Builders FirstSource, Inc.

Good day and welcome to the Builders First Source second quarter 2022 earnings conference call. Today's call is scheduled to last about one hour, including remarks by the 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 First Source. Please go ahead, sir.

Thank you, Katie. Good morning, and welcome to our second quarter 2022 earnings call. With me on the call are Dave Flipman, our CEO, and Peter Jackson, our CFO. Today, we will review our record second quarter results for 2022. The second quarter press release and investor presentation for today's call are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. As a reminder, our adjusted EPS calculation excludes amortization of intangibles. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation for 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 could be useful to investors in our earnings press release, SEC filings, and presentation. Our remarks in the press release presentation and on this call contain forward-looking and cautionary statements within the meaning of the private securities litigation reform act and projections of future results. Please review the forward-looking statement section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections.

With that, we'll turn the call over to Dave. Thanks, Mike. Good morning, everyone, and thanks for joining our call. We ended the first half of the year on strong footing, delivering robust results during the first quarter, with that positive momentum continuing throughout the second quarter, in which we achieved sales growth of 24% and adjusted EBITDA growth of 80%, in the face of difficult comps and a challenging operating environment. These outstanding achievements are a direct result of having strong alignment around a clear strategy and the focused execution against that strategy, driven by the hard work and dedication of our approximately 30,000 team members and their commitment to provide outstanding service to our customers. On slide three, our strategic priorities continue to be organically grow our value-added products and services, drive operational excellence, continue to build our high-performing culture, and pursue strategic tuck-in acquisitions. On slide four, we outline how we continue to execute against our strategic priorities this quarter. Specifically, we delivered record results in the quarter through expanding capacity, increasing value-added product sales, and increasing productivity. We continued to leverage our BFS One Team operating system with a focus on cost containment to drive strong P&L leverage and bottom line performance. We maintained our industry leadership by successfully navigating a challenging industry and macroeconomic environment. We strategically deployed capital toward accretive, inorganic growth opportunities as highlighted by our most recent acquisition, HomeCo. Through July, we have repurchased approximately $1 billion of the $2 billion share repurchase authorization our board approved in May. Turning to slide five, we continue to believe it is important to assess our results using a base business methodology to better appreciate the underlying strength and profitability of our company by normalizing commodity volatility. As a reminder, our base business definition assumes static margins and commodity prices at $400 per thousand board feet. We are maintaining our full year guidance on our base business EBITDA of $2.2 billion, as Peter will discuss in a moment. Turning to slide six. As we outlined in our investor day last December, I want to reaffirm our expected performance by year end 2025, given our assumption of average single family starts growth in the low single digits through that time. We expect our base business to deliver a 10% top line CAGR and a 15% adjusted EBITDA CAGR. Importantly, this represents an average 50 basis point per year expansion in adjusted EBITDA margin for a total of 200 basis points of improvement by 2025 when compared to 2021. And as we deliver this performance, we expect to have between $7 and $10 billion of capital to deploy through 2025. That includes money for this year's planned capital investments in innovation and organic growth, along with potential additional M&A and share repurchases. We have already deployed a total of $2.8 billion of capital since we gave this guidance last December. And in the last 12 months, we have repurchased 25% of our shares outstanding. Looking at our record second quarter results on slide 7 in more detail, we delivered strong core organic growth of 12%. Our single-family core organic growth was nearly 16%, Again, exceeding a single family starts decline of approximately 3.4%. Tough comps against 2021 results impacted year-over-year growth in our multifamily and R&R segments, leaving our year-over-year growth essentially flat. Core organic sales grew 12.2%, while value-added core organic sales grew by 32% compared to the prior year. This highlights, once again, the strength of our strategy and that our team continues to execute it very well. Overall, we delivered record sales of nearly $7 billion in the second quarter and generated $1.5 billion of adjusted EBITDA with a record margin of 21.8%. These results were driven by solid demand for housing across our markets, ongoing productivity initiatives, and pricing discipline in an improving but still supply-constrained environment. As we turn to M&A on slide eight, we remain focused on executing tuck-in M&A that delivers a high return. Over the past year and a half, we completed 10 acquisitions for $21.6 billion of capital aimed at building out our value-added customer offerings, investing in our digital transformation, and further scaling our distribution network. In July, we acquired HomeCo. a lumber and hardware supplier in Flagstaff, Arizona, and are excited to welcome these new team members to the builder's first source family. HomeCo had net sales of approximately $44 million in 2021. This acquisition further demonstrates the fourth pillar of our strategy, M&A, building upon the strong reputation and presence of tuck-in targets while leveraging our BFS one-team operating system to swiftly integrate these new businesses. We have spent approximately $230 million on M&A so far this year, and we expect to invest at least $500 million for the full year of 2022. We remain committed to allocating capital in a disciplined manner that drives long-term value creation for our shareholders. Now let's shift gears and cover our digital strategy on slide 9. Our momentum on our digital transformation of the home building industry is accelerating, Foundational initiatives, such as standardizing our house plan intake and bid process, continue to progress well. We completed agreements with two new customers for our configurable visualization tool. Collectively, Creative Homes of Minnesota and SNAP ADU of California complete over 300 starts annually. And, we now have customers responsible for more than 5,000 starts using Paradigm Visualizer. We recently hit an important milestone in our technology development by successfully integrating the material takeoff, structural design, and visualization models into one process. This means when selections are made in a lot-specific model, such as choosing a siding type and color or expanding from a two- to a three-car garage, it's reflected in the material list in real time. Pricing of the base house and options can be made available in the visualization experience and reflected in the material list. Our three-dimensional models also provide the basis for offering building information modeling, or BIM, services to our customers, allowing them to gain project efficiencies by resolving construction conflicts in the digital world instead of at the job site. This important capability strikes at the heart of the efficiency gains we believe our platform will bring to the home building industry. Also, we have ongoing BIM pilots with one large national builder and two custom builders. Our pilot with Frontlight Building Company of South Carolina is highlighted on their company website and will help you understand how our technologies and services are helping home builders today. Turning to productivity. We delivered $40 million in savings in the second quarter, and we continue to expect to exceed $100 million in savings for the full year 2022 by driving improvement projects and leveraging our BFS one-team operating system. Over the long term, we are targeting 3% to 5% of annual productivity improvement as our teams work together to leverage best practices and technology, allowing us to become faster and more efficient at serving our customers. We are accelerating our effort in this important area to ensure we not only hit our financial targets, but to also make sure our industry-leading platform is as efficient as possible. Increasingly, we're being asked what's different about BFS today versus 15 years ago during the last housing downturn. On slide 10, we would like to point out that the company has seen a dramatic increase in scale and share And BFS is now more than 12 times larger and 60 times more profitable than it was during the last downturn. We are a leaner, more efficient, consolidated company. This increased scale has enabled the company to remove more than $400 million of annual run rate costs through several large combinations, including the integrations of ProBuild and Stock Building Supply, as well as our merger with BMC. We are operating as a consolidated platform, not as a decentralized organization, providing better visibility, alignment, and greater efficiency than other players in our space. We have improved processes and reduced costs to more efficiently serve our distribution network of more than 560 locations. We optimized our footprint by closing 120 locations and repurposing numerous other facilities. Since 2006, we have increased our value-added components and millwork facilities to over 200. That's nearly six times. We have grown our manufacturing capabilities as we have invested in high-speed door lines, truss automation, and robotics, which have improved our variable cost to serve and reduced our dependency on skilled labor. A good example of this would be our recent announcement of our two-year partnership with House of Design on a development and recent startup of our first fully robotic floor truss manufacturing line at our Villa Rica, Georgia facility. We have also contracted for an additional eight fully robotic lines, including four roof truss lines. We have improved our expense structure, making approximately 70% of our SG&A variable. We have leveraged the size and scale of our business through strategic, direct, and indirect And we have dramatically improved our cash generation, capital structure, and leverage, providing us with significant financial flexibility. While we have seen strong demand through July that laid near-term results, we fully recognize the current industry dynamics that are beginning to play out. We've heard from our customers that demand is slowing due to higher mortgage rates and overall affordability concerns. We remain confident that no matter what market conditions we face, we will remain nimble and balance any short-term dislocation, positioning BFS for long-term success and accelerating our market leadership. Turning to slide 11. In this scenario of a highly challenged market where housing starts are down more than 20%, we have several levers to pull to drive out performance, including effectively managing costs through our variable expense structure, optimizing capacity and further streamlining our footprint, reducing discretionary spend, accelerating productivity projects, taking appropriate headcount actions, and moderating capital expenditures. Our industry-leading platform, led by our strong and experienced team, is generating exceptional results, which we believe positions us well for any market environment. charities until 2030. We're committed to investing to capture growth organically and through tuck-in M&A. Although there will certainly be some challenges over the near term, we remain very optimistic on the prospects for our industry over the long term. I am highly confident in our ability to outperform the market in any scenario, and given our bulletproof balance sheet, expect us to lean in opportunistically on M&A in a more challenged market So to sum up, we will continue to execute our strategy, gain share, and deliver value to our shareholders in any environment. Our people are the building blocks of our company and are my inspiration to come to work every day to continue the evolution and growth of our world-class company. I want to recognize Brent Goodwin, an exceptional team member, who for the past four years has worked as an inventory control analyst at our Raleigh, North Carolina yard and millwork facility. Raleigh has been one of the strongest housing markets in the country for quite some time, with more than 60 families moving there each day. For the past several years, Brent's contributions are a key reason why our Raleigh millwork facility has become the go-to supplier for homebuilders in this burgeoning market. Beginning in late Q3 2021, Brent's location began experiencing shortages across multiple millwork product categories. Over the past two years, Brent has been relentless in developing creative solutions to help augment inventory, keeping our stock levels consistent to ensure minimal delays for customers. What makes Brent's work all the more impressive is the fact that he's been able to do it all while enduring first a demolition and then an expansion of his location's main storage warehouse. I want to thank Brent for his many contributions in helping keeping Raleigh's builders on track amid tight supply constraints and strong home buyer demand. We are fortunate to have Brent on our team. And I again want to thank all of our team members for their continued tremendous work and focus in satisfying the needs of our customers. I'll now turn the call over to Peter to discuss our financial results for the second quarter.