Q2 2022 Builders FirstSource Inc Earnings Call
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Good day and welcome to the builders <unk> first source second quarter 2022 earnings Conference call. Today's call is scheduled to last about one hour, including remarks by the management and the question and answer session in order to ask a question. Please press the star key followed by the number one.
On your Touchtone phone at any time during the call.
Now I'd like to turn the call over to Mr. Michael Neese.
Senior Vice President Investor Relations for builders first source. Please go ahead Sir.
Thank you Katie good morning, and welcome to our second quarter of 2022 earnings call.
With me on the call are James Liberman, our CEO and Pete.
Jackson our CFO .
Today, We will review our record second quarter results for 2022.
The second quarter press release, and Investor presentation for today's call are available on our website at investors <unk> beyond.
Dot com.
We will refer to several slides from the investor presentation during our call.
The results discussed today include GAAP and non-GAAP results adjusted for certain items.
As a reminder, our adjusted EPS calculation excludes amortization of intangibles.
We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures.
You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures, where applicable and a discussion of why we believe that could be useful to investors in our earnings press release, SEC filings and presentations.
Our remarks in the press release presentation and on this call contain forward looking and cautionary statements within the meaning of the private Securities Litigation Reform Act and projections of future results.
Please review the forward looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward looking statements and projections.
I will turn the call over to date.
Thanks, Mike Good morning, everyone and thanks for joining our call.
We ended the first half of the year on strong footing delivering robust results during the first quarter with that positive momentum continuing throughout the second quarter in which we achieved sales growth of 24%.
And adjusted EBITDA growth of 80%.
In the face of difficult comps and a challenging operating environment.
These outstanding achievements are a direct result of having strong alignment around a clear strategy and the focused execution against that strategy.
Driven by the hard work and dedication of our approximately 30000 team members and their commitment to provide outstanding service to our customers.
On slide three our strategic priorities continue to be.
Organically grow our value added products and services.
Drive operational excellence.
Continue to build our high performing culture.
And pursue strategic tuck in acquisitions.
On slide four we outlined how we continued to execute against our strategic priorities this quarter.
Typically.
We delivered record results in the quarter through expanded capacity, increasing value added product sales and increasing productivity.
We continued to leverage our BFS <unk> operating system with a focus on cost containment.
Drive strong P&L leverage and bottom line performance.
We maintained our industry leadership by successfully navigating a challenging industry and macroeconomic environment.
We strategically deploy capital towards accretive inorganic growth opportunities as highlighted by our most recent acquisition Hong Kong.
Through July we have repurchased approximately $1 billion of the $2 billion share repurchase authorization our board approved in May.
Turning to slide five.
We continue to believe it is important to assess our results using a base business methodology to better appreciate the underlying strength and profitability of our company by.
By normalizing commodity volatility.
As a reminder, our base business definition assumes static margins and commodity prices at $400 per thousand board feet.
We are maintaining our full year guidance on our base business EBITDA of $2 2 billion.
As Peter will discuss in a moment.
Yes.
Turning to slide six as.
As we outlined in our Investor Day last December I want to reaffirm our expected performance by year end 2025, given our assumption of average single family starts growth in the low single digits through that time.
We expect our base business delivered a 10% top line CAGR and a 15% adjusted EBITDA.
Importantly, this represents an average 50 basis points per year expansion in adjusted EBITDA margin for a total of 200 basis points of improvement by 2025, when compared to 2021.
And as we deliver this performance, we expect to have between seven and $10 billion of capital to deploy through 2025.
That includes money for this year's planned capital investments in innovation and organic growth.
Along with potential additional M&A and share repurchases.
We have already deployed a total of $2 $8 billion of capital since we gave this guidance last December .
And in the last 12 months, we have repurchased 25% of our shares outstanding.
Looking at our record second quarter results on slide seven in more detail.
We delivered strong core organic growth of 12%.
Our single family core organic growth was nearly 16% again exceeding a single family starts decline of approximately three 4%.
Tough comps against 2021 results impacted year over year growth in our multifamily and R&R segments.
Leaving our year over year growth essentially flat.
Organic sales grew 12, 2% while value added organic sales grew by 32%.
Compared to the prior year.
This highlights once again, the strength of our strategy and that our team continues to execute it very well.
Overall, we delivered record sales of nearly $7 billion in the second quarter and generated $1 $5 billion of adjusted EBITDA with a record margin of 21, 8%.
These results were driven by solid demand for housing across our markets ongoing productivity initiatives and pricing discipline, and an improving but still supply constrained environment.
As we turn to M&A on slide eight.
We remain focused on executing tuck in M&A that delivers a high return.
Over the past year and a half we completed 10 acquisitions.
One $6 billion of capital.
Aimed at building out our value added customer offerings investing in our digital transformation and further scaling our distribution network.
In July we acquired Hong Kong.
Lumber and hardware supplier in Flagstaff, Arizona and are excited to welcome. These new team members to the builders first source family.
<unk> had net sales of approximately $44 million in 2021.
This acquisition further demonstrates the fourth pillar of our strategy M&A.
Building upon the strong reputation and presence of tuck in targets, while leveraging our BFS one team operating system to swiftly integrate these new businesses.
We have spent approximately $230 million on M&A. So far this year and we expect to invest at least $500 million for the full year of 2022.
We remain committed to allocating capital in a disciplined manner to drive long term value creation for our shareholders.
Now, let's shift gears and cover our digital strategy on slide nine.
Our momentum on our digital transformation of the homebuilding industry is accelerating.
Foundational initiatives, such as standardizing our house plant intake and bid process continue to progress well.
We completed agreements with two new customers for our Configurable visualization tool collectively creative homes of Minnesota, and snap <unk> of California complete over 300 starts annually.
And we now have customers responsible for more than 5000 starts using paradigm digital effort.
We recently hit an important milestone in our technology development by successfully integrating the material take off structural design and visualization models into one process.
This means when selections are mega DNA, what specific model.
Such as choosing a siding type and color or expanding from a two to a three car garage is reflected in a material list in real time.
Pricing of the base house and options can be made available in the visualization experience and reflected in the material list.
Our three.
Dimensional models also provides a basis for offering building information modeling or bim services to our customers.
Showing them to gain project efficiencies by resolving construction conflicts in the digital world instead of at the job site.
This important capability strikes at the heart of the efficiency gains we believe our platform will bring to the homebuilding industry.
Also we have ongoing <unk> pilots with one large national builder and to custom builders.
Our pilot with frontline building company in South Carolina as highlighted on their company website and.
And we will help you understand how our technologies and services are helping homebuilders today.
Turning to productivity.
We delivered $40 million in savings in the second quarter, and we continue to expect to exceed $100 million in savings for the full year 2022 by driving improvement projects and leveraging our BFS one team operating system.
Over the long term, we are targeting 3% to 5% of annual productivity improvement as our teams work together to leverage best practices and technology, allowing us to become faster and more efficient in serving our customers.
We are accelerating our effort in this important area to ensure we not only hit our financial targets, but to also make sure our industry leading platform is as efficient as possible.
Increasingly we are being asked what's different about BFS today versus 15 years ago during the last housing downturn.
On slide 10, we would like to point out that the company has seen a dramatic increase in scale and share.
In BFS is now more than 12 times larger than 60 times more profitable than it was during the last downturn.
We are a leaner more efficient consolidated company.
This increased scale has enabled the company to remove more than $400 million of annual run rate cost through several large combinations, including.
The integrations are pro build and stock building supply.
As well as our merger with BMC.
We are operating as a consolidated platform not as a decentralized organization.
Providing better visibility alignment and greater efficiency than other players in our space.
We've improved processes and reduce costs to more efficiently serve our distribution network of more than 560 locations.
We optimized our footprint by closing 120 locations and Repurposing numerous other facilities.
Since 2006, we've increased our value added components and millwork facilities to over 200, that's nearly six times.
We have grown our manufacturing capabilities as we have invested in high speed door lines Trust automation, and robotics, which have improved our variable cost to serve and reduced our dependency on skilled labor.
A good example of this would be our recent announcement of our two year partnership with household design on a development and recent startup of our first fully robotic for trusted manufacturing line at our Billerica, Georgia facilities.
We have also contracted for an additional eight fully robotic lines, including for roof truss lines.
We have improved our expense structure.
Making approximately 70% of our SG&A variable.
We have leveraged the size and scale of our business through strategic direct and indirect spend enabling BFS to more efficiently serve our customers.
And we have dramatically improved our cash generation capital structure and leverage providing us with significant financial flexibility.
While we have seen strong demand through July the weak near term results. We fully recognize the current industry dynamics that are beginning to play out.
We've heard from our customers that demand is slowing due to higher mortgage rates and overall affordability concerns.
We remain confident that no matter what market conditions, we face we will remain nimble and balanced any short term dislocation.
Positioning BFS for long term success and accelerating our market leadership.
Turning to slide 11.
In the scenario of a highly challenged market where housing starts are down more than 20%.
We have several levers to pull to drive outperformance, including.
Effectively managing costs through our variable expense structure to flex expenses with demand.
Optimizing capacity and further streamlining our footprint.
Reducing discretionary spend.
Celebrating productivity projects.
Taking appropriate head count actions.
And moderating capital expenditures.
Our industry, leading platform led by our strong and experienced team is generating exceptional results, which we believe positions us well for any market environment.
Anchored by the strength of our balance sheet with no debt maturities until 2030.
We're committed to investing to capture growth organically and through tuck in M&A.
Although there will certainly be some challenges over the near term we remain very optimistic on the prospects for our industry over the long term.
I am highly confident in our ability to outperform the market in any scenario.
And given our bulletproof balance sheet expect us to lean in Opportunistically on M&A and a more challenged market.
So to sum up we will continue to execute our strategy.
Gain share and deliver value to our shareholders in any environment.
Our people are the building blocks of our company and our my inspiration that come to work every day to continue the evolution and growth of our World Class Company.
I want to recognize Brent Goodwin and exceptional team member.
For the past four years has worked as an inventory control analyst that are Raleigh, North Carolina yard and millwork facility.
Raleigh has been one of the strongest housing markets in the country for quite some time.
With more than 60 families moving there each day.
For the past several years rents contributions are a key reason why our Raleigh millwork facilities has become the go to supplier for homebuilders in this burgeoning market.
Beginning in late Q3, 2021 branch location began experiencing shortages across multiple millwork product categories.
Over the past two years rent has been relentless in developing creative solutions to help augment inventory keeping our stock levels consistent to ensure minimal delays for customers.
What makes <unk> work all the more impressive is the fact that he has been able to do it all while enduring first of demolition and then an expansion of its locations main storage warehouse.
I want to thank Brad for his many contributions in helping keeping we're always builders on track amid tight supply constraints and strong homebuyer demand.
We are fortunate to have print on our team.
And I again want to thank all of our team members for their continued tremendous work and focus and satisfying the needs of our customers.
I'll now turn the call over to Peter to discuss our financial results for the second quarter.
Thank you, Dave and good morning, everyone.
We are excited to continue our exceptional track record of financial performance.
We navigated through a complex supply demand environment to produce record second quarter net sales gross margin net income and adjusted EBITDA.
I am also pleased to report that we have again demonstrated our ability to deliver strong cash flow results by generating approximately $900 million.
Free cash flow this quarter.
Our accomplishments have come through disciplined operational management and solid execution of our strategic priorities.
At the same time, we further strengthened our balance sheet by extending debt maturities and returned approximately $1 billion to shareholders through buybacks.
I will cover three topics with you this morning.
First I'll review, our Q2 results.
Second I'll update you on our capital deployment efforts and finally I will touch on our updated guidance for full year 2022.
Let's begin with our Q2 performance on slides 12 and 13.
We had net sales of $6 9 billion for the quarter, which increased approximately 24% compared to the prior year period.
Core organic sales into value added products category grew by 32% highlighting our work to meet the demand across our customer channels.
Although we continue to face supply chain constraints in the quarter. We are pleased to report that we are seeing signs of those constraints loosening and lead times starting to return to normal.
Gross profit was $2 $4 billion or 52% increase compared to the prior year quarter.
The gross margin increased 640 basis points to 34, 8%.
Primarily driven by increased sales in our value added product categories, and disciplined pricing and a volatile supply constrained marketplace.
SG&A increased 15, 9% to $1 billion, driven primarily by four items.
Acquisitions represented over 40% of the increase.
Incentive compensation represented nearly 40% of the increase due to higher net sales and profitability.
Investments in strategic initiatives such as.
Productivity and our digital strategy represented another 10% of the increase in fuel related expenses contributed 10% of the increase in overall SG&A.
Adjusting for commodity inflation expenses were 40 basis points better than the prior year, even after funding our strategic investments and absorbing inflation and several P&L categories.
As a percentage of net sales total SG&A decreased by 110 basis points to 15, 1%.
Clearly our team understands the importance of controlling expenses and has been doing an excellent job.
Adjusted EBITDA increased 80% to one 5 billion, primarily driven by core organic growth commodity inflation and acquisitions.
Adjusted EBITDA margin improved to 21, 8%, which increased 680 basis points compared to the prior year period.
Adjusted net income was $1 1 billion or.
Or $6 26 of adjusted earnings per diluted share compared to adjusted net income of $574 million.
We're $2 76 of adjusted earnings per diluted share in the prior year period.
The 86, 9% increase in adjusted net income was primarily driven by the increase in net sales and gross margin, partially offset by higher income taxes and the SG&A expense.
Now, let's turn to cash flow on slide 14.
Our second quarter cash provided by operating activities was $947 million.
And cash used in investing activities was $258 million.
We generated free cash flow of approximately $900 million.
Primarily driven by core organic growth in sales and commodity inflation.
Moving to capital deployment this.
This year, we have spent approximately $230 million on our M&A transactions, including our most recent purchase of Hong Kong in July .
In the second quarter, we repurchased 16 9 million shares for $991 million.
An average stock price of $58 72.
In addition, we've repurchased approximately $4 4 million shares in July for $270 million at an average stock price of $61 18.
Year to date through July we have repurchased over one $5 billion of stock.
Since August of 2021, we have repurchased approximately 52 3 million shares of stock at an average price of $62 95 for.
For $3 3 billion.
This represents the repurchase of approximately 25% of our total shares outstanding since August of 2021.
We are committed to balanced capital deployment, and we will continue to look for favorable opportunities to repurchase shares considering market dynamics and our ongoing commitment to maximize long term value creation.
Our net debt to EBITDA ratio was approximately <unk> eight times, our LTM adjusted EBITDA.
Excluding our ABL, we have no long term debt maturities until 2030.
Our total liquidity was 1 billion.
Consisting of $838 million and net borrowing availability under the revolving credit facility at.
And $166 million of cash on hand.
We are pleased with our first half 'twenty two performance and I want to thank our entire team for their tremendous execution and dedicated efforts, despite the dynamic environment and tough year over year comparisons.
As we look to the back half of 2022, I would like to provide you with our full year outlook on slide 15.
Given inflation higher interest rates for mortgages and cancellation rates in the mid teens. We now expect full year single family starts across our geographies to be down mid single digits.
We expect multifamily starts to be up in the low double digits and orange are projected to be up in the low to mid single digits.
As a result, we are lowering our base business guide on net sales from 10% to 14% to 8% to 12% or $17 2 billion at the midpoint.
Our EBIT guide remains unchanged and we continue to expect growth of 18% to 22% or $2 2 billion at the midpoint.
That's our outperformance in the first half will be largely offset by market weakness as we move further into the back half of the view.
We will continue to provide you with a commodity price sensitivity chart in our investor presentation on slide 16 to allow you to incorporate your own commodity estimates into your models.
Capex guidance for the year is down to approximately $300 million in 2022 due to continued supply chain delays.
Building on the approximately $40 million of productivity savings achieved during the quarter, we expect to deliver over $100 million in total productivity savings. This year as we continue to drive improvements across our operations.
We now expect free cash flow at the midpoint to increase from $2 2 billion to $2 75 billion.
Reflecting higher than expected commodity prices and increased profitability.
Our projected free cash flow assumes average commodity prices in the range of 700 to $1000 for the full year as prices decelerate through year end.
In conclusion, our efficient operating platform has provided us with line of sight to nearly $3 billion in free cash flow.
Fortress balance sheet with no long term debt maturities until 2030 and over $1 billion of liquidity.
With that let me turn the call back to Dave for his closing remarks. Thanks Peter.
Our industry is clearly experiencing pockets of deceleration.
We've all seen mortgage rates rising single family starts forecast coming down in the back half of this year and cancellation rates increasing.
We are not deterred.
Our company is a much different one today than it was in 2007.
And we remain confident in our ability to effectively navigate the persistently unpredictable environment.
We are operating with our eyes wide open to any near term macro turbulence.
While keeping our eyes.
And sites on our long term goals, our core values and our operating principles as our guidepost.
PFS is a company with fundamental strengths and clear competitive advantages and we are prepared to win in any environment.
We remain leaders in a highly fragmented industry with the opportunity to be the acquirer of choice in the event of market dislocations, given our belief in the long term industry growth trends.
Our more than 550 560 facilities are in 47 of the top 50, msas with tremendous geographic customer and end market diversification.
We have an extremely strong balance sheet, and we will continue to execute our strategy and deliver strong free cash flows.
And finally.
This is a seasoned and highly experienced leadership team that has successfully navigated many prior cycles, and we will deliver compounded shareholder value over the long term.
Katy let's please open the call now for questions.
Thank you Sir at this time, if you would like to ask a question. Please press star one on your Touchtone phone now.
You may remove yourself from the queue at any time by pressing star to once again that is star one if you would like to ask a question.
We will pause for a moment to allow questions to queue.
Thank you our first question will come from Matthew Bouley with Barclays. Your line is now open.
Good morning, everyone. Thank you for taking the questions and congrats on the results in the quarter good morning, Dave.
So first question.
Just looking at the EBITDA sensitivities in the appendix you've done $2 5 billion in EBITDA year to date I don't know if depending on R&R realistic lumber assumption.
Sensitivity would suggest.
$1 billion or less of EBITDA in the second half. So my question is if that's the right way to think about our models here I know thats, a full year static assumptions.
Under if those are more sort of run rate expectations versus a hard guide on top of the first half performance, though.
Not to put words here mouth, but sort of how should we think about that sensitivity and sort of abuse in the second half EBITDA.
Okay, Matt that's a great question. The purpose our original intended lease of that sensitivity page in the back.
Really to give you a normalized environment right dials out any fluctuations in commodity prices.
Dialed out any fluctuations in margins outside of what we continue what we consider to be normal right. So anything more than normal margins be dialed out. So if you think about what's happened. This year. This has been anything but a normal year coolers clearly we've been substantially higher there've been a lot of displacements continuing through the market.
This year, we certainly performed much much better than normal in terms of our margins.
<unk> seen right, we've guided to 27% plus is our normal margins were substantially higher than that so I would use the sensitivity chart is just a way to.
Come up with deltas between various commodity.
Commodity price levels, but accounting for the fact that we're seeing pretty substantially different results in 2022.
As you come up with your model and your estimate on the total included demand.
Okay understood. Thank you for that Peter.
I guess second one just on sort of the gross margin again robust performance there in the quarter, but now we.
We've clearly seen that sort of market inflection and potentially loosening supply chain. So all these things that have.
Help.
Previously helped the gross margin.
So just trying to think about your kind of long term north of 27% Guide I guess.
My question is is the market is normalizing here coming down how should we think about the kind of pace of <unk>.
Gross margin normalization that a base business level.
We get into the second half.
Yes. Good question again, that's an important part of how we think about our business and how we forecast right. In addition to commodities starts certainly margins that are a critical component, it's going to take a while for margins to get back down to that normal level right. While we were pleased.
The supply chain is beginning to show signs of normalizing a bit its certainly not back to normal yet so while we do expect it to sort of slowly progress as the year progresses back towards normal.
I think we are.
We will be.
A little ways out into next year before that gets back to what I would consider to be anywhere near normal south to watch it to see when that could potentially be.
Great. Thanks, Steve Thanks, everybody.
Thanks, Matt.
Thank you. Our next question will come from Reuben Garner with benchmark Company. Your line is now open.
Thank you and good morning, everybody.
Good morning.
Maybe to start on just wanted to understand the base business.
Top line guide so I understand the outlook for single family It looks like it's come down about.
10 points, but theres only a two point reduction in the base business can you talk about that is that largely because of the backlog out there and working through that.
Before you really see any impact late in the late in the year to your volume or is it share gains.
Proved adoption in some of your value added products that kind of make you are letting you hold the line a little bit.
Yes, I think it's a combination of all of that Ruben.
You aptly pointed out the backlog strength is still there we're seeing that really across the board with our customers. We do expect through the course of the back half of the year that backlog to get worked off.
As we've said before it takes about a quarter or so until we start to see volume shipped relative to what's happening in the starts environment, but importantly, as you point out we've been taking share in the value added portions of the business for for a long time and we expect that that will continue so it's a combination really of those two things but <unk>.
And largely it's based on the starts decline that we expect to start seeing in the back half of the second half of the year.
Great and then my next question is I appreciate the color you guys gave on kind of downside.
Your fixed variable and the differences in the business versus previous.
Periods can you can you talk about what.
Your revenue gross margin and even EBITDA might look like next year in a scenario where starts fall.
Family starts fall 20, or 30% and go back to kind of where we were in 17 18, and 19, just kind of compare those those metrics to what you would have seen a few years ago.
Sure I'll start out at a higher level and then Peter can kind of fill in any color, but as you point out and we commented during the script.
We're not the same company clearly were 12 times larger 60 times more profitable, we've got a bulletproof balance sheet.
Over $2 5 billion of free cash flow and as you know in a slowing environment that free cash flow will accelerate as we unwind the working capital, but importantly, we've been talking for several quarters here about any.
Any demand shift or decline being short with certainly relative to what happened in those seven and two key reasons why first the demographic shift we've talked a lot about the millennials driving a lot of the starts over the past few years. We think they are driving about 30% of the housing starts and that demand is much stronger than it was say in 2000.
And secondly, and importantly over the last decade, plus we've had a huge under billing in this industry.
Demand is not going away, we have underserved the market somewhere between $2 6 million single family homes over the last 12 months to 15 years. So we think any of that recessionary environment power through that through the long term. So that's why we're very bullish on where the industry ends up over the long term.
Yes, and while Im not sure I buy into the downside range I certainly spent a lot of time with the team working on models and making sure we understand how our business performs.
In the event of a downturn that looks like that we do think there is a bit of a buffer from backlog.
So where we're going to continue to build out the homes that have been started and put under construction might go longer could go quicker, but thats certainly a component to think about as youre looking at whats going to happen through the rest of this year as.
As you look into the future, though <unk> got a couple of main components that I would highlight right. So youre looking at those variables.
Starts, which we would expect to follow along with right. We're going to move because we are in the main markets where starts occur we're going to move with the market our margins, which are very much driven by both our product mix and the competitiveness and availability of product in the market and then fund the lumber prices certainly influential when we try and outlines.
For you what that might go with that and what that might go to.
Obviously, a recession would impact all three of those variables and would really start us on that trend back towards our normalized margin level.
A quick hit like that something that moves very quickly might put us under the normalized margins for a short period of time, maybe a couple of points below that but we certainly think that the.
Reasonable range.
It's a question really around what the regression looks like how quickly it goes there and how resilient in some of these markets and some of these customers are but also keep in mind we've gotten.
More mature and done a lot of work to improve our business in terms of the synergies the productivity savings are consistently increasing mix towards value add there.
All things, we think we're going to be able to leverage quite well in terms of our results.
Great. Thanks, guys. Congrats on the strong results again and good luck.
I appreciate it thanks, Thanks Robert.
Thank you. Our next question will come from Trey Grooms of Stephens. Your line is now open.
Hey, good morning, everybody and I have to echo the congrats on the very impressive results.
Good morning.
No.
You guys have a long term history of outperforming the markets you serve and Dave you reiterated that you expect to outperform the market in any environment.
More specifically can you talk about.
Expectations for product mix.
Slower periods of housing demand would you expect to see any change in mix or maybe relative demand for prefab components or other value added products.
It's a great question, Trey we've seen that demand shift more to the value added side of the business over the past several years, obviously, both legacy companies were driving that and we've certainly stepped on the gas we think that mix shift will continue over the long term regardless of what's going on in the environment. If for no. Other reason than there has been such a tremendous excellent.
Skilled labor in the industry since the last downturn and you don't just get that back over time. So importantly.
Efficiency gains with the builders are gaining from the work we're going off site will be important.
Even in a slower market environment, because they need those efficiencies they need to be as productive as they can in a slower operating environment. So we're excited about the shift we've had our teams aligned around it and we expect those those.
Product shifts to continue through the course of time.
Okay. Thanks for that and then kind of a follow on.
Around the same topic here can you can you talk about.
How you push towards digital plays into your strategy and a slower operating environment and how that might.
Change the way you go to market or anything like that.
We're really excited about our digital platform and the work that's been done and importantly, we hit an important milestone as we've talked about the long term strategy and the vision that when we acquired paradigm just about a year ago now.
We said, we would take a platform that was fairly narrowly focused in and the millwork side of the business and extend that to the whole home design and importantly, we said we would start with our strength, which was a structural design to the home.
And as I said in the script, we just recently hit an important milestone where we've integrated the material take off with that structural design into the visualized with paradigm. So that starts to bring together some of those key elements and capability that we spoke about.
Still a lot more work to do but the vision is intact.
We have invested heavily in the last 12 months, we will continue to invest heavily we believe in the vision and regardless of the market environment. We think digital is the right long term play not only for us, but importantly for the industry because we're driving a lot of efficiency gains that I talked about it in the script here a little bit spine.
Finding all the problems in the digital world instead of at the job site, just drive tremendous efficiency gains and Thats really at the heart of what we're trying to achieve here and we're excited about it we think we're going to lean in pretty hard regardless of what's going on in the world around us because we believe in the long term strategy and what this is going to bring to the industry.
Yes.
That's what I was hoping to hear so thank you keep up the good work and good luck.
Thanks, a lot.
Thank you. Our next question will come from Mike Dahl with RBC capital markets. Your line is now open.
Good morning, Thanks for taking my questions.
Peter I wanted to follow up on the on Matts question to start the call around the ranges and maybe a specific question around <unk>.
Second half because anything thats, causing some confusion.
I think what you are saying is this year, it's been fairly unique right. So if you were to say pick a number in this kind of commodity tier say $800 lumber.
Range here suggests that would produce $3 to $3 3 billion and adjusted EBITDA I think what you are saying is in reality of the margins. This year are stronger. So you would produce higher than that in the current environment at those lower prices. So that's one.
Correct me, if I'm wrong, there, but more specifically exactly right.
Okay. So maybe just to clear up the confusion can you give us what the true base business EBITDA was in both the quarter and year to date.
No.
I will say, we don't provide quarterly split for base business. We think the annualized view is still the right way to look at it and that accounts for the seasonality and the comparisons we think in a more rational way.
I can offer up that the fall through.
In the second quarter was was about two thirds non commodity one third commodity in terms of what EBIT. It did.
To give you a sense of the type of.
Outperformance, obviously, we're seeing in both categories, but how that reflects on the.
The base business side in the base business material is in there. So you can see our expectation for the full year.
Okay.
Got it.
Do some more math around that.
And then the.
Second question.
You have part of the part of the increase in free cash flow, presumably comes from some similar performance year to date and some additional commodity tailwind you have pulled back your Capex guide by about 100 million.
And so could you could you elaborate a little more on kind of Delta is for free cash and then specifically.
<unk>.
The lower Capex what are you what's contemplated in terms of things that are either getting shelved or pushed out to next year.
Yes, sure I mean, certainly I think the whole team is disappointed on the Capex side, where we've got a lot of really great initiatives that we're pushing on.
Facilities trying to refresh the refresh our fleet investments.
A bunch of different projects that we're excited about.
Just struggled getting what we're looking for whether it be buildings or.
Trucks, whether it be development speed.
The speed of getting properties ready to sort of turn on the switches and get things going.
Just gone.
More slowly than we anticipated so we're not looking at canceling our shelving anything at this point, it's all really just pushing out into next year, we're continuing to push forward and trying to make sure. We have the capacity we need to meet our customers' needs.
When it comes to the broader business you hit you hit the nail on that I mean, clearly we outperformed in the first half.
That profitability on the base business and the performance of the core operations critic.
Critically important to that cash flow increase, but we also saw higher commodity prices than we anticipated.
I think they went up more aggressively in the second quarter and it probably came down pretty aggressively to but overall, it's higher than what we had been anticipating.
The compounding of those three factors.
We're going to pass that cash.
Through the business. We certainly are excited about it it does make an assumption.
One that we've said repeatedly in the panel of course people can have different opinions on this but we do anticipate.
Commodity prices returning to a more historically normalized level by year end so.
Certainly a component of that Thats included anytime were given these guidance numbers.
Okay. Thank you that's very helpful.
Alright, we will take our next question from Tim Memoria with BMO capital markets.
Good morning, and thanks for taking my question.
David I wanted to come back to that the mix question again.
I mean, if you're assuming that the economy is slowing housing start essentially on the thing Thats omni side are going to let's say to I'm not going to fall next year.
Presumably the labor situation is much better than what it is today would you envision even in that scenario for your customers to not create down from a mix standpoint to more commodity products or is that not.
Alright, great. Thanks.
No.
As I said earlier <unk>, we think we're going to continue to lead in our customers love. These products. They solve a lot of problems at the job site and help make them more efficient. So we believe we're going to lean in hard and the mix will continue to shift through the course of time the thing I'd add to that is this isn't just a open a prayer.
The yard during the great recession grew our share of business attributable to.
Troughs and manufactured products so even during a recession that I think all of us anticipate much more severe than what we're looking at year. The market continued to adopt these products for exactly the reasons that Dave mentioned.
And we've been through a cycle down.
Down cycles through the course of time over the last decade, and we continue to penetrate the market because there's real value for our customers with these products.
Got it.
And then second question.
Obviously from a balance sheet standpoint, you guys are in a very strong position as youll maintain fortress balance sheet and I'm just curious.
In case things do.
<unk>.
The downturn were to be more severe than what we had expected how do you how do you guys think.
<unk> kind of keeping liquidity cushion versus.
Let me share repurchases, if the stock was to come under pressure.
Well I would tell you looking at our balance sheet as you described we've got.
A disciplined approach to ensuring we have a bullet proof balance sheet right. So our number one priority in terms of capital allocation, ensuring that we're able to withstand whatever comes so we've run the but the downside models to ensure that to ensure we've got proper coverage.
The other point is that as it stands today not only do we have liquidity.
We still have a substantial amount of.
Capital is best on the working capital side that we could.
It's a cushion in case things reset in terms of evaluation perspective, but we certainly have more in our pocket as well, especially given the unsecured nature of Hawthorne. So.
As good as it is it's even better than it looks and I think what that does for US is it puts us in a position to be.
Both selective but also aggressive as the opportunities present themselves we've been very thoughtful about the way we look at M&A.
<unk> about the criteria that we look that we look at the financial expectations the alignment with strategy.
We're going to continue to do that even with that said, we've been very successful at adding very nice businesses to the portfolio.
We think theres going to be a lot more opportunity to do that.
And significant opportunities to do that opportunistically during a downturn.
This turns out to be.
And let's face it.
A high beta and we're going to be smart and opportunistic about buying back shares where we believe in it we know our stock has tremendous value and we're going to be smart about it and.
Make sure we're allocating capital in a way that maximizes shareholder value over the long term.
Got it that's very helpful. Good luck in the back half.
Thank you.
Thank you. Our next question will come from David Manthey with Baird. Your line is now open.
Back to slide 16.
This is a minor issue, but it seems like the revenues across the tiers ticked down by about a $1 billion and the EBITDA range shaded down by about $100 million across the tiers versus what you had in the grid last quarter is there anything to that is it just refining your thoughts on the grid.
Yes, there is nothing really to add.
We gave an adjusted to stay aligned with our core operating model. So we try and move it. So the two match up and minor things shift from time to time, but it's not signaling anything really.
Alright.
Figured in then.
Second when you talk about the <unk>.
The price fluctuations versus a static commodity environment.
We experienced rapid and significant downside in lumber in the fall of 'twenty in May through August 21, and even year to date since about March, but we haven't really seen much of a.
Falloff in EBITDA in fact, a lot of those quarters actually saw better EBITDA Im just.
Right.
Understand what's different about the future versus the recent past performance we've seen here.
Yes, I think it's a great question and it highlights a lot of the work we've done to make the business.
Stronger more predictable, but it also reflects I think the.
There's still a supply constrained environment I know all of us have had.
A wonderful time talking about the downside opportunities this industry basis since the beginning of the year, but in practice in reality, we're still running hard to be able to deliver on what our customers need to continue building out these homes.
So I think what you've seen in a couple of ways I think probably the most important one.
Is around the way we change pricing.
These changes have made our results a bit more stable a bit more.
Predictable in terms of upside and downside suites in commodities and what it does to our <unk>.
Profitability, we talked about.
Substantially reducing the amount of.
Fixed as we used to call it priced contracts. So that's an important piece of it why we wouldn't see as much.
Sort of constraint or reduction in gross margin percentages during inflationary moments and adversely.
Spansion during the down cycles.
But I think it's more related to the overall demand environment in terms of our capacity getting products to the market having access to those products in the first place and being very careful about how we manage that capacity ensuring that pricing is disciplined and that we are moving our product quickly and efficiently.
Those things really come together to allow us to have a superior profitability performance. Although we do expect some of that will fade over time as we've as we've outlined and margins will normalize a bit but I do think we will retain that that more consistent.
Predictable profitability profile.
Very clear thank you.
Thank you. Thank you.
Our next question will come from Stanley Elliot Your line is now open.
Hey, good morning, everybody. Thank you guys for taking the question and congratulations.
Thanks, Phil.
Can you talk a little bit more about what's happening on the digital side I mean, it sounds to me like things are accelerating or at least tracking almost ahead of expectations.
What I would have look back at the analyst day kind of the five year build targeted $1 billion of revenue.
I would have thought the first two years will more building it out maybe the last three years youre starting to see the revenue flow through.
Is that still the case or are you kind of tracking ahead of those expectations.
So I think we're right on track and what Youre thinking about it right.
We hit an important milestone in the quarter and wanted to share that but thats part of the plan. So theres still a whole lot more work for our team to do my main messages, we're executing well the development is coming together exactly as we expected we still expect to see that $1 billion.
It will be backend loaded in that five year time horizon per design. So we're right on track with where we want to be seen.
I think I would add is I think this reflects how how much the market is underestimating how powerful this thing right.
We've seen the vision for where its going to go in these things that we're that we're rolling out right now as Dave mentioned, our amazing. They are massive they are unprecedented in terms of capabilities for this industry.
Just getting started.
And switching gears a bit you mentioned the automation piece again, I guess the eight lines.
You did have to push some capex out I mean is that going to impact your ability to get those automated lines up and running and then how do you think about that in terms of throughput productivity anything you want to share with us here today.
Well, we've been investing heavily in automation based automation for many years, both legacy companies have done that we're continuing to automate as Peter mentioned there is some equipment challenges just getting things in but our strategy is sound and what I mentioned around the eight lines. This is new technology and capability that we've worked.
With Alfa designed around over the last couple of years and this is beyond automation. This is fully robotic trust manufacturing and so we had an important data point come together as bill record.
We expect over the next couple of years to buy another eight.
More of those lines for the roof side or on the floor truck side.
So we're continuing to innovate and come up with new and creative ways to first of all get a more consistent product to our customers and second we deal with the same labor challenges our customers face.
Got inside so it takes some of those issues off the table, but we will continue to invest and we expect there may be some puts and takes here or there a carryover in capital, but we will spend that money and we're committed to that capability.
We're excited about this I mean, I think that the idea around not having all the capital that we want is really we're already doing 200 miles an hour and lapping everybody, but we wanted to $2 10.
Right, we want to lap everybody faster on this stuff and it's just disappointing it hasnt come in as fast as we'd like.
Im going to hurt us it just maybe going to keep us safe.
Seeing the opportunities as quickly as we'd like.
Great guys. Thanks for the color congratulations best of luck.
I appreciate it.
Thank you. Our next question will come from Adam Baumgarten with Zelman. Your line is now open.
Hey, good morning, everyone could you give us a sense for how the core organic sales growth in the quarter broke down by volume and price.
Yes.
Yeah, I'd say this time it was.
Heavier towards price more of an 80 20 split.
Okay, Great and then just you guys did $40 million of productivity savings in the second quarter target for over 100 can you give us that number for the first quarter.
So the first quarter was actually satisfying the remainder of our synergy savings commitment. So we've changed our languages, we committed to do.
So that first number was.
$32 50 250.
<unk> $52 million in the first quarter and then the remainder the other <unk> that we're talking about is Qs two through four and productivity specific not synergy growth, so 60 million either come in the back half.
Got it that's helpful. Thanks, guys.
Yeah.
Thank you.
Thank you. Our next question will come from Collins Vernon with Jefferies. Your line is open.
Great. Thanks for taking my question I, just wanted to touch on the long term targets here I know you reiterated your 2025 base business targets.
The change in end market expectations. So I was just just to give some more comfort around those targets could you just frame up what would need to happen in the macro environment and the single family end market for there to be risk to that guidance.
Whether that be from a financial perspective, or a timeline of achieving those goals.
Yes, I think the obvious one is that if the if the market for single family.
In particular.
Stays down and doesn't recover back to sort of our expected low single digit growth since 'twenty. One number by 2025 that would put pressure on our ability to make that tool.
Yes, I'd say, that's about it I'd say all of the internal operating stuff that we committed to we've got line of sight to we feel good about.
But from a macro or external.
Expectations perspective, that's the one thing that we count on.
Okay. That's helpful and then.
Can you just dive into the EBITDA bridge, a little bit more I think you said the split between non commodity and commodity was two thirds one third.
<unk> are pretty good.
40% incremental EBITDA and the non commodity business I think so could you just kind of define the moving pieces, there and how sustainable that kind of margin is and maybe what you guys are looking at from a decremental margin perspective, if you start to see volumes turn.
Yes.
Yes.
Comments will.
Sound a bit familiar right.
Youre right. It was about two thirds one third in terms of the benefit that we saw on the non commodity side versus the commodity side. We do think over time things youre going to return towards that normalized 27% plus gross margin level. We don't think it's going to happen over a quarter or two I think it will take while longer for that.
Normalized primarily because of the same reasons, we're seeing the benefit now.
The primary reasons were around supply chain constraints around not having enough capacity to meet the demand.
And that happening in a number of different markets. So there are obviously.
<unk> for that to normalize that will come through in the form of <unk>.
Increased capacity from suppliers it may come through in the form of decreased demand from the end markets.
We certainly think there is.
Permanent benefit in what we have experienced in the past couple of years as it pertains to our increasing value add mix increased adoption in the industry as well as our ability to compete effectively in really successful markets around the country.
Great. Thank you for the color and good luck in the back half of the year.
Thank you.
Thank you. Our next question will come from Jay Mccanless with Wedbush. Your line is now open.
Yes, I think Jay your line maybe on mute.
Yes, Larry I am sorry about the fantastic quarter guys.
After the purchase in July how much do you have left on the authorization now.
There is a $1 billion more left on that authorization.
Okay.
And then.
And I apologize if I missed this but could you kind of walk through what would happen to.
You get to the $2 5 billion on the free cash flow versus the $3 billion.
Pretty nice increase in the midpoint and just wondering what would cause the low end versus the high end Peter.
Yeah, I think the biggest impacts are from.
While commodities did and what the.
The profitability you did in the first half.
You know this is Jay we've been very consistent about it we continue to build our models with that expectation of a progression towards a more normalized commodity.
Commodity price and instead of regressing, it actually accelerated for a window of time.
<unk>.
That benefit is certainly real to us to generate real cash that we put to work.
So that's a big piece of it.
<unk> right, so that that outperformance certainly were.
Happy with and we think that is going to continue to be a.
A positive influence on the business as we continue to execute on productivity initiatives and things, we're doing to drive that profitability and that's another big piece and then probably the least pleasant component is that $100 million.
Capex that we don't think we're going to be able to pull in this year, just given the pace of supply chain issues.
Okay.
Got it. Thanks, Thanks again for taking my questions.
Thank you.
Thank you. Our next question will come from Alex <unk> with B Riley. Your line is now open.
Sure.
Thank you very nice quarter, gentlemen, quick question Peter.
At the very end and it kind of goes back to the last question here, but you referenced line of sight towards $3 billion in free cash flow is this in reference to your 2022 guidance or is that incrementally over the next say 12 months.
No thats the guidance of $2 75, I may have taken some liberties rounded up to three.
We'll continue to watch obviously the results as the year progresses.
If theres more if there's more there I promise you we will deliver it.
Excellent and then can you remind us what your lag time is to the spot price for commodities and then.
As it relates to pricing and non commodities business.
Have you seen any.
Alex.
There are obviously manufactured by others, we see anyone cut prices yet.
It's about a quarter between what the market moves at and what we would expect to flow through our Cogs.
On average it's very open.
It's a pretty wide bell curve, but yes, it's about a quarter.
And I guess the answer to that is no we have not seen any one cutting prices into this market.
With the exception of people who are following the commodity prices right. I mean that is common that happens all the time good or bad.
Thank you.
Thank you thanks Alan.
Thank you. Our next question will come from Steven Ramsey with Thompson Research Group. Your line is now open.
Good morning, I wanted to touch on just one topic.
<unk> inventory.
Given potential slowing of single family demand how are you thinking about replenishing inventory when do you want to be a trustworthy source for builders and balance that against slowing demand and then are you rich.
Plenty seeing now at the same rate as the first half or do you plan for that to happen in the second half.
Yes, we are.
Just running the same play we always do Stephen really this is normal ops for us.
Just like normal seasonality, we continue to align our purchases with the inbound flow of.
Borders we maintain.
Appropriate.
Inventory on hand levels, usually on a days basis, but really down to a granular level.
By market, sometimes by location depending.
Depending on the Skus under consideration certainly its something that we were careful about from the perspective you can never.
Run out right. If you run out of better be the supplier stronger better not be on us. So thats a requirement that we make to our customers and something that we've worked very very hard to ensure.
But we're going to we're still running the same play in a down market as an up market in terms of how we think about ensuring the right amount of supply on hand.
Well thank you.
Thank you.
Thank you and for our last question today will come from Ryan Gilbert with <unk>. Your line is now open.
Hey, Thanks, good morning, everyone.
First question Hey, Good morning first question for me on gross margin just given the lag between commodity price and when it hits your Cogs.
I know that the reduced use of fixed price contracts has reduced volatility.
Volatility in your gross margin, but just given what commodity prices are done.
Could we see that be a tailwind to gross margin in the third quarter relative to the second.
When it comes to commodities I would say.
Probably not.
I think based on what we're seeing in terms of the performance of the business.
If anything.
It's more competitive not less as things normalize thats kind of our expectation.
See it Roading Cigna.
A significant way.
But yeah, I mean, I think there is certainly an opportunity for increased competitiveness.
We're going to be.
Competitive in any part of our business, it's absolutely the commodity space in terms of our gross margin normalizing more quickly than France.
Okay got it.
Second question.
For me is on organic growth over the last few quarters, its really broken away from single family starts growth, whereas if you go back over a few years I think pretty closely tracked single family starts.
Do you have a view on when the core organic.
I guess kind of reverts back to approximating single family starts growth or do you think we can stay at this elevated level.
For some time.
So I think I have a couple of different answers to that question when we're talking about.
Margins.
We've been very very clear that is going to return to normal over time.
I think the other part of that answer though is really around value add value add is an important part of the mix.
<unk> is substantially higher than the rest of the business and while there is certainly a gross margin component to that we believe that that is very sticky like Dave was referring to earlier and that that is going to be held onto in terms of an important resource by the homebuilding community and we're going to continue to invest in it to be that partner for them. So.
Do think that sticky in the long term.
Okay got it and then just.
Quick quick final question on July trends, I think you mentioned that the that.
Demand remains strong or are there any numbers you can you can put to kind of quantify the strength that youre seeing so far in July .
You saw in July .
No I think continued as a good way to characterize it we feel good about July and we're going to continue to be reactive and responsive maybe better said to the market dynamics that we're faced with but right now we are hitting on all cylinders.
Focusing on our customers.
Great. Thanks.
Thank you.
Thank you ladies and gentlemen. This concludes today's event you may now log off and disconnect have a great day.
Okay.
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Okay.
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