Builders FirstSource, Inc. (NYSE:BLDR) Q1 2024 Earnings Call Transcript May 7, 2024
Builders FirstSource, Inc. misses on earnings expectations. Reported EPS is $2.1 EPS, expectations were $2.42. Builders FirstSource, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day everyone and welcome to the Builders FirstSource First Quarter 2024 Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by management and the question-and-answer session. [Operator Instructions] I’d now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.
Heather Kos: Good morning and welcome to our first quarter 2024 earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. The earnings press release and investor presentation are available on our website at investors.bldr.com. We will refer to the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes and they should be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they 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. With that, I’ll turn the call over to Dave.
Dave Rush: Thank you, Heather. Good morning, everyone, and thanks 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. Despite these micro challenges, we built on our successes and drove growth through our value-added products portfolio in 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, install 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. Through our value-added products and install 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 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&A strategy and a track record of buying back shares at competitive prices. 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 first quarter highlights on Slide 4. We continued to deliver strong margins in Q1, reflecting our end-segment diversification, focused execution, and differentiated product portfolio and scale.
Our gross margins of more than 33% reflect a higher mix of value-added products, including multifamily trust and our ability to manufacture more efficiently. We expect the multifamily in 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. At a high level, our digital tools do three things: one, solve customer pain points; two, make it even easier to partner with us and our suppliers; and three, 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’re 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 install sales increased by 17% year-over-year as we leverage our capabilities to help customers address labor constraints. Additionally, we drove $40 million in productivity savings in Q1, primarily through procurement and SG&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 just 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. 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 sizing, home sizes and providing interest rate buydowns to assist buyers with affordable options. Smaller builders were more likely to benefit from rate cuts. We are staying in close contact with our customers of all sizes to maximize our business in the current environment.
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&A on Slide 6. We continue to target attractive opportunities while remaining financially disciplined. In the first quarter, we completed two deals with aggregate 2023 sales of roughly $36 million. In early February, we acquired Quality door and millwork, a leading distributor of millwork doors and windows in Southern Idaho. In March, we acquired Hanson Trust, which further strengthens our value-added position in Northern California and Nevada. And last week, we acquired Shuterman’s [ph] Building Materials.
Shuterman’s [ph] 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&A and organic investments have increased value-added products as a percent of our overall mix by 700 basis points over the past two years and by 1,000 basis points if you go back to 2019. 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&A targets in our fragmented market, and we are pleased with recent improvements in the pipeline. Our disciplined approach to M&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 first quarter, we completed a $1 billion note offering which brought us additional financial flexibility to grow organically and remain acquisitive while maintaining a strong balance sheet. In addition to the two tuck-in acquisitions, we repurchased $20 million 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 $5.5 billion to $8.5 billion of capital from 2024 to 2026 as outlined at Investor Day last December. Now let’s turn to Slides 8 and 9 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.
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. 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 million.
In Q1, we had incremental sales of over $10 million. We remain confident in our ability to meet our targets of $200 million of incremental digital revenue by the end of this year and $1 billion by 2026, as we grow wallet share and win new customers. One of our digital tools, build Optimized uses advanced 3D modeling to identify construction classes 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. 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.
One of my favorite initiatives at BFS is acknowledging team members who go above and beyond [indiscernible] in Atlanta, Georgia personifies this quality. 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 Decola. Ira 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, Ira drove the box truck himself to take care of the customer. I’m grateful for Ira 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.
Peter Jackson: 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’ve included 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. I will cover 3 topics with you this morning. First, I’ll recap our first quarter results. Second, 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 first quarter performance on Slides 10 and 11.
We delivered $3.9 billion in net sales, driven by growth from acquisitions of 1.9% [indiscernible] 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&R and other also declined by almost 5% due to weakness predominantly in the Northeast from inclement weather. 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 first quarter, reflecting our strength and customer stickiness for these higher-margin products. During the first quarter, gross profit was $1.3 billion, increased 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 towards lower margin, early stage homebuilding products, as well as margin normalization, particularly in multifamily. SG&A increased $22 million to $926 million, primarily attributable to acquired operations. As a percentage of net sales, total SG&A increased 50 basis points to 23.8%. The team has done an excellent job managing SG&A, and we stand ready to leverage our fixed costs into the growing market.
Adjusted EBITDA was $541 million, down approximately 14%, primarily driven by lower gross profit and higher operating expenses. Adjusted EBITDA margin was 13.9%, down 240 basis points from the prior year. Adjusted net income of $327 million was down $83 million from the prior year due to lower gross profit and higher operating expenses, primarily due to acquisitions. Adjusted earnings per diluted share was $2.65, 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 million, down $337 million 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 million, and free cash flow was approximately $228 million. For the last 12 months ended March 31st, our free cash flow yield was approximately 6%, while operating cash flow return on invested capital was 22%. 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 billion private offer of 6.375% senior unsecured notes due 2034, which enables a maximum financial flexibility to grow organically and remain acquisitive. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was approximately $2.4 billion, consisting of $1.7 billion in net borrowing availability under the revolving credit facility and approximately $700 million of cash on hand.
Moving to capital deployment. During the first quarter, we repurchased roughly 100,000 shares for $20 million at an average stock price of $202.67 per share. Since the inception of our buyback program in August of 201, we have repurchased 42.2% of total shares outstanding at an average price of $70.42 per share for $6.1 billion. We have $980 million 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 $17.5 billion to $18.5 billion. We expect adjusted EBITDA to be $2.4 billion to $2.8 billion. Adjusted EBITDA margin is forecasted to be 14% to 15%, 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 billion to $1.2 billion. The free cash flow forecast assumes average commodity prices in the range of $400 to $440 per thousand. Our 2024 outlook is based on several assumptions and includes an expectation for improving single-family growth. Please refer to our earnings release in Slide 14 of the investor presentation for a list of these key assumptions. As you all know, we do not typically give quarterly guidance, but we wanted to provide directional color for Q2 given the ongoing interest rate uncertainty and the geopolitical situation.
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 15 and 16. As a reminder, our base business approach showcases the underlying strength and profitability 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 $17.6 billion. Our base business adjusted EBITDA guide is approximately $2.4 billion 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.
Dave Rush: 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. 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, please open the call now for questions.
Operator: [Operator Instructions] And it does appear we have our first question from Matthew Bouley with Barclays.
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