Good day, and welcome to the Builders FirstSource First Quarter 2023 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by management and the question-and-answer session. [Operator Instructions]. I’d now like to turn the call over to Mr. Michael Neese, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead, sir.

Thank you, Shelly. Good morning and welcome to our first quarter earnings call. With me on the call are Dave Rush, our CEO; and Peter Jackson, our CFO. Today we will review our results for the first quarter of 2023. The earnings press release, investor presentation are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings and presentation. Our remarks in the press release, presentation and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'd like to turn the call over to Dave.

Thank you, Mike. Good morning everyone and thanks for joining our call. Our start to 2023 has exceeded our expectations, as the work that we have put into transforming Builders FirstSource into the premier supplier of building product solutions is driving tangible results. We are confident that the resilience of our business and the exceptional positioning with our customers will become increasingly evident to the market as we progress through a dynamic year in 2023. Despite a challenging macro backdrop, we performed above forecast due to the strength of our product portfolio, execution on our strategic priorities and the tireless efforts of our team members. We are managing through this complex environment by leveraging our best-in-class distribution footprint and end market exposure. We remain committed to enhancing our customer relationships by being the easiest in the industry to do business with, while driving improvements that will make home building more affordable and efficient. Our unrelenting emphasis on operational excellence positions us well to continue to execute our goals. We are driving share growth and mix improvement, while continuing to grow through accretive acquisition. Our recent transactions allow us to further expand our value added offerings and reach a more diverse customer base in attractive markets. While macroeconomic factors continue to dominate the headlines, we are closely monitoring local market activity by staying close to our customers and maintaining focus on our strategy. We are controlling what we can control and running the business for long-term value creation. Elevated mortgage rates and affordability challenges are headwinds. The feedback from some homebuilders has suggested that underlying demand has been resilient when we have seen mortgage rates dip. Though the results vary slightly by region, our April sales continued to offer encouraging signs that green shoes are starting to emerge across homebuilding. On…

Thank you, Dave and good morning everyone. I'm pleased to report that we delivered exceptional gross margins in the first quarter, despite a challenging macro backdrop. The advantages of value-added products and services are evident and key to our outperformance. We generated strong free cash flow as we leveraged our best-in-class operating platform and extended our track record of effective cost containment and working capital management. Our robust financial position, industry-leading products and solutions, and reputation for providing excellent customer service allow us to successfully navigate macro volatility and position us for above market growth in the years to come. I will cover three topics with you this morning. First, I'll recap our first quarter results. Second, I'll provide an update on capital deployment. And finally, I'll discuss our second quarter guidance and provide an update on our illustrative full year scenarios. Let's begin by reviewing our first quarter performance on Slide 10. We delivered $3.9 billion in net sales. Core organic sales decreased by 26%, attributable to a 34% decline in single-family due to slowing demand and compared to a strong first quarter of 2022. Multi-family was a bright spot that reflects the benefit of our expansion strategy in this category, growing by nearly 70%. The growth was driven by multiple acquisitions and a strong rental market. R&R and Other grew by more than 3%, mainly attributable to increased sales focus and capacity versus prior year. The cumulative effect of our acquisitions over the past year contributed approximately five percentage points of growth to net sales and one additional selling day had a favorable impact of 1%. While core organic sales and value added products decreased by nearly 17% due to slowing single family starts, this is almost 10 points better than the overall core organic result and underscores…

Thanks Peter. Let me close by saying that we feel really good about our strategy and our execution so far in 2023. Our investments in value-added products, productivity initiatives, and digital solutions are all delivering on our goal to improve our customers experience in partnership with BFS, while driving growth over the long term. While 2023 still appears to be a challenging year for our industry, I'm confident that we can create value for our shareholders through executing our strategy, our focus on value-added products and services, and our disciplined deployment of capital towards growth opportunities. Thank you again for joining us today. Operator, let's please open the call now for questions.

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

Good morning everyone. Congrats on the results. Thank you for taking the questions. So jumping right to the gross margin question, you raised the long-term guide to – the normalized guide to 28% plus. I think I heard you say value adds a little better and productivity coming in faster. My question is, you talk about the benefits of kind of a transformed business. I mean, is this a view to some of these shorter term trends that you're talking about? You got a little more visibility to the trough as a result or just what are some of the bigger underlying pieces, market share, etc. that give you confidence to say that now is the time to raise that gross margin target. Thank you.

Thanks, Matt. Yeah, no, it's a great question. We've been talking, about gross margins for quite a while now, ever since the merger and trying to get a sense of where normal is. We felt really good based on where the business was at that merger date. That 27% or better was something we felt good about on sort of a long-term normalized basis, taking out all the noise around supply chain and that type of thing. But we were continuing to look at it, right? We've been looking at it, managing the business, but in the meantime, we've been working. So, we've worked to improve our value add as a percentage of the overall business, right. The acquisitions we've made, improving mix, it's grown faster, and it’s been more resilient. So the biggest component being just the increased mix of value add on an ongoing basis, we think that's meaningful and important to our average gross margins over time. In addition, we've done a really good job internally of managing productivity, even in a volume down market overall, certainly giving us a lot of confidence that the investments we've made in value add productivity and automation have yielded the benefits we were expecting. So those two factors are the most powerful. And the last one I think is, as we've seen a market as down as it was in Q1, and I think we can all admit, this was a challenging year-over-year compare, we still performed very, very well and that gives us the confidence that we needed to start moving that normalized margin up to 28% plus, because we see that as being really proof positive of the value of what that product does for our customers and for us.

Yeah, I'd just add Matt, that customers see those products as less price sensitive because they are solving problems for them, they are addressing labor concerns for them, and they are reducing cycle times for them, and they can make up some of those costs through the reduction of those cycle times. So that's why we focus on it, from being easiest to do business with perspective and driving value for our customers.

Got you. Okay, great call there. Thank you for that. And then second one, kind of jumping into the near term. The Q2 EBITDA guide, I mean you're guiding in dollars and margin I guess to be lower than that of Q1, which is obviously unusual historically. And I know you're on this path to normalizing gross margin and that looks to be part of that. But any other detail on what are some of the underlying assumptions around Q2, and why you would have such a kind of unusual seasonality there? Thank you.

Sure. Yeah, and I'll let Dave talk to the overall market. What I would say is this is consistent with what we have been communicating. This still assumes that we're going to continue to see an increased competitive environment, a challenging volume environment in Q2, and normalization that continues to flow through in margins and sales. So while we're absolutely confident in the business, I don't want anybody to think that there still aren't some difficult comps coming, at least for the next quarter or two and that's really what you're seeing there in the numbers.

So, what we're hearing from customers is the word stability. You're not really hearing robust. You're hearing more things are stable and that's kind of what we're using as the backdrop of our valuations for our forecast as well. There's increased optimism when mortgage rates stay consistent, and the underlying demand supports a fairly resilient demand when mortgage rates stay consistent. But it's still a volatile overall environment, and we're working with that as a backdrop. And so we're feeling pretty good, but it's all on a relative basis.

All right, well thank you Dave, thanks Peter. Good luck guys.

Thanks Matt.

And we'll take our next question from Mike Dahl with RBC Capital Markets.

Good morning. Thanks for taking my questions. Just to kind of pick up on a couple of those points or questions that Matt had. When we think about the margins and gross margins specifically, you know I think clear enough in terms of your description of normal. You know in the first half of this year you're basically guiding to a mid-30s, low to mid-30s gross margin and even if I were to adjust for a mix, which seems more recurring than non-recurring, you'd still reach that level. It looks like the full year, like the middle scenario if you're at 13% to 14% EBITDA margins, also seems to imply maybe like a low 30s gross margin. So I guess (a) is that the full year expectation embedded? (b) Could – you know I know there's still some potential timing impact in the first half. Maybe you could just articulate what some of those are in terms of things that have been good guides in your favor. And then if I – sorry for the multi-part question, but (c) would be, I think you said, ‘hey, we'll tell you more about base business as the year progresses.’ But if I take that delta between what you expect for gross margin this year and that 28, should we assume that it's kind of like a few hundred million dollars right now that could be still a little bit temporary in your opinion?

So there's one question in 27 parts. I'll do my best and you can tell me if I hit all the points. The first one is around margins. I mean the difference between our guide, which is 28% plus on a normalized basis and what we've talked about in our guide for Q2 for example in the 30, you know mid to low 30s, low to mid 30s, yes you're right, there is a disconnect there. We didn't provide explicit guidance around full year. I mean obviously those scenarios have some numbers embedded, but I think the message we're trying to send is we're in a very volatile environment still. We're seeing pretty significant step downs in volumes and while we have a much better sense of how the market is going to react, we haven't fully digested it. So what we're saying in our numbers for this year is that we started exceptionally strong. That'll of course take our full year average in gross margins up above what we would consider to be normalized margins on an ongoing basis. But as we learn more and as we get better confidence, we'll continue to update that normalized number with our best understanding. You know in terms of what has happened in the near term, I think one of the things that we've been pleasantly surprised by in recent periods has been the strength of gross margins, the resiliency of gross margins. While a big piece of that is mix, I think it's important to point out that our gross margin performance this quarter was really primarily driven by that multi-family investment that we've made. That business as you know has longer lead times on their quote to delivery, which means there's a bit more exposure to commodities and in this environment that's a favorable thing. So there's some transitory benefit in there. We're certainly pleased with that business's performance overall and really happy to have it as part of the business. But those are the types of things we're accounting for when we're giving these normalized gross margin numbers. Did I hit all your points Mike?

Yeah, yeah, pretty much.

I would just add Mike that, yeah the multi-family tailwind will wane as we go farther into the year for sure. And you know we also anticipate the products that anyone can provide will be increasingly competitive, because supply chain issues have waned as well. But the stuff we're good at, the value-added stuff we're good at is where it's a little stickier. So it's a combination of all of those.

Okay, yeah, that's very helpful. Thank you both. And then in terms of a follow-up, just on capital allocation. I mean look, even if some of this is a little temporary in the first half, the underlying EBITDA number, it starts coming through consistent with your middle scenario is incredibly strong. The free cash flow conversions have been great. You've obviously been pretty aggressive buying back the stock, you know a billion dollars effectively in just the last four months. The new authorization is for $1 billion. It seems like you'll throw off considerably more free cash this year. So just thoughts on kind of why not a bigger, why not a bigger authorization just to have it out there, maybe some puts and takes and any more explicit direction you could provide on what type of free cash conversion you'd expect for the full year?

Yeah, and I think probably the first point is that, our thinking around that free cash flow conversion is probably north of $1.5 billion now, because of that call-off we said north of $1 billion in the past, so that's a significant increase in terms of what we're seeing. As you know Mike, some of that is really attributable to the slowdown in the business and the spinning off of some of the value on our working capital balance sheet. The reality is, we are performing quite well and we will continue to deploy capital in the strategy that we've outlined in the past. The board has been very supportive, whenever we need authorization, because we think we have cash to put to work, they'll be there for us and they're absolutely hand-in-glove with us on this strategy, so $1 billion seems fine for now, but we'll revisit it if it makes sense. I mean the only thing I'll point out is, right, we're done with sort of the windfall benefit of the very, very high commodities, so some of the volumes of share buyback that we've seen over the past couple of years because of those commodities are past that.

Okay, thank you. I appreciate it.

And we'll take our next question from Trey Grooms with Stephens.

Hey! Good morning, everyone and yeah, congrats on the quarter.

Trey, thank you.

Sure thing. Peter, I think you said you expect to see increased competitive behavior or an increased competitive environment. How does the competitive behavior look in some of your maybe tougher demand markets versus some of the better markets and are you starting to see that behavior, the competitiveness kind of creep up more in these more difficult markets and is it more or less competitive maybe than what you've seen in prior slowdowns?

Hey Trey, this is Dave. I think it's a market-by-market evaluation Trey. I mean, again, it's still similar to what we've said previously. If you go from west to east, it's a little tougher out west than it is in the east, and where demand is a little tougher, we're seeing definitely more competition, again, around the products that anyone can do. Where we're still doing really well is with the value-added products and the stickiness with those customers around those products and being able to get value for those, because they're more valuable to the customer. Again, it's something that creates efficiencies for them, solves problems for them, they are willing to pay more in those scenarios, because they see the value. But it's generally more west to east as far as competition is going right now around areas where anybody can provide the product and where the supply chain has started to normalize.

Okay, got it. Thank you for that, and then I guess as a follow-up, you call out the operational excellence and cost management initiatives that are helping to drive these gains in efficiency and productivity. Longer term, I see kind of it's obvious what it's doing for the near term and in a downside kind of an environment, but longer term, how do you think about maybe the sustainability of some of these actions and these things driving better margins as end markets improve?

Well, I think that the exciting thing for me Trey is, where we have the most opportunity is where we're already pretty good, and that's in the manufacturing efficiencies and driving technology that create labor efficiencies in the manufacturing process. You've heard us use that we have increased 22% of board foot per labor hour. That's continuing to improve, and as we continue to invest in that segment of the business, there's still a pretty long runway there. As far as the distribution side of the business, the exciting thing there is, as we continue to develop best practices and then we leverage it across 570 locations, that generally also is a meaningful number, and we still think there's opportunity along those lines as well, and all of that supports our pledge that we're going to be the easiest to do business with, and it also is something that we can illustrate to our customers, where we bring value to the party beyond just delivering product.

The other thing I would add is, you know when we talk about the productivity numbers, these are numbers that we've done the work around to analyze that this is permanent change. We're not trying to take credit on productivity for something that sort of comes and goes as a freebie in the year that we're not going to be able to repeat. These are changes to the business. These are operating changes. These are contractual changes that we feel good about in terms of having changed the business for the better over time and we do think it's cumulative and sticky.

Perfect. Thanks for that guys. I'll pass it on.

Thank you.

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

Good morning. Great quarter. My first question here is just, you came in ahead of that 1Q guide which you gave at the end of February. Can you just talk about what came in better than you were expecting? Was it underlying demand? Was it a specific product category? Were you just able to hold on to commodity prices better? And since you gave that guide so late in the quarter, can you just give us a sense of how the year-over-year sales declines exited the quarter versus earlier in the quarter?

Sure. Yeah, no. That's certainly internally that was a bit of a black eye for the organization in terms of the accuracy of our forecast. We knew we were doing well and we felt like the momentum was good, but what we thought was coming was worse than what we actually experienced. That competitive dynamic did not ramp up as quick as we expected. The dynamics didn’t – you know a lot of it was obviously that value-add, that multifamily we've talked about. But even the commodity numbers on some of the longer-term contracts and just some of the way that we floated through was better than we anticipated. So certainly that operating team has done a fantastic job of managing through all the local market dynamics to ensure that they are moving through product and getting a good compensation for what we've been seeing, but we were certainly surprised at how strong all that was. You know it was an interesting quarter in terms of what we saw in the numbers. You won't hear us whine about the weather, but certainly weather on the West Coast, weather in Texas was disruptive in certain periods. That's been a push and a take – that give and a take. That's definitely continuing to work through, so while we feel good about it that's a piece. We also saw the impacts of those interest rate changes, whether they’d be surprises up or down were certainly influential on what our builders were reacting to, right, what our customers were reacting to in the market, but overall I think we feel pretty good as Dave was saying.

But I would just add, you know early in the year with the volatility of expectation that was out pretty much with anybody that you taught, it was tough to put a stake in the ground and say ‘we're great and we know we're going to be okay.’ Our guys did a fantastic job of preparing for the worst and hoping for the best. So we prepared for the downside scenario with our cost management, and then as we got clearer sights of how the market or the quarter was going to play out, we managed against that baseline. And as you heard, even from our builder customers, we just reflected the same sentiment they did at that point in time. And as you're hearing them now, they are also saying it was better than they expected. So it's kind of a combination of all of that.

That's helpful color. And then just on the multifamily business here, obviously very strong in the quarter. Can you just talk about the size of the backlog that you guys have remaining in that business and any guardrails on how to think about the business through the rest of the year here?

Well, it's certainly a nice part about that business is we do have a bit more visibility to the backlog. Right now it is substantial, because that part of the market has been strong and in somewhat surprising fashion has maintained its strength. I think there's absolutely a great profitability story in that world right now. But as Dave mentioned, that will continue to normalize over time as the coal prices and the market prices of commodities tighten. But yeah, that's absolutely part of both, what allowed us to do the M&A in that sector of the market, but what we're enjoying in terms of the results so far this year and through all of 2023.

The only thing I'd add is we've got a really substantial backlog that gets us through 2023 and beyond. But that backlog is declining. In other words, we're completing jobs at a faster pace than we're filling the pipeline back up, because that sector in general is facing the same capital cost issues that the single-family sector is facing. And there's just kind of a pause or a hesitancy in that group to try to figure out what the value proposition going forward needs to look like. We still believe, again long-term, housing demand wins, including in multifamily. But as there's a little bit of a recalibration of that capital cost, we are seeing jobs finished at a greater rate than jobs being entered into the pipeline out 12 months and beyond.

Great, and good luck in the second quarter.

Thank you.

And we'll take our next question from Stanley Elliott with Stifel.

Good morning, everybody. Thank you for the question and a nice start to the year. Hey Dave, piggybacking on the commentary on the multi-family side, when we think about the value added part of the business, does it break down pretty consistently between your single-family, multi-family buckets? And then how quickly is it or how difficult is it rather, for you all to switch kind of focus in between the individual markets if we do see kind of a multi-family decline in ‘24 and beyond?

Stanley, can you repeat the first question? You broke up.

Yeah, sorry about that. So in terms of kind of the multifamily or the value-add piece as a whole, is there a way to differentiate or delineate between how much of your value add is going into multi-family now versus single-family? Maybe it's just consistent with the overall portfolio, but I was looking for maybe a little direction there. And then also in terms of the ability to pivot your products necessarily between multi-family or single-family, more on some of the manufactured side, depending upon what's going to happen with those end markets.

Yeah, thanks for that question. Within the multi-family segment for us, it's primarily value-add. We don't do a lot of non-value add with our multi-family customers and Truss is the overwhelming majority of the value-add. So it will always have a higher percent of multi-family sales as being value-add. Now in the context of the overall business, it's still a fairly – it's 13% of our total business. So even in that context, it doesn't move the needle very much either way versus the single-family. Now, what I will tell you, is our guys have done a great job where we have multi-family plants at capacity moving business to single-family plants that are under capacity. And that's the value of our platform and the ability to have, to manage the effectiveness of where we can build those Trusses in the most efficient way by having the availability of those single-family plants. So there is a coordinated effort to build those Trusses where we can get the most efficient cost and it has to be within the radius of the job that we're trying to supply. But there's a lot of coordination that goes on there and a significant integration effort to make that happen.

Perfect. Actually, that's great color. Thank you and then in terms of kind of the outlook, I mean, the free cash flow continues to be quite good. Even with M&A, you guys are going to be below half a turn of leverage. Peter, how are you guys thinking about managing the capital structure? I mean, you mentioned repurchases, but so what is your comfort level in terms of leverage right now, given that we are in kind of a still somewhat uncertain market?

Yeah, I think as a general guideline we still like one to two times based business as a guideline that is helpful in terms of thinking about how to minimize our risk, but still take on an appropriate amount of it. It's a metric that if you think about base business in the last year, we'd say we have room, but we're certainly in the range, rather than if you just look at our trailing 12 actuals, it looks like we're a little bit under leveraged in that regard. So as this business normalizes, as we get a better visibility into 2023 full year, we'll go ahead and update that base business, give you an updated thought process around the leverage ratio. But at this point, we feel pretty good about our borrowing, both the cost and the tenure and we'll continue to watch it.

Great, guys. Thanks for the question. Best of luck!

Thanks Stanley.

And we'll take our next question from Jay McCanless with Wedbush.

Hey! Good morning, everyone. Thanks for taking my questions. So just, I know that lumber, the actual commodity cost is becoming less relevant for your business, but it's been surprising how subdued the lumber market and lumber prices have been this year, especially in light of some of the curtailments that we're starting to hear about. I guess, maybe what are you hearing from your suppliers there, and how are you feeling about the direction of the lumber prices over the next two to three months?

Yeah, that's a tough question to answer. I think we continue to manage it on a flow-through basis, ensuring that we get the right margins for us. It's been a little bit of back and forth, I hear you. There have been some indications that taking capacity out might be helpful to put a floor under it. There's been some other murmuring, particularly on the OSB side about adding capacity. I think it's kind of range-bound right now, but it’s tough to say. It's been such a surprising commodity over the last few years. I certainly don't feel comfortable predicting, but we're ready.

Okay. And the other question, I think and Dave you may have already addressed this, but just wondering with some of the financial pressures that supposedly are coming from banks tightening credit, etc. Have you seen your competition on the distribution side getting more aggressive on price or is this lift in sentiment from the builders in March and April been able to diffuse some of that or most of that?

I think what you're saying is or asking about is the bank implications on demand, and as a result, what is that doing with our supply chain partners? I would tell you there are products that there is a little of additional capacity versus demand, but in general, our supply chain partners at this point in time have worked through where they had excess capacity in the first quarter and kept things at a normalized environment. So they are still experiencing inflationary pressures in their business as well, specifically around labor, and they've been a little reluctant to get too aggressive, unless it was to balance the capacity versus on-hand situation, which pretty much worked itself out in the first quarter. So I think we're in that. You know the word of the day for the industry is stabilization. I think we're all in kind of a stable market and trying to be nimble and be able to respond either on the upside or the downside as necessary, and I think that's kind of where we are today.

Okay. That sounds great. Thanks for taking my questions.

Thanks Jay.

And we'll take our next question from Steven Ramsey with Thompson Research Group.

Hi! Good morning. Maybe just to clarify on the first quarter, better than expected start to the year, was that in all segments or did one segment drive that over another? And maybe you can dovetail into the green shoots that you saw in April, maybe elaborate how that is connected to the better start.

Well, fair question. I would say overall we saw more resiliency in the market than we had forecasted. I think that's fair to say across the board. We saw the most resiliency in the geographically in the East, I would say product-wise in value-add. And in terms of the timing on that, I don't think there's anything strong indicating there is a time horizon that caused the results to be different, meaning each market is digesting what their demand looks like, each market is resetting and placing orders. But overall, I think it's been more orderly and more disciplined in terms of reacting to the step down in sales than we'd originally forecast.

As far as the green shoots comment, I think what we're seeing from our customers is they are cautiously optimistic. Again, that things will be stable, and there are areas where things are showing the ability for demand to be resilient when mortgage rates are at a level where buyers enter into the market again. Areas of the country that we've seen where that's a little better are where there's actual pockets of strength with real job growth versus what was somewhat of a boom during COVID that's kind of now receded. So again, mainly moving west to east is where we see it improving. And west is coming, starting to show signs of at least of leveling out.

Okay, that's helpful. And then thinking longer term, the secular penetration of value added products in multi-family and single-family, how do you see that shaping up over the long term? You said multi-family is mostly value added products. So, is there less of a penetration opportunity there or adding more value added products into that portfolio for those customers?

Yeah, I mean overall we're very excited about what value-add means in the long term. We've certainly moved the needle quite a bit in terms of our max being a 56% value-add this quarter, but we're not done. There's more opportunity geographically. There are more opportunities to have the full portfolio of products that we have in our offering in markets where it's not there yet. And I think where we ultimately expect to get to is if you look at the digital world, the ability to do more and more of that value-added [inaudible]. We're looking for ways to grow our ability to serve our customers, make them more efficient, help their total cost of build go down. So we're certainly excited about it. We think there's a lot of opportunity there still. You know, there's not a lot of great numbers in terms of share, so it's a little harder to talk about it that way, but we're certainly believers that there's much more to come.

And the only other thing I'd add specifically around Truss is the premise around adding multifamily Truss was in market diversification from single-family. And that only works when you have the coordination between the single-family plants and the multi-family plants to be able to share work. And what we're doing really well is figuring that out and integrating that, and it accomplishes our objective to make sure when multi-family's hot, we're able to hit there, when single-family's hot we're able to hit there.

Excellent! Thank you for the color.

And we'll take our next question from Joe Ahlersmeyer with Deutsche Bank.

Yeah, thanks for taking my questions and congrats on the impressive results.

Thanks, Joe.

Looking at your windows, doors and millwork performance in the quarter, essentially flat year-over-year, could you just maybe unpack that a little more with respect to what drove that? Are we seeing perhaps stronger pricing in doors? Is this mainly the multi-family performance or are we also perhaps seeing a manifestation of the single family completions still positive on a quarterly basis here?

Yeah, I think it's a little bit of a couple of those things. The completion certainly remains strong on those back of the building process products, windows, doors and millwork, a good example. I think there was quite a bit of disruption in that part of the market as well, which slowed the ability to put product on the ground when needed. So that's another big component, but we've also invested. So there's increased ability to serve as well.

Great. And sitting here this time next year, if we're looking at this bridge on page 10, is it likely that we see now the commodity deflation bucket fairly de minimis on a year-over-year basis? And relatedly, that same bucket in the second quarter coming up here, your expectation for that, I assume is a significant increase in the headwind versus 1Q. So maybe just some context around how that shapes up next quarter and this time next year? Thanks.

Yeah, no, you're right. We should have digested the bulk of all this commodity noise, the commodity volatility by next year. Q2 would be the biggest comp in terms of peak pricing hit in Q2 of last year. So it may drain a little bit into Q3, but Q2 is the biggest impact on a year-over-year basis, that's right.

Could it be as much as $2 billion to $2.5 billion of a headwind on sales or is that too aggressive?

We can get back to you on that one. I don't actually have that narrow of a guide off the top of my head.

Okay, no worries. Thanks a lot guys.

Thank you.

[Operator Instructions]. We'll take our next question from David Manthey with Baird.

Yeah, thank you. Good morning everyone. When you talk about productivity savings here, I'm just definitionally wondering, is that mostly or entirely in SG&A? And for example, the $34 million in productivity this quarter, is that separate from your higher gross margin outlook or is there some overlap between the two?

Yeah. The productivity savings actually is also a component of margin where it relates to manufacturing, where we've gained manufacturing efficiencies. It actually is a positive contributor to our margin as well, so it's both. When we get it in the SG&A categories and the COGS categories through manufacturing efficiencies.

And I assume that varies from quarter to quarter, so there's no base rule we should be thinking about?

That is correct.

Okay. Thanks for taking the question.

Thanks David.

And we'll take our next question from Adam Baumgarten with Zelman.

Hey! Good morning, guys. Can you walk us through what you're seeing on pricing for the non-commodity part of the business?

Yeah. I mean, I think commodity pricing has been the headline that we've all talked about, but there's certainly been a lot of work done on the pricing in the non-commodity side. It's an area that I think really lends itself to the process and the discipline that we've implemented over the last five years or so. So certainly, a nice offset to the volume headwinds from the pricing side. Obviously not all of it, but certainly strong healthy pricing in that space. A chunk of it is absolutely attributable to the multi-family mix change and the profitability of that business.

Got it. Thank you.

Thank you.

And we'll take our next question from Ketan Mamtora with BMO Capital Markets.

Thanks for taking my question. Peter, can you just clarify how you think about free cash flow for 2023? I thought I heard $1.5 billion earlier in the comments.

Yeah. You know, free cash flow continues to be a bright spot for us. We actually generated a substantial amount in Q1, and you know that's a bit unusual for us. Some of that has to do with the resizing of the business on a year-over-year comparison basis. But we're still performing well, still quite profitable. So we're comfortable saying that we expect cash flows to be kind of north of that $1.5 billion range for 2023, based on sort of the most likely or middle over the path scenario that we provided.

You said north of $1.5 billion Peter, just to clarify?

That's correct.

Perfect. Thank you so much.

And it appears that we have no further questions at this time. That concludes today's teleconference. Thank you for your participation. You may now disconnect.