Q2 2020 Builders FirstSource Inc Earnings Call
Good morning, and welcome to builders Firstsource second quarter 2020 conference call.
I'm all participants are in listen only mode.
Following the company's remarks, we will conduct a question answer session.
Today's call is being recorded.
Www dot.
The or dotcom.
It was not my pleasure to introduce Mr., Ben sung Ji, Vice President Investor Relations.
Thank you got them good morning, and welcome to builders Firstsource second quarter 2020, <unk> earnings Conference call.
On the call today, Archie our CRO, Chief Executive Officer, and Peter Jackson, Chief Financial Officer.
Probably the slide presentation referenced on this call is available on the Investor Relations section of the builders Firstsource website at <unk> L.D.R. dotcom.
Well, we began let me note that during the course of this conference call. We may make statements concerning the company's future prospects.
As a result business strategies and industry trends.
Statements are considered forward looking statements under the private Securities Litigation Reform Act 1995, and are subject to certain risks and uncertainties, which could cause actual results to differ material from materially from expectation.
Refer to our most recent form 10-K filed with Securities Exchange Commission and other reports filed with the FCC for more information on those risks.
Company undertakes no obligation to publicly update or revise any forward looking statement.
The company will discuss adjusted results on this call we'd have provided reconciliations of non-GAAP financial measures to GAAP equivalents in our earnings press release and detailed explanation non-GAAP financial measures in our form 8-K filed yesterday, both of which are available on our website.
I'll now turn the call over to check girl.
Thank you Dennis good morning, and thank you for joining us.
We are incredibly proud of our team's hard work.
Indication to actually ones over the past several months.
Hey, significant portion of our senior leadership.
As well as our regional and local managers.
With us for well over a decade.
I think you also collective understanding how to look back because we manage the crisis.
Last quarter, we outlined our preparedness to address the unprecedented environment from a safety operational and financial perspective.
Our team well into the occasion and delivered strong results all around.
We proactively managed our business at the local level to quickly rightsize, our operations where necessary to ensure that we continued to safely and effectively with a 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 produced the highest quarterly adjusted EBITDA in our history.
Order volumes recovered as we moved through the quarter.
We are pleased we were able to bring back almost all of our furloughed employees.
He stays in the northeast northwest Midwest.
Initially placed restrictions on homebuilding those limitations have now been lifted so we're back to work and all of our locations around the country.
The homebuilding markets had been brasilia, improving housing starts record low mortgage rates and a shift towards suburban living or all positive fundamentals. The continued 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 ended the quarter gives much movement on as we enter the second half of the year.
Knowledge macroeconomic uncertainties remain.
Hi, unemployment in cold and hot spots 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 homebuilding 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 to balance sheet to support our growth ambitions ending the quarter.
Total liquidity of 1.2 billion up 200 million since our last eight in May.
Strong cash flow continued to strengthen our balance sheet.
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 net financial debt to adjusted EBITDA of 2.5 times.
Getting 2.3 times as of the use of the cooler.
Moving onto our year to date update on slide four.
It is important to note that we've 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.
Unmatched 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.
The first six months or the year sales volumes grew by nearly 4% of which approximately 3% was from our five tuck in acquisitions completed over the past year.
You added product categories, increasing sales volume by an estimated 4%.
First six month as we continued to realize the benefits from our years of strategic investments.
Commodity inflation and one additional selling day each contributed approximately 1% the sales, which led to an increase in reported net sales of 6%.
Despite the market volatility we grew adjusted EBIT up by 5% compared to the same year to date period last year. Thanks, again to our teams a disciplined execution.
Reaction to dynamic local market conditions.
Our operational excellence initiatives remain on track.
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.
Do you get initiatives in process include investments in district 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 were implemented.
We have provided our associates with faster and more accurate pricing information, along with customized marketing tools and analytics, enabling us to execute our strategy on a local level.
Our delivery optimization system covers approximately 70% of our sales and as measurably improved our distribution network in terms of speed uptime and reliability.
Our innovative customer portal might be at best builder is designed to complement our first class face to face customer service and continues to see higher adoption rates.
Our expanding network at my margin value added Offsite 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 do trust lines and existing plans door facility expansions.
Machinery and systems in dozens of our value added operations, such as our newly condition safety Our 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.
We believe is a differentiator for builders firstsource.
During the first after the year, we tightened cast discipline to enhance our financial flexibility and liquidity.
The second half we're focused on disciplined cash deployment to advance our growth strategy.
With a focus on value added acquisitions further strengthens our position within the industry.
Before I turn the call over to Peter I.
I wanted to take a moment and reflect on the fact that today marks the five year anniversary floor acquisition in Brazil.
I think back and what we've accomplished in the Great company, we've become as a result of acquisition there was much to be proud of.
But I almost hate even using the word acquisition because we accomplished 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 rolled up their sleeves and said, let's get this thing done and we did.
I think what I'm. 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 set our top priorities were to de lever integrate and achieve our synergy targets and we did plain and simple.
So it will all our team members. Thank you for what we accomplished over the past five years.
And do all those it invested in us five years ago to make the transaction possible. Thank you as well.
No time for reflection is over everything back door all years Peter.
Yeah.
Morning, everyone.
Also recognizing our teams work to quickly here Josh.
Got it local market conditions executed actively to deliver record quarter.
I will quickly review our second quarter results and then provides an overview.
That's correct.
We had $1.9 billion into sales and the second quarter core organic sales declined 2.1%.
Organic excludes acquisitions in commodity Cox, there given indication or be underlying performance of the business.
As previously disclosed during the month of paper, we experienced a core organic sales declined high single digit person.
However.
Interpret grass order activity sure a smaller drop the stronger recovery and was initially expected.
In June core ROE rebounded up low single digits, reflecting what we believed to be released.
[laughter].
The quarter I'm talking about acquisitions completed over the past year, 2.5% to that sale.
Any price inflation is another 1.8%.
As a result net sales total increased by 2.2%.
Demand for our value added product categories continued to outperform regard within our respective markets, although higher demand in most parts of the country with disproportionately offset by Dr. Kogan 19, the hardest hit there.
Our gross margin percentage was 26.6% just over the high end of our previously communicated expectation of 26% to 26.5%.
Disciplined execution.
Just to inspire team after quarter right.
The 60 basis points decline compared to prior year period was a result, you expected normalization, we have discussed recalls.
No longer lovers seem good products categories.
Since Bang, we've experienced sharp commodity inflation in lumber costs. So please keep in mind mechanics of our margins as we have discussed on prior calls commodity cost inflation cost short term gross margin percentage headwinds.
The spot relative to our short term pricing.
Customers, usually takes one two quarters remarks to normalize.
As a result, because you did magnitude this temporary headwinds we expect our gross margin percentage to be posture.
Before recovering to more normalized levels over the typical once it's important.
Ultimately we will.
Gross margin dollars generated inflationary impact on that so.
Interest expense decreased by $2.6 million to $26.8 million compared to the same period last year.
Excluding the betting that impact of onetime items related to debt instruments and extinguishments in the prior year period.
Interest expense increased by $1.7 million due to a higher outstanding debt balances, we proactively increased our liquidity and financial flexibility in light of coal uncertainty.
Second quarter EBITDA increased $16.3 billion your go to $161.9 million, 11% improve.
As John mentioned this is the highest quarterly EBITDA history.
[laughter] measures, both corporate and local levels combined would it be improving demand through the quarter.
The reduction in variable expenses related to compensation travel and entertainment and fuel costs contributed to an 8.3% EBITDA margin compared with 7.1% marks 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.
Year over year increase or $5.1 billion.
There was primarily driven by improved operating results, partially offset by higher adjusted interest expense.
On slide six I would like highlights the strength of our business driven this quarter focused execution or Marty.
Well enough to partner with customers to supply critical products and services, that's the band recover.
Economic slowdowns, mainly in the northeast northwest Midwest in Florida significantly impact demand across our product categories, partially offset by growth in the remainder of Barclays.
This was especially true or not manufactured product category, which was disproportionately impacted by the geography for most part a pen Doug.
Excluding those impacted regions are manufactured products sales increased in the quarter.
Overall value added core organic sales declined by approximately 3%.
By the contribution of our strategic acquisition.
We are committed to continuing the expansion of our network.
Every component facilities strategically located across the country.
Chad mentioned, we're pleased to have added I stated the art manufacturing facility in Spartanburg, South Carolina during the quarter, extending our industry, leading position 65 manufacturing facilities.
We expect that approximately 25% of our total 2020 capital expenditures, we 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 markets.
Compared to a great decreased 13% and overall U.S. single family starts.
Although we performed better than expected in the majority of our market. The growth was limited by the impact of cobot in certain parts of the country.
Organic growth on our other end market grew 4% as we saw relative strength in the western part of the country and begin to lap the unfavorable tariff.
In the upper Midwest than the prior year period.
Multifamily core organic declined by 2% largely due to timing of some large projects impacted by the shutdowns.
Turning to our financial flexibility on page eight a key factor driving our value creation in recent years has been our strong cash generation.
During the first half from 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 guidance and increased vigilance around work.
Were key drivers in our years they perform.
On a trailing 12 month basis operating cash flow continue to represent more than 90% of adjusted EBITDA.
It's just had a clear impact on net leverage which improved by about half a turn versus prior year to 2.3 times, representing its lowest level since the 2015 program with acquisition.
Since our last call our liquidity improved by an additional $200 million to $1.2 billion would be into the quarter, reflecting our positive free cash flow.
At the onset of the pandemic in April our primary objective was to preserve cash.
We better clarity around the market and without 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 we are focused on investing for the long term.
Turning to our outlook on slide nine.
First half results reflect our experience managing through cycles, and resilience of our business to generate growth.
Our first half results also demonstrate a positive overall homebuilding environment supported by positive tailwind and rising demand across our diverse national footprint, which continued into July.
Based on this backdrop, we are introducing 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 mid single digit range year over year for the third quarter.
New housing demand is proving to be resilient in nearly all localities, where we operate which provides the basis for our outlook.
I mean, all of the macro uncertainties, we are guiding to a balanced growth assumptions, while positioning our business take advantage of potential upside opportunities.
Keep in mind, our core organic growth outlook reflects our core sales.
And excludes the sales contribution from acquisitions as well as specific commodity inflation in the coming quarters.
Over the past few months, we've been managing the rapid commodity inflation incurring 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 below 24% range.
Compared to our normalized levels of over 26%, where commodities are more stable prices. This margin declines in temporary headwinds as we have demonstrated the path, we will see a quarter to a margin pressure during the inflationary period, along with increasing gross margin.
I know that we experienced a similar pressure on gross margins in mid 2018 when inflation spot.
That's the inflation subsided, we recovered that margin with above normal margins during the deflationary period.
Box at the beginning of 2018 through the second quarter 2020, our gross margin has averaged approximately 26% which is in line with our normalized level. It is consistent with how we manage our business through Cogs win.
Since 2018, we have generated nearly $1 billion are operating cash flow, we fully expect builds upon our cash generation through year end 2020.
We continue to expect our cash interest will be the $110 million to $115 million range for the full year 20 Twond.
With our growth projects under way again, we now expects capital expenditures to be into 100 $110 billion range for the full year.
Looking beyond 2020, the structural advantages of our business remain intact.
We deliver solutions and make our customers more productive and to pitch.
We have deeper more integrated relationships with our customers than ever before.
We are much more than a supplier commodity lumber we are highly valued partner to many very sophisticated builders delivering labor savings and just in time delivery of critical building materials, helping them maintain streamline card.
These higher margin value added offerings represent the largest portion of our business and the focus of our growth.
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 in cost or 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 in years to calm.
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 bucket bank, our builders firstsource team for their dedication to our company.
Customers in our communities.
Operator, we can now open up the call for keeping an eye.
Thank you.
Ladies and gentlemen, if you wish to ask a question at this time to signal by pressing star one I'm your telephone keypad. Please ensure the mute button on your telephone they switched off to allow your signals to reach our equipment and she's limit yourselves to two questions again that is star one thank you.
We cannot go to our first question that comes from Matthew Bouley of Barclays.
Good morning, everyone. Thanks for taking the question congrats on the results.
Start up with a question on the on the guide.
For Q3, as you're saying I guess core organic growth in the mid single digit range and.
And Peter that June was up low single digit.
And just any color I got them, how July organic it's trended and sort of.
What are the underlying housing start expectations that are.
With that are forming that God.
Yes, I'll start off by chart finish up there.
Performance in June.
I honestly not done yet, but looking like it will be right now seem range, maybe a little bit better.
We have talked earlier about the potential for an air pocket wondering what.
Copper you might look like.
Pent up demand.
From the from this timeframe when everything was pretty much shutdown.
Things have been.
I'm not telling you anything you could argue no surprises me resilience.
And we're very pleased with sort of overall sustainability the trend as things have come back.
And as you've heard as we've heard from Mandiant always around the country. There is a tremendous amount of optimism on there's real strength not homebuilding market. So vast that's really the.
Rationale that we're giving ourselves for that mid single digits core.
Gross number in that single family space, It's still a little bit open in terms of where it will land could be better.
It's always there's enough volatilities and coax land, where it could be worse, but we're feeling pretty good about on balance and the water rates.
Yeah, I'll just add you've seen the commentary from the builders in recent weeks very very positive.
Foot traffic.
Orders are up.
Just.
A little bit surprisingly it it's been so resilient and there's still seems to be a lot of tailwinds Rachel low I.
I think with everything going on in our country right now people desire more space.
In many cases can use to becoming less of the factor for people, which allows them to.
The new further from downtime downtown areas.
I think there's probably a lot of people of aging parents looking to create space for them.
As opposed to.
Looking to put them in long long term care facilities. So.
It Theres just a lot of Tailwinds right now people I've traveled as much audits given more thought to their living condition.
With the with the diet dynamics that are going on right now so.
As Peter said, you know with any guide or Fourteenish, there's potential for upside or downside, we always try to be pretty measured about our guidance weve ourselves a little wiggle room and this quarter you no different than.
But we're feeling really good about.
How things are shaping up right now.
Perfect. Thank you for that and then.
On the gross margin side.
Clearly see the progress over the years you know the Q3 guide is better than where margins bottoms. You know in the second quarter of 2018, and you mentioned that this one to two quarter lag back to normalization and so my question is what 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 at you know it is what it is lumber and slating.
Let's not get to ahead of ourselves on their system really just asking about how we should think about that takes of normalization.
Yes.
Well I'll start out Peter can add if you'd like but you know we we've seen this movie before right 2018 was the most recent example.
We get compressed for a period of time, and then what 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 with the Tailwinds, we're seeing in housing and the higher prices once we get our our pricing.
No we could set up to be some really nice quarter. It's just like we saw two years ago.
Okay, and we're certainly pushing ourselves to get better and better about managing price in doing so.
Currently as possible quite ready to sign up for for faster than our one two quarters I think thats, probably the right way to think about it for now, but certainly internally that's our goal for ourselves.
Okay. Thank you both.
Okay.
Our next question comes from Mike Bow of RBC capital markets.
Hi, Thanks for taking my questions Echo the.
How much are 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 some of the.
Tacked on the optics around growth there were were potentially mix related but I think gifts. If we if we look at that.
They were not off on acquisition contribution I think the.
Volume and manufactured products may have been down high single digits dish.
Which would affect that.
Rest of the business. So it just wanted to clarify that and then if you could provide some additional color on on those.
Mix impacts, but also just then on the relative growth trends.
And over the course of June and July and manufactured products.
Yeah absolutely.
You heard it right.
Nature of the decline.
Fashion products or is that.
Single digit range.
So we didnt see a decline.
They do some reason for that and we got into the numbers was around.
So.
There was a.
Higher.
<unk> expenses higher mix.
Fashion product in the markets, where we got good partners so was.
Working it is I think representative of opportunity lies in front of us out those markets were covered but.
Area like.
North Western Pacific Northwest, Florida for example.
For products businesses.
As for Us.
Great partnerships.
Proposition.
Higher percent much higher.
Mark so that when we were hurt in those markets disproportionately.
What shows up in networking still feel very good about the business is not not structural issue. It continues to grow.
Other parts of the country continues to be justice itself or so.
In every market, where we sell it versus core.
Overall.
Yeah, and I'll just add to agree with what Peter said part of that was geographical we were shut down in areas, where we have a very strong.
Permanent presence.
But you've also got to consider win win builders hit the brakes right homes that were already under construction, we kept shipping too.
The new home started dropped in the first thing we lose there's the component business right. So that's part of it as well as 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 fresh orders coming in we dropped over 50% our orders coming into the trust plants now are back to a level equivalent to where they were at the beginning of March before the end damage and a solid double digit higher than where they were a year ago. So.
I have zero concerns about art gun business.
But that's great to hear thanks for that color. My second question is really around the reinstated long term guidance and it's it's nice to see that reinstated and the other hand.
Hi are under admission there's still some uncertainty there so the questions really.
Look at the secure results Threeq guide it seems like you're tracking towards like a 525 to 550 million in EBITDA.
This year, that's still takes 40% plus growth over the next two years to get that to get that long term.
EBITDA goal of 750, so because your high level framework changed at all around.
Kind of based business.
What's kind of market growth once internal initiatives and <unk> component would potentially be M&A included in that.
First of all its exciting.
Hi.
In parts of it and no fundamental structure, what we talked about earlier this year is not.
We are.
When we go back to I know you when I talk about this in the past we're going through in looking at the variety of models that we pulled together to look at this business over time.
Certainly have a number of different.
Yes.
Yes, we can.
Shifting to what I would just to sort of core underlying mark right course, we're going to be heavily influenced by single family of course works.
Good morning.
Corridor.
Are.
You also have the ability to really control arm space a lot ways.
Investments that we're making the core business.
Strategy to execute on has been very effective.
Now that are being even below our targeted.
Leverage ratio would have tremendous.
Tremendous opportunity to go after what we believed to be are very very healthy pipeline.
Okay.
And operational excellence continues to.
We continue to make progress we continue to see an operations knows how to launch.
Get better and better results each quarter, so really we're while we were I.
I think prudently conservative by pulling the 22.
Last quarter as we run our numbers looked at where we are not where we can be what things are remarks were coming together for us.
Very good about 22.
You know got seven could be area is absolutely attainable and we are we have line of sight, how we're going to get there.
I mentioned, a dozen everything doesn't have to work together perfectly for us.
We've got to continue working and doing what works.
That's that's great. Thank you.
Thank you.
Our next question comes from Keith Hughes of Suntrust.
Keith perhaps your I'm music.
Yes can you hear me no sorry, I had to conduct yes. Please go ahead.
Okay, sorry 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 without major you'd look to do acquisitions and would you at this point was like will be open to something larger than I'm talking.
Yeah.
We're always open to that.
You know.
And many in many ways one larger than can be easier thing than 20, or 30 small ones and we've we've seen both clearly.
Yes, that's certainly always something we're open to.
You know at this point in the cycle that we do have a lot of liquidity.
<unk>.
Using more equity at this point in the cycle would be prudent but sure that's something we've always been opened.
Yeah.
Second question.
Okay.
I'm certain regions.
You sort of broke up there for a second keep it sounds like you were asking what regions might we think about tuck ins for <unk>.
Yeah, that's correct.
Well you know you can look at the map and see where there's there's holes in our footprint. So part of our motivation in 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 the combination of those two factors.
You know in general we're Underpenetrated in my view, the western part of the country versus versus the east but the.
As I said value I just missed is critical in London.
Okay.
Thank you.
Our next question comes from Trey Grooms of Stephens, Inc.
Hey, good morning.
Well were direct though.
So geographically I'm just kind of wondering.
Definitely held in better clearly.
During the earlier days of the pandemic there was no things very pretty widely as you mentioned.
And you know your value added products. It sounds like when you do see some geographic changes in demand.
I think that impact there.
Just given your exposure.
So I guess that my question is can you touch on you know kind of the geographic areas now that things are starting to kinda.
Move again.
Where you're seeing a relative strength or weakness now and geographically and what that means for that value added mix.
Sure.
Yeah. So.
Just to recap, where we stand in the script right the northeast obviously.
Got to be upper Midwest, Michigan area in particular, the Pacific Northwest and then later on as we got passed the initial impact we also saw slow down in Florida.
Those were all I would say the areas that were highlighted.
Truly.
Saw impact for us as a company.
When it comes to recovery I would say Pacific northwest, it's bounced back very quickly.
I would say, Michigan that upper Midwest area definitely stabilize and starting to.
Mark back North East was still suffering I mean, there's no there's no way around it and continue to have very strict controls I think the population in general is suffered more.
And has stayed slower so that recovery is underway, but certainly not back to normal levels up there yet.
And Florida, you know I think theres still perhaps in the middle of some of the uncertainty given their exposure tourism they certainly seen.
A lot of concern a lot of declines were their core businesses and so there's still a gap there on the road back, but havent been partner could go.
Looking at the relative exposure in those areas for.
We are manufactured products.
It is important to us.
But so is the northeast there, there's a quarter or is it real good strength there for us so it'll be of recovery that you'll see and we're confident that sort of growth overtime the manufactured products.
But those couple of markets will will be a more of a progression back to normal Rob.
[laughter].
But I think it's important to note that if you look at the overall that brought value added products. If you exclude those hard at regions.
We were up low single digits. So the rest of the country is still even with the.
Suppressed Starbucks numbers and some of the concerns still growing as we would expect.
Overtime.
Got it.
All right. Thanks for color appreciate it and I.
I guess as a follow up so.
On the SDMA line.
Was lower as of course in a sales and then what we would have thought, especially given that strong top line you guys put up and just everything that we've we've.
Got it understand some of the Tailwinds.
Bake, but with that said I know you guys have a culture of focusing on lower cost in running the tax yet. So I guess is there any levers that you guys had pulled up and asked you get a.
You know three this pandemic and over the last several months that that you could continue to see well continue to benefit from in the coming quarters.
Yeah, I'm glad you highlighted that training.
I would say this is really just a testament to the discipline in our teams.
Each day.
We went out with some messaging service reminders and some playbooks folks.
When we saw.
Concerning the shutdowns.
Just coaching people on how to manage.
Right.
For the team just did a great job rightsizing the business when it was appropriate you know, making sure that we were kind of cost discipline.
And obviously some of the thing we did to give ourselves a little extra.
Thats ability more broadly as a company we talked about bad.
Delaying wages salary cuts for exactly goods.
<unk> delaying wage increases in salary cuts for executives.
Those are things that we bought where necessary just to give ourselves out of flexibility clearly we did very very well.
As we went through that sort of pause period.
With that recovery that we see.
Weve reinstituted the merit increases.
Stuart all those costs that we made and the nature of the Reis diving into the business has been very specific locations. So we tried to retain the staffing making sure we weren't getting ourselves strategically our boutique impede our ability to win Meanwhile, undermined by being too aggressive.
Because we don't you.
Allowed ourselves to get fab in these markets there wasn't Tom that caught up.
So what you saw 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.
Third of that overall benefit and being community.
Now that one's bit more time to play out.
Question remains well whatever get back to normal where we ever travel like we used to.
No TBD, but certainly that we anticipate will come back to some degree over time.
Third was really the fuel expense and obviously, there's been some volatility in constant fuel so that will normalize to wherever it's going to normalize to overtime.
Right away on that one either but we didn't go back through this organization make any real structural changes are massive because our focus was on making sure we were responding and be ready to move forward than at this point it seems that played out pretty well.
Great. Thanks, a lot for taking my questions and.
That's a lot.
Thanks to.
Our next question comes from seldom classic of Deutsche Bank.
Hey, good morning points on can you remind us what your longer term guidance assumes in terms of starts I understand there.
You mentioned, there remember I didn't get there, but just from a high level can you give us for more detail around what type of support you would need from the macro.
Yeah. So when we first brought out that 750 billion dollar EBITDA target you referred to before we were pretty explicit about 21.1 million single family starts number on there.
However earlier this year coming back so we have enough levers, where we think we can get.
To that number even with just a healthy single family starts environment doesn't have to guess about million one number.
So when we think about it is really those opportunities to control our own they will be very very impactful and perhaps.
As much guys. What we anticipate continued recovery in starts to me.
Talk about obviously the M&A opportunities.
Committed.
<unk> range, we've got quite a bit of room, there, where we have opportunities to grow our value add.
[noise] Greenfield capacity work.
Certainly that's got to strong growth opportunity for us.
Ray operational excellence initiatives, we've talked about right whether it be.
Getting better and more discipline in pricing getting better and.
More effective in our distribution and logistics management.
Or even just.
Opportunities to reduce cost and become more efficient in the back office.
There are certainly ways that can give us an asset that the.
We're not 5% depend on dependent on that single family starts.
Okay. So on the M&A side are you seeing that means identified more opportunities are you seeing an increase won't answer valuations have come down what's really driving the sorting increased optimism there.
Well the pipeline this fall.
It's been pretty full.
For the last few quarters.
Obviously, there was a bit of a pause in.
And what type of diligence award we were doing a when things were shut down, but we ramped that up there's just a lot of good businesses out there right now when we clearly have a strong balance sheet to go after him and so that's why don't we know we've got we are a little more optimistic now we've got a more optimistic tone on what we think with will be.
Able to do and becoming yourself from an acquisition standpoint.
Anyway, you give us expand a little bolt on on what's driving that optimism.
So I guess I'll give you an example, without naming any names where when you are our internal model for valuations.
Using in finding over the years certainly requires us to.
Understand our weighted average common capital and make sure the returns diversity or making sense risk.
And what were what we're experiencing right now is that we're consistently bringing.
Seeing deals brought the Pos firearm regional management teams look at it really nice businesses that we can be a great fit for us around the country.
That's right. 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 that means target.
There are great opportunities.
The valuations makes sense the returns are great.
Teams that together, we think that we will continue sort of accumulate to competitive advantages, we bring together sorted out model product portfolio.
You know capabilities to be brain with international footprint.
Introduce value add or expanding value add markets that I was saying the accumulation of those factors is where that comes from the list and the way that list just.
Being sort of embedded through our process as we continue to accelerate our our M&A focus.
We are raising up.
Got it okay. That's helpful. Appreciate it.
Sure.
Our next question comes from Jay Mccanless of Wedbush.
Good morning, everyone Jake.
Hey, good morning, sorry got a two part question on lumber and then and then one other follow up.
I guess could you talk about what benefit you're sitting on the topline from from commodity inflation, thus far on them for.
And then also maybe talk about when are we thinking about your input cost for lumber, what's the spread between you know.
For screaming lumber.
[music].
Yeah.
So.
Okay start.
Uh huh.
I would tell you that our.
Q2 results the combines a slight tailwind you guys just.
Keep in mind that dynamics, you saw pretty good fall at the beginning.
The quarter in prices and then a pretty good run up towards so.
And that sort of averaged out.
And that really started to accumulated you've got you've got it.
That's one Rodrigo and starting to.
Hey through today.
Now the there's less of our exposure and we talk about commodities for you right around 40%.
Our sales in prior quarters, obviously that will increase a bit systems increased prices start to change the mix in our business, but you look at 40% of our overall sales being commodity exposed and then generally 70 30 mix between.
Lumber and panel.
You know again anytime you got.
A highly commoditized component of your business, that's the most pressure probably in that space.
Commoditized, it's probably not only be slice.
Now that's a.
Sort of broad brush response.
Got it.
So.
And then my follow up question just wondering though.
Yes. It did you guys quantify how much in one time savings you saw from some of the cost actions during two too.
Probably going to come back in Threeq.
Yes.
Well most of the $14 million.
Second quarter I would say were were based on actions that are going to come back over time.
Say media birds that will come back right away based on things people already done.
You know that burden attributable to the TV will take some time to the phase backing up not likely to bounce back in the third quarter, Oh, Darren eat away about it as being struck with itself in certain markets and then fuel.
I think you could probably estimate that better than I can.
That goes with the major components.
Hey, Jay I, just wanted to add a little.
I'll have to your commodity question.
When we look at Q3, it's you know kind of difficult to estimate the right. Now are our best guess is Q3 sales will be positively impacted due to inflation somewhere between five and 7%.
And then of course will probably have another 2% or so year over year growth due to acquisition. So I just wanted to make sure you had those components.
Thank you Chad and like you guys for taking my questions.
Thank you.
Our next question comes from quarter to younger of C.D.A. Davidson.
Good morning, everyone and appreciate you taking my questions.
Turning to start off.
Good morning on the gross margin front you guys came into the year, you know 26% to 26.5%.
Normalized and I think lumber was maybe 400 bucks per thousand.
I know, obviously, it's a moving target, but if we were to think about just structurally higher.
Lumber price and maybe $500 what type of impact with that have on the normalized gross margin outlook, just with commodities naturally being.
Larger percentage of sales.
Yeah, no great question.
As you know we model battling quite a bit it's it's about half the three quarters several points based on current spot.
It's been a meaningful move this year, there's no question watch to see how long it lasts and and how it plays out but it's a its certainly a unimportant changing one that we're we welcome we saw that sticks around the style.
Well it wasn't too bad debt on the other side 2018, either so.
One bad at all [laughter].
And my second one is 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 and related lead you know could you talk about what product categories or what.
You know previous shortfalls these tools really address.
Sure.
Yeah, I guess I just want to reiterate the fact that this this pricing effort, we're making is really just around.
Off will be organized b they should internally.
I was describing areas where.
It works what to close in gas, it's those moments when a price change will come through either good or bad from a vendor and it's not being built or all the way through the system to the quotations for giving our customers.
And.
While while I'm sure the academics, Mike further socket.
Grease prices, it's also decreasing prices, it's important as well because you get stay competitive and make sure you're winning business. We Warner sales people do happen best information. So they can compete.
We used in the marketplace and when you're slow.
You can put yourself in position to miss out in profitability in sales so that that's probably the biggest component.
You know being systematic always helps you don't want to put yourself in a position where you.
Taken an approach that somehow you know arms, Oh market or you know distorts the pricing so that systematic.
Approach, we think is absolutely beneficial.
You know, we as we look at it it's it's Ben.
I was a difficult process to adapt all the tools.
System architecture to the way that we want to approach it going forward.
Very very impressed with both our operations in our IP teams for what they've been doing to pull that together seems very good progress.
A couple more phases to come over the back half of this year.
The markets, where we've implemented so far been pretty manageable so until those like you've changed your time.
Fairly modest percentage of the overall company and seem to be pricing structure for the place.
So we do expect it to continue to accumulate for us over the next year.
We get some of those permanent changes to the I'd structure and allow us to accelerate the use of got more broadly.
And I'll just add you know, even just 50 basis points of margin improvement list that's real money.
And you know part of it is to some degree breaking old habits.
Well, we sold instead of 24% margins well.
Why can't be 24, and a hedge book in the market there so given the more tools understand that.
And then also knowing you know bucketing your customers and knowing which customers are real expensive dessert and making sure you're getting proper margin and net return on those customers. So a lot of this just given him the tools in the information to make those decisions much more quickly.
Right right makes more sense alright, Thank you guys I'll turn it over.
Thank you Kurt.
Our next question comes from Ryan Gilbert of BT <unk>.
Hey, Thanks, guys first question on that third quarter Guy.
So I guess looking back to party is moving commodity inflation, we've seen that flesh on the gross margin operating margin.
Typically been flat or even improved on a year basis, but then just looking at that I just trying to.
Triangulates operating margins and the adjusted EBITDA and gross margin guide it looks like you're expecting some no some pretty meaningful operating margin compression of the third quarter.
I just wondered why you why you think you could be.
Flat or higher.
320 on an operating margin basis.
Yeah. It does I think the probably the most right to answer to your question is the philosophy, if the change in commodities.
You know that doesn't nature of those short term fixed price contracts, certainly put us to a certain amount of exposure for window of time and these are unprecedented increases you're up 23.2 month.
That's very very difficult thing to compensate for so we're just recognizing that in the third border.
Your your point is right on there is some nice leverage that comes when the value of those commodities gets higher and bottom line. So it's no question I'll positive one.
Absolutely expect to flow through our you know over time, but.
Yeah, I know, we could be look into the you know about 300 basis points decline in gross margin Q3. This year over last year, that's [laughter], it's pretty hard to overcome.
From an operating margin standpoint, but as Peter said.
We usually more than made up in the following quarters.
Right.
Okay, and then second question.
On a structural components definitely good to hear that you're up.
Double digits on that you're going to basis or excessive I'm wondering just how the conversations with builders have been progressing in the third quarter, given that which Jay that backlogs are pretty full cycle times, extending I'm wondering if you're seeing more buildings coming to you interested in using components to get their cycle times back up.
Yeah for sure I mean, any time labor is tight did you mentioned they've got all the sudden this surge in 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's just plays right into our our strategy on the components out of the business. So that's why I said earlier I have no concerns about open bowling business very optimistic about.
What the future old for that.
Okay got it thanks, and just lastly, if I could just wonder if you could just expand a little bit of what's going on in Florida.
Most of that commentary that's embedded in Culberson said that.
Demands pretty positive done so it's going to change that competitive landscape for anything, particularly more call out other than what you get anywhere.
I guess our view.
Well I answered as there were certain important customers, who acted more aggressively last aggressively during the downturn than others.
And the nature of some of those decisions certainly gave us some pause there.
Back in certain markets are particularly impacted.
I think game, where some of them work tourism impacted markets all of those markets I'm, absolutely come back to a degree.
There is a recovery underway I don't see there was a long term issue.
I think it there's a bit of progression back to normal that is required.
Full health there.
But we have very strong footprint very good businesses are folks are doing a great job down there certainly not a concern about the operations just a matter of a matter of how quickly it ramps back to where you would consider to be.
Well again.
Okay got it thank you very much.
Our next question comes from a Stephen Ramsey of Thompson Research group.
Good morning.
A question on Greenfield openings, you know how many be done year to date.
Do you have a plans for more this year or or is it still more of a focus on M&A.
Yeah.
Yeah, so year to date.
I think we did.
Just the one we had we had one did open sort of provided your and timelines are somewhere one or two we have.
Couple of war that are being built out.
As far as timing is when they will opens were probably one to two more that will fall into this year again kind of not a yearend timeline great time, it kind of get that worked on again I'm starting to ramp up because it was wet season for us generally but we.
We do continue to focus on looking for areas for Greenfield facilities.
You see that going forward.
Okay, and then on repair remodel ER volumes.
That has some unique geographic exposure that drives that a little differently than the broader market, but on an order trends have been.
More resilient, even that didnt see quite to get new single family Sol maybe just shared this specific drivers for you guys in the quarter and if you have any visibility over.
Over Q3 into Q4.
Sure.
Yes.
So one thing I'll I'll, let you know I'm sure you already know this but just for the other listeners in our RMR and other include just kind of commercial business as well. So I can tell you that we have sort of a tale of utility cities, there a bit where core aren't our retail under model business is far stronger.
More than doubled down 4% rate and then the commercial businesses, where we've seen some downturn and that's definitely offset so where we've got retail footprint.
Yeah, Southern California degree example, business is doing wonderfully really performing well ready in responding to the homeowner needs and those markets are doing very very well.
As mentioned in the script the Midwest market is sourced leveled out you seem to get a headwind there.
In past years, and it's been healthier.
Certainly also seeing that tailwind from the.
Overall trends nationally the our space.
Even even alaska's aren't our market is doing well.
[laughter] part of our business, where we do have projects again, that's got pretty solid Alaska exposure that.
Some of those projects have been either delayed or or.
Cost for whatever reason.
Great. Thanks for the color.
<unk>.
<unk>.
Our next question comes from Rueben Garner off the benchmark company.
Thank you good morning, everybody. Thanks for taking my questions.
<unk>.
Most someone that answers I just have one quick one then if I if I missed it sorry, we had some technical difficulties but.
Oh, the lighting most of the cycle the only them the main.
Driver of a slower recoveries than labor availability, having and have you noticed or any changes on the labor front and then I guess in a related way have you have you had any difficulty getting any specific.
Products do you see you know commodity availability or any any other building products.
Availability and issue.
Limiting growth for our limiting an acceleration in growth in the coming.
Quarters, if the demand is there.
Yeah, good questions hasn't really noticed any changes in labor availability.
Although I would not be surprised with the the recent surge in new home orders that are they get a little tighter and they extend cycle times out a little more that we talked about that a little bit earlier on the call.
From a product availability standpoint.
You know most most folks like us we're running pretty lean.
As as the pandemic hitting we've stayed lean prices have run and that kind of.
Incentivized to you to.
We're mainly because you you know you don't want to jump back in wouldn't when prices are running if you. If you don't have too. So that you know there has been.
Some spotty supply issues the mills cut back on their production when the demand pandemic hit and kind of got us in a situation. We are right now where demand is strong and supplies limited, but you know nothing that I would say is disruptive. It's just something would happen to keep a close are right 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 nothing I would call significant at this point.
Great. Thanks, again, congrats on the quarter and good luck now to get into everything.
Thank you [noise].
Thank you, ladies and gentlemen at this time I would like to turn call over to Mr. CRO 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 the Peter a bit. Thank you.
Ladies and gentlemen back to today's conference call. Thank you for your participation you may now disconnect.
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