Builders FirstSource Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 13 speakers on the call.

Operator

Good day, everyone, and welcome to the Builders FirstSource First Quarter 20 24 Earnings Conference Call. Today's call is scheduled to last about 1 hour, I would now like to turn the call over to Heather Coss, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.

Speaker 1

Good morning, and welcome to our Q1 2024 earnings call. With me on the call are Dave Rush, our CEO and Peter Jackson, 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.

Speaker 1

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 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 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.

Speaker 1

With that, I'll turn the call over to Dave.

Speaker 2

Thank you, Heather. Good morning, everyone. Thank you for joining our call. Our resilient first quarter results reflect our differentiated product portfolio and scale, our team members' consistent focus on executing our strategic priorities and our operational efficiency initiatives. As we expected, a weakening multifamily market and higher mortgage rates driving affordability challenges were headwinds to start the year.

Speaker 2

Despite these micro challenges, we built on our successes and drove growth through our value added products portfolio and our industry leading digital platform. We are committed to advancing innovation and delivering exceptional customer service as a trusted and preferred partner to our customers. We are focused on executing our clear strategic pillars as shown on Slide 3. Our investments in value added products, installed services and digital solutions are driving organic growth, delivering greater efficiency and empowering the next generation of homebuilding. For those who are new to the BFS story, value added products include manufactured components such as trusses, ready frame and wall panels as well as windows, doors and millwork.

Speaker 2

Through our value added products and installed services, we help meet our customer needs such as reducing cycle times, addressing labor constraints and improving home construction quality. With our digital tools, we are providing our customers with a more efficient and cost effective way to manage the construction of their homes that will increase existing customer stickiness, win new business and improve our operational efficiency. We remain committed to innovation and continuously seeking to do things better. We have a robust set of operational We have a robust set of operational and productivity initiatives and are focused on leveraging our scale and fixed cost while delivering the highest quality products and services to our customers. We are deploying capital in a disciplined manner with a proven M and A strategy and a track record of buying back shares at competitive prices.

Speaker 2

Working alongside the best team in the industry, I am confident that we will continue to compound long term shareholder value and achieve our strategic priorities. Let's turn to our Q1 highlights on Slide 4. We continued to deliver strong margins in Q1, reflecting our in segment diversification, focused execution and differentiated product portfolio and scale. Our gross margins of more than 33% reflect a higher mix

Speaker 3

of

Speaker 2

value added products, including multifamily trusts and our ability to manufacture more efficiently. We expect the multifamily end segment to progressively normalize over the course of this year, and we continue to see some normalization in core margins. Moving to Slide 5. We're off to a strong start on our strategic initiatives. Our full digital product launch at the International Builders Show in February was an exciting milestone.

Speaker 2

At a high level, our digital tools do 3 things: 1, solve customer pain points 2, make it even easier to partner with us and our suppliers and 3, help us gain incremental business from new and existing customers. It's a win win, and we're excited about how everything is going so far after the launch. We focused on operational excellence and innovation and using playbooks of proven best practices to increase our safety, efficiency and wallet share with customers. One area where we're using playbooks is with our installed services business. Our installed sales increased by 17% year over year as we deleverage our capabilities to help customers address labor constraints.

Speaker 2

Additionally, we drove $40,000,000 in productivity savings in Q1, primarily through procurement and SG and A initiatives. We believe prudent expense management leads to maximum operational flexibility. This includes optimizing our footprint and balancing cost reductions against future capacity demands. We will remain disciplined managers of discretionary spending no matter the operating environment. Early momentum in single family has slowed as persistent inflation has cooled short term expectations for interest rate reductions.

Speaker 2

However, low existing home inventories and pent up demand provide an environment where growth has continued to build. Builders across the board are having to navigate affordability issues and challenges with the regulatory environment, land development and infrastructure. It's evident that the large national builders have done a good job of utilizing specs, reducing home sizes and providing interest rate buy downs to assist buyers with affordable options. Smaller builders are more likely to benefit from rate cuts. We are staying close contact with our customers of all sizes to maximize our business in the current environment.

Speaker 2

As we have detailed on prior calls, multifamily became a headwind in Q1 as our activity levels and record backlogs have declined versus the prior year. It is important to note, however, that multifamily remains a strong contributor to gross margins and EBITDA even at current levels. Turning to M and A on Slide 6. We continue to target attractive opportunities while remaining financially disciplined. In the Q1, we completed 2 deals with aggregate 2023 sales of roughly $36,000,000 In early February, we acquired Quality Door and Millwork, a leading distributor of Millwork Doors and Windows in Southern Idaho.

Speaker 2

In March, we acquired Hanson Trust, which further strengthens our value added position in Northern California and Nevada. And last week, we acquired Shutterman's Building Materials. Shutterman's manufactures trusses and distributes building materials in the Sioux Falls, South Dakota area. We are excited to welcome these talented new team members to the BFS family. M and A and organic investments have increased value added products as a percent of our overall mix by 700 basis points over the past 2 years and by 1,000 basis points if you go back to 2019.

Speaker 2

Our success with this strategy has been a core component of our improved margin profile through the cycle. We believe there is a long runway of M and A targets in our fragmented market and we are pleased with recent improvements in the pipeline. Our disciplined approach to M and A includes increasing our market position in desirable geographies, extending our lead in value added and specialty solutions and enhancing customer retention. On Slide 7, we provide an update on capital allocation. During the Q1, we completed a $1,000,000,000 note maintaining a strong balance sheet.

Speaker 2

In addition to the 2 tuck in acquisitions, we repurchased $20,000,000 of shares. As proven by our track record, we'll continue to buy back shares while allocating capital to high return opportunities. We remain on track to strategically deploy $5,500,000,000 to $8,500,000,000 of capital from 2024 to 2026 as outlined at Investor Day last December. Now let's turn to Slides 89 for an update on our digital strategy. As the only provider of an end to end digital platform in our space, we believe BFS digital tools will be transformative for the industry and a substantial driver of organic growth.

Speaker 2

Our easy to use portal, mybldr.com, seamlessly delivers our full digital capabilities to our customers. It is designed to create efficiencies for our team members and improved service for our customers by offering increased transparency and engagement in the homebuilding process. Combined with our proprietary estimating and configuration tools, our customers will have more control over the entire building process. This will save time and money for both our customers and their clients while making the homebuilding process more personalized. We were proud to highlight the full digital product capabilities at IBS in February.

Speaker 2

Our customers told us the new tools address an unmet need, and they were excited to use them in their businesses. Since launch in late February, we have seen orders on the digital platform go from nearly 0 to over $60,000,000 In Q1, we had incremental sales of over $10,000,000 We remain confident in our ability to meet our targets of $200,000,000 of incremental digital revenue by the end of this year and $1,000,000,000 by 2026 as we grow wallet share and win new customers. 1 of our digital tool, Build Optimize, uses advanced 3 d modeling to identify construction clashes and resolve mechanical design conflicts before breaking ground. It ensures architects, builders and trades are coordinated and building to the same plan. As a proof point of the advantages of using this transformative tool, we've seen interest from 4 large builders.

Speaker 2

One of these customers has used it in 3 markets and 13 communities across 34 plants. On average, we have identified 150 conflicts per plant. Resolving those conflicts before construction leads to job site time and cost savings. 1 of my favorite initiatives at BFS is acknowledging team members who go above and beyond. Ira Banks in Atlanta, Georgia personifies this quality.

Speaker 2

Ira began with BFS in 1996 as a driver helper and rose through the ranks to operations manager and now oversees our new Atlanta millwork facility in Decula. Ara has the respect of his team members because he's willing to do whatever it takes to solve problems and add value for our customers. Recently, when there was no available drivers for an urgent customer delivery that had to arrive that day, Ara drove the box truck himself to take care of the customer. I'm grateful for Ara's drive to lead by example, a quality we find consistently in leaders across BFS. I'll now turn the call over to Peter to discuss our financial results in greater detail.

Speaker 4

Thank you, Dave, and good morning, everyone. Our first quarter results demonstrated the effectiveness of our strategy and operating model. We are maintaining our fortress balance sheet and prudently deploying capital to the highest return opportunities. We concluded acquisitions and share repurchases during the quarter. We are leveraging our sustainable competitive advantages and strong financial position to drive future growth and value creation for our customers and shareholders.

Speaker 4

I will cover 3 topics with you this morning. First, I'll recap our Q1 results. 2nd, I'll provide an update on our capital deployment. And finally, I'll discuss our 2024 guidance and related assumptions. Let's begin by reviewing our Q1 performance on Slides 1011.

Speaker 4

We delivered $3,900,000,000 in net sales driven by growth from acquisitions of 1.9% or partially offset by commodity deflation of 1.7%. Core organic sales in line with the prior year were driven by a single family increase of more than 4% amid higher sales of early stage homebuilding products. From a geographic perspective, East sales were down mid single digits, Central was flat and the West was up mid teens. As we signaled and expected, multifamily declined more than 13% as we lapped the prior year's strong comps. R and R and other also declined by almost 5% due to weakness predominantly in the Northeast from inclement weather.

Speaker 4

As we mentioned last quarter, inclement weather negatively impacted our operations in Q1 by roughly 3% to 4% of our overall sales. Value added products represented approximately 52% of our net sales during the Q1, reflecting our strength and customer stickiness for these higher margin products. During the Q1, gross profit was $1,300,000,000 increase of approximately 5% compared to the prior year period. Gross margins were 33.4% decreasing 190 basis points mainly due to a timing shift in product mix toward lower margin early stage homebuilding products as well as margin normalization particularly in multifamily. SG and A increased $22,000,000 to $926,000,000 primarily attributable to acquired operations.

Speaker 4

As a percentage of net sales, total SG and A increased 50 basis points to 23.8%. The team has done an excellent job managing SG and A A and we stand ready to leverage our fixed costs into the growing market. Adjusted EBITDA was $541,000,000 down approximately 14%, primarily driven by lower gross profit and higher operating expenses. Adjusted EBITDA margin was 13.9 percent down 2 40 basis points from the prior year. Adjusted net income of $327,000,000 was down $83,000,000 from the prior year due to lower gross profit amid higher and higher operating expenses primarily due to acquisitions.

Speaker 4

Adjusted earnings per diluted share was 2.65 dollars a decrease of 11% compared to the prior year. On a year over year basis, share repurchases added roughly $0.29 per share for the first quarter. Now let's turn to our cash flow, balance sheet and liquidity on Slide 12. Our Q1 operating cash flow was approximately $317,000,000 down $337,000,000 compared to the prior year period, mainly attributable to lower net income and an increase in net working capital. Capital expenditures for the quarter were $90,000,000 and free cash flow was approximately $228,000,000 For the last 12 months ended March 31, our free cash flow yield was approximately 6%, while operating cash flow return on invested capital was 22%.

Speaker 4

Our net debt to adjusted EBITDA ratio was approximately 1.1 times, while base business leverage was 1.2 times. In February, we completed a $1,000,000,000 private offering of 6.3eight senior unsecured notes due 2,034, which enables a maximum financial flexibility to grow organically and remain acquisitive. Excluding our ABL, we have no long term debt maturities until 2,030. At quarter end, our total liquidity was approximately $2,400,000,000 consisting of $1,700,000,000 in net borrowing availability under the revolving credit facility and approximately $700,000,000 of cash on hand. Moving to capital deployment.

Speaker 4

During the Q1, we repurchased roughly 100,000 shares for $20,000,000 at an average stock price of $202.67 per share. Since the inception of our buyback program in August of 2021, we have repurchased 42.2 percent of total shares outstanding at an average price of $70.42 per share for $6,100,000,000 We have $980,000,000 remaining on our share repurchase authorization. We remain disciplined stewards of capital and have multiple paths for value creation to maximize returns. Now let's turn to our outlook, which we are reaffirming on Slide 13. For full year 2024, we expect total company net sales to be $17,500,000,000 to $18,500,000,000 We expect adjusted EBITDA to be $2,400,000,000 to $2,800,000,000 Adjusted EBITDA margin is forecasted to be 14% to 15%.

Speaker 4

And we are guiding gross margins to a range of 30% to 33%, which is in line with our long term normalized expectation. Our recent margins reflect above normal multifamily performance on top of our greater mix of value added products along with the disciplined pricing required to offset increased operating costs. We expect full year 2024 free cash flow of $1,000,000 to $1,200,000,000 The free cash flow forecast assumes average commodity prices in the range of 400 dollars to $4.40 per 1,000 board foot. Our 2024 outlook is based on several assumptions and includes an expectation for improving single family growth. Please refer to our earnings release and slide 14 of the investor presentation for a list of these key assumptions.

Speaker 4

As you all know, we do not typically give quarterly guidance, but we wanted to provide directional color for Q2 given ongoing interest rate uncertainty and the geopolitical situation. In a year over year on a year over year basis, we expect Q2 net sales to be down low single digits to flat as single family growth is offset by expected multifamily headwinds. Year over year adjusted EBITDA is expected to be down high teens in Q2, primarily given the impact of continued multifamily normalization. Turning to Slides 1516. As a reminder, our base business approach showcases the underlying strength and profitability of our company by normalizing sales and margins for commodity volatility.

Speaker 4

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 $17,600,000,000 Our base business adjusted EBITDA guide is approximately $2,400,000,000 at a margin of 13.5%. As I wrap up, I want to reiterate that we are confident in the near term outlook, our exceptional positioning to execute our strategic goals and our ability to create shareholder value in any environment. With that, let me turn the call back over to Dave for some final thoughts.

Speaker 2

Thanks, Peter. Let me close by summarizing how we're set up to drive long term profitable growth by executing our strategic pillars. We believe we are the unquestioned leader in addressing our customers' pain points through our focus on customer service, value added products and install services. Our industry leading digital innovations are bringing greater efficiency to homebuilding and will win us new customers and grow wallet share along the way. Our robust free cash flow generation is funding disciplined capital deployment that will maximize returns and compound long term shareholder value.

Speaker 2

We have a proven playbook for growth during complex operating environments, and we'll keep working to be the best and deliver excellence every day. Thank you again for joining us today. Operator, let's please open the call now for questions.

Operator

Absolutely. And it does appear we have our first question from Matthew Bouley with Barclays.

Speaker 5

Thank you everyone. Thank you for taking the questions. I'll start out on the second quarter. I'm wondering what's implied in the Q2 gross margin. It seems that you're kind of moving into that full year range of 30% to 33 percent in the Q2, but correct me if I'm wrong.

Speaker 5

I know we're talking about normalization in both multifamily and the core. So within that second quarter gross margin, can we say that the over earn in both multifamily and the core is entirely rolled off or not yet entirely rolled off? So would there be sort of more to come beyond the Q2? Thank you.

Speaker 4

Good morning, Matt. Thanks for the question. So the margins that we're seeing are really in line with what we were expecting. The multifamily business specifically, I think outlined it a couple of times, but for everybody just to re state it, we'll continue to normalize, we'll continue to go down over the course of the year. Sales will continue to decline back towards normal and we'll continue to see margins as a percentage return back to normal as the year progresses.

Speaker 4

So, not over, but it's very much in line with what we were expecting. Margins, there's a couple of things going on. We've talked about margin normalization being between $30,000,000 $33,000,000 We think that's an accurate forecast. Just keep in mind that normalization in this instance would assume normal starts, which we're not quite back to yet. But that said, our guide for the year is still within that range.

Speaker 4

We've seen some good things hold on longer and we think that's going to sustain us to be able to get to our guide for the year on margins. But it's performing about like we expected. It's not a surprise in terms of where the rates where the margin levels are.

Speaker 5

Okay. Thank you for that, Peter. Secondly, the multifamily revenue impact, clearly, it's quite concentrated in the manufactured products. I see multifamily was down 13% in Q1. It looks like you have one more, I think, tough year over year comparison in multifamily here in the Q2.

Speaker 5

So I guess within the Q2 guide, is the assumption that multifamily is down sort of more than it was in the Q1? Would that imply that Q2 is sort of the low point for multifamily year over year with lesser declines in the second half? Or should we assume that we should look for kind of a consistent headwind from multifamily declines through the balance of the year? Thank you.

Speaker 4

Yes, it's the latter. You should expect a consistent decline from multifamily throughout the year. It's a long lead time product category. We've got pretty good visibility to what we're expecting to see. There's certainly a bit of slippage from 1 month to the next in any given period.

Speaker 4

But I think what we're seeing and expecting in multifamily is another big decline in Q2 and sort of a consistent year over year decline throughout the end of the year. And we'll of course update you as we learn more.

Speaker 5

Perfect. Thanks, Peter. Thanks, Dave. Good luck, guys.

Speaker 4

Thanks, John.

Operator

And we have our next question from Mike Dahl with RBC Capital

Speaker 6

ask, I guess, it's effectively a follow-up there. When we think about what's implied for the second half, if we look at the 1Q results and the 2Q directional color. At the midpoint, it requires double digit top line growth and kind of 15% EBITDA margins and the high end would be kind of like mid teens top line growth and a 16 EBITDA margin that both of those just given the multifamily declines, your comments just now about further normalization in gross margin, It kind of seemed difficult. So maybe you can help us there. I guess it's a roundabout way of asking more directly when you look at that full year guide.

Speaker 6

Is there point in the range that you think you're leaning more towards at this point, like midpoint or lower or midpoint or higher? Maybe just help us understand how that's evolved.

Speaker 4

Good morning, Mike. Thanks for the question. In short, we're really confident in the forecast, the way it's laid out. That guide is something that we put out there and feel good about reaffirming. The growth that you're talking about is already happening.

Speaker 4

So I think it came through in some of our materials. I think there's maybe this expectation that our whole business moves in the same way in the same quarter And that's really not what we're seeing here, right? You're seeing the early parts of the building process, the lumber, the truss, the stuff that hits the job site early after the start, doing great. We're growing. The momentum is building.

Speaker 4

There's certainly some headwinds we're dealing with. I mean, we talked a little bit about that. I'm sure we'll talk more, but the business performing very well in that category. We've not yet started to see the tailwind, the uplift from some of the later building process products, right? The doors, the millwork, they are also good for us.

Speaker 4

But we have every confidence that that's coming, that that's going to continue to be a good tailwind for us. There are of course a lot of questions about what the overall market in single family is going to do, a lot of questions about interest rates. But again, let's not forget, there's a lot of demand out there. There are a lot of confident homebuilders. There are a lot of good units and good production momentum going on and we're participating.

Speaker 4

So we're not concerned about delivering based on everything we're seeing today, but we do have to digest multifamily. I think we've been very transparent about that. It's working like we expected and things are playing out. So yes, the back half of the year needs to be growing. But again, we're seeing good momentum that we think will pass through on the early stage products.

Speaker 4

We're seeing good growth in categories that we've leaned into, value add, install and we continue to be active in M and A. So certainly a lot to be confident in. We're happy with the business and not shy about what we're seeing for the rest of the year.

Speaker 2

Yes. The only thing I'd add is echo the overarching demand profile continues to be strong. I think the timing of when they actually execute the buy is kind of what is a little more volatile than the expectation that they will execute the buy. And that's part of it, but our builder customers are still indicating that they are seeing that demand and they're expecting the similar trajectory that we've forecasted for ourselves for the back half.

Speaker 6

Okay, got it. Thank you. And then shifting gears just to capital deployment and maybe specifically the buyback. I mean, you've got plenty of liquidity, your leverage is low. The buyback was really just nominal this quarter for the first time in a while.

Speaker 6

What can we take away from that? And maybe anything more specific about how you envision deploying capital through the year?

Speaker 4

Yes. We're you're right. We're sitting on about $700,000,000 in cash plus all the capacity in the ABL. Lots of cool M and A popping, right? I mean, we've done a couple of small deals so far, but we're sitting on a bunch of dry powder and excited about what the opportunities look like.

Speaker 4

We'll have to see how they play out. But at this moment in time, we're ready to take advantage of the opportunities that are going to present themselves. That's kind of how you should read that. A little bit of a slow start to the year, but we're feeling good. Okay.

Speaker 4

Thank you. Thank you.

Operator

And we have our next question from Trey Grooms with Stephens.

Speaker 7

I also want to touch on the guidance, believe it or not. Guys mentioned well, first off, you reiterated the full year. You mentioned that multifamily is going about as you expected. And clearly, you guys have been very vocal about your expectations and kind of the pullback there in multifamily and the impact it could have. But clearly, the 2Q guide is lower than what I think most were kind of modeling or expecting.

Speaker 7

But with you reiterating the full year guide, is it fair to say that kind of overall the 2Q is kind of tracking as you would have thought? Any surprises there? Or maybe even any areas where it's coming in better or worse than you would have expected as we've moved so far through the year?

Speaker 2

Yes. Thanks, Trey. What I would tell you is multifamily in specific, some of that backlog is getting extended. So where at one point in time in the year, I may have thought more of those jobs would finish quicker, they're spread now. It's actually a good thing.

Speaker 2

It kind of smooths that transition for us in one way. The other thing I'd tell you about multifamily, our team has done a great job going after pseudo multifamily, smaller multifamily projects, customers they haven't typically gone after that are helping also transition that. Hadn't started yet, but we're seeing a lot of good momentum in that space, things like assisted living versus a 4 level apartment complex. So smaller jobs as you take them by themselves, but add it up, it will help the transition. But single family is kind of operating the way we expected it to.

Speaker 2

There's been it's never retracted below a level. It's a build and it's a continual build. But at the end of the day, is it as steep of a build as we would like? Of course not. It's not as robust as we would like ever, but it's steady and it's there and it doesn't retract.

Speaker 2

That's an important factor. It is a build even as it's a slower build than we'd love to see. And we're adjusting as we need to, to those market conditions.

Speaker 4

The only thing I might add is there's nothing in what's happened that is a surprise to us in terms of the variable, all the variables I think we've accounted for. There are a couple of variables that were, I would say, bigger headwinds than we anticipated. I think that weather thing is certainly throwing us a curveball. It will bounce back, but that's been a tricky one to navigate, particularly regionally. I think what builders have done to build homes more affordably, whether it be size of the home or complexity of the home, There's some variability on that as well that we've been challenged with.

Speaker 4

But again, I think we're in line and we're doing what we said we were going to do despite those variables.

Speaker 2

Yes. And I would add, a good indicator for me is always our trust backlog. Our trust backlog is at healthy levels. It's continuing to build. That's an indicator for us of what's to come.

Speaker 2

And that if that was starting to slack off, I might get a little more word, but it's where it needs to be for us to be in a healthy situation.

Speaker 7

Got it. All right. Well, thanks for all that color. I appreciate it. And hearing that you're very confident in the guide and being able to reiterate it is encouraging.

Speaker 7

So we appreciate it and thanks. Good luck for the rest

Speaker 4

of the quarter. Thanks, Gerard. Thanks, Gerard.

Operator

And our next question comes from Rafi Jadrosich with Bank of America.

Speaker 8

Hey, good morning. It's Rafe. Thanks for taking my question. I just I wanted to ask on the commodity pricing in the Q1. It was deflationary, but when you look at, I think OSB prices were up, lumber prices seemed kind of flattish sequentially.

Speaker 8

So can you just talk about what you're seeing there, either is it from a mix standpoint or how is the competitive environment evolved and like how do

Speaker 4

you expect that to go going forward? Good morning, Rafe. Yes. So I would tell you right upfront that commodities are where the war is happening. That's where the fight is.

Speaker 4

It's where historically you've got the most aggressive players, you've got the most dynamic pricing, the volatility of it. I think what you're seeing in the numbers is really just around timing. There's a little bit of shift in terms of when we saw the OSB run versus when we were feeling it. That will come through at different points during the year, but I would expect sort of us to be pretty much done with the bad news around the prices of commodities. What I will say though is while we saw the run-in OSB that's starting to walk back And we saw a much smaller run on lumber and that's walking back as well.

Speaker 4

So I think you're seeing that mood of the market recognizing higher for longer and trying to triangulate on what that means to commodity prices. But again, that's not our game. We don't play the commodities up, commodity down bet. We're continuing to on product just in time, move it quickly, price appropriately, get paid for what we do that our strategy hasn't changed at all in that category.

Speaker 8

Got it. That's very helpful. And then just on SG and A, there was some deleverage in the Q1. How should we think about that going forward here, especially as sales turn in the second half of the year? And then just remind us of the base in terms of incentive comp from last year.

Speaker 8

Do you have an easier comparison there? And how

Speaker 4

do we just think about leverage versus what you've done historically? Yes. So SG and A, we saw a couple of one timers come through in Q1 that hurt us a little bit. Some of it was we had some credits last year that we didn't repeat this year. I wouldn't from my perspective and take it what it's worth, I wouldn't read too much into it.

Speaker 4

I think our consistent discipline around expenses will keep us in the ranges that you'd expect. Summer months are always our best leverage months, right? Q2, Q3, so you'll see that come through. In terms of the base business, I guess I would say there isn't much of an adjustment, maybe minor on the bonus side. I think really the storyline around the year over year bonuses that we gave ourselves as you've seen a more challenging target and plan for this year.

Speaker 4

Our performance is more in line versus vastly outperforming that target. So you will see a pullback in the total amount of bonus dollars just by nature of that performance, which you'd expect. I think that shareholders, management, the Board is all in alignment on that one. So that'll be a bit of a tailwind versus the prior year just from a dollar amount perspective.

Speaker 2

The only thing I'd add is our highest variable cost obviously is our labor. And the field and the team have done an exceptional job keeping labor as a percent of gross profit, which is our key metric right in line with our operating within the parameters of what we set for ourselves in this level of sales and activity. And our tools for managing that cost are as good as they've ever been in my 25 years with the company. So the key factor for us in managing SG and A is how well we manage our labor down at the field level and they've done exceptional at that since the beginning of the year.

Speaker 4

Thank you. It's very helpful.

Operator

And we have our next question from Keith Hughes with Truist.

Speaker 4

Thank you. The question on the windows and doors segment, it was down 2%. You talked about some product costs declining. Can you talk about that a little bit more, which product? And is that selling price declining or inputs?

Speaker 4

Any kind of details would be great.

Speaker 2

Well, good morning, Keith. If you recall, Keith, this time last year or in the Q1 last year, we were just coming out of normalization of the supply chain. Windows and doors were getting delivered timely again. And the National Builders' focus on completions in that Q1 was at a higher level just to catch up. That kind of was the pig in the pipeline for us last year in higher millwork and went to a door sales in the Q1 than normal.

Speaker 2

I would tell you this Q1 was normal. So we had to roll over those numbers from last year where it was a bit more tilted towards completions where this year was

Speaker 5

more normal

Speaker 2

with respect to completions. There has been some deflation in the category, and specifically, I think, with millwork on the millwork side. And that's affected it modestly. I think we saw pretty close our volumes did exactly what we expected our volumes to do. And it was more along the lines of some

Speaker 4

of the

Speaker 2

deflationary impacted along with rolling over that higher degree of completions last Q1. That really explained the difference.

Speaker 4

Okay. Thank you.

Operator

And we have our next question from Adam Baumgartner with Zelman and Associates.

Speaker 9

Hey, good morning guys. Can you talk about what you're seeing from a non commodity pricing perspective and maybe specifically on the manufactured product side?

Speaker 2

So, are you talking you're talking about customer pricing or vendor pricing?

Speaker 9

You're pricing to customers.

Speaker 2

So it's as you would expect and why we play in those categories, that is less price sensitive on the manufacturing side because once you get locked in with a designer and you get locked in with somebody who's going to meet delivery schedules and whatnot, that becomes a more important factor. Now, as commodities have fluctuated and the fact that they're a component of manufacturing, that affects the price as commodities go up or down and they've been going down for lumber slightly. But what we've been able to do is offset some of that with our efficiencies that we've been able to gain throughout since the merger with our automation investments and our continual improvement in actual board foot per labor hour produced, has been a nice offset to some of those challenges. But as a whole, ValueAct continues to hold in there better than commodities, which of course is in line with our strategy.

Speaker 9

Okay, got it. That's helpful. And then just on that 3% to 4% impact from weather you saw in 1Q, how should we expect that to be recouped? Is it mostly in 2Q or is it going to span over a few quarters?

Speaker 4

Well, I was happy to say Q2 up until Houston got buried or flooded out. Generally, it takes about a quarter to a quarter and a half to catch back up. It doesn't unfortunately just whipsaw back the other direction, but that's probably a reasonable way to think about it 3 or 4 months.

Speaker 9

Got it. Thanks. Best of luck.

Speaker 4

Thank you.

Operator

And our next question comes from Stanley Elliott with Stifel.

Speaker 10

Hey, good morning everybody. Thank you for the question. Can you all talk a little bit about what you're seeing on the services piece? Very strong numbers up 17%. Is this kind of reflection of your efforts to take it into new markets?

Speaker 10

Is this existing more services with some of your existing customers? And then I guess secondly, how should we eventually think about this either an attach rate or pull through on some of the other things you're doing on the manufacturer side?

Speaker 2

Yes, I would say all of the above. We had a strong install business. We did $2,500,000,000 in labor and materials install in 2023. So we had a nice base to work from. And our initial focus, as you would expect, was on the products that we're already good at in one market and leveraging that platform to other markets.

Speaker 2

And it's the products that we're most familiar with and the products that we distribute every day. So we've got off to a great start. A lot of that increase is from existing markets that are already doing install because those are the ones that had the base to work from. But we developed really nice playbooks and we've had really good interest, which has been pool interest. So it's people reaching out.

Speaker 2

I want to get into this business. How do I do it the right way versus us saying, hey, you need to get into this business, which is in my role, in my seat, that's what you want to see. And we've got really good people, really good plans and we just think it's the next evolution for us as a company in solving our customer pain points and doing it methodically and in a way that we don't make mistakes. That's key for me, to do it the right way and make sure that what we're generating is customer value added solutions.

Speaker 10

And curious kind of tagging on that, if you're willing to share, are you seeing more of this uptake with some of the smaller builders, some of the more national builders? Just trying to kind of get a sense for the flavor there.

Speaker 2

It's a little it depends on the product category, first of all. But the national builders certainly like the install solution wherever they can apply it. The custom guys like it, but they're a little more specific to millwork or a little more specific to install windows, probably not so much install framing, right? So it's a really good play for the National Builders. They seem to like that the best, but there are applications for both segments.

Speaker 4

And to Dave's point, we do see a higher level of adoption of our value added products to the larger players just generally. Yes.

Speaker 2

And install is the natural evolution to the value add. It's the next part of value add. Not only do you get the components delivered to the job site, but you actually install the components that are delivered to the job site. That's just a natural evolution of doing more for our customer.

Speaker 5

Perfect guys. That's it for me. Thanks and best of luck.

Speaker 4

Thanks, Hamlet.

Operator

And we have our next question from Colin Barron with Jefferies.

Speaker 9

Hey, good morning. Thank you for taking my questions. I just wanted to start on the gross margin side of things. You talked about the shift in timing toward early stage homebuilding product being a gross margin mix headwind. Can you maybe quantify that headwind either sequentially or year over year and how it compares to the headwind you're seeing from multifamily normalization?

Speaker 9

And just following up on that, how you're thinking about that mix through the rest of the year, just given what you're seeing in starts, backlog and conversations with your customers?

Speaker 4

Yes. So I don't think I can give you the detail. Good morning, Colin. Thank you for the question. I'm not sure I can give you the breakdown necessarily exactly what you're looking for.

Speaker 4

What I can tell you is on the mix side, it's an expectation that we're going to see a trend back to normal mix. I don't think that's much of a stretch, right? So what we're seeing right now is more of our growth being in the pure commodities and the trust and the relationship between just those two categories biases it towards the commodities. And commodities, like I was saying before, is where we've had the most aggressive normalization. We've seen it across the board on the gross margins, right?

Speaker 4

We've seen gross margin normalization. We've talked about it a lot. It's not just multifamily. It's single family too. Matter of fact, this quarter, the bulk of it was single family normalization.

Speaker 4

Much of that is the mix, but a good chunk of that is also just what we've been messaging over the last year. And that's we have seen this normalization play out. We've seen it across the business. And this year's margins are when you peel back that multifamily stuff, a step down from where they were. That was why we were so adamant last year that our mid-30s gross margin numbers weren't going to hold on because we were seeing it play out.

Speaker 4

But that mix will certainly be a tailwind as we regain the later stage building products, but we have again the lapping from the prior year. So that's why our guide is in that 30% to 33% range because we think that those three variables will play against each other and we want to try and give you the best insight possible to where we'll

Speaker 9

end up. Okay. That's helpful color. I guess I want to pivot towards the M and A pipeline. It sounds like it's pretty robust.

Speaker 9

Any color as to the size of potential deals out there in the market and what those potential targets look like from a product offering perspective?

Speaker 4

We won't get that precise, but I think our strategy has not changed, right? The way we look at the market where we're successful, where we can add the most value are all variables in the discussion. But I think that there is there are always a 1,000,000 rumors about what may or may not trade. I think for us, it's imperative that we stay disciplined and we stay focused. What's exciting is, as it stands today, we see a lot of assets out there that fit that screen.

Speaker 4

And now we just got to see if we can get them across the finish line.

Speaker 9

Okay. Thank you for taking my questions.

Speaker 11

Thanks, Paul.

Operator

And our next question comes from Tyler Batory with Oppenheimer.

Speaker 3

Thank you. Good morning. Question on the competitive environment. You're seeing some of the smaller players out there maybe trying to get more aggressive to take market shares? Is that having an impact on your performance and on your business?

Speaker 2

Well, I would tell you, Tyler, is not any more than usual. Again, where we differentiate ourselves is in the value added solution and the value added space and that's for a reason. Anybody can do commodities, anybody can deliver lumber. It's hard to differentiate yourself in a straight distribution model. So we do see competition in that arena for sure.

Speaker 2

We try to leverage our relationships with those customers where we do other stuff for them very well and use that as a way to continue to maintain share on the commodity side versus just getting into a price war. So we do see competition in that regard. We choose to compete where we want to compete in that, garden. But we'll always do a high percentage of lumber. We're good at doing lumber.

Speaker 2

We're good at meeting schedules and making sure the lumber is there when the customer wants it. And we get recognized for that. And where we get that recognition is where we play. But in short, a lot more competition on the commodity side than the non commodity side. And our reputation on the value added space carries us a long way.

Speaker 4

The only thing I'll add that I think it might be embedded in your question is share. I think one of the variables that we struggle with is what's the real share number. Generally, we would use single family starts as a proxy for the market and then we would compare our sales against that. In general, that's a really tricky thing right now because I think there are some meaningful differences between a start unit and a sales dollar. Homes are smaller.

Speaker 4

The costs of those homes and what being put into them are simpler and cheaper. And we've seen some not insignificant cost reductions or pricing reductions in terms of what we're getting from our vendors and what's selling into the market. Whether it be commodities, which is the obvious one, but also EWP or Millwork or any of the other ones we've talked about, those all represent sort of gaps or deltas between those two units of measure. And then you layer on a little bit of the timing related stuff, whether it be how complete these homes are and what we're selling or the weather or whatever. It certainly has made that whole discussion and that analysis really challenging.

Speaker 4

But back to Dave's point, I think the only place we think we've maybe struggled or battled is in that commodity, the low end where smaller competitors are more willing to get down and dirty.

Speaker 3

Okay, very helpful. And then a quick follow-up on the R and R side of things, down 5% in the quarter. I think weather probably impacting that. What are you seeing here in the Q2? And there's a lot of differing views on the R and R end market out there.

Speaker 3

Just share your confidence in terms of your growth outlook this year in that end market.

Speaker 2

So as it relates specifically to the Q1, we're higher concentrated in R and R in the Northeast. And the Northeast was that set area of the country for us that was more greatly impacted by weather. I think 20 to 23 days had serious weather in the quarter. That's where we felt it. In general, I think R and R will be it's kind of a 2 edged sword, right?

Speaker 2

The bigger projects are facing some of the same kind of cost of money pressures that the small custom builder is facing. But the regular smaller projects, I think, are going to be along the same line as what you would expect.

Speaker 3

Okay. That's all for me. Thank you.

Speaker 4

Thank you.

Operator

And we have our next question from David Manthey with Baird.

Speaker 5

Thanks, Dave, Peter. Good morning. My first question is on the digital. So the revenue uptick is good to see. Could you share with us any data on the number of net users today versus a year ago or the end of last year, just to give us an idea of how that's ramping?

Speaker 5

And then is there any prototypical customer type that's implementing the system or is it just based on personality and choice?

Speaker 4

Morning, Dave. Yes, we're excited about digital. I don't unfortunately have user numbers. I might be able to get them for you, but I don't have them off the top of my head. It's going up.

Speaker 4

We're seeing that. There were, gosh, I don't know what it was, 500 or 700 leads that we took out of IBS. We've got a lot of customers as we do our adoption and our rollout around the country that are coming on board. While most of them are bid to smaller size builders, the profile I think that you're talking about are those that are leaning into digital and technology to be able to make themselves more efficient and more professional and better with their customers. I think you've got sometimes it's generational, candidly, sometimes it's not.

Speaker 4

It's just the mentality around leveraging tools to take waste out of the job, make the job go quicker, connect with the home buyer a little bit more easily, more visually. But it's such a in our opinion, it's such a compelling tool. It's got so much that can help the builder just get a little bit better every day. That game we're all trying to play, creating efficiency, making it more transparent to the builder, to the trades, and to the home buyer. So that those are the types of customers, the ones that really take advantage of technology to do that that we're seeing early.

Speaker 4

But in general,

Speaker 2

I think our digital tool has become, it is increasingly becoming the new way of doing business just because it's so easy. It's very modern, it's very smooth and so far so good. We're excited about the ramp up trend and how it's been progressing so far early days. What I would tell you juices me the most was the traffic we had at our booth at IBS. I have never in my 25 years with going to IBS and seeing the kind of excitement and the kind of traffic that went through our booth, primarily because of our digital platform and showing what capabilities that it was going to present.

Speaker 2

The other thing I would say is think about it, if you're a smaller builder, 50 to 200 homes a year, you don't have the ability to invest in technology for yourself to get this to the level of platform that we're developing. What we're doing is leveraging our ability to make those investments, develop that platform for our customers of that size so that they can play in that space and be efficient without having to make a huge upfront investment themselves. So that's the rationale behind why we developed it and why we think it will be appealing to our customer base. And if IBS is any indication, we hit it right on the head.

Speaker 5

Okay. Thanks guys. In the interest of time, I'll just pass it on. Thank you.

Speaker 4

Thanks, Ed.

Operator

And we have our next question from Jay McCanless with Wedbush.

Speaker 11

Hey, good morning, everyone. So my first question, Peter, I think you called out some pretty positive sales trends for the Western U. S. Could you talk about how that's trended in April May, similar pattern to what you saw in 1Q?

Speaker 4

Good morning, Jay. Yes, pretty similar. I think that the West got hammered out of the gate and they bounced back really nicely. A little more stable through the other two regions. But yes, I think that's been pretty consistent.

Speaker 4

We have to see how this whole weather thing in Houston plays out, but for the time being, it's pretty good.

Speaker 11

Okay. Thanks. And then, taking the lumber question, especially some of the more commodity goods a step further, is this a function of not only higher mortgage rates, but was there an oversupply of commodity lumber in the system to start the year? Just wondering if this all rate driven or if there's some other mitigating factors we need to be monitoring?

Speaker 4

We didn't see a lot of unusual behavior in the market, no. Tough for us to see that from others' perspective, but it's a strong I would think generally a strong and a stable market. So I don't know how people made bets with regard to where stuff was moving.

Speaker 11

Okay, great. Thanks for taking my questions.

Speaker 4

All right. Thanks, Jay.

Operator

And we have our next question from Ketan Mamtora with BMO Capital Markets.

Speaker 12

Thank you. Peter, just one question. You've talked quite a bit about margin normalization and multifamily. On the core organic, the single family piece, do you think at this point we are sort of towards the end of that normalization, we are midway through, how would you characterize that? And are the competitive dynamics in that side of the business changing at all given sort of pressure on EWP prices, given where lumber is today?

Speaker 12

Just curious to get your thoughts.

Speaker 4

Thank you, Don. So yes, I would tell you that we're closer to the end, in terms of how we expect margins to normalize. We're still below normal in terms of volume. So that's a pressure filled environment. It's always very competitive, always has been.

Speaker 4

We expect it always will be on the commodity side. But that now needs to be a battle cry that we rise to, right? And it's something that we've done for years and we feel good about. There's an expectation that the little player will always be more competitive and we think that'll continue to play out. But by and large, I think margins have performed well.

Speaker 4

There's certainly been some aggressiveness from certain vendors, but in most cases, it's in response to past moves. So more of a normalization, more of a rebound back, I mean reversion, if you will, rather than a, uh-oh, we're in trouble, we need to do something dramatic. Does that make sense?

Speaker 12

It does. Thank you very much.

Operator

And it appears we have reached our allotted time for

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Earnings Conference Call
Builders FirstSource Q1 2024
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