Builders FirstSource Inc (BLDR) 2016 Q2 法說會逐字稿

Good day and welcome to the Builders FirstSource second-quarter 2016 earnings conference call. Today's call is being recorded, and will be archived at www.bldr.com. It is now my pleasure to introduce Ms. Jennifer Pasquino, Senior Vice President, Investor Relations. Please go ahead.

Thank you. Good morning and welcome to the Builders FirstSource second-quarter 2016 earnings conference call. Joining me on the call today is Floyd Sherman, Chief Executive Officer of Builders FirstSource; and Chad Crow, President and Chief Financial Officer. A copy of the slide presentation referenced on this call is available on the Investor Relations section of the Builders FirstSource website at www.bldr.com.

(Caller Instructions)

Any reproduction of this call in whole or in part is not permitted without prior written authorization of Builders FirstSource. As a reminder, this conference call is being recorded today, August 5, 2016.

Builders FirstSource issued a press release after the market closed yesterday. If you don't have a copy, you can find it on our website at bldr.com.

Before we begin, I would like to remind you that during the course of this conference call, we may make statements concerning the Company's future prospects, financial results, business strategies, and industry trends Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the SEC, and other reports filed with the SEC, for more information on those risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

The acquisition of ProBuild closed on July 31, 2015, the closing date. As a result, ProBuild's financial results are only included in the Company's GAAP financial statements from the closing date forward, and are not reflected in the Company's historic financial statements. We have, therefore, provided supplemental financial information of the combined Company in this press release that is pro forma or adjusted to include ProBuild's financial results for the relevant periods prior to the closing date.

The Company will discuss these pro forma and 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 explanations of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are available on our website. At this time, it is my pleasure to turn the call over to Mr. Floyd Sherman.

Thank you, and good morning. Welcome to our second-quarter 2016 earnings call. Before I comment on the Business, I'd like to provide an update on the integration and progress against our cost savings. Then I will give a brief recap of the quarterly results and turn the call over to Chad, who will discuss our financial results in more detail. After my closing comments regarding our outlook, we will take your questions.

Let's begin our discussion on slide 5, with an overview of the progress we've made on the acquisition integration and synergy savings. It's been a year since the acquisition of ProBuild closed. The cost saving opportunities we targeted of $100 million to $120 million are right on track. Synergies are being captured through network optimization, procurement, and general & administrative costs, with a breakout of about 20%, 30%, and 50% expected for each area, respectively.

For 2016, we expect to realize an incremental $70 million in savings over 2015. These savings include $12 million to $14 million in projected procurement initiatives, where scale improves our purchasing leverage; $7 million to $8 million in projected network consolidation savings; and $48 million to $50 million in projected overhead and SG&A savings, including benefit and 401(k) plans.

We realized $22 million in the second quarter. This is before one-time costs to achieve these synergies, which is estimated to be $30 million in 2016.

We have successfully completed 46 conversions to Builders' proprietary ERP system with minimal disruptions or issues. We have created a more diversified Company with enhanced scale and improved geographic footprint. Since the close, employee and customer attrition has been minimal.

We are the leading distributor of lumber and building products to the professional building channel. And with our presence in 40 states, and 74 of the top 100 MSAs, we are striving to become the supplier of choice for national homebuilders.

Our national scale facilitates strategic partnerships with customers and suppliers. This allows for better customer reach and less exposure to any one market.

With 24% of our sales attributed to the repair and remodel end market, we've also reduced cyclicality through broader sales exposure. The repair and remodel end market has proven historically to provide a more stable revenue base with strong gross profit margins and good returns.

Now turning to slide 6, our value-added sales of manufactured products, windows, doors, and millwork in the quarter increased 5.4% versus 2015, and mix of these products increased 80 basis points over the prior year. We believe our Company is well positioned to help homebuilders mitigate the impact of well-publicized labor shortages and increased cycle times through our manufactured and evaluated products across our national footprint. And we'll continue to focus on growing our value-added products faster than our overall sales.

Before turning it over to Chad, I will give a brief recap of our results for the second quarter. Sales were $1.7 billion in the quarter; this is an increase of 4% in sales volume as compared to last year, excluding the impact of closed locations and deflation. And we grew adjusted EBITDA by 16.5%, or $16.5 million. EBITDA growth in the quarter was driven by our synergy cost savings initiatives.

Sales fell short of our expectations, largely as a result of weather in April and May, and a continued construction labor constraints in many markets. Although our overall sales in the quarter were a bit lower than we had expected, our June sales were up 5.4%.

Additionally, our integration efforts remain a major priority for the Company. And the EBITDA contribution from these cost saving initiatives are significant. As a result, I believe that we may be growing a little bit slower than the market as a result of the internal focus to deliver on the integration priorities. I am committed to putting these distractions behind us as quickly as possible to get back to growing the top line faster than market.

Now in excluding the impact of deflation and closed locations, our single-family new residential volume sales grew 4.1% in the quarter and 11.2% in the first half. Multi-family sales volume declined 3.2% and 3.5% in the quarter and year-to-date June, respectively. Repair and remodel grew 7.3% in the quarter and 10.1% in the first half versus prior year.

The Census Bureau reported national starts increased 7% in the second quarter of 2016 and 13% in the first half from the single-family perspective, while multi-family starts declined 10% in the second quarter and 4% in the first half. Overall, our year-to-date volume growth is more in line with the market growth.

I feel good about our sales despite weather issues in the quarter and ongoing construction labor constraints. And I'm confident in our ability to grow this Business. I will now turn the call over to Chad, who will review our financial results in more detail.

Thank you, Floyd. Good morning, everyone. First, I would like to discuss the current quarter results on slide 8. As a reminder, we have reflected pro forma adjusted figures to include ProBuild 's financial results prior to the closing date and adjusted for one-time integration, closure, and other costs.

For the second quarter, we reported net sales of $1.7 billion, a 3.3% increase compared to pro forma sales for the second quarter of 2015, excluding the impact of closed locations. To be clear, when we speak about closed locations, we are not normalizing for overlapping market closures. We intend to retain all those sales. These are closures in non-overlapping markets that were closed for other business reasons.

Total sales volume grew 4% over pro forma sales for the second quarter of 2015, but was offset by 0.7% as a result of the negative impact of commodity price deflation on our sales. We estimate that sales volume grew 4.1% in the single-family homebuilding end market, declined 3.2% in the multi-family end market, and increased 7.3% in the repair and remodel end market.

Breaking down our second-quarter 2016 pro forma sales by key product categories, excluding the impact of closed locations, manufactured products were $291 million, up 5.8% from 2015. Windows, doors, and millwork were $343 million, up 5.2%. Lumber and lumber sheet goods were $557 million, up 4% from 2015. Our other categories were flat collectively compared to last year on a pro forma basis, as our gypsum, metal, and concrete products were impacted by the decline in multi-family sales.

From a product mix standpoint, our value-add product categories made up a higher percentage of overall pro forma sales, as our prefabricated components, windows, doors, and millwork categories accounted for 37.8% of sales in the second quarter of 2016, an 80-basis-point improvement over the second quarter of last year.

Our gross margin percentage was 24.9%, down approximately 70 basis points from 25.6% last year, but relatively flat to Q1 2016. Our gross margin percentage decreased, largely due to benefits of commodity deflation last year. Although commodity price inflation generally benefits the Company's operating results in the long term, it can cause short-term gross margin percentage compression when prices are rising, and margin expansion when prices are falling.

Last year, gross profit margin was benefited by approximately 50 basis points in the quarter, as prices dropped significantly in the second quarter of 2015. Additionally, our procurement saving initiatives have just begun to materialize in a meaningful way on negotiated programs, as we are still working through inventory on those products.

Our SG&A, as a percentage of sales, excluding depreciation, amortization, stock comp, and one-time acquisition and integration expenses, decreased by 140 basis points on a year-over-year basis. This was largely attributed to the synergy savings realized in the quarter.

Interest expense was $42.8 million in the quarter, a reduction of $7.1 million over pro forma Q2 2015, largely a result of lower borrowing and capital market transactions by the Company to reduce interest. Additionally, we exercised our contractual right to redeem $35 million in aggregate principal amount of our 2021 notes at a price of 103% in late May. We continue to actively evaluate capital market transactions with the intent of lowering our cash interest.

The Company recorded $4.2 million and $8.7 million in income tax expense in the three and six months ended June 30, 2016, respectively. This expense can largely be attributed to tax goodwill amortization from the ProBuild acquisition. This negatively impacted earnings per share by $0.04 in the second quarter and $0.08 per share in the first half.

At December 31, 2015, we reported a valuation allowance of $136.5 million against our deferred income tax assets, representing a full valuation allowance against these assets. In the second quarter of 2016, we moved from a cumulative loss position over the previous three years to a cumulative income position. If this profitability trend continues, we anticipate that we may reverse substantially all of our valuation allowance as early as the second half of 2016.

The Company had a federal net operating loss carry forward balance at year-end 2015 of over $280 million. As a result, we do not anticipate paying any federal income taxes in 2016, and only expect to pay $4 million to $6 million in state and other taxes.

Adjusted net income was $35.3 million, or $0.31 per diluted share compared to $18.4 million, or $0.16 per diluted share in the second quarter of 2015 on a pro forma adjusted basis. We produced another solid quarter of adjusted EBITDA, totaling $116.7 million, or 7% of sales compared to $100.2 million, or 6.2% of sales in the second quarter of 2015, an increase of 16.5% and a 31% EBITDA flow-through. However, this was short of our expectations, largely a result of softer sales growth than anticipated.

The Company was able to realize $22 million of synergy savings in the quarter before one-time costs, driving the EBITDA improvement year over year. We have provided an adjusted EBITDA reconciliation on slide 13.

Turning to slide 9, I will discuss a few select first-half key operating results. For the first half, we reported net sales of $3.1 billion, a 5.9% increase compared to pro forma sales for the first half of 2015, excluding closed locations.

Total sales volume grew 9.2% over pro forma sales of 2015 but was offset by 3.3% as a negative result of the impact of commodity price deflation on our sales. We estimate that sales volume grew 11.2% in the single-family homebuilding end market, declined 3.5% in multi-family, and increased 10.1% in repair and remodel. Our gross margin percentage was 25%, up slightly from 24.9% last year.

Our SG&A, as a percentage of sales, excluding D&A, stock comp, one-time acquisition and integration expenses, decreased by 160 basis points. This was largely attributed to the synergy savings realized.

Adjusted EBITDA was $178.5 million, or 5.8% of sales compared to $121 million, or 4.2% of sales for the first half of 2015, an increase of $57.5 million, or 47.5% and a 34% sales-to-EBITDA conversion. This improvement was driven by sales growth and realization of cost synergy savings in the year, before one-time costs to implement.

Turning to slide 10, our Business typically uses cash in the first half of the year, and generates cash in the second half. Cash used in operating and investing in the quarter of $6.7 million and the first half of $58.6 million was in line with our expectations and annual guidance of $75 million to $85 million of positive cash flow.

Total liquidity at June 30 was $617 million, consisting of net borrowing availability under the revolver and cash on hand. As of June 30, the Company had $104 million of outstanding borrowings on the revolving credit facility, an increase from March 31, largely a result of the short-term draw to call $35 million of our 2021 notes. We expect to pay down debt in the balance of the year.

Adjusted pro forma EBITDA on a trailing 12-month basis was $371 million and net debt was $1.97 billion as of June 30. This implies a leverage multiple of 5.3 times net debt to adjusted EBITDA. The Company reduced its net-debt-to-adjusted-EBITDA leverage ratio from 5.5 times as of the end of the first quarter and from 6.5 times from Q3 2015.

Turning to slide 11, there are about five years until our first debt maturity. The Company expects to make significant strides in delevering the balance sheet between now and then. We intend to do so through cash generation and paying down debt, although we are always evaluating opportunistic transactions to lower our interest expense or otherwise address our capital structure, allowing us to even further delever the balance sheet. We are prepared to act quickly should an attractive opportunity present itself.

We expect free cash flow generation will give us the opportunity to reduce the debt over the next several years. We believe this will be driven by EBITDA growth, including projected annual cost saving realization of $100 million to $120 million by the end of 2017, and a focus on working capital efficiency, which we believe will run between 9% and 10% of incremental sales. We will invest in our Business through capital expenditures at approximately 1.5% of sales, and we plan to utilize our carry forward NOLs to shelter us from paying federal cash taxes through 2016 and much of 2017.

In 2016, we expect one-time integration costs of approximately $30 million, and cash interest of approximately $155 million to $160 million. As a result, we expect to generate approximately $75 million to $85 million in cash flow for the full year. This is consistent with the guidance provided last quarter.

Once we have the synergies fully realized and one-time costs behind us, we expect the Company's cash flow to increase on a go-forward basis. Should market conditions unexpectedly accelerate or deteriorate, we have the ability to quickly adjust our capital spending and working capital accordingly. I will now turn the call back over to Floyd for his closing comments.

Thank you, Chad. Turning to our outlook, I remain very positive about the future of our Company. I believe our industry remains on a trajectory of solid growth. As Chad mentioned, our sales were shy of expectation in the second quarter; however, we saw a turnaround in June with 5.4% growth on a year-over-year basis.

Oil-related markets continue to be a drag on our overall sales growth, and we believe the overall multi-family market will continue to decline the balance of the year. And as a reminder, multi-family makes up about 11% of our sales.

To mitigate the impact of our top line, we are focused on growth with the national builders, who are capturing share, as well as leveraging the significant growth we're seeing in other areas. For example, we've experienced double-digit growth in the areas such as Pacific Northwest, Colorado, Utah, Idaho, and Alabama, and near double-digit growth in South Carolina, Florida, Indiana, and Wisconsin.

Our Company is well positioned to be the building supply company of choice for builders around the country, thanks to our geographic reach, enhanced product offerings, national manufacturing capabilities, and superior customer service. Our focus will be to leverage our national scale and sales capability to grow faster than the market, with a focus on profitable growth and value-added products. These strengths, our scale, and the potential leverage provided by the synergy savings combines to make Builders FirstSource an industry leader with significant opportunities to drive profitable growth.

We will continue to create value for our shareholders. And I attribute the success we've achieved in both the integration efforts, as well as the strong results we have posted since the acquisition closed, to all of our hard-working and dedicated associates. Thank you, and I will now turn the call over to the operator for Q&A.

(Operator Instructions)

Rob Hansen, Deutsche Bank.

Thanks. So weather was probably -- was undoubtedly an issue in the quarter. I think it was also tough in 1Q as well. If you have any quantification on that in terms of revenue that you might have lost, could you help us out with that? But I think the more important question is, can you make up any of that lost volume in the back half of the year in terms of constraints? Labor or capacity on your end?

I think the, Rob, the weather, I can't give you a real definitive number for the weather affect. But I can tell you it certainly was a major issue in Houston, where we had over 20 inches of rain in one month alone. Certainly, that was our worst weather impact in the market area. The -- I would say, also, the Mid-Atlantic area and sections in the Southeast and Florida were also very dramatically weather impacted.

The -- we really didn't try to put a dollar number too it but those are significant-sized markets for us and the -- we did lose a -- significant days in being able to deliver a product and certainly, that weather, the biggest effect is how it slows down the construction cycles, trying to get the concrete work done, the slabs poured, foundations put in and so forth. And it really also not only on the single-family side but it also created problems on the multifamily side. So that's the best number I can provide unless --

I would add that, as far as being able to catch up, I think there will be some catch-up in the back half of the year, but we are still hearing a lot of complaining about labor shortages and with that labor shortage out there, you cannot make up that construction volume in just a couple of months. I think we will start chipping away at it but I think it's just going to take some time.

We have, Chad, as you know, we have seen since the land started drying out, certainly our business in Houston has shown in July a very significant improvement. What we're seeing flowing into the first part of August. I'm very encouraged with what I see, the bounce back in Houston and in other parts of the Southeast, including Florida.

So the weather just delays things, but, as Chad said, labor will continue to be a problem and it will continue to be a constraint on homebuilding activity in total. But we don't lose business with weather. It just delays and pushes it out.

Got it. And then Floyd, I think you also commented about maybe growing a little bit slower than the market because of the integration focus. I wanted to see if you could just elaborate on that a little bit here. Were there specific instances that caused a problem there or -- and what have you kind of done to remedy that?

No, we have seen, Rob, in the areas that are going through the consolidation of locations, the conversions, very definitely a slowdown and then it takes about 60 days to 90 days and then you begin to really see the activity pick back up again.

But in total, I have to say, and I really -- I guess when it came to budgeting and looking and projecting our sales, I really underestimated, I think the diversion that it causes in management time. When you are changing the wages and salaries, you're changing the benefit schedules, the health benefits, the insurance schedules. You are changing personnel alignment.

ERP conversions --

And then I was going to say then you add on top of that probably the most distracting element of all is the conversion on the ERP systems. It really takes the managers of the local locations, that have got to spend a lot of time with their people, a lot of time focusing on getting the new policy procedures and so forth in place; now they are also dealing with getting prepared for SOX compliance.

And then so more of their time is focused on taking care of these details rather than out there with the sales force and driving new sales and so forth. I really can't put a number on it, other than we obviously, in our management reviews and discussions with our people, it is an issue. I don't like to acknowledge it to a great degree because I don't want it to become an excuse, but very definitely as -- we're seeing the diminishing confusion or distraction as we're going forward.

I think by the end of the year, we certainly will be through with all except for the computer conversions. But I just don't want to put a number on it but it definitely has been a distraction and a diversion from management attention to sales to a certain degree.

I will just add, when I went back on the last year and what we've accomplished, I'm just blown away at how well the people have responded. We are asking a ton of everyone right now within the Company and they have stepped up and they have done a great job.

Does it create some distractions? Absolutely. But I look at it as an investment for the future of this Company. It's something we are going through now and it will be past us in a couple of quarters and we're going to be bigger and stronger as a result of it. But just to Floyd's point, there's only so many hours in a day and we're asking a lot of folks right now.

And Rob, we've put a lot of focus on the conversion of our projected synergy cost savings. And that, we really told our people, that was priority number one.

You would like to say priority number one, absolute without question, is sales but we were looking at -- we wanted to be able to convert $100 million to $120 million of cost benefit to this Company and be able to accomplish it within a two-year period and we damn sure have done it. And our people have done it. And there is a price to be paid for it.

I didn't -- I underestimated very honestly and I've had an experience. We went through it in this Company. But this has gone far better than it ever did when we went through this process within the old legacy Builders FirstSource. But it's still, nevertheless, is -- has certainly put some pressure on us.

Just to be clear, it's not that you're -- is it that you are losing customers or is it you're not necessarily gaining the market share that you thought you would?

Yes. I think we absolutely -- we've done a lot of verifying. We are not losing any customers. I will -- what we are losing is taking advantage of some of the new entrants coming into the market and some of the expanding opportunities that may be available. Our sales to the national builders are really showing very healthy gains.

The -- where we see, I think less growth is in the smaller builder, the higher end, the more custom builder and that requires a lot of management attention and focus and that's where I think we're missing out on some of the new business. I think once we get over, and especially once our operations have gone through the ERP and I would say and I think Chad would agree with this that, that was the single most distracting event that you go through.

But we're seeing noticeable sales improvements in a 60 days after, 90 days after the conversions have been made. I feel very, very good about we've been able to build and hold the customers. We have not seen or lost any real -- any major or even smaller customers. And I feel very good about what we're going to be able to do on a go-forward basis.

Appreciate the color, guys. Thank you.

Thanks, Rob.

John Baugh with Stifel.

Thank you. Good morning, Floyd and Chad and --

Good morning, John.

I was curious on the overlap, your comment only $5 million of loss from absolute closures of locations. But you're excluding those areas where I presume you maybe had two or multiple locations and have consolidated one or two. I guess your expectation has been to maintain 100% of that markets business.

Is there any evidence that maybe you're not quite holding 100%? Is that perhaps one of the sales issues?

I haven't seen any of it --

None at all.

Okay. And then can you help us with lumber and it's fairly volatile, as we know. And it's been up for awhile and yet there was still deflation in the second quarter. Chad, maybe you could walk us through how that all plays out, both I guess from a sales gross margin and then an EBIT impact as we move forward for the next four quarters, given what lumber has done.

Yes, there's a lot of moving parts with that right now. When we go through our analysis and estimate the impact on sales, we look at its relative pricing, right? So it's -- what was the average price this quarter versus same quarter last year?

But we look at that on a two-month lag. Because that's our proxy for how long it takes for us to be able to reset our pricing with our customers and see that starting to impact the top line. So when you look at it from that standpoint, we still had a slight amount of deflation year over years. And that's largely because of the two-month lag.

Now, the margin impact is obviously more tied to how lumber prices were behaving within the quarter. And so, last year prices were falling during the quarter, which lowers our average cost of sales during the quarter against that fixed customer pricing and it creates a gross margin tailwind; that's what we saw last year.

This quarter, we saw prices flat to up during the quarter and that can create some gross margin compression because your average cost is rising versus your fixed-price commitments with your customers. Now going forward, prices still seem to be rising a little bit but we are able -- we have been able to start resetting our pricing with our customers and so we're starting to see the benefit of that improved pricing this quarter. Now, if prices continue to rise during the quarter, that will compress margins a little bit.

I haven't seen inflation to the degree that it's going to create significant compression and I do think we're going to start seeing more of the procurement savings coming through in the third quarter, which will help offset that. So I think net-net, we will see gross margin improvement, probably 30 to 40 basis points over the quarter just ended, Q2 of 2016.

So that's kind of the mechanics and what we were up against this quarter versus last year. Now specifically, if you look at our gross margin on our lumber and lumber sheet goods category, that margin dropped about 300 basis points this quarter versus same quarter last year. So that shows you the impact and the difference between the falling prices last year and what we were facing this quarter.

That's about $17 million of lost gross profit dollars had we been able to hold our margins consistent versus last year, so it was significant. We knew it was coming. That's why we guided to basically, on a sequential basis, flat gross margin and that's exactly what we saw.

Okay, so that 30 to 40 basis points was a consolidated comment. The actual --

That's right.

Okay, All right. That's helpful. And then my last question is around the buckets. With repair and remodel being the strongest, which is somewhat surprising to me. Could you comment why that's the case and then, additionally, you mentioned the June bounce back. Have you seen a somewhat similar pace into July? Appreciate it.

John, I think there are several factors that are driving the -- are really great improvement in growth in the repair and remodel sector. I think, one, we've done a lot of showroom resets, updates to make our selling environment more favorable to both the small contractor and the contractor's customers and to the walk-in trade. I think that's very, very important.

There has been very little work done the last few years under Fidelity's ownership to update and improve the showrooms and so forth. So we have been very aggressive in that area.

We've also hired --our people have done a really good job in getting their internal peoples focused on selling higher-end products and getting us a favorable mix of high profit items being sold, whether it's windows, the exterior door units, the other specialty millwork and so forth.

I think we've also been adding to the sales forces in those repair and remodel areas. And I think that's really paying off. And I think it's all three of those factors. I think another thing that's driving it, can't prove it but in the strong Midwestern markets, they are both agriculturally based and to a certain extent, in a couple of the states, the Balkan area; it's oil-driven.

Agriculture has been under severe pressure. The pricing of the farm commodities are much lower than they were a few years ago. And I think so our people have seen from a building and maybe some more of the traditional parts of the market drying up and so they really put a lot of focus on attacking the repair and remodel sector.

And we had people out in the fields, actively working with the small contractors and earning his business. This contrasts with the big box approach, which is they expect everyone to come into the store. They don't really have people working the field and to the extent that we do.

And I think those -- that's another thing. I think we are taking business away from the big box stores in the markets which we serve. So I think that's kind of sums up why I feel that we're getting the type of growth in this area.

Your second part of the question, July sales, we have two less shipping days in July but on a sales per day basis, July looks like it's coming in right about the same sales per day pace as we saw in June.

Thank you for that and good luck.

Mike Dahl, Credit Suisse.

Thanks for taking my questions. Floyd, Chad, a lot of helpful commentary there, so appreciate that. I wanted to go back to your response to some of the earlier questions around the integration and see if we can frame it slightly different way because despite some of these diversions, as to your point, or the synergies certainly seem to remain on track.

And the timing seems to remain on track. So I'm just curious if some of these issues have been limited some of the upside you would have seen to your synergy targets previously or if it's -- this is just -- there's just some delays and there is still potentially some opportunities beyond what you've already outlined.

From a synergy perspective?

Yes, from a synergy standpoint.

Well I do feel like we are slightly ahead pace right now from the realization perspective. And I still feel very good about the reigns that we've given and we have, quite frankly, uncovered a few extra nuggets along the way, which really didn't surprise me. So I think at the end of the day, I'm pretty comfortable right now seeing we're going to be towards the high end of that range.

So I don't think -- the distractions, a lot of them are part of the process of achieving these synergies. I don't know that it's impacting the upside to the synergies as much as it just might be impacting some incremental sales growth we could have had out there based on the distractions that they can create.

Got it. Okay. And then just on the margin comments, so gross margin up 30 to 40 basis points, I just want to see if we can get a little more clarity because I think in the third quarter, sometimes you see some sequential deleveraging from an SG&A standpoint. So is there any color you can give us on -- from an EBIT or EBITDA standpoint, how we should think about margins for the third quarter?

Well, typically, you'll see a good flow through of your gross margin dollar improvement. We pay salesman commission off of gross profit dollars so that's going to be variable to your incremental cost. But from an EBIT or EBITDA standpoint, we realized $22 million of total synergies in the quarter. There was $2 million or $3 million of that up in gross margin; the rest down in SG&A.

There will be incremental synergy savings, I believe, in the third quarter versus what we just realized in the second quarter, which will obviously help our EBITDA flow-through. We've always said on the base business, our SG&A is typically about 65% variable to the changes in sales volume. I still feel good about that number.

Now when we get to the fourth quarter, we'll start lapping some of the synergy savings that we realized last year and so when we say $70 million realized for the full year this year, that's incremental to what we realized in 2015. So I just want to make sure we don't double count that in the back half of the year.

Okay, makes sense. And then final question, just relating to that comment on July sales per shipping day, could you help us or give us a little more context for -- is that normal seasonally or is July typically higher than June on a sales per day basis? Is it typically lower? Just anything you can do to help us frame that performance.

I would say it's typically pretty close. I would say that's pretty normal.

Okay. Thank you.

Alex Rygiel with FBR Capital Markets.

Good morning. This is Min Cho for Alex. I have a couple of questions. First of all, as it relates to the labor constraints, are you seeing orders that are coming in and then just -- you can't deliver them or are the orders actually being delayed as well? Just want to know what kind of impact it's going to have to overall volumes in terms of sales growth for the year and kind of beyond?

I will let Floyd answer this but I just want to clarify. This isn't our labor. This is like the framers out in the field getting/ Plumbers/ HVAC, et cetera.

I was going to say, we -- the -- we have been able to attract people to our facilities. We certainly have the people available to meet expanded sales. The -- but I can tell you, I was talking with one of our people in a market, in a large market in Florida yesterday. And we had a salesman who was also on the line and he indicated he had eight framing packages that were sitting on the ground at the jobsite, waiting for the concrete work to be put in.

I can tell you in our truss plants in -- we battled this all the way through and beginning to shake loose now but the weather delayed the projects, labor delayed the projects to where we had the largest backlog of truss orders that we've ever had and it's -- we've had them built ahead and we are waiting for those releases to come to the jobsite.

And this is throughout our area. So labor has definitely impacted the jobsite activity which then rolls back. We certainly get some of that. The starts is once the -- once their work is complete and they are getting ready to start the slab. But we're finding -- and I think we've added almost close to two months to the cycle time from the time we get a start to where you get a unit under construction which is where our materials really are sold.

So the -- and most of this is now is labor driven that problem. I don't know if you saw a recent article in The Times where they indicated that the US had 570,000 fewer construction workers born in Mexico in 2014 than in 2007.

But I will tell you, I've been in this industry a long time. There's always been -- you're always confronted with problems but you find a way to solve them. I will tell you the labor problems were acute last year and the year before but we're building more houses. We are attracting more people into the construction field.

I think it's beginning to accelerate. I think it's also -- we are seeing movement to our manufactured products, products that will take labor out of the jobsite once the work is done. The slab is being put in. And I think the industry is solving its problems. I think we're going to still have tight labor going forward but we're going to be able to continue to grow the market. I think we're going to see 8% to 10% for the foreseeable future.

Single-family?

Single-family. Yes. (multiple speakers)

I'm sorry so it sounds like it's not really impacting your demands too much though, the demand for your products.

Not impacting the demands because we're seeing a buildup of backlog, especially in the manufacturing environment. Typically, where you're delivering the commodity type products and other building materials, that is done almost on a day by day basis. We have the contracts to -- and we've had the commitments that we're going to be delivering future homes but generally, the builder won't release those orders until he's -- he thinks he can get that jobsite started.

In some cases, they get fooled. They don't -- they get delays and so you get material out on the jobsite waiting for the comp other trades who get completed with their work. But typically the builder doesn't want to see material out on the job site until it's ready to be used.

Right. Just my last question has to do with line reviews. I know those are always ongoing but I think the last time we spoke, you were in the midst of your windows and door review. Just wondering where you are on that specific product?

So specifically, the question was where are we on negotiating a procurement savings at the window and door manufacturers?

Yes.

We just have completed our door review and the -- an assignment of renegotiated with the -- with some suppliers. I think there we've made several territory changes and product changes. That just finished up so we will begin to see the benefits of that on a go-forward basis.

We are in the process with certain areas of our window and that won't be completed for awhile. The -- we also completed our engineered wood program. That was completed in -- at the end of April, beginning of May. So that's behind us and those of the biggest product areas.

Great. Thank you.

Nick Coppola, Thompson Research Group.

Good morning.

Good morning, Nick.

So on cost synergies, can you talk more about what is left to do in order to get to the top end of that $100 million to $120 million range and even beyond the two-year mark, what you're going to do to drive further savings?

The major items we have left is more in the area of back-office type consolidation that will come as we continue to get more and more of the Company on one ERP system. And then realizing the remainder of the procurement savings. Those are the two big areas left.

The ERP conversions are going far better than I ever could have dreamed. The field has been very pleased with the conversion teams that we have out there helping them. So as we continue to get more of the Company on one system, we will be able to streamline back-office functions. And we are also in the process of shooting for a 1/1/17 go live date on a new payroll, HR system that will create some additional efficiencies and then the procurement.

Once we get to January 1 of next year, it's really just at the continued ERP conversions, the blocking and tackling there and it just takes time to plow through those markets and then wrapping up the procurement savings. I think by the end of the year, first quarter next year, most of the SG&A savings will have been realized.

And beyond the two-year mark, we've talked about before it's going to take longer than that two-year mark to get through the ERP conversions, and so as we continue to get more and more of those behind us, beyond that two-year mark, it will create additional, largely SG&A efficiencies. That's not included in the $100 million to $120 million; that was our two-year target. But I do think as we get more of the Company on that one system, then there will be some additional efficiencies we can realize beyond that two-year mark.

Okay, that's good to hear. And then second question here, in gypsum roofing and insulation categories, sales were down year over year. Can you just help think about the major drivers there? What was going on in terms of volume and maybe price in some of those product categories?

Fairly heavily impacted by the decline in multifamily side, also the -- some commercial construction. And as the volume -- as the activity in those areas come down, it also starts getting to be more price competitive and so I think it's a combination of those two things. But very clearly, the multifamily -- decline of multifamily has really impacted those products for us.

Thanks for taking my questions.

We have time for two more questions. We will go next to Trey Grooms with Stephens, Inc.

Good morning.

Morning, Trey.

First question, I guess is for Chad. You given us some color on the moving pieces going into third quarter. Unless I missed something, I didn't hear a specific EBITDA range or anything like that yet. Is there anything you could give us as far as your stab at where EBITDA should shake-out, at least on top of a range like you've given us in the past?

No, you didn't miss anything. I've given some gross margin guidance. You have some pretty good color on synergy realization and variability of SG&A. I think that the last piece is really what are sales going to do in the back half of the year. I think we all have our estimates on what single-family will do.

I just think you need to keep in mind the mix of our business now. We're 65% single-family. We are 10% multifamily and light commercial, and about 25% R&R. So our thinking is multifamily is probably going to continue to be down year-over-year in the back half of the year. And I think R&R is probably going to settle in at somewhere around 5% growth.

And so when you look at the mix of those businesses those two are going to offset each other. We'll get about a 1% sales loss on multifamily on a consolidated basis and R&R with net would put us up 1% or so on a consolidated basis.

So it really boils down to your outlook on single-family and keeping in mind that we are 65% driven by single-family. If you just want to do some high-level assumptions, at 8% growth in single-family, 10% decline in multi and 5% growth in R&R, that should put us somewhere around 5% growth in sales, everything else being equal.

No share gain, no share loss. We should see a little bit of a lift from commodity price inflation the back half of the year now that we're getting our pricing caught up. So -- but to put a stake in the ground right now on EBITDA guidance, it's just too early in the quarter and I'm just not prepared to do that right now.

Okay, fair enough. And then Floyd, based on your comments, if we are looking out a little further, your comments as far as your expectation for this -- the integration distractions, I think that you've seen so far and your expectation for that to be behind you guys maybe later this year, if I understood that right. So I guess looking into 2017, would it be your expectation that you guys would then be at a point where you're growing with the market or above the market or how should we think about that aspect of it as we look into next year?

Yes, I definitely believe next year, if you look into 2017, we will outperform the market. The, I think, largely, most of the distraction is behind us when we finish out this year and I think it's on a diminishing tail right now. The computer conversions are going to be with us but we're getting very, very good at that.

We've got over 70 people on our conversion teams that are out there. We're adding to it all the time because we're really trying to accelerate the process. But we -- the -- we're -- it's going far better than we had anticipated and so I think that's going to also be less of a distraction. So 2017, I definitely believe we're going to outperform the market.

Good to hear. All right. Thanks a lot. Good luck.

Thank you.

There is time for our last question from Will Randow, Citigroup.

Good morning, and thanks for taking my questions.

Hi Will.

Just had two follow-ups from a couple prior questions, which I think one was more focused on in the, call it, gypsum and roofing segment. You should have saw a commodity deflation just like you have seen in the lumber segment. I'm guessing that had some impact as well as how did your regional weightings help or hurt you this time around relative to what we see on the national data?

From a regional perspective, I assume you're talking to sales in general, from a regional perspective. Is that right?

Yes. Exactly. Like you're weighting to Houston, for example.

As far as -- gave some color earlier. We had some markets that were very strong this quarter. Colorado, the Pacific Northwest, DFW is still very strong. Areas of the Southeast strong. Florida's got some great markets going right now.

The weaker markets were obviously the ones impacted by rain. Houston, the Baltimore-Washington, the Mid-Atlantic specifically. And then those that are starting -- or those that are driven more by the whole economy. If you were to group the, what I would say the more oil-driven markets that we're in, that was about a 2% drag on our overall sales is to give you some perspective on what those markets did.

They were, collectively, down about 12% year over year And so offsetting that obviously was some of the stronger markets that we looked at -- or that we discussed a moment ago.

Now I think the pricing of gypsum and roofing, as you said, there were some increases on gypsum. We saw a decreases on about 100 basis points on -- or so on roofing. But our sales of gypsum were most impacted in the Northeast, where we had very, very heavy amount of business that was going into multifamily.

I think the New York metropolitan area which we service, they saw a dramatic fall-off in multifamily permits as well as starts. The roofing sales really are holding up. We are very encouraged. In fact, we are adding roofing to a number of our locations on a continual basis but we're finding out that we can compete very favorably in -- with roofing with certain types of customers.

And so I'm very encouraged with what I see in roofing. Gypsum, I think it's going to be tough the rest of the year but it's still -- we have a good group. I think they will make the best of tough situations.

And your -- the comment there towards the end dovetails into my second question and that is, when you think about synergies you guys have identified cost synergies, specifically, but when you think about revenue side of potential synergies, meaning offering products where it makes sense regionally across your portfolio of storefronts, if you will, or lumber yards, what type of revenue opportunity is there and how long would it take you to execute on that?

So Will, just to clarify, is your question about our ability to grow with national builders and leverage the national scale or is it more about a value-added product and leveraging the trusses, et cetera, across the --

For example, the example that was just given on adding roofing to locations that previously didn't have them. So kind of expanding the breadth of your product at a given lumberyard as storefront?

We definitely are expanding our business with the national builders, if you look at it on a year-to-date basis. Our sales to our top 20 which are all national builders. We're up about 15.6%, 15.8%, something like that. We are expanding our offerings to financial builder now in more areas, specifically, I will say, California.

It's definitely opening up more and more opportunities for us with the national builder. We're doing things in California. We're looking to expand our facilities there. We are opening up our first California truss plant; that will be in operation almost as we speak. And a lot of that is going to be direct towards the national builder, that are willing to utilize the component products.

I want to point out when you asked about roofing. One of the key areas, I think for future development for us, will be is to get into the roofing business in the state of Texas.

We are currently not in and we don't sell roofing right now in Texas. So we haven't been able to take advantage of all the hailstorms that we've had down here and that has been really a significant boost to the roofing sales. But in the future, we think we have a place to play in this arena and we are investigating and looking at several of our locations to add roofing.

All right. Thanks for taking the time, guys, and congrats on the progress.

Thanks.

That concludes today's question-and-answer session. At this time, I will turn the conference back to management for any additional or closing remarks.

The -- we really appreciate your joining us on the call today. We look forward to updating you on the progress of our business initiatives and the months ahead and if you have any follow-up questions, don't hesitate to give Chad or Jen a call.

And thank you and the -- I'm -- just keep following us. We are going to be delivering you, I think some -- a very good future and feel very, very good about the prospects of our business and where we're headed. Thanks.

And that concludes today's conference. We thank you for your participation. You may now disconnect.