Heather Kos:

Good morning, and welcome to our second quarter 2024 earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. The earnings press release and investor presentation are available on our website at investors.bldr.com. We will refer to the presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable, and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings, and presentation. Our remarks in the press release, presentation, and on this call contains forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'll turn the call over to Dave.

Peter Jackson:

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

Operator:

Certainly. [Operator Instructions] We will go first to Matthew Bouley with Barclays. Please go ahead.

Peter Jackson:

Morning, Matt. Thank you for the question. Yes, so margins has been an important factor for us. It's changed a lot over the years. We certainly get a lot of questions on it. We're pleased with how margins have performed so far, right? We knew normalization was going to happen. We saw it coming particularly on the multi-family side, but we're certainly pleased with how it's progressed. If you look into the future, into the second-half of this year and into next year, more normalization is what we've outlined. And I think that we've been pretty clear about that. Hopefully no change in what expectations are. When it comes to '25 and the exit rate, so I want to be real clear, right, we don't have a crystal ball, we don't know. This is not intended to be guide for '25. We haven't done that work yet. But based on what we're seeing right now, we're coming out of this year at roughly 975 on starts, give or take. Based on that, we're kind of at that level of performance that we're guiding to, right in that 32% range. As you think about 2025 based on what we're seeing right now, we think it's probably another 100 basis points at this level, like if you just extend the line out you'd see another 100 basis points of headwind into 2025 made up of the two pieces you'd expect, right? About half of that is multi-family, and about half of that is core operations based on what we're seeing. So, we're definitely closer to the end than the beginning in terms of the normalization based on what we see. The multi-family is a story, no question. We think that if you look back to last year, we called out a little over 100 basis points of tailwind from multi-family. We'll give back 60, maybe a little -- right in that range basis points in '24, with the other 50 basis points coming in '25. That's probably about a couple hundred million dollars worth of EBITDA headwind from multi-family. And we feel like the rest of the business is performing really well, and we'll be in a strong position to overcome that as we get into '25.

Matthew Bouley:

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

Matthew Bouley:

Of course.

Dave Rush:

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

Peter Jackson:

Thanks, Matt.

Mike Dahl:

Hi, and thanks for taking my questions. Probably going to just follow-up on a couple things there, look, Peter, I know that it's not a practice of yours to give pinpoint estimate on margins or certainly not to give formal guidance a year out at this point in the year. But I just want to be crystal clear on your last comment about exit rate in '25 gross margin just because there's been so much handwriting over this. When you're talking about -- it seems like you're saying, "Hey, if my midpoint is 32% for this year, maybe my midpoint or my starting point in '25 is 31%." Or said another way, maybe my exit rate in 4Q of '24 is around 31% gross margin. Was that the intended message or could you clarify that a little bit more specifically on the 4Q gross margin here?

Mike Dahl:

Okay, yes, that's helpful. And look, I agree and appreciate the zooming out and the perspective about the, hey, even if we're talking about 31%, it's 31% at these depressed levels of volume, which is longer-term actually quite constructive. Just shifting gears, all this stuff around the mix, the complexity, I -- this is, I think, another part that's hard for all of us and investors to appreciate when we're building out a model that tends to be volume focused. And so, I guess when you're -- all the moving pieces there, is there a way for you to articulate, hey, it's all equal, what we're seeing on the mix changes and complexity changes to date or to hold, here's how much of a delta we think it would drive relative to, if I think my single-family starts are low single, is that a -- is it a low single-digit headwind against that? Is it a mid-single digit headwind against that, any, any help you could provide on just kind of ballparking that and would be great?

Dave Rush:

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

Dave Rush:

Thanks, Mike.

Rafe Jadrosich:

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

Rafe Jadrosich:

Thank you. That's helpful. And then, you had an -- in the prepared remarks, there's a comment that I thought was interesting. They're talking about how given the strength of the base gross margin, you sort of see more opportunity to go after profitable shares going forward. How do you think about how your market share trended is kind of in the first-half of this year? And do you expect any changes going forward? And does any of that have to do with some of the mixed impacts that you're thinking about? Have you seen Builders multi-source more? Has that been a headwind? And then going forward, do you expect to try to take market share? Like, what are your expectations there?

Rafe Jadrosich:

Thank you. I appreciate it.

Operator:

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

Dave Rush:

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

Dave Rush:

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

Trey Grooms:

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

Trey Grooms:

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

Trey Grooms:

Great. Thank you very much.

Operator:

We'll go now to Adam Baumgarten with Zelman.

Peter Jackson:

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

Adam Baumgarten:

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

Peter Jackson:

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

Peter Jackson:

Thank you.

David Manthey:

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

Peter Jackson:

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

Dave Rush:

Thank you, Dave.

Reuben Garner:

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

Reuben Garner:

Yes, it does. Thank you. That's helpful. And then, can you update us pre-2020, the way it would work is the builders would set up a contract that you guys I think, at the time it averaged somewhere between 60 and 120 days for the framing package, and during the last few years that strung significantly. Are we still -- the length of this contract is still in the 30-day range and lined up with inventory. Are we seeing that move that all with kind of the reset of the commodity market?

Dave Rush:

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

Reuben Garner:

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

Operator:

We will go now to Jay McCanless with Wedbush.

Peter Jackson:

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

Peter Jackson:

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

Peter Jackson:

Thank you.

Steven Ramsey:

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

Steven Ramsey:

Excellent, thank you.

Operator:

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

Heather Kos:

Good morning, and welcome to our first quarter 2024 earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, 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.

Moving to Slide 5. We're off to a strong start on our strategic initiatives. Our full digital product launch at the International Builders' Show in February was an exciting milestone. At a high level, our digital tools do 3 things:

one, solve customer pain points; two, make it even easier to partner with us and our suppliers; and three, help us gain incremental business from new and existing customers. It's a win-win, and we're excited about how everything is going so far after the launch.

Peter Jackson:

Thank you, Dave, and good morning, everyone. Our first quarter results demonstrated the effectiveness of our strategy and operating model. We are maintaining our fortress balance sheet and prudently deploying capital to the highest return opportunities. We've included acquisitions and share repurchases during the quarter. We are leveraging our sustainable competitive advantages and strong financial position to drive future growth and value creation for our customers and shareholders.

David Rush:

Thanks, Peter. Let me close by summarizing how we're set up to drive long-term profitable growth by executing our strategic pillars. We believe we are the unquestioned leader in addressing our customers' pain points through our focus on customer service, value-added products and install services. Our industry-leading digital innovations are bringing greater efficiency to homebuilding and will win us new customers and grow wallet share along the way.

Matthew Bouley:

I'll start out on the second quarter. I'm wondering what's implied in the second quarter gross margin. It seems that you're kind of moving into that full year range of 30% to 33% in the second quarter, but correct me if I'm wrong. I know we're talking about normalization in both multifamily and the core, so within that second quarter gross margin, can we say that the over earn in both multifamily and the core is entirely rolled off or not yet entirely rolled off. So would there be sort of more to come beyond the second quarter?

Peter Jackson:

Yes, it's the latter. You should expect a consistent decline from multifamily throughout the year. It's a long lead time product category. We've got pretty good visibility to what we're expecting to see. There's certainly a bit of slippage from one month to the next in any given period. But I think what we're seeing and expecting in multifamily is another big decline in Q2 and sort of a consistent year-over-year decline throughout the end of the year. We'll, of course, update you as we learn more.

Michael Dahl:

I want to ask, I guess, is effectively a follow-up there. When we think about what's implied for the second half, if we look at the 1Q results and 2Q, directional color, at the midpoint, it requires double-digit top line growth and kind of 15% EBITDA margins. And the high end would be kind of like mid-teens top line growth and 16% EBITDA margin, both of those, just given the multifamily decline, your comments just now about further normalization in gross margin. It kind of seems difficult. So maybe you can help us there. I guess it's a roundabout way of asking more directly. When you look at the full year guide, is there a point in the range that you think you're leaning more towards at this point, like midpoint or lower or midpoint or higher. Maybe just help us understand how that's evolved.

Michael Dahl:

Okay. Got it. And then shifting gears just to capital deployment and maybe specifically the buyback. I mean you've got plenty of liquidity. Your leverage is low. The buyback was really just nominal this quarter for the first time in a while. What can we take away from that? And maybe anything more specific about how you envision deploying capital through the year?

Operator:

And we have our next question from Trey Grooms with Stephens.

David Rush:

Yes. Thanks, Trey. What I would tell you is multifamily in specific, some of that backlog is getting extended. So where at one point in time in the year, I may have thought more of those jobs would finish quicker. They're spread now. It's actually a good thing. It kind of smoothed that transition for us in one way. The other thing I'd tell you about multifamily, our team has done a great job going after pseudo multifamily.

Trey Grooms:

Got it. All right. Well, I appreciate it. And hearing that you're very confident in the guide and being able to reiterate it is encouraging. So -- we appreciate it, and thanks. Good luck for the rest of the quarter.

Operator:

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

Peter Jackson:

Yes. So I would tell you right up front that commodities are where the war is happening. That's where the fight is. It's where historically, you've got the most aggressive players. You've got the most dynamic pricing, the volatility of it. I think what you're seeing in the numbers is really just around timing. A little bit of shift in terms of when we saw the OSB run versus when we were feeling it. That will come through at different points during the year. But I would expect sort of us to be pretty much done with the bad news around the prices of commodities.

Rafe Jadrosich:

Got it. Very helpful. And then just on SG&A, there was some deleverage in the first quarter. How should we think about that going forward here, especially if sales turn in the second half of the year? And then just remind us of the base in terms of incentive comp from last year, do you have an easier comparison there and how we just about leverage versus what you have done historically?

David Rush:

The only thing I'd add is our highest variable cost obviously is our labor. And the field and the team have done an exceptional job keeping labor as a percent of gross profit, which is our key metric, right in line with our operating -- within the parameters of what we set for ourselves in this level of sales and activity and our tools for managing that cost are as good as they've ever been in my 25 years with the company. So the key factor for us in managing SG&A is how well we manage our labor down at the field level, and they've done exceptional at that since the beginning of the year.

Keith Hughes:

The question on the windows and doors segment. It was down 2%. You talked about some product costs declining. Can you talk about that a little bit more, which product and is that selling prices declining or inputs, any kind of details would be great.

Adam Baumgarten:

Can you talk about what you're seeing from a non-commodity pricing perspective? And maybe specifically on the manufactured product side?

Adam Baumgarten:

Your pricing to customers.

Peter Jackson:

Well, I was happy to say Q2 up until Houston got buried or flooded out. Generally, it takes about quarter to a quarter and a half to catch back up. It doesn't unfortunately just whipsaw back the other direction, but that's probably a reasonable way to think about it, 3 to 4 months.

Stanley Elliott:

can you all talk a little bit about what you're seeing on the services piece, some very strong numbers, up 17%. Is this kind of reflection of your efforts to take it into new markets. Is this existing your -- more services with some of your existing customers. And then I guess secondly, how should we eventually take it up -- this as either attach rate or pull through on some of the other things you're doing on the manufactured side?

David Rush:

It's a little, it depends on the product category first of all. But the national builders certainly like the install solution wherever they can apply it.

Peter Jackson:

And to Dave's point, we do see a higher level of adoption of our value-added products to the larger players just generally.

Operator:

And we have our next question from Collin Verron with Jefferies.

Peter Jackson:

Yes. So I don't think I can give you the detail -- thank you for the question. I'm not sure I can give you the breakdown necessarily exactly what you're looking for. What I can tell you is on the mix side, it's an expectation that we're going to see a trend back to normal mix. I don't think that's much of a stretch, right? So what we're seeing right now is more of our growth being in the pure commodities and the truss and the relationship between just those 2 categories, biases it towards the commodities. And commodities like I was saying before, is where we've had the most aggressive normalization.

Peter Jackson:

We won't get that precise, but I think our strategy has not changed, right? The way we look at the market, where we're successful, where we can add the most value are all variables in the discussion. But I think that there's -- there are always a million rumors about what may or may not trade. I think for us, it's imperative that we stay disciplined and we stay focused. What's exciting is, as it stands today, we see a lot of assets out there that fit that screen, and now we just got to see if we can get them across finish line.

Tyler Batory:

A question on the competitive environment. Are you seeing some of the smaller players out there may be trying to get more aggressive to take market shares. Is that having an impact on your performance and on your business?

Tyler Batory:

Okay. Very helpful. And then a quick follow-up on the R&R side of things, down 5% in the quarter. I think weather probably impacting that. What are you seeing here in the second quarter, and there are a lot of differing views on the R&R end market out there? Just share your confidence in terms of your growth outlook this year in that end market.

Operator:

And we have our next question from David Manthey with Baird.

Peter Jackson:

Dave, yes, we're excited about digital. I don't unfortunately have user numbers. I might be able to get them for you, but I don't have them off the top of my head. It's going up. We're seeing that. They were -- gosh, I don't know what it was 500 or 700 leads that we took out of IBS. We've got a lot of customers as we do our adoption and our rollout around the country that are coming on board. While most of them are mid to smaller-sized builders. The profile, I think, that you're talking about are those that are leaning into digital and technology to be able to make themselves more efficient and more professional and better with their customers.

Operator:

And we have our next question from Jay McCanless from Wedbush.

Peter Jackson:

Yes, pretty similar. I think that the West got hammered out of the gate, and they bounced back really nicely, a little more stable through the other 2 regions. But yes, I think that's been pretty consistent. We have to see how this whole weather thing in Houston plays out. But for the time being, it's pretty good.

Peter Jackson:

We didn't see a lot of unusual behavior in the market, no. Tough for us to see that from others perspective, but it's a strong I would think generally a strong and a stable market. So I don't know how people made bets with regard to where stuff was moving.

Ketan Mamtora:

Peter, just one question. You've talked quite a bit about margin normalization and multifamily. On the core organic, the single-family piece, do you think at this point, we are sort of towards the end of that normalization, midway through? How would you characterize that? And are the competitive dynamics in that side of the business changing at all, given sort of pressure on EWP prices, given where lumber is today. Just curious to get your thoughts.

Operator:

And it appears we have reached our allotted time for the question-and-answer session today. That will conclude today's program. Thank you for your participation. You may now disconnect.

Heather Kos:

Good morning. And welcome to our third quarter earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. The earnings press release and investor presentation are available on our website at investors.bldr.com. We will refer to the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes and they should be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentation. Our remarks in the press release, presentation and on this call 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 Dave.

Peter Jackson:

Thank you, Dave, and good morning, everyone. Our results throughout the year demonstrate the effectiveness of our operating model regardless of the macro environment. Our fortress balance sheet, strong cash flow generation and ability to prudently deploy capital to the highest return opportunities, including acquisitions and share repurchases, continues to deliver value and positions us for long-term success. We are leveraging our sustainable competitive advantages and strong financial position to drive future growth and create value for our shareholders. I will cover three topics with you this morning. First, I'll recap our fourth quarter and full year results. Second, I'll provide an update on capital deployment. And finally, I'll discuss our full year 2024 guidance and related assumptions. Let's begin by reviewing our fourth quarter performance on Slides 10 and 11. We delivered $4.2 billion in net sales, driven by a 1% decline in core organic sales and commodity deflation of 5%, partially offset by growth from acquisitions of roughly 2%. The core organic sales were driven by a single-family decline of 4% amid a weak housing market and share in supply chain normalization. That said, there are signs that the single-family market is starting to pick up. Our early cycle products are beginning to show growth, including high single digits growth in lumber and mid-single digits growth in truss. Multifamily grew by more than 4% driven by our prior year acquisitions as well as favorable margins. R&R and other also grew by over 4% due to increased sales focus and capacity versus 2022. Importantly, value-added products represented 52% of our net sales during the fourth quarter, reflecting our position as the supplier of choice for these higher-margin products. During the fourth quarter, gross profit was $1.5 billion, a decrease of approximately 1% compared to the prior year period. Gross margins were 35.3%, increasing 120 basis points mainly due to productivity and a tailwind from multifamily, partially offset by core organic margin normalization. SG&A increased by $60 million to $974 million, mainly due to higher variable compensation, acquired operations and inflation, partially offset by lower customer reserve expenses. As a percentage of net sales, total SG&A increased 150 basis points to 23.5%, primarily attributable to decreased fixed cost leverage from lower sales. Adjusted EBITDA was $686 million, down approximately 2%, primarily driven by lower net sales due to a weak housing market and commodity deflation. Adjusted EBITDA margin was 16.5%, up 50 basis points from the prior year as we continue to execute and drive improved productivity across the business. Adjusted net income of $439 million was down $32 million from the prior year due to lower net sales. Adjusted earnings per diluted share was $3.55, an increase of 11% compared to the prior year. On a year-over-year basis, share repurchases added roughly $0.55 per share for the fourth quarter. Now let's turn to our cash flow, balance sheet and liquidity on Slide 12. Our 2023 operating cash flow was approximately $2.3 billion, down $1.3 billion compared to the prior year period, mainly attributable to commodity deflation and a shrinking housing market. Capital expenditures for the year were $430 million, all in, we delivered healthy free cash flow of approximately $1.9 billion. For the year, our free cash flow yield was approximately 13% while operating cash flow return on invested capital was 28%. Our net debt to adjusted EBITDA ratio was approximately 1.1x, while base business leverage was 1.4x. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was approximately $1.3 billion consisting of $1.27 billion and net borrowing availability under the revolving credit facility and $70 million of cash on hand. Moving to capital deployment, during the fourth quarter, we repurchased approximately 1.6 million shares for $209 million at an average stock price of $131.74 per share. For the full year of 2023, we repurchased nearly $1.8 billion of shares at an average price of $100.49 per share. As Dave mentioned, the Board approved the repurchase of up to $1 billion of common stock, inclusive of the approximately $200 million remaining on the prior share repurchase plan authorized in April of 2023. We remain disciplined stewards of capital and have multiple paths for value creation to approve an ability to deploy capital and deliver high returns. Now let's turn to our outlook on Slide 13. For full year 2024, we expect total company net sales to be $17.5 million to $18.5 billion. We expect adjusted EBITDA to be $2.4 billion to $2.8 billion. Adjusted EBITDA margin is forecasted to be 14% to 15%, and we are guiding gross margins to a range of 30% to 33%. Our recent above normal margins reflect a greater mix of value-added products, along with the disciplined pricing required to offset increased operating costs. As we move through the year, we expect both our gross margins and the multifamily business to continue to normalize. We expect full year 2024 free cash flow of $1 billion to $1.2 billion. The change from 2023 is primarily due to an expected $500 million year-over-year decrease due to working capital as we move from shrinking to growing sales. The free cash flow forecast assumes average commodity prices in the range of $400 to $440 per 1,000 [indiscernible] our 2024 outlook is based on several assumptions. Please refer to our earnings release and Slide 14 of the investor presentation for a list of these key assumptions. As you all know, we do not typically give quarterly guidance, but we wanted to provide directional color for Q1. On a year-over-year basis, we expect Q1 net sales to be flat to down low single digits as we have lost roughly two days of sales due to inclement weather conditions at the start of the year. Year-over-year adjusted EBITDA is expected to be down high teens to low 20s in Q1 given the impact of extreme weather and continued margin and share normalization. We expect our sales to rebound as the severe weather conditions subside. Regardless, we remain optimistic for a healthy housing market in 2024. Turning to Slides 15 and 16. As a reminder, our base business approach showcases the underlying strength and profitability of our company by normalizing sales and margins for commodity volatility. This helps to clearly assess the core aspects of the business where we have focused our attention to drive sustainable outperformance. Our base business guide on net sales for 2024 is approximately $17.6 billion. Our base business adjusted EBITDA guide is approximately $2.4 billion at a margin of 13.5%. As I wrap up, I want to reiterate that we are confident in the near-term outlook, our exceptional positioning to execute our strategic goals and our ability to create shareholder value in any environment to support profitable growth. With that, let me turn the call back over to Dave for some final thoughts.

Operator:

[Operator Instructions] We'll go first to Matthew Bouley with Barclays.

Peter Jackson:

Thanks, Matt. Your points are all accurate. I think that we've done a really nice job in the value-add sector. I think we've managed pricing in a disciplined way. We certainly have done a good job on productivity and continuing to execute in that category. And certainly, a portion of that hits gross margins, not all of it. What I think is continuing to happen, and I know this is a consistent theme from us, but we want to continue to be candid with investors. There is a normalization that we're seeing in the core and there's a normalization or maybe a recognition of a cycle in multifamily. Those are the two really big components driving the ongoing normalization that we expect in 2024. So multifamily, as we look at it, certainly a dynamic market, but there's been a pullback, right? A lot of multifamily units were put in the ground. Over the last few years, the backlog has been very full, very healthy, and we've done very, very well. There are clear signals both in the broader market and in our numbers that multifamily is normalizing. It's pulling back, and it's going to pull back pretty aggressively. We expect we'll start seeing that in sort of Q1 based on the latest information, and it will hit us all year. So certainly, multifamily is a good business, but there's a headwind there associated with that business shrinking. And we continue to see in pockets around the country, the normalization of margins in a competitive environment, right? We're well below what we would consider to be normal starts, normal single-family starts in this industry. So it's competitive out there. And there are certain markets where we've had to get aggressive, and we'll continue to do that to protect our position and to win in the market and to be the customer of choice. We don't think it's putting us outside of that communicated range for gross margin, but certainly expect that to continue to erode as the year progresses.

Peter Jackson:

Thanks, Matt. You're right. We are anticipating a fairly modest market tailwind this year, which obviously is appreciated, and we'll put to good use. But we are challenging ourselves as an organization in a couple of key areas. A big one that we talked a lot about is digital. We're really excited about what this product is going to do for us in terms of attracting and enhancing our relationships with customers, we think there's real value there. So we're putting that in our number. We also are continuing to invest as you see in value add. So we've got new capacity in the ground. We've got new equipment. We've got a new ability this year that we didn't have last year to provide those types of high-value impactful products to our customers. So we expect growth from that. And we're certainly confident in our team. We've got -- we need to be the best team in the industry, and we think we can win in the market. So those three things really kind of combined to give us the confidence to put out a number there that really represents share growth ultimately.

Operator:

We'll turn now to Mike Dahl with RBC Capital.

Peter Jackson:

Absolutely. So you're right, Mike. This is a light year for us. The way that the numbers show, the comp looked obviously pretty dramatic on a year-over-year basis. We're down a little bit on the EBITDA number due to that multifamily step down. But the change going from a business that's shrinking. And as you know, we spent off a tremendous amount of cash as the business shrinks to turn to an increasing sales environment. And we use working capital when we grow. That sort of turn for us showed large in the numbers. But that headwind that we would expect to see related to growth is generally going to be a little bit smaller in a normal growth year than in a turn year. The turn year is always a big number when it goes from one to the other. So we do anticipate it to be a little bit higher in a normal year. And as we laid out in our Investor Day, there's a cumulative benefit that we expect to deliver on, and that commitment hasn't changed.

Joseph Ahlersmeyer:

Hey, good morning guys. Congrats on the results. So is it right to think that if we've got the headwind from weather in 1Q, we're going to be probably pushing those sales more into 2Q. I'm just trying to think about the phasing of sales for the remainder of the year.

Joseph Ahlersmeyer:

And then looking at your guidance for the all-in business and the base business, is it right to think about the commodity element of this as a full normalization of the multifamily? Are we getting sort of all of both the commodity normalization and market normalization in these '24 numbers? And then maybe if you could just talk about going forward, the opportunity within multifamily kind of between the five and below units versus the much larger projects?

David Rush:

And I would tell you, you're exactly right; our sales teams that have focused on the larger projects partly because their customers are also looking for opportunities in the smaller projects that still qualified technically as multifamily or light commercial. We're all focused on those opportunities and those will help us bridge that headwind a little easier for the rest of the year. But it still takes a little bit of time for those projects to get out of the ground. And the timing of that makes it a little difficult, but only focused on that opportunity.

Trey Grooms:

Hey, good morning, Dave and Peter. Peter, you mentioned that there's -- you're seeing some evidence of residential starting to turn around. And I think you noted seeing high single-digit growth in lumber and low single-digit growth in truss. I guess what's the timing you're referring to there? Is that since January? Just some color on the time frame there? And then secondly, is there any reason why truss would be trending slower than lumber? I mean I didn't know if there would be anything going there from a mix standpoint or something? I would just assume value add would at least stay in pace with lumber or maybe outpace, just any color there?

David Rush:

I mean, lumber and truss go hand-in-hand together, but value-added is more than truss. I think that's the thing you get from the mind. So value added is later in the process.

Rafe Jadrosich:

Hey, good morning, very thanks for taking my question. The last quarter, you provided a scenario framework for 2024 on different macro assumptions and then what that would mean for your earnings? Are you -- should we still sort of be comfortable with that. So it starts tracking that 8% to 14% range on the single-family side and lumber is at $4.25 to $4.75. Would you still be looking for $2.7 million to $3.1 in EBITDA? Or has something else changed in the market where we should be thinking about upside or downside to those scenarios?

Rafe Jadrosich:

That's really helpful. And then just as you look at the gross margin guidance for this year, is it 30% to 33%. And it's really in line with your long-term target despite single-family starts that are tracking below. I think the long-term assumption is $1.1 million. As we look forward here, if you have years where the starts are below that target, do you think you'll be able to do gross margin kind of above 30%? Or is there something unique to '24 that's keeping it higher? Is that just because you still have some multifamily that's flowing through?

David Rush:

And what I would add is our belief in the resilience of that range and the fact that we can hold within that range is our belief in our value-added product portfolio and solutions. Those are the products that are more valuable to our customers and as a result, more have a better margin opportunity for us. And as we continue to grow that as a percentage of our overall sales is always going to help that gross margin number be more resilient.

Keith Hughes:

I don't think your projection here is aligned with what's thought in the market, just specific to Builders First Source. When do you think this is going to really start impacting your business? And if you talk about the unit loss versus margin loss that's been such a positive for '23, that would be helpful.

Operator:

We'll turn now to Collin Verron with Jefferies.

Peter Jackson:

I mean I would say, if you're thinking about our multifamily business, you do have to go back in the rearview mirror a bit, right, in the turn-around what we build, and this is the problem in terms of everybody being able to use the sort of publicly available information. It's a little bit more specific both to markets and what we're building. However, I think what we're seeing right now is that the expected downturn throughout 2024, kind of thought it might hit late in 2023, didn't. I think people were pretty aggressive at trying to get the multifamily projects completed. So we actually saw a nice pull through a little better than we thought of that business in the fourth quarter, but definitely seeing it turn down starting in Q1 in every quarter during the year, you'll see for the multifamily business. Meaningful declines in both sales and margins as the year progresses. Still a really good business. It's just not sort of performing at those two standard deviations above normal levels anymore.

Collin Verron:

And then I just wanted to touch on productivity, which continues to be a pretty meaningful tailwind for you guys. Can you just talk about the projects you're looking to benefit from in 2024 and maybe the size of the project pipeline beyond 2024?

Operator:

We'll go next to Adam Baumgarten with Zelman.

Peter Jackson:

Sure, a little. But I mean scale-wise, we're 5x, 10x, 20x their size. So if they're adding one or two plants in certain markets, we know how to deal with it.

Adam Baumgarten:

And then just thinking about the M&A environment, are you seeing more willingness by acquisition targets to sell at this point given the improved outlook?

Operator:

We'll go now to Ketan Mamtora with BMO Capital Markets.

Peter Jackson:

Yes. The weather is modest. I think it's two to three days in terms of what we are anticipating in terms of a headwind. So that's not a huge deal. In general with the exception of that component, you've got pretty healthy business, both on a year-over-year basis and on a trending basis. So I think that's a positive. What you are seeing, though, and I think it's fair to point it out is the year-over-year lapping of what we've been talking about. I think you've heard me talk about that normalization of margins. And I've been pretty adamant that behind the scenes, regardless of this multifamily curing it, we have seen business getting back to normal in terms of the supply chain normalizing and are negotiating in the competitive environment, things just settling back down to a more normal level. And you're seeing a little bit of that in terms of the year-over-year again, still a very good number, still a very strong performance for the business, but more in line with what we would expect going forward.

Operator:

[Operator Instructions] We'll move next to Dave Manthey with Baird.

Peter Jackson:

Yes, that's fair to say. You're right. We've seen improvements across the Board in terms of margins. Some of that very simply to cover the inflation and the incremental cost, but we have certainly seen an increase and I would also point to our productivity as a driver for why value add has extended its differentiation from commodity. Those Dave referred to $100-plus million worth of investment and the efforts we've put around our team to improve our internal board [indiscernible] hour, our doors per man hour type of productivity metrics has contributed to a bigger differential between value add on average and commodity.

James McCanless:

Hey, good morning everyone. So my question is on the outlook for R&R. I think, up low single digits probably a little bit better, I'd say, than what some of the other national forecasters are expecting. Is that acquisitions driving that? Or do you feel like in those specific markets, you can actually see growth above what people are expecting? .

David Rush:

Also, I think, taken advantage of capacity availability to lean into it as well, and that's a different component than others might have.

James McCanless:

And just one other quick question. I think the $200 million you called out, Dave, in terms of incremental digital sales this year. Maybe talk a little bit more about that, what that's going to look like and why you all feel like -- I think this is new guidance for you guys, just kind of why you wanted to talk about that now and what those incremental sales would look like, please?

Operator:

We'll go next to Kurt Yinger with D.A. Davidson.

Peter Jackson:

Yes Kurt, thanks for the question. So the short answer is we expect the sales pull-through to be pretty consistent with what we're already selling. The costs associated with the digital tools and the development, the rollout and even largely the support is included in the numbers. It's really been spent over the past few years. So there's no -- there's no other material that you're going to see in terms of deltas. The thing we're going to keep a close eye on is what is the support infrastructure necessary to make sure we have the right level of customer experience. We think we have an eye on it, but that's probably the only one that could potentially increase if this really picks up quickly. Again, I don't think it will be big enough to really hit the radar for anybody, even if that were to happen, just based on the service model that we've built out. It's really all about that incremental sales being pulled through from incremental share of wallet and new customers that really like being able to utilize these modern digital tools.

Steven Ramsey:

Wanted to hold in on the installation sales, which at the Investor Day, you estimated at 15% of 2023 sales. I guess, first, is that about where it landed last year? and then thinking for 2024, is there an expectation that installation sales can grow on an absolute basis and where that lands as a percent of the total base business?

Operator:

We'll go next to Jeffrey Stevenson with Loop Capital.

Peter Jackson:

Well, we already saw that in the last part of the year for EWP. I don't know that we'd see too much more of that going forward. And I would call it more supply chain normalization than I would significant deflation. I think they're still challenged with a lot of inflationary operating costs that we all are. So I don't expect that they're going to be able to significantly reduce price. I think it's more holding than where it is right now that we're expecting and hoping for. But quite frankly, it wouldn't surprise me if inflation cause is even price increases going into the year.

Heather Kos:

Good morning. And welcome to our third quarter earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. The earnings press release and investor presentation are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes and they should be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentation. Our remarks in the press release, presentation and on this call 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 Dave.

Peter Jackson:

Thank you, Dave, and good morning, everyone. Our third quarter results demonstrate the effectiveness of our operating model in the face of macro volatility. We are maintaining a healthy balance sheet and prudently deploying capital to the highest return opportunities, which included share repurchases during the quarter. We are leveraging our sustainable competitive advantages and strong financial position to drive future growth and value creation for our shareholders. I will cover three topics with you this morning. First, I’ll recap our third quarter results. Second, I’ll provide an update on capital deployment. And finally, I’ll discuss our full year 2023 guidance and 2024 scenarios. Let’s begin by reviewing our third quarter performance on slides 10 and 11. We delivered $4.5 billion in net sales. For organic sales decreased by 14%, driven by a 19% decline in single-family due to slower demand over the prior year, supply chain normalization and commodity deflation of approximately 9%. Multifamily grew by over 6%, driven by our recent acquisitions, as well as favorable margins, largely attributable to the longer lead time for this end market. R&R and other grew by over 1% amid increased sales focus and capacity versus the prior year. The cumulative effect of our acquisitions over the past year contributed approximately 3 percentage points of growth to net sales. Importantly, value-added products represented 51% of our net sales this quarter, increasing 6 percentage points since Investor Day in Q4 2021. This reflects our position as the supplier of choice for these higher margin products. During the third quarter, gross profit was $1.6 billion, a decrease of approximately 22% compared to the prior year period. Gross margins were 34.9%, decreasing 10 basis points due to normalization in core organic gross margins, offset by roughly 125 basis points of our previously discussed multifamily over earning. SG&A decreased $61 million to $940 million, mainly due to lower variable compensation, partially offset by additional expenses from operations acquired in the last year and inflation. Acquisitions increased SG&A by $34 million in the quarter. As a percentage of net sales, total SG&A increased by 330 basis points to 20.7%, primarily attributable to decreased fixed cost leverage from lower sales. We remain focused on operating efficiently, containing costs and effectively integrating acquisitions. Adjusted EBITDA was approximately $813 million, down 31%, primarily driven by lower net sales due to a weaker housing market and commodity deflation. Adjusted EBITDA margin remained a robust 17.9%, up 90 basis points sequentially as we continue to execute and drive improved productivity across the business. Adjusted net income of $534 million was down $280 million from the prior year quarter. The 34% decrease was largely due to lower net sales. Adjusted earnings per diluted share was $4.24, down 19%, compared to $5.20 in the prior year period. On a year-over-year basis, share repurchases added roughly $0.83 per share. Now let’s turn to our cash flow, balance sheet and liquidity on slide 12. Our third quarter operating cash flow was approximately $665 million, down $835 million, compared to the prior year period, mainly attributable to commodity deflation and a weaker housing market. Capital expenditures were $128 million. All in, we delivered healthy free cash flow of approximately $538 million. For the trailing 12 months ended September 30th, our free cash flow yield was 14.1%, while operating cash flow return on invested capital was 32%. Our net debt to adjusted EBITDA ratio was approximately 1.1 times, while base business leverage was 1.5 times. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was approximately $1.1 billion, consisting of $1 billion in net borrowing availability under the revolving credit facility and $100 million of cash on hand. Moving to capital deployment, during the third quarter, we repurchased approximately 1.7 million shares for $224 million at an average stock price of $136.22 per share. Year-to-date, we have repurchased nearly $1.6 billion of shares at an average price of $97.43 per share. We have approximately $400 million remaining on our most recent $1 billion share repurchase program, approved in April of 2023. We remain disciplined stewards of capital and have multiple paths for value creation through a proven ability to deploy capital and deliver high returns. Now let’s turn to our outlook on slide 13. Given affordability headwinds, our Q3 sales were a little softer than expected. However, the October sales trend was seasonally healthy, and our focus -- our continued focus and execution gives us confidence that we will achieve our full year base business and total company EBITDA guidance for 2023 that we outlined in our second quarter earnings call. For full year 2023, we expect total company net sales to be $16.8 billion to $17.1 billion. We expect adjusted EBITDA to be $2.7 billion to $2.8 billion. Adjusted EBITDA margin is forecasted to be 15.8% to 16.7%. We are guiding gross margins to a range of 34% to 35%. Our recent above-normal margins reflect a greater mix of value-added products, along with disciplined pricing required to offset increased operating costs. As we move through the end of the year, we expect both our gross margins and the multifamily business to continue to normalize. We expect full year 2023 free cash flow of $1.8 billion to $2 billion. The free cash flow forecast assumes average commodity prices in the range of $400 to $425. Our 2023 outlook is based on several assumptions. Please refer to our earnings release and slide 14 of the investor presentation for a full list of these assumptions. Turning to slides 15 and 16, as a reminder, our base business approach showcases the underlying strength and profitability of our company by normalizing sales and margins for commodity volatility. This helps to clear -- to clearly assess the core aspects of the business where we have focused our attention to drive sustainable outperformance. Our base business guide on net sales is $16.4 billion. Our base business EBITDA guide is $2.2 billion at a margin of 13.5%. Moving to slide 17, we recognize that 2024 is coming into focus as we approach year end. Like we did earlier this year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions. I want to emphasize that this is not full year guidance for 2024, but these scenarios should help clarify our range of performance expectations for 2024 and demonstrate the strength of our best-in-class operating platform. As I wrap up, I want to reiterate that we are confident in the near-term outlook, our exceptional positioning to execute our strategic goals and our ability to create value in any environment to support profitable growth. With that, let me turn the call back over to Dave for some final thoughts.

Operator:

Thank you. [Operator Instructions] And our first question comes from Matthew Bouley with Barclays.

Dave Rush:

Yeah. Thanks, Matt. Appreciate the question. As you know, the multifamily projects have a longer life cycle, tend to be 19 months to 18 months. So what we’re seeing in the backlog right now is healthy and will carry us through the first quarter of next year. What’s changing, the dynamic that’s changing a bit is the projects, the new projects are slower to come to market. We believe there’s going to be a pause in some of the multifamily as the market digests what’s coming, what’s completing throughout this year and as they figure out the right balance between cost of capital and rents and what return they can get on the rents, we just think there’s going to be a temporary pause and then things will start up again at the tail end of 2024. But again, because there’s such a long cycle for those projects to get into the ground, we won’t necessarily see that effect in 2024. So we’re forecasting for multifamily to be off in 2024 as a result.

Matthew Bouley:

Got it. Okay. Thanks for that, guys. Very helpful. And then second one, the -- I’m sticking on the framework here. On the single-family side, I guess, it’s two parter. Number one, the low end of a down 4%, just given where interest rates are and a lot of the questions out there, the question is effectively why not outline a lower end? And in that scenario of a lower end, would you be able to kind of push any harder on cost out? So that’s kind of part one of the question. And then part two is just, given the sort of mid-teens EBITDA margin you’re guiding to, I guess, what is the sort of implied gross margin in that? I know there’s a lot in there, but thanks, guys.

Matthew Bouley:

Sure.

Dave Rush:

And just to add, Matt, it’s continued to drive costs out of the business that don’t add value, the benefit of our platform and the fact that we’ve done the hard work in the last two years to integrate these companies. We have a 30-year average experience with our field leadership group. They know what to do, when to do it and how to manage those costs effectively to maximize whatever is presented to us. And we’ve identified a lot of opportunities to continue to focus on productivity and where we are now is we don’t have to keep reinventing those opportunities because our scale allows us to push that across the platform and we have plenty of runway to take existing ideas in the markets that we haven’t been able to push those ideas yet just because of our scale and find -- keep finding dollars to save.

Peter Jackson:

We won’t give anything specific, but I think it’s fair to say we do expect to see normalization into 2024, that pullback, the reversal of the multifamily in particular. But overall, that normalization theme, I think, applies to margins as well.

Dave Rush:

Thanks, Matt.

Operator:

And we have our next question from Trey Grooms with Stephens.

Dave Rush:

Hi.

Peter Jackson:

Sure. I can get started. I’m sure Dave will have a commentary as well. But the year has been a good year, right? We had that big reset at the beginning when the builders decided where their new rates would be, and it’s been very stable. I think we did expect there to be a little bit more volume in the third quarter. We thought there’d be a little bit of a push. Certainly the commentary from the large nationals was very strong and for a variety of reasons, whether it be tone or weather or whatever the factors were, it just wasn’t as good as we expected. Our performance was still quite good. We’re certainly pleased with our profitability. But as we look at the way the year has played out into the fourth quarter, it’s still healthy. The strength of the business continues and we’re pleased with that ability to continue to see good flow through on the sales side, despite some of the headlines that sort of have gotten everybody so concerned.

Trey Grooms:

Okay. Got it. Thanks for that. And then, the full digital rollout coming up soon, any color on how that plays into your scenario analysis for next year that you rolled out?

Dave Rush:

The development is right on track. We had a preview this week, in fact, of some of the features and that continued to be wowed by our development team. But it’s changed, it’s not only changed for the customers we’re going to introduce it to, but it’s changed for our people. And we want to make sure we do this the right way, the prudent way, methodically, making sure the adoption goes the way we want, because we really only get one bite at this apple. And we want to make sure that what we do is the best way for us to ensure success. But what we’re showing people, you’re going to be impressed by. I can’t wait for you guys to see it when you get to it live.

Peter Jackson:

Thanks, Trey.

Joe Ahlersmeyer:

Thanks, everybody. Quickly on the 2024 scenarios, I’m just wondering if you could add some context on the revenue assumptions here, because if you take the single-family starts numbers and kind of take that on your base business revenue, your output on sales would be much higher than that and I get there’s other things in there. You’re giving the commodity assumptions, though, and I don’t think M&A is that significant carryover into next year and you’re talking about multifamily down. So what I guess I’m getting to is there seems to be sort of like a mid-single-digit type outperformance to the starts volume. Wondering if you could just touch on whether you think that’s actual price or if you’re baking in some outperformance versus that volume?

Joe Ahlersmeyer:

That’s great. Very encouraging. And then you mentioned sort of getting these ranges from economists’ discussions. What about your discussions for 2024 with the large builders and even small and regional builders? And then just wondering if you could touch on any differences in outlook between those two groups into next year?

Joe Ahlersmeyer:

Very good. Thanks a lot, everyone.

Operator:

And we have our next question from Keith Hughes with Truist.

Peter Jackson:

Yeah. No. That’s a good question, Keith. One of the things that obviously drew my attention was that number this quarter and making sure that we understood exactly what was going on in the business. I’ll start by saying, we feel very good about the number. It has performed better than expected versus the starts over the last year and it’s given us confidence that both the volume and the margins are real and sustainable. What you’re seeing in the comps, though, is that last year when the thing -- when the market, when single-family starts really started to turn down, we saw a massive and meaningful impact on the lumber and lumber sheet goods, right, the core commodity component of our business. That turned down quick, but at the same time, we were still seeing growth in our value-added categories. The manufacturer product, window stores and millwork, all still growing as we were working through all that backlog, right? The extended cycle times by the builders, the lack of product by the vendors, that was clearing. So that was a dynamic last year. This year, we’re lapping that. And so what we’ve seen is that, well, statistically or on a percentage basis a bit weaker than some of the other categories and looking worse on average. It’s actually in line. It’s just a little bit of timing in terms of the year-over-year. So, still feel good about it, still investing, still seeing the benefits, both on the profitability and the revenue line, but a little bit of comp issue.

Keith Hughes:

Okay. Thank you. One other question on the price deflation in the quarter. Is that all lumber or are there any other products where you’re seeing prices deflating year-to-year?

Keith Hughes:

Okay.

Keith Hughes:

I was -- well, really both. I mean, just in general, between both coming in and out of the warehouse, besides lumber, are there any specific products that you would call out that’s seeing more deflation than others?

Keith Hughes:

Okay.

Keith Hughes:

Okay. Great. Thank you.

Operator:

And we have our next question from Collin Verron with Jefferies.

Peter Jackson:

Yeah. I mean, R&R is fairly small for us, as you know. In that 20% of the business range, it’s inclusive of our retail and commercial categories. So that’s -- there’s a lot in there. In general, what we’ve seen is that we’ve had a bit more capacity available as the overall market has slowed and that’s allowed us to focus in and we’ve had some success. So while there have been, we see it as well, some headlines out of the economists that the investment side on the R&R might be pressured, we’re feeling pretty good about what we’ve seen so far and our ability to fill available capacity by just offering our better services and product portfolio and expertise to categories of customers who want it but haven’t been able to get access to it.

Peter Jackson:

Yeah. No. That’s the million-dollar question, Collin. You’re absolutely right. We continue to wrestle with this. We continue to see the trends of that normalization, right? The share that we took, that we took a lot of and given back a little bit of it. The price that we took and we took a lot of and given back a little bit of it. It has played out, but I think it’s been slower than we’ve anticipated. This quarter we did see a fair amount of what we expected. I think where the beat came, at least in my mind, was some of the timing around some of the rebates, some of the productivity, some of the favorable tailwinds and some of the product mix, which is a little better than expected. Not massive, but it accumulated into a number that was a healthy beat on the margin line, to your point, expected.

Collin Verron:

Great. I appreciate the call and good luck going forward.

Operator:

And we have our next question from Adam Baumgarten with Zelman.

Peter Jackson:

We do. Yeah. We think those things are kind of hand in glove, both the volumes and then the resulting margins as competition levels a little bit.

Peter Jackson:

Thank you.

Dave Rush:

Hi, Kurt.

Peter Jackson:

Yeah. So there’s a couple of different pieces, right? If you stipulate, which I think you have, that we’ve set multifamily aside for all the reasons we’ve already talked about, I think the storyline on single-family is that we’ve seen the bulk of the margin normalization in the core products. There’s more to go, but I think we’ve seen the bulk of it. If you look at subcategories quarter-over-quarter, so Q3 2023 to Q3 2022, you’re talking mid-single digits percentages of margin that we’ve given back in the commodity space. We’ve given back price and margin in every one of the categories. So that normalization that we’ve been talking about, we’ve been digesting it and we’ve been processing it. I don’t think we’re done. I think when we look at the numbers, we see the trends in certain categories and markets, there’s probably another leg there, but it’s far smaller than the first leg. So we’re in the sixth, seventh inning here. We’re not in the second inning. That said, there’s certainly every quarter timing and things that come through in terms of, like Dave said, when we see benefits, when we see the timing on certain rebates, that sort of thing and multifamily is not to be minimized, right? It’s been a big deal for us this year and we do think it will normalize into next year.

Dave Rush:

Yeah. That’s a great question. I would tell you, understand the pilots are not for learning how to implement. It’s for learning how to develop. So what we’ve used the pilots for is get the product where we want it to get. Having said that, one of the favorite modules of the folks that are engaged is the one that you can take and put all the plans for HVAC, framing, plumbing, all into a module and it shows where those trades potentially would collide with each other and resolve that collision before it goes live into the field and that is the one that particularly builders think gives them the biggest and quickest return from savings, because it minimizes the mistakes that you would have to learn on the fly in the field and you get ahead of them. So that’s probably the one that we get the most positive feedback on. But what we’re really trying to do is get everything resolved from a customer perspective on the front end so when we go to a full product launch, they’ll already have solved the problems that they’re counting on us solving.

Kurt Yinger:

All right. Good to hear. Well, appreciate the color and good luck here in Q4, guys.

Operator:

And our next question comes from Quinn Fredrickson with Baird.

Peter Jackson:

No question, affordability rates in particular are in focus for us in terms of trying to predict that starts number. It’s an interesting balance, though. We’ve continued to see very healthy, very stable, as Dave referred to sales and production through the industry. But that question of is there a magic number of mortgage rates that really puts a step down type of impact on this industry is in everybody’s minds. So far, no. But we’re certainly keeping a close eye on it and really what you’re seeing here, and I was trying to highlight it a little bit before, these are different ranges that we’ve seen from economists. We think this encompasses what we saw from all the economists that we were gathering in the last month or two. So, certainly, we’ll continue to dial this in. We’ll continue to update it based on what we’re seeing. But that’s kind of the context in which we came up with it.

Peter Jackson:

We’re ready regardless and I think that’s kind of our outline here with the scenarios is we’ve got a high performing business. We’re going to deliver really favorable positive numbers regardless of which way this goes. So, we didn’t want to hesitate to put this out there for people to contemplate because sometimes the skepticism or the fear in the marketplace can become a little more than what’s appropriate.

Peter Jackson:

Yeah. So I’m glad you asked that question, because I do want to differentiate between a couple of things. First of all, the 3% to 5% is our goal internally. So please do not ever load that into your numbers, because I don’t want to steer you the wrong direction. In terms of what we’ve been able to do, it certainly gets harder, right? I mean, you talk about it being the first couple of years of being harvesting the low-hanging fruit. We have a tremendous opportunity to continue to deliver productivity savings, but I think those savings become a bit more challenging, a bit more programmatic over time. So I think a moderating of the annual number is appropriate, but we intend to continue to deliver on that over time and that will be an important part of our discussion in December as well.

Quinn Fredrickson:

That’s helpful. Thank you.

Operator:

And we have our next question from Mike Dahl with RBC Capital Markets.

Dave Rush:

Well, the only thing, I guess, I want to clarify, Paul is, Paul’s being from a standpoint of even planning for, embedding out and trying to get a project underway, it doesn’t necessarily translate to when we would see sales from a new project because of the 19 months to 18 months of duration. But, so we’re definitely anticipating a slowdown in multifamily. Peter?

Dave Rush:

Yeah. The only thing I’d add is and why I use the term pause versus halt, is just the underlying housing demand need. I mean, if they can’t get into single-family because of affordability concerns, multifamily is the next best option. And I think it will be relatively quick for the rent factor to be figured out to where we get to a rental number that’s cheaper than a mortgage, maybe more than we wanted to pay, but at the end of the day, it’s the best chance I’ve got to get my own place. So maybe pause is too optimistic, but it’s something that I hold because of the overall demand that we see out there.

Peter Jackson:

So I want to be careful here. I totally understand your question. It’s a good question. I don’t want to start getting into guidance for 2024. So I’ll comment directionally based on some of the things we’ve said throughout this year. I hope it’s helpful to you. I think if you go through and look at the margins that we’ve talked about over-earning, it’s been different by quarter. You kind of average them together and you’re kind of in that 150-ish range-ish. So I think that’s a starting point for what we described as over-earning. Now, if you see some of the numbers you’re describing and a big downturn, that adds another layer of challenge to the market and capacity and competition. So that kind of I won’t say all bets are off, but that’s a different model than what I’m referring to. I’m talking about this year and what we think has been unusual in terms of the over-earning. But both of those will play together.

Operator:

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

Ketan Mamtora:

Thanks for squeezing me in. Hey. I’m just curious, can you talk a little bit about how some of the regions are doing as far in October? We talked about some of the product categories, but in terms of your key regions, are you seeing sort of any noticeable change in terms of one being either stronger or weaker versus the other?

Dave Rush:

Yeah. I would say the west relatively has shown a little bit more of a bounce. That’s for sure. I’d say parts of Texas flattened for sure. I think we’re seeing a nice uptick, relative uptick in the north central and in some of those markets. But we’re at the beginning of the year, the discrepancy between great and not so great was wider, it’s -- that gap’s closed. It’s more stable across all markets at this point from a perspective of year-over-year comparison.

Peter Jackson:

Thanks, Ketan.

Dave Rush:

Good morning, Steven.

Peter Jackson:

Yeah. I mean, there’s a couple of key categories that we continue to run the same play, like in football, if they can’t stop the run, we’re going to keep running. We’re going to keep investing in and taking advantage of the need for value-added products and services in this industry. Builders continue to wrestle with the labor availability problems. They continue to wrestle with on-site efficiency and effectiveness. They continue to wrestle with the cost of capital for the cycle times of building a home. That’s what we’re good at. So we’re going to continue to invest. We’ve got multiple plants coming online. We’ve got more capacity coming online in markets where we think it’s really going to be taken up quickly. So that’s an important piece. The other big important piece for us is digital. We think that we already have a lead, we think we’re already the easiest to do business with, we’re the most efficient, we’ve got the best technology and we’re about to take a big leap in that space that we think is going to be both hugely beneficial to our customers, but also make us even more the supplier of choice and the partner of choice in this industry.

Steven Ramsey:

Okay. Helpful. And then on the 2024 scenarios, looks like the free cash flow midpoint is down about $500 million from the midpoint of the 2023 guide. What are the factors that drive the midpoint difference there between EBITDA, working capital and CapEx?

Steven Ramsey:

All right. Thank you.

Operator:

And it looks like we have reached our allotted time for our Q&A session. This does conclude today’s program. Thank you for your participation. You may now disconnect.

Michael Neese:

Thank you, Angela. Good morning and welcome to our second quarter earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. Today, we will review our results for the second quarter of 2023. The earnings press release and investor presentation are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentation. Our remarks in the press release, presentation, and on this call 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 Dave.

Peter Jackson:

Thank you, Dave, and good morning, everyone. Our performance during the quarter further highlighted the resilience of our business in the face of macro pressures. I’m particularly proud of our gross margin results driven by our increased mix of value-added products and services. We are well positioned in the marketplace with differentiated solutions and a healthy balance sheet. We continue to generate robust free cash flow and prudently deploy capital. I’m confident that the combination of our industry-leading scale, ongoing investments in value-added and digital products, and strong financial position will lead to a double-digit adjusted EBITDA margin this year, and sustained growth in the years to come. I will cover three topics with you this morning. First, I’ll recap our second quarter results. Second, I’ll provide an update on capital deployment. And finally, I’ll discuss our full year 2023 guidance. Let’s begin by reviewing our second quarter performance on slide 10. We delivered $4.5 billion in net sales. Core organic sales decreased by 22%, which was better than expected, despite a 31% decline in Single-Family due to slower demand over the prior year. Multi-Family continues to be a bright spot, growing by nearly 30%. As Dave mentioned, the strength in Multi-Family was driven by our recent acquisitions as well as favorable margins, largely attributable to the longer lead time for this end market. R&R and other grew by nearly 5%, mainly due to increased sales focus and capacity versus the prior year. The cumulative effect of our acquisitions over the past year contributed approximately 4 percentage points of growth to net sales. Importantly, value-added products represented 53% of our net sales this quarter versus 45% in the fourth quarter of 2021, reflecting our improving position as a supplier of choice for these higher-margin products. During the second quarter, gross profit was $1.6 billion, a decrease of 33.9% compared to the prior year period. Gross margin increased 40 basis points to 35.2%, driven primarily by a stronger mix in value-added products overall and with particular strength in Multi-Family value-add. SG&A decreased $28 million to $1.02 billion, mainly due to lower variable compensation, partially offset by additional expenses from operations acquired in the last year. Acquisitions increased SG&A by $52 million in the quarter. As a percentage of net sales, total SG&A increased by 740 basis points to 22.5%, primarily attributable to decreased leverage on net sales. We remain focused on operating efficiently, containing costs and effectively integrating operations and acquisitions. Adjusted EBITDA was approximately $769 million, a decline of 49%, primarily driven by lower net sales, including a decline in core organic products attributable to a slower housing market and commodity deflation. Adjusted EBITDA margin remained a robust 17%, up 70 basis points sequentially as we continue to execute and drive improved productivity across the business. Adjusted net income was $498 million, down from an adjusted net income of $1.07 billion in the prior year quarter. The 54% decrease in adjusted net income was primarily driven by a decrease in sales volumes and commodity deflation. Adjusted earnings per diluted share were $3.89 compared to $6.26 in the prior year period. The decrease in adjusted EPS was partially offset by our repurchase of nearly 7 million shares, which added roughly $0.20 per share during quarter. Our second quarter results exceeded the guidance we provided in May, supported by our core business mix and gross margin strength amid outperformance in value-added products. We continue to gain confidence in the strength and durability of our margin performance, and we believe our long-term normalized gross margin percentage is now at 29%-plus versus our previous expectation of 28%-plus. Now, let’s turn to our cash flow, balance sheet and liquidity on slide 12. Our second quarter operating cash flow was approximately $391 million, down $556 million compared to the prior year period, mainly attributable to commodity deflation and a reduction in Single-Family starts. Capital expenditures were $121 million. All in, we delivered healthy free cash flow of approximately $270 million. For the trailing 12 months ended June 30, our free cash flow yield was 17.7%, while operating cash flow return on invested capital was 41.4%. Our net debt to adjusted EBITDA ratio was approximately 1.1 times, while base business leverage was 1.6 times. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was approximately $900 million, consisting of $800 million in net borrowing availability under the revolving credit facility and $100 million of cash on hand. Moving to capital deployment. During the second quarter, we repurchased approximately 7 million shares for $723 million at an average stock price of $103.68 per share. In total, we have repurchased approximately 41% of our outstanding shares since August of 2021. We have approximately $s600 million remaining on our most recent $1 million share repurchase authorization from April 2023. We remain disciplined stewards of capital, and we’ll continue to look for organic and inorganic growth opportunities while maintaining our fortress balance sheet. Let’s turn to our outlook on slide 14. Our July sales trends are encouraging and fuel our confidence in the resilience of our industry. Several of our national customers have begun to provide full year guidance, providing us with better visibility and greater confidence in the strength of the market. As a result, we are establishing our full year base business and total company guidance as we enter the back half of 2023. Our base business approach showcases the underlying strength and profitability of our company by normalizing for commodity volatility. As a reminder, our base business definition assumes normalized margins and static commodity prices at $400 per 1,000 board feet. This is helpful to clearly assess the core aspects of the business where we have focused our attention to drive sustainable outperformance in our industry. Our base business guide on net sales is $16.6 billion. Our base business EBITDA guide is $2.2 billion at a margin of roughly 13.3%. At this time, we are also providing total company guidance for full year 2023, including total net sales, gross margins, adjusted EBITDA and adjusted EBITDA margin. For full year 2023, we expect total company net sales to be $16.8 billion to $17.8 billion. We expect adjusted EBITDA to be $2.6 billion to $2.9 billion. Adjusted EBITDA margin is forecasted to be 15% to 17%. And we are guiding gross margins to a range of 33% to 35%. Our recent above normal margins reflected greater mix in value-added products along with disciplined pricing required to offset our increases in operating costs from inflation. As we move through the second half of the year, we expect both our gross margins and Multi-Family business to continue to normalize. We expect full year 2023 free cash flow of $1.6 billion to $2 billion. Our free cash flow forecast assumes average commodity prices in the range of $400 to $450. Our 2023 outlook is based on several assumptions. Please refer to our earnings release and slide 15 of the investor presentation for a full list of these assumptions. As I wrap up, I want to reiterate that we are exceptionally well positioned to drive our strategic goals. Our guidance illustrates our belief that we will deliver a double-digit adjusted EBITDA margin this year and sustain that momentum in the years to come. As we continue to reap the benefits of our transformed business, we are positioned to achieve an upwardly revised long-term normalized gross margin of 29% or higher. I’m confident that our best-in-class operating platform will continue to generate substantial free cash flow, providing further financial flexibility on top of our already healthy balance sheet. Importantly, we will continue to diligently deploy capital and maximize long-term shareholder value. With that, let me turn the call back over to Dave for some final thoughts.

Operator:

[Operator Instructions] Our first question today comes from Matthew Bouley with Barclays.

Peter Jackson:

Well, first of all, thanks, Matt. We appreciate it. We’re excited about the business and certainly pleased with the way gross margins have been continuing to evolve. We’ve talked about it for -- well, a couple of years now, actually. The strength of the core business, particularly post merger and what we’ve been able to do to grow value-add as a mix of our business has been very impactful. And what we’ve continued to look for, particularly this year, is the normalization, right, with the supply chain getting back to normal, the reset and the level of starts, we were really concerned about what that would mean in terms of the overall market’s ability to sustain margins. I don’t think we were alone in that. What we’ve looked for this year is the performance being at a stable level. And while we’re not quite there yet, we’ve certainly seen stability be established in a lot of parts of the market, a lot of regions, a lot of product categories where we’ve seen things sort of get to normal and level out. When we talk about gross margins, it can be a little bit misleading. Again, this quarter, we saw a substantial tailwind due to Multi-Family, what I would describe as sort of transitory tailwinds. At least a couple of hundred basis points this quarter was really just due to the way the commodity timing, the cost of commodities played out versus some of our contracts. So, we’re pleased with it. Obviously, we’ll take it. But we don’t want to signal to anybody that that’s permanent. And we still have certain areas of the market where things continue to normalize, and we’re not quite sure where things will end up, but we know the pressure is down. We’ve certainly seen that. We’re up 40 bps overall on gross margins. But certainly, that indicates if you take out Multi-Family, some pretty decent step-down in the core, that’s what we thought was going to happen, and that’s pretty much how it’s played out, and we’ll continue to look for that. But even with all of that said, it’s better than we expected. We certainly have gained a lot of confidence in the strength of our business, the strength of value-add, which continues to be really, really desirable for our builder customers, and we’re continuing to invest in it and feel good about what that means for normal margins going forward. We’ll continue to monitor it. I mean, we’ve left the plus at the end because we think -- obviously, we’re performing better than that now, and we’re just going to wait and see where things normalize over time.

Matthew Bouley:

Got it. Thanks, guys, for that comprehensive answer, very helpful. So, I guess, some of what you mentioned, Peter, on the Multi-Family side is going to address this next question. Kind of zooming into the base business, it looks like you’re saying there’s, I don’t know, maybe some rounding, but roughly $600 million of earnings above the base this year. How much of that is -- that Multi-Family commodity cost timing, other commodity, maybe OSB? And could you break down if there’s anything else in there besides commodity that’s kind of above the base business? Thank you.

Operator:

The next question comes from Trey Grooms with Stephens.

Dave Rush:

Thanks, Trey. I appreciate it.

Dave Rush:

Yes. We are seeing evidence from our customers that at the tail end of this year, there’s going to be a lot of supply that comes online all at around the same time. And that in a typical year would have to be digested before a lot of these other new projects come online. That’s one factor. The other factor is the cost of capital. And being able to make sure that the rents that they’re going to generate versus the cost of capital, that equation has to work out exactly right as well. And until some of that -- or some of that glut of openings that comes online at the end of the year, it gets digested. Those kind of dynamics have a little bit of time to work themselves out. So, what we’re hearing is there might be a little bit of a delay in the first and second quarter and then things start picking back up again. The problem, as you know, is these projects are so long in time from plan to execution that we feel like there’s going to be a lag in the first half of next year. But overall, we believe the Multi-Family will be a great segment for us to be in, and it will be a temporary scenario, not necessarily something long term that we got to worry about.

Peter Jackson:

Yes. No, good question. So, we continue to see -- again, it goes to the countervailing trends. We continue to see some erosion in the core market gross margin, less than we expected, but it has continued, and I think we’ll continue to see that through the back half of this year. And then we know pretty -- with pretty reasonable accuracy how Multi-Family will play out just because of the timing of the contracts that were related to the current purchase price of commodities and kind of where we’re at. So, we’ve got a pretty decent look. Certainly, there’s been good performance in gross margins throughout the year, and I don’t think July is significantly different, but the trends remain the same with the overlay of Multi-Family’s normalization being pretty significant over the next year.

Dave Rush:

Yes. I would tell you, we feel really good about the level of automation we have where every plant has some level of automation. Obviously, there’s more opportunity, and we have a pretty long runway there to continue to improve, and we’re excited about that prioritizing those projects. And as you know, as we do acquisitions, typically, there’s a level of automation that we go back in and upgrade those acquisitions with and we’ll have that plan ongoing. We’re a good customer for our automation vendor. And as much as we’re always excited about talking about digital, we’re also on our front foot when it comes to technology in this manufacturing space as well. So yes, we’re excited about where this can continue to go.

Ketan Mamtora:

Thank you. And congrats on a strong quarter. A couple of things. I’m just curious, one, how do you -- what is the M&A pipeline looking at this point? And given sort of housing has held in better than what people expected at the start of the year, has there been any sort of change in your approach to M&A or seller expectations?

Ketan Mamtora:

Got it. And is it possible at all -- Peter, you talked about sort of July started off quite well. Is there any way to sort of quantify what the July trend has been like even relative to sort of Q2 or maybe year-over-year?

Operator:

The next question comes from Adam Baumgarten with Zelman & Associates.

Dave Rush:

Yes. I think the supply chain has normalized to a great extent. I think -- versus when you saw the COVID-related issues, we’re not seeing anything of that magnitude out there. There’s a couple of product categories where lead times are or slightly extended, premium windows is an example, but still, things are normalizing. Now, with the uptick in demand, there is some adjustments by a lot of our vendor partners on staffing and getting staff back up to the new normal of demand, but those look to be very temporary and very slight. So, I would say, all in all, from a supply chain perspective, we’re in pretty good shape.

Peter Jackson:

Yes. So R&R, the way we service R&R, there are a few markets where we’re very focused on it with specific cases. But for the most part, we serve both the Pro new construction and the Pro R&R markets through the same chance. So, you end up with certain time lines where you’ve got pretty heavy demand from one or the other. And obviously, over the past couple of years, the bulk of it has come from the new construction side. So with that pullback a bit, they just opened up more capacity, that Pro R&R business. And as I said in the past, the Pro R&R contractor would generally prefer to use us if we’re available because of all the incremental services and expertise we provide versus a traditional big box or a small player. The categories, the product categories, I would say we performed well across the outline of products or the family of products within Pro R&R. I would say, just stepping back for the whole business, we’ve continued to see really nice performance in the windows, doors and millwork category. That’s been an outperformer for us all year, and we’re pretty excited about that.

Mike Dahl:

First question is kind of back on the Multi-Family side. Obviously, there’s been a few big moving pieces. You’ve made some investments both organically and inorganically in that space. And then, Multi-Family as a mix of percentage -- mix of the overall market has increased. You look at permit activity that’s now dropping off, and you alluded to some normalization. And in Multi-Family, I think, sales, not just margins looking out to next year. Maybe can you help kind of quantify what you think has been internal versus market shifts? And I don’t know if it’s best framed as what you think your new normal mix of Multi-Family would be when you sort through kind of the ebbs and flows? Maybe a little more quantification there or color?

Dave Rush:

Yes. I would just add. We were purposeful when we added that acquisition and entrants into that Multi-Family segment, knowing that it would be a diversification play from Single-Family and vice versa. So, what we’re expecting is as Multi-Family normalizes, we’re expecting Single-Family to remain on stable footing. In addition, in the truss world, what makes it so -- such a good investment for us is we can run Single-Family jobs out of a Multi-Family truss plan. So, we do that today. When we have Multi-Family plants that are maxed out, we run Multi-Family jobs out of our Single-Family plants and vice versa, when each side has more work than they have capacity. So, we’ve got a plan in place to manage through all ebbs and flows of both sides of those businesses and we did so intentionally.

Peter Jackson:

Yes. So, if you think about the historical kind of guidances that we’ve had, we were running -- we were running gross margins kind of 25% to 27%. We talked about how the commodities were generally kind of high-teens to low-20s for gross margins. We talked about how value-add was 800 to 1,000 basis points higher than that. I would tell you kind of where we are today with some of the noise in it. We’re substantially higher than that on the value-add. But we’ve also seen sort of increases across the board. The increases across the board we talked about a lot, just to reiterate, we’ve seen some inflation, right? So if the cost of delivery is higher, the margins need to be higher in order to pay for the increased costs. So, we’ve seen some incremental margin increase across the board to cover that. And then, the two things that have impacted it the most is you’ve seen increased productivity. And what we’ve talked about in Multi-Family, some displacement causing the margins to be higher, full stop. And you’ve seen overall a pretty substantial mix shift away from the commodity side of the business, which used to be half of what we did back in the old days to closer to 25 to a third -- 25% to a third of our business now and that has allowed that normalized gross margin to really drift further and further up the more our mix swings. So, sort of all of those components are feeding in the productivity, the inflation, the overall mix shift to allow us to see that higher amount. But again, going from 35%, 34% for the full year is what we’re signaling, right, for the midpoint, down to the 29%-plus that is the Multi-Family. That is the continued normalization. And we’re going to continue to watch that play out, and we’ll dial in that guidance as we get more confident.

Steven Ramsey:

I wanted to continue the base EBITDA conversation along with the productivity. If I’m connecting the dots, you’re saying this year’s sales and base EBITDA go down $100 million each and then the productivity savings midpoint is $130 million. So, backing out that midpoint of savings, decremental margins look like a low-20% range, if my math is correct. I mean, with the productivity flowing in, is the dollar level of productivity in future years going to be as strong as this year?

Dave Rush:

We believe there’s a huge opportunity there given our platform of the 570-plus locations and our ability to take best practices from -- we’re a product of multiple acquisitions. And we’ve learned how to take the best practice from one of those acquisitions and leverage it across the platform. We’ve built a continuous improvement culture. We have people dedicated to it in each of our divisions for that very purpose, because we believe that the part -- the benefit of our scale is to be able to do it the best way across 570 locations versus just in one area or one market. So, we’re confident that we can achieve at the current levels of continuous improvement that we’ve set for ourselves each year for a long period in the future.

Dave Rush:

Yes. So, it’s probably half and half in terms of what we’re getting on the sort of the inbound versus the operating sides. We’re doing a lot in both with a bunch of individual projects that sort of accumulate to contribute. But directionally, it’s probably right.

Joe Ahlersmeyer:

I just wanted to -- just based on the visibility you may have into your inventory and your Multi-Family backlogs for this quarter. Just maybe any help on the phasing of the gross margin and even just the overall sales and EBITDA third quarter versus fourth quarter?

Joe Ahlersmeyer:

Understood. And then on the inventory balance, that’s come down as commodity costs have come down and rolled through the P&L. But is there additional productivity you’re looking to gain on the inventory balances, or given what we’ve seen in the market, could we actually see it go the other way where you’re preparing, I guess, for a stronger spring in 2024, making sure that you have inventory on hand to service the market?

Operator:

The next question comes from Collin Verron with Jefferies.

Dave Rush:

Well, we were certainly really encouraged by both the results that our public builders were reporting and even more about the projections for the rest of the year. So, we feel really confident that -- again, I’m not calling this robust, but it’s certainly better than everyone expected over the second half of the year and stable to up over the back half of the year. And that gave us the confidence that we have for being able to project what we feel like we can do in that environment.

Peter Jackson:

Yes. We’re excited about digital. It’s continuing to move along. The technology is coming together. The pilots are going well and we’ve given sort of a few hints about some metrics and what that looks like internally but it’s all very, very early days, to be honest. We’ve got some revenue, but it’s pretty modest. It’s not the focus. The focus is not really growing that right now. It’s tuning. It’s completing the technology, tuning what we have built, making sure the technology is sort of stable and capable of running at the scale that we intend to put through it. That’s this year’s goal. We’re certainly expecting pretty significant increases in ‘24 and beyond. And we’ll have some more information on the timing of that and the layout of that as we get into our Investor Day in December.

Reuben Garner:

Congrats again on the strong quarter. I guess, I had some connection issues earlier. So, if I repeat anything, sorry, in advance. But first question is on inventory. Can you talk about where your inventory stands from a volume perspective relative to kind of historically normal times? We’ve heard from both kind of two-step distributors and some manufacturers that the dealer channel is kind of thin and hesitant to add. I was just curious how you guys are viewing inventory? Is that something where you’re stocking and it’s an advantage you have product over some of your smaller peers, or are you the folks that are running thinner than usual now?

Reuben Garner:

Okay, great. And then,, I’m not sure if this one was asked, but an updated way to think about sensitivity to lumber? I know you’ve got the base business lumber out there. But if we’re continuing to run $100 higher, how much of an impact does that have on revenue and profit?

Reuben Garner:

And a quick clarification, Peter. Is that lumber and OSB altogether commodity?

Operator:

The next question comes from Kurt Yinger with D.A. Davidson.

Dave Rush:

Yes. I think we’re the clear leader in the space, first of all. And we have made the most -- we’ve put the most emphasis on finding ways to increase our productivity, specifically in our manufacturing truss and door shops to extend that lead. We believe the investment required to do those type of improvements is not insignificant. And we’re -- we believe our commitment to us has made a difference. And we see that in the marketplace. We especially saw it coming out of COVID, where it was tough for people to find a truss manufacturer that wasn’t -- that didn’t have a significant backlog and people had to pick and choose who they wanted to do business with. And we saw where our customers wanted to do business with us in that environment. So, we feel good about our position. I think anywhere where you see opportunity, people are going to make investment. I just think we’ve got such a nice lead on our competition today, it will be tough for us -- for them to catch us.

Peter Jackson:

Yes. No, that’s a fair question. It’s something we look at pretty regularly, as you know. What I think it boils down to most simply is starts are the best indicator and the best sort of measuring stick for our performance over time. I don’t think it’s accurate at a quarter. And what we’ve seen is sort of as the market turned down, we didn’t go down as much as the market. As the market has turned up, we haven’t gone up as much as the market. And there’s a little bit of product mix to do with that, right? We’ve said in the past, we’re probably two-thirds that’s leveraged towards the beginning of the start, one-third towards the end of the start. So that’s one piece. Another of it is that we’re probably not at the start. We know we’re not at the start. We’re anywhere from 30, sometimes 60 days later when our first product starts to hit the job site. So, a little bit of shifting around that in terms of timing of when our orders hit. Based on the trends we’re seeing right now, we feel pretty good. We may have given up a little bit of share in our estimation, a couple of hundred million dollars worth. We talked a lot during the time line of the big supply chain disruptions about how advantaged we thought we were by having more product and being more effective at meeting customer needs where others struggle. And we’re probably giving back a little bit of that as we anticipated, but that’s kind of in the numbers you’re seeing now. So, feeling pretty good about where we are versus the overall market.

Jay McCanless:

The first question I had, we’ve seen lumber prices, especially framing lumber, move up sequentially for the last couple of months. I guess, is that starting to flow into your pricing not only on commodity goods, but are you also starting to be able to take some price on the value-add goods?

Jay McCanless:

Okay. That’s good to hear. And then just the second question, M&A phrased a different way. Are you starting to see some of this tightening in terms of bank lending standards and underwriting on some of your potential acquisition targets? Is that freeing up or making some people may be more willing to sell than they might have been at the beginning of the year?

Operator:

The next question comes from David Manthey with Baird.

Peter Jackson:

So, I guess, I need to be a little careful how I answer that. On the first hand, we have seen incremental competition and margin erosion in core business, period, full stop. Now, it’s not as much as we expected. It’s not as much as we forecasted, hence the outperformance in that area. I would say that there’s been a lot of strength in the volumes within the value-add, which gives us increasing confidence that we’re meeting a need that our customers see value in it, that they’re leveraging it to improve their cycle times, their job site efficiencies, their job site safety and that we’re at a price point that’s competitive that allows them to do what they need to do better. So, we’re certainly pleased with all of that and have been seeing the competition. Now, the components of cost, the investments that we’ve made, but also the inflation we’ve seen, certainly, I think that has had a structural impact on the overall market, us included, but others as well, where you got to make a little more gross margin if you want to cover those incremental wage costs or truck costs or whatever it is. But then lastly, we’ve done a lot of work. We’re much more efficient and that self-help has allowed us to earn more on the same equipment year-on-year because of our efficiency improvements, whether it be new automation that layers on the same equipment and facilities, sometimes it’s a new equipment, but sometimes it’s just better process. And all of those things are why that strength we’ve seen is sustainable. I think that helps to Dave’s point, us be more competitive, right? We can still make good money where others are struggling. And if we can do it by being more reliable or on time and in-full being better that our quality is better, then we’re always going to be the partner of choice for these builders who want to make sure their houses are high quality and on time.

Operator:

This does conclude today’s question-and-answer session. I will now turn the program back over to our presenters for any additional closing remarks.

Dave Rush:

Thanks, everyone.

Michael Neese:

Thank you, Shelly. Good morning and welcome to our first quarter earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. Today we will review our results for the first quarter of 2023. The earnings press release, investor presentation are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentation. Our remarks in the press release, presentation and on this call 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'd like to turn the call over to Dave.

Peter Jackson :

Thank you, Dave and good morning everyone. I'm pleased to report that we delivered exceptional gross margins in the first quarter, despite a challenging macro backdrop. The advantages of value-added products and services are evident and key to our outperformance. We generated strong free cash flow as we leveraged our best-in-class operating platform and extended our track record of effective cost containment and working capital management. Our robust financial position, industry-leading products and solutions, and reputation for providing excellent customer service allow us to successfully navigate macro volatility and position us for above market growth in the years to come. I will cover three topics with you this morning. First, I'll recap our first quarter results. Second, I'll provide an update on capital deployment. And finally, I'll discuss our second quarter guidance and provide an update on our illustrative full year scenarios. Let's begin by reviewing our first quarter performance on Slide 10. We delivered $3.9 billion in net sales. Core organic sales decreased by 26%, attributable to a 34% decline in single-family due to slowing demand and compared to a strong first quarter of 2022. Multi-family was a bright spot that reflects the benefit of our expansion strategy in this category, growing by nearly 70%. The growth was driven by multiple acquisitions and a strong rental market. R&R and Other grew by more than 3%, mainly attributable to increased sales focus and capacity versus prior year. The cumulative effect of our acquisitions over the past year contributed approximately five percentage points of growth to net sales and one additional selling day had a favorable impact of 1%. While core organic sales and value added products decreased by nearly 17% due to slowing single family starts, this is almost 10 points better than the overall core organic result and underscores the resilience of the value added product portfolio. Importantly, value added products represented 56% of our net sales in the quarter, reflecting our position as the supplier of choice to these valuable high margin products. During the first quarter, gross profit was $1.4 billion, a decrease of 25.2% compared to the prior year period. Gross margin increased 300 basis points to 35.3%, with more than half of the 300 basis points change coming from our multifamily value added products and services. SG&A decreased $64.4 million to $904.2 million, mainly due to lower variable compensation, partially offset by additional expenses from operations acquired in the last year. Acquisitions increased SG&A by $46 million in the quarter. As a percentage of net sales, total SG&A increased by 630 basis points to 23.3%, primarily attributable to decreased leverage to net sales. We remain focused on disciplined cost management and are taking appropriate actions in response to volume dynamics on a market-by-market basis. As we have stated in the past, approximately 70% of SG&A expense is variable with volumes. We are striking the right balance between calibrating operations based on changes in volume and protecting capacity for future growth. Adjusted EBITDA was approximately $632 million, a decline of 37%, primarily driven by lower net sales, including a decline in core organic products attributable to a slowing housing market and commodity deflation. Adjusted EBITDA margin was a robust 16.3%. Adjusted net income was $410 million, down from an adjusted net income of $701 million in the prior year quarter. Adjusted earnings per diluted share was $2.96, compared to $3.90 in the prior year period. The decrease in adjusted EPS was favorably offset by our repurchase of more than 7.5 million shares or $0.15 per share during the quarter. Our first quarter results beat the guidance we provided in February, supported by gross margin strength, as value-added products over-delivered and productivity came in faster than forecast. As a result, we are increasingly confident that our long-term normalized gross margin percentage is now at 28% plus versus our previous expectation of 27% plus. Now, let's turn to our cash flow, balance sheet and liquidity on Slide 12. Our first quarter operating cash flow was approximately $654 million, up from $180 million in the prior year, mainly attributable to disciplined working capital management and improved product mix, as well as effective pricing and cost management. Capital expenditures were $100 million. All in, we delivered robust free cash flow of approximately $554 million. Free cash flow yield is 28.5%, while operating cash flow return on invested capital was 47.1% for the trailing 12 months ended March 31. Our net debt-to-adjusted EBITDA ratio was approximately 0.8x. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end our total liquidity was $1.4 billion, consisting of $1.2 billion in net borrowing, availability under the revolving credit facility and $144 million of cash-on-hand. Moving to capital deployment, during the first quarter we repurchased approximately 7.5 million shares for $628 million at an average stock price of $83.17 a share. In addition, we have repurchased approximately 3.8 million shares so far in the second quarter for $348 million at an average stock price of $91.90. In total, we have repurchased 39% of our outstanding shares since August of 2021. As we have completed our prior share repurchase authorization, the Board of Directors decided to approve a new $1 billion share repurchase authorization. We remain disciplined stewards of capital and will continue to look for organic and inorganic growth opportunities and to repurchase shares at an attractive value while maintaining our fortress balance sheet. Now, I would like to discuss our guide on Slide 13. Given the ongoing challenging conditions in the housing market, we are continuing to provide quarterly guidance. We will reassess our full year guidance for actual and base business as the year progresses. For the second quarter we expect net sales to be in the range of $4 billion to $4.2 billion and adjusted EBITDA to be in the range of $525 million to $575 million with an adjusted EBITDA margin in the range of 13.1% to 13.7%. Our adjusted EBITDA guide for the second quarter assumes gross margins in the 32% to 34% range. Our second quarter guidance includes the following full year assumptions, which are also outlined in the earnings release and on Slide 14. We expect total capital expenditures in the range of $325 million to $375 million. This includes continued investments in scaling our value-added products. We expect interest expense in the range of $150 million to $170 million, an effective tax rate between 23% and 25%, depreciation and amortization expenses in the range of $525 million to $575 million, no change in the number of selling days versus the prior year. And finally, we expect to deliver between $90 million and $110 million in annual productivity savings. We recognize that it is important to think about potential outcomes for the full year. So on Slide 15, we have updated our 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, our strong Q1 performance and visibility into Q2 have meaningfully improved our expectations for each of the full year performance scenarios. Single-family starts are down 15% for the year, we now believe we could generate roughly $2.2 billion in adjusted EBITDA, which is up $500 million from our fourth quarter scenario analysis. This increased EBITDA expectation reflects stronger gross margins and productivity savings than we previously expected. As I wrap up, I want to reiterate that we are exceptionally well positioned to drive our strategic goals forward. We believe that we can sustain a double-digit adjusted EBITDA margin this year, and we continue to see the benefits of our transformed business. I believe that our long-term normalized gross margin percentage is now at 28% or higher. I'm confident in our best-in-class operating platform, will continue to set us up to generate substantial free cash flow, which provides further financial flexibility on top of our healthy balance sheet. We will also continue to diligently deploy capital and work to manage, to maximize long-term shareholder value. With that, let me turn the call back over to Dave for his closing remarks.

Operator:

[Operator Instructions]. And we'll take our first question from Matthew Bouley with Barclays.

Peter Jackson:

Thanks, Matt. Yeah, no, it's a great question. We've been talking, about gross margins for quite a while now, ever since the merger and trying to get a sense of where normal is. We felt really good based on where the business was at that merger date. That 27% or better was something we felt good about on sort of a long-term normalized basis, taking out all the noise around supply chain and that type of thing. But we were continuing to look at it, right? We've been looking at it, managing the business, but in the meantime, we've been working. So, we've worked to improve our value add as a percentage of the overall business, right. The acquisitions we've made, improving mix, it's grown faster, and it’s been more resilient. So the biggest component being just the increased mix of value add on an ongoing basis, we think that's meaningful and important to our average gross margins over time. In addition, we've done a really good job internally of managing productivity, even in a volume down market overall, certainly giving us a lot of confidence that the investments we've made in value add productivity and automation have yielded the benefits we were expecting. So those two factors are the most powerful. And the last one I think is, as we've seen a market as down as it was in Q1, and I think we can all admit, this was a challenging year-over-year compare, we still performed very, very well and that gives us the confidence that we needed to start moving that normalized margin up to 28% plus, because we see that as being really proof positive of the value of what that product does for our customers and for us.

Matthew Bouley:

Got you. Okay, great call there. Thank you for that. And then second one, kind of jumping into the near term. The Q2 EBITDA guide, I mean you're guiding in dollars and margin I guess to be lower than that of Q1, which is obviously unusual historically. And I know you're on this path to normalizing gross margin and that looks to be part of that. But any other detail on what are some of the underlying assumptions around Q2, and why you would have such a kind of unusual seasonality there? Thank you.

Dave Rush:

So, what we're hearing from customers is the word stability. You're not really hearing robust. You're hearing more things are stable and that's kind of what we're using as the backdrop of our valuations for our forecast as well. There's increased optimism when mortgage rates stay consistent, and the underlying demand supports a fairly resilient demand when mortgage rates stay consistent. But it's still a volatile overall environment, and we're working with that as a backdrop. And so we're feeling pretty good, but it's all on a relative basis.

A - Peter Jackson:

Thanks Matt.

Mike Dahl:

Good morning. Thanks for taking my questions. Just to kind of pick up on a couple of those points or questions that Matt had. When we think about the margins and gross margins specifically, you know I think clear enough in terms of your description of normal. You know in the first half of this year you're basically guiding to a mid-30s, low to mid-30s gross margin and even if I were to adjust for a mix, which seems more recurring than non-recurring, you'd still reach that level. It looks like the full year, like the middle scenario if you're at 13% to 14% EBITDA margins, also seems to imply maybe like a low 30s gross margin. So I guess (a) is that the full year expectation embedded? (b) Could – you know I know there's still some potential timing impact in the first half. Maybe you could just articulate what some of those are in terms of things that have been good guides in your favor. And then if I – sorry for the multi-part question, but (c) would be, I think you said, ‘hey, we'll tell you more about base business as the year progresses.’ But if I take that delta between what you expect for gross margin this year and that 28, should we assume that it's kind of like a few hundred million dollars right now that could be still a little bit temporary in your opinion?

Mike Dahl:

Yeah, yeah, pretty much.

Mike Dahl:

Okay, yeah, that's very helpful. Thank you both. And then in terms of a follow-up, just on capital allocation. I mean look, even if some of this is a little temporary in the first half, the underlying EBITDA number, it starts coming through consistent with your middle scenario is incredibly strong. The free cash flow conversions have been great. You've obviously been pretty aggressive buying back the stock, you know a billion dollars effectively in just the last four months. The new authorization is for $1 billion. It seems like you'll throw off considerably more free cash this year. So just thoughts on kind of why not a bigger, why not a bigger authorization just to have it out there, maybe some puts and takes and any more explicit direction you could provide on what type of free cash conversion you'd expect for the full year?

Mike Dahl:

Okay, thank you. I appreciate it.

Trey Grooms:

Hey! Good morning, everyone and yeah, congrats on the quarter.

Trey Grooms:

Sure thing. Peter, I think you said you expect to see increased competitive behavior or an increased competitive environment. How does the competitive behavior look in some of your maybe tougher demand markets versus some of the better markets and are you starting to see that behavior, the competitiveness kind of creep up more in these more difficult markets and is it more or less competitive maybe than what you've seen in prior slowdowns?

Trey Grooms:

Okay, got it. Thank you for that, and then I guess as a follow-up, you call out the operational excellence and cost management initiatives that are helping to drive these gains in efficiency and productivity. Longer term, I see kind of it's obvious what it's doing for the near term and in a downside kind of an environment, but longer term, how do you think about maybe the sustainability of some of these actions and these things driving better margins as end markets improve?

A - Peter Jackson:

The other thing I would add is, you know when we talk about the productivity numbers, these are numbers that we've done the work around to analyze that this is permanent change. We're not trying to take credit on productivity for something that sort of comes and goes as a freebie in the year that we're not going to be able to repeat. These are changes to the business. These are operating changes. These are contractual changes that we feel good about in terms of having changed the business for the better over time and we do think it's cumulative and sticky.

A - Peter Jackson:

Thank you.

Collin Verron :

Good morning. Great quarter. My first question here is just, you came in ahead of that 1Q guide which you gave at the end of February. Can you just talk about what came in better than you were expecting? Was it underlying demand? Was it a specific product category? Were you just able to hold on to commodity prices better? And since you gave that guide so late in the quarter, can you just give us a sense of how the year-over-year sales declines exited the quarter versus earlier in the quarter?

Dave Rush :

But I would just add, you know early in the year with the volatility of expectation that was out pretty much with anybody that you taught, it was tough to put a stake in the ground and say ‘we're great and we know we're going to be okay.’ Our guys did a fantastic job of preparing for the worst and hoping for the best. So we prepared for the downside scenario with our cost management, and then as we got clearer sights of how the market or the quarter was going to play out, we managed against that baseline. And as you heard, even from our builder customers, we just reflected the same sentiment they did at that point in time. And as you're hearing them now, they are also saying it was better than they expected. So it's kind of a combination of all of that.

Peter Jackson:

Well, it's certainly a nice part about that business is we do have a bit more visibility to the backlog. Right now it is substantial, because that part of the market has been strong and in somewhat surprising fashion has maintained its strength. I think there's absolutely a great profitability story in that world right now. But as Dave mentioned, that will continue to normalize over time as the coal prices and the market prices of commodities tighten. But yeah, that's absolutely part of both, what allowed us to do the M&A in that sector of the market, but what we're enjoying in terms of the results so far this year and through all of 2023.

Collin Verron :

Great, and good luck in the second quarter.

Operator:

And we'll take our next question from Stanley Elliott with Stifel.

Dave Rush:

Stanley, can you repeat the first question? You broke up.

Dave Rush:

Yeah, thanks for that question. Within the multi-family segment for us, it's primarily value-add. We don't do a lot of non-value add with our multi-family customers and Truss is the overwhelming majority of the value-add. So it will always have a higher percent of multi-family sales as being value-add. Now in the context of the overall business, it's still a fairly – it's 13% of our total business. So even in that context, it doesn't move the needle very much either way versus the single-family. Now, what I will tell you, is our guys have done a great job where we have multi-family plants at capacity moving business to single-family plants that are under capacity. And that's the value of our platform and the ability to have, to manage the effectiveness of where we can build those Trusses in the most efficient way by having the availability of those single-family plants. So there is a coordinated effort to build those Trusses where we can get the most efficient cost and it has to be within the radius of the job that we're trying to supply. But there's a lot of coordination that goes on there and a significant integration effort to make that happen.

Peter Jackson:

Yeah, I think as a general guideline we still like one to two times based business as a guideline that is helpful in terms of thinking about how to minimize our risk, but still take on an appropriate amount of it. It's a metric that if you think about base business in the last year, we'd say we have room, but we're certainly in the range, rather than if you just look at our trailing 12 actuals, it looks like we're a little bit under leveraged in that regard. So as this business normalizes, as we get a better visibility into 2023 full year, we'll go ahead and update that base business, give you an updated thought process around the leverage ratio. But at this point, we feel pretty good about our borrowing, both the cost and the tenure and we'll continue to watch it.

Peter Jackson:

Thanks Stanley.

Jay McCanless:

Hey! Good morning, everyone. Thanks for taking my questions. So just, I know that lumber, the actual commodity cost is becoming less relevant for your business, but it's been surprising how subdued the lumber market and lumber prices have been this year, especially in light of some of the curtailments that we're starting to hear about. I guess, maybe what are you hearing from your suppliers there, and how are you feeling about the direction of the lumber prices over the next two to three months?

Jay McCanless:

Okay. And the other question, I think and Dave you may have already addressed this, but just wondering with some of the financial pressures that supposedly are coming from banks tightening credit, etc. Have you seen your competition on the distribution side getting more aggressive on price or is this lift in sentiment from the builders in March and April been able to diffuse some of that or most of that?

Jay McCanless:

Okay. That sounds great. Thanks for taking my questions.

Operator:

And we'll take our next question from Steven Ramsey with Thompson Research Group.

Peter Jackson:

Well, fair question. I would say overall we saw more resiliency in the market than we had forecasted. I think that's fair to say across the board. We saw the most resiliency in the geographically in the East, I would say product-wise in value-add. And in terms of the timing on that, I don't think there's anything strong indicating there is a time horizon that caused the results to be different, meaning each market is digesting what their demand looks like, each market is resetting and placing orders. But overall, I think it's been more orderly and more disciplined in terms of reacting to the step down in sales than we'd originally forecast.

Steven Ramsey :

Okay, that's helpful. And then thinking longer term, the secular penetration of value added products in multi-family and single-family, how do you see that shaping up over the long term? You said multi-family is mostly value added products. So, is there less of a penetration opportunity there or adding more value added products into that portfolio for those customers?

Dave Rush:

And the only other thing I'd add specifically around Truss is the premise around adding multifamily Truss was in market diversification from single-family. And that only works when you have the coordination between the single-family plants and the multi-family plants to be able to share work. And what we're doing really well is figuring that out and integrating that, and it accomplishes our objective to make sure when multi-family's hot, we're able to hit there, when single-family's hot we're able to hit there.

Operator:

And we'll take our next question from Joe Ahlersmeyer with Deutsche Bank.

Peter Jackson:

Thanks, Joe.

Peter Jackson:

Yeah, I think it's a little bit of a couple of those things. The completion certainly remains strong on those back of the building process products, windows, doors and millwork, a good example. I think there was quite a bit of disruption in that part of the market as well, which slowed the ability to put product on the ground when needed. So that's another big component, but we've also invested. So there's increased ability to serve as well.

Peter Jackson:

Yeah, no, you're right. We should have digested the bulk of all this commodity noise, the commodity volatility by next year. Q2 would be the biggest comp in terms of peak pricing hit in Q2 of last year. So it may drain a little bit into Q3, but Q2 is the biggest impact on a year-over-year basis, that's right.

Peter Jackson:

We can get back to you on that one. I don't actually have that narrow of a guide off the top of my head.

Peter Jackson:

Thank you.

David Manthey:

Yeah, thank you. Good morning everyone. When you talk about productivity savings here, I'm just definitionally wondering, is that mostly or entirely in SG&A? And for example, the $34 million in productivity this quarter, is that separate from your higher gross margin outlook or is there some overlap between the two?

David Manthey:

And I assume that varies from quarter to quarter, so there's no base rule we should be thinking about?

David Manthey:

Okay. Thanks for taking the question.

Operator:

And we'll take our next question from Adam Baumgarten with Zelman.

Peter Jackson:

Yeah. I mean, I think commodity pricing has been the headline that we've all talked about, but there's certainly been a lot of work done on the pricing in the non-commodity side. It's an area that I think really lends itself to the process and the discipline that we've implemented over the last five years or so. So certainly, a nice offset to the volume headwinds from the pricing side. Obviously not all of it, but certainly strong healthy pricing in that space. A chunk of it is absolutely attributable to the multi-family mix change and the profitability of that business.

Peter Jackson:

Thank you.

Ketan Mamtora :

Thanks for taking my question. Peter, can you just clarify how you think about free cash flow for 2023? I thought I heard $1.5 billion earlier in the comments.

Ketan Mamtora :

You said north of $1.5 billion Peter, just to clarify?

Ketan Mamtora :

Perfect. Thank you so much.

Michael Neese:

Thank you, Brittney and good morning everyone. Welcome to our fourth quarter and full year 2022 earnings call. With me on the call are Dave Rush, our recently appointed CEO; and Peter Jackson, our CFO. Today, we will review our fourth quarter and full year results. The earnings press release and investor presentation are available on our website at investors.bldr.com. We will refer to several slides from the investor 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 Dave.

Peter Jackson:

Thank you Dave and good morning everyone. I want to congratulate Dave on his appointment as our new CEO. I've worked with him for many years and couldn't be happier for him and for this company. I know he will lead us to continued growth and success. I also want to join Dave in thanking our team members for delivering a record year of performance. We sincerely appreciate your hard work and dedication to delivering excellent service to our customers day in and day out. I'm proud to report that we delivered solid financial results in the fourth quarter to cap off a record year of the business. We continued to manage through the complex operating environment with a proactive mindset and a disciplined approach. We expect that the structural enhancements we have made in our business over the past decade will help us mitigate the impact of softer housing demand and inflationary headwinds. Our ample liquidity, low leverage and disciplined cost management provides significant financial firepower to continue to strategically and opportunistically grow our business. I will cover three topics with you this morning. First, I'll recap our fourth quarter results. Second, I'll provide an update on capital deployment, and finally, I'll discuss our first quarter guidance and lay out illustrative full year scenarios. Let's begin by reviewing our fourth quarter performance on Slide 12. We delivered $4.4 billion in net sales. Core organic growth decreased by 8% attributable to a nearly 14% decline in single-family as slowing demand compared to strong fourth quarter 2021 led to difficult comps. Both multi-family and repair, remodel, and other increased by almost 15%. Multi-family was driven by a strong rental market and resulting backlog. R&R and Other growth was mainly attributable to increased sales focus and capacity versus prior year. Two fewer selling days had an unfavorable impact of roughly 3% on net sales. The cumulative effect of our acquisitions over the past year contributed approximately 8 percentage points of growth to net sales. Value-added products saw another quarter of growth compared to total fourth quarters starts, which decreased by 16%. Core organic sales in the category increased by 0.6%, reflecting the macro trend of value-added product adoption and our success in the category. I'm very happy to highlight value-added products represented over half of our revenue in the quarter, a great proof point of success towards our goal of being the supplier of choice for these valuable high growth products. During the fourth quarter, gross profit was $1.5 billion or roughly comparable to the prior year period. Gross margin increased 200 basis points to 34.1%, mainly due to the increased mix of value-added products. SG&A grew 11% to $958.7 million, mainly due to additional operating expenses from companies acquired in the last year inflation and other costs. Acquisitions represented over 60% of the increase in SG&A. As a percentage of net sales total SG&A increased by 340 basis points to 22%. We remain focused on disciplined cost management and are taking appropriate actions in response to volume dynamics on a market by market basis. These actions include footprint rationalization, discretionary spending reductions, and cutting headcount and overtime. As we have stated in the past, approximately 70% of SG&A expense is variable. Within that 70% roughly 20% of sales is driven by volume based formulas, things like commissions and bonuses. The remaining 50% of sales is where we are actively managing our operations. We are striking the right balance between resizing operations based on changes in volume and protecting capacity for future growth. Adjusted EBITDA was approximately $700 million, a decline of $97 million, primarily due to declines in core organic sales and commodities partially offset by M&A. Importantly, adjusted EBITDA margin was 16%. This represents the second fast fourth quarter adjusted EBITDA margin in our history reflecting our focused execution and expense control. Adjusted net income was $470.8 million, down from an adjusted net income of $532.4 million in the prior year quarter, attributable to a decrease in net sales and higher SG&A expense. Adjusted earnings per diluted share was $3.21 compared to $2.78 in the prior year period. The increase reflects our more than $650 million in accretive share repurchases investments during the quarter. To put this in perspective, the repurchase equates to $0.21 or nearly half of the $0.43 change. Now let's turn to our cash flow, balance sheet and liquidity on Slide 14. Our fourth quarter operating cash flow was approximately $971 million, mainly attributable to increased profitability due to effective pricing and cost management, as well as disciplined working capital management. Generally, we see working capital as incremental or decremental of approximately 10% of sales. Capital expenditures were $131 million. All-in we delivered robust free cash flow of approximately $840 million. For the year we generated record free cash flow of approximately $3.3 billion, representing a free cash flow yield of 30.6% operating cash flow. Return on invested capital was 41.1% for the year ended December 31. Our 2022 net debt to adjusted EBITDA ratio was approximately 0.7 times and approximately 1.3 times our estimated 2022 base business EBITDA, well within our stated target of 1 to 2 times. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was $1.5 billion consisting of $1.4 billion in net borrowing availability under the revolving credit facility and approximately $100 million of cash on hand. Moving to capital deployment, during the fourth quarter, we repurchase approximately 10.2 million shares for $651 million at an average stock price of $64.17 per share. In addition, we have repurchased approximately 900,000 shares so far in the first quarter of 2023 for $61 million at an average stock price of $65.94. During 2022 we repurchase almost 42 million shares for $2.6 billion [ph], and we have more than $900 million remaining in our authorization. In total, we have repurchased more than one third of our outstanding shares in the last 18 months. We remain disciplined stewards of capital and we'll continue to look for inorganic growth opportunities and to repurchase shares at an attractive value. We maintain a fortress balance sheet, which will help us withstand a slower housing environment and keep us well positioned for long-term growth. Turning to Slide 15, we continue to believe it is important to assess our results using a base business methodology. During 2022, base business revenue grew 13% while base business adjusted EBITDA increased 28% year-over-year. This approach showcases the underlying strength and profitability of our company by normalizing commodity volatility. As a reminder, our base business definition assumes normalized commodity margins and static commodity prices at $400 per thousand board feet. Overall, I'm proud that we delivered solid results in the fourth quarter despite slowing housing starts. Additionally, our record results for the full year reflect our differentiated platform, talented team members, and intense focus on execution. I'm confident that through our leading footprint, investments in value-added products, and ongoing efficiency initiatives, that we can continue to gain share, grow our value-added products, and deploy capital. Now, I would like to discuss our guidance on Slide 16. Given the current challenging conditions in the housing market, amid elevated mortgage rates and general uncertainty in economic conditions, we are amending our guidance disclosures at this time to align with our public customers. Customers of all types and sizes have expressed their uncertainty about starts in the year ahead. As a result, we have decided to only provide guidance for the first quarter of 2023 as shown on Slide 16. We will reassess full year guidance for actual end base business as the year progresses. For the first quarter, we expect net sales to be in the range of $3.4 billion to $3.7 billion, and adjusted EBITDA to be in the range of $400 million to $440 million with an adjusted EBITDA margin in the range of 11.7% to 11.9%. I would also note that the first quarter guide assumes gross margins to be in the 30% to 32% range. In addition, given the 2022 starts profile, we expect comparisons to prior year will be most difficult in the first two quarters. Our guidance includes the following full year assumptions, which are also outlined in the earnings release, and on Slide 17. We expect total capital expenditures in the range of $300 to $350 million. This includes continued investments in value-added products, and we continue to invest in our technology and infrastructure, and we will migrate to one integrated ERP platform in the coming years. I'll remind you that the related increases in CapEx and OpEx are included in our guidance and our 2025 financial projections from our December 2021 Investor Day. We expect interest expense in the range of $150 million to $170 million, an effective tax rate between 23% and 25%. Depreciation and amortization expenses in the range of 525 million to $550 million, no change in the number of selling days, and we expect to deliver between $90 million and $110 million in productivity savings. We recognize that it's important to think about potential outcomes for the full year, so on Slide 18, we provide a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing markets and commodity conditions. I will reiterate that we are not providing full year guidance here, but this scenario analysis should help clarify our range of performance expectations and demonstrate the capability of our business to achieve strong adjusted EBITDA margins in 2023. To summarize, we are exceptionally well positioned to withstand a slowdown in housing while continuing to drive our strategic goals forward. We have a strong balance sheet and no long-term debt maturities until 2030. We are operating in a proactive fashion and are taking the necessary steps to manage through this downturn with a relentless focus on execution. I'm confident our best-in-class operating platform will continue to generate solid free cash flow, which provides further financial flexibility. We will also diligently deploy capital and work to maximize long-term shareholder value. With that, let me turn the call back over to Dave for his closing remarks.

Operator:

[Operator Instructions] We'll take our first question from Trey Grooms with Stephens. Your line is now open.

David Rush:

Hi Trey. Thanks, Trey.

David Rush:

Thanks, Trey. That's a great question. I'll start with R&R. R&R if you expand it in the current year primarily because we had capacity constraints in 2021 and 2022 just taking care of our existing business. Once those capacity constraints waned, our ability to focus on that segment again allowed us to go after new customers and try to generate more R&Rs business. But multi-family, it's been primarily through acquisition.

Peter Jackson:

Yes, no, thanks, Trey. So that's a good question. There's a lot going on in the market and so we've stayed away from the cash flow including it in the full year scenarios, but yes, the short answer to your question is we still think it's north of $1 billion in free cash flow, assuming about a 20% starts down scenario and a reasonably steady commodity environment. As you know, those, both of those things can move our working capital quite a bit. Generally speaking, we still believe that that roughly 10% incremental or decremental working capital with sales is a good way to think about us. So given the dynamics around what commodities are doing, kind of what starts are doing, as well as the core underlying business' ability to generate cash, we do think that north of $1 billion number is still right.

David Rush:

Yes Trey, I appreciate that question. It makes sense for you to ask it. The value-added has shown incredible resiliency even as we've had headwinds and starts and the market has turned a little bit, at least especially on the component side. They're just such a nice offset to the labor challenge and the labor challenge is going to be consistent even in the current housing environment we're in. So we haven't seen people move away from components even as their starts have gone down. We have achieved over a 50% of our sales in total value-added in Q4, which has been a nice buoy to our overall sales mix, and we think through growing through our recent acquisitions that we're going to be able to continue to maintain that pace.

Peter Jackson:

Yes and probably the only thing I'd throw in, the only thing I'd throw in there, Trey, is that it does correlate to some degree the starts, right? I mean, yes, they're still using it and they're not going away from it like Dave was saying, but we don't want to somehow argue that Truss is going to maintain its volumes when starts are down there. There is a correlation there, but we are seeing growth, we're seeing secular growth, and so that's certainly a strong area for us, and I think you heard it in my comments, right? So fourth quarter value-add, we were still favorable even though starts were down more than 16%.

David Rush:

Thanks Trey.

Matthew Bouley:

Hey, good morning guys. Thanks for taking the questions and welcome Dave to the earnings call. So first question on, you know, still kind of seeing that gross margin above 30% for the Q1 guide. When we look at the midpoint of your scenarios of that kind of 10% to 11% EBITDA margin for the year, what does that imply about the gross margin beyond Q1? How quickly does it normalize and any color on sort of commodity versus non-commodity gross margins as well would be helpful? Thank you.

David Rush:

Yes, the only other thing I'd add Matt is, part of how we've managed margin is actually through some of our cost improvement initiatives around manufacturing. We've actually improved our board foot per man hour by 22% since the merger. That productivity in Truss allows us and will allow us to compete effectively for share even in a challenging environment. So we're kind of going at it from all angles and trying to maintain the margin the best we can.

Peter Jackson:

Yes, Matt, that's a good question. I think we've pretty much already seen that convergence as we get farther into the quarter. Our door and millwork sales have somewhat normalized, but we still believe in the value-added segment as a positive for the overall business. And the Truss component, as I said, has been really resilient. We haven't seen people move away from Truss, granted, because there's fewer starts. We're going to have fewer sales in Truss, but the fact that we can maintain that percentage of our overall business is very encouraging to us and we believe it will continue.

David Rush:

Thanks Matt.

Ketan Mamtora:

Thank you. First question, recognizing that there's still a lot of uncertainty around, can you give us some sense of how you guys are thinking about the multi-family business and R&R? It seems like that is becoming a greater focus area for y'all.

Ketan Mamtora:

Got it. That's helpful. And then my second question, either Dave or Peter, it seems like there is some investor concern about your sort of ability to hold onto price gains on the manufactured component side, with engineered wood pricing also starting to fall quite sharply, obviously single-family is down. Can you talk at a high level, sort of at least philosophically, how you'll approach that?

Peter Jackson:

Yes and I think we've talked a lot about the amount of investment we've made in pricing management and pricing rigor and pricing discipline. That's certainly an important part about how we expect to manage this business on a go forward basis and combine with this point about how efficient we are, we think that puts us in a great position to offer a total cost benefit to our customer, while at the same time getting a fair margin and being able to hold on to what we worked so hard for. So we're certainly optimistic right now, especially as you see each quarter's numbers come through.

Ketan Mamtora:

That's helpful perspective. Good luck in 2023. I'll jump back in the queue.

Operator:

And thank you. We'll take our next question from David Manthey with Barclays. Your line is, I apologize, with Baird. Your line is now open.

David Rush:

Thanks.

David Rush:

Yes, thanks Dave. That's a great question. So the short answer is, we feel really good about the balance sheet and we think that our priorities around capital allocation are still the right ones. We're going to lean in on it. You know, we've got no really, no structured debt till 2030. The ABL is, we just reran that one from a timeline perspective. So we've got new maturity start, plenty of liquidity. We feel very good about the strength of the balance sheet. You layer on the fact that, as you noted, we would expect to release some working capital in the event of a further sort of slowing in the market. So that will be a nice tailwind in terms of available cash. The business is still generating cash, so feel good about that, even in some of these more aggressive downside scenarios. And then the overlay of all that is, we do expect there to be opportunities, right? While M&A has certainly been a source of growth for us, and it has slowed down in terms of total number of opportunities on the market, we still see nice targets at reasonable multiples as evidenced by the Noltex deal that we think should be part of the BFS family. And we're going to continue to execute those. So we're going to -- as we stay disciplined, we think there's really going to be, there are going to be nice opportunities for us to continue to do that. And as we've demonstrated up through now, we think there's real intrinsic value in the repurchase of shares. So to the extent we're not seeing good targets in M&A or we don't have the capacity internally to do more M&A, we'll continue to leverage that as well.

David Rush:

Thanks, Dave.

Keith Hughes:

Thank you. On the guidance for the first quarter, can you give us any kind of breakout how much the revenue decline is from commodity deflation versus units, and the kind of value-added comment within that would be nice as well?

Keith Hughes:

Yes, that's directly what I was looking for. And I guess the question on cash flow, you've played out some M&A targets with the stock where it is now, would you consider buying in excess of free cash flow on other borrowing as we go through this downturn on shares or are you going to be limiting yourself on share repurchase with cash you're generating?

Keith Hughes:

Okay. Thank you.

Operator:

We'll take our next question from Adam Baumgarten with Zelman. Your line is now open.

David Rush:

Yes, Adam, that's a good question. In 2023 multi-family will be a tailwind for our margin. It only creates a little bit of a tailwind though, because it's still only about 15% of our overall business. R&R traditionally has been a higher margin product as well and we expect a favorable result from R&R on our margin maintenance. It will help us hold on to margin. Again, the combination of those two products is a smaller percentage of our overall business and generally our margin profile follows single-family, but they will be helpful in us maintaining as we normalize in other areas.

David Rush:

Yes, Adam I'd love to talk about our digital milestone. So 2022 is a year of development. We really weren't trying to monetize the concept in 2022, and actually even through 2023 it would only be a marginal revenue opportunity. We're playing end game here with the digital solution. What we're focused on in 2023 is the full development of the platform and we believe by the end of the year, we will have achieved all the development milestones. We're piloting it in 40 with 40 customers across four markets. We're going to learn a lot from that. We're going to go back, we're going to refigure, we're going to redevelop, we're going to change what we need to. Because at the end of the day, the full recognition of value in this solution is through pull through sales by making us easier to do business with. We believe fully in that concept still. We believe we are light years ahead of any of our competition as it relates to where we stand in the development process. And we still believe in our goal of $1 billion of incremental sales by 2026, primarily through pull through business. Anything you want to add there, Peter?

Adam Baumgarten:

Okay, great. Thanks, best of luck.

Operator:

We will take our next question from Steven Ramsey with Thompson Group. Your line is open.

David Rush:

Yeah, no thanks, Steven, you're right. We struggled to get what we've wanted. It's gotten a little better. There has not been nearly the relief in things like rolling stock that there have been in certain other categories. So that's still a source of, I would say strain. It's getting better. So my sense is this year's CapEx will be more achievable than last year. There's certainly a lot we want to do, and we're still optimistic that that will continue to free up as the year progresses.

David Rush:

Yes, so the capacity question is a good one. But we firmly believe in investing in the long-term. So we aren't changing our priorities as it relates to investments and capacity, specifically around value-added products. And in fact, we're trying to address kind of labor concerns a little bit through some of these investments. We have fully robotic lines in Georgia and Texas that we're still working through and trying to make sure and having some success with. And I think we have six to seven more on the books that we're going to add over the next two to three years. So we're seeing investments in technology and investments in automations as a way to really address both labor concerns we have today and in the future. So that will definitely not stop. As it relates to the core business, we've been really diligent about protecting our A and B players out in the marketplace and that's not going to change either because we see that as and what we're experiencing now is somewhat of a short-term scenario and over the long-term we want to come out of this guns and blazing on the other side with our best people. So that's kind of how we're approaching it right now.

David Rush:

Thanks you.

Jay McCanless:

Thanks. Good morning. Congrats Dave.

Jay McCanless:

Yes, you bet. So Slide 18, kudos on this new EBITDA presentation, very useful. But when you talk to your single-family builder customers, where do you think they're falling right now on this, these three ranges, negative 15 to negative 25 seems to be what we hear from a lot of people. But would love to hear what feedback you've been getting from your single-family customers on where they think 2023 falls out.

David Rush:

Yes, I mean it's the reason you have three different scenarios there to pick from, right? You saw it as recently as coming out of the year in December, most builders were really pessimistic. Mortgage rates dipped down a couple 20, 40 basis points and all of a sudden the light turned on and everybody started showing up again. So it was really hard to just try to narrow it down to one narrow range and that's why we gave you the different scenarios. But the good thing is, we do know underlying demand remains strong, evidenced by how quickly people returned to the marketplace once they realized mortgage rates were at a rate that they felt like they could execute on the home purchase that they were after. So it was just additional proof that over the long-term home, underlying home demand is there. We've just got to make sure that we balance that affordability against that demand.

David Rush:

I think it's more of what you just said, the latter part. I think they had a good couple year run. They're looking at fairly uncertain environment now and they're just not ready to get off the fence. I think as the year plays out and as we see more certainty as the year plays out around interest rates and mortgage rates and people can evaluate what the next 12 to 18 months look like, I think they'll jump back in and of course we're looking continuously throughout the time that we're there.

David Rush:

Yes, I mean, I think what you described is accurate. It has been a bit erratic ups and downs. I don't know that there's a trend there broadly other than to say it's slower than last year and it's certainly a market that's trying to find its own. Yes, I don't think breaking it down at this point is going to help anybody, but it's certainly a market we're staying very close to operationally to ensure we are responding correctly to whatever is dealt.

Jay McCanless:

Sounds great. Thanks for taking my questions.

Operator:

Well, we will take our next question from Reuben Garner with The Benchmark Company. Your line is now open.

David Rush:

Thanks.

Peter Jackson:

Yes, no, that's a good question. So 2021 guide for those of you who don't remember, was $7 to $10 billion of deployable capital. And the way that was, think about that is 7 was at a onetime leverage at the end and 10 was at a two times leverage at the end. So that's one to two times the, the base business EBITDA from a leverage perspective. The short answer is, we've talked about this a lot and I'm not sure everybody gets it, but commodities for us is an important part of our business, but we make money regardless. We make a lot more money when the price is very high. So it becomes a bit of an option where if you have a high future price, you get a lot more cash flow into the business. And that's exactly what we experience in year one of our execution against our Investor Day targets. We had an incremental amount of cash that has put us far ahead of the pace necessary to make our number, even though you're right currently the forecast of where 2023 is going to be for starts as well below what we have built into our forecast, we talk about low single growth is being, or low single digit single family starts growth is being embedded into the model. But we're certainly in a very strong position with the start that we've had to be able to deliver on that regardless. And as I mentioned, we still expect to see healthy free cash flow delivery throughout the remaining years on top of that nice strong head start.

David Rush:

Thanks.

Collin Verron:

Good morning. Thank you for taking my question. I just wanted to start at the, the fiscal year 2023 scenario of single family starts down 15% to 25%. The sales range there is $15 billion to $17 billion, which is only about a 10% decline in sales versus the 2022 base business sales of $17.7 billion you reported. Can you just talk about the factors there that would get you to that outperformance versus your largest end market?

Collin Verron:

Great. That's helpful color. And I guess my last question here is just on the productivity savings, you guys are expecting that $90 million to $110 million. Can you just give some examples of those productivity improvements that you're executing on here in 2023 and just how achievable those are in these different volume type environments?

Collin Verron:

Great, thank you for the color.

Operator:

And we will take our next question from Michael Dahl with RBC Capital Markets. Your line is now open.

David Rush:

Yes, so I think probably the biggest challenge in this is, that there's no base business at a quarterly level that's, that's not a, it doesn't actually exist, so I'm not holding out on you in terms of talking about that number. You're right, there is a, there is a lot going on in the year-over-year comps and the ability to break out those pieces. Unfortunately it is generally driven by some detailed analytics. We have some top side assumptions, but I don't think they're particularly helpful to you in terms of insight. A lot of the year-over-year comparison from a commodities perspective is negative in the first half or far more negative in the first half than the second. Unfortunately just from a, the ability to break those pieces apart, so starts comp. So I think that our guide or our comment when we were given the guide saying that the first half is going be harder from a comparisons perspective unfortunately it's probably my best insight to offer for the, for the numbers this year.

David Rush:

Yes, I've got…

Michael Dahl:

Yes, I got you. Okay. And, and so my second question is, is kind of somewhat related, but just a two-parter on the full year scenarios. And so as a point of clarification, when you say commodity price my sense has been that a blend of lumber in OSP [ph], but can you correct me if I'm wrong there and, and hit the starting point. Okay. So then just for a frame of reference if we're looking at a blended price year to date, you know, it, it seems like that's kind of in the mid three hundreds, maybe oscillating between mid-300 s and high 300 s. Is that a fair characterization of where you're at year-to-date on that blend?

Michael Dahl:

Yes, lot of changes on, on that on a week-to-week or day-to-day basis. Okay. And, and then, so when we think about the range of scenarios. Obviously you've spoken to the gross margin dynamics a bit and SG&A is going to flex up or down a decent amount depending on if you're like, down 10 versus down a 30, right? But when you think about putting this range together in terms of how you get down to the ultimate EBITDA number, which part is the bigger swing factor in in your models? Is the gross margin line pretty steady normalizing down and the swing factor in EBITDA margin is mostly SG&A flexing or is there a different mix as you get kind of progressively lower on the scale of these scenarios?

Michael Dahl:

Got it, okay. Thanks Peter.

Alex Rygiel:

Thank you. You referenced a slowdown in the average daily sales sort of in December and January. Can you quantify that?