Builders FirstSource, Inc.

and welcome to the Builders FirstSource first quarter 2022 earnings conference call. Today's call is scheduled to last about one hour, including remarks by 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.

Thank you, Priscilla. Good morning, and welcome to our first quarter 2022 earnings call. With me on the call are Dave Flitman, our CEO, and Peter Jackson, our CFO. Today, we will review our record first quarter results for 2022. As a reminder, our adjusted EPS calculation excludes amortization of intangibles. The first quarter press release and our investor 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 directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable, and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings, and our presentation. Our remarks in the press release presentation or 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 our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'll turn the call over to Dave. Thanks, Mike.

Good morning, everyone, and thanks for joining us. 2021 was a phenomenal year for our company. We entered the first quarter of 2022 building on that strong momentum and delivered another quarter of record net sales, gross margin, and adjusted EBITDA. We produced strong core organic sales growth of 15%, marking our fifth straight quarter of double-digit growth. Along with our strong start to the year, we continue to invest prudently in our operations and work hard to deliver outstanding service to our customers in the face of significant supply chain constraints that persist throughout our industry. The success we've achieved is directly attributable to all 28,000 of our hardworking and dedicated team members who go above and beyond every day to help us maintain our position as the industry leader. I'll cover four key topics on today's call. First, I'll provide a quick update on our base business and our record first quarter results. Second, I'll provide an update on our acquisition success that continues to strengthen our premier market position, including our most recent tuck-in deals. Next, I'll provide an update on our digital strategy, and finally, I'll discuss our view of the current state of the housing market. On slide three, I've highlighted this important point for several quarters and would like to share it again. As we discussed during our investor day last December, we believe it is important to assess our results using a base business methodology to better appreciate the underlying growth and profitability of our company by normalizing for commodity prices. As a reminder, our base business definition assumes static commodity prices at $400 per thousand board feet. Turning to slide four, over the next four years, we expect our base business to deliver a 10% CAGR on the top line, a 15% adjusted EBITDA CAGR, and importantly, a 50 basis point per year improvement in adjusted EBITDA margin for a total of 200 basis points of improvement by 2025. And our expected full year 2022 base business performance is ahead of these targets. As a result of this performance, we expect to have $7 to $10 billion of capital to deploy through 2025. That includes this year's planned capital investments in innovation and organic growth, along with M&A and share repurchases. Turning to our first quarter results on slide five, we delivered strong core organic growth of 15%. Commodity price inflation added 13%, and acquisitions added 8%. Our single-family core organic growth was nearly 17%, once again exceeding the single-family starch growth, which was about 4%. And our single-family core organic growth was double digits across all three of our operating divisions. Our multifamily and R&R segments each grew approximately 10%. Core organic sales and value-added products grew by 31% compared to the prior year period, and value-added products were the key growth driver across all customer segments, accounting for nearly 80% of our organic growth in the quarter. This is another strong data point that confirms our strategy is working. We delivered record sales of nearly $6 billion in the first quarter and generated $1 billion of adjusted EBITDA with an adjusted EBITDA margin of 17.6%. These exceptional results were driven by robust demand for housing, internal productivity, and ongoing pricing discipline in a volatile, supply-constrained environment. Let's turn to M&A. We remain focused on executing tuck-in M&A that delivers a high return. As you can see on slide six, there are more than 1,000 potential opportunities with revenue less than $100 million, clearly highlighting our future opportunity for growth. On slide seven, last year we completed seven acquisitions for $1.2 billion. This year, we expect to invest approximately $500 million in accretive M&A, and we're off to a great start. On April 1st, we acquired Panel Trust, a multi-location provider of building components to single and multi-family markets, with seven locations throughout Texas, Georgia, and South Carolina. The additional component capacity expands our value-added solutions offerings in several key high-growth markets. Panel Trust had approximately $138 million in sales last year. Also on April 1st, we acquired Valley Trust, a single location provider of building components to single and multifamily markets in Boise, Idaho. Boise's active housing market is seeing an influx of national home builders rushing in to meet a rise in local demand, and we're excited to partner with builders to meet their ambitious goals. Valley Trust sales were approximately $26 million in 2021. I want to welcome the team members from Panel Trust and Valley Trust to the BFS family, and I look forward to providing future updates on how Builders First Source will continue to lead the way in consolidating our fragmented industry. Next, I'll provide a brief update on our digital strategy on slide eight, as we continue to accelerate our pace of digital transformation. During our fourth quarter earnings call, I highlighted the deployment of Paradigm Estimate, which we continue to roll out across our operations to provide faster and more accurate customer quotes. Year to date, we have completed 2,000 estimates on customer plans across nine states, and that adoption will continue to accelerate. In addition, this process provides a foundation for our configurable visualization technology and improved design and construction efficiency for home builders. Regarding our visualization technology, I'm pleased to announce that we have signed an agreement with Hayden Homes, a builder in the Pacific Northwest, for the use of our HomeBuilder Omni platform. With their plans of approximately 2,000 starts, Hayden Homes will become the largest builder currently using our digital solutions. We believe we are making the necessary investments to revolutionize our industry and that our digital strategy is on track to capture an incremental $1 billion growth opportunity by 2026. Turning to productivity. we expect to deliver over 100 million dollars in productivity savings in 2022 by continuing to leverage our bfs one team operating system which we've highlighted at our investor day in december we're off to a strong start as an example our component manufacturing efficiency metric shows that our board fee produced per hour has improved by 19 versus the first quarter of last year as our teams work aggressively to maximize the throughput of our existing facilities to meet demand. Over the long term, we are targeting 3-5% of annual productivity improvement as our teams work together to leverage best practices and technology, allowing us to become more efficient and productive in serving our customers. Lately, many industry headlines have expressed uncertainty and concern. From what we have seen across the thousands of customers and home sites that we serve, I can affirm that this industry remains strong, underbuilt, and resilient. I believe the home building industry will continue to grow this year and that we will outperform our peers as our platform delivers for our customers and our shareholders. Despite persistent supply chain challenges and rising interest rates, we are not expecting a significant downturn in housing because we are a far healthier and more prepared industry than the last time we saw a significant downturn. Our beliefs are supported by three key facts. First, the significant underbuilding of homes that has occurred over the last 12 plus years. Next, the improvement in underlying demographic demand. And finally, the credit quality of that demand. We continue to believe that the U.S. housing market is significantly underbuilt. And while I acknowledge higher mortgage rates will likely represent a near-term headwind to satisfying that demand, we continue to see tremendous momentum and long-term growth for the industry. In the first quarter, single-family homes under construction increased 27.5% versus the prior year to 789,000 units. As a result of this underlying demand and ongoing supply chain challenges, total units under construction hit 1.6 million in March. The last time this occurred was in the summer of 1973. Also, the cancellation rates have remained low at approximately 8% during the first quarter, essentially unchanged from last year, indicating customer demand remains durable. Turning to demographic growth, we see a clear favorable trend in the most populous age cohort of 25 to 34-year-olds. This swell of young adults is moving into their early 30s, a time of life when many people start to buy their first homes or move from apartments to single-family homes. And we are seeing household formations reflect this demographic shift. And last month, according to the U.S. Census, the home vacancy survey revealed that all major age cohorts younger than 50 years old posted year-over-year increases in home ownership, the first time this has occurred since 1994. This data indicates the overall financial strength and creditworthiness of today's buyers are far healthier and more resilient than in the last cycle, as evidenced by the strong consumer balance sheet She's resulting from the trillions of dollars in COVID relief measures and the low 3.6% unemployment rate. So the homebuilding industry remains well-positioned with significant tailwinds given the historic underbuilding, favorable demographics, and consumers with strong finances. As a company, we have a long track record of successful execution, gaining share and driving efficiencies through innovation for our customers. We significantly overachieved our BMC synergy commitments and are ramping up productivity and operational excellence across the entire organization. We will continue to focus our efforts on accelerating our growth in higher margin, value-added products, and investing further in our digital solutions platform to advance our goal of transforming the home building industry. For 2022, we have increased our outlook and expect strong double-digit-based business growth and significant free cash flow generation. We remain committed to deploying capital into high-return internal investments, accretive bolt-on M&A, and share repurchases. I'd like to spend a couple of minutes highlighting Military Appreciation Month and its importance to Builders FirstSource. At BFS, we are honored to be a military-friendly employer and to be part of the journey for those who have served our country. One veteran we are particularly proud of is Rodney Hatch, who served as a Marine and is now a safety coordinator for multiple locations across our Alabama and Mississippi geographies. Rodney honors and celebrates those who have bravely served our country by creating veteran walls at our locations, showcasing those who are now growing their careers with BFS. His spirit of community doesn't stop with his coworkers. Rodney gives back to local neighborhoods by maintaining Blessing Boxes, an honor system food pantry where people in need can take food and necessities. And when Hurricane Ida hit the area last year, Rodney jumped into action, collecting donations from his fellow team members and delivering them to Louisiana himself. He does all of this on top of his vital role of keeping our people safe, a responsibility he excels at day in and day out. His safety-first mindset and teachings have helped his six locations achieve zero recordable injuries so far in 2022. People like Rodney are the reason we continue to see year-over-year reductions in our recordable incidents as part of our never-ending drive to zero. We are fortunate to have Rodney on our team and I thank him for his service to our country and the communities we serve. And I'm grateful to all of our veterans and each of our 28,000 plus team members who embody our core values, putting people first and showing our customers why BFS is the most valuable partner in our industry. With that, let me turn the call over to Peter to go through a detailed look at our Q1 results and provide an update on our improved 2022 financial guidance.

Thank you, Dave, and good morning, everyone. I would also like to take a moment and thank each one of our team members who delivered an incredible first quarter of 2022. We are very pleased with our remarkable first quarter results. We remain committed to a balanced approach to capital deployment through 2022 and beyond as we leverage our strong cash flow to make accretive investments in our operations and add great businesses to the BFS family, all while executing against our share repurchase authorizations. I will cover three topics with you this morning. First, I'll review our Q1 results. Second, I'll update you on our capital deployment efforts. And finally, I'll provide you with our updated guidance for the full year 2022. Let's begin with our Q1 performance on slide 10. We had net sales of $5.7 billion for the quarter, which increased approximately 36% compared to the prior year period. Core organic sales in the value-added products grew by an estimated 30.8%, underlining our work to meet the strong demand across our value-added channels and the continued supply chain constraints. Our focus on value-added products continues to strengthen our appeal to customers looking to improve efficiency on the job site. Gross profit was $1.8 billion, a 71% increase compared to the prior year quarter. The gross margin percentage increased 670 basis points to 32.3%, primarily driven by disciplined pricing in a volatile, supply-constrained marketplace, as well as effective and timely sourcing. SG&A was $968.6 million, an increase of $147 million, or 17.9%, compared to the prior year period, driven primarily by acquisitions and variable compensation. Variable and incentive compensation increased due to core organic growth and improved profitability. We also made strategic investments in IT, productivity, and digital initiatives. Lastly, fuel-related expenses increased by $12 million, or nearly 50%, due to recent global events. As a percentage of net sales, total SG&A decreased by 270 basis points to 17%. Adjusted EBITDA increased nearly 120% to $1 billion, driven by strong demand across our key customer end markets, higher commodity prices, and improved gross margins. Adjusted EBITDA margin improved to 17.6%, increasing 670 basis points compared to the prior year period as we continue to manage spending in a fast-growing environment. Net income in the quarter was $639.6 million, or $3.56 per share, compared to net income of $172.6 million, or $0.83 per share, in the same period a year ago. Adjusted net income was $700.8 million or $3.90 of adjusted EPS compared to the net income of $296.3 million or $1.42 of adjusted EPS in the prior year period. The 136.5% increase in adjusted net income was primarily driven by the increase in net sales and gross margin. partially offset by higher income taxes and SG&A expenses. Now, let's turn to cash flow. Our first quarter cash provided by operating activities was $179.8 million, and cash used in investing activities was $48.3 million. We generated free cash flow of $131.5 million. I'll highlight the fact that we are cash flow positive in Q1 for the first time. Historically, in the first half of the year, we are an F borrower as we make seasonal increases in working capital. This quarter's positive cash flow really highlights the strength of our market-leading platform. Let's turn to capital deployment. This year, we have spent approximately $180 million on our M&A transactions, which closed in April. In the first quarter, we repurchased approximately 3.6 million shares for roughly $286 million at an average stock price of $79.58. In addition, we repurchased approximately 4.3 million shares in April 2022 for $266.9 million at an average stock price of $62.21. Year-to-date, we have repurchased $552.9 million of stock. The number of shares repurchased was lower than the past two quarters, primarily due to the timing of M&A and seasonal working capital needs. Since August 2021, we have repurchased approximately 35.3 million shares of stock at an average price of $65.10 per $2.3 billion. This represents almost 17% of our total shares outstanding in less than a year. I'm happy to announce that yesterday the Board of Directors authorized a new share repurchase program of $2 billion. When added to the $2.3 billion already repurchased, our authorization provides for $4.3 billion of total share repurchases. we remain committed to opportunistically repurchasing our stock and continuing to create value for our shareholders. Also on slide 11, our pro forma net debt to EBITDA ratio was approximately 0.9 times our actual EBITDA. Excluding our ABL, we have no long-term debt maturities until 2027. Our total liquidity was $1.2 billion, consisting of approximately $900 million in net borrowing availability under the revolving credit facility, and $282 million of cash on hand. We are off to a great start this year. The team is driving higher margin products, delivering value and efficiency to our customers, and our balance sheet remains rock solid. Let's shift gears and discuss updated 22 full-year outlook on slide 12. We continue to see strong underlying demand in new housing construction. We are maintaining our estimate of single family starts growth across our geographies in the mid single digits and R&R and multifamily growth in the low to mid single digits. As we discussed last quarter, we are providing you with our base business guide on net sales and EBITDA, as we believe this is a better measurement of our performance and assumes constant commodity costs at $400 per thousand board foot. We will continue to provide you with a commodity price sensitivity chart in our investor presentation to allow you to incorporate your own commodity estimates into your models. As a result of our Q1 performance, we are increasing our 2022 base business sales growth guidance from 8% to 12% to 10% to 14%, or $17.6 billion at the midpoint. We are also increasing our adjusted EBITDA growth guidance from 12% to 18% to 18% to 22%, or $2.2 billion at the midpoint. Our CapEx forecast came down $20 million due to supply chain delays and is expected to be approximately $390 million in 2022. This year's CapEx will be focused on adding capacities to existing and establishing new value-added facilities to support growth initiatives that will create capacity for higher margin products. We delivered $55 million in cost synergies to the P&L in the first quarter, fully recognizing the synergy commitments of the BMC merger. In addition, we expect to deliver over $100 million in productivity savings this year as we continue to drive improvements across our operations. We expect to generate free cash flow of $2 to $2.4 billion in 2022, reflecting higher commodity prices, disciplined working capital management, and our ability to capitalize on our industry-leading product portfolio. This is an increase of $400 million from last quarter's free cash flow guide. Our projected free cash flow assumes average commodity prices in the range of $700 to $1,000 for the full year. We still anticipate working capital coming down due to lower commodity prices in the back half of 2022. On slide 13, we provide the sensitivity chart I mentioned, providing an illustrative way to think about our total sales and total adjusted EBITDA for the full year 2022 at various static commodity price points. We believe 2022 will be another strong year of growth. We continue to focus on growing value-added products, driving operational excellence across the company, and delivering innovative technology to our customers. With that, let me turn the call back to Dave for his closing remarks.

Thanks, Peter. In summary, the homebuilding industry remains resilient and underbuilt, and we believe it will continue to grow in 2022 and beyond. Our momentum is strong. Our industry-leading platform is generating exceptional results, which we expect to continue in the second quarter, the remainder of this year, and beyond. Our balanced capital allocation strategy is delivering significant value to our shareholders. We're committed to organic growth investments, tuck-in M&A, and continuing to execute share repurchases to generate accretive returns. I remain optimistic on the prospects for our industry and am highly confident in our company's ability to outperform the market over the long term. Priscilla, let's please open the call now for questions.

At this time, if you would like to ask a question, please press the star key followed by the number one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, if you would like to ask a question today, please press the star and one on your touchtone phone. And we will take our first question today from Mike Dahl with RBC Capital Markets. Your line is open.

Good morning. Thanks for taking my questions. I have a set of results here. So I have a couple of questions on kind of the core and some of the margin trends. So it looks like you converted the core still in kind of the mid-30s or low to mid-30s incremental EBITDA and maybe a mid-teens organic or a core organic margin. You know, you're guiding to about 12.2% core EBITDA for the year in terms of the margin. So understanding 15% is pretty exceptional or mid-teens is exceptional. Talk us through the balance of the year and what some of the puts and takes are that bring you down to that full year margin number.

Hey, Mike. Yeah, so it's a good question. There has certainly been a lot going on this year, as you know. The volatility in the markets, the supply chain issues, the ups and downs in commodity pricing. What we've been looking at is an exceptionally strong first half of the year. We knew it would be strong. I'm not sure we knew it would be this strong in terms of the dynamics. What we're anticipating is that the back half of the year we'll see some normalization. that we'll see a directional trend in commodity prices back towards our long-term estimate around the base business 400. Probably won't get there by year end, but it'll head that way. We also anticipate seeing increasing relief in the supply chain space. The interruptions we've seen historically due to basically the illness and the manufacturing facilities around some of the components we need to build homes. That's been improving pretty steadily over the course of the year. And as more capacity either comes on board or the supply chain stabilizes, we think that'll normalize things a little bit in the back half as well. But pretty modestly, we think for the full year, the underlying market is still strong. Margins will remain strong. But it will start to drift back towards a more normal level as the year progresses.

Okay, that helps. And I guess my second question, it's somewhat related. If I look at your bridge on sensitivities around different commodity price assumptions, both your sales and adjusted EBITDA ranges went up a decent amount compared to your prior sensitivities. So, you know, how much of that should we think of as being kind of true sustainable improvement in the base versus some of these just the first half being so exceptional like you're talking about and some things that may be still a little more transitory.

Yeah, no, but again, that's a good point. That page is really focused around trying to layer on the impact of commodities over top of the core base business, right? So we did call up the base, you know, our goal sales in EVA to be pretty handily, and we beat by about 5% in terms of what we're guiding for the full year. That was really based on the Q1 performance. So really, that's a really nice run rate in terms of what we've seen so far. That's the biggest kind of underlying factor on slide 13 of the sensitivities. The only thing I'll highlight on that slide, just as a reminder, this is a bit of a blunt instrument. We think it's handy. We think it's helpful. But just please remember this is a static commodity price snap the line. So volatility and commodity prices will move these numbers around a little bit.

Right, understood. Okay, thanks, Peter. Thanks, Monica.

And we will go next to Jay McCandless with Wedbush. Your line is open.

Hey, good morning. Dave, did you get that stat again where you talked about the amount of homes under construction?

Yeah, we said a total of 1.6 million. Yeah, really a remarkable number looking back through history. It's been a long time since we've been at this level.

Yeah, absolutely. And I guess kind of the follow-up to what Mike Dahl was asking you, if you have that many homes under construction, along with what I think is a pretty heavy permit backlog at the builders, I guess why do you think maybe demand and or activity slows down a little bit? It seems with the builders' cancellation rates staying low that It's hard for me to envision a scenario where unit volumes really take a step back from what we're seeing now.

Yeah, I think you're thinking about it right, Jay. We're actually not expecting volumes to significantly decline this year. As Peter mentioned, there's some comparison issues in the back half of the year. We're hoping for a little bit of supply chain relief as the year progresses, but we're very confident in not only what we're seeing early in the second quarter, but to your point, given the backlog that's out there and conversations with our customers, that the environment's going to remain robust here for the rest of the year.

Great. And then in terms of Hayden Homes, that's a pretty big announcement, pretty encouraging to see that they're taking on the full platform. I mean, I guess maybe what is kind of y'all's thinking on the growth trajectory there? You tested at Hayden for a year and then maybe moved to a bigger builder, or how should we think about that? And getting to that full billion dollars in omni-channel revenue that you talked about at the investor day, how does that for us?

Yeah, thanks for asking that one. We're excited about Hayden, and we're certainly excited about the work that we've got going on with our digital platform, and this is just great recognition of the work and the traction that we're getting in the market. Hayden is the largest customer so far that we've worked with on digital. They are the sixth customer that we have for Omni for Home Builders, but by far the largest at this point. And it's a really cool story, actually. Legacy Paradigm had been working with them a year to 18 months ago, and they kind of lost a little bit of traction until our acquisition of Paradigm last summer. And Hayden really realized that the ability to build out this platform and with the financial wherewithal that we have and the investment we were committed to making in advancing digital is really what brought them back to the table. and allowed us to sign this agreement with them. They also were a legacy BFS customer already in Idaho, so we've got a long-standing relationship with them, and so it was good to see that materialize into the signing of that agreement for Omni. So we're excited about it. To your second part of your question, you know, we do expect things to ramp up, but as you recall, and we've said this the last couple quarters and certainly in our investor day, This is a year where we're investing heavily in that platform to build out our capabilities for digital in Omni and all the other pieces of the digital platform. And so as we would expect, we will see continued customer adoption of this through the course of this year and into next year. But that billion dollars of revenue is really back-end loaded in the back half of that period of time. And, you know, we said that from the beginning only because of the digital ramp-up that we see coming over the next three or four years. So a lot of heavy lifting going on by the team. They're doing a great job, and we're excited.

Sounds great. Great quarter, and thanks for taking my questions. Appreciate it. Thanks, Jack.

We will take our next question from Matthew Booley with Barclays. Your line is open.

Hey, good morning, everyone. Thank you for taking the questions. Wanted to ask first one on the base business revenue guide and some of the components of that. You know, seeing sort of the base business sales guide 10 to 14% for the year. I think you said 5 to 6% from the smaller acquisitions and then You know, obviously, you've got the low to mid single digit growth in the end markets. And, you know, doing the math, that implies sort of minimal non-commodity inflation and other market share gains. I just want to make sure I'm thinking about that correctly and sort of how you guys are thinking about all the pieces there. Thank you.

Yeah, thanks, Matt. The numbers do include the components you described. We certainly have had good success in organic growth on top of our M&A work. As you described, there are certainly some inflationary factors in the market. Our guide for this year attempts to account for them in a balanced way and kind of forecast that out. But as I mentioned, if we do see relief from the supply chain some of that inflationary influence will start to dissipate. Timing is a great question, and we've tried to incorporate that in the back half in a reasonable way as a trended down sort of analytic, but that's really what we're trying to account for in this forecast for the remainder of the year.

Understood. Okay. Got that. And then secondly, the manufactured products and Windows Doors millwork strengths, I don't know, kind of a higher level question to the extent you can see this. Are you finding that, you know, this is just continuing to be driven by better adoption by builders? Or, you know, are you seeing signs, maybe it's a combination of both, but are you seeing signs that builders are actually attempting to simplify their product given all the challenges they're going through? with supply chain, and so that in and of itself is supporting kind of just increased usage of manufactured products across the board. I don't know. Unfair question, but to the extent you can see, I'd be curious, you know, your thoughts there. Thank you.

Yeah, it's a totally unfair question, but we'll answer it anyway, Matt. And I think you hit the nail on the head there. It's really a combination of both, and as we've talked for a long time, both legacy companies in this combination are really stepping on the gas relative to the value add and components and knower, and we've seen great adoption. But also last year, given the supply chain constraints, we did see builders become a little bit more agnostic on the products that they have taken. And also what you're seeing in our windows, millwork and doors, this quarter in particular, Things were really tough a year ago relative to supply. I would say it's incrementally better now, particularly on interior doors. Window leak times have come down a bit, but there's still quite a backlog. And in fact, some of these products that we're talking about here have actually inhibited the timely closing of homes, as we've talked about over the course of the last year. So I think it's a combination of both of those, but listen, I couldn't be more excited about the momentum that we have around our strategy inside the company, the way our team members have embraced it, and also the way our customers are ramping up, because we are saving them time, money, and labor availability will remain tight, and we think these products are very sticky. We've seen that through the course of time. And we think there's still a long runway of adoption ahead of us.

Wonderful. Well, thank you, Dave. Thanks, Peter. Good luck, guys. Thanks, Matt. Thanks, Matt.

We will move next to Keith Hughes with Truist Securities. Your line is open.

Thank you. Kind of building on the last question, your growth in manufactured products has been absolutely outstanding. As you talk to others in the industry and look – and acquisitions that are coming in, are they seeing the same kind of growth levels above the market that you're seeing? Or is this something you need to build a source?

Well, I really can't speak to what our competitors are doing there, Keith, but I can tell you that the phenomenon that we're seeing relative to adoption is not unique to us. It is certainly unique from how hard we're hitting it from our strategy and the way we're investing. I think we have a leg up on our competitors with the capital that we can deploy. preferentially to value added. And we are certainly doing that as we are spending a disproportionate amount of our capital on these assets for both organic growth and as you've seen over the course of time here, the acquisitions that we're doing. And we will continue to do that through the course of time.

Yeah, we're really meeting a need there. You know, the amount of stress builders are under to get homes completed, it's hard on them, right, with all of the supply chain disruptions. And this is an area, by leveraging what we do best, that they can make their lives easier. They can be more efficient. They can be more effective. So it's certainly been really good momentum, and we think our positioning strategically, as Dave was saying, is powerful.

Okay, thank you. Just one follow-up. Your last two acquisitions, the trust acquisitions, as you look at doing acquisitions in the future, is that's where a lot of dollars are going to go just because there's a lot of those available out there? Are there other areas you think you would send the acquisition dollars again to grow the manufacturer product base?

Yeah, I think you'll see us, again, continue to invest heavily in value-add. There are a number of potential targets still out there. Love our footprint, love what we're doing across the country, but we will take opportunities to strengthen the value-added side of the business differentially through M&A through the course of time.

Okay, thank you. Thank you.

And we will go now to Ruben Garner with the benchmark. Your line is open.

Thank you. Good morning, everybody, and congrats on the strong quarter and outlook. So maybe the gross margin line, I don't think I heard any updates to the long-term outlook there, Peter, but maybe it would help if you could kind of – I think historically I would think about rising commodity periods like we just had in the first part of the year as a detractor to gross margin, and yet you guys still posted a well over 30% gross margin, which is way above, I think, your normalized range. Can you kind of walk through the components there and why you think it's so elevated now versus where things will normalize when, I guess, the supply chain loosens up?

Yeah, no, that's a good question. And it really does boil down to the dynamics, whether it's attributable directly to COVID or supply chain interruptions post-COVID, combined with that demand that we were referring to in some of our scripted commentary. The push, the amount of interest from home buyers and the resulting drive by home builders to meet that demand has really put pressure on an industry that over the years has just shrunken down its capacity post kind of the go-go years of the early 2000s. Getting to that limit of available capacity is, you know, I think a lot of ways just pushed us up the Phillips curve. It is what it is. We're responding to it and managing it very, very well, I think. Staying disciplined. Disciplined in the way that we purchase, the way that we, you know, partner with vendors and with customers to keep the supply chain moving the best we can. But that has certainly created opportunities along the way to manage profits and to push through the product that we know we can get. I do think over time, though, that supply chain that difficulty will start to release a little bit, right? It'll alleviate. And as more product becomes available to more folks broadly in the market, we do think there will be a normalization. So you're right. We have not updated our normal gross margin guide. It's still 27% or higher in the long term. We still think we're on track for our LRP goals. But there will be some ups and downs along the way in our estimations.

Got it. And then, correct me, this could be wrong from the start, but I think I saw that the CapEx guide came in lower than you previously were looking at. Any color there? Is this just like an inability to get projects done, or is it, you know, reducing the spend because of the environment? Any color there would be helpful.

Yeah, no, unfortunately it's really just supply chain. We've got orders out for rolling stock and equipment and buildings and all these things we're trying to do, and unfortunately it's just slower moving than we would have hoped. You know, there was an article in the journal yesterday, I think, about just how hard it is to get heavy-duty trucks you know the chip and supply chain shortages in that industry have really made it harder on us we're spending more on r m you know just trying to keep up with the units we have versus getting the new ones we we would rather have all right great thanks and congrats again guys thank you we'll take our next question from david manthey with baird your line is open oh thank you good morning everyone

On your outlook for $7 billion to $10 billion of free cash flow between now and 2025, could you remind me what single-family housing start assumption was baked into that? Was it kind of a low single-digit number?

It was, yes.

Okay. does it matter how we get there if the average is the same does it matter if it's a consistent growth rate or a u-shape or a you know an s-shape or something does it matter over that time frame if it's consistent versus uh more volatile no it really doesn't you know it's uh it's an endpoint target in 2025 so you know to your point the path to get there i don't think is is important um

It certainly is informative as we go through this process that it's a base business guide, right? So all these changes you see in commodities and cash flows along the way, at least so far, have been incremental. But you're right, there's plenty of opportunity for us to move through unusual markets along the way to that ultimate target.

Yep, okay. Thanks, Peter. And then could you potentially bridge SG&A for us versus last year? I'm just trying to kind of parse out how much is acquisition versus the core, meaning compensation, occupancy, transportation, that sort of thing.

We certainly can. I'm not sure I can do it off the top of my head. We can cover it and give you sort of the bigger pieces when we talk or we can get back to you in an email if that's helpful.

Yeah, that sounds good. All right. Thanks very much. Thank you, Dave.

And we will go next to Ryan Gilbert with BTIG. Your line is open.

Hi, thanks. Good morning, guys. Could you offer any commentary around end market core organic growth trends so far quarter to date in 2Q?

Yeah, so there's I mean, I said this the right way. We have certainly continued to see strength across the end markets. There are certainly regional strengths that we notice. You know, I would say that, you know, the central and south part of the country certainly doing the strongest, but all of the markets are up geographically. seeing in the single family core, which I think has kept really good momentum, versus the R&R, which I think we've seen some ebbs and flows. Whenever you see significant increases in commodity prices, for example, that can sometimes put a headwind on the total demand. But on average, in total, everything Each one of the pieces and in total, everything is green and positive year-to-date so far. Good momentum.

And as I said, Ryan, all three of our operating divisions, you know, west, central, and east, have double-digit core organic growth in the quarter. So to Peter's point, you know, very consistent. Some ebbs and flows in certain geographies, but very strong overall.

Okay, great. And I guess considering the increased adoption in value-added manufactured products, Are you seeing any changes in builder interest levels in looking at more vertically integrated off-site solutions?

Well, I certainly think they would take it if we could build it fast enough. The challenge today is really just getting the capacity on the ground and available to them to shorten the existing lead times. What I think is important to highlight here is that it's really opened the eyes, I think, of more builders than ever to the advantages, to what off-site fabricated components can do for builders who want to professionalize and be really good at their art and craft of home building.

Okay, great. Thanks very much. Thank you.

And we will move now to Adam Baumgarten from Zellman. Your line is open.

Hey, good morning. Nice quarter. I guess maybe to start, just could you give us a sense for how much price inflation contributed to the core organic sales growth of 15% in the quarter?

It's an important part of it, no question. We haven't broken out the PDM. We might at some point in the future, but it was meaningful.

Okay, got it. And then just given the free cash flow outlook and the incremental $2 billion authorization, is there any reason to believe that share repurchases in 22 won't be at or above 21 levels?

Well, we certainly won't give specific guidance like that, but I will say that our strategy is consistent. We are not... Going off script on this, we're going to prioritize investing in the company, making sure our debt is in the right position, making sure our investment in organic internal growth is right. We've committed to continuing to do smart, accretive, tuck-in acquisitions. We're going to continue to do that, as you've seen. But we're generating a lot of cash, and we think our stock is undervalued, and we've highlighted that as a pathway that we think is a smart thing to do for investors.

Got it. Thanks.

Thank you. Thank you.

And we will go next to Trey Grooms with Stevens. Your line is open.

Thanks. This is Noah Murkowsko on for Trey. Good morning, and congrats on the strong results.

Good morning. Thanks, Noah.

So first question, it sounded like you're anticipating some supply chain normalization here in the back half of the year. Do you think you'll start to see gross margins get closer or even be at that 27% maybe as we exit the year?

I do think there will be some normalization. I don't think we're going to get all the way back. There are certain products that will remain elevated for some time, just barring a significant change that we don't really see coming. That would indicate that the other products would bring it down somewhat. But I would say at this point, no, we don't think that 27% by year end is right. But a trend in that direction is reasonable to expect.

All right. That makes sense. And then on my follow-up, I was hoping you could kind of frame the magnitude of the capacity expansion that you're doing in value-add. And if we continue to see this kind of growth, do you think you'll run into any capacity constraints before you can get that new capacity online as we look out for the balance of this year?

Well, we certainly have capacity constraints now. Our lead times are longer than we would like them to be. We look at ways to improve our ability to deliver to customers all over the country. Dave talked about our forward feed per man-hour productivity metric where we're trying to get more production, not the same. We've talked in the past about adding shifts. We continue to do that. we continue to add lines and we continue to add plants so you know we're we're double digit equivalent plants um you know in any given year in terms of everything we're doing um but then you know that that is that comes with its own challenges in terms of available components to put into that uh the people we need to do that um but it's it's certainly a focus on meeting that that demand because it's impressive right now and it's something that obviously we do very well.

And it is a disproportionate amount of the capital we're spending in total for the company. It's headed to those value-added products.

Right. That's helpful. Well, thanks for taking my questions and good luck with the rest of the year.

Appreciate it.

Absolutely. Thank you.

We'll take our next question today from Kurt Yinger with DA Davidson. Your line is open.

Great, thank you, and good morning, Dave and Peter. Morning. Here in Q1, there's been a lot of grumbling on the distribution side just around material availability and comments around kind of along the lines of if we had more, we could sell it, and perhaps that's the case for you as well. But I think the growth pretty clearly highlights that you're getting more than your fair share of that vendor supply, and I was hoping you could just talk about what you think is driving that and what it says about the BFS platform?

Yeah, very good question. And we've commented on this in the past. I think the strength of our platform since the merger is enabling exactly what you highlighted there, which is we believe we're getting a disproportionate amount of share from our suppliers. These are long-standing relationships, and importantly, they're symbiotic relationships. We're equally important to our suppliers as they are to us, and we've got really good momentum in those relationships. To your point around supply, I think incrementally I would say, as I think I commented earlier, windows are slightly better than they were a year ago, interior doors. Lumber is more readily available. But to your point, I would expect things like engineered wood products to be constrained in supply for a long time to come. Exterior doors are still tight. Siding and trim are difficult. Some of those products are even still on allocation. So it really is a mixed bag. And when we say we're incrementally better than we were a year ago, I mean exactly that. Some are better, some are no better. And the some that are no better, unfortunately, we think are going to be in tight supply for quite some time to come.

Right. Okay. Thanks for that, Dave. And then, Peter, just a follow-up on the normalized gross margins and where you've been running over the last couple quarters. Are there any product categories that really stick out in terms of significantly outperforming, or has it been pretty broad-based?

It's pretty broad-based. I would say the timing of different products and how they move throughout the last year and a half have been varied, but I think it's fair to say that it's a pretty wide-range, pretty broad-brush increase in pricing that we've seen come through the channel.

Got it. Okay. Well, appreciate all the color, and good luck here in Q2, guys. Thanks so much. Thanks, sir.

And as a reminder, if you would like to ask a question today, please press the star and 1 on your touchtone telephone. We'll go next to Colin Varen with Jefferies. Your line is open.

Great. Thank you for taking my question and a great quarter. I just wanted to turn to the productivity improvements. You talked about how you've hit your BMC synergy target and you're pivoting to more productivity. Can you just talk about some of the larger examples you have? I know you mentioned the increased throughput. And then any color as to what that 3% to 5% of annual productivity improvement translates into dollars on an annual basis and what that does to your long-term incremental EBITDA margin guide for the base business?

Yeah, thanks, Colin. So the productivity is an exciting part of the business. I think there's a lot of history in our company at finding ways to drive improvement. And we think we have a real opportunity at this stage at our scale to really share those best practices and leverage people, process, and technology to continue the momentum that we've seen with the Synergy Savings from BMC. It's a variety of things. It's process, it's redesigning certain things that we work on, but it hits a lot of different areas, right? It's reporting, driving over time. It's changing the architecture of certain organizations. It's improving our ability to optimize our tax rate. They're all things that we think are gonna drive the business. over the next long range of time. Good businesses do it regularly, year in, year out. And we certainly think that we have the capability to do it. What we're looking to do is make it a more normal part of our cadence and less dependent on big acquisitions to be a catalyst for that. So we did build a number into our long range plan. So we certainly have accounted for that SG&A improvement in the numbers. I can be candid and tell you it's not equal to the 3% to 5% target we're going to set for ourselves. We're going to be more aggressive with what we push for, and we're going to commit to our long-range plan having a number lower than that, but success nonetheless. So we certainly feel good about it, and we feel good about our track record and being able to continue to drive those types of improvements in a variety of areas.

Okay, that's helpful color. And then I guess just turning to the macro environment quickly, I know there's a lot of debate out there about housing and concerns around what happens to BLDR's margins if new resi volumes start to decline. So I was just hoping you can give us a little bit of color as to what levers you can pull to adjust to that kind of declining volume and environment to protect your margin and just help us think about how resilient your EBITDA margins would be if we do start to see any volume declines.

Yeah, I mean, that's a good question. While we're not at all concerned with what we think the market is doing or where it will go, we're also not blind to the idea that this is a cyclical business at times and mortgage rates are going up. So we're going to fall back on the playbooks and leadership that we're We're so lucky to have we have a lot of experienced leaders that have been through these types of situations before And when we look at our ability to perform we're certainly very very pleased with our starting point You know to be more specific. We're clearly a better scale a more efficient and leaner organization We have better analytics and a better ability to monitor our performance than at any point in our history. We've taken out what is over $500 million in cost as a result of the combined mergers over the last five to ten years. Those are really important things to consider when you look at what our business will perform, how our business will perform in the face of a headwind environment. You know, more specifically, we have some really obvious actions, right? We manage variable expenses every day. And as the volumes of our business shift, we're going to stay very focused on making sure we're sized accordingly. At our scale, we have a lot of pathways available to us. We also talked about operational excellence and productivity. Those are important characteristics that we will leverage into any sort of headwind environment. And the other factor to think about is that when we are investing in our company, the biggest investment we make in any given year is really around working capital. And that working capital that we fund as we grow this business comes back to us in those moments when the business sees a downturn. We've seen it in past years. We've done a good job at it, and we know we can do it in any environment. That's certainly something that I think is important for investors to keep in mind, just how much cash we'd spend off in any sort of downside environment. There are more on the list of things we can do, but we're certainly prepared for any sort of downturn. At the same time, we're confident that the market is strong and our momentum is very, very good in this market today.

Great. That's really helpful, Collar. Thank you. Have a good one.

Thanks a lot. You too.

And we will take our final questions today from Alex Regiel with B. Riley. Your line is open.

Thank you. Very nice quarter, and thanks for taking my question. Can you expand upon how BFS is going to get paid for Omni and digital platforms? And then how should we think about the profitability of this business in comparison to the legacy BFS business?

Yeah, so the nature of our committed improvement in performance and financial performance when we did the paradigm announcement and subsequent to that, we feel good about confirming our estimates, that billion dollars of increased sales by year five is primarily driven by increased pull-through of what BFS sells. So if you think about what we're offering into the marketplace, it's improved capabilities for home builders and home buyers to make the build process more efficient, right? It's taking plans, you know, having configurable visualizations. It's a powerful tool, especially when you link it to structural design. And that capability is unique and it's powerful in terms of what it allows us to do for our customers. It allows us to offer more options It allows us to offer more value-add. It makes us more efficient in our ability to give good quotes and be better partners for our customers. And it's just easier to place an order. It's easier to work with us when you're leveraging those technologies that Paradigm has developed. So that's where we believe we're going to make our money. It's incremental sales. in those core business markets, in value-add. There'll be more. We'll certainly see licensing revenue. We can go after other revenue streams through the Paradigm platform. But initially, that's the biggest impact in terms of what we've committed to.

Thank you very much. Our pleasure.

Thanks, all.

And this does conclude our Q&A for today. I'll turn the call back to Michael Neese for any additional or closing remarks.

Thanks, Priscilla, and thank you for your time today and for your interest in Builders FirstSource. Have a great day. We will be in New York City tomorrow for the BTIG conference, and we hope to see you there. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.