Builders FirstSource Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 5, 2024
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Operator

Good day, and welcome to the Builders FirstSource Third Quarter 2024 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by management and the question and answer session. I'd now like to turn the call over to Heather Koss, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.

Heather Kos
Heather Kos
SVP, Investor Relations at Builders FirstSource

Good morning, and welcome to our Q3 2024 earnings call. With me on the call are Dave Rush, our CEO Peter Jackson, our CEO designate and CFO and Pete Beckman, our CFO designate. As a reminder, on September 19, we announced a planned CEO and CFO succession. The earnings press release and presentation are available on our website at investors. Bldr.com.

Heather Kos
Heather Kos
SVP, Investor Relations at Builders FirstSource

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 GAAP measures. You can find a 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 our investors in our earnings press release, SEC filings and presentation. Our remarks in this 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.

Heather Kos
Heather Kos
SVP, Investor Relations at Builders FirstSource

Please review these forward looking statements 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, I'll turn the call over to Dave.

Dave Rush
Dave Rush
Former CEO & Director at Builders FirstSource

Thank you, Heather, and good morning, everyone. Before I get into my prepared remarks, on behalf of Builders FirstSource, I want to send our thoughts to all of those who have been impacted by Hurricane Saline and Milton. I am proud of how we have come together as an industry to help with disaster relief efforts in North Carolina and the Southeast. From the first morning after Helene's landfall, we had team members and suppliers reaching out from all over the region and even across the nation asking how they can help. Our Charlotte and Blairsville locations filled trucks with supplies and delivered them to the hard hit Western North Carolina region.

Dave Rush
Dave Rush
Former CEO & Director at Builders FirstSource

Suppliers like Great Southern, Blue Links, Weyerhaeuser, Oracle and many others immediately stepped up and joined our efforts. We are grateful to our partners for their help. And with BFS C. A. R.

Dave Rush
Dave Rush
Former CEO & Director at Builders FirstSource

E. Initiative, we're providing grants to our team members back to help get our team members back on their feet as soon as possible. I want to especially thank Tim McCall, an install manager in Asheville who also serves as a volunteer firefighter in the region. Tim was involved in 20 calls in the first hours after Helene hit. 1 involved climbing over 250 yards of very unstable terrain to help rescue an 11 year old boy who had been buried in the basement of his home by a massive landslide.

Dave Rush
Dave Rush
Former CEO & Director at Builders FirstSource

Tim, we are so proud of your efforts and thank you for your selfless service to the community. I'm sure you have all seen the news that I'm retiring as CEO. I never anticipated that 25 years ago, I would have this wonderful career with this great company. We have the best people in the industry and the opportunity to be CEO of BFS these last couple of years has truly been the joy and highlight of my career. I am so proud of how far we have come and I'm grateful to our leadership team and team members for their support.

Dave Rush
Dave Rush
Former CEO & Director at Builders FirstSource

I have full confidence in Peter and Pete and their ability to drive our strategy forward. One of my first priorities when I became CEO was to develop a succession plan to ensure the consistency of our leadership and execution of our long term strategy. With many years of experience as our CFO, Peter is exceptional at navigating the public company landscape and has spent extra time with each of our regions to get a firsthand understanding of what it takes to support our leaders in the field. He has served as a close advisor to me and was essential in helping craft our current strategy. I am working closely with him to ensure a thoughtful and seamless transition.

Dave Rush
Dave Rush
Former CEO & Director at Builders FirstSource

Pete Beckman is a brilliant financial leader and someone who is widely respected within the organization. I am grateful for our deep bench of talent and to leave BFS in such good hands. I want to wrap up by saying that I'm not going far away. I'll enjoy continuing to serve BFS as a member of our board and I'm taking an active role to ensure smooth transition in the near term. I'm excited to continue supporting our growth and success.

Dave Rush
Dave Rush
Former CEO & Director at Builders FirstSource

Thank you again. I'll now hand the

Dave Rush
Dave Rush
Former CEO & Director at Builders FirstSource

call over to Peter.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thank you, Dave, and good morning, everyone.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

I want to start by saying that we are indebted to Dave for his decades of service at BFS as a leader, steward and champion of the company and our people. Dave has truly done it all and his legacy of excellence will continue to inspire us as we move forward. I'm truly honored and grateful to be named the next CEO of Builders FirstSource. I'm humbled to represent our talented, hardworking team and the fantastic business that we have built. BFS has had tremendous success and become a world class organization because of the commitment and contributions made by this team.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Let's get started with Slide 3 and our strategic pillars, which remain unchanged. As we continue to execute our strategy, I believe there are 3 areas that we can emphasize, so we can continue to outperform today and transform tomorrow. The first opportunity is with our people. I want us to advance the industry standard in this area so that we are recognized as a premier destination for talent. I believe we can enhance how we invest in, develop and support our team members from our frontline operators to our leadership.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

The second opportunity is to further build and capitalize our growth prospects from our products to our processes. I see potential to improve our consistency, capabilities and ways of working so we can extend our lead and grow a bigger, better BFS of tomorrow. And the 3rd opportunity is to improve how we collaborate and learn from each other within the company. We have a wealth of expertise, knowledge and innovative technologies. I believe we have a real opportunity to enhance how we work together.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

So that what we are discovering in Charlotte is shared with Phoenix and what we are developing in Florida can be scaled in Texas. Let's turn now to our Q3 highlights on Slide 4. I'm proud of our resilient performance, which reflects our execution and operational rigor. Even as we continue to see soft sales amid rate uncertainty and extreme weather. Despite these challenges, we delivered strong gross margins of nearly 33%.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Our adjusted EBITDA margin has remained in the mid teens or better for 14 consecutive quarters, which highlights our transformed business model and our differentiated product portfolio and scale. Let's move to Slide 5, where we touch on some of the specific ways we are executing our strategy. Our portfolio of value added products and services remains a competitive advantage for BFS and continues to bolster our partnerships with customers. We've seen steady progress with digital as we continue to hear great feedback from customers and see increasing levels of adoption each week. We demonstrated operational excellence by delivering $27,000,000 in productivity savings in Q3 and have driven $104,000,000 year to date primarily through more efficient manufacturing and procurement initiatives.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Install services continues to be a great opportunity for us as we leverage playbooks from successful markets. I'm pleased that our installed sales increased by 11% year over year as we focus on helping customers address labor challenges. We remain disciplined stewards of discretionary spending and are continuing to maximize operational flexibility. We have consolidated 11 facilities year to date while maintaining our service levels to our customers with an on time and in full delivery rate of over 90%. Single family softness continued in Q3 amid ongoing affordability challenges and below normal starts.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

The initial reaction to the Fed's first interest rate cut in September has been mixed with some homebuyers remaining on the sidelines and waiting for additional rate cuts as mortgage rates fluctuate in the near term. As a reminder, the value of a new start has fallen as the housing market has adapted to affordability challenges. Multifamily continues to be a headwind amid muted activity is expected. Comparisons should get less negative as we lap record performance from last year. On normalized basis, multifamily represents about 9% to 10% of net sales and is an attractive and profitable business for us.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

As we detailed on our Q2 call, our Q4 exit velocity indicates about a percentage point of margin erosion from 24 on a full year basis, roughly half of which is from multifamily. To address the current environment and affordability challenges, builders have employed specs, smaller and simpler homes and interest rate buy downs to help buyers find affordable options. Builders of all sizes are having to navigate this market in addition to regulatory, land development and infrastructure challenges. Smaller builders have been especially impacted by the availability of land and limited options to buy down rates. We are leaning in by partnering with our customers to help them lower the cost of homes for consumers as well as maintain their margins.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

This includes offering a balanced product mix that addresses builder needs while passing through lower material costs. For instance, we have continued to supply more engineered wood and have sold fewer floor trusses to help alleviate affordability challenges. We have also supplied more lower cost offerings and products like windows and doors to help reduce costs. Although these actions in support of our customers need less sales and gross profit dollars, our margin profile remains strong and we are well positioned for growth as starts increase and structural headwinds begin to subside. Turning to M and A on Slide 6, we continue to pursue attractive opportunities while remaining financially disciplined.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Over the years, we have developed a substantial and proven muscle memory to grow through M and A and have an impressive track record of successfully integrating these transactions. In the Q3, we completed 6 deals with an aggregate 2023 sales of roughly $190,000,000 In July, we acquired Western Trust and Components, adding trust capacity in the Flagstaff, Arizona area and CRI SoCal, a dealer and installer of high end windows and doors in Orange County, California. In August, we acquired Wyoming Millwork, the leading independent building products distributor in Delaware. September, we acquired Sunrise Wood Designs, a top custom cabinet manufacturer and installer in North Texas. And in the Reno area, Reno Trust, a leading trust manufacturer to the single and multifamily markets and High Mountain Door and Trim, a distributor and installer of windows, doors and millwork.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Additionally, in October, we acquired Douglas Lumber, which provides a range of building materials to contractors, remodelers and homeowners in the Rhode Island area. These acquisitions reinforce our commitment to growing value added products. We are excited to welcome these talented new team members to the BFS family. On Slide 7, we provide an update on capital allocation. In addition to the 6 tuck in acquisitions during the quarter, we executed share repurchases of roughly $160,000,000 As driven by our track record, we'll continue to allocate capital to high return opportunities, including acquisitions and share repurchases.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

We deployed approximately $1,700,000,000 through the 1st 3 quarters of this year and remain on track to strategically deploy $5,500,000,000 to $8,500,000,000 of capital from 2024 to 2026 as we outlined at Investor Day last December. Now let's turn to Slide 8 and discuss the latest updates on our digital strategy. With our BFS digital tools, we are focused on creating value for our homebuilder customers and in doing so further extending our industry leadership position and driving substantial organic growth. We have seen strong adoption and growth with our target audience of smaller builders despite the challenging market. We have had broad acceptance of the platform so far including interest from multiple top 200 builders.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Since launching in late February, we have seen nearly $600,000,000 of orders placed through our digital platform of which $83,000,000 were incremental sales from existing and new customers. While we're very pleased with the incremental sales to date, given market headwinds from our targeted segment of builders, we now expect total incremental sales of approximately $110,000,000 in 2024 versus our initial goal of $200,000,000 Despite the slow start, we remain confident in our ability to meet our target of $1,000,000,000 in incremental sales in 2026 as we grow wallet share and win new customers. Before I turn the call over, I want to say that we are very fortunate to have Pete Beckman step into the role of CFO. He has a long and proven track record as a finance leader, which I've witnessed firsthand. I look forward to partnering with him to deliver exceptional results and compound shareholder value.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Pete, take it away.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

Thank you, Peter. And good morning, everyone. I appreciate the introduction and I am grateful for opportunity to serve as CFO. For background, I have spent the last 25 years at BFS and legacy companies and roles of increasing responsibility, including being an integral part of the ProBuild and BMC mergers. Most recently, I served as SVP of Financial Planning and Analysis, where I have partnered with all levels of the enterprise and was responsible for our financial forecasting, strategic capital and annual planning.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

I look forward to helping enable profitable growth while maintaining our track record of prudent financial management through the cycle and disciplined capital allocation. Like continued housing market choppiness, we delivered resilient results during the Q3 as we continue to execute our strategy and operating model. We are leveraging our forfeit balance sheet and free cash flow generation to drive disciplined capital deployment as witnessed by our share repurchases and acquisitions during the quarter. Our scale and financial flexibility enable us to act as key partners to homebuilders and we have a clear line of sight to compound value creation over the long term. We are well positioned for meaningful operating leverage when the market turns.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

I will cover 3 topics with you this morning. 1st, I'll recap our Q3 results. 2nd, I'll provide an update on our capital deployment. And finally, I'll discuss our 2024 guidance, 2025 scenarios and related assumptions. Let's begin by reviewing our Q3 performance on Slides 910.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

Net sales were $4,200,000,000 a decrease of 6.7 percent driven by a 7.2% decline in core organic sales as multifamily continues to trend downward and 2.9% of commodity deflation. The decrease in net sales was partially offset by growth from acquisitions of 2% and one additional selling day that contributed 1.4%. The core organic sales decrease was driven by a 31% decline in multifamily as we lap the prior year's strong comps and a 4.6% decline in single family amid lower value per start. This was partially offset by a small increase in repair and remodel of almost 1% given strength in the central region. As we have shared on recent calls, there have been 3 main variables reconciling single family starts for organic sales.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

The first variable is the lag between permits and starts. This quarter unlike last quarter, we have seen the impact of early permit pulls fade, but we continue to see a generally extended permit completion cycle time. As a rule of thumb, we expect a roughly 2 month lag between a start and our first sale. 2nd, the value of the average home has fallen as size and complexity have decreased. Finally, we have seen slight normalization in selling margins of non commodity products and manufacturer price cuts in some products.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

Summarize, although there are less sales dollars built or start today, we remain the market leader and we'll continue to deliver strong operating performance. Value added products represented 49% of our net sales during the Q3. As a rule of thumb, our multifamily sales are made up of roughly 70% value added products. Gross profit was $1,400,000,000 a decrease of approximately 12% compared to the prior year period. Gross margins were 32.8%, down 2 10 basis points, primarily driven by multifamily and core organic normalization.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

SG and A increased $19,000,000 to $958,000,000 primarily attributable to acquired operations and asset write offs, partially offset by lower variable compensation due to lower net sales. As a percentage of net sales, total SG and A increased 190 basis points to 22.6%. Adjusted SG and A decreased approximately $1,000,000 to $783,000,000 primarily attributable to lower variable compensation due to lower net sales, partially offset by acquired operations. On an annual basis, adjusted SG and A is approximately 30% fixed and 70% variable with volumes. For reference, we have an adjusted SG and A reconciliation schedule in the earnings release.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

We are focused on carefully managing our SG and A expenses and are well positioned to leverage our fixed costs as the market grows. Adjusted EBITDA was approximately $627,000,000 down 23%, primarily driven by lower gross profit, partially offset by lower operating expenses after adjustments. Adjusted EBITDA margin was 14.8%, down 3 10 basis points from the prior year, primarily due to lower gross profit margins, partially offset by lower operating expenses after adjustments. Adjusted net income of $360,000,000 was down $174,000,000 from the prior year, primarily due to lower gross profit, partially offset by lower operating expenses after adjustments and lower income tax expense. Adjusted earnings per diluted share was $3.07 a decrease of 28% compared to the prior year.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

On a year over year basis, share repurchases added roughly $0.22 per share for the Q3. Now let's turn to our cash flow, balance sheet and liquidity on Slide 11. Q3 operating cash flow was $730,000,000 an increase of $81,000,000 mainly attributable to a decrease in net working capital. Quarter were $95,000,000 and free cash flow was approximately $635,000,000 For the last 12 months ended September 30, our free cash flow yield was approximately 8%, while operating cash flow return on invested capital was 25%. Our trailing 12 months net debt to adjusted EBITDA ratio was 1.4x, while base business leverage was 1.5x.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

At quarter end, our total liquidity was approximately $2,000,000,000 consisting of $1,700,000,000 in net borrowing availability under the revolving credit facility and approximately $300,000,000 in cash on hand. Moving to capital deployment. During the Q3, we repurchased roughly 900,000 shares for approximately $160,000,000 at an average stock price of $176.73 per share. Since the inception of our buyback program in August 2021, we have repurchased 45.5 percent of total shares outstanding at an average price of $77.62 per share for $7,300,000,000 We have approximately $840,000,000 remaining on our $1,000,000,000 share repurchase authorization. We remain disciplined stewards of capital and have multiple paths for value creation to maximize returns.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

On Slide 12, we show our 2024 outlook. We anticipate a regional financial impact from hurricanes Helene and Milton around $40,000,000 in sales, a relatively modest amount given our geographic diversification. For full year 2024, we have narrowed our range of expected total company net sales to be $16,250,000,000 to $16,550,000,000 We expect adjusted EBITDA to be $2,250,000,000 to $2,350,000,000 Adjusted EBITDA margin is forecasted to be in the range of 13.8% to 14.2%. We expect our 2020 full year gross margin guide to be in the range of 32% to 33%. This also remains in line with our long term expectation of 30% to 33% and normalized single family starts of $1,000,000 to $1,100,000 We expect full year 2024 free cash flow of $1,200,000,000 to $1,400,000,000 assuming average commodity prices in the range of 3.80 dollars to $400 per 1,000 board foot.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

2024 outlook is based on several assumptions. Please refer to our earnings release and presentation for a list of these key assumptions. Moving to Slide 14, we recognize that 2025 is coming into focus as we approach year end. Like we did last year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions. I want to emphasize that this is not guidance, but these scenarios should help clarify our range of performance expectations for 2025 and demonstrate the strength of our best in class operating platform.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

Turning to Slides 1516.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

As a

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

reminder, our base business approach showcases the underlying strength and resiliency of our company by normalizing sales and margins for commodity volatility. This helps to clearly assess the core aspects of the business where we have focused our attention to drive sustainable outperformance. Our base business guide on net sales for 2024 is approximately $15,400,000,000 Our base business adjusted EBITDA guide is approximately $2,300,000,000 at a margin of 14%, which reflects a minimal impact from commodities. For context, Slide 16 shows that our 2020 base business adjusted EBITDA was roughly $1,100,000,000 at 991,000 single family starts. And we are expecting better adjusted EBITDA at lower single family starts this year.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

On Slide 17, we provide a bridge from our 2019 gross margin to the long term normalized midpoint of 31.5%. Our improved margin profile plus a greater mix of value added products, productivity savings and commercial benefits. As I wrap up, I am confident in our ability to execute our strategy and drive long term growth by leveraging our exceptional platform and financial flexibility. The Investor Day goals we laid out last December remain achievable assuming a return to normalize single family starts of $1,100,000 in 2026. With that, I'll turn the call back over to Peter for some final thoughts.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thanks Pete. Nick goes by reiterating that we continue to execute. Our resilient business model allows us to win in any environment and this is evidenced by our strong gross profit margins and cash flow generation in the Q3. I'm confident in the long term strength of our industry due to the significant housing under build and favorable demographic trends. We are well positioned to take advantage of these tailwinds, which will help drive growth for years to come as we execute our strategy.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

We are a key partner to our customers and continue to deepen our value proposition by helping them solve problems through our investments in value added products, digital tools and install services. Our proven playbook for growth, fortress balance sheet and robust free cash flow generation will help us continue to compound long term shareholder value. Even in an uncertain and challenging environment, we are doing the hard work now and building for the future. By continuing to grow in value add and install along with leveraging IP and technological development, we are arming our team members with cutting edge tools to continue to be the supplier of choice for our customers. By investing today, we are exceptionally well positioned to win in the future as the market continues to recover.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thank you again for joining us today. Operator, let's please open the call now for questions. As a reminder, with a lot of questions this morning, please limit yourself to one question and one follow-up.

Operator

Thank you. We'll take our first question from Matthew Bouley with Barclays. Please go ahead.

Matthew Bouley
Matthew Bouley
Managing Director at Barclays

Good morning, everyone. I want to offer my congratulations and best wishes to Dave and best of luck to Peter and Pete. So for my first question, I wanted to touch on your growth versus the market into these 2025 scenarios. So kind of looking into the second half here, I think the way you guys outlined the guide is you obviously reduced the revenue guide by a bit while holding the end market guide. So I'm curious around your balance of share and kind of how you're thinking about that in the near term.

Matthew Bouley
Matthew Bouley
Managing Director at Barclays

But then as you draw it into those 25 scenarios, it looks like you're talking about your growth relatively similar to the starts numbers. So I'm curious how you're thinking about your growth relative to market as we get into 2025 as well. And if some of these headwinds are starting to abate any visibility to that. So I'll stop there, but thank you guys.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thanks, Matt. Yes, there's a lot in that question. So a couple of factors, I would say where we are today, we have certainly seen the choppiness in the market. There wasn't a big relief rally when interest rates were cut, mortgage rates didn't necessarily behave as everyone was hoping in terms of a quick fall. And I think buyers have been appropriately or inappropriately nervous about both rates and the election.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

So it's been a little choppy. I think we've seen that. We've been watching it all year, still performing well. I think the business is still competing well, taking advantage of opportunities. We're investing.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Those things have led to, I think, some solid performance on our part, but we have certainly faced headwinds. We've been hopefully pretty what you see is pretty open about that. The value of these homes has fallen. That's really the biggest disconnect when we look at what starts have done and what our sales have done, particularly in that single family core organic category. That doesn't mean we're not happy and competitive, but certainly it's been challenging out there and we've talked about that.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

As we think about what that means into the Q4 and into next year, I think broadly speaking, it's mixed out there. You've got markets that are doing quite well. They're sort of bouncing up and seeing some green shoots starting to perform. We've got other markets that have struggled and seen headwinds and seen a little bit of excess inventory and builders are reacting in a thoughtful way we believe to managing that. So our guide for the Q4 is certainly focused on the visibility that we have into the market, the conversations we're having with customers.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

It's not a bad market by any stretch, but it's one that has certainly seen some challenges, not at all helped by the weather disruptions that we've seen. As we get into 2025, it's early days. We've been looking at the commentary from the economists. We've been talking with our customers. It's a bit of a mixed bag, some doing better than others.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

We think there'll be a bit of a differentiated reaction as rates are cut. We expect there'll likely be at least a couple of more. We think mortgage rates will continue to settle. That will have different advantages to different builders out in the market. So this is what we're seeing today.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

There's certainly new news. Some of the performance announcements over the past few weeks have shaped our opinions as we go forward. But we thought like last year, this is a helpful starting point for helping people understand what we're thinking based on what we see today.

Matthew Bouley
Matthew Bouley
Managing Director at Barclays

Got it. Okay. Thank you for that, Peter, and for addressing my long question there. Second one, the gross margin guide, I just wanted to confirm that given where the guide is, that you're still looking at roughly 31% as the exit rate for 2024. And again, obviously, we can see the margin numbers in your 2025 scenarios.

Matthew Bouley
Matthew Bouley
Managing Director at Barclays

But between some of the pluses and minuses, productivity, value add, install versus some of the competitive dynamics out there, how are you guys thinking that 31% could drift one way or the other as you go through 2025? Thank you.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

Hey, Matt. Thank you for the question. We're seeing a headwind as we exit 2024 of about another 100 basis points from the year to date average margin. That 100 basis points pretty consistent with what we said last quarter is half of it's made up from the multifamily normalization and the other half from the core business normalization. It is a competitive environment.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

We're going to continue to compete, especially on the commodity products. With the install, install has been a favorable result for us in 2024 and it continues to be a good arrow in the quiver and we'll continue to compete every day and we expect to exit right around

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

31.5.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Overall, we're certainly very pleased with the margin performance. Despite the challenging market, we've seen customers really continuing to benefit from the value added products and services. That part of our business has certainly stayed strong, stayed resilient, and it supported our margins in an environment where volumes are and values are down a little bit.

Matthew Bouley
Matthew Bouley
Managing Director at Barclays

Got it. Okay. So you said 31.5% is the exit rate. So I'll leave it there. Thank you guys.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thanks, Matt.

Operator

And we'll hear next from Charles Perronvitchey with Goldman Sachs. Please go ahead.

Charles Perron
Charles Perron
Analyst at Goldman Sachs

Thank you. Good morning, everyone. First of all, congrats Dave, Peter and Pete on the promotion and retirement. Well deserved. Maybe if I can go first to going back to Matt's question on the 2025 scenario, just want to make sure that we understand this correctly.

Charles Perron
Charles Perron
Analyst at Goldman Sachs

Looking at the base in both case scenarios, it implies approximately 20% incremental EBITDA margin in 2025 once we remove the $200,000,000 multifamily headwind. First of all, is that right? And as you see things playing through next year, how do you see the ability to drive the gross margin versus the SG and A leverage across those scenarios? And just to follow-up as well, do you see the deceleration in the sales that you've seen through 2024 in terms of the content per home as stabilizing and expecting through 2025 to be roughly consistent with what you see today in those scenarios?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thank you, Charles. Appreciate the comments and the questions. So I would say the numbers and the performance of the business around margins in particular, there's a lot going on there, right? With the early look at what we have on the table, I think what it reveals is continuing performance in the areas that you'd expect us to deliver. We expect to see improved performance as a result of productivity initiatives.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

We continue to see the strength around the value add. We continue to look for opportunities within that productivity category to drive both gross margins and EBITDA margins. That is, I would say, a core part of our operating model as a business and something we feel good about as time progresses. The dynamics around how the market will perform next year in light of the sales volumes in the various categories, I think broadly speaking, we continue to see weakness in multifamily. I would say our sense of it is it's stabilized, but it's been a big step down from the peak, but gotten to a level where we believe we can hold here and hopefully start to see some recovery.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Timing will depend on the dynamics of the market. Single family is a dynamic that's different between the types of builders as I mentioned earlier, but certainly one that we think is directionally headed in a positive way. We continue to believe in the strength of the market, the desirability of new homes and the industry's ability to deliver those. We think there's a lot of pent up demand and we are well positioned to help builders deliver and do it in a very efficient way. This again early days on this guide, but for 2025, but we think those scenarios can help add some color in that regard.

Charles Perron
Charles Perron
Analyst at Goldman Sachs

Okay. That's helpful, Peter. And maybe following up, wood product prices and lumber in particular have been trending higher over the last couple of months with the improving housing outlook for 2025 suggesting potentially more upside. I guess against this, how are you positioning your inventories in the business? And how do you see this recovery in commodity prices affecting demand and competitive dynamics across the different value add products that you have in your portfolio if this ongoing upswing persists in 2025?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Yes. So commodities continue to be an important part of what we do, although we have much smaller than it has in the past. It's nice to see the prices bouncing off the bottom. I'd say that below 400 window that we were in for a while was a bit on, I would say, unpleasant more so for the mills and delivery on the commodity side than for us. But certainly, we like to have a healthy sector in the commodity space and that lumber, the dimensional lumber in OSB space in particular.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

We have seen a little bit of a boost. I think it's early days and I would highlight the fact that while new construction is an important driver of demand in that product category, R and R, the repair and remodel market is a far bigger influence. So I think that's where if I'm looking for support and tailwind in that category, that's an important factor to keep an eye You hit the nail on the head, it will certainly be a tailwind for sales and for margins as we see better absorption of our overhead costs, if that continues to increasing costs. Although as always, we keep a close eye on affordability. We want to balance there.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

We don't think any of us want to return to the $13,000,000 to $1600 lumber days. That was pretty dysfunctional. So a modest increase is I think healthy and good to stabilize the market.

Charles Perron
Charles Perron
Analyst at Goldman Sachs

Okay. Thanks for your time guys.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thank you.

Operator

We'll hear next from Mike Dahl with RBC. Please go ahead.

Mike Dahl
Mike Dahl
Managing Director - Equity Research at RBC Capital Markets

Good morning. Thanks for taking my questions. Congrats again to Dave, Peter and Pete. I want to start with gross margins and maybe a 2 parter on both the contributors to the quarter and then thinking about that 4th quarter comment. I mean, when you look at the outperformance in gross margin in the quarter, how would you bucket it out in terms of what whether or not there was some benefit from the rising wood based product costs in the quarter versus maybe give us a sense of kind of on the recent M and A, whether the margin accretion from that or install, like if you could quantify any of that or kind of digital, really just what the drivers are?

Mike Dahl
Mike Dahl
Managing Director - Equity Research at RBC Capital Markets

And similarly looking into 4Q, it seems like your outlook slightly better than it was before. So if you can talk to those contributing factors or any quantification there, that would be great.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

Good morning, Mike. Thanks for the question. With respect to increased performance and margin, we continue to see a normalization in the multifamily space. We continue to have positive uplift from productivity that we continue to deliver. And the rest of it is mix and mix within the core business and it continues to deliver resilient margins better than what we had expected originally when we gave guidance last quarter.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

As we look forward to Q4, we continue to see margin normalization in the multifamily, which is a broken record and we continue to share that each quarter and some continued pressure and normalization in the core business due to the competitive environment that we're still in. And part of it's going to be some of the seasonal build and we'll see some of that volume kind of shoulder off as we exit the year.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Yes. I think Pete's right on in terms of the key drivers. We continue to be under a bit of pressure on the competitive dynamic. You'll see some seasonality. But I think in general, what you're seeing is the continued strength of the core product offerings and the value add in terms of something that we have made a core part of what we do and has continued to be strong.

Mike Dahl
Mike Dahl
Managing Director - Equity Research at RBC Capital Markets

Got it. Okay. Thanks for that. And then my second question, it's on the 25 scenarios and I understand it is early days as you say. But when I look across your range of starts outcomes, I think some of the builders more recently have been a little more subdued in their outlooks than what some of these ranges would imply, certainly the middle or upper ranges.

Mike Dahl
Mike Dahl
Managing Director - Equity Research at RBC Capital Markets

And then taking into account some of the mix factors that have played out this year, it seems like your revenue guide might be suggesting that you actually go back to outpacing the starts environment. So 2 kind of big assumptions in there in terms of some improvement in the overall market and then some improvement relative to that. I was hoping you could talk to that more how you built that and whether or not there are some bigger moving pieces in terms of like, okay, well, you're assuming X for digital and like some carryover M and A or maybe just help us kind of bridge when you both how you thought about starts, but also then framing your revenue versus starts, what some of those other big moving pieces are?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Sure. I mean, I can provide a little bit of color. I won't go into too much detail, but you're right. There is a lot that goes into it. No question.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

I would say the starting point is maybe where we're most maybe disconnected based on your comments and your concern about the overall starts. We at this stage of the game aren't folding in a lot of commentary. We're folding in mainly economist forecasts and the averages of the leading forecasters around the starts number. While an individual builder is certainly important and an important partner for us, there's no one builder that's going to move the entire market. So we generally will stay at the economist level forecasting for starts, especially at the point we're at in early November.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

We do have assumptions in there for commodity prices, for the M and A carryover, for productivity. We've got certainly an expectation that we'll be able to gain share with some of the initiatives we've leaned hard into things like digital and install. And I think it's fair to say that our thinking around the average cost per start is aligning around it flattening out for the most part. We haven't seen continued decline. It's been more stable, I would say since mid summer.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

On a year over year basis, we've certainly seen the comparisons and we've tried to call those out, but it hasn't been something that's aggressively moved down after the reset earlier this year. So that's another variable that's included. But like I said, early days, some high level analytics, we tried to be inclusive of the variables that we think are important. But as you know, this is a challenging game given how volatile things are lately.

Mike Dahl
Mike Dahl
Managing Director - Equity Research at RBC Capital Markets

Okay. Appreciate that, Peter. Thank you.

Operator

Next, we'll hear from David Manthey with Baird. Please go ahead.

David Manthey
Senior Research Analyst at Baird

Thank you. Good morning and congratulations to everyone. My first question is a clarification on Slide 17. When you talk about productivity, does that capture both process improvements as well as scale? And then could you also define other commercial benefits just definitionally for us?

David Manthey
Senior Research Analyst at Baird

Thanks.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Gabe, thank you. I'm going to let Pete handle that one.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

Yes.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

So within the productivity savings, that's process improvements. The scale that we get from the company really helps us leverage our knowledge and our expertise across the platforms. But the productivity savings is process improvement on how we do things and how well we're buying, how well we're manufacturing and how well we're operating on a daily basis. Within the other commercial benefits, without saying it, there's customer supplier terms. We've talked about in the past where we used to have longer fixed price contracts.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

We've worked to eliminate those, shorten the duration so we don't get pinched or absorbing all the commodity risk. Our CRM tools that we put in place and how well we're managing our relationships with our customers and following through And that's where some of the scale is going to come into play. So you'll see that in the bullets on the side of that chart.

David Manthey
Senior Research Analyst at Baird

Thank you. And Peter Jackson, you might have just described this, but I want to be clear. You talked about the trends in single family housing sizes. And I'm just wondering, in those scenarios, are you assuming any improvement or deterioration for that matter in any of those scenarios? It sounds like you're seeing that trend basically flatten out.

David Manthey
Senior Research Analyst at Baird

Is that my understanding?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

That's right. Yes, there's a bunch of pieces in there. Certainly, square footage of the home being 1, but mix of products in the home value of those same products that are appearing in the home all part of that. But yes, we're expecting it to flatten out based on what we're seeing right now. A little bit of a lapping impact, but pretty modest.

David Manthey
Senior Research Analyst at Baird

That's great. Okay. Thank you very much.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thank

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

you.

Operator

And we'll go now to Rafe Jadrosch with Bank of America. Please go ahead.

Rafe Jadrosich
Rafe Jadrosich
Director - Senior Equity Research Analyst at Bank of America

Hi, good morning. Thanks for taking my question. And best of luck to Dave and congrats to Peter and Pete. Just on the manufactured product segment, the year over year decline, Can you is it would it be possible if you could talk a little about the impact of the multifamily, specifically multifamily trusses relative to everything else? Like obviously multifamily is sort of going through that normalization, but excluding that, what are you seeing in terms of the manufactured product, like revenue trends and any commentary on margins there would be helpful?

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

Yes, thanks for the question. I'll start and then I'll hand it over to Peter. What you're seeing in the manufactured products, specifically on the multifamily side, we've been talking about the normalization, but also the volume declines that we've seen in that multifamily space. As a reminder, I think I mentioned in our prepared remarks that multifamily, mainly value added products was 70% of the multifamily overall. That used to be a much higher percent and that's also come down in the quarter or what we're seeing within multifamily manufactured products was down almost 45% to 50% within that multifamily mix.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

We're anticipating that that's going to continue to decline as what we're seeing from the starts and the volume normalizes we'd lap the higher year. The tough comps that we had last year was the peak and Q3 being the highest point of that. It's just a big headwind, but we're seeing more stable volume and it's normalizing at a bottom as we exit the year.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

And I think just broadly speaking, the multifamily trust has been hardest hit. The multifamily, the work part of the business has performed a bit better, a bit more stable. That team has competed well and found other opportunities to protect the business. I think that the side that the single family side has certainly seen pressure, particularly in that category that we highlighted in the spoken remarks about, floor trusses and the shift back to EWP. I think that's probably the only other color that I would add there.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

In general, we're still pleased with manufactured products. In general, I think it's performing well from from a support to customer perspective, from an affordability perspective, from a competitive dynamic, we feel good about it. It's a productivity source for us. But it's certainly on a comp basis has been challenged.

Rafe Jadrosich
Rafe Jadrosich
Director - Senior Equity Research Analyst at Bank of America

That's helpful. And then just on the gross margin bridge that you provided from 2019 to today, which is super helpful. The value add portion that can you talk about how much of that is the margins changing within value add relative to just value add mix moving higher? And then like is there any changes you anticipate from the value add margins today going forward?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

There's a lot in there, right? I mean, we've done a ton of acquisitions. We've added a ton of capacity. We've made tremendous investment. A lot of that had to do with productivity savings within the category itself, that sort of generated through the size and scale of those operations.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

So there's certainly a lot in there. The performance generally speaking, I would say is sustainable from the perspective that we have a lot more to offer. We have a wider portfolio and geography coverage than we did in the past. So I think that's the exciting part about where we can continue to grow this business into the future. That expansion of install, the investments we've made in that business over the years being harvested as we return to growth.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

I think that's an exciting history for us, but even more exciting is what the future holds in that category.

Rafe Jadrosich
Rafe Jadrosich
Director - Senior Equity Research Analyst at Bank of America

Great. Thank you.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Great.

Operator

We'll go next to Philip Ng with Jefferies.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

Hey, guys. Congrats on a solid quarter in a choppy environment. I guess to kind of kick things off, when you look at your scenarios for 2025, is there any assumption that mortgage rates actually pull back from here? And what are you assuming for non commodity products from a pricing standpoint? And certainly very great to see an upbeat view on the market in your various scenarios.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

Peter, it'd be helpful to kind of give us some perspective as you kind of pointed out the market is still pretty choppy. What that earnings power or margin profile could look like if single family starts are actually flat to down low single digits?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thank you, Philip, for your 4 questions. Let me try and jump at a couple of them and you can correct me and point me back in the direction you want me to go. What I would say about the 2025 scenarios, we didn't do a downside. We could do a downside. I think generally speaking, like I said, the economists aren't signaling a downside.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

So if that develops over time where we need to put something out there, we certainly can. We've done it in the past. We're not going to be shy about it. That hasn't been the predominant thinking in the recent past. I think that the ability of this business to perform in the downside is pretty positive, right?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

We have demonstrated the ability to size ourselves to be competitive, to get after it, the ability to protect and hold margins, to do it by partnering with customers with products that they want. So I think that's probably the theme that I want with. You point me to a couple of other points you want me to highlight.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

Your various scenarios, Peter, are you assuming any pullback in mortgage rates and how you're thinking about prices for your products, non commodity?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

So we don't have an explicit mortgage rate assumption in any of our stuff. I think what happens is it's basically embedded or implicit in what the economists are doing. My sense is most of them are taking the middle of the road dot plot and trying to step off of that, but we don't have an explicit assumption for it. In terms of pricing, I will say our sense from what we've seen from vendors is that the era of cuts is ended. What we're seeing right now is stability in pricing and some modest, maybe low single digit price increases.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

We'll see where that pans out. It's a little early to be calling that yet, but that's the tone right now.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

Okay. That's super helpful. And then my next question is around M and A. How's the pipeline looking? Have you seen sellers come back to the market with some level of stabilization?

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

And how do you kind of size the opportunities in front of you, smaller or larger deals in general?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Well, yes, I mean there's no question the market is looking strong. With 6 this quarter, I'd say the pipeline is strong. Smaller deals, by and large, it make up this number, no question. But there are a number of really nice looking businesses out there. I would say that sellers have come to the market with an intent to sell, right?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

They're not exploring, they're looking to move. But a pretty wide portfolio of items that we're looking at and continue to look at, it's a good time to be buying stuff.

Philip Ng
Philip Ng
Managing Director at Jefferies Financial Group

Okay. Appreciate all the great color guys. Thank you.

Operator

We'll hear next from Jay McCanless with Wedbush. Please go ahead.

Jay McCanless
SVP - Equity Research at Wedbush Securities

Hey, thanks for taking my questions. Congratulations to everyone and thank you to you guys and your suppliers for helping out with the hurricane relief, really important work. So the first question I had, going back to slide 17, I guess could you talk about what you saw improve from last quarter to this quarter that gave you the confidence to go ahead and move the gross margin number up and the EBITDA margin up?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thanks, Jay. Talking about 2017, that's the long range view, right? So one of the things we had done during Investor Day was to give people a rough estimate around what we think normalized gross margins were going to be between 30% 33%. A frequent question that we received was, wait a minute, help me get my head around this. What are the big pieces that I should understand if I bridge you from pre BMC merger to what you're telling me is the future of this business.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

And we were a little hesitant to lay that out there until we had a little better understanding of what normalization was going to look like. And as things have kind of calmed down and we feel like there is a clearer line of sight to what this business is and how it will continue to perform, we decided to put this out for everybody to understand the buckets of what has driven it, where we have gotten our sort of inputs to defend that midpoint of 30% to 33%, which is that 31.5%. So this isn't a Q4 or a 2025 thing. This correlates back to the 2026 target for us for Investor Day.

Jay McCanless
SVP - Equity Research at Wedbush Securities

Okay, great.

Jay McCanless
SVP - Equity Research at Wedbush Securities

And then I guess

Jay McCanless
SVP - Equity Research at Wedbush Securities

the other question I had, Peter, you

Jay McCanless
SVP - Equity Research at Wedbush Securities

talked earlier about R and R being a much larger consumer of lumber than single family starts. I guess, could you talk through again what you guys are expecting for R and R this coming year and maybe what the industry kind of outlook is just so we know where things might go?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Yes. I mean,

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

if you look at

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

the overall, I want to just to clarify, right, based on what we've seen from a couple of different sources, R and R is probably and DIY is about half of the demand for lumber and sort of the commodity product. We're closer to a quarter to a third with the rest of it being industrial and commercial. So certainly that DIY R and R space is more important. The tone has been pretty good. I think the sense is that there is a lot of pent up demand for renovations as the housing stock in this country ages.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

There are certain commentators, Ali Wolf, for example, who's pretty, I won't say excited, but a positive about what R and R can do if we start to see a little bit of pullback in the mortgage rates and it starts to release a little bit of that lock in effect that people have experienced since mortgage rates went up. So that would certainly be a tailwind, a balancing out in the market. I think a revival of what that represents for demand on the construction industry. I think all of that is pretty favorable for Builders FirstSource on balance. So that's certainly a positive we look forward to.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Pretty modest and from what we see so far in the forecast for 2025 itself, but over sort of 25%, 26% -ish, we think there's good momentum there.

Jay McCanless
SVP - Equity Research at Wedbush Securities

Okay. That's great. Thanks for taking my questions.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thanks, Jay.

Operator

We'll go now to Jeffrey Stevenson with Loop Capital. Please go ahead.

Jeffrey Stevenson
Vice President at Loop Capital Markets LLC

Hi, thanks for taking my questions today and congrats Dave, Peter and Pete. So productivity savings are coming in better than expected this year through efficient manufacturing and procurement initiatives. And just wondered how long a runway do you have on the strong productivity savings benefits you've seen over the last few years? And should we expect this trend to continue in 2025?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thanks. Yes, productivity is something this organization is really engaged in very effectively, sharing of best practices, working together on lead ideas, ways of doing business that just takes out waste and removes inefficiencies at a real fundamental level has been super successful. We think there's more opportunity for that, but I won't overstate the impact of the transition that we'll see over the next couple of years towards our ERP conversion. So there has to be a balance there, both take a lot of time and energy from the organization. So we'll continue to balance it out from a timing perspective, but there's zero question, I would say in my mind and in the minds of the operating leaders that we can continue to get better, that we can continue to drive productivity savings, well into the future.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

I think we're just in the early innings of what we can do with just a fantastic business and a wonderful platform, particularly as we take advantage of technology and better tools for our teams.

Jeffrey Stevenson
Vice President at Loop Capital Markets LLC

Okay. That's great to hear, Peter. And then I was wondering if you could talk more about the trade off you're seeing the lower value products such as the example in your prepared remarks of builders using EWP instead of floor trusses from the focus on lower value and complex home. I just wondered how widespread is this across regions and do you expect it to continue well into 2025?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Well, we're certainly seeing it everywhere. I would say every homebuilder in their own way is trying to adapt to the affordability challenges. It's tough for homebuyers just given the world that we live in to afford these new prices. And so we're all looking for ways to do what we do more efficiently. So whether it's size of the home, whether it's value of the products that are going in being a little more sharper with the pencil in terms of pricing or and this is I think more direct to your comment, what's the mix of products that are going to show up in the actual, the home itself?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

I think you've seen even today announcements from manufacturers of building materials that have pointed to negative mix. People have moved to the simpler cheaper option in order to make sure the price point for these homes match up to the monthly payment capability of the current homebuilder. I think it has been a bit of a 2 year step down. We're not seeing the continued pace of those declines. They seem to have stabilized to a large degree.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

That's not to say we won't see some shifts in individual product categories. But I think what we have seen throughout the back half of this year so far has been a more stable output in terms of what is going into homes, size of the homes, value of the products, that sort of

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

thing.

Jeffrey Stevenson
Vice President at Loop Capital Markets LLC

Very helpful. Thanks, Peter.

Operator

We'll go next to Steven Ramsey with Thompson Research Group. Please go ahead.

Steven Ramsey
Deputy Director of Research at Thompson Research Group

Good morning. Wanted to ask on the R and R and other category, another quarter of solid organic growth versus the backdrop. I'm curious if you could share a bit more on the central region strength versus other regions, what is allowing you to outperform? And then maybe lastly, just to make my second question wrapped up into this, how much is value added products a factor in this category? Thanks.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

So maybe second question first. Certainly a smaller component of the R and R business that is a more varied from a product perspective, a lot more categories go through that just given the nature of what we sell and where we sell it. Certainly a bit of variance between the individual divisions between those markets. I would say we've had some pretty nice success in some of our smaller markets, particularly in the North Central around the R and R space. They performed well.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

But in general, I think it's a strength for us just as we continue to have available capacity and open our doors to the smaller remodeler. We have a lot of value that we can provide them with subject matter expertise and product knowledge. And generally, we do have success in that category when we focus on it. But just to repeat it, it's a fairly small percentage of our overall business.

Steven Ramsey
Deputy Director of Research at Thompson Research Group

Great. Thank you.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Thank you, Stephen.

Operator

And we'll hear next from Ketan Mamtora with BMO Capital Markets.

Ketan Mamtora
Ketan Mamtora
Director - Building Products Equity Research at BMO Capital Markets

Thank you. Maybe coming back to multifamily, when you talk about 2025, you've got $400,000,000 to $500,000,000 revenue sort of decline. Is that more of just lapping sort of year over year deterioration as you move through 2024? Or are you sort of factoring in sort of further declines in 2025 because it's still a pretty meaningful sort of year over year drop?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

It's primarily lapping. Yes, it's I would say we stabilized, but the lapping effect will still be there.

Ketan Mamtora
Ketan Mamtora
Director - Building Products Equity Research at BMO Capital Markets

Understood. And on the margin normalization side, both for multifamily and for single family, are you seeing signs that we are sort of closer to the end there in terms of sort of the competitive price pressures? Or is it sort of still continuing as we move into Q4 next year?

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

With the multifamily margin normalization, it's continuing to wane and fade. As we said in prior calls, we think it's going to kind of normalize out by Q1 of next year, but we're really hitting that exit rate and most of the normalization you see in the results is a year over year comp to the prior year strength that we had.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

I'd say overall, we're in late innings. We're much closer to the end in terms of the margin normalization. We certainly have teed up that 100 basis point sort of based on the exit velocity that we're seeing. I don't want to miss the opportunity to highlight. We're still well below normal starts.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

So that certainly creates pressure. But based on where we came from, we believe we're much closer than the beginning.

Ketan Mamtora
Ketan Mamtora
Director - Building Products Equity Research at BMO Capital Markets

Very helpful. Thank you.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

Thanks, Ketan.

Operator

And we'll go next to Alex Rygiel with B. Riley. Please go ahead.

Alex Rygiel
Senior Managing Director at B.Riley Securities

Thank you, gentlemen. A very nice quarter. As it relates to the installed sales, which increased about 11% in the quarter, what percentage of your overall net sales is that today? And how does that impact your gross margin?

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

So the 11% is a year to date improvement over the prior year. The margin profile on install is kind of at our normal mix across because we're installing products, windows, doors, millwork, as well as some framing and trusses and siding and other products. So it's very complementary to the overall margins that we have across all the product categories.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Size of install, I think you wanted to know.

Pete Beckmann
Pete Beckmann
CFO at Builders FirstSource

So install was about, I think it was $2,500,000,000 $2,600,000,000 last year. It's increased, so it's going to be a relative increase from that.

Alex Rygiel
Senior Managing Director at B.Riley Securities

Thank you. And then, as

Alex Rygiel
Senior Managing Director at B.Riley Securities

it relates to digital tools, given where we are in the housing cycle, how should we think about that as it relates to sort of your marketing of the product and its receptivity to the product?

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

Yes. I'm glad you asked that question. So digital is, it's still very exciting. The product works. It is absolutely cutting edge and unique in the industry in terms of what we can do versus any competition that exists out there.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

But it's new, right? It's technology in an industry that hasn't historically adopted it quickly. And it's a different way of thinking about how to be more efficient. We've got a lot of really good momentum. It's certainly hard.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

I will confess it's maybe even harder than we gave it credit for, but it's work. And so we're continuing to lean in, continuing to partner with homebuilders, continuing to leverage our team internally to utilize the tools and to help customers get comfortable with the tools. But given our focus on the sort of 50 to 250 starts a year builder and how much pressure they've been under over the past couple of years because of rates, it's been challenging. I do believe this is one way they can compete, that they can be more efficient, that they can be more professionalized and make their business better and more competitive against the big guys. So we think ultimately it will be a positive.

Peter Jackson
Peter Jackson
President & CEO at Builders FirstSource

But certainly in the near term, it's serving a market that's been under pressure. No question.

Alex Rygiel
Senior Managing Director at B.Riley Securities

Thank you very much.

Operator

As there are no further questions at this

Executives
    • Heather Kos
      Heather Kos
      SVP, Investor Relations
    • Dave Rush
      Dave Rush
      Former CEO & Director
    • Peter Jackson
      Peter Jackson
      President & CEO
    • Pete Beckmann
      Pete Beckmann
      CFO
Analysts
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Earnings Conference Call
Builders FirstSource Q3 2024
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