Q3 2023 Builders FirstSource Inc Earnings Call
Good day and welcome to the bills or builders first source of third quarter 2023 earnings conference call.
Today's call is scheduled to last about one hour concluding remarks by management and the question and answer session.
In order to ask a question. Please press the Starkey followed by the number one on your phone at anytime during the call right now.
I'd like to turn the call over to Heather <unk> Senior Vice President Investor Relations for builders first source. Please go ahead.
Good morning, and welcome to our third quarter earnings call with me on the call or day brush our C E O and Peter Jackson CFO. The earnings press release, an investor presentation are available on our website and investors dot builder dotcom, we will refer to several slice from the investor presentation during our call.
The results discussed today include gap.
<unk> adjusted for certain items.
These non-GAAP results for informational purposes.
Should not be considered in isolation.
<unk> comparable measures you can find the reconciliation of these measures to the corresponding GAAP measures, where applicable and a discussion of why we believe that can be useful to investors and our earnings press release SEC filings and presentation.
Remarks in the press release presentation in on this call contained looking and cautionary statements within the meaning of the private Securities Litigation Reform Act.
Jackson's update your results. Please review the forward looking statements section in today's press release SEC.
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 date.
Good.
Good morning, everyone and thanks for joining our call.
We began I'll want to formally welcome Heather to the builders first source T.
To have someone with a deep knowledge and decades of experience bleeding the best relations, which is a critical function here Heather welcome.
Now onto our queue three performance.
Despite industry volatility caused by macroeconomic headwinds.
Brazilian third quarter results reflect the strength of our value added portfolio.
<unk> and operational initiatives, we have put in place over the past several years.
Challenges remain due to inflation and increasing mortgage rates, we continue to generate healthy margins. This is proof of our attractive product mix and the benefits of our investments in multifamily.
We remain confident in our 2023 album as we focus on being the best partner for our customers and escape executing our strategy to drive long term growth.
We continue to create robust free cash flow and invest in the business to operate more efficiently.
Greece customer loyalty and expand our footprint.
We are committed operational excellence, including capture inefficiencies in our supply chain.
Well as ambassador and automation and process improvements. These efforts are driving private activity savings and helping to address our customers labor challenges now and into the future.
We are helping our customers reduce cycle times, which is highlighted by improving our in food deliveries from 94% last year to 96% during the third quarter.
Time Indian food deliveries ensure our customers have the right material at the right time building their loyalty and trust in us.
We are continuing our investments and value added solutions organically and through M&A to help our customers build more official.
These accretive acquisitions have enhanced our value added product coverage and helped us achieve a leading position and desirable markets.
As we grow share in these higher margin products, we were driving mixed improvement across the business.
Are strong free cash flow provides multiple paths for capital deployment, all towards creating shareholder value.
Given the long runway and potential tuck ins, we will remain inquisitive to bolster our growth potential while maintaining the discipline and focus on the highest return opportunities.
Looking at our third quarter highlights on slide four gross margin was approximately 35% and only down slightly on a sequential basis.
Despite normalization incor margins are overall margins have remain resilient, primarily due to stronger mix them value added products, including or multi family business and improve manufacturing efficiencies.
Alright, adjusted EBITDA margin also remains strong highlighting our ability to manage our operations effectively and a challenging and dynamic environment.
This execution is a reflection of our talented and focused field leadership team.
Turning to slide five we generated strong productivity savings of $54 million during the quarter.
This reflects the effectiveness of our B F F. One team operating system, which delivers value across the business by building people excellence and growth.
A recent acquisitions in multifamily contributed an increase of 2% in sales and 4% and EBITDA compared to the prior year quarter.
Multifamily remain to tell when this quarter and we expect this strength to continue for the remainder of 2023 before declining around the second quarter of next year.
Discipline SG&A expense management remains a key focus area.
This includes the ongoing optimization of our footprint in balancing the need for cost reductions against future capacity needs.
We are focused on our discretionary spending and our team has responsibly managed cost in the short term, while executing our strategy for the long term.
Regarding our industry the national builders have reported resilient results by providing incentives such as interest rate by Dallas to ease portability challenges and attract prospective buyers.
The limited inventory of existing homes for sale is also steering traffic to new construction.
As we look forward to 2024, we will maintain our best in class customer service continue our emphasis emphasis on expanding our value added product mixed and launch R. B S. S digital tools to make building process faster more efficient and more affordable.
Turning to M&A on slide six.
Continue to target attractive opportunities, while remaining financially disciplined.
The third quarter, we have completed five deals with an aggregate prior year sales roughly $350 million.
In September we acquired Frank cash and carry a leading building material distributor with trust manufacturing and the Florida Panhandle. We're pleased that this acquisition will help us grow with builders in the area and earlier in the third quarter, we acquired churches lumber, which expanded our presence in the <unk>.
Detroit market, we're excited to welcome these talented new team members to the BFS pain.
As shown on slide six alright, M&A, an organic investments have substantially increased our value added product mix and diversified R. M markets.
Seen the fruit of this growth in recent quarters through higher gross margins, even in it down housing market.
Moving the slides seven I would like to provide an update on capital allocation.
During the third quarter, we prudently deployed capital in line with our stadium priorities.
We made to tuck in acquisitions and repurchased over $200 million of shares while maintaining a strong balance sheet.
We have <unk> typically deployed approximately $5.7 billion since the end of 2021 and remain on track to achieve our 2025 goal of deploying $7 billion to $10 billion of capital as communicated our Investor day in December of 2021.
Now, let's turn to slides eight nine or an update on our digital strategy.
We are steadfast and our commitment to leading the digital evolution in our industry and generating new innovations to drive greater efficiency across homebuilding and enhance our product and service offerings.
As we look forward to our full product launch you want we have made it a priority to drive digital drops adoption across our operations.
My B L. D. R. Dot com is designed to create efficiencies for both our team members and customers by offering improved transparency and engagement in the homebuilding process.
Taking with our proprietary estimating and configuration tools.
This gives our customers more control over the entire building process saving both time and money for our customers and their clients, while making the homebuilding process more personal lives.
In the third quarter, we continued our product development.
The option efforts as we prepare for the upcoming full product wrong.
Operator: Today, and welcome to the Builders FirstSource 3rd 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.
These are important milestones in our journey reshaped the industry and extend our lead as the partner of choice in the market and attain our goal of $1 billion in incremental sales by 2026.
We look forward to sharing more information with you at our Investor Day next month.
Heather Kos: I'd now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.
B F S. We pride ourselves on helping our people achieve their career goals.
Heather Kos: Good morning, and welcome to our 3rd quarter earnings call. With me on the call, our Dave Rush, our CEO, and Peter Jackson, our CFO. The earnings press release and investor presentation are available on our website at investors.builders.com. We will refer to several slides from the investor presentation during our call. The results discussed today include gap and non-gap results adjusted for certain items. We provide these non-gap results for informational purposes, and they should not be considered an isolation from the most directly comparable gap measures.
Team member, who has taken full advantage of every growth opportunity presented to her is sue Dean the general manager of our foreign South Carolina location.
<unk> the various role she's held over her more than 40 years would be F. S. She's earned the nickname Sue D. D for her ability to solve problems and make magic happen.
Since being promoted the general manager Sue has led her location to achieve exceptional results by recognizing her team members potential and empowering them.
Heather Kos: You can find the reconciliations of these non-gap measures to the corresponding gap measures where applicable and is a discussion of why we believe they could be useful to investors in our earnings press release, SEC filings, and presentation. Our remarks in the press release presentation and on this call contain forward-looking and cautionary statements within the meaning of the private security litigation reform act and projections of future results. Please review the forward-looking statement section in today's press release. And on our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. But that, I'll turn the call over today. Thank you, Heather.
Stories like <unk> that may be excited to see all the different ways. Our team members can grow here at the F. S.
I'll now turn the call over to Peter to discuss our third quarter financial results in greater detail.
Thank you, Dave and good morning, everyone.
A third quarter results demonstrate the effectiveness of our operating model and the face of macro volatility.
We are maintaining a healthy balance sheet and prudently deploying capital to the highest return opportunities.
David Rush: Good morning, everyone, and thanks for joining our call. Before we begin, I want to formally welcome Heather to the builders first-source team. We're excited to have someone with her deep knowledge and decades of experience leading investor relations, which is a critical function here.
Included share repurchases during the quarter.
We are leveraging our sustainable competitive advantages and strong financial position to drive future growth and value creation for our shareholders.
I will cover three topics with you this morning.
First I'll recap our third quarter results second I'll provide an update on capital deployment and finally I will discuss our full year 2000 twenty-three guidance in 2024 scenarios.
David Rush: Heather, welcome. Now on to our Q3 performance. Despite industry volatility caused by macroeconomic headwinds, our resilient third-quarter results reflect the strength of our value added portfolio, wrong footprint, and operational initiatives we have put in place over the past several years. While challenges remain due to inflation and increasing mortgage rates, we continue to generate healthy mortgages. This is proof of our attractive product mix and the benefits of our investments in multi-family. We remain confident in our 2023 outlook as we focus on being the best partner for our customers in executing our strategy to drive long-term growth.
Let's begin by reviewing our third quarter performance on slides 10 and 11.
We delivered $4.5 billion in net sales.
For organic sales decreased by 14% driven by 19% decline in single family.
Slower demand over the prior year supply chain normalization and commodity deflation.
Proximately, 9%.
Multifamily grew by over 6% driven by our recent acquisitions as well as favorable margins largely attributable to the longer lead time for this market.
David Rush: We continue to create robust free cash flow and invest in the business to operate more efficiently, increase customer loyalty, and expand our footprint. We are committed to operational excellence, including capturing efficiencies in our supply chain, as well as investing in automation and process improvements. These efforts are driving productivity saving and helping to address our customers' labor challenges now and into the future. We are helping our customers reduce cycle times, which is highlighted by improving our info deliveries from 94% last year to 96% during the third quarter.
R&R and other grew by over 1% increased sales focus and capacity versus the prior year.
The cumulative effect of our acquisitions over the past year contributed approximately three percentage points of growth does that sales.
Importantly value added products represented 51% of our net sales this quarter, increasing six percentage points since investor day in Q4 2021.
This reflects our position as the supplier of choice for these higher margin products.
During the third quarter gross profit was $1.6 billion decrease of approximately 22% compared to the prior year period.
David Rush: All-time and info deliveries ensure our customers have the right material at the right time, building their loyalty and trust in us. We are continuing our investments in value added solutions organically and through M&A to help our customers build more efficiently. These accretive acquisitions have enhanced our value added product coverage and helped us achieve a leading position in desirable markets. As we grow share in these higher margin products, we are driving mixed improvement across the business.
Gross margins were 34.9% decreasing 10 basis points to normalization incor organic gross margins are.
Set by roughly 125 basis points of our previous we discussed multifamily over Ernie.
SG&A decreased $61 million to $940 million, mainly due to lower variable compensation, partially offset by additional expenses from operations acquired in the last year and inflation.
David Rush: Our strong free cash flow provides multiple paths for capital deployment, all towards creating shareholder value. Given the long runway of potential tuck-ins, we will remain equisitive to bolster our growth potential while maintaining a discipline focus on the highest return opportunities. Looking at our third quarter highlights on slide four, gross margin was approximately 35% and only down slightly on a sequential basis. Despite normalization in core margins, our overall margins have remained resilient primarily due to stronger mix and value added products, including our multi-family business and improved manufacturing efficiencies.
Acquisitions increased SG&A by $34 million in the quarter.
As a percentage of net sales total SG&A increased by 330 basis points to 27%.
Primarily attributable to decreased fixed costs leverage from lower sales.
We remain focused on the operating efficiently containing costs and effectively integrating acquisitions.
Adjusted EBITDA was approximately $813 million down, 31%, primarily driven by lower net sales due to a week or housing market and commodity deflation.
And EBIT margin remained a robust 17.9%.
90 basis points sequentially, as we continue to execute and drive improved productivity across the business.
David Rush: Our adjusted ebit.margin also remains strong highlighting our ability to manage our operations effectively and a challenging and dynamic environment. This execution is a reflection of our talented and focused field leadership team. Parning the slide five, we generated strong productivity savings of $54 million during the quarter. This reflects the effectiveness of our BFS one team operating system, which delivers value across the business by building people, excellence and growth. Our recent acquisitions in multi-family contributed an increase of 2% in sales and 4% in ebit.da compared to the prior year quarter.
But just a net income of $534 billion was down $280 million from the prior year quarter.
The 34 per cent decrease was largely due to lower sales.
Adjusted earnings per diluted share was $4.24 down 19% compared to $5.20 in the prior year period.
Rover year basis share repurchases added roughly 83 cents per share.
Now, let's turn to our cash flow balance sheet and liquidity on slide 12.
A third quarter operating cash flow was approximately $665 million down $835 million compared to the prior year period.
David Rush: Multi-family remained a tailwind this quarter and we expect this strength to continue for the remainder of 2023 before declining around the second quarter of next year. Discipline SDNA expense management remains a key focus area. This includes the ongoing optimization of our footprint and balancing the need for cost reductions against future capacity needs. We are focused on our discretionary spending and our team has responsibly managed cost in the short term while executing our strategy for the long term.
Mainly attributable.
Deflation in the week or housing market.
Capital expenditures were $128 million.
All in we delivered healthy free cash flow of approximately $538 million.
The trailing 12 months ended September 30th are free cash flow yield was 14.1% while operating cash flow return on invested capital was 32%.
Our net debt to adjusted EBITDA ratio was approximately 1.1 times, while based business leverage was 1.5 times.
David Rush: Regarding our industry, the National Builders have reported resilient results by providing incentives such as interest rate buy downs to ease affordability challenges and attract perspective buyers. The limited inventory of existing homes for sale is also steering traffic to new construction. As we look forward to 2024, we will maintain our best in class customer service, continue our emphasis emphasis on expanding our value added product mix and launch our BFS digital tools to make building process faster, more efficient and more affordable.
Excluding already but yeah, we have no longterm debt maturities until 2030.
At quarter end, our total liquidity was approximately $1.1 billion consisting of $1 billion in net borrowing availability under the revolving credit facility and $100 million of cash on hand.
Do you need a capital deployment.
During the third quarter, we repurchased approximately 1.7 billion shares for $224 million at an average stock price of $136.22 per share. Your date, we have repurchased nearly $1.6 billion of shares at an average price of $97.43.
For sure.
David Rush: Turning the M&A on slide six, we continue to target the track of opportunities while remaining financially disciplined. Through the third quarter, we have completed five deals with aggregate prior your sales of roughly $350 million. In September, we acquired Frank's cash and carry, a leading building material distributor with trust, manufacturing in the floor to panhandle. We are pleased that this acquisition will help us grow with builders in the area, and earlier in the third quarter, we acquired Church's lumber, which expanded our presence in the Detroit market.
We have approximately $400 million remaining on our most recent 1 billion dollar share repurchase program approved in April of 2023.
We remain disciplined stewards of capital and have multiple paths for value creation through a proven ability to deploy capital and deliver high returns.
Now, let's turn to our outlook on slide 13.
Given that affordability headwinds R Q3 sales were a little softer than expected. However, the October sales trend with seasonally healthy.
And our focus our continued focus and execution gives us confidence that we will achieve our full year base business and total company EBIT guidance for 2023 that we outlined in our second quarter earnings call.
David Rush: We're excited to welcome these talented new team members to the BFS team. As shown on slide six, our M&A and organic investments have substantially increased our value added product mix and diversified our end markets. We have seen the fruit of this growth in recent quarters through higher gross margins, even in a down palsing market.
For full year 2023, we expect total company net sales to be $16.8 billion to $17.1 billion.
We expect adjusted EBITDA to be $2.7 billion to $2.8 billion.
Adjusted EBITDA margin is forecasted to be 15.8% to 16.7%.
David Rush: Moving to slide seven, I would like to provide an update on capital allocation. During the third quarter, we prudently deploy capital in line with our stated priorities. We made two tuck-in acquisitions and repurchased over $200 million of shares while maintaining a strong balance sheet. We have cumulative lead deployed approximately $5.7 billion since the end of 2021 and remain on track to achieve our 2025 goal of deploying seven to $10 billion of capital as communicated our investor day in December of 2021.
Regarding gross margins to arrange a 34, 35%.
A recent above normal margins reflect a greater mix of value added products, along with discipline part pricing required to offset increased operating costs.
As we move through the end of the year, we expect both of our gross margins and a multifamily business to continue to normalize.
We expect full year 2023 free cash flow of $1.82 billion.
Free cash flow forecast assumes average commodity prices in the range of 400 to $425.
David Rush: Now let's turn to slide eight and nine for an update on our digital strategy. We are steadfast in our commitment to leading the digital evolution in our industry and generating new innovations to drive greater efficiency across home building and enhance our product and service offerings. As we look forward to our full product launch in Q1, we have made it a priority to drive digital drops, adoption across our operations. Mybldr.com is designed to create efficiencies for both our team members and customers by offering improved transparency and engagement in the home building process.
R 2000 twenty-three outlook is based on several assumptions.
Please refer to our earnings release, and slide 14 of the Investor presentation for a full list of these assumptions.
Starting to slides 15, 60 as a reminder.
Binder are based business approach showcases the underlying strength and profitability of our company by normalizing sales and margins for commodity volatility.
This helps to clear clearly assess the core aspects of the business, where we have focused our attention to drive sustainable outperformance.
Are based business Sky Dot net sales $16.4 billion.
David Rush: Taking with our proprietary estimated and configuration tools, this gives our customers more control over the entire building process, saving both time and money for our customers and their clients while making the home building process more personalized. In the third quarter we continued our product development and adoption efforts as we prepare for the upcoming full product launch. These are important milestones in our journey who reshape the industry and extend our lead as the partner of choice in the market and attain our goal of $1 billion in incremental sales by 2026.
Are based business EBIT guide is $2.2 billion at a margin of 13.5%.
Moving to slide 17, we recognized at 2024 is coming into focus as we approach here and like.
We did earlier this year, we have laid out a scenario analysis to demonstrate how we are positioned generate resilient financial performance across a range of potential housing market commodity condition.
I want to emphasize that this is not full year guidance for 2024.
But these scenarios should help clarify our range of performance expectations for 2024 and demonstrate the strength of our best in class operating platform.
David Rush: We look forward to sharing more information with you at our investor day next month.
As I wrap up I want to reiterate that we are confident in the near term outlook are exceptional positioning to execute our strategic goals.
David Rush: At BFS we pride ourselves on helping our people achieve their careers. A team member who has taken full advantage of every growth opportunity presented to her is Sue Dean, the General Manager of our Florence South Carolina location. Through the various roles she's held over her more than 40 years with the FS. She's earned the nickname, Sue Dene, for her ability to solve problems and make magic happen. Since being promoted to General Manager, Sue has led her location to achieve exceptional results by recognizing her team members potential and empowering them. It's stories like Sue's that may be excited to see all the different ways our team members can grow here at the FS.
Ability to create value in any environment to support profitable growth.
With that let me turn the call back over to Dave for some final thoughts.
Thanks, Peter let.
Me close by saying that we're executing on our strategic pillars to deliver long term value creation.
Tireless team effort has resulted in a differentiated platform <unk>.
Setting us up for above market growth and exceptional profitability for years to come.
Ah continue to be proud of our operational excellence was just driving increase safety productivity and profitability despite market headwinds.
Peter Jackson: I'll now turn the call over to Peter to discuss our third quarter financial results in greater detail.
We are in a great position today and that is in markets. Further stabilize we are positioned for an even stronger future.
Peter Jackson: Thank you Dave and good morning everyone. Our third quarter results demonstrate the effectiveness of our operating model in the face of macro volatility. We are maintaining a healthy balance sheet and prudently deploying capital to the highest return opportunities, which included cherry purchases during the quarter. We are leveraging our sustainable competitive advantages and strong financial position to drive future growth and value creation for our shareholders.
Will remain at the forefront of technology with our BFS digital tools.
I'm confident will be a game changer.
Industry.
We are exceptionally well positioned in the marketplace to navigate complex operating environments due to our value added solutions fortress balance sheet and strong free cash flow generation.
Sided to share more details about our longer term vision at our upcoming Investor day on December 5th in Atlanta, and look forward to seeing you there. Thank.
Peter Jackson: I will cover three topics with you this morning. First, I'll recap our third quarter results. Second, I'll provide an update on capital deployment and finally I'll discuss our full year 2023 guidance and 2024 scenarios.
Thank you again for joining us today, operator lists please open the call now for questions.
Thank you at this time, if you would like to ask a question. Please press star and one on your telephone keypad.
Peter Jackson: Let's begin by reviewing our third quarter performance on slides 10 and 11. We delivered $4.5 billion in net sales or organic sales decreased by 14% driven by a 19% decline in single family due to slower demand over the prior year, supply chain normalization and commodity deflation of approximately 9%. Multi-family grew by over 6% driven by our recent acquisitions as well as favorable margins largely attributable to the longer lead time for this end market.
You may remove yourself from the queue at anytime by pressing star too and once again that is star one if you would like to ask a question.
Plus for just a moment till that questions to Q.
And our first question comes from Mathieu Bully with Barclays.
Thank you for taking the questions I think it's very helpful that you outlined those 24 framework assumptions here, especially as you.
Look ahead to the Investor day, perhaps you know precluding some of that line of questioning [laughter]. So you can focus a bit more in the longer term. So my question is will focus on that I think I see in the footnote that you are making assumptions about multifamily in our in our into 24 I think Dave earlier.
Peter Jackson: R&R and other grew by over 1% amid increased sales focus and capacity versus the prior year. The cumulative effect of our acquisitions over the past year contributed to approximately 3 percentage points of growth in that sales. Importantly, value added products represented 51% of our net sales this quarter, increasing 6 percentage points since investor day in Q4 2021. This reflects our position as the supplier of choice for these higher margin products.
He made a very specific comment that multifamily could turn and in the second quarter of next year. So my question is how is multifamily contemplated Ah from both the growth and margin perspective in that 2024 framework. Thanks guys.
Yeah. Thanks, Matt appreciate the question as you know the multi family projects have a longer life cycle tend to be 19 to 18 months. So what we're seeing in the backlog right now is healthy and we will carry us through the first quarter of next year.
Peter Jackson: During the third quarter, gross profit was $1.6 billion, a decrease of approximately 22% compared to the prior year period. Gross margins were 34.9%, decreasing 10 basis points due to normalization in core organic gross margins, offset by roughly 125 basis points of our previously discussed multi-family over earning. $30 million, mainly due to lower variable compensation, partially offset by additional expenses from operations acquired in the last year and inflation. Acquisitions increased SGNA by $34 million in the quarter. As a percentage of NAS sales, total SGNA increased by 330 basis points to 20.7%, primarily attributable to decreased fixed cost leverage from lower sales.
What's changing the dynamics, that's changing a bit is the projects and the new projects are slower to come to market. We believe there's gonna be a pause and some of the multifamily as the market Digest, what's coming you know what's completing throughout this year and as soon as they can.
Figure out the right balance between cost of capital and rent and what return they can get on the rent. We just think there's gonna be a temporary pause and then things will start up again at the tail end of 2024, but again, because there's such a long cycle for those projects to get into the ground, we won't necessarily like you see.
That effect and 24, so we're we're forecasting for multifamily that'd be off and 24 as a result.
Peter Jackson: We remain focused on operating efficiently, containing costs and effectively integrating acquisitions.
Yeah, just to add to it I think it's the theme of normalization, we'd seen such displacement in the industry over the last couple of years multifamily included you're gonna see that theme I think in a lot of what we're talking about things are going well, but certainly normalizing back from some of that displacement.
Peter Jackson: Adjusted EBITDA was approximately $813 million down 31%, primarily driven by lower net sales due to a weaker housing market and commodity deflation. Adjusted EBITDA margin remained a robust 17.9%, up 90 basis points sequentially as we continue to execute and drive improved productivity across the business. Adjusted net income of $534 million was down $280 million from the prior year quarter. The 34% decrease was largely due to lower net sales. Adjusted earnings per diluted share was $4.24 down 19% compared to $5.20 in the prior year period. On a year over your basis, share repurchases added roughly 83 cents per share.
Got it okay. Thanks for that guys very helpful.
Then second one the I'm sticking out on the framework here you know on the single family side I guess it was two part or is this number one.
Low end of a down 4%.
You know just giving more interest rates are and and a lot of the questions out. There. My question is is it effectively.
Why not outline a lower lower and and in that scenario of a lower lower and you know would you be able to kind of push any harder on cost out. So that's kind of part one of the question.
Two is just you know given the sort of mid teens EBITDA margin, you're you're guiding too I guess, what is the sort of implied gross margin and that I know, there's a lot in there, but thanks guys.
Peter Jackson: Now let's turn to our cash flow, balance sheet, and liquidity on slide 12. Our third quarter operating cash flow was approximately $665 million down $835 million compared to the prior year period, namely attributable to commodity deflation and a weaker housing market. Capital expenditures were $128 million, all in we delivered healthy free cash flow of approximately $538 million. For the trailing 12 months ended September 30, our free cash flow yield was 14.1%, while operating cash flow return on invested capital was 32%. Our net debt to adjust that even our ratio was approximately 1.1 times, while base business leverage was 1.5 times.
Yeah. So you know I think a couple of factors. The first is that you.
Harvested feedback from the economists that's generally what we lean on just like everybody else when it comes to the expectations for next year, we certainly try and temporary it a little bit by let's say, eliminating statisticians do the high and the low end or the ones that look ridiculous and sort of in terms of trying to come up with.
A real number you know up until very recently I would tell you that the sense was that we would see some nice growth next year immediately some of the more recent revisions from the economist have pulled it back but I still think it's it's fairly favorable. So you know what will play out sure you know that that's.
Peter Jackson: Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was approximately $1.1 billion, consisting of $1 billion in net borrowing availability under the revolving credit facility and $100 million of cash on hand.
A fair it's a fair comment relieve the reason why we gave the range that we did is we think there are a number of scenarios that could play out.
If you Wanna go below the low end of this you know I love the question because I think.
You didn't ask us as informative as anything and that's you know nobody is alleging our double digit margins, even when the market's down anymore.
Peter Jackson: We need a capital deployment. During the third quarter, we repurchased approximately $1.7 million shares for $224 million at an average stock price of $136.22 per share. Due to date, we have repurchased nearly $1.6 billion of shares at an average price of $97.43 per share. We have approximately $400 million remaining on our most recent $1 billion share we purchased for a plan, approved in April of 2023. We remain disciplined stewards of capital and have multiple paths for value creation, through approving ability to deploy capital and deliver high-res...
That's because we've demonstrated an ability to maintain those margins to see healthy profitability to benefit from the mix of our business and we expect to continue to be able to do that now I will certainly retain our discipline around costs.
<unk>, you to resize facilities and markets, depending on what you know what the starts numbers and what the business looks like but I think our our theme around here is really about consistent performance and operational excellence and not really see the huge need to do something on one.
Lies for the business, but just keep doing what we're doing good we're seeing great results and just add Mads has continued to drive call style the business that don't add value the.
Peter Jackson: Now let's turn to our outlook on slide 13. Given that affordability headwinds, our Q3 sales were a little softer than expected. However, the October sales trend was seasonally healthy. In our focus, our continued focus and execution gives us confidence that we will achieve our full-year face business and total company EBITDA guidance for 2023 that we outlined in our second quarter. For full-year 2023, we expect total company net sales to be $16.8 to $17.1 billion.
Benefit of our platform and the fact that we've done the hard work in the last two years and integrate these companies. We have a 30 year average experience with our field leadership group. They know what to do when to do it and how to manage those cost effectively to maximize whatever whatever's.
Whatever's presented to us and we identified a lot of opportunities to continue to focus on productivity and and where we are now is we don't have to keep reinventing those opportunities because our scale allows us to push that across the platform and we have plenty of <unk>.
Peter Jackson: We expect adjusted EBITDA to be $2.7 to $2.8 billion. Adjusted EBITDA margin is forecasted to be $15.8 to $16.7 per cent. We are guiding gross margins to a range of 34 to 35 percent. Our recent above-normal margins reflect a greater mix of value-added products, along with discipline pricing required to offset increased operating costs. As we move through the end of the year, we expect both our gross margins and the multi-family business to continue to normalize. We expect full-year 2023 free cash flow of $1.8 to $2 billion. The free cash flow forecast assumes average commodity prices in the range of 400 to $425.
To take existing ideas and the markets that we haven't been able to push those that is yet just because of our scale and five keep finding dollars is safe.
Got it that's Super helpful. And my question did you have anything around the you know the gross margin expectation within that mid teens EBITDA guide.
We won't give anything specific but I think it's fair to say, we do expect to see normalization into 2024 that you know that that pullback a reversal of the multifamily in particular, but overall that normalization theme I think applies tomorrow as well.
Got it I appreciate the very comprehensive answers guys see you in Atlanta in a month.
Peter Jackson: Our 2023 outlook is based on several assumptions. We is referred to our earnings release and slide 14 of the investor presentation for a full list of these assumptions.
Thanks. Thanks.
And we have our next question from tray grooms with Stevens.
Hey, good morning, everyone.
Peter Jackson: Starting to slide 15 and 16, as a reminder, our base business approach showcases the underlying strength and profitability of our company by normalizing sales and margins for commodity volatility. This helps to clear, to clearly assess the core aspects of the business where we have focused our attention to drive sustainable outperformance. Our base business guide on net sales is $16.4 billion. Our base business, even a guide, is $2.2 billion at a margin of 13.5%.
So.
First question, Peter <unk>, you mentioned that.
Tobar transfer I think he used the word healthy can you go through maybe some more detail on on four Q kind of what you're seeing thus far and and maybe what kind.
Looking into your single family assumption that your Bacon in here for the Fork you got.
Sure I can get started I'm sure they will have commentary as well, but that you know the the year has been.
A good year right, we had that big reset at the beginning when the builders decided whether new rates would be and it's been very stable I think we we did expect there to be a little bit more volume in the third quarter, we thought there'd be a little bit of a push certainly the commentary from the large nationals was very strong.
Peter Jackson: Moving to slide 17, we recognize that 2024 is coming into focus as we approach your end. Like we did earlier this year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions. I want to emphasize that this is not full year guidance for 2024, but these scenarios should help clarify our range of performance expectations for 2024 and demonstrate the strength of our investing class operating platform.
And for a variety of reasons, whether it be tone or whether or whatever the factors where it just wasn't as good as we expected our performance was still quite good. We're certainly pleased with our profitability, but as we look at the at the the way the year has played out into the fourth quarter is still healthy.
David Rush: As I wrap up, I want to reiterate that we are confident in the near-term outlook. Our exceptional positioning to execute our strategic goals and our ability to create value in any environment to support profitable growth.
You know the the.
Strength of the business continues and we're pleased with that ability to <unk>.
Continue to see good.
Go through on the sales side. Despite some of the headlines that sort of have gotten everybody. So concerned.
Yeah. The the only thing I'd add is the national builders continue to be stable right I'm, not saying that there are expecting substantial robust growth, but they're definitely still going for with the plans they've communicated to us.
David Rush: With that, let me turn the call back over to Dave for some final thoughts. Thanks, Peter.
David Rush: Let me close by saying that we're executing on our strategic pillars to deliver a long-term value creation. Our tireless team effort has resulted in a differentiated platform setting us up for above market growth and exceptional profitability for years to come. I continue to be proud of our operational excellence, which is driving increased safety, productivity, and profitability despite market headwinds. We are in a great position today, and as in markets further stabilise, we are positioned for an even stronger future.
Their ability to use interest rate by announcing that.
A prospective buyer into a monthly payment. They can afford is working they're they're basically using that methodology to get the payment and then go from the payment to a selection of house based on that payment and that's working so you know that's that's encouraging before the fourth quarter at least.
Stay at the stable rate and really only be affected by seasonality.
David Rush: We'll remain at the forefront of technology with our BFS digital tools, which I'm confident will be a game changer for the industry. We are exceptionally well positioned in the marketplace to navigate complex operating environments due to our value and solutions for trust balance sheet and strong free cash flow generation.
Yep, Okay got it.
Thanks for that and then you know the the.
Full digital rollout coming up soon any color on how that plays into your scenario analysis for for next year that you wrote up.
It's pretty modest in the first year you know it's.
It's in the hundreds of millions of sales, but we've certainly got a lot of focus in the organization on the initial adoption the communication in in getting it into the hands of Gulf our side of our salespeople and leadership as well as our customers, but so far you know the feedback spring great. We're really.
David Rush: We're excited to share more details about our longer term vision at our upcoming investor day on December 5th in Atlanta and look forward to seeing you there.
David Rush: Thank you again for joining us today.
Operator: Operator, please open the call now for questions. Thank you. At this time, if you would like to ask a question, please press star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two, and once again that is star one if you would like to ask a question. We'll pause for just a moment to allow questions to queue.
Pleased with the tools and the development successes were meeting milestones and feeling really good about the product that we're gonna have to show the market and we're excited that the market's gonna be.
Able to benefit from the tools to improve efficiency and and take cost out. The the development is right on track we had a preview. This week in fact of some of the features of that continue to be well bye development team.
Matthew Bouley: And our first question comes from Matthew Bully with Barclays. Everyone, thank you for taking the questions. I think it's very helpful that you outlined those 24 framework assumptions here, especially as you look ahead to the investor day, perhaps, you know, precluding some of that line of questioning so you can focus a bit more on the longer term. So my questions will focus on that. I think I see in the footnote that you are making assumptions about multi-family and R&R into 24. I think Dave earlier, you made a very specific comment that multi-family could turn in the second quarter of next year.
You know, but it's change it's not only change for the customers were gonna introduce it too, but it's changed for our people and we want to make sure. We do this the right way the prudent way <unk>.
Methodically, making sure the adoption goes to the way we want because we really only get one one bite at this apple and we want to make sure that what we do is the best way for us to ensure success, but what we're showing people you're gonna be impressed by I can't wait for you guys to see it when you move to Atlanta.
Alright looking forward to it thanks for taking my questions and keep up the good work. Thank you.
David Rush: So my question is, how is multi-family contemplated from both a growth and margin perspective in that 2024 framework? Thanks, guys. Yeah, thanks, Matt. Appreciate the question. As you know, the multi-family projects have a longer life cycle tend to be 19 to 18 months. So what we're seeing in the backlog right now is healthy and will carry us through the first quarter of next year. What's changing and the dynamic that's changing a bit is the projects, the new projects are slower to come to market.
Thanks.
And we have our next question from Joe I'll admire with Deutsche Bank.
Thanks, everybody.
Quickly on the 24 scenarios just wondering if you could add some context on the revenue assumptions here cause if you take the single family starts numbers I kind of take that on your face business revenue your output on sales would be much higher than that and I get there's other things.
There, you're giving the commodity assumptions, though and I don't think M&A is that significant carry over into next year and you're talking about multifamily down so what I guess I'm getting too is there seems to be sort of like a mid single digit type outperformance to the starts volume wondering if you could just touch on whether you think that's actual price or if you're baking in.
David Rush: We believe there's going to be a pause in some of the multi-family as the market digest was coming, you know, what's completing throughout this year. And as they figure out the right balance between cost of capital and rent and what return they can get on the rents, we just think there's going to be a temporary pause. And then things will start up again at the tail end of 2024. But again, because there's such a long cycle for those projects to get into the ground, we won't necessarily see that effect in 24.
Outperformance vs that volume.
Yeah, Yeah, I guess the short answer is we are expecting some outperformance.
If I just <unk> rebaseline on the key components.
Single family multifamily down on the normalization the two big drivers there obviously.
David Rush: So we're forecasting for multi-family to be off in 24 as a result. Yeah, and just to add to it, I think it's the theme of normalization. We've seen such displacement in the industry over the last couple of years, multi-family included. You're going to see that theme, I think, in a lot of what we're talking about. Things are going well, but certainly normalizing back from some of that displacement. Got it. Okay, thanks for that guys, very helpful.
Continued normalization in the in both the sales in the margins in those displaced areas multifamily those categories, where we saw some out earning that certainly happening, but we are confident in our ability to to take share in seagrove based on what we've been able to deliver in the investments we've met.
That's great very encouraging and then you mentioned sort of getting these ranges from economists discussions what about your discussions for 24 with the large builders and even smaller regional builders and then just wondering if you could touch on any differences in outlook between.
David Rush: And then, second one, the, I'm sticking on the framework here. You know, on the single family side, I guess it's a two-parter. Number one, you know, the low end of a down four percent, you know, just given where interest rates are and a lot of the questions out there. My question is effectively, you know, why not outline a lower, lower end? And in that scenario of a lower, lower end, you know, would you be able to kind of push any harder on cost out?
<unk> those two groups into next year.
Well the the smaller builders don't have the access to right by the ounce at the larger builders have had and that's that's really the main differentiating factor interestingly enough.
David Rush: So that's kind of part one of the question. And then part two is just, you know, given the sort of mid-teens EBITDA margin you're guiding to, I guess, what is the sort of implied gross margin in that? I know there's a lot in there, but thanks guys. Yeah. So, you know, I think a couple of factors. The first is that you harvested the feedback from the economists. That's generally what we lean on just like everybody else when it comes to the expectations for next year.
It's a small percentage of the total market, but there are there's a market increasing cash buyers, which is a big part of what's gonna keep the smaller guys Goin' as well I think it's still the word is I would use a stable again I don't I don't think it'll be robust from a standpoint.
The the every all the macroeconomic uncertainty getting resolved, but the demand is clearly there I mean, I think that's what securitas through with all the headwinds that we faced as an industry in the last six months.
David Rush: We certainly try and temper it a little bit by, let's say eliminating as statisticians do the high in the low end or the ones that look ridiculous and sort of in terms of trying to come up with a real number. You know, up until very recently, I would tell you that the sense was that we would see some nice growth next year. Admittedly, some of the more recent revisions from the economists have pulled it back, but I still think it's fairly favorable.
I think it's been a ultimate pinpoint that the the longterm demand is there so as far as long as we can keep that affordability equation and check I think that it'll be a stable environment and that's what that's what we're hearing from our larger customers.
David Rush: So, you know, what we'll play out? Sure. You know, that's a fair comment. Really the reason why we gave the range that we did is we think there are a number of scenarios that can play out. If you want to go below the low end of this, you know, I love the question because I think what you didn't ask is as informative as anything. And that's, you know, nobody's challenging our double digit margins even when the market is down anymore.
Very good thanks, a lot everyone.
Thanks, Joe.
And we have our next question from keeps us with truest.
Oh. Thank you so the question on the actual quarter.
The value added products.
Saw pressure with the rest of the market really outperformed the company average as much as normal I just talked about specifically in the corner what was going on there.
David Rush: And that's because we've demonstrated an ability to maintain those margins, to see healthy profitability to benefit from the mix of our business. And we expect to continue to be able to do that. Now, we'll certainly retain our discipline around costs. We'll continue to resize facilities and markets, depending on what, you know, what the starts numbers and what the business looks like. But I think our theme around here is really about consistent performance and operational excellence.
What what the next couple of quarters that it looks like a better product.
Yeah, No that's a good question Keith.
One of the things that obviously drew my attention was that number this quarter and making sure that we understood exactly what was going on in the business.
I'll start by saying.
Feel very good about the number it is performed better than expected versus the stars over the last year and it has given us confidence that both the volume and the margins are real and sustainable what you're seeing in the comps, though is that last year when the thing when the.
David Rush: And not really see the huge need to do something unwise for the business, but just keep doing what we're doing because we're seeing great results. And just to add, Matt, to continue to drive call style of the business that don't add value, the benefit of our platform and the fact that we've done the hard work in the last few years to integrate these companies. We have a 30-year average experience with our field leadership group.
Market when single family starts really started to turn down we saw massive and meaningful impact on the lumbering love her she goes.
The core commodity component of our business that turned down quick but at the same time, we were still see growth in our value added categories. You know the the manufacturer product windows doors millwork, all still growing as we were working through all of that backlog right. The extended cycle times by the builders the <unk>.
David Rush: They know what to do, when to do it, and how to manage those costs effectively to maximize whatever is presented to us. And we've identified a lot of opportunities to continue to focus on productivity. And where we are now is we don't have to keep reinventing those opportunities because our scale allows us to push that across the platform. And we have plenty of runway to take existing ideas in the markets that we haven't been able to push those ideas yet just because of our scale and keep finding dollars. God, that's super helpful.
A product by the vendors that was clearing so that was a dynamic last year. This year, we're laughing and so what we've seen is that well.
Statistically or on a percentage basis, a bit weaker than some of the other categories and looking worse on average it's actually in line is just a little bit of timing in terms of the year over year. So still feel good about it still investing still seeing the benefits both on the profitability and the revenue line, but a little bit accomplish here I.
Oh, It just said that you know the the thing I pay attention to what's the average backlog in our plans today.
Matthew Bouley: And my question, did you have anything around the, you know, the gross margin expectation within that mid-teens EBITDA, God? We won't give anything specific, but I think it's fair to say we do expect to see normalization into 2024 that, you know, that pullback, that reversal of the multi-family in particular, but overall that normalization theme I think applies to Martin's as well. Got it. Appreciate the very comprehensive answers guys. See you in Atlanta in a month. Thank you. Thanks, Matt.
<unk> three to four week backlog, that's kind of where we wanna be because we wanna be at that level of customer service as well and we're seeing that still stay steady unhealthy.
Okay. Thank you one other question on the price deflation in the court is that all lumber or are there any other products, where you're saying prices declining earlier.
I'd say in general it's across the board.
We've talked a lot about inflation and some of the impacts there. Some of that is pulled back we've seen certain categories pull back we seen the competition increase in some of those margins of road clearly the bulk of it.
Trey Grooms: And we have our next question from Trey Grooms with Stevens. Hey, good morning, everyone. So, first question, Peter, you mentioned that October trends were, I think you used word healthy. Can you go through maybe some more detail on, you know, on four kids? Can you kind of what you're seeing thus far? And, and maybe what kind of looking into your single family assumption that you're bacon in here for the 4Q God?
You know the vast majority of it is on the commodity components, but we've seen a little bit elsewhere.
Probably value add no not probably value at least.
Margin normalization, but across the board I think it's fair to say.
Where you at.
Okay and were you asking about price our our cost from vendors.
Trey Grooms: Sure, I can get started. I'm sure they will have a commentary as well, but that, you know, the year has been a good year, right? We had that big reset at the beginning when the Builders decided where their new rates would be. And it's been very stable. I think we did expect there to be a little bit more volume in the third quarter. We thought to be a little bit of a push.
Well really both I mean.
Just in general between coming in and out of the warehouse.
Besides lumbered there.
Specific products that you would call out <unk> mortgage deflation right out.
Well I think we've talked about it and prior quarters or you know a couple of categories that we've seen make some moves probably the <unk>. The most obvious example is.
Trey Grooms: Certainly the commentary from the large nationals was very strong in for a variety of reasons, whether it be tone or weather or whatever the factors were, it just wasn't as good as we expected. Our performance was still quite good. We're certainly pleased with our profitability. But as we look at the way the year has played out into the fourth quarter, it's still healthy. You know, the strength of the business continues and we're pleased with that ability to, you know, continue to see good flow through on the sales side, despite some of the headlines that sort of have gotten everybody so concerned.
After commodities is engineered lumber.
They they had some pretty substantial price increases in and have given a portion of that back.
I would say in general, though it's been fairly modest.
And cost increases for the most part that's leveled out you know more back to a regular normal increase for the cost of inflation and that's it.
Okay, great. Thank you.
Trey Grooms: Yeah, the only thing I'd add is the national builders continue to be stable, right? I'm not saying that they're expecting substantial robust growth, but they're definitely still going forward with the plans that they've communicated to us. Their ability to use interest rate by bouncing get a prospective buyer into a monthly payment they can afford is working. They're basically using that methodology to get a payment and then go from the payment to a selection of house based on that payment and that's working.
<unk>.
And we have our next question from calling bearing with Jeffries.
Hey, good morning. Thank you for taking my question I appreciate the color and single family multifamily I was just hoping you can walk us through how you're thinking about the R&R and market and the potential 2024 scenarios kind of what informs your assumptions around there was markets and maybe how they are in our business stacks up from a march and or product mix perspective.
Yeah, <unk> fairly small for us as you know and that 20 per cent of the business range, it's inclusive of our retail and commercial categories. So that's there's a lot in there in general what we've seen is that we've had a bit more capacity available as the <unk>.
Trey Grooms: So, you know, that's that's encouraging before the fourth quarter, at least to stay at the stable rate and really only be affected by season alley. Yep. Okay, got it. Thanks for that. And then, you know, the full digital rollout coming up soon. Any color on how that plays into your scenario analysis for next year that you rolled up? It's pretty modest in the first year. You know, it's in the hundreds of millions of sales, but we've certainly got a lot of focus in the organization on the initial adoption, the communication and getting it into the hands of both our side of our, you know, sales people and leadership, as well as our customers.
Overall market has slowed and that's allowed us to focus in and we've had some success. So while there's there have been we see it as well as some headlines out of the the economists that the investment.
Vestments side on the R&R might be pressured we're feeling pretty good about what we've seen so far and in our ability to feel available capacity by just offering are better services and product portfolio and expertise to categories of customers, who want it but haven't been able to get access to it.
Great. That's helpful color and then on the gross margin side I think in the quarter. It held up better than I think your previous Guy would have implied can you just walk us through why Martin and we're more resilient this quarter than you anticipated and maybe help us think about the stepped down in March into how quickly you think that that could happen to get to that longer term guy that you put it.
Trey Grooms: But so far, you know, the feedback's been great. We're really pleased with the tools and the development successes, we're meeting milestones and feeling really good about the product that we're going to have to show the market and we're excited that the market's going to be able to benefit from the tools to improve efficiency and take costs out. The development is right on track. We had a preview this week, in fact, of some of the features and I continue to be well by our development team.
There.
Yeah, no that that's the million dollar question call and you're absolutely right. We continue to wrestle with this we continue to see the trends.
Of that normalization right. The share that we took that we took a lot of giving back a little bit of it. The price that we took we took a lot of and give them back a little bit of it. It is played out but I think it's fair to say, it's been slower than we've anticipated this quarter, we did see.
Trey Grooms: You know, but it's changed. It's not only change for the customers we're going to introduce it to, but it's changed for our people. And we want to make sure we do this the right way, the prudent way methodically, making sure the adoption goes the way we want. Because we really only get one bite at this apple and we want to make sure that what we do is the best way for us to ensure success.
A fair amount of what we expected I think where the became at least in my mind was some of the timing around some of the some of the rebates some of the productivity some of the favourable tailwind and some of the product mix. It just a little better than expected massive but it accumulated into a <unk>.
Trey Grooms: But what we're showing people, you're going to be impressed by it. I can't wait for you guys to see it when you go to a lot. All right, looking forward to it. Thanks for taking my questions and keep up good work. Thank you.
Trey Grooms: Thanks. We have our next question from Joe Ahlersmeyer with Deutsche Bank. Thanks everybody.
Number that was you know a healthy b on the margin line and what we would have originally to your point expected. The only thing that as we have a focus on using our scale to leverage our supply chain opportunities better get a lower landed cause more direct sourcing and those come in little bits, you know, we get a bite here.
Joe Ahlersmeyer: Quickly on the 24 scenarios, just wondering if you could add some context on the revenue assumptions here, because if you take the single family starts numbers and kind of going to take that on your base business revenue, your output on sales would be much higher than that. And I get there's other things in there. You're giving the commodity assumptions though. And I don't think M&A is that significant carry over into next year and you're talking about multi family down.
Product goodbye, there on a product, but over time, they start adding up that along with the investments we've made in in the manufacturing automation and efficiencies game, there again, a little bit at a time, but when you look back in six months of doing it and it's actually a meaningful number those things were starting to be able to <unk>.
Joe Ahlersmeyer: So what I guess I'm getting to is there seems to be sort of like a mid single digit type out performance to the starts volume, wondering if you could just touch on whether you think that's actual price or if you're baking in some out performance versus that volume. Yeah, yeah. I guess the short answer is we are expecting some out performance, but if I just go read baseline on the key components, single family, multi family down on the normalization.
I can see actually help.
Great I appreciate the color and good luck going forward.
Thank you.
And we have our next question from Adam Baumgarten with Zelman.
Hey, guys you mentioned the multifamily declines that you're expecting in the second quarter of next year Uhm do you expect that business to normalize from a margin perspective in 2024 at this point I know, it's been a bit of a tailwind.
Joe Ahlersmeyer: The two big drivers there obviously continue normalization in the, you know, in both the sales and the margins in those displaced areas, multi family those categories where we saw some out earning that's certainly happening, but we are confident in our ability to take share and see growth based on what we've been able to deliver in the investments we've made. That's great. Very encouraging. And then you mentioned sort of getting these ranges from economists discussions.
We do yeah, we think those things are kind of hand in glove, both the volumes and then the mark the resulting margins just competition, though that's a little bit.
Okay. Thank you.
Thank you.
And our next question comes from Kurt younger with da Davidson.
Great and good morning, everyone.
Yeah, I just wanted to stick on the gross margin line and and I guess, if you were to kind of Peel back some of the multibank family benefits I mean, how would you characterize where that core gross margin stands versus.
Joe Ahlersmeyer: What about your discussions for 24 with the large builders and even small and regional builders. And then just wondering if you could touch on any differences and outlook between those two groups into next year. Well, the smaller builders don't have the access to right by downs that the larger builders have had. And that's, that's really the main differentiating factor. Interestingly enough, it's a small percentage of the total market, but there are there's a market increasing cash buyers, which is is a big part of what's going to keep the smaller guys going as well.
Where you would expect normalize to be in what.
What stage of that normalization process are we actually talked about it in a long time it seems like over the last several quarters.
It started to materialize, but you know the tale of how that stretches into next year also seems pretty long so just love to hear thoughts there.
Yeah. So there's there's a couple of different pieces right. You you stipulate, which I think you have that we've set multifamily aside for all the reasons, we've already talked about.
Joe Ahlersmeyer: I think it's still the word is I would use a stable again. I don't, I don't think it'll be robust from a standpoint of The every all the macro economic uncertainty in resolve. But the demand is clearly there. I mean, I think that's what's carried us through with all the head ones that we faced as an industry in the last six months. I think it's been a ultimate proof point that the long term demand is there.
I think the storyline on single family is that we've seen the bulk of the margin normalization.
In the core products, there's more to go but I think we've seen the bulk of it. If you look at you know sub categories quarter over quarter. So Q3, 23, Q3 hundred 22, you're talking.
You know.
<unk> single digits percentages of margin that we've given back in the commodity space, we give them back price and margin in every one of the categories. So that normalization that we've been talking about we've been digesting it and we've been processing. It I don't think we're done I think we were when we look at the numbers, we see the trends in certain cat.
Joe Ahlersmeyer: So as far as long as we can keep that affordability equation in jack, I think that, you know, it'll be a stable environment. And that's what that's what we're hearing from our larger customers. Very good. Thanks a lot everyone. Thanks Joe.
<unk> as in markets, there's probably another leg there.
Keith Hughes: And we have our next question from Keith Hughes with truest. Thank you. The question on the actual quarter. The value ed product. You saw pressure with the rest of the market. It didn't really outperform the company average as much as normal. I just was talking about specifically in the quarter, what was going on there. And what's what the next couple quarters you think looks like in this product.
But it's far smaller than the first leg. So we're we're in the sixth seventh inning here, we're not in the second inning.
That said, there's certainly every quarter timing and you know things that come through in terms of like Dave said, when we see benefits when we see the timing on certain rebates that sort of thing and multifamily is not to be minimised right. It's been a big deal for us This year and we do think it will normalize into next.
Keith Hughes: Yeah, not as good question, Keith. One of the things that obviously drew my attention was that number this quarter and making sure that we understood exactly what was going on in the business. I'll start by saying, feel very good about the number. It has performed better than expected versus the starts over the last year. And it's given us confidence that both the volume and the margins are real and sustainable. What you're seeing in the comps, though, is that last year when the thing when the market when single family starts really started to turn down, we saw a massive and meaningful impact on the lumber and lumber.
Okay. That's super helpful. And then just on the technology front out I'm curious what some of the pilots that you've had you know what what are kind of.
The most promising offerings within that where you've seen particular attraction and and maybe some of the faith learning if that you've taken away from these programs.
But to implement or or change kind of on the full scale watch early next year.
Yeah that that's a great question I would tell you understand the pilots are not for learning how to implement it or learning how to develop so what we've used the pilot sport is get the product, where we want it to get having said that.
Keith Hughes: She could write the core commodity component of our business that turned down quick, but at the same time we were still seeing growth in our value added categories. You know, the manufacturer product window stores and bill work all still growing as we were working through all that backlog, right, the extended cycle times by the builders, the lack of product by the vendors that was clearing. So that was a dynamic last year, this year we're lapping that.
One of the favorite modules are the folks that are that are engaged is the one that you can take an input all the plans for a H b a C framing plumbing all into a module and it shows where those trades potentially would collide with each other and resolve that.
Keith Hughes: And so what we've seen is that well, you know, statistically or on a percentage basis, a bit weaker than some of the other categories and looking worse on average. It's actually in line is just a little bit of timing in terms of the year over year. So still feel good about it, still investing, still seeing the benefits, both on the profitability and the revenue line, but a little bit of comp issue.
Collision and you know before it goes live into the field and that is the one that particularly builders. Thank gives them the biggest and quickest return it from savings but calls it.
Minimises the mistakes that you would have to learn on the fly in the field and you'll get ahead of them.
So that that's probably the one that we get the most positive feedback on but you know what we're really trying to do is get everything resolved from a customer perspective on the front and so when we go to a full product launch the they'll already have solve the problems that they're counting on us solving.
David Rush: I would just add that, you know, the thing I pay attention to is what's the average backlog in our plants today, very healthy three to four week backlog. That's kind of where we want to be because we want to be at that level of customer service as well. And we're seeing that still stay steady and healthy.
Keith Hughes: Okay, thank you.
Maybe the Best example of that that day was just referring to is the Shoppable digital twin so that has been a <unk> aspect of this right you're you're taking the plan you're putting it into that three dimensional environment and the real Bang for the Buck has to shop ability they won't be able to pick up the siding or roofing or whatever and see it on.
Keith Hughes: One other question on the price deflation in the quarter. Is that all lumber or are there any other products where you're saying prices deflating earlier? I'd say in general, it's across the board. You know, we we've talked a lot about inflation and some of the impacts there. Some of that has pulled back. We've seen certain categories pull back. We've seen the competition increase and some of those margins are wrote clearly the bulk of it that, you know, the vast majority of it is on the commodity components, but we've seen a little bit elsewhere.
Keith Hughes: Probably value add, you know, not probably value at the least. It's a margin normalization, but across the board, I think it's fair to say. Where were you asking about price or aren't costs from vendors? Well, really both, I mean, just in general between coming in and out of the warehouse beside lumber, there any specific products that you would call out and seeing more deflation. Well, I think we've talked about it in prior quarters.
The rendering have it be impacted with the real design be able to quote and shop, it and buy it.
In that entire experience as you might imagine is quite complex right. It's it's challenging both technically and <unk>. You are you <unk> user interface user experience type of dynamic so what we've been really focused on this summer is.
Our product in front of them right as it stands getting the feedback of how it works, how they're actually gonna transact and interact with that tool and making the tweaks behind the scenes to really drive the technology and the functionality to meet that need state head off and so when de talks about development and using.
The feedback from customers on development, that's a really big one for us and Super excited about what the teams are coming up where we we got to see some some pilot stuff recently or some demo stuff recently, it's I I agree with Dave Yoga like it.
Keith Hughes: There are, you know, a couple of categories that we've seen make some moves, probably the most obvious example is. After commodities is engineered lumber, they had some pretty substantial increase and have given a portion of that back. I would say in general though, it's been fairly modest, then cost increases for the most part, that's leveled out, more back to a regular normal increase per cost of inflation, that's it.
Alright, good to hear well appreciate the color and good luck here and keep it for days.
Keith Hughes: Okay, great, thank you.
Thanks Kurt.
And our next question comes from Quinn Fredrickson with bird.
Hey, good morning, I'm, just curious on the fiscal 24 scenarios in terms of high on birth does it's the the <unk> the swing factor, they're just really rates or anything else, we should be thinking about there.
Operator: Thank you.
Oh no question affordability rates in particular are in focus for us in terms of trying to predict that starts number.
It's an interesting balance, though you know we've continued to see very healthy very stable as day referred to pro sales and production through the industry.
Collin Verron: And we have our next question from Collin Verron with Jeffries. Hey, good morning, guys, thank you for taking my question. I appreciate the color and single family multi-family.
Collin Verron: I was just hoping you can walk us through how you're thinking about the R&R and market in the potential 2020-24 scenarios, kind of what informs your assumptions around those markets and maybe how the R&R business stacks up from a margin or product mix perspective. Yeah, I mean, R&R is fairly small for us, as you know, in that 20% of the business range is inclusive of our retail and commercial categories, so there's a lot in there.
Slipped back question of is there a magic number of mortgage rates that really puts them a step down type of impact on this industries in everybody's minds.
So far no.
But you know, we're certainly keeping a close eye on it and and really what you're seeing here and that was.
Trying to highlight it a little bit before these are different branches that we've seen from economists. We think this encompasses what we saw from all the economists that we were gathering in the last month or two so you know certainly will continue to dial this and will continue to update it based on what we're seeing but that's kind.
Collin Verron: In general, what we've seen is that we've had a bit more capacity available as the overall market has slowed and that's allowed us to focus in and we've had some success. So while there's, there have been, we see it as well, some headlines out of the economists that the investment side on the R&R might be pressured. We're feeling pretty good about what we've seen so far in our ability to fill available capacity by just offering our better services in product portfolio and expertise to categories of customers who want it, but haven't been able to get access to it. Great, that's helpful color.
That the context in which we came up with it.
Yeah. The only thing that that is keep in mind, we're talking in the full year right. We're not we're not sure. If we might have some more macro headwinds in the beginning of the year and at ease as the year goes on but who knows and you know what we what we hear more often than not though as the back half would probably be slightly better than the <unk>.
In that scenario.
We're ready regardless and then it got kind of our outline here with the scenarios as we've got a high performing business.
Peter Jackson: And then on the gross margin side, I think in the quarter it held up better than I think your previous guy would have implied. Can you just walk us through why margins were more resilient this quarter than you anticipated? And then maybe help us think about the step down in margins and how quickly you think that that could happen to get to that longer-term guide that you've punted out there. Yeah, no, that's that's a million-dollar question, Colin.
Really favorable positive numbers, regardless of which way. This goes so we didn't want to hesitate to put this out there for people to contemplate because sometimes the skepticism of the fear in the marketplace can become a little more than what's appropriate.
Okay. Thank you and then on the productivity side is there a certain target based victims of these scenarios or is it kind of a typical three to five per cent kind of productivity savings that you talked about it the investor day. Thanks.
Peter Jackson: You're absolutely right. We continue to wrestle with this. We continue to see the trends of that normalization, right? The share that we took, that we took a lot of and given back a little bit of it, the price that we took and we took a lot of and given back a little bit of it, it has played out, but I think it's fair to say it's been slower than we've anticipated. This quarter we did see a fair amount of what we expected.
Yeah. So I'm glad you asked that question because you wanted to differentiate between a couple of things first of all the 3% to 5% is our goal internally. So please do not ever load that into your numbers because I don't want to steer you the wrong direction.
<unk> of what we've been able to do it certainly gets harder right. I mean, we can talk about it being the first couple of years of being harvesting the low hanging fruit, we have a tremendous opportunity to continue to deliver productivity savings, but I think those savings become a bit more challenging a bit more programmatic overtime. So I think <unk>.
Peter Jackson: I think where the beat came, at least in my mind, was some of the timing around some of the rebate, some of the productivity, some of the favorable tailwinds and some of the product mix, just a little better than expected. Not massive, but it accumulated into a number that was a healthy beat on the margin line than what we would have originally. To your point, expected. The only thing that adds is we have a focus on using our scale to leverage our supply chain opportunities, better get a lower-landed cost, more direct sourcing.
Moderating of the annual number is appropriate.
But we intend to continue to deliver on that over time and that would be an important part of our our discussion in December as well well what I can say definitively it's embedded in our culture now I mean, we we have everybody in the field at all points, we offer incentives for any employee to come up with an idea and submit it.
Peter Jackson: Those come in little bits. We get a bite here on a product, a bite there on a product, but over time they start acting up that along with the investments we've made in the manufacturing, automation, and efficiencies gain there. Again, a little bit out of time, but then you look back in six months of doing it, and it's actually a meaningful number. Those things were starting to be able to track and see actually help.
And if it's an idea that we can use to cultivate savings from we reward the unemployed for that idea. So it is embedded in our culture. We have leaders from the field come together every year to set targets set goals and try to identify initiatives that will be the primary focus.
Peter Jackson: Great, I appreciate the color and good luck going forward. Thank you.
And you know what what I'm proud about is our ability to consistently deliver savings each each year.
Adam Baumgarten: And we have our next question from Adam Baumgarten with Zellman. Hey guys, you mentioned the multi-family declines that you're expecting in the second quarter next year. Do you expect that business to normalize from a margin perspective in 2024 at this point? I know it's been a bit of a tailwind. We do. Yeah, we think those things are kind of hand in glove, both the volumes and then the mark the resulting margin just competition loss a little bit. Thank you.
That's helpful. Thank you.
Thank you.
And we have our next question from Mike Doll with RBC capital markets.
Good morning, Thanks for taking my questions.
Uhm.
Peter <unk>.
With multifamily and I guess kind of challenge the.
Living in framing of.
Pause that then is resolved by.
The end of next year I think that the industry participants we talk to are starting to talk about numbers that are significantly greater you know declines of 30 40 per cent.
Kurt Yinger: And our next question comes from Kurt Yinger with DA Davidson. Great thing.
Kurt Yinger: Good morning, everyone. I just wanted to stick on the gross margin line. And I guess if you were to kind of peel back some of the multi-family benefits, I mean, how would you kind of characterize where that core gross margin stands versus, you know, where you would expect normalized to be in. And what stage of that normalization process are we in because we talked about it in a long time. It seems like over the last several quarters, you know, it started to materialize, but you know, the tale of how that stretches into next year also seems pretty long.
Starts next year and no rebound.
And potentially even further declines in in 2025, so what specifically are you and bedding.
Multifamily who are you talking to this kind of high level of economists like you've alluded to for our industry participants and multifamily and <unk>.
Forming that you that's kind of part one and part two is then maybe it is a follow up just remind us how much of your business and multifamily is more tied to start.
Kurt Yinger: So just love your thoughts there. Yeah, so there's there's a couple of different pieces, right? If you stipulate, which I think you have that we've set multi-family aside for all the reasons we've already talked about. I think the storyline on single family is that we've seen the bulk of the margin normalization in the core products. There's more to go. But I think we've seen the bulk of it. If you look at, you know, subcategories, quarter or over quarter, so Q323 to Q322, you're talking, you know, mid single digits, percentages of margin that we've given back in the commodities, we've given back price and margin in every one of the categories.
Birth is Nathan.
<unk> later in the construction cycle there.
Well, the only thing I, I guess I want to clarify pause pause means.
From a standpoint of even.
Planning for embedding now and trying to get a project.
Under way it doesn't necessarily translate to when we would see sales, but from a new project would cause of the 1918 months of duration, but you know so we're definitely anticipating ah slowdown in multifamily Peter Yeah, Yeah. So I guess comments I'd make when we when we talked about.
You know a bounce back in a couple of different scenarios debuted refer to it a multifamily you talked a little bit about on single fan. So I wanted to make sure we separate those two for starters.
Kurt Yinger: So that normalization that we've been talking about, we've been digesting it, and we've been processing it. I don't think we're done. I think when we look at the numbers, we see the trends in certain categories and markets, there's probably another leg there. But it's far smaller than the first leg. So we're, you know, we're in the sixth, seventh inning here. We're not in the second inning. You know, that said, there's certainly every quarter timing and, you know, things that come through in terms of, like they said, when we see benefits, when we see the timing on certain rebays, that sort of thing. And multifamily is not to be minimized, right? It's been a big deal for us this year, and we do think it will normalize into next year.
Multifamily, we don't know when the boss is there's no question in our minds downsized comment right. We can see that because we're selling into the middle of next year already and we're seeing the declines in quotes and bids and slow now the one thing I also want to be real careful of us we don't sell into <unk>.
Rise is or you know some of the other urban environment, that's not really our play for the most part right where five storey below wood frame multifamily structures, which we do think is going to be a bit more responsive to the housing needs that we see in the in the U S market in this day and age and.
David Rush: Okay, that's super helpful. And then just on the technology front up, I'm curious with some of the pilots that you've had, you know, what are kind of some of the most promising offerings within that where you've seen particular traction. And maybe some of the big learnings that you've taken away from these programs that you'll look to implement or change kind of on the full scale launch early next year.
Some of the other dynamics that we think are favorable to that but.
But you're you're you're comments are accurate in terms of what we received there are certainly pessimism the higher rates have made deals and projects more difficult to pencil out and we even have seen a downturn I would say at this stage, we're not seeing the numbers you've been tee. It up there is it possible sharp wooden wooden.
David Rush: Yeah, that's a great question. I would tell you understand the pilots are not for learning how to implement it or learning how to develop. So what we've used the pilots for is get the product where we want it to get. Having said that, one of the favorite modules of the folks that are engaged is the one that you can take and put all the plans for HBAC framing, plumbing all into a module and it shows where those trades potentially would collide with each other and resolve that collision in, you know, before it goes live into the field and that is the one that particularly builders thank gives them the biggest and quickest return from savings because it minimizes the mistakes that you would have to learn on the fly in the field and you get ahead of them.
<unk>, you know wouldn't rule out it going anywhere for us, though I think our ability to do a couple of things one is to <unk>.
Scale, our facilities change shifts, but also the second thing is too.
Rebalance, where we put our load from a value added products perspective, we can certainly move single family to multifamily and vice versa, which we've been doing recently, so we will continue to do that and ensure that we're protecting this franchise because we absolutely believe in multifamily in the long run even if there is some cyclicality in.
Near term.
To your to your second question, which is the the ratio of that multifamily business and what is what is weighted towards I would say that it's probably kind of.
80% weighted towards the start and more 20% weighted towards the the the completion directionally and that's because the bulk of it is trust an upfront product with a bit of it being related to millwork, which is a little closer to the completion at the completion, but a bit close.
David Rush: So that's probably the one that we get the most positive feedback on, but, you know, what we're really trying to do is get everything resolved from a customer perspective on the front end. So when we go to a full product launch, they'll already have solved the problems that they're counting on us solving. And maybe the best example of that that they was just referring to is the shoppable digital twin. So that has been a core aspect of this, right?
Yeah. The only thing I'd add is and why I use the term falls first of all is just the underline housing demand me I mean, if they can't get into single family because of affordability concerns.
Family is the next best option and I think it will be relatively.
David Rush: You're, you're taking the plan and you're putting it into that three dimensional environment and the real bang for the buck is the shop ability. They want to be able to pick a siding or a roofing or whatever and see it on the rendering, have it be impacted with the real design, be able to quote it and shop it and buy it. And in that entire experience, as you might imagine, is quite complex, right?
Quick for the rent factor to be figured out where we get to a rental number that's cheaper than a mortgage maybe more than we wanted to pay but at the end of the day, it's the best chance I've got to get my own place. So.
Made me pause was too optimistic, but it's something that I I hold because of the overall demand that we see out there.
David Rush: It's challenging both technically and from a UI UX user interface user experience type of dynamic. So what we've been really focused on this summer is putting our product in front of them, right? Like as it stands, getting the feedback of how it works, how they're actually going to transact and interact with that tool and making the tweaks behind the scenes to really drive the technology and the functionality to meet that need state head on.
Okay. Yeah, I mean now that last point, we certainly agree with I think it's just a question of kind of financing panics and other.
Other things in terms of what's kinetic take half.
And duration bear, which and then the.
Five storing below is probably an important distinction too by my second question or follow up which is also related on the margin sides of setting aside the.
David Rush: And so when Dave talks about development and using the feedback from customers on development, that's a really big one for us and super excited about what the teams are coming up with. We got to see some pilot stuff recently or some demo stuff recently. It's, I agree with Dave, you all are going to like it.
The over earning that you've covered kind of AD nauseum on multifamily and just thinking about kind of the core multifamily margin any mix.
If we were to see her multifamily business, which is currently about 13% of sales go to say eight 910%.
David Rush: All right, good to hear. Well, appreciate color. Good luck here and keep it for guys.
Quinn Fredrickson: Thanks. And our next question comes from Quinn, Fredrickson, with Baird. Hey, good morning. Just curious on the fiscal 24 scenarios in terms of the high end versus the low end is the swing factor there just really rates or anything else we should be thinking about there. No question affordability rates in particular are in focus for us in terms of trying to predict that starts number. You know, it's an interesting balance, though, you know, we've continued to see very healthy, very stable as Dave referred to sales and production through the industry.
Oh sales can you help us understand.
Quantify the margin impact to the total company from that type of a change.
Next again setting aside the current over earning dynamics and just.
That being a better than average core margin.
So.
It.
I want to be careful here I totally understand your question is a good question.
I don't want to start getting into guidance for 2024.
So I'll comment Directionally based on some of the things we've said throughout this year I hope. It's helpful to you I think if you go through and look at the margins that we've talked about over earning it's been different by quarter.
Quinn Fredrickson: What that question of is there a magic number of mortgage rates that really puts, you know, a step down type of impact on this industries in everybody's minds so far. No, but, you know, we're certainly keeping a close eye on it and really what you're seeing here. I was trying to highlight it a little bit before. These are different ranges that we've seen from economists. We think this encompasses what we saw from all the economists that we were gathering in the last month or two. So, you know, certainly we'll continue to dial this in, we'll continue to update it based on what we're seeing, but that's kind of the context in which we came up with.
Kind of average in together and you're kind of in that 150 ish range ish.
I think that's a starting point for what we described as over earning now if you see some of the numbers you're describing in a big downturn that adds another layer of challenge to the market and capacity in competition, so that kind of.
Oh, I'd say, all bets are off that a different model than what I'm, referring to inquire about this year and what we think has been unusual in terms of the over earning but both of those will play together.
Okay. Thank you.
Mmm.
Okay.
David Rush: Yeah, the only thing I'd add is keep in mind we're talking the full year, right? We're not sure. If we might have some more macro headwinds in the beginning of the year, and it ease as the year goes on, but who knows. And, you know, what we, what we hear more often than not though is the back half would probably be slightly better than the front after that scenario. We're ready regardless.
And our next question comes from keep mentor with BMO capital markets.
<unk>.
Hey, I just curious can you talk a little bit about how some of the region's saddling. That's fine October be talked about some of the product categories, but in terms of your T. V. <unk> are you seeing any noticeable change in terms of one be the stronger or weaker worse at the other.
David Rush: And then they got kind of our outline here with the scenarios is we've got a high performing business. We're going to deliver really favorable positive numbers regardless of which way this goes. So, we didn't want to hesitate to put this out there for people to contemplate because sometimes the skepticism or the fear in the marketplace can become a little more than what's appropriate.
Yeah, it's at beginning of the year definitely <unk>.
As we came into this we saw a lot sort of west to east the market's got stronger right west what's the worst.
That changed a little bit as the year progressed, I'd say, I'd say west bottomed out and bounced a little bit central struggled a little longer than we've seen certain parts of the especially the south central sort of drag longer than we expected you know again, not horrible, but if I'm comparing the year over year sales trends.
Quinn Fredrickson: Okay, thank you.
Peter Jackson: And then on the productivity side, is there certain target baked into these scenarios or, you know, is it kind of a typical three to five percent kind of productivity savings that you talked about at the investor day. Thanks. Yeah, so I'm glad you asked that question because I do want to differentiate between a couple of things. First of all, the three to five percent is our goal internally. So please do not ever load that into your numbers because I don't want to steer you the wrong direction.
They've probably trail the other markets.
I don't know that there's anything meaningful in terms of differences at this point I think they're all pretty comparable yeah, I I would say the west.
Relatively has has shown a little bit more of a balanced that's for sure I'd say parts of Texas, you know flattened for sure.
Peter Jackson: You know, in terms of what we've been able to do, it certainly gets harder, right? I mean, we talk about it being the first couple of years of being harvesting the low hanging fruit. We have a tremendous opportunity to continue to deliver productivity savings, but I think those savings become a bit more challenging, a bit more programmatic over time. So I think a moderating of the annual number is appropriate, but we intend to continue to deliver on that over time.
I think we're seeing a nice upticks relative uptake in the north central and some of those markets but.
At the beginning of the year that the discrepancy between.
Between great and not so great was wider is that gas closed it's more stable across all markets at this point from a perspective of year over year compares.
Peter Jackson: And that will be an important part of our discussion in December as well. Well, what I can say definitively, it's embedded in our culture now. I mean, we have everybody in the field at all points. We offer incentives for any employee to come up with an idea and submit it. And if it's an idea that, you know, we can use to cultivate savings from, we reward that employee for that idea. So it is embedded in our culture.
Got it that's very helpful.
Thanks for your time.
And our final question comes from Stephen Ramsay was Thompson Research group.
Hi, good morning on the 2024 market outperformance perspective.
Have you thinking about how to get that outperformance, if it's new accounts or bigger penetration of existing accounts just any color on the outperformance.
Peter Jackson: We have leaders from the field come together every year to set targets that go and try to identify initiatives that will be the primary focus. And, you know, what I'm proud about is our ability to consistently deliver savings each year.
Peter Jackson: That's helpful. Thank you.
Yeah, I mean, there's a couple of key categories that we continue to run the same play like in football if they can't stop the run we're gonna keep running we're gonna keep investing in and taking advantage of the need for value added products and services in this industry builders continued to wrestle with the labour availability problems. They.
Mike Dahl: And do we have our next question from Mike doll with RBC capital markets? Good morning. Thanks for taking my questions.
Continue to wrestle with the onsite efficiency and effectiveness. They continued to wrestle with the cost of capital for the cycle times of building a home that's what we're good at so we're going to continue to invest we've got multiple plants coming online we've got more capacity coming online and in markets, where we think is really going to be taken up quickly. So that's an important.
David Rush: Peter, I want to stick with multi-family and I guess kind of challenge the phrasing and framing of the pause that then is resolved by... At the end of next year, I think the industry participants we talked to are starting to talk about numbers that are significantly greater, you know, declines of 30, 40% and starts next year and no rebound and potentially even further declines in 2025. So what specifically are you embedding for multi-family and who are you talking to?
These the other big important piece for US is is digital we think that we already have we.
We think we're already the easiest to <unk> to do business with where the where the most efficient with got the best technology and we're about to take a big lead in that space that we think is gonna be both usually beneficial to our customers, but also make us even more of the supplier of choice in the partner of choice in this.
David Rush: Is this kind of high level economists like you've alluded to or industry participants and multi-family informing that view that's kind of part one and part two has been maybe as a follow up just remind us how much of your business and multi-family is more tied to starts. Versus maybe mid to later in the construction cycle there. Well, the only thing I guess I want to clarify Paul's, Paul's means from a standpoint of even planning for embedding out and trying to get a project underway, it doesn't necessarily translate to when we would see sales. It's not from a new project with calls of the 19 to 18 months of duration, but you know, so we're definitely anticipating a slowdown in multi-family Peter.
<unk>.
The only thing I'd emphasizes what Peter said at the very beginning we're looking at the industry, we're seeing where our customers paying points are and we identify those as opportunities for us. So we're trying and we're focusing on how we can help solve labour challenges for our customers and create opportunity for.
Ourselves, we've got core base operations in our major markets that do that today, we're looking to expand that into additional products. There's there's ways. We can do what we're already good at and expand that and that'll grow share. The other thing I would add as we have the last cup.
Apple years been in somewhat of a maintenance mode. The calls we've had to we've had sales guys that were covered up and just handling the business. They already had we're gonna also make a concerted effort to invest in sales for it to go out and be more hunters and we are gatherers. So.
Peter Jackson: Yeah, yeah, so that I guess comments I'd make when we when we talked about, you know, a bounce back a couple of different scenarios Dave did refer to it a multi-family talked a little bit about on single family. So I want to make sure we separate those two for starters. Multi-family we don't know when the pause is there's no question in our minds. Downside coming right we can see that because we're selling into the middle of next year already and we're seeing the declines in quotes and bids and so on.
There's two things we think are realistic initiatives that will help us scratch here.
Okay helpful and then on the 2024.
<unk> it looks like the free cash flow mid point is down about 500 billion from the bitcoin of the 2023 guide what are the factors that drive the mid point difference there between email working capital Capex.
Peter Jackson: Now one thing I also want to be real careful of is we don't sell into high rise is or you know some of the other urban environment that not really are play for the most. Part right where five story in below would frame multi-family structures which we do think is going to be a bit more responsive to the housing needs that we see in the US market in this day and age and some of the other dynamics that we think are favorable to that.
Yeah, you're right. The mid point is down really straightforward answer on that and hopefully it's consistent with everything you guys know about us and that's when we shrink this business we release, a tremendous amount of working capital and when the business is stable, it's sort of flat and when it's growing we're gonna use some working capital we generally use a rule.
Thumb of about 10%.
Peter Jackson: But your your comments are accurate in terms of what we were seeing there are certainly pessimism the higher rates have made you know deals and projects more difficult to pencil out and we have seen a downturn I would say at this stage we're not seeing the numbers you've been teeing up there. Is it possible sure wouldn't out you know wouldn't rule out it going anywhere for us though I think our ability to do a couple of things one is to you know to scale our facilities change shifts but also the second thing is to rebalance where we put our load from a value added products perspective.
Incrementals decrementals to sales as a good proxy for what happens in our in our working capital obviously, you've got some puts and takes their we've done some good work on managing through some issues that we've been talking about over the past couple of years. The primary answer is just the the working capital flex.
The size of the top one.
Alrighty. Thank you.
Alright I appreciate it.
And it looks like we have reached our a lot of time for a Q&A session.
Does conclude today's program and thank you for your participation you may now disconnect.
Mmm.
Peter Jackson: We can certainly move single family to multi-family and vice versa which we've been doing recently so we'll continue to do that and ensure that we're protecting this franchise because we absolutely believe in multi-family in the long run even if there's some cyclicality, to your second question, which is the ratio of that multi-family business and what is waded towards. I would say that it's probably kind of 80% waded towards the start and more 20% waded towards the completion just directionally.
[noise].
Peter Jackson: And that's because the bulk of it is trust and upfront product with a bit of it being related to milk work, which is a little closer to the completion, not at the completion, but a bit closer to that. Yeah, the only thing I'd add is, and why use the term, Paul's versus Paul's, is just the underlying housing demand. I mean, if they can't get into single family because of portability concerns, multi-family is the next best option, and I think it will be relatively quick for the rent factor to be figured out, where we get to a rental number that's cheaper than a mortgage, maybe more than we wanted to pay, but at the end of the day it's the best chance I've got to get my own place.
Mmm.
[noise] [music].
Mmm.
[music].
Peter Jackson: So maybe Paul's is too optimistic, but it's something that I hold because of the overall demand that we see out there. Okay, yeah, I mean, now that last point, we certainly agree with, I think it's just a question of kind of the financing mechanics and other things in terms of what's going to dictate have steps and duration there, which, and then the five-storing below is probably an important distinction, too.
Alright.
[music].
Peter Jackson: My second question or follow-up, which is also related on the margin side, so setting aside the the over earning that you've covered kind of at Nazia on multi-family and just thinking about kind of the core multi-family margin and mix. If we were to see your multi-family business, which is currently about 13% of sales, go to say 8, 9, 10% of sales, can you help us understand or quantify the margin impact to the total company from that type of a change?
Peter Jackson: It makes, again, setting aside the current over earning dynamics and just focusing on kind of that being a better than average core margin. So I want to be careful here. I totally understand your question. It's a good question. I don't want to start getting into guidance for 2024. So I'll comment directionally based on some of the things we've said throughout this year. I hope it's helpful, too. I think if you go through and look at the margins that we've talked about over earning, it's been different by quarter.
Peter Jackson: You kind of average them together and you're kind of in that one 50-ish range-ish. So I think that's a starting point for what we described as over earning. Now if you see some of the numbers you're describing and a big downturn, that adds another layer of challenge to the market and capacity and competition. So they all bets are off about a different model than what I'm referring to about this year and what we think has been unusual in terms of the over, on both of those who play together. Okay, thank you.
Okay.
[music].
Mmm.
Uh-huh.
Keith Mamtora: And our next question comes from Keith Mamtora with BMO Capital Markets. Thank you. Thank you very much. Hey, I'm just curious. Can you talk a little bit about how some of the regions are doing as far in October? We talked about some of these product categories. But in terms of your key regions, are you seeing any noticeable change in terms of one being stronger or weaker versus the other? Yeah, it's beginning of the year, definitely.
Mhm.
Mmm.
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Uh-huh.
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Keith Mamtora: You know, as we came into this, we saw a lot sort of West to East. The markets got stronger, right? West was the worst. That changed a little bit as the year progressed. I'd say West bottomed out and bounced a little bit. Central struggled a little longer. I think we've seen certain parts of the, especially the South Central sort of drag longer than we expected. You know, again, not horrible, but if I'm comparing the year over year sales trends, they've probably trailed the other markets.
Keith Mamtora: I don't know that there's anything meaningful in terms of differences at this point. I think they're all pretty comparable. Yeah, I would say the West relatively has shown a little bit more of a bounce. That's for sure. I'd say parts of Texas, you know, a flattened for sure. I think we're seeing a nice uptick relative uptick in the north central and in some of those markets. But we're at the beginning of the year, the discrepancy between between great and not so great was wider. It's that gaps closed. It's more stable across all markets at this point from a perspective of year over year comparison. God, that's a helpful good luck. Thanks, Tom.
Stephen Ramsey: And our final question comes from Stephen Ramsey with Thompson Research Group. Hi, good morning on the 2024 market out performance perspective. Have you thinking about how to get that out performance if it's new accounts or bigger penetration of existing accounts?
David Rush: Just any color on the out performance? Yeah, I mean, there's a couple of key categories that we continue to run the same play. Like in football, if they can't stop the run, we're going to keep running. We're going to keep investing in and taking advantage of the need for value added products and services in this industry. Builders continue to wrestle with the labor availability problems. They continue to wrestle with onsite efficiency and effectiveness.
David Rush: They continue to wrestle with the cost capital for the cycle times of building a home. That's what we're good at. So we're going to continue to invest. We've got multiple plants coming online. We've got more capacity coming online in markets where we think it's really going to be taken up quickly. So that's an important piece.
David Rush: The other big important piece for us is digital. We think that we already have, we think we're already the easiest to do business with where the, you know, we're the most efficient. We've got the best technology and we're about to take a big leap in that space that we think is going to be both hugely beneficial to our customers, but also make us even more the supplier of choice and the partner of choice. Industry.
David Rush: The only thing I'd emphasize is what Peter said at the very beginning. We're looking at the industry, we're seeing where our customers' pain points are and we identify those as opportunities for us. So we're trying and we're focusing on how we can help solve labor challenges for our customers and create opportunity for ourselves. We've got core base operations in our major markets that do that today. We're looking to expand that into additional products. There's ways we can do what we're already good at and expand that and that'll grow share.
David Rush: The other thing I would add is we have the last couple of years been in somewhat of a maintenance mode because we have had to. We've had sales guys that were covered up and just handling the business they already had. We're going to also make a concerted effort to invest in sales for us to go out and be more hunters than we are. Gatherers. So those two things we think are realistic and this gives that what office grab to hear. Okay, helpful.
Peter Jackson: And then on the 2024 scenarios, looks like the free cash flow midpoint is down about 500 million from the midpoint of the 2023 guide. What are the factors that drive the midpoint difference there between EBITDA working capital and Catholics? Yeah, you're right. The midpoint is down really straightforward answer on that and always consistent with everything you guys know about us. And that's that when we shrink this business, we release a tremendous amount of working capital.
Peter Jackson: And when the business is stable, it's sort of flat. And when it's growing, we're going to use some working capital. We generally use a rule of thumb of about 10% incrementals and decrementals to sales as a good proxy for what happens in our in our working capital. Obviously you got some puts and takes there. We've done some good work on managing through some issues that we've been talking about over the past couple of years, but the primary answer is just the working capital flex with the size of the top one.
Mike Dahl: Alrighty, thank you. Appreciate it.
Operator: And it looks like we have reached our allotted time for our Q&A session. This does conclude today's program. Thank you for participation. You may now disconnect. Thank you.
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