Good day, and welcome to the Builders FirstSource third quarter 2023 earnings conference call. Today's call is scheduled to last about one hour, including remarks by management and the question and answer session. In order to ask a question, please press the star key followed by the number one on your phone at any time during the call. I'd now like to turn the call over to Heather Kos, Senior Vice President, Investor Relations for Builders FirstSource. Please go ahead. Good morning, and welcome to our third quarter earnings call. With me on the call are Dave Rush, our CEO, and Peter Jackson, our CFO. The earnings press release and investor presentation are available on our website at investors.buildersfirstsource.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 reconciliations of these non-GAAP measures to the corresponding GAAP measures, where applicable, and a discussion of why we believe they can be useful to investors in our earnings press release, SEC filings, and presentation. Our remarks in the press release, presentation, and on this call contain forward-looking and cautionary statements within the meaning of the Private Securities Litigation Reform Act and projections of future results. Please review the forward-looking statements section in today's press release and on 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, Heather. Good morning, everyone, and thanks for joining our call. Before we begin, I want to formally welcome Heather to the Builders FirstSource team. We are excited to have someone with her deep knowledge and decades of experience leading investor relations, which is a critical function here. Heather, welcome. Now on to our Q3 performance. Despite industry volatility caused by macroeconomic headwinds, our resilient third quarter results reflect the strength of our value-added portfolio, broad footprint, and operational initiatives we have put in place over the past several years. While challenges remain due to inflation and increasing mortgage rates, we continue to generate healthy margins. This is proof of our attractive product mix and the benefits of our investments in multifamily. We remain confident in our 2023 outlook as we focus on being the best partner for our customers and executing our strategy to drive long-term growth. We continue to create robust free cash flow and invest in the business to operate more efficiently, increase customer loyalty, and expand our footprint. We are committed to operational excellence, including capturing efficiencies in our supply chain, as well as investing in automation and process improvements. These efforts are driving productivity savings and helping address our customers' labor challenges now and into the future. We are helping our customers reduce cycle times, which is highlighted by improving our in-full deliveries from 94% last year to 96% during the third quarter. On-time and in-full deliveries ensure our customers have the right material at the right time, building their loyalty and trust in us. We are continuing our investments in value-added solutions organically and through M&A to help our customers build more efficiently. These accretive acquisitions have enhanced our value-added product coverage and helped us achieve a leading position in desirable markets. As we grow share in these higher-margin products, we are driving mix improvement across the business. Our strong free cash flow provides multiple paths for capital deployment, all towards creating shareholder value. Given the long runway of potential tuck-ins, we will remain acquisitive to bolster our growth potential while maintaining a disciplined focus on the highest return opportunities. Looking at our third quarter highlights on slide four, gross margin was approximately 35% and only down slightly on a sequential basis. Despite normalization in core margins, our overall margins have remained resilient, primarily due to stronger mix in value-added products, including our multifamily business and improved manufacturing efficiencies. Our adjusted EBITDA margin also remained strong, highlighting our ability to manage our operations effectively in a challenging and dynamic environment. This execution is a reflection of our talented and focused field leadership team. Turning to slide five, we generated strong productivity savings of $54 million during the quarter. This reflects the effectiveness of our BFS One Team Operating System, which delivers value across the business by building people, excellence, and growth. Our recent acquisitions in multifamily contributed an increase of 2% in sales and 4% in EBITDA compared to the prior year quarter. Multifamily remained a tailwind this quarter, and we expect this strength to continue for the remainder of 2023, before declining around the second quarter of next year. Disciplined SG&A expense management remains a key focus area. This includes the ongoing optimization of our footprint and balancing the need for cost reductions against future capacity needs. We are focused on our discretionary spending, and our team has responsibly managed costs in the short term while executing our strategy for the long term. Regarding our industry, the national builders have reported resilient results by providing incentives, such as interest rate buydowns, to ease affordability challenges and attract prospective buyers. The limited inventory of existing homes for sale is also steering traffic to new construction. As we look forward to 2024, we will maintain our best-in-class customer service, continue our emphasis, emphasis on expanding our value-added product mix, and launch our BFS digital tools to make building process faster, more efficient, and more affordable. Turning to M&A on slide six, we continue to target attractive opportunities while remaining financially disciplined. Through the third quarter, we have completed 5 deals with aggregate prior year sales of roughly $350 million. In September, we acquired Frank's Cash & Carry, a leading building material distributor with truss manufacturing in the Florida Panhandle. We are pleased that this acquisition will help us grow with builders in the area. Earlier in the third quarter, we acquired Church's Lumber, which expanded our presence in the Detroit market. We're excited to welcome these talented new team members to the BFS family. As shown on slide six, our M&A and organic investments have substantially increased our value-added product mix and diversified our end markets. We have seen the fruit of this growth in recent quarters through higher gross margins, even in a down housing market. Moving to slide seven, I would like to provide an update on capital allocation. During the third quarter, we prudently deployed capital in line with our stated priorities. We made two tuck-in acquisitions and repurchased over $200 million of shares while maintaining a strong balance sheet. We have cumulatively deployed approximately $5.7 billion since the end of 2021 and remain on track to achieve our 2025 goal of deploying $7 billion-$10 billion of capital, as communicated at our Investor Day in December 2021. Now let's turn to slides eight and nine for an update on our digital strategy. We are steadfast in our commitment to leading the digital evolution in our industry and generating new innovations to drive greater efficiency across home building and enhance our product and service offerings. As we look forward to our full product launch in Q1, we have made it a priority to drive digital adoption across our operations. myBLDR.com is designed to create efficiencies for both our team members and customers by offering improved transparency and engagement in the home building process. Taken with our proprietary estimating and configuration tools, this gives our customers more control over the entire building process, saving both time and money for our customers and their clients, while making the home building process more personalized. In the third quarter, we continued our product development and adoption efforts as we prepare for the upcoming full product launch. These are important milestones in our journey to reshape the industry and extend our lead as the partner of choice in the market and attain our goal of $1 billion in incremental sales by 2026. We look forward to sharing more information with you at our Investor Day next month. At BFS, we pride ourselves on helping our people achieve their career goals. A team member who has taken full advantage of every growth opportunity presented to her is Sue Dean, the General Manager of our Florence, South Carolina, location. Through her, the various roles she's held over her more than 40 years with BFS, she's earned the nickname Sue Deany for her ability to solve problems and make magic happen. Since being promoted to general manager, Sue has led her location to achieve exceptional results by recognizing her team members' potential and empowering them. It's stories like Sue's that make me excited to see all the different ways our team members can grow here at BFS. I'll now turn the call over to Peter to discuss our third quarter financial results in greater detail. Thank you, Dave, and good morning, everyone. Our third quarter results demonstrate the effectiveness of our operating model in the face of macro volatility. We are maintaining a healthy balance sheet and prudently deploying capital to the highest return opportunities, which included share repurchases during the quarter. We are leveraging our sustainable competitive advantages and strong financial position to drive future growth and value creation for our shareholders. I will cover three topics with you this morning. First, I'll recap our third quarter results. Second, I'll provide an update on capital deployment. And finally, I'll discuss our full year 2023 guidance and 2024 scenarios. Let's begin by reviewing our third quarter performance on slides 10 and 11.... We delivered $4.5 billion in net sales. Core organic sales decreased by 14%, driven by a 19% decline in single- family due to slower demand over the prior year, supply chain normalization, and commodity deflation of approximately 9%. Multifamily grew by over 6%, driven by our recent acquisitions, as well as favorable margins, largely attributable to the longer lead time for this end market. R&R and other grew by over 1% amid increased sales focus and capacity versus the prior year. The cumulative effect of our acquisitions over the past year contributed approximately 3 percentage points of growth to net sales. Importantly, value-added products represented 51% of our net sales this quarter, increasing 6 percentage points since Investor Day in Q4 2021. This reflects our position as the supplier of choice for these higher-margin products. During the third quarter, gross profit was $1.6 billion, a decrease of approximately 22% compared to the prior year period. Gross margins were 34.9%, decreasing 10 basis points due to normalization in core organic gross margins, offset by roughly 125 basis points of our previously discussed multifamily over-earning. SG&A decreased $61 million to $940 million, mainly due to lower variable compensation, partially offset by additional expenses from operations acquired in the last year and inflation. Acquisitions increased SG&A by $34 million in the quarter. As a percentage of net sales, total SG&A increased by 330 basis points to 20.7%, primarily attributable to decreased fixed cost leverage from lower sales. We remain focused on operating efficiently, containing costs, and effectively integrating acquisitions. Adjusted EBITDA was approximately $813 million, down 31%, primarily driven by lower net sales due to a weaker housing market and commodity deflation. Adjusted EBITDA margin remained a robust 17.9%, up 90 basis points sequentially as we continue to execute and drive improved productivity across the business. Adjusted net income of $534 million was down $280 million from the prior year quarter. The 34% decrease was largely due to lower net sales. Adjusted earnings per diluted share was $4.24, down 19% compared to $5.20 in the prior year period. On a year-over-year basis, share repurchases added roughly 83 cents per share. Now let's turn to our cash flow, balance sheet, and liquidity on slide 12. Our third quarter operating cash flow was approximately $665 million, down $835 million compared to the prior year period, mainly attributable to commodity deflation and a weaker housing market. Capital expenditures were $128 million. All in, we delivered healthy free cash flow of approximately $538 million. For the trailing 12 months ended September 30th, our free cash flow yield was 14.1%, while operating cash flow return on invested capital was 32%. Our net debt to adjusted EBITDA ratio was approximately 1.1x, while base business leverage was 1.5x. Excluding our ABL, we have no long-term debt maturities until 2030. At quarter end, our total liquidity was approximately $1.1 billion, consisting of $1 billion in net borrowing availability under the revolving credit facility and $100 million of cash on hand. Moving to capital deployment, during the third quarter, we repurchased approximately 1.7 million shares for $224 million at an average stock price of $136.22 per share. Year-to- date, we have repurchased nearly $1.6 billion of shares at an average price of $97.43 per share. We have approximately $400 million remaining on our most recent $1 billion share repurchase program, approved in April of 2023. We remain disciplined stewards of capital and have multiple paths for value creation through a proven ability to deploy capital and deliver high returns. Now let's turn to our outlook on slide 13. Given the affordability headwinds, our Q3 sales were a little softer than expected. However, the October sales trend was seasonally healthy, and our focus, our continued focus and execution gives us confidence that we will achieve our full-year base business and total company EBITDA guidance for 2023 that we outlined in our second quarter earnings call. For full year 2023, we expect total company net sales to be $16.8 billion-$17.1 billion. We expect adjusted EBITDA to be $2.7 billion-$2.8 billion. Adjusted EBITDA margin is forecasted to be 15.8%-16.7%. We are guiding gross margins to a range of 34%-35%. Our recent above normal margins reflect a greater mix of value-added products, along with disciplined pricing required to offset increased operating costs. As we move through the end of the year, we expect both our gross margins and the multifamily business to continue to normalize. We expect full year 2023 free cash flow of $1.8 billion-$2 billion. The free cash flow forecast assumes average commodity prices in the range of $400-$425. Our 2023 outlook is based on several assumptions. Please refer to our earnings release and slide 14 of the investor presentation for a full list of these assumptions. Turning to slides 15 and 16, as a reminder, our base business approach showcases the underlying strength and profitability of our company by normalizing sales and margins for commodity volatility. This helps to clearly assess the core aspects of the business, where we have focused our attention to drive sustainable outperformance. Our base business guide on net sales is $1.6 billion. Our base business EBITDA guide is $2.2 billion at a margin of 13.5%. Moving to slide 17, we recognize that 2024 is coming into focus as we approach year-end. Like we did earlier this year, we have laid out a scenario analysis to demonstrate how we are positioned to generate resilient financial performance across a range of potential housing market and commodity conditions. I want to emphasize that this is not full year guidance for 2024, but these scenarios should help clarify our range of performance expectations for 2024 and demonstrate the strength of our best-in-class operating platform. As I wrap up, I want to reiterate that we are confident in the near-term outlook, our exceptional positioning to execute our strategic goals, and our ability to create value in any environment to support profitable growth. With that, let me turn the call back over to Dave for some final thoughts. Thanks, Peter. Let me close by saying that we're executing on our strategic pillars to deliver long-term value creation. Our tireless team effort has resulted in a differentiated platform, setting us up for above-market growth and exceptional profitability for years to come. I continue to be proud of our operational excellence, which is driving increased safety, productivity, and profitability despite market headwinds. We are in a great position today, and as end markets further stabilize, we are positioned for an even stronger future. We'll remain at the forefront of technology with our BFS digital tools, which I'm confident will be a game changer for the industry. We are exceptionally well positioned in the marketplace to navigate complex operating environments due to our value-added solutions, fortress balance sheet, and strong free cash flow generation. We're excited to share more details about our longer-term vision at our upcoming Investor Day on December fifth in Atlanta, and look forward to seeing you there. Thank you again for joining us today. Operator, let's please open the call now for questions. Thank you. At this time, if you would like to ask a question, please press star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one if you would like to ask a question. We'll pause for just a moment to allow questions to queue. Our first question comes from Matthew Bouley with Barclays. Everyone, thank you for taking the questions. I think it's very helpful that you outlined those 2024 framework assumptions here, especially as you look ahead to the Investor Day, perhaps, you know, precluding some of that line of questioning, so you can focus a bit more on the longer term. So my questions will focus on that. I think I see in the footnote that you are making assumptions about multifamily and R&R into 2024. I think, Dave, earlier, you made a very specific comment that multifamily could turn in the second quarter of next year. So my question is: how is multifamily contemplated from both a growth and margin perspective in that 2024 framework? Thanks, guys. Yeah, thanks, Matt. Appreciate the question. As you know, the multifamily projects have a longer life cycle, tend to be 19-18 months. So what we're seeing in the backlog right now is healthy and will carry us through the first quarter of next year. What's changing, the dynamic that's changing a bit is the projects, the new projects are slower to come to market. We believe there's gonna be a pause in some of the multifamily as the market digests what's coming, you know, what's completing throughout this year. And as they figure out the right balance between cost of capital and rents and what return they can get on the rents, we just think there's gonna be a temporary pause, and then things will start up again at the tail end of 2024. But again, because there's such a long cycle for those projects to get into the ground, we won't necessarily see that effect in 2024. So we're forecasting for multifamily to be off in 2024 as a result. Yeah, just to add to it, I think it's the theme of normalization. We've seen such displacement in the industry over the last couple of years, multifamily included. You're gonna see that theme, I think, in a lot of what we're talking about. Things are going well, but certainly normalizing back from some of that displacement. . Got it. Oh, okay, thanks for that, guys. Very helpful. And then, second one, the, I'm sticking on, on the framework here. You know, on the single-family side, I guess it's a two-parter. Number one, you know, the low end of a down 4%, you know, just given where interest rates are and, and a lot of the questions out there, my question is effectively, you know, why not outline a lower end? And in that scenario of a lower end, you know, would you be able to kind of push any harder on cost out? So that's kind of part one of the question. And then part two is just, you know, given the sort of mid-teen EBITDA margin you're guiding to, I guess, what is the sort of implied gross margin in that? I know there's a lot in there, but thanks, guys. Yeah. So, you know, I think there are a couple of factors. The first is that you've harvested the feedback from the economists. That's generally what we lean on, just like everybody else when it comes to the expectations for next year. We certainly try and temper it a little bit by, let's say, eliminating, as statisticians do, the high and the low end, or the ones that look ridiculous, and sort of in terms of trying to come up with a real number. You know, up until very recently, I would tell you that the, the sense was that we would see some nice growth next year. Admittedly, some of the more recent revisions from the economists have pulled it back, but I still think it's, it's fairly favorable. So, you know, what will play out? Sure. You know, that's a fair comment. Really, the reason why we gave the range that we did is we think there are a number of scenarios that could play out. If you want to go below the low end of this, you know, I love the question because I think what you didn't ask is as informative as anything, and that's, you know, nobody's challenging our double-digit margins even when the market's down anymore. And that's because we've demonstrated an ability to maintain those margins, to see healthy profitability, to benefit from the mix of our business, and we expect to continue to be able to do that. Now, we'll certainly retain our discipline around costs. We'll continue to resize facilities and markets, depending on what, you know, what the starts number is and what the business looks like. But I think our theme around here is really about consistent performance and operational excellence, and not really seeing a huge need to do something unwise for the business, but just keep doing what we're doing because we're seeing great results. And just to add, Matt, it's continued to drive costs out of the business that don't add value. The benefit of our platform and the fact that we've done the hard work in the last two years to integrate these companies, we have a 30-year average experience with our field leadership group. They know what to do, when to do it, and how to manage those costs effectively to maximize whatever whatever is presented to us. And we've identified a lot of opportunities to continue to focus on productivity. Where we are now is we don't have to keep reinventing those opportunities because our scale allows us to push that across the platform, and we have plenty of runway to take existing ideas in the markets that we haven't been able to push those ideas yet, just because of our scale, and find, keep finding dollars to save. Got it. That's super helpful. And on my question, did you have anything around the, you know, the gross margin expectation within that mid-teen EBITDA guide? We won't give anything specific, but I think it's fair to say we do expect to see normalization into 2024. That, you know, pullback, the reversal of the multifamily in particular, but overall, that normalization theme, I think, applies to margins as well. Got it. Appreciate the very comprehensive answers, guys. See you in Atlanta in a month. Thank you. Thanks, Matt. Thanks. We have our next question from Trey Grooms with Stephens. Hey, good morning, everyone. So first question, Peter, you, you mentioned that October trends were, I think you used the word healthy. Can you go through maybe some more detail on 4Q, kind of what you're seeing thus far and, and maybe what, you know, kind of looking into your single-family assumption, that you're baking in here for the 4Q guide? Sure, I can get started. I'm sure Dave will have a commentary as well. But you know, the year has been a good year, right? We had that big reset at the beginning when the builders decided where their new rates would be, and it's been very stable. I think we did expect there to be a little bit more volume in the third quarter. We thought there'd be a little bit of a push. Certainly, the commentary from the large nationals was very strong, and for a variety of reasons, whether it be tone or weather or whatever the factors were, it just wasn't as good as we expected. Our performance was still quite good. We're certainly pleased with our profitability. But as we look at the way the year has played out into the fourth quarter, it's still healthy. You know, the strength of the business continues, and we're pleased with that ability to, you know, continue to see good flow-through on the sales side, despite some of the headlines that sort of have gotten everybody so concerned. Yeah, the only thing I'd add is the national builders continue to be stable, right? I'm not saying that they're expecting substantial, robust growth, but they're definitely still going forward with the plans that they've communicated to us. Their ability to use interest rate buydowns and get a prospective buyer into a monthly payment they can afford is working. They're basically using that methodology to get a payment and then go from the payment to a selection of house based on that payment, and that's working. So you know, that's encouraging for the fourth quarter at least to stay at a stable rate and really only be affected by seasonality. Yep. Okay. Got it. Thanks for that. And then, you know, the full digital rollout coming up soon, any color on how that plays into your scenario analysis for next year that you rolled out? It's pretty modest in the first year. You know, it's in the hundreds of millions in sales, but we've certainly got a lot of focus in the organization on the initial adoption, the communication and, you know, getting it into the hands of both our side of our, you know, salespeople and leadership, as well as our customers. But so far, you know, the feedback's been great. We're really pleased with the tools and the development successes. We're meeting milestones and feeling really good about the product that we're going to have to show the market, and we're excited that the market's going to be able to benefit from the tools to improve efficiency and take costs out. The, the development is right on track. We, we had a preview this week, in fact, of some of the features, and I continue to be wowed by our development team. You know, but it's change. It's not only change for the customers we're going to introduce it to, but it's change for our people, and we, we want to make sure we do this the right way, the prudent way, methodically, making sure the adoption goes the way we want, because we really only get one, one bite at this apple, and we want to make sure that what we do is the best way for us to ensure success. But what we're showing people, you're going to be impressed by. I can't wait for you guys to see it when you, when we get to allow it. Great. Looking forward to it. Thanks for taking my questions, and keep up the good work. Thank you. Thanks, Trey. We have our next question from Joe Ahlersmeyer with Deutsche Bank. Thanks, everybody. Quickly on the 2024 scenarios, just wondering if you could add some context on the revenue assumptions here. Because if you take the single-family starts numbers, and kind of take that on your base business revenue, your output on sales would be much higher than that. I get there's other things in there. You're giving the commodity assumptions, though, and I don't think M&A is that significant carryover into next year, and you're talking about multifamily down. So what I guess I'm getting to is there seems to be sort of like a mid-single-digit type outperformance to the starts volume. Wondering if you could just touch on whether you think that's actual price or if you're baking in some outperformance versus that volume. Yeah. Yeah. I guess the short answer is we are expecting some outperformance. But if I just go re-baseline on the key components, single-family up, multifamily down on the normalization. The two big drivers there, obviously. Continued normalization in the, you know, in both the sales and the margins in those displaced areas. Multifamily, those categories where we saw some out-earning, that's certainly happening. But we are confident in our ability to take share and see growth based on what we've been able to deliver and the investments we've made. That's great. Very encouraging. And then you mentioned sort of getting these ranges from economist discussions. What about your discussions for 2024 with the large builders and even small and regional builders? And then just wondering if you could touch on any differences in outlook between those two groups into next year. Well, the smaller builders don't have the access to rate buydowns that the larger builders have had, and that's really the main differentiating factor. Interestingly enough, it's a small percentage of the total market, but there's a market increase in cash buyers, which is a big part of what's going to keep the smaller guys going as well. I think it's still, the word is... I would use is stable. Again, I don't think it'll be robust, from a standpoint of, all the macroeconomic uncertainty getting resolved. But, the demand is clearly there. I mean, I think that's what's carried us through with all the headwinds that we've faced as an industry in the last six months. I think it's been a ultimate proof point that the long-term demand is there. So as far as long as we can keep that affordability equation in check, I think that, you know, it'll be a stable environment, and that's what we're hearing from our larger customers. Very good. Thanks a lot, everyone. Thanks, Joe. We have our next question from Keith Hughes with Truist. Thank you. Good question on the actual quarter. The value-add products you saw pressure with the rest of the market. Didn't really outperform the company average as much as normal. I just... Could you talk about specifically in the quarter, what was going on there, and what the next couple quarters you think looks like in those products? Yeah. No, that's a good question, Keith. One of the things that obviously drew my attention was that number this quarter and making sure that we understood exactly what was going on in the business. I'll start by saying we feel very good about the number. It has performed better than expected versus the starts over the last year, and it's given us confidence that both the volume and the margins are real and sustainable. What you're seeing in the comps, though, is that last year, when the market, when single-family starts really started to turn down, we saw a massive and meaningful impact on the lumber and lumber sheet goods, right? The core commodity component of our business. That turned down quick, but at the same time, we were still seeing growth in our value-added categories. You know, the manufactured product, windows, doors, and millwork, all still growing, as we were working through all of that backlog, right? The extended cycle times by the builders, the lack of product by the vendors, that was clearing. So that was a dynamic last year. This year, we're lapping that, and so what we've seen is that while, you know, statistically or on a percentage basis, a bit weaker than some of the other categories and looking worse on average, it's actually in line. It's just a little bit of timing in terms of the year-over-year. So still feel good about it, still investing, still seeing the benefits, both on the profitability and the revenue line, but a little bit of comp issue. I would just add that, you know, the thing I pay attention to is what's the average backlog in our plants today? Very healthy, 3-4-week backlog. That's kind of where we want to be because we want to be at that level of customer service as well. And we're seeing that still stay steady and healthy. Okay, thank you. One other question on the price deflation in the quarter. Is that all lumber, or are there any other products where you're seeing prices deflating year-over-year? I'd say in general, it's across the board. You know, we've talked a lot about inflation and some of the impacts there. Some of that has pulled back. We've seen certain categories pull back. We've seen the competition increase, and some of those margins erode. Clearly, the bulk of it, you know, the vast majority of it is on the commodity components, but we've seen a little bit elsewhere. Probably value add - no, not probably. Value add is the least in terms of margin normalization, but across the board, I think is fair to say. Yeah. Were you asking- Any specific- Sam, were you asking about price or our costs from vendors? Well, really both. I mean, just in general between, you know, both coming in and out of the warehouse. Besides lumber, are there any specific products that you would call out that's seeing, you know, more deflation than others? Well, I think we've talked about it in prior quarters. There are, you know, a couple of categories that we've seen make some moves. Probably the most obvious example, after commodities, is engineered lumber. They had some pretty substantial price increases and have given a portion of that back. I would say in general, though, it's been fairly modest. The good news is that- Okay, thank you. ... then cost increases, for the most part, that's leveled out. You know, more back to a regular, normal increase for cost of inflation, and that's it. Okay, great. Thank you. Thank you. We have our next question from Collin Verron with Jefferies. Hey, good morning, guys. Thank you for taking my question. I appreciate the color on single-family, multifamily. I was just hoping you can walk us through how you're thinking about the R&R end market in the potential 2024 scenarios, kind of what informs your assumptions around those markets, and maybe how the R&R business stacks up from a margin or product mix perspective. Yeah, I mean, R&R is fairly small for us, as you know. You know, in that 20% of the business range, it's inclusive of our retail and commercial categories, so that's. There's a lot in there. In general, what we've seen is that we've had a bit more capacity available as the overall market has slowed, and that's allowed us to focus in, and we've had some success. So while there have been, we see it as well, some headlines out of the economists, that the kind of investment side on the R&R might be pressured. We're feeling pretty good about what we've seen so far and our ability to fill available capacity by just offering our better services and product portfolio and expertise to categories of customers who want it but haven't been able to get access to it. Great, that's helpful color. And then on the gross margin side, I think in the quarter it held up better than I think your previous guide would have implied. Can you just walk us through why margins were more resilient this quarter than you had anticipated, and then maybe help us think about the step down in margins and how quickly you think that could happen to get to that longer-term guide that you've put out there? Yeah. No, that, that's the million-dollar question, Collin. You're absolutely right. We continue to wrestle with this. We continue to see the trends of that normalization, right? The share that we took, that we took a lot of and given back a little bit of it, the price that we took, and we took a lot of, and given back a little bit of it. It has played out, but I think it's fair to say it's been slower than we've anticipated. This quarter, we did see a fair amount of what we expected. I think where the beat came, at least in my mind, was some of the timing around some of the rebates, some of the productivity, some of the favorable tailwinds, and some of the product mix, which is a little better than expected. Not massive. But it accumulated into a number that was, you know, a healthy beat on the margin line than what we would have originally, to your point, expected. The only thing I'd add is we have a focus on using our scale to leverage our supply chain opportunities better, get a lower landing cost, more direct sourcing. Those come in little bits. You know, we get a bite here on a product, a bite there on a product, but over time, they start adding up. That along with the investments we've made in the manufacturing, automation, and the efficiencies gained there, again, a little bit at a time, but when you look back at six months of doing it, and it's actually a meaningful number. Those things we're starting to be able to track and see actually help. Great. I appreciate the color, and good luck going forward. Thank you. We have our next question from Adam Baumgarten with Zelman. Hey, guys. You mentioned the multifamily declines that you're expecting in the second quarter of next year. Do you expect that business to normalize from a margin perspective in 2024 at this point? I know it's been a bit of a tailwind. We do. Yeah, we think those things are kind of hand in glove, both the volumes and then the resulting margins as competition levels a little bit. Okay. Thank you. Thank you. Our next question comes from Kurt Yinger with D.A. Davidson. Great, thanks- Morning, Kurt. Good morning, everyone. Yeah, I, I just wanted to stick on the gross margin line, and, and I guess if, if you were to kind of peel back some of the multi-family benefits, I mean, how would you kinda characterize where that core gross margin stands versus, you know, where you would expect normalized to be? And, and, you know, what stage of that normalization process are, are we in? Because we've talked about it in a long time. It seems like over the last several quarters, you know, it's started to materialize, but, you know, the tail of how that stretches into next year also seems pretty long. So just love to hear your thoughts there. Yeah. So there's a couple of different pieces, right? If you stipulate, which I think you have, that we've set multifamily aside for all the reasons we've already talked about, I think the storyline on single-family is that we've seen the bulk of the margin normalization in the core products. There's more to go, but I think we've seen the bulk of it. If you look at, you know, subcategories, quarter-over-quarter, so Q3 2023 to Q3 2022, you're talking, you know, mid-single digits percentages of margin that we've given back in the commodity space. We've given back price and margin in every one of the categories. So that normalization that we've been talking about, we've been digesting it, and we've been processing it. I don't think we're done. I think when we look at the numbers, we see the trends in certain categories and markets, there's probably another leg there, but it's far smaller than the first leg. So we're, you know, we're in the sixth, seventh inning here. We're not in the second inning. You know, that said, there's certainly every quarter, timing and, you know, things that come through in terms of, like Dave said, when we see benefits, when we see the timing on certain rebates, that sort of thing. And multifamily, it is not to be minimized, right? It's been a big deal for us this year, and we do think it will normalize into next year. Okay, that's super helpful. And then just on the technology front, I'm curious with some of the pilots that you've had, you know, what, what are kinda some of the most promising offerings within that, where you've seen particular traction and, and maybe some of the big learnings that you've taken away from these programs that you'll look to implement or, or change kind of on the full-scale launch early next year? Yeah, that's a great question. I would tell you. Understand the pilots are not for learning how to implement it, but learning how to develop. So what we've used the pilots for is get the product where we want it to get. Having said that, one of the favorite modules of the folks that are engaged is the one that you can take and put all the plans for HVAC, framing, plumbing, all into a module, and it shows where those trades potentially would collide with each other and resolve that collision, you know, before it goes live into the field, and that is the one that particularly builders think gives them the biggest and quickest return from savings because it minimizes the mistakes that you would have to learn on the fly in the field, and you get ahead of them. So that, that's probably the one that we get the most positive feedback on, but, you know, what we're really trying to do is get everything resolved from a customer perspective on the front end. So when we go to a full product launch, that we'll already have solved the problems that they're counting on us solving. Maybe the best example of that Dave was just referring to is the shoppable digital twin. So that has been a core aspect of this, right? You're taking the plan, you're putting it into that three-dimensional environment, and the real bang for the buck is the shoppability. They want to be able to pick up a siding or a roofing or whatever and see it on the rendering, have it be impacted with the real design, be able to quote it and shop it and buy it. And that entire experience, as you might imagine, is quite complex, right? It's challenging, both technically and from a UI/ UX, user interface, user experience type of dynamic. So what we've been really focused on this summer is putting our product in front of them, right, as it stands, getting the feedback of how it works, how they're actually going to transact and interact with that tool, and making the tweaks behind the scenes to really drive the technology and the functionality to meet that need state head-on. And so when Dave talks about development and using the feedback from customers on development, that's a really big one for us, and super excited about what the teams are coming up with. We got to see some pilot stuff recently or some demo stuff recently. It's, I agree with Dave. Y'all are going to like it. All right. Good to hear. Well, appreciate the color, and good luck here in Q4, guys. Thanks, Kurt. Our next question comes from Quinn Fredrickson with Baird. Hey, good morning. Just curious on the fiscal 2024 scenarios, in terms of the high end versus the low end. Is the swing factor there just really rates or anything else we should be thinking about there? Well, no question, affordability rates in particular are in focus for us in terms of trying to predict that starts number. You know, it, it's an interesting balance, though. You know, we've continued to see very healthy, very stable, as Dave referred to, pro sales and production through the industry. But that question of, is there a magic number of mortgage rates that really puts, you know, a step-down type of impact on this industry is in everybody's minds. So far, no, but, you know, we're certainly keeping a close eye on it. And really what you're seeing here, and I was, you know, trying to highlight it a little bit before, these are different ranges that we've seen from economists. We think this encompasses what we saw from all the economists that we were gathering in the last month or two. So, you know, certainly, we'll continue to dial this in. We'll continue to update it based on what we're seeing, but that's kind of the context in which we came up with it. Yeah, the only thing I'd add is keep in mind we're talking the full year, right? We're not sure if we might have some more macro headwinds in the beginning of the year and it ease as the year goes on. But who knows? You know, what we hear more often than not, though, is the back half would probably be slightly better than the front half in that scenario. Well, we're ready regardless, and I think that is kind of our outline here with the scenarios is we've got a high-performing business. We're going to deliver really favorable, positive numbers, regardless of which way this goes. So, we didn't want to hesitate to put this out there for people to contemplate because sometimes the skepticism or the fear in the marketplace can become a little more than what's appropriate. Okay. Thank you. And then on the productivity side, is there a certain target base baked into these scenarios? Or, you know, is it kind of the typical 3%-5% kind of productivity savings that you talked about at the Investor Day? Thanks. Yeah. So I'm glad you asked that question because I do want to differentiate between a couple of things. First of all, the 3%-5% is our goal internally, so please do not ever load that into your numbers because I don't want to steer you the wrong direction. You know, in terms of what we've been able to do, it certainly gets harder, right? I mean, you talk about it being the first couple of years of being harvesting the low-hanging fruit. We have a tremendous opportunity to continue to deliver productivity savings, but I think those savings become a bit more challenging, a bit more programmatic over time. So I think a moderating of the annual number is appropriate, but we intend to continue to deliver on that over time, and that'll be an important part of our discussion in December as well. Well, what I can say definitively, it's embedded in our culture now. I mean, we have everybody in the field at all points. We offer incentives for any employee to come up with an idea and submit it, and if it's an idea that, you know, we can use to cultivate savings from, we reward that employee for that idea. So it is embedded in our culture. We have leaders from the field come together every year to set targets, set goals, and try to identify initiatives that will be the primary focus. And, you know, what I'm proud about is our ability to consistently deliver savings each year. That's helpful. Thank you. Thank you. We have our next question from Mike Dahl with RBC Capital Markets. Morning. Thanks for taking my questions. Dave, Peter, I want to stick with multifamily and I guess kind of challenge the phrasing and framing of a pause that then is resolved by the end of next year. I think the industry participants we talk to are starting to talk about numbers that are significantly greater, you know, declines of 30%-40% and starts next year and no rebound and potentially even further declines in 2025. So what specifically are you embedding for multifamily, and who are you talking to? Is this kind of high-level economists like you've alluded to, or are industry participants in multifamily informing that view? That's kind of part one, and part two is then maybe as, as a follow-up, just remind us how much of your business in multifamily is more tied to starts versus, maybe mid to later in, the construction cycle there? Well, the only thing I guess I want to clarify. Pause means from a standpoint of even planning for and bidding out and trying to get a project underway, it doesn't necessarily translate to when we would see sales from a new project because of the 19 to 18-month duration. But you know, so we're definitely anticipating a slowdown in multifamily, Peter. Yeah. Yeah. So the, I guess, the comments I'd make when we, when we talked about a, you know, a bounce back in a couple of different scenarios, Dave did refer to it, a multifamily. We talked a little bit about on single-family, so I want to make sure we separate those two for starters. Multifamily, we don't know when the pause is. There's no question in our minds the downside's coming, right? We can see that because we're selling into the middle of next year already, and we're seeing the declines in, in quotes and bids, and so on. Now, the one thing I also want to be real careful of is we don't sell into high-rises or, you know, some of the other urban environment. That's not really our play for the most part, right? We're five story and below, wood frame, multifamily structures, which we do think is going to be a bit more responsive to the housing needs that we see in the U.S. market in this day and age, and some of the other dynamics that we think are favorable to that. But your comments are accurate in terms of what we're seeing. There is certainly pessimism. The higher rates have made, you know, deals and projects more difficult to pencil out, and we have seen a downturn. I would say at this stage, we're not seeing the numbers you've been teeing up there. Is it possible? Sure. You know, wouldn't rule out it going anywhere. For us, though, I think our ability to do a couple of things. One is to, you know, to scale our facilities, to change shifts, but also the second thing is to rebalance where we put our load from a value-added products perspective. We can certainly move single-family to multifamily and vice versa, which we've been doing recently. So we'll continue to do that and ensure that we're protecting this franchise, because we absolutely believe in multifamily in the long run, even if there's some cyclicality in the near-t erm. To your, to your second question, which is the, the ratio of that multifamily business and what it, what is weighted towards, I would say that it's probably kind of 80% weighted towards the start and more 20% weighted towards the, the completion, just directionally. And that's because the bulk of it is, you know, truss and upfront product, with a bit of it being related to millwork, which is a little closer to the completion, not at the completion, but a bit closer w ith that. Yeah, the only thing I'd add is why I use the term pause versus halt is just the underlying housing demand need. I mean, if they can't get into single-family because affordability concerns, multifamily is the next best option, and I think it will be relatively quick for the rent factor to be figured out to where we get to a rental number that's cheaper than a mortgage, maybe more than we wanted to pay, but at the end of the day, it's the best chance I've got to get my own place. So maybe pause is too optimistic, but it's something that I hold because of the overall demand that we see out there. Okay. Yeah. I mean, no, that last point we certainly agree with. I think it's just a question of kind of the financing mechanics and other things in terms of what's going to dictate kind of depth and duration there. And then the five-story and below is probably an important distinction, too. My second question or you know follow-up, which is also related on the margin side. So setting aside the overearning that you've covered kind of ad nauseam on multifamily, and just thinking about the core multifamily margin and mix, if we were to see your multifamily business, which is currently about 13% of sales, go to, say, 8%, 9%, 10% of sales, can you help us understand or quantify the margin impact to the total company from that type of a change in mix? Again, setting aside the current overearning dynamics and just focusing on that being a better than average core margin. So, I want to be careful here. I totally understand your question. It's a good question. I don't want to start getting into guidance for 2024. So I'll comment directionally based on some of the things we've said throughout this year. I hope it's helpful to you. I think if you go through and look at the margins that we've talked about overearning, it's been different by quarter. You kind of average them together, and you're kind of in that 150-ish range-ish. So I think that's a starting point for what we described as overearning. Now, if you see some of the numbers you're describing and a big downturn, that adds another layer of challenge to the market and capacity and competition. So that kind of, I won't say all bets are off, but that's a different model than what I'm referring to. I'm talking about this year and what we think has been unusual in terms of the overearning, but both of those will play together. Got it. Okay, thank you. All right. Our next question comes from Ketan Mamtora with BMO Capital Markets. Thanks for squeezing me in. Hey, I was just curious, can you talk a little bit about how some of the regions are doing thus far in October? We talked about, you know, some of the product categories, but in terms of your key regions, are you seeing sort of any noticeable change in terms of one being either stronger or weaker versus the other? Yeah, it at beginning of the year, definitely. You know, as we came into this, we saw a lot, sort of west to east, the markets got stronger, right? West was the worst. That changed a little bit as the year progressed. I'd say West bottomed out and bounced a little bit. Central struggled a little longer. I think we've seen certain parts of the, especially the South Central, sort of drag longer than we expected. You know, again, not horrible, but if I'm comparing the year-over-year sales trends, they've probably trailed the other markets. I don't know that there's anything meaningful in terms of differences at this point. I think they're all pretty comparable. Yeah, I would say the West relatively has shown a little bit more of a bounce, that's for sure. I'd say parts of Texas, you know, have flattened for sure. I think we're seeing a nice uptick, relative uptick in the North Central, in some of those markets. But where at the beginning of the year, the discrepancy between great and not so great was wider, it's... That gap's closed. It's more stable across all markets at this point from a perspective of year-over-year comparison. Got it. That's very helpful. Good luck. Thanks, Ketan. Our final question comes from Steven Ramsey with Thompson Research Group. Morning, Steve. Hi, good morning. On the 2024 market outperformance perspective, are you thinking about how to get that outperformance, if it's new accounts or bigger penetration of existing accounts? Just any color on the outperformance. Yeah, I mean, there's a couple of key categories that we continue to run the same play. Like in football, if they can't stop the run, we're going to keep running. We're going to keep investing in and taking advantage of the need for value-added products and services in this industry. Builders continue to wrestle with the labor availability problems. They continue to wrestle with on-site, you know, efficiency and effectiveness. They continue to wrestle with the cost of capital for the cycle times of building a home. That's what we're good at, so we're going to continue to invest. We've got multiple plants coming online. We've got more capacity coming online in markets where we think it's really going to be taken up quickly, so that's an important piece. The other big important piece for us is digital. We think that we already have a lead. We think we're already the easiest to do business with. We're the, you know, we're the most efficient, we've got the best technology, and we're about to take a big leap in that space that we think is going to be both hugely beneficial to our customers, but also make us even more the supplier of choice and the partner of choice in this industry. The only thing I'd emphasize is what Peter said at the very beginning. We're looking at the industry. We're seeing where our customers' pain points are, and we identify those as opportunities for us. So we're trying, and we're focusing on how we can help solve labor challenges for our customers and create opportunity for ourselves. We've got core base operations in our major markets that do that today. We're looking to expand that into additional products. There's ways we can do what we're already good at and expand that, and that'll grow share. The other thing I would add is we have, the last couple of years, been in somewhat of a maintenance mode because we have had to. We've had sales guys that were covered up, and just handling the business they already had. We're going to also make a concerted effort to invest in the sales force to go out and be more hunters than we are, gatherers. So those two things we think are realistic initiatives that will help us grab share. Okay, helpful. And then on the 2024 scenarios, looks like the free cash flow midpoint is down about $500 million from the midpoint of the 2023 guide. What are the factors that drive the midpoint difference there between EBITDA, working capital, and CapEx? Yeah, you're right, the midpoint is down. Really straightforward answer on that, and hopefully, it's consistent with everything you guys know about us, and that's that when we shrink this business, we release a tremendous amount of working capital, and when the business is stable, it's sort of flat, and when it's growing, we're going to use some working capital. We generally use a rule of thumb of about 10% incrementals and decrementals to sales as a good proxy for what happens in our working capital. Obviously, you got some puts and takes there. We've done some good work on managing through some issues that we've been talking about over the past couple of years, but the primary answer is just the working capital flex with the size of the top line. All righty, thank you. All right. Appreciate it. It looks like we have reached our allotted time for our Q&A session. This does conclude today's program. Thank you for your participation. You may now disconnect.