Good morning and thank you for joining Builders FirstSource First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. Michael Neese, Senior Vice President of Investor Relations for Builders FirstSource will now provide the company's opening remarks. Please go ahead, sir.

Thank you, Brad. Good morning and welcome to our first quarter of 2021 earnings call. I hope you and your families continue to remain safe and well. With me on the call are Dave Flitman our CEO; and Peter Jackson, CFO. Today, we will provide an overview of a record first quarter results, discuss the integration highlights, and share how we are well-positioned for continued success in 2021 and beyond. We have provided GAAP results which include BMC in Q1 of 2021 and standalone BFS in Q1 of 2020. We also provide a pro forma result as if we owned BMC in Q1 of 2020. A slide deck and this morning's press release are available on our website at investors.bldr.com. The results discussed during the call will 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. The reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they were useful to investors can be found at the back of the earnings press release and in the 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 statement section in today's press release and our SEC filings for various factors that could cause our actual results to differ materially from forward-looking statements and projections. With that I'd like to turn the call over to Dave.

Thanks Mike. Good morning everyone and thanks for joining us. The positive momentum in our business continued with our record first quarter results. I very much appreciate the efforts of our more than 26,000 team members who are working tirelessly to provide best-in-class service for our customers in these unprecedented market conditions. They continue to grow our business while meeting the needs of our customers in a highly constrained supply environment. We are working closely with our customers and suppliers to reduce cycle-times amid material availability constraints and capitalize on our nation's very strong demand for single-family residential housing. And in that context, the power of our platform is evident as we are seeing rapid growth across all product lines and I could not be more pleased with our team's results. I'll cover five important topics on today's call; first, the positive macro and residential housing environment; second, our record first quarter results and what drove our out-performance; third, our excitement about how we think about our core business and a brief word on commodities; fourth, an update on our latest acquisition and the strength of our M&A pipeline; and finally, an update on the integration of BMC, which is running ahead of our plan. I'd like to take just a minute and share why I remain bullish on our industry and our company. First, let's look at residential housing. According to Freddie Mac the US housing market is 3.8 million single-family homes short of what is needed to meet the country's demand, representing a 52% increase in the nation's home shortage compared with 2018. The gap has widened significantly over the past two years as builders have struggled to keep up with demand in part due to labor and material supply constraints. These challenges play to our strengths including our structural component and value-added offerings. In recent years we have seen accelerating success in these areas and we believe there remains a tremendous opportunity for demand and demographically fueled growth ahead of us. In terms of demand, according to the US Census Bureau, total housing starts jumped 19.4% in March to a seasonally adjusted rate of 1.74 million. The National Association of Home Builders reported that this is the fastest pace for combined single-family and multifamily construction in 15 years. There were only about one million existing homes for sale at the end of February, a nearly 30% drop compared with February 2020. That is the largest annual decline ever and the lowest supply on record. This should bode well for a strong construction pace of new housing starts as we move into the summer season. Improving housing starts, historically low mortgage rates, and a shift towards single-family living are all positive trends that remain tailwinds for our products and services. We now operate in 47 of the top 50 and 86 of the top 100 MSAs. Many of which are not only among the largest, but also some of the fastest-growing MSAs in the country. Our ability to manufacture and assemble structural components at our offsite facilities provides an integrated one-stop solution that helps solve the most challenging needs for our customers; labor availability and job site productivity. As a result of this area of strength and innovation, we expect to continue to outpace market growth for many years to come. Now, let's turn to our record first quarter results. We delivered another very strong top and bottom-line quarter and importantly our organic growth again outpaced the market as we continue to gain market share. On slide three of our investor deck, on a combined basis for BFS and BMC, total sales grew 54% to $4.2 billion. Our core organic sales growth increased 22%. Gross profit increased more than 50% and adjusted EBITDA increased an impressive 187% to $455 million. These record results reflect the favorable housing market, our industry-leading position, our ability to deliver value, and a continuation of our disciplined approach to cost management. We firmly believe our core organic sales growth is sustainable for the long-term and we are positioned for outperformance through economic cycles. We have received questions from analysts and investors over the past quarter about commodities wondering what our underlying growth would look like in recent years if we normalized the commodity side of our business. Holding commodities flat at $400 per 1,000 board feet, our estimates show we have outpaced market growth by 20% from 2018 through 2020 resulting in a roughly 8% revenue CAGR. And that momentum continues to accelerate in the first quarter of this year. Yet another way we have consistently demonstrated our ability to far outperform the market and take advantage of our differentiated product platform. Now, as a combined entity, we have the geographical presence and even stronger platform to further advance our strategy. Turning to M&A, we announced today that we closed on our most recent acquisition earlier this month, John's Lumber, a premier building materials supplier serving the largest housing market in Michigan. The acquisition provides enhanced scale that will benefit our existing 14 locations in the State. The company generated approximately $49 million in net sales for the trailing 12 months ended March 31st 2021. We're excited to welcome the John's Lumber team members to the BFS family. With our very strong balance sheet and robust free cash flow generation, we will continue to reinvest in our business while actively pursuing M&A opportunities. As you can see on slide 5, we have identified over 500 targets and we will continue to be a consolidator in this industry for a long time to come. Finally, I'd like to update you on the BMC integration. Our efforts are ahead of schedule and we remain highly confident in achieving three-year cost synergies of $130 million to $150 million. For 2021, we expect to meet or exceed $60 million to $70 million in realized savings. We saw merger-related cost savings begin to accumulate in the first quarter and are accelerating in the second quarter. We continue to drive our internal operating system, which will allow us to accelerate productivity, improve processes and continue to grow our margins, while servicing our customers more competitively. We believe we can continue to help offset cost escalation with our offsite manufacturing processes and other value-added products including trusses, millwork, wall panels and ready-frame. We are also seeing positive momentum in our growth efforts, as our teams work together to leverage our scale and product strengths. The early returns are reflected in our exceptional first quarter results. These are exciting times and we are continuing to build our world-class home building distribution platform that positions us as a partner of choice. Before I turn the call over to Peter, I would like to highlight one of our many valued team members. May is military appreciation month. Throughout the month, Builders FirstSource is celebrating our many veterans and profiling several of their success stories. One such story focuses on Jason Bennett, the General Manager of our De Pere, Wisconsin lumber location. He joined BFS five years ago, after serving for 23 years in the US Army. As a First Sergeant, Jason was responsible for 200 soldiers. He ensured their safety, welfare and training while on active duty roles. And he learned key management skills that would last long after his military career. When it was time to retire from the military, Jason looked for a company that shared the values instilled in him by the Army. And he found that in Builders FirstSource. Jason joined BFS as a delivery manager in Colorado Springs and immediately fit right in. He worked his way up to operations manager and then general manager. He led his team in adopting new logistics technologies, specifically our delivery and dispatch management system and was able to increase delivery efficiency by 20%. Jason is now a general manager in Wisconsin where he focuses on the safety of his team members and customers. His location continued as accident-free street and recently hit four years without a single recordable incident. We are proud to be a place where veterans feel valued and where their skills and experience translate into a rewarding civilian career. We're grateful for veterans like Jason and how they've served our country and are pleased to have them as part of the BFS family. With that, let me turn the call over to Peter to go through a detailed look at our Q1 results and our 2021 updated financial guidance.

Thank you, Dave. Good morning, everyone. I too would like to thank all of our team members for delivering fantastic results in this unprecedented environment. Your focus and execution is frankly, incredible. I'll cover three topics with you this morning. First, I'll review our combined first quarter results compared to the pro forma results from the prior year quarter. Then, I'll discuss our free cash flow and strong balance sheet. And finally, I'll provide updated guidance on the markets and our forecasted results for full year 2021. Net sales of $4.2 billion for the quarter increased 54.1% compared to the combined pro forma prior year period. Value added core organic sales increased by 22% led by 41.5% growth in our manufactured products category and 7% growth in our windows doors and millwork category. Commodity price inflation increased net sales by 31.3% and acquisitions contributed 2.4% to net sales growth. In Q1, we experienced stronger than expected demand in single-family starts across the country. And we are well positioned to support that demand. Our strong relationships with suppliers enable us to bridge product availability constraints and our value-added products and services provide relief from labor shortages. Our Q1 gross profit of $1.1 billion was an increase of 52.1% year-over-year. Gross margin of 25.6% was slightly better than expected but decreased 40 basis points compared to the prior year period, primarily due to a one-time purchase accounting adjustment. In light of the dramatic increase in costs this year, especially in commodities, I am pleased with our performance driven by the disciplined execution of our procurement and sales teams. SG&A increased 35.3% in the quarter, driven primarily by higher variable compensation related to the increase in profitability as well as depreciation and amortization and one-time charges, primarily related to the BMC merger. Excluding these variables, underlying SG&A decreased by 2.6%. SG&A as a percent of sales decreased 270 basis points to 19.7% and it demonstrates cost leverage on higher sales and continued strong expense controls, which more than offset higher variable costs. Adjusted EBITDA increased 187% to $455.2 million, driven by strong demand in single-family new constructions, commodity price inflation and cost leverage. Our adjusted EBITDA margin improved to a record 10.9%, which was up 500 basis points compared to 5.9% in the same combined pro forma period a year ago. Leverage on sales along with cost management and early synergies drove margin expansion. Core organic value-added product sales were especially impactful due to its rapid growth and higher average margins. We are in the early innings of our cost synergies and pricing opportunities. And we are accelerating our synergy capture and leveraging our combined capabilities. Let's turn to our first quarter cash flow, which was an outflow of $237 million due to our normal seasonal timing of working capital. In the quarter, we used $200.5 million in operating activities, primarily related to investments of over $500 million in net working capital. At the end of the first quarter, our pro forma net debt ratio was approximately 1.2 times our LTM adjusted EBITDA. We have no long-term debt maturities until 2027. And our total liquidity was approximately $1.1 billion providing us with significant financial flexibility. Our strong first quarter results are a testament to our category-leading team and product portfolio, meeting the demands of the strong market momentum. While the impact of increased commodity costs is evident in our results, what is most important to us is that we continue to generate exceptional and sustained growth in our core business with a strong margin profile. The focus of our business is in higher margin, specialty and value-added products and services. Our portfolio of efficient problem solving products such as trusses and millwork continues to grow faster than the overall market. These specialty and value-added products and services have improved our margins over the years, as we help our customers solve labor availability, speed of construction and quality challenges on the job site. And as we have continued to consolidate the industry, we have created a consistent trend of improving operations and driving above market growth, while delivering accelerating EBITDA fall through. We have clearly created a competitively differentiated platform that can drive above-market growth, accelerate that growth with M&A and deliver fantastic bottom line results in any market environment. Let's turn to our 2021 full year outlook. We continue to see strong underlying demand in both new housing construction and remodeling. As we anticipated, builders are seeing such strong demand, that they are limiting sales in certain communities to keep from increasing backlogs due to material and labor availability constraints. Consistent with our first quarter results, our strong organic sales continued in April. Based on our Q1 performance, our positive conversations with customers, our realized synergies with the BMC acquisition and a better view of our pricing and cost environment, we are increasing our full year 2021 outlook. We expect full year net sales to grow to a range of $16 billion to $17 billion or approximately 25% to 33% over our 2020 pro forma net sales of $12.8 billion. This is driven by an increase in single-family starts as well as record commodity prices. We expect adjusted EBITDA to be in a range of $1.75 billion to $1.85 billion or approximately 64% to 73% over our 2020 pro forma adjusted EBITDA of $1.07 billion. Of the $500 million increase in adjusted EBITDA guidance from last quarter, roughly half is driven by organic growth and share gains, while the other half is driven by higher commodity prices. As a result of that outperformance, we are increasing the midpoint of our free cash flow guidance by $550 million to $1.4 billion. Our outlook is based on several assumptions which are outlined in the earnings release including low double-digit growth in single-family starts across our geographies. High single-digit to low double-digit decline in multi-family starts and low to mid-single-digit growth in R&R. Our commodity assumption provides a five to 15% lift to our top line growth. Commodity costs remain high with recent futures trading over $1,600 per thousand. While levels remain elevated so far this year, we anticipate commodity prices to normalize by the fourth quarter. For some added context if commodity prices were to stay elevated at current levels through year-end we would expect to exceed our current guidance. Turning to capital allocation, we are committed to reinvesting in the business for maintenance and growth. We are focused on increasing our capacity through our list of internal CapEx projects and we have a solid pipeline of M&A candidates. As Dave mentioned, we have already executed one bolt-on acquisition this month and we are looking at several more. We continue to assess capital allocation options in light of our accelerating cash flow. Our local field teams are focused on delivering strong core organic growth and we continue to proactively manage expenses across our distribution footprint. We will meet or exceed our cost synergy goals of $60 million to $70 million this year and also deliver on our operational excellence initiatives. Overall, we are continuing to build a world-class distribution network to deliver exceptional value to our stakeholders. We have never been more excited about our strategy and our future. Let me turn the call back to Dave for his closing remarks.

Thanks, Peter. With underlying demand the strongest it's been in nearly 15 years coupled with the broad-based product supply constraints and our country's continued recovery from a horrific pandemic, these truly are unprecedented times. I couldn't be more pleased or proud of how our team has responded. We delivered core organic sales growth over 20%, while also successfully managing through one of the largest mergers this industry has ever seen. We have the right strategy, we have the best team on the field and we're executing at a very high level. Our future is bright, and I'm highly confident in our ability to continue to outpace industry growth while operating in a $120 billion addressable market. Thanks for joining us today. And with that Brad let's open the call for questions.

And we'll take our first question. This comes from Keith Hughes with Truist.

Thank you. Many good things in this release. I guess the one that jumps out are some of the success you've had in manufactured products. Could you talk about what went well during the quarter and what's your outlook for those products in light of this revenue guidance that you've given us?

Good morning, Keith. Thanks for the question. Yes, as you point out, we've had a lot of success in our manufactured products and I think it goes back to the success that each company was having individually. It was part of our strategies. It was something that we focused on historically. And what we've seen over the last few years is increased penetration and adoption by the home builders, because it's solving those problems we've talked about. It helps them build the homes faster. It helps them manage the job site more effectively and just be overall more productive. And we're excited about it. As you pointed out, our organic growth in components was about double what our core organic growth was this quarter which was outstanding. We expect that will continue. We continue to see rapid adoption in these component categories. No one is better positioned than we are in terms of being able to supply the needs of our customers in this area across the country. And so, we're excited about it.

Yes, so we've added shifts, we've added facilities and we'll continue to go down that path absolutely.

Okay. And one other question, gross margin. You talk about the purchase accounting adjustment in the quarter, as you look within this guidance range gross margin, what would it look like for the year based on what we know today and the numbers?

Yes, I think we're feeling pretty good about being able to hold stable. Maybe even see a little bit of tailwind, depending on the trajectory. It's a dynamic market as you know. Price increases not just in commodities, but across the board have been very impactful, but in terms of our discipline and our structure around passing through those prices, we've done a good job. I'm very proud of the team and I think we can continue to perform at this level. I think it's something we're very proud of.

Okay. Thank you.

Thanks, Keith.

And we'll take our next question from Matthew Bouley with Barclays.

Good morning. Congratulations on the results. I agree with the prior comments that there are many good topics to discuss. My first question is on M&A. It was notable that you included the M&A opportunities slide in this morning's presentation, reminiscent of the slide you had at BMC when you completed the acquisition of John's, which we thought the integration might preclude further M&A into 2021, so congrats on that as well. How have you continued to cultivate the pipeline you are now disclosing amid the integration, given your capacity to pursue deals? And does this commentary suggest a potentially more programmatic approach to M&A on the horizon? Thank you.

Yes. Great question, Matt. Thanks for asking that one. So as you pointed out, it's been a part of our strategy in both legacy companies. And as I said on the last call and I'll say again here, this integration between BFS and BMC could not be going better. Our teams have come together extremely well. You heard our comments on the synergies. We're ramping those up. We're having great success. The teams have meshed together extremely well. And obviously, based on our first quarter results, we've stayed focused on our customers and meeting their needs, which is exactly what we needed to do. Importantly, the fourth pillar of our strategy is M&A, and we have an extremely strong balance sheet. As we've talked about, we have a relatively small overall share in a very large market. It's an important part of our strategy. We've got the wherewithal and the focus to continue to drive acquisitions and as you pointed out in my comments this morning, we're focused on it.

Wonderful. Okay. Well, helpful color there. And then, the second one I wanted to ask on manufactured products again, because at a high level, you would say it's not a coincidence that with framing lumber prices this extreme in the near term that may foster adoption of prefab components. My question is, is that too simplistic, or have you found that into this spring that builders are actually coming to you even more so now looking for options to address this issue and what you can do for them on the component side? And really longer term does something like this you think impact the penetration of manufactured products going forward? Thank you.

Sure. I think, what you've seen is steady adoption of these component categories over the past several years in both legacy companies. Obviously, we've got a very strong team on it. As Peter has mentioned, we've added capacity in several locations across the country. You'll continue to see us invest not only in component manufacturing, but automation of those facilities to make sure that we're meeting the demands of the marketplace and we're providing as high quality and consistent product as possible. To your question, I think the adoption continues to accelerate. Some of it is probably related to what's going on with commodities near term, but more importantly, and I think more broadly, what we're seeing is the customers that have experienced the benefits of our component offerings are adopting those more rapidly across their geographic footprint. And that's probably the greater tailwind in what we're seeing here over the near term. I do believe it's sustainable. I believe we'll continue to convert the market this way and we'll continue to invest in this category of the business.

Thanks, guys. Yes, that’s exactly what I was wondering. So thank you for those details Dave and congrats and good luck this year.

Thanks a lot.

Thank you. And we'll take our next question from Mike Dahl with RBC Capital Markets.

Thanks for taking my questions. My first question: I'll keep probing on manufacturing and the tremendous results there. If you were to run rate or analyze the levels you're seeing today, what utilization rate would you be at across your components footprint? And can you elaborate a little more? You talked about adding shifts and investments. Could you refresh us or outline some of the incremental steps you're taking, and if possible quantify any additional investments and plants that may or may not have changed over the past few months in terms of plans for 2021?

Sure. Yes, for context, we've got well over a hundred facilities. We've opened between the combined entities around 13 over the last few years. We've continued to invest. In terms of the capacity utilization, a recent analytic on a single ship baseline would say, we were at about 75% capacity. And Mike, we've talked about this before, that's a tough description because that's not an average. So you've got some facilities that are below and some above that number, but we certainly have a really nice trajectory right now in terms of being able to leverage those new facilities, get them more fully ramped up, but also be able to do things like add second shifts which as you know, it doesn't quite double, but nearly doubles the capacity of any given facility. Also adding lines, also adding automation equipment to increase the productivity and capacity of any one of those lines, that's been the primary way that we've responded. More recently, our Riverside facility in California has come up and running. We've been able to add capacity, other facilities at a number of other facilities double-digit facilities around the country through new equipment. So certainly, it's an area that we've gotten pretty good at extracting more volumes, but at the end of the day, our forward look is absolutely adding footprint. New locations around the country, the adoption in certain markets in particular is very encouraging and we see that as a long runway of strength. Admittedly, the adoption is good, but the incremental share of how much of the home is built off site is continuing to grow and we think the trend continues to come our way with those labor costs going up, which inevitably happens in a market like this. But every time a cost goes up, those efficiency savings that we provide with manufactured products are magnified. We can save 10 board feet of waste on a particular truss. It's more meaningful at 1,600 than it is at 400.

Peter's right on and just add an exclamation point to that. We talk about our number one priority for uses of capital would be reinvesting in our company. The first portion of that goes to maintaining our facilities and making sure our people have what they need to get our products to the customers. The second order of priority is this area our value-added capabilities and continuing to invest heavily in that area of the business.

That's great, very helpful. Second question much as I'm tempted to push you on some of your conservatism around commodities I'll switch over to the capital allocation question to your point Dave. There's, obviously, first and foremost investments for organic growth. You talked about the M&A pipeline a bit, also but if we look at your cash flow and your leverage profile you're on track to be zero-net leverage by year-end if not in a net cash position barring future M&A. And so when you look at that pipeline as impressive as it is, it seems like there's going to be plenty of excess cash flow available beyond your organic investments, beyond M&A. As you think about priorities for that use of cash and comfort level in terms of then actually implementing a plan whether it's buybacks, dividends, can you just give us a little more color or an update on how you're thinking about that? There just seems to be an awful lot of dry powder.

You're right Mike. We have a very strong position right now. Our cash flow is tremendous. We've talked in the past about wanting to maintain a fortress a bulletproof balance sheet. I think we have every reason to be confident in that right now based on what we've done and we'll continue to stay vigilant. We are going to generate a tremendous amount of cash and I'm very specific when I say going to because as you see in our results now we've borrowed money this quarter so we're not sitting on cash. This is not a burning platform. We are absolutely looking at if we continue to work with our board, come up with strategies that we want to put to work in terms of putting all of our capital to work in an efficient way. We've talked in the past about being committed to retaining some level of leverage in order to maximize shareholder return. We will stay committed to that. We just don't have any new announcements today.

Okay. Appreciate it. Thanks for the color.

Thank you.

And we'll take our next question. This comes from David Manthey with Baird.

Yeah. Hey, good morning everyone.

Hi Dave.

Hi Dave.

Clearly you raised your guidance for single-family housing from high single digits to low double-digit growth and it's safe to say that you're not seeing any signs of demand destruction because of the high lumber prices I should say. And then what I'm wondering is, are there any changes in tone of the business in any other way? I'm thinking like what you're seeing in size of homes or stress on custom home to other balance sheets, or anything that's beyond the obvious here, sort of, a tangent something else we should think about as it relates to these unusually high lumber prices?

Yeah, that's a great question. We are keeping our ear to the ground on that, because obviously we're making sure that our optimism at this point isn't misplaced. The short answer is no, the demand is tremendously strong. One of the things we said in the last call that I think was met with a little bit of skepticism is this idea that there's going to be a limit on how many homes builders can build even though there's virtually unlimited demand for those same homes. The level of announcements I don't remember, which analyst had put it out there, but 54% of home builders have announced constraining sales in some number of communities around the country. They're recognizing an inability to deliver homes at that high level. That again is really a sign of that strong demand and is far less about suppression of that demand by the level of prices as we see today. Some of these prices will normalize on their own and that's definitely a theme of ours in terms of commodities that we do expect it to normalize over time. But in the meantime, it is certainly a matter of responding to that, continuing strong demand, keeping up with those shortages around the country and staying disciplined in our management of both the flow-through to maintain our position as a premier supplier but also to maintain our management over prices and make sure we're fairly compensated for the work we're doing but strength across the board.

Okay. And then when you noted that you're adding shifts, some other companies we talked to are saying that they're competing for talent with the X-Box right now, what are your views on labor? Not so much your customers' labor situation, but your own labor in terms of your access to adding people today?

I think that's pretty consistent over the years. It's regional. We haven't seen widespread inability to get people—the usual pockets of demand drivers, certain members of the truss manufacturing world challenging in certain areas. Now there's things you can do. Certainly we're doing well. Our profit sharing and bonuses are motivational to folks. We like our driver pay models in a lot of markets and we're continuing to enhance that certainly looking at shift differential. So there are things you can do to react in a measured way that allows you to evolve and respond depending on how the market is doing. If things pull-back, we could pull-back. But we haven't had any massive issues to date—pockets here and there.

It seems like these trends are playing to your favor, which sounds good. So thank you. Best of luck guys.

Thank you. And we'll take our next question. This comes from Ketan Mamtora with BMO Capital Markets.

Thank you for the question. I want to come back to the value-added products you'll have as you look out over the next three to five years. Clearly the housing backdrop is supportive. How do you see that mix evolving from the current products that are up 42% right now, and within that where do you see the most opportunity? And related to that, how does it shift your margin profile?

Yeah. So it's a great question. This is a dynamic time. This whole commodity pricing being at record levels certainly has thrown us a curveball. I would say that the mix of the business just because of the mathematical change has shifted towards commodities. It's probably roughly 50% at this point, based on the increased prices. On the long-term though, the way we see the dynamic is very similar to where we were 12 months ago. And that's that value add continues to be an increasing part of the business over the last couple of years, at least it's been the biggest component of the business with value and specialty making up 60 plus percent of what we sold in an average year. We think that continues. We think the trend of the broader product portfolio as well as the emphasis and the dependence of the greater homebuilding market on this offsite approach, given its efficiencies, given its ability to be safer and cost less in total, we think that continues to grow. There kind of is no topside to that. We talk about BFS back, as we came out of the great recession before the Probuild merger was about 50% value add, certainly think that's an achievable goal in the long-run. But again, this is a long game we're playing.

I think what you've seen over time is both legacy companies had a strong emphasis on pricing models and getting more efficient at how we take price to the marketplace. And then, secondly, that margin profile as Peter pointed out will continue to improve, based on our penetration of value-added products which we see no end to.

Got it. That's very helpful. And then, just one other clarification, between your prepared remarks, you kind of referenced your expectation of lumber prices kind of normalizing by the fourth quarter of 2021. Is it fair to say, kind of normalized, you're looking at something sort of in the historical average range of 400? Is that the right way to think about it? And I understand kind of, prices are very volatile, but I'm just curious at a high-level.

Yeah. That's how we think about it. That long-term average feels like the reference point that we need to continue to communicate against, recognizing that there's a displacement right now in prices, displacement in demand and supply, probably the primary issue being supply. But eventually, it'll likely go back to a more normalized long-term average that $400 range. It's really just a matter of, when. Are we right on that? We know we're not right. That's the nature of commodity forecasting. So we figured we'd give you a sustainable, consistent target to head towards, when you think about our numbers and you can adjust as you see fit in terms of your expectations of lumber prices.

Got it. That's very helpful. I understand it so well. Thank you.

Thank you.

Thank you. And our next question comes from Reuben Garner with The Benchmark Company.

Thanks. Good morning and congrats on the results and the outlook guys, very impressive.

Thanks Reuben.

So question, manufactured products has been hit pretty, pretty hard so far question-wise, the 40 plus percent growth that you saw in the quarter versus the I think you said 7% in windows, doors and millwork. Is that just a function of timing of when those products are used in the job cycle? Is that just kind of showing you how maybe there's an acceleration in use of your manufactured products or is there going to be a backlog of activity that you're going to see, kind of an acceleration in the windows and doors as you move through the year?

Yeah. Good question. I think it's twofold. I think the whole build-cycle, as we've seen completions get extended out here, because it's just been extended. So it's just changed the point at which our millwork is brought into the home. And then secondly, we've talked a lot about this Reuben, the supply constraints have been hit pretty hard in the windows and door piece of the business. And we're getting what we need, but it certainly has had an impact on our growth for the near-term. We expect that it will correct here through the course of the year.

Perfect. And then, I love the comment about, kind of normalizing lumber and you guys are growing at an 8% CAGR in the last few years. What did the flow through look like on kind of a normalized basis? Is there a good way to think about that?

In looking at that analysis historically, we did get kind of a better sense. And you've heard us Reuben talk about how we've got 12% to 15% fall through is sort of our standard incremental around sales. What we've noticed in these numbers is that, the inclusion of the value add mix, the inclusion of the operational excellence has actually driven that a little better. So we're in that kind of high-teens range for the fall through related to our incrementals, when you include all of those components the growth of the business. And then specifically to point out right now, the nature of commodities and the way that the market has changed, the constraint, the velocity of everything that fall through is actually a little higher. That's probably right around 20% right now. So, pros and cons of that, certainly taking advantage of it right now, but something to think about in the long-run.

Wow. That's very helpful. Thanks guys, and congrats again on the quarter. Good luck as we move through the year.

Thank you, Reuben.

Thanks.

And our next question comes from Steven Ramsey with Thompson Research Group.

Hi. Good morning. Wanted to dig into synergies a little bit, since you're ahead of target, which is great. But maybe can you describe if that was, maybe some conservatism going in, what areas you're ahead on? And what is causing that? And then lastly there, do you see this as getting to your target synergy faster or potentially raising the total synergy target, as you make more progress?

Yeah, good question. I don't think we went into this intending to be conservative; that $130 to $150 million range is solid. And we're executing very well. And as you heard me say, the teams have come together extremely well. And what I think is benefiting us are two things: one is the cultural alignment of these two legacy companies—very, very similar. And then secondly, and perhaps to your question a little more importantly, is the experience that our teams have had in executing large mergers in the past. Our teams knew what to expect. We had very strong leadership that's been through this before. And we just got on with business. And so I think that's reflective of the early ramp-up that we've seen here, over the first quarter of work. We're excited about it. We can deliver more. We certainly will. But I would say, at this point, we're ahead of our plan and feeling good about the momentum.

Okay great. And then, last one on kind of a networking capital investment cash outflow there, would this have been a greater cash outflow without material constraints that you guys have seen and relative to the cash outflow, can't remember, if you discussed, how much of this was due to investment to get the synergies.

From a cash outflow perspective, the investment for synergies is pretty modest. We had talked about it being in the similar $130 to $150 range for expenses that, I certainly don't think, we're going to outspend that forecast either. Yes, the investment is really just in the incremental value of the inventory that we're maintaining, the normal increase in the amount of inventory that we would maintain at our yards in order to carry the increased level of business just seasonally. And then, probably, most importantly, at the end of the day, the incremental accounts receivable that ends up on the books at these higher price levels across the board. Would we otherwise have had more, if not for the material availability constraints? I think, the answer is, unequivocally, yes. I don't know how much more. I haven't really run the math on that but certainly, there are areas around the country where it's quite difficult to get the level of inventory that we would normally have, specialty products like OSB, for example, just extremely difficult to make sure you have what you need. And while we feel like we get more than our fair share, we'd sure like more.

Great. Thanks for the color.

Thank you.

And we'll take our next question from Trey Grooms with Stephens.

Thanks. This is actually Noah Merkousko for Trey and just want to say again congrats on the really strong results.

Hi, Noah.

So first, following up on, I guess, the answer to that last question. There's been a lot of talk of material constraints across the industry, but overall they don't really seem to be holding you back. So maybe if you could just speak to your outlook for lumber and other product availability with everything being so short and just how you're able to manage through that.

Yes. I think, to a large extent you're seeing two or three things happening right now. First of all, I think you're seeing the power and the strength of the platform that we've put together here with our unmatched geographic presence and the strength of our team. Secondly, I think, you're seeing the power of the strong relationships that we've built through both legacy companies with our suppliers. And they're doing their very best job to meet the needs that we have. And then third, I think, we have seen a shift in the marketplace where the builders, just given the significance and the broad breadth of the supply constraints, have been a little bit more brand agnostic, I think, to what they're putting into their homes, just driven in large part by the need. And then, given the access that we have to the broad base of suppliers and products, we've been able to meet those needs probably better than most. And we'd expect that to continue.

From a forecast perspective, we've talked about the inability of the broader industry to meet the massive amounts of demand. Noah, I know you know this, but for the broader group, we've talked about the seasonal capacity availability, that the shoulder seasons, by nature, offer more opportunity for rapid percent growth. We always would have expected a far higher year-over-year percent growth in Q1, candidly Q2 because of the COVID lapping and Q4, just because summer months always are max capacity every year. So we fully expect the ability to grow on a year-over-year basis to be suppressed as we get through those summer months. But that's already accounted for in our numbers. It's nothing new, but I think it's just important to keep in mind that those off season, if you will, shoulder season type of quarters will naturally lend themselves to eye-popping percent increases.

That makes sense. And then, just for my follow-up, on the pre cash flow guide, how much is expected from lower commodity prices flowing through to working capital?

Yes. So, I actually feel pretty good about that forecast, regardless of whether or not prices for commodities come down or not, just because of the way the math works. If prices come down, I'd spin off cash and if prices stay up I make more EBITDA. So that's a good number for us.

All right. Perfect. Thanks and good luck going forward.

Appreciate it. Thank you.

And our next question comes from Jay McCanless with Wedbush.

Hey, good morning everyone. My first question: I know you gave the growth rate on value add, but what was the value add as a percentage of net sales for this year and last year?

I'm not sure what the value add percentage was for the prior year.

Well, for this year and for the prior year.

So value-add a year ago, I want to say, was right around 40%, 41%. This year it drops to 36% or 37%.

36% or 37%.

So you lose a few bits. It grew fast, but that windows, doors and millwork pulls down the average. Where you saw the shrinking of the mix was really in the R&R. Like you'd expect, right? The R&R, the multi-family, some of those other areas that just don't keep pace right now with the single-family starts businesses or products.

Got it. And then I just wanted to clarify, the builders may be slowing down some of their sales, but they're not slowing down on the backlogs, correct? It's because what we've heard is that cancellation rates are way down and that the builders still have in general a pretty heavy backlog to fill out. Is that still the case?

No question about it. They're full steam ahead.

Yeah, those guys are full up. They're not pushing out sales because they need them. They're pushing out sales because they're full to the brim.

Okay. All right. That's all I had. Thank you.

Thanks, Jay.

Thank you, Jay.

Our next question comes from Kurt Yinger with D.A. Davidson.

Great. Good morning everyone.

Good morning.

Hey, Kurt.

I just wanted to start on commodities. How has this volatility in the current environment changed, how your customers kind of purchase a framing package? And what type of risk are you willing to take in terms of locking prices for a certain period of time?

I don't think it's fundamentally changed how people think about purchasing. I think there's certainly a bigger emphasis on making sure that they're staying efficient, which I think lends itself to some of this offsite manufacturing product model that we sell. I think there's also a willingness to consider substitution species and material substitution. We've certainly heard a lot more about that. It's an availability game, right? You're trying to make sure as well as a home buyer trying to make sure you get a house. But as a home builder, you want to make sure you're able to stay on some sort of a schedule. So the expectations, the ordering ahead for us it's making sure that we have a significant percentage of our buys that's on a contractual basis. So we make sure we're getting our place in line if you will. Historically, and I know you know this Kurt is that we've maintained a goal to keep a steady flow. We are going to be in the market consistently over time at our scale and our size and our demand around the country. We don't just sit on the sidelines for any meaningful period of time. That is true now that will continue to be true. I think that maintains our relationships with the mills in a very positive way. And we will continue to make sure we're building up inventory. You've got to be in this game for the better or for worse. We've talked about it in the past in terms of the fixed-price contracts. Certainly, those contracts have shrunk in recent months and year as a percentage of our total sales, but it's still I think it's representative of the type of commitment we have to our customers that we've got the balance sheet, we've got the credit, we've got the relationships. We're your partner that you want to rely on to be able to get to what you need for you to be successful and we're committed to having inventory to do that.

Okay. So to the extent that we were to see commodity prices roll over, you would still expect some kind of short-term benefit just from the trend in prices. Is that fair?

Yes. But certainly less than it used to be, right. With a reduction in the amount of fixed-price contracts, you'll see less suppression on the way up and less expansion on the way down of the gross market percent.

Okay. Got it. All right.

Just mathematically, it gets smaller.

Right, right. Okay. And then just my second one. It sounds like you're pretty confident in the year one synergies. Could you just talk a little bit more about some of the other focus areas in terms of operational excellence and any examples of wins as far as shared best practices since the business has come together over the last couple of months?

I think this is a great area of what I mentioned earlier around cultural alignment, because if you recall both legacy companies had a strong focus on operational excellence and we just carried that through. We've merged the teams together and I've already started to focus on that in addition to the synergies. And some of the early things are just how do we most effectively get our products to the customers given the footprint that has come together? And we have seen a lot of benefit in taking miles out of the system in terms of how we've executed that shifted some customer demand from one location to another. And we're seeing that benefit in the bottom lines. So things like that where and how much inventory that we keep these are some of the early wins that the teams are already executing on.

Got it. Appreciate the color. And good luck here in Q2 guys.

Really appreciate it.

And we'll take our next question from Stanley Elliott with Stifel.

Hey, good morning everyone. When you think about the M&A business I mean, obviously you've got a very strong platform for it, are you seeing some of these smaller operators come to you looking as an exit strategy for them in lieu or ahead of potential tax changes or any changes or any issues they may have from a capacity standpoint given the credit line increases I imagine for a lot of the lumber and et cetera?

Yeah. I mean every day, right? I mean, M&A being the big dog means everybody calls us. So we absolutely are everybody's exit strategy which we love.

The phones have been ringing. I can say that. Yes, yes, yes.

And what is important though in that dynamic, right, is you have to keep in mind as a buyer the reality of what is a sustainable business, what is a mid-cycle business, right. You can't pay the same multiples on a peak business, but there are tremendous opportunities out there to buy at reasonable multiples—really tremendous assets. So it's good times.

Yep. No exciting for sure. And then in terms of the footprint expansion and the focus on the manufacturing side are you at all having any problems finding real estate? Are supply chains constrained in terms of getting the machinery in? Anything like that that will keep you from executing on that part of your strategy right now?

I would say less on the real estate side. Certainly on the equipment side the lead times on equipment have expanded over the last 18 months or so, but our teams were ahead of that and taking that into account and we're already ordering things that we don't expect to put in the ground for quite some time. So we've got a pretty strong forward look on that. Again the teams have come together well, we've got experts around things like press manufacturing. They know what they need and how to get ahead of it.

Perfect guys. Thank you very much. Congratulations best of luck.

Thanks Stan.

Thank you. And we'll take our next question. This comes from Collin Verron with Jefferies.

Great quarter. Thank you for taking my question. It looks like your guidance implies a full year EBITDA margin in line with your 1Q almost 11%. Just given once you typically to seasonally lowest EBITDA margin quarter, can you just talk about the cadence of your expected margin performance for the rest of the year and then just how you're thinking about EBITDA margin over the long term?

Yes. So I won't break out the quarters, but yes there's certainly an expectation that our even margins are going to be higher this year. Our flow-through has been great. Our demand obviously has been very high. There is certainly a seasonal nature to what we do. So inevitably you'll see some nice quarters during the summer when we reach our peak utilization and peak leverage. The nature of our long term, I think we've consistently talked about believing we could get the 9% to 10% EBITDA. We're certainly working on that internally every day in regards to what Dave was talking about on operational excellence the efficiencies that we think we can bring into this business this industry through technology through operational improvements through process. So certainly committed to that and believe that in the long run. The dynamics around any given quarter obviously are a little bit unique but for this year it is going to be an exceptionally strong year given the combination of high demand and record prices in certain products.

Great. Thanks for taking my question.

Thank you.

And we'll take our final question from Ryan Gilbert with BTIG.

Good morning.

Good morning. First question more on manufactured products. I'm wondering if you're seeing any builders or an increased percentage of builders either going deeper into manufactured products offsite manufacturing or exploring opportunities to do so more than just buying a roof truss or a wall package? Like maybe what Raney has been doing in Florida?

Well certainly Raney has done exceptionally well in a market like this. They're a great provider and I think very valued by their home building customers. I think Dave alluded to it before, it's really been consistent. It's not as if we ever had a lull in the demand for increased utilization. There are absolutely markets around the country and I think we've alluded to this before or talked about this before where historically you would not have expected to see a lot of demand for that offsite fabrication type of work. A state like Texas is a good example. Historically very low labor rates precluded the need for the labor overdrive that comes from the offsite fabrication. Those days are gone. There is absolutely strong demand in Texas. It's strong demand across the country. It's just kind of hard to tell the difference. Carrying 500 pounds or carrying 550 pounds I'm not sure I could tell you what the difference feels like. It's a lot.

Okay. Got it. You're adding capacity on the manufacturer product side. Are you seeing your suppliers either in lumber or in millwork doors and windows also add capacity, or has it been pretty consistent?

We are.

Yes. We've heard Peter mentioned earlier about the tightness in OSB. We've heard there were a couple of mills up in Canada that are coming back online the same in the US particularly in the south on the lumber side. So we're expecting that hopefully will help from a capacity standpoint. And obviously the window and door manufacturers are making similar investments here to try to capture as much of this demand as possible.

Okay. Thanks very much.

Sure. Thank you.

Thank you. And this concludes today's Q&A session. I would now like to turn the conference back to Mr. Michael Neese for closing remarks.

Thank you for your time today and for your interest in Builder's FirstSource. We're around all day to take your questions. Take care and stay safe.

Thank you. Ladies and gentlemen this concludes today's call. We thank you for your attendance and participation and you may now disconnect.