Earnings Call Transcript - BLDR Q3 2025

Operator, Operator

Good day, and welcome to the Builders FirstSource Third Quarter 2025 Earnings Conference Call. Today's call is expected to last about 1 hour, including management remarks 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 proceed.

Heather Kos, Senior Vice President, Investor Relations

Good morning, and welcome to our third 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 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.

Peter Jackson, CEO

Thank you, Heather, and good morning, everyone. Over the past several years, we have transformed into a stronger organization powered by our leading network of value-added solutions, our relentless focus on operational excellence, and superior capital deployment. These strengths, combined with our scale and a team dedicated to exceptional customer service, have driven margin expansion, reinforced our industry leadership, and extended our track record of success. By focusing on the factors within our control and leveraging our competitive advantages, we are competing effectively today and are well positioned to outperform our competitors as the market recovers. Let's turn now to Slide 4. Our third quarter results reflect the strength of our strategy and disciplined execution in a weak housing market. We continue to execute effectively and sustain healthy profitability despite a low-starts environment, underscoring our operational discipline and improvement since 2019. Let's take a minute to step back and talk about the market. Single-family construction remains soft as builders manage the pace of starts given affordability concerns, consumer uncertainty, and elevated new home inventories. Demand remains tempered despite Fed rate cuts in 2025. As a reminder, Q4 is one of our slower quarters due to seasonality. Our builder customers have addressed these 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 leveraging our broad product portfolio and bundled solutions to drive cost efficiencies while upholding the highest quality standards. In the multifamily market, activity is expected to remain muted through year-end, in line with our previous thinking. However, we have seen green shoots and quoting activity as our customers see improving financing costs. As a reminder, our first sale tends to lag a multifamily start by roughly 9 to 12 months. We continue to view multifamily as an appealing and profitable business for us, supported by a substantial mix of value-added products and attractive fundamentals. On Slide 5, we highlight some of the key initiatives under our strategic pillars. In the third quarter, we invested more than $20 million in value-added solutions to expand our product offerings in key markets. This included opening a new millwork location in South Carolina and expanding our upgrading plants in 7 states. 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 $11 million in productivity savings in Q3, primarily through targeted supply chain initiatives. Turning to Slide 6. We are prudently managing discretionary spending and maximizing operational flexibility. In response to lower volumes over the last year, we have taken steps to align capacity across our facilities, manage headcount, and control expenses. We are reducing variable costs today while also investing in needed capacity to ensure we are positioned to scale quickly with the expected recovery in demand. Year-to-date through September, we have consolidated 16 facilities, including 8 in the third quarter, 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. Moving to Slide 7. Our disciplined capital allocation strategy focuses on maximizing shareholder returns through organic growth, M&A, and share repurchases. In the third quarter, we deployed over $100 million toward return-enhancing opportunities aligned with those priorities. Drilling 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. In the third quarter, we acquired St. George Truss Company, a truss manufacturer serving builders in Southern Utah and Southern Nevada. In October, we acquired Builders Door & Trim and Rystin Construction. Together, the 2 companies formed a leading provider of door and millwork capabilities in the Las Vegas area, closing a key product gap in the region and strengthening our ability to deliver comprehensive solutions to our customers. We have made 38 acquisitions, representing over $2 billion in annual sales since the BMC merger in 2021, 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. We remain 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 are accelerating the adoption of our digital capabilities 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 in the industry. Despite the weak market, we have seen continued adoption with our target audience of smaller builders. Since launching in early 2024, our digital tools have processed over $2.5 billion of orders and over $5 billion of quotes, representing increases in excess of 200% year-to-date. Importantly, we're seeing that digital is not just about incremental sales; it's a catalyst for broader company growth. The efficiencies and capabilities enabled by our digital tools, including artificial intelligence, accelerate the pace and elevate the precision of our quoting and sales operations. While it's evident that our initial business case around digital did not predict the timing of our outcomes very well, we remain convinced of the tremendous shareholder value that the digital tools will unlock for us. Continuing on the technology front, I'm pleased that we continue to make steady progress on our comprehensive implementation of SAP after the launch of 2 pilot markets in July. We've gained valuable insights from these initial pilots, and we'll be applying those learnings as we prepare for the next phase. During Q3, we also successfully converted to SAP for our centralized accounting functions as well as for all of our internal and external financial reporting. 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. Recognizing one of our incredible team members each quarter is one of the best parts of my role. Today, I want to spotlight Harold Fuqua, driver at our Lebanon, Tennessee yard, who recently celebrated 40 years with BFS. Harold is known for his dependability, strong work ethic, and love of the Tennessee Volunteers. The dedication shows in his commitment; he's often at the yard before 4:00 a.m., and in the way he shares his experience, having trained more than 100 drivers over the years. He's also earned a reputation for driving over the region's toughest hills with skill and care. I'm honored to recognize Harold and so many others across BFS, whose hard work and commitment continue to move us forward. I'll now turn the call over to Pete to discuss our financial results in greater detail.

Pete Beckmann, CFO

Thank you, Peter, and good morning, everyone. We continue to execute our strategy in a down market, responding to near-term challenges and carefully managing costs while preserving our ability to invest for the future. Our financial agility, supported by a healthy balance sheet and strong free cash flow through the cycle, enables us to deploy capital prudently to fuel organic growth, pursue strategic M&A, and return capital to shareholders. These investments are bolstering our competitive position as we invest for the future. Let's begin by reviewing our third quarter performance on Slides 10 through 12. Net sales decreased 6.9% to $3.9 billion, driven by lower organic sales and commodity deflation, partially offset by growth from acquisitions. The core organic sales decrease was driven by a 12% decline in single-family due to lower starts' activity and value per start as well as a 20% decline in multifamily, in line with our expectations amid muted activity levels against stronger prior year comps. Additionally, Repair and Remodel decreased 1% given consumer uncertainty. As we've noted on recent calls, there were a few key factors reconciling single-family starts through our core organic sales. First, as a reminder, there is a roughly 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 remain pressured throughout the supply chain as affordability concerns continue to be paramount. Based on this, we believe our third quarter share was flat to up slightly as we continue to be the industry leader and a trusted partner to our customers. For the third quarter, gross profit was $1.2 billion, a decrease of 13.5% compared to the prior year period. Gross margin was 30.4%, down 240 basis points, primarily driven by below-normal starts' environment. Compared to an approximately 27% gross margin in 2019, our Q3 gross margin reflects the substantial investments we have made in value-added solutions and our continuous improvement. Adjusted SG&A of $790 million increased $7 million, primarily due to acquired operations, partially offset by lower variable compensation due to lower sales. 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 $434 million, down approximately 31%, primarily driven by lower gross profits. Adjusted EBITDA margin was 11%, down 380 basis points from the prior year, primarily due to lower gross profit margins and reduced operating leverage. Our ability to maintain a double-digit EBITDA margin in a weak market is a testament to the strength of our transformed business. Adjusted EPS was $1.88, a decrease of 39% compared to the prior year. On a year-over-year basis, share repurchases enabled by our strong free cash flow generation added roughly $0.10 per share for the third quarter. Now, let's turn to our cash flow, balance sheet, and liquidity on Slide 13. Our third quarter operating cash flow was $548 million, a decrease of $182 million, mainly driven by lower net income. We generated free cash flow of $465 million. Our trailing 12-month free cash flow yield was approximately 8%, and our operating cash flow return on invested capital was 15%. Our net debt to adjusted EBITDA ratio was approximately 2.3x, while our fixed charge coverage ratio was roughly 6x. 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 third quarter capital deployment. Capital expenditures were $83 million, and we deployed $19 million on acquisitions. We currently 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 in a disciplined manner on the path to maximizing value creation. On Slides 14 and 15, we show our 2025 outlook and assumptions. On a year-over-year basis, our latest forecast assumes single-family starts down 9% for the year, multifamily starts down mid-teens, and R&R end market to be flat. The 2025 multifamily headwind to sales of $400 million to $500 million and EBITDA of less than $200 million has largely been digested and remains on track. As a result, we are guiding net sales in the range of $15.1 billion to $15.4 billion. We expect adjusted EBITDA to be $1.625 billion to $1.675 billion. Adjusted EBITDA margin is forecast to be in the range of 10.6% to 11.1%. We expect our 2025 full-year gross margin to be in the range of 30.1% to 30.5%, reflecting our strong execution in a below-normal starts' environment. We expect free cash flow of $800 million to $1 billion. Our revised guidance assumes average commodity prices in the range of $370 to $390 per thousand board foot versus the long-term average of $400. Moving to Slide 16. We recognize that 2026 is coming into focus as we approach year-end. Like we did last year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions. As you can see, we have included a new scenario that provides a perspective on our performance in a normal housing environment. I want to emphasize that this is not guidance, but these scenarios should help clarify our range of performance expectations for 2026 and demonstrate the strength of our best-in-class operating platform. 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 am 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.

Peter Jackson, CEO

Thanks, Pete. I want to close by emphasizing the transformation of BFS, as illustrated on Slide 17. Today, we are an exceptionally improved organization, one powered by our value-added solutions and digital tools, our relentless focus on operational excellence, and a disciplined capital deployment strategy. These improvements, combined with our scale, have positioned us to accelerate growth as we return to a normalized starts environment. By controlling what we can control and leveraging our competitive advantages, we will continue to deliver exceptional long-term shareholder value. Thank you again for joining us today. Operator, let's please open the call now for questions.

Operator, Operator

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

Matthew Bouley, Analyst

So I want to start on the framework, the scenarios for FY '26. If I'm looking at it right, it seems like you're implying kind of maybe a mid- to high 9% EBITDA margin at the midpoint versus this year, obviously, 10.6% to 11.1%. Is that because you're, I guess, implying exiting this year between '29 to '30 on gross margin, and the expectation is that, that should continue kind of given builders negotiating back with suppliers? Or is the SAP implementation part of that? Just, I guess, what are some of the moving pieces behind that margin outlook in 2026?

Peter Jackson, CEO

Matt, it's Peter. I think you're right, for the most part. It's not an SAP thing. It is a sense of both where we have gotten to at the exit of '25, but also our read on the competitive environment and what the dynamics are. It's basically a leveling out. We're about to the bottom. We're thinking based on everything we're seeing on the margin side. But that question is out there in terms of which way the market will go as we signaled with the sort of up and down version of the scenarios. So try to give a middle-of-the-road view on where we think it's going to end up. Overall, I think we're being successful. We're seeing the stabilization. I think we're getting close to the bottom. The real question comes when does the turn happen, the sooner the better; we're ready to go, but we need a little cooperation.

Matthew Bouley, Analyst

Yes. No, absolutely. Makes sense. So then the other one, I guess, just sticking with that slide, I wanted to ask on the normalized EBITDA guide. So obviously, it jumps out a little that it's a different number than what you gave at the Investor Day a couple of years ago. I guess, the revenue number would look to be the main difference there. So I'm wondering if that's a comment on sort of the market share growth that you're assuming at that time, maybe the starting point on market share is a little bit different because of the decline in the market we've just had in the past year? Or just anything else you can kind of give us on what you think may be a little structurally different leading to that level of profitability at $1 million to $1.1 million?

Peter Jackson, CEO

Yes, that's a great question. To begin with, I want to highlight that there's a difference in comparison. During Investor Day, we presented our future plans based on the situation at that time. The initiatives and productivity we discussed then are simply an attempt to project what 2025 could look like, considering assumptions about the coming year. If we were to experience a return to normalcy, what would the numbers reflect? Given the significant changes in the market you've mentioned, such as the average size and content of homes, your observation about market share is valid. The effects of reducing debt in our business, considering the market size dynamics, play a role here as well. However, it's important to recognize that we are not making direct comparisons regarding the end year of Investor Day; there is a distinct difference in metrics over time. I hope this helps clarify our perspective. Currently, the market is weak, and our situation isn't typical. A small recovery could lead us to significantly better performance, reflecting the potential of our business. We are prepared for that change and are eager for it to happen, which summarizes the key differences well.

Operator, Operator

We'll take our next question from John Lovallo with UBS.

John Lovallo, Analyst

The first one is, the midpoint of the outlook implies 4Q sales of about $3.42 billion, adjusted EBITDA of about $341 million, which would imply a sequential quarter-over-quarter decremental of only about 18%. I think year-over-year, it would be about 38%, but both of these are better than what we've experienced over the past few quarters. So can you help us just understand what's driving the improvement there?

Peter Jackson, CEO

Thank you for your question, John. I believe the essence of your comment is fair, and we agree with it. There are a few factors to consider. There's a slight lapping effect where the year-over-year comparisons are not as significantly down, but we are still navigating a challenging market. Pete, do you have anything to add?

Pete Beckmann, CFO

Yes. As Peter mentioned, the fourth quarter typically experiences a decline for us, so we expect to see a decrease compared to the third quarter. Additionally, as Peter noted regarding the year-over-year comparisons, we are beginning to close the gap. We observed that the fourth quarter last year was starting to shrink, and we are now approaching that period more closely.

John Lovallo, Analyst

Okay. Understood. And then the $3.42 billion in implied fourth quarter revenue would be down about 11% year-over-year. Can you help us just kind of bridge that 11% in terms of organic sales, M&A, commodities? And within the organic piece, what are the expectations for single-family versus multifamily versus R&R?

Pete Beckmann, CFO

So the M&A will continue to be a good boost for us, as we've shared in our sales growth really every quarter and in our assumptions. It's roughly 5%. So that will continue. The margin pressure and headwinds that will show up in the form of pricing will continue to be a headwind in Q4, but as we outlined, maybe a little less significant, and we were getting closer to what we feel is a bottom. And then, on the organic side, we still have a starts' assumption out there that's 920,000 single-family starts, which has step-downs on a quarterly basis. So still mid-teens double-digit decline in the fourth quarter. So that's really the big makeup and the headwind that we're seeing in the numbers.

Operator, Operator

We'll take our next question from Charles Perron-Piché with Goldman Sachs.

Charles Perron-Piché, Analyst

First, I want to revisit the scenarios to better understand the role of multifamily. Multifamily starts have increased by 17% year-over-year through August. It seems that the focus is leaning towards larger buildings, which may not be within your range. More generally, how do you perceive this recovery in multifamily housing? How is it incorporated into your projections for next year, considering the positive developments mentioned in your earlier remarks? Additionally, what implications could this have for margins, given the increased value-added elements in that segment?

Pete Beckmann, CFO

Yes. Multifamily right now is 8% to 9% of our sales. We don't have a, call it a, swim lane or a row called out for multifamily. But in 2025, we were going down mid-teens for multifamily. In 2026, we're looking at a flat environment for us, even though the overall starts number is showing a recovery. It's just that lag and expectation of the market that we participate in. In that 4 stories, wood structures and below, it's going to be more of a flattish because of the time it takes to transition that start into a first sale for us. So that's the expectation of multifamily for 2026.

Charles Perron-Piché, Analyst

Okay. That's good color. And then understanding the market dynamics are outside of your control, but you've done a great job in the last few years to adjust your cost structure to protect profitability. Against the scenarios that you presented today, are you considering incremental productivity actions as an asset? And maybe taking a step back, can you talk about your ability to service demand should we see a faster-than-expected pickup in start activity going forward?

Peter Jackson, CEO

Yes, those are good questions. The essence of our business revolves around day-to-day management at the local level, even though we operate on a national scale. We work as a team but approach the business in an entrepreneurial manner, responding to local market demands. Over the long term and particularly in the past year, we've addressed challenges in sales by focusing on local markets and ensuring we meet our customers' needs while effectively utilizing our existing resources. This involves closely managing our variable costs and aligning our workforce, locations, and transportation to match customer requirements, a practice that will remain unchanged. We will continue to respond to local market conditions, and our efforts in productivity have maintained their momentum. Our teams are actively engaged in initiatives aimed at improving the business incrementally compared to last year. However, some of these gains have been offset by the overarching challenges we face. While we have become more efficient on a per-unit basis, a decline in unit numbers and the fixed overhead expenses that come with our business size have impacted our overall productivity metrics, despite our teams achieving positive outcomes. Moving forward, we are well-positioned to capitalize on growth opportunities due to our capacity management at the local level. Although we will need to rehire staff, we are committed to maintaining our service capabilities while scaling operations. Our past experiences, particularly during the COVID spike, have shown us that we can respond more effectively than others, and we've learned valuable lessons from those instances. We're ready for the next opportunity, especially in key markets where we've previously faced capacity issues. We're optimistic about the potential for our business, and we just need a bit of momentum to help us along the way.

Charles Perron-Piché, Analyst

Good luck for the next quarter.

Peter Jackson, CEO

Thank you, Charles. Appreciate it.

Operator, Operator

We'll move next to Mike Dahl with RBC Capital Markets.

Michael Dahl, Analyst

Peter, it's really actually impressive how stable the gross margins have been year-to-date, obviously, step down versus last year about 30.5%, 30.7%, 30.4%, pretty remarkable stability above 30%. I guess I've got a 2-part question here on the margin. I guess, it seemed like the margin came in better than your expectations in 3Q. So can you comment on what drove that? And then, with your fourth quarter guidance still at the midpoint, implying kind of 100 basis point sequential step down, is that something you're already seeing in your exit rate into the fourth quarter? Or is there kind of a buffer against the market softening, it's competitive, maybe things continue to weaken through the quarter? If you could address both of those, that would be great.

Pete Beckmann, CFO

Thanks, Mike. Good questions. So with respect to the margin performance in Q3, we did outperform what we had outlined. We did see a sequential step down. It just wasn't as significant as what we had originally thought and shared on the last call. Some of the outperformance is due to us buying better and us managing through our supply chain initiatives that has really helped in bolster. So we have a professional team that continues to look for the way to maximize and improve our bias. So that was what we're contributing to the outperformance in Q3. With respect to Q4, we're still outlining that, I'll call it, a step down for the, call it, exit quarter rate. We are seeing continued pressure across a weak market that we're operating in, but the team across the business is doing exceptionally well, managing pricing and being extremely disciplined and getting the sale at a level that we feel is appropriate for what we're providing from a service standpoint. It is a weak market that we're operating in. So that competitive dynamic is real, and we're operating and navigating extremely well.

Michael Dahl, Analyst

Thank you for your insights. For my second question, I would like to clarify your position that what you are presenting today is normalized and may not align directly with what was discussed on Investor Day. I want to explore the idea that there appears to be a lower revenue per start trend occurring. There seems to be a discussion regarding whether this issue is cyclical or structural in nature. If you consider this situation as normalized, do you have a different perspective on the pressures experienced over the past couple of years? Do you believe that these pressures represent a new normal, indicating that even during a recovery, these challenges will continue?

Peter Jackson, CEO

Yes. If I understand the question correctly, we’re not trying to market or predict a return to the previous size and complexity of homes. We are acknowledging the current state and projecting from there. Could there be some recovery? Yes, definitely. However, the real challenge, Mike, is that affordability is a significant issue; it’s not just a headline. It’s something people are experiencing, and it will take time to return to where it was five years ago. Given that, I believe the current step-off point in the normalized chart provides a good indication of where we stand today. There is potential for an increase in the starts number, and I have a realistic expectation that we will see improvements in commodity prices. Many mills are currently struggling with these prices. Therefore, there are indicators suggesting that we can perform better than normal. However, I don't want to send the wrong message to the broader investor community about what that implies. This is just based on historical averages and our current situation. And as you noted, our current situation is centered around the size and complexity of homes. That's what we are dealing with.

Operator, Operator

We'll move next to Rafe Jadrosich with Bank of America.

Rafe Jadrosich, Analyst

You mentioned earlier that the market share was stable or slightly increased in the quarter. Could you provide us with an overview of your market share trends throughout the year and the overall competitive landscape? Additionally, what assumptions regarding market share are included in your 2026 outlook or scenarios?

Pete Beckmann, CFO

Yes. Thanks for the question, Rafe. So with respect to the market share, and we've provided in the past a bridge of our sales versus starts on a lag basis. And in the prepared remarks, we remind everyone that it's roughly a 3-month lag. So when you look at the quarter, as we talked about, flat to up a little bit from a share standpoint. If you look back to Q2 starts, they were down year-over-year about 8%. We're still seeing a little bit of headwinds from smaller home and complexity. It's pretty modest, but a little more on the cost basis side of things. And when you factor those structural adjustments in, we're at a flat to up slightly. When we zoom out for the year-to-date, where we are year-to-date, it's pretty flat. It's pretty neutral. Starts are down about, I would say, 5% on a lag basis versus our 8% on sales, and then, taking into account some of those same structural adjustments, it comes out pretty flat. So again, a testament to the team and how well we're managing our price in this weak market and maintaining a share level that we feel is appropriate.

Peter Jackson, CEO

I think that explains why some of our comments suggest we are bouncing around the bottom because of the combined output. We see stabilization in margins and share, which indicates this is likely where we want to be for now. This presents a tremendous opportunity for us, especially as the market begins to pick up a bit, considering our available capacity and scale. That summarizes the reasoning behind our observations.

Rafe Jadrosich, Analyst

That's really helpful. On a year-over-year basis, the value-add has decreased by more than lumber over the past few quarters. Is that spread driven by different end market exposure or competitive dynamics? I believe the long-term goal is for value add to outpace commodities. When do you think that could start to happen?

Pete Beckmann, CFO

Yes. I think what you're seeing mostly in the value-add is from the multifamily side of the business and that year-over-year lapping that we have outlined. Remember that multifamily is much higher indexed towards the value-added products. We saw the truss stepping down, and that's been known, and we've been communicating. But the millwork is also now feeling at later in the build cycle from a multifamily standpoint. And so that's also in the value-added products. So you'll see both of those from a year-over-year basis is the largest contributor to that down percentage.

Peter Jackson, CEO

There's no doubt that we are experiencing pressure across all areas. I want to emphasize that clearly. When we take sales volume out of any of our value-added facilities due to the nature of our work, we have invested in overhead to enhance efficiency in processing products through the factory. This creates a challenging environment in the competitive landscape, as we work to keep those facilities fully operational. I believe we are performing exceptionally well, and I'm very proud of our team, but we are certainly facing some headwinds. Additionally, there is some pass-through product involved, such as engineered wood, which is also encountering similar challenges regarding top-line performance.

Operator, Operator

We'll take our next question from David Manthey with Baird.

David Manthey, Analyst

You really opened the floodgates here with this '26 scenario data, I would just say. But as we look at that data, if we go from the 2025 midpoint to the normalized midpoint, it looks like a contribution margin of a little over 20%. And I just wanted to check with you, if we think about long-term kind of secular, are you still thinking contribution margins on volume would be something in the high teens long term?

Pete Beckmann, CFO

Well, I think the contribution margin also depends on what margins are doing and where we're seeing margins go. When you jump right to the normalized, we move that up to the midpoint of our long-term normalized margins. So it looks like a bigger step up in contribution from where we are today. As you look at the midpoint in 2026, that's an opposite scenario where we see a lot of that margin headwinds and pressure continuing. But a lot of it is the lapping effect of what we're seeing on the slope through 2025. So that flow-through in contribution margin is largely dependent on which way our margin is moving.

David Manthey, Analyst

Right. To put it another way, there are some positive factors that could increase that number as we approach normalization. But what I'm really asking about is the long-term trend. If you consider the model’s volume growth, you previously mentioned high teens. Is that still accurate, or has it changed?

Peter Jackson, CEO

I'm actually uncertain about when we mentioned that. I believe what you said is accurate. I would consider mid- to high teens as my perspective on this. To clarify, we do not intend to alter any of our previous communication or change our stance on this. This is simply an effort to provide a reference point as we envision what 2026 will look like.

Operator, Operator

Yes. Okay. And so staying on this theme, I guess, as we're looking forward, when we look from the '25 midpoint to the flat scenario of '26, the contribution margin is actually, I think, slightly negative. But I think, Peter, as you said, you're taking 2025 as a whole as opposed to 2026 as a starting point of sort of where we are today or year-end 2025. But just so as we think about moving from here to there, could you talk about the major buckets of puts and takes in the model, meaning you get productivity savings, you get some glide path from acquisitions, and then, the offsets there would be, what, labor inflation, occupancy, freight? Could you just talk about the moving parts that will flex that up and down into 2026, even on a flat start scenario?

Pete Beckmann, CFO

Yes. I mean, you started rattling off most of them. So with the flat environment, we are jumping off of a lower point for 2025 than what the whole of the year is. I mentioned that. That was part of my other comments that I made on the margin and where are the margin movements. We are going to expect lapping of acquisitions. So acquisitions completed to date would be reflected in that number. So there's a stub year period that would contribute. There are assumptions around inflation on costs, as you can imagine, every year that we would have that, and some productivity to offset it, but it's still in an environment where it's flat, and we're focusing a lot of our resources on the ERP deployment. So it's not going to be as strong as what we had shared a few years ago. So that all contributed to what we're seeing for 2026.

Peter Jackson, CEO

Yes, I want to emphasize that while the market is weak, our organization is continuing its transformation. Our investments in digital and technology are poised to yield significant returns for the business. We will empower our teams to grow efficiently and accomplish tasks that others cannot, which provides us with a competitive advantage as a partner and provider. There is certainly an investment involved, and we have been open about that. This commitment will persist into 2026, so it's important to keep that in mind when considering the numbers.

Operator, Operator

We'll take our next question from Keith Hughes with Truist.

Keith Hughes, Analyst

You may have addressed this, but I just wanted to be clear. If we look at the scenario analysis for '26, the middle scenario of flat single-family, most of the numbers in that range are below what you're reporting for this year. Is it the flow-through from the start to the end of the year that will be affecting that EBITDA? Is there something else going on?

Peter Jackson, CEO

Yes. It's similar to some of the comments already. I would say that the biggest difference is around the exit margin levels and where that's going to result for the full year of '26. So it's not that things are necessarily going to get a lot worse from where they are, but just recognizing that they got worse through '25.

Keith Hughes, Analyst

Got it. I have a longer-term question. You have always regarded multifamily as a lower investment due to the smaller units. With all the truss work you're doing now, as multifamily begins to grow again, is the starting point for growth in multifamily still less favorable compared to single-family than it was around 5 or 6 years ago?

Peter Jackson, CEO

That's a great question. I can't provide specific numbers for the difference between multifamily and single-family starts right now. What I can say is that multifamily is attractive for us due to the value-added opportunities it presents. There's a lot of truss and millwork involved, and we see it as a growth area for our business. We've been successful in building relationships with contractors and developers, which we believe will strengthen our position in this market. However, it can be challenging to communicate this effectively, as everyone tends to focus on the overall multifamily figures. There's been some disconnect regarding our specific segment of the market. We have confidence in this business and its profitability, and we believe it has not only a solid profile but also significant growth potential.

Operator, Operator

We'll move next to Trey Grooms with Stephens.

Ethan Roberts, Analyst

This is Ethan on for Trey. Just going back to some earlier comments about share. Historically, you guys were able to take share at maybe a couple of hundred basis points above the market and obviously recognizing the current affordability challenged environment. But how should we think about Builders' long-term ability to continue to take share, maybe both in a flat market and on a longer-term time horizon?

Peter Jackson, CEO

Yes. Thanks, Ethan. Good question. So I'm still a strong believer in our ability to take share. I think that the reality, if you go back over the past couple of years, we talk a lot about it, right? I think we've lost some share on the pure commodity side of the business. I think that we've gotten to the point where we're saying no to any more of that. And I think we've leveled that out. I think on the side where we've gained the most share, it's primarily in the value-add space. We have had and have better capacity, better capabilities, a better competitive position than anybody else in the space. And so when the market is running healthily, but also when it's running aggressively, we are an obvious source of relief for builders who are trying to solve problems. And I think that's the storyline in the long run. We are still in an industry where skilled trades, good labor is hard to find and increasingly retiring and becoming harder to find. And that's where our product portfolio or our offering is uniquely suited to meeting the demands of the future. And I think that gets accentuated when you think about digital. The magic of technology in our space is that it helps to take out waste, and it helps to enhance efficiency while sort of protecting the quality and the craft of what homebuilders do. We can assist. We can be a support structure for that. And I think it positions us exceptionally well to be part of what is ultimately the maturing of an industry to meet some of the challenges that we face right now. And that, to me, that's share wins. I absolutely believe that we are positioned to do that. We're certainly better positioned to do it in a growth environment. That's evident in our performance over the last decade. But I think, as you see and even in this tough market, we can hold our own, we can do well. And there are certain categories where we're doing very well. I'd say install continues to be a bright spot. There are certain aspects of value add, there are certain markets in value add, where we're continuing to outperform the competition in the market. It's just a little tough to see with all the headwinds right now.

Ethan Roberts, Analyst

No, that's very helpful. Can you elaborate on the technology investments you're making in the business? Specifically, how these investments might deliver significant incremental returns when demand rebounds compared to previous cycles?

Peter Jackson, CEO

Absolutely. The two main investments we're currently focused on are in the digital and technology sectors. One of these initiatives is Paradigm, which emphasizes AI. This effort enhances our team's ability to become the preferred partner by improving the speed, accuracy, and reliability of our estimates. Effective communication internally and with our customers is essential, as is understanding their needs and our capacity to meet them. A sophisticated tool like Paradigm, with its 3-dimensional digital twin and associated capabilities, significantly aids us in competing effectively in the marketplace, ultimately leading to market share gains. The second key investment is reflected in your adjusted EBITDA number related to our SAP initiative, known internally as Project Elevate. This initiative focuses on introducing modern software solutions to our operational management at the location level. While ERP implementations can be challenging, we initiated this project this quarter, and it has not significantly impacted our overall numbers yet. However, it is expected to lead to improved efficiency over time, enabling our team to be more capable, insightful, and effective in managing costs and delivering quality service consistently. These factors will enhance productivity, and we're committed to continuous improvement. When questioned about funding for these initiatives, our answer lies in the recognized opportunities and targets we are pursuing. While it may take time to see results—as is typical with large-scale projects—I am confident that there are substantial benefits ahead, which will positively impact our overall business.

Operator, Operator

We'll take our next question from Phil Ng with Jefferies.

Philip Ng, Analyst

Relative to your guidance last quarter, good to see strong 3Q results, better than expected, and you revised the outlook higher, particularly on single-family. So you believe last quarter, you had some insights on how perhaps your customers were pursuing land development and how they're managing production and whatnot. I guess, what new insights have you kind of picked up from your builder customers? And how much input they provide for your base case scenario for 2026? And then just to dig into that a little bit more, how do you kind of envision the shape of the year unfolding in your base case for next year?

Peter Jackson, CEO

Thanks for the question, Phil. I cannot provide specific details about next year's outlook, but I can share that this quarter's results reflect a mixed situation, with challenges coming from various directions. The political environment has become more complicated, particularly with housing being a major political topic. On the positive side, the Road Act and other initiatives have gained bipartisan support, and efforts are being made to address barriers that hinder affordable building, which have become entrenched in American society. However, political discussions can be tough for builders, and affordability remains an ongoing challenge for them. They are still facing high incentives on their side, and some major players recognize the difficulty, prompting them to adopt more aggressive strategies to move their inventory. While there is enough overall inventory in the market, new home inventory is high, and if it weren't for the depressed existing inventory, we would be more concerned. We are observing a slowdown in new home starts to ensure that inventories are better managed. Our results reflect this trend, and we have noted some stability at a low level, though there is widespread concern about uncertainty. Builders frequently express that their customers feel uncertain about tariffs, job stability, and the impact of AI. These factors contribute to the market conditions expected in the latter half of 2025 and early 2026. Despite this uncertainty, there is still optimism about the market's future, what can be achieved, and the value being provided. With some assistance in specific areas, I believe there is potential for growth based on our discussions with builders.

Philip Ng, Analyst

Okay. Super. And I appreciate that you guys want to be prepared and ready for a recovery from a supply standpoint capacity. When we kind of look at your normalized situation, call it, 1 million to 1.1 million starts, what type of capacity utilization does that imply? I know you guys kind of built this up during the pandemic. So in a muted demand environment, which we're seeing right now, is there more work to do on the capacity front? Because if I look at your deck where you show single-family starts over a 10-year horizon, I mean, 3 out of the 10 years, we're actually below your normalized level. So how do you kind of balance that dynamic going forward in terms of capacity and headcount and just costs going forward as well?

Peter Jackson, CEO

Yes, that's a great question. The short answer is that the high-level averages aren't very useful because they reflect both small markets with low capacity and large markets with no capacity, creating a misleading average. Our perspective on capacity is very much guided by local market conditions. When we analyze the results from the past five to six years, from 2019 to today, we see that production levels haven't reached dramatically high levels, and we still faced challenges. This has revealed opportunities to enhance capacity by understanding the shifts in where starts are occurring and where they need to be, as well as identifying how to better position our capacity within those markets. Our investments have been targeted and strategic, focusing on areas where we experienced constraints rather than a broad, uniform approach. In addressing the biggest issues, we have taken decisive action and positioned ourselves well. There remains some ongoing work, but I expect it to be less intensive than in the past few years as we await clearer indicators for the next phase of growth.

Operator, Operator

And we'll take our last question from Collin Verron with Deutsche Bank.

Collin Verron, Analyst

When you look at the factors that have made BLDR track below lag single-family starts in your markets, do you think that that's fully stabilized at this point so you'll track more in line with lag starts in 2026? Or are you anticipating more headwinds in '26? And if so, can you help quantify what those might look like as we look at BLDR single-family sales versus starts?

Pete Beckmann, CFO

Yes. Thanks, Collin. I think what we've tried to outline for you is that we are tracking with lag single-family starts at this point, taking into consideration the structural adjustments. If you're thinking about when on the face of the financial that will come true without having to do the additional adjustments, I think it depends on that stabilization of the home size and decontenting, which we're starting to see more of. But what's a little more difficult right now is some of the cost basis and inputs that we're seeing from our manufacturers and suppliers that are being challenged with given different market dynamics and affordability items. So we're going to continue to do our analysis the way we have, and we'll be happy to share with you on future calls. But we think that we're getting to a point where those structural adjustments are starting to get a little bit less impactful, but they're still in there for our reconciliation.

Collin Verron, Analyst

Great. That's helpful color. And then, I think you quickly mentioned some branch consolidation actions that you guys have taken. Any color as to like what the annual cost savings from these actions are? And just given the current demand environment, do you anticipate any further actions?

Pete Beckmann, CFO

We have closed 16 facilities this year and 30 last year, totaling 46 in the last 21 months. This is a standard practice for us, and we discussed it last quarter as well. We continuously assess where we have excess capacity. In connection with the previous question about capacity, we evaluate areas where we have surplus and rationalize that while prioritizing our customers’ needs. When we find that we can service a market more efficiently from a single location rather than multiple ones, we will proceed with those decisions. The excess capacity spans across various sectors, including multifamily truss plants that have experienced a pullback in demand. We have identified locations with reduced starts and recognized the need to minimize fixed costs. We will continue to assess this aspect consistently moving forward as part of our operations. Additionally, as we integrate acquisitions, we will seek the most effective ways to meet customer needs from appropriate locations where we may have overlaps. I hope this provides clarity, and we will keep addressing this topic as we progress.

Operator, Operator

We'll take our next question from Min Cho with Texas Capital Securities.

Min Cho, Analyst

Just 2 quick questions. So it's nice to see the good progression on sales and bids through your digital tools. Can you provide any update on the pilot? Have you expanded homebuilders into the pilot, and just kind of what they're using the most or getting the most value out of, and your expectations for the pilot kind of going into 2026?

Peter Jackson, CEO

Yes, I'm happy to talk about it. Today, because it's an end-to-end platform, the participation rates in different aspects of the tool are varied. I would say every piece of it is being used, which is good. Adoption levels for the simpler tasks are very high. Almost everyone is using it for invoice review, delivery, photos, and payments. A smaller group is using it for estimates and quoting, and another group is highly engaged with the home configure features and visualization tools. Customers are expanding the catalog within home configure for consumers to choose from. Some customers are using it as a virtual model home tool for rendering and drafting. Scheduling has been an interesting part since it's included functionality. Builders are using it when scheduling trades and managing the pace of the build. Those are some of the more common uses. A key point we've discussed before and will emphasize again is making sure our internal staff is well-trained and comfortable with the tool. We're seeing the value of a centralized repository, which acts as a library for builders to store their plans so we can access them for our work. We've observed significant increases in usage, which indicates that the pilot is likely to gain momentum. We'll have a booth at the IBS show this year, where you can see some of our latest developments. We're increasingly leveraging AI capabilities to improve quality, accuracy, and ease of use. We see a tremendous opportunity for improvement. We've added some great team members who are focused on this, and we believe we'll continue to deliver powerful tools that empower our team and enhance the customer experience, helping them tackle affordability challenges and construct higher-quality, more efficiently built homes.

Min Cho, Analyst

Great. And then lastly, just you've mentioned insulation, your insulation business in the past, and you mentioned it today as one of your value-added services. It seems like labor has not been that big of an issue for homebuilders right now. Can you just talk about the longer-term outlook for this business?

Peter Jackson, CEO

Yes, you're correct. In terms of installation, the labor situation has been somewhat of a relief. The key question that remains unclear is the impact of immigration. While there has been some stability in the labor market, there is downward pressure on hourly costs and possibly more labor availability than expected, though not as much as might be anticipated given our current position away from the peak. I've heard that there is a significant drag from the immigration efforts that have occurred. The real question will arise when demand increases, and we start looking to build more homes. The availability of labor for this work is uncertain right now, and it's too early to make predictions, especially with the reverse immigration trend and how individuals have withdrawn from the market. Time will tell. However, I believe this situation is likely to reinforce the importance of our value-add for builders over time. The better we can utilize skilled trade labor efficiently and deliver consistently high-quality results to builders, the more successful we will be. We have extensive experience in this area.

Operator, Operator

And this does conclude the question-and-answer session, and also, will conclude the Builders FirstSource Third Quarter 2025 Earnings Conference Call and Webcast. You may disconnect at this time, and have a wonderful rest of your day.