Q2 2023 Builders FirstSource Inc Earnings Call
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Good day and welcome to the builders first source second quarter 2023 earnings conference call.
Today's call is scheduled to last about one hour, including remarks by management and the question and answer session.
In order to ask a question. Please press the star key followed by the number one on your phone at any time during the call.
I'd now like to turn the call over to Mr. Michael Neese Senior Vice President Investor Relations for builders first source. Please go ahead Sir.
Thank you Angela good morning, and welcome to our second quarter earnings call.
With me on the call are Dave Rush, our CEO , Peter Jackson, our CFO .
Today, We will review our results for the second quarter of 2023.
The earnings press release, and Investor presentation are available on our website at investors <unk> com.
We will refer to several slides in the investor presentation during our call.
The results discussed today include GAAP and non-GAAP results adjusted for certain items.
We provide these non-GAAP results for informational purposes, and they should not be considered in isolation most directly comparable GAAP measures.
You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures, where applicable and a discussion of why we believe that can be useful to investors in our earnings press release, SEC filings and presentations.
Our remarks in the press release presentation and on this call contain forward looking and cautionary statements within the meaning of the private Securities Litigation Reform Act and projections of future results.
Please review the forward looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward looking statements and projections with that I'll turn the call over to David.
Mike Good morning, everyone and thanks for joining our call.
Entering 2019, 'twenty three we prepared for challenging and dynamic here during.
During the first half we had better than anticipated performance driven by the strength of our value added product portfolio continued outperformance in multi family and a more stable housing environment and originally projected multi.
Multifamily is an area, we identified as providing strong growth potential and end market diversification over the long term we are truly seeing the differentiated platform. We have put together over the past few years generate results.
We continue to exceed our near term targets through contributions from operational initiatives instilled over the last few years and by executing our strategic priorities, which is a testament to the unwavering commitment and dedication of our amazing team members.
We are focused on delivering exceptional customer service and always strive to be the easiest company in the industry to do business with.
We are driving mix improvement through value added share growth, while continuing to expand through tuck in acquisitions. Our acquisitions in recent years have allowed us to enhance our value added offerings and also extend our reach to a more diverse customer base in attractive markets. Moreover, these.
Acquisitions have proven to be immediately accretive to our earnings.
We continue to consistently generate robust free cash flow and prudently deploy capital.
<unk>, two tuck in acquisitions and repurchasing over $700 million of shares.
The second quarter alone.
Despite the headwinds posed by elevated mortgage rates and affordability challenges are resilient results in the first half of 2023 give us confidence that we have the right strategies in place with a customer centric approach and an incredible team that is executing at the highest level to successfully.
Navigate this dynamic economic environment.
Any single family builders are showing stabilizing demand, partially due to widespread shortages of existing homes for sale driving healthy new construction.
Public builders have been reporting this stream of stronger than expected results and taking proactive steps such as interest rate buy downs did help get prospective buyers off the sidelines with home prices normalizing that many places our focus on value added solutions digital innovations.
And customer service is helping builders improve their crop construction efficiencies.
We're helping our customers lower cycle times, which is highlighted by our continued improvement.
And in full deliveries from 93% last year to 96% during the second quarter.
On time and in full deliveries ensure our customers have the right material at the right time.
Looking at our second quarter highlights on slide four our gross margin percentage increased 40 basis points to 35, 2% due to stronger mix and value added products overall, largely driven by our multi family segment and the related positive impact from <unk>.
Cost timing.
We maintained a healthy double digit adjusted EBIT da margin showcasing our ability to execute effectively from an operations perspective, and a challenging environment.
This execution is a reflection of our talented field leadership team, which averages 30 plus years of industry experience.
Turning to slide five we drove strong productivity across the business by delivering $50 million in savings during the quarter.
Our BFS one team operating system continues to generate robust efficiencies focused on manufacturing and delivery improvements.
Our recent acquisitions and multifamily contributed an increase of 4% on the top line and 9% to EBITDA compared to the prior year quarter.
Multifamily was an exceptionally strong tailwind this quarter and we expect this strength to continue for the remainder of 2023.
While we expect multifamily to normalize around the first or second quarter of next year. We remain optimistic that single family starts will be on stronger footing in the same period compared to the first half of 2023.
As it relates to our cost structure controlling SG&A and other expenses remains a vital focus for US. This includes the ongoing optimization of our footprint and balancing the need for variable cost reductions against future capacity needs. We are focused on our discretionary spending.
And our team has done a great job of managing costs in the short term, while executing our strategy over the long term.
Turning to M&A on slide six we continue to target attractive opportunities with a disciplined approach thus.
Thus far in 2023, we've completed four deals and are still committed to our goal of invest in an average of $500 million in M&A per year for the next several years during the second quarter, we added millwork capabilities through the acquisitions of JV millwork and builders millwork supply.
And earlier this week, we acquired churches lumber, which expands our presence and scale in the Detroit market. We're excited to welcome our talented new team members to the BFS family.
Alright, M&A and organic investments have substantially increased our value added product mix and diversified our end market. Since Q4 2021 as shown on slide six.
We have seen the fruit of this growth in recent quarters, and we have driven our gross margins higher even in a down housing starts environment.
Moving to slide seven I would like to provide an update on capital allocation in the second quarter, we deployed over $850 million of capital towards organic growth investments.
In M&A and share repurchases, we have cumulatively deployed approximately five $3 billion since the end of 2021 and remain on track to achieve our 2025 goal of $7 billion to $10 billion communicated at our Investor day.
2021.
Yes.
Now, let's turn to slide eight for an update on our digital strategy.
We firmly believe our long term commitment to new digital innovations and technologies will deliver greater efficiency across homebuilding and enhance our product and service offerings. We continue to play a pioneering role in the digital transformation of the homebuilding industry and they have made a significant.
<unk> investment in growing our digital platform we.
We have made it a priority to ensure digital adoption is integrated across our operations as we seek to create a platform that will lead to building better more affordable homes.
B L D. Our dot com serves as the entry point to our collaborative project management platform. It is designed to create efficiency for both PFS and our customers by offering improved transparency and engagement in the homebuilding process.
It combines paradigms next generation estimating technology with our three D home configuration model together these tools allow our customers more control over their design cost estimating and building process ultimately say with both our customer.
And their clients time and money.
We are still in early innings and have more to come as we continue to roll out. These digital solutions to our end users, but we remain confident in our ability to gain an incremental $1 billion in product sales by 2026.
We believe our sustained commitment to investing in digital innovations and technologies will extend BFS is lead as the partner of choice in the market and we look forward to providing more detail on our long term strategy at our Investor day in December .
Before I turn the call over to Peter I want to say, how grateful I am to our team members for continuing to execute in a challenging environment and providing excellent service to our customers on a daily basis.
BFS, we can we keep our high performing people first culture at the heart of all we do that's why we like to recognize team members an organization that embody the true spirit of our beam, where do more build more together philosophy, Carla who there is an inventory control supervisor in Houston.
Texas, who has made a huge impression on her managers and colleagues in May She was honored as one of our first team indeed piece for exemplifying our core values.
<unk> attitude positive attitude her willingness to jump in and help her pursuit of excellence really makes a difference on the team.
For the Supervisors appreciate how she embraces learning new skills, and mentoring others, especially young women due to our industry and quite ploys like Pearl. It made me proud to lead this great organization without the full effort of our team we would not have had the outperformance that we achieved during the first half.
This year.
Now I'll turn the call over to Peter to discuss our second quarter financial results in greater detail.
Thank you, Dave and good morning, everyone.
Our performance during the quarter further highlighted the resilience of our business in the face of macro pressures I'm, particularly proud of our gross margin results driven by our increased mix of value added products and services.
We are well positioned in the marketplace with differentiated solutions and a healthy balance sheet.
We continue to generate robust free cash flow and prudently deploy capital.
I am confident that the combination of our industry, leading scale ongoing investments in value added and digital products and strong financial position will lead to a double digit adjusted EBITDA margin this year.
<unk> growth in the years to come.
I will cover three topics with you this morning.
First I'll recap our second quarter results second I'll provide an update on capital deployment and finally I'll discuss our full year 2023 guidance.
Let's begin by reviewing our second quarter performance on slide 10.
We delivered $4 $5 billion in net sales core organic sales decreased by 22%, which was better than expected. Despite a 31% decline in single family due to slower demand over the prior year.
Multifamily continues to be a bright spot growing by nearly 30%.
Dave mentioned the strength in multifamily was driven by our recent acquisitions as well as favorable margins largely attributable to the longer lead time for this end market.
R&R and other grew by nearly 5% mainly due to increased sales focus and capacity versus the prior year.
The cumulative effect of our acquisitions over the past year contributed approximately four percentage points of growth to net sales.
Importantly value added products represented 53% of our net sales this quarter versus 45% in the fourth quarter of 2021.
<unk>, our improving position as the supplier of choice for these higher margin products.
During the second quarter gross profit was $1 6 billion, a decrease of 33, 9% compared to the prior year period.
Gross margin increased 40 basis points to 35, 2% driven primarily by a stronger mix and value added products overall and with particular strength in multifamily value at.
SG&A decreased $28 million to 1.02 billion, mainly due to lower variable compensation, partially offset by additional expenses from operations acquired in the last year.
Acquisitions increased SG&A by $52 million in the quarter.
As a percentage of net sales total SG&A increased by 740 basis points to 22, 5% primarily attributable to decreased leverage on net sales, we remain focused on operating efficiently containing costs and effectively integrating operations and acquisitions.
Adjusted EBITDA was approximately $769 million a decline of 49% primarily driven by lower net sales, including a decline in core organic products attributable to a slower housing market and commodity deflation.
Adjusted EBITDA margin remained a robust 17% up 70 basis points sequentially as we continue to execute and drive improved productivity across the business.
Adjusted net income was $498 million down from an adjusted net income of $1.07 billion in the prior year quarter.
The 54% decrease in adjusted net income was primarily driven by a decrease in sales volumes and commodity deflation.
Adjusted earnings per diluted share were $3 89 <unk>.
Compared to $6 26 in the prior year period.
The decrease in adjusted EPS was partially offset by our repurchase of nearly 7 million shares which added roughly <unk> 20 per share during the quarter.
Our second quarter results exceeded the guidance, we provided in may supported by our core business mix and gross margin strength amid outperformance and value added products.
We continue to gain confidence in the strength.
Our ability of our margin performance and we believe our long term normalized gross margin percentage is now at 29% plus versus our previous expectation of 28% plus.
Now, let's turn to our cash flow balance sheet and liquidity on slide 12.
Our second quarter operating cash flow was approximately $391 million down $556 million.
Compared to the prior year period, mainly attributable to commodity deflation and a reduction in single family starts.
Capital expenditures were $121 million all in we delivered healthy free cash flow of approximately $270 million.
The trailing 12 months ended June 30th our free cash flow yield was 17, 7% while operating cash flow return on invested capital was 41, 4%.
Our net debt to adjusted EBITDA ratio was approximately one one times while base business leverage was one six times.
Excluding our ABL, we have no long term debt maturities until 2030.
Quarter end, our total liquidity was approximately $900 million.
Consisting of $800 billion in net borrowing availability under the revolving credit facility and $100 million of cash on hand.
Moving to capital deployment.
During the second quarter, we repurchased approximately 7 million shares for 723.
At an average stock price $103 68 per share.
In total we have repurchased approximately 41% of our outstanding shares since August of 2021.
We have approximately $600 million remaining on our most recent $1 billion share repurchase authorization from April 2023.
We remain disciplined stewards of capital and we will continue to look for organic and inorganic growth opportunities, while maintaining our fortress balance sheet.
Let's turn to our outlook on slide 14.
Our July sales trends are encouraging and fuel our confidence in the resilience of our industry.
All of our national customers have begun to provide full year guidance, providing us with better visibility and greater confidence in the strength of the market.
As a result, we are establishing our full year base business and total company guidance as we enter the back half of 2023.
Our base business approach showcases the underlying strength and profitability of our company by normalizing for commodity volatility.
As a reminder, our base business definition assumes normalized margins and static commodity prices at $400 per thousand board.
This is helpful to clearly assess the core aspects of the business, where we have focused our attention to drive sustainable outperformance in our industry.
Our base business guide on net sales of $16 $6 billion, our base business EBITDA Guide is $2 2 billion at a margin of roughly 13, 3%.
At this time, we are also providing total company guidance for full year 2023, including total net sales gross margins adjusted EBITDA and adjusted EBITDA margin.
For full year 2023, we expect total company net sales to be 16.8 to $17 $8 billion, we expect.
Adjusted EBITDA to be two six to $2 9 billion.
<unk> EBITDA margin is forecasted to be 15% to 17%.
And we are guiding gross margins to a range of 33% to 35%.
Our recent above normal margins reflect a greater mix and value added products, along with disciplined pricing required to offset our increases in operating costs from inflation.
As we move through the second half of the year, we expect both our gross margins and multifamily business to continue to normalize.
We expect full year 2023 free cash flow of 162 billion.
Our free cash flow forecast assumes average commodity prices in the range of 400 to $450.
Our 2023 outlook is based on several assumptions. Please refer to our earnings release and slide 15 of the Investor presentation for a full list of these assumptions.
As I wrap up I want to reiterate that we are exceptionally well positioned to drive our strategic goals.
Our guidance illustrates our belief that we will deliver a double digit adjusted EBITDA margin this year and sustain that momentum in the years to come.
As we continue to reap the benefits of our transformed business. We are positioned to achieve an upwardly revised long term normalized gross margin of 29% or higher.
I'm confident that our best in class operating platform will continue to generate substantial free cash flow, providing further financial flexibility on top of our already healthy balance sheet.
Importantly, we will continue.
We generally deploy capital and maximize long term shareholder value.
With that let me turn the call back over to Dave for some final thoughts.
Thanks Peter.
Let me close by saying that we feel better about the current building environment today than we did at the beginning of the year, we're executing our strategy and continuing to invest to drive future growth.
Our results in the first half reflect our hard work over the past few years to build a differentiated platform that has BFS set up to win in any environment.
I am proud of our operational excellence, which is driving increased safety productivity and profitability. Despite market headwinds we are in great position today and as end markets. Further stabilized we are positioned for an even stronger future.
We will continue to be at the forefront of technology with our digital strategy, which I'm confident will be a game changer for the industry. We are exceptionally well positioned to drive shareholder value. This year and in years to come I'm excited to share more details at our upcoming Investor day on December 5th in Atlanta and.
Look forward to seeing you there. Thank you again for joining us today operator, let's please open the call now for questions.
At this time, if you would like to ask a question. Please press star one on your Touchtone phone.
Remove yourself from the queue at any time by pressing star one.
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Our first question today comes from Matthew <unk> with Barclays. Please go ahead.
Good morning, everyone. Thanks for taking the questions and congrats on the results.
I'll start with a question on the long term gross margin guide, which you've now raised.
Twice consecutively. So my question is what what's changed in the past 90 days Thats kind of giving you that incremental confidence and then of course to take another step forward given your gross margin of 33 to 35. This year what are what are the signs you'd be looking for.
To kind of give it give you step in our confidence in yet another step higher from that 29%.
So I'll pause there that's the first question.
Well first of all thanks, Matt appreciate it we're excited about the business and certainly pleased with the way gross margins have been continuing to evolve.
We've talked about it for.
Well a couple of years now actually.
The strength of the core business, particularly post merger and what we've been able to do to grow value add mix of our business has been very impactful and what we've continued to look for particularly particularly this year is the normalization right with the supply chain getting back.
To normal.
The reset the level of starts we were really.
Concerns about what that would mean in terms of the overall market's ability to state sustained margins.
We were alone in that.
What we look for this year is the performance.
Being at a stable level and while we're not quite there yet we have certainly seen stability be established in a lot of parts of the market lot of regions a lot of product categories, where we've seen things sort of get to normal and level out.
When we when we talk about gross margins it can be a little bit misleading.
This quarter, we saw a substantial tailwind due to multifamily what I would describe as sort of transitory tailwind.
At least a couple of hundred basis points. This quarter was really just due to the way the commodity timing.
The cost of commodities played out versus some of our contracts.
We're pleased with it obviously, we'll take it but.
But we don't want to signal to anybody that that's permanent and we still are have certain areas of the market, where things continue to normalize and we're not quite sure where things will end up but we know the pressure is down we've certainly seen that we're up 40 bps.
Overall on gross margins, but certainly that indicates if you take out multifamily some pretty decent step down in the core that's what we thought was going to happen and that's pretty much. How it's played out and we will continue to look for that but even with all of that said.
It's better than we expected we certainly have gained a lot of confidence in the strength of our business. The strength of the value add which continues to be really really desirable for our builder customers in and we're continuing to invest in it and feel good about what that means for normal margins going forward. We will continue to monitor it I mean, we've left the philosophy.
And because we think obviously, we are performing better than that now and we're just going to wait and see where things normalize over time.
Hey, Matt. Thanks again this is Dave I would just add you know.
Since the merger with BMC, we've invested over $100 million in.
Upgrading and automating our manufacturing capabilities and we're starting to see the fruits of that and we're getting a better feel of how that's going to contribute to.
Margins over the longer period as well.
Got it thanks, guys for that comprehensive answer very helpful. So I.
I guess some of what you mentioned Peter on the multifamily side. It is going to address this next question.
Zooming into the base business.
You know it looks like Youre, saying Theres I don't know.
Maybe some rounding but roughly $600 million of earnings above the base this year.
How much of that is that multifamily commodity cost timing.
Other commodity maybe OSB.
And could you break down if there's anything else in there besides commodity that's kind of above the base business. Thank you.
Yeah No. Good question, Matt So just.
Basic reminder, the base business is really just trying to take out any commodity fluctuation in two ways right anything thats not $400 lumber, we normalized for and we also normalized for margins attributable to those same commodities. So we don't normalize for margins anywhere else, but it does.
Have the impact within that 600 that you mentioned and yes, there is some rounding.
Within that 600 that you mentioned that's attributable to margins and this particular year, it's mostly markets. So the vast majority of what has slowed through used a normalization of those outperforming margins over the course of the year. There was certainly a component of that that is from the multifamily.
Right says because a piece of the commodity flows into our manufactured products, including.
Roof and floor trusses as well as wall panels, which obviously have a significant component of commodity interim so.
So we take an adjustment for that so that that is the primary draw.
Driver is the margins attributable to.
The commodity change this year.
Got it alright, well. Thank you Peter Thanks, David Good luck guys.
Thanks, Tom.
The next question comes from Trey Grooms with Stephens. Please go ahead.
Hey, good morning, everyone and.
Echo.
Grant's on the outstanding work in the quarter.
Thanks Ray appreciate it sure.
On multifamily I think you mentioned that you expect that to remain strong through this year.
So are you seeing anything in your backlog or hearing anything from your customers about their backlogs in multifamily debt that would suggest that this slowdown is kind of coming around that time or or anything on the timing there or is that more just kind of a.
Kind of high level expectation at this point.
Hey, Trey. Thanks, Yes, we are seeing evidence from our customers that at the tail end of this year theres going to be a lot of supply that comes online.
All in around the same time and that in a typical year with the half to be digested before a lot of these other new projects come online. That's one factor. The other factor is the cost of capital and being able to make sure that the rents that theyre going to generate versus the cost of capital that equation has to work out exactly.
As well and until some of that backlog or does some of that glut of openings that comes online at the end of the year. It gets digested those kind of dynamics have a little bit of time to work themselves out.
So what we're hearing is there might be a little bit of a delay in the first and second quarter and then things start picking back up again the problem as you know as these projects are so long.
Time from plan to execution.
That we feel like there's going to be a lag in the first half of next year, but overall, we believe multifamily will be a great segment for us to be in and it will be a temporary scenario not necessarily something long term that we got to worry about.
Alright got it okay.
And then Peter you mentioned Youre expecting gross margins to moderate through the year, sorry, if I missed this.
But you are calling out 33% to 35%.
For the year, you've been running at the 35% range. So are you are you seeing any change or.
Any more normalization in the margin thus far in the third quarter or is it still kind of holding in at the high end of the range for now.
Yes, no. Good question. So we continue to see it.
Again, it goes to the countervailing.
Trends, we continue to see some erosion in the core market gross margin less than we expected, but it has continued and I think we will continue to see that through the back half of this year and then we know pretty reasonable with pretty reasonable accuracy, how multifamily will play out just because.
Because of the timing of the contracts that were related to the current purchase price of commodities and kind of where we're at so we've got a pretty decent look.
Certainly there is there has been.
Good performance in gross margins throughout the year and I think July is significantly different but the trends remain the same with the overlay of.
Multifamily is normalization being pretty significant over the next year.
Great. Thank you if I could sneak one more oriented a little bit more higher level.
$100 billion or so invested in automation over the last few years, which you said is bearing fruit, which is pretty clear.
Are you in that process or maybe how should we think about that.
The amount of plants that you have that you would classify as automated.
Where would you like that to be kind of over time.
Yes, I would tell you we feel really good about the level of automation, we have where every plant has some level of automation, obviously, there's more opportunity.
And we have a pretty long runway there to continue to improve and we're excited about that prioritizing those projects.
And as you know as we do acquisitions typically.
There is some there is a level of automation that we go back in and upgrade those acquisitions with and will have that plan ongoing.
We are a good customer for our automation vendor and as much as we're always excited about talking about digital we're also on our front.
Okay, and this manufacturing space as well so yes, we're excited about where this can continue to go.
Thanks for taking the questions and good luck with the rest of quarter.
Thanks.
The next question comes from Cotton Man Torah with BMO capital markets. Please go ahead.
Thank you and congrats on a strong quarter.
Couple of things I'm, just curious one now.
How do you.
What does the M&A pipeline looking at this point and given follow up you know housing is holding better than what people expected at the start of Dr has there been any change.
<unk>.
Your approach to M&A are seller expectations.
Thanks for the question Yeah. The M&A pipeline actually has improved I think just be.
The fact that things were changing that at the beginning of the year and people weren't sure exactly how the year was going to play out kept people on the sidelines for the first half we're seeing more opportunities now in the second half in the couple that we feel like are really good to look at.
And.
We're excited about how we will continue to invest in M&A in the future.
Got it.
And is it possible at all.
Peter you talked about sort of July has started off quite that is there any way to start off now quantified what the July trend has been like even relative to sort of Q2.
Or maybe year over year.
Yeah.
It's been a.
I don't know how to describe it other than refreshing year.
For all of the concerns that we came into the year with.
Due to interest rates due to affordability. It has been a surprisingly and refreshingly normal year, we see good progression throughout the year.
The normal seasonality that we would expect to see with this year months in the summer we see good utilization of our <unk>.
Our capacity nothing's been overwhelmed we've gotten quite busy in certain areas, but nothing has been catastrophic like during the big run around Covid same on behalf of our vendors they perform better.
Well you spots here and there where it's gotten a little tight but by and large the market is has adjusted to the new volumes and.
No really sold through quite well and as we alluded to with our customer base. There is confidence and a lot of areas with regard to how consistently they have been able to sell through what they've been building.
It seems pretty obvious that the demand is still out there and wood.
With the reluctance to move out it isn't an existing home new construction has really been a bright spot and we're excited to be leaning into that quite well.
That's helpful perspective, I will jump back in the queue. Good luck in the back half.
Thank you.
The next question comes from Adam Baumgarten with Zelman <unk> Associates. Please go ahead.
Hey, good morning, guys great results.
Just a question on the environment, but with the ramping starting scene.
Year to date, you hearing about any supply chain strains.
Because you guys, specifically, but for the industry or maybe even.
Essentially and construction cycle times from the builders.
Yes, I think the supply chain has normalized to a great extent I think Bert when you saw the COVID-19 related.
We're not seeing anything of that magnitude out there. There is a couple of product categories, where lead times are or slightly.
Lee extended premium Windows as I think as an example, but.
Still things are normalizing now.
With the uptick in demand that there is some adjustments by a lot of our vendor partners on staffing and getting staff back up to the new normal of demand, but those look to be very temporary and very slight so I would say all in all from a supply chain perspective, we're in.
Pretty good shape.
Okay got it good to hear.
And then just.
You can give us an R&R business I think you had mentioned increased capacity being Tamil and maybe just some more color around that and then also were there any product categories that really stood out as particularly strong in the R&R channel.
Quarter.
Yes, so R&R the way we service our R&R there are a few markets, where we're very focused on it.
With specific case, but.
Part we serve both the.
Pro new construction and the pro R&R markets through the same channel. So you end up with certain timelines, where you've got pretty heavy demand from one or the other and obviously over the past couple of years. The bulk of it is comp from the new construction side. So we've pulled back a bit that just opened.
Up more capacity.
Pro R&R business and said in the past the pro R&R.
Contractor would generally prefer to use us if were available because of all the incremental services and expertise we provide versus a traditional big box or a smaller player.
The categories of product categories.
Say, we performed well.
<unk>.
Cross the outline of prop.
<unk> family of products within pro R&R I would say just stepping back for the whole business. We've continued to see really nice performance in the windows doors and millwork category, that's been an outperformer for us all year and we're pretty excited about that.
Got it that's helpful Best of luck.
Thank you.
Okay.
The next question comes from Mike Dahl with RBC capital markets. Please go ahead.
Good morning, Nice results, thanks for taking my questions.
Good morning, My first question.
First question is kind of back on the multifamily side, obviously, there's been a few big moving pieces you've made some investments.
Investments, both organically and Inorganically in that space, and then multifamily as a mix of presented.
The overall market.
<unk> has increased.
You have the permit activity, that's now dropping off and you alluded to some normalization.
Multifamily I think sales not just margins looking out to next year, maybe can you help kind of quantify what you think has been.
Internal versus market shifts and I don't know if its best framed as.
What you think your new normal.
Mix of multifamily would be when you sort through kind of the ebbs and flows and maybe a little more quantification there Tyler.
Yeah, Yeah No. Your point is right on we've had a lot of change in that multifamily category. We've invested a lot and we've been very successful even in the core business in terms of how we've competed in the marketplace I think that the.
The overall impact of our kind of leaning into this has been.
A big change in the market and a big change for us. So it's increase that multifamily mix, but its a mix that's attributable largely to trust right. So we're not in skyscrapers we're not in.
Shopping malls or certain large scale apart comps.
Complex is right we're in four story and below wood frame.
<unk>, that's sort of our operating arena in our sweet spot that has been doing remarkably well and I think we have been able to.
Improve our positioning in the market and be seen as a serious reliable competitor. We've got the ability to withstand sort of ebbs and flows we can be counted on to deliver even if there are some capacity constraints versus through our network of facilities around the country. So we do think.
We've gained share we do we know we bought share.
And we think that that is all sort of come together to really give us some nice momentum and that momentum is true even though we're really in the middle of integration. So this is still early days for us in terms of getting all of those teams to work together. So we're really excited about what the future holds now you are right about the reset we think that as we.
Get into it.
Back half of next year, when we see things normalize maybe beyond that it's probably closer to 10% Directionally, we'll dial that in for you, but it's probably 10% of sales in an environment like we're in today in a normal world.
Yes, I would just add.
We were purposeful when we added that acquisition.
Entrants into that multifamily segment, knowing that it would be a diversification play from single family and vice versa. So what.
What we're expecting is as multifamily normalizes, we're expecting single family to remain on stable footing. In addition in the trusts world what makes it so.
Such a good investment for US is we can run single family jobs out of our multi family Trust plant. So we do that today. When we have multifamily plants that are maxed out we run multifamily jobs out of our single family plans and vice versa.
When each side has more work than they have capacity so.
We've got a plan in place to manage through all ebbs and flows of both sides of those businesses and we did so intentionally.
Got it okay. That's very helpful. Thank you and then my second question.
You spent a lot of time kind of dissecting the margins maybe at a high level just.
Between commodities coming into multifamily.
Lags.
You're now talking about the 29 plus on normal can you just kind of help us simplify this at a high level in terms of margin differentials.
By not necessarily every product category about high liability, just where do you think your new value add margin will be is it kind of like a low 30 as value add and a 20 on number or just what's kind of driving at.
At a high level that the blended 29.
Yeah.
So if you think about.
The historical kind of guidance is that we've had.
We were running.
We were running gross margins kind of 25% to 27, we talked about how the commodities were generally kind of.
High teens to low twenties for gross margins, we talked about how.
Value add was 800 to 1000 basis points higher than that.
I would tell you kind of where we are today with some of the noise.
In it we are substantially higher than that on the value add.
But we've also seen sort of increases across the board.
The increases across the board, we talked about a lot just to reiterate we've seen some inflation right. So if the cost of delivery is higher the margins need to be higher in order to pay for the increased costs. So we've seen some incremental.
Margin increase across the board to cover that and then the two things that have impacted the most as you have seen increased productivity.
And.
What we've talked about in multifamily some displacement, causing the margins to be higher full stop.
And <unk> seen overall, a pretty substantial mix shift away from the commodity side of the business, which used to be half of what we did back in the old days to closer to 25 third point.
25% to a third of our business now.
That has allowed that normalized gross margin to really drift further and further up the more our mix swings so sort of all of those components are feeding in the productivity the inflation the overall mix shift.
<unk> allow us to see that higher amount, but again going from $35 34 for the full year is what were.
What we're signaling right at the midpoint.
Down to the 29 plus that is the multifamily that is the continued normalization and we're going to continue to watch that play out and we will dial in that guidance as we get more confident.
Great Alright, thanks, Peter they say.
Thank you.
The next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Hi, Good morning wanted to continue the base EBITDA conversation along with the productivity from connecting the dots Youre seeing this year sales and base EBITDA go down 100 million each and then the productivity savings midpoint is $130 million.
Backing out that midpoint of savings decremental margins look like a low 20% range. If my math is correct.
With the productivity flow against the dollar level of productivity in future years going to be.
As strong as this year.
Well it certainly what we're shooting for.
Internally, we have a lot of projects that we think we can leverage to continue to improve our operations continue to offset the impacts of inflation.
Yes.
Whether it be the way, we buy what we buy how we deliver it how we process. It internally back office. Those are all things that we're pretty confident that we can continue to improve and those are the goals we're setting for ourselves.
Well every year be exactly this year, a better well, we will see but certainly where we're headed.
We believe there is a huge opportunity there given our platform of 570, plus locations and our ability to take best practices from.
We're a product of.
Multiple acquisitions, and we've learned how to take the best practices from one of those acquisitions and leverage that across the platform.
We built a continuous improvement culture, we have people dedicated to it and each of our divisions for that very purpose because we believe.
The part the benefit of our scale is to be able to.
Do it the best way across.
570 locations versus just in one area or one market. So we're confident that we can achieve at the current levels of continuous improvement that we've set for ourselves each year.
Sure.
One period in the future.
Okay helpful and then to make sure on the productivity savings how much of that is coming from the distribution side of the business how much of that is more on the manufacturing side and maybe how much of that is automation driven versus other general improvements.
Yes.
Probably half and half in terms of what we're getting on.
Towards the inbound versus the operating sides.
We're doing a lot in both its a bunch of individual projects that sort of accumulate to contribute but directionally, it's probably right.
Helpful. Thank you.
Thank you Justin.
The next question comes from Joe <unk> with Deutsche Bank. Please go ahead.
Thanks, and good morning, everybody.
Just wanted to just based on the visibility you might have into your inventory and your multifamily backlog for this quarter.
Maybe any help on the phasing of the gross margin and even just the overall sales and EBITDA third quarter versus fourth quarter.
Well I think normally we would perform.
A bit lower in the fourth quarter, just as a seasonal representation Qs two and three are always better than Qs one and four.
This year I think is based on what I said before we think it's likely to be more normal. So we would expect Q4 to be a bit weaker.
Certainly as always that's the weaker part of my forecasting confidence is one quarter out we feel pretty good two quarters out gets a little more murky. So.
The right way to think about it.
Understood and then on the inventory balance that's come down as commodity costs have come down and roll through the P&L, but is there additional productivity youre looking to gain on the inventory balances or given what we've seen in the market could we actually see it go the other way, where you're preparing I guess for a stronger <unk>.
In 2020 for making sure that you have inventory on hand to service the market.
Yeah, probably more the latter so I'll start by saying your observation is absolutely correct. We've had great performance operating teams have done a fantastic job of sort of continuing to clean up post the.
The craziness of the supply chain over the last couple of years clearing out.
Excess that we feel we had on hand, tightening up whether it be windows or millwork or whatever.
The teams have done a great job of really managing on in a very streamlined just in time way the inventory that we've got rolling in and out of our facilities.
But you're right when we grow.
Absolutely have more working capital inventory included so.
Coming into the future, where we do see at least based on what we're seeing right now growth on the horizon, We would expect working capital to stop being a tailwind and start being usage into background.
Alright, Thanks, Peter take care everyone.
Thanks, Joe.
The next question comes from Collyn boron with Jefferies. Please go ahead.
Hey, good morning, and thank you for taking my questions.
You highlighted the acceleration in orders from the public builders and the census Bureau data really bouncing off the bottom here I was just hoping you guys could talk about any differences you're seeing between your customers. The large production builders and the smaller builders and then comment on this at this point do you see the bottom in single family being behind the LDR at this point.
<unk> from a single family sales perspective.
Well, we were certainly really encouraged by both the results that are public builders were reporting and.
Even more about the projections for the rest of the year. So we feel really confident that again I'm not calling this robust, but it's certainly better than everyone expected.
For the second half of the year and stable to up.
Over the back half of the year.
And that gave us the confidence we have for being able to project what we feel like we can do in that environment.
Great. That's helpful. And then you guys provided some good color on the digital adoption, providing some take all figures can you just quantify those maybe in terms of revenues and talk about where you guys are in your journey in reaching that $1 billion sales opportunity.
Yes, we're excited about digital it's continuing to move along the technology is coming together the pilots are going well and given sort of a few hints about some metrics and what that looks like internally.
But it's all very very early days to be honest, we've got some revenue, but it's pretty modest it's not the focus the focus is not really growing that right. Now. It's tuning is completing the technology tuning what we have built making sure. The technology is sort of stable and capable of running at the scale that we intend to put through it.
That's this year's goal.
We're certainly expecting pretty significant increases in 'twenty four and beyond.
It will have some more information on the timing of that and the layout of that as we get into our Investor day in December .
Great. Thanks for the color and good luck.
Great. Thanks, Tom.
The next question comes from Reuben Garner with the benchmark company. Please go ahead.
Thanks, Good morning, everybody and congrats again on the strong quarter.
Yes.
Some connect connection issues earlier.
Repeat anything sorry in advance, but first question is on inventory can you talk about where your inventory stands from a volume perspective relative to kind of historically normal times, we've heard from both the kind of two step distributors and some manufacturers that the dealer channel is kind of.
Then and hesitant to add I'm just curious how you guys are viewing viewing.
Inventory is that something where youre stocking and it's an advantage you have product over some of your smaller peers or are the folks that are running thinner than usual.
I would say, we're running normal right I think.
Not seeing the same kind of supply challenges. We did just after COVID-19, it's more of a normal operating environment. Our guys have done an unbelievable job coming through that and getting back to normal for us.
Where we would be normally.
Just seasonal fluctuations now so we will see a buildup of inventory during the third quarter.
It'll start to wane in the fourth quarter as we head into <unk>.
The seasonal months.
But.
Sure.
Business as usual at this point.
Okay, Great and then I'm not sure. If this one was asked but.
And updated way to think about sensitivity to lumber and then you've got the base business number out there but.
We're continuing to run $100 higher.
How much of an impact does that have on revenue and profit.
Yes, that's a good question Reuben.
You may have noticed we brought back the base business guidance.
But we did not bring back that sensitivity chart in the back candidly I think that cost as much confusion as clarity. So we're going to try a different approach.
What I can tell you and this is really based on what we're seeing today.
If lumber goes up or down by $100 a thousand we think its worth between 175 $225 million.
Annual EBITDA.
So.
<unk> 200 is the midpoint.
It's in that range, but there are two things that I need you to just keep in mind right. There are a number of assumptions that go into that type of a rule of thumb metric. The two most important or one that's assuming normalized margins.
So it's a normalized margin impact of that up and down specific to commodities and then please keep in mind. It takes three four months, sometimes a little bit longer of lag before that change in commodity will show up in our results right and you think about the inventory on the ground the order time to do.
<unk> and then the pricing change impact as that flows through so.
Just keep in mind those too.
Assumptions are very critical to that.
Rule of thumb, but again 100 dollar lumber worth between 175 and $225 million of annual EBIT.
And a quick clarification, Peter is that lumber and OSB.
Altogether commodity.
Correct, and we assume a 70 30 lumber OSB mix.
Perfect.
Very helpful. Thanks, guys and congrats again and good luck on down the rest of the year.
Sure.
The next question comes from Kurt Yinger with D. A Davidson. Please go ahead.
Great. Thanks, and good morning, everyone.
Just given the strength and value add and what you've talked about in terms of I guess, the widening kind of margin differential versus traditional distributor products are you seeing competitors I guess to invest behind the category to a greater extent or lean in more there and I guess over the long term how do you think about.
Your ability to kind of differentiate.
With some of those solutions.
Yes, I think.
We are the clear leader in this space first of all and.
We have made the most.
We've put the most emphasis on finding ways to increase our productivity specifically in our manufacturing trust and door shops.
To extend that lead we believe the investment required to do those type of improvements is not insignificant.
And where we believe our commitment to US has made a difference.
We see that in the marketplace, we especially saw it coming out of Covid, where it was tough.
For people to find.
Just trust manufacturer that wasn't that didn't have a significant backlog and people had to pick and choose who they wanted to do business with and we saw were our customers.
Wanted to do business with us in that environment. So we feel good about our position.
I think anywhere where you see opportunity people are going to make investment I. Just think we've got such a nice lead on our competition today, it will be tough for us for them to catch us.
Got it okay. That's helpful.
And then just second I was hoping you could just kind of frame.
How you would characterize your volume performance over the first half.
Relative to what we've seen on the single family start side.
And manufactured products as well I mean, it seems like the core organic sales there trailed single family starts a bit curious if thats footprint, maybe some pricing in there.
Just how you kind of reconcile those different data points.
Yeah, No. That's a fair question, it's something we look at pretty regularly as you know.
What I think it boils down to most simply is.
Starts are the best indicator and the best sort of measuring stick for our performance over time.
I don't think its accurate at a quarter and what we've seen is sort of as the market turned down we didn't go down as much as the market as the market has turned up we haven't gone up as much as the market and there is there is a little bit of product mix to deal with that right. We've said in the past we're probably two.
Thirds, that's leveraged towards the beginning of the start one third towards the end of the start so that's one piece.
Another of it is that we're probably not at the start but we know we're not at the start we're anywhere from 30, sometimes 60 days later when our first product starts to hit the job site, so little bit of shifting around that in terms of timing of when our orders hit.
Based on the trends, we're seeing right now we feel pretty good.
We may have given up a little bit of share in our estimation.
Couple of hundred million dollars worth we talked a lot during the timeline of the.
Of the big supply chain disruptions about how advantaged, we thought we were by having more product being more.
Effective at meeting customer needs, where others struggled.
And we're probably giving back a little bit of that as we anticipated, but thats kind of in the numbers Youre seeing now so feeling pretty good about where we are versus the overall market.
Got it okay I appreciate the color Peter and good luck here in Q3 guys.
Thanks.
The next question comes from Jay Mccanless with Wedbush. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
The first question I had we've seen lumber prices, especially framing lumber.
Sequentially for the last couple of months.
Is that starting to flow into your pricing not only on commodity goods, but are you also starting to be able to take some price on the value add goods.
Like always yeah sure I mean, it will take some time to fully feather in.
But it has started to move modestly.
And we certainly follow it on a consistent basis. The one point I'll make on that though is that one of the big movers has been OSB.
I'm personally a little bit skeptical on the durability of that only because you're so much about incremental capacity coming online over the next year.
We will see we'll see where it pans out, but thats certainly something to keep an eye on.
Okay, that's good to hear.
And then just the second question.
M&A phrase it a different way or are you starting to see some of this tightening in terms of bank lending standards and underwriting.
On some of your potential acquisition targets is that fair.
Freeing up or making some people may be more willing to sell than they might have been at the beginning of the year.
That makes reasonable sense that we would start to see that I would say all of what we've been looking at lately that hasnt been a factor.
Okay. Okay, great. Thanks, guys I appreciate it.
Thanks Jake.
The next question comes from David Manthey with Baird. Please go ahead.
Yes, Hi, this is Quinn fredrickson on for Dave I will just ask one question here.
Peter Your earlier comment I made it sound like the competitive environment has remained pretty benign and value add in better than you expected.
I think thats still the same dynamic among competitors with the commodity price lags in their contracts or is there a structural change in improvement there and then are you assuming an uptick in competitiveness and the expectations for the slight back half.
Gross margin moderation.
So I guess I need to be a little careful how I answer that on the firsthand, we have seen incremental competition and margin erosion in core business.
Period full stop now it's not as much as we expected is not as much as we forecasted hence the outperformance in that area.
I would say that there has been a lot of strength in the volumes within the value at which gives us increasing confidence.
We're meeting a need that our customers see value in it that they are leveraging it to improve their cycle times their job site efficiencies their job site safety and that we are at a price point that is competitive that allows them to do.
They need to do better. So we're certainly pleased with all of that and have been seeing the competition now the components of cost the investments that.
We've made but also the inflation we've seen certainly I think that has had a structural impact on the overall market us included but others as well where you got to make a little more gross margin. If you want to cover those incremental wage costs are or truck costs or whatever it is.
But then lastly, we've done a lot of work we're much more efficient and that self help has allowed us to earn more on the same equipment year on year because of our efficiency improvements.
Whether it be new automation that layers on the same equipment and facilities, sometimes it's new equipment, but sometimes its just better process and all of those things are why that strength that we've seen is sustainable I think that helps to Dave's point us be more competitive right.
Can still make good money, where others are struggling and if we can do it by being more reliable.
Our on time and in full being better than our quality is better than we're always going to be the partner of choice for these builders, who want to make sure. Their houses are high quality and on time and I would just add a real life example, in a major market.
We had a customer try someone else for 50 houses on trust for a lower price. They came back to us less than a month later at our price for those same 50 houses, which we by the way delivered inside of 10 days.
No.
The stickiness, we generated four but being able to do what we do best for our customers they recognize that value proposition.
And that's allowed us to make money for them and us and Thats, where we want to be.
That's helpful. Thank you.
Thank you.
This does conclude today's question and answer session I will now turn the program back over to our presenters for any additional closing remarks.
Thank you very much have a great day.
Thanks, everyone.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Yeah.
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