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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.

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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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<p>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.</p>

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Q3 2024

Builders FirstSource (BLDR): Company Profile, Stock Price, News, Rankings

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Builders FirstSource

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Good day, and welcome to the Builders FirstSource Third Quarter 2024 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by management and the question and answer session. I'd now like to turn the call over to Heather Koss, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.

Good morning, and welcome to our Q3 2024 earnings call. With me on the call are Dave Rush, our CEO Peter Jackson, our CEO designate and CFO and Pete Beckman, our CFO designate. As a reminder, on September 19, we announced a planned CEO and CFO succession. 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 our investors in our earnings press release, SEC filings and presentation. Our remarks in this 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 these forward looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward looking statements and projections. With that, I'll turn the call over to Dave.

Thank you, Heather, and good morning, everyone. Before I get into my prepared remarks, on behalf of Builders FirstSource, I want to send our thoughts to all of those who have been impacted by Hurricane Saline and Milton. I am proud of how we have come together as an industry to help with disaster relief efforts in North Carolina and the Southeast. From the first morning after Helene's landfall, we had team members and suppliers reaching out from all over the region and even across the nation asking how they can help. Our Charlotte and Blairsville locations filled trucks with supplies and delivered them to the hard hit Western North Carolina region.

Suppliers like Great Southern, Blue Links, Weyerhaeuser, Oracle and many others immediately stepped up and joined our efforts. We are grateful to our partners for their help. And with BFS C. A. R.

E. Initiative, we're providing grants to our team members back to help get our team members back on their feet as soon as possible. I want to especially thank Tim McCall, an install manager in Asheville who also serves as a volunteer firefighter in the region. Tim was involved in 20 calls in the first hours after Helene hit. 1 involved climbing over 250 yards of very unstable terrain to help rescue an 11 year old boy who had been buried in the basement of his home by a massive landslide.

Tim, we are so proud of your efforts and thank you for your selfless service to the community. I'm sure you have all seen the news that I'm retiring as CEO. I never anticipated that 25 years ago, I would have this wonderful career with this great company. We have the best people in the industry and the opportunity to be CEO of BFS these last couple of years has truly been the joy and highlight of my career. I am so proud of how far we have come and I'm grateful to our leadership team and team members for their support.

I have full confidence in Peter and Pete and their ability to drive our strategy forward. One of my first priorities when I became CEO was to develop a succession plan to ensure the consistency of our leadership and execution of our long term strategy. With many years of experience as our CFO, Peter is exceptional at navigating the public company landscape and has spent extra time with each of our regions to get a firsthand understanding of what it takes to support our leaders in the field. He has served as a close advisor to me and was essential in helping craft our current strategy. I am working closely with him to ensure a thoughtful and seamless transition.

Pete Beckman is a brilliant financial leader and someone who is widely respected within the organization. I am grateful for our deep bench of talent and to leave BFS in such good hands. I want to wrap up by saying that I'm not going far away. I'll enjoy continuing to serve BFS as a member of our board and I'm taking an active role to ensure smooth transition in the near term. I'm excited to continue supporting our growth and success.

Thank you, Dave, and good morning, everyone.

I want to start by saying that we are indebted to Dave for his decades of service at BFS as a leader, steward and champion of the company and our people. Dave has truly done it all and his legacy of excellence will continue to inspire us as we move forward. I'm truly honored and grateful to be named the next CEO of Builders FirstSource. I'm humbled to represent our talented, hardworking team and the fantastic business that we have built. BFS has had tremendous success and become a world class organization because of the commitment and contributions made by this team.

Let's get started with Slide 3 and our strategic pillars, which remain unchanged. As we continue to execute our strategy, I believe there are 3 areas that we can emphasize, so we can continue to outperform today and transform tomorrow. The first opportunity is with our people. I want us to advance the industry standard in this area so that we are recognized as a premier destination for talent. I believe we can enhance how we invest in, develop and support our team members from our frontline operators to our leadership.

The second opportunity is to further build and capitalize our growth prospects from our products to our processes. I see potential to improve our consistency, capabilities and ways of working so we can extend our lead and grow a bigger, better BFS of tomorrow. And the 3rd opportunity is to improve how we collaborate and learn from each other within the company. We have a wealth of expertise, knowledge and innovative technologies. I believe we have a real opportunity to enhance how we work together.

So that what we are discovering in Charlotte is shared with Phoenix and what we are developing in Florida can be scaled in Texas. Let's turn now to our Q3 highlights on Slide 4. I'm proud of our resilient performance, which reflects our execution and operational rigor. Even as we continue to see soft sales amid rate uncertainty and extreme weather. Despite these challenges, we delivered strong gross margins of nearly 33%.

Our adjusted EBITDA margin has remained in the mid teens or better for 14 consecutive quarters, which highlights our transformed business model and our differentiated product portfolio and scale. Let's move to Slide 5, where we touch on some of the specific ways we are executing our strategy. Our portfolio of value added products and services remains a competitive advantage for BFS and continues to bolster our partnerships with customers. We've seen steady progress with digital as we continue to hear great feedback from customers and see increasing levels of adoption each week. We demonstrated operational excellence by delivering $27,000,000 in productivity savings in Q3 and have driven $104,000,000 year to date primarily through more efficient manufacturing and procurement initiatives.

Install services continues to be a great opportunity for us as we leverage playbooks from successful markets. I'm pleased that our installed sales increased by 11% year over year as we focus on helping customers address labor challenges. We remain disciplined stewards of discretionary spending and are continuing to maximize operational flexibility. We have consolidated 11 facilities year to date while maintaining our service levels to our customers with an on time and in full delivery rate of over 90%. Single family softness continued in Q3 amid ongoing affordability challenges and below normal starts.

The initial reaction to the Fed's first interest rate cut in September has been mixed with some homebuyers remaining on the sidelines and waiting for additional rate cuts as mortgage rates fluctuate in the near term. As a reminder, the value of a new start has fallen as the housing market has adapted to affordability challenges. Multifamily continues to be a headwind amid muted activity is expected. Comparisons should get less negative as we lap record performance from last year. On normalized basis, multifamily represents about 9% to 10% of net sales and is an attractive and profitable business for us.

As we detailed on our Q2 call, our Q4 exit velocity indicates about a percentage point of margin erosion from 24 on a full year basis, roughly half of which is from multifamily. To address the current environment and affordability challenges, 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 this market in addition to 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 leaning in by partnering with our customers to help them lower the cost of homes for consumers as well as maintain their margins.

This includes offering a balanced product mix that addresses builder needs while passing through lower material costs. For instance, we have continued to supply more engineered wood and have sold fewer floor trusses to help alleviate affordability challenges. We have also supplied more lower cost offerings and products like windows and doors to help reduce costs. Although these actions in support of our customers need less sales and gross profit dollars, our margin profile remains strong and we are well positioned for growth as starts increase and structural headwinds begin to subside. Turning to M and A on Slide 6, we continue to pursue attractive opportunities while remaining financially disciplined.

Over the years, we have developed a substantial and proven muscle memory to grow through M and A and have an impressive track record of successfully integrating these transactions. In the Q3, we completed 6 deals with an aggregate 2023 sales of roughly $190,000,000 In July, we acquired Western Trust and Components, adding trust capacity in the Flagstaff, Arizona area and CRI SoCal, a dealer and installer of high end windows and doors in Orange County, California. In August, we acquired Wyoming Millwork, the leading independent building products distributor in Delaware. September, we acquired Sunrise Wood Designs, a top custom cabinet manufacturer and installer in North Texas. And in the Reno area, Reno Trust, a leading trust manufacturer to the single and multifamily markets and High Mountain Door and Trim, a distributor and installer of windows, doors and millwork.

Additionally, in October, we acquired Douglas Lumber, which provides a range of building materials to contractors, remodelers and homeowners in the Rhode Island area. These acquisitions reinforce our commitment to growing value added products. We are excited to welcome these talented new team members to the BFS family. On Slide 7, we provide an update on capital allocation. In addition to the 6 tuck in acquisitions during the quarter, we executed share repurchases of roughly $160,000,000 As driven by our track record, we'll continue to allocate capital to high return opportunities, including acquisitions and share repurchases.

We deployed approximately $1,700,000,000 through the 1st 3 quarters of this year and remain on track to strategically deploy $5,500,000,000 to $8,500,000,000 of capital from 2024 to 2026 as we outlined at Investor Day last December. Now let's turn to Slide 8 and discuss the latest updates on our digital strategy. With our BFS digital tools, we are focused on creating value for our homebuilder customers and in doing so further extending our industry leadership position and driving substantial organic growth. We have seen strong adoption and growth with our target audience of smaller builders despite the challenging market. We have had broad acceptance of the platform so far including interest from multiple top 200 builders.

Since launching in late February, we have seen nearly $600,000,000 of orders placed through our digital platform of which $83,000,000 were incremental sales from existing and new customers. While we're very pleased with the incremental sales to date, given market headwinds from our targeted segment of builders, we now expect total incremental sales of approximately $110,000,000 in 2024 versus our initial goal of $200,000,000 Despite the slow start, we remain confident in our ability to meet our target of $1,000,000,000 in incremental sales in 2026 as we grow wallet share and win new customers. Before I turn the call over, I want to say that we are very fortunate to have Pete Beckman step into the role of CFO. He has a long and proven track record as a finance leader, which I've witnessed firsthand. I look forward to partnering with him to deliver exceptional results and compound shareholder value.

Thank you, Peter. And good morning, everyone. I appreciate the introduction and I am grateful for opportunity to serve as CFO. For background, I have spent the last 25 years at BFS and legacy companies and roles of increasing responsibility, including being an integral part of the ProBuild and BMC mergers. Most recently, I served as SVP of Financial Planning and Analysis, where I have partnered with all levels of the enterprise and was responsible for our financial forecasting, strategic capital and annual planning.

I look forward to helping enable profitable growth while maintaining our track record of prudent financial management through the cycle and disciplined capital allocation. Like continued housing market choppiness, we delivered resilient results during the Q3 as we continue to execute our strategy and operating model. We are leveraging our forfeit balance sheet and free cash flow generation to drive disciplined capital deployment as witnessed by our share repurchases and acquisitions during the quarter. Our scale and financial flexibility enable us to act as key partners to homebuilders and we have a clear line of sight to compound value creation over the long term. We are well positioned for meaningful operating leverage when the market turns.

I will cover 3 topics with you this morning. 1st, I'll recap our Q3 results. 2nd, I'll provide an update on our capital deployment. And finally, I'll discuss our 2024 guidance, 2025 scenarios and related assumptions. Let's begin by reviewing our Q3 performance on Slides 910.

Net sales were $4,200,000,000 a decrease of 6.7 percent driven by a 7.2% decline in core organic sales as multifamily continues to trend downward and 2.9% of commodity deflation. The decrease in net sales was partially offset by growth from acquisitions of 2% and one additional selling day that contributed 1.4%. The core organic sales decrease was driven by a 31% decline in multifamily as we lap the prior year's strong comps and a 4.6% decline in single family amid lower value per start. This was partially offset by a small increase in repair and remodel of almost 1% given strength in the central region. As we have shared on recent calls, there have been 3 main variables reconciling single family starts for organic sales.

The first variable is the lag between permits and starts. This quarter unlike last quarter, we have seen the impact of early permit pulls fade, but we continue to see a generally extended permit completion cycle time. As a rule of thumb, we expect a roughly 2 month lag between a start and our first sale. 2nd, the value of the average home has fallen as size and complexity have decreased. Finally, we have seen slight normalization in selling margins of non commodity products and manufacturer price cuts in some products.

Summarize, although there are less sales dollars built or start today, we remain the market leader and we'll continue to deliver strong operating performance. Value added products represented 49% of our net sales during the Q3. As a rule of thumb, our multifamily sales are made up of roughly 70% value added products. Gross profit was $1,400,000,000 a decrease of approximately 12% compared to the prior year period. Gross margins were 32.8%, down 2 10 basis points, primarily driven by multifamily and core organic normalization.

SG and A increased $19,000,000 to $958,000,000 primarily attributable to acquired operations and asset write offs, partially offset by lower variable compensation due to lower net sales. As a percentage of net sales, total SG and A increased 190 basis points to 22.6%. Adjusted SG and A decreased approximately $1,000,000 to $783,000,000 primarily attributable to lower variable compensation due to lower net sales, partially offset by acquired operations. On an annual basis, adjusted SG and A is approximately 30% fixed and 70% variable with volumes. For reference, we have an adjusted SG and A reconciliation schedule in the earnings release.

We are focused on carefully managing our SG and A expenses and are well positioned to leverage our fixed costs as the market grows. Adjusted EBITDA was approximately $627,000,000 down 23%, primarily driven by lower gross profit, partially offset by lower operating expenses after adjustments. Adjusted EBITDA margin was 14.8%, down 3 10 basis points from the prior year, primarily due to lower gross profit margins, partially offset by lower operating expenses after adjustments. Adjusted net income of $360,000,000 was down $174,000,000 from the prior year, primarily due to lower gross profit, partially offset by lower operating expenses after adjustments and lower income tax expense. Adjusted earnings per diluted share was $3.07 a decrease of 28% compared to the prior year.

On a year over year basis, share repurchases added roughly $0.22 per share for the Q3. Now let's turn to our cash flow, balance sheet and liquidity on Slide 11. Q3 operating cash flow was $730,000,000 an increase of $81,000,000 mainly attributable to a decrease in net working capital. Quarter were $95,000,000 and free cash flow was approximately $635,000,000 For the last 12 months ended September 30, our free cash flow yield was approximately 8%, while operating cash flow return on invested capital was 25%. Our trailing 12 months net debt to adjusted EBITDA ratio was 1.4x, while base business leverage was 1.5x.

At quarter end, our total liquidity was approximately $2,000,000,000 consisting of $1,700,000,000 in net borrowing availability under the revolving credit facility and approximately $300,000,000 in cash on hand. Moving to capital deployment. During the Q3, we repurchased roughly 900,000 shares for approximately $160,000,000 at an average stock price of $176.73 per share. Since the inception of our buyback program in August 2021, we have repurchased 45.5 percent of total shares outstanding at an average price of $77.62 per share for $7,300,000,000 We have approximately $840,000,000 remaining on our $1,000,000,000 share repurchase authorization. We remain disciplined stewards of capital and have multiple paths for value creation to maximize returns.

On Slide 12, we show our 2024 outlook. We anticipate a regional financial impact from hurricanes Helene and Milton around $40,000,000 in sales, a relatively modest amount given our geographic diversification. For full year 2024, we have narrowed our range of expected total company net sales to be $16,250,000,000 to $16,550,000,000 We expect adjusted EBITDA to be $2,250,000,000 to $2,350,000,000 Adjusted EBITDA margin is forecasted to be in the range of 13.8% to 14.2%. We expect our 2020 full year gross margin guide to be in the range of 32% to 33%. This also remains in line with our long term expectation of 30% to 33% and normalized single family starts of $1,000,000 to $1,100,000 We expect full year 2024 free cash flow of $1,200,000,000 to $1,400,000,000 assuming average commodity prices in the range of 3.80 dollars to $400 per 1,000 board foot.

2024 outlook is based on several assumptions. Please refer to our earnings release and presentation for a list of these key assumptions. Moving to Slide 14, we recognize that 2025 is coming into focus as we approach year end. Like we did last year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions. I want to emphasize that this is not guidance, but these scenarios should help clarify our range of performance expectations for 2025 and demonstrate the strength of our best in class operating platform.

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 $15,400,000,000 Our base business adjusted EBITDA guide is approximately $2,300,000,000 at a margin of 14%, which reflects a minimal impact from commodities. For context, Slide 16 shows that our 2020 base business adjusted EBITDA was roughly $1,100,000,000 at 991,000 single family starts. And we are expecting better adjusted EBITDA at lower single family starts this year.

On Slide 17, we provide a bridge from our 2019 gross margin to the long term normalized midpoint of 31.5%. Our improved margin profile plus a greater mix of value added products, productivity savings and commercial benefits. As I wrap up, I am confident in our ability to execute our strategy and drive long term growth by leveraging our exceptional platform and financial flexibility. The Investor Day goals we laid out last December remain achievable assuming a return to normalize single family starts of $1,100,000 in 2026. With that, I'll turn the call back over to Peter for some final thoughts.

Thanks Pete. Nick goes by reiterating that we continue to execute. Our resilient business model allows us to win in any environment and this is evidenced by our strong gross profit margins and cash flow generation in the Q3. I'm confident in the long term strength of our industry due to the significant housing under build and favorable demographic trends. We are well positioned to take advantage of these tailwinds, which will help drive growth for years to come as we execute our strategy.

We are a key partner to our customers and continue to deepen our value proposition by helping them solve problems through our investments in value added products, digital tools and install services. Our proven playbook for growth, fortress balance sheet and robust free cash flow generation will help us continue to compound long term shareholder value. Even in an uncertain and challenging environment, we are doing the hard work now and building for the future. By continuing to grow in value add and install along with leveraging IP and technological development, we are arming our team members with cutting edge tools to continue to be the supplier of choice for our customers. By investing today, we are exceptionally well positioned to win in the future as the market continues to recover.

Thank you again for joining us today. Operator, let's please open the call now for questions. As a reminder, with a lot of questions this morning, please limit yourself to one question and one follow-up.

Thank you. We'll take our first question from Matthew Bouley with Barclays. Please go ahead.

Good morning, everyone. I want to offer my congratulations and best wishes to Dave and best of luck to Peter and Pete. So for my first question, I wanted to touch on your growth versus the market into these 2025 scenarios. So kind of looking into the second half here, I think the way you guys outlined the guide is you obviously reduced the revenue guide by a bit while holding the end market guide. So I'm curious around your balance of share and kind of how you're thinking about that in the near term.

But then as you draw it into those 25 scenarios, it looks like you're talking about your growth relatively similar to the starts numbers. So I'm curious how you're thinking about your growth relative to market as we get into 2025 as well. And if some of these headwinds are starting to abate any visibility to that. So I'll stop there, but thank you guys.

Thanks, Matt. Yes, there's a lot in that question. So a couple of factors, I would say where we are today, we have certainly seen the choppiness in the market. There wasn't a big relief rally when interest rates were cut, mortgage rates didn't necessarily behave as everyone was hoping in terms of a quick fall. And I think buyers have been appropriately or inappropriately nervous about both rates and the election.

So it's been a little choppy. I think we've seen that. We've been watching it all year, still performing well. I think the business is still competing well, taking advantage of opportunities. We're investing.

Those things have led to, I think, some solid performance on our part, but we have certainly faced headwinds. We've been hopefully pretty what you see is pretty open about that. The value of these homes has fallen. That's really the biggest disconnect when we look at what starts have done and what our sales have done, particularly in that single family core organic category. That doesn't mean we're not happy and competitive, but certainly it's been challenging out there and we've talked about that.

As we think about what that means into the Q4 and into next year, I think broadly speaking, it's mixed out there. You've got markets that are doing quite well. They're sort of bouncing up and seeing some green shoots starting to perform. We've got other markets that have struggled and seen headwinds and seen a little bit of excess inventory and builders are reacting in a thoughtful way we believe to managing that. So our guide for the Q4 is certainly focused on the visibility that we have into the market, the conversations we're having with customers.

It's not a bad market by any stretch, but it's one that has certainly seen some challenges, not at all helped by the weather disruptions that we've seen. As we get into 2025, it's early days. We've been looking at the commentary from the economists. We've been talking with our customers. It's a bit of a mixed bag, some doing better than others.

We think there'll be a bit of a differentiated reaction as rates are cut. We expect there'll likely be at least a couple of more. We think mortgage rates will continue to settle. That will have different advantages to different builders out in the market. So this is what we're seeing today.

There's certainly new news. Some of the performance announcements over the past few weeks have shaped our opinions as we go forward. But we thought like last year, this is a helpful starting point for helping people understand what we're thinking based on what we see today.

Got it. Okay. Thank you for that, Peter, and for addressing my long question there. Second one, the gross margin guide, I just wanted to confirm that given where the guide is, that you're still looking at roughly 31% as the exit rate for 2024. And again, obviously, we can see the margin numbers in your 2025 scenarios.

But between some of the pluses and minuses, productivity, value add, install versus some of the competitive dynamics out there, how are you guys thinking that 31% could drift one way or the other as you go through 2025? Thank you.

Hey, Matt. Thank you for the question. We're seeing a headwind as we exit 2024 of about another 100 basis points from the year to date average margin. That 100 basis points pretty consistent with what we said last quarter is half of it's made up from the multifamily normalization and the other half from the core business normalization. It is a competitive environment.

We're going to continue to compete, especially on the commodity products. With the install, install has been a favorable result for us in 2024 and it continues to be a good arrow in the quiver and we'll continue to compete every day and we expect to exit right around

Overall, we're certainly very pleased with the margin performance. Despite the challenging market, we've seen customers really continuing to benefit from the value added products and services. That part of our business has certainly stayed strong, stayed resilient, and it supported our margins in an environment where volumes are and values are down a little bit.

Got it. Okay. So you said 31.5% is the exit rate. So I'll leave it there. Thank you guys.

And we'll hear next from Charles Perronvitchey with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone. First of all, congrats Dave, Peter and Pete on the promotion and retirement. Well deserved. Maybe if I can go first to going back to Matt's question on the 2025 scenario, just want to make sure that we understand this correctly.

Looking at the base in both case scenarios, it implies approximately 20% incremental EBITDA margin in 2025 once we remove the $200,000,000 multifamily headwind. First of all, is that right? And as you see things playing through next year, how do you see the ability to drive the gross margin versus the SG and A leverage across those scenarios? And just to follow-up as well, do you see the deceleration in the sales that you've seen through 2024 in terms of the content per home as stabilizing and expecting through 2025 to be roughly consistent with what you see today in those scenarios?

Thank you, Charles. Appreciate the comments and the questions. So I would say the numbers and the performance of the business around margins in particular, there's a lot going on there, right? With the early look at what we have on the table, I think what it reveals is continuing performance in the areas that you'd expect us to deliver. We expect to see improved performance as a result of productivity initiatives.

We continue to see the strength around the value add. We continue to look for opportunities within that productivity category to drive both gross margins and EBITDA margins. That is, I would say, a core part of our operating model as a business and something we feel good about as time progresses. The dynamics around how the market will perform next year in light of the sales volumes in the various categories, I think broadly speaking, we continue to see weakness in multifamily. I would say our sense of it is it's stabilized, but it's been a big step down from the peak, but gotten to a level where we believe we can hold here and hopefully start to see some recovery.

Timing will depend on the dynamics of the market. Single family is a dynamic that's different between the types of builders as I mentioned earlier, but certainly one that we think is directionally headed in a positive way. We continue to believe in the strength of the market, the desirability of new homes and the industry's ability to deliver those. We think there's a lot of pent up demand and we are well positioned to help builders deliver and do it in a very efficient way. This again early days on this guide, but for 2025, but we think those scenarios can help add some color in that regard.

Okay. That's helpful, Peter. And maybe following up, wood product prices and lumber in particular have been trending higher over the last couple of months with the improving housing outlook for 2025 suggesting potentially more upside. I guess against this, how are you positioning your inventories in the business? And how do you see this recovery in commodity prices affecting demand and competitive dynamics across the different value add products that you have in your portfolio if this ongoing upswing persists in 2025?

Yes. So commodities continue to be an important part of what we do, although we have much smaller than it has in the past. It's nice to see the prices bouncing off the bottom. I'd say that below 400 window that we were in for a while was a bit on, I would say, unpleasant more so for the mills and delivery on the commodity side than for us. But certainly, we like to have a healthy sector in the commodity space and that lumber, the dimensional lumber in OSB space in particular.

We have seen a little bit of a boost. I think it's early days and I would highlight the fact that while new construction is an important driver of demand in that product category, R and R, the repair and remodel market is a far bigger influence. So I think that's where if I'm looking for support and tailwind in that category, that's an important factor to keep an eye You hit the nail on the head, it will certainly be a tailwind for sales and for margins as we see better absorption of our overhead costs, if that continues to increasing costs. Although as always, we keep a close eye on affordability. We want to balance there.

We don't think any of us want to return to the $13,000,000 to $1600 lumber days. That was pretty dysfunctional. So a modest increase is I think healthy and good to stabilize the market.

We'll hear next from Mike Dahl with RBC. Please go ahead.

Good morning. Thanks for taking my questions. Congrats again to Dave, Peter and Pete. I want to start with gross margins and maybe a 2 parter on both the contributors to the quarter and then thinking about that 4th quarter comment. I mean, when you look at the outperformance in gross margin in the quarter, how would you bucket it out in terms of what whether or not there was some benefit from the rising wood based product costs in the quarter versus maybe give us a sense of kind of on the recent M and A, whether the margin accretion from that or install, like if you could quantify any of that or kind of digital, really just what the drivers are?

And similarly looking into 4Q, it seems like your outlook slightly better than it was before. So if you can talk to those contributing factors or any quantification there, that would be great.

Good morning, Mike. Thanks for the question. With respect to increased performance and margin, we continue to see a normalization in the multifamily space. We continue to have positive uplift from productivity that we continue to deliver. And the rest of it is mix and mix within the core business and it continues to deliver resilient margins better than what we had expected originally when we gave guidance last quarter.

As we look forward to Q4, we continue to see margin normalization in the multifamily, which is a broken record and we continue to share that each quarter and some continued pressure and normalization in the core business due to the competitive environment that we're still in. And part of it's going to be some of the seasonal build and we'll see some of that volume kind of shoulder off as we exit the year.

Yes. I think Pete's right on in terms of the key drivers. We continue to be under a bit of pressure on the competitive dynamic. You'll see some seasonality. But I think in general, what you're seeing is the continued strength of the core product offerings and the value add in terms of something that we have made a core part of what we do and has continued to be strong.

Got it. Okay. Thanks for that. And then my second question, it's on the 25 scenarios and I understand it is early days as you say. But when I look across your range of starts outcomes, I think some of the builders more recently have been a little more subdued in their outlooks than what some of these ranges would imply, certainly the middle or upper ranges.

And then taking into account some of the mix factors that have played out this year, it seems like your revenue guide might be suggesting that you actually go back to outpacing the starts environment. So 2 kind of big assumptions in there in terms of some improvement in the overall market and then some improvement relative to that. I was hoping you could talk to that more how you built that and whether or not there are some bigger moving pieces in terms of like, okay, well, you're assuming X for digital and like some carryover M and A or maybe just help us kind of bridge when you both how you thought about starts, but also then framing your revenue versus starts, what some of those other big moving pieces are?

Sure. I mean, I can provide a little bit of color. I won't go into too much detail, but you're right. There is a lot that goes into it. No question.

I would say the starting point is maybe where we're most maybe disconnected based on your comments and your concern about the overall starts. We at this stage of the game aren't folding in a lot of commentary. We're folding in mainly economist forecasts and the averages of the leading forecasters around the starts number. While an individual builder is certainly important and an important partner for us, there's no one builder that's going to move the entire market. So we generally will stay at the economist level forecasting for starts, especially at the point we're at in early November.

We do have assumptions in there for commodity prices, for the M and A carryover, for productivity. We've got certainly an expectation that we'll be able to gain share with some of the initiatives we've leaned hard into things like digital and install. And I think it's fair to say that our thinking around the average cost per start is aligning around it flattening out for the most part. We haven't seen continued decline. It's been more stable, I would say since mid summer.

On a year over year basis, we've certainly seen the comparisons and we've tried to call those out, but it hasn't been something that's aggressively moved down after the reset earlier this year. So that's another variable that's included. But like I said, early days, some high level analytics, we tried to be inclusive of the variables that we think are important. But as you know, this is a challenging game given how volatile things are lately.

Next, we'll hear from David Manthey with Baird. Please go ahead.

Thank you. Good morning and congratulations to everyone. My first question is a clarification on Slide 17. When you talk about productivity, does that capture both process improvements as well as scale? And then could you also define other commercial benefits just definitionally for us?

Gabe, thank you. I'm going to let Pete handle that one.

So within the productivity savings, that's process improvements. The scale that we get from the company really helps us leverage our knowledge and our expertise across the platforms. But the productivity savings is process improvement on how we do things and how well we're buying, how well we're manufacturing and how well we're operating on a daily basis. Within the other commercial benefits, without saying it, there's customer supplier terms. We've talked about in the past where we used to have longer fixed price contracts.

We've worked to eliminate those, shorten the duration so we don't get pinched or absorbing all the commodity risk. Our CRM tools that we put in place and how well we're managing our relationships with our customers and following through And that's where some of the scale is going to come into play. So you'll see that in the bullets on the side of that chart.

Thank you. And Peter Jackson, you might have just described this, but I want to be clear. You talked about the trends in single family housing sizes. And I'm just wondering, in those scenarios, are you assuming any improvement or deterioration for that matter in any of those scenarios? It sounds like you're seeing that trend basically flatten out.

That's right. Yes, there's a bunch of pieces in there. Certainly, square footage of the home being 1, but mix of products in the home value of those same products that are appearing in the home all part of that. But yes, we're expecting it to flatten out based on what we're seeing right now. A little bit of a lapping impact, but pretty modest.

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.

Builders FirstSource Q3 2024 Earnings Call Transcript | Fortune

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Builders FirstSource (BLDR) Q3 2024 Earnings Call Transcript

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