BLDR - NYSE

Good day, and welcome to the Builders FirstSource Second Quarter 2025 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by management and the question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.

Good morning, and welcome to our second quarter 2025 earnings call. With me on the call are Peter Jackson, our CEO; and Pete Beckmann, our CFO. The earnings press release and presentation are available on our website at investors.bldr.com. We will refer to the presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. You can find a 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. And with that, I'll turn the call over to Peter.

Thank you, Heather, and good morning, everyone. Our durable results in the second quarter reinforce the advantage of our differentiated product offerings and commitment to execution. In this challenging market environment, we are prioritizing what's within our control; serving customers with excellence, leveraging technology and managing the business with discipline. These efforts are strengthening our position in the industry and laying the foundation to emerge stronger as market conditions improve. As shown on Slide 3, we continue to execute against our strategy as we operate in a dynamic environment. This morning, I want to drill down on 3 key focus areas within our strategy: Our customers, operational excellence and capital allocation, what we refer to internally as smart investments. Delivering exceptional customer service is a core value as we drive for growth. We thrive to be trusted partners to homebuilders by providing best-in-class service every day and working together to solve the industry's most complex challenges. We are expanding our value-added solutions and leveraging technology, including our end-to-end BFS digital tools to help create a differentiating customer experience while empowering our teams to serve more effectively. The next focus area, operational excellence, is crucial to how we run the business. It's about developing talent, improving agility and embedding technology into our operations with the implementation of a single ERP system. As we talked about previously, moving to SAP will unlock further opportunities for growth and efficiencies, including how we make decisions, streamline operations and manage costs. Finally, we remain disciplined in how we deploy capital. Our consistent strong free cash flow through the cycle gives us the flexibility to invest in organic growth, pursue strategic M&A and return capital to shareholders. These investments are strengthening our competitive position and driving long-term value creation. Let's turn now to our second quarter performance on Slide 5. Our sales were impacted by a softer-than-expected housing market due to ongoing affordability concerns and rising home inventories as completions outpaced sales. While we readily acknowledge that we are experiencing lower margins as we support our customers, I'm pleased that we are maintaining healthy profitability in a low starts environment, a testament to the operational discipline that is part of the fabric of BFS. Slide 6, we highlight key areas where we've been executing our 4 strategic pillars. In the second quarter, we invested more than $35 million in value-added solutions as we build for the future. This included opening a new millwork location in Florida and expanding or upgrading plants in 7 states. We generated $5 million in productivity savings in Q2, primarily through targeted supply chain initiatives. We are focusing on optimizing processes, utilizing new tools and partnering with suppliers to grow share. Turning to Slide 7. We remain disciplined stewards of discretionary spending, and we are continuing to maximize operational flexibility. In response to lower volumes over the last year, we have taken meaningful steps to align capacity across our facilities, manage headcount and control expenses. Year-to-date through June, we have consolidated 8 facilities while maintaining an on- time and in-full delivery rate of 92%. With our industry-leading scale, experienced leadership team and a track record of operating proactively through the cycle, we are confident that we can continue to deliver exceptional customer service. Single-Family starts remain soft as builders manage the pace of construction. As expected, we've experienced a muted sales pace that is below the normal seasonal levels. Given customer feedback and our understanding of land development trends, we expect Single-Family starts to decrease through year-end. Builders are working to help buyers find affordable options by offering smaller and simpler homes, as well as incentives such as interest rate buy-ins. We are marching in lockstep with builders through our comprehensive product portfolio, enabling them to optimize their costs while maintaining quality. Multi-family also remains muted, driven by higher input and financing costs. However, with a substantial mix of value-added products and attractive long-term fundamentals, multi-family remains an appealing and profitable business for us. Turning to M&A on Slide 8. We remain focused on pursuing higher return opportunities that expand our value-added product offerings and advance our leadership position in desirable geographies. Over the years, we have developed substantial and proven muscle memory to grow through M&A and have a track record of successful integration. In the second quarter, we acquired Truckee-Tahoe Lumber with aggregate prior year sales of roughly $120 million. Truckee-Tahoe's reputation of excellence as a leading supplier of lumber and building materials extends our presence in the Northern California and Nevada markets. We have made 35 acquisitions since the BMC merger in 2021, yet our industry remains highly fragmented. Today's market volatility makes price discovery difficult. But despite the current slower M&A environment, we are confident that inorganic investments will remain an important driver of long-term growth. Turning to Slide 9. Our disciplined capital allocation strategy focuses on maximizing shareholder returns through organic growth, M&A and share repurchases. In the second quarter, we deployed over $500 million towards return-enhancing opportunities aligned with our priorities. Now let's turn to Slide 10 and discuss the latest updates on our digital and technology strategy. In June, we announced Gayatri Narayan as our new President of Technology and Digital Solutions. Gayatri brings over 2 decades of global technology leadership experience, having held senior roles at Amazon, Microsoft and PepsiCo. Her proven track record of driving innovation and growth through digital transformation will be instrumental as we leverage technology to enhance connectivity across our industry. We are accelerating the integration of our digital source systems and deploying scalable customer-centric solutions that will strengthen our operational agility and support long-term growth. Our BFS digital tools deliver meaningful benefits to our homebuilder customers and align BFS as a key technology partner. Despite the challenging market, we have seen continued adoption with our target audience of smaller builders. Since launch in early 2024, we have seen more than $2 billion of orders and $4 billion of quotes placed through our BFS digital tools. These metrics are up more than 400% and nearly 300% year-to-date, respectively, compared to 2024. We continue to refine our new adoption road map, and we'll roll out our new thinking around benefits and timing later this year. I'm pleased that we continue to make progress on our implementation of SAP with the launch of 2 pilot markets earlier this month. Although these conversions are never easy, we are working through the details and are excited about the growth and efficiency opportunities to come with this new software. I remain deeply grateful for the opportunities to lead such a skilled and dedicated team that makes a difference every day. This quarter, I want to highlight [ Jim Henry ], a load builder in our Burbank Yard, recently celebrated an incredible 40 years with BFS. Jim is known for his efficiency, flexibility, team-first attitude and his love of cycling. He's had a lasting impact on operations and is someone his teammates look to as a model of how to get the job done right. I'm proud of Jim and the many others across our organization whose hard work and commitment drive BFS forward. I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. We continue to benefit from the strength and adaptability of our operating model. By executing consistently through the cycle, we are generating strong free cash flow and preserving financial flexibility. Our scale, operational rigor and talented team give us confidence in our ability to deliver solid results and compound value into the future. We remain disciplined in our capital deployment with a focus on maintaining a healthy balance sheet and investing in high-return opportunities. I'd like to pause for a moment to highlight our operating model, a core differentiator that continues to set us apart in the industry. At BFS, we have a disciplined enterprise-wide approach that unites our teams across functions, geographies and product categories. We conduct granular performance reviews that track market trends and key productivity metrics, such as truss board foot per labor hour and utilization rates of manufacturing and fleet capacity. These insights enable us to identify opportunities, address challenges early to drive continuous improvement across the business. What truly reinforces this discipline is the active oversight of our Executive Steering Committee. This cross-functional leadership group needs to review operational KPIs, challenge assumptions and confirm alignment with our strategic goals. Their involvement ensures that insights from the field translate into action at the highest levels of the organization, enabling us to respond quickly and adapt as needed to evolving market dynamics. Let's begin by reviewing our second quarter performance on Slides 11 through 13. Net sales decreased 5%, $4.2 billion, driven by lower organic sales and commodity deflation, partially offset by growth from acquisitions. We continued to experience commodity deflation, attributable largely to lower OSB prices. While pending duties and capacity rationalization have contributed to a more stable lumber market, OSB capacity additions have continued to create downward pricing pressure. The organic sales decrease was driven by a 23% decline in multi-family, with muted activity levels against stronger prior year comps. Additionally, Single-Family declined 9%, attributable to lower starts activity and value per start, while repair and remodel increased 3%, driven by strength in the Mid-Atlantic and South Central regions. As we've noted on recent calls, there are a few key factors reconciling Single-Family starts to our core organic sales. First, as a reminder, there was a roughly 3-month lag from start to our first sale. Second, the value of the average home has fallen as size and complexity have decreased over time. Third, margins remain pressured throughout the supply chain as affordability concerns continue to be paramount. Despite these challenges, we continue to lead the building products market and serve as a trusted partner to our customers. For the second quarter, gross profit was $1.3 billion, a decrease of 11% compared to the prior year period. Gross margin was 30.7%, down 210 basis points, primarily driven by single and multi-family margin normalization, as well as a below normal starts environment. Adjusted SG&A of $818 million increased $4 million, primarily attributable to acquired operations, partially offset by lower variable compensation due to lower sales. On an annual basis, adjusted SG&A was approximately 30% fixed and 70% variable with volumes, enabling flexibility during challenging periods. As Peter touched on previously, we are focused on carefully managing our SG&A and are well positioned to leverage our costs as the market grows. Adjusted EBITDA was $506 million, down 24%, primarily driven by lower gross profit. Adjusted EBITDA margin was 12%, down 300 basis points from the prior year, primarily due to lower gross profit margins and reduced operating leverage. Adjusted EPS was $2.38, a decrease of 32% compared to the prior year. On a year-over-year basis, share repurchases, enabled by our strong free cash flow generation added roughly $0.18 per share for the second quarter. Now let's turn to our cash flow, balance sheet and liquidity on Slide 14. Our second quarter operating cash flow was $341 million, a decrease of $111 million, mainly attributable to lower net income. We generated free cash flow of $255 million. Our trailing 12 months free cash flow yield was 9%, and operating cash flow return on invested capital was 18%. Our net debt to adjusted EBITDA ratio was approximately 2.3x, while our fixed charge coverage ratio was roughly 6x. In May, we completed a $750 million offering of 6.75% senior unsecured notes due 2035 to pay down the balance on our ABL. Additionally, we upsized our ABL facility by $400 million to $2.2 billion. We have no long-term debt maturities until 2030. Our maturity profile enables us to remain operationally and financially disciplined while preserving a flexible balance sheet for accretive capital deployment. Moving to second quarter capital deployment. Capital expenditures were $86 million. We deployed $61 million on acquisitions, and we repurchased 3.3 million shares at an average price of $118.27 per share for $391 million. We currently have $500 million remaining on our share repurchase authorization. While our 2.3x leverage ratio is slightly above our target range, we remain comfortable with our net debt levels. We will continue to execute our capital allocation priorities and remain disciplined stewards of capital on the path to maximizing value creation. On Slide 15 and 16, we show our 2025 scenarios and outlook. Given the dispersion of potential housing market and commodity outcomes for the rest of the year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance. As you can see, the bottom of our guidance range corresponds to lower assumptions for Single-Family starts and commodity prices. Our latest forecast assumes Single-Family is down 10% to 12% for the year. We continue to expect a multi- family headwind to sales of $400 million to $500 million and a headwind to EBITDA of less than $200 million, with most of the drag already coming in the first half of the year. We also expect R&R end market to be flat. As a result, we are guiding net sales in the range of $14.8 billion to $15.6 billion. We expect adjusted EBITDA to be $1.5 billion to $1.7 billion. Adjusted EBITDA margin is forecast to be in the range of 10.1% to 10.9%. Given the below-normal starts environment, we expect our 2025 full year gross margin to be below long-term normalized levels and in a range of 29% to 30.5%. We expect free cash flow of $800 million to $1 billion. Our revised guidance assumes average commodity prices in the range of $375 to $425 per thousand board foot. Please refer to our earnings release and presentation for a list of key 2025 assumptions. Additionally, we want to provide color for Q3 because of our ongoing macro volatility and to align with builder expectations. We expect Q3 net sales to be between $3.65 and $3.95 billion given a weaker-than-normal building season. Q3 adjusted EBITDA is expected to be between $375 million and $425 million. In closing, we are closely monitoring the current environment and remain agile to mitigate downside risk in the near term while also investing strategically for the future. I'm confident in our ability to drive long-term growth by executing our strategy, leveraging our exceptional platform and maintaining financial flexibility. With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. I want to close today by emphasizing the transformation of BFS. Today, we are an exceptionally improved organization, one powered by differentiated product offerings, including our value-added solutions, our relentless focus on operational excellence and disciplined capital deployment strategies. This evolution is illustrated on Slide 18, which highlights how our performance in a challenged starts environment is substantially better today than in 2019. Our business is positioned to accelerate when starts increase and current headwinds begin to subside. Our current -- our customer relationships are deepening, our operational efficiency is improving and our technology platform is creating real value for the business. By controlling what we can control and leveraging our competitive advantages, we will continue to compound long-term shareholder value. Thank you for joining us today. Operator, let's please open the call now for questions.

[Operator Instructions] And we will take our first question from Matthew Bouley with Barclays.

So whether we're talking installation, digital, the value-add investments you're making this year, be curious if you can speak a little more where, I guess, specifically or even provide examples of how you are strengthening your competitive position and partnering with your builder customers in this type of, I guess, disappointing starts environment? And sort of what those tactics might mean for your growth and profitability in the future when we eventually get to that environment where starts were to stabilize or improve?

Good morning, Matt, and thank you for the question. Yes, happy to. So a couple of key areas. I think the most basic one is improving our on-time and in-full performance to ensure that our builders are able to be as efficient as possible. I would argue, nobody is better at it than we are. We're well over 90%, and we are known in the industry as the trusted partner to be able to ensure that consistent performance over time. If you think about some of the things we're doing to align more closely with builders, it's figuring out ways to achieve the goals that they have, and their primary goal is stated to us and broadly is affordability. So what are the products that are going to most directly allow them to build a high-quality, cost-efficient home. In some cases, there are product substitutions. In some cases, there are new applications. The pace of the build and the alignment of the build process with what we're doing, we continue to enhance the integrations with our customers, looking for ways to pass data and align schedules and forecasts in a very, very efficient and highly reliable way. A big piece of that is around technology, both in the core systems, but as well as digital. Digital is another way where we have seen customers benefit in terms of utilizing both online tools, but also the 3-dimensional digital twin to optimize their build process to find pockets of waste that can be removed and to create efficiencies in terms of communication and process improvement. All of that is really linked back to our role as connector between builders and vendors. So our ability to operate effectively in a highly efficient digital environment to link our trusted vendor partners with our customers is really that way that we're reinforcing and strengthening and at the same time, ensuring that we're learning from past cycles and having the right capacity on the ground in the right markets. That's a big piece of where we talk about building for the future and being ready. So all of that basically boils down to as the turn starts, and we believe it will come, not quite yet, but we believe it's on its way, we are going to be better positioned than anybody to really grow and take advantage of highly efficient relationships with customers, trusted relationships with customers and massive capacity to be able to truly create value for shareholders and be more of a trusted partner in this space.

Excellent. Well, that's great color, Peter. Really appreciate that. Secondly, maybe diving into the near term and the gross margins. Correct me if I'm wrong, but I think this is the first quarter where your gross margins were actually higher sequentially, perhaps since 2023, which at least surprised us, maybe not you, but what actually drove that? Why did the margins improve in Q2 sequentially? Kind of what does that imply about the Q2 exit rate? And maybe what are you assuming in that margin within the kind of Q3 and second half guide?

Thanks, Matt. Great question. We're actually very pleased with that margin performance for Q2. As we had noted last -- on the last call that we were going to see margins drifting down sequentially through the year, it was a drift down, and we were very pleased with the performance as we had a little better than expected in the multi-family and R&R space that contributed to that margin outperformance. And just to contextualize it, that 20 basis points increase over Q1, that's worth about $8 million. So it's pretty small in the grand scheme of things, but we're very pleased with the outperformance.

Got it. Yes. And any color there on what was assumed in kind of Q3 and second half?

Again, we're looking at sequential normalization or declines through the balance of the year to our stated full year forecast or full year guidance of margin. But it's very consistent with what we said in the prior quarter, given the competitive landscape and the softer- than-normal starts environment is going to continue to put that pressure on margins.

And our next question comes from Mike Dahl with RBC.

Maybe just to pick up on that last point. I guess you did a 30.6% gross margin in the first half of the year. [Technical Difficulty] there with the high end effectively being kind of flat to the first half, the low end implying a really sharp step down. And it seems like the 3Q guide does imply some sort of step down. So just to press a little more on status quo given what you're experiencing in the market today, a little better direction or fine-tuning on where in that range, things are under kind of the status quo environment? And more broadly, just as you think about all these dynamics, any updated views on how you're balancing or looking to balance share and margin in the current environment?

Mike, thanks. Yes. So part of the dynamic here is what's being said broadly. Obviously, there are a lot of public homebuilders that have released over the past couple of weeks versus kind of our signal here that it's a bit worse than what people are thinking. As you know, we spent a lot of time with customers. We spent a lot of time digging into the data. What I think you're seeing is a little bit of a bifurcation, a little bit of a difference in terms of the profile of who we are versus what the builders are doing in terms of their annual cycle. Just to put a finer point on it, we've talked about it before. We're about 2/3 to the start and 1/3 to the completion. If the builders get towards the back end of their year, they're looking at completing and selling homes. But given the inventory environment and what we're seeing in terms of the land market, what we're hearing about the takedowns and the contracts, our sense is builders are slowing on the start side. And without a clear indicator that interest rates are going to move any time soon, I think in the best case scenario, it's going to be a little while. It probably won't help this year. Our sense is that that slowing that resetting to a lower rate in order to manage those completed home inventory levels, that's what's going to flow through. So that's the slowing indication that you've got from us. The higher end of our scenarios that we laid out for you is a flatter version based on kind of where we are now. So you think about it that way, but there's a -- not exactly, but directionally, I would say that's the band that we should think about. The competitive environment, as Pete mentioned, it's pretty stable, it's a tough market. There's a fight out there in terms of what we're seeing when we're quoting and looking at what's going on with share according to our calcs. We think things are pretty well stabilized on the share side. And the signaling of what that took in order to stabilize is what Pete's got laid out in terms of the margins and the results for the rest of the year. Ultimately, I'd just go back to we're performing exceptionally well in a challenging market. It's not easy. We're focused on affordability, but the team is doing a phenomenal job. We're staying focused on the discipline necessary to run this business the right way and to prepare for the future. And we're ready to go when it turns. We just need some cooperation from the external factors.

Yes. That's really helpful. And I guess similar vein, a lot of the concern or pushback that we get from investors is around trust specifically where there is excess nameplate utilization out there and you hear all the builders, this conversation, talking about how they are asking for -- and aggressively asking for help from from all their partners to reduce costs. Can you just help us understand from your perspective, the trust capacity environment, the differences you see on kind of nameplate versus effective utilization? And maybe if you could talk about kind of your trust margins, at least directionally, how those have been performing or expected to perform within the balance of the year and your guidance? I think that might help.

Sure. Yes. I mean, I know it's not going to come as a surprise to anybody. We're underutilized from a capacity perspective and trust, given where starts are, of course, we've got access. I think what we're particularly good at though is making sure we're running the business, driving off of the correct metrics. So for example, every location is absolutely focused on board foot per labor hour metrics to ensure that the biggest expense that we have are people are producing in a way that makes sense for the operation. That's how you cover the overhead. That's how you ensure that we have a stable business. In those instances where we don't have enough volume to absorb that fixed overhead, that's where we do things, like you see in the materials, where we mothball operations or close operations or consolidate in order to ensure that the remaining facilities do have enough to stay stable. It's one of the many advantages of our network of operations and something that our team is exceptionally good at. So that's an example of how we manage it broadly in the space. We're very confident that we are as efficient or better than anybody else in this space in certain markets. Certainly, it's hand-to-hand combat. No hesitation in saying that we've competed away some of the excess margins that we've seen over the past few years. I think all of us have strived very hard to make sure we're getting a fair return on what we do. But that said, it is a competitive environment. That hopefully isn't a surprise, based on everything we've said in the past. But with all of that, we're still doing well. It is a very nice product line for us. It's something that, again, we will have and we'll continue to invest in to ensure that we're aligned with our customers when their need increases, and it will. So we're not shy at all about where we are and continue to -- continuing to invest in those key areas where that capacity is going to be needed even if it's not needed as desperately today.

And our next question comes from John Lovallo with UBS.

The first one is just on the commodity outlook that you guys laid out there. Just within -- in mind, the Canadian lumber tariffs, the antidumping and countervailing going from 14.5% to 27% as of a couple of days ago, set to go up to 34.5% on August 8, with probably a little chance of that changing. Just curious, what you think kind of the knock-on impact might be to lumber? And how does that kind of fit in the context of your forecast?

Thanks, John. we have factored in the duties and increases into our guidance for the lumber side. And we think the lumber right now has been more stable. I think the duties has helped that to remain at a pretty healthy level of above $400 per thousand as you look at the composite of the lumber category. The impact from the duties, I don't think will hit us really in our numbers for at least 3 to 4 months, given the lead time of what we already have on the ground, what we need to work through on what's already been ordered in the pipeline versus when we will receive that new wood with the duties on it and then be able to turn it out. So it will really have a minimal impact on our financial results in 2025. And we'll continue to assess that as we go into 2026. The big drag, as I mentioned in the prepared remarks, was on OSB. And OSB is something that continues to drift down. It's pressured because of oversupply. And we're going to have to just work through that as we try to find as an industry where that balance is.

Yes, OSB is bad right now. There's -- nobody is happy with where OSB is, except for maybe people buying it at the end point.

Got it. Okay. That's helpful. And then in terms of your net leverage, it's at I think 2.3x. It's above the high end of the 1x to 2x. You lowered the EBITDA forecast for the second half. I mean, how does this sort of influence the ability for you guys to buy back stock through the remainder of the year?

Well, so our capital allocation priorities remain the same. We're going to continue to focus on maintaining a healthy balance sheet, fortress balance sheet. Some of the debt activities we did during Q2 helped continue to position us from a liquidity standpoint, which we feel very confident in at this time. We're managing our capital expenditures or organic growth to make sure that it's rightsized for the business that we're operating currently. We're evaluating inorganic growth through acquisitions. And right now, it's just a softer M&A environment. And then lastly, we'll look at stock buyback. As you probably saw in the prepared remarks and in the information that we've provided, we haven't done any since April when we announced the Q1 results.

And our next question comes from David Manthey with Baird.

Hoping -- just -- I can ask you a very high-level question here. Could you discuss the revenue and margin bridge as you think about from the core you just reported into that third quarter guidance that you gave? Essentially, just what are the main drivers of the sequential change from 2Q to 3Q?

So the sequential driver changes for revenue from Q2 to 3Q is really the starts environment that continues to weaken as we go through the quarter -- Single-Family starts, excuse me. A little bit of the continued normalization of multifamily, as we said, largely was behind us in the first half of the year. There's still a little bit left in Q3, as I mentioned last quarter. And the commodity deflation. So we're seeing a softer commodity environment than what we had projected from last quarter, and that's going to have an influence on the revenue in Q3.

Okay. And just setting aside the 30-year conventional mortgage rate for right now, could you discuss the impact on BFS if short rates come down by, say, 50 basis points as we exit the year and into 2026?

Well, it certainly tailwind. I think there are a number of different reasons why that's true. While I do think it will likely have an impact on mortgage rates, the multi-family side of the business, I will tell you has a tremendous amount of promise right now. There are a lot of jobs that are on the cusp, and I think 50 bps would help. I think that there's also this uncertainty on the consumer side that even those who can handle a mortgage in this vicinity are so unsettled by what they don't understand or what they don't trust yet that they've backed off. So I think a sense of lower rates and a little bit more stability could absolutely be a release in terms of demand activity. I think those are the key pieces of where it could help.

Yes, I can start it off. If Pete has comments to add on, please do. In short, productivity is still core. We're still doing a tremendous amount of continuous improvement work. The reality is with about 30% of our SG&A being effectively fixed and not variable with sales, we're seeing some deleverage that's offsetting. So our productivity metrics are driven by P&L outcome. As fun as it is to tell stories about how we can save money with X or Y project, it doesn't show up in the P&L. We don't count it to be true. So while there are certainly a lot of things going on, the offsetting headwinds are sort of eating that benefit. We're going to continue to press. The organization, I think, is still aligned very well and performing very well. Just the reality of that deleveraging is on the account of -- is what's to account for the lower performance. But certainly, a lot of effort there. Did I miss anything, Pete?

Yes, that's a great question. Thank you. I remain incredibly excited about the opportunity of digital and leveraging technology, whether it be core systems or the new AI -- agentic AI that we think is going to be really impactful. The reality is, increasingly, the realization is that digital isn't a tool, digital isn't a product, digital is very much the fabric of who we are. We'd like to think about these tools as being super suits that our employees can put on to better compete in the market, makes us faster, makes us smarter, makes us more agile. The reality is it's not easy to do, and it takes a lot of investment. And unfortunately, it takes more time than I'd like for it to take. But we are seeing improvement. The core of the tools are delivering on the promise of finding and eliminating waste, improving communications with our customers, improving the efficiency and the effectivity, most importantly, of our internal teams. We're still 100% convicted that that's the right way for our business to win in the long run and that we're better positioned than anybody to do it. The reality right now is with our target customer today being the smaller customer and there being a tough market to adapt to, there's a piece of this that's development related and a piece of this that's -- customers are very focused on staying alive and managing affordability, and sometimes new ideas are slower to be adopted than at other times. We're still seeing adoption. We're still seeing it pick up. We're still developing. I don't feel bad at all for the success that we've had, but it has been a little bit slower than we were anticipating. We're still seeing incremental growth, but it's still going in the right direction, just not at the right pace yet.

And our next question comes from Rafe Jadrosich with Bank of America.

Looking ahead, if starts stay where we are today for the extended period of time just because of the macro, are there levers that you could pull from a cost perspective? And then how do you think about balancing market share and margin?

Yes. I guess the first thing I'll highlight going into this is we've already -- the levers have been pulled in terms of just how we run the business with 70% of our SG&A and obviously, all of the COGS stuff being driven by volumes in order for us to perform the way we've already performed given the reset in sales and starts, you've already seen a lot of that being executed in real time. The larger chunky stuff on the fixed side, sure. There's absolutely some of that, that we'll do. We'll continue to assess where we're already focused on the areas of discretionary spending and trying to get certain investments. We're trying to be smart with all of that, where we're being thoughtful about today, but also not losing sight of the strategic vision and where we want to go. So I think that's an important part of all of the analysis. When it comes to the competitive environment and margins, it's a balance. I think that ultimately, we know we are invested and positioned in a way that it is appropriate for us to get a fair return for what we're providing in the marketplace. Certainly with the pressure on affordability, everybody wants it to be less. Everybody, I think, in general, would prefer that we just gave away free houses and then everybody could have one. But that's not how it works. And we are maintaining the right disciplines to ensure we've protected our position while making a fair margin. We absolutely walk away from business where that's not true. And so that sort of balance is one that we've continued to maintain. And I think in the current environment, we feel like there's some equilibrium being found. Limits are being reached, but it's not quite over yet. We'll have to see. It really is dependent on this idea of does it get a little worse from here or is it stable where it is.

That's really helpful. And there is a slide that you guys included in the deck that just shows, we're back to 2019 starts level, but your EBITDA margin is 300 basis points above where you were in 2019. It'd be helpful if you could just talk about like how much of that is mix, productivity, scale? Like what's sort of the bridge to the much higher margin today on the same start level?

I don't know if I have that specific bridge off the top of my head, but our IR strategy deck has a bridge. I don't think it's in the current release for the quarter, but there is a bridge that shows you that directionality. But for those who haven't seen it yet or are flipping to it right now, it's a couple of pieces that you hit on them. Mix is an important one. We have substantially moved the business towards value-add based on both M&A and organic growth in terms of new capacity and expanded sales in those key categories. The other bit is what I alluded to earlier, which is really the continuous improvement focus. We have gotten better at our trade by working together as a team, by leveraging our scale, by coordinating learnings and execution, the way that we partner with customers, everything from closest point of shipment to how we work with vendors to ensure we've got the right product in the right place to win. But those are the 2 big factors. Those are things we feel good about protecting, we think are real and durable and have tremendous opportunity for leverage as we get into an expanding market.

And our next question comes from Keith Hughes with Truist.

Can you hear me now?

We can.

Okay. Sorry about that. So in the slide, you talked about manufactured products being down about 10%. Can you talk about the influence acquisitions had on that? And also what units and price look like amongst those products?

Yes. So I mean, acquisitions have continued to build the trust profile, a bigger part of the business in general. No question that it's been comparably impacted to the downside. Starts have been -- have absolutely flowed through the trust space. And I think we've talked about it in the past. While initially, I think all of the effort around affordability and management, quoting and all of that was really focused on the simpler products, as time has gone on, builders certainly have gotten more aggressive at quoting everything, including trust and EWP, which are the 2 primary categories, product subcategories in that manufacturing products bucket. EWP is a meaningful decliner. I think that's been pretty commonly discussed in the market where prices went up pretty substantially during the supply-constrained days of COVID and EWP was a major benefactor, a lot of that has pulled back and it continues to erode. But there's certainly been pressure on the core business as well, the core trust business. Pete, do you want to add?

Yes. Just to remind, the multi-family is very heavy in the manufacturing, that's seen a lot of normalization. So that was down 28% in the quarter. So it's a pretty significant impact on that overall for the company in that category.

Okay. Is that -- so the majority of this is unit declines that we would have seen?

Yes. Directionally, that's correct.

And our next question comes from Trey Grooms with Stephens.

So maybe for Pete and maybe a little housekeeping here. But on the new ERP rollout, maybe could you update us on how that's progressing and maybe the associated costs? I think it was expected to be about $140 million impact to SG&A in the back half, if I remember correctly. So I guess it would be offsetting some productivity gains that you guys had talked about in the first quarter. Any update there on the cost side of things, timing of when the rollout could be complete? Or anything you could -- any color you could give us on the ERP system?

Yes. Thanks for your question, Trey. I'll start, and I'll hand it over to Peter for some additional color. So the $140 million that we outlined last quarter is still the number. But I want to clarify that $140 million is really a cash expense that we expect to incur in 2025. As it relates to SG&A, there's a schedule in the back of our earnings presentation, the Reg G that reconciles net income to adjusted net income. We have a line in there that is...

Technology implementation expense.

Technology implementation expense that isolates the cost. It is excluded from our adjusted SG&A as we think about that 30% or 70% split. But we don't see any change in that projection for 2025 at this time.

And in terms of the project, we had go live July 1. So we're about 30 days in. It's 22 locations in 2 markets. We are up and running. We certainly had speed bumps and issues, any ERP implementation will, we're working through it. We've got a really dedicated team both on the ground locally and in field support center headquarters here, along with support from Accenture and SAP. So we're -- everybody is diligently working through the issues, and we're still excited about what it represents in terms of enhanced functionality, modernization, interconnectability. I'm not sure if that's a word, but if it isn't, I just made a good one. But yes, we'll move through it.

Okay. Perfect. And maybe one last one. Multi-family clearly has been an awful headwind for you guys. But when do you guys expect to see some stabilization there? Any uptick in the starts that we've seen when that might actually start to flow through for you guys? I know there's a pretty massive lag there. But just in general, maybe a general rule on how to think about the lag and when you guys might be able to see some stabilization on the multi-family side of things?

Yes. Thanks for the question. I think multi-family has been stabilizing. It's been more consistent sequentially from quarter-to- quarter, consistent with what we shared last quarter. So we're seeing that within our numbers with the backlogs that are leveling out. Obviously, they're a little lower than where they had been in the past in the history, and we've been rightsizing that side of the business as well to align with the volumes. As a reminder, we have about 9 to 18 months lead time on multi-family projects depending on the size and complexity of what it is and then the duration in which they run. So we are looking at the multi-family starts positive number as a good indicator that things are leveling off, and we expect to see that continue to build into 2026, and we'll look for that -- we'll provide that information when we give guidance probably in the next couple of quarters.

And our next question comes from Phil Ng with Jefferies.

Pete, appreciate the great color, Peter and Pete. Great color on why the back half, your Single-Family starts sales could be weaker of the destock. Probably impossible question to answer, but when you kind of think through this, does that destock get flushed out by this year and you're in a better spot for next year? I'm awfully just trying to gauge, obviously, hard reset in expectations for '25, your ability to grow next year with some of this destock kind of getting flushed out, maybe multi-family is a good guy. Perhaps any self- help levers you have at your disposal that we should be thoughtful about?

Good morning, Phil. Yes, I love impossible questions.

We eat impossible questions for breakfast.

Yes, the reality is there's been a lot of effort, I think, on the builder side to clear out or at least stabilize that inventory level. And unfortunately, it's run away from them a little bit I think on the ground. And that is evidenced by the below normal seasonal performance. You didn't see the summer run this year than any of us were expecting. That adjustment, I think, is already being made and is already being accounted for and does have a pretty strong opportunity to stabilize through the rest of this year. I think you couple that with -- I think it was David's question earlier about what if we start seeing rate cuts, I think that does set up pretty well for '26. Obviously, way too early to say, but it's not as if the inventory levels are catastrophic. Certainly worse in condos for The Wall Street Journal article this morning that it is in Single-Family homes. But it's still, I would say, manageable given the overall environment, particularly if you consider existing home sales being at such a low level. So I think we're okay. I don't think we're that far off of where growth is a realistic expectation for '26. But the trajectory, obviously, for the back half of this year is necessary to burn off that inventory and keep things back or get things back to a more stable level.

Okay. Super. That's great color. On the M&A front, you guys mentioned inorganic as a means to kind of drive growth. Any color on the pipeline? Last quarter, you kind of commented, the pipeline has kind of dried up a little bit. So color on that front. And then the buildings distribution industry, we're seeing a handful of players get bigger and do a lot more consolidation, tackling different verticals. When you kind of think about your M&A strategy, any view of how that may evolve just given the industry is looking to broaden out and be more horizontal?

Yes. Well, it's funny. Unless you're doing a multibillion-dollar deal, it's been pretty quiet. There's a half a dozen floating around. I think the biggest problem -- and I know this won't come as a surprise to you, people are uncertain about where normal is. It's tough to get comfortable with the transaction price whether it be basing off of a high or expecting things are going to get a bit better in the near future so I'll just wait for that to happen or one of those situations. It's just limited the number of assets coming to market in what I would describe as the bite size scale. As you mentioned, it has gotten to be a more interesting dynamic more broadly in our space. You've got some big and very communicative players out there talking a lot about could be. I think where we have been able to demonstrate meaningful value for shareholders is in that core, in that strike zone of servicing builders and the R&R space around complex projects in pros. So I think that's where we will continue to outperform. I think that's where we continue to be a competitor that is a force to be reckoned with. And we're going to continue to deliver on that promise. I do think there's still tremendous opportunity to do more there. As we mentioned in the past, we're not going to stop looking in that window. We continue to scan the horizon for good opportunities with quality shareholder return. But we don't feel like it's burning a hole in our pocket either. I think we will continue to be prudent, and we'll -- we, I think, have a tremendous track record of shareholder value creation, and we intend to continue that.

And our next question comes from Collin Verron with Deutsche Bank.

Just one for me. You've outlined the difference between BLDR Single-Family revenue underperforming Single-Family starts for several quarters at least now. I just wonder if you can talk about where you think we are in that trend and how much more downside there is to BLDR's revenue per start, given what you're seeing or hearing from customers in terms of their new home footprint or floor plans? Just curious if you think we're approaching a bottom here on that metric? Or do you think this will be ongoing?

Collin, this is Pete. Thanks for the question. So the way that we look at it and I tried to outline that in the prepared remarks as we evaluate our sales -- Single-Family sales versus Single-Family starts lag basis. And I know in the past, we have typically shared some structural adjustments to how the starts have behaved or the value per start itself. So as we look at that for Q2, our Single-Family sales were down relative to the lag starts by about 2%, 3%. And with the shrinking home size, it's really leveled off. We're not seeing much of a difference on the home size from year-over-year. So as we indicated last quarter, the leveling off of the smaller home is certainly there. We continue to see some of the cost and price reductions from manufacturers and included in some of our price normalization as an adjustment. And then the decontenting is becoming smaller as well. So all those things considered, we're pretty much on par with where we should be. We're not losing down. We don't see this gaining a lot of ground, but we're kind of right down the middle at this point. So that gives us an indication that we're leveling off and where we should be, and we're in a great position to accelerate growth as it turns.

And to lose a little bit of the comment prior about where does pricing go and how you feel about that balance between share and margin, that's where we get the confidence from. We've leveled out. We're starting to hit that equilibrium, and we'll just have to see where it goes from here.

And our next question comes from Jay McCanless with Wedbush.

The first question, Peter, you talked about on-time, in-full at 92%. I guess what's something we should benchmark or look for going forward as kind of a goal for the company?

Higher. Yes, we have internal goals that we set in terms of improvement each year. Obviously, the better you get, the harder it is. There's a couple of different ways that we see executing against that improvement. And the obvious one is partnering with our vendors to ensure that our distribution network is as efficient and aligned as possible. So that's improving communication, that's aligning around inventory locations, just-in-time transactions, all those good things. So that's a big piece. And then on the other side, it's really around the alignment with the customer, getting clarity around where they're headed, working with customers and information sharing and alignment around detailed level needs. Again, a lot of that can be benefited if we're working through the digital environment. That is another way where our prediction capabilities improve, especially when you're leveraging what we're implementing, which is a more modern ERP with a granular level of visibility that I think is superior than what we've had historically. While not bad historically, I think this is a step even better that would allow us to improve on-time and in-full. But the team does a great job no matter which system we're in, but it's not easy.

Got it. Okay. And then second question I had, it sounds like the -- you factored in the SLA into the lumber guidance. But I guess it's probably hitting a little later than we thought it would. I guess without giving guidance for '26, but maybe talking directionally about what happens to gross margins when you have to start taking on those higher prices. And then, I guess, more importantly, how long do you guys think it will take to pass that out to the market and start to recoup that little higher cost that you're going to be paying?

Yes. I mean, I think we're going to treat the new lumber price like we treat prices in general. We're a distributor. We don't make a tremendous amount of money on distributing lumber. Nobody does. And so the reality is we're not eating a 20-point increase in lumber. Facts. It's not possible. So it will be passed through. The market will adapt. Now the reality of it, though, is there is a rebalancing that's occurring. There's substitution, there's behavior by individuals within the market to compete at that breakeven level. So I think that while there's certainly going to be an impact on the Canadian side, there is some shifting that will have to happen in order to digest. And remember, the amount of demand that is coming from new construction is still dwarfed by the R&R space. So with the weakness in R&R, you're just looking at a space where it's going to be hard to get a ton of price in general, but there's a threshold of performance. There's a cost structural that isn't going to be able to be crossed for very long before the whole thing resets. So it will be interesting to see how it plays out. You're right. It's a little slower than I think we're expecting. But given the demand profile, I'm not horribly surprised. I think staying stable where it is on the lumber side is a pretty maybe decent performance given everything else considered. OSB is just a different story.

And our next question comes from Reuben Garner with Benchmark Company.

Most of them have been answered. I just have one quick one. Your starts forecast, I know it's typically in your geographies. Can you just talk about what specifically you're seeing geographically? I know Texas, for instance, is a big market for you and has been in the news headlines lately. Do you have any markets that you're over indexed to that are outperforming? Do you feel like that kind of 10% to 12% decline will kind of actually be in line with the broader market?

Let me try and add some color and you re-steer me if you think I'm off base. In general, I would tell you that we're exposed to where new starts are. So when people talk about how rough it is in Florida and how challenging it is in Texas, I'm going to say, yes, that is correct. The dynamics in those markets, given the scale of new construction over the recent years and the impact of some of the new cost profiles in particular, in Florida, the impact is meaningful, and that's where we've seen the biggest impact. Now that said, we are in 43 states. So certain parts of the country are far more stable. We've got parts of the country -- the Northwest has just been healthier. It's just not gone as far, I would say, either direction, and they're chugging along. Sometimes New England will make the headlines because they'll have a big percentage change. But candidly, they just don't have a lot of starts. It's just a much smaller market for us. And so it has less of an impact. But broadly, a lot of red on the map, a little bit of green, but it's those core and traditional starts markets where you'd expect us to be talking that that's accurate for us.

And our next question comes from Ketan Mamtora with BMO Capital Markets.

Peter, maybe to start with, on your point of substitution in lumber, are you seeing more signs of Southern Yellow Pine being used in your residential construction maybe for cross applications? Because historically, our understanding has been builders tend to prefer this spruce trade which comes in Canada?

Yes. I think historically, spruce, SPF in general is considered a superior product. It's preferred by the building community in most markets. It's simply the massive availability of the Southern Yellow Pine. Without getting into too much of the detail, it's still preferred, but if the cost differential was big enough, people will make decisions to manage affordability in ways that may be detrimental to them in other aspects of the build.

And how you -- have you started to see that happen yet and with the price differential that we have today or not yet?

Yes. We've seen that for years. That's been, I would say, a modest trend for a long time. The question is whether or not this markup is enough to create a step function change in the pace. At this point, I would say no, it continues to be measured, but I hesitate to predict where that might go.

Got it. Okay. That's helpful. And then Peter, one more on truss margins, just order of magnitude, how would they compare today versus what they were in 2019?

Better.

And our next question comes from [ Alex Rigel ] with Texas Capital.

Have you seen any competitors pull back and/or suppliers that take notable actions to reduce supply?

Not really. Don't get me wrong, everybody is managing it. And I think we've talked a lot about the downturn and the impact and the deleveraging that everybody is experiencing. But I don't think anybody has done anything dramatic. Probably the most dramatic that I can think of were a couple of [indiscernible].

And then as it relates to your guidance, you trimmed it a little bit. What changed from your prior plan?

It's really the market. The market is weaker than we had originally forecasted, both in starts -- Single-Family starts in particular, but also in the OSB. So those are the 2 main.

And our last question comes from Brian Biros with Thompson Research Group.

One quick one here. On the R&R side, I guess the outlook still calls for flat. And I think you've seen growth there so far through the first 2 quarters here. Does that apply a drop into negative here in the back half or is that kind of still steady and you're just outpacing the flat outlook for R&R?

It's really the latter, just outpacing the flat outlook for R&R. The flat R&R is really for the market, not necessarily our sales.