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

Good morning, and welcome to our third quarter 2024 earnings call. With me on the call are Dave Rush, our CEO; Peter Jackson, our CEO designate and CFO; and Pete Beckmann, our CFO designate. As a reminder, on September 19, we announced a planned CEO and CFO succession. 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 can be useful to our 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 these 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, and good morning, everyone. Before I get into my prepared remarks, on behalf of Builders FirstSource, I want to send our thoughts to all of those who have been impacted by Hurricane Helene and Milton. I am proud of how we have come together as an industry to help with disaster relief efforts in North Carolina and the Southeast. From the first morning after Helene's landfall, we had team members and suppliers reaching out from all over the region and even across the nation asking how they can help. Our Charlotte and Blairsville locations filled trucks with supplies and delivered them to the hard-hit Western North Carolina region. Suppliers like Great Southern, BlueLinx, Weyerhaeuser, Orgle and many others immediately stepped up and joined our efforts. We are grateful to our partners for their help. And with BFS Cares initiative, we're providing grants to our team members - to help get our team members back on their feet as soon as possible. I want to especially thank Tim McCall, an install manager in Nashville, who also serves as a volunteer firefighter in the region. Tim was involved in 20 calls in the first hours after Helene hit. One involved climbing over 250 yards of very unstable terrain to help rescue an 11-year-old boy who had been buried in the basement of his home by a massive landslide. Tim, we are so proud of your efforts, and thank you for your selfless service to the community. I'm sure you have all seen the news that I'm retiring as CEO. I never anticipated that 25 years ago, I would have this wonderful career with this great company. We have the best people in the industry, and the opportunity to be CEO of BFS these last couple of years has truly been the joy and highlight of my career. I am so proud of how far we have come, and I'm grateful to our leadership team and team members for their support. I have full confidence in Peter and Pete and their ability to drive our strategy forward. One of my first priorities when I became CEO was to develop a succession plan to ensure the consistency of our leadership and the execution of our long-term strategy. With many years of experience as our CFO, Peter is exceptional at navigating the public company landscape and has spent extra time with each of our regions to get a firsthand understanding of what it takes to support our leaders in the field. He has served as a close advisor to me and was essential in helping craft our current strategy. I'm working closely with him to ensure a thoughtful and seamless transition. Pete Beckmann is a brilliant financial leader and someone who is widely respected within the organization. I am grateful for our deep bench of talent and to lead BFS in such good hands. I want to wrap up by saying that I'm not going far away. I'll enjoy continuing to serve BFS as a member of our Board, and I am taking an active role to ensure a smooth transition in the near term. I'm excited to continue supporting our growth and success. Thank you, again. I'll now hand the call over to Peter.

Thank you, Dave, and good morning, everyone. I want to start by saying that we are indebted to Dave for his decades of service at BFS as a leader, steward, and champion of the company and our people. Dave has truly done it all, and his legacy of excellence will continue to inspire us as we move forward. I'm truly honored and grateful to be named the next CEO of Builders FirstSource. I'm humbled to represent our talented, hard-working team and the fantastic business that we have built. BFS has had tremendous success and become a world-class organization because of the commitment and contributions made by this team. Let's get started with Slide 3 and our strategic pillars, which remain unchanged. As we continue to execute our strategy, I believe there are three areas that we can emphasize so we can continue to outperform today and transform tomorrow. The first opportunity is with our people. I want us to advance the industry standard in this area so that we are recognized as a premier destination for talent. I believe we can enhance how we invest in, develop, and support our team members from our frontline operators to our leadership. The second opportunity is to further build and catalyze our growth prospects, from our products to our processes. I see potential to improve our consistency capabilities and ways of working so we can extend our lead and grow a bigger, better BFS of tomorrow. And the third opportunity is to improve how we collaborate and learn from each other within the company. We have a wealth of expertise, knowledge, and innovative technologies. I believe we have a real opportunity to enhance how we work together. So that what we are discovering in Charlotte is shared with Phoenix and what we are developing in Florida can be scaled in Texas. Let's turn now to our third quarter highlights on Slide 4. I'm proud of our resilient performance, which reflects our execution and operational rigor, even as we continue to see soft sales amid rate uncertainty and extreme weather. Despite these challenges, we delivered strong gross margins of nearly 33%. Our adjusted EBITDA margin has remained in the mid-teens or better for 14 consecutive quarters, which highlights our transformed business model and our differentiated product portfolio and scale. Let's move to Slide 5, where we touch on some of the specific ways we are executing our strategy. Our portfolio of value-added products and services remains a competitive advantage for BFS and continues to bolster our partnerships with customers. We've seen steady progress with digital, as we continue to hear great feedback from customers and see increasing levels of adoption each week. We demonstrated operational excellence by delivering $27 million in productivity savings in Q3 and have driven $104 million year-to-date, primarily through more efficient manufacturing and procurement initiatives. Installed services continues to be a great opportunity for us as we leverage playbooks from successful markets. I'm pleased that our install sales increased by 11% year-over-year as we focus on helping customers address labor challenges. We remain disciplined stewards of discretionary spending and are continuing to maximize operational flexibility. We have consolidated 11 facilities year-to-date, while maintaining our service levels to our customers with an on-time and in-full delivery rate of over 90%. Single-family softness continued in Q3 amid ongoing affordability challenges and below-normal starts. The initial reaction to the Fed's first interest rate cut in September has been mixed, with some homebuyers remaining on the sidelines and waiting for additional rate cuts as mortgage rates fluctuate in the near term. As a reminder, the value of a new start has fallen as the housing market has adapted to affordability challenges. Multifamily continues to be a headwind amid muted activity. Comparisons should get less negative as we lap record performance from last year. On a normalized basis, multifamily represents about 9% to 10% of net sales and is an attractive and profitable business for us. As we detailed on our Q2 call, our Q4 exit velocity indicates about a percentage point of margin erosion from '24 on a full year basis, roughly half of which is from multifamily. To address the current environment and affordability challenges, builders have employed specs, smaller and simpler homes, and interest rate buydowns to help buyers find affordable options. Builders of all sizes are having to navigate this market in addition to 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 leaning in by partnering with our customers to help them lower the cost of homes for consumers as well as maintain their margins. This includes offering a balanced product mix that addresses builder needs while passing through lower material costs. For instance, we have continued to supply more engineered wood and have sold fewer floor trusses to help alleviate affordability challenges. We have also supplied more lower-cost offerings in products like windows and doors to help reduce costs. Although these actions in support of our customers mean less sales and gross profit dollars, our margin profile remains strong, and we are well positioned for growth as starts increase and structural headwinds begin to subside. Turning to M&A on Slide 6, we continue to pursue attractive opportunities while remaining financially disciplined. Over the years, we have developed a substantial and proven muscle memory to grow through M&A and have an impressive track record of successfully integrating these transactions. In the third quarter, we completed six deals with an aggregate 2023 sales of roughly $190 million. In July, we acquired Western Truss & Components, having trust capacity in the Flagstaff, Arizona area and CRi SoCal, a dealer and installer of high-end windows and doors in Orange County, California. In August, we acquired Wyoming Millwork, the leading independent building products distributor in Delaware. September, we acquired Sunrise Wood Designs, a top custom cabinet manufacturer and installer in North Texas. And in the Reno area, Reno Trust, a leading trust manufacturer to the single and multifamily markets and High Mountain Door & Trim, a distributor and installer of windows, doors, and millwork. Additionally, in October, we acquired Douglas Lumber, which provides a range of building materials to contractors, remodelers, and homeowners in the Rhode Island area. These acquisitions reinforce our commitment to growing value-added products. We are excited to welcome these talented new team members to the BFS family. On Slide 7, we provide an update on capital allocation. In addition to the six tuck-in acquisitions during the third quarter, we executed share repurchases of roughly $160 million. It's driven by our track record, we'll continue to allocate capital to high-return opportunities, including acquisitions and share repurchases. We deployed approximately $1.7 billion through the first three quarters of this year and remain on track strategically to $5.5 billion to $8.5 billion of capital from 2024 to 2026, as we outlined at Investor Day last December. Now let's turn to Slide 8 and discuss the latest updates on our digital strategy. With our BFS digital tools, we are focused on creating value for our homebuilder customers and in doing so, further extending our industry leadership position and driving substantial organic growth. We have seen strong adoption and growth with our target audience of smaller builders despite the challenging market. We have had broad acceptance of the platform so far, including interest from multiple top 200 builders. Since launching in late February, we have seen nearly $600 million of orders placed through our digital platform, of which $83 million were incremental sales from existing and new customers. While we're very pleased with the incremental sales to date, given market headwinds from our targeted segment of builders, we now expect total incremental sales of approximately $110 million in 2024 versus our initial goal of $200 million. Despite the slow start, we remain confident in our ability to meet our target of $1 billion in incremental sales in 2026, as we grow wallet share and win new customers. Before I turn the call over, I want to say that we are very fortunate to have Pete Beckmann step into the role of CFO. He has a long proven track record as a finance leader, which I've witnessed firsthand. I look forward to partnering with him to deliver exceptional results and compound shareholder value. Pete, take it away.

Thank you, Peter, and good morning, everyone. I appreciate the introduction, and I am grateful for the opportunity to serve as CFO. For background, I have spent the last 25 years at BFS and legacy companies in roles of increasing responsibility, including being an integral part of the ProBuild and BMC mergers. Most recently, I served as SVP of Financial Planning and Analysis, where we have partnered with all levels of the enterprise and was responsible for our financial forecasting, strategic capital, and annual planning. I look forward to helping enable profitable growth while maintaining our track record of prudent financial management through the cycle and disciplined capital allocation. Despite continued housing market choppiness, we delivered resilient results during the third quarter as we continue to execute our strategy and operating model. We are leveraging our fortress balance sheet and free cash flow generation to drive disciplined capital deployment, as witnessed by our share repurchases and acquisitions during the quarter. Our scale and financial flexibility enable us to act as key partners to homebuilders, and we have a clear line of sight to compound value creation over the long term. We are well positioned for meaningful operating leverage when the market turns. I will cover three topics with you this morning. First, I'll recap our third quarter results; second, I'll provide an update on our capital deployment; and finally, I'll discuss our 2024 guidance, 2025 scenarios, and related assumptions. Let's begin by reviewing our third quarter performance on Slides 9 and 10. Net sales were $4.2 billion, a decrease of 6.7%, driven by a 7.2% decline in core organic sales as multifamily continues to trend downward, and 2.9% of commodity deflation. The decrease in net sales was partially offset by growth from acquisitions of 2% and one additional selling day that contributed 1.4%. The organic sales decrease was driven by a 31% decline in multifamily as we lap the prior year's strong comps and a 4.6% decline in single-family amid lower value per start. This was partially offset by a small increase in repair and remodel of almost 1%, given strength in the central region. As we have shared on recent calls, there have been three main variables reconciling single-family starts for organic sales. The first variable is the lag between permits and starts. This quarter, unlike last quarter, we have seen the impact of early permit polls stay where we continue to see a generally extended permit completion cycle time. As a rule of thumb, we expect a roughly two-month lag between the start and our first setting. Second, the value of the average home has fallen as size and complexity have decreased. Finally, we have seen slight normalization in selling margins of non-commodity products and manufactured price cuts in some products. Summarized, although there are sales dollars built for start today, we remain the market leader and will begin to deliver strong operating performance. Value-added products represented 49% of our net sales during the third quarter. As a rule of thumb, our multifamily sales are made up of roughly 70% value-added products. Gross profit was $1.4 billion, a decrease of approximately 12% compared to the prior year period. Gross margins were 32.8%, down 210 basis points, primarily driven by multifamily and core organic normalization. SG&A increased $19 million to $958 million, primarily attributable to acquired operations and asset write-offs, partially offset by lower variable compensation due to lower net sales. As a percentage of net sales, total SG&A increased 190 basis points to 22.6%. Adjusted SG&A decreased approximately $1 million to $783 million, primarily attributable to lower variable compensation due to lower net sales, partially offset by acquired operations. On an annual basis, adjusted SG&A is approximately 30% fixed and 70% variable with volumes. For reference, we have an adjusted SG&A reconciliation schedule in the earnings release. We are focused on carefully managing our SG&A expenses and are well positioned to leverage our fixed costs as the market grows. Adjusted EBITDA was approximately $627 million, down 23%, primarily driven by lower gross profit, partially offset by lower operating expenses after adjustments. Adjusted EBITDA margin was 14.8%, down 310 basis points from the prior year, primarily due to lower gross profit margins, partially offset by lower operating expenses after adjustments. Adjusted net income of $360 million was down $174 million from the prior year, primarily due to lower gross profit, partially offset by lower operating expenses after adjustments and lower income tax expense. Adjusted earnings per diluted share was $3.07, a decrease of 28% compared to the prior year. On a year-over-year basis, share repurchases added roughly $0.22 per share for the third quarter. Now let's turn to our cash flow, balance sheet, and liquidity on Slide 11. Q3 operating cash flow was $730 million, an increase of $81 million, mainly attributable to a decrease in net working capital. Capital expenditures for the quarter were $95 million, and free cash flow was approximately $635 million. For the last 12 months ended September 30th, our free cash flow yield was approximately 8%, while operating cash flow return on invested capital was 25%. Our trailing 12 months net debt to adjusted EBITDA ratio was 1.4x, while base business leverage was 1.5x. At quarter end, our total liquidity was approximately $2 billion, consisting of $1.7 billion in net borrowing availability under the revolving credit facility and approximately $300 million in cash on hand. Moving to capital deployment. During the third quarter, we repurchased roughly 900,000 shares for approximately $160 million at an average stock price of $176.73 per share. Since the inception of our buyback program in August 2021, we have repurchased 45.5% of total shares outstanding at an average price of $77.62 per share for $7.3 billion. We have approximately $840 million remaining on our $1 billion share repurchase authorization. We remain disciplined stewards of capital and have multiple paths for value creation to maximize returns. On Slide 12, we show our 2024 outlook. We anticipate a regional financial impact from Hurricane Helene and Milton, around $40 million in sales, a relatively modest amount given our geographic diversification. For full year 2024, we have narrowed our range of expected total company net sales to be $16.25 billion to $16.55 billion. We expect adjusted EBITDA to be $2.25 billion to $2.35 billion. Adjusted EBITDA margin is forecasted to be in the range of 13.8% to 14.2%. We expect our 2024 full year gross margin guide to be in the range of 32% to 33%. This also remains in line with our long-term expectation of 30% to 33% and normalized single-family starts of $1 million to $1.1 million. We expect full year 2024 full year gross margin guide to be in the range of 32% to 33%. This also remains in line with our long-term expectation of 30% to 33% and normalized single-family starts of $1 million to $1.1 million. We expect full year 2024 free cash flow of $1.2 billion to $1.4 billion, assuming average commodity prices in the range of $380 to $400 per 1,000 board feet. 2024 outlook is based on several assumptions. Please refer to our earnings release and presentation for a list of these key assumptions. Moving to Slide 14. We recognize that 2025 is coming into focus as we approach year-end. Like we did last year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions. I want to emphasize that this is not guidance, but these scenarios should help clarify our range of performance expectations for 2025 and demonstrate the strength of our best-in-class operating platform. 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 $15.4 billion. Our base business adjusted EBITDA guide is approximately $2.3 billion at a margin of 14%, which reflects a minimal impact from commodities. For context, Slide 16 shows that our 2020 base business adjusted EBITDA was roughly $1.1 billion and 991,000 single-family starts, and we are expecting better adjusted EBITDA at lower single-family starts this year. On Slide 17, we provide a bridge from our 2019 gross margin to the long-term normalized midpoint of 31.5%. Our improved margin profile has a greater mix of value-added products, productivity savings, and commercial benefits. As I wrap up, I am confident in our ability to execute our strategy and drive long-term growth by leveraging our exceptional platform and financial flexibility. The Investor Day goals we laid out last December remain achievable, assuming a return to normalized single-family starts of $1.1 million in 2026. With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. Let me close by reiterating that we continue to execute. Our resilient business model allows us to win in any environment, and this is evidenced by our strong gross profit margins and cash flow generation in the third quarter. I'm confident in the long-term strength of our industry due to the significant housing underbuilt and favorable demographic trends. We are well positioned to take advantage of these tailwinds, which will help drive growth for years to come as we execute our strategy. We are a key partner to our customers and continue to deepen our value proposition by helping them solve problems through our investments in value-added products, digital tools, and install services. Our proven playbook for growth, fortress balance sheet, and robust free cash flow generation will help us continue to compound long-term shareholder value. Even in an uncertain and challenging environment, we are doing the hard work now and building for the future. By continuing to grow in value addition and install along with leveraging IT and technological development, we are arming our team members with cutting-edge tools to continue to be the supplier of choice for our customers. By investing today, we are exceptionally well positioned to win in the future as the market continues to recover. Thank you again for joining us today. Operator, please open the call now for questions. As a reminder, with a lot of questions this morning, please limit yourself to one question and one follow-up.

We'll take our first question from Matthew Bouley with Barclays. Please go ahead.

Good morning, everyone. I want to offer my congratulations and best wishes to Dave and best of luck to Peter and Pete. So, for my first question, I wanted to touch on your growth versus the market into these 2025 scenarios. So kind of looking into the second half here, I think the way you guys outlined the guide is, you obviously reduced the revenue guide by a bit while holding the end market guide. So, I'm curious around your balance of share and kind of how you're thinking about that in the near term. But then as you draw it into those '25 scenarios, it looks like you're talking about your growth relatively similar to the start number. So, I'm curious how you're thinking about your growth relative to market as we get into 2025 as well. And if some of these headwinds are starting to abate any visibility to that. I'll stop there, but thank you guys.

Thanks, Matt. Yes, there's a lot in that question. So, a couple of factors. I would say where we are today, we have certainly seen the choppiness in the market. There wasn't a big relief rally when interest rates were cut; mortgage rates didn't necessarily behave as everyone was hoping in terms of a quick fall. And I think buyers have been appropriately or inappropriately nervous about both rates and the election. So, it's been a little choppy. I think we've seen that. We've been watching it all year. Still performing well. I think the business is still competing well, taking advantage of opportunities, we're investing. Those things have led to, I think, some solid performance on our part, but we have certainly faced headwinds. We've been hopefully pretty open about that. The value of these homes has fallen. That's really the biggest disconnect. when we look at what starts have done and what our sales have done, particularly in that single-family core organic category. That doesn't mean we're not happy and competitive. But certainly, it's been challenging out there, and we've talked about that. As we think about what that means into the fourth quarter and into next year, I think, broadly speaking, it's mixed out there. You've got markets that are doing quite well. They're sort of bouncing up and seeing some green shoots starting to perform. We've got other markets that have struggled and seen headwinds and seen a little bit of excess inventory, and builders are reacting in a thoughtful way, we believe, to managing that. So, our guide for the fourth quarter is certainly focused on the visibility that we have into the market, the conversations we're having with customers; it's not a bad market by any stretch, but it's one that has certainly seen some challenges, not at all helped by the weather disruptions that we've seen. As we get into '25, it's early days. We’ve been looking at the commentary from the economists. We've been talking with our customers. It's a bit of a mixed bag, some doing better than others. We think there will be a bit of a differentiated reaction as rates are cut. We expect there will likely be at least a couple more. We think mortgage rates will continue to settle that will have different advantages to different builders out in the market. So, this is what we're seeing today. There's certainly new news, some of the performance announcements over the past few weeks have saved our opinions as we go forward. But we thought like last year, this is a helpful starting point for helping people understand what we're thinking based on what we see today.

Got it. Thank you for that Peter and for addressing my long question there. Second one, the gross margin guide. I just wanted to confirm that given where the guide is that you're still looking at roughly 31% as the exit rate for 2024. And again, obviously, we can see the margin numbers in your 2025 scenarios. But between some of the pluses and minuses, productivity, value add, install versus some of the competitive dynamics out there. How are you guys thinking that 31% could drift one way or the other as you go through 2025?

Matt, thank you for the question. We're seeing a headwind as we exit 2024, of about another 100 basis points from the year-to-date average margin, 100 basis points, pretty consistent with what we said last quarter is half of it is made up from the multifamily normalization and the other half from the core business normalization. It is a competitive environment. We're going to continue to compete, especially on the commodity products with the install. Install has been a favorable result for us in 2024, and it continues to be a good arrow in the quiver, and we'll continue to compete every day and we expect to exit right around 31.5. Overall, we're certainly very pleased with the margin performance despite the challenging market; we've seen customers really continuing to benefit from the value-added products and services. That part of our business has certainly stayed strong, stay resilient, and it supported our margins in an environment where volumes are and values are down a little bit.

Got it. Okay, so you said 31.5 is the exit rate. So, I'll leave it there. Thank you, guys.

We'll hear next from Charles Perron-Piche with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone. First of all, congratulations to Dave, Peter, and Pete on their promotions and retirement. It's well-deserved. I would like to start by addressing Matt's question about the 2025 scenario. I want to ensure that we understand this correctly regarding the base case scenarios. It suggests an approximate 20% incremental EBITDA margin in 2025, especially after we account for a $100 million multifamily headwind. Is that accurate? Also, as you analyze the upcoming year, how do you perceive the potential to enhance the gross margin compared to SG&A leverage across these scenarios? Additionally, do you anticipate the deceleration in sales that you've experienced in 2024, particularly concerning content per home, to stabilize and remain roughly consistent through 2025 as reflected in these scenarios?

Thank you, Charles. I appreciate your comments and questions. Regarding our numbers and business performance, particularly around margins, there is a lot happening. From our preliminary analysis, it appears we are maintaining performance in expected areas. We anticipate enhanced performance from our productivity initiatives. We continue to see strength in our value-added services and are actively seeking opportunities within that productivity category to improve both gross margins and EBITDA margins. This focus is a fundamental aspect of our business model, and it gives us confidence as we move forward. Market dynamics for next year, influenced by sales volumes across different categories, are worth noting. Generally, we observe continued weakness in multifamily, although it seems to have stabilized. While it has significantly declined from its peak, we believe we've reached a level where we can maintain and possibly see some recovery, depending on market conditions. The single-family market varies among builders, but we believe it is generally trending positively. We maintain confidence in the market's strength, the appeal of new homes, and the industry’s capability to meet demand. There’s considerable pent-up demand, and we are well-positioned to support builders in a highly efficient manner. Although it’s still early for our guidance for 2025, we believe these scenarios will provide additional insights moving forward.

Okay. That's helpful, Peter. And maybe following up, where product prices in lumber in particular, have been trending higher over the last couple of months with the improving housing outlook for 2025, suggesting potentially more upside. I guess against this, how are you positioning your inventories in the business? And how do you see this recovery in commodity prices affecting demand and competitive dynamics across the different value-add products that you have in your portfolio if this ongoing upswing persists in 2025?

Yes. Commodities remain a significant part of our business, although their role is smaller than it used to be. It's encouraging to see prices recovering. The period when prices were below 400 was challenging, especially for the mills and commodity delivery. We definitely prefer a strong sector in commodities, particularly in dimensional lumber and OSB. There has been a slight increase, but it’s still early. It's important to note that while new construction drives demand for these products, the Repair and Remodel market has a much greater impact. This is where I'm looking for support and growth in this category. You are correct, it will certainly help our sales and margins as we experience better absorption of overhead costs if this trend continues. However, we are always mindful of affordability and aim to find balance. None of us want to return to the days of $1,300 to $1,600 lumber, which was quite problematic. A moderate increase is beneficial to stabilize the market.

Okay. Thanks for your time, guys.

We'll hear next from Mike Dahl with RBC. Please go ahead.

Good morning, and thank you for taking my questions. Congratulations again to Dave, Peter, and Pete. I would like to start by discussing gross margins, specifically focusing on the contributors for this quarter and your thoughts on the fourth quarter. Looking at the strong gross margin performance this quarter, how would you categorize the factors at play? Did the increase in wood-based product costs have any positive impact, and how about the recent M&A activity? Could you quantify any contribution from those areas? Also, I'd like to know more about the digital aspect and the overall drivers behind these results. Additionally, your outlook for the fourth quarter appears slightly more favorable than before, so it would be helpful if you could discuss the contributing factors and provide any quantification on that as well.

Morning, Mike. Thanks for the question. With respect to fee performance and margin, we continue to see a normalization in the multifamily space. We continue to have positive uplift from productivity that we continue to deliver. And the rest of it is mix and mix within the core business, and it continues to deliver resilient margins better than what we had expected originally when we gave guidance last quarter. As we look forward to Q4, we continue to see margin normalization in the multifamily, which is a broken record, and we continue to share that each quarter and some continued pressure and normalization in the core business due to the competitive environment that we're still in. And part of it is going to be some of the seasonal build, and we'll see some of that volume kind of shoulder off as we exit the year.

Yes. I think Pete's right on in terms of the key drivers. We continue to be under a bit of pressure on the competitive dynamic. You'll see some seasonality but I think, in general, what you're seeing is the continued strength of the core product offerings and the value-add in terms of something that we have made a core part of what we do and has continued to be strong.

Thank you for that. My second question is about the '25 scenarios. I recognize it’s still early, as you mentioned. However, I've noticed that some recent builders seem to have a more cautious outlook compared to what your range of outcomes suggests, particularly in the middle or upper ranges. Considering the factors affecting the mix this year, it appears that your revenue guidance may indicate a return to outpacing the starts environment. So, there are significant assumptions here regarding improvements in the overall market and in relation to that. I would appreciate it if you could elaborate on how you developed that outlook, and whether there are some major elements at play, such as your assumptions about digital and any ongoing M&A. Additionally, I'd like your perspective on how you conceptualize starts while also framing your revenue in relation to them and identifying those significant moving parts.

Sure. I can provide a little bit of color. I won't go into too much detail, but you're right. There's a lot that goes into it. No question. I would say the starting point is maybe where we're most maybe disconnected based on your comments and your concern about the overall starts we, at this stage of the game aren't folding in a lot of commentary, we're folding in mainly the economist forecasts and the averages of the leading forecasters around the start numbers. While an individual builder is certainly important and an important partner for us, there's no one builder that's going to move the entire market. So we generally will stay at the economist level forecasting for starts, especially at the point we're at in early November. We do have assumptions in there for commodity prices, for the M&A carryover for productivity. We've got certainly an expectation that we'll be able to gain share with some of the initiatives we've leaned hard into things like digital and install. And I think it's fair to say that our thinking around the average cost per start is aligning around it flattening out for the most part. We haven't seen continued decline. It's been more stable. I would say, since mid-summer on a year-over-year basis, we've certainly seen the comparisons, and we've tried to call those out, but it hasn't been something that's aggressively moved down after the reset earlier this year. So that's another variable that's included. But like I said, early days some high-level analytics, we tried to be inclusive of the variables that we think are important. But as you know, this is a challenging game given how volatile things are lately.

Okay, I appreciate that Peter. Thank you.

Next, we'll hear from David Manthey with Baird. Please go ahead.

Thank you. Good morning and congratulations to everyone. My first question is clarification on Slide 17. When you talk about productivity, does that capture both process improvements as well as scale? And then could you also define other commercial benefits just definitionally for us?

Dave, thank you. I'm going to let Pete handle that one.

Yes. So within the productivity savings, that's process improvements. The scale that we get from the company really helps us leverage our knowledge and our expertise across the platform. But the productivity savings is process improvement on how we do things and how well we're buying, how well we're manufacturing, and how well we're operating on a daily basis. Within the other commercial benefits of saying that there's customer supplier terms. We've talked about in the past where we used to have longer fixed-price contracts. We've worked to eliminate those, shorten the duration. So we don't get pinched or absorb all the commodity risk. Our CRM tools that we put in place and how well we're managing our relationships with our customers and falling through, and that's where some of the scale is going to come into play. So you'll see that in the bullets on the side of that chart.

Thank you and Peter Jackson, you might have just described this, but I want to be clear. You talked about the trends in single-family housing sizes. And I'm just wondering, in those scenarios, are you assuming any improvement or deterioration for that matter in any of those scenarios. It sounds like you're seeing that trend basically flatten out. Is that my understanding?

That's right. Yes. There are a bunch of pieces in there, certainly square footage of the home being one, but mix of products in the home value of those same products that are appearing in the home, all part of that. But yes, we're expecting it to flatten out based on what we're seeing right now. A little bit of a lapping impact but pretty modest.

That's great. Okay. Thank you very much.

Thank you.

And we'll go now to Rafe Jadrosich with Bank of America. Please go ahead.

Hi, good morning. Thank you for taking my question. Best wishes to Dave, and congratulations to Peter and Pete. Regarding the manufactured product segment, could you explain the year-over-year decline? Specifically, how has the multifamily segment, particularly multifamily trusses, affected the overall situation? It seems that the multifamily sector is undergoing normalization, but excluding that, what trends are you observing in manufactured product revenue? Any insights on margins would also be appreciated.

Yes. Thanks for the question. I'll start and then I'll hand it over to Peter. What you're seeing in the manufacturing products, specifically on the multifamily side. We've been talking about the normalization, but also the volume declines that we've seen in that multifamily space. As a reminder, I mentioned in our prepared remarks that multifamily may value-added products was 70% of the multifamily overall. That used to be a much higher percent and that's also come down. And in the quarter or what we're seeing within multifamily, manufactured products is down almost 45% to 50% within that multifamily mix. We're anticipating that that's going to continue to decline as what we're seeing from the starts and the volume normalize as we'd lap the higher year. The tough comps that we had last year was the peak, and Q3 being the highest point of that. It's just a big headwind, but we're seeing more stable volume and it's normalizing at a bottom as we exit the year.

Yes. And I think just broadly speaking, the multifamily trust has been hardest hit. The multifamily work part of the business has performed a bit better, been a bit more stable. The team has competed well and found other opportunities to protect the business. I think that the side, the single-family side has certainly seen pressure, particularly in that category that we highlighted in the spoken remarks about floor trusses and the shift back to EWP. I think that's probably the only other color that I would add there. In general, we're still pleased with manufactured products in general. I think it's performing well from a support to the customer perspective, from an affordability perspective, from a competitive dynamic; we feel good about and it's a productivity source for us. But it certainly on a comp basis has been challenging.

That's helpful. And then just on the gross margin bridge that you provided from 2019 to today, which is super helpful. The value-add portion that can you talk about how much of that is the margins changing within value-add relative to just value-add mix moving higher? And then like is there any changes we anticipate from the value-add margins today going forward?

There's a lot in there, right? I mean we've done a ton of acquisitions. We've added a ton of capacity. We've made tremendous investment. A lot of that had to do with productivity savings within the category itself that sort of generated through the size and scale of those operations. So there's certainly a lot in there. The performance generally speaking, I would say, is sustainable from the perspective that we have a lot more to offer. We have a wider portfolio and geography coverage than we did in the past. So I think that's the exciting part about where we can continue to grow this business into the future. That expansion of install, the investments we've made in that business over the years being harvested as we return to growth. I think that's an exciting history for us, but even more exciting is what the future holds in that category.

Great. Thank you.

We'll go next to Philip Ng with Jefferies.

Hi guys. Congrats on a solid quarter in a choppy environment. I guess to kind of kick things off. When you look at your scenarios for 2025, is there any assumption that mortgage rates actually pull back from here? And what are you assuming for non-commodity products from a pricing standpoint? And certainly, it's very great to see an upbeat view on the market in your various scenarios. Peter, it would be helpful to kind of give us some perspective. As you pointed out, the market is still pretty choppy, what that earnings power or margin profile could look like if single-family starts are actually flat to down low single digits?

Thank you, Philip, for your four questions. Let me address a couple of them, and please guide me if I stray off track. Regarding the 2025 scenarios, we haven't conducted a downside analysis, but we could if necessary. Generally, economists are not indicating a downside, but if that changes and we need to provide insights, we're ready to do so, just as we have in the past. This hasn't been the prevailing thought recently. I believe our business can perform well even in a downturn. We have shown our ability to be competitive, maintain our margins, and work closely with customers by offering them the products they need. That’s the main message I want to convey. Let me know if there are other points you’d like me to emphasize.

Your various scenarios, Peter, are you assuming any pullback in mortgage rates and how are you thinking about pricing of your products, not commodity?

So we don't have an explicit mortgage rate assumption in any of our stuff. I think what happens is it's basically embedded or implicit in what the economists are doing. My sense is most of them are taking the middle of the road dot plot and trying to step off of that, but we don't have an explicit assumption for it. In terms of pricing, I will say our sense from what we've seen from some vendors is that the era of cuts has ended. What we're seeing right now is stability in pricing in some modest, maybe low single-digit price increases. We'll see where that pans out. It's a little early to be calling that yet, but that's the tone right now.

Okay. That's super helpful. And then my next question is around M&A. How is the pipeline looking? Have you seen sellers come back to the market with some level of stabilization? And how do you kind of size the opportunities in front of you, smaller or larger deals in general?

Well, yes, I mean there's no question the market is looking strong. I mean with six this quarter, I'd say the pipeline is strong. Smaller deals, by and large, make up this number, no question, but there are a number of really nice-looking businesses out there. I would say that sellers have come to the market with an intent to sell. They're not exploring. They're looking to move, but a pretty wide portfolio of items that we're looking at and continue to look at it. It's a good time to be buying stuff.

Okay. Appreciate all the great color, guys. Thank you.

We'll hear next from Jay McCanless with Wedbush. Please go ahead.

Hi, thanks for taking my questions. Congratulations to everyone and thank you to you guys and your suppliers for helping out with the hurricane relief, really important work. So the first question I had going back to Slide 17, I guess could you talk about what you saw improved from last quarter to this quarter that gave you the confidence to go ahead and move the gross margin number up and the EBITDA margin up?

Thanks, Jay. Talking about 17, that's the long-range view. So one of the things we had done during Investor Day was to give people a rough estimate around what we think normalized gross margins were going to be between 30% and 33%. A frequent question that we received was wait a minute, help me get my head around this. What are the big pieces that I should understand if I bridge you from pre-BMC merger to what you're telling me is the future of this business. And we were a little hesitant to lay that out there until we have a little better understanding of what normalization was going to look like. And as things have kind of calmed down and we feel like there's a clearer line of sight to what this business is and how it will continue to perform. We decided to put this out for everybody to understand the buckets of what has driven it, where we have gotten our inputs to defend that midpoint of 30% to 33%, which is about 31.5%. So this isn't a Q4 or a '25 thing. This correlates back to the 2026 target for us for Investor Day.

Okay. Great. And then I guess the other question I had, Peter, you talked earlier about R&R being a much larger consumer of lumber than single-family starts. I guess could you talk to again what you guys are expecting for R&R this coming year and maybe what the industry kind of outlook is just so we know where things might go?

If you look at the overall picture, I want to clarify that R&R constitutes about half of the demand for lumber in the DIY sector, while the rest is split between industrial and commercial uses. The DIY R&R space is quite significant, and the sentiment surrounding it has been positive. There seems to be considerable pent-up demand for renovations, especially as the housing stock ages in this country. Some analysts are optimistic about what R&R could achieve if we see a decrease in mortgage rates, which might alleviate some of the lock-in effect people have felt since rates increased. This could provide a boost to the market, indicating a revival in demand for the construction industry. Overall, this outlook remains favorable for Builders FirstSource. Although the forecast for 2025 appears modest at this time, we believe there will be good momentum heading into 2025 and 2026.

Okay. That’s great. Thanks for taking my question.

We'll go now to Jeffrey Stevenson with Loop Capital. Please go ahead.

Hi, thanks for taking my questions today and congrats, Dave, Peter and Pete. So productivity savings are coming in better than expected this year through efficient manufacturing and procurement initiatives. I just wondered how long a runway do you have on the strong product it savings benefits you've seen over the last few years, and should we expect this trend to continue in 2025?

Thanks. Yes. Productivity is something this organization is really engaged in very effectively sharing of best practices, working together on feed ideas, ways of doing business that just takes out waste and inefficiencies at a real fundamental level has been super successful. We think there's more opportunity for that, but I won't overstate the impact of the transition that we'll see over the next couple of years towards our ERP conversion. So there has to be a balance there, both take a lot of time and energy from the organization. But there's zero question, I would say, in my mind and in the minds of the operating leaders that we can continue to get better, that we can continue to drive productivity savings well into the future. I think we're just in the early innings of what we can do with just a fantastic business and a wonderful platform, particularly as we take advantage of technology and better tools for our teams.

Okay. That's great to hear, Peter. And then I was wondering if you could talk more about the trade-off you're seeing, the lower value products such as an example in your prepared remarks of builders using EWP instead of floor trusses from the focus on lower value in complex home. I just wondered, how widespread is this across regions and do you expect it to continue well into 2025?

We are definitely observing this trend everywhere. Every homebuilder is trying to adapt to the challenges of affordability in their own way. It's difficult for homebuyers to manage the new prices in today's world. Therefore, we are all seeking ways to operate more efficiently. This could involve adjusting the size of homes, refining the value of the products we use, or, more directly related to your question, considering the mix of products that will be included in the homes themselves. Recently, manufacturers of building materials have announced a shift towards simpler, more affordable options to ensure that home prices align with the current buyers' monthly payment capabilities. There has been a slight decline over the past two years, but we are not witnessing an ongoing pace of these declines as they appear to have stabilized significantly. While there might be some changes in specific product categories, overall, the latter half of this year has shown more stable output regarding what goes into homes, including their sizes and the value of the products used.

Very helpful. Thanks, Peter.

We'll go next to Steven Ramsey with Thompson Research Group. Please go ahead.

Good morning. Wanted to ask on the R&R and other category, another quarter of solid organic growth versus the backdrop. I'm curious if you could share a bit more on the central region strength versus other regions? What is allowing you to outperform? And then maybe lastly, just to make my second question wrapped up into this, how much is value-added products a factor in this category? Thanks.

So maybe second question first. Certainly, a smaller component of the R&R business. That is more varied from a product perspective, a lot more categories go through that. Just given the nature of what we sell and where we sell it. Certainly, a bit of variance between the individual divisions between those markets. I would say we've had some pretty nice success in some of our smaller markets, particularly in the North Central around the R&R space. They performed well. But in general, I think it's a strength for us just as we continue to have available capacity and open our doors to the smaller remodeler. We have a lot of value that we can provide them with subject matter expertise and product knowledge. And generally, we do have success in that category when we focus on it. But just to repeat it, it's a fairly small percentage of our overall business.

Great, thank you.

And we'll hear next from Ketan Mamtora with BMO Capital Markets.

Thank you. Returning to multifamily, regarding 2025, you're predicting a revenue decline of 400 million to 500 million. Is this primarily due to the year-over-year decline as we progress through 2024, or are you anticipating further declines in 2025 given that it's still a significant year-over-year drop?

It's mainly due to lapping. I would say we've stabilized, but the lapping effect will still be present.

Understood. And on the margin normalization side, both for multifamily and for single-family. Are you seeing signs that we are sort of closer to the end there in terms of sort of the competitive price pressures? Or is it sort of still continuing as we move into Q4 and next year?

With the multifamily margin normalization, it's continuing to wane and fade. As we said on prior calls, we think it's going to kind of normalize out by Q1 of next year, but we're really hitting that exit rate. And most of the normalization you see in the results is a year-over-year comp to the prior year's strength that we had.

I'd say overall, we're in late innings. We're much closer to the end in terms of the margin normalization. We certainly have teed up that 100 basis point sort of based on the exit velocity that we're seeing I don't want to miss the opportunity to highlight we're still well below normal starts. So that certainly creates pressure. But based on where we came from, we believe we're much closer than the beginning.

Very helpful. Thank you.

And we'll go next to Alex Rygiel with B. Riley. Please go ahead.

Thank you, gentlemen. A very nice quarter. As it relates to the installed sales, which increased about 11% in the quarter, what percentage of your overall net sales is that today? And how does that impact your gross margin?

The 11% represents a year-to-date improvement compared to the previous year. The margin profile for installations aligns with our typical product mix, as we're installing Windows, Doors, Millwork, along with framing, trusses, siding, and other products. This variety supports the overall margins across all product categories. Regarding the size of installations, last year it was around 2.5 billion to 2.6 billion, and it has increased, indicating a relative growth from that figure.

And then as it relates to digital tools, given where we are in the housing cycle, how should we think about that as it relates to sort of your marketing of the product and its receptivity to the product?

Yes, I'm glad you asked that question. Digital is still very exciting. The product is absolutely cutting edge and unique in the industry compared to any existing competition. However, it is new technology in an industry that hasn't historically adopted it quickly, and it requires a different way of thinking about efficiency. We have a lot of good momentum; it’s certainly challenging. I admit it might even be harder than we initially thought, but it’s working. We are continuing to focus on partnerships with homebuilders and leveraging our internal team to utilize the tools and help customers become comfortable with them. Given our focus on builders who start between 50 to 250 homes a year and the pressure they have faced recently due to interest rates, it has been tough. I believe this technology can help them compete, become more efficient, and professionalize their operations to enhance their competitiveness against the larger players. Ultimately, we think it will have a positive impact, but in the near term, it addresses a market that has been under pressure.

Thank you very much.

As there are no further questions at this time, ladies and gentlemen, that will conclude today's question-and-answer session and the Builders FirstSource third quarter 2024 earnings conference call. Thank you for your participation. You may disconnect your line at this time, and have a wonderful rest of your day.