Builders FirstSource, Inc. Q4 FY2025 Earnings Call

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

Good morning, and welcome to our fourth quarter and full year 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 certain 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 the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings, and presentation. Our remarks in the press release, presentation, and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'll turn the call over to Peter.

Thank you, Heather, and good morning, everyone. Driven by focused execution and close customer partnerships, we successfully navigated 2025 despite ongoing housing affordability challenges, weak consumer confidence, and depressed commodity prices. We remain committed to reducing barriers to affordable housing and driving a more efficient integrated supply chain. Our ability to perform effectively through each phase of the business cycle reflects the strength of our differentiated value-added solutions, industry-leading technology, and unique operating model. Executing from a position of strength, we continue to invest in initiatives that expand our capabilities, enhance our footprint, and position us to outgrow the competition as conditions improve. I'm confident in our ability to manage through near-term uncertainty and build exceptional long-term value for our shareholders. Let's now turn to Slide 4. Our full year 2025 results reflect disciplined execution as we sustained healthy profitability despite a soft starts environment, underscoring our operational excellence and strategic investments. This included maintaining a gross margin above 30% and an EBITDA margin above 10%, a clear reflection of the durability of our transformed business. I'm grateful for the dedication of our team members and the ongoing support of our customers as we turn the page to 2026. Let me step back and offer some perspective on the market. The housing market remains weak and is characterized by more headwinds than tailwinds as affordability challenges, muted consumer confidence, and depressed commodity prices continue. This was apparent in November and December as our sales fell off more than expected as these cross currents impacted starts and led to a softer Q4. Economists are divided in their outlooks for 2026, with some calling for further declines in single-family starts and others expecting modest growth as macro conditions and regulatory policies remain uncertain. At the same time, prolonged softness in both residential new construction and repair and remodel have pushed OSB well below normal, resulting in a commodity composite below $350 per thousand board foot as we exited 2025. Commodity supply is being curtailed, but not at a pace that we believe will meaningfully lift prices in the near term. Finally, inflationary pressures continue to impact costs, particularly in the insurance and rent categories. Despite these macro pressures, we remain committed to advancing our strategy with a sustained focus on growth, continuous improvement, smart investments, innovation, and developing our people. We cannot control the macro, but advancing our initiatives will enable us to realize share gains, improve the way we operate, and position us to accelerate growth with any level of recovery. Our single-family builder customers have addressed ongoing affordability challenges by offering smaller and simpler homes as well as incentives such as interest rate buydowns. That creates an environment where there are fewer sales dollars per start and every start is more competitive on the affordability front. We are working closely with our customers, leveraging our broad product portfolio and bundled value-add solutions to drive cost efficiencies while upholding the highest quality standards. In the multifamily market, activity remained muted through year-end, in line with our previous thinking. We continue to see green shoots in quoting activity as our customers benefit from improved financing costs. As a reminder, our first sale tends to lag a multifamily start by about 9 to 12 months. Given the current project pipeline, an uptick in our multifamily results will not appear until the back half of this year at the earliest. In response to the market weakness, we are prudently managing spending and maximizing operational flexibility, as shown on Slide 5. We are aligning capacity across our facilities, managing fixed and variable headcount, and reducing capital expenditures. Pete will provide more detail later in his remarks. We consolidated 25 facilities in 2025, bringing our total to 55 over the past two years, 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 make the necessary adjustments and deliver exceptional customer service. On Slide 6, we highlight some of the key initiatives under our strategic pillars. In 2025, we invested more than $110 million in new, expanded, or upgraded value-added operations across our footprint. 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. This capital deployment is strengthening our competitive position and driving long-term value creation. Operational excellence is crucial to how we run the business as we develop talent, improve agility, and embed technology into our operations. We generated $48 million in productivity savings in 2025, primarily through targeted supply chain initiatives. Moving to Slide 7. Our prudent capital allocation strategy focuses on maximizing shareholder returns. In 2025, we deployed nearly $2 billion towards return-enhancing opportunities aligned with our priorities. Drilling down into M&A on Slide 8. We remain focused on pursuing acquisitions that expand our value-added product offerings and advance our leadership position in desirable geographies. We have developed substantial and proven muscle memory to grow through M&A and have a track record of successful integration. As a reminder, we acquired both Builder's Door & Trim and Rystin Construction in October, which together formed the leading provider of door and millwork capabilities in the Las Vegas area. In November, we acquired Lengefeld Lumber, a leading supplier serving Central Texas and Pleasant Valley Homes, a wholesale manufacturer of factory-built housing serving 10 Northeastern states. Pleasant Valley represents an expansion of our prefabricated component strategy to address challenges facing the homebuilding industry such as affordability and access to labor with a cost-competitive factory-built option, which reduces builder cycle times. The company sells HUD-compliant manufactured homes and high-quality semi-custom modular homes to land lease community developers, retailers, and homebuilders. We plan to use available factory capacity to offer high-quality semi-custom modular plans to our existing homebuilder customers, with the potential to expand the offering to our homebuilder customers in other BFS markets in the future. And lastly, in January, we acquired the assets of Premium Building Components, marking our company's first truss and wall panel operations in New York. Since the BMC merger in 2021, we have made 40 acquisitions, representing over $2.3 billion in annual sales, the equivalent of a top 10 LBM player, demonstrating our ability to execute and integrate seamlessly. And with the industry still fragmented, we see significant opportunity ahead and are confident that inorganic investments will remain an important driver of long-term growth. Let's now turn to Slide 9 and discuss the latest updates on our digital and technology strategy. We continue to differentiate by digitally enabling our team members, customer relationships, and value-added product development to drive long-term growth through technology-driven platforms and services. The investments in automation, artificial intelligence, and digital integrations highlight our commitment to creating a seamless experience for our customers to help streamline their operations. Since launching in early 2024, our digital platform has processed nearly $7 billion of quotes through 2025, representing a year-over-year increase in excess of 130%. This week at the International Builder Show, we will showcase the next generation of digital solutions for builders. These solutions deploy emerging technologies to unlock rich insights and make every step of the homebuilding process easier, not only for our builder customers, but also for the entire ecosystem of suppliers and technology partners. We do not categorize digital as only being a driver of long-term growth for BFS. It is integral to how we do business every day. We are committed to digitally transforming the operations and continuing to invest in consumer-grade digital solutions designed to improve our team members' efficiency, engagement, and performance. Our digital investments are particularly impactful in the sales organization, creating time to capture new market share, expand our product offerings, and strengthen our customer relationships. Continuing on the technology front, I'm pleased that we have made steady progress in our comprehensive implementation of SAP after the launch of two pilot markets last July. We're applying the valuable insights we've gained from these initial pilots to prepare for the next phase. In Q4, we advanced the development of our solution and refined our deployment plan, positioning us for continued rollout in 2026 and broader deployment beyond. Although these conversions are always challenging, we are working through the details and are excited about the growth and efficiency opportunities to come with this business-driven transformation. Recognizing one of our incredible team members each quarter is one of my favorite parts of our earnings calls. Today, I want to spotlight Charles Green, an inside sales representative at our Wilmington, North Carolina millwork location, who is celebrating an extraordinary 48 years with BFS. Charlie began his career in 1977 as a truck driver. After 13 years on the road, he transitioned into sales, where he quickly became a subject matter expert in the Wilmington market. Charlie developed a loyal following for his customer service, always checking in to make sure the job is done right and for making jokes. Here's one for you, Charlie. Why did the homebuilder get in trouble with the neighbors? For raising the roof! All right. So that one is probably not good enough for you, Charlie. But your dedication to our customers, your teammates, and the community reflects the values that are important to all of us at BFS. I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. Our fourth quarter and full year performance reflects disciplined execution in a weak housing market. We remain focused on managing costs, advancing key growth initiatives, and harnessing technology for long-term success. As we get into the fourth quarter results, I want to discuss the reasons for our financial performance versus the guidance. Sales decelerated more sharply than expected late in the quarter as homebuilders aggressively delayed starts to work down excess inventory. Additionally, we incurred higher-than-expected insurance cost true-ups, which further pressured performance. In response, we moved quickly to accelerate cost reduction and network optimization actions. With that context, let's turn to our fourth quarter results on Slides 10 through 12. Net sales decreased 12% to $3.4 billion, driven by lower core organic sales and commodity deflation, partially offset by growth from acquisitions. The core organic sales decrease was driven by a 15% decline in single-family, reflecting lower starts activity and reduced value per start, and a 20% decline in multifamily, consistent with our expectations amid muted activity levels against stronger prior year comps. Additionally, repair and remodel decreased 7% as consumer uncertainty persisted. 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 is roughly a 3-month lag from a start to our first sale. Second, the value of the average home has fallen as size and complexity have decreased over time, creating an additional sales headwind. Third, margins across the supply chain remain pressured by housing affordability constraints. Based on this, we believe our full year and fourth quarter share were roughly flat as we continue to be the industry leader and a trusted partner to our customers. For the fourth quarter, gross profit was $1 billion, a decrease of 19% compared to the prior year period. Gross margin was 29.8%, down 250 basis points, primarily driven by a declining starts environment. Compared to roughly 27% in 2019, our current gross margin highlights the meaningful investments we've made in value-added solutions and our continuous improvement initiatives. Adjusted SG&A of $751 million decreased $13 million, primarily due to lower variable compensation amid lower sales, partially offset by acquired operations. As we touched on earlier, we're leaning further into our downturn playbook with $100 million of cost actions, $75 million in year-over-year cost reductions, and $25 million in cost avoidance. These actions include deeper cuts to overtime and temporary labor, adjustments to incentive compensation plans, reduced merit and overhead spend, accelerating the pace of facility consolidations, and tighter controls on discretionary spending. This positions us to leverage our costs as the market improves. Adjusted EBITDA was $275 million, down approximately 44%, primarily driven by lower gross profit. Adjusted EBITDA margin was 8.2%, down 470 basis points from the prior year, primarily due to lower gross profit margins and reduced operating leverage. Adjusted EPS was $1.12, a decrease of 52% compared to the prior year. On a year-over-year basis, share repurchases enabled by our strong free cash flow generation added roughly $0.04 per share for the fourth quarter. Now let's turn to the cash flow, balance sheet, and liquidity on Slide 13. Our fourth quarter operating cash flow was $195 million, down $179 million, primarily due to lower net income. For the quarter, we delivered $109 million of free cash flow and $874 million for the year, underscoring the strength and consistency of our cash generation profile. Our full year free cash flow yield was approximately 8%. Operating cash flow return on invested capital was 13%. Our net debt to adjusted EBITDA ratio was approximately 2.7x. We have no long-term debt maturities until 2030, supporting operational discipline and flexibility for accretive capital deployment. Moving to fourth quarter capital deployment. Capital expenditures were $86 million, and we deployed $227 million on acquisitions. We have $500 million remaining on our share repurchase authorization. We remain comfortable with our net debt levels, and we'll continue to execute our capital allocation priorities with discipline to maximize long-term value creation. On Slides 14 and 15, we outline our 2026 outlook and assumptions, which are broadly consistent with the middle scenario we shared on our third quarter earnings call. Compared to 2025, single-family and multifamily starts are expected to be flat year-over-year, with repair and remodel up 1%. As a result, we are guiding net sales in the range of $14.8 billion to $15.8 billion, adjusted EBITDA of $1.3 billion to $1.7 billion, and adjusted EBITDA margin in the range of 8.8% to 10.8%. We expect our 2026 full-year gross margin to be in the range of 28.5% to 30%, reflecting the below-normal starts environment. We expect free cash flow of approximately $500 million. The year-over-year change is driven primarily by a $300 million swing in working capital and lower EBITDA. In 2025, we benefited from a working capital release through disciplined inventory management and lower sales but expect to invest in working capital in 2026. Our guidance assumes average commodity prices in the range of $365 to $385 per thousand board foot versus the long-term average of $400. For Q1, we expect net sales to be between $3 billion and $3.3 billion and adjusted EBITDA to be between $175 million and $225 million, reflecting the challenging macroeconomic environment, elevated housing inventory levels, and winter weather impacting key markets. The shape of the full year implies a heavier second-half contribution as we lap the starts decline due to normalizing housing inventory levels. In closing, we are closely monitoring the current environment and remaining agile to mitigate downside risk in the near term while also investing strategically for the future. Supported by a fortress balance sheet and strong free cash flow through the cycle, we continue to manage capital with rigor, drive for organic growth and productivity, and pursue M&A. We remain well situated to compound value through our strategic initiatives. With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. While it was a tough quarter, we are taking action to reset our cost profile while continuing to invest in technology and innovation. We have transformed BFS into a materially stronger company, powered by our leading value-added offerings and digital solutions, a relentless focus on operational excellence, and superior capital deployment. With our scale and experienced cycle-tested team, we expect to deliver solid results in the near term and tremendous upside when the market recovers. Thank you for joining us today. Operator, let's please open the call now for questions.

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

You have Elizabeth Langan on for Matt today. I just wanted to start off asking regarding the cadence of the year. Obviously, Q1 will be a little bit softer. You touched on some of the pressures around inventory and weather and noted that the back half will be a little bit stronger. Could you speak a little bit more about how you're thinking on the single-family side versus the R&R side in terms of what you're seeing right now in the market?

Sure. Yes. As you mentioned, the overlay for the year is pretty modest in all the categories, right? We're not expecting a lot of growth. The way that the year is shaped, when you look at it on a year-over-year comp basis, a lot of that has to do with the shape of '25. So the dynamic in '25 came in hot, and the year ended very slowly on the builder side. They pulled back, had too much of the inventory of new homes as they got through the end of the summer, and pulled back very, very hard on their starts volume at the end of the year, harder even than we expected. So that left us with a sort of strong first half, weak second-half baseline to enter in with '26. In our planning, what we're seeing is a very slow exit to '25. It's ramping well. We're seeing the behaviors that you would expect of builders building for a strong summer. And we would expect that to continue to ramp up as we get into the year to get to a healthy level. I think the easiest part about the second half of '26 is with even a reasonably good year. It doesn't have to be a great year. We'll be able to pretty dramatically outperform last year just because of how weak last second half was. So that's sort of the frame. In general, multifamily has continued to bubble along. It has not turned dramatically, but also, I would say the worst of the downturn is over. It's just sort of stable at where it's at. We're hoping that as the rates continue to moderate, we'll continue to see those quotes turn into orders and start hitting the ground in that multifamily space. R&R, it's been sort of stumbling along. Again, I do think rates will help as we get into 2026. Certainly, there's more and more positive coming out of that space in terms of homebuyers being willing to invest and our positioning in that space where we are around the country.

Great. That was really helpful. And then this is probably more for Pete, but you gave some commentary around the pieces of the cost actions that you guys are planning to take this year. Could you give us a little bit more detail around the timing of that and how you're expecting that to kind of shape in across the gross margin and SG&A?

Yes. So just to clarify, the cost actions that we outlined are 100% SG&A related. Most of those actions are already in place and executed, and it's a matter of time to realize the benefits through the course of the year. We are not giving any really additional details around the specifics of each of those at this time, but just know that we're moving aggressively on the evaluation of our facilities and consolidations, consistent with what we've been doing in the last two years, but in a more immediate fashion. So if something is on the fence, we're moving forward with it at this time. And as I said in the prepared remarks, about three-quarters of the adjustments are year-over-year reduction, whereas one-quarter of the cost actions is a cost avoidance.

We will move next with Mike Dahl with RBC Capital Markets.

I wanted to drill down into the gross margin dynamic a little bit. I mean gross margins even in a weak backdrop for the fourth quarter, they're drifting lower, but they're still very resilient. But then obviously, your guidance is still a wide range, including something that would be kind of notably worse at 28.5%. So I wanted to ask more about kind of what you're seeing on the ground that's driving that range of expectations. I know you said it's still competitive out there, but maybe you can speak to kind of some of the more recent dynamics and also when you think through the cadence, how that paces through the year? Is that 28.5% or is it there because that's what you expect in Q1? Or you're just giving yourself a buffer? Anything on dialing in Q1 a little bit better would also be helpful to understand that cadence.

Yes, sure. So as we think about gross margins overall, I think they've been pretty stable, pretty strong. The team has worked very hard to find that sort of equilibrium to ensure that we're not losing share, that we're in a position to gain share, but at the same time, protecting profitability. So that's been an important precursor. And I think we've done a pretty good job. The question around the gross margin coming in at the beginning of this year really has to do with the uncertainty on the resets at the beginning of the year. So there's always a new contract period that triggers at the beginning of the year. You have a sense of volumes and contract levels, but compounded by the delevered facilities because things slower in this time of the year, early Q1, in particular, is the slowest time of the year for us. You get a little bit more pressure and volatility on some of those gross margin numbers. So really, that's the storyline there. By and large, we're expecting a fairly stable year around gross margins right around just sub that 30% level, but that's the thing that we spend probably as much time as anything managing and making sure we're structurally aligned around. As you think about '26, obviously, that will continue.

Okay. Just a clarification. I mean, you're saying stable just under 30%, but then there's the low end of the guide is quite a bit below that. So I just want to be clear, like that is accounting for potential variability that you have not yet seen versus something that you're already experiencing. That's just a clarification. My second question was just making sure I understood the free cash flow dynamic a little bit. It sounds like based on how you expect the comps through the year that maybe that's a, hey, since you expect there to be growth in the back half of the year, even though it's a comp dynamic at minimum, like that's why your working cap is going to swing pretty hard year-on-year. And then would it be kind of getting into next year, it would normalize again? Just want to make sure we understand that.

Yes. So I mean, I'll field the first one. I'd say my first reaction is yes. It's absolutely a band that tries to give you a sense of the ups and downs based on kind of how we're hearing folks talk about it. We are not seeing that deep downside now on gross margins that we're concerned about, but I want to make sure we're really honest about the dynamic right now in terms of the band of where it could be. But our guide is where we think it is, and that's what we're, I think, experiencing in terms of the trajectory of the year and where we're headed. And then Pete, on the cash flow?

Yes. So Mike, your question on the cash flow. So the $500 million guide for 2026 does reflect an investment in working capital through 2026, exiting, as Peter mentioned, with the back half being higher on a year-over-year basis. So your exit point or the point in time in which cash flow is measured is going to be higher, at least in our guidance. So that's going to be the use of cash versus what we experienced in 2025 was a source of cash as we harvested the balance sheet in a declining market. So that's the biggest change with a little bit of impact from the lower EBITDA that we're guiding for 2026.

Just kind of a general reminder, as a rule of thumb, we're in that 9% to 10% incremental and decremental working capital number as it pertains in particular to that year-end trajectory, right? It matters for where we're comparing in that fourth quarter versus fourth quarter. So the more we grow, yes, we will invest, but the return is quite nice on that.

We will move next with John Lovallo with UBS.

I wanted to talk about the incremental margins just on the business. I mean there's been a lot of productivity initiatives achieved over the past few years, and there's some more cost actions planned for this year. So how should we sort of think about the incremental margins for the business as volume kind of comes back here? I mean, should they be above the historical levels?

Well, generally, our incrementals are quite good on the way up, primarily because of the tremendous leverage we get in the business. For all of the pride we hold in the value-add space in particular, it requires a fixed overhead investment that we're at the point of leveraging when the market is growing and returning. So in general, yes, I think we do see higher than average when we're growing, particularly as the adoption of that value add tends to accelerate in a growing market.

Understood. And I just wanted to get your thoughts on recent acquisitions, Sumitomo acquired Tri Pointe. I mean, the Japanese in general have been pretty big proponents of off-site construction. Curious, other than them trying to diversify away from an aging population in Japan, I mean, do you see this as an opportunity for them to really start pushing forward with some of the off-site construction techniques that could benefit your business?

Well, I mean, I guess I'd start by saying we're huge believers in off-site fabrication. So I think all of us are looking for ways to add efficiency and productivity and speed into this industry in any way that we can. Clearly, the Japanese have done a good job in manufacturing over the years. And I think there are homebuilding operations in Japan that have leaned far more heavily into this off-site fabrication idea. I think the challenge in any of these is, can you do it efficiently? Now historically, the Japanese companies have had very long investment horizons. When they talk about doing something, they're not talking about a couple of years. They're usually talking about a couple of decades. So we'll see. We'll see where they end up. I would say, in the near term, we have very good partnerships with all of the Japanese owned homebuilders in the U.S. We work closely with them. I think we've got some really interesting things we're doing with them. And I think we'll look for opportunities to partner in the offsite fabrication space as well. So at this stage, interesting, certainly something we want to keep an eye on, but we're believers in the idea.

We will move next with Charles Perron-Piché with Goldman Sachs.

First, I just want to touch on volume versus price in this environment. The guidance seems to imply relatively flat market share assumptions for you in 2026. The builders have been talking extensively about their desire to lower the stick and brick costs this year. Can you talk about some of the discussions that you have with the builders today? How do you get price for the value-add services that you provide against a pretty competitive backdrop? And are you seeing any change in the appetite for value-add product today?

There's been significant pressure overall. Builders are mainly communicating what they've already secured. They're experiencing the full benefits from our negotiations this past year. You can observe our margins; it's a tough landscape. However, we've successfully found ways to deliver packaged and integrated solutions, providing more value across our services and products. This has solidified our role as a key partner, which helps maintain our pricing structure. Admittedly, setting prices is challenging right now, but we are all striving to build homes more affordably. We have a competitive edge because we offer more options for builders to address this issue than anyone else. Our execution capabilities are unmatched considering our size, expertise, and the caliber of our team. While challenges exist, we've managed to maintain a balanced approach. I want to clarify that there is indeed market share growth aligned with our goals, even as we navigate through some losses we've experienced in 2025. We are pursuing both objectives, which is crucial for our future positioning as the recovery unfolds.

Got it. Okay. That's helpful color, Peter. And then just switching to the acquisition of Pleasant Valley Homes this quarter. It sounds like it's a strategic move into modular housing. I think you talked about the East Coast mainly at their market. So when you think about the outlook for modular housing, how should you consider this opportunity as part of your growth strategy in general?

Yes. It's an exciting experiment for us. It's a great business. The Pleasant Valley folks are a great team. They build a really high-quality house. They've been successful bringing it to market in those Northeast states. I love their footprint. I think they've got a very ingenious approach to the way that they've executed their construction process. And we're interested in exploring whether or not there's a partnership there to be had with our builder customers. To be clear, we're not interested in being a traditional retail HUD and modular home seller. That's not the game that we're in. They certainly have a little bit of that business. We're going to leave that alone. We're happy that that business exists. But our vision is to reach out to our homebuilder partners around the country to say, where does it make sense for you to have access to manufactured modular, high quality in your market that helps you fill particularly that sort of lower-end affordable home category in a way that builders feel like is an advantage to them. And in my sense of it, it works very much the way truss does, right? We own most of the truss plants in this country because we're really good at running them and at meeting the demand for multiple builders. So we keep our capacity filled by being a service provider for various builders. I think that's one of the barriers with modular housing is people trying to go on their own and figure out how to fill and maintain that capacity. We think we can do more of that capacity filling by really working with our partners and finding ways to do it in a way that benefits them and us. So it's worth exploring. Certainly, it's early days, but optimistic about where we think it will head.

We will move next with David Manthey with Baird.

The first question is on the complexion of the year. I get what you're saying relative to the two halves that you experienced in 2025, and it's always a little bit hard to parse out what exactly is base business. But it seems like based on your guidance, the first quarter is maybe like 21% of full-year midpoint. And typically, even if you exclude last year, over the past several years, it's been more like 23%, 24%. So what I'm trying to get to is how much of this is just typical builder conservatism on your part? And how much of it is sort of maybe we are anticipating a little bit of acceleration even relative to normal seasonality through 2026?

It's definitely the latter for Q1. Yes. No, I don't want to pull any punches. We're ramping very quickly this year versus prior year or even two years prior because of how slow we came out of '25. But it's moving like it's doing what you would expect. In order to be able to hit our numbers, we're on track, but it does require a pretty aggressive ramp. I think it's maybe underappreciated how dramatically the big builders slowed when they realized they had too many units going into their year-end.

Yes. Fair enough. Great. And then second is a little bit relative to this contribution margin, incremental margin discussion. When you think about your cost structure; over the past three years, you guys have really constrained operating expenses extremely well. And if we're looking at an acceleration and some growth in '26 and into '27, beyond just the variable compensation elements which would naturally flex, are there any other sort of catch-up items or things that were deferred previously that might come back into play? Or are we just looking at sort of that, as you mentioned earlier, Peter, the outsized kind of contribution margin relative to your long-term targets in the high-teens?

Yes, that's an excellent question. I would describe it by saying that there were expenses related to this business during COVID and during significant growth periods that we chose to maintain because our focus was more on capacity and meeting customer needs rather than maximizing efficiency. To be candid, from the BMC merger and other acquisitions, there were operations where we could have consolidated, but we needed all that capacity to meet demand, so we chose not to. Now, we have disciplined operators managing the business during this quieter period, returning to core principles. The strategies we're implementing to reduce costs and increase efficiency align with our established playbook at BFS. Our teams excel at this, and we've seen reductions in spans and layers, enhanced efficiency, and improved utilization of equipment and fleet, all while maintaining on-time delivery and customer satisfaction. I don’t foresee any areas where we are lagging. Even in a challenging market, we remain dedicated to investing in critical areas. We feel optimistic about the upgraded fleet and our investments in innovation, including technology for our core IT systems and digital initiatives, as well as in AI. We're committed to being in a stronger position as we approach the next recovery compared to where we were two or five years ago.

We will move next with Rafe Jadrosich with Bank of America.

You have Sean on for Rafe. First, so you talked about the weakening revenue environment throughout the quarter. Just curious, did you see a pickup in competition from peers versus earlier in the year? And then it sounds like you guys are doing a good job closing some facilities. But what are you hearing about competitors? Do you think the capacity in the industry is starting to normalize at this point?

We didn't notice any significant changes at the end of the year regarding competition; it remained quite stable. We have observed a few competitors shutting down their facilities. It's important to understand that due to our scale, when we close facilities, it simply means we are adjusting our presence in the market, potentially changing our shipping distances or overlaps. In contrast, when many of our competitors close facilities, they are often exiting the market entirely. Therefore, their decisions tend to be more impactful than ours in terms of their service capabilities. We have also seen some companies that had planned to open new facilities suddenly pause those plans. Overall, the industry is showing a rational response regarding capacity, which is evident not only in our sector but also among various homebuilding product providers.

Okay. Great. And then switching gears, it sounds like you guys are still seeing growth on the installed side of the business. Can you talk about what the size of that was in 2025 and your expectations for 2026 growth in install? And then just a little bit on how margins are trending in that business versus the overall business?

So I would say with the install business, it's largely on par with where we were from a percent of our overall business around 16%, 17% of overall. It outpaced, so it didn't decline as much as the single-family overall business. So it was outpacing the market, which means we're gaining more inroads with the install capabilities in our offering across the platform. And the margins for install are generally in line with the categories that you're installing. So that hasn't changed from what we've communicated previously. It's a good business. We see it as another growth lever for us, and we're going to lean into that. And this is a natural extension from what we do with value-added products and the off-site fabrication. So it's a vector that we're going to continue to invest in and strengthen our capabilities.

It's important to highlight that builders want a seamless job site and need someone who can ensure that everything is done correctly, as reliability remains crucial. This hasn't changed in the current market. Although we are paying closer attention to our operations due to market decline and affordability issues, the overall labor situation in our sector demands that homebuilders run efficiently. I believe our capability to support them in this effort is a key factor in our ongoing success in this area.

We will move next with Trey Grooms with Stephens.

So, first off, regarding working capital investments in the second half of this year compared to the previous year, should we view this as an indication of your expectations for 2027 as you prepare your inventory levels for a stronger market moving into that year? Is that the most accurate way to interpret the inventory management you're anticipating?

As you consider the sales pace at the end of 2025 compared to what we anticipate for 2026, even an increased sales rate will result in a higher accounts receivable balance, representing an investment in working capital. Additionally, if commodity values return to more normal levels by the end of 2026, this will also increase our inventory investment. Typically, we don't need to make significant inventory positions as we manage it consistently and regularly through the business cycle. Our extensive platform and network allow us to handle short-term fluctuations effectively, putting us in a strong position. I hope this clarifies things.

Yes, yes, it does. It's more of just kind of the way the year is expected to progress versus what we saw in '25 more than anything.

Exactly. We're not confident in '27, Trey. It doesn't mean we're not confident in '27. It just means we don't have to load up.

Yes. Just kind of a general reminder, as a rule of thumb, we're in that 9% to 10% incremental and decremental working capital number as it pertains in particular to that year-end trajectory, right? It matters for where we're comparing in that fourth quarter versus the fourth quarter. So the more we grow, yes, we will invest, but the return is quite nice on that.

We will move next with Alex Rygiel with Texas Capital.

Any broader comments on Washington policy and how that is sort of being contemplated in your guidance?

It's been an intriguing dynamic lately. The emphasis on housing and housing affordability has highlighted the significance of our sector to the overall spirit of our nation, which hasn't received this much attention in my memory. There are many ideas being considered, though not all are being realized or have the same level of impact, but people are making efforts. The incremental benefits appear promising. One of the most compelling aspects is the federal government's push for alignment between funding, especially for transportation, and local compliance with reasonable regulations like codes, easements, and density. The federal stance is becoming more assertive, indicating that funding for infrastructure, such as train stations, will be contingent on surrounding density, as it serves no purpose otherwise. This approach seems to support what some state governors are attempting to address regarding the negative aspects of NIMBYism. I recognize the need for a balance between state and local control in these situations. However, overly strict restrictions are creating societal issues, and there is growing awareness and movement towards improvement, which I view positively. While I won't claim there has been a massive shift or significant impact yet, the fact that discussions are happening and progress is being made, no matter how small, is very encouraging compared to where we were a few years ago or even the last five decades.

And this concludes our Q&A session as well as the Builders FirstSource Fourth Quarter 2025 and Full Year Earnings Conference Call. Thank you for your participation, and you may now disconnect.