Good day, and welcome to the Builders FirstSource Second Quarter 2025 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by management and the question-and-answer session. I would now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.

Good morning, and welcome to our second quarter 2025 earnings call. With me on the call are Peter Jackson, our CEO; and Pete Beckmann, our CFO. The earnings press release and presentation are available on our website at investors.bldr.com. We will refer to the presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. You can find a reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentation. Our remarks in the press release, presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the Forward-Looking Statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. And with that, I'll turn the call over to Peter.

Thank you, Heather, and good morning, everyone. Our durable results in the second quarter reinforce the advantage of our differentiated product offerings and commitment to execution. In this challenging market environment, we are prioritizing what's within our control; serving customers with excellence, leveraging technology and managing the business with discipline. These efforts are strengthening our position in the industry and laying the foundation to emerge stronger as market conditions improve. As shown on Slide 3, we continue to execute against our strategy as we operate in a dynamic environment. This morning, I want to drill down on 3 key focus areas within our strategy: Our customers, operational excellence and capital allocation, what we refer to internally as smart investments. Delivering exceptional customer service is a core value as we drive for growth. We thrive to be trusted partners to homebuilders by providing best-in-class service every day and working together to solve the industry's most complex challenges. We are expanding our value-added solutions and leveraging technology, including our end-to-end BFS digital tools to help create a differentiating customer experience while empowering our teams to serve more effectively. The next focus area, operational excellence, is crucial to how we run the business. It's about developing talent, improving agility and embedding technology into our operations with the implementation of a single ERP system. As we talked about previously, moving to SAP will unlock further opportunities for growth and efficiencies, including how we make decisions, streamline operations and manage costs. Finally, we remain disciplined in how we deploy capital. Our consistent strong free cash flow through the cycle gives us the flexibility to invest in organic growth, pursue strategic M&A and return capital to shareholders. These investments are strengthening our competitive position and driving long-term value creation. Let's turn now to our second quarter performance on Slide 5. Our sales were impacted by a softer-than-expected housing market due to ongoing affordability concerns and rising home inventories as completions outpaced sales. While we readily acknowledge that we are experiencing lower margins as we support our customers, I'm pleased that we are maintaining healthy profitability in a low starts environment, a testament to the operational discipline that is part of the fabric of BFS. Slide 6, we highlight key areas where we've been executing our 4 strategic pillars. In the second quarter, we invested more than $35 million in value-added solutions as we build for the future. This included opening a new millwork location in Florida and expanding or upgrading plants in 7 states. We generated $5 million in productivity savings in Q2, primarily through targeted supply chain initiatives. We are focusing on optimizing processes, utilizing new tools and partnering with suppliers to grow share. Turning to Slide 7. We remain disciplined stewards of discretionary spending, and we are continuing to maximize operational flexibility. In response to lower volumes over the last year, we have taken meaningful steps to align capacity across our facilities, manage headcount and control expenses. Year-to-date through June, we have consolidated 8 facilities while maintaining an on-time and in-full delivery rate of 92%. With our industry-leading scale, experienced leadership team and a track record of operating proactively through the cycle, we are confident that we can continue to deliver exceptional customer service. Single-Family starts remain soft as builders manage the pace of construction. As expected, we've experienced a muted sales pace that is below the normal seasonal levels. Given customer feedback and our understanding of land development trends, we expect Single-Family starts to decrease through year-end. Builders are working to help buyers find affordable options by offering smaller and simpler homes, as well as incentives such as interest rate buy-ins. We are marching in lockstep with builders through our comprehensive product portfolio, enabling them to optimize their costs while maintaining quality. Multi-family also remains muted, driven by higher input and financing costs. However, with a substantial mix of value-added products and attractive long-term fundamentals, multi-family remains an appealing and profitable business for us. Turning to M&A on Slide 8. We remain focused on pursuing higher return opportunities that expand our value-added product offerings and advance our leadership position in desirable geographies. Over the years, we have developed substantial and proven muscle memory to grow through M&A and have a track record of successful integration. In the second quarter, we acquired Truckee-Tahoe Lumber with aggregate prior year sales of roughly $120 million. Truckee-Tahoe's reputation of excellence as a leading supplier of lumber and building materials extends our presence in the Northern California and Nevada markets. We have made 35 acquisitions since the BMC merger in 2021, yet our industry remains highly fragmented. Today's market volatility makes price discovery difficult. But despite the current slower M&A environment, we are confident that inorganic investments will remain an important driver of long-term growth. Turning to Slide 9. Our disciplined capital allocation strategy focuses on maximizing shareholder returns through organic growth, M&A and share repurchases. In the second quarter, we deployed over $500 million towards return-enhancing opportunities aligned with our priorities. Now let's turn to Slide 10 and discuss the latest updates on our digital and technology strategy. In June, we announced Gayatri Narayan as our new President of Technology and Digital Solutions. Gayatri brings over 2 decades of global technology leadership experience, having held senior roles at Amazon, Microsoft and PepsiCo. Her proven track record of driving innovation and growth through digital transformation will be instrumental as we leverage technology to enhance connectivity across our industry. We are accelerating the integration of our digital source systems and deploying scalable customer-centric solutions that will strengthen our operational agility and support long-term growth. Our BFS digital tools deliver meaningful benefits to our homebuilder customers and align BFS as a key technology partner. Despite the challenging market, we have seen continued adoption with our target audience of smaller builders. Since launch in early 2024, we have seen more than $2 billion of orders and $4 billion of quotes placed through our BFS digital tools. These metrics are up more than 400% and nearly 300% year-to-date, respectively, compared to 2024. We continue to refine our new adoption roadmap, and we'll roll out our new thinking around benefits and timing later this year. I'm pleased that we continue to make progress on our implementation of SAP with the launch of 2 pilot markets earlier this month. Although these conversions are never easy, we are working through the details and are excited about the growth and efficiency opportunities to come with this new software. I remain deeply grateful for the opportunities to lead such a skilled and dedicated team that makes a difference every day. This quarter, I want to highlight Jim Henry, a load builder in our Burbank Yard, who recently celebrated an incredible 40 years with BFS. Jim is known for his efficiency, flexibility, team-first attitude and his love of cycling. He's had a lasting impact on operations and is someone his teammates look to as a model of how to get the job done right. I'm proud of Jim and the many others across our organization whose hard work and commitment drive BFS forward. I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. We continue to benefit from the strength and adaptability of our operating model. By executing consistently through the cycle, we are generating strong free cash flow and preserving financial flexibility. Our scale, operational rigor and talented team give us confidence in our ability to deliver solid results and compound value into the future. We remain disciplined in our capital deployment with a focus on maintaining a healthy balance sheet and investing in high-return opportunities. I'd like to pause for a moment to highlight our operating model, a core differentiator that continues to set us apart in the industry. At BFS, we have a disciplined enterprise-wide approach that unites our teams across functions, geographies and product categories. We conduct granular performance reviews that track market trends and key productivity metrics, such as truss board foot per labor hour and utilization rates of manufacturing and fleet capacity. These insights enable us to identify opportunities, address challenges early to drive continuous improvement across the business. What truly reinforces this discipline is the active oversight of our Executive Steering Committee. This cross-functional leadership group needs to review operational KPIs, challenge assumptions and confirm alignment with our strategic goals. Their involvement ensures that insights from the field translate into action at the highest levels of the organization, enabling us to respond quickly and adapt as needed to evolving market dynamics. Let's begin by reviewing our second quarter performance on Slides 11 through 13. Net sales decreased 5%, $4.2 billion, driven by lower organic sales and commodity deflation, partially offset by growth from acquisitions. We continued to experience commodity deflation, attributable largely to lower OSB prices. While pending duties and capacity rationalization have contributed to a more stable lumber market, OSB capacity additions have continued to create downward pricing pressure. The organic sales decrease was driven by a 23% decline in multi-family, with muted activity levels against stronger prior year comps. Additionally, Single-Family declined 9%, attributable to lower starts activity and value per start, while repair and remodel increased 3%, driven by strength in the Mid-Atlantic and South Central regions. As we've noted on recent calls, there are a few key factors reconciling Single-Family starts to our core organic sales. First, as a reminder, there was a roughly 3-month lag from start to our first sale. Second, the value of the average home has fallen as size and complexity have decreased over time. Third, margins remain pressured throughout the supply chain as affordability concerns continue to be paramount. Despite these challenges, we continue to lead the building products market and serve as a trusted partner to our customers. For the second quarter, gross profit was $1.3 billion, a decrease of 11% compared to the prior year period. Gross margin was 30.7%, down 210 basis points, primarily driven by single and multi-family margin normalization, as well as a below-normal starts environment. Adjusted SG&A of $818 million increased $4 million, primarily attributable to acquired operations, partially offset by lower variable compensation due to lower sales. On an annual basis, adjusted SG&A was approximately 30% fixed and 70% variable with volumes, enabling flexibility during challenging periods. As Peter touched on previously, we are focused on carefully managing our SG&A and are well positioned to leverage our costs as the market grows. Adjusted EBITDA was $506 million, down 24%, primarily driven by lower gross profit. Adjusted EBITDA margin was 12%, down 300 basis points from the prior year, primarily due to lower gross profit margins and reduced operating leverage. Adjusted EPS was $2.38, a decrease of 32% compared to the prior year. On a year-over-year basis, share repurchases, enabled by our strong free cash flow generation added roughly $0.18 per share for the second quarter. Now let's turn to our cash flow, balance sheet and liquidity on Slide 14. Our second quarter operating cash flow was $341 million, a decrease of $111 million, mainly attributable to lower net income. We generated free cash flow of $255 million. Our trailing 12 months free cash flow yield was 9%, and operating cash flow return on invested capital was 18%. Our net debt to adjusted EBITDA ratio was approximately 2.3x, while our fixed charge coverage ratio was roughly 6x. In May, we completed a $750 million offering of 6.75% senior unsecured notes due 2035 to pay down the balance on our ABL. Additionally, we upsized our ABL facility by $400 million to $2.2 billion. We have no long-term debt maturities until 2030. Our maturity profile enables us to remain operationally and financially disciplined while preserving a flexible balance sheet for accretive capital deployment. Moving to second quarter capital deployment. Capital expenditures were $86 million. We deployed $61 million on acquisitions, and we repurchased 3.3 million shares at an average price of $118.27 per share for $391 million. We currently have $500 million remaining on our share repurchase authorization. While our 2.3x leverage ratio is slightly above our target range, we remain comfortable with our net debt levels. We will continue to execute our capital allocation priorities and remain disciplined stewards of capital on the path to maximizing value creation. On Slide 15 and 16, we show our 2025 scenarios and outlook. Given the dispersion of potential housing market and commodity outcomes for the rest of the year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance. As you can see, the bottom of our guidance range corresponds to lower assumptions for Single-Family starts and commodity prices. Our latest forecast assumes Single-Family is down 10% to 12% for the year. We continue to expect a multi-family headwind to sales of $400 million to $500 million and a headwind to EBITDA of less than $200 million, with most of the drag already coming in the first half of the year. We also expect the R&R end market to be flat. As a result, we are guiding net sales in the range of $14.8 billion to $15.6 billion. We expect adjusted EBITDA to be $1.5 billion to $1.7 billion. Adjusted EBITDA margin is forecast to be in the range of 10.1% to 10.9%. Given the below-normal starts environment, we expect our 2025 full year gross margin to be below long-term normalized levels and in a range of 29% to 30.5%. We expect free cash flow of $800 million to $1 billion. Our revised guidance assumes average commodity prices in the range of $375 to $425 per thousand board foot. Please refer to our earnings release and presentation for a list of key 2025 assumptions. Additionally, we want to provide color for Q3 because of our ongoing macro volatility and to align with builder expectations. We expect Q3 net sales to be between $3.65 and $3.95 billion given a weaker-than-normal building season. Q3 adjusted EBITDA is expected to be between $375 million and $425 million. In closing, we are closely monitoring the current environment and remain agile to mitigate downside risk in the near term while also investing strategically for the future. I'm confident in our ability to drive long-term growth by executing our strategy, leveraging our exceptional platform and maintaining financial flexibility. With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. I want to close today by emphasizing the transformation of BFS. Today, we are an exceptionally improved organization, one powered by differentiated product offerings, including our value-added solutions, our relentless focus on operational excellence and disciplined capital deployment strategies. This evolution is illustrated on Slide 18, which highlights how our performance in a challenged starts environment is substantially better today than in 2019. Our business is positioned to accelerate when starts increase and current headwinds begin to subside. Our customer relationships are deepening, our operational efficiency is improving, and our technology platform is creating real value for the business. By controlling what we can control and leveraging our competitive advantages, we will continue to compound long-term shareholder value. Thank you for joining us today. Operator, let's please open the call now for questions.

And we will take our first question from Matthew Bouley with Barclays.

So whether we're talking installation, digital, the value-add investments you're making this year, be curious if you can speak a little more where, I guess, specifically or even provide examples of how you are strengthening your competitive position and partnering with your builder customers in this type of, I guess, disappointing starts environment? And sort of what those tactics might mean for your growth and profitability in the future when we eventually get to that environment where starts were to stabilize or improve?

Good morning, Matt, and thank you for the question. Yes, happy to. So a couple of key areas. I think the most basic one is improving our on-time and in-full performance to ensure that our builders are able to be as efficient as possible. I would argue, nobody is better at it than we are. We're well over 90%, and we are known in the industry as the trusted partner to be able to ensure that consistent performance over time. If you think about some of the things we're doing to align more closely with builders, it's figuring out ways to achieve the goals that they have, and their primary goal is stated to us and broadly is affordability. So what are the products that are going to most directly allow them to build a high-quality, cost-efficient home? In some cases, there are product substitutions. In some cases, there are new applications. The pace of the build and the alignment of the build process with what we're doing, we continue to enhance the integrations with our customers, looking for ways to pass data and align schedules and forecasts in a very, very efficient and highly reliable way. A big piece of that is around technology, both in the core systems, but as well as digital. Digital is another way where we have seen customers benefit in terms of utilizing both online tools, but also the 3-dimensional digital twin to optimize their build process to find pockets of waste that can be removed and to create efficiencies in terms of communication and process improvement. All of that is really linked back to our role as a connector between builders and vendors. So our ability to operate effectively in a highly efficient digital environment to link our trusted vendor partners with our customers is really that way that we're reinforcing and strengthening and at the same time, ensuring that we're learning from past cycles and having the right capacity on the ground in the right markets. That's a big piece of where we talk about building for the future and being ready. So all of that basically boils down to as the turn starts, and we believe it will come, not quite yet, but we believe it's on its way, we are going to be better positioned than anybody to really grow and take advantage of highly efficient relationships with customers, trusted relationships with customers and massive capacity to be able to truly create value for shareholders and be more of a trusted partner in this space.

Excellent. Well, that's great color, Peter. Really appreciate that. Secondly, maybe diving into the near term and the gross margins. Correct me if I'm wrong, but I think this is the first quarter where your gross margins were actually higher sequentially, perhaps since 2023, which at least surprised us, maybe not you, but what actually drove that? Why did the margins improve in Q2 sequentially? Kind of what does that imply about the Q2 exit rate? And maybe what are you assuming in that margin within the kind of Q3 and second half guide?

Thanks, Matt. That’s a great question. We are very pleased with the margin performance for Q2. As we mentioned on the last call, we anticipated a sequential decline in margins throughout the year, but the decline turned out to be less than expected. We were particularly happy with the results in the multi-family and R&R sectors, which contributed to this margin outperformance. To put it into perspective, the increase of 20 basis points over Q1 corresponds to about $8 million. While this is relatively small in the overall context, we are still very pleased with the performance.

Got it. Yes. And any color there on what was assumed in kind of Q3 and second half?

Again, we're looking at sequential normalization or declines through the balance of the year to our stated full-year forecast or full-year guidance of margin. But it's very consistent with what we said in the prior quarter, given the competitive landscape and the softer-than-normal starts environment, is going to continue to put that pressure on margins.

And our next question comes from Mike Dahl with RBC.

To follow up on that last point, you reported a gross margin of 30.6% in the first half of the year. The high end appears to be flat compared to the first half, while the low end indicates a significant decline. It seems that your guidance for the third quarter also suggests a decline. Can you provide more clarity on the current market conditions, specifically where you see things falling within that range under the current circumstances? Additionally, considering all these factors, do you have any updated insights on how you are managing the balance between market share and margin in this environment?

Thank you, Mike. Yes, part of the situation is influenced by public homebuilders’ recent communications. It appears that conditions are worse than many anticipate. We've invested significant time with customers and analyzing the data. There seems to be a split in how we operate compared to what builders are doing in their annual cycles. To clarify, we are about two-thirds of the way to starting new projects and one-third to completing them. Builders nearing the end of their fiscal year focus on completing and selling homes. However, with the current inventory levels and land market dynamics, we believe builders are slowing down their project starts. Without clear indications that interest rates will change soon, we expect a challenging environment for a while, which likely won’t improve this year. Our assessment is that the slowdown, along with a necessity to adjust to lower completion rates, will influence future results. The best-case scenario suggests a flatter trajectory based on our current positioning. As Pete highlighted, the competitive landscape remains stable, albeit tough, and there is still a significant focus on our market share. We feel our share is relatively stable, although it required substantial efforts to achieve this. Overall, we're excelling in a tough market, with a strong emphasis on affordability. The team is performing exceptionally well, maintaining the discipline needed for effective business management and future readiness. We just need some alignment from external factors to facilitate progress.

Yes, that's really helpful. A lot of the concerns we hear from investors focus on trust, particularly regarding the excess nameplate utilization. Builders are actively seeking assistance from their partners to cut costs. Can you provide insights into the trust capacity environment and the differences between nameplate and effective utilization? Additionally, could you discuss your trust margins and how they've been performing or are expected to perform for the remainder of the year in relation to your guidance? I think that would be beneficial.

Sure. Yes. I mean, I know it's not going to come as a surprise to anybody. We're underutilized from a capacity perspective and trust, given where starts are, of course, we've got access. I think what we're particularly good at though is making sure we're running the business, driving off of the correct metrics. So for example, every location is absolutely focused on board foot per labor hour metrics to ensure that the biggest expense that we have are people are producing in a way that makes sense for the operation. That's how you cover the overhead. That's how you ensure that we have a stable business. In those instances where we don't have enough volume to absorb that fixed overhead, that's where we do things, like you see in the materials, where we mothball operations or close operations or consolidate in order to ensure that the remaining facilities do have enough to stay stable. It's one of the many advantages of our network of operations and something that our team is exceptionally good at. So that's an example of how we manage it broadly in the space. We're very confident that we are as efficient or better than anybody else in this space in certain markets. Certainly, it's hand-to-hand combat. No hesitation in saying that we've competed away some of the excess margins that we've seen over the past few years. I think all of us have strived very hard to make sure we're getting a fair return on what we do. But that said, it is a competitive environment. That hopefully isn't a surprise, based on everything we've said in the past. But with all of that, we're still doing well. It is a very nice product line for us. It's something that, again, we will have and we'll continue to invest in to ensure that we're aligned with our customers when their need increases, and it will. So we're not shy at all about where we are and continuing to invest in those key areas where that capacity is going to be needed even if it's not needed as desperately today.

And our next question comes from John Lovallo with UBS.

Can you share your perspective on the commodity outlook, particularly regarding the recent increase in Canadian lumber tariffs from 14.5% to 27%, which is expected to rise to 34.5% on August 8? What do you anticipate the impact on lumber will be, and how does this align with your forecast?

Thanks, John. We have factored in the duties and increases into our guidance for the lumber side. And we think the lumber right now has been more stable. I think the duties has helped that to remain at a pretty healthy level of above $400 per thousand as you look at the composite of the lumber category. The impact from the duties, I don't think will hit us really in our numbers for at least 3 to 4 months, given the lead time of what we already have on the ground, what we need to work through on what's already been ordered in the pipeline versus when we will receive that new wood with the duties on it and then be able to turn it out. So it will really have a minimal impact on our financial results in 2025. And we'll continue to assess that as we go into 2026. The big drag, as I mentioned in the prepared remarks, was on OSB. And OSB is something that continues to drift down. It's pressured because of oversupply. And we're going to have to just work through that as we try to find as an industry where that balance is.

Yes, OSB is in a bad state right now. No one is satisfied with the current situation of OSB, except perhaps those purchasing it at the end point.

Got it. Okay. That's helpful. And then in terms of your net leverage, it's at I think 2.3x. It's above the high end of the 1x to 2x. You lowered the EBITDA forecast for the second half. I mean, how does this sort of influence the ability for you guys to buy back stock through the remainder of the year?

Well, so our capital allocation priorities remain the same. We're going to continue to focus on maintaining a healthy balance sheet, fortress balance sheet. Some of the debt activities we did during Q2 helped continue to position us from a liquidity standpoint, which we feel very confident in at this time. We're managing our capital expenditures or organic growth to make sure that it's rightsized for the business that we're operating currently. We're evaluating inorganic growth through acquisitions. And right now, it's just a softer M&A environment. And then lastly, we'll look at stock buyback. As you probably saw in the prepared remarks and in the information that we've provided, we haven't done any since April when we announced the Q1 results.

And our next question comes from David Manthey with Baird.

I would like to ask you a general question. Can you explain the revenue and margin changes as you transition from the core results you just reported to the guidance for the third quarter? Specifically, what are the primary factors influencing the sequential change from the second quarter to the third quarter?

The changes in revenue from Q2 to Q3 are primarily due to the ongoing decline in the single-family starts environment as we progress through the quarter. Additionally, there is a slight continuation of the normalization in multifamily starts, which we largely observed in the first half of the year. There's still a bit of this trend remaining in Q3, as I noted in the previous quarter. Furthermore, we are experiencing a softer commodity environment than we initially projected last quarter, and this will affect the revenue in Q3.

Okay. And just setting aside the 30-year conventional mortgage rate for right now, could you discuss the impact on BFS if short rates come down by, say, 50 basis points as we exit the year and into 2026?

Well, it certainly tailswind. I think there are a number of different reasons why that's true. While I do think it will likely have an impact on mortgage rates, the multi-family side of the business, I will tell you has a tremendous amount of promise right now. There are a lot of jobs that are on the cusp, and I think 50 bps would help. I think that there's also this uncertainty on the consumer side that even those who can handle a mortgage in this vicinity are so unsettled by what they don't understand or what they don't trust yet that they've backed off. So I think a sense of lower rates and a little bit more stability could absolutely be a release in terms of demand activity. I think those are the key pieces of where it could help.

And our next question comes from Charles Perron-Piché with Goldman Sachs.

I guess, first, I would like to talk about reduction in productivity savings expectation that you had for this year. Can you talk through the reasons behind that decline? And more broadly, when you think about opportunities for further cost takeout actions over time to build on the initiatives that you've completed year-to-date in terms of footprint?

Yes, I can start. If Pete has any additional comments, please feel free to add. In summary, productivity remains essential. We're making significant strides in continuous improvement efforts. However, with around 30% of our SG&A being effectively fixed and not tied to sales, we are experiencing some deleverage that is counteracting our progress. Consequently, our productivity metrics are influenced by the P&L results. While it's enjoyable to discuss potential cost savings from various projects, they do not reflect in the P&L, so we do not consider them as factual. Despite many initiatives in progress, the opposing headwinds are diminishing those benefits. We will keep pushing forward. The organization is still well-aligned and performing admirably. The reality of this deleveraging is what accounts for the decreased performance, but certainly, there is a lot of effort being made. Did I overlook anything, Pete?

I think the second part of this question was regarding the closures that we've executed this year. So the 8 locations. As part of our ongoing management process, we evaluate the performance of our locations, we evaluate the capacity in our markets. We continue to make the prudent choices on what's best for the company and how do we maximize our ability to service the customer as well as generate the right returns. As a reminder, we closed 30 locations last year. So this is just part of who we are and part of how we run the business, making sure that we have everyone operating at an expectation.

Got it. That's very good color, Peter and Pete. And then I guess, second, moving on to digital. You've talked about continued progress against your initiatives earlier this year and in your prepared remarks as well today. When you think about the continued progress over time, and you highlighted a $200 million target initially, it sounds like you're revising the timeline. But when you think about the adoption of the digital tools and your product across the market, what basically are the biggest pushback or inherent problem that are limiting the adoption? Is it really just driven by the market? Or any other things that you could adjust to really help your go-to-market strategy there?

Yes, that's a great question. Thank you. I remain incredibly excited about the opportunity of digital and leveraging technology, whether it be core systems or the new AI that we think is going to be really impactful. The reality is, increasingly, the realization is that digital isn't a tool or a product; it's very much the fabric of who we are. We like to think about these tools as being super suits that our employees can put on to compete better in the market, making us faster, smarter, and more agile. The reality is it's not easy to do, and it requires a lot of investment. Unfortunately, it takes more time than I would like. However, we are seeing improvement. The core of the tools is delivering on the promise of finding and eliminating waste, enhancing communications with our customers, and improving the efficiency and effectiveness of our internal teams. We remain fully convinced that this is the right path for our business to succeed long-term and that we are better positioned than anyone else to achieve it. Currently, our target customer is smaller businesses, and the market is challenging to navigate. There are aspects related to development and the fact that customers are focused on survival and affordability, which can slow the adoption of new ideas. We are still witnessing adoption, and it's gradually picking up. I don't feel bad about the success we've had, but it has been somewhat slower than we anticipated. We're still seeing incremental growth, moving in the right direction, just not at the desired pace yet.

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

Looking ahead, if starts stay where we are today for the extended period of time just because of the macro, are there levers that you could pull from a cost perspective? And then how do you think about balancing market share and margin?

Yes. The first thing I want to emphasize is that we have already made adjustments in how we operate the business, with 70% of our selling, general, and administrative expenses and all of our cost of goods sold driven by volumes. This has allowed us to perform as we have despite the changes in sales and starts, and you can see that happening in real time. There are definitely larger fixed costs we will address, and we will keep evaluating our discretionary spending and certain investments wisely, balancing our current needs with our long-term strategic vision. This is a crucial part of our analysis. Regarding the competitive landscape and margins, we understand the need for balance. We are confident in our investments and positioning, which should provide us with a fair return for our market offerings. With the current pressure on affordability, there's a general desire for lower costs, but the reality is different. We are maintaining strict discipline to protect our market position while ensuring a reasonable margin. We will walk away from opportunities that do not meet this standard. We have been able to sustain this balance, and at this moment, we believe there is some stability being achieved. Limits are approaching, but it is not entirely resolved yet. It will depend on whether conditions worsen from here or remain stable.

That's really helpful. And there is a slide that you guys included in the deck that just shows, we're back to 2019 starts level, but your EBITDA margin is 300 basis points above where you were in 2019. It'd be helpful if you could just talk about like how much of that is mix, productivity, scale? Like what's sort of the bridge to the much higher margin today on the same start level?

I don't know if I have that specific bridge off the top of my head, but our IR strategy deck has a bridge. I don't think it's in the current release for the quarter, but there is a bridge that shows you that directionality. But for those who haven't seen it yet or are flipping to it right now, it's a couple of pieces that you hit on them. Mix is an important one. We have substantially moved the business towards value-add based on both M&A and organic growth in terms of new capacity and expanded sales in those key categories. The other bit is what I alluded to earlier, which is really the continuous improvement focus. We have gotten better at our trade by working together as a team, by leveraging our scale, by coordinating learnings and execution, the way that we partner with customers, everything from closest point of shipment to how we work with vendors to ensure we've got the right product in the right place to win. But those are the 2 big factors. Those are things we feel good about protecting, we think are real and durable and have tremendous opportunity for leverage as we get into an expanding market.

And our next question comes from Keith Hughes with Truist.

Can you hear me now?

We can.

Okay. Sorry about that. So in the slide, you talked about manufactured products being down about 10%. Can you talk about the influence acquisitions had on that? And also what units and price look like amongst those products?

Yes. Acquisitions have continued to enhance our trust profile, becoming a larger part of our business overall. There’s no doubt that this area has been negatively impacted. There has been a significant flow of starts in the trust space. As we have discussed previously, initial efforts around affordability and management were mainly focused on simpler products. However, as time progressed, builders have become more aggressive in quoting everything, including trust and EWP, which are the two primary subcategories in the manufacturing products sector. EWP has seen a notable decline, which has been widely acknowledged in the market, particularly since prices increased significantly during the supply constraints of COVID, benefiting EWP at that time. Now, that has been pulling back and continues to decline. The core trust business is also under pressure. Pete, would you like to add anything?

Yes. Just to remind, the multi-family is very heavy in the manufacturing, that's seen a lot of normalization. So that was down 28% in the quarter. So it's a pretty significant impact on that overall for the company in that category.

And our next question comes from Trey Grooms with Stephens.

Could you provide an update on the progress of the new ERP rollout and the associated costs? I believe the anticipated impact on SG&A in the second half was around $140 million. It seems like this might offset some of the productivity gains you mentioned in the first quarter. Can you share any information on the costs, the expected timing for completion of the rollout, or any details about the ERP system?

Yes. Thanks for your question, Trey. I'll start, and I'll hand it over to Peter for some additional color. So the $140 million that we outlined last quarter is still the number. But I want to clarify that $140 million is really a cash expense that we expect to incur in 2025. As it relates to SG&A, there's a schedule in the back of our earnings presentation, the Reg G that reconciles net income to adjusted net income. We have a line in there that is... Technology implementation expense.

Technology implementation expense.

That isolates the cost. It is excluded from our adjusted SG&A as we think about that 30% or 70% split. But we don't see any change in that projection for 2025 at this time.

We went live with the project on July 1, so we're about 30 days in. It involves 22 locations across 2 markets, and we're fully operational. There have been some challenges and issues, as is typical with any ERP implementation, but we're managing them. We have a dedicated team working locally and from our support center, along with assistance from Accenture and SAP. Everyone is actively addressing the issues, and we're still enthusiastic about the improvements in functionality, modernization, and connectivity. I'm not entirely sure if "interconnectability" is an actual word, but I think it works well. We will continue to push through these challenges.

Okay. Perfect. And maybe one last one. Multi-family clearly has been an awful headwind for you guys. But when do you guys expect to see some stabilization there? Any uptick in the starts that we've seen when that might actually start to flow through for you guys? I know there's a pretty massive lag there. But just in general, maybe a general rule on how to think about the lag and when you guys might be able to see some stabilization on the multi-family side of things?

Yes. Thanks for the question. I think multi-family has been stabilizing and showing more consistent performance from quarter to quarter, in line with what we discussed last quarter. We are observing this in our numbers with backlogs that are leveling out. They are somewhat lower than historical levels, and we've been adjusting that segment of our business to align with the volumes. Just to note, we have a lead time of about 9 to 18 months for multi-family projects, depending on their size and complexity, as well as their duration. The increase in multi-family starts is a positive sign that things are stabilizing, and we anticipate this trend will continue into 2026. We will provide additional information when we give guidance, likely in the next couple of quarters.

And our next question comes from Phil Ng with Jefferies.

Pete, appreciate the great color, Peter and Pete. Great color on why the back half, your Single-Family starts sales could be weaker of the destock. Probably impossible question to answer, but when you kind of think through this, does that destock get flushed out by this year and you're in a better spot for next year? I'm awfully just trying to gauge, obviously, hard reset in expectations for '25, your ability to grow next year with some of this destock kind of getting flushed out, maybe multi-family is a good guy. Perhaps any self-help levers you have at your disposal that we should be thoughtful about?

Good morning, Phil. Yes, I love impossible questions.

We eat impossible questions for breakfast.

Yes, there's been significant effort on the builder side to manage and stabilize inventory levels. Unfortunately, it appears that they've encountered some challenges on the ground, which is reflected in the below-normal seasonal performance. We didn't experience the expected summer activity this year. However, adjustments are being made, and there's a strong opportunity for stabilization throughout the remainder of the year. In relation to the earlier question about potential rate cuts, I believe that could set us up well for 2026. While it's still too early to make definitive predictions, the current inventory levels are not catastrophic. The situation is certainly more challenging in condos, as noted in a Wall Street Journal article today, compared to single-family homes. Nonetheless, the situation remains manageable, especially considering the low levels of existing home sales. Overall, I feel confident that we're not too far off from where growth can realistically be expected for 2026. However, it is crucial to focus on inventory burn-off in the second half of this year to return to a more stable state.

Okay. Super. That's great color. On the M&A front, you guys mentioned inorganic as a means to kind of drive growth. Any color on the pipeline? Last quarter, you kind of commented, the pipeline has kind of dried up a little bit. So color on that front. And then the buildings distribution industry, we're seeing a handful of players get bigger and do a lot more consolidation, tackling different verticals. When you kind of think about your M&A strategy, any view of how that may evolve just given the industry is looking to broaden out and be more horizontal?

Certainly. It's interesting because, unless there's a major deal in the works, things have been quite calm. There are a few potential deals out there, but the main issue is the uncertainty around what the normal market conditions are. People are hesitant to agree on transaction prices, as they are unsure whether prices will rise soon or if they should wait it out. This situation has limited the number of smaller assets available in the market. As you've noted, the overall dynamic in our industry has become more intriguing, with some large, vocal players discussing potential opportunities. We have been able to create significant value for our shareholders by focusing on serving builders and managing complex projects in the renovation and restoration space. This is where we believe we will continue to excel and remain a strong competitor. There are still great opportunities for us to expand in this area, and as we've indicated before, we are not going to stop exploring potential avenues for quality returns for our shareholders. We are committed to being cautious while maintaining our impressive record of creating shareholder value, and we plan to continue this approach.

And our next question comes from Collin Verron with Deutsche Bank.

Just one for me. You've outlined the difference between BLDR Single-Family revenue underperforming Single-Family starts for several quarters at least now. I just wonder if you can talk about where you think we are in that trend and how much more downside there is to BLDR's revenue per start, given what you're seeing or hearing from customers in terms of their new home footprint or floor plans? Just curious if you think we're approaching a bottom here on that metric? Or do you think this will be ongoing?

Thanks for the question. We evaluate our sales of Single-Family homes in relation to the lagging starts. In the past, we have shared some structural adjustments regarding how the starts have performed and the value per start. For Q2, our Single-Family sales were down by about 2% to 3% compared to the lagging starts. The size of homes is stabilizing, showing little change year-over-year. As mentioned last quarter, the trend of smaller homes remains evident. We are also observing some cost and price reductions from manufacturers, which factors into our price normalization. Additionally, the impact of decontenting is decreasing. Overall, we are aligned with expectations; we are not seeing a significant decline, nor are we gaining much ground. We believe we are at a balanced point, which indicates that we are leveling off, and we are well-positioned to accelerate growth when the time comes.

And to lose a little bit of the comment prior about where does pricing go and how you feel about that balance between share and margin, that's where we get the confidence from. We've leveled out. We're starting to hit that equilibrium, and we'll just have to see where it goes from here.

And our next question comes from Jay McCanless with Wedbush.

The first question, Peter, you talked about on-time, in-full at 92%. I guess what's something we should benchmark or look for going forward as kind of a goal for the company?

Higher. Yes, we have internal goals that we set in terms of improvement each year. Obviously, the better you get, the harder it is. There's a couple of different ways that we see executing against that improvement. And the obvious one is partnering with our vendors to ensure that our distribution network is as efficient and aligned as possible. So that's improving communication, that's aligning around inventory locations, just-in-time transactions, all those good things. So that's a big piece. And then on the other side, it's really around the alignment with the customer, getting clarity around where they're headed, working with customers and information sharing and alignment around detailed level needs. Again, a lot of that can be benefited if we're working through the digital environment. That is another way where our prediction capabilities improve, especially when you're leveraging what we're implementing, which is a more modern ERP with a granular level of visibility that I think is superior to what we've had historically. While not bad historically, I think this is a step even better that would allow us to improve on-time and in-full. But the team does a great job no matter which system we're in, but it's not easy.

Got it. Okay. And then my second question is, it seems you have included the SLA in the lumber guidance, but it appears to be impacting us a bit later than anticipated. Without providing guidance for 2026, could you discuss the direction of gross margins when facing those higher prices? Also, how long do you expect it will take to pass those costs to the market and start recovering the increased expenses?

Yes. I mean, I think we're going to treat the new lumber price like we treat prices in general. We're a distributor. We don't make a tremendous amount of money on distributing lumber. Nobody does. And so the reality is we're not eating a 20-point increase in lumber. It's not possible. So it will be passed through. The market will adapt. Now the reality of it, though, is there is a rebalancing that's occurring. There's substitution, there's behavior by individuals within the market to compete at that breakeven level. So I think that while there's certainly going to be an impact on the Canadian side, there is some shifting that will have to happen in order to digest. And remember, the amount of demand that is coming from new construction is still dwarfed by the R&R space. So with the weakness in R&R, you're just looking at a space where it's going to be hard to get a ton of price in general, but there's a threshold of performance. There's a cost structure that isn't going to be able to be crossed for very long before the whole thing resets. So it will be interesting to see how it plays out. You're right. It's a little slower than I think we're expecting. But given the demand profile, I'm not horribly surprised. I think staying stable where it is on the lumber side is a pretty maybe decent performance given everything else considered. OSB is just a different story.

And our next question comes from Reuben Garner with Benchmark Company.

Most of them have been answered. I just have one quick one. Your starts forecast, I know it's typically in your geographies. Can you just talk about what specifically you're seeing geographically? I know Texas, for instance, is a big market for you and has been in the news headlines lately. Do you have any markets that you're overindexed to that are outperforming? Do you feel like that kind of 10% to 12% decline will kind of actually be in line with the broader market?

Let me provide some insights, and feel free to correct me if needed. Overall, I would say our exposure aligns with where new construction is happening. Regarding the difficulties in Florida and Texas, I agree that those observations are accurate. The conditions in those markets, particularly due to the significant amount of new construction in recent years and the effects of changing costs, are notable. Florida, in particular, has experienced a significant impact. However, we operate in 43 states, and some regions are considerably more stable. The Northwest, for example, has remained healthier and hasn't fluctuated as much. While New England can occasionally grab attention with significant percentage changes, it's a smaller market for us, which means it has less impact overall. In general, we see a lot of challenges across the map, with only a few areas performing well, particularly in traditional market segments where we expect to see activity similar to our expectations.

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

Peter, maybe to start with, on your point of substitution in lumber, are you seeing more signs of Southern Yellow Pine being used in your residential construction maybe for cross applications? Because historically, our understanding has been builders tend to prefer this spruce trade which comes in Canada?

Yes. I think historically, spruce, SPF in general is considered a superior product. It's preferred by the building community in most markets. It's simply the massive availability of the Southern Yellow Pine. Without getting into too much of the detail, it's still preferred, but if the cost differential was big enough, people will make decisions to manage affordability in ways that may be detrimental to them in other aspects of the build.

Have you started to see that happen yet with the current price differences, or not yet?

Yes. We've seen that for years. That's been, I would say, a modest trend for a long time. The question is whether or not this markup is enough to create a step function change in the pace. At this point, I would say no, it continues to be measured, but I hesitate to predict where that might go.

And our next question comes from Alex Rigel with Texas Capital.

Have you seen any competitors pull back and/or suppliers that take notable actions to reduce supply?

Not really. Don't get me wrong, everybody is managing it. We've discussed the downturn and the impact and the deleveraging that everyone is going through. However, I don't think anyone has made any significant changes. Probably the most significant actions I can recall were a couple of situations that were hard to discern.

And then as it relates to your guidance, you trimmed it a little bit. What changed from your prior plan?

The market is weaker than we initially predicted, particularly in single-family starts and in OSB. Those are the two main issues.

And our last question comes from Brian Biros with Thompson Research Group.

One quick one here. On the R&R side, I guess the outlook still calls for flat. And I think you've seen growth there so far through the first 2 quarters here. Does that apply a drop into negative here in the back half or is that kind of still steady and you're just outpacing the flat outlook for R&R?

It's really the latter, just outpacing the flat outlook for R&R. The flat R&R is really for the market, not necessarily our sales.

And there are no further questions at this time. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.