Builders FirstSource, Inc. (NYSE:BLDR) Q4 2022 Earnings Call Transcript

Builders FirstSource, Inc. (NYSE:BLDR) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day, and welcome to the Builders FirstSource Fourth Quarter 2022 and Year End Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by management and the question-and-answer session. I would now like to turn the call over to Mr. Michael Neese, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead, sir.

Michael Neese: Thank you, Brittney and good morning everyone. Welcome to our fourth quarter and full year 2022 earnings call. With me on the call are Dave Rush, our recently appointed CEO; and Peter Jackson, our CFO. Today, we will review our fourth quarter and full year results. The earnings press release and investor presentation are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. You can find the 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.

David Rush: Thank you, Mike. Good morning everyone, and thanks for joining our call. Before we get into the results, I’d like to thank the Board of Directors for the opportunity to serve as the CEO of Builders FirstSource and for trusting me to lead this great organization. I also want to thank all of the BFS field leaders and team members for their support which has been inspiring. I come from a background in finance having spent the first 18 years of my career in various financial roles from controller to CFO. Over my 23 years with BFS, I’ve been fortunate to have had a variety of operational roles including Regional Oversight, primary responsibility for both the ProBuild and BMC integrations and most recently leadership of our enterprise-wide initiatives as EVP of our Strategic Management Office.

I believe my experience and industry knowledge will be a strong basis to build on our success of creating long-term value for shareholders. Now, let’s turn to the business results. Macroeconomic factors will undoubtedly continue to create headlines this year. However, with our exceptional and seasoned team, strong balance sheet and industry leading platform, we are in a great position to win in any environment. We have a field leadership team with over 30 years average experience in the industry. They have been through similar macroeconomic environments to the one we are currently facing today, which gives me great confidence in our ability to manage business changes with quick and decisive action as required. We have maintained very low leverage providing us with maximum flexibility to deal with any scenario and we continue to leverage our footprint, our scale, and our product portfolio to outcompete in the market.

Let’s turn to our long-term strategic priorities on Slide 4 for a moment. As we navigate a changing landscape, we see no need to alter our long-term strategy, and we remain focused on expanding organically in value-added products and services, driving operational excellence, continuing to build our high performing culture, and growing through strategic tuck-in acquisitions. On Slide 5, you can see our continued emphasis on the strategic priorities was key to our record full year 2022 net sales of $22.7 billion, and adjusted EBITDA of $4.4 billion. Top line growth, value-added product mix improvement and disciplined cost management resulted in our adjusted EBITDA margin increasing 390 basis points to 19.3%. The combination of increased profitability and share buybacks supported 81% growth in full year 2022 adjusted EPS.

On Slide 6, you can see that we delivered a 6.6% increase in core organic sales, including nearly 21% growth in our higher margin value-added products. We’re extremely pleased to deliver $123 million in productivity savings for the year, exceeding our $100 million target as we drive improvement across a variety of projects and leverage our BFS One Team Operating System. We remain focused on the importance of controlling SG&A and other expenses. This includes efficiency, efficient cap capacity utilization, ongoing optimization of our footprint, and balancing the need for variable cost reductions and future capacity. Importantly, we have rationalized over 30 locations during the last year while main maintaining coverage and not exiting any markets.

I’m extremely proud of how we continue to demonstrate our high performing culture through improved safety by lowering our recordable incident rate by approximately 22% year-over-year, which marks the second consecutive year of improvement. We also continue to invest in training enhanced DEI initiatives and improved employee benefits to better attract and retain high performing talent. Turning to M&A on Slide 7, in addition to our focus on profitable core organic growth, we continue to execute tuck-in acquisitions aligned with our strategy completing six acquisitions in 2022. Although the M&A pipeline has slowed in the current macro environment, we continue to be acquisitive while remaining disciplined in our approach. We are committed to expanding our geographic footprint in key markets with a particular emphasis on enhancing our value-added portfolio to better serve our customers, diversify our end market exposure, and leverage our technological capabilities.

This is evidence by our recent acquisitions including Pima Door & Supply in the fourth quarter, which expands our millwork footprint in the Phoenix area and earlier this month, we acquired Noltex Truss, a five location truss manufacturer providing building components to the single and multi-family markets throughout Texas. This tuck-in acquisition further extends our leading position in value-added products across the state. We are excited to welcome both Pima and Noltex with their longstanding customer relationships and track record of profitable growth to the BFS family. The still highly fragmented nature of our industry supports our ambition to invest $500 million in M&A per year on average for the next several years. Moving to Slide 8 and looking at our capital allocation in aggregate for 2022, we deployed approximately $3.5 billion of capital towards organic growth investments, tuck-in M&A and share repurchases and remain on track to achieve the goal we established at our 2021 Investor Day of deploying $7 billion to $10 billion from 2022 to 2025.

We will continue to closely monitor our customer sentiment, which currently suggests a challenging year ahead. During the fourth quarter, we saw a slowdown in average daily sales, which has continued into the first quarter. Higher mortgage rates and affordability challenge continue to be headwinds. On Slide 9, we outlined the benefits of our flexible business model for dynamic operating environments such as the one we’re currently experiencing. As we have discussed, we are actively managing the business as conditions indicate, and we are acting decisively wherever we see decelerating demand. Our focus is on effectively managing costs through our variable expense structure to match costs with volumes. We are optimizing capacity and reducing discretionary spend without impairing our ability to maximize the recovery when this turns the corner.

Stepping back, we realize affordability has been an increasing concern over the past several years as home prices and rates have increased significantly. We are working and making housing more attainable by investing in the value-added products, productivity and digital capabilities to reduce cycle times and make homebuilding more efficient. For example, in 2022, we invested approximately $125 million in CapEx supporting our value-added product growth and digital strategy. Going forward, we will continue to prioritize our investments in our fleet, value-added technology, and digital automations. Together, these initiatives will help lower total costs, improve affordability, and allow more people to buy homes. We are committed to strategically accelerate our leading market position and deliver on our overall value proposition, and we will continue to execute while keeping our focus on providing the best possible service to our customers.

Now, let’s turn to Slide 10 to discuss our pioneering role in the digital transformation of the homebuilding industry. We have a long-term commitment to investing in digital innovations and technologies that we believe will drive greater efficiency across homebuilding and enhance our product offerings. On the homebuilders software side, we are executing our development plan and integrating that with our BFS operations through our digital sales teams.

myBLDR.com:

myBLDR.com: Last month at our national event, we announced our inaugural BFS Hall of Fame Class for 2022, the culmination of our annual employee recognition program and a highlight of our people first culture. These distinguished individuals represent the best of our frontline team members, but there is one person I would like to highlight today, Frank Gloria. Frank is a Fleet and Compliance Manager out in Southern California who has been with the company and its predecessors for an impressive 45 years. He oversees our fleet and machinery across 11 locations. Frank takes great pride in keeping everything running consistently and with minimal downtime. His manager emphasized quote, Frank’s knowledge of everything mechanical is simply unrivaled.

Photo by Mikita Yo on Unsplash

On behalf of the leadership team, I want to thank Frank and the other hall of fame inductees for their tremendous contributions. I will conclude by saying that we have the best team to win in a challenging environment. I am confident in our strategies and our ability to deliver long-term results for our shareholders. I’ll now turn the call over to Peter to discuss our fourth quarter financial results in greater detail.

Peter Jackson: Thank you Dave and good morning everyone. I want to congratulate Dave on his appointment as our new CEO. I’ve worked with him for many years and couldn’t be happier for him and for this company. I know he will lead us to continued growth and success. I also want to join Dave in thanking our team members for delivering a record year of performance. We sincerely appreciate your hard work and dedication to delivering excellent service to our customers day in and day out. I’m proud to report that we delivered solid financial results in the fourth quarter to cap off a record year of the business. We continued to manage through the complex operating environment with a proactive mindset and a disciplined approach. We expect that the structural enhancements we have made in our business over the past decade will help us mitigate the impact of softer housing demand and inflationary headwinds.

Our ample liquidity, low leverage and disciplined cost management provides significant financial firepower to continue to strategically and opportunistically grow our business. I will cover three topics with you this morning. First, I’ll recap our fourth quarter results. Second, I’ll provide an update on capital deployment, and finally, I’ll discuss our first quarter guidance and lay out illustrative full year scenarios. Let’s begin by reviewing our fourth quarter performance on Slide 12. We delivered $4.4 billion in net sales. Core organic growth decreased by 8% attributable to a nearly 14% decline in single-family as slowing demand compared to strong fourth quarter 2021 led to difficult comps. Both multi-family and repair, remodel, and other increased by almost 15%.

Multi-family was driven by a strong rental market and resulting backlog. R&R and Other growth was mainly attributable to increased sales focus and capacity versus prior year. Two fewer selling days had an unfavorable impact of roughly 3% on net sales. The cumulative effect of our acquisitions over the past year contributed approximately 8 percentage points of growth to net sales. Value-added products saw another quarter of growth compared to total fourth quarters starts, which decreased by 16%. Core organic sales in the category increased by 0.6%, reflecting the macro trend of value-added product adoption and our success in the category. I’m very happy to highlight value-added products represented over half of our revenue in the quarter, a great proof point of success towards our goal of being the supplier of choice for these valuable high growth products.

During the fourth quarter, gross profit was $1.5 billion or roughly comparable to the prior year period. Gross margin increased 200 basis points to 34.1%, mainly due to the increased mix of value-added products. SG&A grew 11% to $958.7 million, mainly due to additional operating expenses from companies acquired in the last year inflation and other costs. Acquisitions represented over 60% of the increase in SG&A. As a percentage of net sales total SG&A increased by 340 basis points to 22%. We remain focused on disciplined cost management and are taking appropriate actions in response to volume dynamics on a market by market basis. These actions include footprint rationalization, discretionary spending reductions, and cutting headcount and overtime.

As we have stated in the past, approximately 70% of SG&A expense is variable. Within that 70% roughly 20% of sales is driven by volume based formulas, things like commissions and bonuses. The remaining 50% of sales is where we are actively managing our operations. We are striking the right balance between resizing operations based on changes in volume and protecting capacity for future growth. Adjusted EBITDA was approximately $700 million, a decline of $97 million, primarily due to declines in core organic sales and commodities partially offset by M&A. Importantly, adjusted EBITDA margin was 16%. This represents the second fast fourth quarter adjusted EBITDA margin in our history reflecting our focused execution and expense control. Adjusted net income was $470.8 million, down from an adjusted net income of $532.4 million in the prior year quarter, attributable to a decrease in net sales and higher SG&A expense.

Adjusted earnings per diluted share was $3.21 compared to $2.78 in the prior year period. The increase reflects our more than $650 million in accretive share repurchases investments during the quarter. To put this in perspective, the repurchase equates to $0.21 or nearly half of the $0.43 change. Now let’s turn to our cash flow, balance sheet and liquidity on Slide 14. Our fourth quarter operating cash flow was approximately $971 million, mainly attributable to increased profitability due to effective pricing and cost management, as well as disciplined working capital management. Generally, we see working capital as incremental or decremental of approximately 10% of sales. Capital expenditures were $131 million. All-in we delivered robust free cash flow of approximately $840 million.

For the year we generated record free cash flow of approximately $3.3 billion, representing a free cash flow yield of 30.6% operating cash flow. Return on invested capital was 41.1% for the year ended December 31. Our 2022 net debt to adjusted EBITDA ratio was approximately 0.7 times and approximately 1.3 times our estimated 2022 base business EBITDA, well within our stated target of 1 to 2 times. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was $1.5 billion consisting of $1.4 billion in net borrowing availability under the revolving credit facility and approximately $100 million of cash on hand. Moving to capital deployment, during the fourth quarter, we repurchase approximately 10.2 million shares for $651 million at an average stock price of $64.17 per share.

In addition, we have repurchased approximately 900,000 shares so far in the first quarter of 2023 for $61 million at an average stock price of $65.94. During 2022 we repurchase almost 42 million shares for $2.6 billion , and we have more than $900 million remaining in our authorization. In total, we have repurchased more than one third of our outstanding shares in the last 18 months. We remain disciplined stewards of capital and we’ll continue to look for inorganic growth opportunities and to repurchase shares at an attractive value. We maintain a fortress balance sheet, which will help us withstand a slower housing environment and keep us well positioned for long-term growth. Turning to Slide 15, we continue to believe it is important to assess our results using a base business methodology.

During 2022, base business revenue grew 13% while base business adjusted EBITDA increased 28% year-over-year. This approach showcases the underlying strength and profitability of our company by normalizing commodity volatility. As a reminder, our base business definition assumes normalized commodity margins and static commodity prices at $400 per thousand board feet. Overall, I’m proud that we delivered solid results in the fourth quarter despite slowing housing starts. Additionally, our record results for the full year reflect our differentiated platform, talented team members, and intense focus on execution. I’m confident that through our leading footprint, investments in value-added products, and ongoing efficiency initiatives, that we can continue to gain share, grow our value-added products, and deploy capital.

Now, I would like to discuss our guidance on Slide 16. Given the current challenging conditions in the housing market, amid elevated mortgage rates and general uncertainty in economic conditions, we are amending our guidance disclosures at this time to align with our public customers. Customers of all types and sizes have expressed their uncertainty about starts in the year ahead. As a result, we have decided to only provide guidance for the first quarter of 2023 as shown on Slide 16. We will reassess full year guidance for actual end base business as the year progresses. For the first quarter, we expect net sales to be in the range of $3.4 billion to $3.7 billion, and adjusted EBITDA to be in the range of $400 million to $440 million with an adjusted EBITDA margin in the range of 11.7% to 11.9%.

I would also note that the first quarter guide assumes gross margins to be in the 30% to 32% range. In addition, given the 2022 starts profile, we expect comparisons to prior year will be most difficult in the first two quarters. Our guidance includes the following full year assumptions, which are also outlined in the earnings release, and on Slide 17. We expect total capital expenditures in the range of $300 to $350 million. This includes continued investments in value-added products, and we continue to invest in our technology and infrastructure, and we will migrate to one integrated ERP platform in the coming years. I’ll remind you that the related increases in CapEx and OpEx are included in our guidance and our 2025 financial projections from our December 2021 Investor Day.

We expect interest expense in the range of $150 million to $170 million, an effective tax rate between 23% and 25%. Depreciation and amortization expenses in the range of 525 million to $550 million, no change in the number of selling days, and we expect to deliver between $90 million and $110 million in productivity savings. We recognize that it’s important to think about potential outcomes for the full year, so on Slide 18, we provide a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing markets and commodity conditions. I will reiterate that we are not providing full year guidance here, but this scenario analysis should help clarify our range of performance expectations and demonstrate the capability of our business to achieve strong adjusted EBITDA margins in 2023.

To summarize, we are exceptionally well positioned to withstand a slowdown in housing while continuing to drive our strategic goals forward. We have a strong balance sheet and no long-term debt maturities until 2030. We are operating in a proactive fashion and are taking the necessary steps to manage through this downturn with a relentless focus on execution. I’m confident our best-in-class operating platform will continue to generate solid free cash flow, which provides further financial flexibility. We will also diligently deploy capital and work to maximize long-term shareholder value. With that, let me turn the call back over to Dave for his closing remarks.

David Rush: Thanks Peter. Let me provide a few final thoughts. Having spent the greater part of my career with BFS, I firmly believe in our differentiated platform, which is the strongest it’s ever been and will enable us to outperform in any environment. We have a clear strategy that we’re continuing to execute. We generated strong cash flow, and we have significant opportunities to invest that cash to expand our value-added products and solutions, execute strategic acquisitions and return capital to shareholders. Through it all we remain focused on operational excellence to continue to drive increased safety, productivity, and profitability. 2023 will be a challenging year for our industry, but I’m confident in our talented team members who have clearly demonstrated their ability to execute and win in any market. Thank you again for joining us today. Operator, let’s open the call now for questions.

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Q&A Session

Operator: We’ll take our first question from Trey Grooms with Stephens. Your line is now open.

Trey Grooms: Hey, good morning everyone. Dave, congrats on your new role. Look forward to working with you.

David Rush: Hi Trey. Thanks, Trey.

Trey Grooms: Sure. So I guess first, multi-family and R&R very strong in the quarter. Can you talk about how these two segments, the multi-family and R&R are trending through 1Q and, and how you’re thinking about these business lines kind of as we progress through 23?

David Rush: Thanks, Trey. That’s a great question. I’ll start with R&R. R&R if you expand it in the current year primarily because we had capacity constraints in 2021 and 2022 just taking care of our existing business. Once those capacity constraints waned, our ability to focus on that segment again allowed us to go after new customers and try to generate more R&Rs business. But multi-family, it’s been primarily through acquisition.

Trussway:

Panel Truss:

Trey Grooms: Perfect. Thanks for that. And I guess my next question you’d laid out Peter, you laid out expectations for over $1 billion in free cash flow if memory serves me right, and I think it that was in kind of this 800,000 single-family start environment. First off, is that still the expectation? And then how does free cash flow or how do you expect free cash flow to, to move relative to that sensitivity table you gave us in the deck?

Peter Jackson: Yes, no, thanks, Trey. So that’s a good question. There’s a lot going on in the market and so we’ve stayed away from the cash flow including it in the full year scenarios, but yes, the short answer to your question is we still think it’s north of $1 billion in free cash flow, assuming about a 20% starts down scenario and a reasonably steady commodity environment. As you know, those, both of those things can move our working capital quite a bit. Generally speaking, we still believe that that roughly 10% incremental or decremental working capital with sales is a good way to think about us. So given the dynamics around what commodities are doing, kind of what starts are doing, as well as the core underlying business’ ability to generate cash, we do think that north of $1 billion number is still right.

Trey Grooms: Got it. Okay, perfect. That’s good and encouraging. If I could sneak one last one in, you know, the value-added piece now over half your sales in the quarter, that’s super impressive. As the single-family business likely slows further in the coming quarters, how would you expect the value-added mix to change? Would there be or would you expect there to be more or less appetite from homebuilders to utilize these products?

David Rush: Yes Trey, I appreciate that question. It makes sense for you to ask it. The value-added has shown incredible resiliency even as we’ve had headwinds and starts and the market has turned a little bit, at least especially on the component side. They’re just such a nice offset to the labor challenge and the labor challenge is going to be consistent even in the current housing environment we’re in. So we haven’t seen people move away from components even as their starts have gone down. We have achieved over a 50% of our sales in total value-added in Q4, which has been a nice buoy to our overall sales mix, and we think through growing through our recent acquisitions that we’re going to be able to continue to maintain that pace.