Builders FirstSource, Inc.

Good morning, and thank you for joining Builder's First Source Second Quarter 2021 Earnings Conference Call. Today's conference is being recorded. Michael Neese, Senior Vice President of Industrial Relations for Builder's First Source, will now provide the company's opening remarks. Please go ahead, sir.

Thank you, Sarah. Good morning, and welcome to our Second Quarter 2021 Earnings Call. I hope you and your families continue to remain safe and well. With the increase in the COVID-19 Delta strain, our COVID task force continues to closely monitor the developments, and we will continue to follow CDC guidance and protocols for the safety of our team members, customers, suppliers, and communities. With me on the call today are Dave Clifford, CEO, and Peter Jackson, our CFO. We will review our second quarter results and provide an update on our base business momentum, our ongoing integration progress and achievements, as well as our recent M&A. We remain bullish on the housing sector and believe we are well-positioned to continue to capture double-digit singularity. We have provided GAAP results that include BNC in the second quarter of 2021 and standalone BFS in the second quarter of 2020. We have also provided pro-formal results as if we own BNC in the second quarter of 2020. Our adjusted EPS calculation excludes amortization of intangibles. The second quarter press release and the supporting presentation 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 for the most directly comparable GAAP measures. The reconciliation of these non-GAAP measures to the corresponding GAAP measures were applicable, and the discussion of why we believe they are useful to investors can be found in the arranged press release, our SEC filings, and presentations. 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 statement section in today's press release and in our SEC filings for various factors that could cause our actual results to differ materially from forward-looking statements and projections. With that, I'll now turn the call over to Dave. Thanks, Mike. Good morning, everyone, and thanks for joining us. Our record second quarter and first half earnings are the result of the hard work and strong execution by our more than 26,000 team members who have been relentless in providing superior customer service amid robust demand in a very tight supply environment. I want to start by thanking them, as I couldn't be more proud of their efforts. In the second quarter,

We delivered core organic sales growth above 35%, along with record gross profits, adjusted EBITDA, and margin. Our performance accelerated in the second quarter as we continued to expand our value-added offerings, executed disciplined pricing strategies, and accelerated merger-related integration savings. I'll cover three key topics on today's call. First, I'll provide an update on the residential housing environment, which remains very strong, review our second quarter results, and given the unique demand and supply dynamics, share some insights into the strength of the underlying growth in our base business. Second, I'll provide an update on our recent M&A transactions that further strengthen our market position and advance our digital strategy. Finally, I'll provide an update on the BMC integration, which is progressing exceptionally well and running ahead of plan. Let me start with the current state of the residential housing environment. We continue to see strong demand across the country. Specifically, single-family housing demand is robust and our entire supply chain is working hard to keep up with that strength. Regardless of short-term fluctuations, We believe the nation's home building sector is growing today, and there is sustained growth in store for the next several years. Freddie Mac stated earlier this year that the U.S. is underbuilt by approximately 4 million homes. The National Association of Realtors believes we are 5.5 million homes underbuilt. Whichever number you believe, there is a significant shortage of housing in this country. According to the NEHB's second quarter 2021 housing trends report, almost 20% of American adults are considering the purchase of a home within the next year. This statistic has increased for five consecutive quarters and is nearly double the 10% in Q1 of 2020. Additionally, 64% of these potential buyers are first-time buyers, which is the highest share in history. The millennial generation, some 82 million strong, will continue to provide support and growth in new housing construction for many years. There is also an extremely tight supply of existing homes for sale. We have averaged 1.1 million units of inventory in 2021, which is 20% below the five-year average and well below the high of 3.5 million units of inventory in 2007. In addition, adjusting for the effects of the pandemic in the second quarter of last year, single-family starts this quarter grew 27% when compared with the second quarter of 2019. Housing under construction also increased 29% in the second quarter. There are now 439,000 more single-family homes under construction than there were at this time last year, and 396,000 more than the Some industry observers are racing to call the top of this cycle, but the data tells us there will likely be continued strong momentum in new home construction, which will bode well for us and the industry as a whole. Recently, we've heard from several of our home builder customers that they are tapping the brakes on starts for a few reasons, namely labor, material, and land availability, even though demand remains strong. These challenges this year and are pushing some new home construction into next year, supporting our belief that growth will continue for some time. And our 58% core organic growth in our structural components business underscores our belief that our value-added offerings will be increasingly important to builders as they continue to navigate material and labor challenges and look for ways to get more efficient. housing starts showing significant growth, mortgage rates remaining at historical lows, and a continued shift to home ownership are all significant tailwinds. As a reminder, we are in 84 of the largest and fastest growing MSAs in the country. Our team is poised to continue to capture a disproportionate share of the growth as we have done for the past several years and as evidenced by our most recent 260 basis point outperformance over the last six months. I am confident we will outperform the market in any environment, and what we are experiencing now is exactly what we envisioned when we put our merger together. A best-in-class operation located in the top markets in the country, focused on serving customers their construction challenges. We have a seasoned, cycle-tested management team, and we are just getting started. Now, let's turn to our record second quarter results. We delivered another strong quarter of top and bottom line performance Again, outpaced the market as we continued to gain share. Turning to slide four, I'll review our pro forma results for the quarter. Total sales grew 91% to $5.6 billion. Core organic sales increased 35%. Gross profit expanded more than 105%. and adjusted EBITDA increased a remarkable 232% to $836 million, with adjusted EBITDA margin expanding by 640 basis points to a record 15%. Turning to slide 5, we have received many questions from analysts and investors regarding the impact of commodities on our business results. In response, we are providing an overview of the underlying top and bottom line growth of our base business on a normalized basis, assuming a static commodity price of $400 per thousand board feet. For the full year 2021 versus 2020, we expect our base business net sales to grow to $15.3 billion, and adjusted EBITDA to grow to $1.6 billion from $1.1 billion or 45%. Given consistent single-family starts, we believe our 10.1% EBITDA margin on our base business is sustainable and can grow over time. That's a 31% improvement in profitability in two years. Peter will go into further detail in his prepared remarks, but I want to point out to everyone that our base business is large, it's growing, and it has a sustained double-digit EBITDA margin profile. Now, let me spend a bit of time on M&A and our recently announced transactions. Alliance Lumber, which closed on July 1st, Contrary to slide six, Alliance Lumber is the largest supplier of building materials in Arizona, primarily serving the fast-growing greater Phoenix, Tucson, and Prescott Valley metropolitan areas. The Phoenix metro area alone is expected to add more than 100,000 jobs in 2022, so we're excited about our increased presence in the state. Arizona is the number three-ranked single-family MSA in the U.S. This acquisition is aligned with our strategies in investing organically and through M&A to grow our portfolio of high value and faster growth categories. Alliance has an estimated 45% market share with the top home builders and catapults us to a leading position in the state. Its geographic footprint and component manufacturing capability is an excellent strategic fit and the limited overlap of our existing coverage enables us to expand our product offerings into previously untapped regions. Alliance is margin-accretive, and we have an opportunity to embed our millwork capability into their operations. deep, long-standing customer relationships, and a reputation for offering outstanding customer service, Alliance is an established and trusted advisor to leading homeowners and contractors across single-family, multifamily, and commercial end markets. Founder and CEO of Truecar and his team have built a fantastic company with strong leadership and values that align to our own in a similar culture of growth. on our strategy and recent M&A in the digital space, which has been a priority and focus for us over the last several years. Based on third-party research, the home building market is lagging almost every other industry in digital transformation. As a new generation of builders emerges, a generation that grew up with digital technologies, which has accelerated given the impacts business, and we see this trend having a long tail as adoption accelerates. Digital is a significant growth opportunity for BFS as the industry goes through a shift to digital execution. Given the scale of our platform, we feel we are well positioned to help shape important outcomes for our industry, including improved efficiencies and productivities Our digital strategy includes three main areas. First, a focus on our internal processes and productivity by investing in technology to drive operational efficiency and excellence. Next, help streamline interactions with our vendors and customers. Road. On June 29th, we announced a major step forward in our digital strategy with our intent to acquire Paradigm, an innovative software solutions company that is transforming the way new construction and renovation is done. Over the past 20 plus years, Paradigm has grown to over 300 employees, serving more than 250 customers spanning home builders, lumberyard, From home visualization to material take-off technology to drafting services and estimating, Paradigm's software platform helps increase sales and operational efficiencies for new construction and renovation businesses. The addition of Paradigm offers several compelling strategic benefits to builders' first source. 70,000 customers. Paradigm's platform will help us drive internal productivity in our team of over 700 designers and estimators. Paradigm provides another value-added capability to reduce inefficiencies and costs for our home builder customers, strengthening our current partnerships. Finally, and most impactfully, we believe we can capture more than $1 billion of incremental sales over the next five years by utilizing our digital assets to accelerate the adoption and capture rates of value-added products. To be clear, neither our alliance we will continue to reinvest in our business while actively pursuing accretive, tuck-in M&A opportunities to improve our mix and build scale in key growth markets. As you can see on slide 11, we have identified more than 460 targets in the $15 to $100 million revenue range. Our strong balance sheet and cash flow generation will allow us to be a disciplined, consolidated for a long time to come. Finally, I'd like to update you on the BMC integration, which is going very well. Synergies are tracking one year ahead of plan and are projected to exceed our initial expectation. Through the second quarter of this year, we have already captured $36 million in cost savings. Based on our progress to date, we are increasing our synergy targets. Specifically, we are raising our year one 2021 projected savings to between $80 and $100 million from the $60 to $70 million we had previously communicated. And now, we expect to achieve total synergies of between $140 to $160 million. versus our original three-year commitment of between $130 to $150 million. These increased synergy targets underscore the success of the BMC integration to date. In addition, our teams are working closely together to leverage our scale in product offerings. Specifically, we've been able to create additional capacity through our component facilities in overlap markets, accelerating growth in that key category. We have also been able to use our combined relationships to convert more national builders in attractive markets, accelerating growth in structural components, ready frame, and our no-work offerings. These are exciting times, and our outstanding results reflect the strong housing market and underlying demand for new homes, Our industry-leading platform, coupled with our ability to deliver value for our customers, and a continuation of our disciplined approach to cost management and operational excellence. And we are confident in our ability to consistently execute at a very high level. In conclusion, I would like to highlight one of our many valued associates. Nothing is more important than safety of our team members here at BFS. It takes hard work and commitment to build and maintain a strong safety culture. I wanted to spotlight someone who is going above and beyond to lead that culture in her location. Callie Rose is a regional safety manager in Oklahoma. She and her team invited OSHA to voluntarily visit the north of Oklahoma City Lumber and Millward location to further improve their safety and health program. While there, the OSHA representatives were coin as a token of appreciation for a successful inspection and for their outstanding training documentation. Dedicated team members like Callie help reinforce our safety culture and we are glad to have her on our team in Oklahoma. With that, let me turn the call over to Peter to go through a detailed look at our Q2 results and our 2021 updated

for delivering incredible results. Your execution is rock solid. I will cover three topics with you this morning. First, I'll review our second quarter results compared to combined pro forma results from the prior year quarter. Second, I'll discuss our financial position supported by a strong operating cash flow. And third, I'll provide some color on our guidance raise for the full Starting with our Q2 results, we had net sales of $5.6 billion for the first quarter, which increased approximately 91% compared to the combined pro forma prior year period. Turning to slide 13, value-added core organic sales increased by 35%, led by 58% growth in our manufactured products category and 17% growth in our windows, doors, and millwork categories. Our Q2 gross profit of $1.6 billion increased 105% year-over-year, while our gross margin expanded 210 basis points to 28.4%, above our stated more than 26% long-term target. Primarily driven by disciplined cost and pricing management and a dynamic FG&A was $902.9 million, an increase of approximately $324 million compared to the combined pro forma prior year period, driven primarily by expenses related to the BMC merger and other acquisitions, including intangible amortization and one-time charges. Variable compensation was also higher due to the increase in net sales and profitability. excluding acquisition-related one-time charges, underlying SG&A increased by 18.9%. As a percentage of net sales, total SG&A decreased by 360 basis points to 16.2% due to higher sales and continued expense control. Adjusted EBITDA increased 232% to $835.8 million, compared to the year-over-year pro forma period, driven primarily by higher sales at strong margins and cost management, including synergy sales. In Q2, adjusted EPS was $2.76 per share compared to combined pro forma of $0.64 a share in the prior year period. The 331.3% increase was primarily driven by the increase in net sales and gross margin offset by higher tax and higher SG&A expenses due in part to the normalization of COVID expense cuts. Adjusted EPS excludes amortization and one-time expenses related to merger and acquisition activity. Let's turn to cash flow. Our second quarter operating cash flow was an outflow of $3.3 million, and free cash was an outflow of $56 million, primarily due to the impact of commodity inflation on working capital. Turning to slide 15, at the end of the second quarter, our pro forma net debt to EBITDA ratio was approximately one times. We have no long-term debt maturities until 2027, and our total liquidity was approximately $750 million, providing us with significant financial flexibility. Last month, we successfully completed an opportunistic offering of $1 billion of aggregate principal amount of 4.25% unsecured senior notes due in 2032, further strengthening our balance sheet. We use the net proceeds from the offering to repay the credit facility, with remaining proceeds to be used for general corporate purposes. Our strong second quarter and first half performance are the result of superior execution from our field teams. They are meeting the demands of the strong market momentum while delivering excellent service to our customers. While the impact of increased commodity costs is evident in our results, our structural focus remains on profitable growth in our base business. As Dave mentioned, our base business EBITDA is expected to grow 45% this year. We will continue to focus on growing the higher margin specialty and value-add products and services in our portfolio. At the $400 per thousand commodity level, our value-added mix is roughly 43% of our total sales. From 2019 to 2021, our base business net sales are projected to grow at a compounded annual growth rate of 15.4%, while our EBITDA is projected to grow 32%. That exceptional base growth is expected to be further augmented by commodity tailwinds, In the appendix of the investor presentation on slide 20, we've also provided a sensitivity analysis with various commodity cost assumptions and the corresponding profits if you assume static commodity prices at those levels. Please keep in mind that shorter-term price fluctuations can result in materially different results than in a static commodity environment. Most importantly, the base business perspective provides a sharper view of our run rate regardless of where commodity prices ultimately settle. We believe we can continue to grow our base business next year while sustaining a double-digit EBITDA margin. Let's turn to our 2021 full-year outlook on slide 16. Our differentiated platform is delivering above-market growth and strong results, which we expect to continue. we are seeing strong underlying demand in both new housing construction and remodeling. As we anticipated, builders are seeing such strong demand that they are limiting sales in certain communities to maintain backlogs at prudent levels given material and labor constraints. Based on our stellar first half performance, our positive conversations with customers, our accelerated integration synergy capture, a better view of our inflation environment, strong organic sales through July, we are increasing our full year 2021 outlook. We expect net sales in the range of $18 to $19 billion, representing growth of approximately 41 to 48% over 2020 combined pro forma net sales of $12.8 billion. This is driven by an increase in new starts as the key catalyst for our base business growth, plus the benefit of robust but receding commodity prices. We anticipate adjusted EBITDA to be in a range of $2.2 to $2.4 billion, or approximately 105 to 124% over 2020 combined pro forma adjusted EBITDA of $1.07 billion. We expect to deliver significant free cash flow over the next six months based on normal seasonal flows, declining commodity prices, and active working capital management. Our outlook is based on several assumptions which are outlined in the earnings release R&R growth in the low to mid-single digits, and multifamily starts growth in the high single digits. As discussed earlier, our commodity assumption provides an 18% to 28% lift to our base business sales growth. Commodity costs have come down over the past several months, and we expect OSB in particular to continue to come down, during which time we will remain vigilant as we sell through our higher commodity cost materials. Despite the commodity price volatility, we feel confident in hitting our full-year guidance. As Jake mentioned, the integration with EMC is ahead of our initial expectations. We now expect to deliver cost synergies of $18 to $100 million this year, and in addition, Turning to capital allocation, since the merger of BFS and BMC seven months ago, we have spent considerable time focused on our strategic alignment and the analysis of the best ways to deliver value to our shareholders over the long term. As a result, our priorities for balanced capital deployment are, in order, maintaining a strong balance sheet, reinvesting in our business to drive growth and productivity, continuing our tuck-in M&A strategy to grow our capabilities in desirable markets across the country with a specific focus on value-added capabilities, and returning capital to shareholders as appropriate. As part of our balanced capital deployment strategy, we are setting our leverage target in the one to two times range, recognizing that we will appropriately adapt that range to the economic cycle. We remain well positioned to deploy capital effectively after executing multiple value-enhancing transactions given our robust balance sheet and strong M&A pipeline. Overall, the financial results for the first six months have been extraordinary. base business is robust, and we believe there is a long runway for growth in the years ahead. We are focusing on creating value for our stakeholders and are continuing to build our world-class distribution network founded on operational excellence and delivering exceptional value to our customers. Let me turn the call back to Dave for his closing remarks.

Thanks, Peter. In summary, demand in single-family housing remains exceptionally strong. and we continue to capitalize on this positive trend by ensuring we meet the needs of our customers, both today and in the future. The BMC integration continues to progress extraordinarily well, and our realization of cost synergies is a year ahead of schedule. Looking forward, we remain focused on executing our strategy of with high value and faster growth categories, while simultaneously improving efficiencies, productivity, and our digital capabilities in the value chain. Our future is bright, and our ability to execute and our hunger to innovate have never been stronger, and we will continue going above and beyond for our customers and partners to provide best-in-class home building solutions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, that's star 1 to ask a question. It will pause for just a brief moment to allow everyone an opportunity to signal for questions. And we'll take our first question from Ruben Garner with The Benchmark Company.

Thank you. Good morning, everybody. Good morning, Ruben. Good morning. So first off, thanks for all the detail in the deck. I think that's all going to be very helpful for folks seeing how much of your business is not really driven by this lumber market. So maybe if I could start, you mentioned your visibility into next year. How much visibility do you have? In other words, how much business do you think this year is going to be pushed out to next year for you guys? I mean, you're putting up big growth numbers in your manufactured business despite this. Any color into what's going to get pushed out into 2022?

Yeah, Ruben, as I mentioned in my comments, we've been in contact with our customers quite regularly, and almost without exception, you've seen them kind of slow the starts for this year with the intent of pushing demand into next year. And almost to a person, they said this is the strongest environment they've operated in many through their careers. Given the state of the demand, which is much, much different than it's been in a very, very long time, interest rates, we've seen this year into next year. And I also point out, you know, our focus on our value-added portions of our business are just continuing to gain momentum. And I said it in the script, and I'll say it again, I've got confidence in our ability to continue to drive growth and take share in any market environment.

Perfect. Very helpful. And then secondly, on the free cash flow piece, it's a little, I guess, Maybe if you could help us out, what free cash flow have you generated thus far in the year? How much working capital investment is, I guess, embedded in that number? I'm just trying to figure out kind of what's left to go, what's sort of the normalized number there and where your balance sheet will stand as we kind of enter 2022. Congrats on the results, guys, and thanks for your help.

Yeah, thanks, Ruben, and great question. It's been a dynamic year for cash flow, as you highlighted. We've seen an investment of over $1.1 billion year-to-date in our working capital space, right? We're not yet, while the market is certainly turning, either the summer build of normal inventory or the higher prices that we bought through all year. So year to date, our free cash flow has been in use right around $300 million. We do expect to generate the remainder so about a billion eight between now and the end of the year we've already started to see that generation in the third quarter third quarter will be a very good year as you would expect as the market turns and still a significant amount of cash generation into the fourth quarter so certainly see a clear line of sight of where that will take us a billion eight of additional employee capital in ways that will benefit shareholders.

Perfect. Thanks again, and good luck moving forward. Thank you.

Thank you. And next we'll move on to Mike Dahl with RBC Capital Markets.

Morning. Thanks for taking my questions. It's a great deck, so good job. Peter, I wanted to pick up on the cash flow and also the validation, Dave. Peter, I think you have a more technical and colorful term for how much cash is coming in the next six months. A little restrained here. You're a turn lever currently that's clearly going to come down when you send a net out the cash in the second half versus the M&A. he's still lined up close to zero net debt. So that kind of checks off that, you know, box one of maintaining strong balance sheet. When you think about the three other priorities, I know it's in order here from kind of a medium to longer-term standpoint, but when you're thinking more near-term in nature, you know, next couple quarters, next two quarters, you know, is there any bias across the three? I mean, do you whether it's reinvesting internally for their second M&A or returning capital. That last one hasn't been a part of the pro forma company yet. So just any color on kind of more in your term how that balance shakes out.

So, you know, a couple of comments. Obviously really excited about the strength. very favorable debt out there. The 2032 notes, you know, four and a quarter unsecured is something we're very proud of. You know, one of the agencies gave our secured notes an investment grade rating. We certainly are proud of what we've done in the balance sheet in any You know, we put our priorities out there. I think we're excited about what the pipeline looks like for opportunities to continue to grow in M&A. But we're going to remain disciplined. We're not going to, you know, get out over our skis on valuations. We're very clear-eyed about what commodities do over time. That can't be a driver. And we think that that pathway will certainly yield opportunities. You know, your comment about not having done share buybacks as a pro forma entity is absolutely correct. Both prior entities have done share buybacks. So I don't think anybody's necessarily opposed to the concept. It's more a matter of making sure we're looking at the situation each month, each quarter, and making the absolute right decisions for the long term for our shareholders. So we're going to stay committed to that, and we will continue to message as

Got it. My second question is just on the manufactured products. I mean, that is exceptional growth even against a strong market backdrop, and so clearly there's some share gains there. I know this is probably difficult, but is there any way that you could kind of talk to how much of that growth was effectively seeing increased adoption or conversion within your existing customer base versus potentially the added capacity that you've brought on and or just a higher customer count in your manufactured products segment. Thanks.

This is Dave. You know, we had both legacy companies, as you know, had strong underlying momentum and a strong focus on manufacturing components for a long time. And both of us were continuing to gain share. When we put this team together, we knew, particularly in overlap markets, there will be increased opportunities for us to accelerate that growth, both internally based on what we were doing with our assets and where we saw opportunities to extend capacity, which has been very tight in some markets where we've had rapid adoption. But importantly, continuing to convert customers at a higher rate. Those new customers, but I would say more importantly and probably more impactfully, is accelerating growth with customers.

We've already had relationships in certain geographies, and our merger helped them get more comfortable in accelerating and extending that across their footprint. That's great to hear. Thanks, Dave. Thanks, Peter.

Thank you, and next we'll take Matthew Bolley with Hercules.

Morning, everyone. Hey, Matt. Hey, Dave, thank you for taking the questions. I echo. Sure, and happy birthday, Matt. We appreciate you spending your birthday morning with us. I think you ought to get a bigger size piece of cake for that. You know, this is exactly what I imagined for my birthday, so much appreciated. We're thrilled. So, yeah, well, you provided a gift here. So a lot of things to ask about. Let me ask about the digital opportunity, the $1 billion. You know, Dave, you mentioned at the top that you're going to, part of this is using, if I heard you correctly, paradigm to accelerate value-add adoption. And you list on one of the slides that there's, It looked like four or five kind of drivers of the one billion. And what I'm wondering is kind of if you could kind of bucket that out, how much comes from scaling the paradigm software versus how much comes from that litany of internal drivers and across wallet share and driving value-add adoption? Thank you.

Well, the internal piece, you know, I appreciate the question. The internal piece is something. and just what are internally today very manual processes as we go from design to estimating for our customers. And there are two key things that are going to help us accelerate towards that billion. And obviously these are early days, and we still have a lot to figure out. And oh, by the way, we haven't closed the transaction yet. But in our early thinking, you know, we see opportunities to extend their platform more broadly have done a great job to get the customers that they've gotten, but we've just got a bigger platform and the ability to scale that. But if you think also about long-term being able to automate our design and take-offs and actually provide our customers with an estimate of our full capability, including our manufactured components and ready frame and even further down our millwork capability, which is at the core of what Paradigm does today, We just see that ability and the ease with which we'll be able to do that over the long term being a great value proposition for our customers and the ability to get our value-added products in front of them in a more seamless way.

Wonderful. Okay, that's helpful. And, yes, we'll look for that additional color upon the deal closure, but that is very helpful. Second one on the margin side, you know, you made a comment at the top that the base business margin, the 10.1% this year, is something that you see as sustainable, if not with the potential to further expand. I'm doing the math right with a little bit of rounding. It looks like your core... based business incremental margin in the guide this year is right around 18%, give or take, and correct me if I'm wrong. So high level, the question is, is it that you can further expand structural gross margins, or is it that you're shifting to additional SG&A leverage? And I think one thing that would be helpful to address a common question we get from investors is, If any of the base business margin, that 10%, if you think any of that may have also been temporarily benefited by extreme lumber prices and shortages there. So the long question, but would appreciate any color. Thank you.

Yeah, there's a lot in that. Let me try to unpack it a little bit, and then I'll have Peter come over the top with any further color. But, you know, I am confident in our ability to continue to expand that margin over the long haul. I think to your last question, no, I don't think there was any outside impact based on lumber in that. And as you think about our core business, and as Peter highlighted, you know, 43% of that today roughly is our value-added areas. With the growth that we see we just accelerate our synergy capability here. We're going to capture that over the next six to 12 months. And in addition to that, you know, you think about our ability to drive operational excellence in this combined company, which we're just starting to think about and get after over the long haul. We see the ability to continue to improve our margins over time. So it's a combination of growth and internal work that we see going on that will continue to enable us over the long haul to expand those margins.

Yeah, so just a little bit of color on that. Matt, we have seen a couple of, I'd call it leakage of the impact and the acceleration of price in the marketplace into other buckets. We try to normalize for that in here. We try to look at the... the margins that we thought were sustainable over the long term. You know, we've talked in the past about sort of a normalized amount of gross margin. We try to account for that in this and allow the rest of it to slosh over into the commodity unusual pricing bucket. So I think that is an important one. And like I said, we have a lot of different ways to drive the performance of this business on a go-forward basis. And I think it's all of the above. It's that expanded value add. It's the ZNS, GNA, a lot of operational excellence, a lot of improvements that we think we still have in front of us as we continue to solve problems for our customers and just grow.

Wonderful. Well, that is very clear. Thank you, Peter, and thank you, Dave, and best of luck, guys. Appreciate it.

Thank you. Next, we'll take our next question from David Mancy with Beard.

All right, thank you. Good morning, everyone. One day, one. So lumber prices, they clearly have an impact on both the OPEX leverage in the P&L and on the gross margin itself via mix. But as we look at the table in the appendix, sort of top to bottom, Are we to assume that behind that you're looking at SG&A dollars that are materially flat in every one of those states of being in that appendix table?

No. Our expectation is that about roughly 70% of SG&A remains variable. we've used historically. I mean, this is base only, so you do have to sort of exclude that commodity price fluctuation component.

Okay. And then secondly, as it relates to the table as well, you note here that these are constant lumber prices for the full year period. And just to level sense, can you talk about the dynamics in real life as you move from tier to tier across this table? Just what are some of the moving parts that we should look for as you sort of chase lumber prices up and down and the impact on the P&L?

Sure. Yeah, I mean, I think it's consistent with what we have said in the past about commodities. You know, we certainly want, in fact, to have a clear understanding of how our business works as you deal certain parts of the country that are impactful on the results. When you have inflation where you've got longer fixed price contracts, whether it be 60 days and the smaller percentage that's left that are the 90 days or 90 days plus, you inevitably will see a compression in the gross margin percentage as that inflation occurs. And then as it reverses, you'll see an expansion in the gross margin percentage. Conversely, you'll also see in markets with very, very fast pricing turns where everything is very short, sometimes you'll see the exact opposite, where you will see expanding margins on the way up and declining margins on the way down as you're pricing off a replacement in a very fast turnaround environment. inventory quickly so that whatever those impacts are, they happen quickly, right? They pass through very quickly. And I'll re-emphasize this, we're not in the game of predicting and betting on commodities. We're in the game of distributing commodities to the advantage

It's a matter of making sure you're running it in a disciplined and operationally excellent manner. That's perfect. Thank you very much.

Thank you. And next we'll move on to Keith Hughes with Trist.

Thank you. A question on the manufactured products number. I know that does get impacted by commodity inflation. So is there a way you can talk about units, how much units are up year over year? Yeah, so that's the attempt. That 58% excludes what we believe to be the overlap from commodities. That's actually a new note for you in there, Keith, on slide five. In that footnote, you can see we sort of called out its impact. commodities, if you think about the commodities that are included in what we manufacture. Okay, so that gets closer to a unit number. Is that what you're trying to say? Yeah, what we've communicated is close. Based on our analysis of price-volume mix, that's our best estimate, yes. Okay. And same question on the guidance for the second half, implies even up year over year. is that going to slant towards the third or fourth quarter given commodity impact or any sort of directional guidance there would be helpful? Well, I wouldn't hesitate to say third quarter is always higher than the fourth quarter just due to normal seasonality. And I think the impact of commodities... I'm talking about the gain year over year. Does it slant? Is there going to be more of a gain in one quarter versus the other? Based on a prior year comparison? Yeah. I don't know if I know that off the top of my head. Okay, you can get back to John. That's fine. Yeah, it's probably a little more weighted to Q3. Just by nature of the seasonality, it's a little bigger, and the fall through would be a little bigger in that order. Okay. All right. Thank you. Sure.

Thank you, and next we'll take our question from Steven Ramsey, Thompson Research Group.

Hi, good morning. Maybe to start with, on the divestiture of the gypsum operations, is that a meaningful impact to the incremental margins that are non-lumber?

No, it's not. It's a fairly small business in total, and the margins were low average.

Great. And then thinking about product shortages you referred to for window doors, millworks, is that something, I'm sure it's embedded in the guidance for 2H, but in the second half, is that a major impact or is there a greater impact as you get into next year?

Well, it's been an impact all year. I think as you look at the other part of our business, right, that other part of our value-add business, Windows, Doors, and Go work, it's trailed a little bit in terms of growth, still strong, but not where we think it should be. A couple pieces of that, obviously a how far along a lot of these homes are, but some of the cause of them being as, you know, there being as many units under construction as there are, is that we've just struggled. Lead times are longer, they've been longer for, Gosh, coming up on nine months, so this is not new news. I think we just consistently fight it in the channel. I think it's one of those areas where we would see faster completions and faster cycling of sort of the growth in our market if we could relieve that. I know they're trying, but it certainly continues. I would say in a stable way, it may be a little bit less bad than it was, but still bad. from Q1 to Q2, which kind of reflects what Peter just highlighted. But, you know, our teams are just doing a tremendous job to get product for our customers. And, you know, as I mentioned, we've heard from our builders they've slowed starts. It's not a demand problem, you know. The reason those starts have been slowed is exclusively because of the challenges that they've had around labor and materials.

And, you know, we're doing our best to satisfy those needs on those fronts.

Excellent. And then last thing, lumber pricing clearly on random links charts coming down, but some people we talk to in channel checks have said that lumber transactions, the pricing is not coming down on the ground. Are you seeing that in your business?

Yeah, we do so much commodity across the country. I'd say we probably see every on commodity prices and what it's going to do is, in our world, something where it's a bit of a fool's errand, as demonstrated by my forecast last quarter. So I think we'll just maybe leave that alone.

Great.

Thank you.

Thank you. And next we'll take our next question from Finley Elliott.

Good morning, everyone. Thank you all for taking the question, and congratulations. Could you all talk a little bit more about the Alliance acquisition? If I remember correctly, they didn't do a whole lot of value-add millwork like you all do. What's the opportunity set here for you all to put that through their channel, and how quickly can you realize that?

We're excited about that. I made a couple of comments there in the script about that as an opportunity. We had a relatively small footprint in the state, as you know, half a dozen or so locations. They've got great capability on the component side, which we're excited about, but they have not had the millwork as you know and so you know we'll see how quickly we can get that ramped up you know the team is excited about it both the alliance team as well as our team and we'll get after that one as quickly as we can there's obviously a clear need in that market given the growth that they're experiencing and so we're excited about that

In M&A, you've always done a very nice job of rolling up markets. Does the shortage in some of the materials that you're seeing now, does that change your thought process on maybe moving into maybe adding some capacity on the value-added side versus consolidating some of the smaller dealerships? I don't think it materially changes it, and we're doing both. We're investing quite heavily in capabilities on value-added both in the millwork side and the component side, as we see a long runway there of adoption and growth in the markets. And, you know, we're still looking in the markets to understand whether it makes sense for us to augment our capability through the right M&A, which may help us expand our geographic footprint in the local market. And so, you know, as we've talked about both in our capital allocation and just our overall strategy, we're going to continue to do both.

And just to add on to that, one thing that's exciting in some of to get more out of these businesses that they're managing. So I think that adds to our ability to meet the capacity constraints in the market. And as far as being there for our customers, we certainly believe that increased scale and the partnerships that that helps to create in the long run with vendors is certainly advantageous to us and puts us at in a position to get at least if not more than our fair share as we deal with difficult supply environments.

Great, guys. Thank you very much, and best of luck. Thank you.

Thank you. And we'll take our next question from Trey Grooms with Stevens.

Hey, thanks, guys. And, yeah, I wanted to echo on the deck as well. Super helpful. But question, I guess, first off, is to follow up back on one of the earlier ones around the base business EBITDA margins. And, you know, clearly the incrementals are running, you know, high teens. I think you did 10-4 this quarter. And like you said, Dave, it's obvious there's potential for some upside here. But, you know, Dave, where do you see this base business margin opportunity over time as you look at all the moving pieces? Clearly it's higher. But with these types of incrementals, where can we see this going over time?

We're excited about it. Both the top and the bottom line will continue to grow over time. We're not going to project that this morning, Trey, but I will promise you we're absolutely focused on it. That is the focus of this company right now. Our base business, our value-added capabilities, we're going to grow it. We're going to continue to improve profitability, and we're going to invest in it. All right.

Fair enough. I thought it was worth a shot. All right. And then, Peter, a minute ago you mentioned, you know, some of the dynamics, you know, that we've come to understand over the years with lumber price fluctuations, you know, where this most recent spike in lumber, you guys... kind of bucked the trend. It hasn't been your normal kind of reaction as far as the, you know, to the gross margin percentage. So, and you mentioned that, you know, when things move widely or wildly quickly, that the margin can react differently, almost the opposite of what we see in a more normal kind of lumber price movement kind of environment. So with that said, so you guys have been really outperforming or actually seeing margins higher as a result of this spike up. So is it the expectation, per your comment earlier, that it's like a decremental on the way down, that we should expect some kind of normalization of the gross margin just as these prices come down? Did I read that right? Excluding the core business, which obviously is the big focus and what we care about, but unfortunately we still have to model the lumber piece too. But is that kind of what you were pointing to there?

Well, I'm not signaling a downturn. I guess what I want to be upfront about, and then we can talk about it a little bit on prior calls, is the nature of those extended terms, the mix of those extended terms have materially changed. So where there was a more extreme impact on the way up and a pretty extreme impact on the way down, right? Headwind on the margin percentage on the way up, strong tailwind on the margin percentage on the way down. I think both of those are diminished. I think they're diminished because of the reduction in average days of price. I don't think it's signaling a downturn into the future. I think a lot of the, you know, the fall through that we're dialing out in this analytic comes from other parts of the business and commodities and the pricing volatility, the nature of some buying that we did all of that's all gone together in that number. I don't think it's going to be a real big headwind for us. Anytime you have fluctuations, especially as massively as they are now, there's always a little bit of uncertainty as to how it all filters through. But based on what we're seeing in the detail, inventory levels, pricing levels, we think we can manage through it very effectively. I just wanted to sort of signal that I don't think there's going to be as big of a windfall as there have been in the last cycle.

Great. Thanks for the clarity there, Peter. That was perfect. And thanks again for taking the question. Keep up the good work. Thank you.

Thank you. And next we'll move on to Keaton Mantora, BMO Capital Markets.

Thanks for squeezing me in and letting me add my congratulations. Coming back to the value added side of the piece, obviously really strong results. I'm just curious, are there any particular regions or areas of the country where you are seeing, you know, more growth or is it more broad-based?

Yeah, the exciting part about it is we've seen that expansion and growth. broadly across all geographies. So there's not one that I would point to that would be, you know, outpace strong. Obviously, the strength that we have in the south and in Texas, you know, kind of leads the way.

But as we've gained adoption and accelerated penetration, it's really broad-based. Got it. That's helpful. And then can you just remind us in terms of the capacity headroom that you have you know, both on the manufactured side and the millwork side, particularly in light of the strong growth that you guys are seeing?

It's a challenge. You know, as I mentioned earlier, we've been spending quite a bit of capital to increase our capacity in key markets. In addition to that, you know, we're driving productivity and efficiencies to just gain any increment of capacity that we can. I think given the strength of the market and the adoption rate of what we're seeing, we're going to fight that for a bit, but we're not losing sales today because we can't supply. The challenge, as Peter talked about earlier, has been some of the upfront supply chain challenges and just getting materials. We are not the bottleneck currently, but it's something that we've got to be diligent about and stay on top of.

Got it. That's helpful. I'll turn it over. Good luck in the back half of the year. Appreciate it.

Thank you. And once again, ladies and gentlemen, if you would like to ask a question today, you may do so by pressing star 1 on your telephone keypad. And we'll take our next question from Jay McCandless with Redbush.

Good morning, everyone. Thanks for taking my questions. Good morning. Given the velocity of the business now and the lower lumber prices, do you think third quarter of this year's gross margin is trending more towards what we saw in the first quarter or something closer to what we saw in the second quarter? Just wondering, with all the turnover, what seems to be a better outlook for multifamily on Builder's First Source Park? Just wondering how quickly that change in lumber prices is going to flow through to the gross margin.

Well, I think historically we've talked about the timeline for the flow. one to two quarters. So I think that it's fair to say that there'll be a bit of a fade. Obviously Q2 has the lapping of the worst of COVID. We've gotten a lot of good benefits year on year. So I think settling back as prices settle back over the next quarter or two is still appropriate, guys.

And then could you maybe talk about multifamily? It sounds like the demand from what's coming in has changed and you've gone to positive growth there from, I think, negative growth before. A, what's going on there? B, is this helping to offset maybe a little bit slower pace from the single-family builders?

Yeah, that's been a nice sort of surprise, a little ray of sunlight coming through in multifamily when we thought it would be pretty weak. Now, just to clarify, and for those that may be honest, familiar with us, our multifamily is a pretty – Most of the country is four-story and below wood structures. We have a couple of businesses that do quite well in the high-rise market, but they're fairly small. So a lot of our work is project-focused. I think what you see is the resurgence of a little bit of that multifamily housing market as people realize that the new homes aren't going to come out of the ground as fast as people maybe would have hoped. maybe would have hoped. And those, you know, those three to five million underbuilt or underserved homebuyers are going to need some place to live until we're ready. So I think what you're seeing is a little bit of a rebound there. It's still pretty modest, but we're certainly pleased with it because it was, as you know, pretty grim there on the outlooks for a while.

Absolutely. And my compliments on the new deck as well. There's a lot of good detail in there. Thank you for taking my question. That's a lot of thank you.

Thank you. And next we'll move on to Colin Varon with JetFreeze.

Hi, guys. Thanks for taking my question. Most of my questions have actually been answered already, but I got the question on the new leverage target. You sounded very bullish on demand for the next several years. So can you just tie together your bullish commentary, maybe how many more years of growth you see in the cycle with that new one to two times leverage range that you put out there today?

We've got, we think, a really strong positioning on the business in terms of what we've been able to do with the balance sheet, the long maturities, the low and declining interest rates, and we're doing it in a way that makes the business bulletproof. Our focus, our recognition is to make sure continue to generate cash. Our job is to put it to work and maximize the shareholder benefit and, you know, benefit the business, make sure we're healthy, that our stakeholders are satisfied and taken care of and provide a great return. And I think we're lining it up in a way that we've got a lot of firepower to do a bunch of different things, and we're going to be disciplined about how we put that to work, and the math we're doing around the return on investment for internal investments, for M&A, and for potential returning of capital to shareholders is disciplined, and we're going to continue to work with the board and management to make those decisions in the best possible way. Great. Thank you for the call, Eric.

Thank you. We'll take our next caller for a question from Kurt Yinger.

Great, thanks, and good morning, everyone. Morning, Kurt. Morning. Just one quick one on the EBITDA incrementals. You know, it looks like in 21 on the commodities, that margin is about 20% or so. I guess the question is, as we look ahead to 2022 and make whatever assumption we want around lumber prices and the top line impact there, is that the same type of incremental margin we should be kind of looking for presumably on the way down? Or do you have any thoughts around, you know, anything you're doing internally around pricing or things like that that could kind of dampen that impact?

Yeah, so I think the way down versus way up comment is exactly why we did slide five. I think that was really our intent is to help people understand, you know, where it wants to be when commodity prices are at that $400. I think that's a really healthy way to look at it. I just remind everybody how dynamic this year has been, how volatile. I mean, You know, these words coming from the guy who thought we were going to descend gently from our roughly $900 a thousand commodity levels back when we, the last time we met on this call, it's been a heck of a ride since. And I think what you're seeing in these numbers is a lot of the impact of that volatility in one way, shape, or form. So that expectation of it going back to the, you know, the 15-3 and or 21. We really wanted you to have that just to give you a sense of what we think the base business really looks like.

And I hope that answers your question appropriately. Yeah, no, no, no. That's helpful. And I guess just one higher level question. I mean, you're still relatively early in the process of combining the business and a lot of things are going very well. I'm just curious from a pure scale perspective and the relationships you have with your suppliers and your customers, which positive areas of the business that you're seeing right now do you feel like have really been augmented by that increased scale, putting together BMC and BFS?

Yeah, I'm thrilled about a lot of things. But the results that you're seeing, the value-added areas of the business, As I said, we're exactly what we envisioned and hoped for, and it's great to see that playing out. Our organization is focused on it. We're continuing to provide innovation. We're continuing to invest in that part of the business. And, you know, as I said, we've got a long, long way ahead of us.

Yeah, I don't think any of us have that. culture alignment has been fantastic.

Okay. All right. Well, appreciate all the color guys, and good luck here in the back half.

Thanks a lot. Thank you. And lastly, we will take Ryan Gilbert with VTIG.

Hey, thanks, guys. Morning. First question is morning. First question on manufactured products. I think over the last couple of quarters we've talked about the growth of or the core organic growth in the manufactured product segment being driven primarily by existing customer relationships? And I'm wondering as we move into the peak building season here and the really strong core organic growth you've put up in 2Q, if you're seeing the customer base expand from the last couple of quarters? And then just if that has been the case, your thoughts on the stickiness of that new customer base and how that influences your thoughts around normalized gross margin, if we can do better than 26 to 26.5%.

Yeah, very good question. And as I just said, that clearly is the focus of the organization in our value-add. We've seen great adoption. I think I commented earlier that we're seeing really good adoption with customers who have had experience with our value-added capabilities in one geography or another or maybe a few and are gaining more confidence based on what they've seen in those markets around what our value-added capabilities can do to help them both with labor challenges and drive outpaced efficiency a long, long way here over time. And the other thing I would say, and I think I said this in my prepared remarks, a disproportionate amount of the new homes being constructed are those starter homes. And that lends itself very well to the structural design work that we do in our components business. And so given all that backdrop and the focus that we have on it, we'll continue to see the adoption increase.

Okay, great. Thank you. Second question is on multifamily. I know Legacy BMC had a really nice multifamily operation that flowed through or complemented the Millwork Doors and Windows segment of their business. And as we see multifamily start to rebound, I'm wondering the extent that you've been able to take the Legacy BMC multifamily operation and expand it to the entire pro forma business.

Yeah, let me just comment, and I'll flip it over to Peter here for any additional color. You're right to portray the focus that we have at BMC being very strong, but I would highlight... and we had key markets in the south, a little bit up in the east, and somewhat out in California in the west coast. It was not broad-based, and I think that our targeted market focus is exactly why we had such success. We knew where those markets were going to be strong for some period of time, and that's where we had the capability. And our team was just fantastic at driving growth. Yeah, and I think that the combined multi-family business has done well. I think they've partnered well and are seeing... It's a little hard to communicate that when we're talking about comparisons to national metrics, but we think we're doing really well with that business. Anybody who has the background in multifamily recognizes the longer cycle times on those projects.

cycle times that are particularly disrupted by extremely volatile commodity prices. So it's been, of all the markets, they've been as active as anybody. But we certainly are still very pleased with the performance of that business, both top and bottom line.

Okay, great. Thanks very much.

Thank you. Thank you. And that does conclude today's question and answer session. I would like to turn the conference back over to Mr. Michael Neese for any additional or closing remarks.

Thank you, Sarah, and thank you, everyone, for your time and interest in BFS. We are around all day to take your questions. Have a great day. Thank you.

Thank you, and that does conclude today's teleconference. We do appreciate your participation. You may now disconnect.