Good day, everyone, and welcome to the Builders FirstSource First Quarter 2024 Earnings Conference Call. Today's call is expected to last around 1 hour, which will include comments from management and a question-and-answer session. I would now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please proceed.

Good morning, and welcome to our first quarter 2024 earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. The earnings press release and presentation are available on our website at investors.bldr.com. We will refer to the presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. You can find a reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they could 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, Heather. Good morning, everyone. Thank you for joining our call. Our resilient first quarter results reflect our differentiated product portfolio and scale, our team members' consistent focus on executing our strategic priorities, and our operational efficiency initiatives. As we expected, a weakening multifamily market and higher mortgage rates driving affordability challenges were headwinds to start the year. Despite these micro challenges, we built on our successes and drove growth through our value-added products portfolio in our industry-leading digital platform. We are committed to advancing innovation and delivering exceptional customer service as a trusted and preferred partner to our customers. We are focused on executing our clear strategic pillars, as shown on Slide 3. Our investments in value-added products, install services, and digital solutions are driving organic growth, delivering greater efficiency, and empowering the next generation of homebuilding. For those who are new to the BFS story, value-added products include manufactured components such as trusses, Ready-Frame, and wall panels, as well as windows, doors, and millwork. Through our value-added products and install services, we help meet our customer needs, such as reducing cycle times, addressing labor constraints, and improving home construction quality. With our digital tools, we are providing our customers with a more efficient and cost-effective way to manage the construction of their homes that will increase existing customer stickiness, win new business, and improve our operational efficiency. We remain committed to innovation and continuously seeking to do things better. We have a robust set of operational and productivity initiatives and are focused on leveraging our scale and fixed costs while delivering the highest quality products and services to our customers. We are deploying capital in a disciplined manner with a proven M&A strategy and a track record of buying back shares at competitive prices. Working alongside the best team in the industry, I am confident that we will continue to compound long-term shareholder value and achieve our strategic priorities. Let's turn to our first quarter highlights on Slide 4. We continued to deliver strong margins in Q1, reflecting our end-segment diversification, focused execution, and differentiated product portfolio and scale. Our gross margins of more than 33% reflect a higher mix of value-added products, including multifamily truss and our ability to manufacture more efficiently. We expect the multifamily end segment to progressively normalize over the course of this year, and we continue to see some normalization in core margins. Moving to Slide 5. We're off to a strong start on our strategic initiatives. Our full digital product launch at the International Builders' Show in February was an exciting milestone. At a high level, our digital tools do three things: one, solve customer pain points; two, make it even easier to partner with us and our suppliers; and three, help us gain incremental business from new and existing customers. It's a win-win, and we're excited about how everything is going so far after the launch. We're focused on operational excellence and innovation and using playbooks of proven best practices to increase our safety, efficiency, and wallet share with customers. One area where we're using playbooks is with our installed services business. Our install sales increased by 17% year-over-year as we leveraged our capabilities to help customers address labor constraints. Additionally, we drove $40 million in productivity savings in Q1, primarily through procurement and SG&A initiatives. We believe prudent expense management leads to maximum operational flexibility. This includes optimizing our footprint and balancing cost reductions against future capacity demands. We will remain disciplined managers of this discretionary spending no matter the operating environment. Early momentum in single-family has slowed as persistent inflation has cooled short-term expectations for interest rate reductions. However, low existing home inventories and pent-up demand provide an environment where growth has continued to build. Builders across the board are having to navigate affordability issues and challenges with the regulatory environment, land development, and infrastructure. It's evident that the large national builders have done a good job of utilizing specs, reducing home sizes, and providing interest rate buydowns to assist buyers with affordable options. Smaller builders are more likely to benefit from rate cuts. We are staying in close contact with our customers of all sizes to maximize our business in the current environment. As we have detailed on prior calls, multifamily became a headwind in Q1 as our activity levels and record backlogs have declined versus the prior year. It is important to note, however, that multifamily remains a strong contributor to gross margins and EBITDA even at current levels. Turning to M&A on Slide 6, we continue to target attractive opportunities while remaining financially disciplined. In the first quarter, we completed two deals with aggregate 2023 sales of roughly $36 million. In early February, we acquired Quality Door and Millwork, a leading distributor of millwork, doors, and windows in Southern Idaho. In March, we acquired Hanson Truss, which further strengthens our value-added position in Northern California and Nevada. And last week, we acquired Schoeneman's Building Materials. Schoeneman's manufactures trusses and distributes building materials in the Sioux Falls, South Dakota area. We are excited to welcome these talented new team members to the BFS family. M&A and organic investments have increased value-added products as a percent of our overall mix by 700 basis points over the past two years and by 1000 basis points if you go back to 2019. Our success with this strategy has been a core component of our improved margin profile through the cycle. We believe there is a long runway of M&A targets in our fragmented market, and we are pleased with recent improvements in the pipeline. Our disciplined approach to M&A includes increasing our market position in desirable geographies, extending our lead in value-added and specialty solutions, and enhancing customer retention. On Slide 7, we provide an update on capital allocation. During the first quarter, we completed a $1 billion note offering which brought us additional financial flexibility to grow organically and remain acquisitive while maintaining a strong balance sheet. In addition to the two tuck-in acquisitions, we repurchased $20 million of shares as proven by our track record, we'll continue to buy back shares while allocating capital to high-return opportunities. We remain on track to strategically deploy $5.5 billion to $8.5 billion of capital from 2024 to 2026 as outlined at Investor Day last December. Now let's turn to Slides 8 and 9 for an update on our digital strategy. As the only provider of an end-to-end digital platform in our space, we believe BFS digital tools will be transformative for the industry and a substantial driver of organic growth. Our easy-to-use portal myBLDR.com seamlessly delivers our full digital capabilities to our customers. It is designed to create efficiencies for our team members and improved service for our customers by offering increased transparency and engagement in the homebuilding process. Combined with our proprietary estimating and configuration tools, our customers will have more control over the entire building process. This will save time and money for both our customers and their clients while making the homebuilding process more personalized. We were proud to highlight the full digital product capabilities at IBS in February. Our customers told us the new tools address an unmet need, and they were excited to use them in their businesses. Since launch in late February, we have seen orders on the digital platform go from nearly 0 to over $60 million. In Q1, we had incremental sales of over $10 million. We remain confident in our ability to meet our targets of $200 million of incremental digital revenue by the end of this year and $1 billion by 2026, as we grow wallet share and win new customers. One of our digital tools, Build Optimize uses advanced 3D modeling to identify construction clashes and resolve mechanical design conflicts before breaking ground. It ensures architects, builders, and trades are coordinated and building to the same plan. As proof of the advantages of using this transformative tool, we've seen interest from four large builders. One of these customers has used it in three markets and 13 communities across 34 plants. On average, we have identified 150 conflicts per plant, resolving those conflicts before construction leads to job site time and cost savings. One of my favorite initiatives at BFS is acknowledging team members who go above and beyond. Ira Banks in Atlanta, Georgia personifies this quality. Ira began with BFS in 1996 as a driver helper and rose through the ranks to operations manager and now oversees our new Atlanta Millwork facility in Dacula. Ira has the respect of his team members because he's willing to do whatever it takes to solve problems and add value for our customers. Recently, when there were no available drivers for an urgent customer delivery that had to arrive that day, Ira drove the box truck himself to take care of the customer. I'm grateful for Ira's drive to lead by example, a quality we find consistently in leaders across BFS. I'll now turn the call over to Peter to discuss our financial results in greater detail.

Thank you, Dave, and good morning, everyone. Our first quarter results demonstrated the effectiveness of our strategy and operating model. We are maintaining our fortress balance sheet and prudently deploying capital to the highest return opportunities. We've included acquisitions and share repurchases during the quarter. We are leveraging our sustainable competitive advantages and strong financial position to drive future growth and value creation for our customers and shareholders. I will cover three topics with you this morning. First, I'll recap our first quarter results. Second, I'll provide an update on our capital deployment. And finally, I'll discuss our 2024 guidance and related assumptions. Let's begin by reviewing our first quarter performance on Slides 10 and 11. We delivered $3.9 billion in net sales, driven by growth from acquisitions of 1.9% partially offset by commodity deflation of 1.7%. Core organic sales in line with the prior year were driven by a single-family increase of more than 4% amid higher sales of early-stage homebuilding products. From a geographic perspective, East sales were down mid-single digits, Central was flat, and the West was up mid-teens. As we signaled and expected, multifamily declined more than 13% as we lapped the prior year's strong comps. R&R and other also declined by almost 5% due to weakness predominantly in the Northeast from inclement weather. As we mentioned last quarter, inclement weather negatively impacted our operations in Q1 by roughly 3% to 4% of our overall sales. Value-added products represented approximately 52% of our net sales during the first quarter, reflecting our strength and customer stickiness for these higher-margin products. During the first quarter, gross profit was $1.3 billion, a decrease of approximately 5% compared to the prior year period. Gross margins were 33.4%, decreasing 190 basis points, mainly due to a timing shift in product mix towards lower-margin, early-stage homebuilding products, as well as margin normalization, particularly in multifamily. SG&A increased $22 million to $926 million, primarily attributable to acquired operations. As a percentage of net sales, total SG&A increased 50 basis points to 23.8%. The team has done an excellent job managing SG&A, and we stand ready to leverage our fixed costs into the growing market. Adjusted EBITDA was $541 million, down approximately 14%, primarily driven by lower gross profit and higher operating expenses. Adjusted EBITDA margin was 13.9%, down 240 basis points from the prior year. Adjusted net income of $327 million was down $83 million from the prior year due to lower gross profit and higher operating expenses, primarily due to acquisitions. Adjusted earnings per diluted share was $2.65, a decrease of 11% compared to the prior year. On a year-over-year basis, share repurchases added roughly $0.29 per share for the first quarter. Now let's turn to our cash flow, balance sheet, and liquidity on Slide 12. Our Q1 operating cash flow was approximately $317 million, down $337 million compared to the prior year period, mainly attributable to lower net income and an increase in net working capital. Capital expenditures for the quarter were $90 million, and free cash flow was approximately $228 million. For the last 12 months ended March 31, our free cash flow yield was approximately 6%, while operating cash flow return on invested capital was 22%. Our net debt to adjusted EBITDA ratio was approximately 1.1x, while base business leverage was 1.2x. In February, we completed a $1 billion private offering of 6.375% senior unsecured notes due 2034, which enables maximum financial flexibility to grow organically and remain acquisitive. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was approximately $2.4 billion, consisting of $1.7 billion in net borrowing availability under the revolving credit facility and approximately $700 million of cash on hand. Moving to capital deployment. During the first quarter, we repurchased roughly 100,000 shares for $20 million at an average stock price of $202.67 per share. Since the inception of our buyback program in August of '21, we have repurchased 42.2% of total shares outstanding at an average price of $70.42 per share for $6.1 billion. We have $980 million remaining on our share repurchase authorization. We remain disciplined stewards of capital and have multiple paths for value creation to maximize returns. Now let's turn to our outlook, which we are reaffirming on Slide 13. For full year 2024, we expect total company net sales to be $17.5 billion to $18.5 billion. We expect adjusted EBITDA to be $2.4 billion to $2.8 billion. Adjusted EBITDA margin is forecasted to be 14% to 15%, and we are guiding gross margins to a range of 30% to 33%, which is in line with our long-term normalized expectation. Our recent margins reflect above-normal multifamily performance on top of our greater mix of value-added products along with the disciplined pricing required to offset increased operating costs. We expect full year 2024 free cash flow of $1 billion to $1.2 billion. The free cash flow forecast assumes average commodity prices in the range of $400 to $440 per thousand board feet. Our 2024 outlook is based on several assumptions and includes an expectation for improving single-family growth. Please refer to our earnings release in Slide 14 of the investor presentation for a list of these key assumptions. As you all know, we do not typically give quarterly guidance, but we wanted to provide directional color for Q2 given the ongoing interest rate uncertainty and the geopolitical situation.

On a year-over-year basis, we expect Q2 net sales to be down low single digits to flat as single-family growth is offset by expected multifamily headwinds. Year-over-year adjusted EBITDA is expected to be down high teens in Q2, primarily given the impact of continued multifamily normalization. Turning to Slides 15 and 16. As a reminder, our base business approach showcases the underlying strength and profitability of our company by normalizing sales and margins for commodity volatility. This helps to clearly assess the core aspects of the business where we have focused our attention to drive sustainable outperformance. Our base business guide on net sales for 2024 is approximately $17.6 billion. Our base business adjusted EBITDA guide is approximately $2.4 billion at a margin of 13.5%. As I wrap up, I want to reiterate that we are confident in the near-term outlook, our exceptional positioning to execute our strategic goals, and our ability to create shareholder value in any environment. With that, let me turn the call back over to Dave for some final thoughts. Thanks, Peter. Let me close by summarizing how we're set up to drive long-term profitable growth by executing our strategic pillars. We believe we are the unquestioned leader in addressing our customers' pain points through our focus on customer service, value-added products, and install services. Our industry-leading digital innovations are bringing greater efficiency to homebuilding and will win us new customers and grow wallet share along the way. Our robust free cash flow generation is funding disciplined capital deployment that will maximize returns and compound long-term shareholder value. We have a proven playbook for growth during complex operating environments, and we'll keep working to be the best and deliver excellence every day. Thank you again for joining us today. Operator, let's please open the call now for questions.

It appears we have our first question from Matthew Bouley with Barclays.

I'll start out on the second quarter. I'm wondering what's implied in the second quarter gross margin. It seems that you're kind of moving into that full year range of 30% to 33% in the second quarter, but correct me if I'm wrong. I know we're talking about normalization in both multifamily and the core, so within that second quarter gross margin, can we say that the over-earn in both multifamily and the core is entirely rolled off or not yet entirely rolled off. So would there be sort of more to come beyond the second quarter?

Matt, thank you for your question. The margins we are observing are aligning with our expectations. Specifically, in the multifamily sector, as previously mentioned, we anticipate continued normalization, which means we expect margins to decline gradually over the year. Sales are projected to return to normal levels, and we expect margins to also revert to normal percentages as the year moves forward. So far, this situation aligns well with our forecasts. We previously indicated that the normalization of margins would fall between 30% and 33%, and we still believe this is a reasonable expectation. It's important to note that this normalization assumes that we will see standard starts, which we have yet to fully achieve. Nonetheless, our guidance for the year remains within that range. We've observed some positive trends persist longer than anticipated, which we believe will help us meet our margin targets for the year. Overall, the current performance is consistent with our expectations, and there are no surprises regarding the margin levels.

Okay. Secondly, the multifamily revenue impact, clearly, it's quite concentrated in the manufacturing products. I see multifamily was down 13% in Q1. It looks like you have one more, I think, tough year-over-year comparison in multifamily here in the second quarter. So I guess within the second quarter guide, is the assumption that multifamily is down sort of more than it was in the first quarter? Would that imply that Q2 is sort of the low point for multifamily year-over-year with lesser declines in the second half? Or should we assume that we should look for kind of a consistent headwind for multifamily declines through the balance of the year?

Yes, it's the latter. You should expect a consistent decline from multifamily throughout the year. It's a long lead time product category. We've got pretty good visibility to what we're expecting to see. There's certainly a bit of slippage from one month to the next in any given period. But I think what we're seeing and expecting in multifamily is another big decline in Q2 and sort of a consistent year-over-year decline throughout the end of the year. We'll, of course, update you as we learn more.

And we have our next question from Mike Dahl with RBC Capital Markets.

I want to ask, I guess, is effectively a follow-up there. When we think about what's implied for the second half, if we look at the Q1 results and Q2, directional color, at the midpoint, it requires double-digit top-line growth and kind of 15% EBITDA margins. And the high end would be kind of like mid-teens top-line growth and 16% EBITDA margin, both of those, just given the multifamily decline, your comments just now about further normalization in gross margin. It kind of seems difficult. So maybe you can help us there. I guess it's a roundabout way of asking more directly. When you look at the full year guide, is there a point in the range that you think you're leaning more towards at this point, like midpoint or lower or midpoint or higher. Maybe just help us understand how that's evolved.

Mike, thanks for the question. In short, we're really confident in the forecast, the way it's laid out. That guide is something that you put out there and feel good about reaffirming. The growth that you're talking about is already happening. So I think it came through in some of our materials. I think there's maybe this expectation that our whole business moves in the same way in the same quarter. And that's really not what we're seeing here, right? You're seeing the early parts of the building process, the lumber, the truss, the stuff that hits the job site early after the start, doing great. we're growing. The momentum is building. There are certainly some headwinds we're dealing with. I mean, we talked a little bit about that. I'm sure we'll talk more. But the business is performing very well in that category. We've not yet started to see the tailwind, the uplift from some of the later building process products, right, the doors, the millwork, they are also good for us. But we have every confidence that that's coming, that that's going to continue to be a good tailwind for us. There are, of course, a lot of questions about what the overall market in single-family is going to do, a lot of questions about interest rates. But again, let's not forget, there's a lot of demand out there. There are a lot of confident homebuilders. There are a lot of good units and good production momentum going on, and we're participating. So we're not concerned about delivering based on everything we're seeing today, but we do have to digest multifamily. I think we've been very transparent about that. It's working like we expected, and things are playing out. So yes, the back half of the year needs to be growing. But again, we're seeing good momentum that we think will pass through on the early-stage products. We're seeing good growth in categories that we've leaned into, value-add, install, and we continue to be active in M&A. So certainly, a lot to be confident in. We're happy with the business and not shy about what we're seeing for the rest of the year.

Yes. I would just add that the overall demand remains strong. The timing of when our customers actually make their purchases tends to be more unpredictable than the expectation that they will make the purchases. Nevertheless, our builder customers are still reporting strong demand and are anticipating a similar growth trajectory to what we have projected for the latter half of the year.

Okay. Got it. And then shifting gears just to capital deployment and maybe specifically the buyback. I mean you've got plenty of liquidity. Your leverage is low. The buyback was really just nominal this quarter for the first time in a while. What can we take away from that? And maybe anything more specific about how you envision deploying capital through the year?

Yes, we have approximately $700 million in cash along with significant capacity in the ABL, and there are many exciting M&A opportunities arising. We have completed a couple of small deals so far, but we have plenty of resources available and are eager about the potential opportunities ahead. We'll need to see how things develop, but at this point, we are prepared to capitalize on the incoming opportunities. That's the main takeaway. Although the year started off a bit slowly, we are feeling positive.

And we have our next question from Trey Grooms with Stephens.

I also want to discuss the guidance. You mentioned that the full year outlook remains the same and that multifamily is performing as expected. You've been clear about your expectations regarding the pullback in multifamily and its potential impact. However, the second quarter guidance is lower than what many had anticipated. With you reaffirming the full year guidance, can we assume that the second quarter is proceeding as you expected? Have there been any surprises, or are there areas that are performing better or worse than you had anticipated as the year has progressed?

Sure. What I can share is that in the multifamily sector, some of the backlog is taking longer than anticipated. Jobs that I expected to finish sooner are now spread out over a longer timeline. However, this is beneficial as it smooths our transition. Additionally, our team has successfully pursued smaller multifamily projects that they usually wouldn't target, which are also contributing to the transition, even if they haven't started yet. We're seeing positive momentum in areas like assisted living, compared to larger apartment complexes. While smaller projects are individually less significant, they accumulate and aid the transition. As for the single-family sector, it is performing as we anticipated. It hasn't dropped below a certain level; it's a continuous but gradual growth. While we would prefer it to be growing at a faster pace, it remains steady and doesn't retract, which is crucial. We are making adjustments according to the prevailing market conditions.

The only thing I might add is there's nothing in what's happened that is a surprise to us in terms of the variables. All the variables I think we've accounted for. There are a couple of variables that were, I would say, bigger headwinds than we anticipated. I think that weather thing has certainly thrown us a curveball. It will bounce back, but that's been a tricky one to navigate, particularly regionally. I think what builders have done to build homes more affordably, whether it be size of the home or complexity of the home there's some variability on that as well that we've been challenged with. But again, I think we're in line. We're doing what we said we were going to do despite those variables.

Yes. I would say that our truss backlog is a strong indicator for me. Our truss backlog remains at healthy levels and continues to grow. This serves as a predictor for us regarding future performance. If it were to start decreasing, I might become a bit more concerned, but it is currently at the right level for us to be in a good position.

Got it. I appreciate your confidence in the guidance and the fact that you can reaffirm it is encouraging. Thank you, and good luck for the remainder of the quarter.

Thanks, Trey.

And our next question comes from Rafe Jadrosich with Bank of America.

I wanted to ask about commodity pricing. In the first quarter, it was deflationary, but when you look at OSB prices, they were up, and lumber prices seemed relatively flat sequentially. Can you discuss what you're observing there from a mix standpoint? How is the competitive environment changing, and what are your expectations for this moving forward?

Yes. So I would tell you right up front that commodities are where the war is happening. That's where the fight is. It's where historically you've got the most aggressive players. You've got the most dynamic pricing, the volatility of it. I think what you're seeing in the numbers is really just around timing. A little bit of a shift in terms of when we saw the OSB run versus when we were feeling it. That will come through at different points during the year. But I would expect sort of us to be pretty much done with the bad news around the prices of commodities. What I will say, though, is while we saw the run in OSB that's starting to walk back. We saw a much smaller run on lumber and that's walking back as well. So I think you're seeing that mood of the market recognizing higher for longer and trying to triangulate on what that means to commodity prices. But again, that's not our game. We don't play the commodities up, commodity down bet. We're continuing to on product just in time, move it quickly, price appropriately, and get paid for what we do, that our strategy hasn't changed at all in that category.

Got it. Very helpful. And then just on SG&A, there was some deleverage in the first quarter. How should we think about that going forward here, especially if sales turn in the second half of the year? And then just remind us of the base in terms of incentive comp from last year, do you have an easier comparison there and how we just about leverage versus what you have done historically?

We experienced some one-time impacts in SG&A during Q1 that affected us slightly. Some of these were due to credits we had last year that we didn’t have this year. I wouldn’t overanalyze this situation, as I believe our consistent approach to managing expenses will keep us within expected ranges. The summer months, particularly Q2 and Q3, tend to provide us with the best leverage, so you can expect to see that reflected. Regarding our base business, there won’t be significant changes, maybe just a minor adjustment on the bonus side. The key point about year-over-year bonuses is that we set a more challenging target and plan this year. Our performance is aligning with that target rather than greatly exceeding it. As a result, there will be a reduction in total bonus dollars due to this performance, which is anticipated. I believe that shareholders, management, and the Board are all aligned on this, so it will serve as a bit of a tailwind compared to last year in terms of dollar amounts.

The only thing I would add is that our largest variable cost is labor. The team has done an outstanding job of keeping labor costs as a percentage of gross profit, which is our key metric, in line with the targets we set for our sales and activity levels. Our tools for managing this cost are better than ever in my 25 years with the company. Therefore, the crucial factor in managing SG&A is how effectively we handle labor at the field level, and they have excelled in that area since the start of the year.

And we have our next question from Keith Hughes with Truist.

The question on the windows and doors segment. It was down 2%. You talked about some product costs declining. Can you talk about that a little bit more, which product and is that selling prices declining or inputs, any kind of details would be great.

Good morning, Keith. If you remember, around this time last year, in the first quarter, we were just emerging from the normalization of the supply chain, with windows and doors being delivered on time again. National builders were more focused on completions during that first quarter to catch up. This created a significant spike in our millwork and window and door sales compared to the usual levels. I would describe this first quarter as normal. We had to adjust our figures from last year, which were skewed toward completions, whereas this year, the completions were more in line with typical patterns. There has been some deflation in the category, particularly concerning millwork, which has had a slight impact. Our volumes performed as we anticipated, and the differences can largely be attributed to the deflationary effects combined with comparing against the elevated completion levels from the first quarter of last year.

And we have our next question from Adam Baumgarten with Zelman & Associates.

Can you talk about what you're seeing from a non-commodity pricing perspective? And maybe specifically on the manufactured product side?

So you're talking about customer pricing or vendor pricing.

Your pricing to customers.

It's as you would expect, and that’s why we operate in those categories, which are less sensitive to price on the manufacturing side. Once we are committed to a designer and a partner who can adhere to delivery schedules, that aspect becomes more critical. Although commodity prices have varied, impacting manufacturing costs as they rise or fall—lumber prices have slightly decreased—we have managed to counter some of these challenges through the efficiencies we've achieved since the merger, particularly from our investments in automation. Our ongoing improvements in the amount of board feet produced per labor hour have helped mitigate some of these difficulties. Overall, our value-added offerings continue to perform better than commodities, which aligns with our strategic goals.

Okay. Got it. That's helpful. And then just on the 3% to 4% impact from weather you saw in 1Q, how should we expect that to be recouped? Is it mostly in 2Q? Or is it going to span over a few quarters?

Well, I was happy to say Q2 up until Houston got buried or flooded out. Generally, it takes about a quarter to a quarter and a half to catch back up. It doesn't unfortunately just whipsaw back the other direction, but that's probably a reasonable way to think about it, 3 to 4 months.

And our next question comes from Stanley Elliott with Stifel.

Can you discuss what you're observing in the services sector with such strong numbers, up 17%? Is this a result of your efforts to expand into new markets, or is it more about providing additional services to your current customers? Additionally, how can we expect this to translate into either attach rates or increased sales related to other products on the manufacturing side?

Yes. I would say all of the above. We had a strong install business. We did $2.5 billion in labor and materials installed in 2023. So we had a nice base to work from. And our initial focus, as you would expect, was on the products that we are already good at in one market and leveraging that platform to other markets. And it's the products that we're most familiar with and the products that we distribute every day. So we've got off to a great start. A lot of that increase is from existing markets that are already doing install because those are the ones that had the base to work from. But we developed really nice playbooks, and we've had really good interest, which has been pull interest. So as people reaching out, I want to get into this business, how do I do it the right way versus us saying, 'Hey, you need to get into this business.' Which is in my role, in my seat, that's what you want to see. And we've got really good people, really good plans, and we just think it's the next evolution for us as a company in solving our customer pain points and doing it methodically and in a way that we don't make mistakes. That's key for me, to do it the right way and make sure that what we are generating is customer value-added solutions.

And curious kind of tagging on that, if you're willing to share. Are you seeing more of this uptake with some of the smaller builders, some of the more national builders? Just trying to kind of get a sense for the flavor there?

It's a little, it depends on the product category first of all. But the national builders certainly like the install solution wherever they can apply it. The custom guys like it, but they're a little more specific to millwork or a little more specific to install windows probably not so much installed framing, right? So it's a really good play for the national builders. They seem to like that the best, but there are applications for both segments.

And to Dave's point, we do see a higher level of adoption of our value-added products to the larger players just generally.

Yes. And install is a natural evolution to the value add. It's the next part of value add, not only do you get the components delivered to the job site, but you actually install the components that are delivered to the job site, that's just a natural evolution of doing more for our customers.

And we have our next question from Collin Verron with Jefferies.

I just want to start on the gross margin side of things. You talked about the shift in timing towards early-stage homebuilding products being a gross margin mix headwind. Can you maybe quantify that headwind either sequentially or year-over-year? And how it compares to the headwind you're seeing from multifamily normalization? And just following up on that, how you're thinking about that mix through the rest of the year, just given what you're seeing in starts, backlogs and conversations with your customers?

I appreciate your question. Unfortunately, I can't provide the exact breakdown you're looking for. However, I can share that we expect a return to a normal product mix. Currently, our growth is primarily in pure commodities and truss categories, which skews the mix towards commodities. We've observed significant normalization in commodities, affecting gross margins across the board, not just in multifamily but also in single-family homes. In fact, this quarter, single-family normalization was the major contributor. While some of this is due to the mix, a considerable part is tied to the normalization we've discussed over the past year. This year's margins, once we exclude multifamily, are lower than before, which is why we anticipated that our mid-30s gross margin expectations wouldn't be sustainable. The mix will help as we transition to later-stage building products, but there is also carryover from last year. That's why we're projecting margins in the 30% to 33% range, as we believe these three factors will interact, and we want to provide you with the best possible outlook for where we will land.

Okay. That's helpful color. I guess I want to pivot towards the M&A pipeline. It sounds like it's pretty robust. Any color to the size of potential deals out there in the market and what those potential targets look like from a product offering perspective.

We won't be overly specific, but our strategy remains unchanged. Our analysis of the market, identifying where we succeed and where we can offer the most value, are all part of the conversation. There are always numerous rumors about possible trades. For us, maintaining discipline and focus is crucial. The exciting part is that we currently see many assets that align with our criteria, and now we just need to determine if we can successfully acquire them.

And our next question comes from Tyler Batory with Oppenheimer.

A question on the competitive environment. Are you seeing some of the smaller players out there maybe trying to get more aggressive to take market shares. Is that having an impact on your performance and on your business?

What I would tell you, Tyler, is not any more than usual. Again, where we differentiate ourselves is in the value-added solution in the value-added space, and that's for a reason. Anybody can do commodities, anybody can deliver lumber. It's hard to differentiate yourself in a straight distribution model. So we do see competition in that arena for sure. We try to leverage our relationships with those customers where we do other stuff for them very well and use that as a way to continue to maintain share on the commodity side versus just getting into a price war. So we do see competition in that regard. We choose to compete where we want to compete in that regard. But we'll always do a high percentage of lumber. We're good at doing lumber. We're good at meeting schedules and making sure the lumber is there when the customer wants it. And we get recognized for that, and where we get that recognition is where we play. But in short, a lot more competition on the commodity side than the noncommodity side and our reputation on the value-added space carries us a long way.

The only thing I'll add, I think it might be embedded in your question is share. I think one of the variables that we struggle with is what's the real share number. Generally, we would use single-family starts as a proxy for the market and then we would compare our sales against that. In general, that's a really tricky thing right now because I think there are some meaningful differences between a start unit and a sales dollar. Homes are smaller. The cost of those homes and what's being put into them is simpler and cheaper. And we have seen some not insignificant cost reductions or pricing reductions in terms of what we are getting from our vendors and what is selling into the market. Whether it be commodities, which is the obvious one, but also EWP or millwork or any of the other ones we've talked about, those all represent sort of gaps or deltas between those two units of measure. And then you layer on a little bit of the timing related stuff, whether it be how complete these homes are and what we're selling or the weather or whatever, it certainly has made that whole discussion and that analysis really challenging. But back to Dave's point, I think the only place we think we've maybe struggled or battled is in that commodity, the low end where smaller competitors are more willing to get down and dirty.

Okay. Very helpful. And then a quick follow-up on the R&R side of things, down 5% in the quarter. I think weather probably impacting that. What are you seeing here in the second quarter, and there are a lot of differing views on the R&R end market out there? Just share your confidence in terms of your growth outlook this year in that end market.

As it relates specifically to the first quarter, we had a higher concentration in R&R in the Northeast, which was particularly affected by weather. We experienced serious weather for about 20 to 23 days during the quarter, and that impact was significant. Overall, R&R presents a bit of a dual challenge. Larger projects are encountering similar cost pressures as smaller custom builders. However, I believe that the regular smaller projects will trend in line with expectations.

And we have our next question from David Manthey with Baird.

My first question is on the digital. So the revenue uptick is good to see. Could you share with us any data on the number of net users today versus a year ago or the end of last year? Just to give us an idea of how that's ramping? And then is there any prototypical customer type that's implementing the system? Or is it just based on personality and choice?

Yes, we're excited about digital. Unfortunately, I don't have the user numbers right now, but I can try to obtain them for you. We are seeing growth in that area. Recently, we removed about 500 to 700 leads from IBS. Many customers are joining us as we expand our adoption and rollout across the country, primarily mid to smaller-sized builders. The type of customers you’re referring to are those actively embracing digital tools and technology to operate more efficiently, professionally, and to improve interactions with their clients. This trend can sometimes be generational, though it often comes down to the willingness to utilize tools that reduce waste, speed up processes, and enhance connections with home buyers in a more visual manner. We find our digital tool to be incredibly compelling, offering so many features that allow for incremental improvements. We are all focused on creating efficiencies and enhancing transparency for builders, trades, and home buyers. The customers who truly benefit from technology are those who capitalize on these advantages, and we are noticing this early on. Overall, our digital tool is increasingly becoming the norm for conducting business due to its ease of use and modern, smooth interface. We are optimistic about the ongoing increase in usage and how it has progressed in the early stages.

What I would tell you juices me the most was the traffic we had at our booth at IBS. I have never in my 25 years of going to IBS seen the kind of excitement and the kind of traffic that went through our booth, primarily because of our digital platform and showing what capabilities that it was going to present. The other thing I would say is, think about it, if you're a smaller builder, 50 to 200 homes a year, you don't have the ability to invest in technology for yourself to get this to the level of platform that we're developing. What we're doing is leveraging our ability to make those investments and develop that platform for our customers of that size so that they can play in that space and be efficient without having to make a huge upfront investment themselves. So that's the rationale behind why we developed it and why we think it will be appealing to our customer base and if IBS is any indication, we hit it right on the head.

Okay. In the interest of time, I'll just pass it on. Thank you.

And we have our next question from Jay McCanless from Wedbush.

So my first question, Peter, I think you called out some pretty positive sales trends for the Western U.S. Could you talk about how that's trended in April and May, similar pattern to what you saw in Q1?

Yes, pretty similar. I think that the West got hammered out of the gate, and they bounced back really nicely, a little more stable through the other two regions. But yes, I think that's been pretty consistent. We have to see how this whole weather thing in Houston plays out. But for the time being, it's pretty good.

Okay. And then taking the lumber question, especially some of the more commodity goods a step further. Is this a function of not only higher mortgage rates, but was there an oversupply of commodity lumber in the system to start the year? Just wondering if this is all rate-driven, or if there's some other mitigating factors we need to be monitoring?

We didn't see a lot of unusual behavior in the market, no. Tough for us to see that from others' perspective, but it's a strong, I would think generally a strong and a stable market. So I don't know how people made bets with regard to where stuff was moving.

And we have our next question from Ketan Mamtora with BMO Capital Markets.

Peter, just one question. You've talked quite a bit about margin normalization and multifamily. On the core organic, the single-family piece, do you think at this point, we are sort of towards the end of that normalization, midway through? How would you characterize that? And are the competitive dynamics in that side of the business changing at all, given sort of pressure on EWP prices, given where lumber is today. Just curious to get your thoughts.

Ketan, I can say that we are approaching the end regarding our expectations for margin normalization. However, we are still experiencing lower volumes, which creates a challenging environment. Competition remains intense, as it has always been, especially in commodities. It’s crucial for us to embrace this challenge, and we have successfully navigated it for years, which gives us confidence. There is an assumption that smaller players will always have an edge in competitiveness, and we believe that trend will persist. Overall, I think margins have been solid. While some vendors have been aggressive, it's largely been a reaction to previous actions. We're seeing more of a normalization and rebound, resembling a mean reversion rather than any indication of trouble that would necessitate drastic measures. Does that make sense?

It does. Thank you very much.

And it appears we have reached our allotted time for the question-and-answer session today. That will conclude today's program. Thank you for your participation. You may now disconnect.