Builders FirstSource, Inc.

Please stand by. Your program is about to begin. If you need assistance during today's program, please press star zero. Good day, and welcome to the Builders First Source Third Quarter 2023 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 phone at any time during the call. I'd now like to turn the call over to Heather Koss, Senior Vice President, Investor Relations for Builders First Source. Please go ahead.

Good morning, and welcome to our third quarter earnings call. With me on the call are Dave Rush, our CEO, and Peter Jackson, our CFO. The earnings press release and investor presentation are available on our website at investors.builder.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. 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 reconciliations 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 presentations. Our remarks in the press release presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and on 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.

Thank you, Heather. Good morning, everyone, and thanks for joining our call. Before we begin, I want to formally welcome Heather to the Builders FirstSource team. We are excited to have someone with her deep knowledge and decades of experience leading investor relations, which is a critical function here. Heather, welcome. Now on to our Q3 performance. Despite industry volatility caused by macroeconomic headwinds, our resilient third quarter results reflect the strength of our value-added portfolio broad footprint, and operational initiatives we have put in place over the past several years. While challenges remain due to inflation and increasing mortgage rates, we continue to generate healthy margins. This is proof of our attractive product mix and the benefits of our investments in multifamily. We remain confident in our 2023 outlook as we focus on being the best partner for our customers and executing our strategy to drive long-term growth. We continue to create robust free cash flow and invest in the business to operate more efficiently, increase customer loyalty, and expand our footprint. We are committed to operational excellence, including capturing efficiencies in our supply chain, as well as investing in automation and process improvements. These efforts are driving productivity savings and helping address our customers' labor challenges now and into the future. We are helping our customers reduce cycle times, which is highlighted by improving our in-full deliveries from 94% last year to 96% during the third quarter. On-time and in-full deliveries ensure our customers have the right material at the right time, building their loyalty and trust in us. We are continuing our investments in value-added solutions organically and through M&A to help our customers build more efficiently. These accretive acquisitions have enhanced our value-added product coverage and helped us achieve a leading position in desirable markets. As we grow share in these higher margin products, we are driving mixed improvement across the business. Our strong free cash flow provides multiple paths for capital deployment. all towards creating shareholder value. Given the long runway of potential tuck-ins, we will remain acquisitive to bolster our growth potential while maintaining a disciplined focus on the highest return opportunities. Looking at our third quarter highlights on slide four, gross margin was approximately 35% and only down slightly on a sequential basis. Despite normalization in core margin, Our overall margins have remained resilient, primarily due to stronger mix and value-added products, including our multifamily business and improved manufacturing efficiencies. Our adjusted EBITDA margin also remains strong, highlighting our ability to manage our operations effectively in a challenging and dynamic environment. This execution is a reflection of our talented and focused field leadership team. Turning to slide five, we generated strong productivity savings of $54 million during the quarter. This reflects the effectiveness of our BFS one-team operating system, which delivers value across the business by building people, excellence, and growth. Our recent acquisitions in multifamily contributed an increase of 2% in sales and 4% in EBITDA compared to the prior year quarter. Multifamily remained a tailwind this quarter, and we expect this strength to continue for the remainder of 2023 before declining around the second quarter of next year. Discipline SG&A expense management remains a key focus area. This includes the ongoing optimization of our footprint and balancing the need for cost reductions against future capacity needs. We are focused on our discretionary spending, and our team has responsibly managed costs in the short term while executing our strategy for the long term. Regarding our industry, the national builders have reported resilient results by providing incentives, such as interest rate buy-downs, to ease affordability challenges and attract prospective buyers. The limited inventory of existing homes for sale is also steering traffic to new construction. As we look forward to 2024, we will maintain our best-in-class customer service, continue our emphasis on expanding our value-added product mix, and launch our BFS digital tools to make building process faster, more efficient, and more affordable. Turning to M&A on slide six, we continue to target attractive opportunities while remaining financially disciplined. Through the third quarter, we have completed five deals with aggregate prior year sales of roughly $350 million. In September, we acquired Frank's Cash & Carry, a leading building material distributor with Trust Manufacturing in the Florida Panhandle. We are pleased that this acquisition will help us grow with builders in the area. And earlier in the third quarter, we acquired Church's Lumber, which expanded our presence in the Detroit market. We're excited to welcome these talented new team members to the BFS family. As shown on slide six, our M&A and organic investments have substantially increased our value-added product mix and diversified our in-market. We have seen the fruit of this growth in recent quarters through higher gross margins, even in a down housing market. Moving to slide seven, I would like to provide an update on capital allocation. During the third quarter, we prudently deployed capital in line with our stated priorities. We made two tuck-in acquisitions and repurchased over $200 million of shares while maintaining a strong balance sheet. We have cumulatively deployed approximately $5.7 billion since the end of 2021 and remain on track to achieve our 2025 goal of deploying $7 to $10 billion of capital, as communicated our investor day in December of 2021. Now let's turn to slides eight and nine for an update on our digital strategy. We are steadfast in our commitment to leading the digital evolution in our industry and generating new innovations to drive greater efficiency across home building and enhance our product and service offerings. As we look forward to our full product launch in Q1, we have made it a priority to drive digital adoption across our operations. MyBLDR.com is designed to create efficiencies for both our team members and customers by offering improved transparency and engagement in the home building process. Taking with our proprietary estimating and configuration tools, this gives our customers more control over the entire building process, saving both time and money for our customers and their clients while making the home building process more personalized. In the third quarter, we continued our product development and adoption efforts as we prepare for the upcoming full product launch. These are important milestones in our journey to reshape the industry and extend our lead as the partner of choice in the market and attain our goal of $1 billion in incremental sales by 2026. We look forward to sharing more information with you at our investor day next month. At VFS, we pride ourselves on helping our people achieve their career goals. A team member who has taken full advantage of every growth opportunity presented to her is Sue Dean, the general manager of our Florence, South Carolina location. Through the various roles she's held over her more than 40 years with BFS, she's earned the nickname Sue Deanie for her ability to solve problems and make magic happen. Since being promoted to general manager, Sue has led her location to achieve exceptional results by recognizing her team members' potential and empowering them. It's stories like Sue's that made me excited to see all the different ways our team members can grow here at BFS.