Builders Firstsource Stock

Good day, and welcome to the Builders FirstSource Third Quarter 2026 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by management and the Q&A session. [Operator Instructions] I would now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead, ma'am.

Good morning, and welcome to our third quarter 2026 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 the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe these 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 third quarter results reflect the disciplined execution by our team and the resilience of our platform. While housing market conditions remain challenging, we are focused on what we can control, delivering solutions that help builders operate more efficiently and investing in value-added products and technology to drive productivity and fuel growth. These efforts are reinforcing our leadership position and our role as the partner of choice for homebuilders. This environment underscores the importance of the operational excellence and differentiated capabilities at scale, which position us to outperform in any market.

Let's turn now to Slide 4. We delivered third quarter results in line with our expectations for sales and EBITDA, even as single-family activity remains soft. Our value-added offerings, cost actions and ongoing productivity efforts helped cushion the impact of lower volumes. I want to thank our team members for their relentless focus on our customers as we head into the final quarter of the year.

Before turning to our strategic priorities, let me spend a moment on the market backdrop. Mortgage rates moved back above 7% during the quarter. And with consumer confidence still weak, affordability remains the main constraint on new home demand. Higher diesel and transportation costs are also adding pressure across the supply chain. Despite these headwinds, we are maintaining the midpoints of our full year net sales and adjusted EBITDA outlook. Single-family starts are tracking with the assumptions we set last quarter and economic forecasts have moved closer to our view since then. Pete will walk through the details in his remarks.

Demand this fall has been weak, and some builders will likely need to slow starts further to bring inventory in line with sales. Our outlook already reflects this cautious view. In a market like this, builders lean harder on partners who can help them control costs and build efficiently, which plays to our strengths. We expect to capture share by delivering outstanding customer service, bundling our broad product portfolio to help builders with affordability and applying technology in ways that make our sales teams more effective.

Performance varied by region with continued softness across Texas and Colorado, partially offset by relative strength in California, Florida and the Northeast. In multifamily, sales were up modestly in the quarter, but developers remain cautious about new starts as the industry works through existing projects and occupancy stays below desired levels in many markets. Based on the current pipeline, we expect multifamily results to stay muted in the near term.

Our priorities have not changed. We will continue to constrain structural costs and grow faster than the market. Even in a weak year, builders are still starting a meaningful number of homes. The growing shortage of skilled trades is driving builders toward off-site and installed solutions where our offerings and our scale position us as the partner of choice.

Slide 5 highlights how we're managing through the downturn while protecting our ability to invest for the long term. We remain on track to deliver the $140 million in cost actions we outlined. As a reminder, $25 million of those savings will hit next year. So far this year, we have streamlined our organization, reduced overhead across the field support center and operations and focused our investments in the initiatives with the clearest near-term value. We have consolidated 45 facilities so far this year and 100 over the past 3 years, while keeping our on-time and in-full delivery rate above 90%. With our scale and experienced team, we are well positioned to manage through today's market and to benefit from meaningful operating leverage as it recovers.

Slide 6 lays out the key initiatives underway across our 4 strategic pillars. This quarter, we gained share in a challenging market. We also generated $23 million in productivity savings through targeted supply chain initiatives and manufacturing efficiencies and made steady progress on our ERP implementation.

Turning to Slide 7. We deployed approximately $161 million in the third quarter towards return-enhancing opportunities that are aligned with our capital allocation priorities. Strong free cash flow generation through the cycle gives us the flexibility to invest in the business, pursue acquisitions and return capital to shareholders over time.

M&A remains an important lever. As shown on Slide 8, we focus on acquisitions that expand our value-added product offerings and strengthen our position in desirable geographies. This quarter, we acquired ICG and Gleckler and Sons, which enhance our ability to serve customers in the Southeast. Since the BMC merger in 2021, we have completed 44 acquisitions, representing approximately $2.5 billion in annual sales, the equivalent of a top 6 LBM player. The industry is still fragmented, and we see a long runway for M&A to contribute to our growth.

Moving to Slide 9. We see technology as an enabler of our self-help efforts, both in how we run our business and in how we serve our customers. Our goal is to help build a homebuilding ecosystem where data flows efficiently from one step to the next. When information moves cleanly between builders, trades and suppliers, everyone works more efficiently, including us.

Our investments are pulling pieces of that ecosystem together. In the third quarter, we led the Series A financing for Digs, whose AI platform brings the builders' construction documents into a single source of truth that follows the home from preconstruction through warranty. We also invested in Scaffold alongside several of the nation's largest homebuilders. Scaffold's AI connects trade contractors to the homebuilder systems they already use and keeps schedules and purchase orders current across all of them.

We're also using technology to help make our own systems and teams more productive. We have piloted a new sales app with will call functionality, which has reduced the time it takes for customers to place an order by up to 90% -- that means faster service for our customers and more capacity for our teams. It's one example of how technology supports the productivity savings we expect going forward. We'll share more at Investor Day about how technology is benefiting our business and our vision for the homebuilding ecosystem.

One of my favorite parts of these calls is recognizing a member of our team. Today, I want to recognize Kay Moberg, a pricing analyst at our Wasilla, Alaska, location. In 1986, Ferris Bueller made skipping school look like an art. That same year, Kay joined Spenard Builders Supply, one of our legacy companies, as a receptionist. And unlike Ferris, she has been showing up ever since. Her area manager calls her a beam of bright light, and she's always ready to jump in wherever she's needed. And when she's not at work, you'll likely find Kay somewhere in the Alaska wilderness, hiking, cycling, hunting or fishing. Her teammates benefit from that, too, because at inventory time, she brings in summer sausage and smoked salmon. I'm told nobody calls in sick on inventory day in Wasilla. Thank you, Kay, for 40 years of keeping our Alaska team well supplied in more ways than one.

I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. Our third quarter results met our expectations, reflecting solid execution and continued focus on cost management. Our cash flow generation and liquidity give us the capacity to pursue growth opportunities while maintaining financial flexibility.

Turning to Slides 10 through 12. Net sales decreased approximately 2% to $3.9 billion as lower core organic sales were partially offset by growth from acquisitions. Core organic sales declined 6% in single-family, increased 2% in multifamily and were roughly flat in repair and remodel. Even in the softer single-family backdrop, we gained roughly 1 to 2 points of share in the quarter.

As a reminder, our single-family sales don't move one for one with starts. First, there is a roughly 3-month lag between a start and our first sale. Second, the value of a comparable start has declined by about 10% on average since 2019 as homes have become smaller and more value engineered. Third, affordability pressure has extended into pricing across the supply chain, lowering average selling prices per start.

Gross profit was $1.1 billion, down 11%. Gross margin was 27.8%, down 260 basis points, primarily due to the lower housing starts environment and related headwinds. Adjusted SG&A was $785 million, down $5 million. Lower variable compensation, reduced headcount and the benefit of our cost actions more than offset acquired operations and higher insurance, fuel and delivery expenses.

We remain on track to deliver $115 million of cost actions in 2026 or $140 million on a full run rate basis, including the additional savings identified last quarter. These actions are separate from productivity savings. They include additional facility consolidations, adjustments to incentive compensation, tighter control of discretionary spending and the lower merit and overhead spend.

Adjusted EBITDA was $311 million, down 28%. Adjusted EBITDA margin was 8.1%, down 290 basis points primarily due to lower gross profit and reduced operating leverage on the sales decline.

Before I walk through our adjusted EPS, beginning this quarter, we have updated our definition to improve the alignment of adjusted net income and adjusted EPS to be consistent with adjusted EBITDA. Both measures now exclude the same items, such as stock compensation expense and other management identified adjustments, which includes items like severance. Prior periods have been recast on the same basis and a reconciliation is in our release and presentation. Adjusted EPS was $1.51, down 25%, driven by lower adjusted net income, partially offset by share repurchases.

Now let's turn to the cash flow, balance sheet and liquidity on Slide 13. Our third quarter operating cash flow was $147 million compared to $548 million in the prior year, reflecting lower net income and the lapping effect of last year's working capital release. Free cash flow was $76 million. On a trailing 12-month basis, our free cash flow yield was approximately 4%. Our net debt to adjusted EBITDA ratio was approximately 4.1x, in line with our expectations. That is above our long-term target, but we are comfortable with our position, supported by approximately $1.5 billion in liquidity, consistent free cash flow and favorable terms. We expect leverage to return to our target range as EBITDA improves. In the third quarter, we invested $71 million in capital expenditures and $91 million in acquisitions. We did not repurchase shares in the quarter.

Slides 14 and 15 outline our updated 2026 outlook and assumptions. Within our geographies, we continue to expect single-family starts to be down nearly 7%, multifamily starts down about 4% and repair and remodel activity down 1%. We have narrowed our ranges and maintained the midpoints for net sales and adjusted EBITDA. We expect net sales of $14.2 billion to $14.6 billion, adjusted EBITDA of $1.075 billion to $1.125 billion and adjusted EBITDA margin of 7.4% to 7.9%. Our gross margin outlook remains 27.5% to 28.5%. We expect free cash flow of approximately $400 million to $450 million, narrowing the band within our previously stated range.

Our guidance assumes average commodity prices in the range of $390 to $410 per thousand board foot, around the long-term average of $400. Lumber prices have eased slightly as we expected, while OSB prices have risen in recent weeks following mill curtailment announcements.

Moving to Slide 16. As 2027 comes into focus, we have again laid out scenarios showing how we expect to perform across a range of housing and commodity conditions. These scenarios are not guidance. I repeat, these scenarios are not guidance, and they do not include cost actions beyond those already announced. They are meant to frame potential outcomes in different environments.

In closing, we are managing costs and cash closely in the near term while continuing to invest where we see the best long-term returns. Our liquidity and cash generation give us the capacity to do both. We look forward to sharing more about our financial framework and long-term targets at Investor Day next month.

With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. We are the nation's largest supplier of building materials and value-added services to homebuilders. We hold leading positions in manufactured components and in windows, doors and millwork, pairing national scale with strong local relationships in the markets we serve. Technology is a growing part of how we put that scale to work for our teams and our customers.

Our team has managed through cycles before, and we are using this one to strengthen the company. The work we are doing today will make BFS a more efficient, faster-growing business with meaningful earnings upside built to compete and win in any environment.

We'll show you how at our Investor Day on November 17 at the New York Stock Exchange. The leadership team will walk through the many ways we plan to drive shareholder value, and we'll share the long-term targets behind that plan. We hope to see many of you there. Thank you again for joining us today.

Operator, please open the line for questions.

[Operator Instructions] our first question will come from Matthew Bouley with Barclays.

I wanted to ask a question around the 2027 margin outlook and cost reductions. So I think I'm looking at the midpoint margins sort of in the low 6s, and correct me if I'm wrong. I know this year, you talked about $140 million of cost actions that are beyond productivity. So in a scenario of the lower ends of the range, you point out kind of low 800s or high 700s on single-family starts. How do you see your ability to pull back further on SG&A sort of austerity measures in that environment? And do these scenarios include those type of cost reductions?

Yes, it's a fair question. I think as you've seen, we were able to react to the downturn in the market. Very experienced team as much as we don't enjoy shrinking the business. It's a lot more fun to grow it. They know how to do it. And we've executed against that a whole variety of ways that we've made the business smaller to match the size of the market, whether it's location closures, variable costs, fixed overhead reductions, a lot of forms there, whether it be discretionary or the field support center staffing reductions, all actions that we've taken.

We will continue to execute on those based on what the market gives us. So yes, those are opportunities into the future. That's not what we're doing here. This is just our kind of high-level view based on what we're seeing and some of the key variables right now. We haven't gone through our annual operating process. Our planning process that will happen here over the next 1.5 months and into the beginning of next year. We'll roll that out to all of you so you know the detail.

Got it. Okay. No, I appreciate that, Peter. And secondly, I guess, kind of a 2-parter here on M&A. So high level, just how are you thinking about or perhaps kind of explain M&A versus leverage here to the extent you can acquire EBITDA in a leverage-neutral fashion. So just kind of broader thoughts on that outlook? And then secondly, I'd love to hear a little more detail on Gleckler specifically. Our understanding was they were growing. They had a lot of impact perhaps on the Florida market. So just wanted to understand how you were competing with them now that you've acquired them? Any more details on their financials? Anything along those lines would be great to hear.

Sure. Yes. So M&A continues to be an area of focus for us. When we look at the business, we continue to be confident in the balance sheet, the strength of what we borrowed, the tenure at which we've borrowed, the interest rates at which we've borrowed. So we feel confident in what we've got established on the balance sheet. These deals are relatively modest. They're in the range of our cash flows that we're seeing. For us, it's -- if you just look at it mathematically, it's ensuring you've got -- you're on the right side of the interest coverage ratio, it's making sure you're on the right side of the valuation in terms of the multiples. I think we can demonstrate and while we never get into details on these calls, we are able to acquire these assets at a discount from what we would have certainly a couple of years ago, but we think certainly against what we can do with them.

And I think that's a good dovetail into Gleckler. It's a great business. You're right. It's -- we're excited to bring the Gleckler team on board. The BFS and Gleckler teams are working very closely together to figure out how to pull those 2 businesses together and put the best people in the right seats. That means for us, I think, opportunities to optimize, whether it be locations, staffing, the way that we apply our resources to meet customer needs in a variety of different categories, expanding candidly in a couple of categories now that we have better capacity in certain product categories, both Gleckler and ICG working together with BFS to deliver on that. And pricing is always part of that as well. But I think that's a real opportunity for us. We're excited about putting those teams together, takes what is already a strong business for us in Florida and makes it even stronger with a better product portfolio for our customers.

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

This is Chris on for Mike. Maybe just on gross margin. I was hoping you guys could flesh out your thinking around kind of sequential gross margin from 3Q to 4Q. And as we exit the year and given your range of outcomes for '27, how should we think about the potential impact on gross margins on the high end of that range, the low end of that range? That would be helpful.

Well, I'll start at the high level, and Pete can give you more detail. I'd say that if you look at the year and the way things have played out, pretty rough start to the year on gross margins, a lot of competition really aggressive sort of through the first quarter and into Q2. Towards the end of Q2, though, things really started to level out. And I would say, since then, we've been in a fairly narrow band of margin performance. I think that's reflective of candidly how aggressively everything went down. I think there was a bit of a digestion by some of the players who led it down and realizing how far they maybe should have gone versus went, and there's been some stabilization at that level.

Now that always comes into question how stable it's going to be whenever you see significant movements on the starts number. So I think that's what the only question mark that remains for us now is what is this most recent move going in mortgages going to produce from a starts perspective. You've heard our commentary around it. We think it's likely some builders will have to change their trajectory a little bit. And then how will the discipline hold up on the margin side for the folks who are serving that smaller market. And we've got some optimism based on what we've seen. We don't think there's a big move from here, but that's the remaining question in my mind.

Yes. So more specifically with Q4, the imputed number is going to be down slightly from Q3 based on just the squeeze, which we anticipate with some of the pullback in the seasonality, some of the deleverage in the fixed cost structure and cost of goods sold, but also what we're seeing and hearing from our customers and some of their moderating to balance inventory and sales.

Now that laps into 2027. As you think about it, we did not give guide, but the way to think about it is we certainly started the year a little bit higher, and it has come down. So we have to digest that lapping effect as we go into 2027. So just that as a framework is the way to kind of think about what transpires or transposes over into the 2027 kind of scenario modeling.

Understood. I appreciate that. And I guess just more broadly on competitive dynamics and given the change -- the more recent change in the demand backdrop, how are you guys thinking about those dynamics through year-end and into next year? And then particularly on the commodity side, I realize that always tends to be a tougher part of the market, but just what are you seeing there specifically?

Well, I'll reiterate that I think things have stabilized by and large on the competitive side. We will continue to monitor it and react appropriately. I don't see anything dramatic playing out there. But like I said, movements in starts have a tendency to cause reaction. So we'll keep a close eye.

When it comes to commodity side, I think what you've seen is pretty disciplined behavior out of particularly the lumber mills, maybe a little less so on the OSB side, but that has been moving recently as well. You may have seen one of the announcements that came out last night, cutting another mill. That all is supportive. I think it's supportive of pricing remaining in an area where we can be profitable and more importantly, where the mills can be profitable and where we can make a higher number and not see it as a headwind on top of what we've been facing. I think the broad statement is there's no meaningful movement up in our mind until the markets start to move a little bit more aggressively to the north up and to the right. But at least the bottom is, it seems to be found and the industry is taking the appropriate actions to respond to the real demand on the ground.

[Operator Instructions] Our next question comes from Charles Perron-Piché with Goldman Sachs.

First, I would like to ask a little bit more about the comments that you've made about your ability to gain share in this environment. It's quite encouraging, especially while you're able to sustain a gross margin within the targeted range that you talked before. I guess against that, I was wondering if you could discuss your approach to share gains versus protecting margin going forward. And as you focus on service and leveraging your scales and offering, is there a possibility for you to grow share without necessarily having to compete aggressively on price?

Yes. Great question. Thank you. The short answer is yes. And the way that we're going to execute on that, we'll drill you into more of the details when we're together for Investor Day, but the gist of it is our approach to share gains is very focused around individual actions at the market level. So targeting areas of the business where we know we have a right to win, we win elsewhere. We have a very good product offering. Maybe we've got an opportunity to take advantage of available capacity and focusing our sales efforts, whether it be putting the team aligned around a specific initiative, marketing materials, presenting the case to a national level representative from a homebuilder, a number of different approaches, but very much focused at a market level to be able to capture that incremental growth opportunity.

One way that we do that is by taking these opportunities and reaching out to suppliers and putting together a joint approach to attack a particular market or a particular customer. Those are oftentimes bundled. They're grouped together. It does absolutely rely on what you described, our customer service offering, whether it be on time and in full or the subject matter expertise that we can bring to bear. All of that is where we have focused. We have a very disciplined approach to pursuing that opportunity. And I think it's really yielding results, and we're seeing it in this quarter, and we think we have a real opportunity to continue to deliver on that into the future based on the momentum that we've built this year. We started with a great team. We're just giving them more tools to be able to win.

That's very good color. And second question, I guess not all starts are created equal with some builders increasingly shifting their business to build-to-order -- you also hear a little bit more luxury holding relatively better. Can you talk about your ability to service these end market opportunities? And what do those mean from a profitability standpoint given your differentiated offering across your portfolio?

Yes. So it's good, I think, on balance. The primary benefit from BTO is visibility. We have an opportunity to serve a wide variety of product categories. As a distributor, we're certainly very focused on managing that and delivering it both at a very high on time and in full, but also at the lowest cost possible, right? Visibility around build-to-order is usually pretty good. And so our opportunity to both capture a bigger percentage of the value of that start as well as ensure that we're efficiently providing it to the job site are certainly advantages that we bring to bear. But all in all, I guess I would describe it as normal business. We certainly do it every day in a wide variety of markets. So it's not a dramatic shift for us, candidly. It's a very modest one. But that's the one advantage I can think of when we think about...

We'll move next to Rafe Jadrosich with Bank of America.

Can you talk about the diesel and inbound outbound freight impact to the third quarter and then how you're thinking about it for the fourth quarter?

I don't think we break out the quarters. I mean as a frame of reference, it is a meaningful number for us, right? We run a top 20, top 30 fleet in the country. It's an important number based on sort of the peak numbers we're looking at $40 million, $45 million a year on the cost of diesel outbound directionally. Now we're offsetting that in a number of ways, obviously, including it in pricing. We've announced a delivery surcharge to try and offset some of that. But it's meaningful, and it's something that we've paid a lot of attention to. We're focusing on it operationally doing what we can to make sure our trucks have simple things, like the appropriate amount of air in the tires to ensure that we're getting the best fuel mileage, but also making sure we pass it through where there's no way to offset it ourselves. That's an ongoing battle. It ebbs and flows, as you might imagine, based on the daily price. I don't think we have anything -- I'm looking at Pete, I don't think we have anything for the third and fourth quarter breakdown.

Not that we've prepared to share with the group, but you hit it on the head. We have fuel costs that are double what they were a year ago, and we're working through that in SG&A, but our fuel surcharge is up 30% from year-over-year and what we're able to pass through. So we are making progress on it. It's not all the way where we want it. And the inbound is that we've talked about in the past an inflationary cost that passes through naturally.

Okay. That's helpful. And then you sort of commented on the market share trend improving more recently through the year. Are there specific categories or like within your different segments where you're seeing market share gain and more traction versus others?

It's pretty mixed. What we've, I would say, acknowledged, and you can see a little bit in the trajectory of the product categories, we pick up a little bit more of the lumber just by virtue of already having a lot of the value add. Now that said, bundling certainly has helped value add. So there's a bit of a synergistic benefit, I guess, where we capture on both sides. But I think just looking at the numbers, you can see that lumber is an area that we've, I would say, picked up more on a percentage basis.

We'll move on to Ryan Merkel with William Blair.

I want to start with a trend question. Peter, I'm curious to hear how the market has evolved since July, and it sounds like demand hasn't taken a step lower here in 4Q despite the higher rates. Is that right?

No. I got to be real careful how we thread the needle on this one, right? So we've -- the momentum for us hasn't shifted yet in response to the mortgage. But I don't want to misstate. We're waiting to see what happens in that demand shift. There's an expectation it will move. We've insulated it from it a little bit in 2 ways. One, it takes a little bit of time for the acknowledgment of the mortgage rates, the sales pace to change, the starts to be sort of changed at the builder level and then that to show up in our number, right? There's a couple of month gap from the start until we start delivering things to the job site, prep the site, the foundation, the slab, whatever, the rough before they start delivering lumber trusses and framing. So that gap is kind of where we are right now.

The commentary from builders is it's pretty sobering. That move in mortgages was a bit of a shock to the system. And I think that the builders have acknowledged that, and we're recognizing that there's going to be something coming. That has a lot to do with what we put out there for the '27 directionality. But these things have a tendency to move quickly and in any direction you might choose to model. So there's a wait-and-see kind of component here. So far, in good shape. I think our share growth has helped us, not teeing up a dramatic falloff because I think we've got enough of a window to flow through with what we have, but certainly expecting something is going to come through.

Yes. That all makes sense. Okay. And then I'll take a shot at the '27 framework. I guess my question is on gross margin. What are the puts and takes? And I realize that the framework doesn't include more cost out. So that's an important consideration. I know you got the Investor Day coming up, but anything you can tell us on gross margin would be helpful.

Yes. So just to reiterate, this isn't guidance, it's scenario modeling using single-family starts and commodities. I talked about a little earlier, the lapping effect that we'll have in gross margin. So that has to be contemplated into the modeling work on the potential outcome. And what Peter just talked about with some of the pacing due to the affordability that will likely play forward into at least the first part of the year, if not the full year, given future relief on that affordability front. I think it's going to potentially be a challenging environment again, and we're prepared to match it with our ability to manage through any environment.

We'll move on to John Lovallo with UBS.

This is Matt Johnson on for John. Appreciate the time here. I guess, first off, just on the scenarios, just one more question. On the middle scenario you guys have, I think it's calling for single-family starts to be down about 5% and your sales to be down about 3% within that at the midpoint. Is there just any kind of color you guys can give us on how much completed M&A is in that number and kind of what else might be driving that delta? I guess I was just trying to get a handle on what you're assuming for your single-family organic sales performance relative to single-family starts.

Yes. There's some level of acquisitions that are lapping from the 2026 time frame, but no new acquisitions that we've built into it. So I think that's the way to think about that impact from M&A.

Okay. Appreciate that. Then I guess just back on M&A. I think someone asked about it earlier, but you guys completed the Gleckler and ICG deals this quarter, which was encouraging. I guess based on your results and also, I think US LBM's filings, it seems like leverage is becoming a bit more of a challenge just as EBITDA is getting compressed across the industry. I guess, are you guys seeing any less competition for M&A out in the market today? And how would you frame your appetite for M&A with leverage where it's at? And are you seeing more targets come to market just given the state of things out there right now?

So, broadly speaking, we still believe that M&A is going to be a long-term path for us to continue to grow. We capture tremendous synergies. We love being able to bring new talent, new regions, markets, products into the BFS portfolio. So I'll start by saying that hasn't changed, and we don't think that, that will change.

The ups and downs of the M&A sort of transaction space, that's absolutely true. I would say in the scheme of things, it's probably a down market in terms of folks being willing to sell. I think if folks are serious about selling, as you can tell, transactions are going through. I think multiples are more modest than they have been, not surprisingly, I guess, in a lot of ways based on our stock price and the dynamic broadly. That's part of the reason why there aren't as many deals on the market.

That said, I do think this is an environment that lends itself to success with mergers. So I do think folks that are selling are doing it strategically. They're looking out for their teams. They're ensuring that their businesses are going to be strong into the future. And by partnering with BFS, they see a path to do that. So certainly proud to be the partner that's executing in that way.

To your point, there are less folks like us now than there used to be. There aren't very many strong players in our space right now just because of the same things we've been talking to you about over the last couple of years. It's gotten a lot harder. It's not shooting fish in a barrel anymore to make money in LBM. You've got to be on your game. You got to be efficient. You got to be focused on controlling what you can control and driving to serve your customer exquisitely and doing it in a way that helps them address affordability. We're uniquely positioned to do that. And I think that's given us opportunities, both as a desirable partner, but also the strength of our balance sheet to continue to execute. It is a weaker or a slower time for that. But like you said, leverage is certainly something we're keeping an eye on. So being able to do some of these deals around the edges of smaller size, but still desirable from a partnering and acquisition perspective, it seems like a real great opportunity for us, and we're taking advantage of...

[Operator Instructions] We'll move next to David Manthey with Baird.

I'll take my shot at the scenarios here. Last year, you gave us a plus 5%, flat, minus 5% and then what you call the normalized scenario based on 30% to 33% gross margin. I see you didn't give one this year, but just out of curiosity, if you were going to try to put a band around what you'd consider a normalized gross margin today, what would that be?

Yes. So normalized gross margin for us is still anchored on normal volumes. So that's sort of 1.115 single-family total for starts. I think at that level, 30% to 33% is absolutely a reasonable normal, and we're going to work really hard to push north on that number. The challenge today is the sheer number of starts, the quality of the starts, the dollar value of the starts and the available capacity in the industry. That's a tough combination. And we're fighting through the reset at this level, and some of that is coming through in margins. I don't think it's indicative of the long term. I don't. I think it's part of the cycle. And I just remain confident that the 30% to 33% is something we'll get back to.

Okay. And with the scenarios, you -- I get it in terms of even on the flat scenario, you're basically saying you could hold the cost structure that makes sense. The down scenario, I guess, seems conservative because you're saying you wouldn't make any adjustments to the cost structure to kind of get to those scenarios. So it seems conservative on that side. But flipping this over and kind of thinking about more optimistically, if we're looking at up scenarios at some point, would you consider sort of -- I think you've talked in the past about contribution margins north of 20%. Is that a realistic level and maybe even higher on the first turn of starts moving up?

I agree with the first part. I don't agree with the second part. So I would say, yes, I think in that 20s range for contribution margin when we're humming is not unreasonable. You think about utilization of available capacity, the ability to stabilize pricing and say no to maybe some of the more aggressive or egregious stuff that we're taking now in order to make sure we're still humming. That absolutely can flow through. I think the best, though, the real sort of positive outperforming type of behavior that you've seen from us in the past comes when that momentum has had an opportunity to build when we're running at that higher level and those facilities are able to move to a second shift, for example, or a third shift when we're really squeezing the last of the incremental out, that's when it really starts to flow with kind of phenomenal profitability and when you'll see those higher contribution margin fall-through percentages.

We'll move on to Keith Hughes with Truist.

I'll keep harping on the same thing on the scenarios. You talked here about, I guess, a little bit of a normalization in pricing and margin in the jobs with some of the pressure going away. But the scenarios look like a really extreme decremental margin more akin to what's happened in the last couple of years. Are you not making an assumption that the pressure relents a little bit in any of these scenarios?

Yes, definitely not. We started with snap the line today, what's the business if you annualize it, so at current levels and then try to layer on, okay, what happens if it goes down 5%? What happens if it goes down 10% from a market-based perspective. That's our -- it's sort of -- it's an early path. It's a good look. Your point is right on. This isn't all the things we're going to do or how we think we can react to it. It's a first pass, but it's recognizing the market is what it is, and we want to kind of lay it out there as is what it is so that we can get appropriate credit when we outperform it. I think it's -- if it goes down 5% to 10%, it's going to be hard.

Yes. Peter already alluded to it, there's extra capacity that we're still digesting in this environment. We see more step downs, there's still excess capacity and that has to be processed through, which continues to put further pressure on margins in those downside scenarios. That's the way to think about it. Did we lose you, Keith? Did we lose everybody?

No, we're still here. We'll move on to Sam Reid with Wells Fargo.

I'll limit it to one question. Just wanted to touch on any mix assumptions that might be embedded in that 2027 scenario planning. Perhaps as you've maybe taken some share in things like lumber, just curious what flows through to the bottom line with respect to growth and EBITDA margin.

Well, in the scenarios, we didn't model any real change to the mix. So basically, the mix that you see in our 2026 numbers, likely the same mix model in scenarios.

We'll move on now to Trevor Allinson with Wolfe Research.

First is on the multifamily commentary you had in your prepared remarks. I think you said near term, you expect that to remain muted. But how should we think about that pipeline as we move into 2027? Is that an end market that you think you flip to growth as we get into next year? Or does the recent increase in rates mean that, that remains more muted, not just near term, but as we think about next year?

Yes. So you've got some cross currents there. This year, the build-to-rent market, I would say, went into a bit of a pause, if you will, while the whole ROAD to Housing Act, the implications with regard to build-to-rent were figured out. My conversations with some of the major build-to-rent players is it scared the jeebers out of everybody and they all said, we're not doing anything until we know what's going on here, not the least of which is because the investment thesis is sort of in the air until that was clear. Who are they going to be forced to sell, they would not be allowed to own, what were the restrictions they might face.

I would say the way it's worked out pretty -- call it beneficial, but not really detrimental to the space. I think you've seen a little bit of a reinitiation of action and movement. Unfortunately, and this is the other side of the coin, rates moving up is not good for that business, right? The cap rates and the ability to pencil a deal got a lot harder. So I think mixed right now on one hand, the relief rally on the other hand, a pause again because of the mortgage rates, we'll see.

But the way we look at it, more than half of that business for us is stuff that we can see into the future. So back order type stuff, trusses and installed millwork, we can sort of see off a little ways. So we have a pretty good sense of what it's going to do over the next quarter or 2. And at this stage, we're not seeing anything dramatic to start to move. I think rates move and a lot of good things happen. So that's a question mark that will sit out there for us, and we'll keep an eye on it.

Okay. And then second, there's been a lot of talk in the industry about the builders running into labor constraints in certain markets. Is that reaccelerating demand for some of your value-added products? And if so, I suspect that's very market-to-market specific. Any specific markets to call out where you're seeing outsized impact there?

Well, you're right about the labor issues. Initially, it was a little bit of pressure because they were all going to the data centers. I don't think that's necessarily as big of a deal. I think the bigger deal has been the enforcement of the immigration enforcement. There's a substantial amount of conversation with the builders in our markets. Certain markets really pretty substantially impacted in terms of available labor. Surveys are saying 2/3 of builders are talking about it, and I think that's probably right. It's -- yes, it's market specific, but I want to be real clear. I mean, we're seeing and hearing pretty meaningful stories in places you might not expect. So certainly, Texas, Florida, the Carolinas, sure, but Delaware, West Virginia, places that you wouldn't really think of as immigration enforcement hotspots are still being impacted and seeing declining available labor as a result.

We are benefiting, certainly, folks looking at opportunities to take work off the job site. The troublesome aspect of it is sort of this knee-jerk reaction and trying to deal with jobs under construction that it's just disruptive at this stage. I think in the medium to long term, it will certainly be good for us, and we see it as a tailwind on value add. I think it's part of the story and part of how we can help even to the extent we do install can be challenging, but running a public company and doing it the right way has advantages at times like these when you need to make sure that you can deliver. We're getting great utilization and the teams are meeting the needs of customers, which kind of proves our value as the partner of choice once again.

We'll move on now to Reuben Garner with Stone.

Multifamily and R&R have been a little bit more stable of late. Just curious how you thought about them in your scenarios for '27 and any other kind of comments on those 2 markets in particular.

Yes. We certainly contemplate all the pieces of the segments that build up to the total revenue. The scenarios are really concentrated on the single-family starts and the commodities. I think based on the commentary and what Peter just talked about, we look at multifamily, we think it's going to probably have a similar behavior to the single-family. So as we look through those scenarios, I think we -- without giving guidance because it's not guidance, we took a conservative approach to the multifamily again. And then R&R is kind of flattish as we think about what that looks like. Some of the economists are calling for an increase in R&R into the future, not seeing it yet and not willing to bank on it. Obviously, these are smaller pieces of the overall business, but still meaningful to the overall. So that's kind of down the middle way of saying it's consistent with what we're seeing today.

We'll move on now to Collin Verron with Deutsche Bank.

Just wanted to ask one on SG&A. When we look at margins when housing starts were last at these levels, gross margins clearly stepped up, but that's been offset by the higher SG&A spending relative to the sales base. I guess I'm curious how much of that you view as a structural change or how much of that is an opportunity to kind of leverage that going forward? And just maybe some broad comments on how you guys view SG&A longer term?

We're going to have an opportunity to take you into some of that detail when we get together for Investor Day. But broadly speaking, I think you're seeing the reset upwards on some of the input costs that are important to us. Primarily, you're talking about labor, wage-related costs like health care insurance, rents and sort of the transport costs in general. So fuel, right, is a good example. That is, in some ways, structural, but I also think it's important to point out that while we are a best-in-class organization that do a lot of things right.

We have a great team. We have not brought to bear modern technology to the extent that we have available to us. So a whole list of areas where, by giving our team the best, most current tools, we think we're going to get better, more efficient, more effective at executing. That absolutely has a benefit on the SG&A as a percent of sales, certainly a benefit in the COGS as well. But we think that productivity is still a meaningful opportunity for us as we go forward and give our teams the tools they deserve.

We'll move on now to Phil Ng with Jefferies.

I appreciate you giving us an early look for 2027. I understand it's not formal guidance. Curious, what does it factor in for price? Does that incorporate any negotiations you have had with your larger builder customers? Have you had early conversations in terms of their planning assumptions that's incorporated in this? Just curious what's baked in.

Yes. So the discussions with customers are ongoing. I would tell you the real reset, if there is any, isn't going to happen for a few months. That's happening at year-end and into the beginning of the year. Maybe starting now, but it's going to be a little while. Like I said, I think it's industry-driven. So it's not obviously just us. These aren't bilateral negotiations. They're multilateral negotiations for better or worse. And so there's a couple of assumptions in the numbers with regard to price. One is the run rate, the other is the market downturn. It's not massive, as you can tell. But that's kind of how we think about it at this point. And we will absolutely refine it as we get further into the year and have more clarity, both around what the run rates are going to be for starts and what the market reactions are going to be, and that will be rolled out in our actual guidance in February.

Okay. But it's fair to assume that within this framework, you've baked in some price bleed from current run rates. And then if it comes in better and stuff you do on the cost side, maybe that's a source of upside, but you factored some slippage. Is that fair, Peter?

A little. That's right. That's how we do it. When you move down starts, you move down margins a bit.

This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good day, and welcome to the Builders FirstSource Second Quarter 2026 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 2026 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 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 Peter.

Thank you, Heather, and good morning, everyone. Our second quarter results reflect the strength of our differentiated platform and the adaptability of our operating model. We remain focused on the factors within our control including managing the business with discipline and leveraging both our technology capabilities and our value-added solutions. This approach continues to strengthen our position as the partner of choice to homebuilders.

While housing market conditions remain weak, we are continuing to invest in innovation and capabilities that enhance the customer experience, improve efficiency across the value chain and reinforce our competitive advantages. Our business model is built to perform through the cycle, and we are confident in our ability to outgrow the market over time and create sustainable long-term value for our shareholders.

Now let's turn to Slide 4. Our second quarter performance underscores the resilience of our platform in a challenging housing environment. Sales and adjusted EBITDA were in line with expectations, supported by the strength of our team, our value-added solutions and the discipline embedded in how we run our business.

Before turning to our strategic priorities, let me spend a moment on the market backdrop. Ongoing geopolitical uncertainty, persistent inflation, and elevated interest rates continue to weigh on affordability and consumer sentiment, creating a challenging demand environment for new residential construction. In response, we have lowered our full year guidance to reflect a more cautious view of housing starts. Pete will walk through the updated assumptions in his remarks.

Despite these macro headwinds, we remain committed to executing our strategy with a sustained focus on share growth, continuous improvement and prudent capital allocation. We cannot control the market, while consistent execution against these priorities will strengthen how we operate today and position us to accelerate growth as conditions improve.

In single family, builders are actively managing elevated inventory levels and costs in certain markets. At the same time, they are moving towards a greater mix of build-to-order homes versus specs. This environment plays to our strengths, and we expect to capture share by delivering outstanding customer service, bundling our broad product portfolio to drive affordability and applying technology in ways that make our sales teams more effective.

Performance varied by region, with continued softness across Texas and Colorado, partially offset by relative strength in the Northeast. Multifamily, higher interest rates have pushed out project start dates and bidding remains competitive.

As the industry works through existing projects and occupancy rates remain below desired levels in many markets, developers continue to take a cautious approach to new starts. Based on the current pipeline, we expect multifamily results to remain pressured through the balance of the year.

Slide 5 highlights how we are navigating the current environment while preserving the flexibility to invest for the long term. Our operating model enables us to rightsize capacity, control spending, and align working capital with demand, all without compromising our commitment to customers. We have consolidated 36 facilities so far in 2026 and 91 in total over the last 3 years, while maintaining an on-time and in-full delivery rate above 90%. These actions build on the broader cost discipline that Pete will detail.

Supported by our industry-leading scale and leadership team, we are confident in our ability to manage through today's environment, while strengthening the operating leverage we expect to realize as the market recovers.

Slide 6 lays out the key initiatives underway across our 4 strategic pillars. This quarter, we believe we maintained our share in a challenging market, generating $28 million in productivity savings through targeted supply chain and logistics initiatives and made steady progress on our SAP implementation. Together, these efforts reinforce our ability to compound value over time.

Turning to Slide 7. In the second quarter, we deployed approximately $50 million towards return-enhancing opportunities aligned with our capital allocation priorities. Strong free cash flow generation through the cycle gives us the flexibility to invest in the business, pursue accretive acquisitions and return capital to shareholders.

Turning to Slide 8. M&A remains an important lever in our capital allocation framework. We are focused on pursuing acquisitions that enhance our value-added product offerings and strengthen our position in desirable geographies.

In June, we acquired Precision Design & Trim, expanding our installation capabilities in the Boise area. Since the BMC merger in 2021, we have completed 42 acquisitions representing nearly $2.3 billion in annual sales, the equivalent of a top 6 LBM player. With the industry still fragmented, we see significant runway ahead and expect M&A to remain a key contributor to our long-term growth.

Turning to Slide 9. As we continue to advance our digital strategy, we are sharpening our focus on the areas where we believe we can create the most meaningful near-term value. Based on what we have learned from our AI and digital investments to date, we are increasingly prioritizing initiatives that improve the effectiveness and efficiency of our sales teams, enhance customer connectivity and integrate seamlessly with the growing homebuilder technology ecosystem.

We continue to direct our resources towards practical, scalable capabilities that support growth, improve execution and better serve our customers while protecting and building on the digital capabilities and IP we have developed. We remain confident that technology will be an important long-term differentiator for BFS, and we are ensuring our investments are aligned with opportunities that will drive the greatest value for our business. Highlighting one of our team members is something I look forward to every quarter.

Today, I want to recognize Ralph Cummins, an inside sales representative at our Bainbridge Island, Washington location, who is celebrating 40 years with BFS and our legacy companies. In 1986, moviegoers were introduced to the original Top Gun. In that same year, Ralph began his journey with our company. Both has stood the test of time, although Ralph has had a much bigger impact on the people around it.

Ralph has built his career in retail sales and takes pride in keeping the store's inventory aligned with what customers need. He maintains a close pulse on the local market, consistently sharing insights that help the Bainbridge Island team better serve the builders and contractors that count on us. Ralph is also known for one especially sweet tradition. Every week, he bakes cookies for the team and our customers. Thank you, Ralph, for all time sweetness. It's team members like you who make me proud to lead BFS.

I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. Our second quarter results reflect the continued discipline we are applying across costs, working capital and capital deployment. We remain focused on operating efficiently today while advancing the initiatives that support durable growth.

Turning to the second quarter results on Slides 10 through 12. Net sales decreased approximately 9% to $3.9 billion, reflecting lower core organic sales and commodity deflation, partially offset by growth from acquisitions. Organic sales declined 8% in single-family, 10% in multifamily and 2% in repair and remodel. These results were generally in line with our expectations given ongoing market softness and consumer uncertainty. As we've noted on recent calls, several factors reconcile single-family starts to our core organic sales.

First, there is an approximate 3-month lag between a start and our first sale. Second, the value of a comparable start has declined by roughly 10% on average since 2019 as homes have become smaller and more value engineered. Third, affordability pressure has extended into pricing across the supply chain, contributing to lower average selling prices per start. Against this backdrop, we believe that we have maintained share in the quarter, reflecting the competitiveness of our value proposition and our role as a trusted partner to homebuilders.

For the quarter, gross profit was $1.1 billion, a decrease of 16.3% compared to the prior year period. Gross margin was 28.1%, down 260 basis points, primarily driven by a declining starts environment and related headwinds.

Adjusted SG&A of $781 million decreased $37 million primarily due to lower variable compensation, reduced head count and the benefits of cost actions, partially offset by acquired operations and higher fuel and delivery expenses. Building on the actions we have already taken we remain on track to deliver our previously announced $100 million of cost reductions as we continue to proactively manage the business, we have identified an additional $40 million of run rate savings, increase in our total cost actions targeted for 2026 to $115 million.

As a reminder, these specific actions include deeper cuts to overtime and temporary labor adjustments to incentive compensation plans, reduced merit and overhead spend, additional facility consolidations and tighter controls and discretionary spending. These incremental actions are reflected in our updated guidance and reinforce our ability to protect profitability, generate strong free cash flow and preserve the flexibility to invest in the business through the cycle.

Adjusted EBITDA was $329 million, down 35% and adjusted EBITDA margin was 8.5%, down 350 basis points primarily due to lower gross profit and reduced operating leverage on the sales decline. Adjusted EPS was $1.17, a decrease of 51% compared to the prior year.

Now let's turn to the cash flow, balance sheet,, and liquidity on Slide 13. Our second quarter operating cash flow was $68 million compared to $341 million in the prior year, reflecting lower net income.

Free cash flow for the quarter was $32 million. On a trailing 12-month basis, our free cash flow yield was approximately 7%, and operating cash flow return on invested capital was 10%. Our net debt-to-adjusted EBITDA ratio was approximately 3.6x, while above our long-term target, we remain comfortable with our leverage position. Our position is supported by $1.6 billion in liquidity and our strong free cash flow generation. We expect to move back within our target range as EBITDA recovers with the market. Second quarter capital deployment included $36 million of capital expenditures and $14 million on acquisitions, with no share repurchases in the quarter.

Slides 14 and 15 outline are updated 2026 outlook and assumptions. Our guidance reflects continued weakness in housing starts, ongoing affordability pressure and a more cautious consumer. Compared to 2025, we now expect single-family source to be down nearly 7%, multifamily starts down 4% and repair and remodel activity down 1%. As a result, we are guiding net sales in the range of $14 billion to $14.8 billion, adjusted EBITDA of $1 billion to $1.2 billion and adjusted EBITDA margin of 7.1% to 8.1%.

We expect our 2026 full year gross margin to be in the range of 27.5% to 28.5%, reflecting below normal starts activity. We expect free cash flow of approximately $400 million to $500 million. Our guidance assumes average commodity prices in the range of $390 to $410 per thousand board foot in line with the long-term average of $400.

While lumber prices have pushed slightly higher, OSB remains weak. For Q3, we expect net sales to be billion to $3.6 billion to $3.9 billion and adjusted EBITDA to be $275 million to $325 million.

In closing, we are remaining agile to mitigate near-term pressures while investing strategically for the long term. Supported by strong liquidity, disciplined execution and consistent free cash flow, we continue to manage capital with rigor, drive organic growth and productivity and execute on our M&A pipeline. We remain well positioned to create long-term value for our shareholders.

With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. As the nation's largest supplier of building materials and value-added services, we combine national scale with strong local market relationships across the housing ecosystem. We maintain leading positions in manufactured components, windows, doors and millwork.

Our footprint, digital platform and installation capabilities create a durable competitive advantage and strengthen our value proposition with customers. Backed by our experienced cycle-tested team, we are confident in our ability to deliver resilient results in the current environment and to capture meaningful upside as the housing market recovers.

Later this year, we will host our investor deck where we plan to share more on our growth strategy, operational initiatives, capital allocation framework and long-term value creation opportunities. We are excited to discuss our vision of the future with the investment community.

Thank you again for joining us today. Operator, please open the line for questions.

[Operator Instructions] Our first question will come from John Lovallo with UBS.

The first one is you reduced your single family starts outlook, and you now expect to mid-single digit to high single-digit declines. Your fourth quarter revenue outlook, though implies sales are up about 4% year-over-year. So if we think about roughly a 3-month lag between starts and revenue, wouldn't single family starts need to inflect positively year-over-year over the next few quarters to hit that target?

Yes, that's right. I think the context for this is the dramatic decline we saw in builder behavior last year. I think that's the right sort of lens to look at this through. It's not really an increase in this year would be a seasonal decline like you'd expect, compared against last year's precipitous decline, it looks a little bit better.

Okay. Understood. And then through some of our checks, it seems like some of the more recent high-cost market entrants that have been sort of competing on price have been flushed out of the market. I wonder if you could maybe confirm that. And then has this resulted in any easing and sort of the competitive dynamic in those markets?

Well, I don't know that I can speak to specifics about flushing out. I hope you're right. I think that the reality is, there's been some pretty aggressive price discovery. Folks have gotten -- have been absolutely focused on filling capacity around the industry. I think that people have made aggressive moves, sometimes too aggressive and shown meaningful regret. The ability of our team to be able to navigate through that, certainly, margins have been under pressure. That's obvious. But to be able to do that and hold share from our leadership position. I think our team is doing a great job on that.

I also think there are some tailwinds coming, I mean we will all see lumber moving in a stronger direction. If OSB hadn't sort of eroded underneath it, I think that might be a nice story on the strength line. But all of this is really dependent on what the overall market is going to do, the sense of uncertainty that the consumer feels and what builders are trying to do to react. I think that's really what it blows down to.

Our next question will come from Matthew Bouley with Barclays.

I guess a question around, again, what your homebuilder customers are doing around trying to reduce their direct costs. Maybe you can update us on their pushback versus the sort of vendor price increases that we're seeing out there. Obviously, you're calling out lower price and, I think, manufactured products and specialty building products. Certainly in the market, we're seeing vendor price increases and siding, roofing, et cetera. So maybe just kind of update us kind of tick through all your major categories and what you're seeing from a pricing perspective and the ability to push that down to builders.

Yes. Thanks, Matt. That's a good question. There's been a lot of activity. Certainly, some categories are able to pass through just by virtue of what they are and what they're made of. The reality of petroleum internationally right now is under pressure. There are certain categories that are moving in response to that. I would say most of the other categories are pretty flat. There hasn't been much movement in terms of inflation. There are a couple of categories, some subcategories that on a year-over-year basis, are still showing pretty meaningful declines on the prices that the manufacturers are charging. You think about some of the things we've talked about in the past, an EWP on a year-over-year basis is still down. There are certain millwork subcategories that are still down. There are absolutely competitive dynamics in certain of the categories that have limited manufacturers' ability to pass through. I think that applies to us in some degree.

We've, I think, done a good job of managing our capacity, but I think it's fair to say we have more capacity than we need for the existing market. So we're making the prudent steps necessary to resize down, but also trying to make sure we're prepared to take advantage of a return to growth, which we think is likely to happen, at some point in the future. So that there in lies kind of that challenge of finding the right pricing levels.

We are seeing pass-through -- builders rightfully so, are fighting for every penny and trying to manage their own affordability, but this has to be a win-win. And I think as the market works through that price discovery process, we're getting to a more predictable outcome on margins. I'd say we're not quite where we want to be yet, but it's a lot more stable over the past 6 months than we've seen over the past few years.

Got it. Okay. Second one is on M&A. Obviously, from a leverage perspective, presumably, you're going to be more careful with share repurchase here. But I would think from an M&A perspective, certainly, you can acquire EBITDA and perhaps leverage neutral fashion. So what are you seeing out there in terms of the pipeline? And when you have the kind of challenging market conditions like this, whether from a historical perspective or sort of what you're actually seeing now, is there a scenario where you might see more assets come to market? And how would you be looking to approach that?

Yes. Thanks, Matt. Good question. We still think M&A is a great opportunity for us, right? There are a lot of players out there. There are a lot of desirable players out there in our space. So we're continuing to probe and stay close. We certainly have been speaking to a handful of players that are looking to make a move now various reasons. And think this is a good time for us to continue to lean into those opportunities. So we'll continue to do that.

You're right. I mean, the elevated leverage not because of debt, but because of the cycle, certainly is something we're attentive to. I want to be respectful of it. But do not feel concerned with where we are. Liquidity is strong. Our maturities are strong. Our disciplines, our cash flows are still good. So our ability to take advantage of opportunities that present themselves at a time like this, in particular, absolutely. We are still interested. And there are some deals in the pipeline at this point, and we keep looking for the right ones to keep showing up. So looking forward to that opportunity to go down.

Our next question will come from Charles Perron-Piche with Goldman Sachs.

First, I'd like to touch on the commodity. Given the move in lumber that we've seen you to date, I would have expected maybe incremental upside to your commodity price outlook for this year and contributions to result, the fact that your outlook remains the same reflect more of an expectation of a moderation in lumber and commodity prices in the second half? Or are you seeing greater difficulty to pass on some of those cost increases to your customers in this environment?

So thank you for the question, Charles. So the commodity outlook is in line with what we had projected last quarter. We expected it to continue to float up through Q2 and then retreat a little in the second half of the year, and it's performing pretty much in line with that expectation. That's the reason for no change to that guidance.

Okay. Okay. That's good color, Pete. And then in your prepared remarks, you noted that builder increasingly offering build-to-order solutions to differentiate themselves. You're seeing increased traction to your digital offerings as a result. And how can you better serve your customers with your digital offering as a result of this shift?

Yes. We build to order is an obvious reaction from builders that have seen inventories grow, right? It's certainly a good discipline that they have displayed and I think will be effective in helping to manage the business over time, it will give us a more predictable target around which to make sure we're providing the right support.

You're absolutely right. Our digital tools are particularly suited to people trying to do plans and designs and then trying to leverage the tools through to being able to offer the best possible service and value proposition for our builder customers. So we're continuing to find ways to refine those tools and to offer those 3-dimensionl digital twins in a way that is going to create value for builders. So at the end of the day, that has to be the deliverable and the commitment that we live up to is to make the builders' life easier as they're building those homes.

So you hit the nail on the head. I think our tools are absolutely good for that and build for that. And this is the type of market we think that plays to our strengths. As does our value-added offering, as does our bundling package as does our extremely experienced sales team and the subject of matter expertise that we have, those are all reasons that this build to order trend is going to play well for us.

Our next question comes from Rafe Jadrosich with Bank of America.

On the market share commentary, I think you said you held share in the second quarter. If I remember right, in the first quarter, I thought you gained some share. Did the competitive environment change in the second quarter relative to 1Q? And what's sort of the outlook for that in the back half of the year?

If it changed meaningfully, I'd say it's ebbs and flows. What I would describe is that the overall market constricted a little bit in the second quarter. I would say the feel of the market, given the uncertainty and the volatility in the Middle East, I think the sense was, this is harder. That's more of an emotional comment to you than a data-driven comment. But the conversations that we have with builders, the conversations we're having in our operating review calls and speaking with the teams around the country, I think there was a sense of optimism at the beginning of the year that faded pretty meaningfully into the midst of the second quarter as things sort of ebbed and flowed pretty aggressively. But I don't know that there's more than that. I think that generally speaking, the holding share is just an indication of the competition day in, day out.

Okay. That's helpful. And then can you just talk about the inbound and outbound freight impact from higher diesel prices? How does that flow through your P&L? And then just the time like -- how much of a headwind was that to 2Q and what you're anticipating for the third quarter?

Yes. Thanks for the question. So we haven't changed our position on what we expect for the full year. We're still expecting about a $100 million headwind from the higher fuel costs, the combination of the inbound and the outbound. We did see a little bit of softening during some of the ceasefire periods during the quarter. But that doesn't give us enough visibility into the balance of the year with the increased tensions that we're holding on to that $100 million.

We have seen our fuel surcharge and pass-through increased about 20% in the quarter. So we are effective at passing some of it through. We have more work to do. But the inbound, I think as we talked about last quarter, is really going to show up in the cost of inventory, the cost of the materials and that flows through cost of goods sold.

The outbound will be more in the SG&A line. So that's certainly a headwind in SG&A and the recovery of that is going to be up in sales and margin. So there's a little bit of distortion and geography on the P&L. But I think we're -- the team's job managing the costs, and we have -- there's always more work to do but we're managing it on this kind of fluid situation pretty well.

Our next question will come from Mike Dahl with RBC Capital Markets.

First one on 3Q sales dynamic. Obviously, a little bit of a wide range. But given your normal bag to commodity prices and the blended lumber OSB basket, I would have thought that would flip to a pretty nice like low single-digit tailwind from an inflationary standpoint for commodities, which is been would imply at the midpoint or below sales that the volume would actually step worse on a year-on-year basis in 3Q. So I'm wondering, is that the case? Or is it something where like we did know your inventories up as a percentage of sales? Like is there still like a larger-than-normal kind of lag on commodities or some prebuying or contractual dynamic where it's just not impacting U.S. quickly in 3Q, yes?

Yes. I would say you're spot on. The lag on the commodities and seeing those higher prices coming through into our inventory is still the case. We anticipate to pass that through. It will flip even with the expectation of being at a $400 per thousand midpoint in our guide. That will be higher than the prior year on average for the year. So we should see a flip and a benefit in the back part of the year, but it's also on a lower sales activity level. So it's going to be muted from an overall contribution, but it will start to turn into a benefit.

Q3, kind of -- again, we are kind of slip from -- it was going well to the lights turned off happened in the third quarter. So you're also lapping that component. Obviously, it's more prevalent or more evident in the fourth quarter results, but there's a little bit of that there, too. So there's a couple of pieces that come into put.

Yes. No, I appreciate that. It seems like especially at the low end, it would imply the 3Q specific color that it would imply something that may be quite a bit worse on volume. And so I was trying to get at, like something unusual with the commodity relationship versus what we've normally seen? Or is that right that volume-wise, we should expect kind of almost like a worsening year-on-year trends within that guide.

But the follow-up question then is on the gross margin dynamics, you're sitting at 28.2% in the first half of the year, your guide, obviously, at the midpoint 28.0%, I think last quarter, you talked about maybe it's down a little sequentially in 2Q, then up a little sequentially in 3Q, then seasonally down again in 4Q. Can you -- can you just talk with all the moving pieces now, what within the guide is the updated expectation for gross margin specifically in the second half and split between 3Q, 4Q?

Yes. So obviously, in the second half, that 28% midpoint would require a slightly below 28% in order to average down. We're seeing it kind of flat for the balance of the year at this point. There's still enough uncertainty on how it's really going to play out. But we took the approach based on where we exited Q3 and what we're seeing with the lower -- or Q2, excuse me, with the lower starts expectations for the full year, that it's going to be a continued competitive environment that we're going to have to continue to compete and win business every day. And so that's going to keep the pressure on the margins, but we're going to find a way to improve and capture every nickel we can.

I mean, hopefully, it's pretty we said in the past. I mean, Mike, the stronger markets allow for more opportunities to manage both mix and price in a way that gives us stable margins. If we're calling down the top line, it's a tougher environment. It's not dramatically tougher, but we're trying to signal that those 2 go together. And hopefully, that's clear on what we said. But we think it's pretty flat from where we're at now.

Our next question will come from David Manthey with Baird.

I was wondering if you could give us your thoughts on multi-family housing. And I don't know if you have any credence to the NAHB numbers, but you guys have multifamily down mid-singles this year. they're calling for up mid-singles this year and then down in '27. Just wondering if you could talk about why there would be that disconnect there? Why your view is different? And then given the long rates and affordability issues, it would seem like multi-family might be a reasonable relief valve, maybe short rates come down even if long rates don't. Could you talk about the medium term and maybe the prospects for multi-family?

Yes. No, absolutely. This one is a bit of an irritant for me. So I'm going to -- I'll say -- I'll anonymize this because it's not fair. We only play in a portion of the business. So I will readily admit that maybe my perspective is skewed because we're only in 5-storey and below wood structures. So that could be the beginning of the end of the explanation of the next thing I'm going to say. But the multi-family published numbers do not make sense to us. I believe they are incorrect. I believe something happened in the Fed numbers or the way they're doing their surveys or something, I don't think they're right. I don't think there's any way they can be right.

And I've talked to a couple of other players, people in positions of authority that you would know their names, who do this for a living and they agree with me. This does not make sense. So maybe there's some aspect of the tower conversions or something that I'm not seeing that is causing these permits and starts numbers to be higher than what we are seeing. But I think we're actually doing decently in the multi-family space where we play.

100% agree with you that if rates turn a little, the short rates will absolutely release, and we will see an increase I think we're positioned well to be able to take advantage of that with both trust and millwork as well as some other product categories that we've been leaning into. So feeling like that's a good opportunity for us when the time comes.

Okay. Yes, that's good color. And then second, I wanted to just make sure I understand the cost actions here. So I think you realized $13 million in the first quarter. I believe you said $28 million in the second quarter. But then there was a comment about another $15 million. Now it's $115 million remaining or something. Could you just give us sort of what's been achieved so far? What is yet to come in the cadence through the remainder of the year?

And then if you can just talk about how much of that is sort of variable, meaning comp and overtime and things like that versus structural that would remain in place even if the market gets better?

Yes. So there's two components. So I think what you were referencing was really the productivity savings that we've identified and called out. Those are separate and in addition to the cost actions that we are continuing to execute against. What we had stated previously was $100 million of cost actions, $75 million of those were cost out year-over-year, $25 million of cost avoidance. That number has now been increased to $115 million in 2026, but $140 million if you count the full run rate that we expect from the $40 million of new cost actions that we're putting in place immediately. Those are largely -- the original $100 million is largely complete and underway. It's just realizing it through the passage of time through the balance of this year.

The $40 million, it's increasing what we were going after a bit more, and it's targeted specifically SG&A and more on the fixed cost side of the equation. So we see the reduction in the sales. We are very aware of the situation, and we're reacting to help make sure that we're not deleveraging more than we should. So that's the call and the reason for those cost actions, but they are separate from the productivity.

So I know how much you guys hate the cost avoidance, so I'll just take that out, right? We took the $75 million of cuts, got them done. We're adding another $40 million of cuts going to get them done. That is predominantly SG&A predominantly fixed. That's not the variable. The variable is already falling with the decline in sales and the work that the teams do day in, day out to run the business appropriately. So that $115 million annualized run rate of cuts is what we're executing because we're starting the $40 million right now in July, you're not going to get all $40 million this year. So that's where Pete says $15 million of that is going to hit this year. And the rest of it will flow through in the run rate into next year.

Our next question will come from Keith Hughes with Truist.

Just kind of building on the last question, it seems like at the end of the year. On the down note, will you have to -- in the beginning of the year, reassess more fixed cost, if there's no signs of life here for 2027?

Well, I mean just to maybe put a sharper point on it, we do it all the time. So by market, we are looking at what our capacity is, what our profitability is by location every month, every quarter. So we will absolutely do that. I think there is enough excess capacity based on where we are now, that will be a struggle for us for some time until the market turns.

Now we're trying to find that balance. Near-term profitability and long-term capacity and opportunity. So we'll keep looking at it. But yes, that's our lot in life right now with the market as tough as it is.

How many locations have you closed over the cycle here?

I think we're up to 91.

What did you begin back in '22, would you begin with?

Well, you got to remember, we're buying -- so we're probably about 30 or 40 down net, but we've added a bunch, whatever the delta is 60.

So that 91, Keith, is over the last 2.5 years. So it's led a lot of acquisitions. We had some store openings on greenfield projects that were in process underway. So there is a lot of puts and takes.

Okay. And final comment for what is worth, I agree with you on multi-family. These numbers don't make any damn sense. You just don't see about in the market at all.

Our next question will come from Ryan Merkel with William Blair.

First topic is just monthly sales trends. Can you talk about how revenues trended through the quarter and into July? And then were there any big surprises or mostly as expected?

Yes. Thanks. That's unfortunately the reason for the call then. I mean we -- what generally happens throughout the year, and we've talked about it is the seasonality and the seasonal curve. So we know by week what our expected run rate on a daily sales basis is coming out of the holiday, 4th July holiday, we had an expectation of sort of the normal run that sort of gets to the peak that you hold through late summer and then phase into the fall. That didn't happen. The run didn't happen.

So basically, the peak leveled out lower than we expected in July. And the conversations with our customers and the public comments, we've sort of basically concluded that we shouldn't expect for a late pop to hit. We're probably going to see the normal seasonal based on where we are.

If there's a ray of hope in all this, I think the good news is we don't expect last year's light switch. Oh, we're not going to build anymore. We've got too much inventory. I think that the behavior of the builders this year has been a little bit better aligned, sell a unit, build a unit -- sell a unit, start a unit kind of an approach. So I think they're more comfortable with the inventory levels. But it's -- yes, it was an unpleasant July in that regard.

Got it. All right. That makes sense in the context of the guide. All right. And then gross margin, how should we think about 3Q? Should we assume normal seasonality or anything you want to flag?

I don't know that there's anything to flag as we mentioned, kind of flat from where we are today, and it's going to be down on average for the second half relative to the first half in order to meet the midpoint of the guidance. So we're seeing margins holding stable, a little bit of wiggle in different categories, but for the all intents and purposes, pretty much stable margin environment.

Our next question will come from Phil Ng with Jefferies.

I guess flat gross margins perhaps answers this question. But last quarter, Peter, you were talking about still a pretty competitive pricing environment where particularly the specialty category saw some price compression. So I'm just curious, what are you seeing in the marketplace? Some of the regional competitors, as you kind of alluded earlier, was super aggressive and maybe they have regrets now, but are you seeing any stabilization or it's still a little touch and goal, especially as you kind of wind down later in the year when seasonal things slow down?

Yes. Thanks, Phil. So yes, generally speaking, I would say the trend is towards stabilization. There are certain categories or markets that occasionally will show volatility, right? Some of it will get aggressive -- back forth by someone will back off and say, no, this doesn't make sense for us and stabilize and we'll get to status quo is in that market.

Our discipline internally is really around ensuring that you're getting a breakeven or better or an appropriate market or some aspect of that we maintain the core discipline of running our business and maintaining it in a way that we like over the long run, right? Because we sometimes fall victim to the commentary from certain builders who -- well, you need to take losses because this is a hard market. And my response to that is, no, this is a win-win relationship, and we're both going to do this for profit because that's why we're here.

And so we're going to say no to things that don't make sense. I don't think everybody in the space has -- as fine a pencil as we do. So I think you see behaviors for windows of time to get a little sideways. So therein lies all share versus margin conversation that we kind of have with regularity. Given our scale, it's pretty detailed, it's pretty broad, and you can sort of see it in different markets and the dynamic playing out, but we -- at the end of all this and looking at it in consolidation, see a trend towards it stabilizing, getting to numbers that we think are defensible given where we open -- and as volumes continue to hopefully stabilize and turn. We have a good sense of what that means for margins and where.

Okay. Very helpful perspective, Peter. From an M&A perspective, it seems like you still have a fair amount of appetite. In terms of what you're seeing out there, is there a lot of assets coming to market, just given where we are in the cycle? Do you have reluctant sellers? How our multiple is kind of moving around? And then how are you kind of looking through all this, just given still a lot of uncertainty in earnings, right? What kind of multiple you're willing to pay? Or do you kind of view it as, this is great. We got to buy some assets on the cheap at the bottom cycle. Just kind of help us think through that and then certainly put that in perspective with buybacks just given where our stock price is as well.

Yes. No, that's a good question. I mean it's a modest market. I wouldn't say that it's red hot. It's not ice cold. There's a fair number of assets where people have raised their hands. You write about valuations, right? You've got to be very thoughtful about what you're buying. Every seller wants to use a 5-year run rate, you're right, a 5-year average, which is lunacy.

But you also, I think, could be a little bit forward looking when you think about current year numbers. I think that's also an appropriate way to think about the business. Geographies matter, product categories matter. Those have always been true, but I would say especially so now. So the way we look at it is buying a really nice business with a good fit for us. This is a nice time to do it. We still have cash flows. We're still generating cash on a regular basis.

I think the overlay on this entire story is the numbers are just smaller than -- the cash flows are smaller, the M&As are smaller. Any conversations even what we've done already so far this year around share buybacks are smaller. So that's -- I think that by virtue of our business being smaller, that's probably the way to think about what we're up to, and we'll continue to execute the strategy. I think the core of it is very consistent. It still works for us. We still like it.

Our next question will come from Sam Reid with Wells Fargo.

I wanted to circle back on guidance here and drill down a little bit on the fourth quarter. So when you look at the implied Q4 EBITDA range, it does imply a fairly wide spectrum of outcomes. Could you just talk to what you need to see to hit the high end of that range? Because I believe it would imply a sequential step-up in EBITDA dollars. So just walk me through the building blocks there.

Yes. I'd probably back you up. We continue to be consistent in the way that we narrow guide as we go through the year, consistent with the prior years. So as we get to Q3, we'll tighten it up a bit more. I know you're trying to look for the exit rate and the possibility of what Q4 would be. I would tell you, we try to go down the middle. We give obviously a range because there's uncertainty and unknowns that continue to present themselves. But if you go down the middle, that's probably more in line with where the thinking would be at this current time. And we're not in a position where we're going to give actual exit rate information or guidance, which I know is not helpful for you as you start to look forward to 2027 and putting numbers together there.

Never hurts to try. Maybe let me ask a more philosophical question here. We are obviously seeing the builders lean deeper into more build-to-order. It's coming up on builder earnings calls and showing up in builder numbers. So 2 implications for that. One, does that have any implication on your lag versus starts just given build-to-order homes, a little different from spec homes? And then also, as you see more build-to-order, is there potential for more take per start?

Well, that's a really good question. I think the answer is, it may extend the lag a little to order by its nature, has more likelihood of change orders or adaptations throughout this process. However, I want to be a little careful with that because most of the folks making the pivot are spec builders so they don't offer that much variability anyway. So I don't know that it will be meaningful, maybe a little.

In terms of dollars that go in, same kind of general answer and say, yes, order -- build-to-order is generally going to have more dollars in it. But if you're just shifting a spec builder or a largely spec builder or first move-up type of home, the amount of incremental is fairly modest. So don't be wrong, we'll take every penny or every stick, but I don't know that it's going to be meaningful.

Our next question will come from Trevor Allinson with Wolfe Research.

Maybe a question on what you're hearing from your private builder customers on a couple of fronts. The publics seem to be willing to trade some volume here to protect their gross margins. Are you seeing similar actions out of your private customers? And then the publics have also been very vocal about not taking on some of the price increases that the building products companies are pushing. Are you seeing more success getting those price increases passed along to your private customers versus the public?

Well, I don't think anyone is immune to the affordability pressures. I think it's fair to say that the higher up the food chain you are, the easier it is. The amount of pass-through on the private side, I would say, just by virtue of the way that they approach negotiations the larger builders are a sharper instrument. I would say that the smaller guys depends more on the individuals involved in the markets that they play in. That isn't to say that there's a meaningful difference, but there's a difference. That scale matters.

I think that the words, I would not use different words if I was a large homebuilder. But the reality is nobody in this industry is doing this for charitable purposes. There are points where you have to just say no. and this is the price. And if you don't want it, that's fine, but you're not buying it from us for less than this price. And that's the battle, right? That's what we're all engaged in right now because it's gotten back to that point of knowing where your lines are. And I think in the conversations we have with vendors, we have a lot of great vendor partners. They're trying, they're scrapping. We all know we need to build more houses. I think all of us have been very intentional about tightening our belts and being good partners in a tough time in the industry, but there's a threshold where you just can't go past.

It's -- now you're harming your company for the good of an industry, and that's not what we're here to do. So there is pass-through happening, there is a back and forth happening. It's challenging, but I think we all know how to do it, and we're all -- we're all representing our companies the best we can.

Okay. And then second question is maybe related to some of your commentary, and it's another one on gross margin. You've talked about your expectations here near term, but the full year guide still doesn't imply a pretty wide range for the second half. So I guess the question is, what gets you maybe to the high end of your 2026 gross margin range, and it seems like maybe a little bit of a slowing environment. And then related to that, you brought down the high end of your range, but you left the bottom end unchanged. So is that an indication of perhaps maybe a limit to how much margin you're willing to trade for market share gains in this environment?

Yes, that's a heavy question, Trevor. So there are a couple of different pieces to it. I think that the way that margins will shift, there's some mix components, there's some competitive dynamics depending on which markets are stronger than others. You've got different mark profiles. So there's a combination of events that I think could position us to do a little bit better than the median, right? And I think that we've outlined that. We certainly have seen it at certain points, and there's a possibility that could play out that way.

The downside planning and scenario planning is something we do a ton of around here. So we laid out a worse a lower case scenario than where we have ended up so far this year. And I don't -- I still don't think we're going to get there, but we wanted to give you the lower bound. So I think that's why you're seeing us not move the lower end of it. It's not what we had hoped for, but it's not what we had feared either.

So I think that there's your answer there in terms of why we weren't necessarily moving the bottom. Again, kind of back to my prior statement, there is a walkaway point with all of this. And I think we're confident in our ability to recognize where we're not doing -- we're unwilling to take business that doesn't contribute to what we're trying to accomplish and be able to walk away at that point is the right thing for this business regardless of what other players do. So that's the line, I think we've been able to understand and manage the business around.

The good news is, we don't have to be down there all the time, right? We know how to continue to protect our margins. We're still profitable in cash flow positive and doing a lot of good things strategically at a time when the broader market is under a ton of pressure. So I think we feel good about our ability to execute and to continue to drive forward. But it's a challenge. It's a dogfight out there, and we're doing well. I think we're doing better than our competition, but it's tough.

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

Peter, the cost actions that you've taken, you mentioned the incremental being fixed on the SG&A side. What about kind of in your -- any of your manufacturing assets? Can you update us on anything you've done within that $115 million and if there isn't much there, I guess, what it would take for you guys to move towards taking some of that out?

And I guess, secondarily, as a part of that, have you seen any smaller competitors pull or take assets down?

Yes. Yes. No, that's a good question. Let me clarify. So when we talk about the facilities that is a mix between what shows up in SG&A and what shows up in COGS. So you're talking about the manufacturing facilities a meaningful portion of that is up in COGS by virtue of what they do. We have absolutely taken down facilities as part of the 91 that we've closed over the past couple of years. That is inclusive in that number.

The way we think about it is, it's your variable right -- it's your variable cost. So as sales come down, you have to take down those variable costs, at least the ones that show up that way. And then a component of that will show up down in the below -- in the SG&A portion of the P&L. The fixed stuff, right? The line items identified is fixed, the cost category is identified is fixed that aren't necessarily tied to specific sales volumes that's what we're really leading into with those other conversations. I won't call you -- I won't tell you it's super rigid in terms of exactly every dollar coming from where, but the vast majority of the focus on those cost cuts that we've talked about, that $115 million is SG&A related.

Got it. And then you guys have a pretty national footprint, but you still have some differences versus kind of broader starts numbers. Can you talk geographically about any areas of -- in particular of strength or weakness within your portfolio?

Yes. Definitely. And I actually forgot to answer the second half of your first question. Yes, we've absolutely seen competitors closing facilities around us in similar ways. So I think that broadly speaking, everyone is trying to figure out how they can adapt. I think one advantage that we have is the multiple locations per market allow us to be more flexible while still retaining the customer base and maintaining on time and in full ratios and keeping the customers happy. So I think that's been to our advantage in that regard. Others have to exit more dramatically from either chunks of the market or markets entirely.

The second half of the question, so where we're seeing some weakness still persist a little bit in Texas and Colorado. Those are pretty important markets for us. Where we're seeing strength is really in the entire Northeast is performing well. But obviously, there's just a different starts exposure in the Northeast versus some of the other markets.

In your point about where we service versus where we don't, we see that, too. We're in most of the large MSAs, but I'd say we're probably covering 80-ish percent of starts nationally. There are certain parts of the country we're not in Chicago, we're not in South Florida. We're not -- we're not heavily into chunks of Illinois and Indiana, we've got pockets where we're doing great in Indiana, but we don't cover the entire market. So there's examples like that. where we have seen strength in some of the headlines where we just don't participate. So it's part of it. It's not a major part of the story, but it's there.

Our last question for today is Jeffrey Stevenson with Loop Capital.

Can you talk about the size, value and complexity of single-family housing starts this year given builders increased focus on build-to-order homes and whether you've seen any change in mix as the year progressed?

Yes. We really haven't seen change year-over-year or sequentially in the size of home. The size has been pretty stable. As far as the complexity, there's still the value engineering that's been taking place, and we continue to see some cost out year-over-year or opportunity out on the sales versus start. It's pretty modest, maybe in the 1% to 2% range. So it's not a big factor at this point. But it's still there as we see more townhomes or shifts to the type of dwelling space that is being delivered to the market.

Okay. Great, Pete. And I was wondering if you could provide any more color on the $50 million reduction in CapEx guidance and specifically areas you're able to cut or delay this year in a more conservative residential demand environment?

Yes. It's part of the cost actions as we think about conserving capital in a shrinking market or a tightening market, we don't need to invest as much in some of the replacement of our rolling stock, our fleet and equipment. We have the ability to redeploy and move that equipment around and make sure that our operations are taken care of and they have what they need. And so it's just approach to tighten that up as well as not needing to invest as much for growth, especially in markets that we already have a density and a footprint that we can service very well.

We don't need to continue to expand at this time. We continue to evaluate every market by market, and they have different needs and they have different capabilities. So we're -- we do that on a regular basis. We just felt for this year, it was more prudent to pull back on some of the capital expenditures and conserve that capital.

Thank you. That does conclude our allotted time for question and answers. I'll now turn the call back over to our presenters for any final or closing remarks.

Thank you for your time today. And if you have any questions, you can follow up with the Investor Relations team.

Thank you. That brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good day, and welcome to the Builders FirstSource First Quarter 2026 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 over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead.

Good morning, and welcome to our first quarter 2026 earnings call. With me on the call are Peter Jackson, our CEO; and Pete Jackman, 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 were applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentations.

Our remarks in the press release, presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from our forward-looking statements and projections. With that, I'll turn the call over to Peter.

Thank you, Heather, and good morning, everyone. Our first quarter results reflect the adaptability of our operating model as we delivered strong strategic share growth in weak housing market. Across the organization, we remain focused on the factors within our control, including serving our customers, expanding our differentiated portfolio of value-added solutions and leveraging technology to accelerate growth and drive operational excellence. This disciplined approach continues to strengthen our leading position as a trusted world service partner to homebuilders.

By continuing to invest in innovation and the capabilities that matter most to our customers, we are reinforcing our role as the leading building materials provider and extending our competitive advantages. Our strategy enables us to outperform as the market normalizes and to deliver sustainable long-term value for our shareholders. Let's turn now to Slide 4.

Our first quarter results highlighted our agility despite the challenging housing market and seasonally lower time of the year for the industry. We landed at the upper end of the expected Q1 range for sales and EBITDA even if the macro was worse than we expected. We continue to lean on our exceptional team, leading value-added solutions and robust operating model to drive performance. Let me take a moment to share some perspective on the market.

The housing market remains weak as affordability challenges and muted consumer confidence continue to weigh on demand. In recent months, geopolitical tensions have added to market volatility by contributing to higher interest rates and additional inflationary pressure. The surprise of the Middle East conflict and the uncertainty around implications for both affordability and consumer confidence have undermined the spring selling season.

While we are managing what's in our control, these conditions have created sales and cost headwinds that we don't expect to fully offset this year. Sales improved in the first quarter, in line with expectations and daily sales continued to build in April. However, sentiment is clearly weaker. As people discuss, our revised full year guidance reflects these dynamics. Despite ongoing macro challenges, we remain committed to advancing our strategy, including a sustained focus on share growth, continuous improvement and capital allocation. We cannot control the market, but advancing our initiatives will enable us to realize share gains, improve the way we operate and position us to accelerate growth with any level of recovery.

We expect to capture single-family share growth by delivering outstanding customer service, bundling our broad product portfolio to drive affordability and leveraging cutting-edge technology. Multi family, quoting activity remains active, but the uptick in interest rates has deferred certain projects. Given the current project pipeline, we don't anticipate a meaningful improvement in our multifamily results until next year.

In response to the current market weakness, we are prudently managing spending and maximizing operational flexibility as outlined on Slide 5. We remain operationally disciplined and have taken actions to reduce costs in line with demand while preserving our ability to partner with our customers and invest in innovation and technology. So far in 2026, we have consolidated 21 facilities following the consolidation of 55 total facilities over the prior 2 years, all while maintaining an on-time and in-full rate greater than 90%.

Supported by our industry-leading scale, experienced leadership team and proven ability to operate proactively through the cycle, we are confident in our ability to make the necessary adjustments and continue to deliver exceptional customer service. On Slide 6, we highlight some of the key initiatives under our strategic pillars. Our capital deployment is strengthening our competitive position and driving long-term value creation.

Since the inception of the buyback program in August of 2021, we have repurchased nearly 50% of our total shares outstanding. Operational excellence is crucial to how we run the business. As we develop talent, improve agility and increasingly embed technology into our operations. We generated $6 million in productivity savings in Q1, primarily through targeted supply chain and logistics initiatives. Moving to Slide 7. Our prudent capital allocation strategy focuses on maximizing shareholder returns.

In Q1, we deployed $360 million towards return-enhancing opportunities aligned with our priorities. 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. Drilling down into M&A on Slide 8. We remain focused on pursuing acquisitions that expand our value-added product offerings and advance our leadership position in desirable geographies.

We have developed substantial and proven muscle memory to grow through M&A and have a track record of successful integration and synergy capture. As a reminder, we acquired premium building components in January, marking our company's first trust and wall panel operations in York. Since the P&C merger in 2021, we have made 41 acquisitions representing over $2.3 billion in annual sales, the equivalent of a top 6 LBM player. Demonstrating our ability to execute and integrate seamlessly. With the industry still fragmented, we see significant opportunities ahead and are confident that inorganic investments will remain an important driver of long-term growth.

Turning to Slide 9. We continue to differentiate by digitally enabling our team members, strengthening customer relationships and advancing value-added product development to support long-term growth. Our investments in automation, AI and digital integrations are focused on simplifying and accelerating the building process for our customers. In Q1, our digital platform processed nearly $800 million of quotes as we continue to automate key steps of the process. Later this year, we will roll out the next generation of digital solutions.

Deploying emerging technologies to support builders across key stages of the homebuilding journey. The platform will include 4 integrated hubs: community, plan, selections and construction. All accessible through mybldr.com with embedded AI capabilities, providing actionable insights through a single unified platform. Builders will have access to connected tools and real-time data to coordinate the build, reduce waste and sell homes faster.

Digital is central to how we operate today, particularly with our sales organization, where these tools create opportunities to capture share, expand product adoption and deepen customer relationships. Recognizing 1 of our outstanding team members each quarter is 1 of my favorite parts of our earnings call. Today, I'm proud to highlight members of our Middletown New York Millwork team. Sam Lane, Dan Livingston, Anthony Legmen and Eddie Walsh, who are recognized by the New York State Police for their compassion and willingness to help a community member in need during dangerously cold winter weather.

Earlier this year, first responders contacted Sam and his team after identifying a local resident whose front door was severely damaged and no longer provided adequate protection from the coal. The officers were seeking to purchase a replacement or to help ensure the individual safety. When our team learned that the situation and the residents need, they stepped in immediate, producing a brand-new prehung door at no cost and assisting with the installation, I'm truly grateful to our Middletown millwork team for living our BFS purpose every day to build a better future for those we serve. I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. Our first quarter performance reflects disciplined execution in a weak housing market. We remain focused on managing our operations and working capital while advancing key growth initiatives to drive long-term success. Turning to our first quarter results on Slides 10 through 12. Net sales decreased 10% to $3.3 billion, driven by lower organic sales and commodity deflation, partially offset by growth from acquisitions. The core organic sales decrease was driven by an 11% decline in single-family reflecting lower starts activity and reduced value per start and a 1% decline in both multifamily and repair and remodel, consistent with our expectations given muted activity levels and consumer uncertainty.

As we've noted on recent calls, several factors reconciled single-family starts to our organic sales. First, there is an approximate 3-month lag between the start and our first sale. Second, average home value has declined as homes have become smaller and less complex, creating a sales headwind, we believe a comparable start has declined in value by 10% on average since 2019.

Third, housing affordability constraints continue to pressure margins across the supply chain. Against this backdrop, we believe we grew share in the first quarter, reflecting our market-leading offerings and continued role as a trusted partner. For the first quarter, gross profit was $0.9 billion, a decrease of 17% compared to the prior year period. Gross margin was 28.3%, down 220 basis points, primarily driven by a declining start environment. Adjusted SG&A of $740 million decreased $31 million, primarily due to lower variable compensation amid lower sales and lower headcount, partially offset by acquired operations.

As we touched on in February, we linked further into our downturn playbook with $100 million of cost actions, which includes $75 million in year-over-year cost reductions and $25 million in cost avoidance. These actions include deeper cuts to overtime and temporary labor, adjustments to incentive compensation plans, reduced merit and overhead spend, additional facility consolidations and tighter controls on discretionary spending.

To date, all actions are complete or meaningfully underway. We realized $13 million in the first quarter and are on track to achieve our cost reductions this year. This positions us to leverage our costs as the market improves. Adjusted EBITDA was $214 million, down 42%, primarily driven by lower gross profit. Adjusted EBITDA margin was 6.5%, down 360 basis points from the prior year, primarily due to lower gross profit margins and reduced operating leverage. Adjusted EPS was $0.27 and a decrease of 82% compared to the prior year. Now let's turn to the cash flow, balance sheet and liquidity on Slide 13.

Our first quarter operating cash flow was $87 million, down $45 million primarily due to lower net income. For the quarter, we delivered $43 million of free cash flow, underscoring the strength and consistency of our cash generation profile. Our trailing 12 months free cash flow yield was approximately 10%. Operating cash flow return on invested capital was 13%. Our net debt to adjusted EBITDA ratio was approximately 3.2x, while higher than our long-term target, we are confident in the strength of our balance sheet with strong liquidity of $1.5 billion.

We remain comfortable with our net debt levels and we'll continue to execute our capital allocation priorities with discipline to maximize long-term value creation. Moving to the first quarter capital deployment. Capital expenditures $45 million. We deployed $12 million on acquisitions, and we repurchased 3.3 million shares for $303 million. Earlier today, we announced that our Board of Directors authorized $500 million in share repurchase inclusive of the $200 million remaining under our April 2025 authorization. On Slides 14 and 15, we outlined our latest 2026 outlook and assumptions, which reflect continued weakness in housing starts, ongoing affordability pressure and a more cautious consumer. Compared to 2025, single-family and multifamily starts are expected to be down 2.5% and repair and remodel down 1%.

As a result, we are adding net sales in the range of $14.6 billion to $15.6 billion, adjusted EBITDA of $1.1 billion to $1.5 billion and adjusted EBITDA margin of 7.5% to 9.6%. We expect our 2026 full year gross margin to be in the range of 27.5% to 29%. Reflecting the below-normal starts environment, we expect free cash flow of approximately $400 million to $500 million. The year-over-year change is driven primarily by a $180 million swing in working capital and lower EBITDA.

In 2025, we benefited from a working capital release driven by the lower sales environment exit the year. In 2026, we anticipate the second half to be stronger, which requires investment in working capital. Our guidance assumes average commodity prices in the range of $390 to $410 per thousand board foot in line with the long-term average of $400. Despite continued end market softness, commodity prices have pushed higher since mid-December, driven by rising input costs.

For Q2, we expect net sales to be between $3.75 billion and $4.05 billion and adjusted EBITDA to be between $300 million and $350 million. The shape of the full year implies a heavier second half contribution as we lap the starts decline due to the rapid deceleration of starts to reduce new home inventory levels. In closing, we are closely monitoring the current environment and remaining agile to mitigate downside risk in the near term while also investing strategically for the future.

Supported by a fortress balance sheet and strong free cash flow through the cycle, we continue to manage capital with rigor, drive for organic growth and productivity savings and pursue M&A. We remain well situated to compound value through our strategic initiatives. With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. We are the nation's largest supplier of building materials to homebuilders in new residential construction, combining unmatched scale with deep global execution across every major housing market we serve. We are #1 in manufactured components, windows, doors and millwork, providing significant value to builders. Our footprint, digital platform and install capabilities create an unparalleled structural advantage. With our experienced cycle-tested team, we expect to deliver solid results in the near term and significant upside when the market recovers. Thank you again for joining us today. Operator, let's please open the call now for questions.

[Operator Instructions] And we'll go first to John Lovallo with UBS.

Despite the headwinds that you've articulated in housing so far this year, I mean we would argue that the spring selling season has probably been a little bit better than feared and better year-over-year with most builders posting year-over-year order growth. I mean I do recognize there's a 3-month lag from -- for you guys from when you start getting activity. But is this kind of better-than-expected spring part of the driver of the second half step-up that you're expecting? Along with just the easier comps?

John, yes, so thanks for the question. We absolutely did see a nice build at the beginning of the year. There were a number of different conversations we were having about the positive momentum, both on the public and the private side. It's important to remember that we generally see the headlines for the public builders, but they're a significant, but not universal coverage of the industry. That momentum at the beginning of the year, I think, has been good. It's just not -- I don't think able to withstand negative headwinds around uncertainty. That's what we called out here. I still think we'll see a good year. I just think it will be a little bit weaker than what we anticipated and that has led to pressures throughout the business, whether it be on the inflation side or just the competitive dynamics side.

Makes sense. And then maybe just digging a little bit deeper. The outlook implies a pretty nice improvement in margin in the second half at the midpoint, I think a 26% adjusted EBITDA margin would be 9.6%, which is, I think, 200 basis points higher than the first half. I mean what are you kind of expecting to be the big drivers of this improvement?

Yes. Thanks for the question. So it's really driven by the leverage that we gain out of the summer selling seasons, with the strength in our sales flowing through some of it's related to the sequential performance and management of our cost structure. We outlined our productivity was $6 million in the first quarter. We're still targeting our $50 million to $70 million for the full year, as well as the cost actions that we've outlined. So the $100 million of cost actions are well underway. We've completed most actions. Now it's just realizing those benefits as we move forward, which should help accelerate some of that leverage we would see in the back half of the year.

Our next question comes from Charles Perron-Piche with Goldman Sachs.

First, I just want to draw a more into the gross margin guidance embedded for the balance of 2016. I think you mentioned last quarter, Q1 would be the low point for the year. But obviously, it sits on the midpoint of the revised range. So how does it inform your expectations for the balance of the year? And what drives your expectations for the high end versus the low end of that range?

So what we had signaled last earnings call is Q1 would be the low watermark as we were anticipating a stronger build in the selling season as Peter had mentioned, with the uncertainty as well as the increase in input costs, specifically around fuel, a lot of that inbound is still unknown that we're anticipating from our supply partners. It's not nominal amount of impact that it will have on the cost. We've left the margin range fairly wide. We look to navigate what that looks like as we move forward.

At the same time, we do expect to pass through where a distributor passed through those cost increases, but some of it is timing related. And as we work through that, it's probably going to have a muted impact on our margins. So we had signaled a build in margins as we go through the year and we leverage our fixed costs and cost of goods sold. That's still the case. We still anticipate that, but maybe not to the same degree, given the sales volume expectations.

Got it. Okay. That's helpful color. And considering the challenging housing backdrop and the profitability outlook you've highlighted, I would imagine some of your competitors are struggling significantly at these levels. I guess how are you seeing some of them behave in this market environment? And are you seeing some smaller players exiting capacity?

Yes, it's a great question, Charles. The answer is, yes, there's a ton of pressure. And there are smaller players that are certainly struggling. There are players that have closed down a lot of facilities. We've obviously talked about it publicly, but they're doing it privately. We've seen that in the market. We've seen a lot of turnover. People are making significant headcount reductions, talent coming on to the market in some instances, we've seen aggressive behavior, certainly, a mix, as you might expect, right? The bell curve of performers in this market is what we see in terms of reactions.

Some people are trying to pursue product categories perhaps that they haven't before. So new entrants and new competition in certain buckets. We've seen irrational behavior where people will throw numbers out and then not be able to fulfill and have to back off. And so churn in the market. And just in general, a lot of very aggressive behavior. So people alluded to it. I think sometimes it's hard to -- it's hard to relate to what people are seeing in the market, but we're -- volume levels or starts that would be comparable to 2019, but the content of the house is even smaller by another 10%.

So we're certainly seeing a market that's at substantially lower levels of volume running through it even after having an additional 5 years of capacity adds and things going on. So the market is absolutely adapting. Capacity is coming out -- some of the weaker players are really struggling. We're hearing rumors of not being able to pay bills and delays and layoffs, but we'll see how it pans out. We're still strong in this. We're still able to, I think, take advantage.

We alluded to that a little bit, we're sort of leaning in a little bit this quarter, harder than we have and taking advantage of some of those opportunities. it's not easy right now, but I'm absolutely proud of this team for what we've been able to do. We're still strong in this market, even though it's not.

Got it. Peter, and good luck with the quarter.

Our next question comes from Rafe Jadrosich with Bank of America.

I just wanted to start on the share repurchase in the quarter. You are above the sort of target, the long-term target leverage range, but you bought back $300 million. Can you just talk about that decision and strategy going forward?

Sure. Yes, when we talk about our capital deployment strategy, it's very consistent with what we've seen. I would say, the way I would frame that is, first, making sure that our balance sheet and our debt is rock solid. We have plenty of liquidity. Second, that we're investing in the core of the business, continuing to make sure we have what we need from a capital investment perspective. Third, looking at the M&A environment, the inorganic opportunities and what high return targets are out there for us to consider and then finally, what does it make sense to lean in and buy back shares.

And I think we saw the dip this quarter in reaction to the dynamics of what was going on in the Middle East and saw it as an opportunity to pick up shares of BFS at a tremendous discount. We have a lot of confidence in our balance sheet and where we stand on the leverage perspective, certainly with the decline in EBITDA levels, it's resulted in some of the multiples. The leverage multiple as you mentioned, is being a bit higher but it's not an area of concern for the business.

We're going to remain disciplined. We're going to remain thoughtful about how we do it. And at no point are we going to impair our strength on the balance sheet or our liquidity position.

That's helpful. And then just on the inflation side, how are you -- could you just help us understand how you handle sort of higher diesel costs and some of the inflation. Does that get passed along to your customers through surcharges? And maybe just talk about the exposure in terms of the transport on the fuel side.

Yes, absolutely. And we certainly saw, as did everyone else in the space and across the world, increases in fuel costs, diesel specifically, we take those costs as inputs, and we will surcharge our customers passing along. And sometimes it's embedded in the way that we price our product and how to service our customers. So it's all embedded and we do pass that through. We evaluate it very closely. And like I mentioned on a prior question, it's not an insignificant amount on the inbound and it's not insignificant on the outbound. We do take that very serious and passing it through.

Our next question comes from Ryan Merkel with William Blair.

I want to go back to gross margins. What was the biggest surprise in the quarter because you did beat the street on sales? And then on the guidance, how did you think about that? Did you just extrapolate what you saw in the first quarter or did you add a little bit of incremental weakness to the guide?

Ryan, yes, thanks for the question. So I think the challenge that we face in this current environment is the variety of products that we're selling and the dynamics that are happening in each 1 of those categories. What I would say in Q1 is if you look at the trends, the core of the business is pretty well leveled out. They're certainly hand-to-hand combat in certain areas, in certain parts of the country, so you get sort of the normal variability. If you think about lumber commodity and the value add where I think we were surprised is in the specialty products and the other categories. That was where it was certainly more challenging, more volatile than we expected. Not happy about it, recognizing it for what it is and trying to account for that on a go-forward basis. But that's the core of the story.

So Ryan, if I could add to that. What's also working really well is our funding program. Where we picked up a little bit of mix is on the lumber and sheet goods. So as we've been successful with our manufactured or value-added sales, we picked up a little bit more on the lumber and sheet which is a lower margin category, which had a little mix impact. So that's all evidence of some of the share that we've been able to capture on the lumber side, leveraging that value-added capability.

Got it. Okay. And then just back on the guide, I know it's an uncertain environment. So did you just extrapolate sort of the trends in 1Q? Or did you add a little bit of cushion in the guidance. Curious how you thought about it.

I would say we don't just extrapolate we're looking at our buildup from the bottoms up as we think about our sales projections for the year, what's in the pipeline what we're hearing from our customers, the economists, we take all things into consideration as we develop our guide. And we have a normal seasonal curve. So it's a little more muted than what we had communicated last quarter -- or last quarter.

But it's still a seasonal curve and we're seeing certain parts of the country saw out and start to gain momentum as we get into the summer selling season. We're playing closer to the pin, Ryan.

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

I want to follow up on the kind of strategic share comment. So I think in the past, you've talked about others have been more competitive on the lumber and dirty side, not necessarily wanting to share that way. It doesn't sound like this is specifically the goal of, let's win back share in lumber, it's more kind of a function of some other strategy. But can you just elaborate a little bit more on kind of the shift that you've made there? And then if there's any way to quantify when we think about the mix in the act gross margin, what that really cemented the quarter and in the guide?.

Thanks, Mike. Listen, man, there was a lot of feedback there. So I think I got it, but if I don't, please just correct me in the answer. So your question was about what's the bundling -- a little bit more on the bundling, what do we think that's doing in terms of the margins and the business. So our bundling is really sort of the culmination of all the work we've done to offer the variety of products. It's the ability to come in and say, to a builder, we can make your life simpler and more efficient and put together an affordability package for you if you're interested in buying lumber plus trust plus millwork, plus Windows or whatever we're offering in that particular market.

The opportunity there is to have some sort of back end or some sort of combined pricing that allows us to fill capacity, keep our operations humming. But by combining it offer a superior value while at the same time offering or capturing more gross margin dollars for ourselves. So pretty straightforward in that regard. The mix impact right now, I think Pete alluded to it in the past, I think we've walked away from more of the lumber than maybe we have to right now.

We can kind of pick that up, has a little bit of a negative impact on margins by virtue of mix. I would tell you that's not the biggest impact or a negative mix in this quarter -- sorry, or negative margins this quarter. I think the primary issue is what I was outlining before about the other products, the specialty products. It's just gotten tighter I would say, surprised us how quickly it got tight in the quarter. But the core of the business, the lumber and lumber sheet and the value-add, I think, is performing largely in line with what we expect.

Yes, that's helpful. Sorry, Chris. Hopefully, the follow-up comes in clearer. The -- just then to kind of dovetail understanding those comments in terms of that's not really the main driver. Some of the public builders have commented about cost increases are not taking cost increases or want to push them off. We have heard some concerns about kind of players like yourselves being caught in the middle in an inflationary environment. Obviously, historically, there's been sufficient ability to pass through costs, given your position in the market.

But maybe specifically on the commodity pricing right now, there have been periods of time where you might be a quarter or 2 of margin compression as commodities rose. I think you moved away from a lot of the longer duration contracts. So that's been a little less of an issue in recent years. But can you talk through whether there's any timing differentials on -- I know you mentioned fuel, but also on the commodity side that might be pressuring margins in the near term?

Yes. No, that's a good question. So I'll start with the commodity side. You're right. We have largely moved away from those long-term contracts. And we're accurately we, I think, done a better job of matching our commitments to our customers with our purchasing profile and the way we're bringing it in. So certainly, it's a little bit of that, but if it was big enough to mention I'd be calling it out.

So it's fairly modest in terms of the number. The broader question I think you asked is probably the more urgent one and it has to do with, well, builders are saying they're not going to take price increases and vendors are saying, well, we're going to get price increases. So that's going to leave us holding the bag. I'd say that's not true. I think we're pretty good at this. And the balance here is we provide a value to this market on behalf of both of those parties.

And there's a level of profitability that we're going to need to see in order to continue to participate. So to the extent we have good long-term partnerships and the market wants product there's going to be a pass-through of whatever it needs to be. Now do we play a mediating role in that Absolutely, right? We're in the discussions between vendors and builders and builders and vendors, depending on the dynamic.

It's very clear to us that we have an affordability problem, right? We are trying to help the builders achieve that goal in any way we can. But at no point does that involve us becoming a charitable institution and losing money in order do it. So there's a balance, right? And I think they understand I've had conversations with a number of them. And I think they're going to do what they need to do and they're going to press and we're going to do what we need to do, and we're going to hold the line where it's appropriate.

But in the middle, there's a lot of value and a lot of work to be done, and I think we're particularly good at navigating that.

Our next question comes from Matthew Bouley with Barclays.

Just sticking on the gross margin topic. So this guidance change of hundred basis points or so. I heard you mention several drivers. You had the competitive environment, change in your starts assumption from flat to down low single digits. It sounds like price cost due to fuel, talked about lumber mix, and then the specialty products and other margin.

My question is really is any 1 of those, the biggest issue? Or maybe you can kind of rank order the drivers of that change? Obviously, what I'm trying to do is get conviction on what it would take to sort of halt that decline in gross margin.

Thanks for the call, Matt, for the question, Matt. Yes, I think the answer is, if I'm scaling the level of impact, the biggest one is the specialty. I think the second piece is, it's a lot of different stuff in the inflationary component is an important one. It's kind of the impact of fuel and what we're trying to do to manage it. That's more of an outbound cost thing that we're managing. It's certainly, I would say the others are more comparable in size for the starts impact the competitive dynamic mix impact and the fuel on the gross margin side.

Got it. No, that's -- got it. Perfect. That's helpful. And then the second one, the cost savings, the $100 million in 2026. It's the same number from last quarter. Obviously, your overall earnings rejection has come down. So my question is, is there any more room to press on that? And how are you thinking about the balance of hanging on to cost, hanging on to labor, et cetera, versus what it would take to kind of press on more, I guess, austerity type measures?

So I think that the short answer to that is we're always looking at changing the size of the business and cutting costs in a market like this. The primary focus remains on the variable side to ensure that we're matching the people doing the work with the work that we have. And that is the biggest dollar amount by far that you're going to feel in our results. We're working through and as Pete mentioned, largely through most of the cost outs. I think at least initially, we need to digest the impact of that and make sure that we're able to deliver on the things that we're committed to delivering before we take another pass. That said, we will continue to look at it. And as the year progresses, we'll see what we need to do. We're not announcing anything today, nothing new to that.

Our next question comes from Keith Hughes with Truist.

Thank you with the margin hit on specialty. It seems like it's now everything you do. Has it changed the relative margins amongst the products, the pressures of the downturn are they still kind of rank order the same top to bottom.

They're still rank order pretty much the same. I think what you see, Keith, in its the academic in me is kind of fascinated by you actually saw the wave of cost reductions and competitiveness flow through our P&L similar to the way you would see it hit the job side. It started with the lumber. It's a commodity move quickly. It reset quickly all the margins reset quickly, then it worked through some of the value-added products as you get into the structure and we're seeing it, we're all the way through to some of the dogs and cats on the back side of the build that we deliver.

So the relative performance, still very similar, but the timing at which we saw the resets was kind of in that order and why we're seeing the specialty now is just a bit more than we thought.

And our next question comes from David Manthey with Baird.

Guys, I'm wondering if you're expecting to see any relief in the size and complexity of homes as rates are more or less stable here. I mean at some point, I think maybe it just mix up naturally as buyers would skew more affluent because of the affordability, but maybe not. Could you just discuss the second derivative rate of change and any expectations you have that as sort of a leading indicator ahead of unit volumes going up?

Yes, Dave, thanks for that question. It's a fascinating one. We debated it internally going back and forth. I think that the dynamic we've seen up until now is very much a bifurcation of the market, right? You've got strength at the large-scale, the more affluent buyer, the cast fire, if you will. But on the counter, you have a lot more homes shrinking and using in complexity at the bottom end. So the starter homes are more starter. They're simpler. There's less in them. There are also -- not only is it square footage, but it's single pipe stand-alone to the townhouse offering as well, right? So those dynamics we think have played out pretty aggressively. It is our opinion that stability to improvement in the market will likely lead to a reacceleration of some of those factors, meaning people would prefer to live in it would be welcome. I think you'll see more stability through the middle and upper tiers of the market, and we will see a little bit of that.

Okay. And if you could just update us on the ERP, how far are you? And what does the time line look like from here?

Yes, sure. So for those of you who don't recall, we're in the midst of an SAP implementation. We are doing it in a very incremental way. So it's not a risk to the overall business. We did a preliminary pilot last year and have been doing some work to dial it in so that we can scale it. We're going to test those changes later on this year with another rollout. And then the expectation is it will start to accelerate in 2027 for the next kind of few years, I guess, based on the current schedule.

We'll see how it goes as we start to trigger it. But we think we're ready to have a really nice rollout later this year to prove it out to prove out a new training regime and some of the other stuff we built. But that's kind of the thinking around it. It's going well. It's slow process. I'm very impatient, but I think the team is doing a good job.

Our next question comes from Trey Grooms with Stephens.

Everyone. So a little bigger picture here, I guess. I think installed products are something around kind of high teens or so of your sales with the install including the products you're selling, clearly. It seems like that's a value-add area that builders are willing to pay for. How are you thinking about installed generally, is this an area you can lean into in the current environment? And maybe where do you see your install offering going here over time.

Thanks, Trey. Yes, I think install is still a compelling offering. It's got the combined benefit of taking work off of the builder, making the job site more efficient and capturing the off-site benefits of all the other things we're able to do. Right? So whether that be installed trust, installed windows, we do some install framing, we leverage ready frame, there's a bunch that we do.

I believe that even in a market like this, where there's depressed volumes, we're doing quite well with it. It's growing or it's performing better than market. put it that way, right? It might be down, but it's down less than the overall starts, where I think it's really going to shine though is as this market starts to turn. I'm a firm belief that the lack of skilled labor will continue to be a challenge for this country in this industry for a long time. And I think the efficiencies captured in the installed model that we offer will be a differentiator and a competitive advantage as the market begins to accelerate again.

Got it. That makes sense. And then on the -- with cash flow and on the balance sheet, Pete, you guys are -- you mentioned you're expecting second half to be stronger, which will require investment in working capital. Any additional color you can give us there on what that use could be or what you're baking in there for working capital as a use of cash with your updated free cash flow guide for the year?

Yes. So the working capital increase is going to be generally around or your receivables. So as we have higher sales per day as we exit the year, we'll have higher receivables that will carry over that finish line. I think we highlighted last quarter that the year-over-year changes in the change in working capital, specifically year-to-year was going to be about $300 million. Because of the lower guidance, we pulled that back, we're looking at about $180 million in the change in working capital year-on-year which is that change is helping to offset the lower EBITDA that we had outlined.

And then there's some other docking cats with the CapEx guidance that we had changed that kind of make up the delta. But that's really the bigger pieces of it. Now if you also think about inventory with higher inflationary costs on a relative basis point to point, inventory cost is going to be a little bit higher as well. So we try to factor in all the real working -- operating working capital pieces as well as the things around it. I hope that helps give the frame.

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

Great. Thanks, and good morning, everyone. Just looking at kind of the base business, it looks like kind of the current guide is down on sales, 4% to 5%, a little bit more than the drop in end market assumptions I think last quarter, you had kind of assumed a certain level of share gains this year. Have you dialed that back at all? Or how does maybe inflation play into that as well?

Yes. Thanks for the question. So when you're looking at the base business and the trend, you have to also factor into the margin change, the price because that's going to weigh on the top line as well. No, we have not pulled back on our share gains or organic growth. We're still driving that forward in addition to what we had talked about earlier on the bundling and going after strategic share gains where it makes sense and where it's profitable.

So that's all baked into the base business trend that you're looking at. But that weight from price is certainly a factor on the sales line.

And that would be, I guess, a component of competitiveness on gross margin, not necessarily an assumption of kind of vendor-led price decreases. Is that the right way to think about it?

That's correct. But we've talked about all the factors that weigh into that margin performance. So, the competitive nature is certainly 1 of Peter has mentioned the specialty and what we've seen on the specialty side, a little bit of the mix that we talked about. So yes, the competitive environment is still active and with a lower start environment, it's going to continue to persist.

Okay. Great. And then just on manufactured products kind of price cost, lumber has been on a nice low run here through Q1 kind of stabilizing at higher levels in Q2. Did you feel like on the trust side, you're able to fully pass that through or maybe how do you balance that price cost dynamic with the desire to fill up capacity and make sure you're covering more of those fixed costs going forward?

Yes. The fixed cost dynamic is certainly a volume aspect that we talked about with seasonality and fill in the plants and making sure that we're utilizing as much as we can. That factors into some of our facility rationalization Peter mentioned in his remarks that we had closed 21 locations so far this year. Some of those are manufacturing operations where we're trying to make sure we're consolidating and maximizing that utilization.

As far as the trust, we are passing the cost through, there's a little bit of lag on a trust design because you design and that cost basis is built in typically when you're co-inhibiting. So it's a little more extended than just the short term on the lumber and sheet goods However, that resets with each trust that you're bidding and quoting. So it's got a little bit of a lag, but it's something that we're proud of on how our margins have performed and how well the team does with the product that we deliver to our customers. it's going to continue to be a higher-margin category for us as we look in the future.

Our next question comes from Sam Reid with Wells Fargo.

I actually wanted to circle back to a comment that was made in the prepared remarks on April. I believe if I heard correctly, you saw a little bit of a sales improvement in April. I was just curious, is that a function of the macro and maybe just contextualize that April sales improvement in the context of normal seasonality.

Yes, I think you hit it there. It's normal seasonality. We do see sustained growth from January through at least May and then it sort of ebbs and flows throughout the rest of the year, depending on the month and the sort of the focus that the builders have in terms of what they're trying to accomplish and the reactivity to the selling season and how well it's gone. But given the kind of normal seasonality around the country, this is what it's supposed to do. And it's doing it. I think for all of us, we just like it to be a little bit better and a little bit broader.

That makes perfect sense there. And then switching gears, maybe going down a little bit on that install piece. We've been hearing from a lot of the builders that they're getting concessions on labor, that's 1 of the key components that some of the big guys have indicated is driving thick and brick savings. I'm just curious for your installed business, do you see any of those benefits there potentially flowing through the P&L? Just talk through that implication.

Well, I'd say good news and bad news on that. Yes, we're seeing it and no, it doesn't flow to the P&L. It flows through to the job site, right? I mean that labor has a relatively modest margin, well, I guess, everything has a relatively modest margin these days. But it's dominantly a baseline competitive component, much like commodity lumber in the space. We're adding value by virtue of our efficiency. So there's some benefit there, but a lot of that is passing through.

Our next question comes from Phil Ng with Jefferies.

Well, Peter, I guess to kind of kick things off, your sales in 1Q and even 2Q somewhat backward-looking in terms of starts and starts have actually been grinding higher a little bit. Curious what are you hearing from your customers on spring selling fees because you're calling for a better back half. The public guys have been pretty -- I mean it's out there, but just any color on that with the private customers you deal with day to day.

Yes. Thanks, Phil. So yes, I mean, like to recap at the beginning of this year, I think you saw a differentiated performance. You saw some builders who have been more successful in that effort, see really nice start, right? We have a couple of builders who are doing candidly some of their best business ever because they are able to start with a clean sheet, build exactly what the current consumer is looking for and putting it into the ground at pace.

Others are still worried about the burn off. And so there's a mix. Now that characterization that I just gave you is really a public builder storyline and largely what you saw. So I think in general, not too bad, pretty decent year. On balance, I would probably say that it's neutral to negative, but it's neutral to where they were, and there's some optimism in that number.

When I go to the other side of this equation though is the private guys, which is still 40%, 45% of the starts. The impact of uncertainty, the impact of the war and the volatility in the stock market. I think you've had some people just say, you know what, let's just wait a little bit. And I don't think that was the tone earlier I think before the war, there was a bit of a sense of, hey, this isn't too bad. Mortgage rates look pretty good. When it crossed [ 599, ] there was some optimism -- but I think that has pulled back and slowed down.

Again, I don't think that -- it's not the lights have turned off. I don't want to call an end to anything. But it's a bit more tepid than we were hoping for, given what we had seen earlier on in the year. So trying to reset around that, putting our best foot forward as to what we think is going to play out. But Hopefully, that's helpful.

Yes, that's very helpful, Peter. Really appreciate the color. And let me preface this question. I have a necessary seen, it's not clear to me yet the merit of going vertical, horizontal, I mean, for some of these larger distributors that have made big investments recently. But one of them in particular, made a splash with during the LBM market now as well as the insulation side of things. I'm just curious, does that give you a rethink in terms of your approach, which has been more targeted around your core or you're considering actually going more horizontal, how does that like perhaps change the competitive landscape and how you go to market just given what you're seeing in the broader industry at large?

Yes. Thanks, Phil. I hadn't heard anything about what you're talking about. Yes, just didn't. So I think our comments on this have, I think, been pretty consistent. Hopefully, we'll be familiar. We really like the business that we've been able to put together. We've done some of these other things over the years. I think it's public record. We spun off our [ chips in ] business.

We do very little in insulation. We do very little in roofing isn't to say we don't do it. There are certain markets where it makes sense to include it in our offering, but it's not an area of focus for us. And we think that's because there's very little overlap in terms of the benefit that these products can provide by virtue of the way that they're provided and by virtue of the customer that is purchasing what they're selling.

So not true in every instance, but we think this is the right place for us. We feel very good about our ability to compete in our core market and to win. We think our strategic advantages in our core market are the things that are -- that have benefited us in the past and will continue to. I am not intimidated by any player in our market right now by virtue of what they can do.

Some are far better than others at telling the story. And I can absolutely offer my admiration for a good storyteller. I love that since up. So I'll get better at it, but let's just agree that we are the biggest, we are the best and -- of anybody.

Our next question comes from Reuben Garner with the Benchmark Company.

I appreciate you squeezing me in. If this is a repeat, I apologize. I had some feedback earlier on the call, but you mentioned specialty margins a couple of times. I was wondering if you could give a little more color on what you're seeing there. Is it specific products within specialty? Is it just broad-based kind of price cost pressure? What's driving the margin headwind there?

Well, specialty for us by virtue of what we cover is a list about as long as you are. It's everything we sell outside of those primary categories. So it's things like siding, roofing, it's the gypsum, it's cement. It's anything that we're doing is a long list. So it's that culmination of a bunch of small hits that is the outline that we're providing around the specialty that other category, if you look at our investor presentation materials. That's where it's being hit.

Okay. So just to be clear, it's not necessarily the digital or install piece with -- that I believe is within that segment as well. It's more the kind of the long list of products that you sell?

It's not the it will be too small to move the needle. I mean, install is in there, but it's not a -- that's not a meaningful change from what we're able to drill down into it and it's that long list and a bunch of slices. Sorry, it's just hard going forward there.

The rest of the day, trying to part it all out for you. I don't think that makes sense.

Our next question comes from Min Cho with Texas Capital Securities.

Just a couple of quick questions here. Peter, you mentioned that value per start was down in the quarter, but have you started to see any stabilization there? Or do you expect it to kind of decline for the intermediate term?

Well, the callout was 10% versus 2019. So it's a longer-term decontenting. I would say it's fairly leveled out we are -- we might see a point of movement in any given quarter. But it's not moved as dramatically as it did about 1.5 years, 2 years ago.

That definitely makes sense. And also, your value-added sales remains a similar percentage of overall revenue, and I'm assuming that those margins are probably holding up better. But as long as pick back up, can you expect the value-added part of that -- of your business to grow faster or slower? And I know you had mentioned installation will probably grow faster, but just in terms of your just overall value-add products.

No question. Value-add has historically been our high-growth area. We've got better capacity, better service levels and particularly in a market that's labor-constrained, which it will be as this market turns, we will absolutely see better growth in value.

Our next question comes from Adam Baumgarten with Vertical Research.

Just on -- I think you mentioned maybe not being able to recoup all the cost inflation, I assume that maybe relates to fuel in 2026. Can you give us a sense of the magnitude of the headwind you're expecting for 26 at this point?

Well, I mean, it blows down to that fundamental question of affordability and how much can you pass through and how much to eat. So the answer is in broad. It's market-specific depending on local profitability. I would tell you that we're taking it a bunch of different ways. Like Pete was saying, some of it's embedded into the cost that we're providing on the material side, particularly on the inbound cost. On the outbound, we're taking it in a couple of different ways, whether it's pass-through surcharge or part of the negotiation. I think the negative number that we're managing, it's probably around $100 million, right? So it's a meaningful number. The impact on the bottom line, I would say right now is a lot less than that based on what we're doing, but it's not zero.

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

Just a couple of questions. On the competitive dynamics, you talked about sort of specialty, but it struck me that you didn't talk about sort of on the trust side and the EWP side. Is it fair to say then that you're starting to see stabilization there?

Yes. Yes. I mean it continues to be competitive at a given quarter could be up or down within a small range. But yes, I think the -- our belief is that we have better clarity on the lumber and stability is starting to appear the manufactured product category, the broader value add cap.

That's helpful.

I'm going to be careful, right? This is a broad statement, but I think that's generally directionally correct.

I see. Okay. And then just on leverage. I understand it's sort of a function of just how the EBITDA is moving through this year. But on the multiple side, is there a number where you feel that you don't want to go in terms of whether there's a 4 handle on it or whether it is sort of towards the high end of 3, is there a way to sort of think about that in general?

I mean the short answer is our comfort zone is 1% to 2%. So anything north of 1% to 2% is challenging. The threshold for us is always back to where do we believe the market is, where is our balance sheet, how do we manage that in a very thoughtful and strategic way in comparison to the opportunities that were presented.

So I don't want to put a hard range around it, but we keep a very close eye on it. The Board keeps a very close eye on it. And ultimately, our commitment is to have a full improved balance sheet with sufficient liquidity to do what we need to do.

Thank you. This brings us to the end of today's question-and-answer session as well as Builders FirstSource First Quarter 2026 Earnings Call. We appreciate your time and participation. You may now disconnect.

Good day, and welcome to the Builders FirstSource Fourth Quarter 2025 and Full Year 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 would 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 fourth quarter and full year 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 includes certain 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 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 contains 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 Peter.

Thank you, Heather, and good morning, everyone. Driven by focused execution and close customer partnerships, we successfully navigated 2025 despite ongoing housing affordability challenges, weak consumer confidence and depressed commodity prices. We remain committed to reducing barriers to affordable housing and driving a more efficient integrated supply chain. Our ability to perform effectively through each phase of the business cycle reflects the strength of our differentiated value-added solutions, industry-leading technology and unique operating model.

Executing from a position of strength, we continue to invest in initiatives that expand our capabilities, enhance our footprint and position us to outgrow the competition as conditions improve. I'm confident in our ability to manage through near-term uncertainty and build exceptional long-term value for our shareholders.

Let's now turn to Slide 4. Our full year 2025 results reflect disciplined execution as we sustained healthy profitability despite a soft starts environment, underscoring our operational excellence and strategic investments. This included maintaining a gross margin above 30% and an EBITDA margin above 10%, a clear reflection of the durability of our transformed business. I'm grateful for the dedication of our team members and the ongoing support of our customers as we turn the page to 2026.

Let me step back and offer some perspective on the market. The housing market remains weak and is characterized by more headwinds than tailwinds as affordability challenges, muted consumer confidence and depressed commodity prices continue. This was apparent in November and December, as our sales fell off more than expected as these cross currents impacted starts and led to a softer Q4. Economists are divided in their outlooks for 2026, with some calling for further declines in single-family starts and others expecting modest growth as macro conditions and regulatory policies remain uncertain.

At the same time, prolonged softness in both residential new construction and repair and remodel have pushed OSB well below normal resulting in a commodity composite below $350 per thousand board foot as we exited 2025. supply is being curtailed, but not at a pace that we believe will meaningfully lift prices in the near term. Finally, inflationary pressures continue to impact costs, particularly in the insurance and rent categories.

Despite these macro pressures, we remain committed to advancing our strategy with a sustained focus on growth, continuous improvement, smart investments, innovation and developing our people. We cannot control the macro, but advancing our initiatives will enable us to realize share gains, improve the way we operate and position us to accelerate growth with any level of recovery.

Our single-family builder customers have addressed ongoing affordability challenges by offering smaller and simpler homes as well as incentives such as interest rate buy-downs. That creates an environment where there are less sales dollars per start, and every start is more competitive on the affordability front. We are working closely with our customers leveraging our broad product portfolio and bundle value-add solutions to drive cost efficiencies while upholding the highest quality standards.

In the multifamily market, activity remained muted through year-end, in line with our previous thinking. We continue to see green shoots in quoting activity as our customers benefit from improved financing costs. As a reminder, our first sale tends to lag a multifamily start by about 9 to 12 months. Given the current project pipeline, an uptick in our multifamily results will not appear until the back half of this year at the earliest.

In response to the market weakness, we are prudently managing spending and maximizing operational flexibility, as shown on Slide 5. We are aligning capacity across our facilities, managing fixed and variable headcount and reducing capital expenditures. Pete will provide more detail later in his remarks.

We consolidated 25 facilities in 2025, bringing our total to 55 over the past 2 years, 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 make the necessary adjustments and deliver exceptional customer service.

On Slide 6, we highlight some of the key initiatives under our strategic pillars. In 2025, we invested more than $110 million on new, expanded or upgraded value-added operations across our footprint. 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. This capital deployment is strengthening our competitive position and driving long-term value creation.

Operational excellence is crucial to how we run the business as we develop talent, improve agility and embed technology into our operations. We generated $48 million in productivity savings in 2025, primarily through targeted supply chain initiatives.

Moving to Slide 7. Our prudent capital allocation strategy focuses on maximizing shareholder returns. In 2025, we deployed nearly $2 billion towards return-enhancing opportunities aligned with our priorities.

Drilling down into M&A on Slide 8. We remain focused on pursuing acquisitions that expand our value-added product offerings and advance our leadership position in desirable geographies. We have developed substantial and proven muscle memory to grow through M&A and have a track record of successful integration. As a reminder, we acquired both Builders Door & Trim and Rystin Construction in October, which together formed a leading provider of door and millwork capabilities in the Las Vegas area. In November, we acquired Lagerfeld Lumber, a leading supplier serving Central Texas; and Pleasant Valley Homes, a wholesale manufacturer of factory-built housing serving 10 Northeastern states.

Pleasant Valley represents an expansion of our prefabricated component strategy to address challenges facing the homebuilding industry such as affordability and access to labor with a cost-competitive factory build option, which reduces builder cycle times. The company sells HUD compliant manufactured homes and high-quality semi-custom modular homes to land lease community developers, retailers and homebuilders.

We plan to use available factory capacity to offer high-quality semi-custom modular plans to our existing homebuilder customers, with the potential to expand the offering to our homebuilder customers in other BFS markets in the future. And lastly, in January, we acquired the assets of premium building components, marking our company's first trust and wall panel operations in New York.

Since the BNC merger in 2021, we have made 40 acquisitions representing over $2.3 billion in annual sales, the equivalent of a top 10 LBM player, demonstrating our ability to execute and integrate seamlessly. And with the industry still fragmented, we see significant opportunity ahead and are confident that inorganic investments will remain an important driver of long-term growth.

Let's now turn to Slide 9 and discuss the latest updates on our digital and technology strategy. We continue to differentiate by digitally enabling our team members, customer relationships in value-added product development to drive long-term growth through technology-driven platforms and services. The investments in automation, artificial intelligence and digital integrations highlight our commitment to creating a seamless experience for our customers to help streamline their operations.

Since launching in early 2024, our digital platform has processed nearly $7 billion of quotes through 2025, representing a year-over-year increase in excess of 130%. This week at the International Builders Show, we will showcase the next generation of digital solutions for builders. These solutions deploy emerging technologies to unlock rich insights and make every step of the homebuilding process easier, not only for our builder customers but also for the entire ecosystem of suppliers and technology partners.

We do not categorize digital as only being a driver of long-term growth for BFS. It is integral to how we do business every day. We are committed to digitally transforming the operations and continuing to invest in consumer-grade digital solutions designed to improve our team members' efficiency, engagement and performance. Our digital investments are particularly impactful in the sales organization, creating time to capture new market share, expand our product offerings and strengthen our customer relationships.

Continuing on the technology front. I'm pleased that we have made steady progress in our comprehensive implementation of SAP after the launch of 2 pilot markets last July. We're applying the valuable insights we've gained from these initial pilots to prepare for the next phase. In Q4, we advanced the development of our solution and refined our deployment plan, positioning us for continued rollout in 2026 and broader deployment beyond. Although these conversions are always challenging, we are working through the details and are excited about the growth and efficiency opportunities to come with this business-driven transformation.

Recognizing 1 of our incredible team members each quarter is one of my favorite parts of our earnings calls. Today, I want to spotlight Charles Green, an inside sales representative, at our Wilmington, North Carolina millwork location, who is celebrating an extraordinary 48 years with BFS. Charlie began his career in 1977 as a truck driver. After 13 years on the road, he transitioned into sales, where he quickly became a subject-matter expert in the Wilmington market.

Charlie developed a loyal following for his customer service, always checking in to make sure the job is done right and for making jokes. Here's one for you, Charlie. Why did the homebuilder get in trouble with the neighbors? For raising the roof? So that one is probably not good enough for you, Charlie. But your dedication to our customers, your teammates and the community reflects the values that are important to all of us at BFS.

I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. Our fourth quarter and full year performance reflects disciplined execution in a weak housing market. We remain focused on managing costs, advancing key growth initiatives and harnessing technology for long-term success. As we get into the fourth quarter results, I want to discuss the reasons for our financial performance versus the guidance.

Sales decelerated more sharply than expected late in the quarter, as homebuilders aggressively delayed starts to work down excess inventory. Additionally, we incurred higher-than-expected insurance cost which further pressured performance. In response, we moved quickly to accelerate cost reduction and network optimization actions.

With that context, let's turn to our fourth quarter results on Slides 10 through 12. Net sales decreased 12% to $3.4 billion, driven by lower core organic sales and commodity deflation, partially offset by growth from acquisitions. The core organic sales decrease was driven by a 15% decline in single-family, reflecting lower starts activity and reduced value per start and a 20% decline in multifamily, consistent with our expectations amid muted activity levels against stronger prior year comps.

Additionally, repair and remodel decreased 7%, as consumer uncertainty persisted. As we've noted on recent calls, there are a few key factors reconciled in single-family starts to our core organic sales. First, as a reminder, there is roughly a 3-month lag from a start to our first sale. Second, the value of the average home has fallen as size and complexity have decreased over time, creating an additional sales headwind.

Third, margins across the supply chain remain pressured by housing affordability constraints. Based on this, we believe our full year and fourth quarter share were roughly flat, as we continue to be the industry leader and a trusted partner to our customers. For the fourth quarter, gross profit was $1 billion, a decrease of 19% compared to the prior year period. Gross margin was 29.8%, down 250 basis points, primarily driven by a declining starts environment.

Compared to roughly 27% in 2019, our current gross margin highlights the meaningful investments we've made in value-added solutions and our continuous improvement initiatives. Adjusted SG&A of $751 million, decreased $13 million, primarily due to lower variable compensation amid lower sales, partially offset by acquired operations.

As we touched on earlier, we're leaning further into our downturn playbook with $100 million of cost actions, $75 million in year-over-year cost reductions and $25 million in cost avoidance. These actions include deeper cuts to overtime and temporary labor, adjustments to incentive compensation plans, reduced merit and overhead spend, accelerating the pace of facility consolidations and tighter controls on discretionary spending. This positions us to leverage our costs as the market improves.

Adjusted EBITDA was $275 million, down approximately 44%, primarily driven by lower gross profit. Adjusted EBITDA margin was 8.2%, down 470 basis points from the prior year, primarily due to lower gross profit margins and reduced operating leverage. Adjusted EPS was $1.12, a decrease of 52% compared to the prior year. On a year-over-year basis, share repurchases, enabled by our strong free cash flow generation, added roughly $0.04 per share for the fourth quarter.

Now let's turn to the cash flow, balance sheet and liquidity on Slide 13. Our fourth quarter operating cash flow was $195 million, down $179 million, primarily due to lower net income. For the quarter, we delivered $109 million of free cash flow and $874 million for the year, underscoring the strength and consistency of our cash generation profile. Our full year free cash flow yield was approximately 8%.

Operating cash flow return on invested capital was 13%. Our net debt to adjusted EBITDA ratio was approximately 2.7x. We have no long-term debt maturities until 2030, supporting operational discipline and flexibility for accretive capital deployment.

Moving to fourth quarter capital deployment. Capital expenditures were $86 million, and we deployed $227 million on acquisitions. We have $500 million remaining on our share repurchase authorization. We remain comfortable with our net debt levels, and we'll continue to execute our capital allocation priorities with discipline to maximize long-term value creation.

On Slides 14 and 15, we outlined our 2026 outlook and assumptions, which are broadly consistent with the middle scenario we shared on our third quarter earnings call. Compared to 2025, single family and multifamily starts are expected to be flat year-over-year, with repair and remodel up 1%. As a result, we are guiding net sales in the range of $14.8 billion to $15.8 billion, adjusted EBITDA of $1.3 billion to $1.7 billion and adjusted EBITDA margin in the range of 8.8% to 10.8%.

We expect our 2026 full year gross margin to be in the range of 28.5% to 30%, reflecting the below-normal starts environment. We expect free cash flow of approximately $500 million. The year-over-year change is driven primarily by a $300 million swing in working capital and lower EBITDA. In 2025, we benefited from a working capital release through disciplined inventory management and lower sales, but expect to invest in working capital in 2026.

Our guidance assumes average commodity prices in the range of $365 to $385 per thousand board foot versus the long-term average of $400. For Q1, we expect net sales to be between $3 billion and $3.3 billion and adjusted EBITDA to be between $175 million and $225 million, reflecting the challenging macroeconomic environment, elevated housing inventory levels and winter weather impacting key markets. The shape of the full year implies a heavier second half contribution as we lap the starts to decline due to normalizing housing inventory levels.

In closing, we are closely monitoring the current environment and remaining agile to mitigate downside risk in the near term, while also investing strategically for the future. Supported by a fortress balance sheet and strong free cash flow through the cycle, we continue to manage capital with rigor, drive for organic growth and productivity and pursue M&A. We remain well situated to compound value through our strategic initiatives.

With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. While it was a tough quarter, we are taking action to reset our cost profile while continuing to invest in technology and innovation. We've transformed BFS into a materially stronger company, one powered by our leading value-added offerings in digital solutions, a relentless focus on operational excellence and superior capital deployment. With our scale and experienced, cycle-tested team, we expect to deliver solid results in the near term and tremendous upside when the market recovers.

Thank you for joining us today. Operator, let's please open the call now for questions.

[Operator Instructions]. We'll take our first question from Matthew Bouley with Barclays.

You have [ Elizabeth Ling ] on for Matt today. I just wanted to start off asking regarding the cadence of the year. Obviously, 1Q will be a little bit softer. You touched on some of the pressures around inventory and weather and noted that the back half will be a little bit stronger. Could you speak a little bit more about how you're thinking on the single-family side versus the R&R side in terms of what you're seeing right now in the market?

Sure. Yes. As you mentioned, the overlay for the year is pretty modest in all the categories, right? We're not expecting a lot of growth. The way that the year is shaped, when you look at it on a year-over-year comp basis, a lot of that has to do with the shape of '25. So the dynamic in '25 came in hot and the year ended very slowly on the builder side. They pulled back, had too much of the inventory of new homes as they got through the end of the summer, and pulled back very, very hard on their starts volume at the end of the year, harder even than we expected.

So that left us with a sort of strong first half, weak second half baseline to enter in with '26. And our planning, what we're seeing is a very slow exit to '25. It's ramping well. We're seeing the behaviors that you would expect of builders building for a strong summer and we would expect that to continue to ramp up as we get into the year to get to a healthy level. I think the easiest part about the second half of '26 is with even a reasonably good year, it doesn't have to be a great year, we'll be able to pretty dramatically outperform last year just because of how weak last second half was. So that's sort of the frame.

In general, multifamilies continue to bubble along. It has not turned dramatically. But also, I would say the worst of the downturn is over. It's just sort of stable at where it's at. We're hoping that as the rates continue to moderate, we'll continue to see those quotes turn into orders and start hitting the ground in that multifamily space.

R&R, it's been sort of stumbling along. Again, I do think rates will help as we get into 2026, certainly, so there's more and more positive coming out of that space in terms of home buyers being willing to invest in our positioning in that space where we are around the country.

All right. That was really helpful. And then this is probably more for Pete. You gave some commentary around the pieces of the cost actions that you guys are planning to take this year. Could you give us a little bit more detail around like the timing of that and how you're expecting that to kind of shape in across the gross margin and SG&A?

Yes. So just to clarify, the cost actions that we outlined are 100% SG&A related. Most of those actions are already in place and executed and it's a matter of time to realize the benefits through the course of the year. We are not giving any really additional details around the specifics of each of those at this time, but just know that we're moving aggressively on the evaluation of our facilities and consolidations consistent with what we've been doing in the last 2 years, but in a more immediate fashion.

So if something is on the fence, we're moving forward with it at this time. And as I said in the prepared remarks, the 3 quarters of the adjustments are year-over-year reduction, whereas 1/4 of the cost actions is the cost avoidance.

We will move next with Mike Dahl with RBC Capital Markets.

I wanted to drill down into the gross margin dynamic a little bit. I mean gross margins even in a weak backdrop for fourth quarter, they're drifting lower, but they're still very resilient. But then, obviously, your guidance is still a wide range, including something that would be kind of notably worse at 28.5. So I wanted to ask more about kind of what you're seeing on the ground that's driving that range of expectations?

I know you said it's still competitive out there, but maybe you can speak to kind of some of the more recent dynamics and also when you think through the cadence, how that paces through the year? Is that 28.5 or is it there because that's what you expect in 1Q or you're just giving yourself a buffer? Anything on dialing in 1Q a little bit better, it would also be helpful to understand that cadence.

Yes, sure. So as we think about gross margins overall, I think they've been pretty stable, pretty strong. The team has worked very hard to find that sort of equilibrium to ensure that we're not losing share that we're in a position to gain share, but at the same time, protecting profitability. So that's been an important precursor. And I think we've done a pretty good job.

The question around the gross margin coming into the beginning of this year really has to do with the uncertainty on the resets at the beginning of the year. So there's always a new contract period that triggers at the beginning of the year, you have a sense of volumes and contract levels, but compounded by the delevered facilities because they've slower in this time of the year -- early Q1, in particular, is the slowest time of the year for us.

You get a little bit more pressure and volatility on some of those gross margin numbers. So really, that's the storyline there. By and large, we're expecting a fairly stable year around gross margins. right around just sub that 30% level, but that's the thing that we spend probably as much time as anything managing and making sure we're structurally aligned around as you think about 26, obviously, that will continue.

Okay. And just a clarification, I mean, you're saying stable just under 30, but then there's the low end of the guide is quite a bit below that. So I just want to be clear, like that is accounting for potential variability that you have not yet seen versus something that you're already experiencing? That's just a clarification.

My second question was just to make sure I understood the free cash flow dynamic a little bit. It sounds like based on how you expect the comps through the year that maybe that's a, hey, since you expect there to be growth in the back half of the year, even though it's a comp dynamic at minimum, like that's why your working cap is going to swing pretty hard year-on-year? And then would it be kind of getting into next year, it would normalize again? Just want to make sure we understand that.

Yes. So I mean I'll field the first one. I'd say my first reaction is, yes, it's absolutely a band that tries to give you a sense of the ups and downs based on kind of how we're hearing folks talk about it. We are not seeing that deep downside now on gross margins that we're concerned about, but I want to make sure we're really honest about the dynamic right now in terms of the band of where it could be. But our guide is where we think it is, and that's what we're, I think, experiencing in terms of the trajectory of the year and where we're at it.

And then Pete on the cash flow question.

Yes. So Mike, your question on the cash flow, so the $500 million guide for 2026 does reflect an investment in working capital through 2026 exiting, as Peter mentioned, with the back half being higher on a year-over-year basis. So your exit point or the point in time in which cash flow is measured is going to be higher, at least in our guidance. So that's going to be the use of cash versus what we experienced in 2025 was a source of cash as we harvested the balance sheet in a declining market. So that's the biggest change with a little bit of impact from the lower EBITDA that we're guiding for, for 2026.

Just kind of a general reminder, as a rule of thumb, we're in that 9% to 10% incremental and decremental working capital number as it pertains, in particular, to that year-end trajectory, right? It matters for where we're comparing in that fourth quarter versus fourth quarter end. So the more we grow, yes, we will invest, but the return is quite nice on that at least.

We will move next with John Lovallo with UBS.

I wanted to talk about the incremental margins just on the business. I mean, there's been a lot of productivity initiatives achieved over the past few years, and there's some more cost actions planned for this year. So how should we sort of think about the incremental margins for the business as volume kind of comes back here? I mean, should they be above the historical levels?

Well, generally, our incrementals are quite good on the way up, primarily because of the tremendous leverage we get in the business. For all of the pride we hold and the value-add space in particular, it requires a fixed overhead investment that we're at the point of leveraging when the market is growing and returning. So in general, yes, I think we do see higher-than-average when we're growing, particularly as the adoption of that value-add tends to accelerate in a growing market.

Understood. And I just wanted to get your thoughts on recent acquisition, Sumitomo acquired TriPoint. I mean the Japanese, in general, have been pretty big proponents of off-site construction. Curious, other than them trying to diversify away from an aging population in Japan, I mean do you see this as an opportunity for them to really start pushing forward with some of the off-site construction techniques that can benefit your business?

Well, I mean, I guess, I'd start by saying we're huge believers in off-site fabrication. So I think all of us are looking for ways to add efficiency and productivity and speed into this industry in any way that we can. Clearly, the Japanese have done a good job in manufacturing over the years, and I think there are home building operations in Japan that have leaned far more heavily into this off-site fabrication idea.

I think the challenge in any of these is, can you do it efficiently? Now historically, the Japanese companies have had very long investment horizons. When they talk about doing something, they're not talking about a couple of years, they're usually talking about a couple of decades. So we'll see where they end up. I would say, in the near term, we have very good partnerships with all of the Japanese-owned homebuilders in the U.S.

We work closely with them. I think we've got some really interesting things we're doing with them. And I think we'll look for opportunities to partner in the offsite fabrication space as well. So at this stage, interesting, certainly something we want to keep an eye on, but we're believers in the idea.

We will move next with Charles Perron-Piche with Goldman Sachs.

First, I just want to touch on volume versus pricing environment. The guidance seems to imply a relatively flat market share assumptions for you in 2026. The builders have been talking extensively about their decided to lower the stick and brick costs this year. Can you talk about some of the discussions that you have with the builders today, how do you get price for the value-add services that you provide against a pretty competitive backdrop? And are you seeing any change in the appetite for value-add product today?

Well, there's been a lot of pressure across the board. I think that the builders are harvesting -- what the builders are telegraphing is primarily what they already got. I think they're seeing a full year's benefit of the negotiations that we had during the year. And, I mean, you can see our margins, it's been a challenging environment. At the same time, I think we've done a good job of finding ways to offer packaged solutions, integrated solutions, more value-add across the service and product profile that has helped us be that key partner to kind of protect our position, which, in turn, protects our price.

I'm not going to make believe that price is easy right now. It's certainly not. But ultimately, all of us are trying to figure out how to build homes more affordably. And I think we have an advantage in that regard and that we've got more options for builders to be able to solve that problem than anybody else. And our ability to execute that is superior to everybody else versus vis-a-vis our size, our subject-matter expertise and the quality of our folks and the size of our team.

So I think that there's certainly a challenge out there, but we've been fairly successful in keeping that balance. The one maybe subtlety, I'll refute one of the things or argue 1 of the points you made, there is share growth in here in terms of what we're going after and we're balancing it against some of the erosions that we've seen that we're lapping as part of 2025. So we are doing both. And I think it's critical that we continue to execute on that. That's the kind of thing that will position us in a very strong way coming into the recovery upcoming.

Got it. Okay. That's helpful color, Peter. And then just switching to the acquisition of Pleasant Valley Homes this quarter. It sounds like it's a strategic move into modular housing. I think you talked about the East Coast mainly as their market. So when you think about the outlook for modular housing, how should you consider as part of your growth strategy in general?

Yes. It's an exciting experiment for us. It's a great business. The Pleasant Valley folks are a great team. They built a really high-quality house. They've been successful bringing it to market in those Northeast states. I love their footprint. I think they've got a very ingenious approach to the way that they've executed their construction process.

And we're interested in exploring whether or not there's a partnership there to be had with our builder customers. To be clear, we're not interested in being a traditional retail HUD and modular home seller. That's not the game that we're in. They certainly have a little bit of that business. We're going to leave that alone. We're happy that, that business exists. But what our vision is, is to reach out to our homebuilder partners around the country to say, where does it make sense for you to have access to manufactured modular high quality, in your market, that helps you fill particularly that sort of lower-end affordable home category in a way that builders feel like is an advantage to them.

And in my sense of it, it works very much the way Truss does, right? We own most of the Truss plants in this country because we're really good at running them and at meeting the demand for multiple builders. So we keep our capacity filled by being a service provider for various builders. I think that's one of the barriers with modular housing is people trying to go on their own and figure out to fill and maintain that capacity.

We think we can do more of that capacity filling by really working with our partners and finding ways to do it in a way that benefits them and us. So it's worth exploring. Certainly, it's early days, but optimistic about where we think it will head.

I'll move next with David Manthey with Baird.

The first question is on the complexion of the year. I get what you're saying relative to the 2 halves that you experienced in 2025, and it's always a little bit hard to parse out what exactly is base business. But it seems like based on your guidance, the first quarter is maybe like 21% of full year midpoint. And typically, even if you exclude last year over the past several years, it's been more like 23%, 24%. So what I'm trying to get to is how much of this is just typical builder conservatism on your part? And how much of it is sort of maybe we are anticipating a little bit of acceleration even relative to normal seasonality through 2026?

It's definitely the latter for Q1. Yes. No, I don't want to pull any punches. We're ramping very quickly this year versus prior year or even 2 years prior because of how slow we came out of '25. But it's moving like it's doing what you would expect it to do in order to be able to hit our numbers, we're on track, but it does require a pretty aggressive ramp. I think it's maybe underappreciated how dramatically the big builders slowed when they realized they had too many units going into their year-end.

Yes. Fair enough. Great. And then second is a little bit relative to this contribution margin, incremental margin discussion. When you think about your cost structure; over the past 3 years, you guys have really constrained operating expenses extremely well. And if we're looking at an acceleration and some growth in '26 and into '27, beyond just the variable compensation elements which would naturally flex, are there any other sort of catch-up items or things that were deferred previously that might come back into play? Or are we just looking at sort of that, as you mentioned earlier, Peter, the outsized kind of contribution margin relative to your long-term targets in the high-teens?

Yes, that's a great question. The way I would characterize it is, there was -- and I know we're not the only ones, but I'll be candid. There were expenses that were in this business during COVID and during those massive runs that we allowed to maintain because we were more focused on capacity and meeting customer requirements and expectations than we were on maximizing efficiency, just -- not put too fine a point on it. Even from the BMC merger from other acquisitions we did, they were operations where we maybe had the opportunity to do a consolidation or we might otherwise have, but, boy, we needed every bit of that capacity in order to meet the demands, so we left them.

And I think what you've seen are some pretty disciplined operators get a hold of this business in a slower period of time and get back to fundamentals. The plays that we're running, the actions we're taking in order to reduce costs and to be more efficient are very much in line with the playbooks we've had here at BFS for 20 years. So this is what we know how to do. These teams are very, very good at it and what you've seen are consolidations, but being able to maintain on time and in full and customer satisfaction indexes in the market.

You've seen consolidations of spans and layers, better efficiency, better utilization of either equipment or fleet, all of that with the payoff kind of through the business of being able to, at some point, match the volume adjustments, obviously, but also to be able to capture productivity. So I don't anticipate there being anything we're behind on. I would say even with the challenging market, we've stayed committed to investing in the things that really matter.

I think we feel good about the refreshed fleet in the rolling stock, but we're also investing in innovation like technology on the core IT as well as the digital side and our investments in AI. So we're committed to being ready stronger coming into this next recovery than we even are today, and we're better today than we were 2 years ago or 5 years.

We will move next with Rafe Jadrosich with Bank of America.

You have [ Sean ] on for Rafe. First, so you talked about the weakening revenue environment throughout the quarter. Just curious, did you see a pickup in competition from peers versus earlier in the year? And then it sounds like you guys are doing a good job closing some facilities. But what are you hearing about competitors? Do you think the capacity in the industry is starting to normalize at this point?

So in order, no, we didn't see anything really different in the -- at the end of the year with regard to competition. It was pretty consistent. And yes, we have seen a couple of other competitors shutting down facilities. The thing you got to keep in mind, though, is given our scale, we can shut down facilities, and basically, we're just adjusting our footprint in a market, right?

We're maybe adjusting our shipping distances or overlap. When most of our competitors shut down facilities, they're exiting the market. So their decisions are a little more dramatic than ours are when it comes to their ability to serve. We have seen a couple. We've also seen folks who have sort of said they were going to open things, all of a sudden put things on hold. So I think that you are seeing a rational reaction in the industry with regard to capacity, not just in our space, I think it's true in a variety of providers in homebuilding products.

Okay. Great. And then switching gears, it sounds like you guys are still seeing growth on the installed side of the business. Can you talk about what the size of that was in 2025 and your expectations for 2026 growth in install? And then just a little bit on how margins are trending in that business versus the overall business?

So I would say with the install business, it's largely on par with where we were from a percent of our overall business around 16%, 17% of overall. It outpaced, so it didn't decline as much as the single-family overall business. So it was outpacing the market, which means we're gaining more inroads with the install capabilities in our offering across the platform. And the margins for install are generally in line with the categories that you're installing. So that hasn't changed from what we've communicated previously.

It's a good business. We see it as another growth lever for us, and we're going to lean into that. And this is a natural extension from what we do with value-added products and the off-site fabrication. So it's a vector that we're going to continue to invest in and strengthen our capabilities.

And I think it's important to point out that the builder's desire to have a seamless job site. Someone else that can take responsibility for making sure that things are done properly, that reliability is critical. And I don't think that's changed in this market. Yes, there's certainly a finer pencil on everything that we do by virtue of the decline in the market and the affordability challenges. But with the the labor situation broadly in our sector with the requirement for these operators, the building -- the homebuilders to really want to run a tight ship, I think our ability to do that alongside them is important reason why we've had continued success in this space.

We will move next with Trey Grooms with Stephens.

So I guess, first off, on working capital investments in second half this year versus what was the opposite in '25. Is that -- the way we should be looking at that, is that more of a view into your kind of expectations for '27 prepping your inventory levels for a more robust environment there as we kind of enter '27, is that the best way to kind of read that inventory management you're expecting?

The way I would kind of adjust what you're thinking, Trey, is as you think about the sales pace as you exit '25 versus the sales pace that we're anticipating for 2026, even a higher sales per day is going to lead to a higher AR balance -- receivables balance, which is an investment in working capital and the value of commodities, assuming that we return to a more normal level by the end of 2026, it's a higher investment on its own for inventory, let alone any positions that we're taking for what we think to come.

We generally don't have to take positions on inventory. We manage it very consistently and regularly through the cycle because we have a platform and a network that's very large, and we can withstand any short-term swings and we're in a great spot. I hope that helps.

Yes, yes, it does. It's more of just kind of the way the year is expected to progress versus what we saw in '25 more than anything.

Exactly. We're not confident in '27, Trey. It doesn't mean we're not confident in '27. It just means we don't have to load up.

Yes. Got it. Perfect. And then last one for me is, obviously, you guys are clearly under earning, if you would, I guess, right now given the macro. But you guys in the past have given us a view into your earnings power in a more normalized housing environment of, I think it was 1 million to 1.1 million starts and you guys are kind of expecting that $2.1 billion to $24 billion range, 30% to 33% gross margins, you've given us a lot of detail around that. Is that still kind of the best way for us to be thinking about the earnings power of the business in that more kind of normalized environment or has there been anything that has swung your view into that one way or the other?

No, I think you're thinking about it right. We haven't changed our thinking on it. We had that on our scenarios page last quarter, which we didn't have scenarios this quarter, so it's just not in the materials, but it doesn't change the way we're thinking about that earnings power with a normal environment and we're going to continue to look at that through the course of this year and share more expectations around that when we get to Investor Day.

The biggest problem with our base business chart, Trey, is we're sort of close to the number. The edits away from the base business out of it as well is pretty modest. So you're right, it's far more about the current macro environment that's driving our outcomes, and that normalization that, you and Peter are talking about, is really the storyline for where we're headed.

We will move next with [ Ivy Zelman ] with Zelman.

Just thinking through the acquisitions you made maybe just in general, first question, just how much multiple compression have you seen? And then just secondly, when you look at your CapEx for 2026, how much of that is related to investments for AI initiatives? And maybe walk us through what AI is doing to transform the business? Are you reducing headcount? Did you reduce headcount in '25, do you expect to reduce headcount? I can keep going, but I'll stop there, Peter.

Yes. Well, welcome to the call, [ Ivy ]. We've got a lot of stuff going on in that. I guess I'll start with AI and then circle back. I think that the the investments we're making in the business around AI, we're trying to be very pragmatic in terms of keeping it focused on things that are going to drive outcomes that are going to make a difference in the business. I think that the idea of introducing Copilot and things that help in the back office, we're doing that, of course, and that's good, and I think it's positive.

I think the far more powerful opportunities are ones that we see when we face the operating team at the field level to drive customer-facing benefits. So things we're working on, particularly effective in the estimating space, where we've seen our ability to process plans more efficiently, our ability to speed up the estimating process to get turnaround times to customers more quickly. The goal really is to enhance the experience of the salespeople, to empower them with tools at pace that they haven't seen.

We've seen very little in the way of cost reductions in terms of headcount reductions so far. I think we're waiting like everybody else to see where the impacts come, particularly in the back office space. Does someone figure out the solutions that make it easy to adopt and apply in a business environment. I'd say we're far more benefited from pace and capacity to drive sales and to be more focused on growth and customer relationships. I think that's where we've seen the most benefit.

In terms of investments, we've done most of what we've been up to internally consultants and third parties obviously being brought in to assist with that. But by and large, that's done by our internal team. Only a modest amount of that is capitalizable in any given period. both on the digital side and on the core IT side is where we are seeing that spend hit.

Great. And then on the multiples for the companies you acquired?

Yes. So the multiples are kind of in our historical range in terms of the businesses that we've been acquiring in the recent time. Now there's no question that over the past few years, as we've made some of those acquisitions, the payback has been extended because the volumes have declined more than the models have. Now downside wise, I think we're still within the downside band, but it's certainly been -- it's been within the range lately.

I think -- as you know, we look at a lot of different deals and a lot of different opportunities. Our ability to lean in where we see real value, where our opportunities to capture synergies are meaningful and we can create value for shareholders, I think we've been -- I'd like to say we're undefeated in getting the assets that we want. So we still feel good about that. It's just a matter of maintaining that discipline in an environment where it's -- you're looking into the future to get your payback for some of these assets that are fighting through the competitive dynamics.

No, that makes sense. And thinking of that for Pleasant Valley Homes, just to clarify, factory-built HUD modular versus manufactured housing, to clarify. And then just any cost differential that you can highlight to your builder customer. When you think about the Pleasant Valley Homes, what are the attributes that modular bring? I know everybody talks about it and the builders are using it, but really, are there any real cost savings relative to a brick on site question.

Yes. So what we do in that facility is both, right? It runs down a single line from an ability to run a similar size road transportable footprint, you're running HUD down the same line as modular, but they are semi-custom modular. So they're meaningfully modified from the traditional HUD. There's no steel chassis, like it's a traditional modular home designed to various specifications with a lot more variability than maybe the traditional models. .

It also allows us to customize in some modest ways that make it more applicable to consumer demand and need. So that's the powerful thing from our perspective. The ability to be interchange on that line is what made this particular asset desirable for us and allowed us to experiment while not really harming or disrupting the core business. It's a good business. They make nice money, it's a nice business to add the portfolio, but to be able to do that in is pretty exciting. And for us...

Is there any cost differential, Peter, relative to

I think there is, and that's what we're in the process of proving out. When we've done the initial analysis, we believe we could do it at or below what it costs builders to do on the job site for these homes. It's all the advantages that we talk about, right? The efficiency of the line, the getting out of the weather, the ability to have flow, coverage, leveraging multiple layers of staffing, it's all of those things that we think are part and parcel to a well-run offsite fabrication that we can apply in a more comprehensive way.

We will move next with Sam Reid with Wells Fargo.

Just wanted to drill down a little bit on your start assumptions for 2026, but more from the context of square footage per start or value per start. I know you alluded a little bit to rate buydowns potentially influencing that. But just contextualize kind of what's embedded in your guidance in terms of average square footage to the extent you've got a view there?

SP700336881 Yes. Thanks for the question. So when we think about 2026 and the value per start, it's really a flattening out relative to 2025. So square footage about the same, not seeing a material change up or down, so just shooting the middle. Not seeing a lot of change in the inputs or substitutions within the house at this point, more of a leveling off basically across the line on most everything that we're seeing in those adjustments.

So size of the home, the substitution products, the cost inputs as well as the pricing puts. Now we've had some of the overtime and the lapping. There's been some memes around some cost increases from certain manufacturers. So we'll have to keep an eye on it as we think -- as we move forward on what that looks like. And cost increase is a good thing for us, and it benefits our overall, as we pass that through, where we had talked about it previously in the value per home shrinking as when we were seeing cost declines and manufacturers lowering the cost basis.

All helpful color. Switching gears on the P&L. So wonder if you contextualize some of the SG&A expenses that are outside of your control? You alluded to some things like insurance and rent. And those are expense buckets that some of your peers have also called up -- called out as maybe being a little bit more inflationary than expected. Just maybe walk us through what's embedded in your guide around those expense buckets and anything outsized we should be mindful of?

Yes. So rent, absolutely, an inflationary item that we are subject to, given the portfolio of our locations that are under a third-party lease agreement. Those increases are embedded in our expectations for 2026. As far as the insurances go, we have our expectation based on early analysis from the actuaries and others on where cost of benefit insurance as well as casualty insurance is going. But that's all subject to utilization and what we experienced through the course of the year, so we're trying to factor all those into what we expect for 2026 and mitigated as many surprises as we can. So we don't like the surprises and unfortunately, they show up usually at year-end.

We will move next with Collin Verron with Deutsche Bank.

Maybe one just around the M&A. How are you guys thinking about the opportunity for incremental M&A in 2026? Is it just with leverage ticking up with EBITDA coming down, free cash flow seeing some of that working capital investment? And then you've also seen a well-capitalized distributor officially into direct competition for M&A. So I guess I'm just curious of your near-term impact there as well?

Well, we still think we have opportunity to do M&A. Admittedly, the market has been fairly quiet. It's certainly quieted down over the last, I would say, 3, 6 months by and large, that one big asset, notwithstanding. But we think there's still opportunities for us to continue to add high-quality assets that create value to the portfolio. The reality is having a well-capitalized player talking up the industry, I think, just reinforces we've got a good industry, and there's opportunity.

I do think his strategy is a little bit different in terms of how he envisions being successful. I think our ability and our focus on leaning in to support the core homebuilder and major remodeler customer with the subject-matter expertise and capabilities they need to be successful will be the winning strategy at the end of the day. And I think as long as we're sticking to our knitting and doing what we're good at, we will continue to deliver on that, and we know how to add assets very effectively to that pool and capture the synergies that go with. So I still think we've got plenty of track record for folks to look back on and believe in and that we're going to continue to deliver on that into the future.

Great. That's helpful color. And then I just wanted to touch on the guide a little bit for multifamily. I know you're talking about flat starts in 2026, but there is a sizable lag there. And I mean the has been positive in '25. Can you just talk about your expectations for multifamily sales in '26 a little bit more explicitly, just given the lag and sort of your exposure to the high storey and below wood structures, which doesn't necessarily line up with the Census Bureau data?

Yes. So it's a great question. As we think about multifamily, it does have that 9- to 12-month lag. As Peter mentioned in his prepared remarks, we've said that the last several quarterly calls. We're seeing some activity in green shoots that we've been quoting. I think we mentioned this on our prior earnings call. That's still the case, but it's waiting. It's pent-up and it's waiting to really take off and I think it's the cost of capital equation that those multifamily developers are waiting on.

Now when you think about our sales from a multifamily standpoint. We talked about it all year in 2025 where we really saw it level out, but we were lapping a stronger prior year comp throughout the year compared to 2024. When we think about 2026, even though we have flat starts, there's still some of that normalization that we had throughout 2025 from a margin standpoint and a few other categories that provide us with a headwind, and that's all embedded in our margin guide specifically.

Otherwise, we're still excited, and we're pleased with the multifamily business. It's a great portion of what we offer and -- if we have an opportunity to grow in that area, we're going to continue to look for those opportunities to lean into.

We will move next with Ketan Mamtora with BMO Capital Markets.

Just a quick question around sort of Q1. Can you provide any color or context around sort of the activity levels that you are seeing as you've kind of started '26? And how much of an impact recent weather events are having in your guidance? Just trying to understand how much of this is sort of very unique to what happened in January?

It's both. Yes. No, we started slow. We're starting to see really nice as-expected ramp into January. That weather was as bad as advertised. It shut down big swaths of the homebuilding markets that generally go through those winter months. Texas, Carolinas, parts of Florida, it's just -- it was very disruptive. We didn't call it out because as we say in the past, it's good, it's bad. It's a number that we think over time will level itself out over the first half of the year, but it was certainly was impactful on us.

Yes. So just to expand on that, it was about $30 million to $40 million in sales impact for the last week of January that may be lapped into February a little bit. So not a huge number on its own relative to our overall sales projections, but just something that will impact the percentages as we evaluate the year-on-year.

Got it. That's very helpful. And then just coming back to balance sheet and M&A. I'm just curious, as you think about these opportunities and you think about leverage in the short term, understanding that this is kind of a cyclically challenged time, how are you all thinking about sort of leverage in the short term for the right opportunity?

I would just reinforce, we've always said in the short term, we'll do the right thing strategically for the business knowing that we've got very firm and consistent cash flow throughout the cycle. So we don't generally look at it on a quarter basis. We try and look at it for the full year. in terms of really focusing on that leverage ratio because of the seasonality of our business and what we have going on we feel very confident where we are in terms of the strength of the balance sheet, the liquidity we have available and the way we're running the business and generating cash flow even in a relatively weak market.

So it certainly wouldn't wouldn't deter us from buying the right asset and creating the right value. But that backdrop is always there. We're certainly focused on maintaining that discipline around how we think about capital deployment.

We will move next with [ Alex Rygiel ] with Texas Capital.

Any broader comments on Washington policy and how that is sort of being contemplated in your guidance?

Yes, it's been a really interesting dynamic over the past few months. With regard to the focus being placed on housing and housing affordability, the recognition of how important our sector is to sort of the spirit of our nation, right, in a way that really hasn't gotten this level of attention, at least to my memory.

A lot of ideas floating around. I would say not all of them coming to fruition, not all of them having the same level of impact, but people are trying. And I think that the incremental benefits are promising. Probably the most interesting things to me is this alignment between what the federal government is describing as trying to drive alignment between funding -- transportation funding in particular, and local and municipal compliance with reasonable standards around regulation, right, whether it be codes or easements or density, whatever it is, the Fed is taking a little more heavy-handed stance when it comes to -- we're not going to give you a funding to build out a train station, if you're not going to put density around the train station because there's no point, things of that nature.

I think it's interesting. I think it reinforces what I've heard some state governors trying to do in terms of overcoming some of the more destructive components of nimbyism. And I understand there's going to be a balance, right? There's going to be state and local control in all these environments. But some of it is to the point of problems. It's generating societal problems because the restrictions are too tight.

And there is this awareness of it and movement in a way that I think is positive. I'm not going to tell you that it's been massive. I'm not going to tell you there's been a significant impact yet. But the fact that we're having the conversations and incremental steps are occurring is incredibly encouraging versus where we were 2, 3, 5 years ago or can be really over the last 50 years.

And this concludes our Q&A session as well as the Builders FirstSource Fourth Quarter 2025 and Full Year Earnings Conference Call. Thank you for your participation, and you may now disconnect.

Good day, and welcome to the Builders FirstSource Third 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 third quarter 2021 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 or the most directly comparable measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures were 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 Peter.

Thank you, Heather, and good morning, everyone. Over the past several years, we have transformed into a stronger organization powered by our leading network of value-added solutions our relentless focus on operational excellence and superior capital deployment. These strengths, combined with our scale and a team is dedicated to exceptional customer service, have driven margin expansion, reinforced our industry leadership and extended our track record of success. By focusing on the factors within our control and leveraging our competitive advantages, we are competing effectively today. and are well positioned to outperform our competitors as the market recovers.

Let's turn now to Slide 4. Our third quarter results reflect the strength of our strategy and disciplined execution in a weak housing market. We continue to execute effectively and sustain healthy profitability despite a low starts environment. underscoring our operational disciplines and improvements since 2019. Let's take a minute to step back and talk about the market. Single-family construction remains soft as Builders manage the pace of starts given affordability concerns, consumer uncertainty and elevated new home inventories. Demand remains tempered despite Fed rate cuts in 2025.

As a reminder, Q4 is one of our slower quarters due to seasonality. Our Builders customers have addressed these challenges by offering smaller and simpler homes as well as incentives such as interest rate buydowns. That creates an environment where there are less sales dollars per start, and every start is more competitive on the affordability front. We are working closely with leveraging our broad product portfolio and bundled solutions to drive cost efficiencies while upholding the highest quality standards. In the multifamily market, activity is expected to remain muted through year-end, in line with our previous thinking. However, we have seen green shoots and quoting activity as our customers see improving financing costs. As a reminder, our first sale tends to lag a multifamily start by roughly 9 to 12 months. We continue to be multifamily as an appealing and profitable business for us, supported by a substantial mix of value-added products and attractive fundamentals.

On Slide 5, we highlight some of the key initiatives under our strategic pillars. In the third quarter, we invested more than $20 million in value-added solutions to expand our product offerings in key markets. This included opening a new millwork location in South Carolina and expanding our upgrading plants in 7 states. 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. This capital deployment is strengthening our competitive position and driving long-term value creation. Operational excellence is crucial to how we run the business as we develop talent, improve agility and embed technology into our operations. We generated $11 million in productivity savings in Q3 primarily through targeted supply chain initiatives.

Turning to Slide 6. We are prudently managing discretionary spending and maximizing operational flexibility. In response to lower volumes over the last year, we have taken steps to align capacity across our facilities, manage head count and control expenses. We are reducing variable costs today while also investing in needed capacity to ensure we are positioned to scale quickly with the expected recovery in demand. Year-to-date through September, we have consolidated 16 facilities, including 8 in the third 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.

Moving to Slide 7. Our disciplined capital allocation strategy focuses on maximizing shareholder returns through organic growth, M&A and share repurchases. In the third quarter, we deployed over $100 million toward return-enhancing opportunities aligned with those priorities. Drilling into M&A on Slide 8, we remain focused on pursuing acquisitions that expand our value-added product offerings and advance our leadership position in desirable geographies. We have developed substantial and proven muscle memory to grow through M&A and have a track record of successful integration. In the third quarter, we acquired St. George Trust Company, trust manufacturer serving builders in Southern Utah and Southern Nevada. In October, we acquired [indiscernible]. Together, the 2 companies formed a leading provider of door and network capabilities in the Las Vegas area, closing a key product gap in the region and strengthening our ability to deliver comprehensive solutions to our customers.

We have made 3 acquisitions, representing over $2 billion in annual sales since the BMC merger in 2021, the equivalent of a top 10 LVM player demonstrating our ability to execute and integrate seamlessly. And with the industry still fragmented, we see significant opportunity ahead. We remain confident that inorganic investments will remain an important driver of long-term growth.

Let's now turn to Slide 9 and discuss the latest updates on our digital and technology strategy. We are accelerating the adoption of our digital capabilities in 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 in the industry. Despite the weak market, we have seen continued adoption with our target audience of smaller builders. Since launching in early 2024, our digital tools have processed over $2.5 billion of orders and over $5 billion of quotes, representing increases in excess of 200% year-to-date. Importantly, we're seeing that digital is not just about incremental sales.

It's a catalyst for a broader company growth. The efficiencies and capabilities enabled by our digital tools, including artificial intelligence, accelerate the pace and elevate the precision of our quoting and sales operations. While it's evident that our initial business case around digital did not predict the timing of our outcomes very well, we remain convinced of the tremendous shareholder value that the digital tools will unlock for us. Continuing on the technology front.

I'm pleased that we continue to make steady progress on our comprehensive implementation of SAP after the launch of 2 pilot markets in July. We've gained valuable insights from these initial pilots, and we'll be applying those learnings as we prepare for the next phase. During Q3, we also successfully converted to SAP for our centralized accounting functions as well as for all of our internal and external financial report. 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.

Recognizing one of our incredible team members each quarter is one of the best parts of my role. Today, I want to spotlight [indiscernible] driver at our Lebanon, Tennessee yard recently celebrated 40 years with BFS. Harold is known for his dependability, strong work ethic in love of the Tennessee volunteers. The dedication shows in his commitment, he's often at the yard before 4:00 a.m. and in the way he shares his experience, having trained more than 100 drivers over the years. He's also earned a reputation for driving over the region's toughest Hills with skill and care. I'm honored to recognize here and so many others across BFS, whose hard work and commitment continue to move us 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 execute our strategy in a down market. responding to near-term challenges and carefully managing costs while preserving our ability to invest for the future. Our financial agility, supported by a healthy balance sheet and strong free cash flow through the cycle, enables us to deploy capital prudently to fuel organic growth, pursue strategic M&A and return capital to shareholders. These investments are bolstering our competitive position as we invest for the future. .

Let's begin by reviewing our third quarter performance on Slides 10 through 12. Net sales decreased 6.9% to $3.9 billion, driven by lower organic sales and commodity deflation partially offset by growth from acquisitions. The core organic sales decrease was driven by a 12% decline in single family due to lower starts activity and value per start as well as a 20% decline in multifamily in line with our expectations amid muted activity levels against stronger prior year comps. Additionally, repair and remodel decreased 1% given consumer uncertainty.

As we've noted on recent calls, there are a few key factors reconciled single-family starts through our core organic sales. First, as a reminder, there is a roughly 3-month lag from a start to our first sale. Second, the value of the average home has fallen as size and complexity have decreased over time, rating in additional sales headwind. Third, margins remain pressured throughout the supply chain as affordability concerns continue to be paramount. Based on this, we believe our third quarter share was flat to up slightly as we continue to be the industry leader and a trusted partner to our customers. For the third quarter, gross profit was $1.2 billion, a decrease of 13.5% compared to the prior year period. Gross margin was 30.4% and down 240 basis points, primarily driven by below normal starts environment. Compared to an approximately 27% gross margin in 2019, our Q3 gross margin reflects the substantial investments we have made and value-added solutions and our continuous improvement.

Adjusted SG&A of $790 million increased $7 million, primarily due to acquired operations partially offset by lower variable compensation due to lower sales. 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 $434 million, down approximately 31%, primarily driven by lower gross profit. Adjusted EBITDA margin was 11% and down 380 basis points from the prior year, primarily due to lower gross profit margins and reduced operating leverage. Our ability to maintain a double-digit EBITDA margin in a weak market is a testament to strength of our transformative business. Adjusted EPS was $1.88, a decrease of 39% compared to the prior year on a year-over-year basis. share repurchases enabled by our strong free cash flow generation, added roughly $0.10 per share for the third quarter.

Now let's turn to our cash flow, balance sheet and liquidity on Slide 13. Our third quarter operating cash flow was $548 million, a decrease of $182 million, mainly driven by lower net income. We generated free cash flow of $465 million. Our trailing 12-month free cash flow yield was approximately 8%, and our operating cash flow return on invested capital was 15%. Our net debt to adjusted EBITDA ratio was approximately 2.3x, while our fixed charge coverage ratio was roughly 6x. 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 third quarter capital deployment. Capital expenditures were $83 million, and we deployed $19 million on acquisitions. We only have $500 million remaining on our share repurchase authorization. We remain comfortable with our net debt levels, and we'll continue to execute our capital allocation priorities in a disciplined manner on the path to maximizing value creation.

On Slides 14 and 15, we show our 2025 outlook and assumptions. On a year-over-year basis, our latest forecast assumes single-family starts down 9% for the year, will definitely source down mid-teens and [indiscernible] to be flat. The 2025 multifamily headwind to sales of $400 million to $500 million and EBITDA of less than $200 million has largely been digested and remains on track. As a result, we are guiding net sales in the range of $15.1 billion to $15.4 billion. We expect adjusted EBITDA to be $1.625 billion to $1.675 billion. Adjusted EBITDA margin is forecast to be in the range of 10.6% to 11.1%. We [indiscernible] our 2025 full year gross margin to be in the range of 30.1% to 30.5%, reflecting our strong execution in a below normal starts environment.

We expect free cash flow of $800 million to $1 billion. Our revised guidance assumes average commodity prices in the range of $370 to $390 per thousand board foot versus the long-term average of $400.

Moving to Slide 16. We recognize that 2026 is coming into focus as we approach year-end. Like we did last year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions. As you can see, we have included a new scenario that provides a perspective on our performance and a normal housing environment. I want to emphasize that this is not guidance. These scenarios should help clarify our range of performance expectations for 2026 and demonstrate the strength of the best-in-class operating platform.

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 am confident in our ability to drive long-term growth by executing our strategy over in our exceptional platform and maintaining financial flexibility.

With that, I'll turn the call back over to Peter for some final comments.

Thanks, Pete. I want to close by emphasizing the transformation of BFS as illustrated on Slide 17. Today, we are an exceptionally improved organization, one powered by our value-added solutions and digital tools. Our relentless focus on operational excellence and a disciplined capital deployment strategy. These improvements, combined with our scale, have positioned us to accelerate growth as we return to a normalized starts environment. By controlling what we can control and leveraging our competitive advantages, we will continue to deliver exceptional long-term shareholder value. .

Thank you again for joining us today. Operator, let's please open the call now for questions.

[Operator Instructions] We'll take our first question from Matthew Bouley with Barclays.

So I want to start on the framework, the scenarios for FY '26. If I'm looking at it right, it seems like you're implying kind of maybe a mid- to high 9% EBITDA margin at the midpoint versus this year, obviously, 10.6% to 11.1%. Is that because you're, I guess, implying exiting this year between '29 to '30 on gross margin and the expectation is that, that should continue kind of given builders negotiating back with suppliers? Or is the SAP implementation part of that? Just I guess what are some of the moving pieces behind that margin outlook in 2026.

Matt, it's Peter. I think you're right, for the most part. It's not an SAP thing. It is a sense of both where we have gotten to at the exit of '25, but also our read on the competitive environment and the dynamics are -- it's basically a leveling out. We're about to the bottom. We're thinking based on everything we're seeing on the margin side. But that question is out there in terms of which way the market will go as we signaled with the sort of up and downwards in the scenarios. So try to give a middle-of-the-road view on where we think it's going to end up, does the turn happen. The sooner the better, we're ready to go, but we need a little cooperation.

Yes. No, absolutely. Makes sense. So then the other one, I guess, just sticking with that slide, I wanted to ask on the normalized EBITDA guide. So obviously, it jumps out a little that it's a different number than what you gave at the Investor Day a couple of years ago. I guess, the revenue number would look to be the main difference there. So I'm wondering if that's a comment on sort of the market share growth that you're assuming at that time, maybe the starting point on market share is a little bit different because of the decline in the market we've just had in the past year? Or just anything else you can kind of give us on what you think may be a little structurally different leading to that level of profitability at $1 million to $1.1 million?

Yes. It's a good question, although I guess I'll start by pointing out, it's a bit of apples and oranges. So Investor Day, obviously, we're laying out our plans for the future based on where we were in the day but initiatives, productivity, I mean, all the things that we outlined in that meeting, this is simply an attempt to say, based on where we are in 2 and some basic level assumptions about what we think is going to play out over the next year in terms of back if we saw it, we magically made this thing go back to normal over the next year, what would the numbers look like?

So in light of that big difference is the market, as you pointed out, dramatically different. The average size of the home, the average content of the home is markedly different. Your point about share, that's a fair comment, and I think the impact on deleveraging the business, given some of those dynamics in terms of the overall size of the market, as in play and here to -- but don't forget, I mean, this is not apples-to-apples in terms of the end year of Investor Day either. So there's a time line, just a metric snap-aline difference here.

Hopefully, this is a good reference point for you to see -- look, this market is weak. It's not normal for us to be at the level we are today. And it doesn't take much in terms of recovery to get us to the numbers that are meaningfully better based on the outputs of what this business is capable of we're ready for that turn. We're excited about it to come, but that's maybe the best summary of the differences.

Our next question from John Lovallo with UBS.

My questions as well. The first one is the midpoint of the outlook implies 4Q sales of about $3.42 billion, adjusted EBITDA of about $341 million which would imply a sequential quarter-over-quarter decremental of only about 18%, I think year-over-year, it would be about 38%, but both of these are better than what we've experienced over the past few quarters. So can you help us just understand what's driving the improvement there?

John, thanks for the question. It's -- I would say the general the essence of your comment is reasonable. We don't disagree with it. I think that there's a couple of factors at play. You've got a little bit of a lapping effect where the comps year-over-year are less dramatically down, but we're still in a market that's challenged. Pete, on your view, anything to add on that. .

Yes. And as Peter said in his prepared remarks, Q4 is a seasonally lower quarter for us. So sequentially, we will see a step down from Q3 that's expected. As Peter mentioned on the lapping in the year-over-year we are closing the gap. So we saw Q4 last year starting to compress and we're now lapping -- getting closer to that lapping period.

Okay. Understood. And then the $3.42 billion in implied fourth quarter revenue would be down about 11% year-over-year. Can you help us just kind of bridge that 11% in terms of organic sales, M&A commodities and within the organic piece, what are the expectations for single-family versus multifamily versus R&R?

So the M&A will continue to be a good boost for us as we've shared in our sales growth really every quarter and in our assumptions, it's roughly 5%. So that will continue. The margin pressure and headwinds that will show up in the form of pricing, we will continue to be a headwind in Q4, but as we outlined, maybe a little less significant, and we were getting closer to what we feel is a bottom. And then on the organic side, we still have a start assumption out there that's 920,000 single-family starts, which has step downs on a quarterly basis. So still mid-teens, double-digit decline in the fourth quarter. So that's really the big makeup and the headwind that we're seeing in the numbers. .

We'll take our next question from Charles Perron-Piche with Goldman Sachs.

First, I just want to go back to the scenarios. I just want to understand how multifamily plays in it. I think multifamily starts are up 17% year-over-year year-to-date through August. So I think the mix is tied towards the larger building, which are -- I think are outside of your scope. But more broadly, how do you think about this multifamily recovery. How is it embedding in your scenarios for next year, given the reshoot noted in your prepared remarks? And what could that mean for the margin because siding the larger amount of value-added content in that segment? .

Yes. Multifamily right now is 8% to 9% of our sales. We don't have a call it a swim lane or a row called out for multifamily. But in 2025, we were going down mid-teens for multifamily in 2026. We're looking at a flat environment for us. Even though the overall starts number is showing a recovery. It's just that bag and expectation of the market that we participate in, in that 4 stories, wood structures and below, it's going to be more of a flattish because of the time it takes to transition that start into a first sale for us. So that's the expectation of multifamily for 2026.

Okay. That's good color. And then understanding the market dynamics are outside of your control, but you've done a great job in the last few years to doctors structure to protect profitability. I guess the scenario that you presented today, are you considering incremental productivity actions as an offset? And maybe taking a step back, can you talk about your ability to service demand should we see a factor and expected pick up in part activity going forward?

Yes. No, good questions. The storyline around our business is one of day-to-day management week-to-week quarter-by-quarter at the location level, right? Yes, we're a national player. We coordinate as a team, but we run this business in a very entrepreneurial way based on the local market demand. So what you've seen us do over well, over the long term, but particularly in the last year where we've seen headwinds on the sales line, we've looked at it at the local market. How do we make sure we're able to meet our customers' needs and leveraging our existing footprint in the best way possible.

That means really managing the variable portion of the spend making sure we're aligning the hours and the location footprint and the trucks and all of it to what our customers really need. That, that won't change. That will continue to be executed, meaning we will continue to react at that local market, and you'll continue to see that. We have capped our foot on the gas when it comes to productivity. The teams are engaged in a lot of different actions to try and make this business incrementally better this year than it was last year. Some of that candidly has been overwhelmed by the deleveraging even though we're more efficient upper unit basis, the lack of units and the overhead that we sustain as a business of our scale means that some of our productivity numbers have gone bad, even though the teams are doing good things.

And that goes, I think, to your last part of your question, which is we are going to be exceptionally well positioned to take advantage of growth because what we've been able to do in terms of the work that we do at that local level is protect the capacity availability. Yes, of course, we'll have some rehiring to do, but making sure that we have kept our ability to serve at a higher level, while at the same time, scaling operations in the near term. It's something that we're very good at, and I think is going to be evident -- was evident during sort of the COVID spike where we were better positioned and better able to respond than everybody else.

I think that's even going to be more true as we make this next turn because of the thoughtful investments we've made around those markets where we knew we ran out of capacity last time, right? We've learned from those situations and made sure that we're going to be ready in the next turn around key markets and key opportunity areas. So excited about it. I think it's going to be really good for this business. Like I said before, we just need a little momentum coming our way.

We'll move next to Mike Dahl with RBC Capital Markets.

It's really actually impressive how stable the gross margins have been year-to-date, obviously, stepped down versus last year, about 30.5%, 30.7%, 30.4%, pretty remarkable stability above 30. I guess I've got a 2-part question here on the margin. I guess, it seemed like the margin came in better than your expectations in 3Q. So can you comment on what drove that? And then with your fourth quarter guidance so at the midpoint, implying kind of a 100 basis point sequential step down. Is that something you're already seeing in your exit rate into the fourth quarter or is there kind of a buffer against the market is softening, it's competitive, maybe things continue to weaken through the quarter, if you can address both of those, that would be great.

Thanks, Mike. Good questions. So with respect to the margin performance in Q3, we did outperform what we had outlined. We did see a sequential step down. It just wasn't as significant as what we had originally and shared on the call. Some of the outperformance is due to us buying better and us managing through our supply chain initiatives that has really helped and bolstered. So we have a professional team that continues to look for the way to maximize and improve our bias. So that was where we're contributing the outperformance in Q3. With respect to Q4, we're still outlining that, I'll call it, a step down for the, call it, exit quarter.

We are seeing continued pressure across a weak market that we're operating in, but the team across the business is doing exceptionally well, managing pricing and being extremely disciplined and getting the sale at a level that we feel is appropriate for what we're providing from a service standpoint. In a weak market, that we're operating in. So that competitive dynamic is real and we're operating and navigating extremely well.

Okay. That's helpful. My second question, just understanding your position that what you're putting out there today is normalized is not necessarily apples-to-apples versus the Investor Day. I wanted to drill down on the there still seems to be an implication that there's kind of that lower revenue per start dynamic happening. And I think there's kind of a debate on over some period of time is the content and size of home, at least? Is that a cyclical dynamic? Is a structural dynamic. If you're calling this kind of normalized, are you taking a different view on you think that some of those pressures you've seen in the last couple of years, that is kind of -- that is the new normal, even in kind of a recovery, you'd still expect those headwinds to persist.

Yes. So I guess, maybe the -- if I understand the question correctly, we're not trying to advertise or predict or bounce back to the old size and complexity of the -- we're just sort of acknowledging it where it is and drawing the line out from here. Could there be some recovery? Sure. Yes, yes. No question. I think the challenge today, though, to be honest, Mike, is affordability is a real thing, right? It's not a made-up media headline. It's what people are feeling. And that's going to take some time to recover back to maybe where it was 5 years ago. .

So with that in mind, I think the step-off point on the normalized within that scenario chart, is a real good sense of where we are today. I think there's potential upside on the starts number I think there's realistic expectation that we should see upside on the commodity number. I mean if you look at the results of some of these mills or they're software in right now at these prices. So I think there's a lot that would indicate we can do better than normal. But I also don't want to -- I don't want to signal the wrong message to the broader investor community about what that says. That is just historical averages and kind of based on where we are today. And to your point, where we are today is really size and complexity of the home. That's what's in there.

We'll move next to Rafe Jadrosich with Bank of America.

You commented earlier that the market share was flat to up slightly in the quarter. I'm wondering if you could sort of just remind us on what you saw in terms of market share through the year than the just broader competitive environment? And then what do you -- like what's embedded in the 2026 sort of outlook or scenarios in terms of the market share assumption?

Yes. Thanks for the question, Rafe. So with respect to the market share, and we've provided in the past a bridge of our sales versus starts on a lag basis, in the prepared remarks, we remind everyone that it's roughly a 3-month lag. So when you look at the quarter, as we talked about flat to up a little bit from a share standpoint, if you look back to Q2 starts, they were down year-over-year about 8%. We're still seeing a little bit of headwinds from the smaller home and complexity. It's pretty modest but a little more on the cost basis side of things. And when you factor those structural adjustments in, we're at a flat to up slightly.

When we zoom out for the year-to-date, where we are year-to-date, it's pretty flat. It's pretty neutral. Starts are down about, I would say, 5% on a lag basis versus our 8% on sales and then taken into account some of those same structural adjustments. It comes out pretty flat. So again, a testament to the team and how well we're managing our price in this weak market and maintaining a share level that we feel is appropriate. I think that's really the basis for why some of our comments are around. We think we're getting to bouncing around the bottom here because of that combined sort of output.

We see stabilization in margins, stabilization in share, which sort of in my mind, indicates this is kind of where it wants to be right now. Now that has tremendous opportunity for us, obviously, as the market starts to pick up a little bit, especially given our available capacity and scale, but that's sort of the logic around that.

It's really, really helpful. And then just on the value-add on a year-over-year basis has been down by more than lumber over the last few quarters. That spread. Is that just the different end market exposure that's driving that? Is that competitive dynamics? And I think the longer-term goal is for value add to sort of outpace commodity, like when could that start to get back to a point where value is outpacing?

Yes. I think what you're seeing mostly in the value add is from the multifamily side of the business and that year-over-year lapping that we have outlined. Remember that multifamily is much higher indexed towards the value-added products. We saw the trust stepping down, and that's been known, and we've been communicating but the millwork is also now feeling at later in the build cycle from a multifamily standpoint. And so that's also in that value-added product. So you'll see both of those from a year-over-year basis is the largest contributor to that down percentage.

There's no question, there's pressure across the board. I want to be real clear about that. And sales volume out of any of our value-add facilities by virtue of what it is that we do, right? We've installed invested in overhead in order to create efficiency when you put product through the factory, that's a tough environment when it comes to the competitive world and making sure those facilities are full. I think we're doing an exceptional job. I'm very proud of the team. But there is definitely a headwind there. And by the way, there is some pass-through product, right? There's some engineered wood in there that they've also faced a very similar situation in terms of headwinds on the top line. .

We'll take our next question from David Manthey with Baird.

You really opened floodgates here with this '26 scenario data, I would just say. But as we look at that data, if we go from the 2025 midpoint to the normalized midpoint, it looks like a contribution margin of a little over 20%. And I just wanted to check with you, if we think about long term kind of secular, are you still thinking contribution margins on volume would be something in the high teens long term? Well, I think the contribution margin also depends on what margins are doing and where we're seeing margins go. And when you jump right to the normalized, we moved that up to the midpoint of our long-term normalized margins. .

So it looks like a bigger step-up in contribution from where we are today. As you look at the midpoint in 2026, that's an opposite scenario where we see a lot of that margin headwinds and pressure continuing. But a lot of it is the lapping effect of what we're seeing on the slope through 2025. So that flow-through and contribution margin is largely dependent on which way our margin is moving. Right. And said another way, there's probably to normalization, there are some tailwinds that push that number up. But what I'm asking is just secular if you think about the model growing volume? I think in the past, you said high teens. Is that still in play? Or has that changed?

I'm actually drawing a blank when we said that. I trust it what you said is right. I would say mid- to high teens is what we've -- the way I think about it. I don't -- let me say it a different way. We're not intending to change any of our prior messaging or change our tune on this. I think this is just an attempt to give a reference point as we think about what 2026 looks like.

Yes. Okay. And so staying on this theme, I guess, as we're looking forward, when we look from the '25 midpoint to the flat scenario '26, the contribution margin is actually, I think, slightly negative. But I think, Peter, as you said, you're taking 2025 as a whole as opposed to 2026 as a starting point of sort of where we are today or year-end 2025. But just so as we think about moving from here to there, could you just talk about the major buckets of puts and takes in the model, meaning you get productivity savings, you get some glide path from acquisitions? And then the offsets there would be, what, labor inflation, occupancy freight. Could you just talk about the moving parts that will flex that up and down into 2026 even on a flat start scenario? .

Yes. I mean you started rattling off most of them. So with the flat environment, we are jumping off of a lower point for 2025 than what the whole of the year is. I mentioned that was part of my other comments that I made on the margin and where the margin movement. We are going to expect lapping of acquisitions so acquisitions completed to date would be reflected in that number. So there's a stub year period that would contribute.

There are assumptions around inflation on costs, as you can imagine, every year that would have that and some productivity to offset it, but it's still in an environment where it's flat and we're focusing a lot of our resources on the ERP deployment. So it's not going to be as strong as what we had shared a few years ago. So that all contribute into what we're seeing for 2026.

Yes, I think that -- Dave, that's one thing I will emphasize is that yes, the market is weak. But as we think about what we're doing as an organization, the transformation continues. Our investments in digital and technology are going to have tremendous payoff for the business. There's it's obvious that we're going to be able to empower our teams to grow, grow efficiently to do things that, first of all, others can't do, but to give us that gives us an advantage as a partner and as a provider that we're committed to doing. There's certainly an investment associated with that, and we've been very transparent about it, I think. And really, that will continue in '26. It's just a thing to keep in mind as you think about those numbers.

We'll take our next question from Keith Hughes with Truist.

If we look at the scenario analysis for 2 for metal scenario of flat single-family most of the numbers in that range of the way which you're reporting for this year. Is it the flow-through from the starts at the end of the year that will be affecting that EBITDA is there something else going on?

Yes. It's similar to some of the comments already. I would say that the biggest difference is around the exit margin levels where that's going to result for the full year of '26 so it's not that they are necessarily going to get a lot worse from where they are, but just recognizing that they got worse through '25.

Yes. And just [indiscernible] always consider multifamily lower double lower ticket for you just given a smaller unit, you're doing so much trust work and things now. multifamily gets back to a growth vehicle. Is that necessarily an inferior start or less inventory or start in single family versus what it was [indiscernible]?

That's a great question. I don't know if I know off the top of my head, dollars per start splitting multifamily versus single file. What I would tell you is it's very -- it's appealing for us because of the value-add exposure. Obviously, a lot of trust and a lot of mill work. But it's also a growth vector. We see that there's opportunity for us to do more in that space, particularly as we've been able to build our relationships with contractors, with developers. We think that will continue to be a source of strength for us -- but it is -- it's a tricky one when we talk about communicating it to you guys because everybody wants to look at the multifamily deadline number. And given our sort of subsection of that that's been a little bit of the disconnect. But we like the business, we like the profitability. And I think it has not just a good profile, but also the potential to grow quite well. .

We'll move next to Trey Grooms with Stephens.

This is Ethan on for Trey. Just going back to some earlier comments about share. Historically, you guys were able to take share at maybe a couple of hundred basis points above the market. And obviously recognizing the current affordability challenged environment. But how should we think about Builders long-term ability to continue to take share, maybe both in a flat market and on a longer-term time horizon.

Yes. Thanks, Ethan. Good question. So I'm still a strong believer in our ability to take share. I think that the reality, if you go back over the past couple of years, we talk a lot about it, right? I think we've lost some share on the pure commodity side of the business. I think that we've gotten to the point where we're saying no to any more of that. And I think we've leveled that out I think on the side where we gained the most share, it's primarily the value-add space. We have had and have better capacity, better capabilities, a better competitive position than anybody else in the space.

And so when the market is running healthily, but also when it's running aggressively. We are an obvious source of relief for builders who are trying to solve problems. And I think that's the storyline in the long run. We are still in an industry where gill trades good labor is hard to find and increasingly retiring and becoming harder. And that's where our product portfolio, our offering is uniquely suited to meeting the demands of the future. And I think that gets accentuated when you think about digital. The magic of technology in our space is that it helps to take out waste and it helps to enhance efficiency while sort of protecting the quality and the craft of what homebuilders do.

We can assist. We can be a support structure for that. And I think it positions us exceptionally well to be part of what is ultimately the maturing of an industry to meet some of the challenges that we face right now. And that, to me, that's share wins. I absolutely believe that we are positioned to do that. We're certainly better positioned to do it in a growth environment. That's evident in our performance over the last decade. But I think as you see and even in this tough market, we can hold our own, we can do well. And there are certain categories where we're doing very well. I'd say install continues to be a bright spot. There are certain aspects of value add. There are certain markets and value-add where we are continuing to outperform the competition in the market is just a little tough to see with all the headwinds right now.

No, that's super helpful. And maybe diving more into the tech piece that you spoke on at the end of your comments there. Can you talk more about the tech investments that you're making in the business and how specifically how these could provide maybe outsized incremental returns when demand recovers versus prior cycles?

Absolutely. Yes. So the 2 main investments we're making right now are in the digital and technology space. So that one we've been working on for quite a while now. That's paradigm, increasingly AI. I think there's 2 aspects to it, right, right? One is just the capability that it delivers RT to be the preferred partner, right? So if you think about the speed at which we can turn around an estimate, the accuracy, the reliability of our delivery, all of that is really dependent on high-quality communications internally and with the clarity around what it is that the customer needs and our ability to provide it. That comes more easily when you have a wonderful tool and a structure around managing it like we have with Paradox. The 3-dimensional digital twin, the capabilities that we're building around that, those will increasingly empower our team to win head-to-head in the marketplace.

So I see that as share gains is what it boils down to. And then the second piece of that, and that's obviously a significant investment we're making that gets dialed out in your adjusted EBITDA number around SAP, right? The Elevate Project Elevate, we call it internally, is an initiative around introducing more modern software solutions into our field operations. So management at the location level. It's a challenging project, right? All the ERP implemented are, but what you've seen, right, we kicked it off this quarter. It didn't materially impact our numbers at a consolidated level what it will do over time is accumulate in meaningfully improved efficiency.

We see the opportunities for our folks to be more again, more capable, more insightful or able to partner with vendors more able to manage the cost, more able to provide consistent and high level on time and in old performance. Those are the things that will, over time, contribute to productivity. We talk a lot about continuous improvement, Peter, where are you going to get all this money from? Well, there's your answer. You see it. We see the opportunity. We have targets that we're going after. It will take some time to deliver it as it always does with these types of large-scale initiatives, but I'm as confident as I ever have been that there is a pot of gold at the end of that rainbow and there are advantages that sort of derived from that capability technologically that will have a halo effect on the broader business as well.

We'll take our next question from Phil Ng with Jefferies.

Relative to your guidance last quarter, good to see strong 3Q results better than expected, and you revised the outlook higher, particularly on single-family, so I believe last quarter, you had some insights on how perhaps your customers were pursuing land development and how they're managing production or whatnot. I guess what new insights have you kind of picked up from your builder customers and how much input they provide for your base case sterile for 2026. And then just to dig into that a little bit more, how do you kind of envision the shape of the year unfolding in your base case for next year?

Thanks for the question, Phil. So I won't be able to go down into the details about the shape of next year and that sort of thing. I can tell you what you're seeing in the results for this quarter from the public, in particular, that's what we've been hearing. It's a mix. It's a struggle out there. There's certainly struggle from a bunch of different directions. Obviously, the political climate has gotten trickier because housing is continuing to be a high-profile political discussion. The good news, I would say, is that the road act and some of the stuff that's out there, good bipartisan support, people are trying to come up with solutions to take away some of the barriers that have restricted our ability to build that I would argue, have sort of crept into American Society. That's good.

But any time you've got a political discussion, I think it's tough for the builders. They've talked about that. I think that the affordability profile for them still continues to be a challenge. You see that they're still dealing with very elevated incentives on their side of the fence. You've seen a couple of key players acknowledging how hard that is, being forced to maybe even get more aggressive and even want to be to clear some of the inventory. That new home inventory is it's not problematic in terms of the overall amount of inventory available in the market, but it's certainly high for new it's certainly high for new. And if not for, I would say, the depressed existing, we would be paying even more attention to it.

What you're seeing, I think, in the behaviors is a real pullback in the starts pace in order to make sure that those new homes -- that new home inventory is being managed. That's our results, right? That's what we saw coming, that's what we've signaled to you. I think we've seen some stability at this low level. But I think all of us are wondering about the uncertainty. The uncertainty there was something I hear from the builders a lot. Their consumer, their customer is uncertain. They don't know what to make of where tariffs are going to be, where jobs are going to be, what this I think is going to do. And I think those are the themes that we hear that basically underpin some of these what I would characterize as met market numbers for the last half of '25 in the early part of there's a lot of optimism of why the market is going to go, about what we're capable of doing, about the value that's being offered.

And with a little bit of help on a couple of areas, I do think there's room for growth. and based on what we talk to the builders about.

Okay, super. And I appreciate that you guys want to be prepared and ready for recur from a supply standpoint, capacity. When we look at your normalized situation, call it $1 million to 1.1 million starts. What type of capacitization does that imply? I know you guys kind of built this up during the pandemic. So in the muted demand environment, which we're seeing right now, is there more work in the capacity front? Because if I look at your deck where you show single-family starts over a 10-year horizon. I mean, thread of the years were actually below your normalized level. So how do you kind of balance that dynamic going forward in terms of capacity and head count and just costs going forward as well?

Yes. No, that's a great question. So the short answer is that the high-level averages, I would describe as useless effectively because you get small markets with low capacity, big markets with no capacity like an average capacity, but there is true. What I would tell you is this, the way we think about capacity is very local market driven, meaning as we looked at the results and what happened during the last 5-year windows or 5, 6 years, so 2019 through today, in seeing the arc of utilization of some of these facilities.

We never got in my opinion, to a dramatically high level of production, but we still struggle and so what that move yield that I think were the opportunities for us to enhance capacity to recognize where over time, the shift has occurred in terms of where the starts are and where the starts need to do. And then where in those markets do we need to have a better footprint of capacity. That's what you've seen us invest in. It's sort of a rifle shot approach to capacity additions in response to where we got pinched versus, "Oh, well, there's a need, we'll just add it. We'll add it across the country or will peanut butter it." That's not how we think about it.

So in light of that, we have definitely built in some of those holes. I would say, where we had the biggest issues, we've moved the most aggressively, we're best positioned. There's a handful of stuff that we'll continue to do. But I do see it being less than it has been certainly over the last 3 or 4 years as we move forward until we get better clarity as to what the next leg of growth, where the next leg of growth is going to be.

And we'll take our next question from Collin Verron with Deutsche Bank.

When you look at the factors that have made BLDR tracked below lag single-family stores in your markets, do you think that that's fully stabilized at this point so that you'll track more in line with lag starts in 2026? Or are you anticipating more headwinds in '26? And if so, can you help quantify what those might look like as we look at BLDR single-family sales versus starts?

Yes. Thanks, Collin. I think what we've tried to outline for you is that we are tracking with lag single-family starts at this point, taking into consideration the structural adjustments. If you're thinking about when on the face of the financial that will come true without having to do the additional adjustments. I think it depends on that stabilization of the home size and de-contenting, which we're starting to see more of -- but what's a little more difficult right now as some of the cost basis and inputs that we're seeing from our manufacturers and suppliers that are being challenged with given different market dynamics and affordability items.

So we're going to continue to do our analysis the way we have, and we'll be happy to share with you on future calls. But we think that we're getting to a point where those structural adjustments are starting to get a little bit less impactful, but they're still in there for our reconciliation.

Great. That's helpful color. And then I think you quickly mentioned some branch consolidation actions that you guys have taken. Any color as to like what the annual cost savings from these actions are -- and just given the current demand environment, do you anticipate any further actions? .

Yes. So we've taken out 16 facilities this year, 30 last year, so 46% over the last months. So it's something that we do as part of the fabric of who we are, and we talked about that last quarter. We're constantly evaluating where we have excess capacity. So we just talked about capacity with Peter on the prior question. But we look at where we're -- we have excess, and we're rationalizing that and keep it in mind, first and foremost, our customers trying to make sure that we're taking care of our customer. So where we have additional facilities in a market that we can service more effectively from a single location versus multiple locations.

We are going to continue to make those decisions. The capacity is across the board. So it's multifamily trust plants where we saw multifamily pullback. So we've talked about that. locations that are down from a start standpoint, and we just don't need as much fixed cost. We're going to continue to evaluate this on a go-forward basis all the time. It's just part of what we do. And as we integrate acquisitions, and we look at the best way to service our customers from the right locations where we have overlap. So I hope that answers your question. but it's going to be something we will continue to bring up and address as we move forward.

We'll move next to Min Cho with Texas Capital Securities.

Just 2 quick questions. So it's nice to see the good progression on sales and bids through your digital tools. Can you provide any update on the pilot? Have you expanded homebuilders into the pilot and just kind of what they're using the most or getting the most value out of and your expectations for the pilot kind of going into 2026?

Yes. No, happy to talk about it. So we have today is -- because it's an end-to-end platform, the participation rates in different aspects of the tool is pretty varied, as you might imagine. So I would say every piece of it is being used. That's good. Adoption levels, obviously, for the easy stuff or Sky high. We have pretty much everybody is using it for invoice review, delivery, photos and payments. There is a subset of that that's using it for things like estimates and quoting. There's a subset that's really engaged in the home configure aspects of the visualization tools customers are working through actually an expansion of what is in the catalog within home configure for the consumer to select from. .

So we've got a couple of customers that are leaning into that using it as a virtual model home type of a tool set for rendering and drafting. Certainly, scheduling has been an interesting piece because it's a it's an included functionality builders are taking advantage of it when they're scheduling trades and the pace of the build. So I would say those are some of the bigger, more common pieces of utilization. What we talked about in the past and that I'll reemphasize on this call is a big piece of this is also making sure we've got the training and the comfort level with our internal stuff. And people are and that's why we emphasize both the quoting and the sales that are flowing through the tool.

The people within the BFS 4 walls are increasingly seeing the value of a centralized repository because remember, it's a library really. It's a place for the builder to store their plan for us to be able to access them to do the work that we need to do. That's where we see real dramatic increases and I think that's an indicator of where we expect the pilot to continue to build momentum. We'll have another nice booth at the IDS show this year. So you'll be able to see some of the latest things we're working on in terms of the development side is really leveraging increasingly the AI capabilities that we've been developing to increase 2 main things, right? It's quality and accuracy and ease of use.

Those are the things that we think we have tremendous opportunity to improve. We've had some really nice team member adds internally that have been working on that. And I think we're going to continue to weather some really powerful tools for the space, both internally to empower our team and enable our team but also very importantly, obviously, for the customer and for their experience for them to battle this affordability challenge and to build these higher quality, more efficiently constructed homes.

Great. And then lastly, just you mentioned installation, your installation business in the past, and you mentioned it today is one of your value-added services. It seems like labor has not been that big an issue for homebuilders right now. Can you just talk about the longer-term outlook for this business?

Yes. No, you're right. In install the labor side has certainly been a bit of a relief. It's the real question, I think that nobody really -- nobody that I talked to yet, at least, have clarity on is what is the impact of immigration. So there's been actually a reasonable stability in the labor market, certainly pressured downward pressure on cost per hour and perhaps an increased availability, but not perhaps as much as one might expect given how far down we are from the peak. And the sense that I've heard from folks is that there's a meaningful drag from the immigration work that's been done. So the real question comes on the turn.

When the turn comes and we start trying to build more homes, how much labor is actually going to be there and be available to do some of this work. I don't know. I think it's too early to say at this point because I think the reverse immigration and where people have sort of backed out of the market, hard to see. So we'll see. But I do think that it is likely to be reinforcing characteristic or reinforcing factor as to why our value add is more valuable to builders over time. The more we can do to maximize the use of skilled trade labor and do it in a way that is reliable and high quality for builders I think the more successful we're going to be. And we've got a lot of experience doing that.

Our next question from Reuben Garner with Benchmark.

I'm going to squeeze 2 into 1 quick question. The specialty building products category has been pretty steady of late. I don't think there's been a lot of acquired revenue in that space. Are the install and the digital initiatives large enough or growing fast enough that that's driving the bulk of that? And then in the same veins for '26. Would -- do you view the digital initiatives, the install initiatives as the biggest growth above the market drivers for you guys? Or is there some other initiative that you would point to that's likely to be what helps you grow above the market?

Yes. Thanks for the question. On the first part, in that specialty products, just real quick on the digital software sales will flow through that. That hasn't largely changed. Our focus on digital sales and the pull-through is really going to be in the product categories. So the digital software sales isn't really influencing that per se. The install, however, as Peter mentioned, is a good growth driver for us. .

Yes, it may be down a little bit year-over-year, largely driven by the multifamily, but it's not down near as much as the overall market from the assembly. So we are outpacing the market with install. And the labor portion goes through that specialty and other category or if the product categories will be in the natural product categories. So that's what you're seeing from that install and other. We haven't materially bought anything that would influence that specialty bucket otherwise. But it is performing well. It's been more stable from a cost standpoint, and it's been stable from a sales standpoint.

You can imagine that the specialty is something that has a strong correlation to a lot of our more R&R and other focused markets, which are more stable in general than the single-family space. So that's a component of why it does that. In terms of thinking about the future and where we see continued growth, again, I think that our ability to provide a superior product within both the value-add space, if you think about what Ready-Frame offers, what trusts and doors offer that's still very impactful. We think that over time, that will continue to grow faster than market.

The install in what we're able to do and candidly, a variety of product categories just to create ease of doing business for our builder customers. We think that's an offering that has been and will continue to be well received. I think you'll see in '26 some consistency in our areas of focus. We'll certainly we'll be leaning in, in a lot of areas because we're a pretty broad company. And depending on which market we're in, we may have different priorities. But I think those components still will read through in '26.

We'll move next to Jeffrey Stevenson with Loop Capital.

So trust pricing continues to be pressured in a challenging residential demand environment. And I wondered if you've seen any improvement in industry supply-demand imbalances as we move through the back half of the year, would you expect trust pricing to continue to trend lower as we move into 2026.

I think it's a good observation. It's certainly been an area of pressure and I alluded to that earlier. We are seeing some stability. I think the market broadly has moved aggressively. I think all of us have seen the opportunity to be part of the solution in the affordability space by being that partner to customers. The return on investment question, I think is what is important when you're thinking about trust, right? There's -- that's not an EBITDA metric, right, because of the depreciation associated with it. So I think what has happened is the market has made some aggressive moves and gotten some stability and some clarity around what a good return on investment is -- it's always hard to predict where it's going to go.

But our sense is that it's gotten to where it should be and where it's going to get to for the time being. And it will have an opportunity to improve from where it is. But obviously, we're going to stay close to it. I think our competitive position and our cost position vis-a-vis the productivity work we've done over the years makes us the decider at the end of the day that we want the business or not, allows us to do that in a way that others can't compete with. So we're interested in being a responsible market participant.

We think an appropriate margin and return on investment is the right way to think about it from a shareholder perspective. But ultimately, we are going to win this battle, and we're going to stay in the space in a way that maintains our leadership position.

Great. And earlier this year, Peter, you mentioned the slowdown in the M&A pipeline due to macro uncertainties, but you've continued to make strategic bolt-on acquisitions and important value-added categories such as storing millwork and I wondered if the M&A pipeline has started to see some improvement as the year progressed.

Yes, it's a good point. There have been some ebbs and flows. And I think we've been fortunate that a few of the flows were with assets that we really thought were great additions. I'm super excited about the acquisitions in the Nevada market, right? That Las Vegas door and millwork category has been a kind of an eye store on my tracker for a while now. And I like seeing a blank in that category because it's such a good one for us. And we picked up 2 fantastic businesses. I'm really excited about what we're going to be able to do working together to be that preferred partner in that market. It's a market where you already do very, very well and seeing how much better we'll do with that additional category.

That's an example for us of where those opportunistic tuck-ins can be very impactful and important to us. And we continue to see them. I think we saw a little bit of a boost there. And businesses that were sort of in market. But absent flows depending on the uncertainty around the space, that's true within the M&A space, just like it's true for consumers at this point.

We'll take our last question from Adam Baumgarten with Rickel Research Partners.

I think you had mentioned some procurement savings, which probably helped margins a little bit. Can you maybe talk about where you saw some better cost positions there?

No, we're really not going to get to [indiscernible] what I can tell you is that our team is well organized and our communication with our operations has put us in a good position to really be able to identify those opportunities and take advantage of them in a way that has really helped us in the short term. So I think that's [indiscernible]

Yes. The only bit of color I'll add is we're managed by virtue of our scale and who we are. If you're a vendor and you want something to go away, that's a problem for you, we're a very quiet customer we like helping people have problems go away. And sometimes that creates opportunities for us. So we're committed to being that type of partner for our vendors and helping them. And I think this is an example of where we were able to do that. .

And this does conclude the question-and-answer session and also will conclude the Builders FirstSource Third Quarter 2025 Earnings Conference Call and Webcast. You may disconnect at this time, and have a wonderful rest of your day.