Thank you, Katie. Good morning, and welcome to our second quarter 2022 earnings call.

With me on the call are Dave Flitman, our CEO; and Peter Jackson, our CFO. Today, we will review our record second quarter results for 2022.

The second quarter press release and investor presentation for today's call are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during our call.

The results discussed today include GAAP and non-GAAP results adjusted for certain items. As a reminder, our adjusted EPS calculation excludes amortization of intangibles.

We provide these non-GAAP results for informational purposes, and they should not be considered in isolation for the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they could be useful to investors in our earnings press release, SEC filings and presentation.

Our remarks in the press release, presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections.

With that, I'll turn the call over to Dave.

Thanks Mike. Good morning, everyone, and thanks for joining our call.

We ended the first half of the year on strong footing, delivering robust results during the first quarter with that positive momentum continuing throughout the second quarter in which we achieved sales growth of 24% and adjusted EBITDA growth of 80% in the face of difficult comps in a challenging operating environment. These outstanding achievements are a direct result of having strong alignment around the clear strategy and the focused execution against that strategy, driven by the hard work and dedication of our approximately 30,000 team members and their commitment to provide outstanding service to our customers.

On Slide 3, our strategic priorities continue to be: organically grow our value-added products and services, drive operational excellence, continue to build our high-performing culture and pursue strategic tuck-in acquisitions. On Slide 4, we outline how we continue to execute against our strategic priorities this quarter.

Specifically, we delivered record results in the quarter through expanding capacity, increasing value-added product sales and increasing productivity. We continue to leverage our BFS 1-TEAM Operating System with a focus on cost containment to drive strong P&L leverage and bottom line performance.

We maintained our industry leadership by successfully navigating a challenging industry and macroeconomic environment. We strategically deployed capital toward accretive inorganic growth opportunities as highlighted by our most recent acquisition, HomCo.

Through July, we have repurchased approximately $1 billion of the $2 billion share repurchase authorization, our Board approved in May. Turning to Slide 5.

We continue to believe it is important to assess our results using a base business methodology to better appreciate the underlying strength and profitability of our company by normalizing commodity volatility. As a reminder, our base business definition assumes static margins and commodity prices at $400 per thousand board feet.

We are maintaining our full year guidance on our base business EBITDA of $2.2 billion, as Peter will discuss in a moment. Turning to Slide 6.

As we outlined in our Investor Day last December, I want to reaffirm our expected performance by year-end 2025 given our assumption of average single-family starts growth in the low single digits through that time. We expect our base business to deliver a 10% top line CAGR and a 15% adjusted EBITDA CAGR.

Importantly, this represents an average 50 basis point per year expansion in adjusted EBITDA margin for a total of 200 basis points of improvement by 2025 when compared to 2021. And as we deliver this performance, we expect to have between $7 billion and $10 billion of capital to deploy through 2025.

That includes money for this year's planned capital investments in innovation and organic growth, along with potential additional M&A and share repurchases. We have already deployed a total of $2.8 billion of capital since we gave this guidance last December.

And in the last 12 months, we have repurchased 25% of our shares outstanding. Looking at our record second quarter results on Slide 7 in more detail.

We delivered strong core organic growth of 12%. Our single-family core organic growth was nearly 16%, again exceeding a single-family starts decline of approximately 3.4%.

Tough comps against 2021 results impacted year-over-year growth in our multifamily and R&R segments, leaving our year-over-year growth essentially flat. Core organic sales grew 12.2%, while value-added for organic sales grew by 32% compared to the prior year period.

This highlights once again the strength of our strategy and that our team continues to execute it very well. Overall, we delivered record sales of nearly $7 billion in the second quarter and generated $1.5 billion of adjusted EBITDA with a record margin of 21.8%.

These results were driven by solid demand for housing across our markets, ongoing productivity initiatives and pricing discipline in an improving but still supply-constrained environment. As we turn to M&A on Slide 8, we remain focused on executing tuck-in M&A that delivers a high return.

Over the past 1.5 years, we completed 10 acquisitions, reporting $1.6 billion of capital, aimed at building out our value-added customer offerings, investing in our digital transformation and further scaling our distribution network. In July, we acquired HomCo, a lumber and hardware supplier in Flagstaff, Arizona, and are excited to welcome these new team members to the Builders FirstSource family.

HomeCo had net sales of approximately $44 million in 2021. This acquisition further demonstrates the fourth pillar of our strategy, M&A.

Building upon the strong reputation and presence of tuck-in targets while leveraging our BFS 1-TEAM Operating System to swiftly integrate these new businesses. We have spent approximately $230 million on M&A so far this year and we expect to invest at least $500 million for the full year of 2022.

We remain committed to allocating capital in a disciplined manner that drives long-term value creation for our shareholders. Now let's shift gears and cover our digital strategy on Slide 9.

Our momentum on our digital transformation of the homebuilding industry is accelerating. Foundational initiatives such as standardizing our house plan intake and bid process continue to progress well.

We completed agreements with two new customers for our configurable visualization tool. Collectively, creative Homes of Minnesota and SnapADU of California complete over 300 starts annually.

And we now have customers responsible for more than 5,000 starts using paradigm visualizer. We recently hit an important milestone in our technology development by successfully integrating the material takeoff, structural design and visualization models into one process.

This means when selections are made in a lock specific model, such as choosing a siding type in color or expanding from a two to a three car garage is reflected in the material list in real time. Pricing of the base house and options can be made available in the visualization experience and reflected in the material list.

Our three dimensional models also provide the basis for offering Building Information Modeling, or BIM services to our customers, allowing them to gain project efficiencies by resolving construction conflicts in the digital world, instead of at the job site. This important capability strikes at the heart of the efficiency gains we believe our platform will bring to the homebuilding industry.

Also, we have ongoing BIM pilots with one large national builder and two custom builders. Our pilot with front-light building company in South Carolina is highlighted on their company website and will help you understand how our technologies and services are helping homebuilders today.

Turning to productivity. We delivered $40 million in savings in the second quarter and we continue to expect to exceed $100 million in savings for the full year 2022 by driving improvement projects and leveraging our BFS 1-TEAM Operating System.

Over the long term, we are targeting 3% to 5% of annual productivity improvement as our teams work together to leverage best practices and technology, allowing us to become faster and more efficient at serving our customers. We are accelerating our efforts in this important area to ensure we not only hit our financial targets, but to also make sure our industry-leading platform is as efficient as possible.

Increasingly, we are being asked what's different about BFS today versus 15 years ago during the last housing downturn. On Slide 10, we would like to point out that the Company has seen a dramatic increase in scale and share, and BFS is now more than 12x larger and 60x more profitable than it was during the last downturn.

We are a leaner, more efficient, consolidated company. This increased scale has enabled the Company to remove more than $400 million of annual run rate cost through several large combinations, including the integrations of ProBuild and stock building supply as well as our merger with BMC.

We are operating as a consolidated platform, not as a decentralized organization, providing better visibility, alignment and greater efficiency than other players in our space. We've improved processes and reduced costs to more efficiently serve our distribution network of more than 560 locations.

We optimized our footprint by closing 120 locations and repurposing numerous other facilities. Since 2006, we have increased our value-added components and no work facilities to over 200.

That's nearly 6x. We have grown our manufacturing capabilities as we have invested in high-speed door lines trust automation and robotics, which have improved our variable cost to serve and reduced our dependency on skilled labor.

A good example of this would be our recent announcement of our two-year partnership with Household Design on the development and recent startup of our first fully robotic for trust manufacturing line at our Villa Rica, Georgia facility. We have also contracted for an additional eight fully robotic lines including four roof trust lines.

We have improved our expense structure, making approximately 70% of our SG&A variable. We have leveraged the size and scale of our business through strategic direct and indirect spend, enabling BFS to more efficiently serve our customers.

And we have dramatically improved our cash generation, capital structure and leverage, providing us with significant financial flexibility. While we have seen strong demand through July that weighed near-term results, we fully recognize the current industry dynamics that are beginning to play out.

We've heard from our customers that demand is slowing due to higher mortgage rates and overall affordability concerns. We remain confident that no matter what market conditions we face, we will remain nimble and balance any short-term dislocation, positioning BFS for long-term success, and accelerating our market leadership.

Turning to Slide 11. In the scenario of a highly challenged market where housing starts are down more than 20%, we have several levers to pull to drive outperformance, including effectively managing costs through our variable expense structure to flex expenses with demand, optimizing capacity and further streamlining our footprint, reducing discretionary spend accelerating productivity projects, taking appropriate headcount actions and moderating capital expenditures.

Our industry-leading platform led by our strong and experienced team is generating exceptional results, which we believe positions us well for any market environment, anchored by the strength of our balance sheet with no debt maturities until 2030. We're committed to investing to capture growth organically and through tuck-in M&A.

Although there will certainly be some challenges over the near term, we remain very optimistic on the prospects for our industry over the long term. I am highly confident in our ability to outperform the market in any scenario.

And given our bulletproof balance sheet, expect us to lean in opportunistically on M&A in a more challenged market. So to sum up, we will continue to execute our strategy gain share and deliver value to our shareholders in any environment.

Our people are the building blocks of our company and our mine inspiration that come to work every day to continue the evolution and growth of our world-class company. I want to recognize Brent Goodwin, an exceptional team member who for the past four years, has worked as an inventory control analyst at our Raleigh, North Carolina Yard and Millwork facility.

Raleigh has been one of the strongest housing markets in the country for quite some time, with more than 60 families moving there each day. For the past several years, rents contributions are a key reason why our Raleigh millwork facility has become the go-to supplier for homebuilders in this burgeoning market.

Beginning in late Q3 2021, Brent's location began experiencing shortages across multiple millwork product categories. Over the past two years, Brent has been relentless in developing creative solutions to help augment inventory, keeping our stock levels consistent to ensure minimal delays for customers.

What makes Brent work all the more impressive is the fact that he's been able to do it all while during first a demolition and then an expansion of this location's main storage warehouse. I want to thank Brent for his many contributions in helping keeping Raleigh's builders on track amid tight supply constraints and strong homebuyer demand.

We are fortunate to have Brent on our team. And I again want to thank all of our team members for their continued tremendous work and focus in satisfying the needs of our customers.

I'll now turn the call over to Peter to discuss our financial results for the second quarter.

Thank you, Dave, and good morning, everyone. We are excited to continue our exceptional track record of financial performance.

We navigated through a complex supply and demand environment to produce record second quarter net sales, gross margin, net income, and adjusted EBITDA. I am also pleased to report that we have again demonstrated our ability to deliver strong cash flow results by generating approximately $900 million in free cash flow this quarter.

Our accomplishments have come through disciplined operational management and solid execution of our strategic priorities. At the same time, we further strengthened our balance sheet by extending debt maturities and returned approximately $1 billion to shareholders through buybacks.

I will cover three topics with you this morning. First, I'll review our Q2 results.

Second, I'll update you on our capital deployment efforts. And finally, I will touch on our updated guidance for full year 2022.

Let's begin with our Q2 performance on Slides 12 and 13. We had net sales of $6.9 billion for the quarter, which increased approximately 24% compared to the prior year period.

Core organic sales in the value-added products category grew by 32% and highlighting our work to meet the demand across our customer channels. Although we continue to face supply chain constraints in the quarter, we are pleased to report that we are seeing signs of those constraints loosening and lead times starting to return to normal.

Gross profit was $2.4 billion, a 52% increase compared to the prior year quarter. The gross margin increased 640 basis points to 34.8%, primarily driven by increased sales in our value-added product categories and disciplined pricing in a volatile supply-constrained marketplace.

SG&A increased 15.9% to $1 billion, driven primarily by four items. Acquisitions represented over 40% of the increase.

Incentive compensation represented nearly 40% of the increase due to higher net sales and profitability. Investments in strategic initiatives, such as IT, productivity and our digital strategy represented another 10% of the increase, and fuel-related expenses contributed 10% of the increase in overall SG&A.

Adjusting for commodity inflation, expenses were 40 basis points better than the prior year even after funding our strategic investments and absorbing inflation in several P&L categories. As a percentage of net sales, total SG&A decreased by 110 basis points to 15.1%.

Clearly, our team understands the importance of controlling expenses and has been doing an excellent job. Adjusted EBITDA increased 80% to $1.5 billion, primarily driven by poor organic growth, commodity inflation and acquisitions.

Adjusted EBITDA margin improved to 21.8%, which increased 680 basis points compared to the prior year period. Adjusted net income was $1.1 billion or $6.26 of adjusted earnings per diluted share compared to adjusted net income of $574 million or $2.76 of adjusted earnings per diluted share in the prior year period.

The 86.9% increase in adjusted net income was primarily driven by the increase in net sales and gross margin, partially offset by higher income taxes and to SG&A expense. Now let's turn to cash flow on Slide 14.

Our second quarter cash provided by operating activities was $947 million, and cash used in investing activities was $258 million. We generated free cash flow of approximately $900 million, primarily driven by core organic growth in sales and commodity inflation.

Moving to capital deployment. This year, we have spent approximately $230 million on our M&A transactions, including our most recent purchase of HomCo in July.

In the second quarter, we repurchased 16.9 million shares for $991 million at an average stock price of $58.7. In addition, we've repurchased approximately 4.4 million shares in July for $270 million at an average stock price of $61.18.

Year-to-date through July, we have repurchased over $1.5 billion of stock. Since August of 2021, we have repurchased approximately 52.3 million shares of stock at an average price of $62.95 for $3.3 billion.

This represents the repurchase of approximately 25% of our total shares outstanding since August of 2021. We are committed to balanced capital deployment, and we will continue to look for favorable opportunities to repurchase shares considering market dynamics and our ongoing commitment to maximize long-term value creation.

Our net debt-to-EBITDA ratio was approximately 0.8x our LTM adjusted EBITDA. Excluding our ABL, we have no long-term debt maturities until 2030.

Our total liquidity was $1 billion, consisting of $838 million in net borrowing availability under the revolving credit facility, and $166 million of cash on hand. We are pleased with our first half '22 performance, and I want to thank our entire team for their tremendous execution and dedicated efforts despite the dynamic environment and tough year-over-year comparisons.

As we look to the back half of 2022, I would like to provide you with our full year outlook on Slide 15. Given inflation, higher interest rates for mortgages and cancellation rates in the mid-teens, we now expect full year single-family starts across our geographies to be down mid-single digits.

We expect multifamily starts to be up in the low double digits and R&R projected to be up in the low- to mid-single digits. As a result, we are lowering our base business guide on net sales from 10% to 14% to 8% to 12% or $17.2 billion at the midpoint.

Our EBITDA guide remains unchanged. And we continue to expect growth of 18% to 22% or $2.2 billion at the mid as our outperformance in the first half will be largely offset by market weakness as we move further into the back half of the year.

We will continue to provide you with a commodity price sensitivity chart in our investor presentation on Slide 16 to allow you to incorporate your own commodity estimates into your models. CapEx guidance for the year is down to approximately $300 million in 2022 due to continued supply chain delays.

Building on the approximately $40 million in productivity savings achieved during the quarter, we expect to deliver over $100 million in total productivity savings this year as we continue to drive improvements across our operations. We now expect free cash flow at the midpoint to increase from $2.2 billion to $2.75 billion, reflecting higher-than-expected commodity prices and increased profitability.

Our projected free cash flow assumes average commodity prices in the range of $700 to $1,000 for the full year as prices decelerate through year-end. In conclusion, our efficient operating platform has provided us with line of sight to nearly $3 billion in free cash flow, a fortress balance sheet with no long-term debt maturities until 2030 and over $1 billion of liquidity.

With that, let me turn the call back to Dave for his closing remarks.

Thanks Peter. Our industry is clearly experiencing pockets of deceleration.

We've all seen mortgage rates rising single-family starts forecast coming down in the back half of this year and cancellation rates increasing. We are not deterred.

Our company is a much different one today than it was in 2007, and we remain confident in our ability to effectively navigate the persistently unpredictable environment. We are operating with our eyes wide open to any near-term macro turbulence while keeping our eye insights on our long-term goals, our core values and our operating principles as our guidepost.

BFS is a company with fundamental strengths and clear competitive advantages and we are prepared to win in any environment. We remain leaders in a highly fragmented industry with the opportunity to be the acquirer of choice in the event of market dislocations and given our belief in the long-term industry growth trends.

Our more than 560 facilities are in 47 of the top 50 MSAs with tremendous geographic customer and end market diversification. We have an extremely strong balance sheet, and we'll continue to execute our strategy and deliver strong free cash flows.

And finally, this is a seasoned and highly experienced leadership team that has successfully navigated many prior cycles, and we will deliver compounded shareholder value over the long term. Katie, let's please open the call now for questions.

Good morning everyone. Thank you for taking the questions and congrats on the results in the quarter.

Morning, Dave. So first question, just looking at the EBITDA sensitivities in the appendix, you've done $2.5 billion in EBITDA year-to-date.

And I don't know, depending on our realistic lumber assumption, that sensitivity would suggest $1 billion or less of EBITDA in the second half. So my question is if that's the right way to think about our models here?

I know that's a full year static assumption. So I wonder if those are more sort of run rate expectations versus a hard guide on top of the first half performance.

So not to put words into your mouth, but sort of how should we think about that sensitivity and sort of the view to the second half EBITDA?

Matt, yes, that's a great question. The purpose our original intended lease of that sensitivity page in the back is really to give you a normalized environment, right?

It dials out any fluctuations in commodity prices. It dials out any fluctuations in margins outside of what we continue -- what we consider to be normal, right?

So anything more than normal margins we dial out. So -- if you think about what's happened this year, this has been anything but a normal year.

Clearly, we've been substantially higher. There have been a lot of displacements continuing through the market this year.

We've certainly performed much, much better than normal in terms of our margins. As you've seen, right, we've guided to 27% plus as our normal margins, and we're substantially higher than that.

So, I would use the sensitivity chart as just a way to come up with deltas between various commodity price levels, but accounting for the fact that we're seeing pretty substantially different results in 2022 as you come up with your model and your estimate on the total included demand.

Okay. Understood.

Thank you for that Peter. I guess second one just on sort of the gross margin, again, robust performance there in the quarter.

But now, we've clearly seen that sort of market inflection and potentially leasing supply chains and all these things that have helped or previously helped the gross margin. So just trying to -- thinking about your kind of long-term north 27% guide.

I guess my question is, as the market is normalizing here or coming down, how should we think about the kind of pace of gross margin normalization at a base business level as we get into the second half?

Yes, good question again. That's an important part of how we think about our business and how we forecast, right, in addition to commodities and starts, it's certainly margins that are a critical component it's going to take a while for margins to get back down to that normal level, right?

While we are pleased that the supply chain is beginning to show signs of normalizing a bit, it's certainly not back to the almost debt. So while we do expect it to sort of slowly progress as the year progresses back towards normal.

I think we're -- we'll be a little ways out into next year before that gets back to what I would consider to be anywhere near normal, and we'll just have to watch it to see when that could potentially be.

Maybe to start on -- just want to understand the base business top line guide. So I understand that the outlook for single-family looks like it's come down about 10 points, but there's only a two-point reduction in the base business.

Can you talk about that? Is that largely because of the backlog out there and working through that before you really see any impact late in the late in the year-to-year volume?

Or is it share gains or improved adoption in some of your value-added products that kind of let you hold the line a little bit?

Yes, I think it's a combination of all that, Ruben, you have to point out the backlog strength that is still there. We're seeing that really across the board with our customers.

We do expect through the course of the back half of the year, that backlog to get worked off. As we've said before, it takes about a quarter or so until we start to see volumes shift relative to what's happening in the starts environment.

But importantly, as you point out, we've been taking share in the value-added portions of the business for a long time, and we expect that that will continue. So it's a combination really of those two things.

But aptly and largely, it's based on the starts decline that we expect to start seeing in the back half of the second half of the year.

Great. And then my next question is, I appreciate the color you guys gave on kind of downside with your fixed variable and the differences in the business versus previous period.

Can you talk about what your revenue gross margin and even EBITDA might look like next year in a scenario where it starts fall single-family starts fall 20% or 30% and go back to kind of where we were in '17, '18 and '19. Just kind of compare those metrics to what you would have seen a few years ago.

Sure. I'll start out at a higher level and then Peter can kind of fill in any color.

But as you point out, and we commented here in the script, we're not the same company. Clearly, we're 12x larger, 60x more profitable.

We've got a bulletproof balance sheet, over $2.5 billion of free cash flow. And as you know, in a slowing environment, that free cash flow will accelerate as we unwind working capital.

But importantly, we've been talking for several quarters here about any demand shift or decline being short-lived, certainly relative to what happened in '07. And two key reasons why.

First, the demographic shift, we've talked a lot about the millennials driving a lot of the starts over the past few years. We think they're driving about 30% of the housing starts, and that demand is much stronger than it was, say, in 2007.

And secondly and importantly, over the last decade plus, we've had a huge underbilling in this industry. So that demand is not going away.

We've underserved the market somewhere between 2 million and 6 million single-family homes over the last 12 to 15 years. So, we think any of that recessionary environment will power through that through the long term.

So that's why we're very bullish on where the industry ends up over the long term.

Yes. And while I'm not sure I buy into the downside range, I certainly spent a lot of time with the team working on models and making sure we understand how our business would perform in the event of a downturn that looks like that.

We do think there's a bit of a buffer from backlog a quarter or so where we're going to continue to build out the homes that have been started and put under construction. Might go longer, could go quicker, but that's certainly a component to think about as you're looking at what's going to happen through the rest of this year.

As you look into the future, though, you've got a couple of main components that I would highlight, right? So you're looking at those variables, it's starts, which we would expect to follow along with, right?

We're going to move because we're in the main markets where starts occur, we're going to move with the market. Our margins, which are very much driven by both our product mix and the competitiveness and availability of product in the market; and then finally, lumber price is certainly influential.

And we try and outline for you what that might go with -- or that might go to. Obviously, a recession would impact all three of those variables.

And would really start us on that trend back towards our normalized margin level, a quick hit like that, something that moved very quickly, might put us under the normalized margins for a short period of time, maybe a couple of points below that, but we certainly think that's a reasonable range. It's a question really around what the regression looks like, how quickly it goes there and how resilient some of these markets and some of these customers are.

But also keep in mind, we've gotten more mature and done a lot of work to improve our business in terms of the synergies, the productivity savings are consistently increasing mix towards value add there are all things we think we're going to be able to leverage quite well in terms of our results.

I have to echo the congrats on the very impressive results. So you guys have a long-term history of outperforming the markets you serve.

And Dave, you reiterated that you expect to outperform the market in any environment. But more specifically, can you talk about expectations for product mix and slower periods of housing demand, would you expect to see any change in mix or maybe relative demand for prefab components or other value-added products?

Great question, Trey. We've seen that demand shift more to the value-added side of the business over the past several years.

Obviously, both legacy companies were driving that, and we've certainly stepped on the gas. We think that mix shift will continue over the long term regardless of what's going on in the environment.

If for no other reason that there's been such a tremendous exit of skilled labor in the industry since the last downturn, and you don't just get that back over time. So importantly, those efficiency gains that the builders are gaining from the work we're going off site will be important in even in a slower market environment because they need those efficiencies.

They need to be as productive as they can in a slower operating environment. So we're excited about the shift we've had.

Our teams aligned around it. We expect those product shifts to continue through the course of time.

Okay. And then kind of follow on around the same topic here.

Can you talk about how your push towards digital plays into your strategy in a slower operating environment? And how that might change the way you go to market or anything like that?

We're really excited about our digital platform and the work that's been done. Importantly, we hit that important milestone.

As we've talked about the long-term strategy and the vision when we acquired Paradigm just about a year ago now, we said we would take a platform that was fairly narrowly focused in the millwork side of the business and extend that to the whole home design. And importantly, we said we would start with our strength, which was a structural design of the home.

And as I said in the script, we just recently hit an important milestone where we've integrated the material takeoff with that structural design into the visualizer with Paradigm. So, that starts to bring together some of those key elements and capability that we spoke about.

Still a lot more work to do but the vision is intact, and we have invested heavily in the last 12 months. We'll continue to invest heavily, we believe in the vision.

And regardless of the market environment, we think digital is the right long-term play, not only for us, but importantly, for the industry because we're driving a lot of efficiency gains, and I talked about it in the script here a little bit, finding all the problems in the digital world instead of at the job site, just drives tremendous efficiency gains, and that's really at the heart of what we're trying to achieve here. And we're excited about it.

We think we're going to lean in pretty hard regardless of what's going on in the world around us because we believe in the long-term strategy and what this is going to bring to the industry.

Peter, I wanted to follow up on the -- on Matt's question to start the call around the ranges and maybe a specific question around second half because you think it's causing some confusion. I think what you're saying is this year has been fairly unique, right?

So if you were to say, pick a number in this kind of commodity tier, say, $800 lumber, your range here suggests that would produce $3 billion to $3.3 billion in adjusted EBITDA. I think what you're saying is in reality, the margins this year are stronger so you would produce higher than that in the current environment at those lumber prices.

So is one, correct me if I'm wrong there, but more specifically.

That's exactly right. Yes.

Okay. So maybe just to clear up the confusion.

Can you give us what the true base business EBITDA was in both the quarter and year-to-date?

I will say we don't provide a quarterly split for base business. We think the annualized view is still the right way to look at it as it accounts for the seasonality and the comparisons, we think, in a more rational way.

I can offer up that the fall through in the second quarter was about 2/3 non-commodity, 1/3 commodity in terms of what EBIT it is to give you a sense of the type of outperformance. Obviously, we're seeing in both categories.

But how that reflects on the base business side and the base business material is in there. So, you can see our expectation for the full year.

Okay. Got it.

We'll do some more math around that. And then the second question, you have -- part of the increase in free cash flow presumably comes from similar performance year-to-date and some additional commodity tailwinds, you have pulled back your CapEx guide by about $100 million.

And so could you elaborate a little more on kind of deltas for free cash? And then specifically the lower CapEx, what are you what's contemplated in terms of things that are either getting shelved or pushed out to next year?

Yes, sure. I mean I'm certainly -- I think the whole team is disappointed on the CapEx side where we've got a lot of really great initiatives that we're pushing on new facilities, trying to refresh our fleet, investments and a bunch of different projects that we're excited about.

We've just struggled getting what we're looking for, whether it be buildings or trucks, whether it be development, the speed of getting properties ready to sort of turn on the switches and get things going. It's just gone more slowly than we anticipated.

So, we're not looking at canceling or shelving anything at this point. It's all really just pushing out into next year.

We're continuing to push forward and trying to make sure we have the capacity we need to meet our customers' needs. When it comes to the broader business, you hit the nail in the head.

I mean, clearly, we outperformed in the first half. That profitability on the base business and the performance of the core operations critically important to that cash flow increase, but we also saw higher commodity prices than we anticipated.

I think they went up more aggressively in the second quarter and probably came down pretty aggressively, too. But overall, it's higher than what we had been anticipating.

And so the compounding of those three factors, we're going to pass that cash through the business. We certainly are excited about it.

It does make an assumption, one that we've said repeatedly. And of course, people can have different opinions on this.

But we do anticipate commodity prices returning to a more historically normalized level by year-end. So, there's certainly a component of that that's included any time we've given these guidance numbers.

Dave, I want to come back to that the mix question again. I mean, if you're assuming that the economy is slowing, housing starts special on the single-family side are going to, let's say, assume are going to fall next year.

Presumably, the labor situation is much better than what it is today. Would you envision even in that scenario for your customers to not trade down from a mix standpoint to more commodity products?

Or is that not a right way to think?

No. We -- as I said earlier, Ketan, we think we're going to continue to lead in.

Our customers love these products. They solve a lot of problems at the job site and help make them more efficient.

So, we believe we're going to lean in hard and the mix will continue to shift through the course of time.

And the thing I'd add to that is this isn't just an open a prayer. The LDR during the Great Recession grew our share of business attributable to trough and manufacturer products.

So even during a recession that I think all of us anticipated is much more severe than what we're looking at here. The market continued to adopt these products for exactly the reasons that Dave mentioned.

And we've been through cycles, up and down cycles, ports of time over the last decade, and we continue to penetrate the market because there's real value for our customers with these products.

Got it. That's helpful.

And then second question. Obviously, from a balance sheet standpoint, you guys are in a very strong position, as you mentioned, fortress balance sheet.

I'm just curious, in case things were to the downturn were to be more severe than what we are expecting. How do you guys think about kind of keeping liquidity cushion versus let's say, share repurchases if the stock was to come under pressure.

Well, I'd tell you, looking at our balance sheet, as you described. We've got a disciplined approach to ensuring we have a bulletproof balance sheet, right?

So our number one priority in terms of capital allocation is ensuring that we're able to withstand whatever comes. So, we run the, but the downside models to ensure that to ensure we've got proper coverage.

The other point is that as it stands today, not only do we have liquidity, we still have a substantial amount of capital that's un-accessed on the working capital side that we could -- it's a cushion in case things reset in terms of the valuation perspective, but we certainly have more in our pocket as well, especially given the unsecured nature of our bond. So, I think as good as it is, it's even better than it looks.

And I think what that does for us is it puts us in a position to be both selective but also aggressive as the opportunities present themselves. We've been very thoughtful about the way we look at M&A.

We're disciplined about the criteria that we look that we look at, the financial expectations, the alignment with strategy. We're going to continue to do that.

Even with that said, we've been very successful at adding very nice businesses to the portfolio. And we think there's going to be a lot more opportunity to do that and significant opportunities to do that opportunistically during a downturn, if that's the way this turns out to be.

And let's face it, we have a high beta and we're going to be smart and opportunistic about buying back shares. We believe in it.

We know our stock has tremendous value, and we're going to be smart about it and make sure we're allocating capital in a way that maximize the shareholder value over the long term.

And back to Slide 16. This is a minor issue, but it seems like the revenues across the tiers ticked down by about $1 billion, and the EBITDA range shaded down by about $100 million across the tiers versus what you had in the grid last quarter.

Is there anything to that? Is it just refining your thoughts on the grid?

Yes, there's nothing really to it. I mean we tweak it and adjust it to stay aligned with our core operating model.

So, we try to move it. So, the two match up and minor things shift from time to time, but it's not signaling anything really.

Cool. All right.

That's what I figured. And then second, when you talk about the price fluctuations versus a static commodity environment, we experienced rapid and significant downside in lumber in like the fall of '20 and May through August '21 and even year-to-date since about March, but we haven't really seen much of a falloff in EBITDA.

In fact, a lot of those quarters actually saw better EBITDA. I'm just trying to understand what's different about the future versus the recent past performance we've seen here.

Yes. No, I think it's a great question, and it highlights a lot of the work we've done to make the business stronger, more predictable.

But it also reflects, I think, the still supply-constrained environment. I know all of us have had a wonderful time talking about the downside opportunities that this industry faces since the beginning of the year, but in practice in reality, we're still running hard to be able to deliver on what our customers need to continue building out these homes.

So I think what you've seen in a couple of ways, I think probably the most important one is around the way we've changed pricing. These changes have made our results a bit more stable, a bit more predictable in terms of upside and downside swings in commodities and what it does to our profitability.

We talked about substantially reducing the amount of fixed as we used to call it, price contracts. So that's an important piece of it, why we wouldn't see as much sort of constraint or reduction in gross margin percentages during inflationary moments and inversely expansion during the down cycles.

But I think it's more related to the overall demand environment in terms of our capacity, getting products to the market, having access to those products in the first place and being very careful about how we manage that capacity ensuring that pricing is disciplined and that we're moving our product quickly and efficiently. I think those things really have come together to allow us to have a superior profitability performance.

Although, we do expect some of that will fade over time as we've outlined and margins will normalize a bit. But I do think we'll retain that that more consistent, more predictable profitability profile.

Congratulations. Dave, can you talk a little bit more about what's happening on the digital side?

I mean it sounds to me like that things are accelerating or at least tracking almost ahead of expectations. And when I would have looked back at the Analyst Day, kind of the five-year build, you targeted $1 billion of revenue.

I would have thought the first two years were more building it out. Maybe the last three years, you're starting to see the revenue flow through.

Is that still the case? Or are you kind of tracking ahead of those expectations?

So I think we're right on track, Stanley. You're thinking about it right.

We hit an important milestone in the quarter and wanted to share that. But that's part of the plan.

So there's still a whole lot more work for our team to do. My main message is we're executing well the development is coming together exactly as we expected.

We still expect to see that $1 billion, and it will be back-end loaded in that five-year time horizon per design. So we're right on track with where we want to be.

But the thing I would add is I think this reflects how much the market is underestimating how powerful this thing is, right? We've seen the vision for where it's going to go.

And these things that we're that we're rolling out right now, as Dave mentioned, are amazing. They're massive.

They're unprecedented in terms of capabilities for this industry, and we're just getting started.

And switching gears a bit. You mentioned the automation piece, I can guess the eight lines, you did have to push some CapEx out.

I mean is that going to impact your ability to get those automated lines up and running? And then how do you think about that in terms of throughput, productivity?

Anything you want to share with us here today.

Well, we've been investing heavily in automation, base automation for many years. Both legacy companies have done that.

We're continuing to automate. As Peter mentioned, there's some equipment challenges in just getting things in but our strategy is sound.

And what I mentioned around the eight lines, this is new technology and capability that we've worked with House of Design around over the last couple of years. And this is beyond automation.

This is fully robotic trust manufacturing. And so, we had an important data point coming together at Villa Rica, and we expect over the next couple of years to buy another eight more of those lines or four on the roof side, four on the floor trust side.

So we're continuing to innovate and come up with new and creative ways to, first of all, get a more consistent product to our customers and secondly, deal with the same labor challenges our customers face that we've got inside. So, it takes some of those issues off the table.

But we'll continue to invest, and we expect there may be some puts and takes here or there a carryover in capital, but we will spend that money and we're committed to that capability.

We're excited about this. I mean I think that the idea around not having all the capital that we want is really -- we're already doing 200 miles an hour and lapping everybody, but we want to do 210, right?

We want to lap everybody faster on this stuff. And it's just disappointing it hasn't come in as fast as we'd like.

But it's not going to hurt us. It's just maybe going to keep us from seeing the opportunities as quickly as we'd like.

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

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

Okay. Great.

And then just -- you guys did $40 million in productivity savings in the second quarter, target for over $100 million. Can you give us that number for the first quarter?

So, the first quarter was actually satisfying the remainder of our synergy savings commitment. So, we've changed our language as we committed to do.

So that first number was $32 million or $52 million -- $52 million in the first quarter. And then the remainder, the other $100 million that we're talking about is two through four and productivity specific, not synergy.

So $60 million come in the back half.

I just wanted to touch on the long-term targets here. I know you reiterated your 2025 base business targets despite the change in end market expectations.

So, I was just -- just to give some more comfort around those targets, can you just frame out what would need to happen in the macro environment in the single-family end market. For there to be risk to that guidance?

-- whether that be from a financial perspective or a time line of achieving those goals?

Yes, I think the obvious one is that if the market for single family, in particular, stays down and doesn't recover back to sort of our expected low single-digit growth since '21 number by 2025, that would put pressure on our ability to make that tool. I'd say that's about it.

I'd say all the internal operating stuff that we committed to, we've got line of sight to, we feel good about. But from a macro or external expectations perspective, that's the one thing that we count on.

Okay. That's helpful.

And then, can you just dive into the EBITDA bridge a little bit more? I think you said the split between non-commodity and commodity was 2/3, 1/3.

It implies a pretty good 40% incremental EBITDA in the non-commodity business, I think. So could you just kind of define the moving pieces there?

And how sustainable that kind of margin is? And maybe what you guys are looking at from a decremental margin perspective, if you start to see volumes turn?

Yes. I mean I guess the comments will sound a bit familiar, right?

You're right, it was about 2/3, 1/3 in terms of the benefit that we saw in the non-commodity side versus the commodity side. We do think it overtime things are going to return towards that normalized 27% plus gross margin level.

We don't think it's going to happen over a quarter or two. I think it will take a while longer for that to normalize primarily because of the same reasons we're seeing the benefit now.

The primary reasons are around supply chain constraints around not having enough capacity to meet the demand and that happening in a number of different markets. So, there are obviously reasons for that to normalize.

That will come through in the form of increased capacity from suppliers. It may come through in the form of decreased demand from the end markets.

But we certainly think there is a permanent benefit in what we have experienced in the past couple of years as it pertains to our increasing value-add mix, the increased adoption in the industry as well as our ability to compete effectively in really successful markets around the country.

I'm sorry about that. Fantastic quarter, guys.

After we purchased in July, how much do you have left on the authorization now?

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

Okay. And then -- and I apologize if I missed this, but could you kind of walk through what happened to get to the $2.5 billion on the free cash flow versus the $3 billion?

That was a pretty nice increase in the midpoint. I'm just wondering what would cause the low end versus the high end, Peter?

Yes. I mean I think the biggest impacts are from what commodities did and what the profitability did in the first half.

We -- and you know this, Jay, we've been very consistent about it. We continue to build our models with that expectation of a regression towards a more normalized commodity price.

And instead of progressing it actually accelerated for a window of time. So that benefit is certainly real to us.

It generates real cash that we put to work. So that's a big piece of it.

Our profitability is up, right? So that outperformance certainly we're very happy with, and we think that is going to continue to be a positive influence on the business as we continue to execute on productivity initiatives and things we're doing to drive that profitability, and that's another big piece.

And then probably the least pleasant component is that $100 million of CapEx that we don't think we're going to be able to pull in this year just given the pace of supply chain issues.

Very nice quarter, gentlemen. Quick question, Peter.

At the very end, and it kind of goes back to the last question here, but you referenced line of sight towards $3 billion in free cash flow. Is this in reference to your 2022 guidance?

Or is that incrementally over the next, say, 12 months?

No, that's the guidance. So $2.75 billion, I may have taken some liberty and round it up to $3 billion.

We'll continue to watch, obviously, the results as the year progresses and if there's more there, I propose we'll deliver it.

Excellent. And then can you remind us what your lag time is to the spot price for commodities?

And then as it relates to pricing in your non-commodities business, have you seen any products that are obviously manufactured by others? Do we see anyone cut prices yet?

It's about 1/4 between what the market moves at and what we would expect to flow through our COGS. On average, it's very open.

It's a pretty wide bell curve, but yes, it's about 1/4. And I guess the answer to that is no.

We have not seen any one cutting prices into this market with the exception of people who are following the commodity prices, right? I mean that is common.

That happens all the time, good or bad.

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

Or do you plan for that to happen in the second half?

Yes. We're just running the same play.

We always do, Steven. Really, this is normal of for us.

Just like normal seasonality, we continue to align our purchases with the inbound flow of orders. We maintain appropriate inventory on hand levels usually on a days basis, but really down to a granular level by market, sometimes by location, depending on the SKUs under consideration.

Certainly, it's something that we were careful about from the perspective you can never run out, right? If you run out, it better be the suppliers but it better not be on us.

So that's a requirement. That's a commitment we make to our customers and something that we work very, very hard to ensure -- but we're going to -- we're still running the same play in a down market as an upmarket in terms of how we think about ensuring the right amount of supply on hand.

First question, for me on gross margin, just given the lag between commodity price and when it hits your COGS I know that the reduced use of fixed-price contracts has reduced volatility in your gross margin. But just given what commodity prices have done, could we see that be a tailwind to gross margin in the third quarter relative to the second?

When it comes to commodities, I would say probably not. I think based on what we're seeing in terms of performance of the business.

If anything, it's more competitive, not less as things normalize, that's kind of our expectation don't see it eroding in a significant way. But yes, I mean, I think there's certainly an opportunity for increased competitiveness.

If we're going to be competitive in any part of our business, it's absolutely the commodity space in terms of a gross margin normalizing more quickly than that.

Okay. Got it.

And second question, for me is on organic growth over the last few quarters, it's really broken away from single-family starts growth, whereas if you go back over a few years, it's, I think, pretty closely tracked single-family starts. Do you have a view on when the core organic, I guess, kind of reverts back to approximating single-family starts growth?

Or do you think we can stay at this elevated level for some time?

I think I have a couple of different answers to that question. When we're talking about margins, I think we've been very, very clear that is going to return to normal over time.

I think the other part of that answer though is really around value add. Value-add is an important part of the mix.

Our growth is substantially higher than the rest of the business. And while there's certainly a gross margin component to that, we believe that, that is very sticky like Dave was referring to earlier and that, that is going to be held on to in terms of an important resource by the homebuilding community, and we're going to continue to invest and to be that partner for them.

So, we do think that's sticky in the long term.

Okay. Got it.

And then just a quick final question on July trends. I think you mentioned that that demand remains strong.

Are there any numbers you can put to kind of quantify the strength that you're seeing so far in July or you saw in July?

No. I think continued is a good way to characterize it.

We feel good about July, and we're going to continue to be reactive and responsive, maybe better said to the market dynamics that we're faced with. But right now, we are hitting on all cylinders and focusing on our customers.