Good day and welcome to the Builders FirstSource Third Quarter 2021 Earnings Conference Call. Today's call is scheduled to last about one hour including remarks by Builders FirstSource management and the question-and-answer session. I'd now like to turn the call over to Mr. Michael Neese, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead, sir.

Thank you, Leo. Good morning and welcome to our Third Quarter 2021 Earnings Call. I hope you and your families continue to remain safe and well. With me on the call are Dave Flitman, CEO; and Peter Jackson, our CFO. Today we will review our record third quarter results, discuss our ongoing integration progress and achievements and cover our recent M&A activity. We remain bullish on the housing sector and believe we are well positioned for continued profitable growth in a highly fragmented market. We provided results that include BMC in the third quarter of 2021 and standalone BFS in the third quarter of 2020. We have also provided pro forma results as if we owned BMC in the third quarter of 2020. As a reminder, our adjusted EPS calculation excludes amortization of intangibles. The third quarter press release and supporting presentation for today's call are available on our website at investors.bldr.com. 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 direct 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 are useful to investors can be found in the earnings press release, SEC filings and presentation. Our remarks in the press release, presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statement 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.

Thanks, Mike. Good morning everyone and thanks for joining us. I'll cover three key topics on today's call. First I'll provide a quick update on our record third quarter results, including our base business and our view of the current state of the housing market. Second, I'll provide an update on our recent tuck-in acquisitions that further strengthened our leading market position. And finally, I'll provide an update on the BMC integration, which is progressing exceptionally well and continues to track ahead of plan. As you can see on Slide 3, in the third quarter, our team delivered exceptional performance, continued to produce core organic growth, expanded margins and delivered strong cash flow. Sales grew an impressive 63% to $5.5 billion. Embedded in our top line performance, we also delivered core organic growth of 16.1%. Gross profit expanded 103% to a new quarterly record. Adjusted EBITDA more than doubled when compared to the prior year quarter to a record $976 million with adjusted EBITDA margin expanded by 930 basis points to a record 17.7%. Finally, the increase of our EBITDA and margins helped us deliver approximately $1.1 billion in free cash flow while repurchasing 5.3% of our outstanding common shares. This strong performance underscores the strength of our industry-leading platform and the tremendous execution by our team members as we continue to outperform in our markets despite the unprecedented supply chain challenges affecting the homebuilding industry. Last quarter, in an effort to provide greater transparency into our underlying business performance, we provided an overview of the top and bottom line growth of our base business. As shown on Slide 6 for the full year of 2021, we now expect our base business net sales to grow to $15.7 billion from $12.5 billion or 26% and adjusted EBITDA to grow to $1.8 billion from $1.1 billion or 64%. Over time, we believe our base business will sustain and grow our double-digit EBITDA margin and expect to deliver an 11.2% EBITDA margin for the full year 2021. Demand for single-family housing continues to support our top line growth and we believe that growth will be sustained over time as demographics continue to develop favorably coupled with more than a decade of underbuilding. For the quarter on a pro forma basis, our core organic customer growth was 27.5% for single family. Value added core organic sales grew by an estimated 31.2% led by 44.6% growth in our manufactured product category. Our team members are doing an outstanding job getting our customers what they need in a very challenging environment. Single family starts increased approximately 5% in the third quarter on tough comparisons to a strong prior-year period. However, we were encouraged to see our core organic growth remains strong as underlying demand leveled off during the quarter. In addition, looking beyond the effects of the pandemic in the third quarter of last year, single family starts this quarter grew 21% when compared with the third quarter of 2019, and our core organic growth outpaced by 650 basis points. The country has averaged 1.2 million units of existing inventory in 2021 which is 14% below the 5-year average and roughly a third of historical highs. Single-family housing under construction also increased 31% in the third quarter. In fact, there are currently more single-family homes under construction across the country than there have been in more than 14 years and our homebuilder backlog is currently at the highest level it has been in the last 15 years. This data is an encouraging sign for our business as we finish 2021 and look to next year, and we expect demand to remain robust. On Slide 7, we are focused on executing our strategy of investing in growth. We have completed five tuck-in transactions in 2021 since merging with BMC and believe each acquisition adds unique value to not only our portfolio of best-in-class solutions for customers, but also our geographic presence in attractive, economically sound, high-growth markets. Turning to Slide 8, we were excited to welcome the California TrusFrame team to the Builders FirstSource family in the third quarter. CaliTrus was California's largest independent truss manufacturer and has added substantial and profitable scale through our value-added products business on the West Coast. This acquisition adds to our value-added portfolio and provides access to new customers for our continued growth. Also during the quarter, we acquired the Apollo software assets from the former construction technology startup Katerra. The Apollo platform provides design collaboration and workflow, construction budgeting and scheduling, and job site management capabilities combined with mobile functionality. A quick update on our Paradigm acquisition. The BFS and Paradigm teams have come together nicely and are aligning on our digital strategy to drive efficiency in residential construction which will create value for our homebuilder customers and revenue growth for us. Our teams have made a number of customer business wins which have helped us validate the market opportunity associated with developing an end-to-end digital solution. We are now working with several customers on pilots that will improve the preconstruction process, create more accurate material lists, bring our supply partners into a digital workflow and better engage home buyers in the process. We remain confident in our investments in both Paradigm and Apollo and our ability to drive long-term value through digital transformation. Moving forward, we will continue to reinvest in our business to accelerate organic growth while actively pursuing accretive tuck-in M&A opportunities to improve our mix and build scale in key growth markets. We firmly believe the strength of our balance sheet and cash flow generation will allow us to remain a disciplined consolidator in this industry. Next, on Slide 10, I'll provide a brief update on the BMC integration. As reported last quarter, synergies are tracking one full year ahead of our plan and are projected to be in the range of $140 million to $160 million by the end of 2022, exceeding our initial expectations. We delivered $36 million in cost synergies in the third quarter and $74 million during the first nine months of 2021. We now expect 2021 cost synergies to be in the range of $90 million to $110 million, a midpoint increase of $10 million above the expected outcome we reported in the second quarter. Our ability to achieve our synergy commitment in half the time underscores the cultural alignment of our two companies and the strength in collaboration of our leadership team. As we approach Veterans Day, I would like to take a moment to recognize and thank the veterans at BFS and their families. Earlier this fall, I had the honor of signing a statement of support on behalf of our company with the Employer Support of the Guard and Reserve or ESGR. I had the privilege of meeting BFS team member and U.S. Army veteran Corey Basinger. Corey spent 8 years in the Army and has been with BFS nearly 10 years. He is our maintenance manager in Houston, where he oversees critical facilities and equipment processes so we can seamlessly serve our customers. Corey received the Pro Patria and Above and Beyond awards for his excellent leadership and supporting Guard and Reserve employees, in part due to his empathy, experience and understanding of what it means to be a veteran. Thank you, Corey, and thank you to all of our veterans for your service. With that let me turn the call over to Peter to go through a detailed look at our Q3 results and provide an update on our share repurchase program and our 2021 updated financial guidance.

Thank you, Dave and good morning everyone. I want to thank all of our team members for delivering another incredible quarter. I will cover three topics with you this morning. First, I'll review our third quarter results compared to combined pro forma results from the prior year quarter. Second, I'll update you on how we are deploying capital supported by strong operating cash flow. And third, I'll provide you with our updated guidance for the full year of 2021. Let's start with our Q3 results. We had net sales of $5.5 billion for the quarter, which increased approximately 63% compared to the combined pro forma prior-year period. Value-added core organic sales grew by an estimated 31.2% led by 44.6% growth in our manufactured products category. Robust demand in other areas continues to be constrained by supply chain challenges. Commodity price inflation benefited sales by 39% and acquisitions contributed another 8%. Gross profit was $1.7 billion, an increase of $868 million or 103% compared with the combined pro forma prior-year period. Our gross margin increased 620 basis points to 31.1% primarily driven by disciplined pricing in a volatile supply-constrained marketplace along with effective and timely sourcing. Based on our year-to-date experience with the combined entity, we now believe our normalized gross margins will be north of 26.5%. SG&A was $875 million, an increase of approximately $235 million or 36.7% compared to the combined pro forma prior-year period. This was driven primarily by expense related to the BMC merger and other acquisitions including amortization expense of acquired intangibles and one-time charges. Excluding acquisition-related one-time charges and variable compensation, underlying SG&A increased 8.1%. As a percentage of net sales, total SG&A decreased by 300 basis points to 15.9% due to the impact of higher net sales and continued expense control, which more than offset higher variable compensation driven by the increase in net sales and profitability. Adjusted EBITDA increased 244.4% to $975.9 million driven by consistently strong single-family home demand, commodity inflation, execution of merger-related synergies and cost leverage. Adjusted EBITDA margin improved to a record 17.7%, an increase of 930 basis points compared to the year-over-year pro forma period. In Q3 adjusted diluted EPS was $3.39 compared to a combined pro forma of $0.74 in the prior year period. The more than 3-fold increase was primarily driven by the growth in operating income, partly offset by higher taxes. Now let's turn to cash flow. Our third quarter operating cash flow was approximately $1.1 billion, driven by increased net sales and disciplined working capital management. Free cash flow was also a robust $1.1 billion during the quarter. In the third quarter, we repurchased approximately 11 million shares or 5.3% of our common shares outstanding at an average price of $52.74 for a total cost of $578 million. At the end of the quarter, we had approximately $422 million remaining under our existing $1 billion share repurchase authorization. In October, we repurchased an additional 4.5 million shares at an average price of $55.99, leaving approximately $172 million in our current authorization. On Slide 11 our pro forma net debt to EBITDA ratio was approximately 1.1 times for our base business. We have no long-term debt maturities until 2027 and our total liquidity was roughly $1.5 billion consisting of about $1.3 billion of net borrowing availability under our revolving credit facility and $225 million in cash. Our strong third quarter and first nine months performance is a testament to our field teams who are delivering excellent value to our customers. We will continue to focus on growing the higher-margin specialty and value-added products and services in our portfolio. And now let's discuss our 2021 full-year outlook, which we are revising upward and can be found on Slide 12. We continue to see strong underlying demand in new housing construction. Based on our first nine months results, we are increasing our full year '21 outlook. Net sales is expected to grow to a range of $19.3 billion to $19.8 billion or approximately 51% to 55% over 2020 combined pro forma net sales of $12.8 billion. We expect adjusted EBITDA to be in the range of $2.85 billion to $2.95 billion or approximately 166% to 176% of our 2020 combined pro forma adjusted EBITDA of $1.1 billion. In 2021, we expect BMC synergy savings of $90 million to $110 million to be recognized in the P&L. Free cash flow will be in the range of $1.8 billion to $2 billion. A decrease of $400 million as the expected increase in EBITDA will be partially offset by higher cash tax. Our outlook is based on several assumptions, which are outlined in the earnings release including mid-teen percentage growth in single-family starts, R&R growth in the low single digits and multi-family starts growth in the high single digits. Overall, we are having a tremendous year. Our base business is robust and growing and we believe there is a long runway for growth into 2022 and beyond. We are focused on creating value for our stakeholders and are continuing to build our world-class distribution network founded on operational excellence and delivering exceptional value to our customers. Let me turn the call back to Dave for his closing remarks.

Thanks, Peter. In summary, the homebuilding industry momentum continues to be strong. Our core organic growth and in particular our value-added product categories are outpacing the industry in this unprecedented time given rapid growth in demand and widespread supply challenges. Our base business is large and we believe it will grow in 2022, the BMC integration and cost synergies are well ahead of schedule and the implementation of our digital strategy is ramping up. Our team is focused on operational excellence in delivering exceptional results for our customers and for our shareholders. I'm confident that our differentiated platform and our ability to invest organically and through M&A will deliver above-market profitability and generate significant free cash flow for many years to come. Finally, we are excited to host our first ever Investor Day on December 7 and hope to see many of you here in the Dallas area. Operator, let's please open the call now for questions.

We'll take a question from Matthew Bouley of Barclays. Your line is open.

Many areas to touch on here, I guess I'll start with the gross margin. You — Peter, you said the normalized gross margin, you can now commit to north of 26.5. I obviously have to ask the question of how far north are we talking if you have any elaboration on that and maybe within that it would just be helpful if you could describe with this quarter's 31%, how much of that might have been driven by commodity deflation. Thank you.

Yeah. Thank you. The gross margin numbers we're seeing now are really encouraging from our perspective, because it underscores the strength of the product portfolio and the way we're combining the sales of value add with the other products. Certainly the tailwinds from commodities have been welcomed and I think we've done a nice job of generating real profitability and cash flow from it. There is also a little bit unusual in this quarter and everybody is talking about it obviously given the supply chain constraints. That's caused some unusual numbers and some unusual dynamics based on timing and the price increases and things of that nature. So we can think it's a little bit unusual, certainly a significant portion of that gross margin fall-through comes from the benefit on commodities. And so the 26.5% is where based on what we've seen in the nine months combined in the company, we feel very good about. I think we sort of demonstrated a willingness to commit to things that we know we're confident in. I mean, we are very confident in that 26.5% or better. We're certainly thinking about it in the context of the longer-range of the business. It was a more long-term normal where we think we can get to and we'll be talking a lot more about that in our Investor Day.

And then I would just add that we have confidence in our ability to outpace the market and continue that in our value-added portions of the business, which is also helping to shift the mix of the company. As you saw the strong performance in manufactured products. We also had core organic growth above our average in our millwork, doors and windows business which has continued to strengthen throughout the year despite all the supply chain challenges.

That's great color. Thank you both for that. Second one on capital deployment clearly great progress on deploying the balance sheet there with the buyback just in the past 3 months. So I think you're still guiding to over $1 billion of free cash flow just in Q4. Any thoughts on kind of a future buyback authorization and Dave, you also mentioned that just being a disciplined consolidator in M&A, there's other consolidators out there, I'm just curious if you can kind of outline what you're seeing in the M&A market from a competitive perspective and valuations and all that. So thank you both and congrats on the results.

Yes, thank you. So with regard to the share buyback. To date, we're very, very pleased with what we've been able to accomplish. We think we were able to move, put a lot of capital toward this quarter and add on an underpriced stock, and I think we're doing pretty well there. Certainly happy with the momentum. We do have remaining allocation. So we are all authorized for another roughly $175 million. That is going to be our first priority. No new announcement today or anything into the future, but obviously we sort of demonstrated the way we think about the business and how we're going to work in terms of a balanced capital allocation.

The second part of your question there on M&A, we have been disciplined in our work. As you probably expect there's been a lot of opportunities in the market through the course of this year. Valuations have been elevated. We've been disciplined around how we think about the long-term profitability of our targets, especially given the lumber environment that we've had here. We can get the deals that we want and we're going to stay disciplined around that. The five deals that we've done this year we feel very good about. And so we didn't say a lot about the pipeline in the deck, but it's still very strong and robust. And we're going to continue to play out our M&A in a way that makes sense for the company.

Our next question is from Mike Dahl of RBC Capital Markets.

Good morning. Congrats on your results, really exceptional. A couple of questions around the value add. The first one really manufactured products another really strong quarter, your other value add categories up nicely as well but a lot of strength in Manufactured Products combination of a lot of hard work on positioning that business, can you remind us where you're at now from a capacity standpoint and potentially speak to how you're thinking about incremental investments and further capacity expansions there?

Yes, I'll start and then Peter can add any color on it, but we continue to see very high demand in manufacturing performance. It's really not just in one geography, it's all across the country. And as we said when we combined these two companies, the complementary nature of our value-added capabilities was going to be very powerful and we certainly see that play out exactly as we expect. I would tell you right now, we have more demand than we have capacity for our products and we expect that's going to continue. We have moved the market this direction and the labor challenges and the performance around inflation is real. Our customers are all talking about it, we've seen it every day and that's helped us continue to move the market towards offsite manufacturing and helping them be a lot more efficient at the job site. We have invested heavily in that part of the business and we will continue to do so to make sure we're meeting demand.

Yeah, to that point, we have a number of projects around the country where we have seen the utilization of our existing capacity to expand it. We can do that in a number of ways. The easiest way is obviously adding shifts; next would be adding equipment, automation equipment more sophisticated equipment, more equipment in total. Some limitations in that right now, just given the supply chains and availability of certain items further up the supply chain and in greenfield projects. We know there are markets around the country that have been adopting this type of solution, this value-added solution, very, very quickly and we see tremendous opportunities in expanding our footprint, being the provider of choice and the provider with the best variable cost position as we execute that as well to be successful long term.

And my second question, obviously the scale, the execution, the way you positioned the business has helped you to capture a decent amount of share in a very dynamic and supply constrained environment and it's demonstrated the potential power and profitability of the business. As you look forward, there is probably a world in which when things normalize, some of your maybe smaller mom and pop competitors get back on their feet and I guess the question is really, when you think about customer stickiness and share—the stickiness in share gains—how does your experience this year affect how you think about balancing share versus price and margin in a more normal environment and maybe if that differs when you think about commodity versus value add.

Well, certainly on the value-added portions of the business, we continue to see great adoption. We expect that that will continue. However, we have to remain competitive and to your point around that, this is still a very competitive market. We have seen in times in the past that these products are very sticky with our customers because of the value proposition and the benefits that our manufactured components deliver to them which is very real. And that's been nothing but validated since the merger has come together, but that's why we drive productivity and efficiency. Right. We won't rest on our laurels, we know this will continue to be a competitive market and we have to earn that business with our customers each and every day. That's the mentality I have and the entire leadership team has around us. We take nothing for granted.

Just from a modeling perspective, I think how that manifests itself is a little bit of having both. There will be quarters when certainly the mom and pops will level things out in certain of the more commoditized product areas. Our commitment is to be the organization that wins at the end of the day. We think we can continue to perform better than market. We think our mix of products allows us to execute that achievement at a higher-than-industry margin because of our ability to pull through that value-added mix, do it very efficiently and to manage the combined entity in a way to really leverage scale and drive through those investments in technology and leadership in ways that others can't touch. So certainly think it will continue to be competitive, there'll be some ebbs and flows and that never moves in a straight line, but we think that base business trend over time is going to be very desirable to all involved.

We'll take our next question from Ketan Mamtora of BMO Capital Markets.

Thank you and let me offer my congratulations as well. A really strong performance. Within manufactured products, I'm just curious, are there any specific product categories that you are seeing stronger growth versus the others and that these labor challenges are driving faster adoption of component offsite manufacturing?

Yeah, I think the great news is we're seeing strength in all categories of our manufacturing components, whether it's roof truss systems or floor systems. It has been well publicized that EWP has been a challenging supply environment this year; through the great work of our teams all around the country we've been able to get the volumes that we needed, although there is price pressure and that remains there. But importantly also our ReadyFrame is up over 30% this year on a year-to-date basis in house count. So we're not really seeing any areas of weakness. And really the system approach that we're taking—the structural design—helps support all pieces of our manufactured components business. So we're excited because we're getting big traction everywhere.

And then my other question, with the other base business steadily moving higher, I'm just curious how you think about the leverage on the Company?

So the base business is certainly an important metric for us going forward. For those that maybe don't remember, it is re-baselining us at a normalized historical commodity value just taking all that volatility out. What that yields is sort of an underlying business that's showing a steady strengthening and increased profitability and yeah, that is the basis for our leverage. We include that in the investor presentation this quarter to give you an anchor point. We think that's the right way to think about how we're levered over time, because that's a part of the business you can really count on and rely on. So we're going to leverage based on that in terms of our guidance and our commitment over time.

We'll take our next question from Reuben Garner of The Benchmark Company.

Thank you. Good morning, everybody and congrats on the results. So can you just talk about—so the big business is looking to be up over 25% revenue this year and profit is going to be growing north of 60%. What gives you the confidence that you'll be able to grow? I think you made the comment that you think you can grow the base business next year. Can you just talk about what you're seeing that gives you that level of comfort?

Sure. Well, a couple of things. First of all, I just want to be very clear. The strategy of the company is predicated on the base business and always has been. So the fact that we've broken that out provides external clarity, but this is what we're trying to drive. Our organic growth in value-added portions of the business is at the heart of what we're trying to do and so I'm not surprised by it. Given the demand environment that we're seeing, we expect that will continue, but also in the areas of the value add that we're focused on, we have been for quite some time now taking market share and we do expect that will continue for a long time to come. So I just want to be clear though, this is the focus of the company and the leadership team is focused on it every day and that's what we're driving into the marketplace with our customers.

So, in an environment where maybe single-family starts are flat next year, do you think that you still, with the backlog in the business that you have and the initiatives you have to grow the value add, will be able to grow the business in that environment?

Yes, absolutely. And we do think—it's been well publicized that starts slowed through the third quarter of this year but, to a customer, every one of them points to supply chain challenges not weakening underlying demand. So there has been a little pause on starts and we saw that through the third quarter and you just see it in our results. So that gives me even more confidence that we're going to be able to sustain our performance even in a weaker starts environment. These products are very sticky even if starts slow; the labor challenges are not going away, the things we're delivering value on for our customers are not going to change and our value proposition is robust and strong in any starts environment.

Okay. And then last one for me. Many companies that have reported third-quarter results so far ran into some kind of supply chain issues and had volume pressure in some cases. Are there any areas of your business where you're having product shortages or where there is a bottleneck that you didn't see growth because it was pushed out to future quarters, or have you been able to overcome this somehow with your scale and reach?

Well, to your last point, our scale and reach is tremendous, even more so in the combined company. And I think our procurement teams and our field leadership teams deserve credit for the great work in securing what we needed for our customers. It has been a dog fight and we also have great suppliers and they've been tremendous throughout this period in helping to get us more than our fair share in what our customers need. Now having said that, EWP remains a challenge. Even where we've seen lumber and OSB, for instance, kind of loosen up a little bit, the challenge is less in manufacturing right now—it's more in drivers and getting the material to the job sites from a lot of our suppliers. That's also been well publicized. Exterior doors are still a challenge. So things might be in a little different spot than they were three months ago, but there are still widespread challenges that we're up against in the industry every single day. And just to acknowledge your comment about the industry, homebuilders that have had very much success this year have had to govern and sort of pull back a little bit on how many starts and how many sales they can make because of those same supply chain and availability issues. We certainly have seen that but we are not immune to that. That has run through our numbers, but we've also seen the normalization and the bounce off the bottom. So I think there is a lot of reason for optimism that this is a healthy industry making smart decisions about how much we can flow through given the constraints and really looking forward to the day when some of those constraints ease.

We'll take our next question from Keith Hughes of Truist.

Just getting back to the availability questions that we've had before. Are you seeing, if you could call it major product categories, are you seeing things actually getting better sequentially or has the situation not improved in the last 3 to 4 months?

I would say Keith it's incrementally better, certainly on the commodity side of the business as I mentioned. That is loosened up a bit. Interior doors are better than they were a quarter ago. We're still struggling with exterior doors. Hardware remains a challenge, moldings remain a challenge. A lot of the specialty products are a real challenge. Windows remain in high demand and with backlogs. Our team is working on that challenge. It has been for a long time. This is—the encouraging part of it is, even though our millwork, doors and windows organic growth was lower than our total for single-family, we have seen sequentially each quarter of this year that continue to improve. Right. We were at 19% this quarter versus single-family of 27.5%, but we were around 15% in Q2. So I think that just speaks to the softening, but more importantly, the great work that our team continues to do every day to get us what we need.

And final question. Comments from your builder customers—many of them have talked about some slowdown. As I talk to you about next year are they expecting average pacing of completions during the year, more front loaded—any sort of color you can give on that would be helpful?

It's still early and we are in those conversations. But obviously we're kicking off this year strongly. We'll certainly see many good things for the first half of next year. Another piece of it which we heard a little bit about is land and development and I think this gives them a chance to catch their breath a little bit and get out in front of that, where I think they were maybe caught off guard a bit with the strength of the starts this year. But what we're hearing, by and large, is continued strength and continued high demand for what we offer them.

We'll move next to David Manthey of Baird. Your line is open.

David mentioned ReadyFrame and I was wondering if you could talk about what percentage of revenues that is today and what was the comparable figure in the third quarter of 2019. You also gave us an interesting stat there. You said that house count was up 30% year-over-year. Could you provide that number from the third quarter of 2019 as well? Sorry for all the data requests here.

I know and we may follow up with you offline on all that. I don't have all that at my fingertips at the moment Dave, but suffice to say that we're quite pleased with the penetration that we continue to get and we've actually put into looking at this more at a house account level to understand. It's more about organic growth of the business, how are we penetrating the market more. So that's really not a new metric for us and it takes out the noise around what's going on with commodities in the revenues up and down and we are focused squarely on in-house account penetration, as I said, that's up over 30% this year and as you recall, last year was pretty strong. So we're excited about it. It is mirroring very much what's going on with our manufactured products in general and we expect that growth will continue.

Okay, great. I'll look forward to catching up with you on that. And my second question is on the software acquisitions. Could you describe how Apollo and Paradigm kind of fit together and are there additional modules or capabilities that you're going to need to complete your tech platform or is this sort of a complete suite of software now?

We're very pleased with Paradigm and that is the broad capability start to the digital platform, right, and the configuration capabilities they have. They apply almost exclusively to the new home portion of the business. As I've said previously, we're excited to be able to take that into other categories and expand it more broadly. Apollo was a unique one and that was very opportunistic. We got a really good deal on that. It provides particularly mobile capability and some of the front-end workflows that Paradigm provides and ties into order management capability. So we're excited about the end-to-end solution that we have now and the development work will continue from the back end.

And we'll move next to the side of Steven Ramsey. Your line is open.

Maybe to start with the synergies, can you clarify the updated synergies, as you say, does that include any of the acquisitions that have been made? If I think about distributor acquisitions, the sales total over $600 million. It seems like there would be some meaningful synergies coming in.

Yeah. So it does not. Those are still limited to the BMC merger synergies. So midpoint of $100 million on the P&L for '21 and midpoint of our run rate of $150 million by 2022. That does not include the tailwinds from the smaller entities; they're not tracking in the same way. I don't think it's particularly helpful to report it in that consolidated way. It is showing up in the materials for the profitability obviously in that organic growth number. So probably we won't be breaking that out separately, but certainly we'll continue to talk about excellence metrics and where we can identify significant projects.

Okay, helpful. And then if I'm looking at this correctly, it appears the incremental margins on the base business in FY '20 and FY '21 guide are in the low 20% range above normal. Is that expected to moderate as the environment and demand trends normalize over the next year or two?

So that goes back to my comment about the unusual nature of the market in the current period. There certainly is some expectation that certain aspects of that will moderate—things that were based on the timing of sourcing and the unusual disconnects in the market. There has though been a real trend of better discipline around pricing in the right markets making smarter decisions about how we provide value and are compensated for that value. So it's a mix. There will certainly be some underlying sustainable improvement and then it may normalize. We expect to retain some of that structural improvement as a company.

And we'll move to the side of Collin Verron of Jefferies. Your line is open. Mr. Verron, you may want to check your mute switch. Your line is open. Michael Neese: Leo, let's move to the next analyst please. We will move next to Kurt Yinger of DA Davidson. Your line is open.

Great, thanks and good morning Dave and Peter. Just on the base business: EBITDA increased to $1.8 billion from $1.6 billion previously. I'm kind of curious what the moving pieces are there. Maybe it just goes back to kind of the last point around pricing discipline and whatnot, but it seems like a pretty nice uplift, considering the volume outlook is unchanged here. And then as we think about building out 2022 how confident are you in using that as a good jumping-off point?

Yes. So the work in pricing, as you know Kurt, is something we've been focused on for a few years and putting these two teams together, letting really high-quality leadership engage with that yield, working together, sharing best practices, that really has moved the baseline. I think that's certainly there were some examples of situations where we found ourselves in possession of product at cost and not in current pricing and not going to apologize for that. But certainly our ability to continue to be disciplined helped us in the quarter and will help us on an ongoing basis and that is the result of that historical investment, that alignment, the way we think about pricing, the tools we put in place, the way we train. All of that has come to fruition, particularly as you look at the combined business, which has a great market position and in markets around the country where there is just tremendous demand and growth, we're really well positioned.

And then second, just as I think about the products you sell from a pricing perspective: commodities are likely to be a headwind here over the next couple of quarters but there is a pretty significant level of underlying price inflation out there on things like EWP, windows, siding, doors. Can you just talk a bit about how you're thinking about that impact on the top line going forward and how it might help offset that drag from lumber and panels?

You're right, there is tremendous inflation in the marketplace across a number of different products. We are very focused on making sure we're passing that through. Some of the leverage you see from that is part of what is driving some of those margins, obviously. It doesn't cost any more to transport a more expensive piece of lumber, window or door, but it is an important component. As we continue to see volatility in prices, we are going to maintain our discipline around passing it through. There will be instances where things will go back down and we will adapt to that and make sure that we are still the provider of choice, that we're providing tremendous value to our customers, and that our relationships with vendors support moving through the volumes our vendors want to see to meet demand. That dynamic and the ability to continue to be consistently disciplined is something we pride ourselves on and I think we've proven this capability even in really unprecedented times.

And we'll move next to Jay McCanless of Wedbush. Your line is open.

Hi, thank you. Good morning, everyone. Great quarter both. So another question on Slide 16. It looks like the EBITDA ranges at all the dollar per MBF on the EBITDA range has moved up. Is that right, and then what's the biggest driver here—is it a change in mix, some of the acquisitions? Which one of these assumptions on the right hand side of the slide was the biggest driver on that?

It does reflect the change when the base business on the prior slide bumps up, which we did increase the guide there. It is reflected in that sensitivity on Slide 16 about what this business might look like at different commodity prices. It's a couple of factors. Obviously with the growth of the value add faster than the rest, you continue to see that favorable performance on an ongoing basis in what we consider base right—that normalized margin level is a powerful influence on this. Our ability to manage price and see sustained margins across the portfolio and the way we do things is certainly reflected in here. The discipline around expenses, the improved performance and synergies, the operational excellence initiatives we're seeing are bearing fruit. All of that is in some way contributing to the increased starting point as reflected on the sensitivity.

Where did the blended dollar per MBF sit within the third quarter?

It's always a challenge to forecast where commodities are going to go. It was certainly a bit of a surprise for us in terms of the guide in the back half of the year. It has absolutely leveled out above the $400 levels. We are seeing branded averages between $500 and $600 if you're talking about lumber and sheet in terms of what we're seeing. We'll see where it goes from here. But on a year-over-year basis as Kurt mentioned earlier, there is certainly a turn in terms of the year-over-year comparisons, but still very strong and healthy from our historical perspective. At the end of the day, we're going to circle back to the base business and we're going to focus on running the business. We'll reap the benefits of commodities, but that's not where our attention is going to stay.

Do you feel like from a pricing power perspective during the third quarter, did you take more price on the value-add goods or were you able to hold the line better on commodity goods even as the underlying commodity went down in price?

I'm proud of that—we did both. There has been really good discipline in not over-reaching on certain products and acknowledging the customer relationship, but at the same time switching vendors or re-setting where appropriate. We always focus on getting paid for the value that we're providing appropriately. Really across the board, it's been a positive story.

And we'll move next to Iman Akram of Lord Abbett.

Thanks for taking the question. Just back on the commodity front. I want to better understand the lumber dynamics. How—like is there a pricing lag for that or how does that market work?

It is complex. Pricing is a component but it's not the only part of what we do. The vast majority of what we're selling in the commodity space is quoted in pass-through in a relatively narrow period of time. We're pretty happy with that balance—the amount of inventory we have on hand and on order and the way we're quoting our customers. We can walk through that in more detail for you offline. If you look at the end of the day, commodities are an important part of what we do, but a more important part is our base business and our overall strategy.

Okay, thanks. It will be helpful if we could talk offline at some point.

Happy to do it.

Our next question is from Ryan Gilbert of BTIG.

Good morning. First question: Peter, you've talked in the past about the backup in units authorized but not started. That's something we're seeing in the data and Dave, it sounds like based on your comments earlier builders are certainly planning for more units going ahead. I'm just wondering if you're seeing so far in the fourth quarter some movement on getting those units started—maybe a re-acceleration in starts—or is that more a 2022 story?

If we look at our numbers, July was probably the low point in terms of the business and we saw a rebound after that. We started to see a little bit of a re-acceleration. The homebuilders as a group sat down and said, we've committed to too many units under construction relative to what's started, so there was a bit of a pause and then they continued to roll along trying to get to a point where it's sustainable. It's hard to know with precision but certainly we've seen a re-acceleration in growth from that July low point. It will always be dependent on weather, particularly this time of year, but broadly speaking there is very strong demand and we do think those sold units and even some started units will accelerate and continue to grow given that strong demand.

Second question is on multifamily. It looks like we should expect a big year-over-year increase in multifamily in the fourth quarter—am I thinking that correctly? And how does the pipeline or backlog of multifamily projects look as you sit today?

Multi-family is project driven and lumpy. We like to reference national trends but our exposure is concentrated in a few regions and a lot of movement is project-specific. I wouldn't characterize it as a large expected increase for the fourth quarter specifically. We are positive on multifamily; we did divest our standalone gypsum business which had some multifamily and commercial exposure, so you may see some shifts in the category reporting. It's a good area for us, we are seeing growth and we think that will continue through the fourth quarter and into next year.

It appears that we have no further questions at this time. I'd be happy to return the call to Michael Neese for any concluding remarks.

Thank you for your time today and for your interest in Builders FirstSource. As Dave mentioned, we are hosting an Investor Day on December 7th in the Dallas area. We look forward to hosting you in person or virtually through webcast. If you'd like to attend in person, please email me at [email protected]. Have a great day. Thank you.

This does conclude today's call. You may now disconnect your lines and everyone have a great day.