Q2 2024 Builders FirstSource Inc Earnings Call
Please stand by we're about to begin.
Operator: Please stand by. We're about to begin. Good day and welcome to the Builders FirstSource second quarter 2024 earnings conference call. Today's call is scheduled to last about one hour, including remarks by management and a question and answer session. In order to ask a question, please press the star key followed by the number one on your phone at any time during the call. I'd now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations, for Builders FirstSource. Please go ahead.
Speaker Change: Good day and welcome to the Builders FirstSource Second Quarter 2024 Earnings Conference Call.
Speaker Change: 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 1 on your phone at any time during the call.
Heather Kos: I'd now like to turn the call over to Heather Kos, Senior Vice President, Investment Relations for Builders FirstSource. Please go ahead.
Heather Kos: Good morning, and welcome to our second quarter 2024 earnings call. With me on the call are Dave Rush, our CEO, and Peter Jackson, our CFO.
Speaker Change: Good morning and welcome to our second quarter 2024 earnings call. With me on the call are Dave Rush, our CEO , and Peter Jackson, our CFO .
Heather Kos: The earnings press release and presentation are available on our website at investors.bldr.com. We will refer to the presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes only, and they should not be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable in a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings, and presentations.
Speaker Change: The earnings press release and presentation are available on our website at investors.bldr.com. We will refer to the presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items.
Speaker Change: We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures.
You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures, where applicable, in a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings, and presentation.
Heather Kos: Our remarks in the press release presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'll turn the call over to Dave.
Our remarks in the press release presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results.
Dave Rush: Please review these forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'll turn the call over to Dave.
Dave Rush: Thank you, Heather. Good morning, everyone, and thanks for joining us on our call. As we continue to operate in a complex environment, I am proud of our resilient second quarter results, highlighted by our mid-team DBA margin, which demonstrates the strength of our differentiated business model and the hard work of our extraordinary team members. While we continue to see the expected affordability challenges in normalization and multifamily, we are executing our strategy by controlling what we can control, investing in value-added solutions, and driving adoption of our industry-leading digital platform.
Dave: Thank you, Heather. Good morning, everyone, and thanks for joining our call.
Dave Rush: As we continue to operate in a complex environment, I am proud of our resilient second quarter results, highlighted by our mid-team DA margin, which demonstrates the strength of our differentiated business model and the hard work of our extraordinary team members.
Speaker Change: While we continue to see the expected affordability challenges in normalization and multi-family, we are executing our strategy by controlling what we can control, investing in value-added solutions, and driving adoption of our industry-leading digital platform.
Dave Rush: Our ability to solve industry pain points with our best-in-class product portfolio and exceptional customer service makes us a trusted partner as our customers navigate this complex macro landscape. While near-term market dynamics are challenging as starts have lost momentum, we remain focused on executing our strategy in the weeks and months ahead, and we are well positioned for growth as long-term housing tailwinds remain intact. Moving to our strategic pillars, on slide three, we continue to invest in value-added products, installation services, and digital solutions, which are engines for our current and future organic growth.
Speaker Change: Our ability to solve industry pain points with our best-in-class product portfolio and exceptional customer service makes us a trusted partner as our customers navigate this complex macro landscape.
Speaker Change: While near-term market dynamics are challenging as starts have lost momentum, we remain focused on executing our strategy in the weeks and months ahead, and we are well positioned for growth as long-term housing tailwinds remain intact.
Speaker Change: Moving to our strategic pillars on slide 3, we continue to invest in value-added products, install services, and digital solutions, which are engines for our current and future organic growth.
Dave Rush: Through our value-added products and installed services, we help meet our customers' affordability challenges by finding lower cost product options. With our digital tools, we are providing our customers with a more efficient and cost-effective way to manage home construction. Now, let's move to slide five, where we show how we're executing our strategy. We are also maximizing operational flexibility and have consolidated seven facilities while maintaining our service levels to our customers with an on time and in full delivery rate of over 90%, for example.
Speaker Change: Through our value-added products and installed services, we help meet our customers' affordability challenges by finding lower-cost product alternatives.
Speaker Change: ...alternatives, reducing cycle times, and addressing labor constraints. With our digital tools, we are providing our customers with a more efficient and cost-effective way to manage home construction.
Speaker Change: This leads to increased customer stickiness, new business, and improved operational efficiency for BFS.
Speaker Change: We have a robust set of continuous improvement initiatives.
Speaker Change: focused on leveraging our scale while delivering the highest quality products and services to our customers.
Speaker Change: Our highly experienced team members are delivering these critical initiatives while serving our customers with excellence and integrity every day.
Speaker Change: Finally, we continue to allocate capital in a disciplined manner with a proven M&A strategy and a track record of buying back shares at attractive prices over the long term.
Speaker Change: Turning to our second quarter highlights on slide four, while navigating a market challenged by cross currents, we have seen softer than expected sales.
Speaker Change: However, we delivered strong gross margins of nearly 33% in Q2 and our adjusted EBITDA margin has remained in the mid-teens or better for 13 consecutive quarters.
Speaker Change: Our durable margin profile is a key proof point of our transformed business model and our differentiated product portfolio and scale.
Speaker Change: Given the strength of our base gross margin, we see opportunities to more aggressively grow after profitable share.
Speaker Change: We have grown our mix of value-added products over the past five years, improved our manufacturing processes and efficiency.
Speaker Change: and positioned ourselves at the forefront of home building innovation.
Speaker Change: Let's move to slide 5 where we show how
Speaker Change: Our full suite of value-added products and services remains a competitive advantage for BFS and continues to bolster our partnerships with customers.
Speaker Change: We're pleased with our progress on digital, as we continue to hear great feedback from customers and see increasing levels of adoption each week.
Speaker Change: We demonstrated operational rigor by delivering $37 million in productivity savings in Q2 and have driven $77 million year-to-date, primarily through more efficient manufacturing and procurement initiatives.
Speaker Change: As I have spoken about in the past, we continue to use playbooks to drive growth in our install services business.
Speaker Change: I'm pleased that our install sales increased by 15% year-over-year as we focus on helping customers address labor challenges.
Speaker Change: Our managers have best-in-class information to help them navigate this dynamic environment and make effective, real-time decisions.
Speaker Change: We are also maximizing operational flexibility and have consolidated seven facilities while maintaining our service levels to our customers with on-time and in-full delivery rates of over 90%.
Speaker Change: We will remain disciplined managers of discretionary spending no matter the operating environment.
Speaker Change: We are continuing to take actions into the second half of the year to flex the business where appropriate.
Speaker Change: The single-family growth momentum occurring earlier in 2024 has stalled as interest rate cuts have not materialized and starts have come in lower than expected.
Speaker Change: In addition, the value of a new start has fallen as the market has adapted to affordability challenges.
Speaker Change: Multifamily continues to be a headwind amid muted activity and relative to our record performance last year, which is creating an increasingly tough comparison.
Speaker Change: This was expected and detailed on prior calls as multifamily continues to normalize.
Speaker Change: Even at today's levels, Multifamily continues to be a very profitable business for us.
Speaker Change: In the current environment, builders have employed specs, smaller and simpler homes, and interest rate buy-downs to help buyers find affordable options.
Speaker Change: Builders of all sizes are having to navigate affordability issues, along with regulatory, land development, and infrastructure challenges.
Speaker Change: Smaller builders have been especially impacted by the availability of land and limited options to buy down rates.
Speaker Change: We are partnering with our customers to help them lower the cost of homes for consumers, as well as maintain their margins.
Speaker Change: This includes balancing our product mix to address their needs while passing through lower material costs.
Speaker Change: For example.
Speaker Change: When Engineered Wood Products, or EWP, was constrained, we supplied a larger number of higher value floor trusses.
Speaker Change: As EWP supply normalized and prices came down, we have been able to provide customers with more EWP and have sold fewer floor trusses.
Speaker Change: helping to specifically address the builder's biggest current challenge, affordability. We have what the builders want and do what's right by them. Although this trend means less sales and gross profit dollars, our margin profile remains strong.
Speaker Change: We have the operational and financial flexibility needed to partner with our customers to meet their needs and capture growth opportunities.
Speaker Change: Turning to M&A on slide 6, we continue to pursue attractive opportunities while remaining financially disciplined.
Speaker Change: In the second quarter, we completed three deals with aggregate 2023 sales of roughly $72 million.
Speaker Change: In May, we acquired Shunwin's Building Materials, which we detailed on our Q1 call, and TRS Components, which establishes truss manufacturing within Metro Detroit.
Speaker Change: In June , we acquired RPM Wood Products, which enhances our ability to serve high-end custom builders in Northeast Florida.
Speaker Change: Finally, in July , we acquired Western Trust and Components.
Speaker Change: adding Trust Capacity in Flagstaff, Arizona area, and CRI SoCal, a dealer and installer of high-end windows and doors in Orange County. We are excited to welcome these talented new team members to the BFS family.
Speaker Change: Our disciplined approach to M&A includes increasing our market position in desirable geographies, extending our lead in value-added and specialty solutions, and enhancing customer retention.
Dave Rush: Our M&A pipeline remains healthy, and we believe we can continue to acquire in a fragmented market. I'm happy to announce that our board has authorized a new $1 billion share repurchase plan. As proven by our track record, we will continue to buy back shares while allocating capital to high-return opportunities. We remain on track to strategically deploy $5.5 to $8.5 billion in capital from 2024 to 2026, as outlined at Investor Day last December.
Speaker Change: Our M&A pipeline remains healthy, and we believe we can continue to acquire in a fragmented market.
Speaker Change: On slide 7, we provide an update on capital allocation.
Speaker Change: In addition to the three tuck-in acquisitions during the second quarter, we repurchased nearly $1 billion of shares.
Speaker Change: I'm happy to announce that our board has authorized a new $1 billion share repurchase plan. As proven by our track record, we'll continue to buy back shares while allocating capital to high return opportunities.
Speaker Change: We remain on track to strategically deploy $5.5 billion
Speaker Change: Capital from 2024 to 2026 as outlined at Investor Day last December .
Dave Rush: Now, let's turn to slides 8 and 9 for an update on our digital strategy. As the only provider of an end-to-end digital platform in our space, we believe BFS digital tools will be transformative for the industry and a substantial driver of organic growth. We've had broad acceptance of the platform so far, including interest from multiple top 200 builders. Since launching in late February, we have seen the back. The value of orders placed through the digital platform went from nearly zero to over $250 million.
Speaker Change: Now let's turn to slides 8 and 9 for an update on our digital strategy.
Speaker Change: As the only provider of an end-to-end digital platform in our space, we believe BFS digital tools will be transformative for the industry and a substantial driver of organic growth.
Speaker Change: We have seen strong adoption and growth with our target audience of smaller builders, even as they endure a challenging operating backdrop.
Speaker Change: We've had broad acceptance of the platform so far, including interest from multiple top 200 builders.
Speaker Change: Since launching in late February , we have seen the back...
Dave Rush: Year-to-date through Q2, incremental sales have totaled $45 million. I want to extend our heartfelt gratitude to our industry partners and sponsors whose overwhelming support made this successful event possible. I'll now turn the call over to Peter to discuss our financial results in greater detail.
Speaker Change: The value of orders placed through the digital platform go from nearly zero to over $250 million. Year-to-date through Q2, incremental sales have totaled $45 million.
Speaker Change: While we still have a long way to go, we remain confident in our ability to meet our target of $1 billion in incremental sales by 2026 as we grow wallet share and win new customers.
Speaker Change: I am thrilled to share a significant achievement that underscores our team members' commitment to making a positive impact in our communities.
Speaker Change: At our recent annual charity event, we successfully raised over $1 million on behalf of the Leukemia and Lymphoma Society.
Speaker Change: This brings total contributions to nearly $12 million since first partnering with LLS in 2006.
Speaker Change: These funds are crucial to advancing research, patient support, and advocacy programs aimed at finding treatments and cures for blood cancers. I want to extend our heartfelt gratitude to our industry partners.
Speaker Change: and sponsors, whose overwhelming support made this successful event possible.
Speaker Change: I'll now turn the call over to Peter to discuss our financial results in greater detail.
Peter Jackson: Thank you, Dave, and good morning, everyone. We were able to effectively navigate a softer than expected housing environment during the second quarter by leaning into the pillars of our strategy and operating model. Leveraging our Fortress balance sheet and exceptional financial flexibility, we executed nearly $1 billion of share repurchases during stock price weakness and made three tuck-in acquisitions to enhance and expand our footprint. We believe the sustainable competitive advantages in our extensive geographic coverage, value-added solutions, and strong financial position are enabling us to successfully manage market dynamics and deliver long-term value creation. I will cover three topics with you this morning.
Peter Jackson: Thank you, Dave, and good morning, everyone.
Peter Jackson: We were able to effectively navigate a softer-than-expected housing environment during the second quarter by leaning into the pillars of our strategy and operating model.
Peter Jackson: Leveraging our Fortress balance sheet and exceptional financial flexibility, we executed nearly $1 billion of share repurchases into stock price weakness and made three tuck-in acquisitions to enhance and expand our footprint.
Speaker Change: We believe the sustainable competitive advantages in our extensive geographic coverage, value-added solutions, and strong financial position are enabling us to successfully manage market dynamics and deliver long-term value creation.
Peter Jackson: First, I'll recap our second quarter results. Then, I'll provide an update on our capital deployment. And finally, I'll discuss our revised 2024 guidance and related assumptions. Let's begin by reviewing our second quarter performance on slides 10 and 11. Sales were $4.5 billion, a decrease of 1.6%, as core organic sales declined 3.8% with the expected multifamily downward trend. The decrease in net sales was partially offset by growth from acquisitions of 1.9% and commodity inflation of 0.3%. The core organic sales decline was driven by a multifamily decline of 31%.
Speaker Change: I will cover three topics with you this morning.
Speaker Change: First, I'll recap our second quarter results. Second, I'll provide an update on our capital deployment. And finally, I'll discuss our revised 2024 guidance and related assumptions.
Peter Jackson: Partially offset by increases in single-family starts of 1% amid higher starts and repair and remodel of 1.5%. I want to take a moment to discuss the variables impacting the disconnect between single-family starts and core organic sales. As a reminder, historically, there's a roughly two-month lag between a start and our first sale. In the current environment, we are seeing that lag extend as the relative timing of permits, starts, and completions has shifted in response to the changing market. Second, we have seen a meaningful decline in the sales opportunity of a starter home in 2024, as the size, complexity, and value of the average home have fallen.
Speaker Change: Let's begin by reviewing our second quarter performance on slides 10 and 11.
Speaker Change: Net sales were $4.5 billion, a decrease of 1.6%, as core organic sales declined 3.8% with the expected multifamily downward trend.
Speaker Change: The decrease in net sales was partially offset by growth from acquisitions of 1.9% and commodity inflation of 0.3%.
Speaker Change: The core organic sales decline was driven by a multifamily decline of 31%.
Speaker Change: Partially offset by increases in single family of 1% amid higher starts and repair and remodel of 1.5%.
Speaker Change: I want to take a moment to discuss the variables impacting the disconnect between single-family starts and core organic sales.
Speaker Change: As a reminder, historically there is a roughly two-month lag between a start and our first sale. In the current environment, we are seeing that lag extend, as the relative timing of permits, starts, and completions has shifted in response to the changing market.
Speaker Change: Second, we have seen a meaningful decline in the sales opportunity of a start in 2024, as the size, complexity, and value of the average home has fallen.
Peter Jackson: These changes are logical given the affordability challenges in the market, but they mean that we are seeing less dollars per start despite our strong operating performance. As an example, looking at the Phoenix market, we are supplying material to roughly 45 percent more homes, but our dollar sales are up only about 15 percent. To summarize, despite a market where products are smaller, less complex, and cheaper, we remain the market leader and will continue to deliver superior results.
Speaker Change: These changes are logical given the affordability challenges in the market, but it means that we are seeing less dollars per start despite our strong operating performance.
Speaker Change: As an example, looking at the Phoenix market, we are supplying material to roughly 45% more homes, but our dollar sales are up only about 15%.
Speaker Change: To summarize, despite a market where starts are smaller, less complex, and cheaper, we remain the market leader and will continue to deliver superior results.
Peter Jackson: During the second quarter, as we signaled and expected, multifamily declined more than 31% as we lapped the prior year's strong comp. R&R and other improved by over 1% given our retail strength in the faster growing West. Value-added products still represented approximately 49% of our net sales during the second quarter, despite the headwinds from multifamily.
Speaker Change: During the second quarter, as we signaled and expected, multifamily declined more than 31% as we lapped the prior year's strong comps. R&R and other improved by over 1% given our retail strength in the faster growing West.
Speaker Change: Value-added products still represented approximately 49% of our net sales during the second quarter, despite the headwinds from multi-family.
Peter Jackson: Gross profit was $1.5 billion, a decrease of approximately 8% compared to the prior year period. Gross margins were 32.8%. Decreasing 240 base, primarily driven by ongoing normalization, particularly in multifamily.
Speaker Change: Gross profit was $1.5 billion, a decrease of approximately 8% compared to the prior year period. Gross margins were 32.8%, decreasing 240 basis points.
Speaker Change: primarily driven by ongoing normalization, particularly in multifamily.
Peter Jackson: SG&A decreased $45 million to $973 million, primarily attributable to lower variable compensation, partially offset by Acquiring Operations. As a percentage of net sales, total SG&A decreased 70%, to 21.8%.
Speaker Change: SG&A decreased $45 million to $973 million, primarily attributable to lower variable compensation, partially offset by acquired operations.
Speaker Change: As a percentage of net sales, total SG&A decreased 70 basis points to 21.8%.
Peter Jackson: The team has done an excellent job of managing SG&A, and we are well positioned to leverage our fixed costs as the market grows. Adjusted EBITDA was approximately $670 million, down approximately 13%, primarily driven by lower gross profit, partially offset by lower operating expenses. Adjusted EBITDA margin was 15%, down 200 basis points from the prior year. On a sequential basis, adjusted EBITDA margin was up 110%, primarily driven by operating leverage. Partially offset by lower growth.
Speaker Change: The team has done an excellent job of managing SG&A, and we are well positioned to leverage our fixed costs as the market grows.
Speaker Change: Adjusted EBITDA was approximately $670 million, down approximately 13%, primarily driven by lower gross profit, partially offset by lower operating expenses.
Speaker Change: Adjusted EBITDA margin was 15%, down 200 basis points from the prior year. On a sequential basis, adjusted EBITDA margin was up 110 basis points.
Speaker Change: Primarily Driven by Operating Leverage
Speaker Change: Partially offset by lower gross margin.
Speaker Change: The adjusted net income of $420 million was down $78 million from the prior year, primarily due to lower gross profit partially offset by lower operating expenses.
Peter Jackson: The adjusted net income of $420 million was down $78 million from the prior year, primarily due to lower gross profit partially offset by lower operating costs. Adjusted earnings per diluted share was $3.50, a decrease of 10% compared to the prior year. On a year-over-year basis, share repurchases added roughly $0.22 per share for the second quarter.
Speaker Change: Adjusted earnings per diluted share was $3.50, a decrease of 10% compared to the prior year. On a year-over-year basis, share repurchases added roughly $0.22 per share for the second quarter.
Peter Jackson: Now let's turn to our cash flow balance sheet and liquidity on slide 12. Our Q2 operating cash flow was approximately $452 million, an increase of $61 million, mainly attributable to a decrease in net working capital and more than offsetting almost a $100 million decline in adjusted EBITDA. This is a proof point of how our business generates a robust amount of cash in any environment. Capital expenditures for the quarter were $85 million, and free cash flow was approximately $367 million.
Speaker Change: Now let's turn to our Cash Flow, Balance Sheet, and Liquidity on slide 12.
Speaker Change: Our Q2 operating cash flow was approximately $452 million, an increase of $61 million.
Speaker Change: [inaudible]
Speaker Change: This is a proof point of how our business generates a robust amount of cash in any environment.
Speaker Change: Capital expenditures for the quarter were $85 million, and free cash flow was approximately $367 million.
Peter Jackson: Transcripts provided by Transcription Outsourcing, LLC. Our net debt to adjusted EBITDA ratio was approximately 1.4 times, while base business leverage was 1.7. At quarter end, our total liquidity was approximately $1.7 billion, consisting of $1.6 billion in net borrowing availability under the revolving credit facility and approximately $100 million in cash.
Speaker Change: For the last 12 months into June 30th, our free cash flow yield was approximately 10 percent, while operating cash flow return on invested capital was 24 percent.
Speaker Change: Our net debt-to-adjusted EBITDA ratio was approximately 1.4 times, while base business leverage was 1.7 times.
Speaker Change: At quarter end, our total liquidity was approximately $1.7 billion, consisting of $1.6 billion in net borrowing availability under the revolving credit facility, and approximately $100 million in cash on hand.
Peter Jackson: Moving to Capital Deployment. During the second quarter, we repurchased roughly 5.8 million shares for approximately $990 million at an average stock price of $170.01 per share. Since the inception of our buyback program in August of 2021, we have repurchased 45% of total shares outstanding at an average price of $76.65 per share for $7.1 billion. As Dave mentioned, the board approved a new authorization for the repurchase of up to $1 billion of common stock.
Speaker Change: Moving to Capital Deployment.
Peter Jackson: We remain disciplined stewards of capital and have multiple paths for value creation to maximize return. Now, let's turn to our outlook on slide 13, which we are lowering, given a softer than anticipated housing market and weaker commodities. For full year 2024, we expect total company net sales to be $16.4 to $17.2 billion versus our previous range of $17.5 to $18.5. We expect adjusted EBITDA to be $2.2 to $2.4 billion versus the previous range of $2.4 to $2.8 billion.
Peter Jackson: Adjusted EBITDA margin is forecasted to be in the range of 13.4% to 14% versus the previous range of 14% to 15%. And we are updating our 2024 Full Year Gross Margin Guide to the range of 31.5% to 32.5%, from 30% to 33%. This also remains in line with our long-term expectation of 30 to 33% at normalized single-family starts of 1 to 1.1 million.
Peter Jackson: Our long-term margin profile reflects a greater mix of value-added products, recent acquisitions, and disciplined pricing management. We expect full year 2024 pre-tax flow of $1 to $1.2 million, assuming an average commodity price in the range of $380 to $400 per thousand boards.
Peter Jackson: Our 2024 outlook is based on several assumptions. Please refer to our earnings release and slide 14 of the investor presentation for a list of these key assumptions. While we do not typically give quarterly guidance, we wanted to provide color for Q3 given ongoing housing uncertainty and multifamily normalization. We expect Q3 net sales to be in the range of $4.3 to $4.6 billion. Adjusted EBITDA is expected to be between $575 and $625 million in Q2. Now, turning to slides 15 and 16.
Speaker Change: Our 2024 outlook is based on several assumptions.
Speaker Change: Please refer to our earnings release and slide 14 of the investor presentation for a list of these key assumptions.
Speaker Change: We expect Q3 net sales to be in the range of $4.3 to $4.6 billion.
Speaker Change: Adjusted EBITDA is expected to be between $575 and $625 million in Q3.
Peter Jackson: As a reminder, our base business approach showcases the underlying strength and resiliency of our company by normalizing failures and margins for commodity volatility. This helps 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 for 2024 is approximately $16.8 billion. Our base business adjusted EBITDA guide is approximately 2.3, at a margin of 13.7%, which reflects a roughly net zero impact from commodities. For context, slide 16 shows that our 2020 base business adjusted EBITDA was roughly $1.1 billion at 991,000 single family starts.
Speaker Change: Turning to slides 15 and 16.
Speaker Change: Our base business guide on net sales for 2024 is approximately $16.8 billion.
Speaker Change: [inaudible]
Peter Jackson: And we're expecting better adjusted EBITDA at lower single family starts. As I wrap up, I want to reiterate that our exceptional positioning and financial flexibility give us confidence in our ability to execute our strategy and drive longer. The Investor Day goals we laid out in December remain achievable, assuming a return to normalized single-family starts of $1.1 million in 2026. With that, let me turn the call back over to Dave for some final thoughts.
Speaker Change: As I wrap up, I want to reiterate that our exceptional positioning and financial flexibility gives us the confidence in our ability to execute our strategy and drive long-term growth.
Speaker Change: With that, let me turn the call back over to Dave for some final thoughts. Thanks, Peter. Let me close by reiterating that we continue to execute as evidenced by our strong profit margins and cash flow generation.
Dave Rush: Let me close by reiterating that we continue to execute, as evidenced by our strong profit margins and cash flow generation. Our resilient business model allows us to win in any environment. In 2020, we had an 8.7% base business adjusted EBITDA margin at $991,000 single-family home start. This year, we expect a mid-teens adjusted EBITDA margin at a lower level of housing.
Speaker Change: Our resilient business model allows us to win in any environment. In 2020, we had an 8.7% base business adjusted EBITDA margin at 991,000 single-family starts.
Speaker Change: This year, we expect a mid-teens adjusted EBITDA margin at a lower level of housing starts.
Dave Rush: This demonstrates the resiliency of our transformed business and is a strong base to build from as the housing market grows to meet demand. I am confident in the long-term strength of the industry due to the significant housing underbuild and favorable demographic trends. We are well positioned to take advantage of those tailwinds, which will help drive growth for years to come as we execute our strategy. We believe we are the unquestioned leader in addressing our customers' pain through our investments in value-added products, digital tools, and installation services. Our Proven Playbook for Growth and Robust Free Cash Flow Generation will help us continue to compound long-term shareholder value. Thank you again for joining us today. Operator, let's please open the call now for questions.
Speaker Change: This demonstrates the resiliency of our transformed business.
Speaker Change: and is a strong base to build from as the housing market grows to meet demand. I am confident in the long-term strength of the industry due to the significant housing underbuild and favorable demographic trends.
Speaker Change: We are well positioned to take advantage of those tailwinds, which will help drive growth for years to come as we execute our strategy.
Speaker Change: We believe we are the unquestioned leader in addressing our customers' pain points.
Speaker Change: through our investments in value-added products, digital tools, and install services.
Speaker Change: Our proven playbook for growth and robust free cash flow generation will help us continue to compound long-term shareholder value.
Speaker Change: Thank you again for joining us today.
Operator: Certainly. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Once again, that is star one to ask a question and star two to remove yourself. We will pause for just a moment to assemble the question queue. We'll go first to Matthew Bouley with Barclays. Please go ahead.
Speaker Change: Operator, let's please open the call now for questions.
Speaker Change: Certainly. At this time, if you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: You may remove yourself from the queue at any time by pressing star 2.
Speaker Change: In the interest of time, we ask that you please limit yourself to one question and one follow-up.
Speaker Change: Once again, that is star 1 to ask a question and star 2 to remove yourself. We will pause for just a moment to assemble the question queue.
Matthew Bouley: Good morning, everyone. Thank you for taking the questions. Maybe we'll start on the gross margin side, kind of looking at the new margin guide and the cadence that you're implying for the second half. I'm curious, as we kind of zoom into the fourth quarter, what that would imply for the kind of exit rate around gross margins. And certainly, what I'm getting at is, as we think about 2025, where your starting point on gross margins would be, as you continue to highlight that the overall 30 to 33 guide, the long-term guide is kind of at normalized housing starts. And certainly begs the question is if we're not quite at normalized housing starts yet in 2025, you know where the gross margin could land if there's kind of an air gap.
Speaker Change: Good morning everyone. Thank you for taking the questions.
Speaker Change: Certainly begs the question, if we're not quite at normalized housing starts yet in 2025, you know, where the gross margin could land if there's kind of an air pocket, given the starts outlook. Thanks, guys.
Peter Jackson: Good morning, Matt. Thank you for the question. Yeah, so, margins have been an important factor for us. They've changed a lot over the years, and we certainly get a lot of questions on them. We're pleased with how margins have performed so far, right? We knew normalization was going to happen. We saw it coming, particularly on the multifamily side, but we're certainly pleased with how it's progressed.
Speaker Change: For Matt, thank you for the question.
Peter Jackson: As you look into the future, into the second half of this year and into next year, you know, more normalization is what we've outlined. And I think that we've been pretty clear about that. Hopefully, there will be no change in what expectations are when it comes to 25 and the exit rate. So I'm going to be real clear, right? We don't have a crystal ball. We don't know what it says. This is not intended to be a guide for 25.
Speaker Change: When it comes to 25 and the exit rate, so I'm gonna be real clear, right? We don't have a crystal ball.
Speaker Change: We don't know. This is not intended to be guide.
Peter Jackson: We haven't done that work yet. But based on what we're seeing right now, we're coming out of this year at roughly 975 starts, give or take. Based on that, we're kind of at that level of performance that we're guiding to right in that 32% range. As you think about 2025, based on kind of what we're seeing right now, we think it's probably another 100 basis points at this level. Like if you just extended the line out, you'd see another 100 basis points of headwind into 2025 made up of the two pieces you'd expect right about half of that is multifamily, and about half of that is core operations, based on kind of what we're seeing.
Speaker Change: For 25, we haven't done that work yet.
Speaker Change: Why? Based on what we're seeing right now, right? We're coming out of this year at roughly 975 on starts give or take
Speaker Change: Based on that, we're kind of at that level of performance that we're guiding to right in that 32% range.
Speaker Change: As you think about 2025 based on kind of what we're seeing right now, we think it's probably another 100 basis points at this level. Like, if you just extend the line out, you'd see another 100 basis points of headwind.
Speaker Change: into 2025 made up of the two pieces you'd expect right about half of that is multifamily and about half of that is core operations based on kind of what we're seeing so we're definitely closer to the end than the beginning in terms of the normalization based on what we see
Peter Jackson: So we're definitely closer to the end than the beginning in terms of normalization based on what we see. You know, the multifamily is a story, no question. We think that, you know, if you look back to last year, we called out a little over 100 basis points of tailwind from multifamily. We'll give back 60, maybe a little, you know, right in that range, basis points in 24, with the other 50 basis points coming in 25.
Speaker Change: You know, the multifamily is a story, no question. We think that, you know, if you look back to last year, we called out a little over a hundred basis points of tailwind from multifamily.
Speaker Change: We'll give back 60, maybe a little, you know, right in that range basis points in 24 with the other 50 basis points coming in 25. That's probably about a couple hundred million dollars worth of EBITDA headwind from multifamily.
Peter Jackson: That's probably about a couple hundred million dollars worth of EBITDA headwind from multi-factor, and we feel like the rest of the business is performing really well, and we'll be in a strong position to overcome that. Matthew Oling
Speaker Change: And we feel like the rest of the business is performing really well and
Peter Jackson: Matt, the only thing I'd add is our focus and continuing focus on doing more for the customer with installation, doing more for the customer with value add. Those are higher margin products that we help offset any start variation.
Speaker Change: into 25.
Speaker Change: Matt, the only thing I'd add is, you know, our focus and continuing focus on
Matt: Doing more for the customer with install, doing more for the customer with value-add. Those are higher margin profile products that we help offset any start variation.
Matthew Bouley: Got it. Okay, that's a very helpful quantification in color, and that dovetails into my next question. So if I look at kind of the total EBITDA guide for the year, I guess it's down about $300 million at the midpoint. But the base business EBITDA guide is only down by $100 million. So I guess presumably the change in commodity prices is actually the largest change in the guide. I just want to clarify if that's the case.
Speaker Change: Got it. Okay, that's a very helpful quantification in color and that dovetails into my next question. So if I look at kind of the total EBITDA guide for the year, I guess it's down about $300 million at the midpoint. But the base business EBITDA guide is only down by $100 million. So I guess presumably the change in commodity prices...
Matthew Bouley: And if so, when we're talking about the kind of stability on the value add side, can you kind of speak to what has specifically changed in just the value add outlook? I mean, in terms of the growth side starts and specifically value add margins. Just kind of what's really driven that kind of piece of the guidance change there. Thank you.
Speaker Change: is actually the largest change in the guide, and I just want to clarify if that's the case.
Speaker Change: And if so, when we're talking about the kind of stability on the value-add side, can you kind of speak to, you know, what has specifically changed in just the value-add outlook, I mean, in terms of the growth side, starts, and specifically value-add margins?
Speaker Change: Just kind of what's what's really driven that that kind of piece of the guidance change there. Thank you.
Peter Jackson: All right, so one question in 26 parts. Let's see if I can get them all.
Speaker Change: All right, so one question in 26 parts. Let's see if I get them all.
Peter Jackson: So overall, you're right. We have seen a shift in commodities, right? So the market's been weaker, both lumber and OSB. OSB kind of ran up for a little bit, then has absolutely reset and pulled back.
Speaker Change: Of course.
Speaker Change: God.
Speaker Change: So overall, you're right. We have seen a shift in commodities, right? So the market's been weaker.
Speaker Change: The both lumber and OSB, OSB kind of ran up for a little bit, has absolutely reset and pulled back. That is the largest component of the dollar value change in sales that we've called out. So of the $1.2 billion, more than half of that is just the commodity valuation change.
Peter Jackson: That is the largest component of the dollar value change in sales that we've called out. So of the $1.2 billion, more than half of that is just the commodity value. What that means to the business in terms of the rest of the output, the call down on EBITDA, the bulk of EBITDA call down is de-leveraged. The vast majority of it, right?
Peter Jackson: It's because the smaller business absorbs less of the fixed overhead costs. You can see this quarter, we had some pretty substantial improvement just because we are busiest in the summer. We thought we'd be busier in the back half than we are going to be, so we're giving some of that.
Speaker Change: It's the vast majority of it, right? It's the smaller business absorbs less of the fixed overhead costs. You can see this quarter we had some pretty substantial improvement just because we are busiest in the summer months. We thought we'd be busier in the back half than we're going to be, so we're giving some of that back.
Peter Jackson: Value add more specifically, you know, we continue to see strength, we continue to see volumes moving very well, the demand is very strong, customers have consistently stayed with the product, and we haven't seen a shift away from value add broadly. What we are seeing, and what we pointed out here, and what Dave pointed out in his remarks, was really this mixed dynamic. It goes to the customers, focusing on affordability. How do they get cost out?
Speaker Change: Value add more specifically, you know, we continue to see strength, we continue to see the volumes moving very well, the demand is very strong, customers have consistently stayed with the product, we haven't seen a shift away from value add broadly.
Speaker Change: What we are seeing, and what we pointed out here, what Dave pointed out in his remarks, was really this mixed dynamic. It goes to the customers focusing on affordability. How do they get costs out?
Peter Jackson: One of the ways they're doing that is a shift within value. Shifting from Open Web Trust to EWP, it's a lower sales dollar value product, right? It's combined with a lot of other things. They're shrinking the square footage of the house. They're taking out basements, and they're reducing the number of garages and bonuses. All things that are not a surprise if you think about affordability. But that has had broad pressure. That's not unique to ValueAdd or not ValueAdded. I think where ValueAdded has seen pressure is really around the price pass through in that type of mix. Volumes are still strong.
Dave Rush: One of the ways they're doing that is a shift within value add.
Dave Rush: Shifting from Open Web Trust to EWP, it's a lower-sales-dollar-value product. It's combined with a lot of other things. They're shrinking the square footage of the house. They're taking out basements. They're reducing the number of garages and bonus rooms. All things that are not a surprise if you think about the affordability challenge.
Speaker Change: But that has had a broad pressure. That's not unique to ValueAdd or not ValueAdd. I think where ValueAdd has seen pressure is really around the price pass-through in that type of mix. Volumes are still strong. Margins are still strong on the core product categories.
Peter Jackson: One thing I would add on the value add component specifically, Matt, is Even as Trust Volumes decline, our ability to more efficiently manufacture increases as we go from two shifts to one shift. Our second shift is the least profitable, for obvious reasons, but you put up with that because you leverage 100% of the fixed cost. When we go to one shift, that's our most profitable shift. So even as the top line may be less because of the demand being less, the ability to maintain margins is actually easier because we're most efficient at that.
Speaker Change: One thing I would add on the value-add component specifically, Matt, is even as
Speaker Change: Trust Volumes Decline, Our Ability to More Efficiently Manufacture Increases.
Dave Rush: as we go from two shifts to one shift.
Dave Rush: Our second shift is the least profitable for obvious reasons, but you put up with that because you leverage 100% of the fixed cost.
Speaker Change: When we go to one shift, that's our most profitable shift. So even as the top line may be less because of demand being less, the ability to maintain margins is actually easier because we're most efficient in that shift.
Matthew Bouley: Great. Well, I appreciate the color. Thanks, Dave, and Peter. Good luck, guys.
Speaker Change: Great. Well, appreciate the color. Thanks, Dave, Peter. Good luck, guys.
Mike Dahl: We'll hear next from Mike Dahl with RBC Capital Markets.
Matt: Thanks, Matt.
Speaker Change: We'll hear next from Mike Dahl with RBC Capital Markets.
Mike Dahl: Hi, thanks for taking my questions. I'm probably just going to follow up on a couple things there. Look, Peter, I know that it's not your practice of yours to give a pinpoint estimate on margins or certainly not to give formal guidance a year out at this point in the year, but I just want to be crystal clear on your last comments about the exit rate and the 25 gross margin, just because there's been so much hand-wringing over this.
Mike Dahl: Hi, thanks for taking my questions. Probably gonna just follow up on a couple things there.
Mike Dahl: Look, Peter, I know that it's not a practice of yours to give a pinpoint estimate on margins or certainly not to give formal guidance a year out at this point in the year, but I just want to be...
Speaker Change: Crystal clear on your last comments about exit rate and 25 gross margin just because there's been so much
Mike Dahl: When you're talking about it, it seems like you were saying, hey, if my midpoint is 32 for this year, maybe my midpoint or my starting point in 25 is 31, or said another way, maybe my exit rate in 4Q of 24 is around 31% gross margin. Was that the intended message or...
Mike Dahl: Handwriting over this when you're talking about it seemed like you were saying
Speaker Change: Hey, if my midpoint is 32 for this year.
Speaker Change: Maybe my midpoint, or my starting point.
Speaker Change: 25 is 31, or said another way, maybe my exit rate in 4Q of 20.
Speaker Change: 4 is around 31% gross margin. Was that the intended message, or could you clarify that a little bit more specifically on the 4-2 gross margin here?
Peter Jackson: Morning, Mike. In short, yes, you got it right. You heard it right. We think we're around 32 this year. We think our exit rates are around 31 based on everything we're seeing today. This is not a guide. It's not intended to be a crystal ball. It's just trying to give directionality.
Mike Dahl: More to Mike.
Speaker Change: In short, yes, you got it right, you heard it right.
Speaker Change: We think we're around 32 this year. We think our exit rates are around 31 based on everything we're seeing today. This is not guide. It's not intended to be a crystal ball. It's just trying to give directionality. The short answer to that, and I think you alluded to it and so did Matt.
Peter Jackson: The short answer to that, and I think you alluded to it, and so did Matt, our long-range normalized margins, we're saying are 30 to 33 at 1.1 million stars. This would indicate that we're going to be at 31 at $975,000. What does that mean?
Mike Dahl: Our long-range normalized margins, we're saying, are 30 to 33 at 1.1 million starts.
Mike Dahl: This would indicate that we're going to be at 31 at...
Peter Jackson: Well, that means right now margins are strong. Margins are good. Margins are better than we expected, which is great. But it also means we're under pressure in a market that's got extra capacity versus what we're all dialed in for, which is 1.1 million plus, right? So that's the tug of war going on right now and why we're not able to sort of put our stake in the ground and claim
Matt: 975,000 stars.
Matt: What does that mean? Well, that means right now margins are strong.
Speaker Change: Margins are good. Margins are better than we expected, which is great, but it also means we're under pressure in a market that's got extra capacity versus what we're all dialed in for, which is great.
Matt: which is 1.1 million plus, right? So that's the tug of war going on right now and why we're not able to sort of.
Peter Jackson: We've got to see how this plays out. Pretty optimistic, like Dave said, about the overall market, the demos, the underbill. It's good. We think the tone is playing out, maybe belatedly, but positively, in terms of the interest rate environment right now. So we'll see. But it's a strong business. It's really well positioned, and margins look good.
Mike Dahl: Put our put our stake in the ground and claim it. We've got to see how this plays out
Matt: Pretty optimistic, like Dave said, about the overall market, the demos, the underbill, you know, it's good.
Speaker Change: We think the tone is playing out, maybe belatedly, but positively in terms of the interest rate environment right now, so we'll see. But it's a strong business, it's really well positioned, and margins look good.
Mike Dahl: Okay, yeah, that's helpful. And look, I agree and appreciate kind of the zooming out and the perspective about, hey, even if we're talking about 31, it's 31 at these depressed levels of volume, which is, longer term, actually quite constructive. Just shifting gears. All the stuff around the mix, the complexity, yeah, this is, I think, another part that's hard for all of us and investors to appreciate when we're kind of building out a model that tends to be kind of volume-focused.
Speaker Change: Yeah, that's helpful. And look, I agree and appreciate kind of the zooming out and the perspective about the
Speaker Change: Hey, even at, even if we're talking about 31, it's 31 at these depressed levels of volume, which is longer term, actually quite constructive, just shifting gears.
Speaker Change: All the stuff around the mix, the complexity.
Speaker Change: Yeah, this is I think another part that's hard for all of us and investors to appreciate when we're kind of building out a model that tends to be kind of volume focused.
Mike Dahl: And so I guess when you're – all the moving pieces there, is there a way for you to articulate, hey, if all is equal, you know, what we're seeing on the mix changes and complexity changes to date or to hold, you know, here's how much of a delta we think it would drive relative to if I think my single family starts are up low single, is that a – is it a low single-digit headwind against that, is it a mid-single-digit headwind against that, you know, any help you could provide on just kind of ballparking that and – would be great.
Speaker Change: And so I guess when you're, all the moving pieces there, is there a way for you to articulate, hey, if all is equal,
Speaker Change: You know, what we're seeing on the mix changes and complexity changes to date were to hold
Speaker Change: You know, here's how much of a delta we think it would drive relative to if I think my single family starts are a little single. Is that a...
Speaker Change: Is it a low single-digit headwind against that? Is it a mid-single-digit headwind against that? You know, any help you could provide on just kind of ballparking that and...
Speaker Change: would be great.
Peter Jackson: Yeah, so that's a great question. You know, we've spent a lot of time on this. As you know, we spend a lot of energy really trying to understand our We have a lot of data. Unfortunately, it's a lot of data, right?
Speaker Change: Yeah, so that's, it's a great question. You know, we've, we've spent a lot of time on this. As you know, we spend a lot of energy really trying to understand our business integration.
Peter Jackson: So the ability to really understand the mixed impact of hundreds of thousands of SKUs at 570 locations in 80 markets. It's sometimes an adventure to really get through the noise to get the, I think earlier this year, you saw us reacting to what we were seeing, trying to understand it. I think the storyline around this whole value conversation is that the order of magnitude is I think the storyline around the timing of starts versus permits is, again, a little bigger than we expected.
Speaker Change: [inaudible]
Speaker Change: We have...
Matt: A lot of data. Unfortunately, it's a lot of data, right? So the ability to really understand the mixed impact of hundreds of thousands of SKUs at 570 locations in 80 markets.
Speaker Change: It's sometimes an adventure to really get through the noise to get the signal.
Speaker Change: I think earlier this year you saw us reacting to what we were seeing, trying to understand it. I think the storyline around this whole value conversation is that the order of magnitude is bigger than one.
Speaker Change: Thanks for tuning in.
Speaker Change: I think the storyline around the timing of starts versus permits is again order of magnitude a little bigger than we expected.
Peter Jackson: So Q2, if you use our roughly two-month lag, we've got about a 20 point gap that we're tracking down, that we're saying, "Why aren't we up a lot more?" and it's broken down into a few pieces, right?
Speaker Change: So Q2, if you use our roughly two-month lag, we've got about a 20-point gap that we're tracking down, that we're saying, why aren't we up a lot more?
Peter Jackson: The probably the single biggest piece is that we think that the lag between permits and starts is a bit longer. The cycle time is a little longer. You saw large builders pulling large quantities of permits and doing it to beat code changes, doing it to beat the rush. Everybody thought the market was going up, and they haven't put those starts in the ground as quickly as the traditional custom builders. And I think we all know the large nationals, the big guys are winning, right? They've got a bigger share of the pie. We think that's causing a little bit of distortion in the starts. That will settle out as the year progresses, but at least early on, it overstayed its start.
Speaker Change: is a bit longer. The cycle time is a little longer. You saw large builders pulling large quantity of permits and doing it to beat code changes, doing it to beat the rush, when everybody thought the market was going up, and they haven't put those starts in the ground as quickly as the traditional custom builders would have.
Speaker Change: And I think we all know the large nationals, the big guys are winning, right, they've got a bigger share of the pie. We think that's causing a little bit of distortion in the starts number.
Peter Jackson: The other pieces are pieces we've talked about, right? Another third of it is probably related to price. A lot of that is vendor cuts. We talked about EWP, doors, millwork. There are a bunch of categories that have had to readjust to the current demand, and they have adjusted prices in response. So that's important. And another roughly third is in that category of mix, right?
Speaker Change: stated starts at that.
Speaker Change: and another roughly third is in that category of mix, right? It's what we're seeing in terms of, you know, if you think about the traditional good, better, best, you're talking about best to better, better to good, good to let's not do it.
Peter Jackson: It's what we're seeing in terms of, You know, if you think about the traditional good, better, best, you're talking about best to better, better to good, let's not do it, the things we were talking about before with regard to going from basement construction to slab may not sound like a big deal, but that percent is changing in the statistics, and that has a meaningful decline in the value of the product. So rough categories, I think we've got good direction, but we're gonna have to see how that plays out.
Speaker Change: It's the things we were talking about before with regard to going from basement construction to slab may not sound like a big deal, but that percent is changing in the statistics and that has a meaningful decline in the value of product that goes into the house.
Speaker Change: Precision.
Speaker Change: I think we've got good directionality, but we're going to have to see how that plays out.
Peter Jackson: The interesting part of all of it though, Mike, is it's so volatile, right? It moved quickly one way, and there's no reason it can't move quickly the other way. We're just gonna stay close to it and make sure we're serving our customers the best.
Peter Jackson: The only thing I would add, Mike, is it's primarily a top-line scenario for us that we have to manage through. Our margins, regardless, have stayed very consistent and very strong, and we're appreciative of that. You know, another great example is the one that Peter gave in Arizona.
Speaker Change: The only thing I would add, Mike, is it's primarily a top-line scenario for us that we have to manage through. Our margins, regardless, have stayed very consistent and very strong, and we're appreciative of that.
Speaker Change: But...
Peter Jackson: 45% of houses that we've started. 15% is the increase in revenue. You can do the math and say in Arizona, it's a 30% impact.
Peter Jackson: But at the end of the day, it varies depending on the market. What we're seeing, though, is we have the levers that we can pull to get the sale, depending on what the customer chooses to use to solve their problem. And at the same time, we're able to hold our margins because of having that ability to provide an alternative solution that works for both.
Mike Dahl: Depending on what the customer chooses to use to solve their problem, and at the same time, we're able to hold our margins because of having that ability to provide an alternative solution that works for both.
Mike Dahl: Got it. That's all really helpful. Thank you both.
Mike Dahl: Got it. That's all really helpful. Thank you both.
Rafe Jadrosich: We'll go next to Rafe Jadrosich with Bank of America.
Mike Dahl: Thanks Mike.
Speaker Change: We'll go next to Rafe Jadrosich with Bank of America.
Rafe Jadrosich: Hi, good morning. It's Rafe.
Raffaele Gidrauch: Hi, good morning. It's Rafe. Thanks for taking my question.
Rafe Jadrosich: Thanks for taking my question. Peter, appreciate all the colors so far and how we think about the margin progression here. Just following up on the earlier comments about 60 basis points of headwinds from multifamily in 24 and another 50 basis points roughly in 25. How much of that is normalization of the multifamily margins off of excess levels versus the multifamily mix? And how do you think about the multifamily margins today? Like how much have we seen a normalization from the elevated margins you've had in the past? How much more is there to go?
Speaker Change: I'm
Raffaele Gidrauch: Peter, appreciate all the colors so far and how you think about the margin progression here.
Speaker Change: Just following up on the earlier comments about 60 basis points of headwinds from multifamily in 24 and another 50 basis points roughly in 25, how much of that is normalization of the multifamily margins off of excess levels versus multifamily mix?
Speaker Change: And how do you think about the multifamily margins today? How much have we seen a normalization off of the elevated margins you've had in the past? How much more is there to go?
Peter Jackson: Morning, Rafe. Thanks for the question. Yeah, so the, you know, the dynamic around the multifamilies. We've tried to be really open and honest about what we're seeing, but it's not convenient in terms of how it's playing out. In other words, it didn't just stop on January 1st, and we didn't have a nice, clean turn, so I don't have nice, clean numbers last year or this year. So there's a little bit of this you're probably going to poke at, but I can give you sort of a sense of what we're seeing. It's a little bit different.
Speaker Change: Morning, Rafe. Thanks for the question.
Speaker Change: Yeah, so the, you know, the dynamic around the multifamily is a tricky one.
Speaker Change: So there's a little bit of this you're probably going to poke at, but I can give you sort of...
Peter Jackson: It's a little bit different, my best sense of the direction now. We continued to see strong business and multi-family throughout all of last year, and that really began to turn in Q1. We are seeing meaningful declines in our margins, starting in Q1 and stronger in Q2, kind of that 50 to 100 basis points in those periods. It's a headwind driven by many facets. That's because it's sort of the combination of.
Speaker Change: My best sense of the directionality.
Speaker Change: We continued to see strong business and multifamily throughout all of last year that really began to turn in that Q1 winter.
Speaker Change: our margins in what we're seeing starting in Q1 and stronger in Q2, kind of that 50 to 100 basis points in those periods, headwind driven by multifamily.
Peter Jackson: Nick's shift because it's all value-added and that downward shift within the category. So with that in mind, we do expect it to continue this year. I think I mentioned from a dollar perspective. Q2 is going to be a chunky one, right? I was going to hurt a lot, and obviously, it did. But we will continue to see headwinds throughout the year. Again, with that kind of rough average of, round 60 basis points, 50 to 70, give me a band around it based on timing, but overall impact on the company from the full multifamily sector.
Speaker Change: So with that in mind, we do expect it to continue this year. I think I mentioned from a dollar perspective, Q2 is going to be a chunky one, right? That was going to hurt a lot. And obviously it did.
Speaker Change: around 60 basis points, 50 to 70, give me a band around it based on timing, but overall impact on the company from the full multi-family segment of our business.
Rafe Jadrosich: Thank you. That's helpful. And then you had in In the prepared remarks, there's a comment.
Speaker Change: Thank you, that's helpful.
Speaker Change: In the prepared remarks, there's a comment, I thought it was interesting.
Dave Rush: I thought it was interesting just talking about how given the strength of the base gross margin, you sort of see more opportunity to go after profitable shares going forward. How do you think about how your market share trended kind of in the first half of this year? And do you expect any changes going forward? And does any of that have to do with some of the mix impacts that you're thinking about?
Speaker Change: And does any of that have to do with like some of the mix impacts that you're thinking about? Like, have you seen builders multisource more? Has that been a headwind? And then going forward, do you expect to try to take market share? Like, what are your expectations there?
Dave Rush: Like, have you seen builders multisource more? Has that been a headwind? And then, going forward, do you expect to try to take market share? Like, what are your expectations there? Rick, this is Dave.
Speaker Change: You know, Rick, this is Dave. I would tell you, um...
Dave Rush: Right. We want to identify opportunities where it's volume where we have an opportunity to have a win-win with our customer, where we can leverage that incremental volume against our fixed costs, whether it be a manufactured product or even a distributed product, and offset the volume incentive that we may use to go after that business. So it'll be a targeted approach. It'll be a disciplined approach. It will be only where the volume makes sense, and there has to be a win-win solution.
Rick: What we're looking at is a disciplined approach.
Rick: We want to identify opportunities where it's a volume where we have an opportunity to have a win-win with our customer, where we can leverage
Rick: that incremental volume against our fixed costs, whether it be manufactured product or even distributed product, and offset
Speaker Change: You know, the volume incentive that we may use to go after that business. So it'll be a targeted approach, it'll be a disciplined approach, it will be only where the volume makes sense and there has to be a win-win solution there.
Dave Rush: Thankfully, we had all the guys in the first part of July, and that was the focus of the meeting, and they all had a plethora of opportunities that they felt met that description. And, you know, we're going to execute that strategy in the back half.
Speaker Change: Thankfully, we had all the guys in in the first part of July and that was the focus of the meeting and they all had a plethora of opportunities. They felt met that description and you know we're going to execute that strategy in the back half.
Speaker Change: Thank you. I appreciate it.
Trey Grooms: We'll go next to Trey Grooms with Steven's Inc.
Speaker Change: We'll go next to Trey Grooms with Stevens Inc.
Trey Grooms: Hey, good morning, everyone. I appreciate all the color you've given thus far, and this one's, I guess, on lumber, kind of the competitive pricing we've seen on the commodity lumber side, nothing new, but wondering if you're seeing this, you know, become, you know, more widespread or intense, given the kind of weaker environment, but also, you know, on the trusses and ValueAdded, with multifamily pulling back, which was clearly taking up Are you seeing any more competitive behavior on the trust side or ValueAdded side now that multifamily has started to normalize?
Trey Grooms: Hey, good morning, everyone.
Trey Grooms: I appreciate all the color you've given thus far and this one's I guess on just the
Trey Grooms: On lumber, kind of the competitive pricing, you know, that we've seen on the commodity lumber side.
Trey Grooms: nothing new but wondering if you're seeing this you know become you know more widespread or intense given the kind of weaker environment but also you know on the trusses
Speaker Change: and Value Add with multifamily pulling back, which was clearly taking up a lot of that supply. Are you seeing any more competitive behavior on the trust side or value add side now that multifamily has started to normalize?
Dave Rush: Hey Trey, thanks for the question. On the commodity part of the question, we always see players in the marketplace that take commodities too low because it's all they have to offer. And we're not choosing to play in that game. What we will do, though, is partner with our customers so that, you know, commodity becomes part of a package, and we value the overall packaging and create incentives to buy all products from us, whereby through the value-add piece of that package, we can earn back a level of whatever volume incentive we provide.
Trey Grooms: Hey Trey, thanks.
Trey Grooms: Hey Trey, thanks for the question. On the commodity part of the question, we always see
Speaker Change: That, you know, commodity becomes part of a package and we value the overall packaging.
Speaker Change: and create incentives to buy all products from us.
Speaker Change: whereby through the value-add piece of that package we can earn back a level of whatever volume incentive we provide.
Dave Rush: So, you know, our focus on building share is still got to be a win-win. It's not going to be only a win for the customer or only a win for BFS. It won't work or it won't be sustainable if that's the way you approach it.
Dave Rush: With specifically the value-add, where we still have and will maintain an advantage is in our efficiency. We have continued to drive efficiencies. And I said in the earlier comment, if we're in one shift, we're as efficient as we can possibly be when we're in one shift. So we have the ability to leverage incremental volume in that idle capacity. And again, create a more profitable net-net number for us, even as we provide an incentive to customers for the incremental volume. So that's kind of how, even as we've managed and tried to pick opportunities to drive the top line, we've been able to hold on to the board.
Speaker Change: We have continued to drive efficiencies, and I said in the earlier comment, if we're in one shift, we're as efficient as we can possibly be when we're one shift.
Speaker Change: So, you know, that's kind of how, even as we've managed in trying to pick opportunities to drive the top line, we've been able to hold on to the margin.
Trey Grooms: Okay, that's helpful. Peter mentioned something about price pass through. And I think it was when you were talking about the value add side, just trying to make sure I understand what that comment meant.
Speaker Change: Yep. Okay, that's helpful. I heard Peter mention something about price pass-through, and I think it was when you were talking about the value-add side, just trying to
Peter Jackson: I'll answer it and then I'll let you follow up. That's actually when we get a cost reduction from our vendors on products, and we immediately pass that through. It is, again, impactful on the top line because now we're selling a lower-cost product, but our margin profile is not impacted, and we're operating under the same model from a profitability standpoint. Yeah, right. Yeah, yeah.
Speaker Change: make sure I understand what that comment meant.
Peter Jackson: on products, and we immediately passed that through.
Peter Jackson: So just to echo that same thought, we do stay very focused on making sure we're acting in a disciplined manner with our customers in key categories. As you know, commodities, we pass it all. My little color on that, I guess I'm a bit disappointed. I would have expected and hoped to see a lumber industry be a little more intentional about making money. Not everyone is bad and is a bad actor in that category, but I'm I can still remain surprised at how many players are willing to sustain loss or losing Bill's Business Units, whatever you want to call it, longer than I would have expected. There's an awful lot of weeping and gnashing of the teeth out there, but not a lot of behavior. Hopefully, we will.
Speaker Change: Is that right? Yeah, so just to echo that same thought, we do stay very focused on making sure we're acting in a disciplined manner with our customers in key categories. As you know, commodities, we pass it all through.
Peter Jackson: But that's disappointing, and I think what you see are weaker lumber numbers that we absolutely pass through to our customers. What I was referring to before are certain price cuts that we've seen, right? Specific actions taken by EWP players, doors players, millwork players, and some others, where we've seen, you know, low to mid single-digit reductions in overall sales attributable to nothing else than customer, you know, charging the sorry, the prices we give our customers are adjusted because of the prices we're charged by our
Speaker Change: Specific actions taken by
Speaker Change: EWP players, Dwarves players, Millwork players, and some others.
Speaker Change: The prices we give our customers are adjusted because of the prices we're charged by our vendors.
Trey Grooms: Yep. Okay. Got it. And then just a quick one for my follow-up.
Speaker Change: Yep. Okay, got it. And then just a quick one for my follow up. You know, there's
Trey Grooms: You know, there are very, I guess, differing views on kind of the multifamily outlook and, you know, maybe what, how quickly that could take to kind of normalize. I'd love to maybe get your thoughts on that. I think you mentioned there may be a little bit more headwind to come in 2025, but any color on maybe the timing of when we might see that stabilization and multifamily. And then, you know, I know it's hard to say, but, you know, directionally, you know, do you think we could see maybe a pretty quick rebound there once after it does find some stabilization? Or do you feel like we could tread water there at that kind of much lower level for a while?
Speaker Change: very, I guess, differing views on kind of the multifamily outlook and, you know, maybe how quickly that could
Speaker Change: I'd love to maybe get your thoughts on that. I think you mentioned there may be a little bit more headwind to come in 25, but
Speaker Change: Any color on maybe the timing of how...
Speaker Change: You know, when we might see that stabilization and multifamily and then
Speaker Change: I know it's hard to say, but directionally, do you think we could see maybe a pretty quick rebound there after it does find some stabilization, or do you feel like we could tread water there at that kind of much lower level there for a while?
Dave Rush: Yeah, Trey, what we've seen, I'll tell you the dynamic we've seen in 2024 is that, in addition to people hesitant to start new projects, we've actually seen existing projects get delayed and pushed, you know, pretty consistently throughout the year. Projects are still on the board, projects are still going to get done, but they're getting pushed, which, quite frankly, was part of the top line headwind in the first half, even though the multifamily is a small piece of the overhaul.
Speaker Change: Yeah, Trey, what we've seen, I'll tell you the dynamic we've seen in 2024 is
Speaker Change: In addition to people hesitant to start new projects, we've actually seen existing projects
Speaker Change: [inaudible]
Speaker Change: But it's getting pushed, which, quite frankly, was part of the top-line headwind in the first half, even though it was a multifamily small piece of the overhaul. New projects take...
Dave Rush: New projects take so long to get underway that I think the order that has to happen is that we have to have the cost of capital come down. Then there will be new projects that come out of the ground, but they're going to take a while to get going. The one thing we are seeing, though, is a gap currently in favor of multifamily, where rental rates are now less than mortgage rates for essentially the same type of living arrangement.
Speaker Change: So long to get underway that I think the order That has to happen is we have to have the cost of capital come down
Speaker Change: Then there's going to be new projects that come out of the ground, but they're going to take a while to get going. The one thing we are seeing though is a gap currently
Dave Rush: So a lot of the excess capacity that we feel like we came into the year with, with multifamily, we do believe will burn off during the rest of this year, which will encourage a quicker rebound in multifamily in 2025. The problem is, it just takes so long.
Speaker Change: So, a lot of the excess capacity...
Trey Grooms: Yep. Okay. Thanks for the color, Dave. I really appreciate it.
Unknown Executive: is still a very profitable business for us at these levels and will continue to be at the levels we expect to have through 24 and into
Operator: Great. Thank you very much. We'll go now to Adam Baumgarten with Zellman. Hey, good morning, everyone.
Adam Baumgarten: We'll go now to Adam Baumgarten with Zellman.
Speaker Change: Thanks a lot.
Speaker Change: We'll go now to Adam Baumgarten with Zellman.
Adam Baumgarten: Morning, Adam. Honestly, to know that answer with precision, I'd probably call you. We know there are data points that prove our point. What we don't have is confidence in the individual buckets, way too volatile and way too customer specific, and regionally influenced for us. But again, if we're missing, you know.
Speaker Change: Good morning, Adam. Honestly, to know that answer with precision, I'd probably call you guys.
Peter Jackson: 20 points in terms of where there's that sale. I think directionally, you know, the biggest third is on the extended time it's taking between permit and sale. We know another chunk of it is in the value, just the prices charged, and the rest of it is that mixed component. It's the square footage. It's smaller. It's cheaper, five to seven, I don't know. I'm guessing, to be honest. You know, we've done enough proof points to know that it's a thing, right? It's harder to decide which part of what.
Speaker Change: I think directionally, you know, the biggest third is on the extended time it's taking between permit and sale.
Speaker Change: We know another chunk of it is on the value, just the price is charged, and the rest of it is that mix component. It's square footage, it's smaller, it's cheaper.
Speaker Change: You know.
Peter Jackson: We've done enough proof points to know that it's a thing, right? It's harder to decide which part of what.
Speaker Change: We've done enough proof points to know that it's a thing, right? It's harder to decide what part of what aspect is, you know, for example,
Peter Jackson: Aspect is, you know, for example... We took a bid for a national builder from last year and compared the exact same house, the exact same model, this year, and it was down mid-teens in overall sale opportunity for the exact same house. So, you know, we don't have that in every market and every builder, but at the end of the day, again, it was another proof point that what we suspected was happening was actually happening.
Speaker Change: We took a bid for a national builder from last year and compared the exact same house, the exact same model this year, and it was down mid-teens in overall sale opportunity.
Speaker Change: and the exact same house. So, you know, we don't have that in every market and every builder, but at the end of the day, again, it was another.
Peter Jackson: We know what we're dealing with and, you know, again, as that changes, the encouraging thing is the margin profile is not also changing, and that's, you know, I'd love to have all the volume that we could possibly get. But at the end of the day, I at least want to keep the balance between what we're selling and what we're making on what we're selling in check. Okay, got it. Thanks.
Speaker Change: And directionally, we know what we're dealing with and, you know, again,
Speaker Change: As that changes, the encouraging thing is the margin profile is not also changing, and that's...
Speaker Change: You know, I'd love to have all the volume that we could possibly get, but at the end of the day, I at least want to keep the balance between what we're selling and what we're making on what we're selling in check along the way.
Peter Jackson: And then just a couple more on digital sales, the incremental sales you expect in 24. I think you've talked about 200 million in the past. Is that still expected for the year? And then just on M&A, any change to the strategy there given the increase in the share repurchase activity and the authorization? Yeah, let me talk a little about digital. As we've started the rollout, the digital, and the adoption, I think it probably isn't a surprise that we went first to our employees, and we've gotten them up to speed on the benefits of digital so they can more fully explain them to their customers.
Speaker Change: Okay got it thanks and then just a couple more just on the digital sales the incremental sales you expect in 24 I think you've talked about 200 million in the past is that still expected for the year and then just on M&A any change to the strategy there given the increase in the share repurchase activity in the authorization?
Speaker Change: Yeah.
Speaker Change: Let me talk a little about digital. As we've started to roll out the digital and the adoption, I think it probably isn't a surprise that we've gone first to our employees and we've gotten them up to speed on the benefits of digital so they can more fully explain to their customers.
Peter Jackson: The customers that we've gone to initially have been existing customers. So it's why we give you that stat of orders through the system of $250 million. Now we fully expect existing customers to push orders through the system. That's business we probably would have already had, and we would still get had we not had digital. But we still want to track it. It's an indication of acceptance. And so the incremental business we get is going to come more from new customers and, as we continue to get existing customers more comfortable, increase the wallet from those guys.
Speaker Change: The customers that we've gone to initially have been existing customers.
Speaker Change: So, it's why we give you that stat of orders through the system of $250 million. Now, we expect fully...
Speaker Change: That existing customers pushing orders through the system, that's business we probably would have already had, we would have still gotten had we not had digital. But we still want to track it. It's an indication of acceptance.
Speaker Change: And so the incremental business we get is going to come more.
Speaker Change: [inaudible]
Peter Jackson: But that, obviously, is going to be more in the form of a hockey stick. No, we're not giving up on the 200 million for this year at this point in time. It is admittedly, you know, a tougher point to get a little bit to the stick, but we still know that it's gonna be there. And the acceptance we're getting.
Speaker Change: No, we're not giving up on the $200 million for this year at this point in time. It is admittedly a tougher point to get a little bit to the hockey stick, but we still know that hockey stick's going to be there.
Speaker Change: And the acceptance we're getting, even as it is from existing customers, is really encouraging. I'll let Peter talk through the M&A piece.
Peter Jackson: Yeah, I 100% agree on digital. It is encouraging. The momentum is good. On M&A, the momentum is good there too. I think you've seen the increasing number of Adam Baumgarten, Stanley Elliott, Heather Kos, Rafe Jadrosich, David Mamtora, Peter Jackson,
David Manthey: We'll hear next from David Manthey with Baird.
David Manthey: Hi everyone. Good morning.
David Manthey: Peter, on your non-guidance, the 31% gross margin exiting the year. When you talked about 2025, you said 100 basis points of headwind, 50 from multifamily makes sense. But then the other 50, you said core operation. And I was just wondering if you could explain that a little bit more. Is that just lower operating leverage?
Peter Jackson: Rough estimate for the 24 results. We are seeing pressure, right? The battle is on in markets, particularly where you have what I would consider to be, you know, tougher, more competent competitors, sometimes competitors that have less of a margin threshold, right? They're willing to drop their margins in order to try and capture the sales line. So this is the same business as and the other right one, and you have aggressive competitors in matched markets, you're going to see some price erosion. And that's a bit of what we're seeing, a little bit of mix in there here and there, but that's the bulk of that half.
David Manthey: Got it. Okay.
Peter Jackson: And you have aggressive competitors and matched markets youre going to see some price erosion and that's a bit of what we're seeing a.
Peter Jackson: A little bit of mix in there here and there, but that's the bulk of that half point.
Peter Jackson: And then on the EBITDA margin, in the base business, which you raised by 20 basis points to 13.7. Could you share with us the source of your increased confidence, despite the kind of lackluster macros here? And also, I assume that your 2026 ranges and that 14.4 midpoint are intact as well. Is that right?
Speaker Change: Got it Okay, and then on the EBITDA margin.
Speaker Change: In the base business, which you raised by 20 basis points to 13 seven.
Speaker Change: Could you share with us the source of your increased confidence despite the kind of lackluster macros here and also I assume that your 2026 range is at 14 four midpoint is intact as well is that right.
Peter Jackson: So the second half of the question: yes, our 26 is still intact. We would need volumes to rebound, but we feel good about the core business. And I think that informs where we're dialing in on the EBITDA number for that base business calc. We're getting better and better clarity around what our margin profile looks like in a healthy market, what our profile looks like in the current market. And being able to dial in the breakout from commodities, kind of seeing the full year really leveling out right around that 400 level without a ton of volatility, a bit, but not a ton, is giving us the ability to kind of just dial it in a little bit more to what we think is a real sort of neutral commodity level or performance.
Speaker Change: So the second half of the question, Yes, our 26 is still intact.
Speaker Change: We would need volumes to rebound, but we feel good about the core business and I think that informs where we're dialing in on the EBITDA number for.
Speaker Change: For that base business calc, we're getting better and better clarity around what our margin profile looks like in a healthy market.
Speaker Change: What our profile looks like in the current market and being able to dial in.
The breakout from commodities kind of seeing the full year really leveling out right around that 400 level without a ton of volatility a bit but not a ton is giving is giving us the ability to kind of just dial it in a little bit more to what we think is a real sort of neutral come.
<unk> the level of performance core business is still very healthy.
Peter Jackson: Our business is still very healthy, you know, as much as we want it to be bigger. I think what you're seeing here and what the base business chart lays out is a business that's really been transformed based on what we sell and how we service our customers and the stability of that core business, even though you've seen kind of some ups and downs in the initial performance of the overall market.
Speaker Change: As much as we want it to be bigger I think what youre seeing here and what the base business chart lays out is a business that's really been transformed based on what we sell and how we service our customers and the stability of that core business, even though you've seen some kind of some ups and downs in the stock.
Speaker Change: <unk> performance of the overall market.
David Manthey: Sounds good. Thank you very much.
Speaker Change: Sounds good thank you very much.
Dave Rush: Thank you Dave.
Reuben Garner: We'll go now to Reuben Garner with The Benchmark Company.
Dave Rush: We'll go now to Reuben Garner with the benchmark company.
Reuben Garner: Thanks. Good morning, everybody.
Reuben Garner: Thanks, Good morning, everybody.
Reuben Garner: Uh huh.
Reuben Garner: On the multifamily, but I do have a quick follow up.
Speaker Change: The top line for next year.
Speaker Change: I think your business is more multifamily starts are a little over 40% off of the peak levels I think your businesses.
Speaker Change: 25% to 30% range does that imply that at the current kind of run rate for starts we have another 10 to 15 points of topline pressure within your multifamily business.
Reuben Garner: I hate to harp on multifamily, but I do have a quick follow-up about the top line for next year. I think your business is, well, multifamily starts are a little over 40% off of peak levels. I think your business is in the 25 to 30% range. Does that imply that at this current kind of run rate for starts, we have another 10 to 15 points of top line pressure within your multifamily?
Speaker Change: In 2005.
Peter Jackson: So the That's a tough question. It's very specific. Greetings, Reuben.
Speaker Change: So the.
Peter Jackson: Thank you for the question. I appreciate it. The question is very specific, and I'm not sure I can go all the way down.
Speaker Change: That's a tough question is very specific greetings Rubin. Thank you for the question I appreciate it.
Speaker Change: The question is very specific and I'm not sure I can go all the way down what I will say is we do expect there to be the rest of the sort of lapping of the rest of the decline in multifamily. So certainly expect there to be continued.
Peter Jackson: What I will say is, we do expect there to be the rest of the sort of lapping of the rest of the decline in mold, and certainly expect there to be continued headwinds on the sales, kind of in that, you know, maybe 400-ish range based on what we're seeing now, and around 200 of headwinds on the EBITDA line for multifamily, but remember, multifamily is all in, got the full portfolio of multifamily products I know in the past I've thrown out some color around trust only. I'm going to try not to do that anymore because I think I just muddy the waters.
Speaker Change: Headwinds on the sales line kind of in that.
Speaker Change: Maybe 400 ish range based on what we're seeing now and around 200 of headwind on the on the EBITDA.
Speaker Change: EBIT line for multifamily, but remember multifamily is all in you got the full portfolio of multifamily products. When we're talking about multifamily I know in the past I've thrown out some color around trust only I'm going to try not to do that anymore, because I think I just muddy the waters.
Peter Jackson: But when we're talking about the total nut, based on what we're seeing today, I would say that's the trend out, know, certainly some headwinds, but multifamily is only 11% of our business this year, going to decline a little bit further next year and be an even smaller percentage. It's just a declining impact on the overall as it shrinks back and kind of no Does that answer your question? Yep, it does. Thank you. That's very helpful.
Speaker Change: When we're talking about the total nut.
Speaker Change: Based on what we're seeing today that would say that's the trend out.
Speaker Change: Certainly some headwind, but multifamily is only 11% of our business. This year because of a decline a little bit further next year and be an even smaller percentage. It's just a declining impact on the overall as it shrinks back in kind of normalizes.
Speaker Change: That answer your question yes.
Speaker Change: It does thank you that's helpful. And then can you update us pre 'twenty 'twenty. The way. It would work is the builders would set up of the contract for you guys. I think at the time it averaged somewhere between 60 and 120 days further framing package and during the last few years that shrunk.
Reuben Garner: And then, can you update us, you know, pre-2020, the way it would work is the builders would set up a contract for you guys. I think at the time it averaged somewhere between 60 and 120 days for their framing package, and during the last few years, that shrunk significantly. Are we still, are the length of those contracts still in the kind of 30-day range and lined up with inventory? Have you seen that move at all with the kind of reset of the commodity markets?
Speaker Change: Significantly or we still.
Speaker Change: Length of those contracts still in the kind of 30 day range and lined up with inventory have you seen that move at all with kind of the reset of the commodity market.
Dave Rush: It's still in the range with how we buy our inventory, which is what we've always tried to do. As long as we have the ability to cover what we soil, we're willing to work with our builders, however we need to, to match that up also with how they price their. And it hasn't gotten to the point where it was 90 plus or whatever, but we're generally in a 45-day exposure rate, but that's exactly how much inventory we hold and how we carry.
Speaker Change: It's still in the range with how we buy our inventory, which is what we've always tried.
Speaker Change: To do.
Speaker Change: The as long as long as we have the ability to cover what we soil we're willing to work with our builders. However, we need to to match that up also with how they price their homes.
Speaker Change: And it hasn't.
Speaker Change: Gotten to the point, where it was 90 plus or whatever but we're generally in a 45 day exposure rate, but thats exactly how how much inventory we hold.
Speaker Change: How we carry it.
Peter Jackson: Yeah, there's certainly been some pressure back. There are certain players that have been less disciplined.
Dave Rush: Yeah, there's certainly been some pressure back there are certain players that have been less disciplined we've definitely tried to hold the ground and what we think is good smart way of quoting in the market, but to Dave's point. We've we've tried to increase that those 30 day numbers, we talked about where baxter and sort of the the busyness.
Dave Rush: Of the supply chain issues, where you really have to move it quick now that we're back into a more of a normal cadence, where we've got that 45 day ish.
Dave Rush: We've definitely tried to hold the ground on what we think is a good, smart way of quoting in the market. But to Dave's point, we've, we've tried to increase it. Those 30 day numbers we talked about were back during sort of the busyness of the supply chain issues where you really had to move it quick. Now that we're back into more of a normal cadence, where we've got that 45 day ish line of sight, if you will, between what's on the ground and what's on order.
Speaker Change: Line of sight, if you will between what's on the ground and what's on order, it's a lot easier to work with customers and tie it together and use some 60 day terms that sort of thing we're still apps.
Dave Rush: It's a lot easier to work with customers and tie it all together and use some 60 day terms, that sort of thing. We're still absolutely opposed to 90 and 120 day terms because we think that's the wrong discipline in the wrong way. Well, and at that point, we actually do take market risk. I mean, and, you know, what we're trying to do is mitigate their risk and mitigate our risk; we work with them to try to find that middle ground and make sure that they're covered and we're covered. And, you know, we'll adjust off of that a touch market-specific if it helps solve a problem for our customers. But in general, we're in that 45 day range.
Speaker Change: Absolutely opposed to 90 and 120 day terms, because we think that's the wrong discipline in the wrong way of approaching the market well and at that point, we actually do take market risk.
Speaker Change: What we're trying to do is mitigate their risk and mitigate mitigated our risk we work with them to try to find that middle ground and make sure that they are covered and workover.
And we'll adjust off of that a touch.
Speaker Change: Market specific if it helps solve a problem for our customer but in general we're in about 45 day range.
Reuben Garner: Exactly what I was getting at. Thanks, guys. I appreciate it. Good luck going forward.
Speaker Change: Exactly what I was getting at thanks, guys I appreciate it and good luck going forward.
Robert: Thanks Robert.
Jay Mccanless: We'll go now to Jay McCanless with Wedbush.
Gane McCanless: We'll go now to gain mccanless with Wedbush.
Jay Mccanless: Morning, everyone. Thanks for my questions. The first one I had, when you think about lumber prices the way you guys look at them, I got, you know, talking about $400 kind of being the base. Assumption. Could you talk about what deflation you've seen in 2Q24 versus where it was in 2Q23?
Gail McCanless: Good morning, everyone. Thanks for taking my questions. The first one I had when you think about lumber prices and the way you guys look at it.
Speaker Change: Talking about $400 kind of being the base of <unk>.
Sumption could you talk about what deflation you've seen in <unk> 24 versus where it was <unk> 23.
Peter Jackson: We called it out in terms of what went through COGS. It was just a, it was basically zero, right? 0.3 or whatever, something that does move a little out of sequence and sync with what you see in random length. It is going to be a headwind in the second half, as you get to that sort of full year. I'm a little below the four.
Speaker Change: We called it out in terms of what went through Cogs. It was just a.
Speaker Change: It was basically zero right that 0.3 or whatever you know.
Speaker Change: Mall, 3% headwind that.
Speaker Change: Is something that does move a little out of sequence in sync with what you see in random lengths. It is going to be a headwind in the second half versus the first half, which is how you get to that sort of full year number that's a little below the 400 level.
Peter Jackson: Okay. Thanks Peter.
Jay Mccanless: Thanks, Peter. And then the other question I had, if you look at, I can't remember which slide it's on, but commodity lumber was up, I think, 13% in sales for the second quarter. That's almost double the rate of single family start growth that the census numbers had for the national readings as well as the South readings. I guess, with things in general slowing down a little bit, are you trying to outgrow and take even more market share on the commodity side until value add maybe comes back a little bit? Because those were pretty impressive numbers relative to where the rest of the market was.
Peter Jackson: Other question I had if.
Speaker Change: If you look at I can't remember, which slide upon the commodity lumber was up I think 13% of sales for the second quarter.
Speaker Change: Almost double the rate of single family starts growth.
Speaker Change: This number has had for the national readings as well as the south readings I guess.
Speaker Change: With things than general slowing down a little bit are you trying to outgrow and take even more market share on the commodity side.
Speaker Change: <unk> value add maybe comes back a little bit because those were pretty impressive numbers relative to where the rest of the market was.
Peter Jackson: Well, hey, we always want to take all the share, brother. Come on, man.
Speaker Change: Okay, we always want to take all of the share of other come on in no.
Peter Jackson: No, in all honesty, in all sincerity, we saw, we always see a couple-month lag, and if you think about the Q1 starts number, that was up in the 20s, so you're just seeing that slosh over a little bit into Q2. We are seeing that, you know, a comparable performance in the business. We'll certainly stay aggressive, like they've said. We think when there's opportunities to lean in and take share, we're going to keep doing it, but that's not really it.
Speaker Change: Honest in all sincerity, we saw we always see a couple of month lag and if you think about the Q1 starts number that was up in the Twenty's. So you're just seeing that sloshed over a little bit into Q2, we are seeing that.
Speaker Change: Our comparable performance in the business, we will certainly stay aggressive like Dave said, we think when theres opportunities to to lean in and take share we're going to keep doing it.
Speaker Change: But that's not really the explanation for Q2.
Speaker Change: Okay, great. Thanks for taking my questions.
Speaker Change: Thank you.
Steven Ramsey: We'll go now to Steven Ramsey with the Thompson Research Group.
Jay Mccanless: Okay, great. Thanks for taking my question. We'll go now to Steven Ramsey with Thompson Research Group. Good morning. Maybe just to wrap my two questions into one here, the BAPS mix at 49%, pretty impressive even with the complexity.
Speaker Change: We'll go now to Steven Ramsey with Thompson Research group.
Steven Ramsey: Good morning, maybe just to wrap my two questions into one here, but that's mix at 49% pretty impressive even with the complexity headwinds that you have.
Steven Ramsey: Clearly a lot of dynamic here, but do you think the housing market normalizes.
Speaker Change: Its complexity going up from current levels over the next couple of years to reach your plan or do you need it that complexity level to move up or can the current complexity level.
Speaker Change: <unk> allow for that to allow you to reach your long term targets. Thanks.
Steven Ramsey: Yeah, thanks for the question. Keep in mind, Value Added Product. The movement is within the category, right?
Speaker Change: Yeah. Thanks for the question.
Speaker Change: Keep in mind there.
Speaker Change: The value added products.
Speaker Change: The movement is within the category right. It's still engineered wood products are still value add so as you go from trust engineered wood, we're not leaving the value add product category, we're moving within it.
Dave Rush: It's still, engineered wood products are still value-added. So as you go from trust to engineered wood, we're not leaving the value-added product category, we're moving within it. Sales opportunity is less, but again, our margin profiles are held in there, and we're doing what we can to keep our customers addressing affordability and at the same time maintaining their margins as well. So I don't see The shift in incremental value-add products will come as the market returns to normal.
Speaker Change: The.
Speaker Change: Sale opportunity is less but again our margin profiles of held in there.
Speaker Change: And we're doing what we can to keep our customers addressing the affordability and at the same time, maintaining their margins as well so I don't I don't see.
Speaker Change: <unk>.
Speaker Change: The shift in the incremental value add products will come as the market returns to normal.
Dave Rush: There will be higher demand for those products in general, and right now, we offer the full spectrum. We will send you sticks if you don't want value-added. But then we go from ready frame to panel, to panel and truss, to fully installed framing packages, all of which would fall into the value-added product category in total. And we would expect it to maintain for sure and incrementally grow as housing starts to return to normal levels. Excellent, thank you.
Speaker Change: There'll be a higher.
Speaker Change: For those products in general and right now we offer the full spectrum. We will send you sticks of you don't want value add but then we go from ready frame to panel to panel and trusts.
Speaker Change: Fully installed framing packages, all which would funnel into the value added product category in total.
Speaker Change: And we would expect it to maintain for sure and incrementally grow as housing starts return to normal normal levels.
Speaker Change: Excellent. Thank you.
Rob: Thanks, Rob.
Operator: Ladies and gentlemen, that will conclude today's question and answer session and the Builders FirstSource second quarter 2024 earnings conference call. Thank you for your participation. You may disconnect your line at this time, and everyone have a wonderful day.
Speaker Change: Ladies and gentlemen that will conclude today's question and answer session and the builders first for second quarter 2024 earnings Conference call.
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Speaker Change: Thank you for your participation you may disconnect. Your lines at this time and everyone have a wonderful day.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].