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Yeah. It's a mix. Some markets, it absolutely helps us, and we're excited about what we're going to be able to do together and we'll be able to add capacity. I mean the reality is if capacity in the market is constrained, it's because all of us are already constrained. So that will be a different challenge. Those markets where we don't play as much, there may be opportunities to do some of that. There's a lot to say grace over right now.

Steven Ramsey -- Thompson Research Group -- Analyst

Great. And then last quick one. Multifamily activity and timing helped Q3. Is it a benefit in Q4 and early 2021?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Yeah. So multifamily, we think, will settle down a little bit. We certainly were benefited by some projects that came through. The multifamily team has done a really nice job for us. We think it will slow down a bit, but continue to be a good area for us. And we're not anticipating -- I know that there have been some market forecasts out there that are pretty depressing.

We don't think it will be that bad for us. But it's certainly an area of the market -- as you get closer to commercial, those larger scale projects have been more impacted by COVID and the dynamics of the marketplace than some of the smaller areas where we tend to focus for multifamily, so we're feeling pretty good about it. A pretty small part of our business overall, but we think it will be a tailwind.

Steven Ramsey -- Thompson Research Group -- Analyst

Got you. Thanks.

Operator

Thank you. Our next question comes from Reuben Garner with The Benchmark Company.

Reuben Garner -- Benchmark Company -- Analyst

Thank you, Good morning everybody. I need to harp on the commodity question, but I do have a clarification. I think there's some -- I don't know if concern is the right word, but questions around how much of your EBITDA strength in the back half of this year was driven by lumber. Normally, you guys have a profit pressure during these rising price environments. Has the increase been so dramatic that even though you've got that gross profit margin drag, the net of higher commodity prices has been a positive for you on a year-over-year basis in a substantial way? And if so, could you quantify how much net benefit to EBITDA is in your fourth quarter and third quarter results?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

So two halves to your question. I would say the first part to your question is around kind of the performance of the business in terms of pricing. We certainly did better than we had done in the past. I think there are a couple of main reasons for that. The first of which is -- I have tremendous gratitude and admiration for our team in terms of being able to execute, utilizing some of the tools we've been working on, utilizing all the experience that our teams have been very, very proactive, very aggressive in terms of responding to the marketplace. Getting those prices changed quickly, managing the costs and the inbound ordering, doing it in a very disciplined and quick reacting way, I think, was the biggest impact.

I will also say that we certainly benefited from the headline nature of those commodity price increases. There wasn't anyone who didn't know. There wasn't anyone who could say, well, I'm not going to buy from you because it's expensive. It was like, OK, well, you're not buying it from anybody else either because we've got a good position. We can get you the product that you want. If you would like it, this is what it costs. So I think that those combination of factors certainly was a huge benefit and the reason why we performed as well as we did. We generally don't try and break out for you the exact impact of commodities from an EBITDA perspective. We have talked about how much we felt was impacting for the third quarter in that 7.2% range.

We think the fourth quarter, just to be explicit, we'll be in the -- 25% to 35% of our growth will be attributed to commodity inflation in the fourth quarter. Just as a general rule of thumb, we have talked about our fall through in that 12% to 15% range being roughly true for the impact of commodities up or down as well. So if you want to use some rough numbers, that's a good way to think about it, although I'll tell you the exact math is a bit more painful.

M. Chad Crow -- President & Chief Executive Officer

Yeah. Just to clarify, the 25% to 35% is Q4 over Q4 sales growth we expect to come from commodity inflation. It's a big number.

Reuben Garner -- Benchmark Company -- Analyst

Got it. Because -- yeah. Okay. Yes, that was very helpful. And then shifting gears away from commodities, I'm sure you're tired of hearing about it, I am, too. Next year, something that's been a drag for the whole industry over the last several years has been the size of homes shrinking. I think it's been kind of a low single-digit volume drag for everybody, and I think you guys have seen that as well. Are you seeing or hearing an opportunity for things to go the other way? How big of an opportunity from a volume benefit for your products do you think you could get out of some of the bigger -- the return of the bigger luxury houses in some of the suburban markets?

M. Chad Crow -- President & Chief Executive Officer

Well, a couple of things. Yes, I do think homes have gotten smaller. It feels like maybe that's starting to bottom out now. But I don't worry about that a whole lot. I've said many times over the years, the only way you get back to a normal building environment of one million, 1.1 million single-family houses is you've got to have that mix of smaller homes. And that's what we've been missing really since this recovery started. And so to us, it's a good thing, it gets you to that higher flow through. It gets you to that throughput on the homes coming through the system. And yes, there's a higher mix of smaller ones. But again, the only way you get to those historical average is to have that proper balance, and we've just been missing that.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

I've read the articles that people are now nesting and wanting a bigger home after being trapped. And I think we'll have to see. I think there's maybe hope that things level out. I'm not sure it turns into a tailwind because of what Chad was talking about. We need those smaller homes, and we'll get them. I think that expansion of that starter and move-up home part of the industry is great news, long overdue.

Reuben Garner -- Benchmark Company -- Analyst

Got it. Thanks guys. Congrats on the quarter and goodluck and then on the holidays, talk you guys later on. Thanks.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Thank you. Thank you. Our next question comes from Seldon Clarke with Deutsche Bank.

Seldon Clarke -- Deutsche Bank -- Analyst

Hey, thanks for squeezing me in. So you saw 7% organic sales growth in the third quarter, call it, 9% to 10% growth, including M&A. But total SG&A was only up about 3%, and it looks like it's going to be down in the fourth quarter just based on your guidance. I know you talked about some true-up there, so maybe it's not the best way to think about it. But moving forward, if you can continue to generate the sort of mid- to high single-digit organic growth rate, ignoring commodities for a second, how can we -- how should we think about the relationship in that scenario between SG&A and volume growth?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Yeah. So we have historically talked about SG&A being about 70% variable, about 30% fixed. Now the unique dynamic that you alluded to is this idea that it's -- that's based on real volume and not the sort of vagarities of commodities, if you will. So that's the only adjustment I would advise you to make sure you're keeping track of. But yes, we certainly have seen great leverage as a result of the expansion of commodities as well as great leverage off of the core organic growth.

M. Chad Crow -- President & Chief Executive Officer

And I think you commented that SG&A was going to be down in the fourth quarter, and I don't think that's correct. I think when you layer in the sales growth, the top line growth, including the inflation, you'll see that it's probably not.

Seldon Clarke -- Deutsche Bank -- Analyst

Okay. That's helpful. Yeah, I think I was understating the commodity impact. And then kind of a just higher-level question, but Chad, you talked about going into some of your more local markets and hosting these town halls. And you mentioned just briefly that you were excited about some of the capabilities and complementary aspects of the merger. So could you just give us a little bit more color on maybe what you learned and -- throughout this process? And whether you're thinking about the potential top line synergies any differently now that you're kind of a couple more months into the process and you have had these experiences meeting with some of the local teams and things like that?

M. Chad Crow -- President & Chief Executive Officer

Sure. Yeah. What was really good to see is as you go into some of these -- and we were visiting primarily the markets where we overlap and mainly major major markets. But really good to see the geographic footprint. So just top of mind there, you can see the potential in logistics savings, where our footprint might be more focused on the South end of town, and their footprint might be more focused on the North end. It certainly is going to give us some ways to optimize our delivery. From a product selection standpoint, we would see a facility where they're very big. They have a very big ready-frame operation, for example, and we're very big in components. And they may also have a large millwork facility.

And so when you look at, in these major markets where we overlap, just the completeness of the product and service offering we can offer our customers and then how much better we will be positioned from a geographic standpoint to deliver it, that's what you're after, right? You want to be able to serve your customers with the full breadth of offerings, but also in the most efficient way you can. And so we saw a lot of examples of that. And then not to mention just the enthusiasm.

And in many cases, there was almost a little mini family reunions going on when we saw some people that -- we've traded employees over the years. And they've got a lot of talented people, we've got talented people. And it's just -- it's really great to think about really we'll be the A team when we put these two companies together.

Seldon Clarke -- Deutsche Bank -- Analyst

Got it. And in that example, where you've got a facility in the North end and they have one in the South that have slightly different product categories, how does -- historically, has that changed the market share or pricing dynamics in those sort of specific areas?

M. Chad Crow -- President & Chief Executive Officer

Well, if you're a builder, clearly, you typically are going to have -- want to have more than one supplier, right, just to make sure you're keeping everyone honest. But the advantage there is by offering that full breadth of products -- so builders -- we want to position the company where we can make the builders' life as easy as possible and make it easier to do business with us than any of our competitors. And so the more we can offer that -- as I said, that broad expansion of products and services, the more likely they're going to want to do business with us.

That -- will that tend to lead to additional share of wallet? Yes, it should. Price? Maybe. There's still going to be other competitors in the market. They're still going to keep you honest. But it's more about being that go-to supplier for the builder and making their life as easy as possible and easy to do business with us versus any of our competitors. That's what you're after, and that's what -- that's why these two businesses will complement each other so much and help us achieve that in a lot of these overlap markets.

Seldon Clarke -- Deutsche Bank -- Analyst

Yeah, it makes a lot of sense. I appreciate the question, thank you.

M. Chad Crow -- President & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Ryan Gilbert with BTIG.

Ryan Gilbert -- BTIG -- Analyst

Hey, thanks guys. Just to ask the 2021 EBITDA commodity price impact, maybe a different way. Looking back to the last period of rapid commodity price inflation and then subsequent deflation in 2018, 2019, I thought what was interesting about 2019 is that even though you experienced a commodity price headwind on revenue, you were still able to grow adjusted EBITDA throughout the year. So looking at third quarter and fourth quarter gross margins, even less impact from commodity prices than what you experienced in 2018. Just wondering what your confidence level is that you can continue to grow adjusted EBITDA if you know this commodity price tailwind turns into a headwind in the quarters coming.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Yeah. I mean it's a great question. I think that each cycle is a bit different. The extreme nature of this one has certainly impacted the industry differently. We're going to be in a different demand profile, I would say, going into next year. So that could potentially change things as well. I think we've got to wait and see how it plays out.

I do feel really good about the underlying core though, right? Our ability to manage pricing, our ability to get good leverage off of the business, our ability to continue to grow the underlying operations in the strong demand environment and the movement toward value add, I think are all very positive tailwinds or data points for that discussion. But we just have to wait and see.

Ryan Gilbert -- BTIG -- Analyst

Okay. Got it. And then second question on structural components. I mean we've heard from you and from many homebuilders that cycle times are extending. It seems like builders should be looking for opportunities to improve their cycle times or their productivity, and it seems like, at least in theory, structural component should offer that. So I'm wondering if your builder customers are more -- or if you're getting more inbounds from homebuilders about using structural components to kind of speed up the framing process or if homebuilders are more receptive to your sales teams who are selling structural components.

M. Chad Crow -- President & Chief Executive Officer

Yeah. As we have said all along, shortages in labor create the perfect environment to drive builders who aren't currently using components to consider them, and that's certainly in an environment we're still in. And combine that with just the overall demand, the existing customers that are using components and just the incremental number of homes, they're wanting us to run through our component plants. As Peter said earlier, the backlogs are very strong right now. So it should be a very value-add conducive environment for the next few quarters.

Ryan Gilbert -- BTIG -- Analyst

And do you think that the recent surge in demand and extension in cycle times has had some noticeable impact in builder demand for structural components?

M. Chad Crow -- President & Chief Executive Officer

Yeah. I wouldn't say it's off the charts. We've got -- as you can imagine, we've got customers that have traditionally used components, and they are keeping us very busy right now with the increase in starts that we've seen in recent months. But yes, certainly, there's been an uptick in incoming inquiries and demand. And as I said, I think -- I don't see the labor issue getting better anytime soon, especially with the strong surge in starts. So as I said, I think that's going to continue to be a pretty favorable environment for us.

Ryan Gilbert -- BTIG -- Analyst

Okay, great. Thanks very much for the time.

M. Chad Crow -- President & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Kurt Yinger with D.A. Davidson.

Kurt Yinger -- D.A. Davidson -- Analyst

Thanks and good morning everyone. I appreciate you squeezing in. I just want to start off. I mean, with two pretty remarkable periods of volatility in commodities over the last three years, is there anything internally or that your customers are pushing to do to maybe change some of the backward-looking price locks? And I realize it's not completely standardized, but is there anything creative or something that people are trying to do to maybe smooth it out a bit?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Well, there's certainly been a lot of conversation about it, no question. I think there are some ebbs and flows and some customers have gone away from the price locks or tried to. I think some of us in the industry in the distribution space have looked for ways to create a bit more stability in terms of the way we buy, whether it be directly from the mills or contractual relationships. Unfortunately, I'm not sure the options markets are really all that helpful just based on the way that they work right now.

So there have even been discussions about how that might change in the future. I'm optimistic that in our new structure as the combined entity with BMC, that might be something we could even continue to follow down that path. Our ability to be a positive influence and a stabilizing influence in this industry, I think, is enhanced with our scale and with our ability to act in a coordinated way. So we will absolutely continue to look at that. And certainly, some interesting models based on what some folks have done out there.

Kurt Yinger -- D.A. Davidson -- Analyst

Okay. Okay. That's interesting. And just my second one. An earlier question touched on the $750 million EBITDA target. Could you just remind us within your own control as far as the operational excellent targets, kind of where you stand as far as putting those in place and the biggest buckets of opportunity that remain?

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Sure. Yeah. I mean we had talked about a roughly $65 million target out there for ourselves. I think we're probably about halfway based on what we talked through up until prior year. Continuing to make progress in that space. We certainly see the best opportunities, the biggest opportunities for ourselves in a couple of key areas. We think that, that pricing management and pricing discipline, sort of taking the inconsistencies and inefficiencies out of our process is still being a real -- a potential forward-looking benefit for our business.

Excited to see what we can do partnered together with BMC in that way as well. And then I think our ability to continue to enhance our internal operations using digital tools, processes, whether that be as we interact with our customers, but even back office. We certainly still see tremendous value going forward, leveraging best practices, leveraging technology and then a combination of those two things, we think will be really impactful. So certainly feel very good about our ability to deliver and go beyond those targets we'd issued back in '18. So certainly expecting that to be an important part of the way the business is going to run post merger as well.

Kurt Yinger -- D.A. Davidson -- Analyst

Got it. Got it. Okay, appreciate all the details and good luck in the 4th quarter here.

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Thank you. Appreciate the questions.

Operator

Thank you. This concludes today's question-and-answer session. I'd like to now turn the conference back to Mr. Chad Crow for any closing remarks.

M. Chad Crow -- President & Chief Executive Officer

Thank you once again for joining us today, and we look forward to updating you on our future results and the progress on our merger with BMC. If you have any follow-up questions, don't hesitate to reach out to Binit or Peter. Have a good day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Binit Sanghvi -- Vice President, Investor Relations.

M. Chad Crow -- President & Chief Executive Officer

Peter M. Jackson -- Senior Vice President and Chief Financial Officer

Matthew Bouley -- Barclays -- Analyst

Mike Dahl -- RBC Capital Markets -- Analyst

Trey Grooms -- Stephens. -- Analyst

Keith Hughes -- Truist Securities -- Analyst

Steven Ramsey -- Thompson Research Group -- Analyst

Reuben Garner -- Benchmark Company -- Analyst

Seldon Clarke -- Deutsche Bank -- Analyst

Ryan Gilbert -- BTIG -- Analyst

Kurt Yinger -- D.A. Davidson -- Analyst

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