Builders FirstSource, Inc.
Q2 2020 Earnings Call Transcript

Published: 31 Jul 2020

[Operator:]

Good morning, and welcome to Builders FirstSource’s Second Quarter 2020 Conference Call. At this time all participants are in a listen-only mode. Today’s call is being recorded and will be available at www.bldr.com. It is now my pleasure to introduce Mr. Binit Sanghvi, Vice President, Investor Relations.

[Binit Sanghvi:]

Thank you, Kevin. Good morning, and welcome to the Builders FirstSource Second Quarter 2020 Earnings Conference Call. With me on the call today are Chad Crow, Chief Executive Officer; and Peter Jackson, Chief Financial Officer. A copy of the slide presentation referenced on this call is available on the Investor Relations section of the Builders FirstSource website at bldr.com.

[Chad Crow:]

Thank you, Binit. Good morning, and thank you for joining us. We are incredibly proud of our team’s hardwork and dedication to excellence over the past several months. A significant portion of our senior leadership as well as our regional and local managers have been with us for well over a decade, giving us a collective understanding of how to effectively manage during crisis. Last quarter, we outlined our preparedness to address the unprecedented environment from a safety, operational and financial perspective. Our team rose to the occasion and delivered strong results all around. We proactively managed our business at the local level to quickly rightsize our operations where necessary to ensure that we continue to safely and effectively deliver critical products and services to our customers, all the while adjusting to a ever changing market landscape and keeping as many of our team members as possible working through the pandemic. Our focus execution allowed us to take advantage of strong housing fundamentals to produce the highest quarterly adjusted EBITDA in our history. Order volumes recovered as we moved through the quarter and we are pleased we were able to bring back almost all of our furloughed employees. Many states in the Northeast, Northwest and Midwest, initially placed restrictions on homebuilding. Those limitations have now been lifted, so we are back to work in all of our locations around the country.

[Peter Jackson:]

Thank you, Chad. Good morning, everyone. Let me start by also recognizing our team's work to quickly adjust cost, adapt to local market conditions and executed actively to deliver a record quarter. I will quickly review our second quarter results, and then provide you an overview of how we intend to manage going forward. We had $1.9 billion in net sales in the second quarter with core organic sales declining 2.1%. Core organic excludes the acquisitions and commodity impacts from that sale to give an indication of the underlying performance of the business. As previously disclosed, during the month of April, we experienced a core organic sales decline in the high single-digit percent range. However, as the quarter progressed order activity showed a smaller drop and a stronger recovery than we initially expected. In June, core organic growth rebounded up low single-digits, reflecting what we believe to be a release in pent up demand. For the quarter, our five tuck-in acquisitions completed over the past year added 2.5% to net sale. Commodity price inflation added another 1.8%. As a result, net sales in total increased by 2.2%. Demand for our value added product categories continued to outperform within our respective markets. Although higher demand in most parts of the country was disproportionately offset by the impact of COVID-19 in the hardest hit areas. Our gross margin percentage was 26.6%, just over the high end of our previously communicated expectation of 26% to 26.5%, due to the disciplined execution and rapid adjustments by our team as the quarter progressed.

[Operator:]

Thank you. We can now go to our first question, that comes from Matthew Bouley of Barclays.

[Matthew Bouley:]

Morning everyone. Thanks for taking the question, and congrats on the results. Start off with a question on the guide for Q3. You're saying, I guess core organic growth in the mid-single digit range and I think I mentioned Peter, that June was up low single digit, just any color I got from how July organic is trended, and sort of just what are the underlying housing start expectations that are that are informing that guide?

[Peter Jackson:]

Yes. I’m start off and let Chad finish up. The performance in June, July is obviously not done yet. But looking like it'll be right in that same range maybe a little bit better. We had talked earlier about the potential for an air pocket, wondering what the recovery might look like if there were some pent up demand from the sort of timeframe when everything was pretty much shut down. Things have been not telling you anything you don't already know, surprisingly resilient. And we're very pleased with sort of the overall sustainability of the trend that things have come back. And as you've heard, as we have heard, from many of the builders around the country, there is a tremendous amount of optimism. There's no strength in that homebuilding market. So that's really the rationale that we're giving ourselves for that mid-single digits third quarter growth number in that single family space. It's still, a little bit open, in terms of where it will land could be better. As always, there's enough volatility in COVID land where it could be worse, but we were feeling pretty good about it on balance and the order rates to what we're seeing.

[Chad Crow:]

Yes, and I'll just add. You've seen the commentary from the builders and in recent weeks, very, very positive. The traffic is up, new orders are up. Just a little bit surprisingly, it's been so resilient, and there still seems to be a lot of tailwind. Rates are low. I think with everything going on in our country right now, people desire more space. In many cases commutes are becoming less of a factor for people, which allows them to move further from downtown areas. I think there's probably a lot of people with aging parents looking to create space for them, as opposed to, looking to put them in long term care facilities. So there's just a lot of tailwind right now, people aren't traveling as much. A lot of -- I think they've given more thought to their living condition with the dynamic that are going on right now. So as Peter said, with any guide or forecast, there's potential for upside or downside we always try to be pretty measured about our guidance and leave ourselves a little legroom and then this quarter is no different and we're feeling really good about how things are shaping up right now.

[Matthew Bouley:]

Perfect. Thank you for that. And then I guess on the gross margin side, you can clearly see the progress over the years. The Q3 guide it's better than where margins bottomed in the second quarter of 2018 And you mentioned this one to two quarter lag, back to normalization. And so my question is, with all the progress you've made, is there any reason that you think that, the pace of margin recovery might not be any might not be faster than what we saw at that time? Or should we think that hey, look, it is what it is, lumbers inflating and let's not get too ahead of ourselves on this. So, really just asking about how we should think about that pace of normalization? Thanks, guys.

[Chad Crow:]

Well, I'll start out Peter can add a few lines but. We've seen this movie before, right? 2018 was one of the most recent example. We get compressed for a period of time and then when things flatten out or we start to see deflation, we get paid back, and then so Q3 is going to be a quarter of margin compression, but with the tailwinds we are seeing in housing and, and the higher prices once we get our pricing got up, it could set up to be some really nice quarter just like we saw it.

[Peter Jackson:]

And we're certainly pushing ourselves to get better and better about managing price and doing so efficiently as possible quite ready to sign up for faster than our one two quarters. So I think that's probably the right way to think about it for now. But certainly internally, that's our goal for ourself.

[Matthew Bouley:]

Okay, thank you both.

[Operator:]

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

[Mike Dahl:]

Hi, thanks for taking my questions. Echo the commentary around best results here in a challenging time. The first question I had is on manufactured products, I think, Peter, you made a comment about how some of the impact on the optics around growth there where we're potentially mixed related, but I think if we if we look at that – I mean we’re not off on acquisition contribution. I think the volume and manufactured products may have been down high single digits ish, which would have lagged the rest of the business. So good. Just want to clarify that. And then if you could provide some additional color on those mix impacts, but also just then on the relative growth trends you've seen over the course of June and July in manufactured products?

[Peter Jackson:]

Yes, absolutely. You heard it right, that the nature of the decline in manufactured products is sort of that, mid-single digit in that organic components. So yes, we did see a decline. The biggest reason for that and we dug into the numbers was around the fact that the other was a higher amount of, on a mixed basis, a higher mix of that manufactured product in the markets where we got hit the hardest. So was unfortunate it's I think, representative of opportunity delays in front of us as those markets were covered. But, an area like, the Northwest, specific northwest of Florida for example, that's a manufactured products business is a great business for us. We've great partnerships. We've sort of proven the value proposition, and it's a higher percent -- a much higher percentage of the mix in those markets. So then when we work hard in those markets, disproportionately, that's why it shows up in that organic number. But still feel very good about the business. It's not a structural issue, it continues to grow. In other parts of the country, it continues to be just as successful or more so in every market where we sell it versus the core and overall business.

[Chad Crow:]

Yes, and I'll just add. I agree with what Peter said, part of it was geographical We were shut down in areas where we have a very strong component presence. But you've also got to consider when builders hit the brakes? Like homes that were already under construction, we kept shipping to new home started, dropped and the first thing we lose there is the component business, right. So that's part of it as well. I'll tell you that moving into the pandemic, so around the first week of March, to the depths of the pandemic, as far as new truck orders coming in, we dropped over 50%. Our orders coming into the truss plants now are back to a level equivalent to where they were at the beginning of March before the pandemic, and a solid double digit higher than where they were a year ago. So I have -- I have zero concerns about our components.

[Mike Dahl:]

That's great to hear. Thanks for that color. My second question is really around the reinstated long term guidance, and it's nice to see that reinstated. On the other hand, I think prior on admission, there's still some uncertainty there. So the question is really if we look at the two key results through Q2 guide, it seems like you're tracking towards like 525 to 550 million in EBITDA this year. And that still takes 40% plus growth over the next two years to get that to get that long term EBITDA goal of 750. So has your high level framework changed at all around kind of based business? What kind of market growth was internal initiatives and then what component would potentially be M&A included in that?

[Peter Jackson:]

First of all, exciting. And then I’m looking forward to it, and now it's fundamental structure of what we thought about earlier this year is not changed. We are -- when we go back there – and I know as you have not talked about this in the past, when we're going through and looking at the variety of models that we pull together to look at this business over time. We certainly have a number of different levers that we can pull, in addition to what I would describe as sort of a core underlying mark. Right. Of course, we're going to be heavily influenced by single family. Of course, we're going to be impacted by a commodity, sort of core to who we are. But we also have the ability to really control our own fate in a lot of ways. Investments that we're making in the core business that’s value-add strategy that we've been executing on has been very effective. Now with our being even below our targeted leverage ratio, we have tremendous liquidity and terms of this opportunity to go after what we believe to be a very, very healthy pipe of M&A opportunities. And operational excellence continues to perform. We continue to make progress. We continue to see an operation that knows how to and wants to get better and to have better results each quarter. So, really, while we were -- I think, prudently conservative by pulling the 2020 guidance last quarter as we run our numbers and looked at where we're at and where we can be, what things are sort of coming together for us. We feel very good about 2022. We think that is just the area is absolutely attainable and we have line of sight to how we're going to get there. And as I mentioned, it doesn't -- everything doesn't have to work together perfectly for us to hit that number. We have to continue working and doing what we're good at.

[Mike Dahl:]

That's great. Thank you.

[Chad Crow:]

Thank you.

[Operator:]

Our next question comes from Keith Hughes of SunTrust. Keith, perhaps you're on mute.

[Keith Hughes:]

Yes. Can you hear me now? Sorry, I had to connection problem.

[Operator:]

Yes. Please go ahead .

[Keith Hughes:]

Okay, sorry. Miss you again. On acquisitions, you talk about for some time doing tuck-ins, if you could talk about what regions, what products, things of that nature, you would look to do acquisitions? And what you, at this point in cycle, be open to something larger than a tuck-ins?

[Chad Crow:]

We're always open to that. In many ways, one large one can be easier than 20 or 30. small ones, and we've seen both clearly. But yes, that's certainly always something we're open to. At this point in the cycle we do have a lot of liquidity. It may be using more equity at this point in the cycle would be proven. But sure, that's something we've always been open to.

[Keith Hughes:]

Second question, on these smaller tuck-ins. Is there a region that you try ?

[Chad Crow:]

You sort of broke up there for a second, Keith. It sounds like you were asking what regions might we think about tuck-ins for?

[Keith Hughes:]

Yes, what regions. That's correct.

[Chad Crow:]

Well, you can look at the map and see whether there's holes in our footprint. So, part of our motivation is regional. But I think just as importantly as product mix. We're much more inclined to go after the company with a high mix of value add. So it's kind of a combination of those two factors. In general, we're under penetrated in my view in the western part of the country versus the east. But as I said, value add is just as critical on my mind.

[Keith Hughes:]

Okay. Thank you.

[Chad Crow:]

Thank you.

[Operator:]

Our next question comes from Trey Grooms of Stephens Inc.

[Trey Grooms:]

Hey, good morning.

[Chad Crow:]

Good morning, Trey.

[Trey Grooms:]

So geographically, just kind of wondering, I think that definitely held in better clearly. During the earlier days of the pandemic, there was things vary pretty widely, as you mentioned. And your value added products, it sounds like, when you do see some geographic changes in demand that can have an impact there just giving your exposure. So I guess, my question is, can you touch on kind of the geographic areas now that things are starting to kind of move again. Where you're seeing relative strength or weakness now and geographically and what that means for that value-added mix?

[Peter Jackson:]

Sure. Yes. So, just to recap what we were saying in the script, right, the Northeast, obviously, kind of the upper Midwest, the Michigan area, in particular, the Pacific Northwest and then later on as we got past the initial impact, we also saw slowdown in Florida. Those were all I would say the areas that were highlighted and I think truly saw the biggest impact for us as a company. When it comes to recovery, I would say, in Pacific Northwest has bounce back very quickly. I would say, the Michigan and upper Midwest area has definitely stabilized and started to march back. Northeast is still suffering quite a bit. I mean, there's no way around it. They continue to have very strict controls. I think the population in general has suffered more and has states slower. So that recovery is underway, but certainly not back to normal levels up there yet. In Florida, I think they're still perhaps in the middle of some of the uncertainty, given the exposure to tourism, they've certainly seen a lot of concern, a lot of the declines for their core businesses. And so they are still, again, they're on the road back, but haven't been far to get go. When looking at the relative exposure in those areas for manufactured products, obviously, Florida is important to us. But so it's the Northeast. There are some corridors of real good strength there for us. So it will be a recovery that you'll see and we're confident in that sort of growth over time in the manufactured products. But those couple of markets will be a more of a progression back to normal rather than a quick snap back. But I think it's important to know that, if you can look at the overall value-added products. If you exclude those target regions, we were up low single digit. So the rest of the country is still even with the suppressed starts numbers and some of the concerns still growing as we would expect it to be in overtime.

[Trey Grooms:]

Got it. All right. Thanks for all the color. Appreciate it. And I guess as a follow up. So on the SG&A line, it was lower as a percent of sales then what we would have thought, especially given that strong top line you guys put up and just everything that we've done. But we'd be kind of understand some of the tailwinds may abate. But with that said, I know, you guys have a culture of focusing on lower cost and running a tight ship. So I guess, is there any levers that you guys had pulled up in SG&A through this pandemic, and over the last several months that you could continue to see or continue to benefit from in the coming quarters?

[Peter Jackson:]

I'm glad you highlight that, Trey. I would say this is really just a testament to the discipline that our teams live and breathe each day. We went out with some messaging, sort of just some reminders and some playbooks to folks. When we saw that sort of a concern in the shutdown setting, just coaching people on how to manage through it, right, and what our team just did a great job resizing the business when it was appropriate, making sure that we were cutting costs, being disciplined. And obviously, some of the things we did to give ourselves a little extra flexibility more broadly as a company we talked about that, delaying wages, salary cuts for executives. Sorry, delaying wage increases and salary cuts for executives. Those were things that we thought were necessary just to give ourselves that flexibility. Clearly we did very, very well as we went through that sort of pause period. Since then, with the recovery that we've seen, we've reinstituted, the merit increases, we restored all those cuts that we made. And the nature of the resizing of the business is very specific to the locations. So we try to retain the staffing, making sure we weren't hurting ourselves strategically. Our ability to compete, our ability to win, we didn't want to undermine that by being too aggressive, because we don't believe that we've allowed ourselves to get fat in these markets. There wasn't a ton of a cut. So what you saw at the end of the day was I think some real flexibility in the core around comm that some of that will come back, obviously in terms of expenses. You saw about a third of our overall benefit being TBD. Now that ones bit more time to play out. The question remains, will it ever get back to normal? Will we ever travel like we used to? TBD, but certainly that we anticipate will come back to some degree over time. Then third, that was really the fuel expense. And obviously, there's been some volatility in the cost of fuel. So that will normalize to wherever it's going to normalize to over time, maybe not right away on that one either. But we didn't go back through this organization and make any real structural changes or massive cuts. Our focus was on making sure we were responding and being ready to move forward. At this point that seems things played out pretty well.

[Trey Grooms:]

Great. Thanks a lot for taking my questions. And best of luck.

[Peter Jackson:]

Thank you, Trey.

[Operator:]

Our next question comes from Seldon Clarke of Deutsche Bank.

[Seldon Clarke:]

Hey, good morning. Thanks. Can you give us some lineups what your longer term guidance assumes in terms of starts? Understand there -- you mentioned there are numbers of way you can get there. But just from a high level, can you give us some more detail around what type of support you will need from the macro?

[Peter Jackson:]

Yes. So, when we first brought out that $750 million EBITDA target we were referring to before. We were pretty explicit about putting a $1.1 million single family start number on there. However, earlier this year, we've come back and said, we have enough levers where we think we can get to that number even with just a healthy single family starts environment. It doesn't have to get to that million one number. So way we think about it is really those opportunities to control our own fate will be very, very impactful and perhaps as much as what we anticipate the continued recovery and starts today. So we talked about that, obviously, the M&A opportunities, what we are committed to staying within our stated range. We've got quite a bit of room there, where we have opportunities to grow our value-added with both greenfield and capacity work. Certainly that's a strong growth opportunity for us. And the operational excellence initiatives we've talked about right, whether it would be getting better and more disciplined. The pricing getting better and more effective in our distribution and logistics management, or even just opportunities to reduce costs and become more efficient in the back office. We think there are certainly ways that it can get us to that. We're not 100% dependent on that single family starts.

[Seldon Clarke:]

Okay. So on the M&A side, are you seeing -- have you've identified more opportunities? Are you seeing an increased willingness or valuations that come down. What's really driving the sort of increased optimism there?

[Chad Crow:]

Well, the pipeline is full. It's been pretty full for the last few quarters. Obviously, there was a bit of a pause and in what type of diligence work we were doing, when things were shut down. But we brought that back up. There's just a lot of good businesses out there right now. And we clearly have a strong balance sheet to go after them. And so that's why we've got -- we are a little more optimistic. Now we've got a more optimistic tone on what we think we'll be able to do in the coming years from an acquisition standpoint.

[Seldon Clarke:]

Anyway, you could just expand a little bit on what's driving that optimism?

[Peter Jackson:]

So I guess, I'll give you an example without naming any names, where you are -- our internal model for valuations that we've been using and refining over the years certainly requires us to understand our weighted average cost of capital and make sure that the returns that we're seeing are making sense, but even risk we're taking in one of those deals. And what we're experiencing right now is that we are consistently bringing, seeing deals brought to pass by our regional management teams that look at really nice businesses that we think would be a great fit for us around the country. They're tuck-ins, right? So you may not be very excited about it at the top level, but we're seeing an accumulation of these deals and when we put them through our models and start speaking with the leadership teams of these targets, we thing there's a -- there are great opportunities. The valuations make sense. The return are great. The teams fit together and we think that it will continue to sort of accumulate into competitive advantages. We bring together sort of that model of our product portfolio, the capabilities that we bring with our national footprint, opportunities to introduce value-add or expanded value-add market. That's -- I would say, the accumulation of those factors is where that optimism comes from the list and the way that list is being sort of vetted through our processes as we continue to accelerate our M&A focus. We're ready to go.

[Seldon Clarke:]

Yes. Okay. That sounds good. Appreciate it.

[Peter Jackson:]

Sure.

[Operator:]

Next question comes from Jay McCanless of Wedbush.

[Jay McCanless:]

Good morning everyone.

[Peter Jackson:]

Hey, Jay.

[Jay McCanless:]

Hey, good morning. So I got a two-part question on lumber and then one as a follow-up. I guess, could you talk about what benefit you're seeing on the top line from commodity inflation thus far in the quarter? And then also maybe talk about when we think about your input costs for lumber? What's the spread between two before framing lumber versus sheet goods?

[Chad Crow:]

So, maybe I can start. I would tell you that our Q2 results, the commodity is a slight tailwind. Keep in mind that dynamics, you saw a pretty good fall at the beginning of the quarter in prices and then a pretty good run out towards the end. So net-net it sort of averaged out, not a lot of impact and really started to accumulate if you've got into May. That's where the really starting to hit on May through today. Now the split of our exposure and we talked about commodities being right around 40% of our sales and prior quarters obviously now increase a bit as those increase prices start to change the mix in our business. But if you look at that 40% of our overall sales being commodity exposed and internally its 70/30 mix between lumber and panels. Again, anytime you got a highly commoditized component of your business that can be the most pressure probably in that space, the most commoditized and its probably of the panels. But that's sort of a broad-brush response.

[Jay McCanless:]

Got it. That's helpful. And then my follow-up question, just wondering --I guess, did you guys quantify how much in one time savings you saw from some the cost actions during 2Q that are probably going to come back in 3Q?

[Peter Jackson:]

Most of the $14 million beat in the second quarter, I would say were based on actions that are going to come back over time. I would say maybe further that will come back right away based on things people already done that are attributable to TV will take some time to phase back and unlikely they bounce back in the third quarter. Although I starting to eat away at it as things start to losing up in certain markets. And then, you'll -- I think you could probably estimate that better than I can. And those are the major components.

[Chad Crow:]

Hey, Jay, I just want to add a little follow up to your commodity question. When we look at Q3, and it's kind of difficult to estimate, but right now our best guess is Q3 sales will be positively impacted due to inflation somewhere between 5% and 7%. And then, of course, we'll probably have another 2% or so year-over-year growth due to acquisition. So I just wanted to make sure you have those components.

[Jay McCanless:]

Appreciated. Thank you. Thank you guys for taking my questions.

[Chad Crow:]

Thanks Jay.

[Operator:]

Our next question comes from Kurt Yinger of D.A Davidson.

[Kurt Yinger:]

Yes. Good morning everyone, and appreciate you taking my questions.

[Chad Crow:]

Good morning, Kurt.

[Kurt Yinger:]

I just want to start off - yes, good morning. On the gross margin front, you guys came into the year 26% to 26.5% kind of normalized. And I think lumber was maybe 400 bucks per thousand. Obviously, it’s a moving target. But if we were to think about just structurally higher lumber price and maybe $500, what type of impact would that have on the normalized gross margin outlook, just with commodities naturally being arger percentage of sales?

[Chad Crow:]

Yes. No, great question. As you know, we modeled that one quite a bit. It's about half to three quarters of a point based on current spot. It's been a meaningful move this year. There's no question. We'll have to see how long it lasts and how it plays out. But it's certainly an important change and one that we're we welcome. We just hope it sticks around this time.

[Kurt Yinger:]

Well, it wasn't too bad on the other side of 2018 either so.

[Chad Crow:]

Not bad at all.

[Kurt Yinger:]

And my second one, it seems like over the past couple quarters you guys have start to see some real tangible benefits from some of those pricing tools. And I'm wondering how much opportunity you feel is left there. And relatedly, could you talk about which product categories or what previous shortfalls these tools really address?

[Chad Crow:]

Sure. Yes. And I guess I just want to reiterate the fact that this pricing effort we're making is really just around being thoughtful, being organized, being efficient internally. I was describing areas where we're sort of closing the gaps. It's those moments when price change will come through the good or bad from a vendor and it's not being filtered all the way through the system to the quotation we're giving our customers. And while I'm sure the academics might prefer the fact that you need to increase prices and also decrease in prices, that's important as well, because you need to stay competitive and make sure you're winning the business. We want our salespeople to have the best information so they can compete and win in the marketplace. And when you're slow, you can put yourself in a position to fit out in profitability and in sales. So that's probably the biggest component. Being systematic always helps. You don't want to put yourself in a position where you've taken an approach that somehow harms a market or distorts the pricing. So that systematic approach we think it's absolutely beneficial. As we look at it, it's been a difficult process to adapt all of the tools, the system, the architecture to the way that we want to approach it going forward. I'm very, very impressed with both our operations and our IT teams for what they've been doing to pull that together. We've seen some very good progress with a couple more phases to come over the back half of this year. The markets where we've implemented so far have been pretty manual. So thus I can changes over time. It is a fairly modest percentage of the overall company. I think the new pricing structure is put in place. So we do expect it to continue to accumulate for us over the next year as we get some of those permanent changes to the It structure and allow the business to accelerate the use of that more broadly.

[Peter Jackson:]

And I'll just add, even just 50 basis points of margin improvement, that's real money. And part of it is, to some degree breaking old habits. I've always sold this with a 24% margins as well. Why can't it be 24.5. What can the market bear? So give them more tools to understand that. And then also knowing, bucketing your customers and knowing which customers are more expensive to serve and making sure you're getting proper margin and a net return on those customers. So a lot of it's just giving them the tools and the information to make those decisions much more quickly.

[Kurt Yinger:]

Right. Makes a lot of sense. All right. Thank you guys. I'll turn it over.

[Peter Jackson:]

Thank you, Kurt.

[Operator:]

Our next question comes from Ryan Gilbert of BTIG.

[Ryan Gilbert:]

Hey, thanks, guys. First question is on the third quarter guide. So, I guess, looking back to prior years and there's been commodity inflation. We've seen that pressure on the gross margin. Operating margin has typically been flat or even improved on the year-over-year basis. But then just looking at that markets trying to kind of triangulate to operating margins and adjusted EBITDA and gross margin guide. It looks like you're expecting some pretty meaningful operating margin compression in the third quarter. And I'm just wondering why you think you can be flat or higher in 3G 2020 on an operating margin basis?

[Peter Jackson:]

Yes. I think the -- probably the most direct answer to your question is the velocity of the change in commodities. The nature of those short term fixed price contracts certainly put us through a certain amount of exposure for a window of time. And these are unprecedented increases. You're up 20, 30 points a month. That's a very, very difficult thing to compensate for. So we're just recognizing that in the third quarter. Your point is right on there is some nice leverage that comes when the value of those commodities gets higher. And to the bottom line it's a no question of positive and one that we absolutely expect to flow through our P&L over time, but that's a short answer.

[Chad Crow:]

Yes. I know. We could be looking at about 300 basis points decline in gross margin Q3 this year over last year. That's pretty hard to overcome from an operating margin standpoint. But as Peter said, we usually more than make that up in the following quarters.

[Ryan Gilbert:]

Right. Completely understand. Okay. And then second question on structural components. Definitely good to hear that, you're up double digits on the year-over-year basis on trusses. I'm wondering just how the conversations with builders have been progressing in the third quarter, given that negotiating that backlogs are pretty full. cycle times are extending. I'm wondering if you're seeing more builders coming to you, interested in using components to get those cycle times back up?

[Chad Crow:]

Yes, for sure. I mean, anytime labor's tied, as you mentioned, they've got all of a sudden the surge and their backlogs are bigger than normal. They're looking for ways to get those houses in the ground as quickly as possible. And so that just plays right into our strategy on the component side of the business. So that's why I said earlier, I have no concerns about our component business, very optimistic about what the future holds for that.

[Ryan Gilbert:]

Okay. Got it. Thanks. And just lastly, if I could. I was wondering if you could just expand a little bit on what's going on in Florida. I think most of the commentary we've heard from the builders has been that, and the demands pretty positive down there. So has there been a change to that competitive landscape or anything in particular, you want to call out other than what you could earlier?

[Peter Jackson:]

I guess, I want to be a little bit thoughtful about how I answer this. There were certain important customers who acted more aggressively and less aggressively during the downturn than others. And the nature of some of those decisions certainly gave us some pause there. Back in this certain markets, they were particularly impacted, at least out of the gate or some of the more tourism impacted markets. All those markets have absolutely come back to the degree. There is a recovery underway. And I don't see that as a long term issue. But I do think there is a bit of a progression back to normal that is required for us to kind of see full help there. But we have a very strong footprint. Very good businesses. Our folks are doing a great job down there. It's certainly not a concern about the operation. It's just a matter of how quickly it ramps back to where we would consider to be strong again.

[Ryan Gilbert:]

Okay. Got it. Thank you very much.

[Operator:]

Our next question comes from Steven Ramsay of Thompson Research Group.

[Steven Ramsay:]

Good morning. I guess, question on Greenfield openings. How many have you done year to date? Do you have plans for more this year? Or is it still more of a focus on M&A?

[Peter Jackson:]

Yes. So year to-date, I think we did just the one -- we had one that open sort of provided year end timelines, so its somewhere one or two. We have a couple more that are being built out. As far as timing and when they will open. So probably one to two more that will fall into this year. Again, kind of that year end timeline. It's a great time to kind of get that work done and get them starting to ramp up, because it's a bit of a slow season for us generally, but we do continue to focus on looking for areas for retail facilities and we expect to continue that going forward.

[Steven Ramsay:]

Okay. And then on repair and remodel volumes, I know you guys have some unique geographic exposure that drives that a little differently than the broader market. But our trends have been more resilient, maybe even didn't see quite the dip that new single family saw. Maybe just share the specific drivers for you guys in the quarter and if you have any visibility over Q3 into Q4?

[Peter Jackson:]

Sure. Yes. So the one thing I'll let you know. I'm sure you already know this. But just for the other listeners that our R&R and other includes kind of the commercial business as well. So I can tell you that we have sort of a tale of two cities there that where core R&R retail and remodel businesses is far stronger, more than doubled at 4% rate. And then the commercial businesses where we see some downturn and that's definitely offset. So we've got that retail footprint. Southern California is a great example, business is doing wonderfully, really performing well, ready and responding to the homeowner needs. And those markets are doing very, very well. As we mentioned in the script, the Midwest market is sort of leveled out. We've seen a bit of a headwind there in past years and it's been healthier. Certainly also seeing that tailwind from the overall trends nationally in the R&R space. Even Alaska's R&R market has done well. But that commercial part of our business where we do have projects. Again, that's got some pretty solid Alaska explorer. That has been part of it, as some of those projects have been either delayed or paused for whatever reason.

[Steven Ramsay:]

Great. Thanks for the color.

[Operator:]

Our next question comes from Reuben Garner of the Benchmark Company.

[Reuben Garner:]

Thank you. Good morning, everybody. Thanks for taking my question.

[Peter Jackson:]

Good morning, Reuben.

[Reuben Garner:]

Most of them have been answered. So I just have one quick one and if I missed it, sorry, we had some technical difficulties. But have you had any -- most of the cycle, the only -- the main driver of a slower recovery has been labor availability. Have you noticed any changes on the labor front? And then, I guess, in a related way, have you had any difficulty in getting any specific products? Do you see commodity availability or any other building products availability and issue in limiting growth or limiting and acceleration in growth in the coming quarters if the demand is there?

[Chad Crow:]

Yes. Good questions. Haven't really noticed any changes in labor availability. Although I would not be surprised with the recent surge in new home orders that may get a little tighter and it may extend cycle times out a little more. We talked about that a little bit earlier on the call. From a product availability standpoint, most folks like us were running pretty lean as the pandemic hit, and we've stayed lean, prices have run and that kind of incentivizes you to remain lean, because you don't want to jump back in when prices are running if you don't have to. So that -- there has been some spotty supply issues, the bills cut back on their production when the pandemic hit and kind of got us in a situation we are right now where demand is strong and supplies limited. But nothing that I would say is disruptive. It's just something we're having to keep a closer eye on and be little more aggressive on the buying side in some markets where we're having trouble with some extended lead times, but nothing I would call significant at this point.

[Reuben Garner:]

Great. Thanks again and congrats on the quarter. And good luck navigating through everything.

[Chad Crow:]

Thank you.

[Operator:]

Thank you ladies and gentlemen. At this time, I would like to turn the call over to Mr. Crow for any additional or closing remarks.

[Chad Crow:]

Thank you again for joining our call today. And we look forward to updating you on our future results. If you have any follow up questions, please don't hesitate to reach out to Peter or Binit. Thank you.

[Operator:]

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.