Builders FirstSource, Inc. Q1 FY2022 Earnings Call

Good day and welcome to the Builders FirstSource First Quarter 2022 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by management and the question-and-answer session. Please review the forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'll turn the call over to Mr. Michael Neese, Senior Vice President, Investor Relations for Builders FirstSource.

Thank you, Priscilla. Good morning and welcome to our first quarter 2022 earnings call. With me on the call are Dave Flitman, our CEO; and Peter Jackson, our CFO. Today, we will review our record first quarter results for 2022. As a reminder, our adjusted EPS calculation excludes amortization of intangibles. The first quarter press release and our investor presentation for today's call are available on our website. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. Our remarks in the press release, presentation and on this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. With that, I'll turn the call over to Dave.

Thanks, Mike. Good morning, everyone, and thanks for joining us. 2021 was a phenomenal year for our company. We entered the first quarter of 2022 building on that strong momentum and delivered another quarter of record net sales, gross margin, and adjusted EBITDA. We produced strong core organic sales growth of 15%, marking our fifth straight quarter of double-digit growth. Along with our strong start to the year, we continue to invest prudently in our operations and work hard to deliver outstanding service to our customers in the face of significant supply chain constraints that persist throughout our industry. The success we've achieved is directly attributable to all 28,000 of our hard-working and dedicated team members who go above and beyond every day to help us maintain our position as the industry leader. I'll cover four key topics on today's call. First, I'll provide a quick update on our base business and our record first-quarter results. Second, I'll provide an update on our acquisition success that continues to strengthen our premier market position, including our most recent tuck-in deals. Next, I'll provide an update on our digital strategy. And finally, I'll discuss our view of the current state of the housing market. Over the next 4 years, we expect our base business to deliver a 10% compound annual growth rate on the top line, a 15% adjusted EBITDA CAGR, and importantly, a 50 basis point per year improvement in adjusted EBITDA margin for a total of 200 basis points of improvement by 2025. As a result of this performance, we expect to have $7 billion to $10 billion of capital to deploy through 2025. That includes this year's planned capital investments in innovation and organic growth, along with M&A and share repurchases. Turning to our first quarter results, we delivered strong core organic growth of 15%. Commodity price inflation added 13%, and acquisitions added 8%. Our single-family core organic growth was nearly 17%, once again exceeding the single-family starts growth, which was about 4%. Core organic sales in value-added products grew by 31% compared to the prior year period, and value-added products were the key growth driver across all customer segments, accounting for nearly 80% of our organic growth in the quarter. This is another strong data point that confirms our strategy is working. We delivered record sales of nearly $6 billion in the first quarter and generated $1 billion of adjusted EBITDA with an adjusted EBITDA margin of 17.6%. These exceptional results were driven by robust demand for housing, internal productivity, and ongoing pricing discipline in a volatile, supply-constrained environment. We remain focused on executing tuck-in M&A that delivers a high return. Last year, we completed 7 acquisitions for $1.2 billion. This year, we expect to invest approximately $500 million in accretive M&A, and we're off to a great start. On April 1, we acquired Panel Truss, a multi-location provider of building components to single and multifamily markets. The additional component capacity expands our value-added solutions offerings in several key high-growth markets. I want to welcome the team members from Panel Truss and Valley Truss to the BFS family, and I look forward to providing future updates on how Builders FirstSource will continue to lead the way in consolidating our fragmented industry. So the homebuilding industry remains strong, underbuilt, and resilient. I believe the homebuilding industry will continue to grow this year, and that we will outperform our peers as our platform delivers for our customers and our shareholders.

Thank you, Dave, and good morning, everyone. I would also like to take a moment to thank each one of our team members who delivered an incredible first quarter of 2022. We remain committed to a balanced approach to capital deployment through 2022 and beyond as we leverage our strong cash flow to make accretive investments in our operations and add great businesses to the BFS family, all while executing against our share repurchase authorizations. Let's begin with our Q1 performance. We had net sales of $5.7 billion for the quarter, which increased approximately 36% compared to the prior year period. Core organic sales in the value-added products grew by an estimated 30.8%, underlining our work to meet the strong demand across our value-added channels and the continued supply chain constraints. Gross profit was $1.8 billion, a 71% increase compared to the prior year quarter. The gross margin percentage increased 670 basis points to 32.3%, primarily driven by disciplined pricing in a volatile, supply-constrained marketplace. We also made strategic investments in IT, productivity, and digital initiatives. Lastly, fuel-related expenses increased by $12 million or nearly 50% due to recent global events. Here's the summary of our cash flow. Our first quarter cash provided by operating activities was $179.8 million, and cash used in investing activities was $48.3 million. We generated free cash flow of $131.5 million. We are cash flow positive in Q1 for the first time. This quarter's positive cash flow highlights the strength of our market-leading platform. We spent approximately $180 million on our M&A transactions. In the first quarter, we repurchased approximately 3.6 million shares for roughly $286 million. Year-to-date, we have repurchased $552.9 million of stock. I'm happy to announce that yesterday, the Board of Directors authorized a new share repurchase program of $2 billion. We remain committed to opportunistically repurchasing our stock and creating value for our shareholders. We are maintaining our estimate of single-family starts growth across our geographies in the mid-single digits and R&R and multifamily growth in the low to mid-single digits. As a result of our Q1 performance, we are increasing our 2022 base business sales growth guidance from 8% to 12% to 10% to 14%. We also increased our adjusted EBITDA growth guidance from 12% to 18% to 18% to 22%. Our expectations for free cash flow is also increased to $2 billion to $2.4 billion in 2022, reflecting higher commodity prices, disciplined working capital management, and capitalizing on our industry-leading product portfolio.

In summary, the homebuilding industry remains resilient and underbuilt, and we believe it will continue to grow in 2022 and beyond. Our momentum is strong. Our industry-leading platform is generating exceptional results, which we expect to continue in the second quarter, the remainder of this year, and beyond. Our balanced capital application strategy is delivering significant value to our shareholders. We're committed to organic growth investments, tuck-in M&A, and continuing to execute share repurchases to generate accretive returns.

We will take our first question today from Mike Dahl with RBC Capital Markets.

Nice set of results here. So I have a couple of questions on the core and some of the margin trends. You're guiding to about 12.2% core for the year in terms of the margin. Talk us through the balance of the year and what some of the puts and takes are that bring you down to that full-year margin number.

Certainly, there has been a lot going on this year: volatility in the markets, supply chain issues, the ups and downs in commodity pricing. We anticipate that the back half of this year will see some normalization, with commodity prices heading back toward our long-term estimate around the base business. We're also looking for increasing relief in the supply chain space.

We're not expecting volumes to significantly decline this year. Given the backlog that's out there and conversations with our customers, the environment is going to remain robust for the rest of the year.

Could you give that stat again where you talked about the number of homes under construction?

Yes. We said total homes under construction reached 1.6 million.

Can you give us a sense for how much price inflation contributed to the core organic sales growth of 15% in the quarter?

It's an important part of it. It was meaningful.

Thank you for your time today and for your interest in Builders FirstSource. Have a great day.