This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Good day and welcome to the Builders FirstSource third quarter 2021 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Builders FirstSource management and the question and answer session. In order to ask a question, please press the star key followed by the number one on your touchtone phone at any time during the call. I'd now like to turn the call over to Mr. Michael Neese, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead, sir.
spk08: Thank you, Leo. Good morning and welcome to our third quarter 2021 earnings call. I hope you and your families continue to remain safe and well. With me on the call are Dave Flitman, CEO, and Peter Jackson, our CFO. Today, we will review our record third quarter results, discuss our ongoing integration progress and achievements, and cover our recent M&A activity. We remain bullish on the housing sector and believe we are well positioned for continued profitable growth in a highly fragmented market. We have provided results that include BMC in the third quarter of 2021 and standalone BFS in the third quarter of 2020. We have also provided pro forma results as if we own BMC in the third quarter of 2020. As a reminder, our adjusted EPS calculation excludes amortization of intangibles. The third quarter press release and supporting presentation for today's call are available on our website at investors.bldr.com. 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 direct 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 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 Litigations Reform Act and projections of future results. Please review the forward-looking statement section in today's press release and in our SEC findings 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 Dick. Thanks Mike.
spk10: Good morning everyone and thanks for joining us. I'll cover three key topics on today's call. First, I'll provide a quick update on our record third quarter results, including our base business and our view of the current state of the housing market. Second, I'll provide an update on our recent tuck-in acquisitions that further strengthen our leading market position. And finally, I'll provide an update on the BMC integration, which is progressing exceptionally well and continues to track ahead of plan. As you can see on slide three, in the third quarter, our team delivered exceptional performance, continued to produce core organic growth, expanded margins, and delivered strong cash flow. Sales grew an impressive 63% to $5.5 billion. Embedded in our top-line performance, we also delivered core organic growth of 16.1%. Gross profit expanded 103% to a new quarterly record. Adjusted EBITDA more than doubled when compared to the prior year quarter to a record $976 million, with adjusted EBITDA margin expanding by 930 basis points to a record 17.7%. Finally, the increase of our EBITDA and margins helped us deliver approximately $1.1 billion in free cash flow while repurchasing 5.3% of our outstanding common shares. This strong performance underscores the strength of our industry-leading platform and the tremendous execution by our team members as we continue to outperform in our markets. despite the unprecedented supply chain challenges affecting the home building industry. Last quarter, in an effort to provide greater transparency into our underlying business performance, we provided an overview of the top and bottom line growth of our base business. As shown on slide six, for the full year 2021, We now expect our base business net sales to grow to $15.7 billion from $12.5 billion, or 26%, and adjusted EBITDA to grow to $1.8 billion from $1.1 billion, or 64%. Over time, we believe our base business will sustain and grow our double-digit EBITDA margin. and expect to deliver 11.2% EBITDA margin for the full year 2021. Demand for single-family housing continues to support our top-line growth, and we believe that growth will be sustained over time as demographics continue to develop favorably, coupled with more than a decade of under-building. For the Corps, on a pro forma basis, Our core organic customer growth was 27.5% per single family. Value-added core organic sales grew by an estimated 31.2%, led by 44.6% growth in our manufactured products category. Our team members are doing an outstanding job getting our customers what they need in a very challenging environment. Single-family starts increased approximately 5% in the third quarter on tough comparisons to a strong prior year period. However, we were encouraged to see our core organic growth remain strong as underlying demand leveled off during the quarter. In addition, looking beyond the effects of the pandemic in the third quarter of last year, single-family starts this quarter grew 21% when compared with the third quarter of 2019, which our core organic growth outpaced by 650 basis points. The country has averaged 1.2 million units of existing inventory in 2021, which is 14% below the five-year average and at roughly a third of historical highs. Single-family housing under construction also increased 31% in the third quarter. In fact, there are currently more single-family homes under construction across the country than there have been in more than 14 years, and the homebuilder backlog is currently at the highest level it's been in the last 15 years. This data is an encouraging sign for our business as we finish 2021 and look to next year, and we expect demand to remain robust. On slide seven, we are focused on executing our strategy of investing in growth. We have completed five tuck-in transactions in 2021 since merging with BMC, and believe each acquisition adds unique value to not only our portfolio of best-in-class solutions for customers, but also our geographic presence in attractive, economically sound, high-growth markets. Turning to slide 8, we were excited to welcome the California Trust Frame Team to the builder's first source family in the third quarter. CalTrust was California's largest independent trust manufacturer and has added substantial and profitable scale to our value-added products business on the West Coast. This acquisition adds to our value-added portfolio and provides access to new customers for our continued growth. Also during the quarter, we acquired the Apollo software assets from former construction technology startup, Katerra. The Apollo platform provides design collaboration workflow, construction budgeting and scheduling, and job site management capabilities combined with mobile functionality. A quick update on our paradigm acquisition. The BFS and Paradigm teams have come together nicely and are aligning on our digital strategy to drive efficiency in residential construction, which will create value for our home builder customers and revenue growth for us. Our teams have made a number of customer visits which have helped us validate the market opportunity associated with developing an end-to-end digital solution. And we are now working with several customers on pilots that will improve the pre-construction process, create more accurate material lists, bring our supply partners into a digital workflow, and better engage homebuyers in the process. We remain confident in our investments in both Paradigm and Apollo and our ability to drive long-term value through digital transformation. moving forward we will continue to reinvest in our business to accelerate organic growth while actively pursuing accretive tuck-in m a opportunities to improve our mix and build scale in key growth markets we firmly believe the strength of our balance sheet and cash flow generation will allow us to remain a disciplined consolidator in this industry Next, on slide 10, I'll provide a brief update on the BMC integration. As reported last quarter, synergies are tracking one full year ahead of plan and are projected to be in the range of $140 to $160 million by the end of 2022, exceeding our initial expectation. We delivered $36 million in cost synergies in the third quarter, and $74 million during the first nine months of 2021. We now expect 2021 cost synergies to be in the range of $90 to $110 million, a midpoint increase of $10 million above the expected outcome we reported in the second quarter. Our ability to achieve our synergy commitment in half the time underscores the cultural alignment of our two companies and the strength and collaboration of our leadership team. As we approach Veterans Day, I would like to take a moment to recognize and thank the veterans at BFS and their families. Earlier this fall, I had the honor of signing a statement of support on behalf of our company with the employer support of the Guard and Reserve, or the ESGR. I had the privilege of meeting BFS team member and U.S. Army veteran, Corey Basinger. Corey spent eight years in the Army and has been with BFS for nearly 10. He is our maintenance manager in Houston, where he oversees critical facilities and equipment processes, so he can seamlessly serve our customers. Corey received the Pro Patria and Above and Beyond Awards for his excellent leadership in supporting Guard and Reserve employees. in part due to his empathy, experience, and understanding of what it means to be a veteran. Thank you, Corey, and thank you to all of our veterans for your service. With that, let me turn the call over to Peter to go through a detailed look at our Q3 results and provide an update on our share repurchase program and our 2021 updated financial guidance.
spk13: Thank you, Dave, and good morning, everyone. I want to thank all of our team members for delivering another incredible quarter. I will cover three topics with you this morning. First, I'll review our third quarter results compared to combined pro forma results from the prior year quarter. Second, I'll update you on how we are deploying capital supported by a strong operating cash flow. And third, I'll provide you with our updated guidance for the full year of 2021. Let's start with our Q3 results. We had net sales of $5.5 billion for the quarter, which increased approximately 63% compared to the combined pro forma prior year period. Value-added core organic sales grew by an estimated 31.2%, led by 44.6% growth in our manufactured products category. Robust demand nationally continues to be constrained by supply chain challenges. Commodity price inflation benefited sales by 39%, and acquisitions contributed another 8%. Gross profit was $1.7 billion, an increase of $868.68 million, or 103%, compared with the combined pro forma prior year period. Our gross margin increased 620 basis points to 31.1%, primarily driven by disciplined pricing in a volatile, supply-constrained marketplace, along with effective and timely sourcing. Based on our year-to-date experience with the combined entity, we now believe our normalized gross margins will be north of 26.5%. SG&A was $875 million, an increase of approximately $235 million, or 36.7%, compared to the combined pro forma prior year period. This was driven primarily by expense related to the BMC merger and other acquisitions, including amortization expense of acquired intangibles and one-time charges. Excluding acquisition-related one-time charges and variable compensation, underlying SG&A increased 8.1%. As a percentage of net sales, total SG&A decreased by 300 basis points to 15.9% due to the impact of higher net sales and continued expense control, which more than offset higher variable compensation driven by the increase in net sales and profitability. Adjusted EBITDA increased 244.4% to $975.9 million, driven by consistently strong single-family home demand, commodity inflation, execution of merger-related synergies, and cost leverage. Adjusted EBITDA margin improved to a record 17.7%, an increase of 930 basis points compared to the year-over-year pro forma period. In Q3, adjusted diluted EPS was $3.39 compared to a combined pro forma of 74 cents in the prior year period. The more than threefold increase was primarily driven by the growth in operating income, partly offset by higher taxes. Now let's turn to cash flow. Our third quarter operating cash flow was approximately $1.1 billion, driven by increased net sales and disciplined working capital management. Free cash flow was also a robust $1.1 billion during the quarter. In the third quarter, we repurchased approximately 11 million shares, or 5.3% of our common shares outstanding, at an average price of $52.74 for a total cost of $578 million. At the end of the quarter, we had approximately $422 million remaining under our existing $1 billion share repurchase authorization. In October, we repurchased an additional 4.5 million shares at an average price of $55.99 leaving approximately $172 million in our current authorization. On slide 11, our pro forma net debt to EBITDA ratio was approximately 1.1 times our base business. We have no long-term debt maturities until 2027, and our total liquidity was roughly $1.5 billion, consisting of about $1.3 billion of net borrowing availability under our revolving credit facility and $225 million in cash. Our strong third quarter and first nine months performance is a testament to our field teams who are delivering excellent value to our customers. we will continue to focus on growing the higher margin, specialty, and value-added products and services in our portfolio. And now, let's discuss our 2021 full-year outlook, which we are revising upward and can be found on slide 12. We continue to see strong underlying demand in new housing construction. Based on our first nine-month results, we are increasing our full-year 21 outlook. Net sales is expected to grow to a range of $19.3 to $19.8 billion, or approximately 51% to 55% over 2020 combined pro forma net sales of $12.8 billion. We expect adjusted EBITDA to be in a range of $2.85 to $2.85 to $2.95 billion, or approximately 166 to 176% over 2020 combined pro forma adjusted EBITDA of $1.1 billion. In 2021, we expect BMC Synergy savings of $90 to $110 million to be recognized in the P&L. Free cash flow will be in the range of $1.8 to $2 billion, an increase of $400 million as the expected increase in EBITDA will be partially offset by higher cash taxes. Our outlook is based on several assumptions which are outlined in the earnings release, including mid-teen percentage growth in single-family starts, R&R growth in the low single-digits, and multifamily starts growth in the high single-digits. Overall, we are having a tremendous year. Our base business is robust and growing, and we believe there is a long runway for growth into 2022 and beyond. We are focused 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.
spk10: Thanks, Peter. In summary, the home building industry momentum continues to be strong. Our core organic growth, and in particular our value-added product categories, is outpacing the industry in this unprecedented time, given rapid growth in demand and widespread supply challenges. Our base business is large, and we believe it will grow in 2022. The BMC integration and cost synergies are well ahead of schedule, and the implementation of our digital strategy is ramping up. Our team is focused on operational excellence and delivering exceptional results for our customers and for our shareholders. I'm confident that our differentiated platform and our ability to invest organically and through M&A will deliver above-market profitability and generate significant free cash flow for many years to come. Finally, we're excited to host our first ever Investor Day on December 7th and hope to see many of you here in the Dallas area. Operator, let's please open the call now for questions.
spk06: At this time, if you would like to ask a question, press star 1 now on your telephone keypad. Again, that is star 1 on your telephone keypad. We'll take a question from Matthew Booley of Barclays. The line is open.
spk01: Morning, everyone. Good morning. Thanks for the results.
spk07: Thank you very much.
spk01: Yeah, many areas to touch on here. I guess I'll start with the gross margin. Peter, you said the normalized gross margin, you can now commit to north of 26.5. I obviously have to ask the question of how far north are we talking, if you have any elaboration on that. And maybe within that it would just be helpful if you could describe with this quarter's 31% how much of that might have been driven by commodity deflation. Thank you.
spk13: Yeah, thank you. The gross margin numbers we're seeing now are really encouraging from our perspective because it underscores the strength of the product portfolio, the way we're combining the sales of value-add with the other products. Certainly, the tailwinds from commodities have been welcomed, and I think we've done a nice job of generating real profitability and cash flow from it. There's also a little bit of unusual in this quarter, and everybody's talking about it, obviously, given the supply chain constraints. That's caused some unusual numbers and some unusual dynamics based on timing and, you know, the price increases and things of that nature. So we do think it's a little bit unusual, certainly a significant portion of that gross margin fall through. It comes from the benefit on commodities portion. And so the 26.5% is where, based on what we've seen in the nine months combined company, we feel very good about. I think we've sort of demonstrated a willingness to commit to things that we know we're confident in, and we are very confident in that 26.5% or better. We're certainly thinking about it in context of the longer range of the business. You know, what's a more long-term normal? Where do we think we can get to? And we'll be talking a lot more about that at our investor meeting.
spk10: And, Matt, I would just add that we have great confidence in our ability to outpace the market and continue that in our value-added portions of the business, which is also helping to shift the mix of the company. As you saw, the strong performance in manufactured products, we also had core organic growth above our average in our millwork doors and windows business, which has continued to strengthen throughout the year, despite all the supply chain challenges we've had.
spk01: That's great color. Thank you both for that. Second one on capital deployment, clearly great progress on deploying the balance sheet there with the buyback just in the past three months. So I think you're still guiding to over a billion of free cash flow just in Q4. Any thoughts on kind of a future buyback authorization? And, you know, Dave, you also mentioned that just being a disciplined consolidator in M&A. There's other consolidators out there. I'm just curious if you can kind of outline what you're seeing in the M&A market from a competitive perspective and valuations and all that. So thank you both and congrats on the results. Yeah, thank you.
spk13: So with regard to the share buyback today, we're very, very pleased with what we've been able to accomplish. We think we were able to put a lot of capital to work this quarter on an underpriced stock, and I think we're doing pretty well with it, certainly happy with the momentum. We do have remaining allocation, so we've been authorized for another roughly $175 million. That is going to be our first priority. No new announcement today on anything into the future, but obviously we've sort of demonstrated the way we think about the business and how we're going to work in terms of a balanced capital allocation.
spk10: John, the second part of your question there on M&A, you know, we have been disciplined in our work. Both legacy companies have. As you probably expect, there's been a lot of opportunities in the market through the course of this year. Valuations have run up. We've been disciplined around how we think about the long-term profitability of our targets, especially given the lumber environment that we've had here. We can get the deals that we want, and we're going to stay disciplined around that. You know, the five deals that we've done this year we feel very good about. And, you know, we didn't say a lot about the pipeline slide in the deck, but it's still very strong and robust, and we're going to continue to play out our M&A in a way that makes sense for the company.
spk01: Great. Well, see you all in a month in Dallas, and thanks again.
spk06: Thanks a lot.
spk01: Look forward to it.
spk06: Thanks, Matt. Our next question is from Mike Dahl of RBC Capital Markets.
spk04: Good morning. Phenomenal results. Really exceptional. I had a couple questions around the value-add. The first one really manufactured products, you know, another really strong quarter. I know your other value-add categories have nicely as well, but a lot of strength in manufactured products, culmination of a lot of hard work on positioning that business. Can you remind us where you're at now from a capacity standpoint and potentially speak to how you're thinking about incremental investments and further capacity expansions there?
spk10: Yeah, I'll start, and then Peter can add any color on it. But, you know, we continue to see very high demand in manufactured components, and it's really not just in one geography. It's all across the country. You know, and as we said when we combined these two companies, The complementary nature of our value-added capabilities was going to be very powerful, and we're certainly seeing that play out exactly as we expect. I would tell you right now we have more demand than we have capacity for our products, and we expect that's going to continue. We have moved the market this direction, and the labor challenges – The performance around inflation is real. Our customers are all talking about it, seeing it every day. And that's helping us continue to move the market towards off-site manufacturing and helping them be a lot more efficient at the job site. We have invested heavily in that part of the business, and we will continue to do so to make sure we're meeting demand.
spk13: Yeah, to continue that point, we have a number of projects around the country where we have seen the utilization of our existing capacity to expand it we can do that in a number of ways the easiest way is obviously adding shifts next we'd be adding equipment automation equipment more sophisticated equipment more equipment in total some limitations in that right now just given the supply chain and availability of the raw components further up the supply chain um and then greenfield you know along the line in greenfield we know there are markets around the country that have been adopting this type of solution, this value-added solution very, very quickly. And we see tremendous opportunities in expanding our footprint, being the provider of choice and the provider with the best sort of variable cost position as we execute that as well to be successful in the long term.
spk04: Okay, great. That's very helpful. And my second question You know, obviously the scale, the execution, the way you've positioned the business has helped you to capture a decent amount of share in a very dynamic and supply constrained environment. And it's demonstrated, you know, the potential power and profitability of the business. As you look forward, there's probably a world in which when things normalize, some of your maybe smaller mom and pop competitors or, you know, get back on their feet. And, you know, I guess the question is really when you think about customer stickiness and share, the stickiness of share gains, you know, how does your experience this year affect how you think about balancing share versus price and margin in a more normal environment, and maybe if that differs when you think about commodity versus value-add?
spk10: Well, certainly on the value-added portions of the business, we continue to see great adoption. We expect that that will continue. However, we have to remain competitive. And to your point around that, this is still a very competitive market. We have seen, as we've said in times past, that these products are very sticky with our customers because of the value proposition and the benefits that our manufactured components deliver to them, which is very real, and that's been nothing but validated since the merger has come together. But that's why we drive productivity and efficiency. We won't rest on our laurels. We know this will continue to be a competitive market, and we have to earn that business with our customers each and every day. That's the mentality I have. That's the mentality our entire leadership team has around this. We paid nothing for branding. Yeah, just from a modeling perspective, I think how that manifests itself is a little bit of heaven's love. You know, there'll be quarters when certainly the mom and pops will level things out in certain of the more commoditized product areas. Our commitment is to be the...
spk13: The organization that wins at the end of the day, we think we can continue to perform better than market. We think our mix of products allows us to execute that achievement at a higher than industry margin. because of our ability to pull through that value-added mix, to do it very efficiently, and to manage the combined entity in a way that really leverages scale and drives through those investments in technology and leadership in ways that others just can't match. think it will continue to be competitive. Like Dave said, that doesn't change, and there'll be some ebbs and flows. Nothing ever goes in a straight line, but we think that base business trend over time is going to be very desirable to all involved.
spk04: Great. Well, thank you both. Appreciate that, and look forward to the investor day.
spk06: Thanks a lot. We'll take our next question from Ketan Mamtora of BMO Capital Markets.
spk00: Thank you, and let me offer my congratulations as well, a really strong performance. Within manufactured products, I'm just curious, are there any, you know, specific product categories that you are seeing, you know, kind of stronger growth versus the others? And if these labor challenges are kind of driving faster adoption, you know, of component offsite manufacturing?
spk10: Yeah, I think the great news is we're seeing strength in all categories of our manufacturing components, whether it's our roof truss systems, our floor systems. As it's been well publicized, EWP has been a challenging supply environment this year. Through the great work of our procurement teams all around the country, we've been able to get the volumes that we needed. although it's been a dogfight and it remains that. But importantly also our ready frame, you know, it's up over 30% this year on a year-to-date basis in house count. So we're not really seeing any areas of weakness and really the system approach that we're taking, the structural design, helps support all pieces of our manufactured components business. So we're excited about it. We're getting great traction everywhere.
spk00: Got it. That's helpful. And then my other question, you know, with kind of the base business, you know, kind of steadily moving higher, I'm just curious kind of how do you think or is there any rethink in how you look at the leverage on the company?
spk13: So the base business is certainly an important metric for us going forward. For those that maybe don't remember, it's re-baselining us at a normalized historical commodity value, just taking all that volatility out of the story. What that yields is a sort of underlying business that's showing a steady strengthening, you know, an increased profitability. And yeah, that is the basis for our leverage. We included that in the investor presentation quarter to give you an anchor point. We think that's the right way to think about how we're levered over time because that's the part of the business you can really count on and rely on. So we're going to lever it based on that in terms of our guidance and our commitment over time.
spk00: Got it. I'll turn it over. Good luck. Thanks a lot.
spk06: We'll take our next question from Ruben Garner of the Benchmark Company.
spk03: Thank you. Good morning, everybody, and congrats on the results. So can you just talk about, I mean, the base business is, if I'm looking at it correctly, going to be up over 25% revenue this year. Profit's going to be growing north of 60%. What kind of gives you the confidence that you'll be able to grow the, I think you made the comment that you think you can grow the base business next year. Can you just talk about what you're, that gives you that level of comfort?
spk10: Sure. Well, a couple of things. First of all, I just want to be very clear. The strategy of the company is predicated on the base business, and it always has been. The fact that we've broken that out has provided some external clarity, but this is what we're trying to drive. Our organic growth or value-added portions of the business is at the heart of what we're trying to do. I'm not surprised by it. Given the demand environment that we're seeing, we expect that will continue. But also, you know, in the areas of the value add that we're focused on, we have been for quite some time now taking market share, and we do expect that that will continue for a long time to come. So I just want to be clear, though, this is the focus of the company. It's what the leadership team lives and breathes every day, and that's what we're driving into the marketplace with our customers.
spk03: So in an environment where maybe the start, single family or total starts are flat next year, do you think that you'd still, with the backlog and the business that you have and the initiatives you have to grow the value add, do you think you'd be able to grow the base business in that environment? Yes.
spk10: Absolutely. And, you know, we do think it's been well publicized here, right? Starts have slowed through the third quarter of this year. But to a customer, every one of them have pointed to supply chain challenges, not a weakening in underlying demand. So, you know, there has been a little pause on starts, and we saw that through the third quarter, and you've just seen our results. So that gives me even more confidence that we're going to be able to sustain our our performance even in a weaker starts environment. These products are very sticky. Even if starts slow, the labor challenges aren't going away. The things that we're delivering value on for our customers are not going to change. So our value proposition is robust and strong in any starts environment.
spk03: Okay. And then last one for me is, are there any areas, most companies that have reported third quarter results so far ran into some kind of supply chain issues and had volume, you know, even volume pressure in some cases. Are there any areas of your business that you're having product shortages or where there's, you know, bottlenecks that you didn't see growth and it's been pushed out to future quarters? Or have you guys just been able to overcome this somehow with your, you know, scale and reach?
spk10: Well, to your last point, I mean, our scale and reach is tremendous, even more so in the combined company. And I can't give our procurement teams and our field leadership teams enough credit for the great work in securing what we needed for our customers. It has been a dogfight. I believe it will remain that. We also have great suppliers. And they've been tremendous throughout this period in helping to get us more than our fair share in what our customers need. Now, having said that, EWT remains a challenge. Even where we've seen lumber and OSB, for instance, kind of loosen up a little bit, the challenge is less in manufacturing right now, and it's more in drivers and getting the material to the job sites from a lot of our suppliers. That's also been well publicized. Exterior doors are still a challenge. So things might be in a little different spot than they were three months ago, but there's still widespread challenges that we're up against in the industry every single day.
spk13: And I just acknowledge your comment about the industry homebuilders, right? Any one of them that have had very much success this year have had to govern and sort of pull back a little bit on how many starts and how many sales they can make because of those. those same supply chain issues and availability issues. We certainly have seen that, but we're not somehow immune to that. That has run through our numbers, but we've also seen the normalization and the bounce off the bottom. So I think there is a lot of reason for optimism that this is a healthy industry making smart decisions about how much we can flow through given the constraints and really looking forward to the day when some of those constraints are eased.
spk03: Great. Thanks. Congrats again, guys, and good luck. Look forward to seeing you next month.
spk06: Appreciate it. Thank you. We'll take our next question from Keith Hughes of Truist.
spk12: Yeah, thank you. Just getting back to the availability questions that we've had before. Are you seeing, if you could call it any major product categories, where you're seeing things actually getting better sequentially, or is the situation just not improved over the last three to four months?
spk10: Yeah, I would say, Keith, it's incrementally better. You know, certainly on the commodity side of the business, as I mentioned, you know, that has loosened up a bit. You know, interior doors are better than they were a quarter ago. We're still struggling with exterior doors. You know, hardware remains a challenge. Moldings remain a challenge. A lot of the specialty products are a real challenge. Windows, you know, remain in high demand and with lengthy backlogs. Our team is working on that challenge and has been for a long time. The encouraging part of it is even though our millwork doors and windows organic growth was lower than our total for single family, we have seen sequentially each quarter of this year that continued to improve. We were at 19% this quarter versus single family at 27.5%. But we were 15-ish, you know, in Q2. So I think that just speaks to a little bit of softening, but more importantly, the great work that our team continues to do every day to get us what we need.
spk12: And final question, comments from your builder customers. You talked about some of the slowdown that many of them have talked about. Did they talk to you about next year? Are they expecting average pacing of completions during the year, more front-loaded, any sort of color you can get on that would be helpful?
spk10: Yeah, it's still early, and we are in those conversations, but obviously the kicking of starts out of this year will certainly mean good things for the first half, at least, of next year. The other piece of it, which we've heard a little bit about, is land and development of that, and I think this gives them a chance to catch their breath a little bit and get out in front of that a little bit, where I think they were maybe caught off guard a bit with the strength of the starts this year. But what we're hearing, by and large, is continued strength and continued high demand for what we offer them.
spk06: Thank you. We'll move next to David Manthe of Baird. Your line is open.
spk14: Thank you. Good morning, everyone. You mentioned ReadyFrame. I was wondering if you could talk about what percentage of revenues that is today and what was the comparable figure in the third quarter of 19. You also gave an interesting stat there. You said that house count was up 30% year over year. Could you provide that number from the third quarter of 19 as well? Sorry for all the data requests here.
spk10: Yeah, no problem. We may have to catch you offline on all that. I don't have all that at my fingertips at the moment, Dave, but just suffice it to say that we're quite pleased with the penetration that we continue to get. And we flip to, actually, even in the BMC days, we flip to looking at this more at a house count level to understand It's likened more to organic growth of the business. Are we penetrating the market more? So that's really not a new metric for us. And it kind of takes out the noise around what's going on with commodities and the revenues up and down. And we're focused squarely on house count penetration. As I said, that's up 30%, over 30% this year. And as you recall, last year was pretty strong. So, you know, we're excited about it. It is mirroring very much what's going on with our manufactured products in general, and we expect that that growth will continue.
spk14: Okay, great. Yeah, I'll look forward to catching up with you on that. And my second question is on the software acquisitions. Could you describe how Apollo and Paradigm kind of fit together and Are there additional modules or capabilities that you're going to need to complete your tech platform or is this sort of a complete suite of software now?
spk10: Well, we're quite pleased with Paradigm, and that is the broad capability that we needed to start a digital platform, right? And the configuration capability that they have, that they've applied almost exclusively to the millwork portion of the business. As I've said previously, we're excited to be able to take that to other product categories and extend it more broadly. Apollo was a unique one, and it was very opportunistic. As you saw that, you know, we got a really good deal on that. And it provides particularly mobile capability and some of the back-end work that the Paradigm piece didn't provide, in particular the job site management capability. And so, you know, we're excited about the end-to-end solution that we have now. And the Apollo pickup just saved us a bit of development work on the back-end.
spk12: Okay. Terrific. Thanks, Dave. Thank you.
spk06: And we'll move next to the site of Stephen Ranzi. Your line is open.
spk09: Hi, good morning. Maybe to start with the synergies, can you clarify that the new synergies or updated synergies, I should say, does that include any of the acquisitions that have been made? If I think about distributor acquisitions, the sales total over $600 million up here. So it seems like there would be some meaningful synergies coming in.
spk13: Yeah, so it does not. Those are limited to the BMC merger synergies. So midpoint of 100 on the P&L for 21 and midpoint of our run rate for 150 by 22. That does not include the tailwinds from the smaller entities. Not tracking it the same way, don't think it's particularly helpful to report it in that consolidated way. It is showing up in the materials for The profitability, obviously, and that organic growth number. So probably won't be breaking that out separate, but certainly we'll continue to talk about offset excellence metrics and where we can identify significant projects.
spk09: Okay, helpful. And then if I'm looking at this correctly, it appears the incremental margins on the base business in FY20 and the FY21 guide or in the low 20% range above normal, is that expected to moderate as the environment and demand trends normalize over the next year to two years?
spk13: Yeah, so that goes back to kind of my comment about the unusual nature of the market in the current period. There certainly is some expectation that certain aspects of that will moderate, things that were based on the timing of sourcing, the things that were based on usual disconnects or displacements in the market. There has, though, been a real trend of better discipline around pricing in the right markets, making smarter decisions about how we provide value and are compensated for that value. So it's a mix. There will certainly be some underlying sustainable improvement, and we'll probably get back a little bit. Okay, thank you.
spk06: And once again, that is star one to ask a question. And we'll move to the site of Colin Varon of Jefferies. Your line is open. Mr. Varon, you may want to check your mute switch. Your line is open.
spk08: Leo, let's move to the next analyst, please.
spk06: We will. We'll move next to Kurt Weinger of DA Davidson. Your line is open.
spk15: Great. Thanks, and good morning, Dave and Peter. Good morning, Kurt. Just on the base business EBITDA increase to 1.8 from 1.6 billion previously, I'm kind of curious what the moving pieces are there. Maybe it just goes back to kind of the last point around pricing discipline and whatnot. but seems like a pretty nice uplift considering the volume outlook kind of is unchanged here. And then as we think about kind of building out 2022, kind of how confident are you in using that as kind of a good jumping off point?
spk13: Yeah, so the work in pricing, as you know, Kurt, is something we've been focused on for a few years and putting these letting really high-quality leadership engage with the field, working together, sharing best practices, that really has moved, we think, the baseline. As I mentioned, certainly there were some examples of situations where we found ourselves in possession of you know product at an out-of-line cost in terms of current pricing and and not going to apologize for that but certainly our ability to continue to be disciplined helped us in the quarter and will help us on an ongoing basis and that is the a result of that historical investment, that alignment, the way we think about pricing, the tools we put in place, the way we train, all of that has come to fruition, particularly as you look at a business that's combined well, has a great market position, and in markets around the country where there's just tremendous demand and growth, we're really well positioned.
spk15: Got it. Okay. That makes sense. And then second, you know, just as I think about the products you sell from a pricing perspective, you know, commodities likely to be a headwind here over the next couple quarters. But, you know, you name it, EWP windows, siding doors, there's a pretty significant level of underlying price inflation out there. So can you just talk a bit about how you're thinking about that impact on the top line here going forward and how it might help offset that drag from lumber and panels?
spk13: Well, you're right. There's tremendous inflation in the marketplace. Like you said, a number of different products. We're very focused on making sure we're passing that through. Some of the leverage you see from that is part of what is driving some of those margins, obviously. It doesn't cost any more to transport a more expensive piece of lumber or window or door. It's probably a smaller component, but certainly important to mention. As we continue to see volatility in prices, we are going to maintain our discipline around passing it through. There will be instances where things will go back down, and we'll adapt to that and make sure that we are still the provider of choice, that we're providing tremendous value to our customers, that our products, our relationships with vendors are served to move through the high volumes that our vendors want to see to meet the demand that our customers want to receive. But that dynamic, that ability to continue to be consistently disciplined, is something we pride ourselves in and not something I think we've proven the capability to do, even in really unprecedentedly volatile times.
spk15: Got it. Okay. Thanks for that, Peter, and good luck here in U4, guys.
spk06: Thanks, sir. And we'll move next to Jay McCandless of Whitbush. Your line is open.
spk11: Thank you. Good morning, everyone. Great quarter. Thank you. So another question on slide 16. It looks like the EBITDA ranges at all the dollar per MBF, all the EBITDA ranges moved up. I guess, A, is that right? And then, B, what's the biggest driver here? Is it a change in mix, some of the acquisitions, just any, you know, which one of these assumptions on the right-hand side of the slide, which was the biggest driver on that?
spk13: Yeah, no, good catch.
spk11: So it does move, right?
spk13: When the base business on the prior slide bumps up, which we did increase the guide there, it reflects in that sensitivity on slide 16 about what this business might look like at different commodity prices. It's a couple of factors. Obviously, with the growth of the value add faster than the core, performance on an ongoing basis in what we consider base, right, that normalized commodity level, that's a powerful influence on this. Our ability to manage price and see sustained margins across the portfolio and in the way we do things is certainly reflected in here, as is the discipline around expenses, you know, the improved performance and synergies, the operational excellence initiatives we're seeing and they're bearing fruit. All of that is in some way contributing to the increased sort of starting point and then reflected on the sensitivity. Great.
spk11: Thank you. And then my second question, I guess staying on this slide, where did, in the way y'all are calculating this blended, I think it's a blend of both frame and lumber and sheet lumber, where did this dollar per MBS end within the third quarter?
spk13: Yeah, so you're hitting a point that's always a challenge, right, is we don't know where commodities are going to go. It was certainly a bit of a surprise for us in terms of the guide in the back half of the year. It has absolutely leveled out above the $400 levels and is going up. I mean, random lengths is – you know, between 500 and 600, if you're talking about kind of lumber and sheet in terms of what we're seeing. We'll see where it goes from here, but, you know, on a year-over-year basis, as Kurt mentioned earlier, there's certainly a turn in terms of the year-over-year comparisons, but still very, very strong and healthy from a historical perspective. But at the end of the day, we're still going to circle back to base business and we're going to focus on running the core. We'll reap the benefits of commodities, but that's not where our attention is going to stay.
spk11: Right. And one other one, if I could sneak it in. Do you feel like from a pricing power perspective during the third quarter, were you able to take more price on the value-add goods or were you able to hold the line better on commodity goods even as the underlying commodity went down in price? Yeah, I'm actually proud of that one.
spk13: We did both. We did both. There's certainly good discipline in not getting caught on certain products, acknowledging the relationship, working with customers, but at the same time pushing vendors for quickly resetting where appropriate, but always focusing on getting paid for the value that we're providing in an appropriate way. But really, across the board, it's been a really positive story. That's great. Thank you. Thanks, John.
spk06: And we'll move next to Iman Akram of Lord Abbott.
spk05: Hi. Thanks for taking the question. Just back on the commodity front, just trying to better understand the lumber dynamics. how like is there when you're talking with contractors, is there a pricing law or is there that law or as the prices move or how does that market work?
spk13: Yeah, so, I mean, price laps are a small part of what we do now. It's certainly shrunk in recent years. The vast majority of what we're selling in the commodity space is quoted and passed through in a pretty narrow period of time. We're pretty happy with that balance, the amount of inventory we have on hand. and on order with the way we're quoting. But we can walk through that in more detail for you offline. At the end of the day, with commodities, an important part of what we do, we think a far more important part is certainly the base business and what we're doing with the overall strategy.
spk05: Okay, thanks. And, yeah, it will be helpful if we could talk offline at some point. Yeah, great. Happy to do it. Thanks.
spk06: Our next question is from Ryan Gilbert of BTIG.
spk02: Hi. Thanks, guys. First question, morning. I wanted to talk about, or I should say, Peter, you've talked in the past about the backup in units authorized but not started, and that's certainly something that we're seeing in the data. And, Dave, it sounds like, based on your comments earlier, builders are certainly planning for more units Going ahead, I'm just wondering if you're seeing so far in the fourth quarter some movement on getting those units started, maybe a reacceleration in starts, or if we think that's more a 2022 story.
spk13: So I think if we're looking at our numbers, our assessment is July was probably the weakest in terms of the context of the business. It wasn't bad, but it was weaker from a growth perspective than the rest of the year. And we've come back from that. So we've started to see a little bit of the reacceleration. If I'm characterizing it, the home builders as a group sat down and said, uh-oh, we've got way too many units under construction or not yet started. Let's govern this. And there was a bit of a pause. And then they've continued to roll along, trying to get to a point where it's very supportable and sustainable. I don't think it's possible to know that with precision, but certainly we know better now. than we have in the past, and that does represent a bit of a reacceleration in growth from that July slow point. Tough to say, right? I mean, it'll always be dependent on weather, particularly this time of the year, but broadly speaking, there's certainly a very strong demand, and we do think started units will accelerate and continue to grow just given that strong demand profile.
spk10: And we also know that they are squarely focused on getting completions between now and the end of the year. And so to my earlier comment, I do think, you know, the starts growth will still end in the first half of next year quite nicely.
spk02: Okay, great. Second question is on multifamily. Just parsing the guide, it looks like we should expect a big year-over-year increase in multifamily in the fourth quarter. Am I thinking about that correctly? And how does the pipeline or the backlog of multifamily projects look as you said today?
spk13: Yeah, no, good question. So, you know, multifamily is a bit tricky. We like to be able to reference it as it compares to the national multifamily number, but it's really just not a comparable metric for us given we're really sort of focused in a few key regions around the country. A lot of movement within those – within the market is – So you see these sort of lumpy moves in and out in any given period. I don't know that I agree that it's a large expected increase for the fourth quarter. I think we're still positive. You know, I think that the one adjustment that I'll highlight is we did dispose of our standalone gypsum business that did have some multifamily and commercial exposures. You'll see a little bit of moves in that in the R&R and other bucket, but it's pretty modest overall. It's a good area for us. We are seeing growth, and we think that will continue through the fourth quarter and into next year.
spk02: All right, great. Thanks very much.
spk13: Thank you. Thanks a lot.
spk06: And it appears that we have no further questions at this time. I'd be happy to return the call to Michael Neese for any concluding remarks.
spk08: Thank you for your time today and for your interest in Builder's First Source. As Dave mentioned, we are hosting an investor day on December 7th in the Dallas area. We look forward to hosting you in person or virtually through a webcast. If you'd like to attend in person, please email me at michael.neese at bldr.com. Have a great day. Thank you.
spk06: This does conclude today's call. You may now disconnect your lines. And everyone, have a great day.
Disclaimer