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Formed in 1998, Builders FirstSource is the largest supplier of structural building products, value-added components, and services in the U.S.

This year's Fortune 500 marks the 66th running of the list.

Net sales at Builders First Source, a Dallas-based supplier of construction materials, fell 5.8% in 2019, but profits were up 8.1%; both metrics reflected the impact of falling commodity prices.

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Everybody loves an up-and-comer: 2018's top three-year performers in revenues, profits, and stock returns.

This year's Fortune 500 marks the 63rd running of the list.

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Builders FirstSource is a manufacturer and supplier of building materials, manufactured components, and construction services to homebuilders, contractors, remodelers, and U.S. consumers. Its manufactured products include wood floors, wall panels, stairs, windows, doors, mouldings, wood siding, roofing, insulation, cabinets, and much more. The company also offers software products for drafting, estimating, quoting, and designing home services for retailers, distributors, manufacturers, and homebuilders. Founded in 1998, the company was originally named BSL Holdings, but changed its name in 1999.

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Builders FirstSource

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Good day, and welcome to the Builders FirstSource Second Quarter twenty twenty five Earnings Conference Call.

Today's call is scheduled to last about one hour, including remarks by management and the question and answer 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 twenty twenty five earnings call. With me on the call are Peter Jackson, our CEO and Pete Beckman, our CFO. The earnings press release and presentation are available on our website at investors.bldr.com. We will refer to the presentation during our call. The results discussed today include GAAP and non GAAP results adjusted for certain items.

We provide these non GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. You can find a 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 contain forward looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward looking statements and projections. And with that, I'll turn the call over to Peter.

Thank you, Heather, and good morning, everyone. Our durable results in the second quarter reinforce the advantage of our differentiated product offerings and commitment to execution. In this challenging market environment, we are prioritizing what's within our control, serving customers with excellence, leveraging technology and managing the business with discipline. These efforts are strengthening our position in the industry and laying the foundation to emerge stronger as market conditions improve. As shown on Slide three, we continue to execute against our strategy as we operate in a dynamic environment.

This morning, I want to drill down on three key focus areas within our strategy: our customers, operational excellence and capital allocation, what we refer to internally as smart investments. Delivering exceptional customer service is a core value as we drive for growth. We strive to be trusted partners to homebuilders by providing best in class service every day and working together to solve the industry's most complex challenges. We are expanding our value added solutions and leveraging technology, including our end to end BFS digital tools, to help create a differentiated customer experience while empowering our teams to serve more effectively. The next focused area, operational excellence, is crucial to how we run the business.

It's about developing talent, improving agility and embedding technology into our operations with the implementation of a single ERP system. As we talked about previously, moving to SAP will unlock further opportunities for growth and efficiencies, including how we make decisions, streamline operations and manage costs. Finally, we remain disciplined in how we deploy capital. Our consistent, strong free cash flow through the cycle gives us the flexibility to invest in organic growth, pursue strategic M and A and return capital to shareholders. These investments are strengthening our competitive position and driving long term value creation.

Let's turn now to our second quarter performance on Slide five. Our sales were impacted by a softer than expected housing market due to ongoing affordability concerns and rising home inventories as completions outpaced sales. While we readily acknowledge that we are experiencing lower margins as we support our customers, I'm pleased that we are maintaining healthy profitability in a low starts environment, a testament to the operational discipline that is part of the fabric of BFS. Slide six, we highlight key areas where we've been executing our four strategic pillars. In the second quarter, we invested more than $35,000,000 in value added solutions as we build for the future.

This included opening a new millwork location in Florida and expanding or upgrading plants in seven states. We generated $5,000,000 in productivity savings in Q2, primarily through targeted supply chain initiatives. We are focusing on optimizing processes, utilizing new tools and partnering with suppliers to grow share. Turning to Slide seven, we remain disciplined stewards of discretionary spending and we are continuing to maximize operational flexibility. In response to lower volumes over the last year, we have taken meaningful steps to align capacity across our facilities, manage headcount and control expenses.

Year to date through June, we have consolidated eight facilities while maintaining an on time and in full delivery rate of 92%. With our industry leading scale, experienced leadership team and a track record of operating proactively through the cycle, we are confident that we can continue to deliver exceptional customer service. Single family starts remain soft as builders manage the pace of construction. As expected, we've experienced a muted sales pace that is below the normal seasonal levels. Given customer feedback and our understanding of land development trends, we expect single family starts to decrease through year end.

Builders are working to help buyers find affordable options by offering smaller and simpler homes as well as incentives such as interest rate buy ins. We are marching in lockstep with builders through our comprehensive product portfolio, enabling them to optimize their costs while maintaining quality. Multifamily also remains muted, driven by higher input and financing costs. However, with a substantial mix of value added products and attractive long term fundamentals, multifamily remains an appealing and profitable business for us. Turning to M and A on Slide eight.

We remain focused on pursuing higher return opportunities that expand our value added product offerings and advance our leadership position in desirable geographies. Over the years, we have developed substantial and proven muscle memory to grow through M and A and have a track record of successful integration. In the second quarter, we acquired Truckee Tahoe lumber with aggregate prior year sales of roughly $120,000,000 Truckee Tahoe's reputation of excellence as a leading supplier of lumber and building materials extends our presence in the Northern California and Nevada markets. We have made 35 acquisitions since the BMC merger in 2021, yet our industry remains highly fragmented. Today's market volatility makes price discovery difficult.

But despite the current slower M and A environment, we are confident that inorganic investments will remain an important driver of long term growth. Turning to Slide nine. Our disciplined capital allocation strategy focuses on maximizing shareholder returns through organic growth, M and A and share repurchases. In the second quarter, we deployed over $500,000,000 towards return enhancing opportunities aligned with our priorities. Now let's turn to Slide 10 and discuss the latest updates on our digital and technology strategy.

In June, we announced Gayatri Narayan as our new President of Technology and Digital Solutions. Gayatri brings over two decades of global technology leadership experience, having held senior roles at Amazon, Microsoft and PepsiCo. Her proven track record of driving innovation and growth through digital transformation will be instrumental as we leverage technology to enhance connectivity across our industry. We are accelerating the integration of our digital source systems and deploying scalable customer centric solutions that will strengthen our operational agility and support long term growth. Our BFS digital tools deliver meaningful benefits to our homebuilder customers and align BFS as a key technology partner.

Despite the challenging market, we have seen continued adoption with our target audience of smaller builders. Since launch in early twenty twenty four, we have seen more than $2,000,000,000 of orders and $4,000,000,000 of quotes placed through our BFS digital tools. These metrics are up more than 400% and nearly 300% year to date, respectively, compared to 2024. We continue to refine our new adoption roadmap and we'll roll out our new thinking around benefits and timing later this year. I'm pleased that we continue to make progress on our implementation of SAP with the launch of two pilot markets earlier this month.

Although these conversions are never easy, we are working through the details and are excited about the growth and efficiency opportunities to come with this new software. I remain deeply grateful for the opportunities to lead such a skilled and dedicated team that makes a difference every day. This quarter, I want to highlight Jim Henry, a load builder in our Burbank yard, recently celebrated an incredible forty years with BFS. Jim is known for his efficiency, flexibility, team first attitude and his love of cycling. He's had a lasting impact on operations and is someone his teammates look to as a model of how to get the job done right.

I'm proud of Jim and the many others across our organization whose hard work and commitment drive BFS forward. I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. We continue to benefit from the strength and adaptability of our operating model. By executing consistently through the cycle, we are generating strong free cash flow and preserving financial flexibility. Our scale, operational rigor and talented team give us confidence in our ability to deliver solid results and compound value into the future. We remain disciplined in our capital deployment with a focus on maintaining a healthy balance sheet and investing in high return opportunities.

I'd like to pause for a moment to highlight our operating model, a core differentiator that continues to set us apart in the industry. At VFS, we have a disciplined enterprise wide approach that unites our teams across functions, geographies, and product categories. We conduct granular performance reviews to track market trends and key productivity metrics, such as trust board foot per labor hour and utilization rates of manufacturing and fleet capacity. These insights enable us to identify opportunities, address challenges early, and drive continuous improvement across the business. What truly reinforces this discipline is the active oversight of our executive steering committee.

This cross functional leadership group meets to review operational KPIs, challenge assumptions, and confirm alignment with our strategic goals. Their involvement ensures that insights from the field translate into action at the highest levels of the organization, enabling us to respond quickly and adapt as needed to evolving market dynamics. Let's begin by reviewing our second quarter performance on Slides 11 through 13. Net sales decreased 5% to $4,200,000,000 driven by lower organic sales and commodity deflation, partially offset by growth from acquisitions. We continue to experience commodity deflation attributable largely to lower OSB prices.

While pending duties and capacity rationalization have contributed to a more stable lumber market, OSB capacity additions have continued to create downward pricing pressure. The core organic sales decrease was driven by a 23% decline in multifamily with muted activity levels against stronger prior year comps. Additionally, single family declined 9%, attributable to lower starts activity and value per start, while repair and remodel increased 3%, driven by strength in the Mid Atlantic and South Central regions. As we've noted on recent calls, there are a few key factors reconciling single family starts to our core organic sales. First, as a reminder, there is a roughly three month lag from a start to our first sale.

Second, the value of the average home has fallen as size and complexity have decreased over time. Third, margins remain pressured throughout the supply chain as affordability concerns continue to be paramount. Despite these challenges, we continue to lead the building products market and serve as a trusted partner to our customers. For the second quarter, gross profit was $1,300,000,000 a decrease of 11% compared to the prior year period. Gross margin was 30.7%, down two ten basis points, primarily driven by single and multifamily margin normalization as well as a below normal starts environment.

Adjusted SG and A of $818,000,000 increased $4,000,000 primarily attributable to acquired operations, partially offset by lower variable compensation due to lower sales. On an annual basis, adjusted SG and A is approximately 30% fixed and 70% variable with volumes, enabling flexibility during challenging periods. As Peter touched on previously, we are focused on carefully managing our SG and A and are well positioned to leverage our costs as the market grows. Adjusted EBITDA was $5.00 $6,000,000 down 24%, primarily driven by lower gross profit. Adjusted EBITDA margin was 12%, down 300 basis points from the prior year, due to lower gross profit margins and reduced operating leverage.

Adjusted EPS was $2.38 a decrease of 32% compared to the prior year. On a year over year basis, share repurchases, enabled by our strong free cash flow generation, added roughly zero one eight dollars per share for the second quarter. Now let's turn to our cash flow, balance sheet and liquidity on Slide 14. Our second quarter operating cash flow was $341,000,000 a decrease of $111,000,000 mainly attributable to lower net income. We generated free cash flow of $255,000,000 Our trailing twelve months free cash flow yield was 9%, and operating cash flow return on invested capital was 18%.

Our net debt to adjusted EBITDA ratio was approximately 2.3x, while our fixed charge coverage ratio was roughly 6x. In May, we completed a $750,000,000 offering of 6.75% senior unsecured notes due 2035 to pay down the balance on our ABL. Additionally, we upsized our ABL facility by $400,000,000 to $2,200,000,000 We have no long term debt maturities until 02/1930. Our maturity profile enables us to remain operationally and financially disciplined while preserving a flexible balance sheet for accretive capital deployment. Moving to second quarter capital deployment.

Capital expenditures were $86,000,000 We deployed $61,000,000 on acquisitions, and we repurchased 3,300,000.0 shares at an average price of $118.27 per share for $391,000,000 We currently have $500,000,000 remaining on our share repurchase authorization. While our 2.3x leverage ratio is slightly above our target range, we remain comfortable with our net debt levels. We will continue to execute our capital allocation priorities and remain disciplined stewards of capital on the path to maximizing value creation. On slide fifteen and sixteen, we show our 2025 scenarios and outlook. Given the dispersion of potential housing market and commodity outcomes for the rest of the year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance.

As you can see, the bottom of our guidance range corresponds to lower assumptions for single family starts and commodity prices. Our latest forecast assumes single family is down 10% to 12% for the year. We continue to expect a multifamily headwind to sales of 400,000,000 to $500,000,000 and a headwind to EBITDA of less than $200,000,000 with most of the drag already coming in the first half of the year. We also expect R and R end market to be flat. As a result, we are guiding net sales in the range of $14,800,000,000 to $15,600,000,000 We expect adjusted EBITDA to be 1,500,000,000.0 to $1,700,000,000 Adjusted EBITDA margin is forecast to be in the range of 10.1% to 10.9%.

Given the below normal starts environment, we expect our 2025 full year gross margin to be below long term normalized levels and in a range of 29% to 30.5%. We expect free cash flow of $800,000,000 to $1,000,000,000 Our revised guidance assumes average commodity prices in the range of three seventy five dollars to $425 per thousand board foot. Please refer to our earnings release and presentation for a list of key 2025 assumptions. Additionally, we want to provide color for Q3 because of our ongoing macro volatility and to align with builder expectations. We expect Q3 net sales to be between $3,650,000,000 and $3,950,000,000 given a weaker than normal building season. Q3 adjusted EBITDA is expected to be between $375,000,000 and $425,000,000 In closing, we are closely monitoring the current environment and remain agile to mitigate downside risk in the near term while also investing strategically for the future. I'm confident in our ability to drive long term growth by executing our strategy, leveraging our exceptional platform and maintaining financial flexibility. With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. I want to close today by emphasizing the transformation of BFS. Today, we are an exceptionally improved organization, one powered by differentiated product offerings, including our value added solutions, our relentless focus on operational excellence and disciplined capital deployment strategies. This evolution is illustrated on Slide 18, which highlights how our performance in a challenged starts environment is substantially better today than in 2019. Our business is positioned to accelerate when starts increase and current headwinds begin to subside.

Our current our customer relationships are deepening, our operational efficiency is improving and our technology platform is creating real value for the business. By controlling what we can control and leveraging our competitive advantages, we will continue to compound long term shareholder value. Thank you for joining us today. Operator, let's please open the call now for questions.

Certainly. And we will take our first question from Matthew Bouley with Barclays. Please go ahead.

Good morning, everyone. Thank you for taking the questions. So whether we're talking installation, digital, the value add investments you're making this year, Be curious if you can speak a little more where, I guess, specifically or even provide examples of how you are strengthening your competitive position and partnering with your builder customers in this type of, I guess, disappointing starts environment and sort of what those tactics might mean for your growth and profitability in the future when we eventually get to that environment where starts were to stabilize or improve? Thank you.

Good morning, Matt, and thank you for the question. Yes, happy to. So a couple of key areas. I think the most basic one is improving our on time and in full performance to ensure that our builders are able to be as efficient as possible. I would argue nobody is better at than we are.

We're well over 90%, and we are known in the industry as the trusted partner to be able to ensure that consistent performance over time. If you think about some of the things we're doing to align more closely with builders, it's figuring out ways to achieve the goals that they have. And their primary goal, as stated to us and broadly, is affordability. So what are the products that are gonna most directly allow them to build a high quality, cost efficient home? In some cases, there are product substitutions. In some cases, there are new applications. The pace of the build and the alignment of the build process with what we're doing, we continue to enhance the integrations with our customers, looking for ways to pass data and align schedules and forecasts in a very, very efficient and highly reliable way. A big piece of that is around technology, both in the core systems but as well as digital. Digital is another way where we have seen customers benefit in terms of utilizing both online tools but also the three-dimensional digital twin to optimize their build process, to find pockets of waste that can be removed and to create efficiencies in terms of communication and process improvement.

All of that is really linked back to our role as connector between builders and vendors. Right? So our ability to operate effectively in a highly efficient digital environment to link our trusted vendor partners with our customers is really that way that we're reinforcing and strengthening And at the same time, ensuring that we're learning from past cycles and having the right capacity on the ground in the right markets, that's a big piece of where we talk about building for the future and being ready. So all of that basically boils down to as the turn starts, and we believe it will come, not quite yet, but we believe it's on its way, we are going to be better positioned than anybody to really grow and take advantage of highly efficient relationships with customers, trusted relationships with customers and massive capacity to be able to truly create value for shareholders and be more of a trusted partner in the space.

Excellent. Well, that's great color, Peter. Really appreciate that. Secondly, maybe diving into the near term and the gross margins. Correct me if I'm wrong, but I think this is the first quarter where your gross margins were actually higher sequentially, perhaps since 2023, which at least surprised us.

Maybe not you. But, you know, what what actually drove that? Why did the margins improve, in q two sequentially? Kind of what's that imply about the Q2 exit rate? And maybe what are you assuming in that margin within the kind of Q3 and second half guide? Thank you.

Thanks, Matt. Great question. We're actually very pleased with that margin performance for Q2. As we had noted last on the last call that we were going to see margins drifting down sequentially through the year, it was a drift down. And we were very pleased with the performance as we had, a little better than expected in the multifamily and R and R space that contributed to that margin outperformance.

And just to contextualize it, that 20 basis points increase over Q1, that's worth about $8,000,000 So it's pretty small in the grand scheme of things, but we're very pleased with the outperformance.

Got it. Yeah. And any color there on what was assumed in kind of Q3 and second half?

Again, we're looking at sequential normalization or declines through the balance of the year toward our stated full year forecast or full year guidance of margin. But it's very consistent with what we said in the prior quarter given the competitive landscape and the softer than normal starts environment is going to continue to put that pressure on margins.

All right. Well, thanks, Pete. Thanks, Peter. Good luck, guys.

Thank you. And our next question comes from Mike Dahl with RBC. Please go ahead.

Morning. Thanks for taking my questions. Maybe just to pick up on that last point, I guess you did a 30.6% gross margin in the first half of the year. You saw there with the the high end effectively being kind of flat to the first half, the low end implying a really sharp step down. And it seems like the three q guide does imply some sort of step down.

So just to press a little more on, you know, status quo given what you're experiencing in the market today, a little better direction on, or fine tuning on where where in that range things are under kind of the status quo environment? And more broadly, just as you think about all these dynamics, any updated views on how you're balancing or looking to balance share and margin in the current environment?

Mike, thanks. Yes. So part of the dynamic here is what's being said broadly. Obviously, are a lot of public homebuilders that have leased over the past couple of weeks versus kind of our signal here that it's a bit worse than what people are thinking. As you know, we spend a lot of time with customers.

We spend a lot of time digging into the data. What I think you're seeing is a little bit of a bifurcation, a little bit of a difference in terms of the profile of who we are versus what the builders are doing in terms of their annual cycle. Just to put a finer point on it, we've talked about it before. We're about twothree to the start and onethree to the completion. As the builders get towards the back end of their year, they're looking at completing and selling homes.

But given the inventory environment and what we're seeing in terms of the land market, what we're hearing about the takedowns and the contracts, our sense is builders are slowing on the start side. And without a clear indicator that interest rates are going to move anytime soon, I think in the best case scenario, it's going to be a little while and probably won't help this year. Our sense is that that slowing, that resetting to lower rate in order to manage those completed home inventory levels, that's what's gonna flow through. So that's the slowing indication that you've got from us. The higher end of our scenarios that we laid out for you is a flatter version based on kind of where we are now.

So you think about it that way. But there's a not exactly, but directionally, I would say that's the band that we should think about. The competitive environment, as Pete mentioned, is pretty stable. Right? It's it's a tough market.

There's a there's a fight out there. You know, in terms of what we're seeing when we're quoting and looking at what's going on with share according to our calcs, we think things have pretty well stabilized on the share side. And the signaling of what that took in order to stabilize is what Pete's got laid out in terms of the margins and the results for the rest of the year. Ultimately, I just go back to we're performing exceptionally well in a challenging market. It's not easy.

We're focused on affordability, but the team is doing a phenomenal job. Staying focused on the disciplines necessary to run this business the right way and to prepare for the future, and we're ready to go when it turns. We just need some cooperation from the external factors.

Yeah. Thanks for that, Peter. That's really helpful. And I I guess, similar similar vein, a a lot of the the concern or pushback that we get from investors is, you know, around trust specifically where there is excess nameplate utilization out there, and you hear all the builders to this conversation talking about how, yeah, they they are asking for and aggressively asking for help from from all their partners to to reduce costs. Can you just help us understand from your perspective the trust capacity environment, the differences you see on kind of nameplate versus effective utilization?

And and maybe if you could talk about kind of your your trust margins, at least directionally, you know, how those have been performing or or expected to perform within within the balance of the year and your guidance. I think that might help.

Sure. Yes. I mean, I know it's not going to come as a surprise to anybody. We're underutilized from a capacity perspective in trust, right, given where starts are, of course, we've got access. I think what we're particularly good at, though, is making sure we're running the business, driving off of the correct metrics.

So for example, every location is absolutely focused on board foot per labor hour metrics to ensure that the biggest expense that we have, our people, are producing in a way that makes sense for the operation. That's how you cover the overhead. That's how you ensure that we have a stable business. In those instances where we don't have enough volume to absorb that fixed overhead, that's where we do things like you see in the materials, where we mothball operations or close operations or consolidate in order to ensure that the remaining facilities do have enough to stay stable. It's one of the many advantages of our network of operations and something that our team is exceptionally good at.

So that's an example of how we manage it. Broadly in the space, we're very confident that we are as efficient or better than anybody else in this space. In certain markets, certainly, it's hand to hand combat. No hesitation in saying that we've competed away some of the excess margins that we've seen over the past few years. I think all of us have strived very hard to make sure we're getting a fair return on what we do.

But that said, it is a competitive environment that hopefully isn't a surprise based on everything we've said in the past. But with all of that, we're still doing well. It is a very nice product line for us. It's something that, again, we will have and we'll continue to invest in to ensure that we're aligned with our customers when their need increases, and it will. So not shy at all about where we are and continuing invest in those key areas where that capacity is going to be needed even if it's not needed as desperately today.

Thank you. And our next question comes from John Lovallo with UBS. Please go ahead.

Good morning, guys. Thanks for taking my questions as well. The first one is just on the commodity outlook that you guys laid out there. Just within mind the Canadian lumber tariffs, the antidumping and countervailing going from 14.5% to 27% as of a couple of days ago and set to go up to 34.5% on August 8 with probably little chance of that changing. Just curious what you think kind of the knock on impact might be to lumber?

And how does that kind of fit in the context of your forecast?

Thanks, John. Good morning. We have factored in the duties and, increases into our guidance for the lumber side, and we think the lumber right now has been more stable. I think the duties has helped that to remain at a a pretty healthy level above $400 per thousand as you look at the composite of the lumber, lumber category. The the impact from the duties, I don't think will hit us really in our numbers for at least three to four months given the lead time of what we already have on the ground, what we need to work through on what's already been ordered and in the pipeline versus when we'll we will receive that new wood with the duties on it and then be able to churn it out.

So it'll really have a minimal impact on our financial results in in 2025, and we'll continue to assess that as we go into 2026. The the big drag, as I mentioned in the prepared remarks, was on OSB, and OSB is, something that continues to drift down. It's pressure because of, oversupply, and we're gonna have to just work through that as, we we try to find, as an industry, where that balance is.

Yeah. OSB is bad right now. There's it's there's nobody is happy with where OSB is except for maybe people buying it at the end point.

Got it. Okay. That's helpful. And then in terms of your net leverage, it's at I think 2.3 times. It's above the high end of one to two times.

You lowered the EBITDA forecast for the second half. I mean how does this sort of influence the ability for you guys to buy back stock through the remainder of the year?

Well, so our capital allocation priorities remain the same. We're going to continue to focus on maintaining a healthy balance sheet, fort fortress balance sheet. Some of the, debt activities we did during q two help continue to position us from a liquidity standpoint, which we feel very, confident in at this time. We're managing our capital expenditures or organic growth to make sure that it's right sized for the business that we're operating currently. We're evaluating inorganic growth through acquisitions.

And right now, it's just a softer m and a environment. And then lastly, we'll look at stock buyback. As you probably saw in the in the prepared remarks and in the information that we've provided, we haven't done any since April when we announced the Q1 results.

Thank you. And our next question comes from David Manthey with Baird. Please go ahead.

Yes, thanks. Good morning, guys. Hoping just I can ask you a very high level question here. Could you discuss the revenue and margin bridge as you think about from the report you just reported into that third quarter guidance that you gave? Essentially, just what are the main drivers of the sequential change from 2Q to 3Q?

So the sequential driver changes for revenue from Q2 to 3Q is really the start environment that continues to weaken as we go through the quarter.

Single family starts, excuse me. A little bit of the continued normalization of multifamily, as we said, largely was behind us in the first half of the year. There's still a little bit left in last quarter. And the commodity deflation.

So we're seeing a softer commodity, environment than what we had projected from last quarter, and that's going to have, an influence on the revenue in Q3.

Okay. Thank you. And just setting aside the thirty year conventional mortgage rate for right now, could you discuss the impact on BFS if short rates come down by say 50 basis points as we exit the year and into 2026?

Well, it's certainly a tailwind. I think there are a number of different reasons why that's true. While I do think it will likely have an impact on mortgage rates, the multifamily side of the business, I will tell you, has a tremendous amount of promise right now. There are a lot of jobs that are sort of on the cusp, and I think 50 bps would help. I think that there's also sort of this uncertainty on the consumer side that even those who can handle a mortgage in this vicinity are so unsettled by what they don't understand or what they don't trust yet that they've backed off.

So I think a sense of lower rates and a little bit more stability could absolutely be a release in terms of demand activity. Think those are the key pieces of where it could help.

And our next question comes from Charles Frohmeich with Goldman Sachs. Please go ahead.

Thank you. Good morning. I guess, first, I would like to talk about the reduction in productivity savings expectation that you held for this year. Can you talk through the reasons behind that decline? And more broadly, when you think about the opportunity for further cost takeout actions over time to build on the initiatives that you've completed year to date in terms of footprint?

Yes. Can start it off. If Pete has comments to add on, please do. In short, productivity is still core. We're still doing a tremendous amount of continuous improvement work.

The reality is with about 30% of our SG and A being effectively fixed and not variable with sales, we're seeing some deleverage that's offsetting. So our productivity metrics are driven by P and L outcome. As fun as it is to tell stories about how we can save money with X or Y project, if it doesn't show up in the P and L, we don't count it to be true. So while there are certainly a lot of things going on, the offsetting headwinds are sort of eating that benefit. We're going to continue to press. The organization, I think, is still aligned very well and performing very well. Just the reality of that deleveraging is the account of is what's to account for the slower performance.

But certainly a lot of effort there. Dennis, anything to

I think the second part of this question was regarding the closures that we've executed this year. So the eight locations, that's part of our ongoing management process that we evaluate the performance of our locations. We evaluate the capacity in our markets. We continue to make the prudent choices on what's best for the company and how do we maximize our ability to to service the customer as well as, generate the right returns. As a reminder, we closed 30 locations last year.

So this is just part of who we are and part of how we run the business, making sure that we have everyone operating at an expectation.

Got it. That's very good color, Peter and Pete. And then I guess second, moving on to digital. You've talked about continued progress against your initiatives earlier this year, and in your prepared remarks as well today. When you think about the continued progress over time and you highlighted $200,000,000 target initially, it sounds like you're revising that timeline.

But when you think about the adoption of digital tools and your product across the markets, what basically are the biggest pushback or inherent problem that are limiting the adoption? Is it really just driven by the market or any other things that you could adjust to really help your go to market strategy there?

Yes. That's a great question. Thank you. I remain incredibly excited about the opportunity of digital and leveraging technology, whether it be core systems or the new AI, agentic AI that we think is going to be really impactful. The reality is increasingly, the realization is that digital isn't a tool.

Digital isn't a product. Digital is very much the fabric of who we are. We like to think about these tools as being, super suits that our employees can put on to better compete in the market. Makes us faster, makes us smarter, makes us more agile. The reality is it's not easy to do, and it takes a lot of investment.

And and, unfortunately, it it takes more time than I'd like for it to take. But we are seeing improvement. The core of the tools are delivering on the promise of finding and eliminating waste, improving communications with our customers, improving the efficiency and the effectivity, most importantly, of our internal teams. We're still 100% convicted that that's the right way for our business to win in the long run and that we're better positioned than anybody to do it. The the reality right now is with our target customer today being the smaller customer and there being a a tough market to adapt to, there's a piece of this that's development related and a piece of this that's customers are very focused on staying alive and managing affordability, and sometimes new ideas are slower to be adopted than at other times.

We're still seeing adoption. We're still seeing it pick up. We're still developing. I don't feel bad at all for the success that we've had, but it has been a little bit slower than we were anticipating. We're still seeing incremental growth.

It's still going in the right direction, just not at the right pace yet.

That sounds good. Thanks for the color and good luck with everything.

Thank you. And our next question comes from Rafi Jadrocic with Bank of America. Please go ahead.

Hi. Good morning. It's Ray Singh. Thanks for taking my questions. Looking ahead, if starts stay where we are today for an extended period of time just because of the macro, are there levers that you could pull from a cost perspective?

Builders FirstSource (BLDR) Q2 2025 Earnings Call Transcript

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