Q4 2020 Builders FirstSource Inc Earnings Call

As a combined company, we started the year with strong momentum closing out 2020 with record fourth-quarter and full-year results at both the fs and BMC.

I want to personally thank all of our team members for their hard work and Relentless determination during this unprecedented year which led to those outstanding results.

I'll cover three important topics on today's call that we believe will ensure that are already very strong performance continued well into the future.

First I'll provide an update on why we remain bullish on the macro backdrop and our industry and are even stronger position in the industry following the completion of our merger dead second. I'll share our new Mission Vision and values which are critical ingredients to our strong culture and I'll unveil the updated strategy of our combined company.

Finally, I'll bring you up to speed on our integration efforts as well as the value capture opportunities. We are seeing across the combined organization.

Homebuilding Market remains strong resilient and growing and and improved economic outlook for 2021 bodes. Well for our customers, we are bullish on the subject for housing amid what has been a long-term shortage of housing Supply.

I also suggest coming into twenty-twenty. The industry is under built since the last downturn by 2 to 2 and 1/2 million units.

In addition the you have to add a roughly nine hundred fifty thousand households in 2020.

We believe there continues to be a long Runway of under built and demographically fueled growth in front of us.

Improving housing starts historically low mortgage rates and a shift toward single-family Suburban living are all positive trends that continue to support the man for our products and services.

Together as a bigger stronger competitor. We are well positioned to capture a greater share of the increased demand in the single-family home Market.

As was the case with both Legacy companies, we will remain disciplined in our pricing processes and we will strike the right balance between profitability and volume growth, especially considering highly constrained Supply environment. We believe the Strategic combination of our two great organizations is a transformational step forward for our teams our customers off and our suppliers.

Together we have more than Twelve billion dollars in revenues in excess of 1 billion dollars in adjusted ebitda.

Even with our combined size and scale we estimate our share in core product categories is only about 10% Paving a long Runway of organic and inorganic growth opportunities with us in our 120 billion dollar addressable Market.

The benefit from our leading network of 550 distribution and Manufacturing locations that spanned forty states that Network includes forty six of the Top fifty and eighty five of the top 100 em essays covering most of the nation's fastest-growing regions. We have significantly enhance our ability to serve as key high-growth markets in our south south east and west regions which represent over three-quarters of single-family housing starts and Approximately 80% of our current combined revenues.

Will Leverage The Power of both companies operating systems to extend our competitive advantage of the market? We expect our scale will yield continued productivity opportunities this year with addition to our deal synergies?

You're still in the early Innings of this important work in both Legacy companies and we have meaningful opportunities to drive productivity and efficiency across the combined company, but those who don't know me. I am Relentless when it comes to ensuring the safety of our team members. We have put many processes in place to protect our Associates during the pandemic and I'm also encouraging a 12% reduction in recordable injury rates for the pro forma combined company in 2020.

But to be clear our goal is zero recordable injuries, and we have more work ahead of us to accelerate our progress toward achieving that goal.

For my second topic. I'd like to take a few minutes to talk with you about our updated Mission Vision Values and strategies.

The core team of leaders from both Legacy companies work together to finalize the Mission Vision Values and strategic pillars that will serve as our guides guideposts as we continue to grow our share of customers off and especially building materials production and distribution space.

MPG does the investor deck you can see that our mission is to be the best supplier of building materials and services by having a people-first culture that delivers exceptional customer service rep in innovative solutions to help build more efficiently while at the same time creating Superior value for our stakeholders.

Also shown on page leaders our vision which is to make the dream of homeownership more capable for everyone making Builders FirstSource the most valuable partner in the industry. I'm in we rely on our values to guide our behaviors in achieving our mission and vision safety people Integrity customers and Xbox or is he like the say internally spice a blend of ingredients to produce a better outcome?

I'm excited to introduce the combined company strategy which consists of four key pillars.

The first is to expand our Market penetration by leveraging and growing our portfolio of value-added products and services.

Second Drive operational excellence to improve our profitability invest in Innovation and provide outstanding service to our customers.

Our third strategic priority is to cultivate build and Empower high-performing culture.

And the Ford we will continue to pursue a disciplined approach to strategic Acquisitions with many opportunities in our Pipeline and one of the strongest balance sheets in our industry dead.

Investor deck has a slide that highlights the details of our strategy on page nine importantly, you should recognize that this strategic framework is similar to one shared by both Legacy, please the past several years, which just underscores my confidence that executing it well will result in strength strong and sustainable future top and bottom line growth.

No leverage are significant free cash flow generation to drive growth while preserving a strong balance sheet enhance our double-digit return on invested capital and return capital of the shareholders money.

We have brought together two, very strong companies with complementary capabilities and cultures.

As we look ahead. I have no doubt that together. We will be able to accelerate profitable growth for our customer-centric service model.

Finally, I'd like to briefly share with you. How are important work on integration is proceeding back in September. We officially launched our integration management office or IMO wage flexibility the price of strong leaders from both organizations who are responsible for leading our integration efforts.

In addition executive sponsors were assigned to lead to 9 function of work streams responsible for developing detailed initiatives to integrate optimize and transform the combined company that once the merger was finalized.

Back in October we launched the organizational survey for both companies to better understand any cultural related issues that might affect our success as a combined company.

Encouragingly the survey showed that the cultures of the two companies are remarkably similar this along with the fact that most of our Associates have been through the integration process before God has given us a high level of confidence that our integration plan will be implemented successfully and on schedule.

On B1 post closed the teams came together to discuss growth opportunities. And the many ways our combined company will create value from the merger.

As I said before and firmly believe at the heart of this merger is growth expanding our Geographic reach in a highly fragmented industry enhancing and growing our sweet of you added offerings and our Market position pursuing strategic Acquisitions and giving our people the resources needed to deliver results and grow their careers.

Since we close the transaction early last month, we have been seamlessly executing our plans. The integration is on track and I feel even better today about our prospects for the future than I did in August when we announced the transaction.

Over the next three years. I have complete confidence in our ability to deliver 130 to 150 million dollars of run-rate cost synergies and we are on track to real life 60 to 70 million dollars of those cost synergies in our 2021 results.

Before I turn the call over to Peter I would like to highlight one of our many value team members.

Production manager at our Colorado Springs location joined the company out of high school in nineteen years later is a top operator and a respect.

Thanks to his leadership videos location and one of the highest efficiency ratings of any truck plan that our company last year.

Truly grew up in the trust World his colleagues credit his success to his hard work dedication and incredible attitude.

He's also a leader in safety taking great pains to ensure facilities are clean. And that everyone is well-versed and proper protocol in large part due to his guidance the Colorado Springs location has been accident free for nearly ten months.

Thank you beta in the many incredible Associates who have made the first several weeks of our integration. So smooth while continuing to maintain a superior quality of service that our customers expect expect from

it's an exciting time at Builders First Source as we execute our strategy and remain focused on serving our customers growing our share capturing synergies associated with our merger wage in shareholder value.

With that, let me turn the call over to Peter to highlight our financial performance and our outlook for the year.

Thank you, Dave. Good morning. Everyone. I would like to start by thanking our team for the incredible results and focused execution during this unprecedented time.

I'm covered three tops with you today first. I'll review VFS as stand-alone fourth quarter results. Then I'll discuss free cash flow provide you with an update on our upside revolving credit facility and discuss are pro forma leverage and finally, I'll give you the road map for how we see the market and our outlook for 20 21 Standalone Builders First Source Bank to point five billion dollars in net sales in the fourth quarter a 43.5% increase compared to a year ago core organic sales increased by 15% off. Well commodity price inflation added twenty six. 5% to that sale our latest Acquisitions completed during the year contributed to a net sales growth of 2%

Value added for organic sales grew by an estimated 10.8% led by 16.9% growth in our manufactured products category a 5.3% growth in our Windows Doors and Millwork category.

We continue to experience accelerated and stronger-than-expected demand across the country throughout the fourth quarter. As a reminder of the fourth quarter is typically a slower part of the hunger.

Our gross profit of 669.2 million dollars was an increase of 40% year-over-year gross margin of 26.4% while slightly better-than-expected wage. Sixty basis points compared to the prior you. Primarily due to an inflation driven shift in product mix towards our lower-margin commodity products.

Sg&a, as a percentage of net sales decreased 480 basis points to 18% amid cost leverage on commodity price inflation higher wage organic sales and continued strong expense control, which more than offset higher variable costs related to the increase in net sales.

Adjusted ebitda who 140 7.8 million dollars to a quarterly record of 257.1 million dollars an increase of 135%

Increase was primarily driven by organic sales growth across all three of our customer and markets and commodity inflation.

Adjusted ebitda margin improved to 10.2% of net sales compared to 6.2% in the same. A year ago. I'm extremely proud of our team for delivery is very strong results.

Our continued focus on and efforts to improve our mix and carefully managed pricing levels supported our record growth process adjusted either. And adjusted net income for the month. Let's turn to our cash flow for the full year. We generated operating cash flow of $260 million dollars while investing over $260 million wage working capital. We also invested 140 million dollars in capital expenditures, including two new Greenfield truck manufacturing facilities among several initiatives as well as refreshing vehicles and equipment and investing in technology and automation to support operational excellence and increase sales volume.

On a pro-forma basis the combined company's operating cash flow was $468 plus tax of $181.

Last month, we amended an extended the maturity of our existing nine hundred million dollar revolving credit facility the amendment increased total commitment by five hundred million dollars up to one point four billion dollars and total while extending the maturity by an additional twenty six months the increase and extension of this facility provides us with a group Capital base that better represents our larger reach and scale going forward.

Earlier this month. We gave notice that on March 3rd 2021 eighty two point five million dollars at the 2027 notes will be redeemed out of Redemption price equal to 103% of the principal amount of the notes plus accrued and unpaid interest.

The end of the fourth quarter our pro forma net was approximately 1.35 s r l t m adjusted the. In addition. We have no long-term debt maturities do off until 2027 or strong stand alone and combined results in 2020 demonstrate positive momentum for the new Builders First Source and the broader home building industry where demand continues to outstrip supply.

Turning to our Outlook. We continue to see robust underlying demand in a single family and remodeling sectors. Most Builders are seeing increased buyer traffic and I ordered our business momentum continued in January reflecting another month of double-digit sales and organic growth as compared to Prior year. On a pro-forma. Although housing starts were strong in the fourth quarter of 2020 homebuilders continue to experience an extended construction cycle this just the timing of a good start to our sales as evidenced by houses under construction growth of approximately 17% We expect this Dynamic to continue throughout 2021 until home builders through their elevated backlog as we see these backlogs providing a strong.

Farm Beach

In for our business and the industry throughout 20 21 in into 2022.

We therefore expect net sales for the full year 2021 to be in the range of 13.9 to fourteen point six billion dollars or an approximate 9 to 14,000 increase for Mark 2020 pro forma net sales of 12.8 billion. We expect adjusted ebitda to grow 20 to 25% over our 2018 pro forma adjusted ebitda as Dave mentioned the expected realized 60 to 70 million dollars of the cost energy this year the dimensional Lumber index average 676 for $676 per thousand in the fourth quarter and hit two quarterly all-time highs during twenty-twenty. We have seen a lotta T crossed remain elevated levels in January and February and Futures have even reached new all-time highs.

Despite elevated levels in 2021. We do anticipate commodity prices normalized in the back half of the U as in the past. We remain confident that we will successfully managed through the inflationary and deflationary environment and will exceed the guidance if commodity prices stay at elevated levels.

Our Outlook is based on several assumptions which are outlined in the earnings rules including growth and single-family starts across our geographies in the high single-digits plugged in for single-family starts remains extremely high We Believe actual starts will be constrained by material and labor availability.

Multi-family starts decline in the low single-digit and our and our growth in the low single-digit.

Our free cash flow is projected to be in the range of $800 to $900 million this year.

Are significant cash generation and low leverage gives us the ability to invest in growth initiatives and deploy value-creating our Capital allocation plan include reinvesting in the business in in both growth and maintenance Capital expenditures. We also have a solid pipeline of m&a candidates.

As you heard from Dave, we believe the long-term underlying industry fundamentals remain very healthy as evidenced by strong home buyer demand and continued adoption of foul you added products the factors under our control further support our ability to drive results in this environment these include continued expense management delivering feel driven Boston or Jeep and ongoing operational excellence initiatives with our strong flexible down position. We have a significant opportunity ahead of us to continue to be a consolidation within our 120 billion dollar addressable Market overall. The new Builders FirstSource entered 20-21 an exceptionally strong footing and we are excited to deliver another year of record results. So with that operator, let's open the call to questions.

Thank you.

Ladies and gentlemen. If you like to ask your question, please signal by pressing star one on your telephone keypad using the speaker phone. Please make sure the mute function on your phone is turned off to allow your signal to reach our equipment again, please press star one to ask a question will pause for just a moment while everyone an opportunity to signal for questions.

We'll take our first question from McDonald with RBC Capital markets, please go ahead.

Morning. Thanks Chad theater congrats to you guys. And and your whole team great season. We'll miss you but tremendous results, uh going out on a high note. First question is uh, Israeli around thinking through Capital. I'm just giving it sounds like the the integration so far progressing smoothly all the early days, you know between the combined balance sheet already having relatively low leverage and then the cash flow guy gear providing some of the slides in here and your commentary make it seem like there's obviously still a long runway for for growth via m&a life in some ways, maybe even more programmatic than it has been in the past. I guess. I'm just thinking about you know, how how we should use?

Cadence of talking m a while you're integrating these two companies and then also given the excess cash flow how you think about returning Capital to shareholders?

Great question. Like this is Dave, you know we're excited about the balance sheet as you as you point out. And as you heard Peter say we have a lot of opportunities to invest Capital inside the company or group, you know, I love a lot of things about the culture the two companies, you know, the Millwork business that we have combined the trust and off-site component manufacturing. Both companies were investing heavily in those days. You will continue to do that including automation of our facilities. You heard me talking about that over time chatting. Also talked about that. So very good alignment around that and as you think about just from a standpoint 150 locations, which are now 550, you know, I get excited about that. I get excited about things like ready frame penetration and the opportunity to take that across the country and often times the number of facilities that we have. So a lot of exciting internal investment opportunities through your point around m&a, you know, we got one of the strongest balance sheet here here inside the inside the ending wage.

And that wasn't by accident as you know, both Legacy company's perspective and you heard me saying my comments, you know as excited as I am about our platform and our growth potential. We still have a relatively small share and pass this industry remains highly fragmented, you know, as Peter said we've got

Long emanate Pipeline and you know, we're fifty seven days into the integration. So we got a lot of a lot of work ahead of us here. But you know, you will see us continue to be an aggregator in this industry over a long time because there's a lot of opportunities to do so well position for that.

Okay, thanks babe. Checking second question or kind of a two-parter on on November environment first. I guess I'm curious you're marking performance the margin guide off. It's very strong and clearly a number of things going into that. But I'm wondering just giving the given the tightness in the lumber supply chain as well as the backlog that the builders are trying to work through, you know has the relationship between commodity inflation and margin oil changed in a way that even in the more inflationary environment you're able to achieve higher margins than you'd normally expect just given given the bottlenecks incur the urgency from the customers to get product on the job sites. The second part is just the clarification when you talk about

Normalization, I think there's a lot of different views on what normal may or may not be given what's transpired. So any sense of just when you say the normal is that true long-term trend line price or or how do you think about you know, what what that normalization looks like in the second half

Yeah, another great question. Like I'll put the theatre here in a minute. But let me let me just say, you know, if you've watched both Legacy companies execute and what was you know, a high inflationary environment involved in eighteen and then that deflation and nineteen and just unprecedented inflation and Supply constraints and 2020. You know, we're we've got a lot of expertise around that and I have the utmost confidence that whatever the market brings our way in terms of inflation and deflation that we're going to do a great job of managing through that and I think you know because of those challenges in the market over the past couple of years, we've sharpen our tool kits and we've got even better at doing that which is what you see represented in the way we've executed on a margin basis here over the last couple of years Peter exactly, right? They did the work that we've been talking about over the past few years on pricing management and training within the organization. I think it was true in DMC just like it was for a BFS.

It really is come into play as you've seen such dramatic increases in the price of clients, right? Our ability to react has gotten better or disciplines Iraq on the management of that has gotten better. And I think you've seen that in the gross margin results. I would also say that there's there's some truth to the idea that I moved that dramatic as forced everyone in the industry to to take stock of pricing more aggressively right? I mean, you're this isn't something you could ever hope to protect your customer from when you're up 100 plus percent in some products. So certainly a respect for the need to change price and quickly and we participated in that and and I think we did as you mentioned far better than usual as a combination of those two factors.

as for the launch

Turned estimate you're you're right on we did revert to a long-term average. There's certainly a lot of debate about whether or not there's going to be a new normal. I think that's fair. There are some legitimate questions out there. But at the end of the day, you know, the game of prognosticating commodity prices is not one. We really like to participate in an ability to make money on the way up. We prove an ability to make money on the way down and for us we think of a modest forecast and a normalization the back half of the year is just to a Smart prudent way to dedicate the business and we're just excited about the court. We think we've got a great platform here in the growth we have for the year looks really really like that.

Okay. Yeah fair enough to make sense, and that's that's great. Certainly. Seems like a lot of momentum this year. So, thank you.

We'll take our next question for Matthew bully with Barclays, please go ahead.

Good morning, like the offer my congratulations to everyone that as well and retirement. So, I guess first question the I guess on the guide the corner of organic Outlook. It seems like based on all the pieces. You've given you're implying kind of mid-single Digit organic growth within the nine to 14% total. You know, Peter you mentioned completions and units under construction really ramping. I think you said 17% and and you even gave a little bit of view in 222 just in terms of confidence of having some, you know, Builder backlogs driving that so I'm just trying to reconcile that versus the mid single-digits. Um, and is the expectation Cadence wise that the growth should be sort of flattered or even down into the second half of the year like

Great question, man. I just say the Peters comments earlier during the prepared remarks, you know, there's been an increasing challenge here to go from starts to completion based on what's been going on in the supply chain. You know, you look at Lumber we just talked about Lumber OSD is as tight as it's ever been, you know, even getting windows and doors and you know, we've all talked about a lot of those challenges in the past and result of that has been just extension of the time from start to completion of the home now having said that, you know, we're projecting starts in the middle upper single-digits, you know, we're going to capture absolutist as much of the core organic growth that can possibly be had here. We're well-positioned for it. Our customers have large back logs which underscores the confidence that Peter outlined in terms of our performance wage twenty Twenty-One. And even in the twenty twenty-two given the reality of where we are in the market in many of these product categories not improving from a capacity standpoint, you know any time soon. So we got a log

Confidence in our performances you seen you heard Peter talk about double-digit core organic growth here to start twenty Twenty-One. And you know, we're going to we're going to outperform the market regardless of wage going on and like you said the cops do get more Channel.

In the back half a year, but I just want to reiterate our assumptions around both Commodities and single-family starts are you know are tempted to give you a modest and reasonable thoughtful look at what we think the market can do given the Dynamics at play If The Market does better than that we're going to do have no hesitation in saying that we're just trying not give you what we think of a thoughtful view. We're certainly very bullish on the overall strength of demand. This is not a demand commentary we can you know consumers are strong Trends off solid like what we're seeing and that's sort of the hint you saw for 2020 to the inability to deliver on the products that demand is asking for is really just an extension of the bill, and we can capitalize very well for for us and for the news.

Perfect now and I appreciate the Assumption there around you know, quote unquote normalization and commodity and and even the market as well as you know, potentially reading some room for how long it's been stalemated. So that that is helpful. I guess the second question is on value-add and manufactured products in particular, you know, you talked about the really strong organic results there. It did accelerate after the past couple of quarters, you know, and then they even just mentioned that the expansion of ready frame across the the table will be our footprint. So I get I guess the question is just kind of linking those together. What's you know, what do you seeing in manufacturing manufactured products today? And then now that you've you know hit the gas pedal on the integration, you know, what are some of the things we should look for in terms of expanding products nationally like

Answer your question. You know I'm excited about it is you want both Legacy companies perform here over the last couple of years, you saw continued penetration in meeting the market down the value-added tap and I think a large part driven by the needs of our customers, you know, they're they're continuing to look for ways to get more efficient and productive in that place perfectly into our value-added offerings. And I think that was only asked exasperated here in the past six to nine months based on the strength of the market, you know, some of the supply chain challenges. So these Builders need to get more effective or what they do off and you know, we're pleased to have the offerings that we do. So we expect continued strong organic growth and penetration of the markets and especially in markets, but you know, haven't historically been a component Market wage. We think the time is right now labor constraints are still very real and I think we'll continue to fight those sort of challenges and you know to your question around, you know, what to expect going forward. I think we've talked about you know our phone number.

Priorities are going forward is to invest in the strong growth opportunities that we have inside the company and I'm not any more excited about any of that than our value-added offerings including ready frames. And so, you know, that's what I think you can expect going forward and hope which is a lot more the same and the wherewithal to continue to accelerate that growth.

Wonderful. Well, thank you and my congrats again to everybody.

Thank you. We'll take our next question from Sikh on Pandora with BMO Capital markets.

Thank you congrats on a strong start coming back to reading frame. I'm not looking for exact numbers, but it's not a big fan of you know, size what kind of opportunity you know, you have there to grow and you know, would that require any additional investments from the outside to be able to capture that growth?

Yeah, great question and I can talk about radio frame for a long time because in Legacy BMC we were continuing to invest in it and we're excited about the growth which is we talked about over the past, you know couple years have been from a house penetration standpoint in the in the double-digit growth Arena, you know, I would just tell you in Legacy BMC in the fourth quarter that house penetration was nice 20% as we continue to grow strength and momentum and really exciting part about ready for him and that investment to your question is, you know, it's a relatively minor investment. You know, we're talking about saw Xander Nelson computer-aided design and capability, but it's a relatively minor investment to extend that across the markets and is a large part driven by the know. How are people right to not only Home Design, you know the homes and put that in the ready for a model but also, you know how we deliver it to job sites and and I'm loaded in a way that's very effective for the framers so they can do the work mode.

So minor investment is we extended through markets and we will continue to be aggressive they're doing that.

Got it. That's that's helpful. And then, you know, maybe you can you talk about you know, any disruptions from the recent storms that we've had in Texas, you know, how you off of managing, um, you know, given what has happened.

Yeah, no that that's a great question. It's been a difficult time. Obviously not just for us for the whole state. We had some Interruption as you might imagine. We have some shutdowns, you know, the initial read is that it's you know, probably around forty million in sales that were delayed as a result of those shutdowns. We'll see how it how it plays through the rest of the quarter for a company of our scale. Obviously, that's not material but it's impossible to the folks in the states. So we've done some work with our employees to make sure we're supporting them. And those that were in fact it were continuing to bring all of our facility back up and and candidly they're they're running quite well now as you can imagine there's a lot of pent-up demand there was any way in a very very busy Mark. There're their role in their role and hot right now. It's fun.

Correct. Understood. I'll turn it over. Good luck through 2021.

Do we think it's going to last through 2021? Is that your question?

All I said was good luck as we move through the year. Oh, good luck. I apologize. Yeah. Thank you so much.

We'll take our next question from David man with beard, please go ahead.

All right, good morning everyone. So exciting to quarterly depreciation and amortization. I assume that most that resides in sg&a in your combined p&l. Is there a piece of that depreciation that resides in cost of goods sold first off?

There is a little bit. Yes. It's a beautiful to the manufacturing facilities and bigger than a breadbox less than 10% of it.

That's a great question. I don't I don't know if you've ever broken that out before I don't have it handy on me off.

Okay, I'm what I'm getting at here is I'm thinking about total sg&a with or without DNA as a fixed component of your operating expenses. Did you remind me this what percent of the combined company sg&a is fixed versus variable in the very short-term.

Yeah, we we generally talking about it is about 70% variable. So most of that cost moves with the increasing and decreasing volumes. It's a bath and that when we talk about the commodity influences component of growth, but certainly the the bulk of what we do is move by the Fall.

Okay, and DNA would be a portion of that 30%

Yes, yeah, as we finish the purchase accounting will have some update for you on on what the dollars are going to be in those buckets, but as it stands, that's still working, Okay, thank you. Yeah, we're just trying to work through the profile on this year, and then in terms of working capital is your goal still to remain in that twelve to thirteen percent of sales range and here too just to be clear. Could you give us how you define working capital for that calculation?

Yeah, so that's twelve to thirteen percent. It's not familiar to me. Maybe maybe that was on The BMC side that the number we've used in the past is closer to 8 to 9. That's a number of a glued receivable inventory and payables amount and obviously that's that's gone down over time and we'll move as we look at the valuation model in the current numbers, but this is a rule of thumb that 89% of the uh, as an incremental percentage VW sales is the right way to think about it.

Okay.

All right. Thank you very much guys. Good luck.

We'll take our next question from calling Verizon with Jeffrey's please go ahead.

Good morning. Thanks for taking my question. So I just wanted to start on the ebitda margin expansion the guidance implies about a hundred basis points and expansion. I was just telling them how this might show up on your P know we can gross profit or exiting a and just giving we're lovers now on the capturing the Synergy you can you just talk about the Cadence of this Improvement throughout the year.

Sure. Yeah, so the you know generally speaking we talked about the fall through on our incremental sales in that twelve to fifteen percent range. Obviously, you'll you'll see some movement that will go above or below that but that's a good rule of thumb for house our business grows over time. So that fall through is you see the expansion both move underlying volume and in the Commodities throughout the year this year will fall through and you'll see that gross margin then translate as we talk about the volume impact on sg&a will translate down into that fax number so you think about it more broadly. We like high prices as a distributor. This is certainly a very good season for us. If you will in terms of the prices, we're seeing and the growth The Leverage of odd business is quite strong as you can imagine. So that's the reason it's driving that fall through to those very high numbers. We also do expect to see an increase in wage.

Generation of synergies throughout the year as well as an increase in generation of productivity savings and improvements throughout the year. I don't know if I would say it's a straight line increase but for the purposes of this discussion, that's a reasonable way to look at it.

Okay, great. Thank you. And just on the longer price would be an all-time highs. There's been a lot of headlines just about the impact on home prices and the ability to buy her. She get appraisals. It took you to have an impact in the near-term. But have you heard from any of your customers that think could slow down as we start to look at like six months to a year if lumber prices don't normalize or do they just think that the low interest rates in New Jersey a line fundamentals in the industry from a demographic standpoint can really sustain this even in this high level price environment.

Yeah, I think it's far more the latter but the demand is so strong. The problem is our ability to build the homes of people want as an industry. So while there could be on the back on the edges some headwinds, but you know framing really isn't isn't the anywhere near an important part as important part of the cost of the home as many other factors. So sure there's a component they're dead receiving inflation and a couple of other areas that in the long-term may drive demand down but at this stage, I'm not sure what to be able to see it wage as time passed. I think we'll be able to fix some of the constraints in the industry that will normalize that as well with technical than feedback into a stronger demand profile as well.

Great.

Thank you for the color.

Thank you. We'll take our next question from Keith Hughes with truest please go ahead.

Thank you on the DNA estimate. You have 4 year at 5:40 to 5:50. How much of that is ideal amortization? How much of it is for traditional appreciation?

Yeah, well, I mean like I mentioned it's still a work in progress, but it's pretty substantial step up on the on the account as you can imagine right that'll burn off over 2 years, but as it relates to the valuation wage will do as part of that person County will see a pretty substantial Step Up.

Okay, and the this is sort of after earlier just wanted bear down a little bit more with the expansion. You have some performing numbers projected here for 21 you expect to see you. Margins up in every quarter or there with the comp in the fourth quarter. So it's not that we might see some degradation there.

Yeah, you know what? That's a fair question. We we do anticipate being increasingly difficult comparisons you get you're looking at the beginning of the year last year. Modest numbers across the board and by the end of the year looking at record Commodities record starts, you know, a lot of Records in there which has been pretty fun I can do but yeah, the the cost will get harder in the back half a year. The real question is what happens with commodities and starts, you know, there's the the numbers that we've got laid out here would indicate some popcorn things they elevated, you know able to figure it.

But overall the year looks great, you know a lot of confidence in both the overall industry and our performance.

Okay, thank you for all the performance numbers historically both of years and that's really helped out. That's all for me.

You're welcome. Thank you. We'll take our next question from Trey groups with Stevens, please go ahead good morning everyone and congrats to everybody on getting a deal done in chat on your retirement and best of best of luck to you. So on the first question that I have is you know, I know I know your mom died instead hasn't included historically haven't included any sales synergies, you know between the two companies but you know life the rollout of ready frame to two more branches more of the Builders FirstSource branches examples like that. You know, where where do you see potential opportunities for some benefits to the Top Line, you know sales synergies or whatever you want to call them, you know where you can benefit from the combined company just areas Thursday.

I know it doesn't you're not including it in the guide or

In the sanity guide but it seems like there could be some opportunities if you can just maybe update us on where where you think there might be some low-hanging fruit.

Yeah, thanks Keith. And as I mentioned we've got nine. Sorry about that. We got nine work streams on on our transaction here focus on integration and in one of the wage growth as you might expect and you know, we talked about ready frame, but we're seeing a lot of opportunities in as we talked about when we announced the deal, you know, one of the exciting Parts about the deal is the fact that we will offer a broader offering and even in the local markets where we're individually very strong, you know, one of the other Legacy companies might have been stronger in Newark versus components as we practised together, you know, we're very excited about having that full breadth of offerings across the footprint. So we're seeing a lot of opportunities like that in terms of you know, growth potential across our value-add investments. Yeah, there's several others, but it's early days, you know the teams working hard on it and we're very excited about it.

Okay. Thanks Dave. And then last one for me is you know, there's you mentioned, you know earlier in the comments that you know, there could be some inflation in in some other areas. And of course there's there's tightness in a lot of the different products out there outside of lumber and a lot of manufactures, you know of these products are are out with with price increases or wallboard interior doors and Roofing and insulation. How are you guys looking at the inflation outside of lumber for this year relative to you know, what we've seen in the last couple of you expect that to accelerate just walk you thinking in there.

We do there's certainly been enough increases across the board from different vendors that you know, I think to think otherwise would be misinformed. There are there are a lot of reasons for it. Some of it is inputs. You know, some of it is cost of doing business. The other is I think just for recognition that were were chasing an iceberg wrong number and capacity in the market is is struggling to keep up with people that are trying to balance that that price capacity, you know that price volumetric but it certainly is something that we I would say are happy about it's part of what we do we perform well in markets with strong pricing. So we're we are participating in that we're making a mistake disciplined about it communicating with our vendors where we think it's maybe out of line, but for the most part trying to be supportive to make sure we have an industry that that can grow and continue to prestige.

All right, cool. Thanks. And then last one sorry I said last one earlier.

Do you want to sneak one more and you guys, you know talk about commodity normalizing and in the back half, you know, and and you've got a range here with your ebitda range, you know with the margins there. How would that look? You know if this commodity is surprised everybody I say well maybe not everybody but most folks, you know, the way that Faith so its resilient stayed up the tire that has to be the winner and you know, and they had to accelerate it. So if we don't see if if the commodity doesn't normalize in the back half off, how does that change your outlook?

Detroit good and important question. Let me start and then I'll flip it over to computer. But but I think you know for a number of reasons. I think you know, the lumber questions here are starting to become less and less important especially in our combined company. You know, first of all is we talked about you know, we're both expert in in managing through the cycle. And as you heard of say earlier, you know, we're real confident in our ability that regardless of what the market froze froze Addis, you know, and a lot of things that we talked about that we're excited about here in having the largest footprint in our industry or product portfolio product of a graphical weeks with 550 locations $85 of the top 100 nsa's, you know, what importantly is you look at our Millwork and components business, you know, that's that's more than 5 billion numbers of the combined company revenues right now and they're the fastest-growing in the company so weak back to our strategy, you know, growing those value-added components will be an important part of how we roll.

Company and how we continue to improve profitability. Not that Lumber won't be an important part of what we do and it always will be but it's going to have less and less of an impact on what we do overtime. Right? And so I just bought it everybody's head calibrated. You know, that's one of the most exciting Parts about this merger, you know, and I would just say we've got to stop thinking about what we're building here as a lumber distributor, right? We are a growth company and a fast-growing one at that and I think you know time will prove that out as we as we go forward and and drive this growth in areas that are non commodity related the page. Yeah, no great point and and we're we do pretty well at Lumber to which is I think the right way to think about it, right? Maybe there should be the the core where we're headed. But we do we do well at it and destroy the answer on a question raise your right on it is going to be a really nice Tailwind if it stays High based on the guy that you were getting cuz the map will show right you got a first-half grow second half dead.

Edwin if you look at just the the math of the Commodities and then you take away the second half Edwin, that's a great story will look forward to enjoying that business if you're right. Thanks a lot guys. I appreciate the color. Good luck.

Thank you.

We'll take our next question from Ruben Garner with Benchmark Company, please go ahead.

Thank you. Good morning, everybody and and congrats on the the quarter and good luck. Enjoy your retirement at most of my questions have been answered. I guess that's one kind of more macro-level picture in the past few and see it has been one to highlight the the kind of falling footprint, you know, the size of homes that are being built whether it was because of new entry homes or just smaller homes in general and I think they've been some signs that that might be reversing. Are you guys seeing anything there what's kind of baked in your guide massage apologies, but any color you could do on that, that'd be great.

Yeah, we can tag team as I need you. Would you point out the room? And I mean the average square foot of the home has continued to fall and I think that's accelerated over the past couple of years just based on the entry level or above first time, you know, Step Up buyers. I think we're somewhere around twenty three hundred square feet at this point for the average home size. But as you've heard me saying Legacy DMC, I don't really get concerned about the side of the home as long as it continues to fuel growth right in the industry and I haven't met a start. I don't like yet at this point. So as long as that, you know holds up and continues to fuel growth. We're in control penetrate with our value-added offers. Yeah, and I think we're what you might be alluding to is the room or in the the Rumblings that people are that might turn right. We we received folks that are more committed to the homes that there were stuck in right so they liked it a little bit bigger than want that office where they can close the door for example, so there's I think reason to believe that we met

See the end of that shrinking of the home. I've seen it, you know no data yet, but I think it's reasonable to think that's a real thing and and that'll just sort of take away 1000 will have wings we were seeing in the industry and and Via stabilizing factor to date point though. We could still see an average decline just because I think the growth of the single-family starter home has been so strong which is great for us. Right? It's just the land for everybody.

Perfect. And then actually I might sneak one more in but the cash flow that you're generating obviously very strong and and the balance sheet is is in great shape. I think for some months earlier, but you just may be emphasized what you know, if you're not able to get enough guilt done, I guess as a use of cash what what you might do with the wage if you move forward you continue to build a a fortress or or do you think you'll get more aggressive in other ways to to either return cash to shareholders or investment in the business?

Yeah, we've got a really nice position. Like you said get the leverage ratio based metric is quite low. We're we feel very good about the strength. She tends to maintain that as a priority moving into the you know, the investment opportunities, you know, Dave alluded to it and I think we all feel good about it, you know as we get off cash generation point in our year Well gotten through a lot of the additional stress of the integration VSR position to to really be aggressive on some of those m&a opportunities that are out there really like the portfolio and think we have a lot of runway in front of us to consolidate the industry and you know the store the answer if for whatever reason all those things don't use up the cash. Yeah. The options are open, right you see both companies buy back shares in the past and we'll look at it. But right now we we feel like we've got the sites are full with great targets.

Perfect congrats again, and thanks for the detail.

We'll take our next question from J McMahon with with wedbush, please go ahead.

They get longer one Chad all the best. Enjoy your retirement repeater on the Peter on the lumber guidance. I'm just wondering are you guys thinking the revenues total revenues first half made should be a little bit higher this year than revenues in the second half of Wonder prices start to fall back down. And then also, are you hearing or seeing capacity increases or or or I guess capacity utilization getting better at your suppliers to have that kind of confidence for for luggage to be up 0 to 10% this year.

Yeah, I don't think that modern strong enough to excuse sales from second half. I mean, I mean second half store, please stronger so that she can seem to see that the answer on the wrong path City question. It's a good one. I mean I'm of two minds right on one hand some capacity coming online doesn't appear to be enough to walk to pull the rug out from under it. But the counter to that argument of sort of bullishness on prices is that historically this is not an industry that's helped write off. So, I don't know that I want to be the guy to put my foot down and say yeah this time it's different. I haven't seen any evidence to prove that. So we're going to continue to put that sort of modest for the reasonable number out there. And if it's better than I thought it would be good.

About it. And then the other question I had very strong results in multi-family quarter. But then you're you're calling from multi-family to be down in twenty one is what we do all this quarter just kind of finishing out some of those larger projects that were started in the nineteen and and that project activity is going to flow from here.

Yeah, I mean in Context multi-family about 6% of our business. So it's pretty specifically focused on certain geographies and certain projects. There is a month exactly what you described projects that sort of our concluding and the pipeline wall still good looks to be maybe not as much of a positive contributor as it worked last year's team really sort of did a really nice job of expanding the business and leveraging some of our capacity that that gets a little harder in this environment and we've all seen multi-family struggle that off so good about the business. We think there's still a growth opportunity there, but just sort of line of sight thinking of going to moderate this

Got it. Thanks for taking my questions.

Okay, next to Alex Regal would be Riley, please. Go ahead.

If you real quick question that relates to your free cash flow forecast, which is fantastic. How should we think about working capital changes relative to you know, the anticipation of places coming back down to sort of normalized levels. I guess the question here is how much could that be cash flow forecast vary depending on come on in places?

Yeah.

You know that that that's a great question. Umm, the short answer is our business being distribution based is going to generate a tremendous amount of cash as sales in Chrome and that includes the value of Commodities and any sales decline associated with them. So certainly do expect given our our stated belief or stated forecast rather that the bulb commodity prices are going to come down. There is a component that in there. It's unfortunately it's a little bit hard to put your finger on it. But to put it in context we talked about the increase in cap working capital usage in 2020 being about two hundred sixty million dollars in our in our prepared remarks. So just to kind of put it in context that that's directionally the types of numbers you'd expect to see when extrapolating that to the larger entity for a full switch back to sort of historical.

Thanks a lot.

Great. Thank you.

Thank you. We'll take our next question from Kurt hanger with d a Davidson please go ahead.

Great. Thank you and good morning, everyone.

Just went on on the capital spending side just talked about any kind of notable projects. You have slated for 20 21 here. And as you think about your capacity of present particularly on manufactured products, I'd how do you feel about your ability to supply increasing levels of demand as the market grows and perhaps those products continue to games options.

Yeah, I think you've been peeking into my office reviews. So that's a good one. We've got actually a lot of facilities around the country right now that are focused on meeting the in-home demand couple of factors there obviously hiring being an important one making sure we're running all the ships. We can utilizing equipment fully and in markets where even that's not enough money. I'm sure we're bringing in the increased capacity on equipment side that we need. So, you know, we we talked a little bit earlier about the ability and the willingness and desire to invest in organic growth for the month. The store the tip of the sphere right? It's how do you react to make sure you've got the right trust equipment door machine saws computer equipment to be able to chase that expanding use of value app while continuing your invest in you know, the trucks in the core operations that we need, but you you're a birth.

Be right where we're focused on making sure we're reacting in those markets that are that are white hot to have the capacity that we need and it's off the high-quality challenge right out of high quality problem.

All right. Thanks for the color Peter and good luck here in q1 guys.

We'll take our next question from Steven Ramsey with Thompson research group, please go ahead.

Hey, good morning. Everyone quick question on the margin guide. Maybe I'm misunderstanding. It looks like the high-end implies margins not stepping up with increased sales people matching the the high-end boat sales and even a guidance is that due to Lumber there any other factors they're driving that.

I don't know if I can point to a specific driver. I think you might be just seeing the impact of multiple variables in the high and low end of the range commodity is absolutely part of it off as is the growth of various regions and the variables we put around that so I don't know that I have a a hard answer for you.

Okay, great. And then one other thing not not trying to get into specific guidance, but just qualitatively starts time extending between starts. The completion wage. Is this factor into Revenue generation for twenty Twenty-One, but maybe help support demand out the 2022 at this this Dynamic control here.

That's right. Yeah, we you know, we generally tell everyone that the best proxy for our long-term growth is that single family starts metric and it's true the challenge with an extension of that bill cycle. You start to get a little bit of Wiggle, right? It doesn't look as clean and it's a little harder to draw the line. So we just wanted to point that out everybody to say it's still the right number but it will extend the time that will be able to enjoy the upside if that expansion of homes under construction continues out for a while. We actually think that's going to happen, you know, 2122 and then you know as things we expect continued to be strong that that gives us a nice run. So yeah.

Excellent. Thank questions, please. Go ahead.

Hi, thanks. Good morning guys. First question. I really appreciate your comments earlier about you know, overtime Lumber being, you know less important component. This is froze. But for I think for the time being it's still, you know, relatively important piece of the story. So my first question is on on Lumber and you know, just given the strength of Demands that we've seen from home builders as you're you know, you know writing fixed price contracts with the builders. Are you noticing the length of time that you're fixing lumber prices compressing 4th quarter and so far and 21

One of the things that has been a discussion in those fixed price contracts and the appropriateness of them in light of the market and market dynamics off. Our observation is those peer to be falling as a percentage of the total just given the way the market is evolved over the years. They're certainly something that way we manage very closely to make sure people are living up to their commitments where we live up to ours as a partner in this industry. We've got you know the financial wherewithal to do. What is right no matter what else would also making sure that both sides are living up to it. So that's something we're careful with but more broadly. It's about the relationship with the customer in working with them in a way. That's Obviously good for the End customer and mutually beneficial and you know watching the evolution of the industry. It appears that that is something that is declining overall, but still, you know an employer

material part of August

Okay. Got it. Second question is speaking into sales synergies a little more. You know, I guess one Dynamic that I've noticed in the field is that I'm a builder would buy like a a wall package Run DMC or b l t r i trust is from a different distributor. And with the combined company wage seen an ability. Are you able to take advantage after you going after you know the I guess the your your new ability to sell both on premium packages and trusses to home builders or do you think that's odd future opportunity for the combined company?

Well you rightfully point on. I mean it's early days, right but you know as we talked about that growth for extreme earlier, you know, we're excited about it. We see nothing is a deterrent in that, you know, we've not had pushed back an age where customers are equally excited about our combined offering and a lot of these markets and so, you know time will play out but we're excited to know roadblocks and we think the future is very bright to continue to age those markets with our offer.

Okay, great. Thanks so much for the time.

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session at this time. I turn the conference back to Chad Kroeger for an additional closing remarks.

Thank you. We appreciate everyone joining the call today and for the continued support of our company.

I'm personally looking forward to watching what this new management team and all of our incredible team members will accomplish in the years ahead as you heard throughout the call today. There's a lot of excitement about the future of our company.

I certainly share that excitement and truly believe BFF is in the strongest position is has ever been I'm proud to have been a part of this amazing journey over the past two decades. If you have any follow-up questions, please reach out to Peter or Mike. Thank you. Stay safe. And adios.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.