Good day, and welcome to the Builders FirstSource Second Quarter 2023 Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by 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, Angela. Good morning and welcome to our second quarter earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. Today, we will review our results for the second quarter of 2023. The earnings press release and investor presentation are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentation. Our remarks in the press release, presentation, and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today’s press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I’ll turn the call over to Dave.

Thank you, Mike. Good morning, everyone, and thanks for joining our call. Entering 2023, we prepared for a challenging and dynamic year. During the first half, we had better than anticipated performance driven by the strength of our value-added product portfolio, continued outperformance in Multi-Family, and a more stable housing environment than originally projected. Multi-Family is an area we identified as providing strong growth potential and market diversification over the long term. We are truly seeing the differentiated platform we have put together over the past few years generate results. We continue to exceed our near-term targets through contributions from operational initiatives instilled over the last few years, and by executing our strategic priorities, which is a testament to the unwavering commitment and dedication of our amazing team members. We are focused on delivering exceptional customer service and always strive to be the easiest company in the industry to do business with. We’re driving mixed improvement through value-added share growth while continuing to expand through tuck-in acquisitions. Our acquisitions in recent years have allowed us to enhance our value-added offerings and also extend our reach to a more diverse customer base in attractive markets. Moreover, these acquisitions have proven to be immediately accretive to our earnings. We continue to consistently generate robust free cash flow and prudently deploy capital, making two tuck-in acquisitions and repurchasing over $700 million of shares in the second quarter alone. Despite the headwinds posed by elevated mortgage rates and affordability challenges, our resilient results in the first half of 2023 give us confidence that we have the right strategies in place with a customer-centric approach and an incredible team that is executing at the highest level to successfully navigate this dynamic economic environment. Many single-family builders are showing stabilizing demand partially due to widespread shortages of existing homes for sale, driving healthy new construction. Public builders have been reporting a stream of stronger-than-expected results and taking proactive steps, such as interest rate buy-downs to help get prospective buyers off the sidelines. With home prices normalizing in many places, our focus on value-added solutions, digital innovations, and customer service is helping builders improve their construction efficiencies. We are helping our customers lower cycle time, which is highlighted by our continued improvement on in full deliveries from 93% last year to 96% during the second quarter. On-time and in-full deliveries ensure our customers have the right material at the right time. Looking at our second quarter highlights on slide 4. Our gross margin percentage increased 40 basis points to 35.2% due to stronger mix in value-added products overall, largely driven by our Multi-Family segment and the related positive impact from commodity cost timing. We maintained a healthy double-digit adjusted EBITDA margin, showcasing our ability to execute effectively from an operations perspective in a challenging environment. This execution is a reflection of our talented field leadership team, which averages 30-plus years of industry experience. Turning to slide 5. We drove strong productivity across the business by delivering $50 million in savings during the quarter. Our BFS One Team Operating System continues to generate robust efficiencies, focused on manufacturing and delivery improvement. Our recent acquisitions in Multi-Family contributed an increase of 4% on the top line and 9% to EBITDA compared to the prior year quarter. Multi-Family was an exceptionally strong tailwind this quarter, and we expect this streak to continue for the remainder of 2023. While we expect Multi-Family to normalize around the first or second quarter of next year, we remain optimistic that Single-Family starts will be on stronger footing in the same period compared to the first half of 2023. As it relates to our cost structure, controlling SG&A and other expenses remains a vital focus for us. This includes the ongoing optimization of our footprint and balancing the need for variable cost reductions against future capacity needs. We are focused on our discretionary spending, and our team has done a great job on managing costs in the short term while executing our strategy over the long term. Turning to M&A on slide 6. We continue to target attractive opportunities with a disciplined approach. Thus far in 2023, we have completed four deals and are still committed to our goal of investing an average of $500 million in M&A per year for the next several years. During the second quarter, we added millwork capabilities through the acquisitions of JB Millworks and Builders Millwork Supply. And earlier this week, we acquired Church’s Lumber, which expands our presence and scale in the Detroit market. We’re excited to welcome our talented new team members to the BFS family. Our M&A and organic investments have substantially increased our value-added product mix and diversified our end markets since Q4 2021, as shown on slide 6. We have seen the fruit of this growth in recent quarters, and we have driven our gross margins higher even in a down housing starts environment. Moving to slide 7. I would like to provide an update on capital allocation. In the second quarter, we deployed over $850 million of capital towards organic growth investments, tuck-in M&A, and share repurchases. We have cumulatively deployed approximately $5.3 billion since the end of 2021 and remain on track to achieve our 2025 goal of $7 billion to $10 billion communicated at our Investor Day in 2021. Now let’s turn to slide 8 for an update on our digital strategy. We firmly believe our long-term commitment to new digital innovations and technologies will deliver greater efficiency across homebuilding and enhance our product and service offerings. We continue to play a pioneering role in the digital transformation of the homebuilding industry and have made a significant investment in growing our digital platform. We have made it a priority to ensure digital adoption is integrated across our operations as we seek to create a platform that will lead to building better, more affordable homes. myBLDR.com serves as the entry point to our collaborative project management platform. It is designed to create efficiency for both BFS and our customers by offering improved transparency and engagement in the homebuilding process. It combines Paradigm’s next-generation estimating technology with our 3D Home Configuration model. Together, these tools allow our customers more control over their design, cost estimating, and building process, ultimately saving both our customers and their clients time and money. We are still in early innings and have more to come as we continue to roll out these digital solutions to our end users, but we remain confident in our ability to gain an incremental $1 billion in product sales by 2026. We believe our sustained commitment to investing in digital innovations and technologies will extend BFS’ lead as the partner of choice in the market, and we look forward to providing more detail on our long-term strategy at our Investor Day in December. Before I turn the call over to Peter, I want to say how grateful I am to our team members for continuing to execute in a challenging environment and providing excellent service to our customers on a daily basis. At BFS, we keep our high-performing, people-first culture at the heart of all we do. That’s why we like to recognize team members in our organization that embody the true spirit of our 'Be More, Do More, Build More Together' philosophy. Perla Jover is an Inventory Control Supervisor in Houston, Texas, who has made a huge impression on her managers and colleagues. In May, she was honored as one of our first team MVPs for exemplifying our core values. Perla’s positive attitude for willingness to jump in and help in her pursuit of excellence really makes a difference on the team. The supervisors appreciate how she embraces learning new skills and mentoring others, especially young women new to our industry. Employees like Pearl make me proud to lead this great organization. Without the full effort of our team, we would not have had the outperformance that we achieved during the first half of this year. I’ll now turn the call over to Peter to discuss our second quarter financial results in greater detail.

Thank you, Dave, and good morning, everyone. Our performance during the quarter further highlighted the resilience of our business in the face of macro pressures. I’m particularly proud of our gross margin results driven by our increased mix of value-added products and services. We are well positioned in the marketplace with differentiated solutions and a healthy balance sheet. We continue to generate robust free cash flow and prudently deploy capital. I’m confident that the combination of our industry-leading scale, ongoing investments in value-added and digital products, and strong financial position will lead to a double-digit adjusted EBITDA margin this year and sustained growth in the years to come. I will cover three topics with you this morning. First, I’ll recap our second quarter results. Second, I’ll provide an update on capital deployment. And finally, I’ll discuss our full year 2023 guidance. Let’s begin by reviewing our second quarter performance on slide 10. We delivered $4.5 billion in net sales. Core organic sales decreased by 22%, which was better than expected, despite a 31% decline in Single-Family due to slower demand over the prior year. Multi-Family continues to be a bright spot, growing by nearly 30%. As Dave mentioned, the strength in Multi-Family was driven by our recent acquisitions as well as favorable margins, largely attributable to the longer lead time for this end market. R&R and other grew by nearly 5%, mainly due to increased sales focus and capacity versus the prior year. The cumulative effect of our acquisitions over the past year contributed approximately 4 percentage points of growth to net sales. Importantly, value-added products represented 53% of our net sales this quarter versus 45% in the fourth quarter of 2021, reflecting our improving position as a supplier of choice for these higher-margin products. During the second quarter, gross profit was $1.6 billion, a decrease of 33.9% compared to the prior year period. Gross margin increased 40 basis points to 35.2%, driven primarily by a stronger mix in value-added products overall and with particular strength in Multi-Family value-add. SG&A decreased $28 million to $1.02 billion, mainly due to lower variable compensation, partially offset by additional expenses from operations acquired in the last year. Acquisitions increased SG&A by $52 million in the quarter. As a percentage of net sales, total SG&A increased by 740 basis points to 22.5%, primarily attributable to decreased leverage on net sales. We remain focused on operating efficiently, containing costs, and effectively integrating operations and acquisitions. Adjusted EBITDA was approximately $769 million, a decline of 49%, primarily driven by lower net sales, including a decline in core organic products attributable to a slower housing market and commodity deflation. Adjusted EBITDA margin remained a robust 17%, up 70 basis points sequentially as we continue to execute and drive improved productivity across the business. Adjusted net income was $498 million, down from an adjusted net income of $1.07 billion in the prior year quarter. The 54% decrease in adjusted net income was primarily driven by a decrease in sales volumes and commodity deflation. Adjusted earnings per diluted share were $3.89 compared to $6.26 in the prior year period. The decrease in adjusted EPS was partially offset by our repurchase of nearly 7 million shares, which added roughly $0.20 per share during the quarter. Our second quarter results exceeded the guidance we provided in May, supported by our core business mix and gross margin strength amid outperformance in value-added products. We continue to gain confidence in the strength and durability of our margin performance, and we believe our long-term normalized gross margin percentage is now at 29%-plus versus our previous expectation of 28%-plus. Now, let’s turn to our cash flow, balance sheet, and liquidity on slide 12. Our second quarter operating cash flow was approximately $391 million, down $556 million compared to the prior year period, mainly attributable to commodity deflation and a reduction in Single-Family starts. Capital expenditures were $121 million. All in, we delivered healthy free cash flow of approximately $270 million. For the trailing 12 months ended June 30, our free cash flow yield was 17.7%, while operating cash flow return on invested capital was 41.4%. Our net debt to adjusted EBITDA ratio was approximately 1.1 times, while base business leverage was 1.6 times. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was approximately $900 million, consisting of $800 million in net borrowing availability under the revolving credit facility and $100 million of cash on hand. Moving to capital deployment. During the second quarter, we repurchased approximately 7 million shares for $723 million at an average stock price of $103.68 per share. In total, we have repurchased approximately 41% of our outstanding shares since August of 2021. We have approximately $600 million remaining on our most recent $1 billion share repurchase authorization from April 2023. We remain disciplined stewards of capital, and we’ll continue to look for organic and inorganic growth opportunities while maintaining our fortress balance sheet. Let’s turn to our outlook on slide 14. Our July sales trends are encouraging and fuel our confidence in the resilience of our industry. Several of our national customers have begun to provide full year guidance, providing us with better visibility and greater confidence in the strength of the market. As a result, we are establishing our full year base business and total company guidance as we enter the back half of 2023. Our base business approach showcases the underlying strength and profitability of our company by normalizing for commodity volatility. As a reminder, our base business definition assumes normalized margins and static commodity prices at $400 per 1,000 board feet. This is helpful to clearly assess the core aspects of the business where we have focused our attention to drive sustainable outperformance in our industry. Our base business guide on net sales is $16.6 billion. Our base business EBITDA guide is $2.2 billion at a margin of roughly 13.3%. At this time, we are also providing total company guidance for full year 2023, including total net sales, gross margins, adjusted EBITDA, and adjusted EBITDA margin. For full year 2023, we expect total company net sales to be $16.8 billion to $17.8 billion. We expect adjusted EBITDA to be $2.6 billion to $2.9 billion. Adjusted EBITDA margin is forecasted to be 15% to 17%. And we are guiding gross margins to a range of 33% to 35%. Our recent above-normal margins reflected greater mix in value-added products along with disciplined pricing required to offset our increases in operating costs from inflation. As we move through the second half of the year, we expect both our gross margins and Multi-Family business to continue to normalize. We expect full year 2023 free cash flow of $1.6 billion to $2 billion. Our free cash flow forecast assumes average commodity prices in the range of $400 to $450. Our 2023 outlook is based on several assumptions. As I wrap up, I want to reiterate that we are exceptionally well positioned to drive our strategic goals. Our guidance illustrates our belief that we will deliver a double-digit adjusted EBITDA margin this year and sustain that momentum in the years to come. As we continue to reap the benefits of our transformed business, we are positioned to achieve an upwardly revised long-term normalized gross margin of 29% or higher. I’m confident that our best-in-class operating platform will continue to generate substantial free cash flow, providing further financial flexibility on top of our already healthy balance sheet. Importantly, we will continue to diligently deploy capital and maximize long-term shareholder value. With that, let me turn the call back over to Dave for some final thoughts.

Thanks, Peter. Let me close by saying that we feel better about the current building environment today than we did at the beginning of the year. We’re executing our strategy and continuing to invest to drive future growth. Our results in the first half reflect our hard work over the past few years to build a differentiated platform that has BFS set up to win in any environment. I am proud of our operational excellence, which is driving increased safety, productivity, and profitability despite market headwinds. We are in a great position today and as end markets further stabilize, we are positioned for an even stronger future. We’ll continue to be at the forefront of technology with our digital strategy, which I’m confident will be a game changer for the industry. We are exceptionally well positioned to drive shareholder value this year and in years to come. I’m excited to share more details at our upcoming Investor Day on December 5th in Atlanta and look forward to seeing you there. Thank you again for joining us today. Operator, let’s please open the call now for questions.

Our first question today comes from Matthew Bouley with Barclays.

Good morning, everyone. Thank you for the questions and congratulations on the results. I’ll begin with the inquiry regarding the long-term gross margin guide, which you have now increased twice in a row. What has changed in the past 90 days to give you that additional confidence? Furthermore, considering your gross margin of 33% to 35% this year, what indicators are you looking for to support a further increase from that 29%? I’ll stop there for my first question.

Thank you, Matt. We appreciate it. We’re excited about the business and pleased with the continuing evolution of our gross margins. We’ve discussed this for a couple of years now. The strength of our core business, especially after the merger, and our ability to grow value-add as part of our mix has been very impactful. This year, we’ve been looking for normalization, especially with the supply chain returning to normal, and we were concerned about how that would affect the market’s ability to maintain margins. This concern was common. We aimed for performance to stabilize, and while we’re not quite there yet, we’ve observed stability in many areas of the market, regions, and product categories where things are normalizing. Talking about gross margins can be somewhat misleading. This quarter, we experienced a significant boost from Multi-Family, which I would categorize as transient tailwinds. Several hundred basis points this quarter came primarily from commodity timing and costs compared to our contracts. We’re pleased with this outcome and will take it, but we don’t want to imply that it’s permanent. There are still areas in the market that are normalizing, and we’re uncertain about where they will ultimately settle, though we recognize that pressure is easing. Our gross margins are up 40 basis points overall, but taking out Multi-Family shows a notable decline in the core area, which we anticipated. Despite that, it’s performing better than we expected. We have gained a lot of confidence in our business's strength and the desirability of value-add for our builder customers, and we continue to invest in it, feeling positive about what it means for future normal margins. We’ll keep monitoring it and have kept our expectations optimistic because we are currently outperforming those expectations, and we will see how things normalize over time.

Hey Matt, thanks again. This is Dave. I would just add, since the merger with BMC, we’ve invested over $100 million in upgrading and automating our manufacturing capabilities, and we’re starting to see the fruits of that. And we’re getting a better feel of how that’s going to contribute to margins over the longer period as well.

Got it. Thanks, guys, for that comprehensive answer, very helpful. So, I guess, some of what you mentioned, Peter, on the Multi-Family side is going to address this next question. Kind of zooming into the base business, it looks like you’re saying there’s, I don’t know, maybe some rounding, but roughly $600 million of earnings above the base this year. How much of that is that Multi-Family commodity cost timing, other commodity, maybe OSB? And could you break down if there’s anything else in there besides commodity that’s kind of above the base business? Thank you.

Yes. No, good question, Matt. So just a basic reminder, the base business is really just trying to take out any commodity fluctuation in two ways, right? Anything that’s not $400 lumber we normalize for, and we also normalize for margins attributable to those same commodities. So we don’t normalize for margins anywhere else, but it does have the impact within that $600 million that you mentioned that yes, there’s some rounding. Within that $600 million that you mentioned, that’s attributable to margins. And this particular year, it’s mostly margins. So, the vast majority of what has flowed through is the normalization of those outperforming margins over the course of the year. There is certainly a component of that that is from the Multi-Family, right? So it’s because a piece of the commodities flows into our manufactured products, including roofing, floor, trusses, as well as wall panels, which obviously have a significant component of commodity in them. So, we take an adjustment for that. So, that is the primary driver is the margins attributable to the commodity change this year.

The next question comes from Trey Grooms with Stephens.

Yes, I’d echo the congrats on the outstanding work in the quarter.

Thanks, Trey. I appreciate it.

Sure. So, on Multi-Family, I think you mentioned that you expect that to remain strong through this year. So, are you seeing anything in your backlog or hearing anything from your customers about their backlogs in Multi-Family that would suggest that this slowdown is kind of coming around that time or anything on the timing there, or is that more just kind of a high-level expectation at this point?

Yes, we are noticing signs from our customers that towards the end of this year, a significant amount of supply will come online simultaneously. In a typical year, this supply would need to be absorbed before many new projects can begin. Another important consideration is the cost of capital, which must align with the rents that will be generated; this balance is crucial. Until the surge of openings at year-end is absorbed, these dynamics will take some time to stabilize. We're hearing that there may be a slight delay in activity during the first and second quarters, with a potential rebound afterward. The challenge is that projects take considerable time from planning to execution, leading us to anticipate a lag in the first half of next year. However, we believe that the Multi-Family sector will ultimately be beneficial for us, and this situation is expected to be temporary rather than a long-term concern.

Right. Got it. Okay. And then, Peter, you mentioned you’re expecting gross margins to moderate through the year. Sorry if I missed this, but you’re calling out 33% to 35% for the year. You’ve been running at the 35% range. So, are you seeing any change or any more normalization in the margin thus far in the third quarter, or is it still kind of holding in at that high end of the range for now?

Yes, that's a good question. We continue to observe some decline in the core market gross margin, which has been less than we anticipated, but it has persisted, and I believe this trend will continue through the latter half of the year. We have a fairly accurate understanding of how Multi-Family will progress due to the timing of contracts connected to the current commodity purchase prices. Overall, there has been strong performance in gross margins throughout the year, and I don't expect July to be notably different. However, the trends are consistent, with a significant normalization in Multi-Family expected over the next year.

Great. Thank you. If I could sneak one more in, a little bit more higher level. $100 billion or so invested in automation over the last few years, which you said is bearing fruit, which is pretty clear. Where are you in that process, or maybe how should we think about the amount of plants that you have that you would classify as automated? And where would you like that to be kind of over time?

Yes. I would tell you, we feel really good about the level of automation we have, where every plant has some level of automation. Obviously, there’s more opportunity, and we have a pretty long runway there to continue to improve, and we’re excited about that prioritizing those projects. And as you know, as we do acquisitions, typically there’s a level of automation that we go back in and upgrade those acquisitions with, and we’ll have that plan ongoing. We’re a good customer for our automation vendor. And as much as we’re always excited about talking about digital, we’re also on our front foot when it comes to technology in this manufacturing space as well. So yes, we’re excited about where this can continue to go.

The next question comes from Ketan Mamtora with BMO Capital Markets.

Thank you, and congratulations on a strong quarter. I have a couple of questions. Firstly, how does the M&A pipeline look at this point? Also, since the housing market has performed better than expected at the beginning of the year, has this changed your approach to M&A or the expectations of sellers?

Thanks for the question. Yes, the M&A pipeline actually has improved. I think just the fact that things were changing at the beginning of the year and people weren’t sure exactly how the year was going to play out kept people on the sideline for the first half. We’re seeing more opportunities now in the second half and a couple that we feel like are really good to look at. And we’re excited about how we’ll continue to invest in M&A in the future.

Got it. Is it possible to quantify the trend in July, considering how it started off quite well, in relation to Q2 or year-over-year?

Yes, it has been a refreshing year. Despite the concerns we had at the beginning of the year due to interest rates and affordability, the year has turned out to be surprisingly normal. We've seen good progress throughout the year, following the expected seasonal trends with busier months in the summer. Our capacity has been well utilized, and while we have experienced increased activity in certain areas, there have been no overwhelming challenges like we faced during the COVID surge. Our vendors have also performed well, with only a few tight spots, but overall the market has adjusted well to the new volumes. There appears to be confidence among our customers regarding their ability to sell what they’ve produced. Demand remains strong, and due to the reluctance to move from existing homes, new construction is emerging as a positive aspect, which we are pleased to engage with.

The next question comes from Adam Baumgarten with Zelman & Associates.

Just a question on the environment. With the ramping starts you’ve seen year-to-date, are you hearing about any supply chain strains? Maybe not for you guys specifically, but for the industry or maybe an extension in construction cycle times for the builders?

Yes, I believe the supply chain has largely returned to normal. Compared to the issues caused by COVID, we are not experiencing anything of that scale. There are a few product categories, such as premium windows, where lead times are a bit longer, but overall, things are getting back to normal. With the increase in demand, many of our vendor partners are making some adjustments to their staffing to meet this new level of demand, but these changes seem to be temporary and minor. Overall, from a supply chain standpoint, we are in pretty good shape.

Okay, got it. Good to hear. And then just switching gears to the R&R business, I think you had mentioned increased capacity being a tail and maybe just some more color around that. And then also, were there any product categories that really stood out as particularly strong in the R&R channel in the quarter?

Yes. So R&R, the way we service R&R, there are a few markets where we’re very focused on it with specific cases. But for the most part, we serve both the Pro new construction and the Pro R&R markets through the same chance. So, you end up with certain timelines where you’ve got pretty heavy demand from one or the other. And obviously, over the past couple of years, the bulk of it has come from the new construction side. So with that pullback a bit, they just opened up more capacity, that Pro R&R business. And as I said in the past, the Pro R&R contractor would generally prefer to use us if we’re available because of all the incremental services and expertise we provide versus a traditional big box or a small player. The categories, the product categories, I would say we performed well across the outline of products or the family of products within Pro R&R. I would say, just stepping back for the whole business, we’ve continued to see really nice performance in the windows, doors, and millwork category. That’s been an outperformer for us all year, and we’re pretty excited about that.

The next question comes from Mike Dahl with RBC Capital Markets.

The first question relates to the Multi-Family sector. There are several significant factors at play. You have made investments both organically and through acquisitions in this area, and the percentage of Multi-Family within the overall market has grown. Permit activity is now declining, and you mentioned some normalization. I'm curious about the sales trends in Multi-Family, particularly regarding margins as we look ahead to next year. Could you clarify the balance between internal developments and market changes? How would you define what your new normal distribution in Multi-Family looks like amid these fluctuations? Any additional insights or quantification would be helpful.

We’ve experienced significant changes in the Multi-Family segment. Our investments have paid off, and we've effectively competed in the marketplace. Leaning into this segment has led to notable shifts in both the market and our own position. While we've increased our Multi-Family presence, it largely relates to truss, rather than larger constructions like skyscrapers or shopping malls. Our focus is on four-story and below wood frame structures, which has been successful for us. We believe we've strengthened our market position and established ourselves as a trustworthy competitor. We’re capable of managing fluctuations and can still deliver despite some constraints in our facilities across the country. We feel confident that we have gained market share and that this has contributed to our positive momentum, even as we navigate the integration of our teams. We’re optimistic about the future. You mentioned the reset, and we anticipate that in the latter half of next year, as conditions normalize, we could see a new baseline of about 10% of sales in an environment similar to what we’re experiencing now.

We intentionally focused on the acquisition and entry into the Multi-Family segment as a way to diversify from Single-Family and vice versa. We anticipate that as the Multi-Family sector stabilizes, the Single-Family sector will also remain steady. Additionally, the truss business is a strong investment for us because we can use a Multi-Family truss plan for Single-Family projects. Currently, when Multi-Family plants reach maximum capacity, we can manage jobs from our Single-Family plants, and similarly, we adapt when either side has more work than it can handle. We have a strategy to navigate the fluctuations in both business areas, which we executed with intention.

Got it. Yes, that’s very helpful. Thank you. Moving to my second question, you've focused extensively on analyzing the margins. At a high level, can you help us understand the margin differences between commodities and the Multi-Family segments, especially now that you're discussing a normal margin of over 29%? Where do you anticipate your new value-added margin will be? Perhaps around the low 30s for value-added and 20 for lumber? What factors are influencing the blended 29% margin at a high level?

Sure. Historically, we’ve maintained gross margins between 25% and 27%. We mentioned that commodities typically yielded margins in the high-teens to low-20s, while value-add was generally 800 to 1,000 basis points higher. Currently, we’re seeing significant improvements in value-add margins. However, we’ve also experienced increases across the board. This is due to inflation affecting delivery costs, which necessitates higher margins to offset these increased expenses. As a result, we’ve seen incremental margin increases throughout the business. Two key factors influencing this are improved productivity and changes in the Multi-Family sector, which has led to higher margins. Additionally, there has been a notable shift in our business mix from commodities, which used to account for half of our operations, to now roughly 25% to a third, contributing to a higher normalized gross margin. All these elements—productivity, inflation, and mix changes—are driving this increase. Nevertheless, we’re indicating a full year midpoint gross margin around 34% to 35%, but it’s normalizing toward the 29%-plus mark in the Multi-Family segment. We’ll continue monitoring this trend and adjust our guidance as needed.

The next question comes from Steven Ramsey with Thompson Research Group.

I wanted to continue the base EBITDA conversation along with the productivity. If I’m connecting the dots, you’re saying this year’s sales and base EBITDA go down $100 million each, and then the productivity savings midpoint is $130 million. So, backing out that midpoint of savings, decremental margins look like a low-20% range if my math is correct. I mean, with the productivity flowing in, is the dollar level of productivity in future years going to be as strong as this year?

Well, it’s certainly what we’re shooting for. Internally, we have a lot of projects that we think we can leverage to continue to improve our operations, continue to offset the impact of inflation, whether it be the way we buy, what we buy, how we deliver it, how we process it internally, back office, those are all things that we’re pretty confident that we can continue to improve, and those are the goals we’re setting for ourselves. Will every year be exactly this year or better? Well, we’ll see certainly where we’re headed.

We see a significant opportunity due to our network of over 570 locations and our experience in adopting best practices from various acquisitions. We have figured out how to implement the most effective practices from these acquisitions across our entire platform. We've established a culture focused on continuous improvement, with dedicated personnel in each division working towards this goal. Our scale allows us to optimize operations across all 570 locations rather than being limited to just a single area or market. Therefore, we are confident that we can maintain our current levels of continuous improvement for many years to come.

The next question comes from Joe Ahlersmeyer with Deutsche Bank.

I would like to know if you could provide some insights into your inventory and Multi-Family backlogs for this quarter, particularly regarding the phasing of gross margin and overall sales and EBITDA for the third quarter compared to the fourth quarter.

I believe that typically, our performance in the fourth quarter is slightly lower due to seasonal factors. Quarters two and three tend to do better than quarters one and four. This year, based on what I mentioned earlier, we anticipate a more typical pattern. Therefore, we expect the fourth quarter to be a bit weaker. As always, this is the part of my forecasting where I have less confidence—one quarter ahead, we feel relatively good; looking two quarters ahead, it becomes a bit less clear. That might be the best perspective to have.

Understood. And then on the inventory balance, that’s come down as commodity costs have come down and rolled through the P&L. But is there additional productivity you’re looking to gain on the inventory balances, or given what we’ve seen in the market, could we actually see it go the other way where you’re preparing, I guess, for a stronger spring in 2024, making sure that you have inventory on hand to service the market?

Yes, I would say it's more of the latter. Your observation is spot on. We have achieved excellent performance. Our operating teams have done an outstanding job of continuing to improve after the chaos of the supply chain over the past few years, clearing out excess inventory and tightening up on items like windows and millwork. They have effectively managed the inventory in a streamlined just-in-time manner as it flows in and out of our facilities. However, you're correct that as we grow, we will have more working capital inventory involved. Looking ahead, we do see growth on the horizon, and as a result, we expect working capital to shift from being a benefit to becoming a usage factor for that growth.

The next question comes from Collin Verron with Jefferies.

You’ve pointed out the increase in orders from public builders and the Census Bureau data indicating a recovery. I was hoping you could share any differences you’re noticing between large production builders and smaller builders among your customers. Additionally, do you believe the worst is behind BLDR in the Single-Family segment, particularly regarding Single-Family sales?

We were really encouraged by the results reported by our public builders and even more by their projections for the rest of the year. We feel confident that while I wouldn’t call it robust, it is certainly better than expected for the second half of the year and is stable to improving as the year progresses. This gives us the confidence to project our capabilities in that environment.

Great. That’s helpful. And then you guys provided some good color on the digital adoption, providing some takeoff figures. Can you just quantify those maybe in terms of revenues and talk about where you guys are in your journey in reaching that $1 billion sales opportunity?

Yes. We’re excited about digital. It’s continuing to move along. The technology is coming together. The pilots are going well and we’ve given sort of a few hints about some metrics and what that looks like internally but it’s all very, very early days, to be honest. We’ve got some revenue, but it’s pretty modest. It’s not the focus. The focus is not really growing that right now. It’s tuning. It’s completing the technology, tuning what we have built, making sure the technology is sort of stable and capable of running at the scale that we intend to put through it. That’s this year’s goal. We’re certainly expecting pretty significant increases in ‘24 and beyond. And we’ll have some more information on the timing of that and the layout of that as we get into our Investor Day in December.

The next question comes from Reuben Garner with The Benchmark Company.

Congrats again on the strong quarter. I guess, I had some connection issues earlier. So, if I repeat anything, sorry, in advance. But first question is on inventory. Can you talk about where your inventory stands from a volume perspective relative to kind of historically normal times? We’ve heard from both kind of two-step distributors and some manufacturers that the dealer channel is kind of thin and hesitant to add. I was just curious how you guys are viewing inventory? Is that something where you’re stocking and it’s an advantage you have product over some of your smaller peers, or are you the folks that are running thinner than usual now?

I would say we’re running normal, right? I think we’re not seeing the same kind of supply challenges we did just after COVID. It’s more of a normal operating environment. Our guys have done an unbelievable job of coming through that and getting back to normal for us. We’re where we would be normally with just seasonal fluctuations now. So we’ll see a buildup of inventory during the third quarter, and it will start to wane in the fourth quarter as we head into the seasonal months. But we’re kind of business as usual at this point.

Okay, great. And then, I’m not sure if this one was asked, but an updated way to think about sensitivity to lumber? I know you’ve got the base business lumber out there. But if we’re continuing to run $100 higher, how much of an impact does that have on revenue and profit?

Yes, that's a great question, Reuben. You might have noticed that we reintroduced our base business guidance and estimate, but we chose not to include the sensitivity chart this time. Honestly, I believe that led to more confusion than clarity, so we're going to try a different method. Based on what we see today, if lumber prices fluctuate by $100 or $1,000, we estimate that it could affect our annual EBITDA by between $175 million and $225 million. If we consider $200 as the midpoint, it's within that range. However, there are two important points to remember. First, this assumes normalized margins, specifically regarding how commodities impact our margins. Second, keep in mind that it typically takes about three to four months, sometimes a bit longer, for any changes in commodity prices to reflect in our results. This involves factors like existing inventory, order times, delivery, and how price changes flow through our system. So, these two assumptions are crucial for that estimate. To reiterate, a $100 change in lumber is estimated to result in an annual EBITDA impact of between $175 million and $225 million.

And a quick clarification, Peter. Is that lumber and OSB altogether commodity?

Correct. And we assume a 70-30 lumber OSB mix.

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

Just given the strength in value-add and what you’ve talked about in terms of, I guess, the widening kind of margin differential versus traditional distributed products. Are you seeing competitors, I guess, invest behind the category to a greater extent or lean in more there? And I guess, over the long term, how do you think about your ability to kind of differentiate with some of those solutions?

Yes. I believe we are the clear leader in the industry. We have focused heavily on boosting our productivity, particularly in our manufacturing truss and door shops, to maintain that lead. We recognize that the investment needed for these improvements is considerable, and our dedication to this has made a significant impact, as evidenced in the market. We notably experienced this post-COVID, when many struggled to find truss manufacturers without substantial backlogs, leading customers to favor us. Therefore, we are confident in our position. Where there are opportunities, investments will be made. However, I believe our strong lead over the competition makes it challenging for them to catch up.

Got it. Okay. That’s helpful. And then just second, I was hoping you could just kind of frame how you would characterize your volume performance over the first half relative to what we’ve seen on the Single-Family start side. And I guess in manufactured products as well, I mean it seems like the core organic sales there trailed Single-Family starts a bit. Curious if that’s footprint, maybe some pricing in there and just how you’d kind of reconcile those different data points.

Yes. No, that’s a fair question. It’s something we look at pretty regularly, as you know. What I think it boils down to most simply is starts are the best indicator and the best sort of measuring stick for our performance over time. I don’t think it’s accurate at a quarter. And what we’ve seen is sort of as the market turned down, we didn’t go down as much as the market. As the market has turned up, we haven’t gone up as much as the market. And there’s a little bit of product mix to do with that, right? We’ve said in the past, we’re probably two-thirds that’s leveraged towards the beginning of the start, one-third towards the end of the start. So that’s one piece. Another of it is that we’re probably not at the start. We know we’re not at the start. We’re anywhere from 30, sometimes 60 days later when our first product starts to hit the job site. So, a little bit of shifting around that in terms of timing of when our orders hit. Based on the trends we’re seeing right now, we feel pretty good. We may have given up a little bit of share in our estimation, a couple of hundred million dollars worth. We talked a lot during the timeline of the big supply chain disruptions about how advantaged we thought we were by having more product and being more effective at meeting customer needs where others struggle. And we’re probably giving back a little bit of that as we anticipated, but that’s kind of in the numbers you’re seeing now. So, feeling pretty good about where we are versus the overall market.

The next question comes from Jay McCanless with Wedbush.

The first question I had, we’ve seen lumber prices, especially framing lumber, move up sequentially for the last couple of months. I guess, is that starting to flow into your pricing, not only on commodity goods, but are you also starting to be able to take some price on the value-add goods?

Like always, yes, sure. I mean, it will take some time to fully feather in, but it has started to move modestly and we certainly follow it on a consistent basis. The one point I’ll make on that though is that one of the big movers has been OSB. I’m personally a little bit skeptical on the durability of that, only because we hear so much about incremental capacity coming online over the next year. We’ll see. We’ll see where it pans out, but that certainly is something to keep an eye on.

Okay. That’s good to hear. And then just the second question, M&A phrased a different way. Are you starting to see some of this tightening in terms of bank lending standards and underwriting on some of your potential acquisition targets? Is that freeing up or making some people maybe more willing to sell than they might have been at the beginning of the year?

That makes reasonable sense that we would start to see that. I would say what we’ve been looking at lately, that hasn’t been a factor.

The next question comes from David Manthey with Baird.

Yes. Hi. This is Quinn Fredrickson on for Dave. I’ll just ask one question here. Peter, your earlier comment made it sound like the competitive environment has remained pretty benign in value-add and better than you expected. Do you think that’s due to same dynamic among competitors with the commodity price lags in their contracts, or is there a structural change and improvement there? And then, are you assuming an uptick in competitiveness and the expectations for the slight back half gross margin moderation?

So, I guess, I need to be a little careful how I answer that. On the first hand, we have seen incremental competition and margin erosion in core business, period, full stop. Now, it’s not as much as we expected. It’s not as much as we forecasted, hence the outperformance in that area. I would say that there’s been a lot of strength in the volumes within the value-add, which gives us increasing confidence that we’re meeting a need that our customers see value in it, that they’re leveraging it to improve their cycle times, their job site efficiencies, and their job site safety and that we’re at a price point that’s competitive that allows them to do what they need to do better. So, we’re certainly pleased with all of that and have been seeing the competition. Now, the components of cost, the investments that we’ve made, but also the inflation we’ve seen, certainly, I think that has had a structural impact on the overall market, us included, but others as well, where you got to make a little more gross margin if you want to cover those incremental wage costs or truck costs or whatever it is. But then lastly, we’ve done a lot of work. We’re much more efficient and that self-help has allowed us to earn more on the same equipment year-on-year because of our efficiency improvements, whether it be new automation that layers on the same equipment and facilities, sometimes it’s a new equipment, but sometimes it’s just better process. And all of those things are why that strength we’ve seen is sustainable. I think that helps to Dave’s point, us to be more competitive, right? We can still make good money where others are struggling. And if we can do it by being more reliable or on time and in-full being better that our quality is better, then we’re always going to be the partner of choice for these builders who want to make sure their houses are high quality and on time.

And I would just add a real-life example. In a major market, we had a customer try someone else for 50 houses on trusses for a lower price. They came back to us less than a month later at our price for those same 50 houses, which we, by the way, delivered inside of 10 days. So, the stickiness we generated or by being able to do what we do best for our customers, they recognize that value proposition. And that’s allowed us to make money for them and us, and that’s where we want to be.

This does conclude today’s question-and-answer session. I will now turn the program back over to our presenters for any additional closing remarks.

Thank you very much. Have a great day.

Thanks, everyone.

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.