Good morning, welcome to Builders FirstSource Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded and will be archived at www.bldr.com. It is now my pleasure to introduce Ms. Jennifer Pasquino, Senior Vice President, Investor Relations.
Thank you. Good morning, welcome to the Builders FirstSource Third Quarter 2017 Earnings Conference Call. Joining me today on the call is Floyd Sherman, Chief Executive Officer, Chad Crow, President and Chief Operating Officer, and Peter Jackson, Chief Financial Officer. A copy of the slide presentation referenced on this call is available in the investor relations section of the Builders FirstSource website at www.bldr.com. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session, instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without prior written authorization of Builders FirstSource. As a reminder, this conference call is being recorded today, November 9th, 2017. Builders FirstSource issued a press release after the market closed yesterday. If you don't have a copy, you can find it on our website.
Before we begin, I would like to remind you that during the course of this conference call, we may make statements concerning the company's future prospects, financial results, business strategies, and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the SEC and other reports 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 provide reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanations of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are on our website.
At this time, it is my pleasure to turn the call over to Mr. Floyd Sherman.
Thank you, and good morning. Welcome to our third quarter 2017 earnings call. I will start with a brief update on our third quarter results and then turn the call over to Chad, who will provide an update on our execution against our 2017 priorities as well as our longer-term growth initiatives. Finally, Peter will discuss our financial results in more detail. After our closing comments regarding our outlook, we'll take your questions. Let's start on page four. Our sales for the quarter were $1.9 billion. We had one fewer sales day in the third quarter of 2017 over the third quarter of 2016. Therefore, we'll discuss the sales per day growth in the quarter.
We're very pleased that our sales per day in the quarter, excluding closed locations, grew 9.5% over 2016 and was benefited by approximately 6.9% as a result of the impact of commodity price inflation on our sales. Sales volume per day, excluding closed locations, grew approximately 4.7% in the new residential home building end market and approximately 1.7% in the repair and remodel end market. Excluding Alaska, whose economy continues to be impacted by oil prices and drilling slowdown, our R&R growth in the lower 48 was up 4%. Hurricanes Harvey and Irma took their toll on Houston, Florida, and the Southeast region of the U.S., where about 13% of our annual sales are concentrated. Thanks to our hardworking associates, we relatively quickly returned to full operation with only minimal physical damage to our locations.
Given that many of our stores in these regions were closed for several days during and after the storm, sales in the quarter were affected. We estimate the storms impacted the company's sales by $18 million-$20 million and EBITDA by approximately $4 million. Turning to slide five. In the quarter, we continued to experience rapidly rising commodity prices. Framing lumber and sheet good prices increased 21.4% and 43.1% since 2016 year-end, respectively, most of which occurred in Q3. Higher lumber prices are contributing to our sales. Rapid price fluctuations caused some short-term gross profit margin compression. Higher prices are good for our business in the long run. I'm pleased to report that our investments in manufacturing capacity are continuing to pay off with 8.4% growth of sales in manufactured products in the quarter, faster than the volume growth in the single-family end market.
Moving into page six with an overview of the macro housing markets. The outlook for new residential housing market continues to be bright. We've reached approximately 1.2 million annual starts, with approximately 835,000 of those being single-family starts. This remains about 25% below the historic average, just growing now to levels we have historically seen in recessionary troughs. As a reminder, we are lapping strong single-family starts growth in the fourth quarter of 2016 of approximately 13% and are estimating mid-single-digit growth in the single-family home building market for the balance of 2017, bringing the full year 2017 growth in the mid to high single-digit range. We believe there are still multiple years of growth ahead of us and are very confident in the continued strength of the housing market. I'll now turn it over to Chad, who will discuss our 2017 priorities and our look at future growth.
Thank you, Floyd. Good morning. Starting on page seven, I would like to share our progress against our 2017 priorities, including our increased focus on profitable market share expansion and improved operational efficiencies. We are still making significant new investments to drive our growth initiatives, including 110 net additional sales associates year-to-date. We are committed to these investments that will drive long-term results and plan to continue our sales force expansion initiatives. There remains significant opportunities to increase the reach and penetration of our higher margin value-added products. Year-to-date, we have opened three new truss plants with plans to open additional locations later this year and into next. The demand for these products will continue to rise as home builders look for ways to build homes more efficiently, especially with the well-publicized labor shortages and extended lead times.
We are also increasing our focus on implementing best practices across the organization in order to drive incremental operational efficiencies. Our logistics and back-office automation initiatives are underway, our existing infrastructure, customer connectivity, and logistical capabilities should make these particularly rewarding investments. Our continued focus on cash generation will allow us to fund these initiatives, as well as continue to deleverage the balance sheet. We generated $41 million of cash in the quarter, which is in line with our 2017 guidance of generating $145 million-$155 million of free cash flow and reducing our leverage ratio to four times by year-end. Finally, we are only as strong as our people, and we are committed to continue to attract, train, and retain the best associates in the industry and develop our future leaders. Moving to page eight.
We continue to build out our plans to accelerate growth and further expand profitability with a primary focus on creating long-term shareholder value. We believe that as the housing market returns to historical averages over the next four to six years, along with our focus on operational excellence and growing our value-added product categories, it will enable us to double 2016 EBITDA and cash flow, generate approximately $1 billion in cash over that time period, and result in an EPS between $2 and $2.50. We have a strong platform that is well-positioned to take advantage of accelerating growth and improved market conditions. On top of that, we are executing initiatives intended to expand profit margins and cash flow. We plan to continue to leverage our national manufacturing footprint and differentiated capabilities to grow our higher margin value-added products faster than the market over the next several years.
In addition to growing our value-added products, we see opportunities to increasingly leverage our strength, including unparalleled size, geographic footprint, and end market exposure to grow and capture market share. This growth model, coupled with unlocking the opportunities we have identified with our operational excellence initiatives such as distribution and logistics, pricing and margin management, back office efficiencies, and system enhancements, provides opportunities for us to meaningfully accelerate profit growth. As a result of our focus on growth and operational efficiencies, we believe we have a realistic approach that creates cash generation and reinvestment opportunities. Our balanced approach to growth investments and ongoing debt reduction is designed to allow us to increase investment in organic and acquisitive growth while achieving and maintaining our long-term leverage target of 2.5 to 3.5 times EBITDA.
Before I turn the call over to Peter, I would like to make a few comments related to the executive transition we announced in August. As you are aware, Floyd Sherman will be stepping down as CEO at the end of the year. Over his 16-year tenure at Builders, Floyd was instrumental in building the platform and business we currently have, turning adversity into opportunity, and positioning the business to take advantage of the growth potential we have today. I would like to thank Floyd for his contributions to Builders FirstSource, and I am pleased that he will remain as an employee advisor to the company through March 2019, and will also remain on our board as we execute the company's growth strategy in the coming years. I will now turn the call over to Peter, who will review the financial results in more detail.
Thank you, Chad. Good morning, everyone. Starting on slide 10, I will first discuss the current quarter results and then touch briefly on our year-to-date results on page 11. As a reminder, we have included adjusted figures to normalize for one-time integration, closure, and other costs. We had one less sales day in the third quarter of 2017 than prior years, so I will speak to our results on a sales per day basis. For the third quarter, we reported net sales of $1.9 billion, a 9.5% increase compared to the third quarter of 2016, excluding the impact of closed locations and including an estimated 6.9% benefit from commodity price inflation. We are pleased with the growth despite the impact of Hurricane Harvey and Hurricane Irma, given that many of our stores in these regions were closed for several days during and after the storms.
We estimate that our sales volume grew approximately 4.6% in the single-family new residential home building end market and 1.7% in the repair and remodel end market, with market-driven declines in multifamily and other. Our gross margin percentage was 24.4%, down approximately 60 basis points from 25% in the third quarter of 2016. The decrease on a year-over-year basis was largely attributable to the rapid run-up in commodity prices. Framing lumber and sheet goods prices increased 9.8% and 25.7% in the third quarter, respectively. Rapid commodity inflation will cause short-term gross margin percentage compression when prices are rising, and margin percentage expansion when prices are falling due to the short-term pricing commitments we provide our customers versus the volatility of the commodity markets. I expect that as commodity prices stabilize, the company will benefit from higher commodity prices, enhancing our go-forward profitability.
Our SG&A percentage of sales decreased by 40 basis points on a year-over-year basis. The reduction was largely driven by cost leverage achieved while absorbing investments in growth initiatives, including additional sales associates and new facilities. Interest expense for the quarter was $33.8 million compared to adjusted interest expense of $39 million in 2016. The $5.2 million reduction was largely due to multiple transactions the company executed to lower our go-forward cash interest expense, to extend our maturity profile, and to address our capital structure. These transactions have reduced our annual cash interest expense by over $30 million annually and extended our weighted average long-term debt maturity. Adjusted income tax expense increased by $29 million compared to 2016, although the company does not expect to pay federal cash taxes in 2017, given its NOL carryforwards.
Tax expense increased year-over-year as a result of the company no longer maintaining a full valuation allowance reserve against its deferred tax assets. Adjusted net income for the quarter was $45.5 million, or $0.39 per diluted share, compared to adjusted net income of $69.2 million or $0.61 per diluted share in the third quarter of 2016. More than all of the reduction on a year-over-year basis can be attributed to the income tax expense issues I just discussed. Third quarter adjusted EBITDA grew $3.8 million to $122 million compared to prior year. Sales growth generated profit growth in the quarter, offset by investments in growth initiatives and short-term commodity inflation impact on gross margins. Additionally, we estimated that the hurricanes negatively impacted EBITDA by about $4 million. Switching now to the year-to-date financial results, please turn to page 11.
Year-to-date net sales were $5.3 billion, a 9.3% increase compared to year-to-date 2016, excluding the impact of closed locations. We estimate that our sales volume grew approximately 5.9% in the single-family new residential homebuilding end market and approximately 3.2% in the repair and remodel end market, offset by declines in multifamily and other. Commodity price inflation benefited sales by an estimated 5.8%. Year-to-date gross margin percentage was 24.7%, a decrease of approximately 30 points from 2016. The decrease on a year-over-year basis was largely driven by gross profit margin compression on our commodity products due to inflation in the lumber and lumber sheet good markets. To reiterate, commodity inflation will generally benefit the company's operating results in the long term, although it can cause short-term margin compression. Year-to-date SG&A as a percentage of sales decreased by 70 basis points on a year-over-year basis.
The reduction was largely attributable to the decline in depreciation and amortization on acquired ProBuild assets and cost leverage realized. Adjusted net income was $100.6 million, or $0.87 per diluted share, compared to adjusted net income of $75.8 million or $0.67 per diluted share year-to-date 2016. A 34% increase was largely driven by EBITDA growth, $21.7 million in interest expense savings, $16.1 million decline in depreciation and amortization related to ProBuild assets, offset by previously discussed increase in income tax accruals. Year-to-date, adjusted EBITDA grew $25.5 million to $322.3 million compared to year-to-date 2016. The 8.5% year-over-year improvement was largely driven by sales growth, again, while absorbing the impacts and costs of commodity inflation, hurricanes in the period, and the investments we are making in growth initiatives that we have mentioned.
Turning to page 12, we expect free cash flow generation will be used to drive down our debt in 2017. We believe this will be driven by EBITDA growth and a continued focus on working capital efficiency, which is estimated to run between 9% and 10% of incremental sales in the long term. We expect to invest in our business through capital expenditures at approximately 1% of sales. Upon further review with our tax planning team, we expect our current NOL tax asset to shelter us from paying federal cash taxes in 2017. As a result of the opportunistic capital markets transactions executed in the last year and a half, cash interest should be reduced by approximately $130 million in 2017. We expect one-time ProBuild integration and conversion costs of approximately $20 million.
As a result, we are reconfirming our full-year cash flow guidance of approximately $145 million to $155 million, although perhaps more to the low end of the range. Our business typically uses cash in the first half of the year and generates cash in the second half of the year due to seasonal working capital needs. The company generated cash from operations and investing of $48.1 million in the third quarter. Due to seasonal working capital needs in the first quarter, cash used in operations and investing was $50.9 million year to date. This was in line with our expectations and annual guidance of $145 million to $155 million in positive cash flow from operations and investing activities for the full year of 2017. We will utilize this cash to pay down debt and expect to reduce our leverage ratio to four times by year-end.
Turning to page 13, total liquidity at September 30, 2017 was $769 million, consisting of net borrowing availability under the revolving credit facility and cash on hand, which is more than sufficient for our operating needs. We have an extended debt maturity profile with no maturities until 2022 and a weighted average long-term debt maturity of 6.4 years. The terms of our debt allow the company to repay our most expensive bonds first, benefiting future free cash flows. We have made progress on improving our leverage ratio. The net debt to adjusted EBITDA ratio on a trailing 12-month basis as of September 30, 2017, was 4.6x, a 0.7x reduction from prior year, which is consistent with our focus on deleveraging the balance sheet and increasing cash flow and improving liquidity. I would like to update our 2017 guidance.
As a reminder, higher lumber and sheet goods pricing is beneficial to our business in the long term, resulting in higher gross margin and EBITDA dollars. Commodity inflation can cause short-term gross margin percentage compression when prices are rising and margin percentage expansion when prices are falling due to the short-term pricing commitments we provide customers versus the volatility of the commodity markets. However, commodity price inflation generally benefits the company's operating results in the long term, creating higher gross margin and EBITDA dollars. We expect benefit from higher commodity prices in the future and have not changed our long-term goal of doubling the 2016 EBITDA. We will not sacrifice our growth initiatives to short-term margin issues that will ultimately reverse, reconfirming our investment strategy in new facilities and additional sales professionals.
We expect sales growth in the fourth quarter to be up high single digits on a sales per day basis over prior year, with about half coming from volume and half from commodity inflation. Gross margin is expected to be relatively flat to Q3 as we continue to feel the short-term margin compression from the recent commodity hyperinflation. We will continue to focus on generating even more cost leverage while not sacrificing investing on growth initiatives. Overall, we expect to see EBITDA growth of 5%-10% and cash flow generation of approximately $200 million in the fourth quarter. Given the recent commodity inflation impacts on our business, we are pleased with these financial results. I will now turn the call back over to Chad for his closing comments.
Thank you, Peter. I'm excited about the outlook for Builders FirstSource. We are continuing to leverage our scale and look for opportunities to grow the top line and profits. The new residential housing market continues to show strength, and we are continuing on the path of de-leveraging our balance sheet, which we believe will give us flexibility to continue to fund our growth initiatives. We have laid out a plan to double EBITDA and cash flow and are excited about the prospects the future holds. I'll now turn the call over to the operator for Q&A.
Thank you. At this time, if you'd like to ask a question, please press star and one on your touch-tone telephone. You may withdraw your question from the queue at any time by pressing the pound key. Once again, to ask a question, please press the star and one on your touch-tone phone. We can take our first question from Nishu Sood with Deutsche Bank. Please go ahead. Your line is open.
Thank you. First, I wanted to ask about the recovery of sales pace in the hurricane-affected areas. I think you laid out pretty well what happened in the third quarter. Where are we in terms of getting back to the kind of pre-event sales pace in Texas, Florida, and in the Southeast?
Our guys did an incredible job of bouncing back in both those areas that were impacted by the hurricanes, Nishu. I would say we're back to levels of where we were pre-hurricane. Obviously, we were shut down for probably on average about six days, then it was a little slow for a week or two after that, so far it looks like we've returned to normal business levels.
Got it. The importance of obviously your products in rebuilding efforts, would you anticipate some tailwind? Obviously, two pretty major events happening at the same time imply some significant rebuilding. As you look across your product portfolio, even what you've seen since the events, do you anticipate any benefit from that in 2018?
I think it'll definitely be a net positive for us. I think we'll probably start seeing it in 2018. As you know, it'll take a while for folks to get their insurance money, in these markets, as there are in many markets, there's still the issue of labor shortages. I do think we'll start seeing some bounce in 2018, and no doubt over the next couple of years, it will be a net positive for us.
Got it. The second question was on the rising lumber prices, obviously pretty sharp, and I think you discussed that pretty well, just the effects on the third quarter. My question was about the effect of the rising lumber and panel prices on the value proposition of your prefabricated products. As lumber prices rise, that obviously means that obviously the price would go up on the prefab products as well. How does that affect the value proposition as you're out there in the market relative to site framing?
Well, I think you have increases on both sides. You see the increases from the labor shortages and the inflation on the labor side, as well as the inflation on the lumber side. I think it's a pretty balanced impact net-net. The overall desire of home builders to be more efficient, we think outweighs it in the long run.
Got it. Great. Thank you.
Thank you. We can go next to Michael Dahl with Barclays. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. Looking at some of the impact in the third quarter and into the fourth quarter around some of the growth investments, and I know you outlined these earlier in the year, could you just give us an update on how these are rolling out and whether or not there have been incremental investments since the second quarter discussion?
Sure. Yeah. This year we've got about $7.5 million in total in the investments we've made in those growth areas. About almost $3 million in the third quarter of incremental year-on-year investment. Again, focused in those two areas of salespeople and value-added facility expansions, so the additional facilities that we've added. We feel like the progress has been very solid, very positive, and we're making progress in both those areas.
Okay. I guess what I should have asked is, the spend that we're seeing come through, does that represent additional opportunities that you've identified over the last few months, or is it simply more of a timing issue on the spend around some of the initial investments?
Well, I'll comment on the sales force growth. We're going to keep pushing that initiative, but we think it's very important to recruit new people into our industry. It is an aging workforce, and we're going to push hard over the next couple of years to develop the bench strength we need. We have no intentions of tapping the brakes on recruiting and training sales force. That's probably the bulk of the cost that you're seeing as far as an investment standpoint. As Peter mentioned, the other large piece is the opening of new manufacturing facilities, which we're obviously going to keep doing as well. I guess the short answer to your question is no, not necessarily new opportunities that we've seen in the last few months.
This was something we had planned for the year, and this is something we're going to keep doing.
Just from a timing perspective, it ramped up in earnest at the beginning of the third quarter last year. You're seeing the lapping of that ramp up to the full load.
Okay. Got it. My next question, understanding that obviously you've been dealing with a difficult environment in terms of some of the rapid moves and your inflation, that's causing some disruption in the profitability near term. Given what you're seeing today, hearing you on the fourth quarter commentary, as we look into early 2018, realistically, when do you think we should see a return to more of the 25% type of gross margin range?
Well, I think as we look at the commodity movements, always volatile, difficult to forecast. Based on where we are today, I think we feel confident going into Q1 and Q2, we're going to see a nice recovery back to what we think are far more normal gross margin levels. It always takes a little while to get fully back, I think in that Q1, Q2 range, we're feeling very good. We love higher commodity prices in the long run.
Right. Okay, thanks.
Thank you. Next we can go to Trey Grooms with Stephens Inc. Please go ahead. Your line is open.
Hey, good morning.
Morning, Trey.
Morning.
First off, I want to congratulate you, Floyd, on your retirement. It's been great working with you over the years, and we wish you the best.
Thank you. I appreciate it. It's also been great working with you guys.
What's that, Trey?
Okay, I'll move on to questions. I guess first, I know lumbers, there's been a lot of attention there. Just with the folks that you guys talk to, you've got your finger on the pulse of what's going on in the lumber industry as well as anybody. Also understanding that things happen and things move around. Just from where you sit today, what are your expectations as we look into the next several months? As it relates to lumber prices. Understanding, you don't have the crystal ball, but you do, as I said, you guys usually have as good a feel as anybody.
I'll jump in and Floyd may want to add on. I would say from the framing lumber standpoint, it feels pretty solid. I think we're going to see prices hold pretty much where they are right now. I think OSB and panels probably have some slack in it. They're pretty elevated, and you may see a pullback on those. That's typically the most volatile of our commodity product categories is the OSB. Generally speaking, I think we'll see some healthy lumber prices for most of 2018.
I would agree with what Chad had to say.
Okay, thanks. Thanks for that. Appreciate it. Also just kind of outside of lumber, as we're moving into next year, I know a lot of folks out there, manufacturers are seeing inflation on their raws as well, there's price increases in the market and that sort of thing. Just outside of lumber, if you could just give us any thoughts around your expectations around the other things that you guys are providing to your customers, windows and doors, drywall, et cetera. Just any color on directionally how we should be thinking about that.
I think in general, we've already started discussions with suppliers, we'll probably see price increases next year on most of those product categories you mentioned in the 2%-3% range.
2%-3%. Okay. Great. Lastly, this is kind of, I guess, a little bit bigger picture, maybe it's a little premature as well, just with the discussions you're having with your customers kind of looking into next spring. Again, I know it's early, just any initial thoughts or conversations you guys are having with the builders and your customers in the new res market this year looking into next year rather, the moving pieces there specifically, new single-family versus multi and then starter home versus move-ups and how labor is ultimately playing a role. Just any high level color you could give us around some of those conversations and how they're going.
It feels like the demand next year is still going to be strong. We still feel good about kind of that high single-digit growth in single family. I think it's going to be another rough year in multifamily. You're probably looking at multifamily down another 5%-10% year-over-year, I think R&R will be fairly steady, 3%, 4% growth. Labor will still be tight. Somehow we figure out ways to build more houses every year, slowly we're figuring out the labor problem. Should play well into the truss and panel side of the business next year as it has been. We feel good about it. We really haven't come off our forecast of kind of that high single-digit growth in single family over the next few years.
Great. That's super helpful. Again, congrats to both of you and I'll pass it on. Thank you.
Thank you.
Thank you. We can go next to Jay McCanless with Wedbush. Please go ahead. Your line is open.
Thanks for taking my questions, definitely want to echo what Trey said for both Floyd and Chad. It's a great accomplishment for both of you guys.
Thanks, Jay.
The first question I had, could you give me the breakout of the gross sales change for both R&R and single family for the third quarter?
Yeah. We saw in the third quarter on a sales per day, about 4.7% growth in single family, down about almost 13% in multi-family. R&R, about 1.7% up
When you make the adjustment for Alaska, that brings R&R in the rest of the 48 states in which we operate back to about a 4% increase.
Right. A total volume growth up for about two and a half.
Two and a half. Okay. That actually plays into my second question. Is there a certain level in terms of crude oil pricing we could watch for Alaska to get better? If so, is there any type of 3-month, 6-month lag from oil hitting a certain price, and then Alaska starting to get better that we could focus or a price level where we could focus?
Yeah, that's a tough question, Jay. I don't know that we have the answer on what's the kind of the trigger point on oil prices. I would think there would be some sort of lag. As you know, it takes a little bit of time to get the drilling activities ramped up again, but I don't have a good answer for you on that one, sorry.
Okay. The last question I had, and I apologize if I missed this, but the expenses as a percentage of sales, where do you guys expect that for 4Q? Also maybe could you talk a little bit about how much you've invested in new salespeople thus far with this initiative and what type of payback period you're expecting with it?
I'll attack your second part first and then let Peter address the first one. Year to date, we're at about, I think it's about $6 million that we've invested in the sales force. Year to date is about $5 million that we've invested in the sales force. Far those guys in general are covering about half of their commission cost. Some of them haven't been here all that long. We feel pretty good about that. Overall, I think those guys are certainly north of $150 million in sales they've generated. 110 net new associates, we feel pretty good about, and we certainly think it's worth the investment when you're looking out three, four years in the future of our business. Got it.
Back on SG&A, we do anticipate seeing improved SG&A performance versus prior year and versus Q3. Our comp will continue to get better as we continue to leverage, really, the cost that we have in our fixed pool.
Okay. Thanks for taking my question.
Thank you. We can go next to Keith Hughes with SunTrust. Please go ahead. Your line is open.
Thank you. Question also on SG&A. You've shown some really nice leverage this year, really in all quarters, and per your last comments on the fourth. As we turn to 2018, will that number continue to show leverage accelerate given that you've done some investments and picked up? What's your kind of rough view for 2018?
Yeah. I would say generally, we have seen positive leverage. We will continue to see positive leverage. Some of the benefits we've seen is related to the commodity price. That's mathematically true. We also anticipate in the long run to see leverage from our incremental sales at a roughly 70% rate. We do expect to see it's about 70% variable on the SG&A side, so we expect to see leverage there. Part of our long-term strategy as we drive the business forward is really focused around operational initiatives to help us increase efficiency and improve that leverage over time. Yes.
Okay. On the long-term plan that you highlighted last call, we have a slide on it today. Can you give us a few of the underlying metrics in terms of getting to the EPS numbers such as D&A, interest expense, share count, things like that, so we can work down from EBITDA to your $2-$2.50 in EPS?
Yeah. We're not ready to break down those components for you yet. We're at the point right now of working through the specific initiatives that are going to drive the key points here. We've got some models internally, over the next few quarters, we'll start giving you more details about what we're thinking we're going to work towards. We can talk a little bit more about some of the initiatives we've got going, not ready to break down those components yet.
Okay. Thank you.
Thank you. We can go next to John Baugh with Stifel. Please go ahead. Your line is open.
Thank you. Floyd, a distinguished career. Enjoy retirement.
Thank you, John.
Questions. I think there was a reference that the commodity was the primary influence on gross margin, and I don't recall if that was Q3 or year to date or both maybe. Could you discuss the pluses and minuses, which I get net to a slight drag, of the other influences on gross margin for the quarter and/or year to date?
Yeah. The major items that you'll see in the numbers is with the growth being so quick on the lumber side, there's a mix component, the lumber and sheet goods side. That's an important part. We've also talked a little bit about the impact of the less sales per day, that was a slight headwind. The Hurricanes, obviously, another headwind. The investments we made, we think were important investments in terms of the growth of the business on a go-forward basis. Those are two main things we've talked about in terms of expanding the sales force and expanding our value-added footprint.
I'll just add the window plant being shut down in Houston was a decent drag on our window category in the quarter as well, which is one of our higher margin. In addition to the window plant in Houston, we have a very large millwork presence in Houston that was really impacted by the Hurricane. We unfortunately got caught in a real high water area, we lost considerable days in the Houston millwork operation. That was also true in Florida. Our millwork operations were really impacted, took a while to get back. As you know, in Florida, the main issue we faced was a loss of power. As Chad said earlier, we're now back running full steam. We're back on a normal track, things look very good in October from my point of view. Very pleased with what I see.
Yeah. Floyd's comments really underscore the business's ability to overcome those unexpected events and really show both sales growth and profit growth in a very disruptive quarter.
Yeah. Obviously, a lot of moving parts in Q3. I guess, kind of furthering that question, assuming we don't have disruptions like this in the future and assuming lumber settles down, would the mix shift to prefab or manufactured components allow gross margins, everything being equal, to go up, or are there other influences that may get in the way of that?
Well, over time, the improved profitability of manufactured components will absolutely improve our mix over time. We see a significant margin trade up on any movement towards manufactured products, absolutely.
Okay. Just to put it in context, 110 salespeople net additional. What's the gross number of salespeople today?
We had about 1,700 at the beginning of the year outside sales force.
Okay. Then my final question is simply, any guide on the future ProBuild D&A numbers or percentages changes?
We're pretty well rolled out of that this quarter. There is a modest decline in the future, but we're through the bulk of it now.
Great. Thank you. Good luck.
Thank you.
Thank you. We can go next to Matt McCall with Seaport Global Securities. Please go ahead. Your line is open.
Thanks. Good morning, everybody.
Morning, Matt.
Morning.
I'll add my congratulations to both of you guys. Well done, Floyd, and look forward to many years, Chad. I guess I'm going to follow up on a few of these just to make sure I understand. Peter, did you say that we should view your SG&A as 70% variable, and that's kind of the way to look at the leverage opportunity?
As an internal rule of thumb, that's generally what we use. Obviously, that's modified by significant initiatives and investments, but yeah, as an operating rule of thumb.
Okay. That's where I was going with it. You've got the sales adds, the new locations, and you quantified this year, I think $5 million or $6 million incremental spend. Is that the way to look at it? We've got the 70% that's variable, and we got to add in the components like these growth initiatives to get to a true number so that fixed component is growing. Is that the way to look at it?
Yeah, we think that's a reasonable approach to model it.
Okay. Chad, you said, I think to John's question, you added 110 to your 1,700 base, and it sounds like that's going to continue. As we look out and model 2018, is the expectation something similar next year from a total spend perspective? Was that $5 million just the salespeople?
Correct.
Okay. Is that a good way to think about next year? You said you're going to continue to invest. You think that's still a good opportunity?
Yeah, I think so. $5 million-$6 million probably next year.
Okay. You talk about new locations. Sorry if I missed it, but what's been the total addition to date in locations, and how should we think about that looking out to 2018?
This year we've opened three new truss plants, and we've got three more slated for the back half of this year and into next year. Obviously, still working on some budgeting for next year. Also we've invested in some of the equipment in those truss plants and other truss plants as well to increase the productivity and the efficiencies. That's always been our focus, and we will continue to focus on the manufactured side of the business. I would say over the next few years, you're probably looking at something similar, three to four new plants a year.
Three to four new a year. I'm assuming it's the cost of goods line. Have you talked about the total investment this year and the way we should think about that?
Well, certainly, the manufacturing facilities do have a higher component of COGS, but you also have incremental SG&A with that when it comes to management and drivers and the delivery costs of those facilities are down in SG&A.
Any quantification similar to that $5 million to $6 million that we talked about for people, for the sales force?
Year to date, I think it's about $2 million to $3 million, so probably three to four on an annual basis.
The last question I had, the outlook you gave from a kind of an end market perspective, R&R, single family, multi-family, that was helpful. The question I had is really on R&R. To Floyd's point, Alaska had a bit of a drag. How should we think about all in? You said 3%-4% growth R&R next year. Was that a market comment and you guys are going to see a little bit of pressure because of the exposure to Alaska, or was that kind of an adjusted number?
I think we'll probably still see some drag to that number due to Alaska next year.
Okay. All right. Thank you all.
Thank you.
Thank you. As a reminder, if you'd like to ask a question, please press the star and one on your touch tone telephone. We can pause another moment to allow any additional questions to enter the queue. Once again, that is star and one to ask a question. It appears we have no further questions at this time. Mr. Sherman, I can turn it back to you for any closing remarks.
Thank you. I feel very excited about the future that we have before us with this company, and very excited about what Chad, Peter, the rest of the team are going to be producing in the years ahead. I can tell you, since I am a shareholder, and will remain a shareholder, I'm going to be really looking closely to make sure that we deliver on the promise that I know that's in front of us. I'd like to thank all of you for joining the call today. Since this will be my last earnings call before handing over the reins to Chad, I'd like to express my sincere appreciation to all of the investing community who have supported us throughout the years. In addition, I'd like to extend my appreciation to all of our associates who've helped us build such a great organization.
I'm very pleased with what we have built and look forward to seeing the progress over the coming years. Thank you, and have a great finish to the week.
This does conclude today's call. Thank you everyone for your participation. You may disconnect at any time, and have a great day.