Good day, and welcome to the Builders FirstSource 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. I'd now like to turn the call over to Mr. Michael Neese, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead, sir.

Thank you, Katie. Good morning, and welcome to our second quarter 2022 earnings call. With me on the call are Dave Flitman, our CEO; and Peter 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.bldr.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 for 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 they could be useful to investors in our earnings press release, SEC filings and presentation. 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. With that, I'll turn the call over to Dave.

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 comparables in a challenging operating environment. These outstanding achievements are a direct result of having strong alignment around our clear strategy and focused execution against that strategy, driven by the hard work and dedication of our approximately 30,000 team members and their commitment to provide outstanding service to our customers. On Slide 3, 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 4, we outline how we continue to execute against our strategic priorities this quarter. Specifically, we delivered record results in the quarter through expanding capacity, increasing value-added product sales, and enhancing productivity. We continue to leverage our BFS 1-TEAM Operating System with a focus on cost containment to 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 deployed capital toward accretive inorganic growth opportunities, as highlighted by our most recent acquisition, HomCo. Through July, we have repurchased approximately $1 billion of the $2 billion share repurchase authorization our Board approved in May. Turning to Slide 5. 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 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, which Peter will discuss in a moment. Turning to Slide 6. 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 to deliver a 10% top-line CAGR and a 15% adjusted EBITDA CAGR. Importantly, this represents an average 50 basis point 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 $7 billion 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 7 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 3.4%. Tough comparisons against 2021 results impacted year-over-year growth in our multifamily and R&R segments, leaving our year-over-year growth essentially flat. Core organic sales grew 12.2%, while value-added organic sales grew by 32% compared to the prior year period. 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 in an improving but still supply-constrained environment. As we turn to M&A on Slide 8, we remain focused on executing tuck-in M&A that delivers a high return. Over the past 1.5 years, we completed 10 acquisitions, reporting $1.6 billion of capital, aimed at building out our value-added customer offerings and investing in our digital transformation and further scaling our distribution network. In July, we acquired HomCo, a lumber and hardware supplier in Flagstaff, Arizona, and are excited to welcome these new team members to the Builders FirstSource family. HomCo 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 1-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 that drives long-term value creation for our shareholders. Now let's shift gears and cover our digital strategy on Slide 9. Our momentum regarding our digital transformation of the homebuilding industry is accelerating. Foundational initiatives such as standardizing our house plan 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 SnapADU of California complete over 300 starts annually. And we now have customers responsible for more than 5,000 starts using the Paradigm Visualizer. We recently hit an important milestone in our technology development by successfully integrating the material takeoff, structural design, and visualization models into one process. This means when selections are made in a specific model, such as choosing a siding type in color or expanding from a two to a three-car garage, it is reflected in the 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 provide the basis for offering Building Information Modeling, or BIM services to our customers, allowing 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 BIM pilots with one large national builder and two custom builders. Our pilot with Front-light Building Company in South Carolina is highlighted on their company website and 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 1-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 at serving our customers. We are accelerating our efforts in this important area to ensure we not only hit our financial targets but 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, and BFS is now more than 12 times larger and 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 costs through several large combinations, including the integrations of ProBuild 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 reduced 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 have increased our value-added components and network 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 the development and recent startup of our first fully robotic trust manufacturing line at our Villa Rica, Georgia facility. We have also contracted for an additional eight fully robotic lines, including four roof trust 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 spending, 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 that weighed on 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 balance 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 spending, accelerating productivity projects, taking appropriate headcount 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 about the prospects for our industry over the long term. I am highly confident in our ability to outperform the market in any scenario. Given our bulletproof balance sheet, expect us to lean in opportunistically on M&A in 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 inspiration to come to work every day to continue the evolution and growth of our world-class company. I want to recognize Brent Goodwin, an exceptional team member who for the past four years, has worked as an inventory control analyst at our 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, Brent's contributions have been key reasons why our Raleigh millwork facility has become the go-to supplier for homebuilders in this burgeoning market. Beginning in late Q3 2021, Brent's location began experiencing shortages across multiple millwork product categories. Over the past two years, Brent has been relentless in developing creative solutions to help augment inventory, keeping our stock levels consistent to ensure minimal delays for customers. What makes Brent's work all the more impressive is the fact that he's been able to do it all while enduring first a demolition and then an expansion of this location's main storage warehouse. I want to thank Brent for his many contributions in helping keep Raleigh's builders on track amid tight supply constraints and strong homebuyer demand. We are fortunate to have Brent on our team. I again want to thank all of our team members for their continued tremendous work and focus on 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 and demand environment to produce record second quarter net sales, gross margin, net income, and adjusted EBITDA. I am also pleased to report that we again demonstrated our ability to deliver strong cash flow results by generating approximately $900 million in 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 the 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 in the 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, a 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 in 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 IT, productivity, and our digital strategy represented another 10% of the increase, and fuel-related expenses contributed to a 10% 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 in 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 $1.5 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 $6.26 of adjusted earnings per diluted share compared to adjusted net income of $574 million or $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 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 year, we have spent approximately $230 million on our M&A transactions, including our most recent purchase of HomCo in July. In the second quarter, we repurchased 16.9 million shares for $991 million at an average stock price of $58.7. 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 $1.5 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 $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 0.8x 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 in net borrowing availability under the revolving credit facility and $166 million of cash on hand. We are pleased with our first half '22 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 R&R 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 EBITDA guide remains unchanged, and we continue to expect growth of 18% to 22% or $2.2 billion at the midpoint as our outperformance in the first half will be largely offset by market weakness as we move further into the back half of the year. 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 in 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 $1,000 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, a 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 forecasts coming down in the back half of this year, and cancellation rates increasing. We are undeterred. Our company is much different 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 insights on our long-term goals, our core values, and our operating principles as our guideposts. BFS 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, and given our belief in the long-term industry growth trends. Our more than 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'll 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. Katie, let's please open the call now for questions.

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. 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. And I don't know, depending on our realistic lumber assumption, that 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 that's a full-year static assumption. So I wonder if those are more sort of run-rate expectations versus a hard guide on top of the first half performance. So not to put words into your mouth, but sort of how should we think about that sensitivity and sort of the view on the second half EBITDA?

Matt, that's a great question. The goal of the sensitivity page we included is to provide a normalized environment. It removes any fluctuations in commodity prices and margins beyond what we consider to be normal. This year has certainly not been normal; we've experienced significantly higher margins. As you’ve seen, we expect our normal margins to be over 27%, and we are performing well above that. I suggest using the sensitivity chart to analyze differences between various commodity price levels, while also recognizing the notably different results we have seen in 2022 as you build your model and estimate total included demand.

Thank you for that, Peter. I'd like to discuss the gross margin, which showed strong performance this quarter. However, we've noticed a shift in the market and factors like leasing and supply chains that previously supported the gross margin. With your long-term guidance of 27%, how should we view the pace of gross margin normalization at the base business level as we enter the second half of the year?

That's a great question. It's a key aspect of how we assess our business and make forecasts. Along with commodities and starts, margins are an essential factor, and it will take some time for them to return to normalized levels. While we are encouraged that the supply chain is starting to show some signs of improvement, it is still not at a fully normal state. We anticipate a gradual return to normality as the year goes on, but we may be looking at early next year before we see margins close to what I would consider normal. We'll need to keep an eye on this to understand when that might happen.

Our next question will come from Reuben Garner with Benchmark Company. Your line is now open.

To start, I want to clarify the guidance for the base business top line. I see that the outlook for single-family has decreased by about 10 points, yet the reduction in the base business is only two points. Can you explain this? Is it mainly due to the backlog that you're working through before any noticeable impact on the year-over-year volume? Or are you experiencing share gains or better adoption of your value-added products that have helped you maintain the current level?

Yes, I think it's a combination of all that, Ruben, you have to point out the backlog strength that 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 volumes shift 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 a long time, and we expect that that will continue. So it's a combination really of those two things. But aptly 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 with your fixed variable and the differences in the business versus previous period. Can you talk about what your revenue, gross margin, and even EBITDA might look like next year in a scenario where it starts to fall 20% or 30% and go back to kind of where we were in '17, '18 and '19? Just kind of compare 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 here in the script, we're not the same company. Clearly, we're 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 working capital. But importantly, we've been talking for several quarters here about any demand shift or decline being short-lived, certainly relative to what happened in '07. 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're driving about 30% of the housing starts, and that demand is much stronger than it was, say, in 2007. And secondly, over the last decade-plus, we've had a huge underbuilding in this industry. So that demand is not going away. We've underserved the market somewhere between 2 million and 6 million single-family homes over the last 12 to 15 years. So, we think any of that recessionary environment will 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. While I may not fully agree with the downside range, I have spent considerable time with the team developing models and ensuring we understand how our business would fare in the event of a downturn like that. We believe there is some buffer from backlog for at least a quarter, allowing us to continue building the homes that are already started. This could take longer or happen more quickly, but it's an important factor to consider as we look at the remainder of this year. Looking ahead, there are a couple of main components worth highlighting. Firstly, regarding starts, we expect to align closely with market trends since we operate in the primary markets where starts occur. Our margins depend significantly on our product mix, as well as the competitiveness and availability of products in the market, and lumber prices also play a crucial role. We strive to outline the potential impacts on these variables. A recession would likely affect all three and push us toward our normalized margin levels. A rapid downturn could temporarily dip us below our normalized margins by a couple of points, but we see this as a reasonable scenario. The key question revolves around the nature of the regression, its speed, and the resilience of some markets and customers. Additionally, we have become more mature and have made significant improvements in our business, especially regarding synergies and consistent productivity gains; the shift towards value-added services is something we believe we can leverage for our results.

Thank you. Our next question will come from Trey Grooms of Stephens. Your line is now open.

I have to echo the congrats on the very impressive results. So 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. But more specifically, can you talk about expectations for product mix in 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?

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 that there's been such a tremendous exit of skilled labor in the industry since the last downturn, and you don't just get that back over time. So importantly, those efficiency gains that 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. We expect those product shifts to continue through the course of time.

Okay. And then kind of follow on around the same topic here. Can you talk about how your push towards digital plays into your strategy in 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. Importantly, we hit that important milestone. As we've talked about the long-term strategy and the vision when we acquired Paradigm just about a year ago now, we said we would take a platform that was fairly narrowly focused in 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 of the home. And as I said in the script, we just recently hit an important milestone where we've integrated the material takeoff with that structural design into the visualizer with Paradigm. So, that starts to bring together some of those key elements and capabilities that we spoke about. Still a lot more work to do but the vision is intact, and we have invested heavily in the last 12 months. We'll continue to invest heavily, we believe in the vision. 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, and I talked about it in the script here a little bit, finding all the problems in the digital world instead of at the job site, just drives tremendous efficiency gains, and that's 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.

Thank you. Our next question will come from Mike Dahl with RBC Capital Markets. Your line is now open.

Peter, I wanted to follow up on Matt's question regarding the ranges, particularly in relation to the second half of the year, as I think it may be causing some confusion. What you're indicating is that this year has been quite unique. For instance, if we look at a commodity like $800 lumber, your range implies that it would generate $3 billion to $3.3 billion in adjusted EBITDA. However, it seems that you're suggesting the actual margins this year are stronger, meaning you would produce more than that under the current conditions at those lumber prices. Please correct me if I'm mistaken, but specifically, I wanted to clarify this point.

That's exactly right. Yes.

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?

I will say we don't provide a quarterly split for base business. We think the annualized view is still the right way to look at it as it 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 about 2/3 non-commodity, 1/3 commodity in terms of what EBITDA does to give you a sense of the type of outperformance. Obviously, we're seeing in both categories. But how that reflects on the base business side and the base business material is in there. So, you can see our expectation for the full year.

Sure. We'll look into that further. Regarding the increase in free cash flow, it's likely influenced by strong performance so far this year and some favorable commodity conditions. You've reduced your capital expenditure guidance by about $100 million. Could you provide more details on the changes to free cash flow and clarify what you're planning in terms of projects that might be delayed or rescheduled for next year?

Yes, absolutely. I think the entire team is disappointed with the CapEx situation. We have several exciting initiatives related to new facilities, fleet refreshes, and other investment projects. However, we've faced challenges in acquiring what we need, whether it's buildings or trucks, and the pace of getting properties ready to start operations has been slower than expected. We are not canceling or shelving anything at this time; it's mainly about shifting timelines to next year. We are committed to moving forward and ensuring we have the capacity to meet our customers' demands. Regarding the overall business, we clearly exceeded expectations in the first half. The profitability of our core operations has significantly contributed to the increase in cash flow, but we also encountered higher commodity prices than we predicted. Those prices rose sharply in the second quarter and diminished just as quickly. Nevertheless, they remain above our initial forecasts. The combination of these factors will allow us to pass cash through the business, which we are eager about. We maintain the assumption that commodity prices will return to a historically normalized level by year-end, and this expectation is factored into our guidance numbers.

We will take our next question from Ketan Mamtora with BMO Capital Markets.

Dave, I want to come back to that the mix question again. I mean, if you're assuming that the economy is slowing, housing starts special on the single-family side are going to, let's say, assume are 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 trade down from a mix standpoint to more commodity products? Or is that not a right way to think?

No. As I mentioned earlier, Ketan, we believe we will continue to lead in this area. Our customers appreciate these products because they address many challenges on the job site and enhance efficiency. Therefore, we are confident that we will pursue this direction vigorously, and the product mix will keep evolving over time.

And the thing I'd add to that is this isn't just an open prayer. The LDR during the Great Recession grew our share of business attributable to trough and manufactured products. So even during a recession that I think all of us anticipated was much more severe than what we're looking at here. The market continued to adopt these products for exactly the reasons that Dave mentioned.

And we've been through cycles, up and down cycles, parts 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. That's helpful. For my second question, it's clear that your balance sheet is very strong, as you've described it as a fortress balance sheet. I'm curious about how you would manage a liquidity cushion if the downturn turns out to be more severe than expected, especially in relation to share repurchases in case the stock comes under pressure.

Looking at our balance sheet, we maintain a disciplined approach to ensure it remains strong. Our top priority for capital allocation is to ensure we can handle any challenges that arise. We run downside models to guarantee adequate coverage. Currently, we not only have liquidity but also a significant amount of unused capital available for working purposes, which provides a cushion in case valuations change. Moreover, we have additional resources, particularly considering our unsecured bonds. This offers us a better position than it may appear. It allows us to be both selective and aggressive when opportunities arise. We have been strategic in our approach to mergers and acquisitions, adhering to our strict criteria regarding financial expectations and alignment with our strategy. We will continue this method. Despite our careful approach, we have successfully added valuable businesses to our portfolio, and we anticipate more opportunities to do the same, especially during a downturn. Given our high beta, we will be strategic and opportunistic when it comes to share repurchases. We believe in the value of our stock and will ensure that our capital allocation maximizes long-term shareholder value.

Thank you. Our next question will come from David Manthey with Baird. Your line is now open.

And back to Slide 16. This is a minor issue, but it seems like the revenues across the tiers ticked down by about $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's nothing really to it. I mean we tweak it and adjust it to stay aligned with our core operating model. So, we try to move it so the two match up and minor things shift from time to time, but it's not signaling anything really.

Cool. All right. That's what I figured. And then second, when you talk about the price fluctuations versus a static commodity environment, we experienced rapid and significant downside in lumber in like the fall of '20 and 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. I'm just trying to understand what's different about the future versus the recent past performance we've seen here.

Yes. No, I think it's a great question, and it highlights a lot of the work we've done to make the business stronger and more predictable. But it also reflects, I think, the still supply-constrained environment. I know all of us have had a wonderful time talking about the downside opportunities that this industry faces 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've changed pricing. These changes have made our results a bit more stable, a bit more predictable in terms of upside and downside swings in commodities and what it does to our profitability. We talked about substantially reducing the amount of fixed, as we used to call it, price 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 inversely expansion 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 pricing is disciplined and that we're moving our product quickly and efficiently. I think those things really have 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 outlined and margins will normalize a bit. But I do think we'll retain that more consistent, more predictable profitability profile.

Thank you. Our next question will come from Stanley Elliott. Your line is now open.

Congratulations. Dave, can you talk a little bit more about what's happening on the digital side? I mean it sounds to me like that things are accelerating or at least tracking almost ahead of expectations. And when I would have looked back at the Analyst Day, kind of the five-year build, you targeted $1 billion of revenue. I would have thought the first two years were more building it out. Maybe the last three years, you're 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, Stanley. You're thinking about it right. We hit an important milestone in the quarter and wanted to share that. But that's part of the plan. So there's still a whole lot more work for our team to do. My main message is we're executing well, and the development is coming together exactly as we expected. We still expect to see that $1 billion, and it will be back-end loaded in that five-year time horizon per design. So we're right on track with where we want to be.

But the thing I would add is I think this reflects how much the market is underestimating how powerful this thing is, right? We've seen the vision for where it's going to go. And these things that we're rolling out right now, as Dave mentioned, are amazing. They're massive. They're unprecedented in terms of capabilities for this industry, and we're just getting started.

And switching gears a bit, you mentioned the automation piece; I can 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, base automation for many years. Both legacy companies have done that. We're continuing to automate. As Peter mentioned, there's some equipment challenges in 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 House of Design 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 coming together at Villa Rica, and we expect over the next couple of years to buy another eight more of those lines or four on the roof side, four on the floor trust 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 secondly, deal with the same labor challenges our customers face that we've got inside. So, it takes some of those issues off the table. But we'll 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 think the idea of not having all the capital we want is frustrating. We're already moving incredibly fast and outpacing everyone, but we want to go even faster. It's disappointing that the capital hasn't come in as quickly as we hoped. However, it's not going to hurt us; it may just delay our ability to capitalize on opportunities as quickly as we would like.

Thank you. Our next question will come from Adam Baumgarten with Zelman. Your line is now open.

Could you give us a sense for how the core organic sales growth in the quarter broke down by volume and price?

Yes, I'd say this time, it was much heavier towards price, more of an 80:20 split.

Okay. Great. You achieved $40 million in productivity savings in the second quarter and are aiming for over $100 million. Can you provide the number for the first quarter?

So, the first quarter was actually satisfying the remainder of our synergy savings commitment. So, we've changed our language as we committed to do. So that first number was $32 million or $52 million in the first quarter. And then the remainder, the other $100 million that we're talking about is two through four and productivity-specific, not synergy. So $60 million come in the back half.

Thank you. Our next question will come from Colin Verron with Jefferies. Your line is open.

I wanted to discuss the long-term targets. I understand you have reaffirmed your 2025 base business targets despite the alterations in end market expectations. To provide more confidence around those targets, could you outline what would need to occur in the macro environment of the single-family end market that might pose a risk to that guidance? This could involve either a financial perspective or a timeline for achieving those goals.

Yes, I think the obvious one is that 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 '21 number by 2025, that would put pressure on our ability to make that tool. I'd say that's about it. I'd say all 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 2/3, 1/3. It implies a pretty good 40% incremental EBITDA in 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. I mean I guess the comments will sound a bit familiar, right? You're right, it was about 2/3, 1/3 in terms of the benefit that we saw in the non-commodity side versus the commodity side. We do think it over time that things are 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 a while longer for that to normalize primarily because of the same reasons we're seeing the benefit now. The primary reasons are 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 reasons for that to normalize. That will come through in the form of increased capacity from suppliers. It may come through in the form of decreased demand from the end markets. But we certainly think there is a permanent benefit in what we have experienced in the past couple of years as it pertains to our increasing value-add mix, the increased adoption in the industry, as well as our ability to compete effectively in really successful markets around the country.

Thank you. Our next question will come from Jay McCanless with Wedbush. Your line is now open.

I'm sorry about that. Fantastic quarter, guys. After we purchased in July, how much do you have left on the authorization now?

There's $1 billion more left on that authorization.

Okay, I apologize if I missed this, but could you explain what happened to result in the $2.5 billion in free cash flow compared to the $3 billion? The increase in the midpoint is significant, and I'm curious about the factors that could lead to the low end versus the high end, Peter?

Yes. I believe the main impacts come from commodity performance and profitability in the first half. We have consistently maintained expectations of a return to more normalized commodity prices. Rather than gradually adjusting, the situation accelerated for a period, providing a substantial benefit to us. This translates into real cash that we can reinvest, which is significant. Our profitability has also increased, and we are pleased with this outperformance, believing it will continue to positively affect the business as we implement productivity initiatives and other measures to enhance that profitability. However, one less favorable aspect is that we anticipate being unable to achieve the $100 million in capital expenditures this year due to ongoing supply chain issues.

Thank you. Our next question will come from Alex Rigel with B. Riley. Your line is now open.

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, that's the guidance. So $2.75 billion, I may have taken some liberty and rounded it up to $3 billion. We'll continue to watch, obviously, the results as the year progresses, and if there's more there, I propose we'll 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 in your non-commodities business, have you seen any products that are obviously manufactured by others? Do 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 anyone 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. Our next question will come from Steven Ramsey with Thompson Research Group. Your line is now open.

I wanted to touch on just one topic replenishing inventory given potential slowing of single-family demand, how are you thinking about replenishing inventory when you want to be a trustworthy source for builders and balance that against slowing demand? And then, are you replenishing now at the same rate as the first half? Or do you plan for that to happen in the second half?

Yes. We're maintaining our usual strategy. This is typical for us. Just like our regular seasonal practices, we continue to adjust our purchases based on incoming orders. We keep the right inventory levels, often managing it on a daily basis, and sometimes even more specifically by market or location, depending on the SKUs involved. We're very cautious about ensuring that we never run out. If there's any shortage, it's the suppliers' responsibility, not ours. This is something we guarantee to our customers and work diligently to maintain. We are continuing the same strategy in a down market as we do in an up market to ensure we have the right supply available.

Thank you. And for our last question today will come from Ryan Gilbert with BTIG. Your line is open.

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 in your gross margin. But just given what commodity prices have 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 performance of the business. If anything, it's more competitive, not less as things normalize, that's kind of our expectation don't see it eroding in a significant way. But yes, I mean, I think there's certainly an opportunity for increased competitiveness. If we're going to be competitive in any part of our business, it's absolutely the commodity space in terms of a gross margin normalizing more quickly than that.

Okay. Got it. And second question, for me is on organic growth over the last few quarters, it's really broken away from single-family starts growth, whereas if you go back over a few years, I think it's 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?

I think I have a couple of different answers to that question. When we're talking about margins, I think 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. Our growth is substantially higher than the rest of the business. And while there's 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 and to be that partner for them. So, we do think that's sticky in the long term.

Okay. Got it. And then just a quick final question on July trends. I think you mentioned that demand remains strong. Are there any numbers you can put to kind of quantify the strength that you're seeing so far in July or you saw in July?

No. I think continued is 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 and focusing on our customers.

Thank you, ladies and gentlemen. This concludes today's event. You may now log off and disconnect. Have a great day.