Please standby. We are about to begin. Good day and welcome to the Builders FirstSource Second Quarter 2024 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 Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.

Good morning, and welcome to our second quarter 2024 earnings call. With me on the call are Dave Rush, our CEO, and Peter Jackson, our CFO. The earnings press release and investor 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 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 contains 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, and thanks for joining our call. As we continue to operate in a complex environment, I'm proud of our resilient second quarter results, highlighted by our mid-teens EBITDA margin, which demonstrates the strength of our differentiated business model and the hard work of our extraordinary team members. While we continue to see the expected affordability challenges and normalization in multi-family, we are executing our strategy by controlling what we can control, investing in value-added solutions, and driving adoption of our industry-leading digital platform. Our ability to solve industry pain points with our best-in-class product portfolio and exceptional customer service makes us a trusted partner as our customers navigate this complex macro landscape. While near-term market dynamics are challenging as starts have lost momentum, we remain focused on executing our strategy in the weeks and months ahead, and we are well-positioned for growth as long-term housing tailwinds remain intact. Moving to our strategic pillars, on slide three, we continue to invest in value-added products, installed services, and digital solutions. We are providing our customers with a more efficient and cost-effective way to manage home construction. This leads to increased customer stickiness, new business, and improved operational efficiency for BFS. We have a robust set of continuous improvement initiatives focused on leveraging our scale while delivering the highest quality products and services to our customers. Our highly experienced team members are delivering these critical initiatives while serving our customers with excellence and integrity every day. Finally, we continue to allocate capital in a disciplined manner with a proven M&A strategy and a track record of buying back shares at attractive prices over the long term. Turning to our second quarter highlights on slide four, while navigating a market challenged by crosscurrents, we have seen softer than expected sales. However, we delivered strong gross margins of nearly 33% in Q2, and our adjusted EBITDA margin has remained in the mid-teens or better for 13 consecutive quarters. Our durable margin profile is a key proof point of our transformed business model and our differentiated product portfolio and scale. Given the strength of our base gross margin, we see opportunities to more aggressively go after profitable share. We have grown our mix of value-added products over the past five years, improved our manufacturing processes and efficiency, and positioned ourselves at the forefront of homebuilding innovation. Let's move to slide five where we show how we're executing our strategy. Our full suite of value-added products and services remains a competitive advantage for BFS and continues to bolster our partnerships with customers. We're pleased with our progress on digital as we continue to hear great feedback from customers and see increasing levels of adoption each week. We demonstrated operational rigor by delivering $37 million in productivity savings in Q2 and had driven $77 million year-to-date primarily through more efficient manufacturing and procurement initiatives. As I've spoken about in the past, we continue to use playbooks to drive growth in our Installed Services business. I'm pleased that our installed sales increased by 15% year-over-year as we focus on helping customers address labor challenges. Our managers have best-in-class information to help them navigate this dynamic environment and make effective real-time decisions. We are also maximizing operational flexibility, and have consolidated seven facilities while maintaining our service levels to our customers with an on-time and in-full delivery rate of over 90%. We will remain disciplined managers of discretionary spending no matter the operating environment. We are continuing to take actions into the second half of the year to flex the business where appropriate. The single-family growth momentum, occurring earlier in 2024, has stalled as interest rate cuts have not materialized and starts have come in lower than expected. In addition, the value of a new start has fallen as the market has adapted to affordability challenges. Multi-family continues to be a headwind amid muted activity and relative to our record performance last year, which is creating an increasingly tough comparison. This was expected and detailed on prior calls as multi-family continues to normalize. Even at today's levels, multi-family continues to be a very profitable business for us. In the current environment, builders have employed specs, smaller and simpler homes, and interest rate buy-downs to help buyers find affordable options. Builders of all sizes are having to navigate affordability issues along with regulatory, land development, and infrastructure challenges. Smaller builders have been especially impacted by the availability of land and limited options to buy down rates. We are partnering with our customers to help them lower the cost of homes for consumers, as well as maintain their margins. This includes balancing our product mix to address their needs while passing through lower material costs. For example, when engineered wood products or EWP were constrained, we supplied a larger number of higher-value floor trusses. As EWP supply normalized and prices came down, we have been able to provide customers with more EWP, and have sold fewer floor trusses, helping to specifically address the builders' biggest challenge, affordability. We have what the builders want and do what's right by them. Although this trend means less sales in gross profit dollars, our margin profile remains strong. We have the operational and financial flexibility needed to partner with our customers to meet their needs and capture growth opportunities. Coming to M&A, on slide six, we continue to pursue attractive opportunities while remaining financially disciplined. In the second quarter, we completed three deals with aggregate 2023 sales of roughly $72 million. In May, we acquired Schoeneman's Building Materials, which we detailed on our Q1 call, and TRS Components which establishes truss manufacturing within Metro Detroit. In June, we acquired RPM Wood Products, which enhances our ability to serve high-end custom builders in Northeast Florida. Finally, in July, we acquired Western Truss & Components, adding truss capacity in the Flagstaff, Arizona area, and CRi SoCal, a dealer and installer of high-end windows and doors in Orange County. We are excited to welcome these talented new team members to the BFS family. 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. Our M&A pipeline remains healthy, and we believe we can continue to acquire in a fragmented market. On slide seven, we provide an update on capital allocation. In addition to the three tuck-in acquisitions during the second quarter, we repurchased nearly $1 billion of shares. I'm happy to announce that our Board has authorized a new $1 billion share repurchase plan. 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 eight and nine 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. We have seen strong adoption and growth with our target audience of smaller builders even as they endure a challenging operating backdrop. We've had broad acceptance of the platform so far, including interest from multiple top 200 builders. Since launching in late February, we have seen the value of orders placed through the digital platform go from nearly zero to over $250 million. Year-to-date through Q2, incremental sales have totaled $45 million. While we still have a long way to go, we remain confident in our ability to meet our target of $1 billion in incremental sales by 2026, as we grow wallet share and win new customers. I am thrilled to share a significant achievement that underscores our team members' commitment to making a positive impact in our communities. At our recent annual charity event, we successfully raised over $1 million on behalf of the Leukemia & Lymphoma Society. This brings total contributions to nearly $12 million since first partnering with LLS in 2006. These funds are crucial for advancing research, patient support, and advocacy programs aimed at finding treatments and cures for blood cancers. I want to extend our heartfelt gratitude to our industry partners and sponsors whose overwhelming support made this successful event possible. I'll now turn the call over to Peter to discuss our financial results in greater detail.

Thank you, Dave, and good morning, everyone. We were able to effectively navigate a softer than expected housing environment during the second quarter by leaning into the pillars of our strategy and operating model. Leveraging our fortress balance sheet and exceptional financial flexibility, we executed nearly $1 billion of share repurchases into stock price weakness and made three tuck-in acquisitions to enhance and expand our footprint. We believe the sustainable competitive advantages of our extensive geographic coverage, value-added solutions, and strong financial position are enabling us to successfully manage market dynamics and deliver long-term value creation. I will cover three topics with you this morning. First, I'll recap our second quarter results. Second, I'll provide an update on our capital deployment. And finally, I'll discuss our revised 2024 guidance and related assumptions. Let's begin by reviewing our second-quarter performance on slides 10 and 11. Net sales were $4.5 billion, a decrease of 1.6% as core organic sales declined 3.8% with the expected multi-family downward trend. The decrease in net sales was partially offset by growth from acquisitions of 1.9% and commodity inflation of 0.3%. The core organic sales decline was driven by a multi-family decline of 31%, partially offset by increases in single-family of 1% amid higher starts and repair & remodel of 1.5%. I want to take a moment to discuss the variables impacting the disconnect between single-family start and core organic sales. As a reminder, historically there is a roughly two-month lag between a start and our first sale. In the current environment, we are seeing that lag extend as the relative timing of permit starts and completions has shifted in response to the changing market. Second, we have seen a meaningful decline in the sales opportunity of a start in 2024 as the size, complexity, and value of the average home has fallen. These changes are logical given the affordability challenges in the market. But it means that we are seeing fewer dollars per start despite our strong operating performance. As an example, looking at the Phoenix market, we are supplying material to roughly 45% more homes. But our dollar sales are only about 15%. To summarize, despite a market where starts are smaller, less complex, and cheaper, we remain the market leader and will continue to deliver superior results. During the second quarter, as we signaled and expected, multi-family declined more than 31% as we lacked the prior year's strong comps. R&R and Other improved by over 1% given our retail strength in the faster growing West. Value-added products still represented approximately 49% of our net sales during the second quarter, despite the headwinds from multi-family. Gross profit was $1.5 billion, a decrease of approximately 8% compared to the prior-year period. Gross margins were 32.8%, decreasing 240 basis points, primarily driven by ongoing normalization, particularly in multi-family. SG&A decreased $45 million to $973 million, primarily attributable to lower variable compensation, partially offset by acquired operations. As a percentage of net sales, total SG&A decreased 70 basis points to 21.8%. The team has done an excellent job of managing SG&A, and we are well positioned to leverage our fixed costs as the market grows. Adjusted EBITDA was approximately $670 million, down approximately 13%, primarily driven by lower gross profit, partially offset by lower operating expenses. The adjusted EBITDA margin was 15%, down 200 basis points from the prior year. On a sequential basis, the adjusted EBITDA margin was up 110 basis points, primarily driven by operating leverage, partially offset by lower gross margin. Adjusted net income of $420 million was down $78 million from the prior year primarily due to lower gross profit, partially offset by lower operating expenses. Adjusted earnings per diluted share was $3.50, a decrease of 10% compared to the prior year. On a year-over-year basis, share repurchases added roughly $0.22 per share for the second quarter. Now let's turn to our cash flow balance sheet and liquidity on slide 12. Our Q2 operating cash flow was approximately $452 million, an increase of $61 million, mainly attributable to a decrease in net working capital and more than offsetting almost a $100 million decline in adjusted EBITDA. This is a proof point of how our business generates a robust amount of cash in any environment. Capital expenditures for the quarter were $85 million, and free cash flow was approximately $367 million. For the last 12 months ended June 30th, our free cash flow yield was approximately 10%, while operating cash flow return on invested capital was 24%. Our net debt to adjusted EBITDA ratio was approximately 1.4 times, while base business leverage was 1.7 times. At quarter end, our total liquidity was approximately $1.7 billion, consisting of $1.6 billion in net borrowing availability under the revolving credit facility and approximately $100 million in cash on hand. Moving to capital deployment, during the second quarter, we repurchased roughly 5.8 million shares for approximately $990 million at an average stock price of $170.01 per share. Since the inception of our buyback program in August of 2021, we have repurchased 45% of total shares outstanding at an average price of $76.65 per share for $7.1 billion. As Dave mentioned, the board approved a new authorization for the repurchase of up to $1 billion of common stock. We remain disciplined stewards of capital and have multiple paths for value creation to maximize returns. Now let's turn to our outlook on slide 13, which we are lowering, given a softer than anticipated housing market and weaker commodities. For full-year 2024, we expect total company net sales to be $16.4 billion to $17.2 billion versus our previous range of $17.5 billion to $18.5 billion. We expect adjusted EBITDA to be $2.2 billion to $2.4 billion versus the previous range of $2.4 billion to $2.8 billion. The adjusted EBITDA margin is forecasted to be in the range of 13.4% to 14% versus the previous range of 14% to 15%. And we are updating our 2024 full-year gross margin guidance to the range of 31.5% to 32.5% from 30% to 33%. This also remains in line with our long-term expectations of 30% to 33% at normalized single-family starts of 1 million to 1.1 million. Our long-term margin profile reflects a greater mix of value-added products, recent acquisitions, and disciplined pricing management. We expect full-year 2024 pre-cash flow of $1 to $1.2, assuming an average commodity price in the range of $380 to $400 per thousand board feet. Our 2024 outlook is based on several assumptions. Please refer to our earnings release and slide 14 of the investor presentation for a list of these key assumptions. While we do not typically give quarterly guidance, we wanted to provide color for Q3, given ongoing housing uncertainty and multi-family normalization. We expect Q3 net sales to be in the range of $4.3 billion to $4.6 billion. Adjusted EBITDA is expected to be between $575 million and $625 million in Q3. Turning to slides 15 and 16, as a reminder, our base business approach showcases the underlying strength and resiliency 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 $16.8 billion. Our base business adjusted EBITDA guide is approximately $2.3 billion at a margin of 13.7%, which reflects a roughly net zero impact from commodities. For context, slide 16 shows that our 2020 base business adjusted EBITDA was roughly $1.1 billion at 991,000 single-family starts. And we're expecting better adjusted EBITDA at lower single-family starts this year. As I wrap up, I want to reiterate that our exceptional positioning and financial flexibility gives us the confidence in our ability to execute our strategy and drive long-term growth. The Investor Day goals we laid out in December remain achievable, assuming a return to normalized single-family starts of $1.1 million in 2026. With that, let me turn the call back over to Dave for some final thoughts.

Thanks, Peter. Let me close by reiterating that we continue to execute as evidenced by our strong profit margins and cash flow generation. Our resilient business model allows us to win in any environment. In 2020, we had an 8.7% base business adjusted EBITDA margin at 991,000 single-family starts. This year, we expect the mid-teens adjusted EBITDA margin at a lower level of housing starts. This demonstrates the resiliency of our transformed business and is a strong base to build from as the housing market grows to meet demand. I am confident in the long-term strength of the industry due to the significant housing underbuild and favorable demographic trends. We are well-positioned to take advantage of those tailwinds, which will help drive growth for years to come as we execute our strategy. We believe we are the unquestioned leader in addressing our customers' pain points through our investments in value-added products, digital tools, and installed services. Our proven playbook for growth and robust free cash flow generation will help us continue to compound long-term shareholder value. Thank you again for joining us today. Operator, let's please open the call now for questions.

Certainly. We will go first to Matthew Bouley with Barclays. Please go ahead.

Good morning, everyone. Thank you for taking the questions. Maybe we will start on the gross margin side, looking at the new margin guide and the cadence that you are implying for the second-half, I am curious as we zoom into the fourth quarter, what that would imply for the exit rate around gross margins? And certainly, what I'm getting at is, as we think about 2025, where your starting point on gross margins would be as you continue to highlight that the overall 30 to 33 guide, the long-term guide is kind of at normalized housing starts, and certainly it begs the question, if we're not quite at normalized housing starts yet in 2025, where the gross margin could land if there's an air pocket, given the starts outlook? Thanks, guys.

Good morning, Matt. Thank you for the question. Margins have been a significant aspect for us, and they've varied a lot over the years. We certainly receive numerous inquiries about it. We're satisfied with how margins have performed so far. We anticipated a normalization process, especially in the multi-family sector, and we're pleased with its development. Looking ahead to the second half of this year and next year, we expect further normalization, which we've clearly communicated. We do not expect any changes in those projections. Regarding 2025 and exit rates, I want to clarify that we don't have a definitive forecast yet. Based on our current observations, we expect to finish this year with approximately 975 starts. This aligns with our guidance of around 32%. For 2025, based on current trends, we estimate an additional 100 basis points of headwind due to two factors: approximately half from multi-family and half from core operations. We are definitely nearer to the end of the normalization phase rather than the beginning. The multi-family sector is undoubtedly a significant story. Last year, we identified over 100 basis points of tailwind from multi-family, but we expect to return about 60 basis points in 2024 and another 50 basis points in 2025. This amounts to roughly a couple hundred million dollars in EBITDA headwind from multi-family. However, we believe the remainder of the business is performing very well and will be in a strong position to manage that as we move into 2025.

Matt, the only thing I'd add is our focus and continuing focus on doing more for the customer with installed, doing more for the customer with value-add, those are higher margin profile products that we held, all said, any start variation.

Got it. Okay, that's very helpful quantification and color. And that dovetails into my next question. So, if I look at the total EBITDA guide for the year, I guess it's down about $300 million at the midpoint. But the base business EBITDA guide is only down by $100 million. So, I guess, presumably, the change in commodity prices is actually the largest change in the guide. I just want to clarify if that's the case. And if so, when we're talking about the kind of stability on the value-add side, can you speak to what has specifically changed in just the value-add outlook in terms of the growth side, starts, and specifically value-add margins, just what's really driven that piece of the guidance change there? Thank you.

All right, so one question in 26 parts; let's see if I get them all. Overall, we have observed a shift in commodities. The market has weakened, particularly in lumber and OSB, with OSB experiencing a short-term increase before resetting and pulling back. This change in commodity valuation is the primary contributor to the dollar value change in sales, accounting for more than half of the $1.2 billion. When we consider its impact on the business, most of the decrease in EBITDA is attributed to deleveraging, as the smaller business absorbs less of the fixed overhead costs. We experienced significant improvement this quarter, especially during the summer months. We anticipated being busier in the latter half of the year than we now expect, which is contributing to some of the decrease in outlook. On the value-add side, we continue to see strong demand and consistent customer loyalty to our products, with volumes moving well. There has not been a broad shift away from value-add. However, we pointed out a mix dynamic where customers are increasingly focusing on affordability and finding ways to reduce costs. This includes a shift from open-web truss to EWP, which is a lower dollar value product. Additionally, customers are downsizing their homes by reducing square footage, eliminating basements, and cutting back on garages and bonus rooms, all of which reflect the affordability challenges. This pressure is not unique to the value-add sector. While value-add has faced some pressure regarding price pass-through affected by this mix, volumes and margins in our core product categories remain strong.

One thing I would add on the value-add components specifically, Matt, is even as truss volumes declined, our ability to more efficiently manufacture increases. As we go from two shifts to one shift, our second shift is the least profitable, for obvious reasons, but you put up with that because you leverage 100% of the fixed costs. When we go to one shift, that's our most profitable shift, so even as the top line may be less because of the demand being less, the ability to maintain margins is actually easier because we're most efficient in that one shift.

Great. Well, appreciate the color. Thanks, Dave, Peter. Good luck, guys.

Thanks, Matt.

We'll hear next from Mike Dahl with RBC Capital Markets.

Hi, and thank you for answering my questions. I want to follow up on a couple of points. Peter, I understand that you typically don't provide precise margin estimates or formal guidance a year in advance, but I want to clarify your last comment about the gross margin exit rate for 2025, especially given the discussion around it. It seems you might be indicating that if your midpoint for this year is 32%, then perhaps the midpoint or starting point for 2025 is 31%. In other words, is your exit rate for the fourth quarter of 2024 around 31% gross margin? Could you clarify that a bit further regarding the fourth-quarter gross margin?

Morning, Mike. In short, yes, you got it right. You heard it right. We think we're around 32% this year. We think our exit rate is around 31% based on everything we're seeing today. This is not guide. It's not intended to be a crystal ball; it's just trying to give directionality. The short answer to that, and I think you've alluded to it, and so did Matt, our long-range normalized margins we're seeing are 30% to 33% at 1.1 million starts. This would indicate that we're going to be at 31% at 975,000 starts. What does that mean? Well, that means, right now, margins are strong. Ours are good. Ours are better than we expected, which is great. But it also means we're under pressure in a market that's got extra capacity versus what we're all dialed in for, which is 1.1 million-plus, right? So, that's the tug of war going on right now, and why we're not able to put our stake in the ground and claim it. We've got to see how this plays out. Pretty optimistic, like Dave said, about the overall market, the demos, the underbuild, it's good. That we think tone is playing out maybe belatedly but positively in terms of the interest rate environment right now. So, we'll see. But it's a strong business. It's really well-positioned, and margins look good.

Okay, that's helpful. I agree and appreciate the broader perspective that even if we're discussing 31%, it's still 31% at these low volume levels, which is actually quite positive in the long term. Shifting gears, the mix and complexity are aspects that can be challenging for us and for investors when we’re building a volume-focused model. So, with all the moving pieces, can you articulate whether the mix and complexity changes we’re seeing are equal? Also, how significantly do you think these changes will impact our projections? If my single-family starts are anticipated to be a low single, would this represent a low single-digit headwind or a mid-single-digit headwind? Any guidance you could offer on estimating this would be greatly appreciated.

That's a great question. We've invested considerable time and energy into understanding our business at a detailed level. We have a wealth of data, but it's quite substantial. Analyzing the mix impact of hundreds of thousands of SKUs across 570 locations in 80 markets can be challenging, as we need to sift through a lot of noise to find the signal. Earlier this year, we responded to our observations and tried to comprehend the situation. The key takeaway from this value discussion is that the order of magnitude is larger than we anticipated. Regarding the timing of starts versus permits, it also turned out to be a bit larger than expected. In Q2, considering our approximate two-month lag, we're tracking a 20-point gap and questioning why we're not seeing a more significant increase. This can be divided into a few components. The primary factor is that the lag between permits and starts appears to be longer. Builders have been pulling a large number of permits ahead of code changes and to stay ahead of the market, but they haven't accelerated starts as quickly as traditional custom builders. Major national builders are gaining a larger market share, which seems to be distorting the starts numbers early on, but we expect that to stabilize over the year. Other contributing factors include pricing changes, as many vendors have had to adjust their prices in response to current demand, particularly in categories like doors and millwork. Additionally, about a third of this issue relates to the product mix, whether it's shifting from higher to lower quality options or changes in construction types, which impact the overall value of the products used in homes. While we have a general direction on this, I won't pretend that we have the figures down to a fine detail. The situation is quite volatile and can change rapidly in either direction, so we'll continue monitoring it closely to ensure we're meeting our customers' needs effectively.

The only thing I would add, Mike, is it's primarily a top-line scenario for us that we have to manage through. Our margins, regardless, have stayed very consistent and very strong, and we're appreciative of that. But the best example is the one that Peter gave in Arizona. Forty-five percent number of houses that we've started, 15% is the increase in revenue. You can do that math and say in Arizona it's 30% impact. But at the end of the day, it varies depending on the market. What we're seeing, though, is we have the levers that we can pull to get the sale, depending on what the customer chooses to use to solve their problem. And at the same time, we're able to hold our margins because of having that ability to provide an alternative solution that works for both.

Got it. That's all really helpful. Thank you both.

Thanks, Mike.

We'll go next Rafe Jadrosich with Bank of America.

Hi, good morning. It's Rafe. Thanks for taking my question. Peter, I appreciate all the color so far and how we should think about the margin progression here. Just following up on the earlier comments about 60 basis points of headwinds from multi-family in '24 and another 50 basis points roughly in '25, how much of that is normalization of the multi-family margins off of excess levels versus multi-family mix? And how do you think about the multi-family margins today? Like how much have we seen a normalization off of the elevated margins you've had in the past? How much more is there to go?

Good morning, Rafe. Thanks for the question. Yes, so the dynamic around the multi-family is a tricky one. We've tried to be really open and honest about what we're seeing, but it's not convenient in terms of how it's playing out. In other words, it didn't just stop on January 1st, and we didn't have a nice clean turn. So, I don't have nice clean numbers last year or this year. So, there's a little bit of this you're probably going to poke at, but I can give you sort of my best sense of the directionality. We continue to see strong business in multi-family throughout all of last year that really began to turn in that Q1 window. We are seeing meaningful declines in our margins in what we're seeing starting in Q1 and stronger in Q2, kind of that 50 to a 100 basis points in those periods headwind driven by multi-family, right? That's sort of the combination of the mixed shift because it's all value-added and that downward shift within the category. So, with that in mind, we do expect it to continue this year. I think I mentioned from a dollar perspective, Q2 is going to be a chunky one, right? That was going to hurt a lot and obviously it did, but we will continue to see headwinds throughout the year. Again, with that kind of rough average of around 60 basis points, 50 to 70, give me a band around it based on timing, but overall impact on the company from the full multi-family segment of our business.

Thank you. That's helpful. In the prepared remarks, there was a comment that I found interesting. They mentioned that due to the strength of the base gross margin, there appears to be more opportunity to pursue profitable market share moving forward. How do you feel about the trend in your market share during the first half of this year? Do you anticipate any changes ahead? Does it relate to the mixed impacts you are considering? Have you noticed that Builders are sourcing from multiple suppliers more frequently? Has that been a challenge? Looking ahead, do you plan to increase your market share? What are your expectations in that regard?

Rafe, this is Dave. I would tell you what we're looking at is a disciplined approach, right? We want to identify opportunities where it's a volume where we have an opportunity to have a win-win with our customer, where we can leverage that incremental volume against our fixed costs, whether it be manufactured product or even distributed product, and offset the volume incentive that we may use to go after that business. So, it will be a targeted approach. It'll be a disciplined approach. It will be only where the volume makes sense. And there has to be a win-win solution there. Thankfully, we had all the guys in the first part of July, and that was the focus of the meeting. And they all had a plethora of opportunities. They felt that description, and we're going to execute that strategy in the back half.

Thank you. I appreciate it.

Thanks, Rafe.

We'll go next to Trey Grooms with Stephens, Inc.

Good morning, everyone. Thank you for the insights shared so far. Regarding lumber, I wanted to ask about the competitive pricing we're seeing in the commodity lumber market. Is this becoming more prevalent or intense due to the current weaker environment? Additionally, with multi-family projects decreasing, which previously consumed a significant portion of supply, are you noticing more competitive behavior in the truss or value-added segments as multi-family begins to stabilize?

Hey, Trey. Thanks for the question. On the commodity part of the question, we always see the players in the marketplace that take commodities too low because it's all they have to offer. And we're not choosing to play in that game. What we will do, though, is partner with our customers that commodity becomes part of a package, and we value the overall packaging and create incentives to buy all products from us, whereby through the value-add piece of that package, we can earn back a level of whatever volume incentive we provide. So, our focus on building share has still got to be a win-win. It's not going to be only a win for the customer or only a win for BFS. It won't be sustainable if that's the way you approach it. With specifically the value-add, where we still and will maintain an advantage is over our efficiencies. We have continued to drive efficiencies, and I said in the earlier comment, if we're in one shift, we're as efficient as we can possibly be when we're one shift. So, we have the ability to leverage incremental volume in that idle capacity and, again, create a more profitable net-net number for us, even as we provide an incentive to customers for the incremental volume. So, that's kind of how, even as we've managed and tried to pick opportunities to drive the top line, we've been able to hold on to the market.

Yes. That's helpful. I heard Peter mention something about price pass-through, and I think it was when you were talking about the value-add side, just trying to make sure I understand what that comment meant.

I'll answer it, then I'll let you follow up. That's actually when we get a cost reduction from our vendors on products, and we immediately pass that through. It is, again, impactful on the top line because now we're selling a lower-cost product, but our margin profile is not impacted, and we're kind of operating under the same model from a profitability standpoint. Is that right?

Yes. To reiterate, we remain focused on acting in a disciplined manner with our customers in key categories. As commodities fluctuate, we pass those changes through. However, I am a bit disappointed to see the lumber industry not being more proactive in driving profitability. While not all players are problematic, I am surprised by how many are willing to endure losses in their business units longer than I would have anticipated. There's a lot of concern within the industry, yet not much behavior indicating we're moving in a positive direction. I hope that changes, but it is discouraging. We are seeing weaker lumber numbers, which we pass on to our customers. Previously, I mentioned certain price reductions from EWP, Doors, Millwork, and other players, where we've observed low to mid-single-digit declines in overall sales solely due to adjustments in prices we provide our customers based on the costs charged by our vendors.

Yes, got it. Just a quick one for my follow-up, there's very I guess, differing views on kind of the multi-family outlook and maybe how quickly that could take to normalize. I'd love to maybe get your thoughts on that. I think you mentioned there may be a little bit more headwind to come in 2025, but any color on maybe the timing of when we might see that stabilization and multi-family? And then, I know it's hard to say, but directionally, do you think we could see maybe a pretty quick rebound there after it does find some stabilization, or do you feel like we could tread water there at that much lower level there for a while?

Yes, Trey. I'll tell you the dynamic we've seen in 2024 is, in addition to people hesitant to start new projects, we've actually seen existing projects get delayed and pushed pretty consistently throughout the year. The project's still on the board. The project's still going to get done, but it's getting pushed, which, quite frankly, was part of the top-line headwind in the first half, even though multi-family's a small piece of the overall. New projects take so long to get underway that I think the order that has to happen is we have to have the cost of capital come down. Then there's going to be new projects that come out of the ground, but they're going to take a while to get going. The one thing we are seeing, though, is a gap currently that is in favor of multi-family, where rental rates are now less than mortgage rates for essentially the same type of living arrangement. So, a lot of the excess capacity that we feel like we came into the year with, with multi-family, we do believe will burn off during the rest of this year, which will encourage a quicker rebound in multi-family in 2025. The problem is it just takes so long.

Yes. Okay. Thanks for the color, Dave. I really appreciate it.

Truss wood is still a very profitable business for us at these levels and will continue to be at the levels we expect to have through 2024 and into 2025.

Great. Thank you very much.

Thanks, Trey.

We'll go now to Adam Baumgarten with Zelman.

Good morning, everyone. Regarding the decline in new starts, could you provide an overall sense of how much it's decreased, including what portion is due to smaller square footage and how much is related to a lower mix of value?

Good morning, Adam. Honestly, to know that answer with precision, I'd probably call you guys. We know there are data points that prove our point. What we don't have is confidence in the individual buckets. It's way too volatile and way too customer specific, regionally influenced for us. But again, if we're missing 20 points in terms of where is that sale, I think directionally, the biggest third is on the extended time, it's taking between permit and sale. We know another chunk of it is on the value, just the price is charged and the rest of it is that mix component. It's square footage. It's smaller. It's cheaper. Five to seven, I don't know. I'm guessing, to be honest.

We have gathered enough evidence to confirm that it's a real issue. However, determining which specific aspect is challenging. For instance, we compared a bid from a national builder last year for the same house and model this year, and we found a mid-teens decline in overall sales opportunity for that identical property. While this trend does not apply uniformly across all markets and builders, it reinforces our suspicions about the situation. We have a clearer understanding of what we are facing. Importantly, as circumstances change, the encouraging news is that the margin profile remains stable. Although I would love to maximize our volume, I want to ensure that we maintain a balance between our sales and profits while keeping checks along the way.

Okay, got it. Thanks. And then, just a couple more, just on the digital sales, the incremental sales, you expect in '24, I think you've talked about $200 million in the past. Is that still expected for the year? And then, just on M&A, any changes in the strategy there given the increase in the share repurchase activity and authorization?

Yes, let me discuss digital. As we began to implement digital and promote its adoption, it’s probably no surprise that we focused first on our employees. We have trained them on the advantages of digital, enabling them to better explain it to customers. Our initial customers have primarily been existing ones. Although we reported $250 million in orders through the system, we expect that existing customers will consistently place orders. This business would likely have occurred regardless of our digital efforts, but we still want to monitor it as it reflects acceptance. We anticipate that new customers will drive incremental business, and as we ensure that existing customers become more comfortable, we will see additional spending from them. However, we expect this growth to follow a hockey stick trajectory. We are still targeting $200 million for this year. It is admittedly a challenging time to reach that hockey stick growth, but we are confident it will happen. The encouraging acceptance from existing customers adds to our optimism. I’ll let Peter address the M&A aspect.

Yes, I 100% agree on digital. It is encouraging. The momentum is good. On M&A, the momentum is good there too. I think you've seen the increasing number of acquisition targets that we are closing on. Still little bit smaller, but we really like to pace. The pipeline still looks very good. We are still pleased with the potential targets out there. And, the way that negotiations are going. Certainly, very optimistic about our ability to continue to grow the business in a healthy way with really, really nice assets like the ones we added this quarter.

Great. Thanks. Best of luck.

Thank you.

We'll hear next from David Manthey with Baird.

Hi, everyone. Good morning. Peter, in your non-guidance, that 31% gross margin exiting the year, when you talk about the 2025, you said 100 basis points of headwinds. Fifty from multi-family makes sense. But then the other 50, is that corporations? And just wondering if could explain that a little bit more. Is that just lower operating leverage because it will lower levels of starts and raw demand, or is that something else?

Yes, it is. It's all driven by volume, right? On the individual operating units, we still have a lot of fixed operating expenses tied to that. And the overall output on that will naturally see some degradation in margins as you drive through. Obviously, we'll manage it; we'll the investment we made over time based on the initiatives that we've had, within the larger portion of the sales mix as they become critical in a more challenging market.

Got it, okay. Then on the EBITDA margin, in the base business which you raise by 20 basis points to 13.7%, could you share with us the source of your increased confidence despite the kind of lackluster macros here? And also, I assume that your 2026 ranges in that 14 for midpoint is intact as well? Is that right?

So, the second half of the question, yes, our '26 is still intact. We would need volumes to rebound, but we feel good about the core business. And I think that informs where we are dialing in on the EBITDA number for that base business comp. We are getting better and better clarity around what our margin profile looks like in a healthy market, what our profile looks like in the current market, and being able to dial in the breakout from commodities kind of seeing the full-year really leveling out right around that 400 level without a ton of volatility, a bit, but not a ton is giving us the ability to dial it in a little bit more to what we think is a real sort of neutral commodity level or performance. Core business is still very healthy. As much as we wanted to be bigger, I think, what you're seeing here and what their base business chart lays out is a business that's really been transformed based on what we sell and how we service our customers, and the stability of that core business, even though you've seen kind of some ups and downs in the starts performance at the overall market.

Sounds good. Thank you very much.

Thank you, Dave.

We will go now to Reuben Garner with The Benchmark Company.

Hi. Good morning, everybody. I'd like to harp on the multi-family, but I do have a quick follow-up about the top line for next year. I think your business is where multi-family starts are little over 40% off the peak level, but I think your business is limited to 25% to 30% range. Does that imply that at this current run rate for starts we have another 10 to 15 points of top line pressure within your multi-family business in '25?

So, that's a tough question. It's very specific. Greetings, Reuben. Thank you for the question. I appreciate it. The question is very specific, and I'm not sure I can go all the way down, what I say is we do expect there to be lapping of the rest of the decline in multi-family. So, certainly we expect there to be continued headwinds on the sales line, kind of in that maybe 400-ish range, based on what we are seeing now, and around 200 of headwinds on the EBITDA line for multi-family, but remember, multi-family is all in. You got the full portfolio of multi-family products when we are talking about multi-family. I know in the past I've thrown out some color around truss. I'm going to try not to do that anymore, because I think I just muddy the waters, but when we are talking about the total, based on what we are seeing today, I would say that's the trend now. Certainly some headwind, but multi-family is only a 11% of our business this year. It's going to climb a little bit further next year in maybe smaller percentage, it's just a declining impact on the overall, as it strings back and kind of normalizes. Does that answer your question?

Yes, it does. Thank you. That's helpful. Can you provide an update on the pre-2020 process? Builders used to establish contracts that averaged between 60 and 120 days for the framing package, and recently, that timeframe has changed significantly. Is the current length of this contract still around 30 days and aligned with inventory? Are we seeing any shifts in this due to the reset in the commodity market?

It's still in the range with how we buy our inventory, which is what we have always tried to do. As long as we have the ability to cover what we sold, we are willing to work with our builders however we need to match that up, also, with how they priced their homes. And it hasn't gotten to the point where it was 90-plus or whatever. But we are generally in a 45-day exposure rate, but that's exactly how much inventory we hold and how we carry it.

Yes. There has only been some pressure back. There are certain players that have been less disciplined. We've definitely tried to hold the ground on what we think is good, smart way of coding in the market, but today's point, we've tried to increase those 30 days numbers we talked about, back during sort of the busyness of the supply chain issues, where you really had to move it quick. Now that we are back into more of a normal cadence, where we got that 45-day-ish line of sight, if you will, between what's on the ground, what's on the order, it's a lot easier to work with customers and tie it together and use some 60-day terms, that sort of thing. We are still absolutely opposed to 90 and 120-day terms, because we think that's the wrong discipline and the wrong way of approaching the market.

Well, and at that point, we actually do take market risk. I mean, what we are trying to do is mitigate their risk and mitigate our risk; we work with them to try to find that middle ground and make sure that they're covered and we are covered. And we'll adjust off of that, and touch markets specific if that solves the problem for our customer. But in general, we are in that 45-day range.

Exactly where I was getting at; thanks, guys. Appreciate it, and good luck going forward.

Thanks, Reuben.

We will go now to Jay McCanless with Wedbush.

Good morning, everyone. Thanks for taking my questions. The first one I had, when you think about lumber prices in the way you guys look at it, talking about $400 kind of being the base assumption, could you talk about what deflation you're seeing in 2Q '24 versus where it was 2Q '23?

We called it out in terms of what went through COGS. It was just basically zero, right, at 23 or whatever, small 3% headwind. That is something that does move a little out of sequence with what you see in random blanks. It is going to be a headwind in the second half versus first half, which is how you get to that sort of full-year number that's a little below the 400 level.

Thank you. I noticed that commodity sales were up by 13% in the second quarter, which is nearly double the growth rate for single-family starts according to the census data for both national and southern regions. Given that these figures were quite strong while the overall market showed some decline, are you focusing on gaining more market share in commodities until the value-added segment improves?

Well, Jay, we always wanted to take all the shares about that comment. Now, in all honest and all sincerity, we always see a couple month lag, and if you think about the Q1 starts number, that was up in the 20s. So, you are just that swash over a little bit into Q2. We are seeing a comparable performance in the business. We will certainly see a graphic, like Dave said. We think when there're opportunities to lean in and take share, we are going to keep doing it. But that's not really the explanation, if you will.

Okay, great. Thanks for taking my question.

Thank you.

We will go now to Steven Ramsey with Thompson Research Group.

Hi. Good morning. Maybe just wrap my two questions into one here, the product mix at 49%, pretty impressive even with the complexity headwinds that you have, certainly love the dynamic here, but do you think that housing market normalizes complexity going up from current levels over the next couple of years to reach your plan or do you needed that complexity level to move up, or can the current complexity level allow for that to allow you to reach your long-term targets? Thanks.

Yes. Thanks for the question. Keep in mind, the value-added products, the movement is within the category. The engineered wood products are still value-adds. So, as you go from truss engineered wood, we are not leaving the value-add product category, we are moving within it. The sale opportunity is less, but again, our margin profiles have held in there. And we are doing what we can to keep our customers addressing affordability, and at the same time, maintaining their margins as well. So, I don't see the shift in the incremental value-add products will come as the market returns to normal for those products in general. And right now we offer the full spectrum. We will send you sticks if you don't want value-add. But this we go from READY-FRAME to panel, to panel and truss. So, fully installed framing packages, all which you have would tunnel into the value-added product category in total. And we would expect it to maintain, for sure, and incrementally grow as housing starts return to normal levels.

Excellent, thank you.

Thank you.

Ladies and gentlemen, that will conclude today's question-and-answer session, and the Builders FirstSource second quarter 2024 earnings conference call. Thank you for your participation. You may disconnect at this time, and everyone have a wonderful day.