Please standby. We are 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 the question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.

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. The earnings press release and investor 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, and they should 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 can be useful to investors in our earnings press release, SEC filings, and presentation. Our remarks in the press release, presentation, and on this call contains 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.

Thank you, Heather. Good morning, everyone, and thanks for joining our call. As we continue to operate in a complex environment, I'm proud of our resilient second quarter results, highlighted by our mid-teens EBITDA 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 and normalization in 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, 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, installed services, and digital solutions [technical difficulty] -- we are providing our customers with a more efficient and cost-effective way to manage home construction. This leads to increased customer stickiness, new business, and improved operational efficiency for BFS. We have a robust set of continuous improvement initiatives focused on leveraging our scale while delivering the highest quality products and services to our customers. Our highly experienced team members are delivering these critical initiatives while serving our customers with excellence and integrity every day. 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. Turning to our second quarter highlights on slide four, while navigating a market challenged by crosscurrents, we have seen softer than expected sales. 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. Our durable margin profile is a key proof point of our transformed business model and our differentiated product portfolio and scale. Given the strength of our base gross margin, we see opportunities to more aggressively go after profitable share. We have grown our mix of value-added products over the past five years, improved our manufacturing processes and efficiency, and positioned ourselves at the forefront of homebuilding innovation. Let's move to slide five where we show how we're executing our strategy. Our full suite of value-added products and services remains a competitive advantage for BFS, and continues to bolster our partnerships with customers. 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. We demonstrated operational rigor by delivering $37 million in productivity savings in Q2, and had driven $77 million year-to-date primarily through more efficient manufacturing and procurement initiatives. As I've spoken about in the past, we continue to use playbooks to drive growth in our Installed Services business. I'm pleased that our installed sales increased by 15% year-over-year as we focus on helping customers address labor challenges. Our managers have best-in-class information to help them navigate this dynamic environment and make effective real-time decisions. 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 rate of over 90%. We will remain disciplined managers of discretionary spending no matter the operating environment. We are continuing to take actions into the second-half of the year to flex the business where appropriate. The single-family growth momentum, occurring earlier in 2024, has stalled as the interest rate cuts have not materialized and starts have come in lower than expected. In addition, the value of a new start has fallen as the market has adapted to affordability challenges. Multi-family continues to be a headwind amid muted activity and relative to our record performance last year, which is creating an increasingly tough comparison. This was expected and detailed on prior [calls] (ph) as multi-family continues to normalize. Even at today's levels, multi-family continues to be a very profitable business for us. In the current environment, builders have employed specs, smaller and simpler homes, and interest rate buy-downs to help buyers find affordable options. Builders of all sizes are having to navigate affordability issues along with regulatory, land development and infrastructure challenges. Smaller builders have been especially impacted by the availability of land and limited options to buy down rates. We are partnering with our customers to help them lower the cost of homes for consumers, as well as maintain their margins. This includes balancing our product mix to address their needs while passing through lower material costs. For example, when engineered wood products or EWP was constrained, we supplied a larger number of higher-value floor trusses. As EWP supply normalized and prices came down, we have been able to provide customers with more EWP, and have sold fewer floor trusses, helping to specifically address the builders' biggest challenge, affordability. We have what the builders want and do what's right by them. Although this trend means less sales in gross profit dollars, our margin profile remains strong. We have the operational and financial flexibility needed to partner with our customers to meet their needs and capture growth opportunities. Coming to M&A, on slide six, we continue to pursue attractive opportunities while remaining financially disciplined. In the second quarter, we completed three deals with aggregate 2023 sales of roughly $72 million. In May, we acquired Schoeneman's Building Materials, which we detailed on our Q1 call, and TRS Components which establishes truss manufacturing within Metro Detroit. In June, we acquired RPM Wood Products, which enhances our ability to serve high-end custom builders in Northeast Florida. Finally, in July, we acquired Western Truss & Components, adding truss 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. 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. Our M&A pipeline remains healthy, and we believe we can continue to acquire in a fragmented market. On slide seven, we provide an update on capital allocation. In addition to the three tuck-in acquisitions during the second quarter, we repurchased nearly $1 billion of shares. 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. We remain on track to strategically deploy $5.5 billion to $8.5 billion of capital from 2024 to 2026, as outlined at Investor Day, last December. Now, let's turn to slide eight and nine 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 have seen strong adoption and growth with our target audience of smaller builders even as they endure a challenging operating backdrop. 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 value of orders placed through the digital platform go from nearly 0 to over $250 million. Year-to-date through Q2, incremental sales have totaled $45 million. 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. I am thrilled to share a significant achievement that underscores our team members' commitment to making a positive impact in our communities. At our recent annual charity event, we successfully raised over $1 million on behalf of the Leukemia & Lymphoma Society. This brings total contributions to nearly $12 million since first partnering with LLS in 2006. These funds are crucial to advance in 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 and sponsors whose overwhelming support made this successful event impossible. I'll now turn the call over to Peter to discuss our financial results in greater detail.

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 into stock price weakness. And, made three tuck-in acquisitions to enhance and expand our footprint. We believe the sustainable competitive advantages and 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. 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. Let's begin by reviewing our second quarter performance on slides 10 and 11. Net sales were $4.5 billion. A decrease of 1.6% as core organic sales declined 3.8% with the expected multi-family 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 multi-family decline of 31%. Partially offset by increases in single-family of 1% amid higher starts and repair & remodel of 1.5%. I want to take a moment to discuss the variables impacting the disconnect between single-family start and core organic sales. 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 permit starts and completions has shifted in response to the changing market. 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. 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. As an example, looking at the Phoenix market we are supplying material to roughly 45% more homes. But, our dollar sales are only about 15%. 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. During the second quarter as we signaled and expected, multi-family declined more than 31% as we lacked the prior-year's strong comps. 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 multi-family. 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, primarily driven by ongoing normalization, particularly in multi-family. SG&A decreased $45 million to $973 million, primarily attributable to lower variable compensation, partially offset by acquired operations. As a percentage of net sales, total SG&A decreased 70 basis points to 21.8%. 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 basis points, primarily driven by operating leverage, partially offset by lower gross margin. 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. 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. 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. For the last 12 months ended June 30th, our free cash flow yield was approximately 10%, while operating cash flow return on invested capital was 24%. Our net debt to adjusted EBITDA ratio was approximately 1.4 times, while base business leverage was 1.7 times. 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. 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. We remain disciplined stewards of capital and have multiple paths for value creation to maximize returns. 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 billion to $17.2 billion versus our previous range of $17.5 billion to $18.5 billion. We expect adjusted EBITDA to be $2.2 billion to $2.4 billion versus the previous range of $2.4 billion to $2.8 billion. 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 guidance to the range of 31.5% to 32.5% from 30% to 33%. This also remains in line with our long-term expectations of 30% to 33% at normalized single-family starts of 1 million to 1.1 million. Our long-term margin profile reflects a greater mix of value-added products, recent acquisition and disciplined pricing management. We expect full-year 2024 pre-cash low of $1 to $1.2, assuming an average commodity price in the range of $380 to $400 per thousand board feet. 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 multi-family normalization. We expect Q3 net sales to be in the range of $4.3 billion to $4.6 billion. Adjusted EBITDA is expected to be between $575 million and $625 million in Q3. Turning to 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. 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 billion 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. And we're expecting better adjusted EBITDA at lower single-family starts this year. 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. 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.

Thanks, Peter. 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 starts. This year, we expect the mid-teens adjusted EBITDA margin at a lower level of housing starts. 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 underbill 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 points through our investments in value-added products, digital tools, and installed 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.

Certainly. [Operator Instructions] We will go first to Matthew Bouley with Barclays. Please go ahead.

Good morning, everyone. Thank you for taking the questions. Maybe we will start on the gross margin side, looking at the new margin guide and the cadence that you are implying for the second-half, I am curious as we zoom into the fourth quarter, what that would imply for the 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 it begs the question, if we're not quite at normalized housing starts yet in 2025, where the gross margin could land if there's an air pocket, given the starts outlook? Thanks, guys.

Morning, Matt. Thank you for the question. Yes, so margins has been an important factor for us. It's changed a lot over the years. We certainly get a lot of questions on it. 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 multi-family side, but we're certainly pleased with how it's progressed. If you look into the future, into the second-half of this year and into next year, more normalization is what we've outlined. And I think that we've been pretty clear about that. Hopefully no change in what expectations are. When it comes to '25 and the exit rate, so I want to be real clear, right, we don't have a crystal ball, we don't know. This is not intended to be guide for '25. 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 on 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 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 into 2025 made up of the two pieces you'd expect, right? About half of that is multi-family, and about half of that is core operations based on 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. The multi-family is a story, no question. We think that if you look back to last year, we called out a little over 100 basis points of tailwind from multi-family. We'll give back 60, maybe a little -- 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 multi-family. And we feel like the rest of the business is performing really well, and we'll be in a strong position to overcome that as we get into '25.

Matt, the only thing I'd add is our focus and continuing focus on doing more for the customer with installed, doing more for the customer with value-add, those are higher margin profile products that we held, all said, any start variation.

Got it. Okay, that's very helpful quantification and color. And that dovetails into my next question. So, if I look at 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. And if so, when we're talking about the kind of stability on the value-add side, can you speak to what has specifically changed in just the value-add outlook in terms of the growth side, starts, and specifically value-add margins, just what's really driven that piece of the guidance change there? Thank you.

All right, so one question in 26 parts; let's see if I get them all.

Of course.

So, overall, you're right, we have seen a shift in commodities, right? So the market's been weaker, the -- both lumber and OSB, OSB kind of ran up for a little bit, had absolutely reset and pulled back. That is 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. What that means to the business in terms of the rest of the output called down on EBITDA, the bulk of EBITDA call-down is deleveraging, 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. Value-add, more specifically, 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. What we are seeing and what we pointed out here -- what Dave pointed out in his remarks was really this mix dynamic, right? It goes to the customers focusing on affordability, how do they get cost out? One of the ways they're doing that is a shift within value-add, shifting from open-web truss to EWP, that's just -- 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, they're reducing the number of garages and bonus rooms. All things that are not a surprise, if you think about the affordability challenge. But that has had a broad pressure, that's not unique to value-add or not value-add. I think where value-add 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.

One thing I would add on the value-add components specifically, Matt, is even as truss volumes declined 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 costs. 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 in that one shift.

Great. Well, appreciate the color. Thanks, Dave, Peter. Good luck, guys.

Thanks, Matt.

We'll hear next from Mike Dahl with RBC Capital Markets.

Hi, and thanks for taking my questions. Probably going to just follow-up on a couple things there, look, Peter, I know that it's not a practice of yours to give 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 comment about exit rate in '25 gross margin just because there's been so much handwriting over this. When you're talking about -- it seems like you're 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 could you clarify that a little bit more specifically on the 4Q gross margin here?

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 rate is 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've alluded to it, and so did Matt, our long-range normalized margins we're seeing are 30% to 33% at 1.1 million starts. This would indicate that we're going to be at 31% at 975,000 starts. What does that mean? Well, that means, right now, margins are strong. Ours are good. Ours 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 put our stake in the ground and claim it. We've got to see how this plays out. Pretty optimistic, like Dave said, about the overall market, the demos, the under build, it's good. That we think 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.

Okay, yes, that's helpful. And look, I agree and appreciate the zooming out and the perspective about the, 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 this stuff around the mix, the complexity, I -- this is, I think, another part that's hard for all of us and investors to appreciate when we're building out a model that tends to be volume focused. And so, I guess when you're -- all the moving pieces there, is there a way for you to articulate, hey, it's all equal, what we're seeing on the mix changes and complexity changes to date or to hold, here's how much of a delta we think it would drive relative to, if I think my single-family starts are low single, is that a -- is it a low single-digit headwind against that? Is it a mid-single digit headwind against that, any, any help you could provide on just kind of ballparking that and would be great?

Yes, so that's -- it's a great question. We spent a lot of time on this. As we spend a lot of energy, we're trying to understand our business at a granular level. We have a lot of data. Unfortunately, it's a lot of data, right? So, the ability to really understand the mix 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 signal. 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 we expected. I think the storyline around the timing of starts versus permits is again, order of magnitude, a little bigger than we expected. 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? Probably the single biggest piece is 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 quantity 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 would have. 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, that, that will settle out as the year progresses. But at least early on, it overstated starts a bit. The other pieces are pieces we've talked about, right? Maybe another third of it is probably related to the pricing changes. A lot of that is vendor. Vendors have cut. We talked about EVP, 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 an important piece. And another roughly third is in that category of mix, right? It's what we're seeing in terms of, 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. It's that 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. So, rough categories, that's kind of how we think about it, but I'd be lying if I told you we had those numbers with precision. I think we've got good directionality, but we're going to have to see how that plays out. The interesting part of all of it, though, Mike, is it's so volatile, right? It moved quickly one way. There's no reason it can't move quickly the other. We're just going to stay close to it and make sure we're serving our customers the best we can.

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. But the best example is the one that Peter gave in Arizona. Forty-five percent number of houses that we've started, 15% is the increase in revenue. You can do that math and say in Arizona it's 30% impact. 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.

Got it. That's all really helpful. Thank you both.

Thanks, Mike.

We'll go next Rafe Jadrosich with Bank of America.

Hi, good morning. It's Rafe. Thanks for taking my question. Peter, I appreciate all the color so far and how we should think about the margin progression here. Just following up on the earlier comments about 60 basis points of headwinds from multi-family in '24 and another 50 basis points roughly in '25, how much of that is normalization of the multi-family margins off of excess levels versus multi-family mix. And how do you think about the multi-family margins today? Like 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?

Good morning, Rafe. Thanks for the question. Yes, so the dynamic around the multi-family is a tricky one. 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 my best sense of the directionality. We continue to see strong business in multi-family throughout all of last year that really began to turn in that Q1 window. We are seeing meaningful declines in our margins in what we're seeing starting in Q1 and stronger in Q2, kind of that 50 to a 100 basis points in those periods headwind driven by multi-family, right? That's sort of the combination of the mixed 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? That 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 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.

Thank you. That's helpful. And then, you had an -- in the prepared remarks, there's a comment that I thought was interesting. They're 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 is 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 mixed impacts that you're thinking about? Have you seen Builders multi-source 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?

Rafe, this is Dave. I would tell you what we're looking at is a disciplined approach, right? 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 that incremental volume against our fixed costs, whether it be manufactured product or even distributed product, and offset the volume incentive that we may use to go after that business. So, it will 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. 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. They felt that description, and we're going to execute that strategy in the back half.

Thank you. I appreciate it.

Thanks, Rafe.

We'll go next to Trey Grooms with Stephens, Inc.

Hey, good morning, everyone. I appreciate all the color you've given thus far. And this one's I guess so on just the -- on lumber, kind of the competitive pricing that we've seen on the commodity lumber side. Nothing new, but wondering if you're seeing this become more widespread or intense, given the kind of weaker environment. But also, on the trusses and value-add, with multi-family pulling back, which was clearly taking up a lot of that supply, are you seeing any more competitive behavior on the truss side or value-add side now that multi-family has started to normalize?

Hey, Trey. Thanks for the question. On the commodity part of the question, we always see the 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 that 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. So, our focus on building share has 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 be sustainable if that's the way you approach it. With specifically the value-add, where we still and will maintain an advantage is over our efficiencies. 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. 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 market.

Yes. 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 make sure I understand what that comment meant.

I'll answer it, 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 kind of operating under the same model from a profitability standpoint. Is that right?

Yes. 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 commodities, we pass it all through. A little color on that, I guess. I'm a bit disappointed. I would have hoped to have seen a lumber industry be a little more intentional about making money. Not everyone is a bad actor in that category, but I remain -- I continue to be surprised at how many players are willing to sustain loss or losing bills, 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 that would indicate that we're moving in the right direction. Hopefully, we will, but that's disappointing. 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, specific actions taken by EWP players, Doors players, Millwork players, and some others where we've seen low to mid-single-digit reductions in overall sales attributable to nothing else than customer -- the prices we give our customers are adjusted because of the prices we're charged by our vendors.

Yes, got it. Just a quick one for my follow-up, there's very I guess, differing views on kind of the multi-family outlook and maybe how quickly that could take to 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 multi-family? And then, 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 much lower level there for a while?

Yes, Trey. I'll tell you the dynamic we've seen in 2024 is, in addition to people hesitant to start new projects, we've actually seen existing projects get delayed and pushed pretty consistently throughout the year. The project's still on the board. The project's still going to get done, but it's getting pushed, which, quite frankly, was part of the top-line headwind in the first-half, even though multi-family's a small piece of the overall. New projects take 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. 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 that is in favor of multi-family, where rental rates are now less than mortgage rates for essentially the same type of living arrangement. So, a lot of the excess capacity that we feel like we came into the year with, with multi-family, we do believe will burn off during the rest of this year, which will encourage a quicker rebound in multi-family in 2025. The problem is it just takes so long.

Yes. Okay. Thanks for the color, Dave. I really appreciate it.

Truss wood is still a very profitable business for us at these levels and will continue to be at the levels we expect to have through 2024 and into 2025.

Great. Thank you very much.

Thanks, Trey.

We'll go now to Adam Baumgarten with Zelman.

Hey, good morning, everyone. Just on the value of new starts declining, I guess, could you give us a sense for -- I know you gave the Phoenix example, but maybe overall what it's down and how much of that's from smaller square footage and how much of it is that lower mix of value at?

Good morning, Adam. Honestly, to know that answer with precision, I'd probably call you guys. We know there are data points that prove our point. What we don't have is confidence in the individual buckets. It's way too volatile and way too customer specific, regionally influenced for us. But again, if we're missing 20 points in terms of where is that sale, I think directionally, the biggest third is on the extended time, it's taking between permit and sale. 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. Five to seven, I don't know. I'm guessing, to be honest.

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 -- 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 in the exact same house. So, 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 is actually happening. And directionally, we know what we're dealing with. And again, as that changes, the encouraging thing is the margin profile is not also changing. And that's -- 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 and what we're selling and check along the way.

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 changes in the strategy there given the increase in the share repurchase activity and authorization?

Yes. Let me talk a little about digital. As we started to roll out the digital and the adoption, I think it probably isn't a surprise that we have 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; the customers that we've gone to initially have been existing customers. So, it's while we give you that stat of orders through the system of $250 million, now we expect fully that existing customers push in orders through the system. That business we probably -- we 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. 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, incremental wallet from those guys. But, that obviously is going to be more in the form of a hockey stick. So, no, we are 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 is going be there. And, the acceptance for getting even as it is from existing customers is really encouraging. I'll let Peter talk to the M&A piece.

Yes, 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 acquisition targets that we are closing on. Still little bit smaller, but we really like to pace. The pipeline still looks very good. We are still pleased with the potential targets out there. And, the way that negotiations are going. Certainly, very optimistic about our ability to continue to grow the business in a healthy way with really, really nice assets like the ones we added this quarter.

Great. Thanks. Best of luck.

Thank you.

We'll hear next from David Manthey with Baird.

Hi, everyone. Good morning. Peter, in your non-guidance, that 31% gross margin exiting the year, when you talk about the 2025, you said 100 basis points of headwinds. Fifty from multi-family makes sense. But then the other 50, is that corporations? And, just wondering if could explain that a little bit more. Is that just lower operating leverage because it will lower levels of starts and raw demand, or is that something else?

,:

Got it, okay. Then on the EBITDA margin, in the base business which you raise 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 in that 14 for midpoint is intact as well? Is that right?

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 are dialing in on the EBITDA number for that base business comp. We are 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 dial it in a little bit more to what we think is a real sort of neutral commodity level or performance. Core business is still very healthy. As much as we wanted to be bigger, I think, what you're seeing here and what their 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 starts performance at the overall market.

Sounds good. Thank you very much.

Thank you, Dave.

We will go now to Reuben Garner with The Benchmark Company.

Hi. Good morning, everybody. I'd like to harp on the multi-family, but I do have a quick follow-up about the top line for next year. I think your business is where multi-family starts are little over 40% off the peak level, but I think your business is limited to 25% to 30% range. Does that imply that at this current run rate for starts we have another 10 to 15 points of top line pressure within your multi-family business in '25?

So, that's a tough question. It's very specific. Greetings, Reuben. Thank you for the question. Appreciate it. The question is very specific, and I'm not sure I can go all the way down, what I say is we do expect there to be lapping of the rest of the decline in multi-family. So, certainly we expect there to be continued headwinds on the sales line, kind of in that maybe 400-ish range, based on what we are seeing now, and around 200 of headwinds on the EBITDA line for multi-family, but remember, multi-family is all in. You got the full portfolio of multi-family products when we are talking about multi-family. I know in the past I've thrown out some color around truss. I'm going to try not to do that anymore, because I think I just muddy the waters, but when we are talking about the total, based on what we are seeing today, I would say that's the trend now. Certainly some headwind, but multi-family is only a 11% of our business this year. It's going to climb a little bit further next year in maybe smaller percentage, it's just a declining impact on the overall, as it strings back and kind of normalizes. Does that answer your question?

Yes, it does. Thank you. That's helpful. And then, can you update us pre-2020, the way it would work is the builders would set up a contract that you guys I think, at the time it averaged somewhere between 60 and 120 days for the framing package, and during the last few years that strung significantly. Are we still -- the length of this contract is still in the 30-day range and lined up with inventory. Are we seeing that move that all with kind of the reset of the commodity market?

It's still in the range with how we buy our inventory, which is what we have always tried to do. As long as we have the ability to cover what we soiled, we are willing to work with our builders however we need to match that up, also, with how they priced their homes. And it hasn't gotten to the point where it was 90-plus or whatever. But we are generally in a 45-day exposure rate, but that's exactly how much inventory we hold and how we carry it.

Yes. There has only been some pressure back. There are certain players that have been less disciplined. We've definitely tried to hold the ground on what we think is good, smart way of coding in the market, but today's point, we've tried to increase those 30 days numbers we talked about, back during sort of the busyness of the supply chain issues, where you really had to move it quick. Now that we are back into more of a normal cadence, where we got that 45-day-ish line of sight, if you will, between what's on the ground, what's on the 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 are still absolutely opposed to 90 and 120-day terms, because we think that's the wrong discipline and the wrong way of approaching the market.

Well, and at that point, we actually do take market risk. I mean, what we are 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 are covered. And we'll adjust off of that, and touch markets specific if that solve the problem for our customer. But in general, we are in that 45-day range.

Exactly where I was getting at; thanks, guys. Appreciate it, and good luck going forward.

Thanks, Reuben.

We will go now to Jay McCanless with Wedbush.

Good morning, everyone. Thanks for taking my questions. The first one I had, when you think about lumber prices in the way you guys look at it, talking about $400 kind of being the base assumption, could you talk about what deflation you're seeing in 2Q '24 versus where it was 2Q '23?

We called it out in terms of what went through COGS. It was just basically zero, right, at 23 or whatever, small 3% headwind. That is something that does move a little out of sequence with what you see in random blanks. It is going to be a headwind in the second-half versus first-half, which is how you get to that sort of full-year number that's a little below the 400 level.

Okay, thank you. And then, the other question I had, if you look at -- I came with slide a ton, but commodity number was up I think, 13% in sales for the second quarter, that's almost double the rate of single-family starts growth that the census numbers had for the national readings as well the south readings, I guess, with these in general serving 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, where of the rest of the market was?

Well, Jay, we always wanted to take all the shares about that comment. Now, in all honest and all sincerity, we always see a couple month lag, and if you think about the Q1 starts number, that was up in the 20s. So, you are just that swash over a little bit into Q2. We are seeing a comparable performance in the business. We will certainly see a graphic, like Dave said. We think when there're opportunities to lean in and take share, we are going to keep doing it. But that's not really the explanation, if you will.

Okay, great. Thanks for taking my question.

Thank you.

We will go now to Steven Ramsey with Thompson Research Group.

Hi. Good morning. Maybe just wrap my two questions into one here, the product mix at 49%, pretty impressive even with the complexity headwinds that you have, certainly love the dynamic here, but do you think that housing market normalizes complexity going up from current levels over the next couple of years to reach your plan, or do you needed that complexity level to move up, or can the current complexity level allow for that to allow you to reach your long-term targets? Thanks.

Yes. Thanks for the question. Keep in mind, the value-added products, the movement is within the category. The engineered wood products are still value-adds. So, as you go from truss engineered wood, we are not leaving the value-add product category, we are moving within it. The sale opportunity is less, but again, our margin profiles have held in there. And we are 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 the incremental value-add products will come as the market returns to normal [technical difficulty] for those products in general. And right now we offer the full spectrum. We will send you sticks if you don't want value-add. But this we go from READY-FRAME to panel, to panel and truss. So, fully installed framing packages, all which you have would tunnel into the value-added product category in total. And we would expect it to maintain, for sure, and incrementally grow as housing starts return to normal levels.

Excellent, thank you.

Thank you.

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 at this time, and everyone have a wonderful day.