Builders FirstSource, Inc.

Good morning and welcome to Builder's First Sources Second Quarter 2020 conference call. At this time, all participants are in a listen-only mode. Following the company's remarks, we will conduct a question and answer session. Today's call is being recorded and will be available at www.bldr.com. It is now my pleasure to introduce Mr. Binit Sangdee, Vice President, Investor Relations.

Thank you, Kevin. Good morning, and welcome to Builders First Source second 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 First Source 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 the GAAP equivalents in our earnings press release and detailed explanations of non-GAAP financial measures in our form 8K filed yesterday, both of which are available on our website. I will now turn the call over to Jethro. Thank you, Bennett. Good morning and thank you for joining us. We are incredibly proud of our team's hard work and dedication to excellence over the past several months. A significant portion of our senior leadership, as well as our regional and local managers, have been with us for well over a decade, giving us a collective understanding of how to effectively manage through a crisis. Last quarter, we outlined our preparedness to address the unprecedented environment from a safety, operational, and financial perspective. Our team rose to the occasion and delivered strong results all around. We proactively managed our business at the local level to quickly right size our operations where necessary to ensure that we continue to safely and effectively deliver critical products and services to our customers. all while adjusting to an ever-changing market landscape and keeping as many of our team members as possible working through the pandemic. Our focused execution allowed us to take advantage of strong housing fundamentals to produce the highest quarterly adjusted EBITDA in our history. Order volumes recovered as we moved through the quarter, and we are pleased we were able to bring back almost all of our furloughed employees. Many states in the Northeast, Northwest, and Midwest initially placed restrictions on home building. Those limitations have now been lifted, so we are back to work in all of our locations around the country. The home building 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. In June, we experienced a sharp sequential rebound in sales, and we were appropriately resourced to capture that demand. The dramatic improvement as we entered the quarter gives us momentum as we enter the second half of the year. We acknowledge macroeconomic uncertainties remain with high unemployment and COVID hotspots slowing the recovery in certain regions. However, as we look across our national footprint, we believe we are exceptionally well situated to take advantage of the home building tailwinds that continued into July. We remain confident in our ability to outperform within our industry through organic and inorganic growth opportunities that enhance our ability to partner with our customers. We have the balance sheet to support our growth ambitions, ending the quarter with total liquidity of $1.2 billion, up $200 million since our last update in May. Our strong cash flow continued to strengthen our balance sheet, at the same time provide dry powder for future M&A. We were especially pleased to surpass the low end of our long-term targeted ratio of net financial debt to adjusted EBITDA of 2.5 times, achieving 2.3 times as of the end of the quarter. Moving on to our year-to-date update on slide four, it is important to note that we have been able to demonstrate the particular strength of our strategy, team, and platform during this period of fluctuating demand. Our ability to deliver record adjusted EBITDA in the first half of 2020 is a direct result of our national footprint unmasked scale and manufacturing capability, and exceptional sales force. The breadth of our product portfolio also supported higher demand in all three of our end markets. For the first six months of the year, sales volume grew by nearly 4%, of which approximately 3% was from our five tuck-in acquisitions completed over the past year. Value-added product categories increased in sales volume by an estimated 4%, in the first six months, as we continued to realize the benefits from our years of strategic investments. Commodity inflation and one additional selling day each contributed approximately 1% to sales, which led to an increase in reported net sales of 6%. Despite the market volatility, we grew adjusted EBITDA by 5% compared to the same year-to-date period last year, thanks again to our team's disciplined execution and quick reaction to dynamic local market conditions. Our operational excellence initiatives remain on track. As we mentioned on previous calls, these best practices are being implemented throughout the organization and are making our company more agile and easier to do business with. Key initiatives and process include investments in distribution and logistics software, pricing and margin management tools, back office process efficiencies, and information system enhancements. The rollout of our pricing optimization has been particularly successful, now covering 15 of our major markets. Where implemented, we have provided our associates with faster and more accurate pricing information along with customized market tools and analytics enabling us to execute our strategy on a local level. Our delivery optimization system covers approximately 70% of our sales and has measurably improved our distribution network in terms of speed, uptime, and reliability. Our innovative customer portal, My BFS Builder, is designed to complement our first-class face-to-face customer service and continues to see higher adoption rates. Our expanding network of high-margin, value-added off-site component manufacturing facilities remain core to our strategy. We intend to use a portion of our cash flow to continue investing in value-added growth capacity through both organic and acquisition opportunities. This includes our investment plans related to greenfield facilities, new trust lines and existing plans, door facility expansions, and machinery and systems in dozens of our value-added operations, such as our newly commissioned state VR trust plant in Spartanburg, South Carolina. Through consistent execution of our long-range strategic plan, we will continue to add our differentiated offering of industry-leading value-added capacity that enhance our geographic footprint, technological capabilities, and integrated partnerships with our customers. Our customers value our commitment to high-caliber service and, in particular, our ability to continually invest in service capabilities throughout the cycle, which we believe is a differentiator for Builder's First Course. During the first half of the year, we tightened cash discipline to enhance our financial flexibility and liquidity. In the second half, we are focused on disciplined cash deployment to advance our growth strategy. with a focus on value-added acquisitions that further strengthens our position within the industry. Before I turn the call over to Peter, I wanted to take a moment and reflect on the fact that today marks the five-year anniversary of our acquisition of ProBuild. When I think back on what we have accomplished and the great company we have become as a result of that acquisition, there is much to be proud of. But I almost hate even using the word acquisition because what we accomplished was only possible because thousands of our team members from both companies chose to forget which jersey they were wearing prior to July 31st, 2015, and rolled up their sleeves and said, let's get this thing done, and we did. I think what I am most proud of is the fact that we did what we said we were going to do from the start. If you recall, we were over six times levered when the deal closed. And a lot of people thought we were crazy and that we would never survive. From the start, we said our top priorities were to de-lever, integrate, and achieve our synergy targets. And we did, plain and simple. So to all our team members, thank you for what we accomplished over the past five years. And to all those that invested in us five years ago to make the transaction possible, thank you as well. Now, time for reflection is over. Everyone back to work. It's all yours, Peter. Thank you, Jeff. Good morning, everyone. Let me start by also recognizing our team's work to quickly adjust costs, adapt to local market conditions, and execute effectively to deliver a record quarter. I will quickly review our second quarter results and then provide you an overview of how we intend to manage going forward. We had $1.9 billion in net sales in the second quarter, with core organic sales declining 2.1%. Core organic excludes acquisitions and commodity impacts from that sale to give an indication of the underlying performance of the business. As previously disclosed, during the month of April, we experienced a core organic sales decline in the high single-digit percent range. However, as the quarter progressed, order activity showed a smaller drop and a stronger recovery than we initially expected. In June, Core organic growth rebounded up low single digits, reflecting what we believe to be a release in pent-up demand. For the quarter, our five tucking acquisitions completed over the past year added 2.5% to net sales. Commodity price inflation added another 1.8%. As a result, net sales in total increased by 2.2%. Demand for our value-added product categories continue to outperform within our respective markets, although higher demand in most parts of the country was disproportionately offset by the impact of COVID-19 in the hardest-hit areas. Our gross market percentage was 26.6%, just over the high end of our previously communicated expectations. The 60 basis point decline compared to the prior year period was a result of the expected normalization we have discussed in our calls, mainly in our lumber and lumber sheet goods products categories. Since May, we have experienced sharp commodity inflation in lumber and panel costs, so please keep in mind the mechanics of our margins as we have discussed on prior calls. Commodity cost inflation causes short-term gross margin percentage headwinds when prices spike. relative to our short-term pricing commitments that we provide customers. It usually takes one to two quarters for the margins to normalize at the new prices. As a result of the speed and magnitude of this temporary headwind, we expect our gross margin percentage to be pressured in the third quarter before recovering to more normalized levels over the typical one to two quarter lag. Ultimately, we will benefit from higher gross margin dollars generated from the inflationary impact on that sale. Features expense. decreased by $2.6 million to $26.8 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 $1.7 million due to a higher outstanding debt balance as we proactively increased our liquidity and financial flexibility in light of COVID uncertainty. Second quarter EBITDA increased $16.3 million from a year ago to $161.9 million, an 11% improvement. As Chad mentioned, this is the highest quarterly EBITDA in our history, driven by our cost management measures both at the corporate and local levels, combined with the improving demand through the quarter. The reduction in variable percent margin in the prior year period. Adjusted net income for the quarter was $79.2 million or 67 cents per diluted share, compared with $71.4 million or 63 cents per diluted share in the second quarter of 2019. The year-over-year increase of $5.1 million per diluted share was primarily driven by the improved operating results partially offset by higher adjusted interest expense. On slide six, I would like to highlight the strength of our business, driven this quarter by the focused execution of our team, allowing us to partner with customers to supply critical products and services as demand recovers. Economic slowdowns, mainly in the Northeast, Northwest, Midwest, and Florida, significantly impacted demand across our product categories, partially offset by growth in the remainder of our footprint. This was especially true in our manufactured product category, which was disproportionately impacted by the geographies hurt most by the pandemic. Excluding those impacted regions, our manufactured product sales increased in the quarter. Overall value-added core organic sales declined by approximately 3%, offset by the contribution of our strategic acquisitions. We are committed to continuing the expansion of our network country. As Chad mentioned, we are pleased to have added a state-of-the-art manufacturing facility in Spartanburg, South Carolina during the quarter, extending our industry-leading position to 65 manufacturing facilities. We expect that approximately 25% of our total 2020 capital expenditures will be invested in our value-add growth initiatives and expansion of our production capacity. Our second quarter Core organic sales declined by an estimated 4% in the single-family new construction end market, compared to a decrease of 13% in overall U.S. single-family starts. Although we performed better than expected in the majority of our markets, the growth was limited by the impact of COVID in certain parts of the country. Core organic growth in the R&R and other end market grew 4%, we saw relative strength in the western part of the country and began to lap the unfavorable tariff impact in the upper Midwest in the prior year period. Multifamily core organic declined by 2%, largely due to the timing of some large projects impacted by the shutdowns. Turning to our financial flexibility on page 8, a key factor driving our value creation in recent years has been our strong cash generation. During the first half of 2020, we produced free cash flow of approximately $115 million. The aggressive actions we discussed last quarter to preserve cash, including an initial reduction in discretionary CapEx spending and increased vigilance around working capital, were key drivers in our year-to-date performance. On a trailing 12-month basis, operating cash flow continued to represent more than 90% of adjusted EBITDA. This has had a clear impact on net leverage, which improved by about half a term versus prior year to 2.3 times, representing its lowest level since the 2015 ProBuild acquisition. Since our last call, our liquidity improved by an additional $200 million to $1.2 billion at the end of the quarter, reflecting our positive free cash flow. At the onset of the pandemic in April, our primary objective was to preserve cash. With better clarity around the market and with ample liquidity, we are resuming our investment in capital priorities, including acquisitions and growth capex, primarily focused on value-added growth initiatives. Our deal pipeline remains robust, and we are focused on investing for the long term. Turning to our outlook on slide nine, Our first half results reflect our experience managing through cycles and the resilience of our business to generate growth. Our first half results also demonstrate a positive overall home building environment, supported by positive tailwinds and rise in demand across our diverse national footprint, which continued into July. Based on this backdrop, we are inducing an outlook for the third quarter. We expect adjusted EBITDA to be flat year-over-year at approximately $160 million. We anticipate core organic sales growth to be in the mid-single-digit range year-over-year for the third quarter. New housing demand has proven to be resilient in nearly all localities where we operate, which provides the basis for our outlook. Amid all of the macro uncertainties, we are guiding to a balanced growth assumption while positioning our business to take advantage of potential upside opportunities. Keep in mind, our core organic growth outlook reflects our core sales performance and excludes the sales contribution from acquisitions as well as specific commodity inflation in the coming quarters. Over the past few months, we have been managing the rapid commodity inflation occurring in our industry. As I mentioned earlier, we expect our third quarter gross margin percentages to be below our normalized levels due to that inflation. We anticipate our gross margin percentage to be in the low 24% range for the third quarter compared to our normalized levels of over 26% when commodities are at more stable prices. This margin decline is a temporary headwind as we have demonstrated in the past. We will see a quarter or two of margin pressure during the inflationary period along with increasing gross margin dollars I'll note that we experienced similar pressure on gross margins in mid-2018 when inflation spiked. As the inflation subsided, we recovered that margin with above normal margins during the deflationary period. In fact, since the beginning of 2018 through the second quarter of 2020, our gross margin had averaged approximately 26%, which is in line with our normalized level and is consistent with how we manage our business through commodity swing. 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. We continue to expect our cash interest will be in the $110 to $115 million range for the full year of 2020. With our growth projects underway again, we now expect capital expenditures to be in the $100 to $110 million range for the full year. Looking beyond 2020, the structural advantages of our business remain intact. We deliver solutions that make our customers more productive and efficient. We have deeper and more integrated relationships with our customers than ever before. We are much more than a supplier of commodity lumber. We are a highly valued partner to many very sophisticated builders. delivering labor savings and just-in-time delivery of critical building materials, helping them maintain a streamlined supply chain. These higher margin value-added offerings represent the largest portion of our business and the focus of our growth. With our solid financial position, we believe we are uniquely positioned to accelerate our profitable growth through underlying market expansion, supplemented by targeted acquisitions and operational excellence initiatives. to accomplish our long term objectives and capture underlying market growth. We therefore affirm our previously communicated long range plan targets, which remain on track to be achieved by 2022. We have full confidence in our business to be the supplier of choice for building materials and value added products in the months and years to come. Our strong financial position, coast-to-coast geographic reach, diversified product offerings, national manufacturing capabilities, and strong partnerships with customers are unmatched competitive advantages in any market environment. I would especially like to thank our Builders FirstSource team for their dedication to our company, our customers, and our communities. Operator, we can now open up the call for Q&A.

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star 1 on your telephone keypad. Please ensure the mute button on your telephone is switched off to allow your signal to reach our equipment. And please limit yourselves to two questions. Again, that is star 1. Thank you. We can now go to our first question that comes from Matthew Booley of Barclays. Morning, everyone.

Thanks for taking the question. And congrats on the results. I'll start off with a question on the guide for Q3. You know, you're saying, I guess, core organic growth in the mid-single-digit range, and I think you mentioned, Peter, that June was up low single-digit. Just any color I got from how July organic has trended and sort of, you know, just what are the underlying housing start expectations that are informing that guideline? Yeah, so I'm going to start off and let Chad finish up. The performance in June, July is obviously not done yet, but looking like it'll be right in that same range, maybe a little bit better. You know, we had talked earlier about the potential for an air pocket, wondering what the recovery might look like if there was some pent-up demand from the sort of that time frame when everything was pretty much shut down. Things have been, and I'm not telling you anything you don't already know, surprisingly resilient. And we're very pleased with sort of the overall sustainability of the trend as things have come back. And as you've heard, as we've heard from many of the builders around the country, there is a tremendous amount of optimism. There's no strength in that home building market. So that's really the rationale that we're giving ourselves for that mid-single digits third quarter growth number in that single family space. It's still a little bit open in terms of where it will land could be better. As always, there's enough volatility in COVID land where it could be worse, but we're feeling pretty good about it on balance and the order rates and what we're seeing. Yeah, and I'll just add, you've seen the commentary from the builders in recent weeks, very, very positive. The traffic's up. New orders are up. Just, you know, a little bit surprisingly, it's been so resilient, and there still seems to be a lot of tailwinds. Rates are low. I think with everything going on in our country right now, people desire more space. In many cases, commutes are becoming less of a factor for people, which allows them to move further from downtown areas. I think there's probably a lot of people with aging parents looking to create space for them as opposed to looking to put them in long-term care facilities. So there's just a lot of tailwinds right now. People aren't traveling as much. I just think they're giving more thought to their living condition. with the dynamics that are going on right now. As Peter said, with any guide or forecast, there's potential for upside or downside. We always try to be pretty measured about our guidance and leave ourselves a little wiggle room. This quarter is no different. We're feeling really good about how things are shaping up right now. Perfect. Thank you for that. Then I guess on the gross margin side, you can clearly see the progress over the years you know the Q3 guide is better than where margins bottomed you know in the second quarter of 2018 and you mentioned this one to two quarter lag you know back to normalization and so my question is with all the progress you've made is there any reason to think that you know, the pace of margin recovery might not be any, might not be faster than what we saw at that time, or should we think that, hey, look, you know, it is what it is, lumber's inflating, and, you know, let's not get too ahead of ourselves on this. So it's really just asking about how we should think about that pace of normalization. Thanks, guys. Well, I'll start out, Peter, if you'd like, but, you know, we've seen this movie before, right? 2018 was the most recent example. We get compressed for a period of time, and then when things flatten out or we start to see deflation, we get paid back. And so Q3 is going to be a quarter of margin compression. But, you know, with the tailwinds we're seeing in housing and the higher prices, once we get our pricing cut up, you know, they could set up to be some really nice quarters just like we saw two years ago. And we're certainly pushing ourselves to get better and better about managing price and doing so as efficiently as possible. Not quite ready to sign up for faster than our one-to-two orders, so I think that's probably the right way to think about it for now. But certainly internally, that's our goal for ourselves.

Okay. Thank you both. Our next question comes from Mike Bell of RBC Capital Markets.

All right, thanks for taking my questions. Echo the commentary around nice results here in a challenging time. The first question I had, just on manufactured products, I think, Peter, you made a comment about how, you know, some of the impact on the optics around growth there were potentially mix-related. But I think if we look at that... assuming we're not off on an acquisition contribution, I think the volume in manufactured products may have been down high single digits-ish, which would have lagged the rest of the business. So I just want to clarify that, and then if you could provide some additional color on those mix impacts, but also just then on the relative growth trends you've seen over the course of June and July in manufactured products. Yeah, absolutely. You heard it right. The nature of the decline in manufactured products is in sort of that big single digit range and that organic component. So yeah, we did see a decline. The biggest reason for that when we dug into the numbers was around the fact that there was a higher amount of, on a mixed basis, a higher mix of Unfortunately, it's, I think, representative of opportunity that lays in front of us as those markets recover. But, you know, an area like, you know, the Northwest, Pacific Northwest, Florida, for example, that's a manufactured products business. It's a great business for us. We have great partnerships. We've sort of proven the value proposition, and it's a higher percent, much higher percent disproportionately. That's why it shows up in that organic number. But still feel very good about the business. It's not a structural issue. It continues to grow in other parts of the country. It continues to be just as successful or more so in every market where we sell it versus the core and the overall business. Yeah, and I'll just add that I agree with what Peter said. Part of it was geographical. We were shut down in areas where we have a very strong component presence but you've also got to consider when builders hit the brakes, right? Homes that were already under construction, we kept shipping to. New homes started, dropped, and the first thing we lose there is the component business, right? So that's part of it as well. I'll tell you that moving into the pandemic, so around the first week of March, to the depth of the pandemic as far as new trust orders coming in, we dropped over 50%. Our orders coming into the trust plans now are back to a level equivalent to where they were at the beginning of March before the pandemic and a solid double-digit higher than where they were a year ago. So I have zero concerns about our component business. That's great to hear. Thanks for that, Collar. My second question is really around the reinstated long-term guidance, and it's nice to see that reinstated. You know, on the other hand, you know, I think by your own admission, there's still some uncertainty there. So the question's really, you know, if we look at the 2Q results, the 3Q guide, it seems like you're tracking towards like a 525 to 550 million in EBITDA this year. That still takes 40% plus growth over the next two years to get that long-term growth. EBITDA goal of 750. Has your high-level framework changed at all around base business, what's market growth, what's internal initiatives, and then what component would potentially be M&A included in that? First of all, it's exciting. No, the fundamental structure of what we talked about earlier this year is not changing. We are, when we go back there, and I know you and I have talked about this in the past, when we're going through and looking at the variety of models that we pull together to look at this business over time, we certainly have a number of different levers that we can pull in addition to Of course we're going to be heavily influenced by single family. Of course we're going to be impacted by commodities. That's sort of core to who we are. But we also have the ability to really control our own fate in a lot of ways. Investments that we're making in the core business, this value add strategy that we've been executing on has been very effective. Now with our being even below our targeted leverage ratio, we have tremendous liquidity and tremendous opportunity to go after what we believe to be a very, very healthy pipeline of M&A opportunities. And operational excellence continues to perform. We continue to make progress. We continue to see an operation that knows how to and wants to get better and drive better results each quarter. Really, while we were, I think, prudently conservative by pulling the 22 guidance last quarter, as we run our numbers and looked at where we're at and where we can be and what things are sort of coming together for us, we feel very good about 22. We think that that 750 area is absolutely attainable, and we have line of sight to how we're going to get there. As I mentioned, everything doesn't have to work together perfectly for us to hit that number. We have to continue working and doing what we're good at. That's great. Thank you. Thank you.

Our next question comes from Keith Hughes of SunTrust. Keith, perhaps you're on mute.

Yeah, can you hear me now? Sorry, I had to connect. Yes, please go ahead. Okay, sorry. Let me start again. On acquisitions, you talked about, you know, for some time doing tuck-ins, if you could talk about what regions, what products, things of that nature you would look to do acquisitions in, would you, at this point in the cycle, be open to something larger than a tuck-in? We're always open to that. You know, in many... In many ways, one large one can be easier than 20 or 30 small ones, and we've seen both, clearly. But yeah, that's certainly always something we're open to. You know, at this point in the cycle, we do have a lot of liquidity. It may be using more equity at this point in the cycle would be prudent, but sure, that's something we've always been open to. Second question, when you do smaller tuck-ins, is there a certain region that you're trying to focus on? You sort of broke up there for a second, Keith. It sounds like you were asking what regions might we think about tuck-ins for. Yeah, what regions? Yeah, that's correct. Well, you know, you can look at the map and see where there's holes in our footprint. So, you know, part of our motivation is regional, but I think just as importantly is product mix. we're much more inclined to go after the company with a high mix of value-add. So it's kind of a combination of those two factors. You know, in general, we're underpenetrated, in my view, in the western part of the country versus the east, but as I said, value-add is just as critical in my mind. Okay, thank you.

Thank you. Our next question comes from Trey Grooms of Stevens, Inc.

Hey, good morning. Good morning, Trey. So geographically, just kind of wondering, things have definitely held in better, clearly. During the earlier days of the pandemic, things varied pretty widely, as you mentioned, and You know, your value-added products, it sounds like, you know, when you do see some geographic changes in demand, that can have an impact there just given your exposure. So I guess my question is can you touch on, you know, kind of the geographic areas now that things are starting to kind of move again, you know, where you're seeing relative strength or weakness now and geographically and what that means for that value-added mix? Sure. Yeah, so just to recap what we were saying in the script, right? The Northeast, obviously, kind of the upper Midwest, the Michigan area in particular, the Pacific Northwest, and then later on as we got past the initial impact, we also saw a slowdown in Florida. Those were all, I would say, the areas that were highlighted and I think truly saw the biggest impact for us as a When it comes to recovery, I would say the Northwest has bounced back very quickly. I would say the Michigan and upper Midwest area has definitely stabilized and started to march back. Northeast is still suffering with it. There's no way around it. They continue to have very strict controls. I think the population in general has suffered more. and has stayed slower. So that recovery is underway, but certainly not back to normal levels up there yet. In Florida, I think they're still perhaps in the middle of some of the uncertainty. Given the exposure to tourism, they've certainly seen a lot of concern, a lot of declines for their core businesses. So they're still, again, they're on the road back, but haven't You know, when looking at the relative exposure in those areas for manufactured products, obviously Florida is important to us, but so is the Northeast. There are some corridors of real good strength there for us. So it will be a recovery that you'll see, and we're confident in that sort of growth over time in the manufactured products. But those couple of markets will be more of a progression back to normal rather than a quick snap. But I think it's important to note that if you look at the overall value-added products, if you exclude those targeted regions, we were up low single digits. So the rest of the country is still, even with the suppressed STARS numbers and some of the concerns, still growing as we would expect to see it over time. Got it. All right. Thanks for all that, Keller. Appreciate it. I guess as a follow-up. So on the SG&A line, you know, it was lower as a percent of sales than what we would have thought, especially given that strong top line you guys put up and just everything that we've done. But we can kind of understand some of the tailwinds, you know, may abate. But with that said, I know you guys have a culture of focusing on lower costs and running a tight ship. So, I guess, is there any levers that you guys have pulled in SG&A, you know, through this pandemic and over the last several months that you could continue to see or continue to benefit from in the coming quarters? I'm glad you highlighted that, Trey. and the shutdowns hitting, just coaching people on how to manage through it. And boy, the team just did a great job resizing the business when it was appropriate, making sure that we were cutting costs and being disciplined. And obviously, some of the things we did to give ourselves a little extra flexibility more broadly as a company, we talked about that, the laying wages, salary cuts for executives, delaying wage increases and salary cuts for executives. Those were things that we thought were necessary just to give ourselves that flexibility. Clearly, we did very, very well as we went through that sort of pause period. Since then, with the recovery that we've seen, we've reinstituted the merit increases, we've restored all those cuts that we made, and the nature of the sizing of the business has been very specific to the location. So we tried to retain the staffing, making sure we weren't hurting ourselves strategically. Our ability to compete, our ability to win, we didn't want to undermine that by being too aggressive because we don't believe that we've allowed ourselves to get fat in these markets if there wasn't a ton of the cut. So what you saw at the end of the day was, I think, some real flexibility in the core around comp that some of that will come back, obviously, in terms of expenses. You saw about a third of that overall benefit being P&E. Now, that one's a bit more time to play out. You know, the question remains, will it ever get back to normal? You know, will we ever travel like we used to? You know, TBD, but certainly that we anticipate will come back to some degree over time. And about a third of it was really the fuel expense, and obviously there's been some volatility in the cost. to over time. Maybe not right away on that one either. But we didn't go back through this organization and make any real structural changes or massive cuts. Our focus was on making sure we were responding and being ready to move forward. At this point, that seems to have played out pretty well for us. Great. Thanks a lot for taking my questions, and best of luck.

Thanks, Craig.

Our next question comes from Selden Clark of Deutsche Bank.

Hey, good morning. Thanks.

Can you just remind us what your longer-term guidance assumes in terms of starts?

I understand you mentioned there are a number of ways you can get there, but just from a high level, can you give us some more detail around what type of support you would need from the macro? Yeah, so when we first brought out that $750 million EBITDA target we were referring to before, we were pretty explicit about putting a 1.1 million single family starts number on there. However, earlier this year, we've come back and said, you know, we have enough levers where we think we can get to that number even with just that million-one number. So the way we think about it is really those opportunities to control our own fate will be very, very impactful and perhaps as much as what we anticipate the continued recovery and starts to be. So when we talk about that, obviously the M&A opportunities, while we are committed to staying within our stated range, we've got quite a bit of room there. grow our value-addedness with both green fuel and capacity work, certainly that's a strong growth opportunity for us. And the operational excellence initiatives we've talked about, right, whether it be getting better and more disciplined in pricing, getting better and more effective in our distribution and logistics management, or even just opportunities to reduce can become more efficient in the back office. We think there are certainly ways that it can get us to that 750 without 100% dependence on that single family starts number. Okay, so on the M&A side, are you seeing, have you identified more opportunities? Are you seeing an increased willingness or valuations that come down? What's really driving the sort of increased optimism there? Well, the pipeline is full. It's been pretty full for the last few quarters. Obviously, there was a bit of a pause in what type of diligence work we were doing when things were shut down, but we've ramped that back up. There's just a lot of good businesses out there right now, and we clearly have a strong balance sheet to go after them, and so that's why we are a little more optimistic now. We've got a more optimistic tone on what we think we'll be able to do in the coming years from an acquisition standpoint. Any way you could just expand a little bit on what's driving that optimism? So I guess I'll give you an example without naming any names. We are, our internal model for valuations that we've been using and refining over the years certainly requires us to understand our weighted average cost of capital and make sure that the returns that we're seeing are making sense depending on the risk we're taking on one of these deals. And what we're experiencing right now is that we are consistently seeing deals brought to us by our regional management teams that look at really nice businesses that we think would be a great fit for us around the country So you may not be very excited about it at the top level, but we're seeing an accumulation of these deals, and when we put them through our models and start speaking with the leadership teams of these targets, there are great opportunities. The valuations make sense. The returns are great. The teams fit together, and we think that it will continue to sort advantage is we bring together sort of that model of our product portfolio, the capabilities that we bring with our national footprint, opportunities to introduce value-added or expanded value-added markets. I would say the accumulation of those factors is where that optimism comes from. The list and the way that list is being sort of vetted through our process as we continue to accelerate our M&A focus. We're ready to go.

Got it. Okay. That's helpful. Appreciate it. Sure. Our next question comes from Jay McCandless of Wedbush.

Good morning, everyone. Hey, Jay. Hey, good morning. So I got a two-part question on lumber and then one other follow-up. I guess, could you talk about what benefit you're seeing on the top line from commodity inflation thus far in the quarter? And then also maybe talk about, when we think about your input cost for lumber, what's the spread between two befores, framing lumber versus sheet goods? So, maybe I can start. I will tell you that our Q1 two results, the commodity is a slight tailwind. You gotta keep in mind the dynamics. You saw a pretty good fall at the beginning of the quarter in prices and then a pretty good run up towards the end. So net-net, it sort of averaged out to not a lot of impact. It really started to accumulate as you got into May. That's when the ron brio started to hit and kind of made through today. Now the split of our exposure, and we talk about commodities being right around 40% of our sales in prior quarters, obviously that'll increase a bit as those increased prices start to change the mix in our business. But if you look at that 40% of our overall sales being commodity exposed, and then generally a 70-30 mix between lumber and panels, You know, again, anytime you've got a highly commoditized component of your business, that can be the most pressure. Probably in that space, the most commoditized bid is probably that LSP slice above the panels. But that's sort of a broad brush response. Got it. Okay. That's helpful. And then my follow-up question, just wondering the – Yes, could you guys quantify how much in one-time savings you saw from some of the cost actions during 2Q that are probably going to come back in 3Q? Well, most of the $14 million beat in the second quarter, I would say, were based on actions that are going to come back over time. I would say maybe a third of it will come back right away based on things we've already done. That third attributable to TV will take some time to phase back in. That's unlikely to bounce back in the third quarter, although we'll start to eat away at it as things start to loosen up in certain markets. And then fuel, I think you could probably estimate that better than I can. I go to the major components. Hey, Jay, I just wanted to add a little follow-up to your commodity question. When we look at Q3, and it's kind of difficult to estimate, but right now our best guess is Q3 sales will be positively impacted due to inflation somewhere between 5% and 7%. And then, of course, we'll probably have another 2% or so year-over-year growth. due to acquisition. So I just wanted to make sure you have those components. I appreciate it. Thank you, Chad. And thank you guys for taking my questions.

Thanks, Jake. Our next question comes from Kurt Yinger of DA Davidson.

Good morning, everyone, and I appreciate you taking my questions. I just wanted to start off – yeah, good morning. On the gross margin front, you guys came into the year 26% to 26.5% normalized, and I think lumber was maybe $400 per thousand. Obviously, it's a moving target, but if we were to think about just a structurally higher lumber price at maybe $500, what type of impact would that have on the normalized gross margin outlook? just with commodities naturally being a larger percentage of sales? Yeah, no great question. As you know, we model that one quite a bit. It's about half to three-quarters of a point based on current spot. It's been a meaningful move this year, there's no question. We'll have to see how long it lasts and how it plays out. It's certainly an important change and one that we welcome. We just hope it sticks around this time. Well, it wasn't too bad on the other side of 2018 either. Wasn't bad at all. And my second one, you know, it seems like over the past couple of quarters, you guys have started to see some real tangible benefits from some of those pricing tools. And I'm wondering how much opportunity you feel is left there to And relatedly, could you talk about which product categories or what previous shortfalls these tools really address? Sure. Yeah, and I guess I just want to reiterate the fact that this pricing effort we're making is really just around being thoughtful, being organized, being efficient internally. I was describing areas where where we're sort of closing gaps. It's those moments when a price change will come through, either good or bad, from a vendor, and it's not being filtered all the way through the system to the quotations we're giving our customers. And while I'm sure the academics might prefer the fact that you need to increase prices, it's also decreasing prices that's important as well, because you need to stay competitive and make sure you're winning the businesses. We want our salespeople to have the best information so they can compete and win in the marketplace. And when you're slow, you can put yourself in a position to miss out in profitability and in sales. So that's probably the biggest component. Being systematic always helps. You don't want to put yourself in a position where you've taken an approach that somehow approach we think is absolutely beneficial. As we look at it, it's been a difficult process to adapt all of the tools, the system, the architecture to the way that we want to approach it going forward. I'm very, very impressed with both our operations and our IT teams for what they've been doing to pull that together. We've seen some very good progress. with a couple more phases to come over the back half of this year. The markets where we've implemented so far have been pretty manual, so those IT changes are done. It's a fairly modest percentage of the overall company has seen the new pricing structures put in place, so we do expect it to continue to accumulate for us over the next year as we get some of those permanent changes to the IT structure could use those back more broadly. And I'll just add, you know, even just 50 basis points of margin improvement, that's real money. And, you know, part of it is to some degree breaking old habits. I've always sold this with a 24% margins. Well, why can't it be 24 and a half? What can the market bear? So giving them more tools to understand that. And then also knowing, you know, bucketing your customers and knowing which customers are more expensive to serve. and making sure you're getting proper margin and net return on those customers. So a lot of this is giving them the tools and the information to make those decisions much more quickly. Right, right. Makes a lot of sense. All right. Thank you, guys. I'll turn it over. Thank you, Kurt.

Our next question comes from Ryan Gilbert of BTIG.

Hey, thanks, guys. First question is on the third quarter guide. So, I guess, you know, looking back to prior years when there's been commodity inflation, we've seen that push on the gross margin, but operating margin has typically been flat or even improved on a year-over-year basis. But then just, you know, looking at the markets trying to kind of triangulate to operating margin from the adjusted EBITDA and gross margin guide, it looks like you're expecting some, you know, some pretty meaningful operating margin compression in the third quarter. I'm just wondering why you think you could be flat or higher in 3-2-20 on an operating margin basis. Yeah, I think that probably the most direct answer to your question is the velocity of the change in commodities. The nature of those short-term fixed price contracts certainly put us through a certain amount of exposure for a window of time. And these are unprecedented increases. You're up 20, 30 points a month. That's a very, very difficult thing to compensate for. So we're just recognizing that in the third quarter. Your point is right on. There is some nice leverage that comes when the value of those commodities gets higher. And for the bottom line, it's no question a positive and one that we we absolutely expect to flow through our P&L over time, but that's a short answer. Yeah, you know, we could be looking at, you know, about a 300 basis points decline in gross margin Q3 this year over last year. That's pretty hard to overcome from an operating margin standpoint, but as Peter said, we usually more than make that up in the following quarters. Right, completely understand. Okay, and then second question is, on structural components. Definitely good to hear that you're up double digits on a year-over-year basis now on trusses. I'm wondering just how the conversations with builders have been progressing in the third quarter, given that we're hearing that backlogs are pretty full, cycle times are extending. I'm wondering if you're seeing more builders coming to you interested in using components to get their cycle times back up. Yeah, for sure. I mean, anytime... Labor's tight, as you mentioned. They've got all of a sudden this surge, and their backlogs are bigger than normal. They're looking for ways to get those houses in the ground as quickly as possible, and so that just plays right into our strategy on the component side of the business. So that's why I said earlier I have no concerns about our component business. I'm very optimistic about what the future holds for that. Okay, got it. Thanks. And just lastly, if I could, I was wondering if you could just expand a little bit on what's going on in Florida. I think, you know, most of the commentary we've heard from the builders has been that the demand's pretty positive down there. So has there been a change to that competitive landscape or anything in particular you want to call out other than what you did earlier? I guess I want to be a little bit thoughtful about how I answer this. There were certain important customers who acted more aggressively and less aggressively during the downturn than others. And the nature of some of those decisions certainly gave us some pause there. Back in the certain markets that were particularly impacted, at least out of the gate, were some of the more tourism-impacted markets. All those markets have absolutely come back to a degree. There is a recovery underway, and I don't see that as a long-term issue, but I do think there's a bit of a progression back to normal that is required for us to kind of see full health there. But we have a very strong footprint, very good businesses. Our folks are doing a great job down there. It's certainly not a concern about the operations, just a matter of how quickly it ramps back to where we would consider to be Okay, got it.

Thank you very much. Our next question comes from Steven Ramsey of Thompson Research Group.

Good morning. I guess a question on Greenfield openings. You know, how many have you done year to date? Do you have plans for more this year, or is it still more of a focus on M&A?

Yeah, so year-to-date, I think we did just the one. We had one that opened sort of right at year-end timeline, so it's somewhere one or two. We have a couple more that are being built out as far as timing and when they will open, so probably one to two more that will fall into this year again kind of in that year-end timeline. It's a great time to kind of get that work done and get them starting to ramp up because it's a bit of a slow season for us generally, but we do continue to focus on looking for areas for rainfall facilities, and we expect to continue that going forward.

Okay, and then on repair and remodel volumes, I know you guys have some unique geographic exposure that drives that a little differently than the broader market, but R&R trends have been more resilient, maybe even didn't see quite the dip that new single families saw. Maybe just share the specific drivers for you guys in the quarter and if you have any visibility over Q3 into Q4.

Sure. Yeah, so the one thing I'll let you know, and I'm sure you already know this, as a commercial business as well. So I can tell you that we have sort of a tale of two cities there a bit where core R&R, our retail and remodel business, is far stronger, more than double that 4% rate. And then the commercial business is where we've seen some downturn, and that's definitely offset. So where we've got that retail footprint, Southern California is a great example. Business is doing wonderfully. really performing well, ready and responding to the homeowner needs, and those markets are doing very, very well. As we mentioned in the script, the Midwest market has sort of leveled out. We have seen a bit of a headwind there in past years, and it's been healthier, certainly also seeing that tailwind from the overall trends nationally in the R&R space. Even Alaska's R&R market has done well. But that commercial part of our business where we do have projects, again, that's got to reach all of the Alaska exposure. That has been part of it as some of those projects have been either delayed or paused for whatever reason.

Great. Thanks for the comment. Our next question comes from Ruben Garner of The Benchmark Company. Thank you. Good morning, everybody. Thanks for taking my questions.

Most of them have been answers. I just have one quick one, and if I missed it, sorry. I had some technical difficulties. But have you had any – most of the cycle, the main driver of a slower recovery has been labor availability. Have you – Have you noticed any changes on the labor front? And then, I guess, in a related way, have you had any difficulty getting any specific products? Do you see, you know, commodity availability or any other building products availability and issue in limiting growth or limiting an acceleration in growth in the coming quarters if the demand is there? Yeah, good questions. Haven't really noticed any changes in labor availability, although I would not be surprised with the recent surge in new home orders that may get a little tighter and it may extend cycle times out a little more. We talked about that a little bit earlier on the call. From a product availability standpoint, you know, most folks like us were running pretty lean as the pandemic hit and we've stayed lean, prices have run and that kind of incentivizes you to remain lean because you don't want to jump back in when prices are running if you don't have to. So there has been some spotty supply issues. The mills cut back on their production when the pandemic hit and kind of got us in the situation we are right now where demand is strong and supply is limited. You know, nothing that I would say is disruptive. It's just something we're having to keep a closer eye on and be a little more aggressive on the buying side in some markets where we're having trouble with some extended lead times. But nothing I would call significant at this point. Great. Thanks again, and congrats on the quarter, and good luck navigating through everything.

Thank you. Thank you. Thank you, ladies and gentlemen. At this time, I would like to turn the call over to Mr. Crowe for any additional or closing remarks.

Well, thank you again for joining our call today, and we look forward to updating you on our future results. If you have any follow-up questions, please don't hesitate to reach out to Peter or Bennett. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.