David Rush: And what I would add is our belief in the resilience of that range and the fact that we can hold within that range is our belief in our value-added product portfolio and solutions. Those are the products that are more valuable to our customers and as a result, more have a better margin opportunity for us. And as we continue to grow that as a percentage of our overall sales is always going to help that gross margin number be more resilient.
Operator: We will now turn to Keith Hughes with Truist.
Keith Hughes: I don’t think your projection here is aligned with what’s thought in the market, just specific to Builders First Source. When do you think this is going to really start impacting your business? And if you talk about the unit loss versus margin loss that’s been such a positive for ’23, that would be helpful.
Peter Jackson: I mean, timing is a tough thing to predict, as you know, Keith. I think based on what we’re seeing in and hearing, in the market is healthy. We’ve certainly seen some positive signs early in the year. It would be nice if the Fed helped, can’t lie based on everything that’s kind of out there in the public markets, it feels like a second half dynamic. When we call out the numbers around core organic, there’s certainly a big component of it. It’s primarily price volume mix driven, like we give you the days, we give you the commodities in the price/volume mix space that normalization talking about in margins is certainly an important part, a driver in terms of the normalization of gross margins, it’s less of an impact on sales.
So the driver this year really has to be unit volumes turning and starting to accelerate again. And that’s our expectation, and that’s what we’re starting to see. So there’s certainly a lot of optimism, I would say, at this point, it really becomes a question of timing.
Operator: We’ll turn now to Collin Verron with Jefferies.
Collin Verron: Hi, good morning. Thank you for taking my question. I just want to dive into the multifamily, a little bit more in your assumption around that 20% to 30% decline in multifamily starts. I guess, any help in thinking about your sales performance versus that start to decline for the full year, just given the backlog of projects that’s still under construction according to the Census Bureau data, and maybe the lag that you would normally see from a start to your sales? And then I guess, second on that, can you just help us think about the cadence of the multifamily stores maybe on a quarterly basis throughout the year to kind of get to that sales performance?
Peter Jackson: I mean I would say, if you’re thinking about our multifamily business, you do have to go back in the rearview mirror a bit, right, in the turn-around what we build, and this is the problem in terms of everybody being able to use the sort of publicly available information. It’s a little bit more specific both to markets and what we’re building. However, I think what we’re seeing right now is that the expected downturn throughout 2024, kind of thought it might hit late in 2023, didn’t. I think people were pretty aggressive at trying to get the multifamily projects completed. So we actually saw a nice pull through a little better than we thought of that business in the fourth quarter, but definitely seeing it turn down starting in Q1 in every quarter during the year, you’ll see for the multifamily business.
Meaningful declines in both sales and margins as the year progresses. Still a really good business. It’s just not sort of performing at those two standard deviations above normal levels anymore.
David Rush: I would just add, remember, it’s only 13% of our overall business. The other thing I would add is we were at the Harvard Housing Conference, and there were multifamily players there. And it’s a cost of capital challenge in addition to all of the multifamily that had been constructed over the last 12 to 18 months is coming to market all at the same time. So there’s a little bit of a digestion of that in addition to solving the capital cost equation. But again, just like in single-family, the long-term outlook for multifamily is very positive when you look at the demand curve and what people need housing and what multifamily satisfies for that population. So long term, we’re still very positive on the business. And we do know we’ll have to manage some of the cost — the capital challenges at or there today. But again, 13% of our business.
Collin Verron: And then I just wanted to touch on productivity, which continues to be a pretty meaningful tailwind for you guys. Can you just talk about the projects you’re looking to benefit from in 2024 and maybe the size of the project pipeline beyond 2024?
Peter Jackson: Yes. The productivity initiatives are in two kind of camps. One is how can we improve our productivity through automation and technology and then how can we do it through best practices. The benefit of our scale, our 550-plus locations, is the ability to take a best practice across the enterprise and get little chunks of productivity in every single location. So it falls in those two camps. A lot of the automation and technology is around improving customer service, improving truck turnaround times also in the manufacturing environment using automation to get more throughput per labor hour. But that would outline the things we’re working on for 2020.
Operator: We’ll go next to Adam Baumgarten with Zelman.
Adam Baumgarten: Hey, good morning. If we look at the market for manufactured products like truss, are you seeing your competitors ramp up capacity as well?
Peter Jackson: Sure, a little. But I mean scale-wise, we’re 5x, 10x, 20x their size. So if they’re adding one or two plants in certain markets, we know how to deal with it.
David Rush: I would tell you the other differentiation we have is not just adding locations, it’s actually improving the throughput of the locations we already own. We’ve invested over $100 million in existing plants. Over 65% of our tables have some level of automation. Every plant has some level of automation. So there’s a lot of different ways we can extend our lead without building physical plant to do so, and we’re focused on that as well.
Adam Baumgarten: And then just thinking about the M&A environment, are you seeing more willingness by acquisition targets to sell at this point given the improved outlook?
Peter Jackson: Yes, it’s gotten a little better. I think one of the things that was holding back the M&A environment was just uncertainty around the direction of the market and people not knowing where the bottom was and not having sort of kind of a valuation to step off of. And that created disagreements between buyers and sellers. I think that’s calmed down a bit. So we’re a little bit more optimistic for this year, but deals are unique. Each one is a unicorn. I would say the one thing that’s also improved the farther away we’ve gotten to the unusual commodity impact on numbers. People are now more easily or readily accepting of a base business kind of valuation for the — for what they have going forward, and that makes the conversations easier.
Operator: We’ll go now to Ketan Mamtora with BMO Capital Markets.
Ketan Mamtora: Thanks for taking my question. I was curious if you can talk a little bit about sort of what you’re seeing in Q1. I mean you talked about weather being a challenge. But sales, you’re pointing to kind of flat to down, but EBITDA is down quite a bit more. Peter, is there any way to sort of think about how much of it is weather-driven versus margin normalization?
Peter Jackson: Yes. The weather is modest. I think it’s two to three days in terms of what we are anticipating in terms of a headwind. So that’s not a huge deal. In general with the exception of that component, you’ve got pretty healthy business, both on a year-over-year basis and on a trending basis. So I think that’s a positive. What you are seeing, though, and I think it’s fair to point it out is the year-over-year lapping of what we’ve been talking about. I think you’ve heard me talk about that normalization of margins. And I’ve been pretty adamant that behind the scenes, regardless of this multifamily curing it, we have seen business getting back to normal in terms of the supply chain normalizing and are negotiating in the competitive environment, things just settling back down to a more normal level.
And you’re seeing a little bit of that in terms of the year-over-year again, still a very good number, still a very strong performance for the business, but more in line with what we would expect going forward.
David Rush: I would just add from a customer sentiment perspective, the national biller, customers are seeing increased foot traffic. And more importantly, the foot traffic that they are seeing are more apt to actually buy a home. So the percentage of closings to people looking, I feel like is gaining traction and their ability to match up available inventory and monthly mortgage payment to demand is — they’ve done a great job with that. Now where we need a little help from the Fed mortgage rates would be to get the non-national builder customer in an arena where the cost of the mortgage is helping to drive that demand to them. So that less so, but we expect that to be what is the first off the sidelines when we get that movement, but the national builders have done a good job in the existing environment.
Operator: [Operator Instructions] We’ll move next to Dave Manthey with Baird.
David Manthey: Hi, good morning everyone. I’m thinking broadly on a product basis. Is the margin differential between commodity and value-added product different than it was five to seven years ago? I assume both categories have moved up. But as we normalize out here and go forward the next three to five, can you just discuss the delta between those two?
Peter Jackson: Yes, that’s fair to say. You’re right. We’ve seen improvements across the Board in terms of margins. Some of that very simply to cover the inflation and the incremental cost, but we have certainly seen an increase and I would also point to our productivity as a driver for why value add has extended its differentiation from commodity. Those Dave referred to $100-plus million worth of investment and the efforts we’ve put around our team to improve our internal board [indiscernible] hour, our doors per man hour type of productivity metrics has contributed to a bigger differential between value add on average and commodity.
Operator: We’ll go next to Jay McCanless with Wedbush.
James McCanless: Hey, good morning everyone. So my question is on the outlook for R&R. I think, up low single digits probably a little bit better, I’d say, than what some of the other national forecasters are expecting. Is that acquisitions driving that? Or do you feel like in those specific markets, you can actually see growth above what people are expecting? .
Peter Jackson: Jay, thanks for the question. For us, R&R kind of falls into two camps. There’s R&R DIY and Retail. And then there’s kind of pro-remodel R&R. And I think with us, too, it’s market specific. We don’t do it everywhere. So that’s why there’s a little difference in what we believe is going to happen for us, possibly versus some of the national guys and a lot of what I think is a headwind for them are big ticket items that we have never sold and don’t sell like appliances, et cetera. So the fact that we have kind of a different product offering to that group a different kind of customer focus and in different parts of the country is why we — why I believe we might have a little different expectation.
David Rush: Also, I think, taken advantage of capacity availability to lean into it as well, and that’s a different component than others might have.
Peter Jackson: I mean we’re such a small player in that overall market segment, it’s a little easier for us to kind of grow that if we just focus on it a little bit. And we have the ability to do that in this current environment.
James McCanless: And just one other quick question. I think the $200 million you called out, Dave, in terms of incremental digital sales this year. Maybe talk a little bit more about that, what that’s going to look like and why you all feel like — I think this is new guidance for you guys, just kind of why you wanted to talk about that now and what those incremental sales would look like, please?
Peter Jackson: Perfect. Thank you for teeing that up for me, Jay. Next week, at IBS, we’re doing a [indiscernible] product launch. Then we’ll be rolling our digital tools out market by market. There’s a lot of preparation in training our sales team to then know how to intelligently explain it to our customers and show the benefits to our customers. And that just takes time. And we’re doing it market by market. We’re making sure we do it right the first time. And as we get momentum, it will — you’ll see the efforts paying off in the later part of the year. And that’s why I said more like a hockey stick probably in 2024. But we’re really excited about it, and it all starts next week with the IBS product launch.
Operator: We’ll go next to Kurt Yinger with D.A. Davidson.
Kurt Yinger: I just wanted to stick with the digital tools and the rollout there. I was hoping you could talk about maybe the cost impact in 2024 and recognizing that the sales are back half weighted, and it’s kind of the first year that you’re fully rolling these. How should we think about kind of the incremental margins attached to those sales?
Peter Jackson: Yes Kurt, thanks for the question. So the short answer is we expect the sales pull-through to be pretty consistent with what we’re already selling. The costs associated with the digital tools and the development, the rollout and even largely the support is included in the numbers. It’s really been spent over the past few years. So there’s no — there’s no other material that you’re going to see in terms of deltas. The thing we’re going to keep a close eye on is what is the support infrastructure necessary to make sure we have the right level of customer experience. We think we have an eye on it, but that’s probably the only one that could potentially increase if this really picks up quickly. Again, I don’t think it will be big enough to really hit the radar for anybody, even if that were to happen, just based on the service model that we’ve built out.
It’s really all about that incremental sales being pulled through from incremental share of wallet and new customers that really like being able to utilize these modern digital tools.
Operator: We’ll move now to Steven Ramsey with Thompson Research Group.
Steven Ramsey: Wanted to hold in on the installation sales, which at the Investor Day, you estimated at 15% of 2023 sales. I guess, first, is that about where it landed last year? and then thinking for 2024, is there an expectation that installation sales can grow on an absolute basis and where that lands as a percent of the total base business?
Peter Jackson: Thanks for the question. Installation is definitely a focus point for our strategy for 2024 as it fits very nicely into solving our customers’ pain points. We do it successfully in a lot of markets today. We did $2.5 billion of material labor sales in related insulation last year. So our focus is to grow both organically and inorganically. The low-hanging fruit is the markets that we are already doing some level of installation expanding the products that we install in those markets. But we’re also looking at new markets that have not done installation in the past. To do that effectively, we put our best people together and we developed an installation playbook that people can access and utilize to grow that business in their markets.
And we’re always looking for people who are already doing it well today that could fit into our profile through M&A. So we’re going to pull all of those levers during the year, but it will be starting in Q2 and then going from there for the most part. And it will be focused on the things we’re already good at today.
Operator: We’ll go next to Jeffrey Stevenson with Loop Capital.
Jeffrey Stevenson: Are you expecting any price deflation this year in categories such as EWP and millwork, which benefited from supply-driven pricing gains the last several years?
Peter Jackson: Well, we already saw that in the last part of the year for EWP. I don’t know that we’d see too much more of that going forward. And I would call it more supply chain normalization than I would significant deflation. I think they’re still challenged with a lot of inflationary operating costs that we all are. So I don’t expect that they’re going to be able to significantly reduce price. I think it’s more holding than where it is right now that we’re expecting and hoping for. But quite frankly, it wouldn’t surprise me if inflation cause is even price increases going into the year.
Operator: Ladies and gentlemen, that will conclude today’s question-and-answer session as well as today’s event. We want to thank you for your participation. You may disconnect at this time, and have a wonderful day.
