Good morning and thank you for joining Builders FirstSource Second Quarter 2021 Earnings Conference Call. Today’s conference is being recorded. Michael Neese, Senior Vice President of Investor Relations for Builders FirstSource will now provide the company’s opening remarks. Please go ahead, sir.

Thank you, Sarah. Good morning and welcome to our second quarter 2021 earnings call. I hope you and your families continue to remain safe and well. With the increase in the COVID-19 Delta strain, our COVID task force continues to closely monitor the developments and we will continue to follow CDC guidance and protocols for the safety of our team members, customers, suppliers and communities. With me on the call today are Dave Flitman, CEO and Peter Jackson, our CFO. Today, we will review our second quarter results and provide an update on our base business momentum, our ongoing integration progress and achievements as well as our recent M&A. We remain bullish on the housing sector and believe we are well-positioned to continue to capture double-digit single-family starts growth. We have provided GAAP results that include BMC in the second quarter of 2021 and standalone BFS in the second quarter of 2020. We have also provided pro forma results as if we own BMC in the second quarter of 2020. Our adjusted EPS calculation excludes amortization of intangibles. The second quarter press release and the supporting presentation for today’s call are available on our website at investors.bldr.com. 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 to the most directly comparable GAAP measures. A reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they are useful to investors can be found in the earnings press release, our SEC filings and presentations. 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 materially from forward-looking statements and projections. With that, I’ll now turn the call over to David.

Thanks Mike. Good morning, everyone. And thanks for joining us. Our record second quarter and first half earnings are the result of the hard work and strong execution by our more than 26,000 team members who have been relentless in providing superior customer service amid robust demand in a very tight supply environment. I want to start by thanking them as I couldn’t be more proud of their efforts. In the second quarter, we delivered core organic sales growth above 35%, along with record gross profit, adjusted EBITDA and margin. Our performance accelerated in the second quarter as we continued to expand our value-added offerings, executed disciplined pricing strategies and accelerated merger-related integration savings. I will cover three key topics on today’s call. First, I’ll provide an update on the residential housing environment, which remains very strong, review our second quarter results and given the unique demand and supply dynamics, share some insights into the strength of the underlying growth in our base business. Second, I’ll provide an update on our recent M&A transactions that further strengthen our market position and advance our digital strategy and highlight our very strong pipeline of potential tuck-in acquisitions. And finally, I’ll provide an update on the BMC integration, which is progressing exceptionally well and running ahead of plan. Let me start with the current state of the residential housing environment. we continue to see strong demand across the country. Specifically, single-family housing demand is robust and our entire supply chain is working hard to keep up with that strength. Regardless of short-term fluctuations, we believe the nation’s homebuilding sector is growing today, and there is sustained growth in store for the next several years. Freddie Mac stated earlier this year that the U.S. is underbuilt by approximately 4 million homes. The National Association…

Thank you, Dave and good morning everyone. I want to thank all of our team members for delivering incredible results. Your execution is rock solid. I will cover three topics with you this morning. First, I will review our second quarter results compared to combined pro forma results from the prior year quarter. Second, I will discuss our financial position, supported by a strong operating cash flow. And third, I will provide some color on our guidance raise for the full year 2021. Starting with our Q2 results, we had net sales of $5.6 billion for the first quarter, which increased approximately 91% compared to the combined pro forma prior year period. Turning to Slide 13, value-added core organic sales increased by 35% led by 58% growth in our manufactured products category and 17% growth in our windows, doors and millwork category. Commodity price inflation benefited net sales by 52% and acquisitions contributed 3.5%. We experienced stronger than expected demand in Q2 single-family starts across the country, and we were well positioned to support this demand and take market share. Our Q2 gross profit of $1.6 billion increased 105% year-over-year, while our gross margin expanded 210 basis points to 28.4%, above our stated more than 26% long-term target, primarily driven by disciplined cost and pricing management and a dynamic supply-constrained marketplace. SG&A was $902.9 million, an increase of approximately $324 million compared to the combined pro forma prior year period, driven primarily by expenses related to the BMC merger and other acquisitions, including intangible amortization and onetime charges. Variable compensation was also higher due to the increase in net sales and profitability. Excluding acquisition-related onetime charges, underlying SG&A increased by 18.9%. As a percentage of net sales, total SG&A decreased by 360 basis points to 16.2% due to higher sales…

Thanks Peter. In summary, demand in single-family housing remains exceptionally strong, and we continue to capitalize on this positive trend by ensuring we meet the needs of our customers, both today and in the future. The BMC integration continues to progress extraordinarily well, and our realization of cost synergies is a year ahead of schedule. Looking forward, we remain focused on executing our strategy of investing both organically and through M&A to continue to align our portfolio with high value and faster growth categories while simultaneously improving efficiencies, productivity and our digital capabilities in the value chain. Our future is bright, and our ability to execute and our hunger to innovate have never been stronger, and we will continue going above and beyond for our customers and partners to provide best-in-class homebuilding solutions. With that, Sarah, let’s open the call for questions.

Thank you. [Operator Instructions] And we will take our first question from Reuben Garner with The Benchmark Company.

Thank you. Good morning everybody.

Good morning, Reuben.

So first off, thanks for all the detail in the deck. I think that’s all going to be very helpful for folks seeing how much of your business is not really driven by this lumber market. So maybe if I could start, you mentioned your visibility into next year, how much visibility do you have? In other words, how much business do you think this year is going to be pushed out to next year for you guys? I mean you’re putting up big growth numbers in your manufactured business despite this. Any color into what’s going to get pushed out into 2022?

Yes. Reuben, as I mentioned in my comments, we’ve been in contact with our customers quite regularly. And almost without exception, you’ve seen them kind of slow the starts for this year with the intent of pushing demand into next year. And almost to a person, they said this is the strongest environment they have operated in many through their careers. Given the state of the demand which is much, much different than it’s been in a very, very long time, interest rates, we expect the continuation of what we’ve seen this year into next year. And I’d also point out, our focus on our value-added portions of our business are just continuing to gain momentum. And I said it in the script, and I’ll say it again, I’ve got confidence in our ability to continue to drive growth and take share in any market environment.

Perfect. Very helpful. And then secondly, on the free cash flow, Peter, it’s a little – I guess, maybe if you could help us out, what free cash flow have you generated thus far in the year? How much working capital investment is, I guess, embedded in that number? I am just trying to figure out, kind of, what’s left to go, what’s sort of the normalized number there and where your balance sheet will stand as we kind of enter 2022. Congrats on the results guys and thanks for your help.

Yes. Thanks, Reuben, and great question. It’s been a dynamic year for cash flow as you highlighted. We have seen an investment of over $1.1 billion year-to-date in our working capital space, right? We’re not yet – while the market is certainly turning, we’re not yet on burning through either the summer build of normal inventory or the higher prices that we bought through all year. So year-to-date, our free cash flow has been at use right around $300 million. We do expect to generate the remainder, so the – about $1.8 billion between now and the end of the year. We’ve already started to see that generation in the third quarter. Third quarter will be a very good year, as you would expect as the market turns, and still a significant amount of cash generation into the fourth quarter. So certainly see a clear line of sight of where that will take us. $1.8 billion of additional cash from now to the end of the year is certainly going to put us in a very strong position to deploy capital in ways that will benefit shareholders.

Perfect. Thanks again and good luck looking forward.

Thank you.

Thank you. And next, we will move on to Mike Dahl with RBC Capital Markets.

Good morning. Thanks for taking my question. Peter, I wanted to pick up on the cash flow and also the capital allocation, Dave. Peter, I think you have a more technical and colorful term for how much cash is coming in the next 6 months, a little restrained here, not even that. But if you look at that turn lever currently, that’s clearly going to come down when you kind of net out the cash in the second half versus the M&A, you still wind up close to zero net debt. So that kind of checks off the box on a maintained strong balance sheet. When you think about the three other priorities, I know it’s in order here from kind of a medium to longer-term standpoint. But when you’re thinking more near-term in nature, next couple of quarters, next few quarters, is there any bias across the three? I mean whether it’s reinvesting internally for their tuck-in M&A or returning capital? That last one hasn’t been a part of the pro forma company yet. So, just any color on kind of more near-term, how that balance shakes out?

So, a couple of comments, obviously, really excited about the strength of the balance sheet. Our action to put structural very favorable debt out there, the 2032 notes 4.25% unsecured is something we’re very proud of. One of the agencies gave our secured notes and investment-grade rating. We certainly are proud of what we’ve done on the balance sheet and excited about what that means. To your point, we’ve put our priorities out there. I think we are excited about what the pipeline looks like for opportunities to continue to grow in M&A, but we’re going to remain disciplined. We’re not going to get out over our skis on valuations. We’re very clear-eyed about what commodities do over time, that can’t be a driver. And we think that, that pathway will certainly yield opportunities. Your comment about not having done share buybacks as a pro forma entity is absolutely correct. Both prior entities have done share buybacks. So I don’t think anybody is necessarily opposed to the concept. It’s more a matter of making sure we’re looking at the situation each month, each quarter and making the absolute right decisions for the long term for our shareholders. So we’re going to stay committed to that, and we will continue to message as things develop.

Got it. That’s helpful. My second question is just on the manufactured products, I mean that is exceptional growth even in a – even against the strong market backdrop. And so clearly, there is some share gains there. I know it’s probably difficult, but is there any way that you could kind of talk to how much of that growth was effectively seeing increased adoption or conversion within your existing customer base, versus potentially the added capacity that you’ve brought on and/or just a higher customer count in your manufactured products segment? Thanks.

Mike, this is Dave. We had both legacy companies, as you know, had strong underlying momentum and a strong focus on manufactured components for a long time. And both of us, we’re continuing to gain share. When we put this team together, we knew, particularly in overlap markets, there will be increased opportunities for us to accelerate that growth, both internally based on what we were doing with our assets and where we saw opportunities to extend capacity, which has been very tight in some markets where we’ve had rapid adoption. But importantly, continuing to convert customers at a higher rate. Those new customers, what I would say more importantly and probably more impactfully, is accelerating growth with customers we’ve already had relationships in certain geographies and our merger helped them get more comfortable in accelerating and extending that across their footprint.

That’s good to hear. Thanks, Dave. Thanks Peter.

Thank you.

Thank you. And next we will take Matthew Bouley with Barclays.

Good morning everyone. Hey, Dave, thank you for taking the questions. I echo…

Sure. Happy Birthday, Matt. We appreciate you spending your Birthday morning with us. I think, you ought to get a bigger size piece of cake for that.

This is exactly what I imagine for my Birthday, so much appreciated. So, yes, well, you provided a gift here, so a lot of things to ask about. Let me ask about the digital opportunity, the $1 billion. Dave, you mentioned at the top that you’re going to – part of this is using, if I heard you correctly, Paradigm to accelerate value-add adoption. And you list on one of the slides that there is – look like four or five kind of drivers of the $1 billion. And what I’m wondering is kind of – if you could kind of bucket that out, how much comes from scaling the Paradigm software versus how much comes from that litany of internal drivers and across wallet share and driving value-add adoption? Thank you.

Well, the internal piece – I appreciate the question – the internal piece is something internally that we feel strongly about where we can gain some efficiencies, and just we are internally today have very manual processes as we go from design to estimating for our customers. And there are two key things that are going to help us accelerate towards that $1 billion. And obviously, these are early days, and we still have a lot to figure out. And, by the way, we haven’t closed the transaction yet. But in our early thinking, we see opportunities to extend their platform more broadly across our customer base, which Nathan and his team have done a great job to get the customers that they have gotten, but we just got a bigger platform in the ability to scale that. But if you think also about long-term, being able to automate our design and takeoffs and actually provide our customers with an estimate of our full capability, including our manufactured components and READY-FRAME and even further down our millwork capability, which is at the core of what Paradigm does today, we just see that ability and the ease with which we will be able to do that over the long-term, being a great value proposition for our customers and the ability to get our value-added products in front of them in a more seamless way.

Wonderful. Okay. That’s helpful. And yes, we will look for that additional color upon the deal closure, but that is very helpful. Second one on the margin side. You made a comment at the top that the base business margin, the 10.1% this year is something that you see as sustainable, if not with the potential to further expand. If I’m doing the math right, with a little bit of rounding, it looks like your core base business incremental margin in the guide this year is right around 18% give or take. And correct me if I’m wrong. But – so high level, the question is, – is it that you can further expand structural gross margins? Or is it that you’re shifting to additional SG&A leverage? And I think one thing that would be helpful to address a common question we get from investors is if any of the base business margin, that 10%, if you think any of that may have also been temporarily benefited by extreme lumber prices and shortages there? So it’s a long question, but I would appreciate any color. Thank you.

Yes, there is a lot in that. Let me try to unpack it a little bit, and then I’ll have Peter come over the top with any further color. But I am confident in our ability to continue to expand that margin over the long haul. I think to your last question, no, I don’t think there was any outsized impact based on lumber in that. And as you think about our core business, and as Peter highlighted, 43% of that today roughly is our value-added areas. With the growth that we see, the continued improvement in mix, we just accelerated our synergy capability here. We’re going to capture that over the next 6 to 12 months. And in addition to that, you think about our ability to drive operational excellence in this combined company, which we’re just starting to think about and get after over the long haul. We see the ability to continue to improve our margins over time. So it’s a combination of growth and internal work that we see going on that will continue to enable us over the long haul to expand those margins.

Yes. So, just a little bit of color on that, Matt, we have seen a couple of, I’d call it, leakage of the impact and the acceleration of price in the marketplace into other buckets, we try to normalize for that in here. We try to look at the margins that we thought were sustainable over the long-term. We’ve talked in the past about sort of a normalized amount of gross margin. We try to account for that in this and allow the rest of it to slosh over into the commodity unusual pricing bucket. So I think that is an important one. And like I said, we have a lot of different ways to drive the performance of this business on a go-forward basis. And I think it’s all of the above. It’s that expanded value add, it’s the efficiency in that more gross margin line, it’s the efficiency in SG&A, a lot of operational excellence, a lot of improvements that we think we still have in front of us as we continue to solve problems for our customers and just grow.

Wonderful. Well, that is very clear. Thank you, Peter and thank you, Dave and best of luck guys.

Appreciate, Matt.

Thank you. Next, we will take our next question from David Manthey with Baird.

Hi, thank you. Good morning everyone.

Good morning, Dave.

Good morning.

So lumber prices, they clearly have an impact on both the OpEx leverage in the P&L and the gross margin itself via mix. But as we look at the table in the appendix sort of top to bottom, are we to assume that behind that, you’re looking at SG&A dollars that are materially flat in every one of those states of being in that appendix table?

No. Our expectation is that about roughly 70% of SG&A remains variable. That’s the rule of thumb that we’ve used historically. I mean this is base only. So you have to sort of exclude that commodity price fluctuation component.

Okay. And then secondly, as it relates to the table as well, you note here that these are constant lumber prices for the full year. And just to level set, can you talk about the dynamics in real life as you move from tier-to-tier across this table, just what are some of the moving parts that we should look for as you sort of chase lumber prices up and down and the impact on the P&L?

Sure. Yes. I mean I think it’s consistent with what we have said in the past about commodities. We certainly want investors and view the analyst community to have a clear understanding of how our business works. As you deal with the increases and decreases in commodities, there are certain characteristics of certain parts of the country that are impactful on the results. When you have inflation, where you’ve got longer fixed-price contracts, whether it be 60 days and the smaller percentage that’s left that are the 90 days or 90 days plus, you inevitably will see a compression in the gross margin percentage as that inflation occurs. And then as it reverses, you’ll see an expansion in the gross margin percentage. Inversely, you will also see it in markets with very, very fast pricing turns where everything is very short. Sometimes you will see the exact opposite, where you will see expanding margins on the way up and declining margins on the way down as you’re pricing off a replacement in a very fast turnaround environment. By and large, we, of course, want to make sure we’re turning inventory quickly so that whatever those impacts are, they happen quickly, right? They pass through very quickly. We’re – and I’ll reemphasize this, we’re not in the game of predicting and betting on commodities. We’re in the game of distributing commodities to the advantage of our broader business. And I think that our demonstrated performance historically shows that we’re pretty good at it. We know how to make money in ups and downs. It’s a matter of making sure you’re running it in a disciplined and operationally excellent manner.

That’s perfect. Thank you very much.

Thank you. Next, we will move on to Keith Hughes with Truist.

Thank you. Question on the manufactured products number, I know that does get impacted by commodity inflation. So is there a way you can talk about units, how much units were up year-over-year?

Yes. So that’s the attempt. That 58% excludes what we believe to be the overlap from commodities. That’s actually a new note 48% in there, Keith, on Slide 5. In that footnote, you can see we sort of called out, it’s about 4% of that 22% that has some exposure to commodities, as you think about the commodities are included in what we manufacture.

Okay. So that gets closer we can get to a unit number, is that what you’re trying to say?

Yes. Well, we’ve communicated at close. Based on our analysis of price volume mix, that’s our best estimate, yes.

Okay. And second question on the guidance for the second half implies EBITDA up year-over-year, is that going to slant towards the third or fourth quarter given commodity impact or any sort of directional guidance there would be helpful?

Well, I wouldn’t hesitate to say third quarter is always higher than the fourth quarter just due to normal seasonality.

Normal seasonality.

And I think that the impact of commodity is as it occurs.

I’m talking about the gain year-over-year. Because the slant – is there going to be more of a gain in one quarter versus the other?

Based on a prior year comparison?

Yes.

I hope I know that off the top of my head.

Okay, you can get back on this one.

Yes. It’s probably a little more weighted to Q3. Just by nature of the seasonality, it’s a little bigger and the fall-through would be a little bigger in that quarter.

Okay, alright. Thank you.

Sure. Thank you.

Thank you. Next, we will take our question from Steven Ramsey, Thompson Research Group.

Hi, good morning. Maybe to start with on the divestiture of the gypsum operations, is that a meaningful impact to the incremental margins that are non-lumber?

No, it’s not. It’s a fairly small business in total, and the margins were below average.

Great. And then thinking about product shortages, you referred to for windows, doors, millworks – millwork. Is that something – I am sure it’s embedded in the guidance for 2H, but in the second half, is that a major impact? And then – or is it a greater impact as you get into next year?

Well, I mean, it’s been an impact all year. I think if you – as you look at the other part of our business, right. The other part of our value-add business, windows, doors and millwork, it’s trailed a little bit in terms of growth. Still strong, but not where we think it should be. A couple of pieces of that, obviously, a chunk of that is the expansion in units under construction, and it’s just sort of how far along a lot of these homes are. But some of the cause of them being as – there being as many units under construction as there are, is that we have just struggled. Lead times are longer. They have been longer for, gosh, coming up on nine months plus. So, this is not new news. I think we just consistently fight it in the channel. I think it’s one of those areas where we would see faster completions and faster cycling of, sort of, the growth in our market if we could relieve that. I know they are trying, but it certainly continues – I would say, in a stable way. It may be a little bit less bad than it was, but still bad.

Yes. I would say we saw a little acceleration in our organic growth there from Q1 to Q2, which kind of reflects what Peter just highlighted. But our teams are just doing a tremendous job to get product for our customers. And as I mentioned, we have heard from our builders, they have slowed starts. It’s not a demand problem. The reason those starts have been slowed is exclusively because of the challenges that they have had around labor and materials. And we are doing our best to satisfy those needs on both fronts.

Excellent. And then last thing, lumber pricing, clearly on randomly starts coming down, but some people we talk to in-channel checks have said that lumber transactions, the pricing is not coming down on the ground. Are you seeing that in your business?

Yes. I mean we do so much commodity across the country. I would say we probably see everything in one place or another. I think speculating on commodity prices and what it’s going to do is, in our world, something where – it’s a bit of a fool’s errand, as demonstrated by my forecast last quarter. So, I think we will just maybe leave that along.

Great. Thank you.

Thank you. And next, we will take our next question from Stanley Elliott.

Hi, good morning everyone. Thank you all for taking the question and congratulations. Could you talk a little bit more about the Alliance acquisition? If I remember correctly, they didn’t do a whole lot of value-add millwork like you all do. What’s the opportunity set here for you all to put that through their channel and how quickly can you realize that?

Yes. We are excited about that. I made a couple of comments there in the script about that as an opportunity. We had a relatively small footprint in the states, as you know, half a dozen or so locations. They have got great capability on the component side, which we are excited about, but they have not had the millwork opportunity, and we are very strong in millwork, as you know. And so we will see how quickly we can get that ramped up. The team is excited about it, both the Alliance team as well as our team. And we will get after that one as quickly as we can. There is obviously a clear need in that market, given the growth that they are experiencing. And so we are excited about that.

In M&A, you have always did a very nice job of rolling up markets. Does the shortage in some of the materials that you are seeing now, does that change your thought process on maybe moving into, maybe adding some capacity on the value-added side versus consolidating some of the smaller dealerships?

I don’t think it materially changes it. And we are doing both. We are investing quite heavily in capabilities on value added, both in the millwork side and the component side as we see a long runway there of adoption and growth in the markets. And we are still looking in the markets to understand where it makes sense for us to augment our capability through the right M&A, which may help us expand our geographic footprint in the local market. And so as we have talked about both on our capital allocation and just our overall strategy, we are going to continue to do both.

And just to add on to that, one thing that’s exciting in some of these opportunities is that we have got the efficiency, the skill sets to help them improve their performance to get more out of these businesses that they are managing. So, I think that adds to our ability to meet the capacity constraints in the market. And as far as being there for our customers, we certainly believe that increased scale and the partnerships that, that helps to create in the long run with vendors is certainly – it’s advantageous to us and puts us in a position to get, at least if not more than our fair share, as we deal with typical supply environment.

Great guys. Thank you very much and best of luck.

Thanks.

Thank you. And we will take our next question from Trey Grooms with Stephens.

Hi. Thanks guys. And yes, I wanted to echo on the deck as well, super helpful. But my question, I guess first off, is the follow-up back on one of the earlier ones around the base business EBITDA margins. And clearly, the incrementals are running high-teens I think you did 10.4 this quarter. And like you said, David, obviously, there is potential for some upside here. But Dave, where do you see this base business margin opportunity over time as you look at all the moving pieces? Clearly, it’s higher. But with these types of incrementals, where could we see this going over time?

Yes. We are excited about it. We think both the top and the bottom line will continue to grow over time. We are not going to project that this morning, Trey. But I will promise you we are absolutely focused on it. That is the focus of this company right now, our base business our value-added capabilities. We are going to grow it. We are going to continue to improve profitability, and we are going to invest in it.

Alright. Fair enough. I thought it was worth a shot. And then – and then, Peter, a minute ago, you mentioned some of the dynamics that we have come to understand over the years with lumber price fluctuations, where this most recent spike in lumber, you guys had kind of bucked the trend. It hasn’t been your normal kind of reaction as far as the – to the gross margin percentage. So – and you mentioned that when things move widely – or wildly quickly, that the margin can react differently, almost the opposite of what we see in a more normal kind of lumber price movement kind of environment. So, with that said, is – so you guys have been really outperforming or actually seeing margins higher as a result of this spike up. So, is it the expectation per your comment earlier that it’s like a decremental on the way down that we should expect some kind of normalization of the gross margin just as these prices come down? Did I read that right? Excluding the core business, which obviously is the big focus in what we care about, but unfortunately, we still have to model the lumber piece, too. So – but is that kind of what you were pointing to there?

Well, I am not signaling a downturn. I guess what I want to be upfront about, and I think we have talked about a little bit on prior calls, is the nature of those extended terms, the mix of those extended terms have materially changed. So, where there was a more extreme impact on the way up and a pretty extreme impact on the way down, right. Headwind on the margin, percentage on the way up, strong tailwind on the market, percentage on the way down, I think both of those are diminished. I think they are diminished because of the reduction in average days of price lock in our mix of sales. I don’t think it’s signaling a downturn into the future. I think a lot of the fall-through that we are dialing out and this analytic comes from other parts of the business and commodities and the pricing volatility, the nature of some buying that we did, all of that, all glommed together in that number. I don’t think it’s going to be a real big headwind for us. Anytime you have fluctuations, especially as massively as they are now, there is always a little bit of uncertainty as to how it all filters through. But based on what we are seeing in the detail, inventory levels, pricing levels, we think we can manage through it very effectively. I just wanted to sort of signal that there – I don’t think there is going to be as big of a windfall as there have been in the last cycles.

Great. Thanks for the clarity there. It appears that was perfect. And thanks again for taking the question. Keep up the good work. Thank you.

Thank you. And next, we will move on to Ketan Mamtora, BMO Capital Markets.

Thanks for squeezing me in and let me add my congratulations. Coming back to the value-added side of the piece, obviously, really strong results, so I am just curious, are there any particular regions or areas of the country where you are seeing more growth or is it more-broad based?

Yes. The exciting part about it is we have seen that expansion and growth broadly across all the geographies. So, there is not one that I would point to that would be outpaced strong. Obviously, the strength that we have in the South and in Texas, a kind of leads the way, but as we have gained adoption and accelerated penetration, it’s really broad based.

Got it. That’s helpful. And then can you just remind us in terms of the capacity headroom that you have, both on the manufacturer side and the millwork side, particularly in light of the strong growth that you guys are seeing?

No, it’s a challenge. We were spending – as I mentioned earlier, we have been spending quite a bit of capital to increase our capacity in key markets. In addition to that, we are driving productivity and efficiencies to just gain any incremental capacity that we can. I think, given the strength of the market and the adoption rate of what we are seeing. We are going to fight that for a bit, but we are not losing sales today because we can’t supply. The challenge, as Peter talked about earlier, has been in some of the upfront supply chain challenges and just getting materials. We are not the bottleneck currently, but it’s something that we have got to be diligent about and stay on top of.

Got it. That’s helpful. Good luck in the back half of the year.

I appreciate it.

[Operator Instructions] And we will take our next question from Jay McCanless with Wedbush.

Good morning everyone. Thanks for taking my question.

Good morning.

First – good morning. Given the velocity of the business now and the lower lumber prices, do you – do you think third quarter this year’s gross margin is trending more towards what we saw in the first quarter, or something closer to what we saw in the second quarter? Just wondering with all the turnover and what seems to be a better outlook for multi-family on Builders FirstSource part, just wondering how quickly that change in lumber prices is going to flow through to the gross margin.

Well, I think historically, we have talked about the timeline for the flow-through of changes in commodities, just being in that quarter-ish time line, one quarter to two quarters. So, I think that’s – it’s fair to say that there will be a bit of a fade. Obviously, Q2 had the lapping of the worst of COVID. We have gotten a lot of good benefits year-on-year. So, I think settling back as prices settle back over the next quarter or two quarters is still appropriate.

And then could you maybe talk about multi-family? It sounds like the demand from what’s coming in has changed and you have gone to positive growth there from, I think, negative growth before. A, what’s going on there? B, is this helping to offset maybe a little bit slower pace from single-family builders?

Yes. That’s been a nice, sort of surprise, a little ray of sunlight coming through in multi-family when we thought it would be pretty weak. Now just to clarify for those that maybe aren’t as familiar with us, our multi-family is a pretty market specific focused business on most of the country. It’s four-story and below wood structures, a couple of businesses that do quite well in the high-rise market, but they are fairly small. So, a lot of our work is project focused. I think what you see is the resurgence of a little bit of that multi-family housing market as people realize that the new homes aren’t going to come out of the ground as fast as people maybe would have hoped, as all of us maybe would have hoped. And those 3 million to 5 million underbuilt or underserved homebuyers are going to need some place to live until we are ready. So, I think what you are seeing is a little bit of a rebound there. It’s still pretty modest, but we are certainly pleased with it because it was, as you know, pretty grim there on the outlook for a while.

Perfect. And my compliments on the new deck as well. There is a lot of good detail there. Thanks for taking my questions.

Thank you.

Thank you. Next, we will move on to Collin Verron with Jefferies.

Hi guys. Thank you for taking my question. Most of my questions have actually been answered already. But I guess I will touch on the new leverage target. You seem to be very bullish on demand for the next several years. So, can you just tie together your bullish commentary, maybe how many more years of growth you see in the cycle with that new 1x to 2x leverage range that you put out there today?

Yes. I mean I think that it’s exciting times to be in Builders FirstSource is what that blows down to. We have got we think a really strong positioning on the business in terms of what we have been able to do with the balance sheet, the long maturities, the low and declining interest rates. And we are doing it in a way that makes the business bulletproof. Our focus, our recognition is to make sure we have an incredibly strong balance sheet throughout the cycle. This is a great time in the cycle where we think that there is more runway and we are going to continue to generate cash. Our job is to put it to work and maximize the shareholder benefit, and benefit the business, make sure we are healthy and our stakeholders are satisfied and taking care of and provides a great return. And I think we are lining it up in a way that we have got a lot of firepower to do a bunch of different things. And we are going to be disciplined about how we put that to work. And the math we are doing around the return on investment for internal investments, for M&A and for potential returning of capital to shareholders is disciplined. And we are going to continue to work with the Board and management to make those decisions in the best possible way.

Great. Thank you for the color.

Thank you. We will take our next caller – question from Kurt Yinger.

Great. Thanks and good morning everyone.

Good morning Kurt.

Good morning. Just one quick one on the EBITDA incremental, it looks like in ‘21, on the commodities, that margin is about 20% or so. I guess the question is, as we look ahead to 2022 and make whatever assumption we want around lumber prices and the top line impact there, is that the same type of incremental margin we should be kind of looking for, presumably, on the way down or do you have any thoughts around anything you are doing internally around pricing or things like that, that could kind of dampen that impact?

Yes. So, I think the way down versus the way up comment is exactly why we did Slide 5. I think that was really our intent is to help people understand where it wants to be when commodity prices are at that $400. So, I think that’s a really healthy way to look at it. I just remind everybody how dynamic this year has been, how volatile. I mean these words coming from the guy who thought we were going to descend gently from our roughly $900 or $1,000 commodity levels back when the last time we met on this call. It’s been a heck of a ride since. And I think what you are seeing in these numbers is a lot of the impact of that volatility in one way, shape or form. So, that expectation of it going back to the 15.3 and the $1.6 billion number for ‘21, we really wanted you to have that just to give you a sense of what we think the base business really looks like. And hopefully, that answers your question appropriately.

Yes. That’s helpful. And I guess just one higher level question. I mean you are still relatively early in the process of combining the business and a lot of things are going very well. I am just curious from a pure scale perspective and the relationships you have with your suppliers and your customers, which positive areas of the business that you are seeing right now, do you feel like have really been augmented by that increased scale, putting together BMC and BFS?

Yes. Now, I am thrilled about a lot of things, but the results that you are seeing in the value-added areas of the business. As I said earlier, were exactly what we envisioned and hope for, and it’s great to see that playing out. Our organization is focused on it. We are continuing to provide innovation. We are continuing to invest in that part of the business. And as I said, we have got a long, long runway ahead of us.

Yes, I don’t think any of us have that forecasted number of 58%...

In growth.

Right. So, the ability of the team to be put together like they have been and execute at that level, it’s really amazing, it’s awesome.

The cultural alignment has been fantastic.

Okay, alright. Well, I appreciate all the color guys and good luck here in the back half.

Thanks a lot.

Thank you. And lastly we will take Ryan Gilbert with BTIG.

Hi. Thanks guys.

Good morning.

First question is – good morning. First question on manufactured products, I think over the last couple of quarters, we have talked about the growth on – the core organic growth in the manufactured products segment being driven primarily by existing customer relationships. And I am wondering as we move into the peak building season here, and the really strong core organic growth you put up in 2Q, if you are seeing the customer base expand from the last couple of quarters. And then just – if that has been the case, your thoughts on the stickiness of that new customer base and how that influences your thoughts around normalized gross margin if we can do better than 26 to 26.5?

Yes. I mean, very good question. And as I have just said, that clearly is the focus of the organization in our value-add. We have seen great adoption. I think I commented earlier that we are seeing really good adoption with customers who have had experience with our value-added capabilities in one geography or another, or maybe a few and are gaining more confidence based on what they have seen in those markets around what our value-added capability can do – can do to help them both with labor challenges and drive outpaced efficiencies at the job site. So, we see a long runway here over time. And the other thing I would say and I think I said this in my prepared remarks, a disproportionate amount of the new homes being constructed are those starter homes, and that lends itself very well to the structural design work that we do in our components business. And so given all that backdrop and the focus that we have on it, we will continue to see the adoption increase.

Okay, great. Second question is on multi-family. I know legacy BMC had a really nice multi-family operation that flowed through – or complemented the millwork, doors and windows segment of their business. And as we see multi-family start to rebound, I am wondering the extent that you have been able to take the legacy BMC multi-family operation and expand it to the entire pro forma business?

Yes. Let me just comment and I will flip it over to Peter here for any additional color. You are right to portray the focus that we had at BMC being very strong. But I would highlight what Peter said earlier, even in the BMC legacy footprint, it was a very targeted approach to multi-family and key markets in the South, a little bit up in the East and somewhat out in California and the West Coast. It was not broad based. And I think that our targeted market focus is exactly why we had such success. We knew where those markets were going to be strong for some period of time, and that’s where we had the capability. And our team was just fantastic at driving growth.

Yes. And I think that the combined multi-family business has done well. I think they have partnered well and are seeing strong performance. What we consider to be taking market share, it’s a little hard to communicate that and we are talking about comparisons to national metrics. But we think we are doing really well with that business. Anybody who has the background in the multi-family recognizes the longer cycle times on those projects, cycle times that are particularly disrupted by extremely volatile commodity prices. So, there has been – it’s been – of all the markets they have been as active as anybody. But we certainly are still very pleased with the performance of that business, both top and bottom line.

Okay, great. Thanks very much.

Thank you. And that does conclude today’s question-and-answer session. I would like to turn the conference back over to Mr. Michael Neese for any additional or closing remarks.

Thank you, Sarah and thank you everyone for your time and interest in BFS. We are around all day to take your questions. Have a great day. Thank you.

Thank you. And that does conclude today’s teleconference. We do appreciate your participation. You may now disconnect.