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

Builders FirstSource, Inc. (NYSE:BLDR) Q4 2023 Earnings Call Transcript February 22, 2024

Builders FirstSource, Inc. beats earnings expectations. Reported EPS is $3.55, expectations were $2.7. 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. And welcome to the Builders FirstSource Fourth Quarter 2023 and Full Year 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 third quarter 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.

David Rush: Thank you, Heather. Good morning, everyone, and thanks for joining our call. I’m proud of our full-year results. I’m proud of our full-year results, which demonstrate the strength of our broad product portfolio and continued execution by our team members. Despite a challenging operating environment in 2023, which saw significant reduction in single-family starts, we delivered resilient results. As promised, we delivered a double-digit EBITDA margin in the high teens along with robust free cash flow. We accomplished this through operational rigor and by closely partnering with our customers to help address their pain points through the use of our value-added solutions. Our results in 2023 further validate our strategy to be the easiest to do business with across the industry.

I also want to thank everyone who participated both in person and virtually at our Investor Day in December, where we laid out the next leg of our growth journey. We’re grateful for your ongoing support. As we begin 2024, we are excited about the opportunities in front of us. We remain focused on profitable growth by leading with our value-added solutions, deploying our digital platform, and expanding in desirable markets through our proven M&A strategy. These initiatives, along with our commitment to efficient operations and disciplined capital deployment, will continue to compound long-term shareholder value. Our investments in value-added and digital solutions are driving clear market differentiation, delivering greater efficiency, and empowering the next generation of home building.

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Q&A Session

By leveraging our scale in value-added products, we are able to help meet our customers’ needs, such as reducing cycle times, addressing labor constraints, and improving home construction quality. As a proof point of our execution, I’m pleased that our service levels for on-time and in-full have continued to improve year-over-year. Our on-time delivery was 90% in 2023, while our in-full performance was 96%. With our investments in technology and automation, we’ll keep working to drive these metrics higher. We remain committed to operational excellence and innovation to increase efficiency and create value. We have a robust set of operational and productivity initiatives and are focused on leveraging our scale and fixed costs while delivering the highest quality products to our customers.

Our continuous improvement mindset employs technology, including our digital solutions and automation, to improve the construction process and drive greater discipline in our operations. As an important pillar of our strategy, we are focused on maintaining a fortress balance sheet. Our strong free cash flow provides financial flexibility and multiple high returning paths for capital deployment, enabling our clear set of priorities. We continued our robust buyback program in 2023, repurchasing nearly $1.8 billion of shares. I’m happy to announce that yesterday our board increased our share repurchase authorization to a total of $1 billion. We remain disciplined in our approach to tuck-in acquisitions and still have a long runway of targets in a fragmented market.

Our focus areas for M&A include increasing our market position in desirable geographies, extending our lead in value-added and specialty solutions, and enhancing customer stickiness. Let’s turn to our full year highlights on slide 4. We delivered strong margins in 2023, including a robust 17% adjusted EBITDA margin that underscores our differentiated product portfolio and scale. Our resilient gross margin of more than 35% reflects stronger mix in value-added products, notably in our multifamily business, and improved manufacturing efficiencies. As we have communicated, we continue to see some normalization in core margins. We are also seeing multifamily normalized and expected to continue over the course of this year. Looking at slide 5, I want to highlight the over 30% improvement in our recordable incident rate in 2023, which is a remarkable achievement.

At BFS, the safety of our team members is always our highest priority, and I am proud of the culture we have created to be a safer company every day. I am also excited to see the structural improvements we are making to remove excess costs and operate more efficiently. Our strong productivity savings of $175 million for 2023 reflect the hard work we are doing on targeted initiatives, and we expect another $100 million of productivity savings in 2024. Prudent SG&A expense management also remains a key focus area. This includes the ongoing optimization of our footprint and balancing the need for cost reductions against future capacity demands. We remain disciplined stewards of discretionary spending, and our team has responsibly managed cost in the short term while executing our strategy for the long term.

As expected, we had a strong year in multifamily as prior year acquisitions were supercharged by a strong market. Multifamily remained a tailwind in Q4 as we worked through record backlogs. For single family, lower mortgage rates and low existing home inventories have helped us steady activity levels. National builder customers have done a good job of utilizing specs in conjunction with interest rate buy-downs to provide homebuyers with affordable options to purchase new homes. Our focus this year is on being the best partner to our customers by providing the highest quality customer service, driving our robust value-added solutions, and launching our BFS digital tools to make the building process faster, more efficient, and more affordable.

Turning to M&A on slide 6, we continue to target attractive opportunities while remaining financially disciplined. In 2023, we completed seven deals with aggregate 2022 sales of roughly $540 million. Early in the fourth quarter, we acquired Standale Lumber, which gives us a strong presence in the growing Grand Rapids, Michigan market. Then in December, we acquired Encore Building Products, a leading building materials distributor that represents our entry into the Arkansas market and will serve as our platform for future growth in the state. And in early February, we acquired Quality Door and Millwork, a leading distributor of millwork doors and windows in Southern Idaho. We’re excited to welcome these talented new team members to the BFS family.

We also show how our M&A and organic investments increased value-added products as a percent of overall mix by 700 basis points over the past two years. Our success with this strategy has been a core component of our improved margin profile through the cycle. On slide 7, we provide an update on capital allocation. During the fourth quarter, we made two tuck-in acquisitions and repurchased over $200 million of shares while maintaining a strong balance sheet. And for all 2023, we prudently deployed approximately $2.5 billion in-line with our stated priorities. We have cumulatively deployed approximately $6.1 billion from 2022 through 2023, and we communicated a new goal at our investor day this past December to deploy $5.5 billion to $8.5 billion of capital from 2024 to 2026.

Now let’s turn to slides eight and nine for an update on our digital strategy. We are establishing a differentiated position as the only provider of an end-to-end digital platform in our space. Combined with our leading operating model and strong relationships, we believe BFS Digital Tools will be a substantial driver of growth for us and transformative for the industry. Our easy-to-use mybldr.com portal will seamlessly deliver our full digital capabilities to our customers. It is designed to create efficiencies for our team members and improve service for our customers by offering increased transparency and engagement in the home building process. Combined with our proprietary estimating and configuration tools, our customers will have more control over the entire building process.

This will save both time and money for both our customers and their clients while making the home building process more personalized. We are excited to showcase the full digital product capabilities at the International Builders Show next week. To drive the adoption of these innovative solutions, we have focused on training our sales and operations teams to help our customers leverage these powerful new tools. We are confident in our ability to deliver value from our digital solutions and meet our target of $200 million of incremental digital revenue by the end of this year and $1 billion by 2026 as we grow wallet share and new customers. Throughout the year, we acknowledge team members that go above and beyond. Rich Rapuzi, market manager in our Alaska market embodies these values like no other.

I had the pleasure of spending time with Rich recently and witnessed the positive impact he has made on his team during his remarkable 50-year career at BFS and Legacy companies. Rich’s journey started as a customer service rep in 1974 and is rooted in hands-on experience and continuous learning. Through his career, Rich established vital departments and assumed multiple leadership roles. What truly sets Rich apart is his passion for his community and mentoring others. His colleagues will tell you that he deeply cares about helping people reach their potential. As Rich prepares for retirement later this year, his impact will endure through the lives he has touched. While he’ll be greatly missed, his legacy will resonate within our organization for years to come.

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 results throughout the year demonstrate the effectiveness of our operating model regardless of the macro environment. Our fortress balance sheet, strong cash flow generation and ability to prudently deploy capital to the highest return opportunities, including acquisitions and share repurchases, continues to deliver value and positions us for long-term success. We are leveraging our sustainable competitive advantages and strong financial position to drive future growth and create value for our shareholders. I will cover three topics with you this morning. First, I’ll recap our fourth quarter and full year results. Second, I’ll provide an update on capital deployment.

And finally, I’ll discuss our full year 2024 guidance and related assumptions. Let’s begin by reviewing our fourth quarter performance on Slides 10 and 11. We delivered $4.2 billion in net sales, driven by a 1% decline in core organic sales and commodity deflation of 5%, partially offset by growth from acquisitions of roughly 2%. The core organic sales were driven by a single-family decline of 4% amid a weak housing market and share in supply chain normalization. That said, there are signs that the single-family market is starting to pick up. Our early cycle products are beginning to show growth, including high single digits growth in lumber and mid-single digits growth in truss. Multifamily grew by more than 4% driven by our prior year acquisitions as well as favorable margins.

R&R and other also grew by over 4% due to increased sales focus and capacity versus 2022. Importantly, value-added products represented 52% of our net sales during the fourth quarter, reflecting our position as the supplier of choice for these higher-margin products. During the fourth quarter, gross profit was $1.5 billion, a decrease of approximately 1% compared to the prior year period. Gross margins were 35.3%, increasing 120 basis points mainly due to productivity and a tailwind from multifamily, partially offset by core organic margin normalization. SG&A increased by $60 million to $974 million, mainly due to higher variable compensation, acquired operations and inflation, partially offset by lower customer reserve expenses. As a percentage of net sales, total SG&A increased 150 basis points to 23.5%, primarily attributable to decreased fixed cost leverage from lower sales.

Adjusted EBITDA was $686 million, down approximately 2%, primarily driven by lower net sales due to a weak housing market and commodity deflation. Adjusted EBITDA margin was 16.5%, up 50 basis points from the prior year as we continue to execute and drive improved productivity across the business. Adjusted net income of $439 million was down $32 million from the prior year due to lower net sales. Adjusted earnings per diluted share was $3.55, an increase of 11% compared to the prior year. On a year-over-year basis, share repurchases added roughly $0.55 per share for the fourth quarter. Now let’s turn to our cash flow, balance sheet and liquidity on Slide 12. Our 2023 operating cash flow was approximately $2.3 billion, down $1.3 billion compared to the prior year period, mainly attributable to commodity deflation and a shrinking housing market.

Capital expenditures for the year were $430 million, all in, we delivered healthy free cash flow of approximately $1.9 billion. For the year, our free cash flow yield was approximately 13% while operating cash flow return on invested capital was 28%. Our net debt to adjusted EBITDA ratio was approximately 1.1x, while base business leverage was 1.4x. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was approximately $1.3 billion consisting of $1.27 billion and net borrowing availability under the revolving credit facility and $70 million of cash on hand. Moving to capital deployment, during the fourth quarter, we repurchased approximately 1.6 million shares for $209 million at an average stock price of $131.74 per share.