Builders FirstSource, Inc.

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Good day, and welcome to the Builders FirstSource first quarter 2026 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 FirstSource. Please go ahead.

Good morning and welcome to our first quarter 2026 earnings call. With me on the call are Peter Jackman, our CEO, and Pete Beckman, our CFO. The earnings press release and presentation are available on our website at investors.bldr.com. We will refer to the 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 gap measures. You can find the reconciliation of these non-gap measures to the corresponding gap measures where applicable, and a discussion of why we believe they can 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 our forward-looking statements and projections. With that, I'll turn the call over to Peter.

Thank you, Heather, and good morning, everyone. Our first quarter results reflect the adaptability of our operating model as we delivered strong strategic share growth in a weak housing market. Across the organization, we remain focused on the factors within our control, including serving our customers, expanding our differentiated portfolio of value-added solutions, and leveraging technology to accelerate growth and drive operational excellence. This disciplined approach continues to strengthen our leading position as a trusted, full-service partner to home builders. By continuing to invest in innovation and the capabilities that matter most to our customers, we are reinforcing our role as the leading building materials provider and extending our competitive advantages. Our strategy enables us to outperform as the market normalizes and to deliver sustainable long-term value for our shareholders. Let's turn now to slide four. Our first quarter results highlighted our agility despite the challenging housing market and seasonally lower time of the year for the industry. We landed at the upper end of the expected Q1 range for sales in EBITDA, even as the macro was worse than we expected. We continued to lean on our exceptional team leading value-added solutions, and robust operating model to drive performance. Let me take a moment to share some perspective on the market. The housing market remains weak as affordability challenges and muted consumer confidence continue to weigh on demand. In recent months, geopolitical tensions have added to market volatility by contributing to higher interest rates and additional inflationary pressure. The surprise of the Middle East conflict and the uncertainty around implications for both affordability and consumer confidence have undermined the spring selling season. While we are managing what's in our control, these conditions have created sales and cost headwinds that we don't expect to fully offset this year. Sales improved the first quarter in line with expectations, and daily sales have continued to build in April. However, sentiment is clearly weaker. As Pete will discuss, our revised full-year guidance reflects these dynamics. Despite ongoing macro challenges, we remain committed to advancing our strategy, including a sustained focus on share growth, continuous improvement, and capital allocation. We cannot control the market, but advancing our initiatives will enable us to realize share gains, improve the way we operate, and position us to accelerate growth with any level of recovery. We expect to capture single-family share service, bundling our broad product portfolio to drive affordability, and leveraging cutting-edge technology. In multifamily, courting activity remains active, but the uptick in interest rates has deferred certain projects. Given the current project pipeline, we don't anticipate a meaningful improvement in our multifamily results until next year. In response to the current market weakness, we are prudently managing spending and maximizing operational flexibility. as outlined on slide five. We remain operationally disciplined and have taken actions to reduce costs in line with demand, while preserving our ability to partner with our customers and invest in innovation and technology. So far in 2026, we have consolidated 21 facilities, following the consolidation of 55 total facilities over the prior two years, all while maintaining an on-time and in-full rate greater than 90%. Supported by our industry-leading scale, experienced leadership team, and proven ability to operate proactively through the cycle, we are confident in our ability to make the necessary adjustments and continue to deliver exceptional customer service. On slide six, we highlight some of the key initiatives under our strategic pillars. Our capital deployment is strengthening our competitive position and driving long-term value creation. Since the inception of the buyback program in August of 2021, we have repurchased nearly 50% of our total shares outstanding. Operational excellence is crucial to how we run the business as we develop talent, improve agility, and increasingly embed technology into our operations. We generated $6 million in productivity savings in Q1, primarily through targeted supply chain and logistics initiatives. Moving to slide seven, Our prudent capital allocation strategy focuses on maximizing shareholder returns. In Q1, we deployed $360 million towards return-enhancing opportunities aligned with our priorities. Our consistent, strong free cash flow through the cycle gives us the flexibility to invest in organic growth, pursue strategic M&A, and return capital to shareholders. Drilling down into M&A on slide 8, We remain focused on pursuing acquisitions that expand our value-added product offerings and advance our leadership position in desirable geographies. We have developed substantial and proven muscle memory to grow through M&A and have a track record of successful integration and synergy capture. As a reminder, we acquired premium building components in January, marking our company's first truss and wall panel operations in New York. Since the BMC merger in 2021, we have made 41 acquisitions representing over $2.3 billion in annual sales, the equivalent of a top six LVM player, demonstrating our ability to execute and integrate seamlessly. With the industry still fragmented, we see significant opportunities ahead and are confident that inorganic investments will remain an important driver of long-term growth. Turning to slide nine, We continue to differentiate by digitally enabling our team members, strengthening customer relationships, and advancing value-added product development to support long-term growth. Our investments in automation, AI, and digital integrations are focused on simplifying and accelerating the building process for our customers. In Q1, our digital platform processed nearly $800 million of quotes as we continue to automate key steps of the process. Later this year, we will roll out the next generation of digital solutions, deploying emerging technologies to support builders across key stages of the home building journey. The platform will include four integrated hubs, community, plan, selections, and construction, all accessible through myBLDR.com with embedded AI capabilities providing actionable insights through a single unified platform. Builders will have access to connected tools and real-time data to coordinate the build, reduce waste, and sell homes faster. Digital is central to how we operate today, particularly with our sales organization, where these tools create opportunities to capture share, expand product adoption, and deepen customer relationships. Recognizing one of our outstanding team members each quarter is one of my favorite parts of our earnings Today, I'm proud to highlight members of our Middletown, New York Millwork team, Sam Lane, Dan Livingston, Anthony Legnini, and Eddie Walsh, who were recognized by the New York State Police for their compassion and willingness to help a community member in need during dangerously cold winter weather. Earlier this year, first responders contacted Sam and his team after identifying a local resident whose front door was severely damaged and no longer provided adequate protection from the cold the officers were seeking to purchase a replacement door to help ensure the individual's safety. When our team learned of the situation and the residents' need, they stepped in immediately, producing a brand-new pre-hung door at no cost and assisting with the installation. I'm truly grateful to our Middletown Millwork team for living our BFS purpose every day, to build a better future for those we serve. I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. Our first quarter performance reflects disciplined execution in a weak housing market. We remain focused on managing our operations and working capital while advancing key growth initiatives to drive long-term success. Turning to our first quarter results on slides 10 through 12, net sales decreased 10% to $3.3 billion. driven by lower core organic sales and commodity deflation, partially offset by growth from occupations. The core organic sales decrease was driven by an 11% decline in single-family, reflecting lower starts activity and reduced value per start, and a 1% decline in both multi-family and repair and remodel, consistent with our expectations given muted activity levels and consumer uncertainty. As we've noted on recent calls, several factors reconcile single-family starts to our core organic sales. First, there is an approximate three-month lag between a start and our first sale. Second, average home value has declined as homes have become smaller and less complex, creating a sales headwind. We believe a comparable start has declined in value by 10% on average since 2019. Third, housing affordability constraints continue to pressure margins across the supply chain. Against this backdrop, we believe we grew share in the first quarter, reflecting our market leading offerings and continued role as a trusted partner. For the first quarter, gross profit was $0.9 billion, a decrease of 17% compared to the prior year period. Gross margin was 28.3%, down 220 basis points, primarily driven by declining starts environment. Adjusted SG&A of $740 million decreased $31 million, primarily due to lower variable compensation amid lower sales and lower headcount, partially offset by acquired operations. As we touched on in February, we leaned further into our downturn playbook with $100 million of cost actions, which includes $75 million in year-over-year cost reductions, and $25 million in cost avoidance. These actions include deeper cuts to overtime and temporary labor, adjustments to incentive compensation plans, reduced merit and overhead spend, additional facility consolidations, and tighter controls on discretionary spending. To date, all actions are complete or meaningfully underway. We realized $13 million in the first quarter and are on track to achieve our cost reductions this year. This positions us to leverage our costs as the market improves. Adjusted EBITDA was $214 million, down 42%, primarily driven by lower gross profit. Adjusted EBITDA margin was 6.5%, down 360 basis points from the prior year, primarily due to lower gross profit margins and reduced operating leverage. Adjusted EPS was $0.27, a decrease of 82% compared to the prior year. Now let's turn to the cash flow balance sheet and liquidity on slide 13. Our first quarter operating cash flow was $87 million, down $45 million, primarily due to lower net income. For the quarter, we delivered $43 million of free cash flow, underscoring the strength and consistency of our cash generation profile. Our trailing 12 months free cash flow yield was approximately 10%. Operating cash flow return on invested capital was 13%. Our net debt to adjusted EBITDA ratio was approximately 3.2 times. While higher than our long-term target, we are confident in the strength of our balance sheet with strong liquidity of 1.5 billion dollars. We remain comfortable with our net debt levels and will continue to execute our capital allocation priorities with discipline to maximize long-term value creation. Moving to the first quarter capital deployment, capital expenditures were 45 million dollars. We deployed $12 million on acquisitions, and we repurchased 3.3 million shares for $303 million. Earlier today, we announced that our Board of Directors authorized $500 million in share repurchases, inclusive of the $200 million remaining under our April 2025 authorization. On Slides 14 and 15, we outline our latest 2026 outlook and assumptions. which reflect continued weakness in housing starts, ongoing affordability pressure, and a more cautious consumer. Compared to 2025, single-family and multifamily starts are expected to be down 2.5% and repair and remodel down 1%. As a result, we are adding net sales in the range of $14.6 to $15.6 billion, adjusted EBITDA of $1.1 to $1.5 billion, an adjusted EBITDA margin of 7.5% to 9.6%. We expect our 2026 full-year gross margin to be in the range of 27.5% to 29%, reflecting the below-normal starts environment. We expect free cash flow of approximately $400 to $500 million. The year-over-year change is driven primarily by a $180 million swing in working capital and lower EBITDA. In 2025, we benefited from a working capital release driven by the lower sales environment to exit the year. In 2026, we anticipate the second half to be stronger, which requires investment in working capital. Our guidance assumes average commodity prices in the range of $390 to $410 per thousand workflow, in line with the long-term average of $400. Despite continued end market softness, commodity prices have pushed higher since mid-December, driven by rising input costs. For Q2, we expect net sales to be between $3.75 and $4.05 billion, and adjusted EBITDA to be between $300 and $350 million. The shape of the full year implies a heavier second-half contribution as we lap the starts decline due to the rapid deceleration of starts to reduce new home inventory levels. In closing, we are closely monitoring the current environment and remaining agile to mitigate downside risk in the near term, while also investing strategically for the future. Supported by a fortress balance sheet and strong free cash flow through the cycle, we continue to manage capital with rigor, drive for organic growth and productivity savings, and pursue M&A. We remain well-situated to compound value through our strategic initiatives. With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. We are the nation's largest supplier of building materials to home builders in new residential construction, combining unmatched scale with deep local execution across every major housing market we serve. We are number one in manufactured components, windows, doors, and millwork, providing significant value to builders. Our footprint, digital platform, and install capabilities create an unparalleled structural advantage. With our experienced, cycle-tested team, we expect to deliver solid results in the near term and significant upside when the market recovers. Thank you again for joining us today. Operator, let's please open the call now for questions.

Thank you. If you'd like to ask a question, press star 1 on your keypad. To leave the queue at any time, press star 2. We do ask that you please limit yourself to one question. Once again, that is star 1 to ask a question. And we'll go first to John Lovallo with UBS. Your line is now open.

Good morning, guys. Thanks for taking my questions. You know, despite the headwinds that you've articulated in housing, you know, so far this year, I mean, we would argue that the spring selling season has probably been a little bit better than feared and generally better year over year with most builders posting year over year order growth. You know, I mean, I do recognize there's a three-month lag from, you know, for you guys from when you start getting activity. But is this, you know, kind of better than expected spring part of the driver of the second half step up that you're expecting along with the, you know, just the easier comps?

Hey, John. Yeah, so thanks for the question. We actually did see a nice build at the beginning of the year. There were a number of different conversations we were having about the positive momentum both on the public and the private side. It's important to remember that we generally see the headlines for the public builders, but they're a significant but not universal coverage of the industry. That momentum at the beginning of the year, I think, has been good. It's just not, I don't think, able to withstand the negative headwinds around uncertainty. That's what we called out here. I still think we'll see a good year. I just think it'll be a little bit weaker than what we anticipated, and that has led to, you know, pressures throughout the business, whether it be on the inflation side or just the competitive dynamics side.

Makes sense. And then maybe just digging a little bit deeper, you know, the outlook implies, you know, a pretty nice improvement in margin in the second half. At the midpoint, I think 2.26 adjusted EBITDA margin would be 9.6, which is, I think, 200 basis points higher than the first half. What are you kind of expecting to be the big drivers of this improvement?

Yeah, thanks for the question. So it's really driven by the leverage that we gain out of the summer selling seasons with the strength in our sales flowing through. Some of it's related to the sequential performance and management of our cost structure. We outlined our productivity was $6 million in the first quarter. We're still targeting our $50 to $70 million for the full year. as well as the cost actions that we've outlined. So the $100 million of cost actions are well underway. We've completed most actions. Now it's just realizing those benefits as we move forward, which should help accelerate some of that leverage we would see in the back half of the year.

Okay. Thank you, guys.

Next one. Thank you. Our next question comes from Charles Perrone-Piche with Goldman Sachs. Your line is now open.

Good morning, everyone. First, I just want to drill a little bit more into the gross margin guidance embedded for the balance of 26. I think you mentioned last quarter Q1 would be the low point for the year. But obviously, it sits at the midpoint of the revised range. So how does it inform your expectations for the balance of the year? And what drive your expectations for the high end versus the low end of that range?

So what we had signaled last earnings call is Q1 would be the low watermark as we were anticipating a stronger build in the selling season, as Peter had mentioned, with the uncertainty as well as the increase in input costs, specifically around fuel. A lot of that inbound is still unknown that we're anticipating from our supply partners. It's not an... nominal amount of impact that it'll have on the cost, and so we've left the margin range fairly wide. We look to navigate what that looks like as we move forward. At the same time, we do expect to pass through where a distributor to pass through those cost increases, but some of it's timing related, and as we work through that, it's probably going to have a muted impact on our margins. So, We had signaled a build in margins as we go through the year and we leverage our fixed costs and cost of goods sold. That's still the case. We still anticipate that, but maybe not to the same degree given the sales volume expectations. Got it. Okay.

That's helpful. And, you know, considering the challenging housing backdrop and the profitability outlook you've highlighted, I would imagine some of your competitors are struggling significantly at these levels. I guess, how are you seeing some of them behave in this market environment? And are you seeing some smaller players exiting capacity?

Yeah, that's a great question, Charles. The answer is, yeah, there's a ton of pressure. And there are smaller players that are certainly struggling. There are players that have closed down a lot of facilities. You know, we've obviously talked about it publicly, but they're doing it privately. We've seen that in the market. seen a lot of turnover. People are making significant headcount reductions, talent coming onto the market in some instances. We've seen aggressive behavior, certainly a mix, as you might expect, right? The bell curve of performers in this market is what we see in terms of reactions. Some people are trying to pursue product categories, perhaps, that they haven't before, so new entrants and new competition and back off and so churn in the market um and just in general a lot of very aggressive behavior so you know we people alluded to it i think sometimes it's it's hard to um it's hard to relate to what people are seeing in the market but we're at volume levels for starts that would be comparable to 2019 but the content of the house is even smaller by So we're certainly seeing a market that's at substantially lower levels of volume running through it, even after having an additional five years of capacity ads and things going on. So the market is absolutely adapting. Capacity is coming out. Some of the weaker players are really struggling. We're hearing rumors of not being able to pay bills and delays and layoffs, but we'll see how it pans out. We're still strong in this. We're still able to I think take advantage. We alluded to that a little bit. We're sort of leaning in a little bit this quarter, harder than we have, and taking advantage of some of those opportunities. It's not easy right now, but I'm absolutely proud of this team for what we've been able to do. We're still strong in this market, even though it's tough. Got it.

Thank you for the color, Peter, and good luck with the quarter.

Thank you. Our next question comes from Rafe Jadrusich with Bank of America. Your line is now open.

Hi, good morning. Thanks for taking my question. I just wanted to start on the share repurchase in the quarter. You are above the sort of target, the long-term target leverage range, but you bought back $300 million. Can you just talk about that decision and strategy going forward?

Sure. Yeah, when we talk about capital deployment strategy. It's very consistent with what we've seen. I would say the way I would frame that is, first, making sure that our balance sheet and our debt is rock solid, that we have plenty of liquidity. Second, that we're investing in the core of the business, continuing to make sure we have what we need from a capital investment perspective. Third, looking at the M&A environment, the inorganic opportunities, and what high return opportunities targets are out there for us to consider. And then finally, when does it make sense to lean in and buy back shares? And I think we saw the dip this quarter in reaction to the dynamics of what was going on in the Middle East and saw it as an opportunity to pick up shares of BFS at a tremendous discount. We have a lot of confidence in our balance sheet and where we stand on the leverage perspective, certainly with the decline in the Even at levels, it's resulted in some of the multiples. The leverage multiples you mentioned is being a bit higher, but it's not an area of concern for the business. We're going to remain disciplined. We're going to remain thoughtful about how we do it. And at no point are we going to impair our strength on the balance sheet or our liquidity position.

Thank you. That's helpful. And then just on the inflation side, how are you to just, help us understand how you handle sort of higher diesel costs and some of the inflation does that get passed along to your customer through surcharges and maybe just talk about the exposure in terms of the the transport and fuel side yeah absolutely and we certainly saw as did everyone else in the space and across the the world increases in fuel costs diesel specifically

We take those costs as inputs, and we will surcharge our customers passing along. And sometimes it's embedded in the way that we price our product and how to service our customers. So it's all embedded, and we do pass that through. We evaluate it very closely. And like I mentioned on a prior question, it's not an insignificant amount on the inbound, and it's not insignificant on the outbounds. We do take that very serious in passing it through.

Thank you. That's helpful.

Thanks, Rick. Thank you. Our next question comes from Ryan Merkle with William Blair. Your line is now open.

Hey, everyone. Thanks for the question. I want to go back to gross margins. What was the biggest surprise in the quarter? Because you did beat the street on sales. And then on the guidance, how did you think about that? Did you just extrapolate what you saw in the first quarter, or did you add a little bit of incremental weakness to the guide?

Hey, Ryan. Yeah, thanks for the question. So, you know, I think the challenge that we face in this current environment is the variety of products that we're selling and the dynamics that are happening in each one of those categories. What I would say in Q1 is if you look at the trends, the core of the business is pretty well leveled out. There's certainly hand-to-hand combat in certain areas and certain parts of the country, so you get sort of the normal variability. If you think about lumber commodity and the value add, where I think we were surprised is in the specialty products and the other categories. That was where it was certainly more challenging, more volatile than we expected. Not happy about it, recognizing it for what it is and trying to account for that on a go-forward basis. But that's the core of the story.

So Ryan, if I could add to that, what's also working really well is our bundling program. So where we picked up a little bit of mix is on the lumber and sheet goods. So as we've been successful with our manufactured or value-added sales, we picked up a little bit more on the lumber and sheet, which is a lower margin category, which had a little mix impact. But that's all evidence of some of the share that we've been able to capture on the lumber side, leveraging that value-added capability.

Got it. Okay. And then just back on the guide, you know, I know it's an uncertain environment. So did you just extrapolate sort of the trends in one cue or did you add a little bit of cushion into the guide? I'm just curious how you thought about it.

I would say we don't just extrapolate. We're looking at our buildup from the bottoms up as we think about our sales projections for the year, what's in the pipeline, what we're hearing from our customers, the economists. We take all things into consideration as we develop our guide. And we have a normal seasonal curve, so it's a little more muted than what we had communicated last quarter. But it's still a seasonal curve, and we're seeing certain parts of the country thaw out and start to gain momentum as we get into the summer selling season. We're playing closest to the pin, Ryan. Got it.

All right. Thanks, guys. Best of luck. Pass it on.

Thank you. Our next question comes from Mike Dahl with RBC Capital Markets. Your line is now open.

Thanks for taking that question. I want to follow up on the kind of strategic share and bundling comment. So I think in the past you've talked about, you know, as It doesn't sound like this is specifically kind of the goal of let's win back share in lumber. It's more kind of a function of some other strategy. But can you just elaborate a little bit more on kind of the shift that you've made there? And then if there's any way to quantify when we think about the mix impact gross margin, what that really meant in the quarter and in the guide.

Thanks, Mike. Listen, man, there was a lot of feedback there, so I think I got it, but if I don't, please just correct me in the answer. So your question was about what's the bundling, a little bit more on the bundling, what do we think that's doing in terms of the margins and the business? So our bundling is really sort of the culmination of all the work we've done to offer the variety of products. It's the ability to come in and say, To a builder, we can make your life simpler and more efficient and put together an affordability package for you if you're interested in buying lumber plus truss plus millwork plus windows or whatever we're offering in that particular market. The opportunity there is to have some sort of back end or some sort of combined pricing that allows us to fill capacity. keep our operations humming, but by combining it, offer a superior value while at the same time offering or capturing more gross margin dollars for ourselves. So pretty straightforward in that regard. The mix impact right now, I think Pete alluded to it in the past. I think we've walked away from more of the lumber than maybe we would have to right now. We can kind of pick that up, has a little bit of a negative impact on margins by virtue of mix. I will tell you that's not the biggest impact for a negative mix in this quarter. Sorry, for negative margins this quarter. I think the primary issue is what I was outlining before about the other products, the specialty products. It's just gotten tighter. And I would say surprised as to how quickly it got tight in the quarter. But the core of the business, the lumber and lumber sheet and the value add, I think is performing largely in line with what we expect.

TAB, Mark McIntyre, yeah that's helpful sorry for that hopefully the follow up comes in clear the just just been to kind of dovetail understanding those comments in terms of. TAB, Mark McIntyre, yeah that's not really the main driver there, you know some of the public builders have commented about cost increases are not taking cost increases or want to push push them off, we have heard some concerns about. have players like yourselves being caught in the middle in an inflationary environment. Obviously, historically, there's been sufficient ability to pass through costs given your position in the market, but maybe specifically on the commodity pricing right now, there have been periods of time where you might see a quarter or two of margin compression, you know, as commodities rose, I think you moved away from a lot of the longer duration contracts. So that's been a little less of an issue in recent years. But can you talk through, you know, whether there's any timing differentials on, I know you mentioned fuel, but also on the commodity side that might be pressuring margins in the near term?

Yeah, no, that's a good question. So I'll start with the commodity side. You're right. We have largely moved away from those long-term contracts. More accurately, we've, I think, done a better job of matching our commitments to our customers with our purchasing profile and the way we're bringing it in. So certainly there's a little bit of that, but if it was big enough to mention, I'd be calling it out. So it's fairly modest in terms of the number. The broader question I think you asked is probably the more pertinent one, and it has to do with, well, builders are saying they're not going to take price increases, and vendors are saying I'd say that's not true. I think we're pretty good at this. And the balance here is we provide a value to this market on behalf of both of those parties. And there is a level of profitability that we're going to need to see in order to continue to participate. So to the extent we have good long-term partnerships and the market wants product, there is going to be a pass-through of whatever it needs to be. Do we play a mediating role in that? Absolutely. Right. We're in the discussions between vendors and builders and builders and vendors, depending on the dynamic. It's very clear to us that we have an affordability problem. Right. We are trying to help the builders achieve that goal in any way we can. But at no point does that involve us becoming a charitable institution and losing money in order to do it. So. There's a balance, right? And I think they understand that. I've had conversations with a number of them, and I think they're going to do what they need to do, and they're going to press, and we're going to do what we need to do, and we're going to hold the line where it's appropriate. But in the middle, there's a lot of value and a lot of work to be done, and I think we're particularly good at navigating that.

Thanks for that, Peter.

Thank you. Our next question comes from Matthew Boulet with Barclays. Your line is now open.

Morning, everyone. Thank you for taking the questions. Just sticking on the gross margin topic, so this guidance change of 100 basis points or so, I've heard you mention several drivers. You have the competitive environment, changing your starts assumption from flat to down low single digit. Sounds like price cost due to fuel. You talked about lumber mix, and then the specialty products and other margin. My question is really, is any one of those the biggest issue? Or maybe if you can kind of rank order the drivers of that change, because obviously what I'm trying to do is get conviction on what it would take to sort of halt that decline in gross margin.

Thank you. Thanks for the call, Matt, for the question, Matt. Yeah, I think the answer is if I'm scaling the level of impact, the biggest one is the specialty. I think the second piece is lot of different stuff. I think the inflationary component is an important one. It's kind of the impact of fuel and what we're trying to do to manage it. Maybe not so much on gross margins, though. That's more of an outbound costing that we're managing. It's certainly, I would say, the others are more comparable in size for the starts impacted, competitive, dynamic, mix impact and the fuel on the gross margin side.

Okay, got it. Perfect. That's helpful. And then the second one, the cost savings, $100 million in 2026. It's the same number from last quarter. Obviously, your overall earnings rejection has come down. So my question is, is there any more room to press on that? And how are you thinking about the balance of you know, hanging on to cost, hanging on to labor, et cetera, versus, you know, what it would take to kind of press on more, I guess, austerity type measures.

Thank you. So I think that the short answer to that is we're always looking at changing the size of the business and cutting costs in a market like that. The primary focus remains on the variable side to ensure that we're matching the people doing the work with the work that we have. And that is the biggest dollar amount by far that you're going to feel in our results. Working through, and as Pete mentioned, largely through most of the cost outs, I think at least initially we need to digest the impact of that and make sure that we're able to deliver on the things that we're committed to delivering before we take another pass. That said, We will continue to look at it, and as the year progresses, we'll see what we need to do. We're not announcing anything today, nothing new today.

Okay, got it. Well, thank you, Peter. Good luck, guys. Thanks, man.

Thank you. Our next question comes from Keith Hughes with Truist. Your line is now open.

Thank you. With the margin hit on specialty, it seems like it's now everything you do. Has it changed the relative margins amongst the products, the impressions of the downturn? Are they still kind of rank order the same top to bottom?

They're still rank order pretty much the same. I think what you see, Keith, and it's, I don't know, the academic in me is kind of fascinated by it. You actually saw the wave of cost reductions and competitiveness flow through our P&L similar to the way you would see it hit the job site. It started with the lumber. It's a commodity. It moved quickly. It reset quickly. All the margins reset quickly. Then it worked through some of the value-added products as you get into the structure. And we're seeing it work all the way through to some of the dogs and cats on the backside of the build that we deliver. So the relative performance, still very similar. But the timing at which we saw the resets was kind of in that order. And why we're seeing the specialty now is just a bit more than we thought. Thank you.

Thank you. And our next question comes from David Manthe with Baird. Your line is now open.

Thank you. Good morning, everyone. Guys, I'm wondering if you're expecting to see any relief in the size and complexity of homes as rates are more or less stable here. I mean, at some point, I think maybe it just mix up naturally as buyers would skew more affluent because of the affordability, but maybe not. Could you just discuss the second derivative rate of change and any expectations you have of that as sort of a leading indicator ahead of... unit volumes going up?

Yeah, Dave, thanks for that question. It's a fascinating one. We debated it internally going back and forth. I think that the dynamic we've seen up until now is very much bifurcation of the market, right? You've got strength at the large scale, you know, the more affluent buyer, the cash buyer, if you will, but on the counter, you have a lot more homes shrinking and reducing in complexity at the bottom end. So the starter homes, more starter, they're simpler, there's less in them. They're also, not only is it square footage, but it's single family standalone to the townhouse offering as well, right? So those dynamics we think have played out pretty aggressively. It is our opinion that stability to improvement in the market will likely lead to a reacceleration of some of those factors, would prefer to live in a detached home. People would prefer to have a larger home. People would prefer to have better inputs to those homes. I think until we work through some of the affordability at the low end, that's going to be slow to move. I think as you get more certainty, a reduction in uncertainty, that would be welcome. I think you'll see more stability through the middle and upper tiers of the market, and we will see a little bit of that.

Okay, thank you. And if you could just update us on the ERP, how far are you, and what does the timeline look like from here?

Yeah, sure. So for those of you who don't recall, we're in the midst of an SAP implementation. We are doing it in a very incremental way, so it's not a risk to the overall business. We did a preliminary pilot last year and have been doing some work to dial it in so that we can scale it. We're going to test those changes later on this year with another rollout. And then the expectation is it'll start to accelerate in 2027 for the next few years, I guess, based on the current schedule. We'll see how it goes as we start to trigger it. But we think we're ready to have a really nice rollout. roll out later this year to prove it out, to prove out the new training regime and some of the other stuff we've built. But that's kind of the thinking around it. It's going well. It's a slow process. I'm very impatient, but I think the team's doing a good job.

Sounds good. Thank you.

Thanks, Dave.

Thank you. Our next question comes from Trey Grooms with Stevens. Your line is now open.

Hey, good morning, everyone. So a little bigger picture here, I guess. I think installed products are, you know, something around, you know, kind of high teens or so of your sales, you know, with the install, including the products you're selling, clearly. It seems like, you know, that's a value-add area that builders are, you know, willing to pay for. How are you thinking about install generally? Is this an area you can... lean into in the current environment and maybe where do you see your install offering going here over time?

Thanks, Trey. Yeah, I think install is still a compelling offering. It's got the combined benefit of taking work off of the builder, making the job site more efficient, and capturing the offsite benefits of all the other things we're able to do, right? So whether that be installed trusts, installed windows, you know, we do some installed framing, we leverage ready frame. There's a bunch that we do. I believe that even in a market like this where there's depressed volumes, we're doing quite well with it. It's growing or it's performing better than market, put it that way, right? It might be down, but it's down less than the overall starts. Where I think it's really going to shine, though, is as this market starts to turn. I'm a firm believer that the lack of skilled labor will continue to be a challenge for this country and this industry for a long time. And I think the efficiencies captured in the installed model that we offer will be a differentiator and a competitive advantage as the market begins to accelerate again.

Got it. Thanks. That makes sense. And then... With cash flow and on the balance sheet, Pete, you mentioned you're expecting second half to be stronger, which will require investment in working capital. Any additional color you can give us there on what that use could be or what you're baking in there for working capital as a use of cash with your updated free cash flow guide for the year?

Yeah, so the working capital increase is going to be generally around for your receivables. So as we have higher sales per day as we exit the year, we'll have higher receivables that we'll carry over that finish line. I think we highlighted last quarter that the year-over-year change in the change in working capital specifically year-to-year was going to be about $300 million. Because of the lower guidance, we pulled that back. We're looking at about $180 million in the change in working capital year-on-year. which is that change is helping to offset the lower EBITDA that we had outlined. And then there's some other dogs and cats with the FX guidance that we had changed that kind of make up the Delta. But that's really the bigger pieces of it. Now, if you also think about inventory with higher inflationary costs on a relative basis, point to point, inventory cost is going to be a little bit higher as well. We try to factor in all the real operating working capital pieces as well as the things around it. Hope that helps give the frame. Yep. Super helpful. Thank you. I'll pass it on. Thanks, Troy.

Thank you. Our next question comes from Kurt Yinger with DA Davidson. Your line is now open.

Great. Thanks, and good morning, everyone. Just looking at kind of the base business, it looks like kind of current guide is down on sales four to 5%, you know, a little bit more than the drop in end market assumptions. I think last quarter you had kind of assumed a certain level of share gains this year. Have you dialed that back at all, or how does maybe inflation play into that as well?

Yeah, thanks for the question. When you're looking at the base business and the trend, you have to also factor into the margin change, the price, because that's going to weigh on the top line as well. No, we have not pulled back on our share gains or organic growth. We're still driving that forward in addition to what we had talked about earlier on the bundling and going after strategic share gains where it makes sense and where it's profitable. So that's all baked into the base business trend. trend that you're looking at but that weight from price is certainly a factor on the sales line and that would be I guess a component of you know competitiveness on gross margin not necessarily an assumption of kind of vendor-led price decreases is that the right way to think about it that's correct but we've we've talked about all the factors that weigh into that March and performance so The competitive nature is certainly one of it. Peter's mentioned the specialty and what we've seen on the specialty side, a little bit of the mix that we talked about. So yes, the competitive environment is still active and with a lower starts environment, it's going to continue to persist.

Okay, great. And then just on manufactured products, kind of price cost, you know, lumber's been on a nice little run here. through Q1 and stabilizing at higher levels in Q2. Did you feel like on the trust side, you're able to fully pass that through? Or maybe how do you balance that price-cost dynamic with the desire to fill up capacity and make sure you're covering more of those fixed costs going forward?

Yeah, the fixed cost dynamic is certainly a volume aspect that we talked about with seasonality and filling the plants and making sure that we're utilizing as much as we can. That factors into some of our facility rationalization. Peter mentioned in his remarks that we had closed 21 locations so far this year. Some of those are manufacturing operations where we're trying to make sure we're consolidating and maximizing that utilization. As far as the trust, we are passing the cost through. There's a little bit of lag on a trust design because you design and that cost basis is built in typically when you're quoting and bidding. So it's a little more extended than just the short term on the lumber and sheet goods. However, that resets with each trust that you're bidding and quoting. So it's got a little bit of a lag, but it's something that we're proud of on how our margins have performed and how well the team does with the product that we deliver to our customers. it's going to continue to be a higher margin category for us as we look in the future. Got it. Okay. Thanks for the color, Pete.

Thank you. Our next question comes from Sam Reed with Wells Fargo. Your line is now open.

Thanks, everyone. I actually wanted to circle back to a comment that was made in the prepared remarks on April. I believe if I heard correctly, you saw a little bit of a sales improvement in April, which is curious, kind of, is that a function of the macro and maybe just contextualize that April sales improvement in the context of normal seasonality?

Yeah, I think you hit it there. It's normal seasonality. We do see sustained growth from January through at least May, and then it sort of ebbs and flows throughout the rest of the year, depending on the month and the sort of the the focus that the builders have in terms of what they're trying to accomplish and the reactivity to the selling season and how well it's gone. But given the kind of normal seasonality around the country, this is what it's supposed to do. And it's doing it. I think for all of us, we just like it to be a little bit better and a little bit broader.

Yeah, that makes perfect sense there. And then switching gears, maybe going down a little bit on that install piece, And we've been hearing from a lot of the builders that they're getting concessions on labor. That's one of the key components that some of the big guys have indicated is driving thick and brick savings. I'm just curious for your installed business, are you seeing any of those benefits there potentially flowing through the P&L? Just talk through that implication. Thanks.

Well, I'd say good news and bad news on that. Yeah, we're seeing it. No, it doesn't flow to the P&L. It flows through the job site, right? I mean, that's Labor has a relatively modest margin. Well, I guess everything has a relatively modest margin these days, but it's predominantly a baseline competitive component, much like commodity lumber in the space. We're adding value by virtue of our efficiency, so there's some benefit there, but a lot of that's passing through.

All helpful, Keller. Thanks so much. Thanks.

Thank you. Our next question comes from Phil Ng with Jefferies. Your line is now open.

Hey, guys. Thanks for squeezing me in. Well, Peter, I guess to kind of kick things off, your sales in 1Q and even 2Q is somewhat backwards looking in terms of starts, and starts have actually been grinding higher a little bit. I'm curious, what are you hearing from your customers on spring selling season? Because you're calling for a better back half. The public eyes have been pretty I mean, it's out there, but just any color on that with the private customers you deal with day to day.

Yeah, thanks, Bill. So, yeah, I mean, like to recap, Q3, Q4, middle of Q3 and through Q4, that's pretty rough, right? They pulled back hard on their starts in order to burn off the spec inventory that they have on the ground. And I'd say that was true very broadly. Anybody who was looking at specs was looking at a slowdown and very caught. about putting new product in the ground. The reaction to that at the beginning of this year, I think you saw differentiated performance. You saw some builders who had been more successful in that effort see really nice start, right? We have a couple of builders who are doing candidly some of their best business ever because they're able to start with a clean sheet, build exactly what the current consumer is looking for and putting it into the ground at pace. Others are still worried about the burn-off, and so there's a mix. Now, that characterization that I just gave you is really a public builder storyline and largely what you saw. So I think, you know, in general, not too bad, pretty decent year. On balance, I would probably say that it's neutral to negative, but it's neutral to where they were, and there's some optimism in that number. Where I go to the other side of this equation, though, is the the private guys, which is still 40, 45% of the starts. The impact of uncertainty, the impact of, you know, the war and the volatility in the stock market, I think you've had some people just say, you know what, let's just wait a little bit. And really, I don't think that was the tone earlier in the year. I think before the war, there was a bit of a sense of, hey, this isn't too bad. Mortgage rates look pretty good. You know, when it crossed, 599, there was some optimism, but I think that has pulled back and slowed down. Again, it's not like the lights have turned off. I don't want to call an end to anything, but it's a bit more tepid than we were hoping for, given what we had seen earlier on in the year. So trying to reset around that, putting our best foot forward as to what we think is going to play out, but hopefully that's helpful.

Yeah, that's very helpful, Peter. Really appreciate the call there. Um, and let me preface this question. Um, I haven't necessarily seen, um, it's, it's not clear to me yet. The merits of going vertical, uh, horizontal, I mean, for some of these larger distributors, uh, that have made big investments recently. Uh, but one of them in particular has made a splash with, you know, they're in the LBM market now, as well as the installation side of things. Um, I'm just curious, does that give you a rethink in terms of, you know, your approach, which has been more targeted around your core? or you're considering actually going more horizontal, how does that, like, perhaps change the competitive landscape and how you go to market, just given what you're seeing in the broader industry at large?

Yeah, thanks, Phil. I hadn't heard anything about what you're talking about. Yeah, that's new news. Just kidding. So, you know, I think our comments on this have, I think, been pretty consistent. Hopefully, it'll be familiar. We really like of business that we've been able to put together. We've done some of these other things over the years. It's public record. We spun off our gypsum business. We do very little in insulation. We do very little in roofing. That doesn't say we don't do it. There are certain markets where it makes sense to include it in our offering, but it's not an area of focus for us. We think that's because there's very little overlap in terms of the benefit that these products can provide by virtue of the way that they're provided and by virtue of the customer that is purchasing what they're selling. So not true in every instance, but we think this is the right place for us. We feel very good about our ability to compete in our core market and to win. We think our strategic advantages in our core market are the things that have benefited us in the past and will continue to. I am not intimidated by any player in our market right now by virtue of what they can do. Some are far better than others at telling the story. And, you know, I can absolutely offer my admiration for a good storyteller. I've loved that since I was a kid. So I'll get better at it, but let's just agree that we are the biggest, we are the best, and I ain't afraid of anybody.

Okay. That's a great call. I really appreciate it. Thank you. Thanks, Bill.

Thank you. Our next question comes from Ruben Gardner with The Benchmark Company. Your line is now open.

Thanks. Good morning. I appreciate you squeezing me in. If this is a repeat, I apologize. I had some feedback earlier on the call. But you mentioned specialty margins a couple times. I was wondering if you could give A little more color on what you're seeing there. Is it specific products within specialty? Is it just broad-based kind of price-cost pressure? What's driving the margin headwind there?

Well, specialty for us, by virtue of what we cover, is a list about as long as your arm. You know, it's everything we sell outside of those primary categories. So it's things like, you know, siding roofing it's the gypsum it's cement it's you know anything that we're doing um it's a long list so it's that culmination of a bunch of small hits that is is the outline that we're providing around the specialty that other category if you look at our investor presentation materials that's where it's being hit

Okay, so just to be clear, it's not necessarily the digital or install piece that I believe is within that segment as well. It's more kind of the long list of products that you sell.

It's not digital. Digital would be too small to move the needle. I mean, install is in there, but that's not a meaningful change from what we're able to drill down into. And it's that long list and a bunch of slices. All right. It's just hard, right?

Going forward, guys.

And we could be here the rest of the day trying to carve it all out for you. I don't think that makes sense.

No, no. I appreciate it. Thank you, guys.

Thanks, Ruth.

Thank you. Our next question comes from Min Cho with Texas Capital Securities. Your line is now open.

Great. Good morning. Thank you. Just a couple quick questions here. Peter, you mentioned that value per start was down in the quarter, but have you started to see any stabilization there, or do you expect it to kind of decline for the intermediate term?

Well, the callout was 10% versus 2019, so it's a longer-term decontenting. I would say it's fairly leveled out. We are, you know, we might see a point of movement in any given quarter. But it's not moved as dramatically as it did about a year and a half, two years ago.

Got it. That definitely makes sense. And also, your value-added sales remains a similar percentage of overall revenue. And I'm assuming that those margins are probably holding up better. But as long as it's picked back up, do you expect the value-added part of your business to grow faster or slower? And I know you had mentioned installation will probably grow faster, but just in terms of your overall value-add products.

Bill, question. Value-add has historically been our high-growth area. We've got better capacity, better service levels, and particularly in a market that's labor-constrained, which it will be as this market turns, we will absolutely see better growth in value-add.

Perfect. Great. Thank you. Good luck with this quarter.

Thank you. Our next question comes from Adam Baumgarten with Vertical Research. Your line is now open.

Hey guys, good morning. I think you'd mentioned maybe not being able to recoup all the cost inflation. I assume that maybe relates to fuel in 2026. Can you give us a sense of the magnitude of the headwind you're expecting for 2026 at this point?

Well, I mean, it boils down to that fundamental question of affordability and how much can you pass through and how much do you need to eat? So the answer isn't broad. It's market specific, depending on local profitability. I would tell you that we're taking it a bunch of different ways. Like Pete was saying, some of it's embedded into the costs that we're providing on the material side, particularly on the inbound cost. On the outbound, we're taking it in a couple of different ways, whether it's pass-through, surcharge, or part of the negotiations. You know, I think the negative number that we're managing is probably around $100 million, right? So it's a meaningful number. The impact on the bottom line, I would say right now is a lot less than that based on what we're doing, but it's not zero.

Got it. That's really helpful. Thanks a lot, guys.

Thank you. And our final question today comes from Ketan Mamtora with BMO Capital Markets. Your line is now open.

Morning. Thanks for squeezing me in. Hey, just a couple of questions. On the competitive dynamics, you talked about specialty, but it struck me that you didn't talk about the trust side and the EWP side. Is it fair to say then that you're starting to see stabilization there?

Yeah. Yeah. I mean, it continues to be competitive. Any given quarter could be up or down within a small range. But, yeah, I think our belief is that we have better clarity on the lumber and stability starting to appear on the manufactured product category, the broader value-add category. Got it. That's helpful. So I've got to be careful, right? This is a broad statement, but I think that's generally directionally correct.

I see. Okay. And then just on leverage, I understand it's sort of, you know, a function of just, you know, how the EBITDA is moving through this year. But on the multiple side, is there a number where you feel that you don't want to go in terms of, you know, whether there's a four handle on it or whether it is sort of towards the high end of three? Is there a way to sort of think about that in general? Okay.

I mean, the short answer is our comfort zone is one to two. So anything north of one to two is challenging. The threshold for us is always back to where do we believe the market is? Where is our balance sheet? How do we manage that in a very thoughtful and strategic way in comparison to the opportunities that were presented? So I don't want to put a hard range around it, but You know, we keep a very close eye on it. The board keeps a very close eye on it. And ultimately, our commitment is to have a bulletproof balance sheet with sufficient liquidity to do what we need to do.

Understood. No, that's fair. I'll turn it over. Good luck. Thanks, Keaton.

Thank you. This brings us to the end of today's question and answer session. as well as Builders FirstSource First Quarter 2026 Earnings Call. We appreciate your time and participation. You may now disconnect.