Good morning, and welcome to the Builders FirstSource Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Following the Company's remarks, we will conduct a question-and-answer session. Today's call is being recorded and will be available at bldr.com. It is now my pleasure to introduce Mr. Binit Sanghvi, Vice President, Investor Relations.

Thank you, Cathy. Good morning and welcome to the Builders FirstSource second quarter earnings conference call. With me today are Chad Crow, Chief Executive Officer; and Peter Jackson, Chief Financial Officer. A copy of the slide presentation reference on this call is available on the Investor Relations section of the Builders FirstSource website at www.bldr.com. Before we begin, let me know that during the course of this conference call. We may make statements concerning the Company's future prospects, financial results, business strategies and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements. The Company will discuss adjusted results on this call. We have provided reconciliations of non-GAAP financial measures to their GAAP equivalent in our earnings press release and detailed explanations of non-GAAP financial measures in our Form 8-K filed yesterday both of which are available on our website. I will now turn the call over to Chad Crow.

Thank you, Binit. Good morning and thank you for joining us. I will start on Slide 3. I'm very pleased to share with you another outstanding quarter of execution and results delivered by the 15,000 team members of Builders FirstSource. During the second quarter of 2019, we made significant progress in the execution of our strategic plan and again delivered above market growth, expanded margins, and exceptional free cash flow generation. We continued our strategic investments in market leading value added products and solutions while realizing the gross margin and customer value benefits from these investments made over the last several years. Our operational excellence initiatives also continued to gain momentum and are delivering measurable results, and of course, our strong cash flow and working capital management continue to underpin our investments while at the same time enabling the reduction of our ratio of net financial debt to adjusted EBITDA to 2.7 times at the end of the quarter Our second quarter results and performance built on a strong starts in 2019 providing momentum as we enter the strength of the selling season. In the first half of 2019, we grew our estimated sales volume excluding commodity deflation by more than 4% well above overall housing starts, which actually declined during the period. In the first 6 months of the year, net sales declined by 7% as sales volume growth was offset by commodity price deflation of more than 10%. Consistent with our strategic plan value added products led the growth increasing and estimated sales volume by 7% in the first half, as we continue to realize the benefits of our investments. Adjusted EBITDA grew by 11% compared to the first half of last year, as our team delivered on our objectives, demonstrating strong margin management and overall execution. Our…

Thank you, Chad. Good morning everyone. As a reminder, we have included adjusted figures to normalize for onetime costs related to our integration work and other nonrecurring items. We had $1.9 billion in net sales in the second quarter down 8.9% due to commodity inflate, the inflation which decreases sales by 11.3%. The commodity headwind offset estimated sales volume growth of 2.4%, well above the overall U.S. starts market. Our value-added product categories again led the way with a 5% increase over Q2 of 2018, reflecting the execution of our strategic plan; gross margin of $517.2 million increased by $21 million or 4.2% over the prior year; sequential gross margin percentage remained at a high level, increased slightly to 27.2%; and an exceptionally strong improvement of 350 basis points over the second quarter of 2018. The margin percentage increase was attributable to an improved product mix, the decline and the cost of commodities relative to our customer pricing commitments and our teams continued focus on pricing discipline. Commodity prices moved lower during the quarter, framing longer and sheet good prices declined by approximately 10% and 6% respectively, compared to the beginning of the second quarter. As a result our gross margin percentage increased as cost decline relative to our customer pricing agreement. As we have discussed in prior calls, market price inflation causes short-term gross margin percentage compression when prices rapidly rise, and similarly causes gross margin percentage expansion when prices rapidly decline relative to the short-term pricing commitments that we provide customers. In addition, our team again demonstrated its ability to manage through commodity price volatility, and at the same time, maintain a focus on delivering value add solutions to our customers. The result is a favorable sales mix towards higher margin products and another strong quarterly gross margin.…

Thank you, Peter. Moving to Slide 8, I'd like to build upon some of the last points that Peter just shared about our strengths from a financial perspective and dive a bit into some of the day-to-day operational underpinnings of our advantages and execution as well. If you've been listening to our prior calls, we are very proud of the growth platform that we have built, and often speak about our national scale and industry leading footprint. The acquisition of ProBuild in 2015 enabled us to create the largest professional supplier in the space, leading to more than 400 locations across 40 states and an unmatched depth and breadth of resources. Our manufacturing and distribution capabilities are coast to coast. And while not in every MSA, our presence in 77 at the top 100 provides a highly attractive geographic balance and a solid foundation for growth. Today, I would like to take a moment to highlight how we also go about building highly efficient and effective local market networks to create competitive strength and deliver a truly differentiated customer value proposition. First, within each of our local and regional markets, we are intensely focused on local customer relationships, connectivity and demands and dynamics all of which differ from Market to Market. Within each market, we seek to build a reasonable density of operational capabilities to support exceptionally strong trust and reliability. In addition, we develop I had a high caliber distribution, competency and exceed our customers' expectations with deep and talented management. We have found that our run it like you own a culture empowers local management to deliver high levels of service and responsiveness. This leads to relationships often spanning decades built on trust. That positions our team members as extensions of our customers' teams. Our designers are able…

[Operator Instructions] And we'll go first to Matthew Bouley of Barclays.

So, the truss plans that you guys acquired in July, obviously at the same time, you guys are investing in your own plans and the new greenfield. Can you take us or help us think about how you're going to balance that going forward? Perhaps of what you're looking for in a given market where you might choose the M&A route instead of a greenfield? And, is this something that we should expect to see more of? Thank you.

Yes, if don't believe we've said on prior calls. I look at a lot of these opportunities as a build versus buy decision. And at the right multiple, it makes more sense in my mind to go the M&A route, it gets you into the market quicker plus you're not adding capacity into a market which can be difficult and create some real pricing war. So, it'll be a balanced approach though, like I said, we're going to be -- we're going to be pretty busy. And it's got to make sense from a financial perspective and from a multiple perspective, but I like the fact that we have the flexibility to do either now, now that we've gotten our leverage ratio down, we can make those decisions and be, a little more opportunistic when it comes to grow in value as part of our business.

And then secondly, you guys again, reported a pretty significant outgrowth in your single family volumes relative to the single family housing starts. I would just be curious if you guys have any final thoughts points on that? Just, how do you think you're actually comparing versus your own markets? You could look at different data points of completion data probably held up a little better in Q2. So, what do you guys see as a sustainable share gain at this point, as the market recovers? And what kind of metrics are you looking at to kind of determine your market outperformance?

So, I'll let Chad comment more broadly, but specifically to some of the details, I think we do see share gains for the business. We mentioned that we have some particular strength on the east coast. I think we were also advantage of this by some of the markets that were most negatively impacted with starts being areas where we don't play a ton of big chunks California for example. But even in the markets where there has been some decay, we have still seen some sharp growth. And I think that Chad hit on a couple of the points as to why, I mean we are a reliable provider, we are a trusted partner for our home builder and customers, and we performed well. But more broadly, I would say that, that east of the Mississippi for us this year has definitely been going to strength where we've seen the biggest share gains and the biggest successes.

Yes, I think a lot of it goes back to the multiyear investments in value added and components manufacturing them. I'm still a, my firm believer that that is not going to go away, the labor shortage is not going to go away, the cost of labor is not going to go away. And I think it's a trend that will continue and that's why we were focused on developing that part of our business and that's where we've seen some definite out growth when it comes to our volume for starts.

We will now go to a question from Trey Morrish of Evercore.

Hey, Chad and Peter, thanks for the time and yes, great quarter. I want to first touch on the gross margin. I'm wondering, if you could just put in buckets of the year-over-year improvement of try and dimensionalize new improvement in mix, the decline from lumber costs relative to pricing, and then your price disappointed that that you highlighted?

Sure, yes, as you can imagine, we spend a lot of time making sure we understand that. From our analysis, we would say more than 50% of is an direct result of both the decline in commodities and the -- in the period as well as compared to prior year, so there's sort of two components. One is last year at this time we were seeing pretty significant headwinds, obviously from the rapid inflation. So with that normalizing there's clearly a normal tail in there. In addition is as we pointed out there was a modest decline during the quarter in the value of commodities. So those components together leading to a little more than half of the total change, probably about 20% to 30% of the remainder of the total changes is attributable to mix and that goes to the investments that we've made and the sort of continued growth and our performance of the value at portion of the business. And the balance is really across the rest of the business, but with a focus on the work that we've done in operational excellence. So pricing discipline, special order margin, those areas of the business where we feel like we can refine our ability to manage price effectively is the bounce.

Thanks. And then I want to go back to a something in your guidance that you said. You said that gross margin to normalize above 26% in fourth quarter. I wonder what do you mean by normalize you're talking about in for Q4 are you talking about more of a longer term run or you think you you're going to stay above it that 26% level?

Yes, both of those. So, we've talked about in the past, people have frequently asked us what is normal. You guys talk about gross margin impacts due to commodity fluctuations, but what's at app our current and then based on the current prices, which is important part of the equation always but we think it's about 26. We were a little cautious as we bond throughout the year that to snap that line, because we wanted to see where things have settled. But as we work through the year, we think that's a good guide for everyone that based on current commodity prices, it's not 25 as normal in the fourth quarter and going forward we think normal is over 26.

And now, we will take a question from Mike Dahl of RBC Capital Markets.

Thanks for taking my questions. Nice job of getting a lot of cross currents right now. My first question, I just wanted to get a little more detail on the acquisitions if we could. Can you give us a sense for from a revenue and EBITDA or margin standpoint, how we should think about contribution both for the second half and on a run rate basis?

It's pretty modest acquisition. I'm not sure that you're going to be able to decipher it out into details. Truss facilities we've talked quite a bit about what an incremental value would be provided by a truss facility and that will question about how we allocate capital. We feel pretty good about our ability to balance between debt pay down, stock repurchases and M&A. But I think it's fair to say that we're only buying when we think we're getting a good deal. We think it's a deal that makes sense for us. And, that $43 million represents a relatively modest investment for the three class, they're already up and running in a market where we haven't heard before.

Yes, I like the fact that it gets us into a couple of new MSAs and if we so choose to expand the product offering in those in MSAs. We do have facilities already north of north of Phoenix. So we now have the opportunity to serve the customers up there as well with truss and panel.

Okay. I guess quickly on that then, should we think about these as being similar in nature whether it's size or otherwise to your existing plants? Or is there anything different about these plants that we should be aware of?

No, they're generally similar.

My second question is around sticking with the theme on manufactured products. Obviously, the markets had some headwinds in terms of starts and your volume has continued to well outpace that. But it has decelerated over the past quarter. And so, I want to get a sense of just when you think about that 6% on manufactured products volume, you're putting in a lot of investment organically you've bolted on with these couple of plants. How are you thinking about within your guidance potential for reacceleration? Or just what level of growth in volumes should we be thinking about for manufactured products going forward?

Yes, that's a tough forecast. I mean, obviously, you're going to have correlation with starts. We've talked about that single-family starts over the long-term with the best indicator of our underlying demand-. We do think we're taking shares so obviously that's another component and this is part of our ability to do that, because we think the macro trend is coming towards Builders FirstSource as it pertains to our ability to invest in our skill set in that truss manufacturing. Or I would say that maybe the best answer to your question? We're going to continue to invest in this space, because we believe that the growth, there is always going to be better than starts.

Got it. Okay. Thank you.

And this is going to be better than starts. It's kind of tough to correlate, but I think that's the summary.

And now, we will go to Alex Rygiel of B. Riley.

Could you add some color on your thoughts as to the weakness in the R&R market?

Well, it's unfortunately a trend we've been talking about for a few quarters, it's just largely, where we do most of our R&R is in the upper Midwest, which is still being hit from the tariff issues. Alaska, which is still struggling with the lower oil prices and into a lesser degree on the West Coast is our three pockets of R&R and really the hardest hit has been the upper Midwest for us.

And any comments on progress through July, as it relates to 2Q results?

You mean, our business going in July?

Exactly.

Good. Yes. We're happy.

It's good. And I think our guidance for Q3 reflects that.

And now, we will go to Matt McCall of Seaport Global Securities.

So back to value add. Give us an idea where you see that go and say next year, next three years, next five years. I'm going back to the comment you made when asked about gross margin, you said normalizing above 26% at the current mix. I assume the goal is not to keep the current mix. So what I'm trying to get at is where do you see the mix going overtime? And where do you see the margin going overtime as a result of that mix shift?

Yes, it does move and I think we can kind of talk about the fact that since the merger, when we were about 36% value add, were' up over 40% value add. So there's clearly a trajectory there that the footprint and the investment in capacity has enabled us to track with broader industry transition towards that type of off-site manufacturing. So we feel good about it, pretty tough to predict in any given period, what the growth rate is going to be, and what the impact on mixes. And candidly, it's almost impossible if you want me to forecast commodities because the problem with that 26% and with the value-add percentage is that is dependent on the value of commodities, because it will change our relative mix just from $1 perspective. So it's a little tough to extrapolate. I mean, I would say, if you're talking a 0.25 to a 0.5 point of growth on an ongoing basis, assuming that things continue to trajectory, that's probably a reasonable basis, unfortunately, as soon as a stable commodity price, which I wouldn't be foolish enough to promise you.

So yes, I understand that. So 0.25 to 0.5 point of next shift as soon as what you're saying here. So is it still, remind me that the gross margin delta that we should assume value add versus commodity?

Yes, so with current level, it might be a little bit lower, but it's still in that, there to a 1000 basis points of trade up when you go from traditional stick to a trust manufacturing environment.

Okay. Chad, you just had a question about the R&R environment. I think in the guidance, there was an assumption of, did I hear low to mid single digit growth for the year after being down Q2, what's, if I heard that right, what's, what's got you comfortable that it's going to improve?

Well, after the tariff moves yesterday maybe a little tougher to get there, but we are seeing some strengthening in Alaska and the West Coast is holding in well. So I'm optimistic we can see an overall improvement there, but again the real key is going to be the mood that on the tariff issue and how it's impacting the farmers in the upper Midwest.

Okay, there are days here right here, there's an assumption of growth for the year.

Yes, low singles.

Okay, and then I did not hear the outlook for multifamily. Could you just repeat that one? Yes, low singles.

I'm sorry, you broke up there. Could you repeat the question?

The multifamily growth assumed in the form that I didn't I didn't catch that.

Yes, low single digit, throughout low single digits. We get some pretty momentum as of late, we feel good about the progress we've got coming. So that'll be a small growth area.

We will now go to Megan McGrath of Buckingham Research.

Good morning. Just a quick follow up on multifamily comment. You're not the first to talk about maybe a working through a little bit of backlog in multifamily in the second quarter. So just curious where you see that backlog now? Will we see a bit of a payback in future quarters or do feel like it's stabilized a little bit?

I would say for us we're seeing stabilization. We think our backlog looks pretty good, growing in some parts of the country. So we feel pretty good about it.

Yes. Yes, I would say in particular in the in the northeast, we're seeing some nice projects coming our way in the northeast part of the country.

And just a bigger picture question, on some of your initiatives, you've talked about specifically, pricing and efficiency initiative. I'm just curious in this kind of an environment when you have really aggressive lumber price deflation. Does that make the pricing initiatives are more or less important as you're seeing such large deflation? And has the priority in those initiatives shifted at all in this current environment?

I would say if anything, our focus on pricing has increased over the course of the year, the more we The more we dig, the more I feel there's incremental opportunities there, regardless of what commodities are doing. Clearly, commodities, is the toughest, most competitive part of our business and it kind of is what it is. But two thirds of our business is not commodity related and I still feel like there's really nice opportunities there no matter what we have to deal with from a commodity inflation standpoint.

And just sort of recap some of the some of that price, the work that we're doing is really focused on discipline process, right? Is it this is in out to gouge the customer type of dynamic. This is a, how do we make sure we're updating our prices effectively. We're giving people tools to use so that they understand the cost benefit of the relationship with individual customers. It's just, I would say fundamentals that we can get and have been getting better at. So it is very, I would say long-term good practice that we think is going to help us regardless. And it's a great is a great project and a high priority.

Our next question will come from Kurt Yinger of Davidson.

Yes, good morning, and thanks for taking my questions. First, just on the pricing tools, are the benefits from those accruing to all categories more so on the commodity side? How should we kind of think about that?

We think it's pretty broad. Yes. I mean, we're our approach has been very market oriented. So market by market and we see it across the board. I mean, obviously commodities by very nature is more competitive, but we see it everywhere.

Okay and you've highlighted the east as kind of an area of strength, which is I believe, where you offer more kind of turnkey framing services there's a lot of talks about the products that you're offering filters to drive efficiencies. But how do you think about some of those services that kind of help you win share as well.

Services are a big part of it in installation services to customer stickiness, optimizing bringing packages on the design I inside as a service. So anytime, you can add more services to your offering, you're just that much more of a partner with the home builder, and as I said a minute ago, a much more much stickier relationship, much less likely to price you to save a nickel on a two by four. And so anything we can do to be that partner that the builder relies upon to help them build that house most efficiently, whether its products or services or some definitely we're focusing on.

And we'll move next to John Baugh with Stifel.

Thank you, Good morning to Peter and team congrats. And I just wanted to get a sense. As we think about modeling longer term. You mentioned I believe that you started to see, your, I don't know backlog of orders or what you're looking at an incoming business, settling out a little bit with homes that people want to buy. I take that as code language for smaller homes. If I'm wrong on that, correct me. But my question is, as we think about we've always modeled units of single family housing start. And obviously, we couldn't be looking at a smaller unit. If you have enough data or input color near order book, how we would take about a delta when we model revenue versus starts and units as we go out of time with what you're saying? Thank you.

Yes. So John, I wish I could tell you, yes. The short answer is I don't think we have a good rule of thumb for you. You see in the census information like we have, we've done some analysis internally. But it doesn't give us a sense that you can really forecast or predict the impact on volumes due to the size of the homes. Obviously, they'll have an impact, but we haven't seen a material change in volumes or what we sell yet, as a result of.

Okay. So for near-term modeling purposes don't, units are still a pretty good predictor?

I mean, we've talked about, if you want to use a pointer to as a volume adjustment attributable to that, we don't think that sound reasonable, but it's tough to say that's the right number that we've got a lot of statistics for analytics to support that.

And I think the homes are a little smaller. But I also believe that the demand, the home buyers demanding the smaller homes still want a nice home. So they still want nice doors, nice windows and so to a large degree, if you're just taking out a little bit of square footage, it could just be a little bit dollar framing packets, but you're still getting some nice sales and margin on a lot of the other pieces of them.

And you're having a nice year. You mentioned commissions influencing the SG&A. I'm just wondering on the compensations number for corporate? Is that influencing the number in any way? You should have an increase in dollars, as I said, but how would that manifest itself in SG&A?

Yes, that's the other components, a little smaller than the commission's number. But those are the two big numbers that have changed, obviously, performance this year more broadly has been to a little bit of quicker rule on the timing of the bonus. Although I will say that some of the lapping that will do in the back half of the year will normalize that a bit.

And then lastly, you did a phenomenal job of deleveraging, the acquisition and obviously you got a tailwind from the deflation of commodities. So is there some way to you think about where your, I'm going to ask you, Chad, to project lumber prices. But is there some way using the word normalized? Where your debt-to-EBITDA would be, if we hadn't had all this deflation to kind of get a sense of whether you feel very normal lumber inflation or rate? There might be a creep back up and that number where you are debt-to-EBITDA on a normal lumber price situation?

No question. We picked up a ton of tailwind this quarter as a result of the deflation for the past couple of quarters, right? I mean, it's something that we already indicate more broadly, when people ask us long-term question about what would you do in the case of a downturn, right? This is a good example in a, maybe a false way because it's just value of commodities, but we generated a lot of cash when sales were down. And yes, I would say the math. We look at a little less than a couple $100 million that we would have had a tailwind on. This time a year, we're almost always increasing our leverage ratio. So it to drop, it's pretty remarkable and obviously 1.8 turns versus last year is indicative effect. As far as normal, I think we've been pretty committed to the idea of debt pay down and de-risking, but in that 2.5 to 3.5 range, we're not afraid. I would say to fall out of the bottom of that range, if it means we're building dry powder if we can't find those deals, but as we indicated, as we took action on this year, or this quarter, there are some good yields out there. And we will continue to snatch those up where we think it makes sense. And we're getting a good value for our money. I think we're in a bit of a sweet spot now. No question if the price of commodities runs back up, we will see growth in working capital as a result and definitely.

So the simple math would be Peter that, if we saw the lumber inflate right back, we'd get back roughly $200 million of level working capital benefit. Is that a simple way to think about it?

Yes, it's probably a little less than that maybe 175, but yes. That's a little bit back to where it was this time last year where it was pretty always.

It's obviously a seasonal business, so yes, during the peak of the selling season, you could see that.

We will move now to Steven Ramsey of Thompson Research Group.

Good morning. If you think about investing $30 million this year towards the value add business, does the newly acquired plants take some of the $30 million? Or do you are to that kind of that level of investment to increase the capacity and grow these new plants?

We're adding, yes it's incremental.

Is there any way to kind of ballpark? Is it meaningful? I know it's only a half year or less than that really?

Well, the investment of $43 million, then the acquisition price of the three plants plus the $30 million that you're referring to as or sort of rough guide on how much is the incremental CapEx is going to be attributable to grow in value add. I'm not sure I followed what you were asking.

Yes, I guess I'm saying the newly acquired assets, does it, as it lays a base for the CapEx on to those plants? Is there a need for more CapEx that you want to put in, in the Netherlands?

In those specific facilities, we'll assess but I think that they're already in pretty good shape. They're already well automated from what we've seen. But we're looking for ways to improve them but not a significant source of incremental investment.

And then as you think about gaining share, and kind of what that looks like on the ground, do you win that share because of value add for better pricing, or quicker delivery? And then do you win, are you winning that from larger competitors or is it smaller competitors? And then I guess kind of another element to that is a slower market or one that we're in? Does it, is it more conducive to gaining share?

I would say, yes. Certainly, the offering of the component side of the business helped us gain share in many times, if you can get that business, a lot of the other products that go into the home will follow. I don't, I think we're taking share from Big and small competitors. There's definitely a market by market situation. But there's no doubt in my mind that enhancing our value add proposition creates additional opportunities to grow share. And as I talked about earlier, the customer stickiness barring a, just dramatic fall in housing, I don't think small ebbs and flows and housing demand is going to impact that that situation when it comes to components and our ability to take share.

We will now go to a question from Jay McCanless of Wedbush.

Hey, good morning, everyone. Peter, I missed the guidance you gave on the commodity inflation for 3Q. Could you give me that again?

Sure, it's 14% to 17%. So this is this is the big quarter for the year.

I believe you said also that that's going to be the commodity deflation, we should expect for the four year, is that correct?

The combined deflation for the full year is similar to what we saw on a second quarter. So that 10% of 13%.

Thank you. And then the other question I have is, we've had two public builders now announced that they're going to start potentially building more homes for the single family for rent operators. And just wondering if the if this does catch fire and become a trend and the built, the big builders are building even more houses than they are now. How do you guys feel about your capacity? Would you need to make some meaningful investments if we were to see the big guys take even more share than they already have? Or do you feel like you can flex up without a lot of expenditures?

I think as far as the structural capacity is there, we would probably have to bring on some additional ship sin some of the points, if it really took off. I wouldn't see a large CapEx investment though I think that we got the capacity and the structure there. But labor, we had to get some more labor.

I love the way you're thinking on volume, Jay. Keep it coming.

Well, you know, I got to be optimistic about something. The one of the question maybe on value add, and I mean, I certainly don't give me this offline. But what has been the historical growth rate in value add products that have value add volumes, since the merger. You all have that handy?

Yes, I don't I don't have a handy have an estimate off the top my head. I would say high single digits, maybe double or write double lines probably in their 8 to 10.

Okay, great. Thanks for taking my question.

Go back and follow up. We can follow up.

Thanks Jay.

Okay.

Now we will go to Trey Grooms of Stephens.

So, just a couple of housekeeping really, one is, let's see the integration-related expenses you guys had in the quarter? I think it was $3 million. Is there anything there? We should be thinking about kind of as we're modeling the next couple of quarters?

Not for this year, it's pretty stable. But we are looking as we have promised to finish our ERP conversions by the end of this year. So, there'll be a pretty substantial reduction in that integration cost line coming into 2020. We'll likely shift a bit of that into operations because there's some interesting projects we've been looking at, but there's a pretty substantial portion of that will go away.

And then just a little bit of clarity. And sorry, if you guys touched on this, I dropped off for just a second. But the 26 or north of 26% margin that you guys referred to. Just to be clear, that's basically taking out any commodity impact either direction, that's just the kind of the new normal meaning no commodity impact?

Exactly, it does assume a flat commodity environment, which we can talk about but that's kind of how we're thinking.

And then kind of going into the 4Q guide that you gave, if I heard you, right. You're looking for something North at 26 in the 4Q, but that would, I mean you're, I think, if my math is right, you're going to have a little bit of benefit still left from commodity deflation in 4Q. Is that right? Or is that going to be kind of behind us at that point?

It'll be pretty well gone. By that point, we're looking at sort of bringing down inventory at that point. It'll be pretty well gone. We'll be looking at normal. The biggest impact in the fourth quarter that people will see is the lapping of last year's big deflation.

Make sense. And then the, given where your leverage is now and again, you may have touched on this, I'm sorry, if you have. But given where your leverage is now, and it's kind of within that target range, should we, I know you've picked up a few plants and done some things like that. And I know you've got plans for plant kind of Greenfield type stuff and expansions on your own. But should we expect you guys to start kind of ramp it up on the on the M&A front? And just given where we are in the cycle, which still seems very reasonable and your leverage here?

I said earlier, I liked the position we're in. We don't have to buy anybody. We can invest through just our normal CapEx. If we come kind pf across opportunities, that are a good value at good multiples. We can be opportunistic, we can pay down debt. So I like the flexibility. I like to position we're in. Short answer, yes, we're going to keep looking to expand our value add offering. But it's got to be an acquisition that makes sense. And this one we just did, obviously we built did make sense, but there could be some other smaller opportunities out there come our way.

And then lastly is kind of within the guidance Peter. The SG&A I know you guys have some bonuses and things like that you touched on. But it actually looks like the SG&A, if I'm back into this, right. Looks like a pretty reasonable SG&A versus last year. Is that I mean, almost flat, even, maybe even down is that right? Is that the right way to look at the SG&A expenses going in the back half?

I appreciate you pointing that out. That has been certainly a significant focus for the operation. You're absolutely right with the exception of some incremental commissions and some incremental bonuses. The team has done a really, really good job of disciplined spent management particularly when you think about the challenges and the overall hiring markets in the challenges and attracting retaining top talent. It is really good job by the team. Obviously, that does look great because the sales line has moved on us. But this, the SG&A dollar discipline has been quite exceptional by the team.

Yes. And we started out the year really focusing on it because we knew deflation was going to be a headwind. And so the guys were really focused on that. And then, as we've already discussed, we're starting to see some of the operational excellence initiatives flow through largely on the warehouse and delivery side helping us manage those costs even better.

Alright, well, thanks for all the color you guys have given us on this call and in the press release and everything on the guidance and everything, it's very helpful. Best of luck in the quarter and talk to you soon. Thank you.

And with that, that does conclude today's question-and-answer session. I would like to turn things back over to Chad Crow for any additional or closing comments.

Thank you, once again for joining our call today, and we certainly look forward to updating you on our, for the progress of our initiatives in November. And if you have any follow-up questions in the meantime, please don't hesitate to reach out to Binit or Peter. Thank you.

And again, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.