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Builders Firstsource Inc  (NASDAQ:BLDR)
Q1 2019 Earnings Call
May. 03, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Builders FirstSource First Quarter 2019 Earnings Conference Call. Today's call is being recorded and will be archived at www.bldr.com.

It is now my pleasure to introduce Mr. Binit Sanghvi, Vice President, Investor Relations.

Binit Sanghvi -- Vice President, Investor Relations

Thank you, Rachel. Good morning, and thank you all for joining us for the Builders FirstSource first quarter 2019 earnings conference call. With me today are Chad Crow, Chief Executive Officer; and Peter Jackson, Chief Financial Officer.

A copy of the slide deck referenced on this call is available on the Investor Relations section of the Builders FirstSource website at www.bldr.com. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without prior written authorization of Builders FirstSource. And as a reminder, this conference call is being recorded today, May 3, 2019. Builders FirstSource issued a press release after the market closed yesterday. If you do not have a copy, you can find it on our website at bldr.com.

Before we begin, I would like to remind you that during the course of this conference call, we may make statements concerning the Company's future prospects, financial results, business strategies and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. And are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the 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.

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

Chad Crow -- Director and Chief Executive Officer

Thank you, Binit. Good morning, and thank you for joining our call today. I will start with an update on our first quarter achievement, then Peter will discuss our first quarter results in more detail. I will then finish with an update on our strategic priorities and outlook.

I'll start on Slide three. I am extremely pleased with our strong start to 2019, as we managed to outperform the market, demonstrating the resilient strength of our Company, strategy and team. We continue to capitalize on our competitive advantages and realize the increasing benefits of our investments and initiatives. While commodity price deflation decreased our net sales by more than 9%, we grew our sales volume by nearly 7%, substantially outperforming the recent housing starts.

Adjusted EBITDA grew by almost 22% compared to the first quarter last year.

Excluding deflation, our value-added product sales grew by an impressive 10% as we continue to benefit from our investments in capacity, as well as investment in our sales force. Our team continue to execute our strategy in a challenging quarter and our results clearly reflect it.

Our operational excellence initiatives continue to show tangible progress. As we have discussed on prior calls, our primary initiatives are focused in four areas; enhanced business analytics, pricing management tools, our My BFS Builder customer portal and delivery optimization technology. To date, we have rolled out our delivery optimization system to nearly 170 locations, measurably improving the speed, up time and reliability of our distribution network. We expect these initiatives to contribute between $14 million and $16 million to our EBITDA in 2019.

We are increasingly realizing the growth and margin expansion benefits of our investments in value-added products capacity. While becoming an even more important partner to our customers by helping them solve challenges like increasing costs, labor scarcity, and long cycle times. Our plan is to continue expanding our manufacturing and value-added capacity remain on track. During the balance of 2019, we intend to invest in three new truss plants, approximately eight new truss lines in existing plants, door facility expansions and new machinery and systems to a dozen more. We're extremely proud of our industry-leading production capacity, sales force and distribution network and will continue to invest to enhance our position. I will talk more about our value-added products and their potential a little later in the call.

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

Peter Jackson -- Director and Chief Executive Officer

Thank you, Chad. Good morning, everyone. As a reminder, we have included adjusted figures to normalize for one-time costs related to our integration work and other non-recurring items. Please also note that we had one less sales day in the first quarter of 2019 than prior year. So I will speak to our results on a sales-per-day basis.

We had $1.6 billion in net sales in the first quarter, down 2.5%, primarily due to the commodity inflation, which decreased sales by 9.3%. The commodity headwind offset strong sales volume growth of 6.8%. As Chad mentioned, this included 10% sales volume growth in our value-added product categories, reflecting a strong execution of our strategic plan.

Gross margins of $442 million increased by $31 million, or 7.5% over the prior year. Sequential gross margin percentages remained higher-than-expected at a record 27.1%, 290 basis points higher than the first quarter of 2018.

Commodity prices began the quarter by continuing last year's downward trend before stabilizing at a level a bit below our expectation. As a result, our first quarter gross margin percentage benefited from those declining costs relative to our customer pricing agreements. Together with our team's continued pricing discipline, this price cost benefit combined with a favorable shift in mix toward higher margin value-added products resulted in an exceptionally strong gross margin for the quarter.

As we have discussed in prior calls, market price volatility inflation causes short-term gross margin percentage compression when prices rapidly rise and similarly, cause gross margin percentage expansion when prices rapidly decline relative to the short-term pricing commitments we provide customers. This expansionary benefit diminished over the course of the quarter as commodity prices have stabilized and gross margin percentages are returning to more normalized levels.

Our SG&A as a percentage of sales increased by 160 basis points on a year-over-year basis. This increase was primarily due to higher variable compensation as similar to the fourth quarter, our strong gross margin led to higher commissions expenditures in the quarter. Increased insurance expenses also contributed to the higher SG&A.

Adjusted interest expense for the quarter was $24.9 million compared to $26.7 million in the prior year, a decline of $1.8 million. The reduction was mainly the result of our ongoing balance sheet management in debt. This included the opportunistic repurchase of some of our 2024 notes during the quarter.

Adjusted net income for the quarter was $39.8 million, or $0.34 per diluted share, compared to $27.6 million, or $0.24 per diluted share in the first quarter of 2018. The year-over-year increase of $12.2 million, or 44% was primarily driven by the improved operating results, combined with the lower interest expense.

First quarter EBITDA grew by $18.3 million, or 22.2% to $100.9 million. The improvement was largely driven by our strong growth in sales volumes, particularly in our value-added product categories and the related increased gross margin percentage.

Turning to Slide five. The strength of our business, including our national scale showed itself in the quarter. Our team successfully managed a soft quarter for housing starts, numerous regional weather disruptions and low commodity prices. And despite these challenges, four of our core product segments -- categories reported impressive sales growth in the quarter.

Excluding deflation, even our lumber and lumber sheet goods product category grew sales volume reflecting our geographic diversity. As we build further upon this success, we are committed to continuing the expansion of our current network of 58 manufacturing facilities, strategically located across the country. Approximately 25% of our 2019 capital expenditures will be invested in our value-add growth initiatives and expansion of our production capacity as Chad outlined.

Turning to Page six, our fourth quarter sales volume per day grew an estimated 7.5% in the single-family new construction end market, in spite of a decline in overall single-family starts. Regional strength, particularly in the Southeast, contributed to the outperformance. Our sales volume in R&R and other end markets grew by 5.2%, primarily due to a strengthening in Alaska. And multifamily sales volume improved by 4.1%, largely due to timing of projects started in 2018.

Turning to Page seven. Our business uses cash in the first half of the year and generates cash in the second half due to seasonal working capital needs. The Company used cash in operations and investing of only $14.8 million in the quarter. Given this strong start, we are increasing our full year cash flow guidance to $190 million to $220 million in free cash flow after funding our capital expenditure plans of approximately 1.5% of net sales.

Total liquidity as of March 31, 2019, was an ample $585.9 million, comprised of borrowing availability under our revolving credit facility and cash on hand. Our net debt-to-adjusted EBITDA ratio on a trailing 12-month basis as of March 31, 2019 was 3 times, a 1.6 times reduction from prior year, and comfortably within our target range of 2.5 times to 3.5 times lever.

As we look forward to the rest of 2019, we have a high-level of confidence in our team's ability to execute on market opportunities, mitigate challenges and deliver the initiatives within our control. And we provide some details on what we see for the second quarter of 2019. Net sales are expected to be down in the second quarter driven by commodity price deflation in the range of 11% to 13%. As a result, despite an expected increase in sales volume, our second quarter sales are expected to be down by 8% to 10% as compared to the second quarter of 2018. However, we expect the gross margin percentage to improve 190 basis points to 210 basis points compared to the second quarter of 2018. Although, declining sequentially from the exceptional margin experienced during the last two quarters, as the previously mentioned benefit from rapidly declining commodity costs tails off. As a result, second quarter EBITDA is expected to be between $120 million to $130 million.

For the full-year 2019, we expect single-family starts in our markets to grow in the range of 3% to 6%. R&R market growth in the low-single digits and flat- to low-single-digit growth in the multifamily market. At this point, we anticipate full-year commodity deflation similar to the 9% to 10% we saw in the first quarter. We also remain confident in our operational excellence initiatives, which we expect to contribute $14 million to $16 million to the 2019 EBITDA. We will continue to invest in our business through capital expenditures at approximately 1.5% of sales.

Regarding cash taxes, we expect to fully utilize our federal NOL tax asset during 2019, and become a federal cash taxpayer again in the second half of the year. We expect an effective tax rate of approximately 25% for the full-year. Cash interest and interest expense are both expected to be in the range of $95 million to $100 million.

As we continue our systems integration work to support our operational initiatives, we expect one-time-related costs of $15 million to $20 million for the year. As already mentioned, we expect to generate $190 million to $220 million in free cash flow for the full-year 2019, an increase of $10 million from our prior guidance.

Now, Chad will provide an update regarding our strategic priorities and outlook.

Chad Crow -- Director and Chief Executive Officer

Thank you, Peter. Moving to Page eight, although housing has slowed over the last few quarters, the fundamental underpinnings of homebuyer demand remain intact. We continue to expect single-family housing starts to progress over the coming years toward the 1.1 million historical average. We continue to develop our sales force and invest further in our manufacturing and value-added facility expansion initiatives. These growth platforms provide a significant ongoing opportunities to increase our market share and increase the penetration of our higher-margin products. As the market also accelerates its adoption of these laborsaving, high-efficiency products.

In addition to capturing market growth, the growth of our value-added product sales and operational excellence initiatives under way are expected to generate approximately $100 million of incremental profitability in the coming years. Our plan remains on track to generate EBITDA of 50% higher than last year or roughly $750 million as we reach historic norms in housing.

We expect to deliver EPS between $3 and $3.50 and achieve greater than 85% conversion of our adjusted net income to free cash flow. The substantial cash we generate will be used to fund both our high-return growth investments and to further improve our financial flexibility.

Turning to Slide nine, we detail expectations for our growth initiatives. Our core business strength, including our national footprint, unmatched scale and manufacturing capability, and exceptional sales force provides us with a platform well-positioned to capitalize on the continuing operations we see for core growth in the residential housing market. We expect to generate an incremental $130 million to $160 million in EBITDA compared to the full-year 2018 as housing starts return to historical averages.

In addition to this core growth, our plans continue to call for investing in approximately 20 new manufacturing facilities, including three under way this year, by expanding our nationwide footprint to serve a number of markets where we see accelerating opportunities to serve our customers. Additionally, our plan includes a set of operational excellence efficiency initiatives already under way, including investments in distribution and logistics software, pricing and margin management tools, back office process efficiencies and information system enhancement. These initiatives are expected to generate an additional $60 million to $70 million in incremental annual EBITDA. When fully rolled out across our 400 locations, these initiatives and investments are designed to deliver cost benefit and margin expansion, which total $90 million to $110 million. They will further differentiate our service levels, strengthen our connectivity with our customers and provide economic and strategic value that is unrivaled by our smaller competitors.

Moving to Slide 10, I would like to take a moment to provide a bit more detail around what we have been doing to build our leadership in the manufactured products category. As we have outlined previously, our industry leading manufacturing capacity delivers value-added products to fulfill customer's needs, helping them address the ongoing challenges of skilled labor scarcity, long cycle times and control over both quality and cost.

With all the talk about future building technologies, few focused on the largest category of off-site construction, which is here today, value-added manufactured components. This is a highly profitable and growing opportunity that we have been focused on for more than a decade. During that time, we have extended our leadership position and built a network of 58 manufacturing facilities. Today, we carry a complete line of off-site manufactured components from roof trusses, floor trusses and wall panels to our pre-cut better-framing system solution.

Our facilities utilize the latest technology, including computer controlled saws, 3D software design and automated material placement and finishing. These high-speed lines improve efficiency by 35% of 40% compared to the typical manual lines employed by most of our smaller competitors. The trends are clear, customers are increasingly pivoting toward the entry-level and lower-priced products to satisfy the growing need for entry-level homes. Homebuilders are striving to deliver high value to home buyers while reducing their costs. Builders FirstSource helps homebuilders achieve that goal.

In addition to the accelerating rate of adoption, another encouraging sign is the growing interest in a broader set of components beyond roof trusses. We recently held customer workshops in one of our largest MSAs to help builders and their framers understand the benefits of off-site construction solutions. The results were very positive as all the attendees adopted at least one new type of manufactured component, many for the first time. The signs are all very positive and our scale, resources and deep customer relationships put us in a position to capitalize on this customer opportunity and continue to gain high margin share in this rapidly growing market.

Moving to Slide 11. Although, we hear divergent opinions about the health of the US housing industry and its outlook, we continue to see a housing supply deficit. As the second quarter has begun, we remain confident in the fundamentals of the macroeconomic environment and in the demographic drivers of demand. And our homebuilders are making the necessary adjustments to their products to respond to the evolving needs of homebuyers. We are confident in our team's ability to execute our strategy, deliver above-market growth and create value for our customers and shareholders. The ongoing roll-out of our operational excellence initiatives and our strategic investments in manufacturing capacity are expected to continue to drive improvements in profitability and cash flow generation. I look forward to building on our success.

Operator, we can now open the call up for Q&A.

Questions and Answers:

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions) And our first question today will come from Matthew Bouley with Barclays.

Matthew Bouley -- Barclays -- Analyst

Good morning. Congrats on the quarter. Thank you for taking my questions.

Chad Crow -- Director and Chief Executive Officer

Thank you.

Matthew Bouley -- Barclays -- Analyst

I guess, wanted to start out on the gross margin, the 27.1% in the quarter. You guys historically talked about that 25% level as being normalized. And understanding we shouldn't get ahead of ourselves. Obviously, there were some incremental lumber capture in the quarter, I think, Peter, as you mentioned, but just longer term kind of as these operational initiatives roll-out, is there any -- I know as you continue to mix toward the value-added categories, is there any reason why structurally that kind of an ongoing gross margin can't be stronger than 25% over time? Thank you.

Peter Jackson -- Director and Chief Executive Officer

Yeah. Thank you, Matt. That's a good point. The movement in commodities, of course, influences our average gross margin and where we stand currently, I don't think there is any question for us internally that there is opportunity north of 25%. In the near-term, let's say, drifting 25% to 25.5%, but when you start layering on the expected benefits of the growth in value-add and manufactured components, as well as the working operational excellence, we certainly see that increasing over time. That is accurate.

Chad Crow -- Director and Chief Executive Officer

Peter is way too kind, with the dollars we are investing in manufacturing facility, there damn well better be higher margins in the future. So well done, Peter, but -- yeah. Absolutely, there should be higher margins in the future, that's the whole point of all the investments.

Matthew Bouley -- Barclays -- Analyst

All right. Well said. Secondly, I was looking at Slide 10, there, you guys gave some disclosures around the size of the manufactured products industry. It seems that you guys have kind of nearly 25% share of that market. So, as you continue to invest in these facilities, do you guys kind of longer term, again, kind of target, I guess, a market share of that particular industry? Do you think you can actually grow above even that market or kind of just enjoy how that market itself likely grows faster than broader housing? Thank you.

Chad Crow -- Director and Chief Executive Officer

I'll just -- can we go back to my previous comment. We are putting a lot of time and money into growing that side of our business, and I absolutely believe we should be outpacing the -- whatever that market is, we should be taking share in that market and that's been our strategy, as we said in the opening comments for over a decade now and that will continue to be our strategy, is to grow that side of the business and take share.

Peter Jackson -- Director and Chief Executive Officer

Again, back to our overall strategy, it's a quite fragmented market still, plenty of opportunities for us to grow organically, inorganically, as well as the expanding use of the product by the broader homebuilding industry. We are excited about it.

Matthew Bouley -- Barclays -- Analyst

All right. I appreciate the thoughts. Thanks again.

Peter Jackson -- Director and Chief Executive Officer

Thank you.

Operator

Next, we'll move to Trey Grooms with Stephens Inc.

Trey Grooms -- Stephens Inc -- Analyst

Good morning, gentlemen.

Chad Crow -- Director and Chief Executive Officer

Trey?

Trey Grooms -- Stephens Inc -- Analyst

Nice work in the quarter.

Peter Jackson -- Director and Chief Executive Officer

Thank you.

Trey Grooms -- Stephens Inc -- Analyst

So, I guess, kind of a follow-up to the last question on the margins. So, looking a little bit more near-term, I think the 2Q guide would imply 25.7% or something like that in the -- at the midpoint. So, given this -- that value-add mix is much heavier value-add than it has been in the past, I guess, and was the last time we had an environment that wasn't influenced one way or the other by the volatility in lumber prices. Is this 25.7% is that kind of the way to think about the new norm as we look into the next couple of quarters? Or is there -- in that 25.7%, is there still any benefit at all from the lumber deflation there? Or just how do we think about that?

Peter Jackson -- Director and Chief Executive Officer

Yeah. There is, I would say, a very modest amount of influence left over in April from the deflation, but that's about it. So I'd say the bulk of that greater than 25% is in our opinion normal. And we'll just have to keep an eye on commodity prices to see how that might move that number around a bit.

Trey Grooms -- Stephens Inc -- Analyst

All right. Thanks for that clarity. And then you're expecting to spend this year 25% of your total CapEx on growth initiatives, which includes value-added capacity, which you kind of talked about some of the different things there. How are you thinking about the revenue opportunity from these expansions that you're putting into place this year? And then also, I think, you spent $20 million last year on something similar, and how do we think about the impact this year coming from that?

Peter Jackson -- Director and Chief Executive Officer

Yeah. So I would say the messaging is consistent. I wouldn't say there have been any changes to the guides we put around those facilities. They're generally $15 million to $20 million in sales with 10% to 12% or higher depending on the opportunity in the geographic location in margins. We are talking about a pretty substantial return when it comes to the investment. It does take some time to get them out of the ground. So, our ramp up expectation is probably about 20 months from start to finish in terms of getting the facility running. So that's sort of the challenge in laying out a number there, but it is certainly a tailwind both in sales and EBITDA based on the investments we've continued to be consistent with over the last couple of years and we expect to continue over the upcoming years. With the advantage of as we return to a more normalized leverage ratio opportunities for tuck-ins to contribute to that as well.

Trey Grooms -- Stephens Inc -- Analyst

Okay. And then looking longer term, I know you laid out 25% of CapEx this year, but longer term, is that the kind of -- is that the level of investment needed as we look forward to hit the type of incremental EBITDA numbers you're kind of looking at for value-added products over the longer-term? Is that kind of a good assumption going forward on the spend?

Peter Jackson -- Director and Chief Executive Officer

We think so, yes. I mean, our models has a pretty consistent growth amount in there. Admittedly, there is certainly a lot more to do there. So more investment to come, but over the coming years, we think that's -- that consistent level of investment is a good baseline for your model. Yeah.

Trey Grooms -- Stephens Inc -- Analyst

Okay. And last one from me kind of on the Page 10 there, where you have those four categories of manufactured products. And you look at those four buckets there and with your expansion plans, what would that mix of kind of incremental capacity look like? Is it pretty balanced among those four buckets? Or is there one area that's more attractive to you? Just any color there.

Chad Crow -- Director and Chief Executive Officer

I would say, the bulk of the investment would be in the roof trusses and the floor trusses, a lesser amount go into the wall panels and the pre-cut framing packages.

Trey Grooms -- Stephens Inc -- Analyst

All right. That's it for me. I'll turn it over. Thanks a lot for taking my questions and good luck.

Peter Jackson -- Director and Chief Executive Officer

Thanks, Trey.

Operator

Our next question we'll hear from Trey Morrish with Evercore ISI.

James Morrish -- Evercore ISI -- Analyst

Thanks, guys. And I add my congratulations on a great quarter.

Chad Crow -- Director and Chief Executive Officer

Thanks, Trey. Good morning.

James Morrish -- Evercore ISI -- Analyst

I wanted to just ask, just high-level conceptually lumber prices really haven't rebounded this year, granted it has been a slow start to the year and the housing environment has gradually improved. But I'm just wondering from where you're sitting, why do you think that lumber has kind of stayed down where it has?

Chad Crow -- Director and Chief Executive Officer

Well, I think, last year was obviously an anomaly, several things that triggered the rapid inflation we saw and then, of course, it fell off at the end of the year. I think what we've seen so far this year, we've had some additional capacity come on. We haven't had the delivery, the rail and the trucking delays that we saw last year. And I think housing demand has been a little soft at the first half the year. I think a lot of that was due to a little bit rougher weather year-over-year. I think as we get into the -- more of the seasonal building time, you'll -- we would expect to see prices strengthen a little bit. We're not expecting a runaway like we saw last year, but would expect, as we get into the summer months as demand picks up, it'll eat up some of that additional capacity that's come online at the mills. But all in all, still expecting it to be a relatively flat year from a commodity pricing standpoint.

James Morrish -- Evercore ISI -- Analyst

Okay. And then talking about your volumes, very strong numbers 6.8% and then on a single-family sales up 7.5%. While the starts environment really over the last six months has been very underwhelmed. Just kind of wondering why you've been able to see such strong growth, particularly this quarter in such a tough environment? And then why, as most of us believe, that the housing environment is getting better as the year goes on for a little bit of decelerate 2Q?

Peter Jackson -- Director and Chief Executive Officer

So, I guess, I can start there and Chad can sure chime in, but end of the analysis we've seen so far would indicate that our geographic exposure being so broadly spread out across the country helped to sort of insulate us from some of the disruption in certain key markets. I think that some of the markets that were hardest hit are markets that perhaps we don't have a strong presence in, so that worked to our advantage as well.

And then lastly, in the part that I would emphasize the most is this idea that our value-add in our manufactured components, the areas that we feel is the right balance and the portfolio sort of offering that we're able to provide, continued to be strong in March, reason because we happen to continued to invest, right. We continued to investment from sales force perspective, from an equipment perspective, so those aspects of the business continue to grow as a result of that focus and operational performance.

Chad Crow -- Director and Chief Executive Officer

Yeah. And this year, as Peter hinted, is a little different. Last year, at this time, it was more of the Western part of the country that was outperforming. And this year, for us it's more in the Southeast. And I think some of that is weather related. I think west of the Mississippi took a harder hit from a weather perspective. And we're really performing well in some of these Southeast markets and taking some shares. So, it's a little bit different than what we saw last year, but I think, the geographic diversity certainly, as Peter mentioned, helps that.

James Morrish -- Evercore ISI -- Analyst

Okay, got it. Thank you, Chad and Peter. Appreciate it.

Peter Jackson -- Director and Chief Executive Officer

Thank you.

Operator

And next we'll to Nishu Sood with Deutsche Bank.

Nishu Sood -- Deutsche Bank -- Analyst

Thank you. I wanted to start out with the sales expectation for the second quarter. You had a really nice daily sales day performance in 1Q. Offset a good proportion -- you had 6.5% that offset a good proportion of the commodity price deflation. You're implying, I think, in your guidance that the 11% to 13% commodity price pressure in 8% to 10% overall sales growth, you're implying that slows the daily sales growth to about 3%. So just trying to understand that 6.5% against the volatility that we've had in the housing market is a really nice performance. And so, why would that slow, especially given that housing has stabilized and even started to rebound here?

Peter Jackson -- Director and Chief Executive Officer

Yeah. I'm not surprised at all that you've caught that, Nishu. So my observation on this is that you know this as well I do. One quarter does not a trend make. While we feel very confident about our performance and we're pleased with it, it seemed unwise to extrapolate a number that was so successful. Are we going to try to replicate that? Absolutely. From a forecasting perspective, we believe that the overall performance of the industry is one that we will approximate and hopefully beat, but we're trying to forecast what we believe to be a reasonable and deliverable target that we absolutely intend to try and beat.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. Got it. Okay. And a question on the investments in the manufacturing capacity. Clearly, the continued focus on that through the housing wobble has turned out to be a great decision. Looks like the housing market may have still some room left to run here. At what stage though does it become late enough in the cycle? And how will you judge that to say that the investment should perhaps be slowed down? Because clearly adding capacity later in the cycle closer to potential recession or volume declines would kind of aggravate the risk of those investments. So how are you folks judging that? Or are you taking a through-the-cycle view on these investments and that it could continue even later into the cycle?

Chad Crow -- Director and Chief Executive Officer

Well, I think, a lot of that will depend on as things play out what we think the cycle is going to look like. And right now, we are in the camp of -- the growth can't go on forever, but I don't -- at this point, I wouldn't expect a significant downturn when there is a slowing and when we do kind of hit that peak of a cycle. So we very well could for the most part invest right through it if that's the position we continue to take. And a lot of it maybe dependent on the market, this market specific that we are looking at, but you know it's a balancing act, as you know. We want to be long-term focused. We want to invest in where we think the building industry is heading. Will we have to tap the brakes here and there along the way, perhaps. But again, it's just kind of going to be a game time decision as we get a little deeper into the cycle.

Peter Jackson -- Director and Chief Executive Officer

The other thing I would like add to that is a complicating factor in trying to make the decision is that, there is growth broadly in the use of that component product. There is also this aging of the ownership and the experience level in the industry. So there is sort of this almost disconnected from the market, opportunity to grow that part of the business. So there is certainly a lot of tailwind there and we don't want to leave money on the table. To your point, we always have to keep an eye on the end as well.

Nishu Sood -- Deutsche Bank -- Analyst

Got you. And just related to that Clayton Homes, big news, 4,000 unit facility to serve Nashville, not only for their single-family builders, but arguably for competitors as well. As you know, obviously, there are the lumber contractors -- I'm sorry, the framing contractors that have entered the space as well. You continue to make investments and obviously, there is a growing level of interest from, not only those players, but from start-ups as well. So it's pretty active space. As you folks sit and think about your relative position, what gives you the confidence that it's the distributor who is best positioned to longer term provide this service? Or do you think the landscape is large enough that there is room for different business models?

Chad Crow -- Director and Chief Executive Officer

Personally, I think, the landscape is large enough. As Peter mentioned, I think, the trend to off-site construction will continue. And I feel like that there is a growing opportunity out there. So it doesn't surprise me at all that other players see the same thing and want to get into it. I think Buffet is a pretty smart guy, so maybe that just validates our investment thesis.

Peter Jackson -- Director and Chief Executive Officer

And I do think we're better positioned than they are just from the perspective that we can sell to everybody and it helps us better utilize our capacity on an ongoing basis. Because we can sell to every homebuilder and homebuilders try and do it themselves or even framers that are aligned with the given homebuilder try and do it themselves, it's far more difficult for them to cover their fixed overhead over time. It's an advantage that we will possess no matter the market or the competitor.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. Thank you.

Chad Crow -- Director and Chief Executive Officer

Thank you.

Operator

And Mike Dahl with RBC Capital Markets, we'll have our next question.

Michael Dahl -- RBC Capital Markets -- Analyst

Good morning. Thanks for taking my questions.

Chad Crow -- Director and Chief Executive Officer

Good morning.

Michael Dahl -- RBC Capital Markets -- Analyst

My first question on, I'm still trying to wrap my head around the market commentary a little bit and fully appreciate your ability to outperform your markets just given the investments you're making and also some of the better trends that the builders have reported from an order standpoint, but we did come out of 1Q with, I think, national single-family permits down 8% year-on-year. And so, just trying to think through the cadence to get through to the 3% to 6% that I think was your market growth, not just your specific Company performance. So, can you help us a little and maybe just frame what you think your markets -- how you think your markets performed in the quarter?

Peter Jackson -- Director and Chief Executive Officer

Yeah. So, I guess, I can start. The commentary as far as our performance during the quarter, we saw the same, I would say, broad starts numbers in our markets that we would have expected in the national with the exception of Northern California. It's probably the most obvious one. A little bit in some of the secondary MSAs, but clearly, we're in the heart of most of the large ones. So, not a massive difference, but certainly, a difference and California is a significant mover. So that is absolutely one of the ways in which we think that 3% to 6% for us perhaps differentiates a little bit from the national number. But that is an area where we continue to see strength as we hear feedback from our homebuilder customers. Our sales force continues to hear that. Yes, there has been a slowdown. Yes, there has been a pause, if you will, but there is absolutely a wave coming in terms of the rebound that you might expect to see from the reduction in home mortgage rates and the actions that the homebuilders have taken to recover the market.

Chad Crow -- Director and Chief Executive Officer

Yeah. And we had all our regional leaders in Dallas, I believe it was last week, just for an operational review, and a lot of the feedback we got was exactly what Peter said. It seemed like toward end of last year, and this is -- specifically they were talking in the Southeast US, a lot of the builders, as rates were creeping up last year, started backing up on specs. And the guys that were in last week fully expect and are hearing from their builder customers that now they're a little behind and they're going to have to build more specs than they had originally thought. And then some of it, of course, is they feel like there is some pent-up demand from all the wet weather we've had and they said the backlog is looking very strong over the next several months as these lots continue to dry out and construction can start to take place at a normal cadence.

Michael Dahl -- RBC Capital Markets -- Analyst

Okay. Got it. Thanks. And then my second question clearly strength on the gross margins, which you've covered. The -- some of the trade-off has been you've -- I think, as you've called out, have some variable comp that's tied to some of those levels of profitability. So I was hoping just like you gave your thoughts on what a new "normal" at least in the near term, on gross margins could be, can you give us what your sense or how should we be thinking about kind of a normal run rate for SG&A right now?

Peter Jackson -- Director and Chief Executive Officer

Yeah. Well, you are definitely seeing the few things that are happening. One is the reset with the deflation flowing through, but also the outsized margins are driving a bit higher expense on SG&A, the commissions and bonuses line. So, I do think that over the longer term, we are talking about still the 12% to 15% all through, still seeing a normalized EBITDA rate that is influenced both by that mix that move toward value-add and the operational excellence initiatives.

In the near-term, no question that the EBITDA dollars will be negatively influenced by the reset in the deflation -- reset in the commodities and the resulting deflation, but again offsetting with the underlying growth that's kind of how we get to the full-year number. And we'll just have to work through that messaging, so that everybody is clearly able to understand the impact of the commodity movement and how that differentiates from sort of the core operations of the business.

Michael Dahl -- RBC Capital Markets -- Analyst

Okay. I think that's helpful. Thanks, Peter, Chad.

Chad Crow -- Director and Chief Executive Officer

Thank you.

Operator

And John Baugh with Stifel, we'll have our next question.

John Baugh -- Stifel, Nicolaus & Company -- Analyst

Good morning. Congrats. Thanks for completely ruining all our models of taking housing starts and lagging them three to six months.

Chad Crow -- Director and Chief Executive Officer

Happy to help, John.

John Baugh -- Stifel, Nicolaus & Company -- Analyst

Yeah. I was wondering if we could, from a high-level, talk about the value-add. You've obviously been at it for, as you said a decade. And talk to, I don't know the barriers to entry, if you will, because it's obvious it's working, is it your scale geographically? Is it your capital balance sheet? What precisely do you think keeps you in front of the competition, as this is a clear direction that people should be moving? Thank you.

Chad Crow -- Director and Chief Executive Officer

Well, a big part of it is just the people. We've got people in this organization that have lived in brief components their entire life and they're really good at it. There is a bit of a barrier to entry, certainly higher than someone who just wants to open a lumber yard. When you're talking probably $6 million, $7 million to get a plant up and running, there is a degree of a barrier there. And I think our broad footprint and our customer relationships across the country, certainly help us when we do decide to put a new plant in to fill it a lot quicker and begin to cover that overhead, because we'll typically be in conversation with customers in that market long before we put a plant there and know that there is a level of demand there that will support it. So, look, I think, it's just a combination of those things. And as you already pointed out, we have been doing it very, very, very long time, and this is something we feel like we are one of the best at. So, there is a competitive advantage there when you have been doing it as long as we have and have the personnel we have, and the customer relations we have coast-to-coast.

John Baugh -- Stifel, Nicolaus & Company -- Analyst

And, Chad, I know it is long since integrated ProBuild, but they were not as progressive with this opportunity as you. Is there -- obviously, it hinges on where you build a plant, but is there some sort of buy in that you've achieved with, if you will, the legacy ProBuild people that also maybe driving this?

Peter Jackson -- Director and Chief Executive Officer

Absolutely.

Chad Crow -- Director and Chief Executive Officer

Yeah. I think that's absolutely part of it and then a lot of it is just demand from our customers where we continue to see the market shift toward these products. And so, where there is gaps in our offering, we've got, in many cases, customers reaching out to us and saying when you're going to start selling me components. So, it's a good position to be in.

John Baugh -- Stifel, Nicolaus & Company -- Analyst

Okay. And then just a quick comment, maybe on the repair remodel side. Existing home sales have been weak for quite some time, and there is some evidence out there is choppiness in that margin. What have you seen and -- based on that on your projection? How are you looking at that side of the market? Thank you and good luck.

Peter Jackson -- Director and Chief Executive Officer

Thank you. Yeah. So, the R&R market, just to recap right, we are primarily exposed in three key markets; Southern California, Alaska and the Upper Midwest. Southern California, as everybody is aware, has seen a pullback in the housing starts and certainly a lot of interruption from weather, started this year. However, in short, the core R&R part of that business has been pretty stable -- pretty healthy. Alaska has been a headwind for us the past couple of years. They've struggled with the reset in the oil prices, but things have leveled off there and they started to see some growth, which we are pleased with. It's a great operation for us. And while we continue to, I think, see a bit slower than normal growth in the Midwest, it's not been enough to offset the recovery more broadly. So, it's -- I think it's a strong part of the business for us right now, we always anticipate that it's going to be a bit more stable than the volatility of the single-family starts market and that sort of proving out, while a quarter here a quarter there might be weaker, we've seen it be pretty consistent.

John Baugh -- Stifel, Nicolaus & Company -- Analyst

Great. Thank you.

Chad Crow -- Director and Chief Executive Officer

Thank you.

Operator

And next we will move to Megan McGrath with Buckingham Research.

Megan McGrath -- The Buckingham Research Group -- Analyst

Hi, good morning. Thanks. Most of my questions have been answered, but maybe a couple of big picture ones on your value-added businesses. With housing starts having slowed a little bit, I know builders aren't saying they're getting much relief from the labor side, but are your conversations with them in terms of your long-term needs that you're meeting, are they changing at all, or is it less about meeting the labor availability problems and more about cost, or are the conversations staying the same?

Chad Crow -- Director and Chief Executive Officer

I would say they're pretty consistent. And as I said earlier, I fully expect as we get into the seasonal building time, those labor constraints are going to be just as real as they were last year. Obviously, they hit the peak during the late spring and summer when most of the building activity is trying to take place. So now so far those conversations really haven't changed.

Megan McGrath -- The Buckingham Research Group -- Analyst

Okay. And then when you think about the market potential, the slide that you showed us in terms of the rising share of those manufactured products. Is part of that assumed growth dependent on your ability to kind of bring these options to market at a lower price as you become more efficient in your manufacturing, is that still a barrier for the builders? Some are saying we just can't make it pencil.

Peter Jackson -- Director and Chief Executive Officer

I think our argument is that, the overall studies would say it proves itself. We can charge what we believe to be a fair market price, and the benefits to the homebuilder in speed, waste, safety, the quality plus the computer-aided design and engineered aspect of the components, it generally takes costs out just from a pure lumber perspective. So we've had very good success at getting paid a fair margin and a fair price and still having it to be of benefit to the homebuilder. So we don't think there's a cost out component that's net needed in order to be a competitor, not to say we're not going to continue to fight for it. We think the efficiency is where we continue to separate ourselves from competitors.

Megan McGrath -- The Buckingham Research Group -- Analyst

Okay. Great. Thanks.

Chad Crow -- Director and Chief Executive Officer

Thank you.

Operator

And next we'll move to Matt McCall with Seaport Global Securities.

Matthew McCall -- Seaport Global Securities -- Analyst

Thank you. Good morning, everybody.

Chad Crow -- Director and Chief Executive Officer

Good morning.

Peter Jackson -- Director and Chief Executive Officer

Hi, Matt.

Matthew McCall -- Seaport Global Securities -- Analyst

Can we maybe look at the manufacturing products, any way you could give us an idea the same location growth there, I think the growth of 8%, if I just average the other non-commodity categories, your growth in manufacturing products was double the other categories? So, I guess, I'm trying to understand the growth is from the market, the same location share gains you are generating, and then maybe the share gains from new facilities that you have been able to recognize.

Peter Jackson -- Director and Chief Executive Officer

I appreciate the question. It is a really good question. And, no.

Matthew McCall -- Seaport Global Securities -- Analyst

All right.

Peter Jackson -- Director and Chief Executive Officer

Basically, A) I don't have the materials in front of me; B) at this stage, we haven't made the decision to start breaking out. Clearly, we're going to communicate that as part of our long range plan, messaging over time, we are just not ready to do that today.

Matthew McCall -- Seaport Global Securities -- Analyst

Okay. That's fair. Maybe one, so the pricing and margin structure for manufactured products use a lot of lumber there as well. How does that work in a volatile commodity environment? Do you see the same impact from a profitability perspective or the contract structure differently?

Chad Crow -- Director and Chief Executive Officer

It is a component obviously, but there is a lot more that goes into the manufacturing of trusses as opposed to distributing sticks. And so, while it can impact that manufactured component business, it's not nearly to the degree it would be on commodity lumber. You've got design cost, you've got labor cost, you've got other things to go in to the component that kind of helps insulate it from the wild swings that you can get on the on the distributed framing products.

Matthew McCall -- Seaport Global Securities -- Analyst

Okay. All right. That's helpful, Chad. And, I guess, the follow-on, there have been a few questions around this. But the starts projection you gave up 3% to 6%, I don't remember what the assumption was, the outlook was last quarter, and you talked about some of the regional improvements, but can you just go through, first of all, what was it? And what were some of the specific geographies that changed to help you move it up to 3% to 6% this year?

Peter Jackson -- Director and Chief Executive Officer

Yeah. So honestly, we did not provide full-year guide in the last quarter guide, really because of the uncertainties. The homebuilders are not willing to guide and we didn't think it's wise for us to get out in front of them, subsequent to that we have heard a lot of commentary a lot more affirming, if you will, and their expectations for the year. As well as in the commentary we've heard directly from them, so we feel much better. I think that 3% to 6% it might be a little richer based on the first quarter results than what we have modeled when we gave sort of our cash flow guidance, but as the increase in cash flow guidance would indicate, we think there has been some strengthening beyond even our expectations. Admittedly offset a little bit by the continued flatness of the commodity pricing.

Chad Crow -- Director and Chief Executive Officer

And I think, part of our optimism the balance of the year is from what I talked about earlier when we had the regional leaders in a few weeks ago. There does feel like some pent-up demand due to the weather and the commentaries from some of the builders that they feel like they're a little behind on specs.

Matthew McCall -- Seaport Global Securities -- Analyst

Okay. Thank you, guys.

Chad Crow -- Director and Chief Executive Officer

Thank you.

Operator

And next we'll move to Jay McCanless with Wedbush.

James McCanless -- Wedbush Securities Inc. -- Analyst

Hey, good morning. The first question I had was on the logistics, and I think you guys said you had rolled that out 170 locations. Can you just remind us where you are in that and how much longer that roll-out is going to take?

Chad Crow -- Director and Chief Executive Officer

We expect to be done with the bulk of the roll-out at the end of this year, and then we are going to -- that won't be to every location, it's the larger locations. We are going to pause at that point and then see how much further we think we need to roll it out, it may not make sense to roll-out to a single-site market, for example, you get much more benefit in larger markets where you got multiple locations trying to work together to make deliveries and serve the customers. So, we are going to -- we'll finish Phase I at the end of this year, and then as I said pause and see if there is a next phase or not.

James McCanless -- Wedbush Securities Inc. -- Analyst

And then the other question I had, I know this isn't probably the best comp, but if you just look at framing lumber, it seems like you guys are going to have the commodity headwind for this quarter assuming prices stay were they're now. And then third quarter, but then fourth quarter it looks like it gets a lot easier. Is that how you guys are thinking about internally if prices stayed flat, and if so, what type of effect assuming that, that commodity deflation lessens through the year? What type of effect should we expect on gross margin?

Peter Jackson -- Director and Chief Executive Officer

Yeah. So I would say on the commodity value impact, you hit the nail on the head, we will see a fading headwind to the sales dollars. The only thing I want to make sure I point out is just we just account for the lapping that we will see. So I don't think anybody anticipates a significant deflationary environment in the fourth quarter of this year, which would cause us not to be able to replicate the large tailwind from the deflationary impact in the fourth quarter. So, just keep that in mind over those two different thesis right, there is, of course, the baseline core operating impact of the value of commodities. And then there is the short-term swings or flows in gross margin percentage that we see in any given quarter and the way that those compare. For example, this quarter we saw the tailwind not only from this year's deflation, but also the lack of inflation from last year.

James McCanless -- Wedbush Securities Inc. -- Analyst

Got it. Okay. Great. Thanks for taking my questions.

Chad Crow -- Director and Chief Executive Officer

Thanks, Jay.

Operator

And that will conclude today's question-and-answer session. At this time, I would like to turn the call back over to Mr. Crow for any additional or closing remarks.

Chad Crow -- Director and Chief Executive Officer

Thank you. And again, I really appreciate everyone joining our call today. And we certainly look forward to updating you on the progress of our initiatives in the quarters ahead. If you have any follow-up questions, please don't hesitate to reach out to Binit or Peter. Thank you.

Operator

And that will conclude today's call. We thank you for your participation.

Duration: 60 minutes

Call participants:

Binit Sanghvi -- Vice President, Investor Relations

Chad Crow -- Director and Chief Executive Officer

Peter Jackson -- Director and Chief Executive Officer

Matthew Bouley -- Barclays -- Analyst

Trey Grooms -- Stephens Inc -- Analyst

James Morrish -- Evercore ISI -- Analyst

Nishu Sood -- Deutsche Bank -- Analyst

Michael Dahl -- RBC Capital Markets -- Analyst

John Baugh -- Stifel, Nicolaus & Company -- Analyst

Megan McGrath -- The Buckingham Research Group -- Analyst

Matthew McCall -- Seaport Global Securities -- Analyst

James McCanless -- Wedbush Securities Inc. -- Analyst

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