Good day, and welcome to the Builders FirstSource Second Quarter 2023 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 Mr. Michael Neese, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead, sir.

Thank you, Angela. Good morning and welcome to our second quarter earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. Today, we will review our results for the second quarter of 2023. 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 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.

Thank you, Mike. Good morning, everyone, and thanks for joining our call. Entering 2023, we prepared for a challenging and dynamic year. During the first half, we had better than anticipated performance, driven by the strength of our value-added product portfolio, continued outperformance in Multi-Family, and a more stable housing environment than originally projected. Multi-Family is an area we identified as providing strong growth potential and in market diversification over the long term. We are truly seeing the differentiated platform we have put together over the past few years generate results. We continue to exceed our near-term targets through contributions from operational initiatives instill over the last few years, and by executing our strategic priorities, which is a testament to the unwavering commitment and dedication of our amazing team members. We are focused on delivering exceptional customer service and always strive to be the easiest company in the industry to do business with. We’re driving mixed improvement through value added share growth, while continuing to expand through tuck-in acquisitions. Our acquisitions in recent years have allowed us to enhance our value-added offerings and also extend our reach to a more diverse customer base in attractive markets. Moreover, these acquisitions have proven to be immediately accretive to our earnings. We continue to consistently generate robust free cash flow and prudently deploy capital, making two tuck-in acquisitions and repurchasing over $700 million of shares in the second quarter alone. Despite the headwinds posed by elevated mortgage rates and affordability challenges, our resilient results in the first half of 2023 give us confidence that we have the right strategies in place with a customer-centric approach and an incredible team that is executing at the highest level to successfully navigate this dynamic economic environment. Many single-family builders are showing stabilizing demand partially due to…

Thank you, Dave, and good morning, everyone. Our performance during the quarter further highlighted the resilience of our business in the face of macro pressures. I’m particularly proud of our gross margin results driven by our increased mix of value-added products and services. We are well positioned in the marketplace with differentiated solutions and a healthy balance sheet. We continue to generate robust free cash flow and prudently deploy capital. I’m confident that the combination of our industry-leading scale, ongoing investments in value-added and digital products, and strong financial position will lead to a double-digit adjusted EBITDA margin this year, and sustained growth in the years to come. I will cover three topics with you this morning. First, I’ll recap our second quarter results. Second, I’ll provide an update on capital deployment. And finally, I’ll discuss our full year 2023 guidance. Let’s begin by reviewing our second quarter performance on slide 10. We delivered $4.5 billion in net sales. Core organic sales decreased by 22%, which was better than expected, despite a 31% decline in Single-Family due to slower demand over the prior year. Multi-Family continues to be a bright spot, growing by nearly 30%. As Dave mentioned, the strength in Multi-Family was driven by our recent acquisitions as well as favorable margins, largely attributable to the longer lead time for this end market. R&R and other grew by nearly 5%, mainly due to increased sales focus and capacity versus the prior year. The cumulative effect of our acquisitions over the past year contributed approximately 4 percentage points of growth to net sales. Importantly, value-added products represented 53% of our net sales this quarter versus 45% in the fourth quarter of 2021, reflecting our improving position as a supplier of choice for these higher-margin products. During the second quarter, gross…

Thanks, Peter. Let me close by saying that we feel better about the current building environment today than we did at the beginning of the year. We’re executing our strategy and continuing to invest to drive future growth. Our results in the first half reflect our hard work over the past few years to build a differentiated platform that has BFS set up to win in any environment. I am proud of our operational excellence, which is driving increased safety, productivity and profitability despite market headwinds. We are in a great position today and as end markets further stabilize, we are positioned for an even stronger future. We’ll continue to be at the forefront of technology with our digital strategy, which I’m confident will be a game changer for the industry. We are exceptionally well positioned to drive shareholder value this year and in years to come. I’m excited to share more details at our upcoming Investor Day on December 5th in Atlanta and look forward to seeing you there. Thank you again for joining us today. Operator, let’s please open the call now for questions.

[Operator Instructions] Our first question today comes from Matthew Bouley with Barclays.

Good morning, everyone. Thanks for taking the questions. And congrats on the results. I’ll start with the question on the long-term gross margin guide, which you’ve now raised twice consecutively. So, my question is, what’s changed in the past 90 days that’s kind of given you that incremental confidence? And then, of course, to take another step forward, given your gross margin of 33% to 35% this year, what are the signs you’d be looking for to kind of give you step in -- or confidence in yet another step higher from that 29%. So, I’ll pause there. That’s the first question.

Well, first of all, thanks, Matt. We appreciate it. We’re excited about the business and certainly pleased with the way gross margins have been continuing to evolve. We’ve talked about it for -- well, a couple of years now, actually. The strength of the core business, particularly post merger and what we’ve been able to do to grow value-add as a mix of our business has been very impactful. And what we’ve continued to look for, particularly this year, is the normalization, right, with the supply chain getting back to normal, the reset and the level of starts, we were really concerned about what that would mean in terms of the overall market’s ability to sustain margins. I don’t think we were alone in that. What we’ve looked for this year is the performance being at a stable level. And while we’re not quite there yet, we’ve certainly seen stability be established in a lot of parts of the market, a lot of regions, a lot of product categories where we’ve seen things sort of get to normal and level out. When we talk about gross margins, it can be a little bit misleading. Again, this quarter, we saw a substantial tailwind due to Multi-Family, what I would describe as sort of transitory tailwinds. At least a couple of hundred basis points this quarter was really just due to the way the commodity timing, the cost of commodities played out versus some of our contracts. So, we’re pleased with it. Obviously, we’ll take it. But we don’t want to signal to anybody that that’s permanent. And we still have certain areas of the market where things continue to normalize, and we’re not quite sure where things will end up, but we know the pressure is down. We’ve certainly seen that. We’re up 40 bps overall on gross margins. But certainly, that indicates if you take out Multi-Family, some pretty decent step-down in the core, that’s what we thought was going to happen, and that’s pretty much how it’s played out, and we’ll continue to look for that. But even with all of that said, it’s better than we expected. We certainly have gained a lot of confidence in the strength of our business, the strength of value-add, which continues to be really, really desirable for our builder customers, and we’re continuing to invest in it and feel good about what that means for normal margins going forward. We’ll continue to monitor it. I mean, we’ve left the plus at the end because we think -- obviously, we’re performing better than that now, and we’re just going to wait and see where things normalize over time.

Hey Matt, thanks again. This is Dave. I would just add, since the merger with BMC, we’ve invested over $100 million in upgrading and automating our manufacturing capabilities, and we’re starting to see the fruits of that. And we’re getting a better feel of how that’s going to contribute to margins over the longer period as well.

Got it. Thanks, guys, for that comprehensive answer, very helpful. So, I guess, some of what you mentioned, Peter, on the Multi-Family side is going to address this next question. Kind of zooming into the base business, it looks like you’re saying there’s, I don’t know, maybe some rounding, but roughly $600 million of earnings above the base this year. How much of that is -- that Multi-Family commodity cost timing, other commodity, maybe OSB? And could you break down if there’s anything else in there besides commodity that’s kind of above the base business? Thank you.

Yes. No, good question, Matt. So just a basic reminder, the base business is really just trying to take out any commodity fluctuation in two ways, right? Anything that’s not $400 lumber we normalize for, and we also normalize for margins attributable to those same commodities. So we don’t normalize for margins anywhere else, but it does have the impact within that $600 million that you mentioned that yes, there’s some rounding. Within that $600 million that you mentioned, that’s attributable to margins. And this particular year, it’s mostly margins. So, the vast majority of what has flowed through is the normalization of those outperforming margins over the course of the year. There is certainly a component of that that is from the Multi-Family, right? So it’s because a piece of the commodities flows into our manufactured products, including roofing, floor, trusses as well as wall panels, which obviously have a significant component of commodity in them. So, we take an adjustment for that. So, that is the primary driver is the margins attributable to the commodity change this year.

The next question comes from Trey Grooms with Stephens.

Yes, I’d echo the congrats on the outstanding work in the quarter.

Thanks, Trey. I appreciate it.

Sure. So, on Multi-Family, I think you mentioned that you expect that to remain strong through this year. So, are you seeing anything in your backlog or hearing anything from your customers about their backlogs and Multi-Family that would suggest that this slowdown is kind of coming around that time or anything on the timing there, or is that more just kind of a -- kind of high-level expectation at this point?

Yes. We are seeing evidence from our customers that at the tail end of this year, there’s going to be a lot of supply that comes online all at around the same time. And that in a typical year would have to be digested before a lot of these other new projects come online. That’s one factor. The other factor is the cost of capital. And being able to make sure that the rents that they’re going to generate versus the cost of capital, that equation has to work out exactly right as well. And until some of that -- or some of that glut of openings that comes online at the end of the year, it gets digested. Those kind of dynamics have a little bit of time to work themselves out. So, what we’re hearing is there might be a little bit of a delay in the first and second quarter and then things start picking back up again. The problem, as you know, is these projects are so long in time from plan to execution that we feel like there’s going to be a lag in the first half of next year. But overall, we believe the Multi-Family will be a great segment for us to be in, and it will be a temporary scenario, not necessarily something long term that we got to worry about.

Right. Got it. Okay. And then, Peter, you mentioned you’re expecting gross margins to moderate through the year. Sorry if I missed this, but you’re calling out 33% to 35% for the year. You’ve been running at the 35% range. So, are you seeing any change or any more normalization in the margin thus far in the third quarter, or is it still kind of holding in at that high end of the range for now?

Yes. No, good question. So, we continue to see -- again, it goes to the countervailing trends. We continue to see some erosion in the core market gross margin, less than we expected, but it has continued, and I think we’ll continue to see that through the back half of this year. And then we know pretty -- with pretty reasonable accuracy how Multi-Family will play out just because of the timing of the contracts that were related to the current purchase price of commodities and kind of where we’re at. So, we’ve got a pretty decent look. Certainly, there’s been good performance in gross margins throughout the year, and I don’t think July is significantly different, but the trends remain the same with the overlay of Multi-Family’s normalization being pretty significant over the next year.

Great. Thank you. If I could sneak one more in, a little bit more higher level. $100 billion or so invested in automation over the last few years, which you said is bearing fruit, which is pretty clear. Where are you in that process, or maybe how should we think about the amount of plants that you have that you would classify as automated? And where would you like that to be kind of over time?

Yes. I would tell you, we feel really good about the level of automation we have where every plant has some level of automation. Obviously, there’s more opportunity, and we have a pretty long runway there to continue to improve, and we’re excited about that prioritizing those projects. And as you know, as we do acquisitions, typically, there’s a level of automation that we go back in and upgrade those acquisitions with and we’ll have that plan ongoing. We’re a good customer for our automation vendor. And as much as we’re always excited about talking about digital, we’re also on our front foot when it comes to technology in this manufacturing space as well. So yes, we’re excited about where this can continue to go.

The next question comes from Ketan Mamtora with BMO Capital Markets.

Thank you. And congrats on a strong quarter. A couple of things. I’m just curious, one, how do you -- what is the M&A pipeline looking at this point? And given sort of housing has held in better than what people expected at the start of the year, has there been any sort of change in your approach to M&A or seller expectations?

Thanks for the question. Yes, the M&A pipeline actually has improved. I think just the fact that things were changing at the beginning of the year and people weren’t sure exactly how the year was going to play out, kept people on the sideline for the first half. We’re seeing more opportunities now in the second half and a couple that we feel like are really good to look at. And we’re excited about how we’ll continue to invest in M&A in the future.

Got it. And is it possible at all -- Peter, you talked about sort of July started off quite well. Is there any way to sort of quantify what the July trend has been like even relative to sort of Q2 or maybe year-over-year?

Yes. It’s been a -- I don’t know how to describe it other than refreshing year. For all of the concerns that we came into the year with due to interest rates, due to affordability, it has been a surprisingly and refreshingly normal year. We see good progression throughout the year, the normal seasonality that we would expect to see with busier months in the summer. We’ve seen good utilization of our capacity. Nothing’s been overwhelmed. We’ve gotten quite busy in certain areas, but nothing has been catastrophic like during the big run around COVID. Same on behalf of our vendors, they’ve performed very well. Few spots here and there where it’s gotten a little tight, but by and large, the market has adjusted to the new volumes and really sold through quite well. And as we alluded to with our customer base, there’s confidence in a lot of areas with regard to how consistently they’ve been able to sell through what they’ve been building. It seems pretty obvious that the demand is still out there. And with the reluctance to move out of an existing home, new construction has really been a bright spot, and we’re excited to be leaning into that quite well.

The next question comes from Adam Baumgarten with Zelman & Associates.

Just a question on the environment. With the ramping starts you’ve seen year-to-date, are you hearing about any supply chain strains? Maybe not for you guys specifically, but for the industry or maybe an extension in construction cycle times for the builders?

Yes. I think the supply chain has normalized to a great extent. I think -- versus when you saw the COVID-related issues, we’re not seeing anything of that magnitude out there. There’s a couple of product categories where lead times are or slightly extended, premium windows is an example, but still, things are normalizing. Now, with the uptick in demand, there is some adjustments by a lot of our vendor partners on staffing and getting staff back up to the new normal of demand, but those look to be very temporary and very slight. So, I would say, all in all, from a supply chain perspective, we’re in pretty good shape.

Okay, got it. Good to hear. And then just switching gears to the R&R business, I think you had mentioned increased capacity being a tail and maybe just some more color around that. And then also were there any product categories that really stood out as particularly strong in the R&R channel in the quarter?

Yes. So R&R, the way we service R&R, there are a few markets where we’re very focused on it with specific cases. But for the most part, we serve both the Pro new construction and the Pro R&R markets through the same chance. So, you end up with certain time lines where you’ve got pretty heavy demand from one or the other. And obviously, over the past couple of years, the bulk of it has come from the new construction side. So with that pullback a bit, they just opened up more capacity, that Pro R&R business. And as I said in the past, the Pro R&R contractor would generally prefer to use us if we’re available because of all the incremental services and expertise we provide versus a traditional big box or a small player. The categories, the product categories, I would say we performed well across the outline of products or the family of products within Pro R&R. I would say, just stepping back for the whole business, we’ve continued to see really nice performance in the windows, doors and millwork category. That’s been an outperformer for us all year, and we’re pretty excited about that.

The next question comes from Mike Dahl with RBC Capital Markets.

First question is kind of back on the Multi-Family side. Obviously, there’s been a few big moving pieces. You’ve made some investments both organically and inorganically in that space. And then, Multi-Family as a mix of percentage -- mix of the overall market has increased. You look at permit activity that’s now dropping off, and you alluded to some normalization. And in Multi-Family, I think, sales, not just margins looking out to next year. Maybe can you help kind of quantify what you think has been internal versus market shifts? And I don’t know if it’s best framed as what you think your new normal mix of Multi-Family would be when you sort through kind of the ebbs and flows? Maybe a little more quantification there or color?

Yes. Yes. No, your point is right on. We’ve had a lot of change in that Multi-Family category. We’ve invested a lot, and we’ve been very successful, even in the core business in terms of how we’ve competed in the marketplace. I think that the overall impact of our kind of leaning into this has been a big change in the market and a big change for us. So it’s increased that Multi-Family mix, but it’s a mix that’s attributable largely to truss, right? So we’re not in sky scrapers. We’re not in shopping malls or certain large-scale apartment complexes, right? We’re in four-storey and below wood frame structures. That’s sort of our operating arena and our sweet spot. That has been doing remarkably well. And I think we have been able to improve our positioning in the market and be seen as a serious, reliable competitor. We’ve got the ability to withstand sort of ebbs and flows. We can be counted on to deliver even if there are some capacity constraints through our network of facilities around the country. So, we do think we’ve gained share. We do -- we know we bought share, and we think that that has all sort of come together to really give us some nice momentum. And that momentum is true, even though we’re really in the middle of integration. So, this is still early days for us in terms of getting all those teams to work together. So, we’re really excited about what the future holds. Now, you are right about the reset. We think that as we get into probably back half of next year, when we’re seeing things normalize, maybe beyond that, it’s probably closer to 10% directionally, we’ll dial that in for you, but it’s probably 10% of sales in an environment like we’re in today in a normal world.

Yes. I would just add. We were purposeful when we added that acquisition and entrants into that Multi-Family segment, knowing that it would be a diversification play from Single-Family and vice versa. So, what we’re expecting is as Multi-Family normalizes, we’re expecting Single-Family to remain on stable footing. In addition, in the truss world, what makes it so -- such a good investment for us is we can run Single-Family jobs out of a Multi-Family truss plan. So, we do that today. When we have Multi-Family plants that are maxed out, we run Multi-Family jobs out of our Single-Family plants and vice versa, when each side has more work than they have capacity. So, we’ve got a plan in place to manage through all ebbs and flows of both sides of those businesses and we did so intentionally.

Got it. Yes. That’s very helpful. Thank you. And then my second question, you’ve spent a lot of time kind of dissecting the margins. Maybe at a high level, just between commodities, between the Multi-Family legs, when you’re now talking about a 29% plus on normal, can you just kind of help us simplify this at a high level in terms of margin differentials by not necessarily every product category, but high level. Just where do you think your new value-add margin will be? Is it kind of like a low-30s value-add and a 20 on lumber? Just any -- what’s kind of driving at a high level the blended 29%?

Yes. So, if you think about the historical kind of guidances that we’ve had, we were running -- we were running gross margins kind of 25% to 27%. We talked about how the commodities were generally kind of high-teens to low-20s for gross margins. We talked about how value-add was 800 to 1,000 basis points higher than that. I would tell you kind of where we are today with some of the noise in it. We’re substantially higher than that on the value-add. But we’ve also seen sort of increases across the board. The increases across the board we talked about a lot, just to reiterate, we’ve seen some inflation, right? So if the cost of delivery is higher, the margins need to be higher in order to pay for the increased costs. So, we’ve seen some incremental margin increase across the board to cover that. And then, the two things that have impacted it the most is you’ve seen increased productivity. And what we’ve talked about in Multi-Family, some displacement causing the margins to be higher, full stop. And you’ve seen overall a pretty substantial mix shift away from the commodity side of the business, which used to be half of what we did back in the old days to closer to 25 to a third -- 25% to a third of our business now and that has allowed that normalized gross margin to really drift further and further up the more our mix swings. So, sort of all of those components are feeding in the productivity, the inflation, the overall mix shift to allow us to see that higher amount. But again, going from 35%, 34% for the full year is what we’re signaling, right, for the midpoint, down to the 29%-plus that is the Multi-Family. That is the continued normalization. And we’re going to continue to watch that play out, and we’ll dial in that guidance as we get more confident.

The next question comes from Steven Ramsey with Thompson Research Group.

I wanted to continue the base EBITDA conversation along with the productivity. If I’m connecting the dots, you’re saying this year’s sales and base EBITDA go down $100 million each and then the productivity savings midpoint is $130 million. So, backing out that midpoint of savings, decremental margins look like a low-20% range, if my math is correct. I mean, with the productivity flowing in, is the dollar level of productivity in future years going to be as strong as this year?

Well, it’s certainly what we’re shooting for. Internally, we have a lot of projects that we think we can leverage to continue to improve our operations, continue to offset the impact of inflation, whether it be the way we buy, what we buy, how we deliver it, how we process it internally, back office, those are all things that we’re pretty confident that we can continue to improve, and those are the goals we’re setting for ourselves. Will every year be exactly this year or better, well, we’ll see certainly where we’re headed.

We believe there’s a huge opportunity there given our platform of the 570-plus locations and our ability to take best practices from -- we’re a product of multiple acquisitions. And we’ve learned how to take the best practice from one of those acquisitions and leverage it across the platform. We’ve built a continuous improvement culture. We have people dedicated to it in each of our divisions for that very purpose, because we believe that the part -- the benefit of our scale is to be able to do it the best way across 570 locations versus just in one area or one market. So, we’re confident that we can achieve at the current levels of continuous improvement that we’ve set for ourselves each year for a long period in the future.

Okay, helpful. And then to make sure on the productivity savings, how much of that is coming from the distribution side of the business? How much of that is more on the manufacturing side? And maybe how much of that is automation driven versus other general improvements?

Yes. So, it’s probably half and half in terms of what we’re getting on the sort of the inbound versus the operating sides. We’re doing a lot in both with a bunch of individual projects that sort of accumulate to contribute. But directionally, it’s probably right.

The next question comes from Joe Ahlersmeyer with Deutsche Bank.

I just wanted to -- just based on the visibility you may have into your inventory and your Multi-Family backlogs for this quarter. Just maybe any help on the phasing of the gross margin and even just the overall sales and EBITDA third quarter versus fourth quarter?

Well, I think normally, we would perform a bit lower in the fourth quarter just as a seasonal representation. Qs 2 and 3 are always better than Qs 1 and 4. This year, and I think it’s based on what I said before, we think it’s likely to be more normal. So, we would expect Q4 to be a bit weaker. Certainly, as always, that’s the weaker part of my forecasting confidence it’s one quarter out, we feel pretty good; two quarters out, gets a little more murky. So maybe the right way to think about it.

Understood. And then on the inventory balance, that’s come down as commodity costs have come down and rolled through the P&L. But is there additional productivity you’re looking to gain on the inventory balances, or given what we’ve seen in the market, could we actually see it go the other way where you’re preparing, I guess, for a stronger spring in 2024, making sure that you have inventory on hand to service the market?

Yes, probably more the latter. So I’ll start by saying your observation is absolutely correct. We’ve had great performance. Operating teams have done a fantastic job of sort of continuing to clean up post the craziness of the supply chain over the last couple of years, clearing out excess that we feel we had on hand tightening up, whether it be windows or millwork or whatever, the teams have done a great job of really managing on -- in a very streamlined just-in-time way, the inventory that we’ve got rolling in and out of our facilities. But you’re right. When we grow, we absolutely have more working capital inventory included. So, coming into the future where we do see, at least based on what we’re seeing right now, growth on the horizon, we would expect working capital to stop being a tailwind and start being the usage into that group.

The next question comes from Collin Verron with Jefferies.

You’ve highlighted the acceleration in orders from the public builders and the Census Bureau data really bouncing off the bottom here. I was just hoping you guys could talk about any differences you’re seeing between your customers with the large production builders and the smaller builders. And then a comment on this -- at this point, do you see the bottom in Single-Family being behind BLDR at this point, particularly from a Single-Family sales perspective?

Well, we were certainly really encouraged by both the results that our public builders were reporting and even more about the projections for the rest of the year. So, we feel really confident that -- again, I’m not calling this robust, but it’s certainly better than everyone expected over the second half of the year and stable to up over the back half of the year. And that gave us the confidence that we have for being able to project what we feel like we can do in that environment.

Great. That’s helpful. And then you guys provided some good color on the digital adoption, providing some takeoff figures. Can you just quantify those maybe in terms of revenues and talk about where you guys are in your journey in reaching that $1 billion sales opportunity?

Yes. We’re excited about digital. It’s continuing to move along. The technology is coming together. The pilots are going well and we’ve given sort of a few hints about some metrics and what that looks like internally but it’s all very, very early days, to be honest. We’ve got some revenue, but it’s pretty modest. It’s not the focus. The focus is not really growing that right now. It’s tuning. It’s completing the technology, tuning what we have built, making sure the technology is sort of stable and capable of running at the scale that we intend to put through it. That’s this year’s goal. We’re certainly expecting pretty significant increases in ‘24 and beyond. And we’ll have some more information on the timing of that and the layout of that as we get into our Investor Day in December.

The next question comes from Reuben Garner with The Benchmark Company.

Congrats again on the strong quarter. I guess, I had some connection issues earlier. So, if I repeat anything, sorry, in advance. But first question is on inventory. Can you talk about where your inventory stands from a volume perspective relative to kind of historically normal times? We’ve heard from both kind of two-step distributors and some manufacturers that the dealer channel is kind of thin and hesitant to add. I was just curious how you guys are viewing inventory? Is that something where you’re stocking and it’s an advantage you have product over some of your smaller peers, or are you the folks that are running thinner than usual now?

I would say we’re running normal, right? I think we’re not seeing the same kind of supply challenges we did just after COVID. It’s more of a normal operating environment. Our guys have done an unbelievable job of coming through that and getting back to normal for us. We’re where we would be normally with just seasonal fluctuations now. So we’ll see a buildup of inventory during the third quarter, and it will start to wane in the fourth quarter as we head into the seasonal months. But we’re kind of business as usual at this point.

Okay, great. And then,, I’m not sure if this one was asked, but an updated way to think about sensitivity to lumber? I know you’ve got the base business lumber out there. But if we’re continuing to run $100 higher, how much of an impact does that have on revenue and profit?

Yes. That’s a good question, Reuben. You may have noticed we brought back the base business guidance and estimate, but we did not bring back that sensitivity chart in the back. Candidly, I think that caused as much confusion as clarity. So, we’re going to try a different approach. What I can tell you, and this is really based on what we’re seeing today, if lumber goes up or down by $100, $1,000, we think it’s worth between $175 million and $225 million in annual EBITDA. So, it’s -- if I use 200 as the midpoint, it’s in that range, but there are two things that I need you to just keep in mind, right? There are a number of assumptions that go into that type of rule of thumb metric. The two most important are: one, that’s assuming normalized margins. It’s a normalized margin impact of that up and down specific to commodities. And then, please keep in mind, it takes three, four months, sometimes a little bit longer of lag before that change in commodity will show up in our results, right? You think about the inventory on the ground, the order time, the delivery and then the pricing change impact as that flows through. So, just keep in mind, those two assumptions are very critical to that, that rule of thumb. But again, $100 lumber worth between $175 million and $225 million of annual EBITDA.

And a quick clarification, Peter. Is that lumber and OSB altogether commodity?

Correct. And we assume a 70-30 lumber OSB mix.

The next question comes from Kurt Yinger with D.A. Davidson.

Just given the strength in value-add and what you’ve talked about in terms of, I guess, the widening kind of margin differential versus traditional distributed products. Are you seeing competitors, I guess, invest behind the category to a greater extent or lean in more there? And I guess, over the long term, how do you think about your ability to kind of differentiate with some of those solutions?

Yes. I think we’re the clear leader in the space, first of all. And we have made the most -- we’ve put the most emphasis on finding ways to increase our productivity, specifically in our manufacturing truss and door shops to extend that lead. We believe the investment required to do those type of improvements is not insignificant. And we’re -- we believe our commitment to us has made a difference. And we see that in the marketplace. We especially saw it coming out of COVID, where it was tough for people to find a truss manufacturer that wasn’t -- that didn’t have a significant backlog and people had to pick and choose who they wanted to do business with. And we saw where our customers wanted to do business with us in that environment. So, we feel good about our position. I think anywhere where you see opportunity, people are going to make investment. I just think we’ve got such a nice lead on our competition today, it will be tough for us -- for them to catch us.

Got it. Okay. That’s helpful. And then just second, I was hoping you could just kind of frame how you would characterize your volume performance over the first half relative to what we’ve seen on the Single-Family start side. And I guess in manufactured products as well, I mean it seems like the core organic sales there trailed Single-Family starts a bit. Curious if that’s footprint, maybe some pricing in there and just how you’d kind of reconcile those different data points.

Yes. No, that’s a fair question. It’s something we look at pretty regularly, as you know. What I think it boils down to most simply is starts are the best indicator and the best sort of measuring stick for our performance over time. I don’t think it’s accurate at a quarter. And what we’ve seen is sort of as the market turned down, we didn’t go down as much as the market. As the market has turned up, we haven’t gone up as much as the market. And there’s a little bit of product mix to do with that, right? We’ve said in the past, we’re probably two-thirds that’s leveraged towards the beginning of the start, one-third towards the end of the start. So that’s one piece. Another of it is that we’re probably not at the start. We know we’re not at the start. We’re anywhere from 30, sometimes 60 days later when our first product starts to hit the job site. So, a little bit of shifting around that in terms of timing of when our orders hit. Based on the trends we’re seeing right now, we feel pretty good. We may have given up a little bit of share in our estimation, a couple of hundred million dollars worth. We talked a lot during the time line of the big supply chain disruptions about how advantaged we thought we were by having more product and being more effective at meeting customer needs where others struggle. And we’re probably giving back a little bit of that as we anticipated, but that’s kind of in the numbers you’re seeing now. So, feeling pretty good about where we are versus the overall market.

The next question comes from Jay McCanless with Wedbush.

The first question I had, we’ve seen lumber prices, especially framing lumber, move up sequentially for the last couple of months. I guess, is that starting to flow into your pricing not only on commodity goods, but are you also starting to be able to take some price on the value-add goods?

Like always, yes, sure. I mean, it will take some time to fully feather in, but it has started to move modestly and we certainly follow it on a consistent basis. The one point I’ll make on that though is that one of the big movers has been OSB. I’m personally a little bit skeptical on the durability of that, only because we hear so much about incremental capacity coming online over the next year. We’ll see. We’ll see where it pans out, but that certainly is something to keep an eye on.

Okay. That’s good to hear. And then just the second question, M&A phrased a different way. Are you starting to see some of this tightening in terms of bank lending standards and underwriting on some of your potential acquisition targets? Is that freeing up or making some people may be more willing to sell than they might have been at the beginning of the year?

That makes reasonable sense that we would start to see that. I would say what we’ve been looking at lately, that hasn’t been a factor.

The next question comes from David Manthey with Baird.

Yes. Hi. This is Quinn Fredrickson on for Dave. I’ll just ask one question here. Peter, your earlier comment made it sound like the competitive environment has remained pretty benign in value-add and better than you expected. Do you think that’s due to same dynamic among competitors with the commodity price lags in their contracts, or is there a structural change and improvement there? And then, are you assuming an uptick in competitiveness and the expectations for the slight back half gross margin moderation?

So, I guess, I need to be a little careful how I answer that. On the first hand, we have seen incremental competition and margin erosion in core business, period, full stop. Now, it’s not as much as we expected. It’s not as much as we forecasted, hence the outperformance in that area. I would say that there’s been a lot of strength in the volumes within the value-add, which gives us increasing confidence that we’re meeting a need that our customers see value in it, that they’re leveraging it to improve their cycle times, their job site efficiencies, their job site safety and that we’re at a price point that’s competitive that allows them to do what they need to do better. So, we’re certainly pleased with all of that and have been seeing the competition. Now, the components of cost, the investments that we’ve made, but also the inflation we’ve seen, certainly, I think that has had a structural impact on the overall market, us included, but others as well, where you got to make a little more gross margin if you want to cover those incremental wage costs or truck costs or whatever it is. But then lastly, we’ve done a lot of work. We’re much more efficient and that self-help has allowed us to earn more on the same equipment year-on-year because of our efficiency improvements, whether it be new automation that layers on the same equipment and facilities, sometimes it’s a new equipment, but sometimes it’s just better process. And all of those things are why that strength we’ve seen is sustainable. I think that helps to Dave’s point, us be more competitive, right? We can still make good money where others are struggling. And if we can do it by being more reliable or on time and in-full being better that our quality is better, then we’re always going to be the partner of choice for these builders who want to make sure their houses are high quality and on time.

And I would just add a real-life example. In a major market we had a customer try someone else for 50 houses on truss for a lower price. They came back to us less than a month later at our price for those same 50 houses, which we, by the way, delivered inside of 10 days. So, the stickiness we generated or by being able to do what we do best for our customers, they recognize that value proposition. And that’s allowed us to make money for them and us, and that’s where we want to be.

This does conclude today’s question-and-answer session. I will now turn the program back over to our presenters for any additional closing remarks.

Thank you very much. Have a great day.

Thanks, everyone.

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.