Q2 2019 Earnings Call

Please standby.

Good morning, and welcome to the builders Firstsource second quarter conference call. At this time all participants are in a listen only mode. Following the Companys remarks, we will conduct a question and answer session. Today's call is being recorded and will be available at www Dot C.L.D.R. Dot com. It is now my pleasure to introduce Mr. Bennett, Sophie Vice President Investor Relations.

Thank you Kathy good morning, and welcome to the builders Firstsource second quarter earnings Conference call with me today are Chad Crowe, Chief Executive Officer, and Peter Jackson, Chief Financial Officer.

A copy of the slide presentation referenced on this call is available on the Investor Relations section of the builders Firstsource web site.

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Before we begin let me note that during the course of this conference call. We may make statements concerning the Companys financial future prospects financial result business strategies and industry trends.

Such statements are considered forward looking statements under the private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations.

Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the FCC for more information on those risks.

The company undertakes no obligation to publicly update or revise any forward looking statements.

The company will discuss adjusted results on this call. We have provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release.

And detailed explanation of non-GAAP financial measures in our form 8-K filed yesterday, both of which are available on our website.

I will now turn the call over to Chad Crowe.

Thank you Ben.

Good morning, and thank you for joining us I will start on slide three.

I'm very pleased to share with you another outstanding quarter of execution and results delivered by the 15000 team members of builders Firstsource.

During the second quarter of 2019.

We made significant progress in the execution of our strategic plan and again delivered above market growth expanded margins, an exceptional free cash flow generation.

We continued our strategic investments in market, leading value added products and solutions, while realizing the growth margin in customer value benefits from these investments made over the last several years.

Our operational excellence initiatives also continue to gain momentum and are delivering measurable results and of course, our strong cash flow and working capital management continue to underpin our investments while at the same time, enabling the reduction of our ratio of net financial debt to adjusted EBITDA to 2.7 times at the end of the quarter.

Our second quarter results and performance built on a strong start to 2019, providing momentum as we enter the strength of the selling season.

In the first half of 2019, we grew our estimated sales volume excluding commodity deflation.

By more than 4% well above overall housing starts which actually declined during the period.

In the first six months of the year net sales declined by 7% as sales volume growth was offset by commodity price deflation of more than 10%.

Consistent with our strategic plan value added products led the growth increasing in estimated sales volume by 7% in the first half as we continue to realize the benefits of our investments.

Adjusted EBITDA grew by 11% compared to the first half of last year as our team delivered on our on our objectives, demonstrating strong margin management and overall execution.

Our operational excellence initiatives are gaining momentum and remain on track as mentioned on previous calls our primary initiatives consist of some specific action plans underway in four key areas.

Enhance business analytics pricing management tools are my BFS builder customer portal and delivery optimization technology.

During the first half we completed the rollout of our delivery optimization system to approximately 200 locations.

Measurably, improving the speed uptime and reliability of our distribution network.

And continued to realize the benefits of our pricing tool implementation as well.

We continue to expect to benefit between 14, and 16 million to our EBITDA in 2019 from these initiatives.

As our customers continue to face increased labor costs and scarcity.

They increasingly look to partner with us for solutions.

Our market, leading manufacturing in value added capacity and capabilities have positioned us well to meet this growing opportunity.

In July of 2019, we purchased three manufacturing facilities in Arizona, and Nevada, expanding our presence to 40 states and 77 of the top 100 in essays.

During the balance of 2019, we also plan to add three new Trust plans approximately eight new trust lines in existing plants as well as door facility expansions and new machinery and a dozen more of our value added operations.

Our industry, leading production capacity Salesforce and distribution network are key to our competitive advantage.

And we will continue to invest in extending our leading position.

Later in the call I will talk more about the competitive advantage that we are further leveraging through the combination of our national scale local management focus and net worth market density.

I'll now turn the call over to Peter Peter who will review, our second quarter results in more detail.

Thank you Chad good morning, everyone.

As a reminder, we have included adjusted figures to normalize for one time costs related to our integration work and other nonrecurring items.

We had $1.9 billion in net sales for the in the second quarter down, 8.9% due to commodity inflation deflation, which decreased sales by 11.3%.

The commodity headwind offset estimated sales volume growth of 2.4% well above the overall us starts market.

Our value added product categories again led the way with a 5% increase over Q2 of 2018.

Reflecting the execution of our strategic plan.

Gross margin of $517.2 million increased by $21 million or 4.2% over the prior year.

Sequential gross margin percentage remained at a high level increased slightly to 27.2%.

And an exceptionally strong improvement of 350 basis points over the second quarter of 2018.

The margin percentage increase was attributable to an improved product mix.

The decline in the cost of commodities relative to our customer pricing commitments and our team's continued focus on pricing discipline.

Commodity prices move lower during the quarter framing lumber and seek good prices declined by approximately 10, and 6% respectively compared to the beginning of the second quarter.

As a result, our gross margin percentage increased as cost decline relative to our customer pricing agreements.

As we have discussed in prior calls market price inflation caused a short term gross margin percentage compression when prices rapidly rising and similarly causes gross margin percentage expansion when prices rapidly decline relative to the short term pricing commitments that we provide customers.

In addition, our team again demonstrated its ability to manage through commodity price volatility and at the same time maintain a focus on delivering value added solutions to our customers.

The result is a favorable sales mix towards higher margin products and another strong quarterly gross margin.

Our SG M&A as a percentage of sales increased by 240 basis points on a year over year basis similar to the first quarter of 2019, the largest component was the impact of deflation on sales.

On the spending side variable compensation was higher due to higher commission expenditures as Weve mentioned in prior quarters, we pay higher incentives for higher margin sales accordingly, our outsized gross margin percentage led to higher commission expenditures in the quarter.

Interest expense for the quarter was $29.4 million compared to $29 million in the prior year, an increase of $400000.

The increase was due to $4.3 million in charges related to debt financing transactions during the quarter.

Excluding these one time charges adjusted interest expense decreased by $3.9 million, largely due to lower outstanding debt levels compared to a year ago.

During the quarter, we issued $400 million and notes that mature in 2027. The net proceeds were used to repay $300 million of our term loan and to purchase $97 million in 2024 notes.

This refinancing further demonstrates our commitment to prudently manage our balance sheet by layering in attractive long term fixed rate debt.

Adjusted net income for the quarter was $113.9 million or 98 cents per diluted share compared to $90.2 million or 77 cents per diluted share in the second quarter of 2018.

The year over year increase of $23.7 million or 26.3% was primarily driven by the improved operating results combined with lower interest expense.

Second quarter, EBITDA grew by $24.7 million or 7% to $246.5 million. The improvement was primarily driven by the aforementioned growth and gross margin dollars.

Turning to slide five.

The strength of our business, including our national scale demonstrate itself again in the second quarter housing starts remained soft in commodity prices continued to decline our team managed growth in four of five non commodity related product categories, and excluding deflation, even our lumber and lumber seek goods product category achieved positive positive estimated sales volume growth.

As we build further upon the success we are committed to continuing the expansion of our network of manufacturing facilities strategically located across the country.

As Chad mentioned, we are pleased to have added three additional trucks manufacturing facilities. After the quarter ended bringing our total to 61.

Approximately 25% of our total 2019 capital expenditures will be invested in our value added growth initiatives and expansion of our production capacity.

Turning to page six our second quarter sales volume grew by an estimated 2.4% in the single family New construction end market compared to an overall decline of 6% in overall us single family starts.

Regional strength, particularly in parts of the east contributed to the outperformance.

Our sales volume in our in our and other end markets to climb by 2.2% as weak activity in the agricultural sector continued in the Midwest related to the ongoing trade dispute with China.

Multifamily sales volume improved by 3.2% largely due to timing of projects started in 2018.

Turning to page seven.

Although our business typically uses of cash in the first half of the year and generates cash in the second half due to seasonal working capital.

The company generated cash.

In operations and investing a $138 million in the first half of 2019.

The improvement is largely due to the effects of continued to monitor the deflation on the value of working capital compared to the prior year period.

Total liquidity as of June Thirtyth, 2019 was an ample $755.3 million comprised of borrowing availability under our revolving credit facility and cash on hand.

Our net debt to adjusted EBITDA ratio on a trailing 12 month basis as of June Thirtyth 2019 was 2.7 times, a 1.8 times reduction from the prior year end or lower end of our target range of two and a half to three and a half times.

Looking forward to the second half of 2019.

We remain confident in our teams ability to execute on market opportunities.

Mitigate challenges and deliver the initiatives within our control.

Let me provide some details on the third quarter and full year 2019.

Net sales are expected to be down 11% to 14% in the third quarter, driven by a commodity price deflation impact in the range of 14% to 17%.

Gross margin percentage is expected to remain relatively steady sequentially from the second quarter of 2019.

As a result third quarter EBITDA is expected to be between 140 and $150 million.

For the full year 2919, we expect our single family sales volume to grow in the range of 3% to 6%.

Our in our market growth in the low single digits.

And flat to low single digit growth in the multifamily market.

At this point, we anticipate full year commodity deflation similar to the 10% to 13% we saw in the second quarter.

From a gross margin perspective, we expect gross margin to normalize above 26% in the fourth quarter.

We also remain confident in our operational excellence initiatives, which we expect to contribute $14 million to $16 million for the full year of 2019 in EBITDA.

Overall, we expect EBITDA to be in the $475 million to $490 million range for the full year of 2019.

We expect an effective tax rate of approximately 25% for the balance of 2009 capital expenditures are expected to total approximately 1.5% of full year sales.

And regarding cash taxes, we expect to fully utilize our federal and are well tax assets and credits to become a federal cash tax payer again in the fourth quarter of the year.

Cash interest and cash interest expense are both expected to be in the range of $100 million to $105 million.

As we continue our systems integration work, we expect onetime cost related.

Two two that approximately $15 million to $20 million for the year.

We now expect to generate $180 million to $210 million in free cash flow for the full year 2019. After funding our capital expenditure plans of approximately 1.5% of net sales and our recent acquisition in the amount of $43 million I would highlight that the new guidance is actually an increase relative to the first quarter free cash flow guidance.

Now Chad will provide an update regarding our strategic priorities and outlook.

Thank you Peter.

Moving to slide eight.

I'd like to build a bomb some of the last points that Peter just shared about our strength from a financial perspective and dive a bit into some of the day to day operational underpinnings of our advantages and execution as well.

If you've been listening to our prior calls you know we are very proud of the growth platform that we've built and often speak about our national scale and industry leading footprint.

The acquisition of Probuild in 2015 enabled us to create the largest professional supplier in this space.

Leading to more than 400 locations across 40 states and an unmatched depth and breadth of resources.

Our manufacturing and distribution capabilities, our coast to coast and while not in every NSC. Our presence in 77 of the top 100 provides a highly attractive geographic balance and a solid foundation for growth.

Today, I would like to take a moment to highlight how we also go about building highly efficient and effective local market networks due to a competitive strength and deliver a truly differentiated customer value proposition.

First within each of our local and regional markets. We are intensely focused on local customer relationships connectivity demands and dynamics all of which differ from market to market.

Within each market, we seek to build a regional density of operational capabilities to support exceptionally strong trust and reliability.

In addition, we develop a high caliber distribution competency and exceed our customers expectations with deep and talented management.

We have found that our run it like you own it culture empowers local management to deliver high levels of service and responsiveness.

This leads to relationships often spanning decades built on trust that positions our team members as extensions of our customers teams.

Our designers are able to closely partner in the build process and become the trusted advisor on specific products and services that best suit each job.

Equally important however is how we created a density of operations in key markets.

Take the Atlanta, Atlanta Metro area for example, where we view and manage inventory across a network of locations in order to service customers quickly efficiently and reliably from multiple delivery points within the market.

By combining combining our knowledge of local homebuilder needs and activity across and optimize network, we benefit from cost and asset efficiency and become the supplier of choice to our customers our teams generate and share local market intelligent intelligence by utilizing in depth analysis across locations customers and projects to ensure that products are shipped from the optimal location.

Dedicated specialists move products between locations to minimize working capital eliminate redundant inventory and less rapidly restock, while ensuring that customer needs to reliably met with efficiency and precision.

We have also aligned our compensation structure to incentivize local managers to work together across shipping lines and locations in sharing seamless coordination and execution.

The result is that we have the right products at the right place and consistently do what is best for our customer.

Our on time delivery rate is over 90% across the Atlanta market and is just one example of better customer service at a lower cost to serve while delivering financial performance to our shareholders.

This aspect of our competitive advantage is difficult for smaller competitors to achieve as it lies in the power powerful combination of balance of our national scale with intense local management and regional network density.

Moving to page nine.

Although us housing starts have shown year over year softness over the last few quarters. The fundamentals of homebuyer demand remain intact, and we have seen increasing signs of stabilizing buyer activity as the second quarter progress. It is important to note that we have been able to demonstrate the particular strengths of our strategy team and platform. During this period of fluctuating demand.

Our national footprint unmatched scale and manufacturing capability and exceptional Salesforce provides us with a platform well positioned to capitalize on the ongoing opportunities for core growth in the coming quarters and years.

Together with our ongoing investments in operational excellence and value added capabilities. These strategic advantages continue to give me confidence that we will achieve our goals.

Our target framework begins with capturing an incremental 130 to 160 million in EBITDA as compared to the full year 2018 from what we call core business growth as housing starts return to historical averages.

In addition to this core growth our plans continue to call for investing in approximately 20, new value added products facilities.

Including three additions this year plus the three that we recently acquired.

We are seeing significant ongoing opportunities to increase our market share and increase the penetration of our higher margin products as our customers also accelerate their adoption of these labor saving high efficiency products.

As I mentioned earlier in the call our value creation plan also includes a set of operational excellence initiatives already well underway, including investments in distribution and logistics software pricing and margin management tools back office process efficiencies and information system enhancements.

When fully rolled out across our roughly 400 locations. These initiatives and operational excellence and value added products are designed to deliver cost benefits and margin expansion, which totaled 90 to 110 million in incremental EBITDA and they will further differentiate our service levels and strengthen our it's an activity and overall value proposition with our customers.

Our overall plan remains on track to generate EBITDA, 50% higher than last year or roughly 750 million as we reach historical historic norms and housing.

We expect to deliver EPS between $3 and $3.50 and achieved greater than 85% conversion of our adjusted net income to free cash flow. These substantial cash we generate will be used to fund both our high return growth investments and to further improve our financial flexibility.

Moving to slide 10.

Housing market fundamentals and demand drivers remain.

Fundamentally supportive as we enter the prime selling season as homebuilders have continued their pivot toward home formats and price points that are increasingly in demand by home buyers in the market, we have seen stabilizing sentiment and activity and we are more confident than ever that our network scale market diversity and value added product leadership provides us with distinctive competitive advantages and a long runway of growth opportunities.

Despite the anticipation of ongoing commodity deflation headwinds I remain confident that our consistent strategic investments and execution by our talented and motivated team will continue to deliver strong results as we build an efficient and agile organization and implement our operational excellence programs.

As always I would like to thank our 15000 team members across the country for their hard work and delivery of excellent service to our customers as we drive value creation in the quarters and years ahead.

Operator, we can now open the call for Q and a.

Certainly and ladies and gentlemen to ask a question that is star one on your telephone keypad. Please note that if you're on a speakerphone. Please pick up the handset or de press your mute function to allow that signal to reach our system.

Again that is star one if youd like to ask a question.

And we'll go first to Matthew Bouley of Barclays.

Good morning.

Congrats on the quarter and thank you for taking my questions.

You bet.

So the the trust plans that you guys acquired.

In July obviously at the same time, you guys are investing in your own plants and the new Greenfields.

Can you think.

Or help us think about how you are going to balance that going forward.

Perhaps what you're looking for in a given market, where you might choose the M&A route instead of a greenfield and is this something that we should expect to see more of thank you.

Yes, as we've said on prior calls I look at a lot of these opportunities as a build versus buy decision and at the right multiple.

It makes more sense in my mind to go the M&A route. It gets you into the market Quaker plus you're not adding capacity into.

A market, which which can be difficult and create some real pricing or so.

It will be a bit it'll be a balanced approach, though like I said, we were going to be we're going to be pretty picky and it's got to make sense from a financial perspective and from a from a multiple perspective, but I like the fact that we have the flexibility to do either now now that we've gotten our leverage ratio down.

We can make those decisions and be.

Little more opportunistic when it comes to growing the value add part of our business.

Got it okay. Thank you for that and then secondly.

The you guys again reported a pretty significant outgrowth in Europe in your single family volumes relative to the single family housing starts I would just be curious if you guys have any finer points on that just how do you. How do you think you're actually comparing versus your own markets.

You know you could look at different data points, the completions data probably held up a little better in Q2. So what are you guys kind of see as a sustainable share gain at this point as as the market recovers and what kind of metrics are you looking at to kind of determine your market outperformance. Thank you.

So I'll, let Chad comment more broadly, but specifically to some of the details I think we do see share gain for the business.

We mentioned that where we're seeing particular strength on the east coast.

I think we were also advantage a bit by some of the markets that were most negatively impacted with starts.

Being areas, where we don't play a ton of big chunks of California for example.

But even in the markets, where there has been some decay, we have still seen some share growth and I think that.

Our chat hit on a couple of the points as to why I think we are reliable provider. We are a trusted partner for our home builder customers and Weve performed well.

But more broadly I would say that the east.

East of the Mississippi for US this year has definitely been a strength, where we've seen the biggest share gains and the biggest successes.

And I think a lot of it goes back to the.

The multi year investments in value add and component manufacturing.

I am still a firm believer that.

That is not going to go away the labor shortage is not going to go away the.

The cost of labor is not going to go away and I think it's a trend that will continue and that's why we are focused on developing that part of our business and thats, where weve seen some some definite outgrowth when it comes to our volume or start.

Alright, great I'll leave it there and congrats again guys.

Thank you. Thank you.

We will now go to a question from Trey Morrish of Evercore.

Hey, Chad and Peter Thanks for the time and great quarter.

I wanted to first touch on the gross margin and wondering if you could just put buckets of the year over year improvement of.

Trying to monetize your revenue mix the decline from lumber costs relative to pricing and your pricing discipline that you highlighted.

Sure, Yes, as you can imagine we spent a lot of time, making sure we understand that.

From our analysis, we would say.

More than 50% of that is and.

A direct result of both the decline in commodities and the.

In the period as well as compared to prior year. So there's sort of two components one is.

Last year at this time, we were seeing pretty significant headwinds obviously from the rapid inflation.

So with that normalizing, there's clearly a normal tailwind there.

In addition, as we pointed out there was a modest decline during the quarter and the value of commodities. So those components together, leading to a little more than half of the total change.

Probably about 20% to 30% of the remainder of the total change is attributable to mix and that goes to the investments that we've made in the sort of continued growth and outperformance of the value add portion of the business.

And the balance is really across the rest of the business, but with a focus on the work that we've done in.

In operational excellence, so pricing discipline special order margin those those areas of the business, where we feel like we can refine our ability to manage price effectively is the battle.

Okay.

Thanks, and then I wanted to go back to a something in your guidance that you said, you said that gross margin to normalize above 26% in Fourq I Wonder what do you mean by normalized you're talking about in Fourq. Q itself are you talking about more of a longer term run rate. You think you are you're going to stay above that 26% level.

Yes.

To both of those so what weve talked about in the past people are frequently asked US what is normal you guys talk about gross margin impacts due to commodity fluctuations, but what's normal.

At our current mix based on the current prices, which is important part of the equation always but we think its above 26, we were a little cautious as we bought throughout the year to snap that line because we wanted to see where things have settled but as we work through the year, We think thats a good guide for everyone that based on current commodity prices, it's not 25 as normal in the fourth quarter and going forward. We think normal is over 26.

Okay got it thanks very much guys.

Thank you.

And now we will take a question from Mike Dahl of RBC capital markets.

Hi, Thanks for taking my questions and nice job navigating a lot of cross currents right now.

Thank you.

My first question I, just wanted to get a little more detail on the acquisitions. If we could can you give us a sense for.

From a revenue and EBITDA or margin standpoint, how we should think about.

Contribution both for the second half and on a run rate basis.

It's pretty modest acquisition I'm, not sure that you're going to be able to decipher it out at the details.

Trust facilities or.

We've talked quite a bit about what.

On incremental value, we'd be provided by a trust facility and.

No that that whole question about how we allocate capital we feel pretty good about our ability to.

To balance between debt pay down stock repurchases and M&A, but I think it's fair to say that were only buying what we think we're getting a good deal we think its a.

A deal that makes sense for us and.

Got 43 million represents.

Relatively modest investment for the three plants that are already up and running in a market, where we have put forth.

Yes, and I like the fact that it gives us into a couple of new MSR days and.

If we so choose to expand the product offering.

And those and as we do have facilities already north of.

North of Phoenix, and so we now have the opportunity to to serve the customers up there as well with with trust in panel.

Okay. Thanks, and I guess just quick quickly on that then should we think about these as as being similar.

In nature or whether it's.

Size or otherwise to.

Your existing plants or is there anything different about these plants that we should be aware of.

Now they are generally similar.

Okay.

My second question is.

Around second with the theme on manufactured products, obviously, the markets had some headwinds in terms of starts.

And your volume has continued to well outpace that but it has decelerated over the past quarter and so I wanted to get a sense of just when you think about that 6% on.

Manufactured products volume, you're putting in a lot of investment organically you few of bolted on with these.

These couple of plants.

How are you thinking about within your guidance.

Yes potential for Reacceleration or just what level of growth.

In volumes should we be thinking about for manufactured products going forward.

Yes, Thats, a tough forecast asking me to obviously, you're going to have a correlation with starts we've talked about that.

Single family starts over the long term best indicator of our underlying demand. We do think we're taking share. So obviously, that's another component and this is part of our ability to do that because we think the macro trend is coming towards builders firstsource as it as it pertains to our ability to invest in our skill set in that dress manufacturing.

Our updated.

Maybe the best answer your question, we're going to continue to invest in this space because we believe that the growth there is always going to be better than star.

Got it okay. Thank you kind of talk talk to correlate, but I think thats a thats the summer.

Sure understood. Thanks.

Thank you.

And now we will go to Alex Rag of B. Riley.

Thank you very nice quarter as well could you add some color on your thoughts as to the weakness in the iron ore market.

Well it's.

Unfortunately, a trend we've been talking about for a few quarters, it's largely.

Where we do most of our on ours in the upper Midwest, which is still being hit.

From the tariff issues.

Alaska.

Which is still struggling with the lower oil prices.

And then to a lesser degree.

On the West Coast is our three pockets of.

Of our and our and really the hardest hit has been the upper Midwest for us.

And any comments on progress through July as it relates to Twoq results.

You mean, how is business going in July .

Exactly.

Good Yeah. This is we're happy.

It's good and you know I think our guidance for Q3 reflects that.

Excellent. Thank you.

Thank you and now we will go to Matt Mccall with Seaport Global Securities.

Thank you and when everybody.

One of them home. So so the the <unk> back to value add.

Can you give us an idea of where do you see that going say next year next three years next five years I'm I'm going back to the comment you made when asked about gross margin you said normalizing above 26% at the current mix I assume the goal is not to keep the current mix. So what I'm trying to get at is where do you see the mix going over time, and where do you see the margin going over time as a result of that mix shift.

Yeah.

It does move and I think we can talk about the fact that it since the merger when we were about 36% value add were up over 40% value add so there's clearly a trajectory there that you know the footprint and the investment in capacity has enabled us to track with broader industry transition towards that type of off site manufacturing. So we feel good about it pretty tough to predict in any given period, what the growth rate is going to be and what the impact on mix isn't candidly.

It's almost impossible. If you want me to forecast come on because the problem with that 26 and with the value add percentage is that it's dependent on the value of commodities because it will change our relative mix just from a dollar perspective.

So it's.

The little tough to extrapolate I mean, I would say you know if you're talking a quarter to a half point of growth on an ongoing basis, assuming that things continue to the trajectory that's probably oh.

A reasonable basis. Unfortunately, it assumes a stable commodity price, which I wouldn't be foolish enough to promise you.

Right. So yeah, I understand that so quarter to a half point of of mix shift as soon as what you are saying, Peter So where is it still remind me that that gross margin delta that we should assume value added versus commodity.

Yeah. So you know with with current levels that it might be a little bit lower but it's you know it's still you know in that 800 to 1000 basis points of trade up when you go from traditional stick to trust manufactured environment.

Okay. Chad you just had a question about the order environment and I think in the guidance there was an assumption of.

Did I hear is low to mid single digit growth for the year after being down in Q2, what what's if I heard that right. What's what's got you comfortable that it's going to improve.

Well.

After the tariff news yesterday may be a little tougher to get there but.

You know we are seeing some strengthening in Alaska and the West coast is holding in well.

So I'm optimistic we can we can see an overall improvement there, but again the the real key is going to be the the mood that are on the tariff issue and how it's impacting the the farmers in the upper Midwest.

Okay, but I did hear that right. There was an assumption of low to mid single digit growth for the year.

Yeah low singles.

What's in it and then I didn't get it it's not a game.

Okay got it and then I did not hear the outlook for multi family could you just repeat that.

I'm sorry, you broke up there could you repeat the question.

The multi family growth assumed in the fourth gun that I didn't I didn't catch that.

Yes, low low single digits flat to low single digits.

Got you we've had some pretty good momentum as of late we feel good about the projects. We've got comment so that will be on a small growth area.

Okay. Thank you.

And we will now go to Megan Mcgrath of Buckingham Research.

Good morning, just a quick follow up on one multifamily comment you're not the first to talk about maybe of working through a little bit of backlog in multifamily in the second quarter. So just curious where you see that backlog now well, we see a bit of a payback in future quarters or do you feel like it's it's stabilized a little bit.

Yeah.

I would say for us we're seeing stabilization, we think our backlog looks pretty good.

Growing in some parts of the country. So we feel pretty pretty good about it yes, I would say in particular in the northeast we're seeing some.

Some nice projects coming our way.

In the northeast part of the country.

Great. Thanks.

Bigger picture question.

Some of your initiatives you talked about.

And specifically.

Pricing and efficiency initiatives.

Just curious in this kind of environment when you.

Really aggressive lumber price deflation does that make the pricing initiatives or more or less important as you. As you are seeing such large deflation and has the priority in those initiatives shift at all in this current environment.

I would say if anything our focus on pricing has increased.

Over the course of the year the more we do the more we dig the more I feel there's there's incremental opportunities there regardless of what what commodities are doing.

Clearly commodities as the the toughest most competitive part of our business.

And it kind of is what it is but two thirds of our business is not commodity related and I still feel like Theres really nice off our opportunities there no matter, what we have to deal with from a commodity inflation standpoint.

Okay, and just sort of recap some of the some of that pricing work that we're doing is really focused on disciplined process right is it who this isn't a good.

You know out to Gaza customer type of dynamic. This is a how do we make sure we're updating our prices effectively we're giving people tools to use so that they understand the cost benefit of the relationship with individual customers. Its just.

I would say fundamentals that we can get and have been getting better at so it is very I would say long term. Good practice that we think is going to help us regardless.

It's a great. It's a great project in a in a high priority.

Okay. Thank you very much.

Our next question will come from Eric.

Dave it's been.

Yes, good morning, and thanks for taking my questions first just on a pricing tools are the benefits from those accruing to all categories or more so on the commodity side, how should we kind of think about.

[noise].

We think it's pretty broad, yes, I mean, it's where our approach has been very market oriented so market by market and we see it across the board I mean, obviously.

Commodities by its very nature is more competitive, but we see it everywhere.

Okay, and you've highlighted that.

As kind of an area of strength, which is I believe where he offer more kind of turnkey framing services.

You know Theres a lot of talk about the products that you're offering builders to drive efficiencies, but how do you think about some of those services and that kind of help you win share as well.

Well I think services are a big part of it is installation services.

To a customer stickiness.

Optimizing framing packages on the design side as a service.

So anytime you can add more services to your offering you know you are just that much more of a partner with the homebuilder.

And as I said, a minute ago, a much more much stickier relationship.

Muscle much less likely to surprise you to save a nickel on a two by four and so anything we can do.

You know to be that partner that the builder relies upon to help and build that house, most efficiently, whether it's products or services or some definitely we're focused on.

Great. Thank you very much and good luck in the third quarter.

Thank you.

And we'll move next to John Baugh Stifel.

Thank you good morning, Peter and team congrats.

I just wanted to get a sense.

As we think about modeling longer term you mentioned I believe that you're starting to see.

Your your pattern on backlog of orders or what you're looking at an incoming business.

Settling out a little bit with homes that people want to buy Ike I take that is.

As a code language for smaller homes, if I'm wrong on that correct me, but my question is.

As we think about Weve always modeled units of single family housing starts and obviously, we could be looking at a smaller unit is you have enough data or input color in your order book, how we would think about a delta when we model Nina revenue versus starts in units as we go out in time with what you're seeing thank you.

Yeah, So John I wish I could tell you. Yes is the short answer is I don't think we have a good rule of thumb for you.

You've seen the census information like we have.

We've done some analysis internally, but it doesn't give us a sense that.

You can really forecast or predict the impact on volumes due to the size of the homes. Obviously it will have an impact, but we haven't seen a material change in volumes from what we sell and yet as a result.

Okay. So for nearer term modeling purposes stones.

Units are still a pretty good predictor.

Yes, I mean, we've talked about if you want to use a point or two as a volume adjustments attributable to that we don't think thats reasonable, but it's tough to say that that's the right number that we've got a lot of statistics for analytics to support that.

I think the homes are a little smaller, but I also believe that.

The demand the homebuyers demanding these smaller home still one nice home so they still want.

Nice doors nice windows.

And so to a large degree if you're just taking out a little bit of square footage.

It could just mean, a little bit smaller framing package, but you're still getting some nice sales and margin on.

A lot of the other pieces of the home.

Okay.

And.

You are having a nice year, you mentioned commissions influencing the as DNA I'm just wondering on the compensations.

Number for corporate.

Is that influencing the number in any way.

You should have an increase in bonuses I assume but how would that manifests itself in this arena.

Yes, that's the other component its a little smaller than the commission's number but those are the two big numbers that are changed obviously for the performance. This year more broadly has been you have a little bit quicker accrual on the timing of the.

The bonus although I will say that.

Some of the lapping that we'll do in the back half of the year will normalize that a bit.

Yes.

Okay, and then lastly.

He's done a phenomenal job of de leveraging since the acquisition.

Obviously, you got a tailwind from the deflationary commodities so.

Is there some way Peter do you think about where you are.

Thank you and I'm not going to ask you Chad per day projected lumber prices, but is there some way using the word normalized.

Where your debt to EBITDA would be if we hadn't had all this deflation trying to get a sense of whether you feel for a normal lumber inflation or rate.

There might be a creep back up in that number where you are debt to EBITDA on a normal lumber price situation.

No question, we picked up a ton a tailwind this quarter as a result of the deflation over the past couple of quarters right I mean, it's.

It's something that.

We sort of indicate more broadly when people ask us that long term question about what would you do in the case of a downturn right. This is a good example.

Maybe a false way because it's just value of commodities, but we generated a lot of cash when sales are down.

And yes it is.

Say that math, we looked at a little less than a couple of hundred million dollars.

We would have had a tailwind on this time of year, where we're almost always increasing our leverage ratio so for it to drop.

Is pretty remarkable and obviously 1.8 turns versus last year is indicative of that.

As far as normal I think we've been pretty pretty committed to the idea of debt pay down and de risking but in that two and a half to three and a half range. We're not afraid I would say to fall out of the bottom of that range. If it means we're building dry powder, we can't find good deals, but as we indicated as we took action on this year or this quarter.

There are some good deals out there and we will continue to to snatch those out where we think it makes sense and we're getting a.

You know a good value for our money.

I think we're in a bit of a sweet spot now no question that the price of commodities bronze backup we will we will see growth in working capital as a result, I guess, so the simple math would be Peter that you know if we saw the lumber inflate right back we'd give back roughly $200 million of working capital benefit is that is that a simple way to think about it.

Yes, it's probably a little less than that maybe 75, but yeah. Yeah. Okay. All right. Thank you should get back to where it was this time last year, which was pretty old. It's obviously a seasonal business. So yeah. During the peak of the selling season, you could see that.

Okay. Thank you very much good luck.

Thank you.

We will move now to Steven Ramsey of Thompson Research group.

Good morning.

When I think about it.

Investing.

30 million this year towards the value add business.

Does the new the newly acquired plants.

Take some of the 30 million or do you add to that kind of that level of investment to increase the capacity and grow these new plants.

We're adding.

Yes incremental.

Second is there any way to kind of ballpark is it meaningful I know, it's only a half year or less than that really.

Well the investment of 43 million in the acquisition price is the three plants plus the 30 million that you're referring to is there are sort of rough guide on how much of the incremental capex is going to be attributable to the growth in value add.

I'm not sure I follow what you were asking.

Yes, I guess I'd say the newly acquired assets does it as it lays a base for been Capex on to those plants.

Is there a need for more capex that you want to put in.

In the next one.

In those specific facilities, yes, we'll we'll do that but I think that they're already in pretty good shape, there already well automated from what we've what we've seen I'm always looking for ways to improve them, but not a significant source of incremental investment.

Great. Okay, and then as you as you think about as we think about gaining share and kind of what that looks like on the ground do you win that share because of value add for better pricing.

Quicker delivery and then do you when are you winning that from.

Larger competitors or is it.

Smaller competitors.

And then I guess kind of another element to that.

Is a slower market or one that we're in is more conducive to gaining share.

A I would say yes.

Certainly the offering of.

The component side of the business helps us gain share in many times, if you can get that business a lot of the other.

Products that go into the home will follow.

I don't know.

I think we're taking share from big and small competitors, it's definitely a market by market.

Situation, but there is no doubt in my mind that.

Enhancing our value add proposition.

Creates additional opportunities to grow share and as I talked about earlier the customer sticking is.

Not barring a you know just.

The dramatic fall in housing I don't think small ebbs and flows in housing demand is going to impact impact that that situation. When it comes to components and in our ability to take share.

Great. Thank you for the color.

Thank you.

We will now go to a question from Jay Mccanless of Wedbush.

Hey, good morning, everyone.

Oh, good morning, Peter I missed the guidance you gave on the commodity deflation for Threeq could you give me that again.

Sure, it's a 14% to 17%. So this is this is the big quarter for the year.

And I believe you said also that that's going to be the commodity deflation. We should expect for the full year is that correct.

The commodity inflation for the full year is similar to what we saw in the second quarter, so that 10% to 13%.

Thank you.

And then the other question I had is.

We've had two public builders now announced that they're going to start.

Potentially building.

More homes for the single family for rent operators.

Just wondering you know if the if this does catch fire and become a trend and the built the big builders are building even more houses than they are now how do you guys feel about your capacity would you need to make some meaningful investments. If we were to see the big guys take even more share than they already have or do you feel like you can flex up without a lot of expenditures.

[noise].

I think as far as the structural capacity is there.

We would probably have to bring on some additional ships.

In the in some of the plants. If it really took off I wouldn't see a large capex type investment, though I think we got capacity in the structure there but.

Labour we'd have to get some more labor I love the way Youre thinking on volume Jay if you could comment.

Okay, I kind of got to be optimistic about something the one other question maybe on.

You add and I mean.

Certainly on give me this offline but.

What has been the historical growth rate in value add products about value add volumes since the merger do you all have that handy.

Yeah, I don't I don't have it handy if an estimate off the top my head would say high single digits, maybe double or right at the double digit line, it's probably in their eight to 10.

Okay, great. Thanks for taking my call I go back with your back book.

We can follow and <expletive> . Thank you okay.

And now we will go to Trey grooms of Stephens.

Thank you good morning.

They trigger.

So just a couple of.

Housekeeping really.

One is.

Let's see the integration related expenses, you guys had in the quarter.

I think it was 3 million is is there anything there we should be thinking about kind of as we're modeling the next couple of quarters.

Not for this year.

It's pretty it's pretty stable, but we are looking as we have promised to finish our ERP conversions by the end of this year. So there will be a pretty substantial reduction in that integration cost line coming into.

2020.

What will likely shift a bit of that into operations. Because there is some interesting projects, we've been looking out but so there's a pretty substantial portion of that that will go away.

Got it Okay, and then just a little bit of clarity and sorry, if you guys touched on this I dropped off for just a second but the the 26 or.

North of 26% margin that you guys referred to just to be clear, that's basically taking out any commodity impact either direction. That's just the kind of the the new normal meaning no commodity impact that.

Exactly it does assume a flat commodity environment, which.

Yeah.

We can talk about but that that's kind of our thinking.

Okay, and then kind of going into the the Fourq Guide that you gave if I heard you right you're looking for something north of 26 in the Fourq, you, but that would I mean you.

I think if my math right, you're going to have a little bit of benefit still left from.

Commodity deflation in for Q.

Is that right or is that going to be kind of the behind this at that point, it it'll be pretty well gone.

By that point, you know, we're looking at sort of bringing down inventory at that point, a it'll be pretty well gone where we'll be looking at normal that the biggest impact in the fourth quarter that people see is the lapping of last year's big deflation.

Okay got it.

Makes sense and then.

The.

Given where your your leverage is now and again you may have touched on this I'm sorry, if you have but given where your leverage is now in its kind of within that target range should we you know I know you've picked up a few plants and done some things like that and I know you've got plans for you know plant and kind of Greenfield type stuff and expansions on your own but should we expect you guys to start kind of ramping up on the on the M&A front and you know just given the given where we are in the cycle, which still seems very reasonable and your leverage here.

Yeah, you know I said earlier I like the position we're in.

We don't have to buy anybody weaken then we can invest through just our normal capex, if we come across opportunities.

That are a good value at good multiples, we can be opportunistic we can pay down debt. So I like the flexibility I like the position. We're in a short answer yeah, we were going to keep looking to expand our value add offering but it's got to be it's got to be an acquisition that makes sense and this one we just did obviously, we felt did make sense, but there could be some other smaller opportunities that come our way.

Got it Okay, and then lastly, as I'm kind of within the guidance Peter the SG and I know you guys have some bonuses and things like that you touched on it but it actually looks like the SDMA is is if I'm backing into this right.

It looks like a pretty reasonable <unk> level versus last year is that I mean, almost flat to even.

Maybe even down is that is that right is that the <unk>.

The right way to look at the SGN expense kind of in the back then.

I appreciate you pointing that out that has been certainly a significant focus for the operation you're absolutely right with the exception of some incremental commissions and some incremental bonuses. The team has done a really really good job of disciplined spend management, particularly when you think about the challenges in the overall hiring market challenges.

Attracting and retaining top talent, it's a it's a really good job by the team. Obviously does look great because the sales line has moved on us but this the ft. In a dollar a discipline has been quite exceptional by the team. Yes, we started out the year really focusing on because we knew deflation was going to be a headwind and so the guys were really focused on that and then as we've already discussed we're starting to see some of the operational excellence initiatives flow through largely on the warehouse and deliveries the delivery side, helping us manage those costs even better.

All right well. Thanks, Thanks for all the color you guys have given us on this call and in the in the press release and everything on the guidance and everything that's very helpful.

Oh, thank you.

And with that that does conclude todays question and answer session I would like to turn things back over to Chad CRO for any additional or closing comments.

Yes. Thank you once again for joining our call today, and we certainly look forward to updating you on our progress of our initiatives in November and if you have any follow up questions. In the meantime, please don't hesitate to reach out to bid or Peter Thank you.

And again that does conclude today's call we'd like to thank you again for your participation you may now disconnect.