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Edited Transcript of BLDR earnings conference call or presentation 1-May-20 2:00pm GMT

Q1 2020 Builders FirstSource Inc Earnings Call

DALLAS May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Builders FirstSource Inc earnings conference call or presentation Friday, May 1, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Binit Sanghvi

Builders FirstSource, Inc. - VP of IR

* M. Chad Crow

Builders FirstSource, Inc. - CEO, President & Director

* Peter M. Jackson

Builders FirstSource, Inc. - Senior VP & CFO

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Conference Call Participants

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* James A. Morrish

Evercore ISI Institutional Equities, Research Division - Analyst

* Jay McCanless

Wedbush Securities Inc., Research Division - SVP of Equity Research

* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Kurt Willem Yinger

D.A. Davidson & Co., Research Division - Research Associate

* Matthew Adrien Bouley

Barclays Bank PLC, Research Division - VP

* Michael Glaser Dahl

RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products

* Reuben Garner

The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst

* Ryan Christopher Gilbert

BTIG, LLC, Research Division - Director & Homebuilding Analyst

* Seldon T. Clarke

Deutsche Bank AG, Research Division - Associate Analyst

* Steven Ramsey

Thompson Research Group, LLC - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Builders FirstSource's First Quarter 2020 Conference Call. (Operator Instructions)

Today's call is being recorded and will be available at www.bldr.com.

It is now my pleasure to introduce Mr. Binit Sanghvi, Vice President, Investor Relations.

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Binit Sanghvi, Builders FirstSource, Inc. - VP of IR [2]

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Thank you, Anna. Good morning, and welcome to the Builders FirstSource First Quarter 2020 Earnings Conference Call.

With me on the call today are Chad Crow, Chief Executive Officer; and Peter Jackson, Chief Financial Officer.

A copy of the slide presentation referenced on this call is available on the Investor Relations website of Builders FirstSource at bldr.com.

Before we begin, let me note that during the course of this conference call, we may make statements concerning the company's future prospects, financial results, business strategies and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks.

The company undertakes no obligation to publicly update or revise any forward-looking statements. The company will discuss adjusted results on this call. We provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanations of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are available on our website.

I will now turn the call over to Chad Crow.

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [3]

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Good morning, and thank you for joining us. I'd first like to say that our thoughts are with those impacted by the COVID-19 pandemic. We express our gratitude to the first responders, health care workers and all those on the front line who have worked tirelessly to help us get through this situation.

I am also incredibly proud of how the Builders FirstSource team has responded to take care of each other, our customers and our communities by upholding our core values to protect the well-being of all.

For several years leading up to 2020, we have taken significant actions to expand our business, optimize our operations, pay down debt, improve cash flow and more closely partner with our customers through an integrated product offering. While the U.S. economy has transformed in an unprecedented way since our last update in February, our business entered the COVID-19 pandemic at the strongest point in our company's history. This has allowed us to effectively power through the initial phases of the pandemic, as demonstrated by our solid first quarter performance, while also taking additional steps to fortify our business for the uncertain period ahead.

Last quarter and before the pandemic began to impact the economy, I announced my planned retirement in 2020 at the commencement -- and the commencement of a search for my replacement. Given the rapidly evolving market landscape, along with the economic uncertainty of the coming months, I have notified the Board of my intention to stay until the virus situation stabilizes, and the company has resumed more normal operations. We are all completely focused on emerging from this crisis a stronger company.

Before we discuss results, I'll provide an update on the current market landscape and some actions we have taken.

As I mentioned, we entered this pandemic at the strongest point in our company's history. As an essential business, we continue to supply critical products to customers with a paramount focus on health and safety. We are prioritizing the well-being of our team members, channel partners and the communities where we operate. Fortunately, we have the ability to do so while maintaining operational continuity.

Nearly all of our locations have remained open, except in the few states or counties where construction activities were suspended. But that list of states is shrinking. We have dedicated teams in place to monitor best practices, ensure compliance with shifting local orders and implement swift action as needed.

In addition to the many safety protocols and social distancing measures that we have put in place, our investments in technology are helping us maintain our connections with customers and our overall effectiveness. This includes My BFS Builder where we complement our first-class face-to-face customer service with an innovative customer portal. Customers can quickly access details regarding their account, receive automated -- automatic notifications of delivery, download statements and make payments, all with the goal of making it easier for customers to do business with us and for the time being, minimize physical contact.

Our business performed well in the first quarter, even during the month of March. We met our financial expectations and finished the quarter strong, and our value-add products were once again a major contributor to our success.

Looking ahead, there are several factors I would like to call out for the coming months. During the quarter, many of our customers worked vigorously to complete existing units under construction. As a valued partner to many builders, I am proud that our teams were able to provide customers with the critical products they needed to keep projects moving. However, as the quarter ended and the economic conditions softened in April, home sales declined and new projects coming into the pipeline have not fully replaced completed projects. As a result, we have taken actions to address the softer market conditions in what we expect will be an air pocket in construction activity.

Last month, we announced proactive steps to enhance our financial flexibility, liquidity and cash flow.

At the end of March, we had $672 million of total liquidity. Out of an abundance of caution, we recently tapped the debt markets to end the month of April with $1 billion of total liquidity, including $193 million of cash and no significant debt maturities for the next 7 years.

On the operational side, we are taking a balanced approach to mitigate the impact of reduced demand on our profitability. While protecting as many existing jobs as we can as we believe the worst of the downturn will be short-lived.

Recall that in 2019, we added $25 million in EBITDA through an operational excellence initiatives to optimize process and control costs in a growing market. In response to COVID-19, we are enhancing our efforts to include: resizing locations where needed; minimizing discretionary capital expenditures; optimizing working capital; limiting and delaying operating expenses; tightly managing corporate spend; and reducing Board and senior management pay.

These actions, while difficult, are helping to preserve cash and profitability while maintaining our ability to efficiently respond as demand recovers. We will continue to take prudent actions to maintain a strong liquidity position and operate our business with a safety-first emphasis across our nationwide footprint.

While the extent and duration of the current economic crisis remains unclear, we are well prepared to navigate through it and keep our company positioned to succeed as the economy begins to improve.

I will now turn the call over to Peter, who will review our first quarter results and balance sheet in more detail.

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [4]

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Thank you, Chad. Good morning, everyone. I'm proud of our team's work in delivering another quarter of strong results and supporting our customers during this dynamic time. I will streamline our first quarter review, given it is in the rearview mirror at this point.

I will also highlight the structural elements that we see as important near-term considerations to help communicate our confidence in the business.

We had $1.8 billion in net sales in the first quarter, with Core Organic Growth of 3.9%. You heard me use a new term right there as we are introducing a new Core Organic Growth metric this quarter. We believe it is an efficient way to discuss the underlying performance of our business by excluding acquisitions, commodity impacts and differences in selling days from net sales.

Net sales in total increased 9.5%. Core Organic Growth, as I mentioned, was 3.9%. Our 5 tuck-in acquisitions completed over the past year added 3.5% and 1 additional selling day contributed 1.7%. Commodity price inflation was minimal and added 0.4% to net sales. Our value-added product categories again led the way on a per day and Core Organic basis, reflecting the continued execution of our strategic plan and the emphasis of those businesses on those key products.

Our gross margin percentage was 26% and in line with our expectation for the quarter. The 110 basis points decline compared to the prior year period was a result of the previously communicated normalization in our lumber and lumber sheet goods product margin. Last year, we experienced a strong tailwind due to commodity deflation, which did not recur in 2020.

Amid all of the expected noise related to COVID, please continue to keep in mind the mechanics of our margins as we have discussed in -- on prior calls. Commodity cost deflation causes short-term gross margin percentage expansion when prices drop rapidly relative to our short-term pricing commitments that we provide customers. We experienced this benefit during the first quarter of 2019, and this benefit did not recur in the first quarter of 2020.

Commodity costs increased markedly in February of 2020 before retreating to prior levels in the face of COVID-related interruptions. At this point, we expect we will see a modest impact from commodity inflation in our Q2 results.

Interest expense increased by $27 million to $51.9 million compared to the same period last year. Excluding the net impact of onetime items related to debt extinguishments, interest expense was down by $1 million on a lower outstanding debt balance year-over-year.

First quarter EBITDA decreased $3.9 million to $97 million, representing the higher end of our expectations. The year-over-year decline was largely driven by the previously discussed normalization in our gross margin percentage in the first quarter of 2020.

On Slide 4, you can see that the strength of our business, driven by our national scale and strong local customer relationships, was again evident as our customers push to complete units under construction. Higher-margin value-added products, remained at 42% of total sales in the quarter with estimated volume growth of 9% in combined manufacturing -- manufactured products and windows, doors and millwork product categories.

On Slide 5, our first quarter organic growth was an estimated 3% in the single-family new construction end market, with broad-based growth across the country. A common thread is that we grew value-added products in the single-family market in all of our regions. Core Organic Growth in R&R and other end markets was 2% on broad growth as well. Multifamily Core Organic improved by 19%, largely due to the timing of projects started earlier in 2019 when we implemented organizational improvements.

Turning to our strengthened liquidity and de-risked balance sheet on Page 6, let me first address cash flow. During the quarter, we had an outflow of free cash of approximately $79 million. The first quarter is seasonally our low point for cash flow as we typically use cash in the first half of the year and build up cash in the second half. This year is clearly shaping up to be unprecedented in nature, and as Chad discussed, we have taken aggressive action to preserve cash, including a significant reduction in CapEx spending and an increased vigilance around working capital.

Looking at our net leverage, we ended the quarter down 0.2x compared to prior year and up 0.3x from December 31. The sequential increase is partly due to the funding of prior acquisitions, which are not yet fully reflected in EBITDA as well as the normal seasonal buildup in working capital.

On a pro forma basis, our net leverage was closer to the low end of our 2.5 to 3.5x targeted range.

With that backdrop, let's focus on the structure of our capital resources for the current environment. We have already discussed our spending and cash preservation measures, so I'll address the recent debt financing transactions that have provided significant additional liquidity in recent months. Since the beginning of the year, we have several moves to push out maturities and improve our access to cash.

First, in February, we issued $550 million of senior unsecured notes that mature 10 years from now in 2030. We used the proceeds to pay off $504 million of existing debt that matured in 2024, plus a portion of our 2027 notes. This transaction was opportunistic in nature and a fortunate timing ahead of COVID's impact on the economy.

In April 2020, in response to the pandemic, we raised an additional $350 million in 2027 senior notes. We used those to repay the funds drawn under our revolving credit facility and left the remainder in cash. Following these transactions, we have approximately $1 million -- $1 billion of total liquidity, including $193 million of cash, representing a greater than 50% increase in liquidity since the end of the first quarter.

We have termed -- a term loan in the amount of $52 million due in 2024, but beyond that, we have no maturities until 2027 and a weighted average maturity schedule of 8 years. That represents an almost 3 year extension in our weighted average maturity schedule since the beginning of the year. Including our recent bond offering, we expect our cash interest to be in the $100 million to $110 million range for the full year of 2020.

We believe our balance sheet is appropriately structured to face the challenges ahead. We have no covenants worth discussing, and we have over $800 million available to us on our revolver. We are prepared to draw down additional capital as needed, but do not see a reason to do so at this time based on our free cash flow expectations.

In terms of capital allocation, our primary objective at this time is to preserve cash. We have put numerous investment plans on hold, including acquisitions, and growth CapEx. If you recall, we had originally anticipated to invest around 1/3 of our total 2020 capital expenditures in value-add growth initiatives. While some of those -- some of that has already been spent, with the deferral of growth projects, we now expect capital expenditures to be in the $75 million to $85 million range for the full year.

In summary, we ended the quarter with a strong capital position, have further fortified our balance sheet and have ample coverage to effectively navigate the developing economic environment.

I will now turn the call back to Chad for his closing comments.

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [5]

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Thank you, Peter. We have managed through prior downturns, and our business is much stronger today than it was a decade ago. Our national scale, VAS product portfolio and our local market density across 77 of the top 100 MSAs are just a few of the reasons.

Today, high-margin value-added product, which make our customers more productive and efficient, are the largest portion of our business. Our net leverage is at the low end of our long-term target, and we have a much deeper and more integrated relationship with our customers than ever before. We are much more than a supplier of lumber. We are a highly valued partner to many very sophisticated builders delivering labor savings and just-in-time delivery of critical building materials, helping them maintain a streamlined supply chain.

As I have mentioned several times today, we are better prepared than at any point in our history to address the rapidly evolving and unprecedented economic environment.

In early April, we withdrew our full year guidance due to the uncertainty in the current homebuilding market. Our prior outlook did not contemplate the COVID-19 pandemic.

Similarly, in regards to our previously communicated long-range plan, despite our confidence in long-term financial goals, we are also putting our targeted 2022 timing under review until we have a better view of the economic impact of COVID.

The uncertainty regarding the duration of the COVID crisis, the pace of recovery and the lingering impacts on the economy remain unclear. As I mentioned earlier, the hurried pace by customers to complete projects during March tapered off as we moved through April.

This resulted in a high single-digit percent decline in Core Organic net sales for the month of April compared to the prior year period. We believe this was due to a combination of factors, including some builders shutting down certain of their construction sites due to strict shelter-in-place orders, conflicting local mandates and for obvious health reasons. Our teams have also noted understaffing at some critical government offices delaying permitting and production schedules.

At construction sites that are operational, the logistics have become more complex to accommodate precautions to limit the spread of the virus. And as many public builders have reported, the pace of new home orders has weakened in recent months due to social distancing guidelines, stay-at-home recommendations and general economic uncertainty deferring some near-term home-buying activity. We believe these factors make it likely that the market environment will weaken further in the coming months as the backlog of projects that started prior to the pandemic are completed and before new starts begin to ramp up again.

That said, we still believe there will be a significant base level of demand for our essential products and services. We are encouraged by the reported uptick in new home sales in the past 2 weeks and have seen similar trends in orders coming into our truss and panel plants. From an operational and financial perspective, we are well positioned for a challenging second quarter, and we'll continue to adjust our business as needed.

Given the limited visibility on the length and severity of the economic impact, we have a range of internal forecasts depending on many sets of future assumptions. While we are not publicly disclosing our scenario analysis, based on our cost position, our capital structure, our operational excellence initiatives, and a lot of contingency planning, we believe that our business will be able to produce positive free cash flow for the remainder of the full year 2020. We remain ready to make operational adjustments and react quickly. We will continue to align our costs with the evolving demand environment and will work to preserve our strong liquidity and balance sheet flexibility.

We have full confidence in our business to be the supplier of choice for building materials and value-added products in the months and years to come. Our enhanced geographic reach, diversified product offerings, national manufacturing capabilities and strong partnerships with customers are unmatched competitive advantaged -- competitive advantages in any market environment.

I would especially like to thank the Builders FirstSource team for their unwavering dedication to our company, customers and communities during this volatile time and into the recovery.

Operator, we can now open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And we'll now take a question from Matthew Bouley with Barclays.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [2]

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And hope everyone is doing well. I wanted to ask a sort of bigger-picture question on the value-added products and prefab components, particularly in this environment. Is -- are you guys thinking that sort of where construction labor could potentially become more available for several reasons here over these next several months.

Do you think prefab can continue to take share? I know it's -- we've talked about this before, but it varies by market, where it's been more or less adopted. What have you seen so far in those categories? And how are you thinking about the dynamic whether prefab can continue to take share?

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [3]

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Personally, I don't think that's a trend that's going to reverse. It's been taking share. I think it will continue to take share. I think builders see the value in it. That they see the efficiency it creates on their job sites. It requires -- it can require less people and less time on the job sites. I guess there could be a few instances where builders could revert back. But in general, I don't see that trend reversing.

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [4]

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I agree. We grew through the last cycle in value add. I think that there was -- there's an argument to be made, there was far more labor availability during the last cycle than there is or will be during this one. So I think there's every reason for confidence. This is a product that the homebuilders like and use and rely on.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [5]

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Got it. Okay. That's helpful. And then secondly, I wanted to ask about so -- the comment you just made, Chad, around sort of pushing out the timing of thinking about some of your operational excellence, I -- understandably so.

But I guess my question is, what can you actually continue in this environment in terms of those operational excellence initiatives? What are you taking a pause on? I kind of just want to hear the big-picture thoughts, but then also what that could mean for cost savings in 2020.

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [6]

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Yes. Maybe I wasn't clear. Right now, we have no intention to pausing on operational excellence initiatives. The pausing is more on some of the growth initiatives and M&A activity. But right now, we're full speed ahead on our operational excellence initiatives.

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Operator [7]

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We'll now take our next question from Trey Morrish with Evercore ISI.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [8]

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Chad, it's nice to hear that you're going to be sticking around for a little bit, given all the uncertainty, so we could talk a little bit more. But you are also around last cycle as well during the downswing.

How much of what you're doing today is related to the playbook that you've all pulled out last cycle? And just how do you view the current challenging environment compared to the financial crisis downswing?

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [9]

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Yes. That's a great question. First of all, it wasn't just me that it was around. I bet, gosh, 75% of our team has probably been around, and that includes the guys out in the field. And one thing they are very good about is adjusting their operations for demand, to changes in demand. That's not just in situations like this, but from a seasonal perspective across a given year, especially in the upper -- the Northern markets where seasonality is a huge factor.

That's just a way of life for them. And so the good news is we have an experienced team that knows how to deal with this. Right now, we have the playbook ready. And to be honest, we haven't initiated all those plays yet because we haven't needed to. Our sales have held up remarkably well. Now in states where we were required to close for a period of time, we did some temporary layoffs and things like that and adjusted our cost structure. But as we've opened back up, we've been able to bring most of those folks back.

Now that being said, we do anticipate a slowdown in the coming months, and we will be prepared to adjust our cost structure accordingly. I don't have the crystal ball of what this is going to look like. Personally, I think it's not going to be anything like the last crisis. I think it's going to be much shorter lived than that. I think the underpinnings are much different right now. We're not in an overbuild position like we were 10 years ago. In fact, you could argue we were still in an underbuild position now.

Now there will be some bumps along the way. There's a high level of unemployment that we'll have to work through. But there's still a lot of positive things that give me hope that this is going to be relatively short-lived.

I think the pandemic could drive some people out of big cities and wanting some space of their own. That could drive some additional homebuilding. Mortgage rates are still low. So there's the demographics. There's a lot of things that give me hope that this will be relatively short-lived and nothing like 10 years ago.

If it gets as bad as 10 years ago, we've got a boatload of liquidity, and we'll be ready to react.

So right now, I, look, we've got an experienced team. We've got a balance sheet that's got $1 billion of liquidity, and we will manage through whatever the current economic environment presents to us. But when you compare what I see coming in the next few months and few quarters to what we went through in 2008, I don't think it's going to be anything like that.

Will there be a couple of rough quarters? Yes, I think there will be, but -- and we'll be able -- we'll be ready to pull the playbook out again. But right now, as I said, we've been very fortunate being deemed as an essential business, and our business has held up remarkably well thus far.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [10]

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Okay. And then you talked about April being down high single digits in your Core Organic Growth. I'm just wondering if you could kind of talk about that, at least qualitatively. Any difference in that you're seeing value-add, I guess, with different customer types whether it's public or private builders acting differently? Whether they got their focus on the spectrum and versus build-to-order or acting differently. Any type of color you can you can provide there?

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [11]

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It's more regional based. As you would expect, up in the Northeast, they've been hit the hardest. They're probably down more than any other region. The opposite of that is, gosh, down around Georgia and Florida, you wouldn't know there was anything going on. Our results so far are on plan and up first part of the year.

And so those are the 2 bookings that we're seeing and all the other regions are kind of falling in between that. So it -- we haven't really seen a difference by builder type. It's really more a geographical difference in how much the pandemic has really shut down operations in those regions.

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Operator [12]

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We'll now take our next question from John Baugh with Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

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Welcome back, Chad. It's like you never left.

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [14]

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Yes. I know, it's great.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [15]

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I was wondering sort of building on that last question a little bit. If there's a way -- obviously, in states where construction is closed, I would assume the results are materially weaker. And then they might actually rebound a little from where they've been in the last few weeks. Do I have that right, first?

And then secondly, in those areas where you've remained open, you sort of mentioned that the pipeline isn't filling on the front end. I was curious as to whether you felt that was sort of cancellation or deferrals. If you have any sort of read-through on those or not.

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [16]

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Well, I think your first assumption is correct. In states where we were closed, there is a little bit of pent-up demand there as we reopened. We see a little bit of a surge, but we still think the worst is yet to come in the next couple of months.

That's a tough question on whether it's deferrals or cancellations. Honestly, I think it's got to be some of both. You've got 30 million people that are filing for unemployment now. How many of those were potential homeowners in the near term, I don't know. But I can say in the southeast, where our results are still pretty strong, we're seeing a -- still a pretty solid pipeline of new starts and new construction. But I think time will tell. I wish I had the answer, but I think time will tell on whether these are deferrals or cancellations, but my guess is it's going to be some of both.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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Okay. And then obviously, you're not going to do M&A now. I fully understand. But curious as to how you think the competitive landscape is positioned going into this downturn. Whether there might be even more opportunities and if correct, where you'd sort of pull the trigger? What would it take timing-wise or what you're seeing to sort of change your stance?

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [18]

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Yes. I do think this will create opportunities that otherwise wouldn't have been there. What those will look like, I don't know. But clearly, as we've discussed, we took out a lot of incremental debt. Liquidity -- in uncertain times, liquidity is king. In uncertain times, liquidity is a lot like a concealed weapon. I'd rather have it and not need it, than need it and not have it.

So consider us armed and dangerous once this thing levels out and there's acquisition opportunities out there because personally, I don't think we're going to need that incremental liquidity, but I've learned as coming through the last downturn, it's better to have it. And so if things turn out like I think they will, we will have ample liquidity to be able to take advantage of some these situations that will come up.

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Operator [19]

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We'll now take our next question from Mike Dahl with RBC.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [20]

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This is actually Chris on for Mike. My first question is just on [unlocked] pricing. Is there any way you could help us flush out the timing of when you're going to start seeing the impact of the lower prices on results? Just given your -- if you could just give us an update on your inventory and [net] you have going forward in the -- in light of the lower-demand backdrop?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [21]

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Sure. Yes, I mean, the nature of our commodities is pretty consistent. We saw that run-up in pricing, sort of the middle of the first quarter. It generally takes about a quarter to 2 quarters for that to flush through the P&L in terms of the impact on gross margins, resetting pricing. Now in this case, because it went up and then came back down again, it has the potential to be a little quicker, but you still got to work through that inventory.

As far as inventory levels, our days of inventory is less than it was a year ago. We've been very disciplined about the amount of inventory we brought on to make sure that we didn't get caught behind any material changes in demand. But that said, we're still the distributor. So we have inventory on the ground. We will continue to have inventory on the ground. But I think that our performance to date has been sort of continuing the progress that we made last year in keeping our days well managed.

I think that the overall lumber and commodity pricing, both OSB and lumber ran up a bit, but it settled back down. I don't know that there's much room for it to go much lower. I would say that manufacturers have done a good job of taking capacity offline to manage. So it's really a matter of seeing when things start to ramp back up again from a homebuilding and demand perspective as to when, if at all, the prices move again.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [22]

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Got it. That's helpful. And then just for my second question, I was hoping you can drill a little deeper into the trends you saw in April, specifically by product category. Is there any way you could you could break out, I mean, how the value-added parts of your business performed relative to the company average?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [23]

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So we definitely don't want to go down into the weeds on April. I think that the overall trends have been largely consistent what you'd expect from us. It's a lot of question mark about where that goes into the future as things start to transition, to digest this air pocket or whatever it is we're going to call it of the shelter in place.

We're already starting to see the improvement in starts -- sorry, in orders through our customers. But really, we're going to have to watch our homebuilder communication, permits and starts, the normal characteristics that you'd expect us to monitor from our homebuilding customers to know when we'll expect things to turn around. But like Chad said, there'll be a window here where it's going to get harder.

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Operator [24]

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

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [25]

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I have 2 questions. One, once the homebuilder orders start to bottom and tick up in the right direction, how long will it take for us to see that in your sales, given where inventories are right now?

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [26]

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Yes. I mean it's -- it -- I don't know that there's a hard and fast answer to that, Keith. I think that it's a good question. It's really dependent on the customer and the region, a couple of weeks or a couple of months. I mean, though it could be a range like that. But I think one of the interesting aspects of this when we look at, at least the recent past, there is a little bit of a buffering that happens as homebuilders continue to build through a little bit of their backlog.

You have sort of this ability to expand and contract the under construction. I think we've seen a little bit of that. We've already started to see some of the green shoots or initial indications that we bounced off the bottom on orders. It's a question of how long it lasts. And does it continue that trajectory? Are there multiple dips? And when it gets a little bit back to normal, what does that normal look like?

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [27]

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Okay. Second question, lumber prices. It sequentially fell off pretty hard once this whole mess started. Typically, you tend to get, for a period of time, a little bit of extra margin from that. Is that going to be the case in the second quarter? Or will this just get competed away because the environment is so difficult?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [28]

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Given how fast it went up and back down again, I expect it's probably the latter this time.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [29]

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Okay. Okay.

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [30]

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Because it was, I think -- it was a month or 2.

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [31]

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And I'll just add, as we expect to see business slow in the quarter, there may be opportunities where we get a little more aggressive on price to just keep the volume coming through our facilities and keep our folks working. So that could offset some of the -- any advantage we would have gotten from the fluctuation in commodity prices this time around.

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Operator [32]

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We will now take our next question from Kurt Yinger with D.A. Davidson.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [33]

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Yes. I just wanted to start on gross margin and maybe trying to think about the variability there kind of associated with volume declines and maybe trying to create some goalposts on how you might think about the downside there.

And then just on decremental EBITDA margins, I think you guys typically target a low double-digit range. Do you think that's still a reasonable benchmark? Or is there anything we should be thinking about that might kind of change that in the current environment?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [34]

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Kurt. Yes, I mean, it -- you're right on. That's a great question. I don't know that I have a lot of particularly useful detail other than we maybe recap a couple of things that we've talked about in the past. Yes. We will expect to see deleveraging, to a small degree, in gross margin as demand declines. The extent of the demand will correlate to the size of the impact on margins.

We certainly see the variability in the SG&A as a rule of thumb being around 70% variable. The tricky part in this particular situation is that we know it's temporary. The downturn in volume is temporary. So we may keep a few more folks around to make sure that we're ready to go on the back end. There are some critical roles in this business that are extremely hard to recruit and retain and you don't want to let them slip away because you have a 30- or a 60-day window in which you lost some volume.

So that's a good question mark for us to see how bad it goes down and how much do we want to protect versus how much do we just get down to business and rescale the business as appropriate. That fall through is a good question. Overall for the year, do I think it's likely to be in that range? Sure. I don't think that net directionally is wrong. But for a window of time, could it be better or worse? Yes. No, it could be.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [35]

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Okay. That's helpful. And you touched on something that kind of leads into my next question. It's really around how do you balance taking more kind of permanent actions from a facility or even headcount perspective relative to the potential for a short-lived downturn.

I mean, is there a certain time frame where you kind of defer maybe some of these decisions, but at which point, you say, "All right, we got to start kind of protecting the margin and the profitability of the business." Is there any kind of way to think about when that might be?

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [36]

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Well, that's also a great question and probably the thing we're struggling with the most right now. As I said earlier, thus far, we've been very fortunate and our business has held up really well. We expect to see that decline. We also still currently expect it to be relatively short-lived. When I say, relatively short-lived, months, not years, decline. And so as long as we believe that, I am certainly willing to keep investing in, as Peter said, our key employees. Many, many folks.

We've got a lot of talented team members and to let some of them go just to ride out a fairly brief downturn in our business would be -- would not be the right thing to do. We want to keep these people employed, and we want to be ready for things to -- when things do recover. And so that's the tough question.

Every day, we learn a little more. And as we continue over the next few weeks and months, if it becomes clear that our assumptions may be off and this may be a little longer downturn, then we'll adjust accordingly. But right now, we're working under the assumption that it's going to be relatively short-lived. And so there will be -- anytime our business slows, there's a reduction in overtime, there's a reduction in temp labor, there's a reduction in hours worked. But as far as permanently letting people go, we want to defer that as long as we can and keep buying time in order to get some more clarity on what this thing is going to look like.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [37]

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Right. Okay. Yes, that makes a lot of sense. And then just lastly, on the competitive front, how do you think about -- or are you seeing any potential benefits kind of in a more challenging backdrop associated with your relative scale and liquidity compared to some of your smaller competitors? And is that something that might benefit more on the customer side from an order perspective or maybe how suppliers approach, who's retailing your product? Any color there would be helpful.

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [38]

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So I think that the real obvious one, I guess, with $1 billion in liquidity, there is a clear understanding in the marketplace that we are not going anywhere and you can count on us. I think that is the desirable position to be in when you're talking with customers about how to make sure you're supporting them and working with them.

It's always a dynamic environment when you're trying to react. And again, it kind of reiterated an earlier point, and some parts of the countries that are killing it that are doing great. And other parts of the country that are really suffering and happen to hunker down a big way because their customers are.

Being able to partner in every one of those situations, continuing to invest in our business from an operational excellence perspective, continuing to invest in the portal, continuing to be able to offer services that others can't, we think that -- it's that continuity. It's that reliability and that strength that in this moment and over time, continues to give us a competitive advantage.

Will it -- I think the area where it may offer better opportunities are those that having come through this cycle as owners of their own smaller business decide maybe this isn't such a horrible time to pass the reins. And boy, Builders FirstSource seems like a good group to work with. Maybe we'll sell to them.

So there are opportunities. It's a little too early to say because we don't know what it's really going to look like. At this point, it hasn't looked like much.

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Operator [39]

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We'll now take our next question from Steven Ramsey with Thompson Research Group.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [40]

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I guess I wanted to start with this -- the Southeast. Is that the only region of strength, albeit a big region? I guess also with that, what was the percentage of sales coming from the Southeast maybe in 2019? And then thinking about the strength of it, is it on all fronts, both current activity and new orders?

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [41]

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No. It's not -- it's the strongest region of the country right now for us. But there's other markets that you can see they've been impacted, but they haven't been near -- as impacted nearly as much as you might have thought they would have been. And yes, the strength we're seeing in the Southeast is a combination of both existing orders and new orders.

I don't have the percentage of sales breakout with me now, but that's probably something that maybe you could discuss with Binit later, but it's not the only region. I was just pointing out the kind of the book ends of the strongest and the most impacted when I made that comment earlier.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [42]

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Great. And then on customer speeding up work in March, can you maybe explain how this played out? And are you see -- is that what's driving some of -- is that continuing into April or is that -- does that taper off in Q1?

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [43]

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Well, when we were talking about the customers, they're basically finishing homes that had already been started. So units under construction. They were really making sure they got those homes completed. But we did see many builders start to tap the brakes on spec homes, on new lot development and of course, traffic and new buyer activity slowed given the restraints created by the pandemic.

So yes, we mentioned the April results and how they trailed off. Still all in all, a pretty strong April, in my opinion, given what's going on. But as I mentioned earlier, we are still concerned that there's kind of an air pocket of demand coming that we'll have to work through in the coming months.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity Research Analyst [44]

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Right. And then last question. You talked about the geographical differences being kind of the biggest diverging trend. But maybe can you talk to the difference in health of smaller builders versus large builders? And is cash collection challenged in one or both groups right now?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [45]

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Yes. I think Chad alluded to it a little bit, but the difference between the large and small is less pronounced than the difference between hard-hit regions and those regions not seeing nearly the impact. It's -- I think that's -- it's substantial. It's kind of hard to overstate how different those 2 regional indicators are.

Now as far as the cash flow and the collections, as you can imagine, we have been paying particularly close attention to that. The good news is our days are better this year than they were last year. So our -- we have not seen a decay in our performance today. We are certainly being thoughtful about it and being conservative and staying close to our customers whenever there are any delays or indicators of stress that we are staying close. But I think at this point, based on the relatively modest decline in what has happened so far in terms of sales, we certainly have not seen any issues there.

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Operator [46]

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

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [47]

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So Chad, I just want to go back to what you were talking about in terms of being willing to push price if you need to keep volume up whenever this air pocket ends. Are you seeing some of your competitors already making that decision and being more aggressive on price?

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [48]

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No, I really haven't seen that yet. It's just something we would anticipate seeing if we see a significant drop-off in demand.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [49]

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And then I was wondering if you all could quantify the high single-digit decline in April. How much of that is related to whether it's percentage points, or something along those lines, how much of it is related to areas where you still can't ship product, whether it's Michigan or the Northeast, something like that?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [50]

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Yes. I don't know if we have an exact estimate. It's a substantial -- they're -- I'm banging the same drum again. There's a massive difference between those regions, right? Pacific Northwest, where they shut down Washington; the Northeast, where they've been most deeply impacted; Michigan, as you described. Those numbers are materially different than what you're seeing in the rest of the country. So I think it's fair to say, yes.

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [51]

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I think we can safely say it's around half of that number.

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Operator [52]

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Our next question will come from Seldon Clarke with Deutsche Bank.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [53]

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So I heard there's a lot of moving pieces here in the more medium-term far from the situation, it's still a little bit unclear. But you sound fairly optimistic about the resiliency and more of a short-term impact to housing than anything else.

Can you just give us a little bit more color on what gives you so much confidence here just given where unemployment is trending? Maybe just a little bit more color on where you actually think starts could shake out under various scenarios. Obviously, there's a lot of in-between with where we were before this was pandemic and where we were in the financial crisis. So just any color on where you think starts might shake out would be helpful.

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [54]

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I don't know that I'm ready to give a starts number yet. But look, as I said earlier, this crisis just looks a lot different than what we went through last time. I won't rehash those. But I do think there's going to be incremental demand created down the road. And you've seen some articles on it recently of renters fleeing apartments and deciding now is the time to get a bit of space of our own if -- I know for our company, in particular, we -- I'm shocked at how well this whole telecommuting thing is working.

And thankfully, we have ways in place to monitor what folks are doing at home and metrics and very, very pleased with the productivity that we've seen with folks. And so if this whole telecommuting thing sticks, that's probably going to create a group of people that say, "You know what, I don't have to live near downtown anymore where it's more expensive."

If I'm working from home, maybe we go out to the suburbs where it's cheaper and we have a little space of our own. So I think that could provide a boost down the road. And we just don't have the excess inventory in homes that we had a decade ago.

Now to your point, there's a lot of unemployed people right now, and we've got to get folks back to work. And the longer we don't go back to work, that obviously, the more of this thing is going to drag out. But I just think there's a lot of still underlying strength, that if we can get folks back to work that we're going to be able to flush through this. And again, I'm not talking weeks and look, everything's back to normal. It very well could be -- it's likely going to be months. I'm just saying it's not going to be 4 or 5 years like we saw with the last financial crisis. That's my opinion anyway.

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Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [55]

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Okay. That's helpful. And I guess just under different scenarios and given your kind of willingness to sort of ride this out in the short term, like how do you think about decremental margins over the next couple of quarters versus how they might shake out if this is a little bit of a longer-term weakness -- weakness persists for a little bit longer than you would expect?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [56]

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We certainly don't want to imply guidance on the margins. I think that when we've talked about incrementals and decrementals in the past as sort of the curvature has alluded to. We're talking low double digits, so 12% to 15% is sort of a rule of thumb.

And to reiterate, I guess, a little bit about the comment about the -- if we hold on -- if the worst-case scenario happens and we hold on to people a little longer than we should, then it does turn out to be down more. Of course, that's going to make that a little bit worse on the downside. But it would recover over time because we'll see that stabilized at a lower level when we'll take the appropriate actions to reset margins and cost levels to where they need to be.

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Operator [57]

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We'll take our next question from Reuben Garner with Benchmark.

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Reuben Garner, The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst [58]

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So I know R&R is not a huge part of your business, but -- and I'm sorry if I missed it, I got kicked out of the call briefly. But have you seen any uptick in R&R activity or any trends to call out in that part of your business?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [59]

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Yes. So definitely some green shoots are good news. Not all good because there are some offsetting headwinds. So the short answer is some of our more retail-focused businesses have seen a nice little uptick. As you know, we own the [50-line] San Lorenzo brands in California. They're doing quite well in the retail. Some other parts of the country doing well also.

Unfortunately, there's -- we also have our brand -- our retail brand up in Alaska, and the Alaska market has really been hit hard. They've gotten a double whammy of oil as well as COVID. So they're certainly being hurt by all this. So I think we're doing well in that space, a couple of weaker pockets geographically, but certainly happy with our performance there overall.

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Reuben Garner, The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst [60]

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Very -- that's helpful. So -- and then second one for me. I know working capital was brought up. The normal rule of thumb, I think, is 9% to 10% of every incremental or detrimental dollar of revenue. Is there anything about the current environment that would mix that drastically different over the next, I don't know, the duration of 2020? Good luck navigating through this.

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [61]

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Thank you. Yes. No real difference. Based on our recent performance, we might come in a little towards the lower end of the 9% to 10%. But I think things have been fairly consistent.

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Operator [62]

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We'll take our next question from Ryan Gilbert with BTIG.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Director & Homebuilding Analyst [63]

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First question for me it's a little backward-looking, but the 3% Core Organic Growth in single-family in the first quarter, a little slower than what we were seeing in large single family starts. Is that -- do you think that's impacted by COVID? Or did you lose some share as competitors got -- or to the extent that competitors got more aggressive in the market in the first quarter? And how's that trended? Or has that trend continued in April so far?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [64]

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Yes. As you can imagine, that caught our attention. We pay pretty close attention to the single-family numbers. The tricky part, and we talked a little bit about it at the end of last quarter, is that we had a really strong end of '18 and beginning of '19. I think it's fair to say we took a boat load of share and so you're looking at some tough comps.

I would also argue the numbers are a little bit odd. I personally have a hard time believing that there isn't some mathematical anomaly in that February starts number. It just doesn't ring true to what the market is doing. I think that if you smooth that out a little bit, for us, if you look at it over the last year, we netted a tremendous amount of share. Is there a little bit of pushback from our competitors and people trying to take some of that share back? Sure, yes, no doubt. But I think that we feel good about our share position about having net taken share.

And I think we felt really good coming into the year. I mean it's -- I know we blew by Q1, but it's a little tough to swallow just how well we were doing in Q1 and how the momentum of the business and the demand was building, only to sort of be snuffed out by the COVID dynamics, and now we're just going to -- we'll navigate through this bit, but I think we're starting from a position of strength.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Director & Homebuilding Analyst [65]

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Yes, totally understand. And can you comment on just pricing and then margins for structural components through late March and April?

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Peter M. Jackson, Builders FirstSource, Inc. - Senior VP & CFO [66]

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We generally don't get into the, to the granularity of the individual product categories. I would say, on a year-over-year basis, we certainly had some tailwind within those manufactured products, but the component of it that has a good aspect of it in '19. So on a year-over-year basis, it would have trended a little.

But I think it's a very healthy part of our business. Margins have been strong and we're continuing to stay disciplined on pricing and particularly in that category where we think we bring a lot of value to the table.

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Operator [67]

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And that does conclude today's question-and-answer session. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

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M. Chad Crow, Builders FirstSource, Inc. - CEO, President & Director [68]

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Well, thank you once again for joining us today. We look forward to updating you on our second quarter results. And if you have any follow-up questions, please reach out to Binit or Peter. Thank you.

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Operator [69]

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And once again, that does conclude today's conference call. We thank you all for your participation. You may now disconnect.