Q3 2024 Builders FirstSource Inc Earnings Call
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Speaker Change: Good day and welcome to the Builders First Source third quarter 2024 earnings conference call. Today's call is scheduled to last about one hour including remarks by management and the question and answer session.
In order to ask a question, please press the star key followed by the number 1 on your phone at any time during the call.
Speaker Change: I'd now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.
Heather Kos: Good morning and welcome to our third quarter 2024 earnings call.
Heather Kos: With me on the call are Dave Rush, our CEO, Peter Jackson, our CEO-designate and CFO, and Pete Beckman, our CFO-designate. As a reminder, on September 19th, we announced a planned CEO and CFO succession.
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.
Heather Kos: The results discussed today include GAAP and non-GAAP results adjusted for certain items.
Heather Kos: We provide these non-GAAP results for informational purposes.
Heather Kos: 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, and a discussion of why we believe they could be useful to our investors at 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 mean of the Private Securities Litigation Reform Act and projections of future results.
Heather Kos: Please review these forward-looking statements section in today's press release and on our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'll turn the call over to Dave. Thank you, Heather. And good morning, everyone.
Dave Rush: Before I get into my prepared remarks, on behalf of Builders First Source, I want to send our thoughts to all of those who have been impacted by Hurricane Selene and Milton.
Heather Kos: I am proud of how we have come together as an industry to help with disaster relief efforts in North Carolina and the Southeast.
Heather Kos: From the first morning after Helene's landfall, we had team members and suppliers reaching out from all over the region and even across the nation asking how they can help.
Heather Kos: Our Charlotte and Blairsville locations filled trucks with supplies and delivered them to the hard-hit Western North Carolina region.
Heather Kos: Suppliers like Great Southern, Blue Lynx, Warehouser, Orgel, and many others immediately stepped up and joined our efforts.
Heather Kos: We are grateful to our partners for their help.
Heather Kos: And with BFS CARES Initiative, we're providing grants to our team members, help get our team members back on their feet as soon as possible.
Heather Kos: I want to especially thank Tim McCall, an install manager in Nashville, who also serves as a volunteer firefighter in the region.
Heather Kos: Tim was involved in 20 calls in the first hours after Helene hit.
Heather Kos: One involved climbing over 250 yards of very unstable terrain to help rescue an 11-year-old boy who had been buried in the basement of his home by a massive landslide.
Heather Kos: Tim, we are so proud of your efforts and thank you for your selfless service to the community.
Speaker Change: I'm sure you have all seen the news that I'm retiring as CEO.
Heather Kos: I never anticipated that 25 years ago, I would have this wonderful career with this great company. We have the best people in the industry, and the opportunity to be CEO of BFS these last couple of years has truly been the joy and highlight of my career.
Heather Kos: I am so proud of how far we have come and am grateful to our leadership team and team members for their support.
Heather Kos: I have full confidence in Peter and Pete and their ability to drive our strategy forward.
Heather Kos: One of my first priorities when I became CEO was to develop a succession plan to ensure the consistency of our leadership and execution of our long-term strategy.
Heather Kos: With many years of experience as our CFO, Peter is exceptional at navigating the public company landscape.
Heather Kos: and has spent extra time with each of our regions to get a first-hand understanding of what it takes to support our leaders in the field. He has served as a close advisor to me and was essential in helping craft our current strategy.
Heather Kos: I am working closely with him to ensure a thoughtful and seamless transition.
Heather Kos: Pete Beckman is a brilliant financial leader and someone who is widely respected within the organization.
Heather Kos: I am grateful for our deep bench of talent and to leave BFS in such good hands. I want to wrap up by saying that I'm not going far away.
Heather Kos: I'll enjoy continuing to serve BFS as a member of our board and am taking an active role to ensure a smooth transition in the near term. I'm excited to continue supporting our growth and success. Thank you again. I'll now hand the call over to Peter.
Peter Jackson: Thank you, Dave, and good morning, everyone. I want to start by saying that we are indebted to Dave.
Peter Jackson: for his decades of service at BFS as a leader, steward, and champion of the company and our people.
Peter Jackson: Dave has truly done it all, and his legacy of excellence will continue to inspire us as we move forward.
Speaker Change: I'm truly honored and grateful to be named the next CEO of Builders First Source.
Heather Kos: I'm humbled to represent our talented hard-working team and the fantastic business that we have built.
Heather Kos: BFS has had tremendous success and become a world-class organization.
Heather Kos: because of the commitment and contributions made by this team.
Heather Kos: Let's get started with slide 3 and our strategic pillars, which remain unchanged.
Heather Kos: As we continue to execute our strategy, I believe there are three areas that we can emphasize so we can continue to outperform today and transform tomorrow.
Heather Kos: The first opportunity is with our people. I want us to advance the industry standard in this area.
Heather Kos: I believe we can enhance how we invest in, develop, and support our team members, from our frontline operators to our leadership.
Heather Kos: The second opportunity is to further build and catalyze our growth prospects.
Heather Kos: from our products to our processes.
Heather Kos: I see potential to improve our consistency, capabilities, and ways of working so we can extend our lead and grow a bigger, better BFS of tomorrow.
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Heather Kos: And the third opportunity is to improve how we collaborate and learn from each other within the company.
Heather Kos: We have a wealth of expertise, knowledge, and innovative technologies. I believe we have a real opportunity to enhance how we work together so that what we are discovering in Charlotte is shared with Phoenix and what we are developing in Florida can be scaled in Texas.
Heather Kos: Let's turn now to our third quarter highlights on slide 4.
Heather Kos: I'm proud of our resilient performance, which reflects our execution and operational rigor.
Heather Kos: Even as we continue to see soft sails amid rate uncertainty and extreme weather.
Heather Kos: Despite these challenges, we delivered strong gross margins of nearly 33 percent.
Heather Kos: Our adjusted EBITDA margin has remained in the mid-teens or better for 14 consecutive quarters, which highlights our transformed business model and our differentiated product portfolio and scale.
Heather Kos: Let's move to slide 5 where we touch on some of the specific ways we are executing our strategy.
Heather Kos: Our portfolio of value-added products and services remains a competitive advantage for BFS and continues to bolster our partnerships with customers.
Heather Kos: We've seen steady progress with digital, as we continue to hear great feedback from customers and see increasing levels of adoption each week.
Heather Kos: We demonstrated operational excellence by delivering $27 million in productivity savings in Q3.
Heather Kos: ...and have driven $104 million year to date primarily from more efficient manufacturing and procurement initiative.
Heather Kos: Install services continues to be a great opportunity for us as we leverage playbooks from successful markets.
Heather Kos: I'm pleased that our install sales increased by 11% year over year as we focus on helping customers address labor challenges.
Heather Kos: We have consolidated 11 facilities year-to-date while maintaining our service levels to our customers with an on-time and in-full delivery rate of over 90%.
Heather Kos: https://www.kenhub.com
Heather Kos: Single-family softness continued in Q3.
Heather Kos: Amid ongoing affordability challenges and below normal starts.
Heather Kos: The initial reaction to the Fed's first interest rate cut in September has been mixed, with some homebuyers remaining on the sidelines and waiting for additional rate cuts as mortgage rates fluctuate in the near term.
Heather Kos: As a reminder, the value of a new start has fallen as the housing market has adapted to affordability challenges.
Heather Kos: Multifamily continues to be a headwind amid muted activity is expected.
Heather Kos: Comparisons should get less negative as we lap record performance from last year.
Heather Kos: On a normalized basis, multifamily represents about 9-10% of net sales and is an attractive and profitable business for us.
Heather Kos: As we detailed on our Q2 call, our Q4 exit velocity indicates about a percentage point of margin erosion from 24 on a four-year basis, roughly half of which is from multifamily.
Heather Kos: to address the current environment and affordability challenges.
Heather Kos: Builders have employed specs, smaller and simpler homes, and interest rate buy-downs to help buyers find affordable options.
Heather Kos: Builders of all sizes are having to navigate this market in addition to regulatory, land development, and infrastructure challenges.
Heather Kos: Smaller builders have been especially impacted by the availability of land and limited options to buy down rates.
Speaker Change: We are leaning in by partnering with our customers to help them lower the cost of homes for consumers, as well as maintain their margins.
Heather Kos: This includes offering a balanced product mix that addresses builder needs while passing through lower material costs.
Heather Kos: For instance, we have continued to supply more engineered wood and have sold fewer floor trusses to help alleviate affordability challenges.
Heather Kos: We have also supplied more lower-cost offerings in products like Windows and Doors to help reduce costs.
Heather Kos: Although these actions in support of our customers
Heather Kos: We need less sales and gross profit dollars. Our margin profile remains strong, and we are well positioned for growth as starts increase and structural headwinds begin to subside.
Heather Kos: Turning to M&A on slide six, we continue to pursue attractive opportunities while remaining financially disciplined.
Heather Kos: Over the years, we have developed a substantial and proven muscle memory to grow through M&A and have an impressive track record of successfully integrating these transactions.
Heather Kos: In the third quarter, we completed six deals with an aggregate 2023 sales of roughly $190 million.
Heather Kos: In July, we acquired Western Trust and Components, adding trust capacity in the Flagstaff, Arizona area.
Heather Kos: and CRI SoCal, a dealer and installer of high-end windows and doors in Orange County, California.
Heather Kos: In August, we acquired Wyoming Millwork, the leading independent building products distributor in Delaware.
Heather Kos: In September, we acquired Sunrise Wood Designs, a top custom cabinet manufacturer and installer in North Texas.
Heather Kos: And in the Reno area, Reno Trust, a leading trust manufacturer to the single and multifamily markets, and High Mountain Door & Trim, a distributor and installer of windows, doors, and millwork.
Heather Kos: Additionally, in October, we acquired Douglas Lumber, which provides a range of building materials to contractors, remodelers, and homeowners in the Rhode Island area.
Heather Kos: These acquisitions reinforce our commitment to growing value-added products. We are excited to welcome these talented new team members to the BFS family.
Heather Kos: On slide 7, we provide an update on capital allocation.
Heather Kos: In addition to the six tuck-in acquisitions during the third quarter,
Heather Kos: We executed share repurchases of roughly $160 million.
Heather Kos: It's proven by our track record we'll continue to allocate capital to high return opportunities including acquisitions and share repurchases
Heather Kos: We deployed approximately $1.7 billion dollars through the first three quarters of this year and remain on track to strategically deploy $5.5 to $8.5 billion dollars of capital.
Heather Kos: from 2024 to 2026, as we outlined at Investor Day last December.
Heather Kos: Now let's turn to slide 8 and discuss the latest updates on our digital strategy.
Heather Kos: With our BFS digital tools, we are focused on creating value for our home builder customers, and in doing so, further extending our industry leadership position and driving substantial organic growth.
Heather Kos: We have seen strong adoption and growth with our target audience of smaller builders, despite the challenging market.
Heather Kos: We have had broad acceptance of the platform so far, including interest from multiple top 200 builders.
Heather Kos: Since launching in late February, we have seen nearly $600 million of orders placed through our digital platform.
Heather Kos: Of which, $83 million were incremental sales from existing and new customers.
Heather Kos: While we're very pleased with the incremental sales to date, given market headwinds from our targeted segment of builders, we now expect total incremental sales of approximately $110 million in 2024 versus our initial goal of $200 million.
Heather Kos: Please see the complete disclaimer at https://sites.google.com
Heather Kos: Despite a slow start, we remain confident in our ability to meet our target of $1 billion in incremental sales in 2026 as we grow wallet share and win new customers.
Heather Kos: Before I turn the call over, I want to say that we are very fortunate to have Pete Beckman step into the role of CFO. He has a long and proven track record as a finance leader, which I have witnessed firsthand.
Heather Kos: I look forward to partnering with him to deliver exceptional results and compound shareholder value. Pete, take it away.
Pete Beckman: Thank you, Peter, and good morning, everyone. I appreciate the introduction and I am grateful for the opportunity to serve at CFO.
Pete Beckman: For background, I have spent the last 25 years at BFS and legacy companies in roles of increasing responsibility, including being an integral part of the ProBuild and BMC mergers.
Pete Beckman: Most recently, I served as SVP of Financial Planning and Analysis, where I partnered with all levels of the enterprise.
Pete Beckman: and was responsible for our financial forecasting, strategic capital, and annual planning.
Pete Beckman: I look forward to helping enable profitable growth while maintaining our track record of prudent financial management through the cycle and disciplined capital allocation.
Pete Beckman: By continued housing market choppiness, we delivered resilient results during the third quarter as we continue to execute our strategy and operating model. We are leveraging our forfeit balance sheet and free cash flow generation to drive disciplined capital deployment as witnessed by our share repurchases and acquisitions during the quarter.
Pete Beckman: Our scale and financial flexibility enable us to act as key partners to homebuilders. And we have a clear line of sight to compound value creation over the long term.
Pete Beckman: We are well positioned for meaningful operating leverage when the market turns.
Pete Beckman: I will cover three topics with you this morning. First, I'll recap our third quarter results. Second, I'll provide an update on our capital deployment. And finally, I'll discuss our 2024 guidance, 2025 scenarios, and related assumptions.
Pete Beckman: Let's begin by reviewing our third quarter performance on slides nine and 10.
Pete Beckman: Net sales were $4.2 billion, a decrease of 6.7%, driven by a 7.2% decline in core organic sales as multifamily continues to trend downward and 2.9% of commodity deflation.
Pete Beckman: The decrease in net sales was partially offset by growth from acquisitions of 2%.
Pete Beckman: and one additional selling day that contributed 1.4 percent.
Pete Beckman: The core organic sales decrease was driven by a 31% decline in multifamily, as we lapped the prior year's strong comps, and a 4.6% decline in single family amid lower value per start.
Pete Beckman: This was partially offset by a small increase in repair and remodel of almost 1% given strength in the central region.
Speaker Change: I'm going to take a break. I'll be back in just a moment. I'm going to take a break.
Pete Beckman: As we have shared on recent calls, there have been three main variables reconciling single-family starts to work for organic sales.
Speaker Change: The first variable is the lag between permits and starts. This quarter, unlike last quarter, we have seen the impact of early permit polls fade, but we continue to see a generally extended permit to completion cycle time.
Pete Beckman: As a rule of thumb, we expect a roughly two-month lag between a start and our first sale.
Pete Beckman: Second, the value of the average home has fallen as size and complexity have decreased.
Pete Beckman: Finally, we have seen slight normalization in selling margins of non-commodity products and manufacturer price cuts in some products.
Pete Beckman: To summarize, although there are less sales dollars bill per start today, we remain the market leader and will continue to deliver strong operating performance.
Pete Beckman: Value-added products represented 49% of
Pete Beckman: As a rule of thumb, our multifamily sales are made up of roughly 70% value-added products.
Pete Beckman: Gross profit was $1.4 billion, a decrease of approximately 12% compared to the prior year period.
Pete Beckman: Those margins were 32.8%.
Pete Beckman: Down 210 basis points.
Pete Beckman: primarily driven by multifamily and core organic normalization.
Pete Beckman: SG&A increased $19 million to $958 million, primarily attributable to acquired operations and asset write-offs.
Pete Beckman: partially offset by lower variable
Pete Beckman: As a percentage of net sales, total SG&A increased 190 basis points to 22.6 percent.
Pete Beckman: Adjusted SG&A decreased approximately $1 million to $783 million, primarily attributable to lower variable compensation due to lower net sales, partially offset by acquired operations.
Pete Beckman: On an annual basis, adjusted SG&A is approximately 30% fixed and 70% variable with volumes.
Pete Beckman: For reference, we have an adjusted SG&A reconciliation schedule in the earnings release.
Pete Beckman: We are focused on carefully managing our SG&A expenses and are well positioned to leverage our fixed costs as the market grows.
Pete Beckman: The EBITDA was approximately $627 million, down 23%, primarily driven by lower gross profit, partially offset by lower operating expenses after adjustments.
Pete Beckman: Adjusted EBITDA margin was 14.8%.
Pete Beckman: down 310 basis points from the prior year.
Pete Beckman: primarily due to lower gross profit margins partially offset by lower operating expenses.
Pete Beckman: after adjustment.
Pete Beckman: Adjusted net income of $360 million was down $174 million from the prior year, primarily due to lower gross profit, partially offset by lower operating expenses after adjustments and lower income tax expense.
Pete Beckman: Adjusted earnings per diluted share was $3.07, a decrease of 28% compared to the prior year.
Pete Beckman: On a year-over-year basis, share repurchases added roughly 22 cents per share for the third quarter.
Pete Beckman: Now let's turn to our Cash Flow, Balance Sheet, and Liquidity on slide 11.
Pete Beckman: Q3 operating cash flow was $730 million, an increase of $81 million, mainly attributable to a decrease in net working capital.
Pete Beckman: Capital expenditures for the quarter were 95 million dollars and free cash flow was approximately 635 million dollars.
Pete Beckman: https://TheBusinessProfessor.com
Pete Beckman: For the last 12 months ended September 30th, our free cash flow yield was approximately 8%, while operating cash flow return on invested capital was 25%.
Pete Beckman: Our trailing 12 months net debt to adjusted EBITDA ratio was 1.4 times, while base business leverage was 1.5 times.
Pete Beckman: At quarter end, our total liquidity was approximately $2 billion.
Pete Beckman: consisting of 1.7 billion dollars in net borrowing availability under their revolving credit facility and approximately 300 million dollars in cash on hand.
Pete Beckman: moving to capital deployment.
Pete Beckman: In the third quarter, we were purchased roughly 900,000 shares for approximately $160 million at an average stock price of $176.73 per share.
Pete Beckman: Since the inception of our buyback program in August 2021, we have repurchased 45.5% of Total Shares Outstanding at an average price of $77.62 per share for $7.3 billion.
Pete Beckman: We have approximately $840 million remaining on our $1 billion share repurchase authorization.
Pete Beckman: We remain disciplined stewards of capital and have multiple paths for value creation to maximize returns.
Pete Beckman: On slide 12, we show our 2024 outlook. We anticipate a regional financial impact from Hurricanes Helene and Milton, around $40 million in sales.
Pete Beckman: a relatively modest amount given our geographic diversification.
Pete Beckman: For full year 2024, we have narrowed our range of expected total company net sales to be $16.25 to $16.55 billion.
Pete Beckman: We expect the adjusted EBITDA to be 2.25 to 2.35 billion dollars.
Pete Beckman: adjusted EBITDA margin is forecast to be in the range of 13.8 to 14.2 percent.
Pete Beckman: We expect our 2024 Full Year Gross Margin Guide to be in the range of 32 to 33 percent.
Pete Beckman: This also remains in line with our long-term expectation of 30 to 33 percent and normalized single-family starts of 1 to 1.1 million.
Pete Beckman: We expect full year 2024 free cash flow of $1.2 to $1.4 billion, assuming average commodity prices in the range of $380 to $400 per thousand board foot.
Pete Beckman: 2024 Outlook is based on several assumptions. Please refer to our earnings release and presentation for a list of these key assumptions.
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Pete Beckman: Moving to slide 14.
Pete Beckman: We recognize that 2025 is coming into focus as we approach year-end.
Pete Beckman: Like we did last year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions.
Pete Beckman: I want to emphasize that this is not guidance, but these scenarios should help clarify our range of performance expectations for 2025 and demonstrate the strength of our best-in-class operating platform.
Pete Beckman: Turning the slides 15 and 16, as a reminder, our base business approach showcases the underlying strength and resiliency of our company by normalizing sales and margins for commodity volatility.
Pete Beckman: This helps to clearly assess the core aspects of the business.
Pete Beckman: or we have focused our attention to drive sustainable outperformance.
Pete Beckman: Our base business guide on net sales for 2024 is approximately $15.4 billion.
Pete Beckman: Our base business adjusted EBITDA guide is approximately $2.3 billion at a margin of 14%.
Pete Beckman: which reflects a minimal impact on commodities.
Pete Beckman: For context, slide 16 shows that our 2020 base business adjusted EBITDA was roughly $1.1 billion at 991,000 single-family starts, and we are expecting better adjusted EBITDA at lower single-family starts this year.
Speaker Change: Thank you very much.
Speaker Change: On slide 17, we provide a bridge from our 2019 gross margin to the long-term normalized midpoint of 31.5 percent.
Pete Beckman: our improved margin profile, plus a greater mix of value-added products, productivity savings, and commercial benefits.
Pete Beckman: As I wrap up, I am confident in our ability to execute our strategy and drive long-term growth by leveraging our exceptional platform and financial flexibility.
Pete Beckman: The Investor Day goals we laid out last December remain achievable, assuming a return to normalized single-family starts of $1.1 million in 2026.
Pete Beckman: With that, I'll turn the call back over to Peter for some final thoughts.
Speaker Change: Thanks Pete.
Peter Jackson: And I close by reiterating that we continue to execute.
Speaker Change: Our resilient business model allows us to win in any environment, and this is evidenced by our strong gross profit margins and cash flow generation in the third quarter.
Speaker Change: I'm confident in the long-term strength of our industry due to the significant housing underbuild and favorable demographic trends. We are well positioned to take advantage of these tailwinds, which will help drive growth for years to come as we execute our strategy.
Speaker Change: We are a key partner to our customers and continue to deepen our value proposition by helping them solve problems through our investments in value-added products, digital tools, and install services.
Speaker Change: Our proven playbook for growth, Fortress Balance Sheet, and robust free cash flow generation will help us continue to compound long-term shareholder value.
Speaker Change: Even in an uncertain and challenging environment, we are doing the hard work now and building for the future.
Speaker Change: By continuing to grow in value-add and install, along with leveraging IT and technological development, we are arming our team members with cutting-edge tools to continue to be the supplier of choice for our customers. By investing today, we are exceptionally well positioned to win in the future.
Speaker Change: as the market continues to recover.
Speaker Change: Thank you again for joining us today. Operator, please open the call now for questions. As a reminder, with a lot of questions this morning, please limit yourself to one question and one follow-up.
Speaker Change: Thank you ladies and gentlemen at this time if you would like to ask a question please press star 1 on your telephone keypad. If at any point you find your question has been answered you may remove yourself from the queue by pressing star 2.
Speaker Change: Once again, that is star 1 to ask a question and star 2 to remove yourself. Again, in the interest of time, we ask that you please limit yourself to one question and one follow-up question. We will pause for just a moment to assemble the question queue.
Speaker Change: https://otter.ai
Speaker Change: We'll take our first question from Matthew Boulay with Barclays. Please go ahead.
Matthew Boulay: Good morning everyone. I want to offer my congratulations and best wishes to Dave and best of luck to Peter and Pete.
Matthew Boulay: So for my
Matthew Boulay: For my first question, I wanted to touch on your growth versus the market into these 2025 scenarios.
Matthew Boulay: So
Speaker Change: Kind of looking into the second half here. I think the way the way you guys outlined the guide is
Speaker Change: Thank you.
Speaker Change: You know, you obviously reduce the revenue guide by a bit while holding the end market guide. So I'm curious around your balance of...
Speaker Change: share and kind of how you're thinking about that in the near term, but then as you draw it into those 25 scenarios.
Speaker Change: It looks like you're talking about your growth relatively similar to the starts number. So I'm curious how you're thinking about your growth relative to market.
Speaker Change: As we get into 2025 as well, you know, and if some of these headwinds are starting to abate any visibility to that, so I'll stop there. But thank you guys.
Speaker Change: https://www.kenhub.com
Speaker Change: Thanks, Matt. Yeah, there's a lot in that question. So, a couple of factors. I would say where we are today, we have certainly seen the choppiness in the market.
Speaker Change: You know, there wasn't a big relief rally when interest rates were cut. Mortgage rates didn't necessarily behave as everyone was hoping in terms of a quick fall. And I think buyers have been appropriately or inappropriately nervous about both rates and the election. So it's been a little choppy.
Speaker Change: You know, I think we've seen that. We've been watching it all year. Still performing well. I think the business is still
Speaker Change: competing well, taking advantage of opportunities, we're investing. Those things have led to I think some solid performance on our part, but we have certainly faced headwinds.
Speaker Change: hopefully pretty, what you see is pretty open about that. The value of these homes has fallen. That's really the biggest disconnect. When we look at what starts have done and what our sales have done, particularly in that single family core organic category.
Speaker Change: That doesn't mean we're not happy and competitive, but certainly it's been challenging out there, and we've talked about that.
Speaker Change: as we think about what that means into the fourth quarter and into next year. I think broadly speaking, it's mixed out there. You've got markets that are doing quite well. They're sort of bouncing up and seeing some green shoots starting to perform.
Speaker Change: We've got other markets that have struggled and seen headwinds and seen a little bit of excess inventory and builders are reacting in a thoughtful way, we believe, to managing that.
Speaker Change: So our guide for the fourth quarter is certainly focused on the visibility that we have into the market, the conversations we're having with customers. It's not a bad market by any stretch, but it's one that has certainly seen some challenges, not at all helped by the weather disruptions.
Speaker Change: that we've seen.
Speaker Change: You know, as we get into 25, it's early days.
Speaker Change: You know, we've been looking at the commentary from the economists, we've been talking with our customers, it's a bit of a mixed bag, some doing better than others, we think it'll be a bit of a differentiated reaction as rates are cut.
Speaker Change: We expect there will likely be at least a couple of more. We think mortgage rates will continue to settle. That will have different advantages to different bills.
Speaker Change: out in the market.
Speaker Change: So this is what we're seeing today. You know, there's certainly new news. Some of the performance announcements over the past few weeks have shaped our opinions as we go forward, but we thought, like last year, this is a helpful starting point for helping people understand what we're thinking based on what we see today.
Speaker Change: Got it. Okay, thank you for that, Peter, and for addressing my long question there. Second one, the gross margin guide, I just wanted to confirm that given where the guide is,
Speaker Change: that you're still looking at, you know, roughly 31% as the exit rate for 2024. And again, you know, obviously we can see the margin numbers in your 2025 scenarios.
Speaker Change: Between some of the pluses and minuses, productivity, value add, install, versus some of the competitive dynamics out there, how are you guys thinking that 31% could drift one way or the other as you go through 2025? Thank you.
Speaker Change: Hey, Matt. Thank you for the question.
Speaker Change: We're seeing a headwind.
Speaker Change: As we exit 2024 of about another 100 basis points from the year-to-date average margin.
Hunter: Hunter Basis points, pretty consistent with what we said last quarter is half of it's made up from the multifamily normalization and the other half from the core business normalization.
Speaker Change: with the install. The install has been a favorable result for us in 2024 and it continues to be a good arrow in the quiver and we'll continue to compete every day and we expect to exit.
Speaker Change: right around 31 and a half. Overall, we're certainly very pleased with the margin performance.
Speaker Change: Despite the challenging market, we've seen customers really continuing to benefit from the value-added products and services. That part of our business has certainly stayed strong, stayed resilient, and it's supported our margins in an environment where volumes and values are down a little bit.
Speaker Change: Got it. Okay, so you said 31 and a half is the exit rate, so I'll leave it there. Thank you guys.
Speaker Change: Thanks, Matt.
Speaker Change: And we'll hear next from Charles Perron-Pichet with Goldman Sachs. Please go ahead.
Charles Perron-Pichet: Thank you. Good morning, everyone. First of all, congrats, Dave, Peter, and Pete on the promotion and retirement.
Charles Perron-Pichet: well-deserved.
Charles Perron-Pichet: Maybe if I can go first to, going back to Matt's question on the 2025 scenario, just want to make sure that we understand this correctly. Looking at the base and bulk case scenarios, it implies approximately 20% incremental EBITDA margin in 2025 once we remove the $200 million
Charles Perron-Pichet: a multi-family headwind. First of all, is that right? And as you see, you know, things flowing through next year, how do you see the ability to drive, you know, the gross margin versus the SGA leverage across those scenarios? And just to follow up as well, do you see the deceleration in the sales that you've seen through 2024 in terms of the content per home?
Charles Perron-Pichet: as, you know, stabilizing and expecting through 2025 to be roughly consistent with what you see today in those scenarios.
Speaker Change: Thank You Charles, appreciate the comment and the questions. So you know that I would say the numbers and the performance of the business around margins in particular
Speaker Change: There's a lot going on there, right? With the early look at what we have on the table, I think what it reveals is continuing performance in the areas that you'd expect us to deliver.
Speaker Change: We expect to see improved performance as a result of productivity initiatives. We continue to see the strength around the value add. We continue to look for opportunities within that productivity category to drive both gross margins and EBITDA margins.
Charles Perron-Pichet: That is, I would say, a core part of our operating model as a business and something you feel good about as time progresses.
Charles Perron-Pichet: The dynamics around how the market will perform next year in light of
Charles Perron-Pichet: The sales volumes in the various categories, I think broadly speaking, we continue to see weakness in multifamily. I would say our sense of it is it's stabilized, but it's been
Charles Perron-Pichet: It's been a big step down from the peak, but gotten to a level where we believe we can hold here and hopefully start to see some recovery. Timing will depend on the dynamics of the market.
Charles Perron-Pichet: Single-family is a dynamic that's different between the types of builders, as I mentioned earlier, but certainly one that we think is directionally headed in a positive way. We continue to believe in the strength of the market, the desirability of new homes, and the industry's ability to deliver those.
Charles Perron-Pichet: We think there's a lot of pent-up demand, and we are well-positioned to help builders deliver and do it in a very efficient way. Again, early days on this guide for 2025, but we think those scenarios can help add some color in that regard.
Speaker Change: Okay, that's helpful, Peter. And maybe following up, you know, wood product prices and lumber in particular have been trending higher over the last couple of months with improving housing outlook for 2025 suggesting potentially more upside. I guess against this, how are you positioning your inventories?
Charles Perron-Pichet: in the business, and how do you see this, you know, recovery in commodity prices affecting demand and competitive dynamics across the different value-add products that you have in your portfolio if, you know, this ongoing upswing persists in 2025?
Speaker Change: Yeah, so commodities continue to be an important part of what we do, although be it much smaller than it has in the past. It's nice to see the prices bouncing off the bottom. I'd say that below 400 window that we were in for a while was a bit, I would say, unpleasant, more so for the for the mills and the delivery on the commodity side than for us, but certainly, you know, we like to have a healthy sector in the commodity space and that lumber, the dimensional
Charles Perron-Pichet: particular. We have seen a little bit of a boost. I think it's early days, and I would highlight the fact that while new construction is an important driver of demand in the market,
Charles Perron-Pichet: in that product category. R&R, the repair and remodel market, is a far bigger influence. So I think that's where, if I'm looking for support and tailwind in that category, that's an important factor to keep an eye on.
Charles Perron-Pichet: increasing costs. Although, as always, we keep a close eye on affordability. We want a balance there. We don't think any of us want to return to, you know, the $1,300 to $1,600 lumber days. That was pretty dysfunctional. So a modest increase is, I think, healthy and good to stabilize the market.
Speaker Change: Okay, thanks for your time, guys.
Speaker Change: Thank you.
Speaker Change: We'll hear next from Mike Dowell with RBC. Please go ahead.
Mike Dowell: Morning. Thanks for taking my questions. Congrats again to Dave, Peter, and Pete.
Mike Dowell: I want to start with...
Mike Dowell: I want to start with gross margins and maybe a two-parter on both the contributors to the quarter and then thinking about that fourth quarter.
Mike Dowell: versus maybe, you know, give us a sense of kind of on the recent M&A, you know, whether the margin accretion from that or install, like if you could quantify any of.
Mike Dowell: Any of that or what kind of digital, you know, really just what the drivers are and and similarly looking looking into 4q It seems like you're yeah, it looks slightly better than it than it was before So if you can if you can talk to those contributing factors or any quantification there, that would be great
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Good morning, Mike. Thanks for the question.
Speaker Change: With respect to increased performance and margin, we continue to see a normalization in the multifamily space.
Mike Dowell: We continue to have a positive uplift from productivity that we continue to deliver. And the rest of it is mix and mix within the core business and it continues to deliver resilient margins better than what we had expected originally when we gave guidance last quarter.
Mike Dowell: As we look forward to Q4,
Mike Dowell: We continue to see margin normalization in the multifamily, which is a broken record, and we continue to share that each quarter.
Mike Dowell: and some continued pressure and normalization in the core business due to the competitive environment that we're still in. And part of it's going to be some of the seasonal build and we'll see some of that volume kind of shoulder off as we exit the year.
Speaker Change: Yeah, I think Pete's right on in terms of the key drivers. We continue to be under a bit of pressure on the competitive dynamic. You'll see some seasonality.
Mike Dowell: But I think, in general, what you're seeing is the continued strength of the core product offerings and the value add in terms of something that we have made a core part of what we do and has continued to be strong.
Speaker Change: Got it. Okay. Thanks. Thanks for that. And then my second question, look, it's on the 25 scenarios, and I understand it is early days, as you say, but when I look across your range of
Mike Dowell: starts outcomes. I think some of the builders more recently have been a little more subdued in their outlooks than what some of these ranges would imply, certainly the middle or upper ranges. And then, you know, taking into account the
Mike Dowell: Some of the mixed factors that have played out this year, it seems like your revenue guide might be suggesting that you actually go back to outpacing the Starks environment. So two kind of big assumptions in there in terms of
Mike Dowell: You know some improvement in the overall market and then some improvement relative to that
Mike Dowell: I was hoping you could talk to that more, how you built that, and whether or not there are some bigger moving pieces.
Mike Dowell: in terms of like, okay, well, you're assuming X for digital and like some carry over M&A or maybe just help us kind of bridge when you both how you thought about starts but also then framing your revenue versus starts what some of those other big moving pieces are.
Speaker Change: Sure, I mean, I can provide a little bit of color. I won't go into too much detail, but you're right. There's a lot that goes into it.
Speaker Change: No, no question. I would say the starting point is maybe where we're most maybe disconnected based on your comments and your concern about the overall starts.
Mike Dowell: We, at this stage of the game, aren't folding in a lot of commentary. We're folding in mainly economist forecasts and the averages of the leading forecasters around the starts numbers.
Mike Dowell: While an individual builder is certainly important and an important partner for us, there's no one builder that's going to move the entire market. So we generally will stay at the economist level forecasting for starts, especially at the
Mike Dowell: you know, at the point we're at in early November.
Mike Dowell: We do have assumptions in there for commodity prices, for the M&A carryover, for productivity. We've got certainly an expectation that we'll be able to gain share with some investors.
Mike Dowell: with some of the initiatives we've leaned hard into, things like digital and install. And I think it's fair to say that our our thinking around the average cost per start is aligning around
Mike Dowell: around it flattening out for the most part. We haven't seen continued decline. It's been more stable, I would say, since mid-summer on a year-over-year basis. We've certainly seen the comparisons and we've
Mike Dowell: We've tried to call those out, but it hasn't been something that's aggressively moved down after the reset earlier this year.
Mike Dowell: here. So that's another variable that's included.
Mike Dowell: But, like I said, early days, some high-level analytics. We tried to be inclusive of the variables that we think are important, but as you know, this is a challenging game given how volatile things are lately.
Speaker Change: Okay. Appreciate that, Peter. Thank you.
Speaker Change: Next we'll hear from David Manthei with Baird. Please go ahead.
David Manthei: Thank you. Good morning and congratulations to everyone. My first question is a clarification on slide 17. When you talk about productivity, does that capture both process improvements as well as scale? And then could you also define other commercial benefits just definitionally for us? Thanks.
Speaker Change: Dave, thank you. I'm going to let Pete handle that one.
Pete Beckman: Yeah, so within the productivity savings, that's process improvements. The scale that we get from the company really helps us leverage our knowledge and our expertise across the platform.
Pete Beckman: But the productivity savings is process improvement on how we do things.
Mike Dowell: how well we're buying, how well we're manufacturing, and how well we're operating on a daily basis.
Mike Dowell: Within the other commercial benefits,
Mike Dowell: customer supplier terms. We've talked about in the past where we used to have longer fixed price contracts. We've worked to eliminate those, shorten the duration so we don't get pinched or absorbing all the commodity risk.
Mike Dowell: Our CRM tools that we put in place and how well we're managing our relationships with our customers and following through
Mike Dowell: And Anne, that's where some of the scale is going to come into play, so you'll see that in the bullets on the side of that chart.
Mike Dowell: Thank you and Peter Jackson you might have just
Mike Dowell: describe this, but I want to be clear.
Mike Dowell: You talked about the trends in single-family housing sizes, and I'm just wondering, in those scenarios, are you assuming any improvement or deterioration, for that matter, in any of those scenarios? It sounds like you're seeing that trend basically flatten out. Is that my understanding?
Speaker Change: That's right. Yeah, there's a bunch of pieces in there, certainly square footage of the home being one, but mix of products in the home, value of those same products that are appearing in the home, all part of that. But yes, we're expecting it to flatten out based on what we're seeing.
Speaker Change: right now. A little bit of a lapping impact, but pretty modest.
Speaker Change: That's great. OK. Thank you very much.
Speaker Change: Thank you.
Speaker Change: And we'll go now to Rafe Jadraush with Bank of America. Please go ahead.
Rafe Jadraush: Hi, good morning. Thanks for taking my question and best of luck to Dave and congrats to Peter and Pete.
Speaker Change: Amin.
Speaker Change: Just on the manufactured product segment, the year-over-year decline, would it be possible if you could talk a little about the impact of the multifamily, specifically multifamily trusses, relative to everything else? Like obviously multifamily is sort of going through that normalization, but excluding that, what are you seeing in terms of the manufactured
Speaker Change: product like revenue trends and any commentary on margins there would be helpful.
Speaker Change: Yeah, thanks for the question. I'll start and then I'll hand it over to Peter. What you're seeing in the manufactured products, specifically on the multifamily side?
Speaker Change: We've been talking about the normalization, but also the volume declines that we've seen in that multifamily space.
Speaker Change: As a reminder, I think I mentioned in our prepared remarks that multifamily value-added products was 70% of the multifamily overall.
Speaker Change: That used to be a much higher percent, and that's also come down, and in the quarter, or what we're seeing within multifamily, manufactured products is down almost 45 to 50% within that multifamily mix.
Speaker Change: We're anticipating that that's going to continue to decline is what we're seeing from the the starts and the volume normalized as we lap the higher year. The the tough comps that we had last year was the peak and Q3 being the highest point of that. It's just a big headwind but we're seeing more stable volume and it's normalizing at a bottom as we exit the year.
Speaker Change: Yeah, and I think just broadly speaking, the multifamily trust has been hardest.
Speaker Change: The multifamily work part of the business has performed a bit better, a bit more stable. The team has competed well and found other opportunities to protect the business.
Speaker Change: I think that the
Speaker Change: The single family side has certainly seen pressure, particularly in that category that we highlighted in the spoken remarks.
Speaker Change: about floor trusses and the shift back to EWP.
Speaker Change: I think that's probably the only other color that I would add there.
Speaker Change: In general, we're still pleased with manufactured products. In general, I think it's performing well from a.
Speaker Change: From a support to customer perspective, from an affordability perspective, from a competitive dynamic, we feel good about it. It's a productivity source for us, but it certainly on a comp basis has been challenging.
Speaker Change: That's helpful. And then just on the
Speaker Change: Gross Margin Bridge that you provided from 2019 to today, which is super helpful the the value add
Speaker Change: portion. Can you talk about how much of that is the margins changing within value-add relative to just value-add mixed?
Speaker Change: moving higher and then like what is there any changes you anticipate from the value-add margins today going forward?
Speaker Change: It was a lot in there, right? I mean, we've done a ton of acquisitions. We've added a ton of capacity. We've made tremendous investment. A lot of that had to do with productivity savings within the category itself.
Speaker Change: that sort of generated through the size and scale of those operations. So there's certainly a lot in there. The performance, generally speaking, I would say, is.
Speaker Change: sustainable from the perspective that we have a lot more to offer. We have a wider portfolio and geography coverage.
Speaker Change: than we did in the past. So I think that's the exciting part about where we can continue to grow this business into the future.
Speaker Change: that expansion of install, the investments we've made in that business over the years being harvested as we return to growth. I think that's an exciting history for us, but even more exciting is what the future holds in that category.
Speaker Change: Great, thank you.
Speaker Change: We'll go next to Philip Ng with Jefferies.
Philip Ng: Hey guys, congrats on a solid quarter and a choppy environment. I guess to kind of kick things off, when you look at your scenarios for 2025, is there any assumption that mortgage rates actually pull back from here, and what are you assuming for non-commodity products from a pricing standpoint? And certainly very great to see an upbeat view on the market in your various scenarios. Peter, it would be helpful to kind of give us some perspective, as you kind of pointed
Speaker Change: What that earnings power margin profile could look like if single family starts are actually slotted down low single digits
Speaker Change: Well, thank you, Phyllis.
Speaker Change: or your four questions. Let me try and jump at a couple of them and you can correct me and point me back in the direction you want me to go.
Speaker Change: you know, we.
Speaker Change: What I would say about the 2025
Speaker Change: scenarios. We didn't do a downside. We could do a downside. I think, generally speaking, like I said, the economists aren't signaling a downside.
Speaker Change: You know, if that develops over time where we need to put something out there, we certainly can. We've done it in the past. We're not gonna be shy about it. That hasn't been the predominant thinking in the recent past.
Speaker Change: You know, I think that the.
Speaker Change: the ability of this business to perform in the downside.
Speaker Change: is pretty positive, right? We have demonstrated the ability to size ourselves, to be competitive, to get after it, the ability to protect and hold margins, to do it by partnering with customers with products that they want. So I think that's probably the theme that I want.
Speaker Change: Your various scenarios, Peter, are you assuming any pullback in mortgage rates and how you think about pricing for your products, non-commodity?
Speaker Change: So, we don't have an explicit mortgage rate assumption in any of our stuff.
Speaker Change: I think what happens is it's basically embedded or implicit in what the economists are doing.
Speaker Change: My sense is most of them are taking the middle-of-the-road dot plot and trying to step off of that, but we don't have an explicit assumption for it.
Speaker Change: In terms of pricing, I will say our sense from what we've seen from some vendors is that the era of
Speaker Change: cuts is ended. What we're seeing right now is stability in pricing and some modest, maybe low single digit price increases. We'll see where that pans out. It's a little early to be calling that yet, but that's the tone right now.
Speaker Change: Oh wow, that's super helpful. And then my next question is around M&A. How's the pipeline looking? Have you seen sellers come back to the market with some level of stabilization and how do you kind of size the opportunities in front of you, smaller or larger deals in general?
Speaker Change: https://www.kenhub.com
Speaker Change: Well yeah, I mean there's no question the market's looking strong.
Speaker Change: With six this quarter, I'd say the pipeline is strong. Smaller deals, by and large, make up this number, no question. But there are a number of really nice looking businesses out there. I would say that sellers have come to the market with an intent to sell, right? They're not exploring, they're looking to move. But a pretty wide portfolio of items that we're looking at and continue to look at. It's a good time to be buying stuff.
Speaker Change: Okay. Appreciate all the great color guys. Thank you.
Speaker Change: We'll hear next from Jay McAnlis with
Jay McAnlis: Thanks for taking my questions. Congratulations to everyone and thank you to you guys and your suppliers for helping out with the hurricane relief. Really important work.
Jay McAnlis: So the first question I had, going back to slide 17, I guess could you talk about what you saw improve from last quarter to this quarter that gave you the confidence to go ahead and move the gross margin number up and the EBITDA margin up?
Speaker Change: Thanks, Jay. Talking about 17, that's the long range...
Speaker Change: view, right? So one of the things we had done during Investor Day was to give people a rough estimate around what we think normalized gross margins were going to be between 30 and 33.
Speaker Change: A frequent question that we received was, wait a minute, help me get my head around this. What are the big pieces that I should understand if I bridge you from pre-BMC merger to what you're telling me is the future of this business?
Speaker Change: and we were a little hesitant to lay that out there until we had a little better understanding of what normalization was going to look like and as things have kind of calmed down and we feel like there's a
Speaker Change: There is a clear line of sight to what this business is and how it will continue to perform. We decided to put this out for everybody to understand the buckets of what has driven it.
Speaker Change: where we have gotten our sort of inputs to defend that midpoint of 30 to 33%, which is about 31 and a half. So this isn't a Q4 or a 25 thing. This correlates back to the 2026 target for us for Investor Day.
Speaker Change: Okay, great. And then I guess the other question I had, Peter, you talked earlier about R&R being a much larger consumer of lumber than single-family starts. I guess, could you talk through again what you guys are expecting for R&R this coming year and maybe what the industry kind of outlook is just so we know where things might go?
Speaker Change: Yeah, I mean, if you look at the overall, I want to just to clarify, right, based on what we've seen from a couple of the different sources, R&R is probably, and DIY is about half of the demand for lumber and
Speaker Change: and sort of the commodity product.
Speaker Change: We're closer to a quarter to a third.
Speaker Change: with the rest of it being industrial and commercial. So, you know, certainly that that DIY R&R space is more important.
Speaker Change: The tone has been pretty good, you know. I think the sense is that there is a lot of pent-up demand for renovations as the housing stock in this country ages.
Speaker Change: There are certain commentators, you know,
Speaker Change: I won't say excited, but positive about what R&R can do if we start to see a little bit of pullback in the mortgage rates and it starts to release a little bit of that lock-in effect that people have experienced since mortgage rates went up.
Speaker Change: So, that would certainly be a tailwind, you know, a balancing out in the market. I think a revival of what that represents for demand on the construction industry. I think all of that is pretty favorable for Builders First Source, you know, on balance. So, that's certainly a positive we look forward to.
Speaker Change: pretty modest and from what we see so far in the forecast for 25 itself but over sort of 25-26 ish we think there's
Speaker Change: good momentum there.
Speaker Change: Okay, that's great. Thanks for taking our questions.
Speaker Change: Thanks, Jack.
Speaker Change: We'll go now to Jeffrey Stephenson with Loop Capital. Please go ahead.
Jeffrey Stephenson: Hey, thanks for taking my questions today and congrats Dave, Peter, and Pete.
Jeffrey Stephenson: So productivity savings are coming in better than expected this year through efficient manufacturing and procurement initiatives. And just wondered how long a runway do you have on, you know, the strong productivity savings benefits you've seen over the last few years? And, you know, should we expect, you know, this trend to continue in 2025?
Speaker Change: Thanks. Yeah, you know, productivity is something this organization is really...
Speaker Change: engaged in very effectively sharing of best practices, you know, working together on neat ideas, ways of doing business that just takes out waste.
Speaker Change: whose inefficiencies at a real fundamental level has been super successful.
Speaker Change: We think there's more opportunity for that, but I won't overstate the impact of the transition that we'll see over the next couple of years towards our ERP conversion. So there has to be a balance there. Both take a lot of time and energy from the organization.
Speaker Change: So we'll continue to balance it out from a timing perspective.
Speaker Change: But there's zero question, I would say, in my mind and in the minds of the operating leaders.
Speaker Change: that we can continue to get better, that we can continue to drive productivity savings.
Speaker Change: well into the future, I think we're just in the early innings of what we can do with just a fantastic business and a wonderful platform, particularly as we take advantage of technology and better tools for our teams.
Philip Ng: Okay, that's great to hear, Peter. And I was wondering if you could talk more about the, you know, trade-off you're seeing, the lower value products such as the example in your prepared remarks of builders using EWP instead of floor trusses.
Philip Ng: from, you know, the focus on lower value and complex home. I just wondered, you know, how widespread is this across regions? And, you know, do you expect it to, you know, continue well into 2025?
Speaker Change: Well, we're certainly seeing it everywhere. I would say every home builder in their own way is trying to adapt to the affordability challenge.
Speaker Change: it.
Speaker Change: It's tough for homebuyers, just given the world that we live in, to afford these new prices. And so we're all looking for ways to...
Speaker Change: to do what we do more efficiently.
Speaker Change: So whether it's size of the home, whether it's value of the products that are going in, being a little more sharper with the pencil in terms of pricing, or, and this is I think more direct to your comment, what's the mix of products that are going to show up in the actual, the home itself?
Speaker Change: I think you've seen, even today, announcements from manufacturers of building materials.
Speaker Change: that have pointed to negative MEX.
Speaker Change: People have moved to the simpler, cheaper option in order to make sure the price point for these homes match up to the monthly payment capability of the current home builder.
Speaker Change: You know, I think it has been a bit of a two-year step down. We're not seeing the continued pace of those declines. They seem to have stabilized to a large degree. That's not to say we won't see some shifts in individual product categories.
Speaker Change: But I think what we have seen throughout the back half of this year so far has been a more stable output in terms of what is going into homes, size of the homes, value of the products, that sort of thing.
Speaker Change: Very helpful. Thanks, Peter.
Speaker Change: We'll go next to Stephen Ramsey with Thompson Research Group. Please go ahead.
Speaker Change: Please see the complete disclaimer at https://sites.google.com
Stephen Ramsey: Good morning. I wanted to ask on the R&R and other category, another quarter of solid organic growth versus the backdrop. I'm curious if you could share a bit more on the central region strength versus
Speaker Change: other regions, what is allowing you to outperform? And then maybe lastly, just to make my second question wrapped up into this, how much is
Speaker Change: value-added products a factor in this category. Thanks.
Speaker Change: So maybe second question first. Certainly a smaller component of the R&R business, that is a more varied, from a product perspective, a lot more categories go through that, just given the nature of what we sell and where we sell it.
Speaker Change: You know, certainly a bit of
Speaker Change: variance between the individual
Speaker Change: to divisions between those markets.
Speaker Change: I would say we've had some pretty nice success in some of our smaller markets, particularly in the north-central around the R&R space, they performed well. But in general, I think it's a strength for us just as we continue to have available capacity.
Speaker Change: and open our doors to the smaller remodeler. We have a lot of value that we can provide them with subject matter expertise and product knowledge. And generally, we do have success in that category when we focus on it.
Speaker Change: but just to repeat it, it's a fairly small percentage of our overall business.
Speaker Change: Great, thank you.
Speaker Change: Thank you, Stephen.
Speaker Change: And we'll hear next from Caton Memtorm with BMO Capital Markets.
Caton Memtorm: Thank you. Coming back to multifamily, when we talk about 2025, you've got 200-500 million revenue decline.
Caton Memtorm: Is that more of just lapping year-over-year deterioration as you move through 2024? Or are you factoring in further declines in 2025? Because it's still a pretty meaningful year-over-year drop.
Speaker Change: It's primarily lapping. Yeah, I would say we've stabilized but the lapping effect will still be there.
Speaker Change: Understood. And on the margin normalization side, both for multifamily and for single-family, are you seeing signs that we are sort of closer to the end there in terms of sort of, you know, the competitive price pressures or is it sort of still continuing, you know, as we move into Q4 and next year?
Speaker Change: With the multifamily margin normalization, it's continuing to...
Speaker Change: Wayne and Fade, as we said on prior calls, we think it's going to...
Speaker Change: kind of normalize out by Q1 of next year, but we're really hitting that exit rate, and most of the normalization you see in the results is a year-over-year comp to the prior year strength that we had.
Speaker Change: I'd say overall, we're in late innings. We're much closer to the end in terms of the margin normalization.
Speaker Change: We certainly have teed up that 100 base point.
Speaker Change: Sort of based on the exit velocity that we're seeing, I don't want to miss the opportunity to highlight we're still well below normal starts. So that certainly creates pressure. But based on where we came from, we believe we're much closer than the beginning.
Speaker Change: Thank you. Thank you.
Speaker Change: And we'll go next to Alex Riegel with Bea Riley. Please go ahead.
Alex Riegel: Thank you gentlemen, a very nice quarter. As it relates to the installed sales which increased about 11% in the quarter, what percentage of your overall net sales is that today and how does that impact your gross margin?
Speaker Change: So the 11% to year-to-date improvement over the prior year.
Speaker Change: The margin profile on install is kind of at our normal mix across because we're installing products Windows, doors, millwork, as well as some framing and trusses and Siding and other products, so it's it's very complementary to the overall margins that we have
Speaker Change: have across all the product categories.
Speaker Change: Hello.
Speaker Change: besides of Ansel, I think you wanted to know.
Speaker Change: Professor of Medical Medicine, Rankin College
Speaker Change: So, install was about, I think it was...
Speaker Change: 2.5 billion, 2.6 billion last year. It's increased, so it's going to be a relative increase from that.
Speaker Change: Thank you. And then as it relates to digital tools, given where we are in the housing cycle, how should we think about that as it relates to sort of your marketing of the product and its receptivity to the product?
Speaker Change: Yeah, I'm glad you asked that question. So, you know, digital is, it's still very exciting. The product works.
Speaker Change: It is absolutely cutting-edge and unique in the industry in terms of what we can do versus any competition that exists out there.
Speaker Change: But it's new, right? It's technology in an industry that hasn't historically adopted it quickly. And it's a different way of thinking about how to be more efficient.
Speaker Change: We've got a lot of really good momentum. It's certainly hard. I will confess it's maybe even harder than we gave it credit for, but it's work.
Speaker Change: And so we're continuing to lean in, continuing to partner with home builders, continuing to leverage our team internally to utilize the tools and to help customers get comfortable with the tools.
Speaker Change: But given our focus on the sort of 50 to 250 starts a year builder
Speaker Change: and how much pressure they've been under over the past couple of years because of raids, it's been challenging.
Speaker Change: I do believe this is one way they can compete, that they can be more efficient, that they can be more professionalized and make their business better and more competitive against the big guys.
Speaker Change: So we think ultimately it will be a positive, but certainly in the near term it's serving a market that's been under pressure, no question.
Speaker Change: Thank you very much.
Speaker Change: There are no further questions at this time. Ladies and gentlemen, that will conclude today's question and answer session and the Builders for Source third quarter 2024 earnings conference call. Thank you for your participation. You may disconnect your line at this time and have a wonderful rest of your day.