Earnings Call Transcript - BLDR Q3 2020

Operator, Operator

Good day, and welcome to the Builders FirstSource Third Quarter 2020 Conference Call. 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. 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. 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, Form 8-K filed yesterday, both of which are available on our website. I will now turn the call over to Chad Crow.

Chad Crow, CEO

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 remains 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 a resilient housing environment. We expect to continue to deliver above-market growth through our shared commitment to value-added product offerings, which allow us to closely partner with customers to streamline the construction process. In addition, a larger platform will strengthen our ability to invest in best-in-class innovative solutions that deliver significant benefits to our customers. During the past 1.5 months, 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 company's capabilities in 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 brought both of us great pride to see our hard-working team members across the country whose efforts are directly responsible for putting us in the successful position we are in today. Both Dave and I enjoyed getting to interact with so many team members and seeing 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 that 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 DoJ. Also in October, we filed our Form S-4 with the SEC. We are working diligently with both agencies. Once we have completed these two regulatory 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 towards winning together as one, which is our merger tagline, while continuing to stay focused on customers and delivering exceptional operational performance. Moving to our results on Slide 4, I will outline 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 towards 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 9 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 1 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 9 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 will no doubt prove to be efficiency-enhancing investments as we move into our next generation of growth. And finally, amidst the planned merger of 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 turn the call over to Peter, who will review our third quarter results in more detail.

Peter Jackson, CFO

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 have 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 continued 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’m 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 one-time 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 6, the strength of our business was evident again in the third quarter. Our team grew net sales across 4 of 5 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 expanding 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 8. Our results in the first 9 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 have 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 underway 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 will now turn the call back to Chad for his closing remarks.

Chad Crow, CEO

Thank you, Peter. This is an exciting time for Builders FirstSource. We are on the 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 the 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’m 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’m 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.

Operator, Operator

Our first question comes from Matthew Bouley with Barclays.

Matthew Bouley, 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 are 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 is going on there and maybe how value-add is expected to perform within that Q4 revenue outlook?

Peter Jackson, CFO

Sure. Yes. 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. 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 would say, still below normal in those markets. And again, that exposure in commodities and - is different - I'm sorry, the exposure to value add 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 is 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 have 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 towards the back half of the build cycle that is included in value add for us. All in all, we are not concerned about it. We continue to monitor it. I think it is important, obviously, to our strategic vision of the company. But all of our data says we have reason to be confident. We are 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 COVID, that is certainly a challenge for us. So we will 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 is just some unevenness in the business.

Matthew Bouley, 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 have continued to obviously progress with the merger planning. So I guess I'm just curious if there is any sort of operational updates around how you are 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 have continued to dig deeper, just curious what kind of the latest is on the operations.

Chad Crow, CEO

Yes. I would kind of sum it up as expected. Clearly, we are 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 is a lot of excitement out there amongst our team members on the opportunities that we are going to have as a go-forward company. But no real surprises good or bad so far. It is just as expected, which is good. Still feel good about the synergy ranges we have given. One thing that is clear, we are all very busy. So there is not a whole lot of excess capacity sitting around at the moment, which is a high-class problem to have. So yes, it is going as expected, which is a good thing.

Operator, Operator

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

Michael Dahl, Analyst

Tremendous results, guys. Good way to end the year. First question, just around margins, and this is more thinking towards 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 is 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 Jackson, CFO

Yes. That is a great question. And you have heard me make this half joking comment before, if you can tell me what commodities are going to be, I will tell you what my margins are going to be. It is a really big question, Mark. That run-up that we saw this year in commodities is unprecedented. And while it is turned, it is certainly not back to historical norms. We are quite elevated, and I think the market in some ways is still digesting it. It is certainly still passing through in our pricing. We have seen some of the materials that the homebuilders have put out there about what they are doing with their pricing. Some people have maybe tried to play the game a little bit from what we are reading into their comments that they have tried to slow down or speed up their build cycles. Personally, I think they are missing out in terms of the opportunity and the demand that is out there. We are motivated to build whatever we can and get it out. And I think that dynamic, as it evolves over the next 6 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 are going to see a return to those really high lumber prices is low. So I think it is fair to say that we will see some tailwinds associated with the deflation for a bit of time. But it is so volatile and so dynamic in different parts of the country. I would say at this point, I'm not comfortable putting a normal out there for you. What you are 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 combined entity starts to perform at; that will be a critical piece to that as well.

Chad Crow, CEO

Yes. 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 have 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 five-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 is a wonderful environment for us. Could margins be a tick lower? Maybe, but we will 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 is nothing structurally that has 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.

Michael Dahl, Analyst

Right. Okay. I appreciate that, Chad and Peter. I guess, I will ask a slightly different way, and this has been more of a hypothetical. But let's say obviously, going into next year, there is still going to be some carryover tailwinds from inflation based on what we are still seeing. In an environment where we gradually normalize down to, call it, a 450 to 500 lumber, which would still be above normal and OSB kind of normalizes lower. Based on what you are seeing in demand, you guys have the $750 million target out for 2022, but you are exiting 2020 at a really strong rate. Is it possible that you hit the $750 million, actually a year early in 2021?

Chad Crow, CEO

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

Peter Jackson, CFO

There is, 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 will 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 are 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 are going to continue to refine, and commodities are going to be what they are going to be. I think if we spend all of our time talking about commodity prices and its impact on the bottom line, we will have lost the real value in this business. But yes, I do think that could get us there sooner if they stay on it.

Operator, Operator

Our next question comes from Trey Grooms with Stephens.

Trey Grooms, Analyst

Congrats on the great results. So first off, of course, I guess, sticking with lumber, one more question there. It has been pretty tight up until now. And of course, there have 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, how are you thinking about inventory positioning as we enter kind of the slower-seasonally slower winter months where maybe some supply might loosen up?

Peter Jackson, CFO

Yes. So I will 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 is what you are seeing in the reflection of the prices in the spot for the random lengths coming back down. I would say it is 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 are going to keep our inventory tied to our days demand, we are 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 you have seen a pretty good - this may come up later in the conversation, you have seen a pretty big increase in the value of our working capital. I will point to the fact that is basically all driven by the value of the product rather than the quantity of product we have on hand. We intend to stay lean.

Chad Crow, CEO

Yes. Trey, I will just add, there have definitely been some - not just in products, we deliver just across the board. As you know, there have been some product shortages and those continue. I have 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 over the last couple of months, this may be the first time it has ever happened and definitely in recent years where new home sales have outpaced starts; it is 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 is a high-class problem to have, right? And it will extend this backlog and this favorable environment into next year, which isn't a bad thing. But I do think it is 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, Analyst

Sure. Makes sense. And then kind of on that, with product shortages you are 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 Jackson, CFO

You are right. There have been some price increases announced. You will 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, and 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 have 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 will 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, Analyst

Great. One last one for me is on the 25% of CapEx that you are 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 are 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 Jackson, CFO

You know what, that is a great question. I think that the mix of what we are investing in at any given time, I mean we talked about Riverside and the new truss facility; those are pretty significant investments, sort of one-time. The nature of the capacity expansion related to individual machine lines and expansion of existing facilities is generally a little bit different. So it is kind of hard to give you a hard number, but it certainly has been supportive of the expansion in value add that we have talked about. That 25% in terms of a future investment, that is an interesting question because on one hand, I would say, yes, I think that is reasonable based on what we have seen over the past couple of years. But I will 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 has got such a great return. And in certain markets, particularly as we combine these two businesses, I think it is 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 be shy about putting more money into that, given our investment performance and our returns to date.

Operator, Operator

Our next question comes from Keith Hughes with Truist Securities.

Keith Hughes, Analyst

I had some questions on the guidance for the 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 are getting the number?

Peter Jackson, CFO

Well, 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 is always a bit of that. Yes, I mean, I think the big story is not a surprise to anybody, it is the impact of commodities and what that does. As you look at our business, 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 have got a pretty significant impact on 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 have 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 flexing rather in those numbers, but nothing material has changed or there are some areas of concern.

Keith Hughes, Analyst

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

Peter Jackson, CFO

Yes, yes.

Keith Hughes, Analyst

Yes. Okay.

Peter Jackson, CFO

Double underline the yes.

Michael Dahl, Analyst

Tremendous results, guys. Good way to end the year. First question, just around margins, and this is more thinking towards 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 is 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 Jackson, CFO

Well, the fourth quarter guidance reflects what we see in this environment. I think we are optimistic about what we see in underlying fundamentals. We think we have very challenging demographics for our pricing, and we will continue to make investments in the value add. But I don't want to get ahead of ourselves here. We've said previously we are not going to project SG&A guidance too far into the future. We want to keep it flexible these days.

Chad Crow, CEO

I think we need to stay focused on the fundamentals and let the short-term volatility sort itself out. We will navigate through the issues, but the structural demand is there. We keep our eyes on future priorities. Our next question comes from Steven Ramsey with Thompson Research Group.

Steven Ramsey, Analyst

On value add, maybe some questions on - are the supply chain disruptions in the industry 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 grow faster?

Peter Jackson, CFO

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 are ordering each year. So less concerned about our access. Although let's face it, all manufacturing has been pretty disrupted. So that is something that we are 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 has been a problem this year. Windows and doors, in particular, have struggled. And not to throw stones at them, it has been a very difficult time. But that is certainly an area where we are hoping for a good, solid recovery because we believe in the demand story.

Steven Ramsey, 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 6 to 12 months to greenfield or open more - or expand value-add capacity in those areas? Or does the acquisition of BMC get you into those areas to maybe a degree that you would like?

Peter Jackson, CFO

Yes. It is a mix. Some markets, it absolutely helps us, and we are excited about what we are going to be able to do together and we will be able to add capacity. I mean the reality is if capacity in the market is constrained, it is 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 is a lot to say grace over right now.

Operator, Operator

Our next question comes from Reuben Gardner with The Benchmark Company.

Reuben Garner, Analyst

I wanted to harp on the commodity question, but I do have a clarification. 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 have 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 Jackson, CFO

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 I have tremendous gratitude and admiration for our team in terms of being able to execute, utilizing some of the tools we have 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 is expensive. And I was like, okay, well, you are not buying it from anybody else either because we have 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 will 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 is a good way to think about it, although I will tell you the exact math is a bit more painful.

Chad Crow, CEO

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

Operator, Operator

Our next question comes from Seldon Clarke with Deutsche Bank.

Seldon Clarke, Analyst

So you saw 7% organic sales growth in the third quarter and call it, 9% to 10% growth, including M&A. But total SG&A was only up about 3%, and it looks like it is going to be down in the fourth quarter just based on your guidance. I know you talked about some true-up there stating that it is 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 should we think about the relationship in that scenario between SG&A and volume growth?

Peter Jackson, CFO

Yes. 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 is based on real volume and not the sort of vagarities of commodities, if you will. So that is the only adjustment I would advise you to make sure you are 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, the core organic growth.

Chad Crow, CEO

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

Operator, Operator

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

Chad Crow, CEO

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

Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect.