Good morning, and welcome to Builders FirstSource's Fourth Quarter 2017 Earnings Conference Call. Today's call is being recorded and will be archived at www.bldr.com. It is now my pleasure to introduce Ms. Jennifer Pasquino, Senior Vice President and Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to the Builders FirstSource fourth quarter and fiscal 2017 earnings conference call. Joining me today on the call is Chad Crow, Chief Executive Officer; and Peter Jackson, Chief Financial Officer. A copy of the slide presentation referenced on this call is available on the Investor Relations sections of the Builders FirstSource website at bldr.com. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Any reproduction of this call, in whole or in part, is not permitted without prior written authorization of Builders FirstSource. And as a reminder, this conference call is being recorded today, March 1, 2018. Builders FirstSource issued a press release after the market close yesterday. If you don't have a copy, you can find it on our website. Before we begin, I would like to remind you that during the course of this conference call, we may make statements concerning the company's future prospects, financial results, business strategies, and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the SEC and other reports with the SEC for more information on those risks. The company undertakes no obligation to publicly update or revise any forward-looking statements. The company will discuss adjusted results on this call. We've provided reconciliation of non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanation of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are on our website. At this time, it's my pleasure to turn the call over to Mr. Chad Crow.

Thank you, Jen, and good morning. Welcome to our fourth quarter and fiscal 2017 earnings call. I will start with a brief update on our fourth quarter performance and an update on our execution against our 2017 priorities, as well as our longer-term strategic growth initiatives. Then I will turn the call over to Peter, who will discuss our financial results in more detail. After our closing comments regarding our outlook, we will take your questions. Let's start on page four of the presentation. I continue to be impressed by the execution of our 15,000 associates across our 402 locations as we work to further enhance our position as a preferred supplier to our customers. Our sales for the fourth quarter of $1.8 billion represent a solid increase in sales per day of 13.2% over 2016, excluding closed locations. This growth was benefited by commodity price inflation of approximately 7.6%. Sales volume per day, excluding closed locations, grew approximately 7.5% in the single family homebuilding end market, and approximately 5.2% in the repair and remodeling, and other end market. Turning to slide 5. Throughout the year, we experienced rapidly rising commodity prices. Framing lumber and sheet good prices increased 21% and 18% in 2017 respectively. These price fluctuations caused an ongoing short-term gross profit margin compression, but I am very pleased with our organization's responsiveness to the challenge and ability to mitigate the impact. As we manage through this period of commodity price inflation, we expect these higher prices will benefit our profitability in the longer term. I am also pleased to report that our increased investments in manufacturing capacity continue to pay off with 11% growth in sales of manufactured products in the year, faster than the overall growth of the residential housing market. Our growth and other value-added…

Thank you, Chad. Good morning, everyone. On slide 11, I will first discuss the current quarter results and then touch briefly on our year-to-date results on page 12. As a reminder, we have included adjusted figures to normalize for one-time integration closure and other costs. We have one more sales day in the fourth quarter of 2017 than prior year, so I will speak to our results on a sales per day basis. For the fourth quarter, we reported net sales of $1.8 billion, a 13.2% increase compared to the fourth quarter of 2016, excluding the impact of closed locations and including an estimated 7.6% benefit from commodity price inflation. We estimate that our sales volume grew approximately 7.5% in a single family new residential homebuilding end market, and 5.2% in the repair and remodel/other end market with expected market driven declines in multi-family. Our gross margin percentage was 24.2%, down 110 basis points from 25.3% in the fourth quarter of 2016. The decrease on a year-over-year basis was largely attributable to the higher commodity prices, framing lumber and sheet goods prices increased 21% and 18% from year-end 2016 to year-end 2017 respectively. Commodity inflation will cause short-term gross margin percentage compression when prices are rising and margin percentage expansion when prices are falling due to the short-term pricing commitments we provide customers versus the volatility of the commodity markets. Additionally, higher sales in commodity products had a negative mix impact on gross margin percent. These price fluctuations caused some ongoing short-term gross margin profit compression, but I am pleased with the company's ability to mitigate the impact. I expect that as commodity prices stabilize, the company will begin to benefit from higher commodity prices, enhancing our go-forward profitability. Our SG&A as a percentage of sales decreased by 140 basis…

Thank you, Peter. And thank you, all, for allowing us to share with you our progress on our ongoing investments in the company's future. There's a lot to be excited about as we enter 2018. Housing demand appears strong and while material cost inflation continues to create short-term challenges, I see it as an advantage in the coming years. In addition, we will continue to leverage our core strength to grow the top-line and profits, as well as creating meaningful value for shareholders through our strategic growth priorities and operational excellence initiatives. We've laid out a plan to double EBITDA and generate over $1 billion in net cash flow and are excited about the prospects the future holds. I'll now turn the call over to the operator for Q&A.

Thank you. Our first question comes from Blake Hirschman from Stephens, Inc. Please go ahead.

Yeah. Good morning, guys, and congrats on a great quarter.

Thanks, Blake.

Good morning.

First off, just wanted to get a little bit more color and insight into how you're kind of thinking about the trend in lumber prices going through the year from these sky-high levels? I mean, I appreciate the detail, the 4% to 6% top-line and the flat sequential margins. Just kind of curious as to when you guys are making your outlook for the year if you expect them to pull back throughout the course of the year, stay up here or just kind of overall on...?

It's been an incredible run, a year, a year-and-a-half of really unprecedented inflation. I was looking at price charts a couple of weeks ago, and I really thought the line was going to go vertical and actually fall back over on itself. It was so absurd. But our best guess is in the next four to six weeks, you'll probably start to see some flattening out. And, I think, prices will stay at healthy levels all year. It's just the demand has been really strong. The weather has been strong. The fires late last year were creating some log shortages. And then, this time of the year in the winter with the colder weather, you do have transportation issues primarily in the colder weather. Trains can only carry about half the rail cars they normally would. So, all these things are just adding up to a lot of demand and a lot of pressure on price. But, all in all, as we've said many times, high lumber prices is great for business. I think you will see things start to flatten out through March and into April. So, that's kind of what we're counting on, maybe a little more pressure in the near-term. Back half of the year, hopefully, a little bit of relief.

Got it. All right. Thanks for that. And then one more, just on the long-term plan, the EPS update. Just to be clear. Is there anything else that changed outside the tax reform and, I guess, the interest savings from taking out the 10.75% notes? Was there any other assumption changes there?

No. We didn't make any changes beyond those.

Okay. Great. Thanks for answering my questions and best of luck.

Thank you.

Our next question comes from Nishu Sood from Deutsche Bank. Please go ahead.

Thank you. The 15% to 20% EBITDA growth for 2018, can you just walk us through kind of the high-level assumptions behind that, just in terms of – on the revenue growth, and just the kind of drop-through, or what you're assuming in terms of the commodity headwind to gross margins and on the SG&A side?

Sure. We want to break down the revenue. We're talking about high-single digits for a single family, about 3% for the R&R space, and then probably similar downturn that we saw in 2017 and 2018 for the multi-family. We're looking at the numbers around commodity inflation based on what we're seeing right now, kind of in that 4% to 6% range. And then based on the growth that we're seeing in the relative space, in other words, the rapid growth in the manufacturing products space, we think that that is all going to pan out to that 12% to 15% range, not including, of course, the incremental investments we're making in some of our operational excellence initiatives.

Got it. 12% to 15% incremental you're talking about?

Incremental flow-through. Correct.

Got it. Got it. Okay. Great. The commodity inflation that we've seen here should make your four- or five-year targets that you've laid out easier to achieve. I think you mentioned that the only change you're assuming in the numbers, because obviously you've updated them, is the tax rate. So, how should we think about it relative to the commodity inflation? Have your numbers become more conservative as a result of the unprecedented rate of commodity inflation?

If – I'll jump in if you don't mind. If you assume lumber prices stay where they are today, yeah, there's probably a little bit of conservatism in there, but we all know that's not going to happen. Lumber prices never stay stable for a four- or five-year period. But assuming they did, yes, you're correct.

Got it. Got it. Okay. And just finally, obviously in this dramatic increases in lumber prices, has the effect which you always lay out very well on near-term effect on gross margins, longer term it benefits, has this unprecedented rate of inflation kind of reduced that near-term drag? In other words, obviously a lot of demand for lumber – single-family trends have been very, very strong. Has that reduced to the period of kind of price guarantees and maybe lessen the shorter-term drag from the commodity inflation?

Are you asking if our pricing structure has changed with our – like with our national builders, for example?

Exactly, yeah.

No.

So, another of (26:49) your lookouts are shorter now, lesser effect on the gross margin.

No. There really hasn't been any change in the pricing structure that we have with the national builders thus far.

Got it. Got it. Okay. Great. Thank you.

Our next question comes from Will Randow from Citi. Please go ahead.

Hey. Good morning, guys, and congrats on the progress.

Thank you.

Good morning.

I guess in terms of your growth investments, could you dig into a little bit more detail there? I believe $10 million to $15 million you're looking to spend this year and what that run rate may look like over the next couple following that. And also on CapEx at 1.7%, when do you think it'll kind of stabilize closer to 1.5%?

Yes. So, okay, I'll answer those in inverse order. The CapEx number of about 1.7%, we had a little bit of timing at the end of 2017 with a couple of projects that rolled over into 2018. So, we're sort of feeling like we're still in the band for that period. With the change in the tax code and us continuing to look at growth opportunities over the upcoming years, we'll update you if we change it but right now, we're staying in that 1% to 1.5% band. As far as the comparisons year-on-year for the investments, we had about an incremental $2.5 million in the fourth quarter related to our investments in locations and salespeople primarily, for about $10 million year-over-year. And then for next year, we've got another $10 million that's going to be broken up new locations, additional salespeople, we won't lap the full load of those incremental salespeople until, probably the end of Q1, so in Q2. And then OpEx investments represent the rest. So operational excellence items that where we're spending money on teams and some help on that area.

And just to be clear, after this $10 million to $15 million the following year, you're thinking about $10 million, is that incremental, or could that be at the midpoint of $2.5 million step down?

For 2018, we see that as incremental but we think that starts to put us in a healthy space for the investments that we want to make.

And then just as a last question – just as a last follow-up on operational excellence. Can you talk about kind of what buckets you expect to see cost savings, and how that may offset some of the increase in sales spend, for example?

Yeah. The main buckets we're looking at is pricing and margin optimization, delivery optimization, and then back-office automation and efficiencies there. And we've laid out a number. At the maturity down the road, we're probably looking at incremental annual savings of somewhere in the $50 million to $60 million range. And those are broken out about a third, a third, a third in each of those buckets I just gave you.

And that starts kind of hitting towards the end of this year?

Well, we'll get a little bit of benefit this year. I would estimate full maturity on some of these initiatives is probably three to four years out.

Okay. Thanks, guys, and good luck in 2018.

Thank you.

Thank you.

Our next question comes from Mike Dahl from Barclays. Please go ahead.

Hey. This is Matthew Bouley on for Mike today. Thanks for taking the questions.

Good morning, Matt.

Good morning. So, you outlined kind of a pathway to the 3.5 times leverage by the end of 2018. Could you just outline, now that you're reaching these levels, kind of your expectations on returning to the M&A market at this point? Thank you.

Yeah. We're not in a hurry. We've got a lot to say grace over right now and a lot of things we're looking at internally that, I think, can drive some real value. But when we acquired ProBuild and took on the leverage, we knew we would have two or three years of being kind of out of the M&A market and we're sticking to that plan. I think by the end of 2018, as you said, we will have kind of gotten to the promised land from a leverage standpoint. So, later this year, maybe we start entertaining things. But as I said, we're really in no hurry right now.

Got it. Thank you for that. Second question the working capital guide 10% of incremental sales. Just the question is really how we should think about the pace of inventory investment here just in light of the lumber inflation and kind of your expectations around inventory within that guide? And I know you outlined the completion of the delivery management integration with ERP if I guess, if that's playing into it at all. Thank you.

Well, the incremental working capital is pretty well within our range. We consistently talk about 9% to 10%. There's clearly a headwind in that number associated with the inflation, right? The same sticks of lumber are worth a bit more and we are a seasonal user. So, just to remind everybody we're going to build up inventory in Q1 and Q2, and then burn that inventory off in the back half of the year. That's pretty consistent with what we've done in the past. I think that hits on your main points.

Okay. Got it. Thank you very much.

Our next question comes from Alex Rygiel from B. Riley FBR. Please go ahead.

Good morning. Nice quarter, gentlemen.

Thank you.

Thank you.

Two quick questions. First, can you talk a little bit about the benefit of the hurricanes from Texas and Florida that rolled over into the first quarter or in the fourth quarter that are rolling over into the first quarter and into maybe the second quarter of this year?

Yes. We've talked about that in prior quarters. I really think the governor on (33:18) all that is going to be the availability of labor. And so, I think you're going to start seeing some benefit on the rebuild going on in Houston and Florida over the next year or two, but I really think the availability of labor is going to limit how much that growth can really be in those markets. So, overall, it's an absolute positive over the coming years. But, I think, it's just going to bleed in slowly over the next year or two.

And then to follow-up on an earlier question. Your longer term EBITDA goal that you set out a little while ago was before the inflation of commodities, was before a number of the additional salespeople that you've added, and it was before a lot of the new value-added plants that are coming online and are planned for next year. So, why not raise the long-term EBITDA goal at this point in time?

So, a couple of points. I guess the point on inflation, fair, like Chad mentioned, as things stabilize, we'll start to feather that in as it makes sense. We have not. We've left a static commodity number in our forecast. Those other items though were included. We did have the expanding sales force as an initiative, the additional value-add as initiatives. And we continue to include the benefit from the operational excellence initiatives as well. We try to break that out on slide 9 in the presentation to give everybody a better feel. But those were the items that we've been counting on as our strategic plan since we rolled this out. So, that's not new.

Fair enough. Thank you.

Our next question comes from Jay McCanless from Wedbush. Please go ahead.

Hey. Good morning, everyone.

Good morning.

A couple of housekeeping items first. Could you let us know what we should use for D&A this year, as well as what did you say the tax rate provision is going to be?

25% and $100 million in D&A.

Okay. Perfect. And then, the second question I had, very strong growth in R&R this quarter, but then guidance for about 3% growth as we move into 2018. Can you talk to us about what's going on there and why that growth that we saw in the fourth quarter isn't going to be sustainable as we go into the rest of the year?

Well, we're guiding to 3% growth in full-year 2018. We did have a little bit stronger Q4 in R&R. But keep in mind, a lot of our R&R business is up in Alaska, and that's going to be a little bit sluggish up in Alaska, we think, in 2018, again.

Okay. And then the other question I had on the gross margin guidance, probably something sub 25% for the first couple of quarters and then go into 25%, maybe 25% plus in the back half of 2018. Is that the right way to think about it?

Directionally, yes.

Okay, great. Thanks for taking my questions.

Thank you.

Our next question comes from Matt McCall from Seaport Global Securities. Please go ahead.

Thank you. Good morning, everybody.

Good morning, Matt.

So the new truss plants, the new lines, new millwork facilities, new door shops, additional salespeople, can you go through all the additions – and I know, I understand that it's in your longer term outlook and kind of the additions in 2017. Quantify maybe on a percent basis if you can the percent additions to both sales capacity and to physical capacity, and what does that look like in 2018? I guess I'm trying to get at – you outperformed starts, is that – are all the investments fully layered in, or we're going to see residual benefit as we move out in 2018? And how long do the benefits last that you're going to make in 2018?

Well, I'll let Chad talk to some of the specifics. He's got some exciting commentary about the individual things we're doing. I think broadly, we do have these feathering in as they come online. As you know, opening the doors doesn't equate to full production and full profitability. But, yes, absolutely, these are coming online, we'll get to that one year breakeven amount, and then they start contributing back, right? So, that means some of the things we did in 2017 are the things that are going to really move the needle in 2018 and on a go-forward basis. Rule of thumb, particularly on the manufacturing, the truss plants, $5 million to $7 million cost, $15 million to $20 million a year in revenue. So, you're generating EBITDA of about $2.5 million a year once they're up and running. Like you said, very nice for us, a nice contribution, but they're going to feather in over time.

Yeah. And so, we've got – we opened four new plants in 2017. Right now, we have scheduled to open three new truss plants in 2018. And then some of the efficiency gains are also in upgrading the existing plants, putting in automated lines, overhead laser projection. When you do all those things to a plant, you can add anywhere from 20%, 30%, 35% efficiency to those plants. So combined, there's a lot to get excited about in growing the value-added side of the business.

So, thank you, Chad. So, Peter, earlier, you were asked about how you get to the high end, and you talked about the market assumptions that you were making there. What about the company's performance beyond the cycle? What kind of outgrowth assumptions do you have in your outlook for 2018, maybe compared to 2017 even?

Well for 2018, what's included is the benefit of those value add product growth components. That's the biggest contributor. In the near-term, the effect of the investment and the effort of the team is going to be pretty modest on the bottom line. There is some benefit there but it's a lot offset in in the raw numbers. As we get into the out years as Chad was referring to that's where we start to see the outsized benefit of the operational excellence initiatives. The value add stuff, that's more of a cumulative snowball type of fact.

And there's – it's a good trade up. There's a little bit of cannibalization when you convert a builder for example from stick framing to trusses, but that's a trade we'll take all day long because it's a much higher margin for us.

Okay.

Note that, it does represent share growth.

Yeah.

Okay. So, said differently, maybe this year, there's not as much share growth in your assumptions? It comes in later years did I hear that correctly? Use kind of market growth as our guide?

I think it's a solid place to start. There is consistent share growth year in year out, although, with the offsetting impact of cannibalization is probably fairly modest. What I was talking about in the out years is really around the operational excellence initiatives.

Oh. Got it. Okay. All right. Thank you all.

Thank you.

There appears to be no other questions at this time. I'd like to turn the conference back to our speakers for any additional or closing remarks.

Thank you for joining our call today. We look forward to updating you on the progress of our initiatives in the quarter ahead. If you have any follow-up questions, please reach out to Jen Pasquino or Peter Jackson. Thank you.

This does conclude our conference for today. Thank you for your participation. You may disconnect.