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