Good day, welcome to the Builders FirstSource fourth quarter 2022 and year-end earnings conference call. Today's call is scheduled to last about one hour, including remarks by management and the question-and-answer session. In order to ask a question, please press the Star key followed by the one on your touch-tone phone at any time during the call. I would 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, Brittney, and good morning, everyone. Welcome to our fourth quarter and full year 2022 earnings call. With me on the call are Dave Rush, our recently appointed CEO, and Peter Jackson, our CFO. Today, we will review our fourth quarter and full year results. The earnings press release and investor presentation are available on our website at investors.bldr.com. We will refer to several slides from the investor presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should 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 the discussion of why we believe they can be useful to investors in our earnings press release, SEC filings, and presentation.
Our remarks on 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 statement section in today's press release and in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'll turn the call over to Dave.
Thank you, Mike. Good morning, everyone. Thanks for joining our call. Before we get into the results, I'd like to thank the board of directors for the opportunity to serve as the CEO of Builders FirstSource and for trusting me to lead this great organization. I also want to thank all of the BFS field leaders and team members for their support, which has been inspiring. I come from a background in finance, having spent the first 18 years of my career in various financial roles from controller to CFO. Over my 23 years with BFS, I've been fortunate to have had a variety of operational roles, including region oversight, primary responsibility for both the ProBuild and BMC integrations, and most recently, leadership of our enterprise-wide initiatives as EVP of our strategic management office.
I believe my experience and industry knowledge will be a strong basis to build on our success of creating long-term value for shareholders. Let's turn to the business results. Macroeconomic factors will undoubtedly continue to create headlines this year. With our exceptional and seasoned team, strong balance sheet, and industry-leading platform, we are in a great position to win in any environment. We have a field leadership team with over 30 years average experience in the industry. They have been through similar macroeconomic environments to the one we are currently facing today, which gives me great confidence in our ability to manage business changes with quick and decisive action as required. We have maintained very low leverage, providing us with maximum flexibility to deal with any scenario, and we continue to leverage our footprint, our scale, and our product portfolio to outcompete in the market.
Let's turn to our long-term strategic priorities on slide four for a moment. As we navigate a changing landscape, we see no need to alter our long-term strategy. We remain focused on expanding organically in value-added products and services, driving operational excellence, continuing to build our high-performing culture, and growing through strategic tuck-in acquisitions. On slide five, you can see our continued emphasis on the strategic priorities was key to our record full-year 2022 net sales of $22.7 billion and adjusted EBITDA of $4.4 billion. Top-line growth, value-added product mix improvement, and disciplined cost management resulted in our adjusted EBITDA margin, increasing 390 basis points to 19.3%. The combination of increased profitability and share buybacks supported 81% growth in full year 2022 adjusted EPS.
On slide six, you can see that we delivered a 6.6% increase in core organic sales, including nearly 21% growth in our higher-margin value-added products. We're extremely pleased to deliver $123 million in productivity savings for the year, exceeding our $100 million target as we drive improvement across a variety of projects and leverage our BFS One Team operating system. We remain focused on the importance of controlling SG&A and other expenses. This includes efficient capacity utilization, ongoing optimization of our footprint, and balancing the need for variable cost reductions and future capacity. Importantly, we have rationalized over 30 locations during the last year while maintaining coverage and not exiting any markets.
I'm extremely proud of how we continue to demonstrate our high-performing culture through improved safety by lowering our reportable incident rate by approximately 22% year-over-year, which marks the second consecutive year of improvement. We also continue to invest in training, enhance DEI initiatives, and improved employee benefits to better attract and retain high-performing talent. Turning to M&A on slide seven. In addition to our focus on profitable core organic growth, we continue to execute tuck-in acquisitions aligned with our strategy, completing six acquisitions in 2022. Although the M&A pipeline has slowed in the current macro environment, we continue to be acquisitive while remaining disciplined in our approach. We are committed to expanding our geographic footprint in key markets, with a particular emphasis on enhancing our value-added portfolio to better serve our customers, diversify our end market exposure, and leverage our technological capabilities.
This is evidenced by our recent acquisitions, including Pima Door & Supply in the fourth quarter, which expands our millwork footprint in the Phoenix area. Earlier this month, we acquired Noltex Truss, a five-location truss manufacturer providing building components to the single and multifamily markets throughout Texas. This tuck-in acquisition further extends our leading position in value-added products across the state. We're excited to welcome both Pima and Noltex with their long-standing customer relationships and track record of profitable growth to the BFS family. The still highly fragmented nature of our industry supports our ambition to invest $500 million in M&A per year on average for the next several years. Moving to slide eight and looking at our capital allocation in aggregate for 2022.
We deployed approximately $3.5 billion of capital towards organic growth investments, tuck-in M&A, and share repurchases, and remain on track to achieve the goal we established at our 2021 Investor Day of deploying $7 billion-$10 billion from 2022-2025. We will continue to closely monitor our customer sentiment, which currently suggests a challenging year ahead. During the fourth quarter, we saw a slowdown in average daily sales, which has continued into the first quarter. Higher mortgage rates and affordability challenge continue to be headwinds. On slide nine, we outlined the benefits of our flexible business model for dynamic operating environments such as the one we're currently experiencing. As we have discussed, we are actively managing the business as conditions indicate, and we are acting decisively wherever we see decelerating demand.
Our focus is on effectively managing costs through our variable expense structure to match costs with volumes. We are optimizing capacity and reducing discretionary spend without impairing our ability to maximize the recovery when this turns the corner. Stepping back, we realize affordability has been an increasing concern over the past several years as home prices and rates have increased significantly. We are working to making housing more attainable by investing in value-added products, productivity, and digital capabilities to reduce cycle times and make home building more efficient. For example, in 2022, we invested approximately $125 million in CapEx supporting our value-added product growth and digital strategy. Going forward, we will continue to prioritize our investments in our fleet value-added technology and digital innovations. Together, these initiatives will help lower total costs, improve affordability, and allow more people to buy homes.
We are committed to strategically accelerate our leading market position and deliver on our overall value proposition, and we will continue to execute while keeping our focus on providing the best possible service to our customers. Now let's turn to slide 10 to discuss our pioneering role in the digital transformation of the home building industry. We have a long-term commitment to investing in digital innovations and technologies that we believe will drive greater efficiency across home building and enhance our product offerings. On the home builder software side, we are executing our development plan and integrating it with our BFS operations through our digital sales teams. We're excited to have reached a significant milestone in launching the pilot of our new mybldr.com platform. This platform will introduce our home builder customers to easy-to-use digital tools to virtually design and build their homes.
These include key capabilities such as plan intake and markup, home configuration, conflict identification, material estimating and ordering, and job site scheduling. In January, we began communicating this release at both our BFS national event and the International Builders' Show. At both events, we received overwhelmingly positive feedback, affirming the need for this innovative technology in our industry. We are launching the current mybldr.com capabilities to 40 pilot customers across four markets. This will allow us to assess, collaborate with, and provide new solutions to our customers in a way that aligns our BFS sales and operations teams. We will add new features with monthly releases throughout 2023 as we build and scale our end-to-end digital home building platform. The overall digital strategy remains on schedule, and we are on track to gain an incremental $1 billion in sales by 2026.
Last month at our national event, we announced our inaugural BFS Hall of Fame class for 2022, the culmination of our annual employee recognition program and a highlight of our people-first culture. These distinguished individuals represent the best of our frontline team members, there is one person I would like to highlight today, Frank Gloria. Frank is a fleet and compliance manager out of Southern California who has been with the company and its predecessors for an impressive 45 years. He oversees our fleet and machinery across 11 locations. Frank takes great pride in keeping everything running consistently and with minimal downtime. His manager emphasized, quote, "Frank's knowledge of everything mechanical is simply unrivaled." On behalf of the leadership team, I want to thank Frank and the other Hall of Fame inductees for their tremendous contributions.
I will conclude by saying that we have the best team to win in a challenging environment. I am confident in our strategies and our ability to deliver long-term results for our shareholders. I'll now turn the call over to Peter to discuss our fourth quarter financial results in greater detail.
Thank you, Dave. Good morning, everyone. I want to congratulate Dave on his appointment as our new CEO. I've worked with him for many years and couldn't be happier for him and for this company. I know he will lead us to continued growth and success. I also want to join Dave in thanking our team members for delivering a record year of performance. We sincerely appreciate your hard work and dedication to delivering excellent service to our customers day in and day out. I'm proud to report that we delivered solid financial results in the fourth quarter to cap off a record year for the business. We continue to manage through the complex operating environment with a proactive mindset and a disciplined approach.
We expect that the structural enhancements we have made in our business over the past decade will help us mitigate the impact of softer housing demand and inflationary headwinds. Our ample liquidity, low leverage, and disciplined cost management provide significant financial firepower to continue to strategically and opportunistically grow our business. I will cover three topics with you this morning. First, I'll recap our fourth quarter results. Second, I'll provide an update on capital deployment. Finally, I'll discuss our first quarter guidance and lay out illustrative full year scenarios. Let's begin by reviewing our fourth quarter performance on slide 12. We delivered $4.4 billion in net sales. Core organic growth decreased by 8% attributable to a nearly 14% decline in single family as slowing demand compared to strong fourth quarter of 2021 led to difficult comps.
Both multifamily and repair, remodel, and other increased by almost 15%. Multifamily was driven by a strong rental market and resulting backlog. R&R and other growth was mainly attributable to increased sales focus and capacity versus prior year. Two fewer selling days had an unfavorable impact of roughly 3% on net sales. The cumulative effect of our acquisitions over the past year contributed approximately 8 percentage points of growth to net sales. Value-added products saw another quarter of growth. Compared to total fourth quarter starts, which decreased by 16%, core organic sales in the category increased by 0.6%, reflecting the macro trend of value-added product adoption and our success in the category.
I'm very happy to highlight value-added products represented over half of our revenue in the quarter, a great proof point of success towards our goal of being the supplier of choice for these valuable high-growth products. During the fourth quarter, gross profit was $1.5 billion or roughly comparable to the prior year period. Gross margin increased 200 basis points to 34.1%, mainly due to the increased mix of value-added products. SG&A grew 11% to $958.7 million, mainly due to additional operating expenses from companies acquired in the last year, inflation, and other costs. Acquisitions represented over 60% of the increase in SG&A.
As a percentage of net sales, total SG&A increased by 340 basis points to 22%. We remain focused on disciplined cost management and are taking appropriate actions in response to volume dynamics on a market by market basis. These actions include footprint rationalization, discretionary spending reductions, and cutting headcount and overtime. As we have stated in the past, approximately 70% of SG&A expense is variable. Within that 70%, roughly 20% of sales is driven by volume-based formulas. Things like commissions and bonuses. The remaining 50% of sales is where we are actively managing our operations. We are striking the right balance between resizing operations based on changes in volume and protecting capacity for future growth. Adjusted EBITDA was approximately $700 million, a decline of $97 million, primarily due to declines in core organic sales and commodities, partially offset by M&A.
Importantly, adjusted EBITDA margin was 16%. This represents the second fast fourth quarter adjusted EBITDA margin in our history, reflecting our focused execution and expense control. Adjusted net income was $470.8 million, down from an adjusted net income of $532.4 million in the prior year quarter, attributable to a decrease in net sales and higher SG&A expense. Adjusted earnings per diluted share was $3.21 compared to $2.78 in the prior year period. The increase reflects our more than $650 million in accretive share repurchases investments during the quarter. To put this in perspective, the repurchase equates to $0.21 or nearly half of the $0.43 change. Now let's turn to our cash flow, balance sheet and liquidity on slide 14.
Our fourth quarter operating cash flow was approximately $971 million, mainly attributable to increased profitability due to effective pricing and cost management as well as disciplined working capital management. Generally, we see working capital as incremental or decremental of approximately 10% of sales. Capital expenditures were $131 million. All in, we delivered robust free cash flow of approximately $840 million. For the year, we generated record free cash flow of approximately $3.3 billion, representing a free cash flow yield of 30.6%. Operating cash flow return on invested capital was 41.1% for the year ended December 31st.
Our 2022 net debt to adjusted EBITDA ratio was approximately 0.7 times and approximately 1.3 times our estimated 2022 base business EBITDA, well within our stated target of one to two times. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was $1.5 billion, consisting of $1.4 billion in net borrowing availability under the revolving credit facility and approximately $100 million of cash on hand. Moving to capital deployment. During the fourth quarter, we repurchased approximately 10.2 billion shares for $651 million at an average stock price of $64.17 per share.
We have repurchased approximately 900,000 shares so far in the 1st quarter of 2023 for $61 million at an average stock price of $65.94. During 2022, we repurchased almost 42 million shares for $2.6 billion, and we have more than $900 million remaining in our authorization. In total, we have repurchased more than one-third of our outstanding shares in the last 18 months. We remain disciplined stewards of capital and will continue to look for inorganic growth opportunities and to repurchase shares at an attractive value. We maintain a fortress balance sheet which will help us withstand a slower housing environment and keep us well positioned for long-term growth. Turning to slide 15. We continue to believe it is important to assess our results using a base business methodology.
During 2022, base business revenue grew 13%, while base business adjusted EBITDA increased 28% year-over-year. This approach showcases the underlying strength and profitability of our company by normalizing commodity volatility. As a reminder, our base business definition assumes normalized commodity margins and static commodity prices at $400 per thousand board feet. Overall, I'm proud that we delivered solid results in the fourth quarter despite slowing housing starts. Our record results for the full year reflect our differentiated platform, talented team members, and intense focus on execution. I'm confident that through our leading footprint, investments in value-added products, and ongoing efficiency initiatives, that we can continue to gain share, grow our value-added products, and deploy capital. I would like to discuss our guidance on slide 16.
Given the current challenging conditions in the housing market amid elevated mortgage rates and general uncertainty in economic conditions, we are amending our guidance disclosures at this time to align with our public customers. Customers of all types and sizes have expressed their uncertainty about starts in the year ahead. As a result, we have decided to only provide guidance for the first quarter of 2023, as shown on slide 16. We will reassess full year guidance for actual end base business as the year progresses. For the first quarter, we expect net sales to be in the range of $3.4 billion-$3.7 billion and adjusted EBITDA to be in the range of $400 million-$440 million, with an adjusted EBITDA margin in the range of 11.7%-11.9%.
I would also note that the first quarter guide assumes gross margins to be in the 30%-32% range. In addition, given the 2022 starts profile, we expect comparisons to prior year will be most difficult in the first two quarters. Our guidance includes the following full year assumptions, which are also outlined in the earnings release and on slide 17. We expect total capital expenditures in the range of $300 million-$350 million. This includes continued investments in value-added products. We continue to invest in our technology and infrastructure, and we will migrate to one integrated ERP platform in the coming years. I'll remind you that the related increases in CapEx and OpEx are included in our guidance and our 2025 financial projections from our December 2021 Investor Day.
We expect interest expense in the range of $150 million-$170 million, an effective tax rate between 23%-25%, depreciation and amortization expenses in the range of $525 million-$550 million. No change in the number of selling days, and we expect to deliver between $90 million-$110 million in productivity savings. We recognize that it's important to think about potential outcomes for the full year. On slide 18, we provide a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions.
I will reiterate that we are not providing a full year guidance here. This scenario analysis should help clarify our range of performance expectations and demonstrate the capability of our business to achieve strong adjusted EBITDA margins in 2023. To summarize, we are exceptionally well-positioned to withstand a slowdown in housing while continuing to drive our strategic goals forward. We have a strong balance sheet and no long-term debt maturities until 2030. We are operating in a proactive fashion and are taking the necessary steps to manage through this downturn with a relentless focus on execution. I'm confident our best-in-class operating platform will continue to generate solid free cash flow, which provides further financial flexibility. We will also diligently deploy capital and work to maximize long-term shareholder value. With that, let me turn the call back over to Dave for his closing remarks.
Thanks, Peter. Let me provide a few final thoughts. Having spent the greater part of my career with BFS, I firmly believe in our differentiated platform, which is the strongest it's ever been and will enable us to outperform in any environment. We have a clear strategy that we're continuing to execute. We generate strong cash flow, and we have significant opportunities to invest that cash to expand our value-added products and solutions, execute strategic acquisitions, and return capital to shareholders. Through it all, we remain focused on operational excellence to continue to drive increased safety, productivity, and profitability. 2023 will be a challenging year for our industry, but I'm confident in our talented team members who have clearly demonstrated their ability to execute and win in any market. Thank you again for joining us today. Operator, let's open the call now for questions.
At this time, if you would like to ask a question, please press the star and one on your touch tone phone. You may remove yourself from the queue at any time by pressing the star and two. Once again, that is star and one if you would like to ask a question. We will take our first question from Trey Grooms with Stephens. Your line is now open.
Hey, good morning, everyone. Dave, congrats on your new role. Look forward to working with you.
Morning, Trey. Thanks, Trey.
Sure. I guess first, you know, multifamily and R&R, very strong in the quarter. Can you talk about how, you know, these two segments, the multifamily and R&R are trending through 1Q and, you know, how you're thinking about these business lines, you know, kind of as we progress through 2023?
Thanks, Trey. That's a great question. I'll start with R&R. R&R expanded in the current year, primarily because we had capacity constraints in 2021 and 2022, just taking care of our existing business. Once those capacity constraints waned, our ability to focus on that segment again allowed us to go after new customers and try to generate more R&R business. With multifamily, it's been primarily through acquisition. We did the Trussway acquisition, and even recently with Noltex, they have a good multifamily segment, as well as panel trusses from the prior year. That has allowed us to grow in that segment at a time when multifamily is actually experiencing one of their stronger years. It's a very nice complement to the offset of single-family having a little bit of headwinds right now.
That's primarily how we grew in both those segments.
Perfect. Thanks for that. I guess my next question, you know, you'd laid out, Peter, you laid out expectations for over $1 billion in free cash flow, if memory serves me right. I think that was in kind of this 800,000 single-family start environment. First off, is that still the expectation? Then, you know, how does free cash flow or how do you expect free cash flow to move relative to, you know, that sensitivity table you gave us in the deck?
No, thanks, Trey. That's a good question. There's a lot going on in the market, we've stayed away from the cash flow, including it in the full year scenarios. Yes, the short answer to your question is we still think it's north of $1 billion in free cash flow, assuming about a 20% starts down scenario and, you know, a reasonably steady commodity environment. As you know, both of those things can move our working capital quite a bit. Generally speaking, we still believe that that roughly 10% incremental or decremental working capital with sales is a good way to think about us.
Given the dynamics around what commodities are doing, kind of what starts are doing, as well as the core underlying business' ability to generate cash, we do think that north of a $1 billion number is still right.
Got it. Okay, perfect. That's, that's good and encouraging. If I could sneak one last one in. You know, the value-added piece now over half your sales in the quarter, that's super impressive. As the single-family business likely slows, you know, further in the coming quarters, how would you expect the value-added mix to change? You know, would there be, or would you expect there to be more or less appetite from home builders to utilize these products?
Yeah, Trey, I appreciate that question, and it makes sense for you to ask it. The value added has shown incredible resiliency, even as we've had headwinds and starts and the market has turned a little bit, at least especially on the component side. They're just such a nice offset to the labor challenge. The labor challenge is gonna be consistent even in the current housing environment we're in. We haven't seen people move away from components even as their starts have gone down. We have achieved over 50% of our sales in total value added in Q4, which has been a nice buoy to our overall sales mix. We think through growing through our recent acquisitions, that we're gonna be able to continue to maintain that pace.
Got it. Thanks for taking the question.
The only thing I'd throw in there, Trey, is that, you know, it does correlate to some degree the starts, right? I mean, yes, they're still using it, and they're not going away from it like Dave was saying. We don't wanna somehow argue that, you know, truss is gonna maintain its volumes when starts are down. There is a correlation there, we are seeing growth. We're seeing secular growth, that's certainly a strong area for us. I think you heard it in my comments, right? Q4 value add, we were still favorable even though starts were down more than 16%.
Yep. Got it. Makes sense. Thanks for taking the question. I'll pass it on. Good luck.
Thanks, Trey.
Thank you. We'll take our next question from Matthew Bouley with Barclays. Your line is open.
Hey, good morning, guys. Thanks for taking the questions, and welcome Dave to the earnings call.
Good morning, Matt.
First question on, you know, still kind of seeing that gross margin above 30% for the Q1 guide. You know, when we look at the midpoint of your scenarios, of that kind of 10%-11% EBITDA margin for the year, what does that imply about the gross margin beyond Q1? You know, how quickly does it normalize? Any color on sort of commodity versus non-commodity gross margin as well would be helpful. Thank you.
Thanks, Matt. The storyline for that gross margin number continues to be one of good progress, pleased with what we've seen so far, but certainly an open question in terms of where it gets to. As you highlighted, things have stayed strong in the gross margin line. It is beginning to retrace like we've discussed in the past, right? Beginning to normalize as the supply chain normalizes. We certainly have performed well. I mean, our 30%-32% gross margin guide for Q1 is certainly well north of what we've said historically is our normalized, roughly 27% plus gross margin. We're continuing to see really nice performance and mix up from the value add component of our business, which we'd hope for and which we're expecting.
As the year progresses, we do anticipate that continuing to trend back towards a normalized level. You know, we're pretty optimistic about what that looks like, but for now, not ready to provide any real guidance in terms of the full year.
The only other thing I'd add, Matt, is part of how we've managed margin is actually through some of our cost improvement initiatives around manufacturing. We've actually improved our board foot per man hour by 22% since the merger. That productivity and truss allows us and will allow us to compete effectively for share, even in a challenging environment. We're kind of going at it from all angles and trying to maintain the margin the best we can.
Got it. Okay, that's very helpful. That makes sense. Second one, you know, on the value add, you had the 16% decline in manufactured products over the quarter. You know, clearly that's more tied to the front end of construction. I think you had the windows, doors, and millwork growing 22% reflecting completions. My question is, how should we think about the timing of those converging? Kind of at what point do you see this sort of tail of completions beginning to more closely resemble what we've seen in starts? Thank you.
Yeah, Matt, that's a good question. I think we've pretty much already seen that convergence as we get farther into the quarter. Our door and millwork sales have somewhat normalized. We still believe in the value-added segment as a positive for the overall business. The truss component, as I said, has been really resilient. We haven't seen people move away from truss. Granted, because there's fewer starts, we're gonna have fewer sales in truss, but the fact that we can maintain that percent of our overall business is very encouraging to us, and we believe it will continue.
Got it. All right, thanks Dave, thanks Peter. Good luck, guys.
Thanks, Matt.
Thank you. We'll take our next question from Ketan Mamtora with BMO Capital Markets. Your line is now open.
Thank you. First question, you know, recognizing that there's still a lot of uncertainty around, can you give us some sense of how you guys are thinking about the multifamily business and R&R? It seems like that is becoming a greater focus area for y'all.
Ketan. Appreciate the question. Multifamily will certainly be a buoy for us in 2023. We are not quite sure how 2024 is gonna play out. I was at the Harvard Housing Conference, there was some concern that multifamily in 2024 may start seeing some headwinds. What we're seeing in the amount of bid activity for 2024 has not tremendously waned though, we're still slightly optimistic there. On the R&R front, again, the thing that made that difficult for us in prior years was capacity and the supply chain constraints that we were facing. It was hard to fully explore that opportunity and go after new business when we were having struggles with supply chain taking care of existing customers.
We will rededicate our focus on growing that share now, that those kind of conditions have lessened.
Got it. That's helpful. Then my second question, you know, either Dave or Peter, you know, it seems like there is some investor concern about your sort of ability to hold on to price gains on the manufactured component side, you know, with engineered wood pricing also starting to fall quite sharply. Obviously, single family is down. Can you talk at a high level, you know, sort of at least philosophically, you know, how you approach that?
Yeah, that's a great question. I think, for us, we did invest significantly, almost $100 million in our ability to gain productivity through automation in all our plants. That has created a cost advantage for us in the marketplace. We believe we're the low-cost provider for truss in the marketplace. That gives you a little bit of flexibility to go after share where that's the answer and to, you know, be able to hold on to a little bit of margin for a little longer time where that's available. Anything you wanna add there, Peter?
Yeah, I mean, I think we've talked a lot about the amount of investment we've made in pricing management and pricing rigor and pricing discipline. That's certainly an important part about how we expect to manage this business on a go-forward basis. Combined with Dave's point about how efficient we are, we think that puts us in a great position to offer a total cost benefit to our customer, while at the same time getting a fair margin and being able to hold on to what we've worked so hard for. We're certainly optimistic right now, especially as you see each quarter's numbers come through.
I do believe, Norman, the margins for product that the margin ran up some simply based on supply and de-demand dynamics, that will normalize first. We're already seeing that. You're definitely seeing it, for example, with lumber and sheet goods as an example. The other products in our industry won't respond as quickly and as deeply as lumber and sheet goods have, but we should see some of that. But as far as what we can control, I think what we're gonna try to do is win by providing, you know, better customer service, better reduced cycle times for our customers, allow them to win on cycle time costs and, you know, then we'll be able to hold on to some of the margin that we've tried to create.
That's helpful perspective. Good luck in 2023. I'll jump back in the queue.
Thanks, Ketan.
Thank you. We'll take our next question from David Manthey with Barclays. I apologize, with Barclays. Your line is now open.
Yeah. Thank you. Let me add my congratulations to you, Dave.
Yeah.
First question, could you discuss your comfort level with the debt in a downside 2023 scenario? I assume you de-lever a lot from the balance sheet unwinding. Is there any change in your views at all on M&A or share repurchase as we move through this downturn yet, or potentially in the future?
Yeah, thanks, Dave. That's a great question. The short answer is we feel really good about the balance sheet, we think that our priorities around capital allocation are still the right ones, we're gonna lean in on it. You know, we've got no relation, no structured debt till 2030. The ABL we just reran that one from a timeline perspective, we've got new maturity start, plenty of liquidity. We feel very good about the strength of the balance sheet. You layer on the fact that, as you noted, we would expect to release some working capital in the event of a further sort of slowing in the market. That will be a nice tailwind in terms of available cash.
The business is still generating cash, so feel good about that, even in some of these, you know, more aggressive downside scenarios. The, the overlay of all that is we do expect there to be opportunities, right? While M&A has certainly been a source of growth for us, and it has slowed down in terms of total number of opportunities on the market, we still see nice targets at reasonable multiples, as evidenced by the Noltex deal that we think should be part of the BFS family, and we're gonna continue to execute those. As we stay disciplined, we think there's really gonna be, there are going to be nice opportunities for us to continue to do that.
As we've demonstrated, up through now, we think there's real intrinsic value in the repurchase of shares. To the extent we're not, seeing good targets in M&A or we don't have, you know, the capacity internally to do more M&A, we'll continue to leverage that as well.
The only thing I'd add on the M&A front is we are still at or above our plan that we laid out on Investor Day of $500 million per year dedicated to M&A. Even as it slows now, over the long term, we don't have any concern over hitting that target.
Okay. Thank you for that. Second, maybe we could just get an update on Ready-Frame specifically. Could you talk about revenues, number of locations, and anything in terms of the capital outlook or growth expectations, not just this year, but over, say, the next one to three years?
Yeah. You know, Ready-Frame is a valuable part of our value-added product portfolio. You know, certainly not one of the bigger components, but an important area that we think allows people to enter into the use of the offsite fabrication ideas, concepts. We think it dovetails really nicely with what we're doing in digital in terms of the precision that we are able to deliver out of that digital solution, then integrating really nicely into all the value-added products. You know, that Ready-Frame offering in particular, we've looked at it post-merger at opportunities to expand. We continue to put it into new markets, making sure we have capacity, making sure we're managing it. The growth is still positive, and we feel good about it in the long term.
Okay, thank you.
Thanks, Dave.
We will take our next question from Keith Hughes with Truist. Your line is open.
Thank you. On the guidance for the first quarter, can you give us any kind of breakout how much of the revenue decline is from commodity deflation versus units? A kind of value-added comment within that would be nice as well.
Well, I mean, in terms of the breakdown, the commodity prices have pretty well, I would say, leveled out based on what we're looking at, been pretty stable. You know, the decline year-over-year in commodities is meaningful. It'll get worse on a comp basis as we go through the second quarter. Last year, it peaked in Q2. Certainly a lot of headwind from commodities. You know, what we've seen is sort of that trend down. You know, on a year-over-year comp basis, that trend down started probably Q3, Q4 last year. Probably the best way to describe it. Comps will be most difficult in Q1 and Q2 and get a little easier in the back half of the year.
Won't break down the guide in those subcomponents, but hopefully that gives you good context.
Yeah, that's directionally what I'm looking for. I guess a question on cash flow. You played out some M&A targets. With the stock where it is now, would you consider buying in excess of free cash on other borrowing as we go through this downturn on shares? Or are you gonna be limiting yourself on share repurchase to what cash you generate?
Well, I mean, I think the way we think about deploying capital broadly, right, is that we have an appropriate balance sheet. We're well-structured. As long as we're in kind of our range of one to two times base business, we're extremely comfortable. Certainly not intimidated by the idea of being a little below or a little above for a window of time. I think that's just good management. We certainly are committed to continuing to deploy capital. We think it's a responsibility of management. We think it's the responsible thing to do. We think it's good for shareholders, so we're gonna continue to stay committed. We'll look for opportunistic moments, right? Where in each one of those categories, we think there'll be times when it might make sense to lean in.
We're never gonna put ourselves in a position where we put ourselves at risk. We've got a lot of confidence in our ability to
To sort of see what the business is capable of and manage that liquidity and, we're confident we can work well in that range.
Okay, thank you.
Thanks, Steve.
We will take our next question from Adam Baumgarten with Zelman. Your line is now open.
Good morning, everyone. Just a question on the mix of business.
Yeah.
Is there any meaningful impact on margins, either positive or negative, from a higher mix of multifamily and R&R revenue?
Yeah, Adam, that's a good question. In 2023, multifamily will be a tailwind for our margin. It only creates a little bit of a tailwind though, because it's still only about 15% of our overall business. R&R traditionally has been a higher margin product as well, and we expect a favorable result from R&R on our margin maintenance. It'll help us hold on to margin. Again, the combination of those two products is a smaller percentage of our overall business, and generally, our margin profile follows single-family, but they will be helpful in us maintaining as we normalize in other areas.
Okay, got it. Just on digital solutions, you guys said you're on track to deliver $1 billion in revenue by 2026. Can you maybe give us an update on where you ended in 2022?
Yeah, Adam. I'd love to talk about our digital milestones. 2022 is a year of development. We really weren't trying to monetize the concept in 2022, and actually, even through 2023, it'll only be a marginal revenue opportunity. We're playing end game here with the digital solution. What we're focused on in 2023 is the full development of the platform, and we believe by the end of the year, we will have achieved all the development milestones. We're piloting it with 40 customers across four markets. We're gonna learn a lot from that.
We're gonna go back, we're gonna refigure, we're gonna redevelop, we're gonna change what we need to because at the end of the day, the full recognition of value in this solution is through pull through sales by making us easier to do business with. We believe fully in that concept still. We believe we're light years ahead of any of our competition as it relates to where we stand in the development process. We still believe in our goal of $1 billion of incremental sales by 2026, primarily through pull-through business. Anything you wanna add there, Peter?
You nailed it. That's perfect.
Okay, great. Thanks. Best of luck.
Thank you.
We will take our next question from Stephen Ramsey with Thompson Group. Your line is open.
Hi, good morning. maybe to start with on CapEx. The last couple years, it seems like there the delay of deliveries has caused some push out on CapEx spend. supply chain and labor is a little bit better now. Do you feel like you can deliver on all the CapEx this year or more likely to deliver than prior years? Is there any delay embedded in this current guidance?
Yeah. No, thanks, Steven. You're right. We've struggled to get what we wanted. It's gotten a little better. There has not been nearly the relief in things like rolling stock that there have been in certain other categories. That's still a source of, I would say, strain. It's getting better. My sense is this year's CapEx will be more achievable than last year. There's certainly a lot we want to do, and we're still optimistic that that will continue to free up as the year progresses.
Okay, helpful. Another question somewhat related to CapEx and labor as you plan for a downturn, but also want to be prepared for taking advantage of longer term strength in housing. How do you think about holding on to labor for the long term and building out capacity even if it's not fully soaked up in the next 12 or so months?
Yeah. The capacity question is a good one. We firmly believe in investing in the long term. We aren't changing our priorities as it relates to investments in capacity, specifically around value-added products. In fact, we're trying to address kind of labor concerns a little bit through some of these investments. We have fully robotic lines in Georgia and Texas that we're still working through and trying to make sure and having some success with. I think we have six to seven more on the books that we're gonna add over the next two to three years. We're seeing investments in technology and investments in automations as a way to really address both labor concerns we have today and in the future. That will definitely not stop.
As it relates to the core business, we've been really diligent about protecting our A and B players out in the marketplace. That's not gonna change either because we see that as what we're experiencing now is somewhat of a short-term scenario. Over the long term, we wanna come out of this guns a-blazing on the other side with our best people. That's kinda how we're approaching it right now.
Excellent. Thank you.
Thank you.
We will take our next question from Jay McCanless with Wedbush. Your line is open.
Thanks. Good morning. congrats, Dave.
Thanks, Jay.
Yeah, you bet. slide 18, kudos on this new EBITDA presentation. It's very useful. when you talk to your single-family builder customers, where do you think they're falling right now on this, these three ranges? You know, -15% to -25% seems to be what we hear from a lot of people, but would love to hear what feedback you've been getting from your single-family customers on where they think 2023 falls out.
Yeah, I'll start on that one and Dave can jump on. The short answer is they are all over the place. You know, there's a lot of differential depending on what market you're in, the type of house you're selling, your exposure to custom versus spec. You know, we've talked a lot about East to West, how much harder this market has been, how rapid the downturn has been in certain markets. It really is all across the board with people, you know, quite pessimistic and quite optimistic being, I would say, equally common. What we try to do is account for a few of those scenarios playing out, trying to think about what they balance out in our numbers to give you some sense of if we lead one way or lead the other, right?
If Powell got leaning one way or leaning the other, what might potentially play out. You can imagine that's been a tough one for us.
Yeah. I mean, it's the reason you have three different scenarios there to pick from, right? You, you saw it as recently as coming out of the year in December, you know, most builders were really pessimistic. Mortgage rates dipped down a couple, 20, 40 basis points, and all of a sudden, the light turned on and everybody started showing up again. It was really hard to just try to narrow it down to one narrow range, and that's why we gave you the different scenarios. The, the good thing is we do know underlying demand remains strong, evidenced by how quickly people return to the marketplace once they realize mortgage rates were at a rate that they felt like they could execute on the home purchase that they were after.
It was just additional proof that over the long-term home, underlying home demands there, we just got to make sure that we balance that affordability against that demand.
Got it. Thank you. Then my second question, in terms of M&A activity slowing down a little bit, kind of surprised by that because we've been hearing that the banks have been tightening up on land lending and tighten up generally on anything related to housing. Are you just... Or the potential targets you're looking at, are they not feeling that pinch right now? Or did everyone have such a good two or three years that they can hold off for a little bit? Maybe a little more depth on that.
I think it's more of what you just said, the latter part. I think they had a good couple year run. They're looking at a fairly uncertain environment now, and they're just not ready to get off the fence. I think as the year plays out and as we see more certainty as the year plays out around interest rates and mortgage rates, and people can evaluate what the next 12 to 18 months look like, I think they'll jump back in. Of course, we're looking continuously throughout the time that we're there.
Great. Thanks. The last one I had, just if you think about whatever metric you want to use, bid activity, quote requests, et cetera, you know, because we did see kind of a tale of two cities with mortgage rates in January and February. Can you talk about how business was in January? What February looked like compared to January, just given the spike higher that we did see in rates?
Yeah. I mean, I think what you described is accurate. It has been a bit erratic, ups and downs. I don't know that there's a trend there broadly other than to say it's slower than last year, and it's certainly a market that's trying to find its own. Yeah, I don't think breaking it down at this point is going to help anybody. It's certainly a market we're staying very close to operationally to ensure we're responding correctly to whatever is dealt.
Yeah. The only thing I'd add is this is not a 2008, 2009 scenario, right? Demand over the long term is still extremely positive. That demand is not speculative. It's for houses that they want to live in. Over the long haul, we still feel pretty good even though it's going to be a little choppy until we get our footing.
Sounds great. Thanks for taking my questions.
Thank you.
We will take our next question from Reuben Garner with The Benchmark Company. Your line is now open.
Thanks. Good morning, everybody. Congrats, Dave, on the new role.
Thanks.
I had some technical difficulties, but I'm just gonna ask one question, so I don't repeat anything. Hopefully, this one's not repetitive. The reiteration of the $7 billion-$10 billion in deployable capital from the Investor Day, I think, starts are probably likely off in the 30% range. I kind of looked at that deployable capital as kind of a free cash flow equivalent, and maybe that's wrong. I just wanted to, I guess, clarify if that $7 billion-$10 billion is kind of the cash generation of the business. If so, you know, what is the biggest thing that gives you confidence that you can still do that even though the starts environment has clearly moved against you in such a big way?
Yeah. No, that's a good question. 2021 guide, for those of you who don't remember, was $7 billion-$10 billion of deployable capital. The way think about that is seven was at a 1x leverage at the end, and 10 was at a 2x leverage at the end. That's 1x-2x the base business EBITDA from a leverage perspective. The short answer is, you know, we've talked about this a lot, and I'm not sure everybody gets it, but commodities for us is an important part of our business, but we make money regardless. We make a lot more money when the price is very high. It becomes a bit of an option where if you have a high future price, you get a lot more cash flow into the business.
That's exactly what we experienced in year 1 of our execution against our Investor Day targets. We had an incremental amount of cash that has put us far ahead of the pace necessary to make our number, even though you're right, currently the forecast of where 2023 is gonna be for starts is well below what we have built into our forecast. We talk about low single-digit single-family starts growth is being embedded into the model. We're certainly in a very strong position with the start that we've had to be able to deliver on that regardless. As I mentioned, we still expect to see healthy free cash flow delivery throughout the remaining years on top of that nice, strong head start.
Thanks, Peter. Congrats on the strong results, guys, and good luck going forward.
Thanks.
Thanks.
We will take our next question with Collin Verron with Jefferies. Your line is open.
Good morning. Thank you for taking my question. I just wanted to start at the fiscal year 23 scenario of single-family starts down 15%-25%. The sales range there is $15 billion-$17 billion, which is only about a 10% decline in sales versus the 2022 base business sales of $17.7 billion you reported. Can you just talk about the factors there that would get you to that outperformance versus your largest end market?
Yeah. I think that's. I'm glad you're asking the question that way. I think it's the right way to think about it. The variables obviously are starts, you know, starts in single family being the biggest impact on us. The other being the impact of M&A, right? We've been acquisitive in the year-over-year growth from those acquisitions are certainly impactful in terms of how we're performing versus the prior year numbers. There's a bit of gross margin in there. The normalization will be a bit of a headwind, but we are also seeing some share growth that we've embedded in that as well. That's an offset.
You know, across the board, being able to offset a share or a portion of that single family decline through the strength of our core business and the differentiated model is a healthy thing for us, and we're certainly quite proud of it.
Great. That's helpful color. I guess my last question here is just on the productivity savings you guys are expecting at $90 million-$110 million. Can you just give some examples of those productivity improvements that you're executing on here in 2023 and just how achievable those are in these different volume-type environments?
It actually, it goes hand in hand with what we need to do from a standpoint of competitiveness related to slower housing starts and increasing our customer service, reducing cycle times. A lot of it is around synergies that we realize from new M&A we've done over the last 18 months. Some of it is related to payroll productivity, getting more for less, specifically within our delivery initiatives and some of our truck turnaround initiatives. Some are around manufacturing productivity. As I mentioned, since the merger, board foot per man-hour has gone up 22%. That is a combination of best practices across plants as we continue to acquire value-added plants from other parts of the country and integrate them into the BFS way of doing things.
There's productivity savings there. We're always constantly reviewing our indirect spend. There's opportunities there. We probably got six to eight different initiatives that will fund that $90 million-$110 million. We're very confident in our ability to get there.
Great. Thank you for the color.
Thank you.
We will take our next question from Michael Dahl with RBC Capital Markets. Your line is now open.
Morning. Thanks for taking my questions. Dave, congrats on the new role.
Thanks, Mike.
A couple follow-ups. On the first quarter guide, the slide has a comment saying, you know, there's a bullet point saying that sales and adjusted EBITDA include the expected benefit of price, commodity, and margin impacts for the quarter. You know, I think, Peter, as you articulated earlier, there is a sharper commodity headwind from a top-line standpoint in one Q. Can you just elaborate maybe a little bit on what that comment means and if it's possible to then split out if there is still some benefit on margins, you know, what your base business for one Q would be estimated at versus that 400-440 total?
I think probably the biggest challenge in this is that there's no base business at a quarterly level. That's not a. It doesn't actually exist. I'm not holding out on you in terms of talking about that number. You're right. There is a lot going on in the year-over-year comps, and the ability to break out those pieces, unfortunately, is generally driven by some detailed analytics. We have some top side assumptions, but I don't think they're particularly helpful to you in terms of insight. A lot of the year-over-year comparison from a commodities perspective is negative in the first half or far more negative in the first half than the second. Unfortunately, just from the ability to break those pieces apart, so it starts comp.
I think that our guide or our comment when we were given the guide saying that the first half is gonna be harder from a comparisons perspective, unfortunately is probably my best insight to offer for the numbers this year.
Yeah. Okay. Yeah. I guess it was just, you know, since that comment says there's still benefits in there, but maybe that speaks to the margin. You know, margins haven't quite normalized yet in 1 Q.
Yeah.
I've got-
The footnote is really just trying to say it's all in. That was all.
Yeah. I got you. Okay. My second question is kind of somewhat related, but just a two-parter on the full year scenarios. As a point of clarification, when you say commodity price, my sense has been that's a blend of lumber and OSB, but can you correct me if I'm wrong there and, you know?
That's right.
Can you put the starting point? Okay. Just for a frame of reference, if we're looking at a blended price year to date, you know, it seems like that's kind of in the mid $300s, maybe oscillating between mid $300s and high $300s. Is that a fair characterization of where you're at year to date on that blend?
Yeah. I mean, if I just talk to random lengths, I think that's right. Between $350 and $400 is the range, a little bit below our base business assumption, in terms of how the year has started. you know, it's early.
Yeah. A lot of changes on a week-to-week or day-to-day basis. Okay. When you think about the range of scenarios, you know, obviously you've spoken to the gross margin dynamics a bit, SG&A is gonna flex up or down a decent amount depending on if you're like, you know, down 10% versus down 30%. Right? When you think about putting this range together in terms of how you get down to the ultimate EBITDA number, which part is the bigger swing factor in your models? Is the gross margin line pretty steady normalizing down and the swing factor in EBITDA margin is mostly SG&A flexing, or is there a different mix as you get kind of progressively lower on the scale of these scenarios?
That's a really good question. You know, we're in the mid-20s or, sorry, low 20s for SG&A as a % of sales, and it's about 70% variable. You're talking about 6% that's in that fixed bucket. If I think about the impact of margins, obviously that falls like price all the way through the bottom line, so that's very impactful. I guess off the top of my head, they seem pretty comparable. I actually don't have a hard answer for you on that, but I think you're right. Those are two of the major components. What happens when sales decline, and how much of the leverage can we offset with, you know, rescaling the business, and then how does pricing fall through, you know, the more aggressive any potential downturn might end up being?
We do expect it to be harder on both margins and commodity prices.
Got it. Got it. Okay. Thanks.
Sure. Thanks.
we will take our last question from Alex Rygiel with B. Riley. Your line is now open.
Thank you. You referenced a slowdown in the average daily sales sort of in December and January. Can you quantify that?
Well, I mean, there's two pieces to it. One of them is the normal seasonality. We do see, generally speaking, about 20% less sales in the depth of winter than we do in the peak of summer. It's a lot more than that, obviously, in the seasonal markets. We're also seeing the downtrend of sort of orders generating starts, generating sales for us on new houses. That decline has been pretty consistent as one might expect. You know, we would expect to lap the peak, probably Q2.
Excluding commodity products, are you seeing suppliers reduce their prices yet?
More rumors than actions. There are a couple of categories where it looks like it's probably gonna happen and we'll stick. For the most part, though, it's been less increases or no increases.
Yeah. I would add there that they're still struggling as well with labor, and what they're having to pay for the cost of labor. At the end of the day, the normal dynamics around supply and demand are gonna win out and, you know, people are gonna go after share. They're gonna do it with whatever availability they have. It just hasn't been widespread at this point. Thank you very much.
All right. Thank you.
This does conclude today's conference call. Thank you for your participation. You may disconnect at any time.