Builders FirstSource Inc (BLDR) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Builders FirstSource Second Quarter 2018 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.

Thank you. Good morning, and welcome to the Builders FirstSource Second Quarter 2018 Earnings Conference Call. Joining me on the call today is Chad Crow, Chief Executive Officer; Peter Jackson, Chief Financial Officer; Binit Sanghvi, VP of Investor Relations.

A copy of the slide presentation referred on this call is available on the Investor Relations section of the Builders FirstSource website at www.bldr.com. (Operator Instructions)

Any reproduction of this call, whole or in part, is not permitted without prior written authorization of Builders FirstSource.

And as a reminder, this conference call is being recorded today, August 8, 2018. 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 www.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 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 company will discuss adjusted results on this call. We have provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanations of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are on our website.

At this time, it is my pleasure to turn the call over to Mr. Chad Crow.

Thank you, Jen, and good morning. Welcome to our second quarter earnings call. I will start with a brief update on our second quarter performance as well as an update on our progress against strategic growth initiatives.

Then I will turn the call over to Peter, who will discuss our financial results in more detail. After our closing comments regarding our outlook, we will be happy to take your questions.

Let's start on Page 4. I'm very pleased with our performance in the quarter as we continue to deliver profitable growth initiatives while successfully managing through challenges, including commodity price volatility.

Our results highlight our team's ongoing focus on cost discipline and flexible response to changing market factors as well as strategic growth in value-added products and capturing share through strong customer relationship management.

Our sales for the quarter of $2.1 billion grew a solid 13.4% over 2017. Approximately 8.8% of this year-over-year growth was achieved by successfully passing on commodity price inflation and approximately 4.6% from increased sales volume, including 6% in the single family homebuilding end market.

Turning to Slide 5. Commodity prices showed large fluctuations in the quarter, rising sharply most of the quarter before retreating in recent weeks. Framing lumber and sheet goods prices ended the quarter up 26% and 27%, respectively, over prices at the beginning of the year. As we managed through this period of commodity inflation, our short-term pricing agreements caused gross margin profit compression.

Our team reacted quickly and again, showed the ability to respond to these challenges and mitigated the impact on EBITDA margin through cost leverage and disciplined cost management.

The result was a substantial year-over-year improvement in total EBITDA dollars while maintaining our EBITDA margin percentage and setting the stage for margin expansion as commodity prices eased.

Our increased investments in manufacturing capacity also continued to pay off with 19% growth in manufactured products leading to double-digit growth in our overall value-added products in the second quarter, considerably faster than the overall growth of the residential housing market.

We will continue to invest in our growth initiatives. As a result show in the second quarter, these platforms provide us significant ongoing opportunities to increase both our overall market share and penetration of our higher-margin products.

We also remain committed to our initiatives focusing on developing our sales force and management pipeline and have invested over the last several years in adding to our exceptional talent.

We believe these initiatives are positioning our business for future accelerated growth. We've continued to execute on our strategic plan to expand our manufacturing and value-added capacity this year, including 3 new truss plants, 10 new lines in existing plants, 1 new millwork facility and capacity additions to many more.

We've continued to invest in these higher-margin products in order to grow them faster than the overall housing market by adding further to our existing network of 57 manufacturing facilities strategically located across the country.

With the continuing labor challenges being faced by our customers, demand for our labor-saving products should continue to rise, providing us incremental opportunities.

Moving on to our Page 6 with an overview of the housing market. The outlook for new residential housing demand and activity remains very bright. The U.S. homebuilding industry has now reached approximately 1.25 million annual starts with approximately 880,000 of those being single family starts.

This remains approximately 20% below the long-term historic average and is just now reaching the levels that we have seen in previous recessionary troughs.

Demographic trends, market demand, employment and other underlying economic conditions remain very supportive. Homeownership rates have recently started to show improvement with household formation among young buyers trending higher but remain below precrisis levels.

We continue to anticipate mid- to high single-digit growth in the single family homebuilding market this year with ongoing growth in the years ahead.

Moving to Page 7. We are on track in executing our plans to accelerate growth, further expand profitability and create meaningful incremental shareholder value.

We will continue to develop our sales force and invest in our manufacturing and value-added facility expansion initiatives. These growth platforms provide us significant ongoing opportunities to increase our market share and increase the penetration of our higher-margin products.

Beyond our expectations that the market will return to historical average housing starts over the next several years, we have growth and operational excellence initiatives underway, geared to generate an additional $100 million of profitability, independent of market growth.

We have set challenging but achievable targets based on the strengths of our core business, along with our operational excellence initiatives and strategic growth investments. The plan is to double 2016 EBITDA of approximately $380 million and to generate over $1 billion in free cash flow after capital investments and deliver an EPS between $3 and $3.50 as housing starts reach historical averages.

Our strategic plan balances cash generation, high return reinvestment opportunities and profitable growth and ongoing debt reduction to achieve our leverage target of 2.5 to 3.5x EBITDA.

Turning to Slide 8, I would like to provide a bit more detail on our specific growth initiatives. Leveraging our existing core business strengths, including our national footprint, unmatched scale and manufacturing capability and best-in-class sales force, we are confident that our plans enable us to capitalize on growth in the residential housing market to generate an incremental $250 million to $280 million in EBITDA. We call this core growth.

In addition to this core growth, we continue to expand our national manufacturing footprint and capabilities to keep growing our higher-margin value-added products faster than the overall market over the next several years.

Our plans call for investing in 17 new truss and 8 millwork and door facilities over the next 4 years, including the 4 facilities underway this year, expanding our national footprint to serve a number of locations that do not currently have adequate access to these higher-margin products and where we see great opportunities to serve market needs with our customers.

Our strategic plan further includes a set of operational excellence efficiency initiatives across our organization, including distribution and logistics, pricing and margin optimization, back-office efficiencies and system enhancements that are expected to contribute between $65 million and $75 million in incremental annual EBITDA.

We have made good progress implementing these initiatives and are focused on creating substantial strategic and economic value for the organization through efficiencies and customer service advancements.

These projects when leveraged across our 400 locations should offer significant profit margin expansion opportunities and further differentiate our service and connectivity with our customers, providing economic and strategic value that is unrivaled by our smaller competitors. We are starting to see benefits from our initiatives that give us confidence that these projects should generate the anticipated value creation.

I will now turn the call over to Peter, who will review our financial results in more detail.

Thank you, Chad. Good morning, everyone. As a reminder, we have included adjusted figures to normalize for onetime integration and other costs. We reported net sales of $2.1 billion, a 13.4% increase compared to the second quarter of 2017, including an estimated 8.8% benefit from commodity price inflation and a 4.6% from organic volume growth.

Our underlying sales volume grew approximately 6% in the single family new construction end market. And as Chad highlighted, our value-added products increased 11.1%, led by a solid 18.7% growth in manufactured products.

Gross margin of $496.3 million in the second quarter of 2018 increased by $35.5 million or 7.7% over the second quarter of 2017. Our gross margin percentage was 23.7%, down 130 basis points from 25% in the second quarter of 2017.

The margin percentage decrease on a year-over-year basis was attributable to sharp increases in commodity prices. Framing lumber and sheet goods prices were increased 26% and 27%, respectively, from year-end 2017 to the end of the second quarter.

As we have discussed in prior calls, commodity inflation caused a short-term gross margin percentage compression when prices are rising and margin percentage expansion when prices are falling due to the short-term pricing commitments we provide customers versus the volatility of the commodity markets.

Additionally, higher prices in commodity products had a negative mix impact on gross margin percent. I am pleased with our team's ability to mitigate the impact through continued cost discipline and strong growth in high-margin products.

Furthermore, in the quarter through the combination of our team's execution and ability to pass on higher commodity product prices on a year-over-year basis, we are reaping the benefits of EBITDA dollars versus 2017.

As we near the end of the quarter, commodity prices started to ease, albeit, at a higher level. As this trend in lumber price continues, we should further benefit with enhanced profitability and a return to more normalized gross margin percentage in the coming quarters.

Our SG&A as a percentage of sales decreased by 130 basis points on a year-over-year basis. This reduction was driven by operating leverage and ongoing cost management.

Interest expense for the quarter was $29 million compared to $33.7 million in 2017. The reduction was largely the result of transactions the company executed in 2017 to lower our go forward cash interest expense and further strengthen our capital structure, slightly offset by a rising interest rate environment.

Adjusted net income for the quarter was $62.6 million or $0.54 per diluted share compared to $43 million or $0.37 per diluted share in the second quarter of 2017.

The year-over-year increase of $19.6 million or 45.6% was primarily driven by robust sales growth and ongoing cost management. Second quarter adjusted EBITDA grew $15.1 million or 12.2% to $139.1 million. The year-over-year improvement was largely driven by strong sales growth, operating leverage and disciplined cost management, which fully offset the impact of commodity inflation on gross margin.

Additionally, we realized the positive benefits in EBITDA dollars from our team's ability to pass on higher lumber prices on a year-over-year basis. We expect this benefit to expand as commodity prices normalize.

Switching now to the year-to-date financial highlights, please turn to Slide 11. The company achieved strong results year-to-date in 2018, including 12.3% sales growth, 10.8% EBITDA growth, a $0.29 improvement in adjusted earnings per share and a 0.3x reduction in leverage even after funding our strategic growth and capital investments.

I'm very pleased to report that value-added sales per day grew at a healthy 10.5% year-to-date.

Turning to Page 12. We expect our free cash flow generation to be utilized to fund our balanced investments in strategic initiatives and continuing debt reduction.

We believe this will be supported by EBITDA growth and our continuing focus on working capital efficiency, which is estimated to run approximately 10% of incremental sales.

We expect to continue to invest in our business through capital expenditures at approximately 1.5% of sales. We expect our current NOL tax assets to shelter us from paying all but approximately $15 million to $20 million in cash taxes in 2018.

As a result of the capital market transactions we executed in 2017, our cash interest should be reduced to approximately $100 million in 2018.

We expect onetime costs of $15 million to $20 million as we continue our systems integration work. And in total, we expect to generate $170 million to $190 million target range in net free cash flow after investing activities for the full year 2018, albeit, likely at the lower end of the range, given the headwind we have experienced from still elevated lumber prices in our inventory.

We expect to utilize cash generation to pay down debt and fund our strategic growth investments, and we remain confident reducing our leverage ratio to below 3.5x by year-end, achieving a major target set in 2015 with the ProBuild acquisition.

Due to the seasonal pattern of working capital needs, we typically use cash in the first half of the year and generate cash in the second half of the year. Cash used in operations and investing year-to-date was $217.8 million, including $48.9 million of capital investments.

This was in line with our expectations and with our annual guidance. We continue reducing our leverage ratio despite the impact of commodity price inflation on inventory.

Our net debt to adjusted EBITDA ratio on a trailing 12-month basis as of June 30, 2018, was 4.5x, representing a 0.3x reduction from the second quarter of 2017. Total liquidity at March 31, 2018, was ample at $298 million consisting of net borrowing availability under our revolving credit facility and cash-on-hand, which is more than sufficient for our operating needs.

As we look forward with confidence in our team's execution in the housing market environment, I would like to provide color on how we are seeing the third quarter of 2018 as well as reconfirming how we are thinking about full year 2018.

For full year 2018, we still expect single family starts to grow in the mid- to high single-digit range, R&R market volume growth of approximately 3% and declines in the multi-family end market.

We anticipate 6 to 8 percentage points of top line sales growth on commodity inflation on a year-over-year basis. From a gross margin perspective, the recent relief in the rise of lumber and panel prices has started to benefit our gross margin percentage. And as we move through the remainder of the year, we expect to move closer to a more normalized gross margin in the 25% range.

Commodity inflation driven gross margin compression during the balance of 2018 should not be nearly as impactful in the second half, allowing us to return to a more normalized incremental EBITDA conversion of 12% to 15% in the second half of 2018.

We will continue our growth investments, including initial costs in our operational excellence initiatives, all of which combined, we expect to total $10 million to $12 million in incremental costs in 2018.

Overall, we expect 15% to 20% year-over-year EBITDA growth for the full year in 2018 and current estimates still indicate that we will finish out at the upper end of that range.

We expect the impact of the 2017 Tax Act to result in an effective tax rate of approximately 25% for the balance of 2018. For the third quarter specifically, we expect sales to be in the 10% to 15% over prior year range, with 5% to 9% coming from commodity inflation.

Gross margin is expected to be up sequentially from Q2 by 40 to 50 basis points as we start to see the relief on short-term margin pressure from the recent commodity price moves. We will maintain our focus on cost discipline, efficiency improvements and leverage reduction while investing in our growth initiatives.

We expect EBITDA growth to be between 20% and 30% over Q3 2017.

Before I turn the call back over to Chad for his closing comments, I would like to thank Jen Pasquino for all of her contributions to Builders FirstSource since joining us in 2011. Most of you know, she has decided to retire and this will be her last earnings call as our Investor Relations officer. She will be transitioning responsibilities to Binit Sanghvi through the end of August. We wish Jen all the best in her future endeavors.

And with that, I'll turn it back to Chad.

Thank you, Peter. As demonstrated by our solid second quarter results, our team continues to execute on plans and deliver value to our customers at an exceptionally high level. I'm impressed with our execution in building an even stronger Builders FirstSource.

I continue to look forward to capturing the substantial growth and value-creating opportunities that we have laid out into further setting the groundwork for our future.

We continue to execute a clear strategy and I believe that we have never been better positioned to generate increasing returns for our shareholders and value for our customers by leveraging our national footprint, strong customer relationships, end market diversity and operational excellence initiatives.

I want to thank all of ours Associates for their hard work and once again delivering such strong results as we build an even brighter future together.

I'll now turn the call over to the operator for Q&A.

(Operator Instructions) Our first question comes from Matt Bouley with Barclays.

On for Matt. Your manufactured products growth, was there any benefit in the quarter from the timing of your capacity expansion? And I guess more specifically on that, where do those projects stand that you have outlined for this year?

So I wouldn't say that there's a significant change due to the facilities -- the 4 facilities that we're opening up this year. Generally, the ramp-ups are pretty smooth. They are elongated over the first year. There's always a little bit of a headwind associated with the inefficiencies when you do that, so that's part of what we called out in the investments in our strategic initiatives. But I -- but the benefit you're seeing this year was primarily from the facilities we opened last year.

And then was there any sort of -- presumably, there's some pricing in there. Is there any comment you can give about the level of pricing benefit in that growth percentage?

Yes, it's around 4% or 5% benefit from inflation in there. So still very strong volume growth.

Maybe switching gears to, obviously, a more minor segment, the roofing, gypsum and insulation. Presumably, there's some pricing there. A couple of quarters of sales declines sequentially here. Have those categories just seen an inflection in the competitive landscape? Or how should we think about those specific categories going forward?

Well a couple of things, yes, I would say you're right. The competitive landscape is changing, and we're certainly not considered one of the major players in those categories. And so from a competitive positioning, it has gotten a little tougher. I would also say that a lot of our business that we do especially in gypsum is multi-family and commercial, and then we've, obviously, seen a tail off in that business.

Our next question comes from Nishu Sood with Deutsche Bank.

This is Nishu Sood from Deutsche Bank. So I wanted to ask about the gross margin outlook. Lumber prices were peaking by some of the indices in kind of mid-2Q or so and then declining after that. Obviously, it's going to help your margins. Would we expect to see a little more, though, than just I think you said 40 to 50 bps in gross margins. Wouldn't that trajectory -- I guess it depends on what you're assuming kind of going forward. But wouldn't that get us pretty much back to normalized with that kind of peaking mid-2Q based on the kind of 60 to 90 days you're normally pricing out those contracts?

Well, Nishu, I would say that the price has peaked at the beginning of June. And so we have maybe 2 to 3 weeks of prices falling in the back half of the second quarter. And so really, obviously, no benefit in the second quarter. And given the transportation issues that we were all experiencing before prices started falling, we had a 6, 7 week backlog of orders coming in which were at the higher prices. And so what we saw in July was the tail on our order products still coming in. We, obviously, weren't buying much additional inventory because prices were falling so fast. You typically don't like to be buying when prices are falling that rapidly, you'd rather wait until you hit the bottom. And so our average cost on hand will slow the change. Combine that with the 30-day tail we have on most of our pricing. And so most of July was spent finishing out projects that were priced in the second quarter. And so the net result in all of that is we saw minor margin improvement in July. But in the last couple of weeks, we've started to see a marked improvement, invoiced margins up 50, 60 basis point. But remember, that's after July was relatively flat with the second quarter. So a little bit of lag there. I hope that helps explain some of it. But certainly like the trends we're seeing now, and we expect those trends to continue and even accelerate.

Got it, got it. No, that makes a lot of sense. And this extreme volatility, obviously, it has made it more difficult from your folks' perspective, what about the behavior on the customer perspective? When prices are so volatile, obviously, it makes inventory management a little more complex, as you mentioned. Do builders change the timing of their purchases as well or is that -- not purchase, I meant, obviously, it's kind of timing, the contracts and the price locks? Or does it really just entirely dependent upon the construction cycles?

It's hard for them to move houses back and forth that easily and time is money for them and they want houses completed and done. You do get a few customers, and we've seen it, who have asked for us to reset our price agreements because prices were falling and the short answer was no. We took it in the short the last year on the way up, and we committed -- we stayed committed to our contracts, and we expect our business partners to do the same and so the answer was no to that. And something else I'll mention on the commodity prices. Prices have fallen a lot in recent weeks, but they're just now getting back to where they were at the beginning of the year. And so it's easy to lose sight of how high a point they started to fall from. Prices are still at a healthy level even though they've fallen as much as they have. In fact, they could fall, gosh, another $100, $1,000, and we would just then get -- be getting back to -- at historical average price for both framing lumber and OSB. And so we feel like prices will start to bottom out in the next couple of weeks. There's a lot of folks that have been on the sidelines not buying. Inventory positions are getting low and folks are going to have to start buying again. So it feels like we're going to find the floor here in the next couple of weeks.

Got it. And just following up on the earlier question about the strength in the manufactured products. What do we -- obviously, very encouraging to see that the strengths and obviously, that's the higher value add, higher margins part of the business. So to what extent is that sustainable? Obviously, you've laid out the 10% to 15% sales growth for the year. And yes, so just wanted to kind of understand the sustainability of that.

I'm fairly confident it will sustain itself. We're really happy with what we're seeing and hearing from the demand side. I know there's been a few negative headlines on housing, recently on prices, are home prices getting expensive and interest rates creeping up. But in my opinion, the tailwinds still outweigh the headwinds, and we're liking what we see from a demand standpoint and I think that's going to feed right into those value-added products.

Our next question comes from Trey Morrish with Evercore.

So first, I wanted to talk on the SG&A side. Clearly, you saw a good amount of leverage year-over-year. And part of that was likely due to just better top line revenue from the commodity inflation. But can you talk about what types of internal initiatives you're doing and pushing to tighten the belt to really drive down some of those costs?

Well, I'll touch on one that's near and dear to my heart and that's our delivery optimization efforts. We've targeted of that $65 million to $75 million of annual savings, 1/3 of that is delivery optimization and to date we've rolled out our new delivery dispatch management system to about 100 of our locations and expect to have that rolled out to 140 by year-end. And we're starting to see a gap now between the markets that are on the system and have been on it a while and have adopted versus those that aren't on it yet. We're seeing driver on road percentage to go up. We're seeing engine idle times decrease. And basically, what you want to see an overall increase in your fleet efficiency.

And so, although, diesel has gone up this year and driver wages continue to go up, these are starting to look like they are taking some -- taking hold and really helping us offset some of these increases. And so I think that's part of what you're seeing. We're going to implement a driver incentive program in Q4 to further motivate our drivers to begin managing their day by these metrics. We've got a lot of really great information in the hands of our operators when it comes to delivery optimization, and we're starting to see that take hold.

So that's just one area. Obviously, a lot of these initiatives, back-office efficiencies, things like that, some of them are really hard to measure from a hard dollar perspective. If we're turning our trucks a little quicker in the yards, if our drivers are on the road a little more during the day, there's, obviously, savings there. There's efficiency there. Hard to put up an exact number on these things, but the overall goal is to see your SG&A as a percentage of sales drop. And so I think that's certainly part of what you're seeing.

Got it. And then turning back to gross margins. You talked about some modest new improvement sequentially. It sounds like you're still working through some of that higher cost lumber and you expect when lumber falls or when ultimately, it finds a bottom. You think it sounds like you'll jump in and buy a lot more because you'll see some kind of stabilization. But assuming that lumber remains firm kind of from here, at what point do you think you will ultimately see your gross margins return to that 25% number?

We generally talk about it, and I know you've heard us in the light of the amount of inventory we have on hand. And then the time lines around when we reset our pricing with our customers. So we generally say, it's about a quarter or quarter and a half from the time the turn happens, whether be up or down, the things would level out kind of that 3- to 4-month range. So in fourth quarter, probably.

Our next question comes from Keith Hughes with SunTrust.

As we look out for the remainder of the year, given what you said on the previous questions on inventory, we would see, all other things being equal, step up in gross margin in the fourth quarter from the third quarter. Would that be correct as the lumber flows through the income statement?

Yes, I mean as long as we stipulate that commodity prices sort of stay where they're at now. That's a reasonable assumption.

I made a million assumptions in there, but I'm just trying to isolate...

Yes. Agreed.

Second question on the SG&A, a lot of leverage here in the quarter. Is that something, and I'm I guess it's kind of back to the lumber question. Will we continue to see this kind of leverage going into the second half? Or will that sort of slow up to 1 degree or the other?

Yes, that will moderate. If you think about the impact of commodities on the business to the extent that moderates, that will back off a bit. Q3 is probably in a favorable position still. But as we talk about Q4, that would be one of the offsets.

Okay. And it was referred in the prepared statement about 17 new truss facilities, at least 4 this year. How long does it take one of those to get up to full capacity where we -- or just a rate where we added it to the margins of the company?

You're usually looking about the [broaden] at break even after about 1 year and then, obviously, in years 2 to 3 being profitable and it's usually about overall 3-year payback on those things.

Okay. And you are looking at this about 4 years, that's going to be the pacing, we'll see?

Yes, sounds about right.

Okay. and how about the millwork? How quickly will those come on?

Those are quicker. I would say -- yes, within a year, you're probably up and running and may be slightly shorter payback, a little less in expensive equipment. And not only are we opening some new facilities, but also upgrading some of the equipments on some of our plants too, then obviously, that's going to be an immediate benefit when you're just replacing older equipment with more efficient equipment.

Our next question comes from Mike Dahl with RBC Capital Markets.

Nice results in what's obviously been a challenging lumber environment. A couple of questions, just following up on some of the manufactured products questions. The first one is, I was hoping you could break down. So it sounds like there's mid-teens volume growth in the quarter. Can you give us a sense of how much of that was same customer growth versus expanding your customer base there?

I'm not sure I understand it. Could you repeat the question?

Sure. How much of the growth in volume from manufactured products was coming from effectively your same customers buying more of that -- of those products this year or further penetrating and expanding your customer base into new relationships.

I'm not sure I have that information. Do you have them?

Yes, I don't have them. I would say, my gut would say, it's probably, by far, the lion's share's growth through additional customers -- may be 90% of the growth was through the same customers and the remainder on acquiring new customers.

Got it. Okay. Second question on that is just around the margin profile. I know you won't get into specifics around margin -- product categories, but could you give us any sense of at least directionally what the margin has looked like for manufactured products? Are you seeing the type of margin pressure that you've experienced in lumber just due to the pricing volatility there? Or has there been any stronger year-on-year trend in manufactured product margins?

I would say the margin trend on manufactured has been somewhat flat because there is some pressure on price due to lumber inflation, but also the incremental volumes and running the plants more efficiently have helped to offset that. So I would say it's been relatively flat on a margin basis.

Got it. And Jen, we'll miss you. Enjoy your retirement.

Thanks, Mike.

Our next question comes from John Baugh with Stifel.

Likewise, Jen, enjoy your future. I did have a quick question. The gross margin in the press release commentary says the decrease was largely due to the commodity prices. What other factors were in there, if any? And you did just touch on the manufacturing margin being relatively flat. I guess I'm curious and this is a longer-term question, not a Q3 question, should we see the gross margin outside of inflation dissipating improve? If so, kind of what should be the expectation and why and when?

So I think we hit on a couple of those. Clearly, as we saw a decline -- the bulk of the decline that we talked about attributable to commodities, there's also the mix component, again, through this quarter, so that gets us to over 100 or the 130 bps. There's may be a little bit in there on the gypsum piece. We've kind of talked about that in a couple of discussions that the dynamics in that marketplace with regard to pricing and price increases has been a challenge for us. We definitely see, as you alluded to, an increasing gross margin level. There's the increase in EBITDA dollars on a year-over-year basis, which is great. But also as the normalization in the commodity prices are seeing, we see a leveling out or more of a return to normal for us. A, getting rid of the headwind and B, catching up on the pricing. That's definitely a trend that we're seeing as we're getting into Q3 and one that we expect to see for the rest of the year.

And I'll just jump in because I love talking about these initiatives. But some of the pricing initiatives we have going -- I'm excited about some early results we're seeing. We are piloting a new pricing tool in 2 markets this month and once we get the kinks worked out of that, we plan on rolling that out to additional markets. We've got a special order margin initiatives. So special order margin initiatives, so a special order meaning items that we don't typically carry in stock, but we special order for customers. We've got an initiative, we've just started that in July and in the first month, we saw a 25 basis point improvement in special order margin. I expect more to come on that.

And then our new BI platform that we're rolling out is giving us a lot better information around net profitability by customer and allows us to do some customer stratification. And so it really helps the guys have some information at their fingertips to look at what are we really making off our customers. It's easy to say, "Hey, I'm selling this guy at 24% margin," that's a good margin. But are they paying by credit card or are we having to run additional hotshots out there. And so we're getting a reporting in place now where we can look at all the pieces of profitability basically down to the EBIT or EBITDA per customer and makes some more educated pricing decisions. And so a lot of things like that are underway, again rolling these things out to 400 locations and adoption is always a challenge, but -- so we're still in the early stages but really liking some of the early results so far.

Okay. That's helpful color. And then, Chad, you sound fairly bullish about the -- I don't know, the near- and intermediate-term outlook for housing in general. I guess, trying to look for potential issues, are you hearing or seeing anything from the people you talk with that you're concerned about -- certainly, we seem to be underbuilding relative to household formation, but we have this dynamic with inflating cost of building a home. And I'm just kind of curious, we could have a 2-hour discussion I'm sure, on the building outlook. But the puts and takes, anything you're seeing on the horizon may be that's concerning or cautious that now you see us getting back to a normal build level?

The one thing I think could slow the rate of growth, I don't think it would be enough to send us backwards, it would be the cost of homes, especially the higher-end homes. I think there's some markets now where it's getting pretty pricey, and I think some folks may step aside and wait for prices to come down.

I think if that happens, then prices will come down. The builder's will have to adjust. I think there's still demand there. I think we're going to see an increase in demand in the entry-level homes. But if there's any, I guess, if you would say there's any headwind at all that I think might have some teeth to it, it would be the upper end homes and how pricey some of those are getting. But again, does that mean we go from 8% growth in single family to a 4%, 5% for a period of time or heck, even if we had the year where we flattened out, not the end of the world, that's still a very healthy environment for us, and we can still perform very well and generate a lot of cash even in that environment. So yes, I am bullish about it.

Good. And then lastly, any -- you kind of know how you SKU geographically to the national housing start numbers we talk about. Any color there on your 6% single family, I guess, I'm focused on the single family piece.

So this quarter, we didn't see anything specific in the geographic mix. We do see a strong trend with regard to the starter homes. We think that's a really positive part of the growth in the market right now, in terms of that next leg of the stool, if you will, and the expansion to get us back to a more normalized build rate. So we think that's a component in what we're saying in the discrepancy between the starts number and our number. We certainly in the markets we play in, don't see share loss.

So the only thing I wanted to add and was sort of a follow-up to the gross margin question was with regard to some of the impact that we see. There was a component when I mentioned gypsum that I wanted to quote -- to add to it I guess is the idea that we definitely see an exposure in the multi-family and the commercial sales and that is a piece of it. But there's also the rule of thumb on the expansion of our facilities. So continuing to see declines in multi-family, but the other component was the rule of thumb on the new truss plant creation because there was a there are some question about how that started up and where we were going to see the benefits.

The cost in those facilities are about $5 million to $7 million on the facilities. Leasing the land and the building and then revenues, really in that $15 million to $20 million range, be -- on an annual basis. EBITDA, $2.5 million. We generally would see breakeven in about a year with payback in that 2 to 3-year range. So with an IRR of around 20, definitely excited about the opportunities to open up those new truss plants. Always have to cross the hurdle on expansions on the timing and the building requirements as well as making sure we select the right locations. So it looks like a couple more questions, operator.

(Operator Instructions) And our next question comes from Jay McCanless with Wedbush.

Jen, congratulations. I'm sure you've got lots of fun stuff planned for retirement. Just wanted to double check. What are you guys expecting for fiscal '18 total revenue growth, including the commodity portion of it?

So the Q3 question?

Full year.

Full year. So sales growth for the full year, we haven't laid out -- we have laid out the commodity impact of about 6% to 8%.

I just -- I was just wondering because from 1Q to 2Q, the CapEx percentage went down to 1.5 from 1.7 and I didn't know if that was a shift in some spending or what was going on there.

Yes, we had some timing on a couple of projects, nothing fundamentally changed in our investment strategy. We are certainly seeing -- back to the plant-build discussion. The hurdles on building some of these facilities is expanding the time line on them.

And then, Chad, I know you discussed lumber prices earlier and that's the stuff I really want to touch on because we've seen OSB prices, the weekly numbers have turned negative in the last couple of weeks. Framing lumber seems to be holding up a little bit better. Does this guidance that you guys have laid out there assume that maybe we see a couple more weeks of declines and then things turn? Or how are you thinking about it? And as part of that also, what should we think about the relative impact of OSB on you guys versus framing lumber?

Yes. The guidance we laid out assumes that prices bottom out here in the next couple of weeks and kind of stabilize within a reasonable range. Framing lumber is the largest component of our commodity category. The one largest SKU is 7/16" OSB, which I think -- I could be off a little here. I think it's about 5% of that category, but the framing lumber composite, it drives the majority of that category.

Our next question comes from Trey Grooms with Stephens.

And yes, I did want to start off by congratulating Jen as well, and good luck with your retirement. We'll miss you.

Thanks, Trey.

So one was just on the rollout of the I think it's the 17 plants that you highlighted. Is there a geographic -- I mean I know, Peter, you mentioned making sure that you hit the right markets with those and that sort of thing. But we're looking out over a 3- or 4-year period as you roll these out, understanding these aren't 3- or 4-year investments but longer term, is there a geographic focus that you guys have in mind with those that you could talk about?

It's -- generically, Trey, it's out west largely. I mean we've got a pretty concentrated footprint in the eastern part of our country. The holes in our geography are more western parts of the country.

Okay. And so I understand that right, on the 17, that's truss and millwork combined? Or is there -- is it mostly truss plants?

Those new facilities is mostly truss plants. The expansion is blinded between the truss and the door facilities -- door and millwork facilities.

Okay, got it. Thanks for clearing that up. Peter, you mentioned the -- you kind of reiterated the free cash flow guidance range for the year, but you said that it may it come in at the low end. Can you help bridge that for us? Where it will -- if it could shake out low end versus where it would have may be midpoint or higher end of the range?

Yes, I mean what we're struggling with at this point, and you can imagine, right, the purchase price has changed quite a bit for the lumber and building materials. So to date, we've seen a pretty substantial headwind from that inflation on our inventory and to some degree, in our AR. So as we look at that sort of receding as it has, we started to get a sense of it normalizing kind of at that bottom end of the range. It's the -- adjusted EBITDA we sort of laid out integrate some expenses in that $15 million to $20 million range, working capital in that. Right now, we think it's about 10% of sales -- of the incremental sales. Cash interest in the $95 million to $100 million, cash taxes in the $15 million to $20 million, capital expenditures like we mentioned, came down a little, so you're kind of in that 1.5% range. That gets you to the lower end. Depending on where we ended up, we end up with the year-end EBITDA and the year-end working capital. Those are the kind of the true variables here from this point to the end of the year.

Right. And just so we're clear, in longer-term, kind of taken some of these fluctuations out, is it still kind of 9% or 10% of the working capital piece? Is that kind of what we should be looking for?

Yes, in that core piece. Yes, that 9% to 10% is still -- we feel pretty good about that barring the kind of lumpy fluctuations, correct. It's still about the cash, at the end of the day.

I just want to follow-up on the previous question from Jay, just a little more clarification. Of our commodity product category, 70% of that is framing lumber-driven and 30% is panels. And of that panel portion, 7/16" OSB is the largest piece of that. I think it's about 6% of the panels category, so I just wanted to clarify that.

At this time, there appears to be no further questions. Mr. Crow, I will turn the call back over to you for closing remarks.

Well, thank you, once again for joining our call today. We look forward to updating you on the progress of our initiatives in the quarters ahead. And if you have any follow-up questions, please reach out to Jen, Binit or Peter, thank you.