- Season: 5
- Episode: 8
In the latest MDM Podcast, Dave Flitman, president and CEO of Builders FirstSource, discusses on a wide range of topics, including where the company sees organic growth white space, how M&A — most notably the 2020 merger with BMC Stock Holdings but other smaller deals, too — is reshaping the company and how it views technology as a differentiator.
MDM: Well hey, welcome Dave, to the MDM podcast. Really glad to be able to speak with you today.
Flitman: Thanks, Eric. It’s great to be with you.
MDM: All right, well, let’s get right into the financial performance of Builders FirstSource. And I wanted to start, Dave, with the general business climate. What’s driving organic growth for the company? And where does Builders FirstSource see opportunities to take share with your existing footprint?
Flitman: Great question. And, we’ve been operating in a very robust business environment, actually, since pre-COVID times, so this isn’t something that just started recently. But if I could, let me just take a minute and describe to you the company, because it’s been recently reconstituted.
Builders FirstSource acquired my old company, BMC, at the end of last year. We actually closed the deal on January 1. And that’s enabled us to become the largest building materials distributor in the United States. We’ve got a footprint in 39 states, operate 550 facilities. And, importantly, we’ve got 27,000 team members that come to work every day working hard to satisfy our customers in this crazy market environment we’ve been operating in.
And so, we’ve got a really good handle on the market, I think, both in terms of new home construction, which represents about three-quarters of our business. It’s directly linked to single-family housing starts. But importantly, also, we also have about 12% of our business linked to repair and remodel. And an important 12% also linked to multifamily. So, we got a pretty good handle on the entire market.
But back to your question, you know, this has been a very strong market environment. And I think what, what gets lost on people is that even prior to COVID, you know, the strength was, was very robust in our industry. In fact, in the first quarter of 2020, it was actually the first time the industry had hit an annualized million single-family housing starts in a quarter since 2007.
So this started, then COVID hit. And, and things just came back roaring strong, you know, through the summer, last year. Really driven by two things, I think one was, you know, all driven by the work-from-home environment, and it had really two effects. First was, people decided they could live anywhere, and perhaps maybe they weren’t living in the ideal location. So, if they were going to work from home, maybe they would move, and that might require a new home to be constructed.
But importantly, also, at that time, those who decided they weren’t going to move, but were going to work from home, maybe they needed to remodel a little bit, maybe they needed an in-home office that they didn’t have. And so, really, both effects really put a significant strain on the supply chain across the industry. And things have been cranking ever since.
MDM: Yeah, excellent. In fact, I’m glad you brought up, you know, some of those end markets. You know, we just had a pretty upbeat construction report today that was released. And I don’t know if you could talk, Dave, a little bit more about, you know, what end markets are performing well for the company, and really how the company sees the rest of 2021 playing out.
Flitman: Yeah, I mean, things continue to be very strong, Eric. In fact, you know, if you point back to our second quarter results, our sales were up 91% year over year. Importantly, our core organic growth — so that we strip out any effects from inflation as well as acquisitions — our core organic growth was up 35% in the second quarter, so very strong numbers.
And an important part of what we do in our company to help our customers is, is drive what we call manufactured products, really value-added components and millwork. But the manufactured product organic growth was 58%. And when I, when I talk about manufactured products, this is primarily offsite manufacturing, where we produce and assemble and then deliver to the job sites, fully constructed roof trusses, wall systems and floor systems.
And with all that’s going on, the difficulty to get labor, and the builders’ need to drive productivity and efficiency at the job sites, those components that we deliver really help them get more efficient and deal with some of those challenges.
So, we’ve seen over the past several years just an increase in our manufacturing components business, and now we’re growing much faster than the market in that area as adoption continues, continues to accelerate.
But single-family construction is about three-quarters of what we do, so that’s been a very strong tailwind for the company from the market standpoint and in the great products that we have on the manufactured side, as well as what we do in millwork — and people don’t really understand and appreciate what we do but, but we also, you know, pre-hang doors and windows and deliver those to the job site. So again, in effect, we’re helping those, those customers of ours get more productive at the job site. Doing as much of that work off of the job site as we possibly can and delivering in a very efficient manner.
MDM: Yeah. Excellent. And Dave, you had mentioned tailwinds. I wanted to kind of shift directions here a little bit and talk about some of the headwinds that the company is up against. Earlier in the conversation, you did bring up some of the supply chain congestion and material shortage. How do those look right now for the company? How is Builders FirstSource navigating around some of those, those headwinds that are, that are facing probably not just you, but really the entire industry?
Flitman: Yeah, it really is a challenge and has been for the last 18 months for the entire industry. And as I described earlier, you know, the strength of both new home construction as well as the DIY work that started last summer, just put a tremendous constraint on the entire supply chain from a volume standpoint.
And at the same time, you know, the suppliers to this industry are not immune to the effects of COVID. So, as they started to ramp up construction, oftentimes they were hit with COVID outbreaks and really couldn’t accelerate their production fast enough. And with the demand continuing to accelerate, that’s really what’s gotten us in the position that we have been in, you know, really, for the last 18 months.
Our team has done what I was described as just a tremendous job of being able to work with our suppliers, and, for the most part, get our customers what they need when they need it, which is what we work hard to do. We’ve got great suppliers across our product portfolio, and they’ve worked really, really hard.
Obviously, the volume of products that we put through our company, and the relationships we have with our customers enable us to get a very strong position in the supply chain. We certainly needed all that that we could.
I would say, incrementally, Eric, it’s somewhat better than it was at this time last year, particularly on the lumber front, as some of the DIY uptick that we saw a year ago has subsided a bit. But by and large, the supply chain remains highly constrained. And recently, we’ve seen several of our customers kind of lower their projections for the end of the year. Not in any way demand-driven, but completely and solely driven on the supply chain challenges.
So, the big message is that continues to persist. I expect, as long as demand holds up — which I expect will continue for some time — that we’ll continue to struggle with some of the supply chain challenges throughout the remainder of this year. And really into 2022.
MDM: Yeah, you know, Dave, the other the other headwind that we’re hearing a lot about, and we’ve been writing about quite a bit is, is the labor shortage. And you know, whether that’s, you know, employees within the company, whether that’s, you know, truck driver shortage, you know, really, you know, labor shortages across the supply chain. What is Builders FirstSource doing to enhance talent acquisition and make sure that you’re, you’re keeping the best and brightest coming into the company, and that you’re keeping those open positions filled?
Flitman: Yeah, great question. And it really is a challenge. And you’ve described a few of those roles. I mean, we have struggled, like others have to get the right level of talent in here and keep it. There’s just more opportunity than there are people at the moment.
Specific to our industry, let me start at the highest level. Back in the Great Recession there when it happened, a lot of skilled labor left this industry for other spots and just hasn’t returned. And so, over the course of the last decade that really hasn’t gotten any better. And then more recently, it’s gotten what I would describe as significantly worse.
And so, a couple things. First of all, the beauty of what we do, and some what I described to help our customers, is really helping them deal with some of that. But for, from our standpoint, you know, we’re doing a couple things. First of all, we’re working hard to attract talent into this industry. And into our company, specifically. We’ve had to get very competitive with labor to attract the right talent here.
But more importantly, we’ve done some creative things. We are recruiting heavily for those coming out of the military. We’ve had great success in doing that. We’ve had a couple thousand people that we’ve hired over the course of the last couple years into the company. And our recruiting — we have a full-time recruiter — and we’re showing up in places that the company didn’t show up.
So, we’re doing the normal things as you would expect and having to pay people, but we’re also looking for talent in different, different areas than the company has historically, to some success. And then importantly, we’re working hard once we attract talent to the company to make sure that people understand they’ve got a great career path here.
You know, you might get hired pulling lumber, but if you want to, you want to be a driver, you want to get into an administrative role, there’s ample opportunity in a company with 27,000 people that is growing as rapidly as we are. And so, we go to great lengths to make sure people understand, we’re not just hiring you for a role. We’re hiring to make sure you know you’ve got a great career at Builders FirstSource well into the future. It’s still a challenge, still a lot of work to do, but I feel good about the progress we’re making.
MDM: And it sounds to me, Dave, as a quick follow-up, that it is about more than, it’s about more than wages, it’s about more than salary. It’s about that career path that you talked about. And as well as the, you know, the additional benefits and different things about coming to work for the company.
Flitman: It is. It’s about the vision and what we’re trying to do. You know, I talk to people about our vision of making the reality of homeownership more affordable for everyone in the country, right? And that’s something people can get behind. Because this industry has been grossly under-built for the last decade or so. The demographic shifts — there are more homebuyers in the market now than ever.
In fact, you know, one out of five adults have said that they’re looking to buy a new home in the next 12 months in the country. And so, there’s a lot of pent-up demand here. And we can help that demand situation improve and get people into the homes that they need. So, it’s something that I’m passionate about, and we talk about it a lot here, culturally, and I think it resonates with people.
MDM: Excellent. Well, you know, I wanted to shift to M&A. And Dave, you began our conversation with, with just a little bit of a background, you know, with the Builders FirstSource and BMC Stock Holdings merger. It seems like it was about a year ago when that when that deal was announced, that $2.5 billion-dollar merger. Can you talk a little bit and I know you’re coming at this, you know, at the time you were with BMC. Can you talk a little bit about what drove that deal, maybe take us through the roots of the merger? How long talks were going on before, you know, it finally reached the finish line and we all got to see that these two, already big companies were about to become even bigger.
Flitman: Yeah, I mean, it was a tremendous opportunity that I think was right for both companies and right for the industry. And maybe I could tell you just a little bit of a story about my background before I get into that, and just how fragmented this industry is.
I came most recently from outside the industry in 2018. And I came from foodservice distribution where the top three largest competitors had about one-third of the market. About 35% market share. When I joined this industry back in 2018, it was pretty obvious that it was more fragmented, but I was amazed to see that the top 10 competitors at the time only had just a shade over 20% market share. So that tells you just with all the consolidation that has happened in the industry over time, it was still, and it still remains, very fragmented.
But to the logic of this deal, specifically, you know, we were, we were at BMC, No. 2 to Builders FirstSource, but we overlapped in some key markets. And I think what both of us saw the opportunity, as I got to know Chad Crow, who was the CEO at the time was, you know, we would be better together in terms of serving the large national builders and those that sat in both of our footprints.
And it was really, you know, it came together as a true merger of equals that was an all-stock deal. And the logic behind the deal was, their strengths were our weaknesses, and vice versa. And so, you know, the manufacturer components that I’m so excited about, BMC was investing heavily in that, but it wasn’t what I would call a towering strength of the company. And on the opposite side, our towering strength at BMC was millwork. And it wasn’t a very important or large portion of what Builders FirstSource did.
So even in markets where we overlapped, product portfolio, and the offerings to our customers, were not in conflict in any way. They were highly complimentary. And the opportunity, and the discussion with our customers became quite quickly, you know, as you’re growing across the country — and now we’re in 39 states together — we have a portfolio to serve your needs better than anyone else in this industry, right? And if you’re looking to have less suppliers, and a better continuity of supply, we would be the company to do that. And so, over the course of time, as we started to talk about what that value proposition looked like for our customers, it just made an increasing amount of sense.
And I think, you know, nine months post-close at this point, some of the results that I spoke about earlier I think just underscore that we were right on the mark with that. You know, we’ve had great adoption of our products. We’re growing rapidly with our customers, and they’ve embraced that value proposition.
The deal, you know, it took some time to come together, as those sorts of things do. But I think at the root of it, you have two companies who thought about customers in similar fashion, whose cultures around serving the customer first and developing their people were very well aligned. And I think that’s why this merger has gone so well.
We’re out, we’re outperforming our synergy targets. We’re ahead of target and, in fact, we said we’d overachieve our synergy targets that we announced when we announced the deal. We said we would deliver $140 million in synergies in three years. On our most recent earnings call, we said, you know, we’re doing better than that. And in fact, we’re going to overachieve and deliver $150 million in synergies in only two years. And I think some of what I just described is at the root of that. The cultures are all aligned. We’ve got experienced management teams that came together, all aimed at getting this thing done and serving our customers better.
MDM: Now, excellent. And it sounds to me, I mean, and you shared a little bit here, Dave, but that that, you know, Builders FirstSource, post-merger with BMC, is really just in a great position in the marketplace. And as you said, you both, you know, one company brought in strength where the other had weaknesses, and vice versa. And do you feel like that’s really playing out for the, for the business right now?
Flitman: There’s no question about it that we are stronger together than either of us were individually. And that’s what’s so exciting about the way this thing happened.
MDM: Yeah, fantastic. Well, look, you know, Builders FirstSource, has, has made a number of deals since then. Some smaller deals, certainly, most deals by comparison are going to be smaller than that one. And I’ve been covering them in MDM. And they always get a great response. People want to hear what you guys are up to. What is the company’s acquisition appetite right now? Can we expect more strategic moves in the coming months? And I know, you can’t speculate too much on what that looks like. But does the appetite remain strong for bringing more businesses into the Builders FirstSource world?
Flitman: It does. It’s an important pillar, you know, we’ve got four key pillars to our strategy. The fourth one is M&A. And it goes back to my earlier comments, Eric, about, you know, the fragmented nature of the industry. And, you know, even after our merger, you know, we’ve still got mid-teens kind of percentage market share in an industry that’s, you know, more than $120 billion and growing.
And so, we see ample opportunity to do a couple things. One is, you know, add to our value-added capabilities in key markets. So, we believe strongly in all the things that I’ve described to you about the strength of our footprint, our national scale, our ability to serve large and small customers alike. But we also believe in being No. 1 or No. 2 in all the local markets that we serve. Because it’s great to talk about national presence and capability, but if you can’t serve your customers locally, you’re going to lose the battle, right?
And so, we’re continuing to look at opportunities to strengthen us in particular markets, particularly on the value-added side of the business. So, I would expect, you know, our appetite will continue, we certainly have the strength in our balance sheet — being about one times leverage at the moment — to continue to invest both organically, you know, and put the capital into the business that we need to support our growth, but importantly, to continue to acquire those things that, that makes sense over time.
MDM: Yeah, great. And you know, Dave, you’ve touched on this over the last few minutes. And just thinking about consolidation throughout the buildings materials vertical, and really just how fragmented the industry is. Do you see M&A continuing to play a key role in the industry? And do you, frankly, do you expect consolidation to continue at the same pace? We’ve seen a number of deals, you know, both from you guys, as well as your competitors, some pretty big deals, whether it’s publicly traded companies, whether it’s private equity getting involved, or whether it’s its privately held businesses. Do you think consolidation will continue in ’21 and beyond?
Flitman: I do. I think the industry is ripe for continued consolidation. But importantly, I don’t think it starts with, you know, the distributors like ourselves. I think it really starts with our customers. And even in my short time in the industry, you know, I’ve seen our homebuilder customers continue to drive acquisitions and get stronger and expand their footprint. And the best way for us to continue to serve them, if that happens, is to continue to make sure we’ve got the presence and the capability in all the markets, you know, where our customers are aimed at going. And so, yes, I do think the industry will continue to consolidate over time. I think it makes a lot of sense. And we’re in a great position, should that happen.
MDM: Excellent. Yeah, thank you very much. You know, wanted to move on, shift gears a little bit here. And talk a little bit about technology and digital transformation. And I don’t know if you could just take us through, take our audience through how Builders FirstSource is really working to become a leader in digital transformation and why this is important not only for the company and, you know, as you’ve stressed throughout the conversation, what’s really important is that it’s important for your customers.
Flitman: Yeah, great question. And we’ve obviously made some recent acquisitions there that, you know, caught the industry by surprise a little bit. Certainly, it did a few of our, our investors as well as the analysts. But really, you know, we got to thinking about this back when the pandemic started, and both legacy companies had been investing in digital capability.
And I guess at the highest level, I would start by saying, I think this industry is ripe for improved efficiencies. You know, if you look at homebuilding and how it happens, there hasn’t been what I would call dramatic change in how homes are constructed in this industry, albeit for a few of kind of the efficiencies that I described earlier that we’re trying to deliver on, and some of our competitors are as well. But, but by and large, our homes are constructed in this country the same way it was 150 years ago.
I wouldn’t describe — and I mean no disparagement here — but I would not describe this industry as early adopters in terms of new technology. And if you think about all the industries that have gone digital and continue to invest in that capability, you know, there are only a couple of industries that I can point to that are less digitally enabled than ours, and, and that would be agriculture and honey.
So, that’s kind of in the pecking order where the homebuilding industry sits. We’ve seen some of our customers make investments in their capabilities over the past few years, but really from a supply standpoint, you know, we just see a lot of opportunity to drive efficiencies. Whether those are internal efficiencies, or efficiencies at the interface with our customers and our suppliers. You know, we just see the opportunity to digitally enable some of the work that we do here going forward. And that’s what got us interested in digital.
MDM: Yeah, great. And, you know, Dave, you had, you had hinted at some of the response from analysts and investors on some of the recent acquisitions, notably the acquisition of WTS Paradigm, which was thoroughly dissected by ‘the Street.’ What’s your response to analysts who question the price tag of the deal? And really what, you know, what do you see the path forward for Builders FirstSource with those capabilities now in house?
Flitman: Yeah, so let me take the second part of that question first. So, we see a huge opportunity. And the reason we acquired Paradigm was, first of all, both legacy companies had a very strong relationship with them. We knew Nate and his team for quite some time, their strength was in millwork configuration, windows and doors in particular. And we had a very strong relationship, we knew their team, we knew their technical capabilities. And we all, we saw the opportunity to bring that in as a platform play for us and expand that capability more broadly across our product portfolio. And, more importantly, across what we do.
And, as you heard me describe earlier, Eric, you know, particularly our manufactured areas, our value-added capabilities around millwork components that we do, our strength is in design. You know, we start to do a lot of our work by taking the blueprint from our customers and actually completing the structural design of that home, whether it’s the roof systems individually, the wall systems, the floor systems or ideally, doing all of that. Make sure that they’re designed efficiently and effectively as they can be and then drive, you know, the component growth from that.
But each one of those processes, you know, from designing that capability and those structures to estimating and getting the material takeoffs and actually getting the product to jobsite — all of those handoffs are very inefficient. Most of them are manual today. We may be working in a system to do a design, but when you go to the estimation of that, that’s either in another system or happens manually.
So, we saw Paradigm’s platform as a unique way to digitize a lot of that and make just our internal processes around all of what I just described much more efficient. And then, those handoffs to the customer, when you think about the configuration of that, and visualizing what that looks like in the home, whether it’s the millwork capability that Paradigm already has, or that structural capability that we produce, you know, add that interface with our customer, making that, you know, more efficient and more effective.
And then, finally, just, we see a great opportunity in supporting our customers’ growth and how they interact with their customers and making that more efficient. And so, those are kind of the three buckets of opportunity that we saw and why we thought Paradigm was a great fit for that if we were going to enter the digital space. They’ve got that capability. And we think that platform can be expanded to the things that I just described.
But to your, to your question about the analysts’ reactions. I mean, I get the surprise. We obviously couldn’t talk about it. It certainly was not an area where the company had invested heavily previously. The price tag for Paradigm was $450 million. So, it was a material acquisition that caught folks by surprise. But as we’ve talked through with them over the past couple months, logic that I just walked you through, and the opportunities and, you know, the fact that we’ve announced publicly that we see a potential for a billion dollars of incremental sales over the next five years through that Paradigm acquisition, people are starting to understand the strategy and the value that we can create.
Obviously, we don’t have all that created today. It’s going to take time to play out. It’s an investment on our part to take that platform and turn it into what I just described. But that initial shock and response that we saw, has since, you know, moved to one or more of excitement, and seeing alongside of us what that opportunity could look like.
MDM: Yeah, no, that’s great. And I’m gonna look forward to checking in with some of those analysts here in a couple years based on what you’ve just told me. So, thanks. Thanks for that. Well, you know, and speaking of digital capabilities and acquisitions, you guys obviously just made another complimentary move by acquiring the Apollo software assets from construction technology startup Katerra, for a smaller deal, $4.5 million. But how does this deal, you know, complement the Paradigm deal? And really, how does it continue to drive your company’s digital goals? And the reason I bring this up is just because it’s fresh and so I don’t know if you could share a little bit about the drivers behind that deal.
Flitman: Yeah, obviously, that one was a lot more opportunistic, because of, you know, what happened with Katerra’s bankruptcy. And we knew about the Apollo software and the strength that I just described to you around the Paradigm platform, which really plays to our design capability, and configuration and takeoff capability, you know, one area where we didn’t, hadn’t thought through, you know, how we were going to develop was more of the backend. So, you think about job site management capability and how you get those materials to the job site, and manage the efficiency of all the trades actually at the job site.
Well, it turns out, the Apollo software has already developed a lot of that capability. And in addition to that, they’ve got great mobile capability they can build into to mobile devices as well. And so, it was a fairly small acquisition, certainly compared to the Paradigm. But when we, when we saw the value that could be created there, it was really a no-brainer for us to look more at that end-to-end solution that we would want to provide to our customers over time.
MDM: You know, Dave, earlier in this conversation, you said that, you know, this industry is certainly not early adopters when it comes to some of this digital transformation. I mean, do you guys feel like you’re, you’ve got some ground to cover, and that you’re actually covering that ground with some of these moves you’ve made? And do you know, I guess, what’s next for the company, when it comes to some of these digital enhancements?
Flitman: Well, the proof is gonna be in the pudding, of course. I just described to you the theory of the case. And we’ve got to put that into practice, and certainly bring our customers around to our way of thinking about it. But I’ve got great confidence that’s going to happen, Eric, and the reason I do is, as you listen to me describe our vision on the digital capabilities that we’re looking to build, you know, we’re not going to be asking our customers to change how they build homes, change their approach to construction. What we’re going to be helping them do is deal with the pain points that they have today in that process as it exists.
So, we’re going to take out friction, we’re going to take that out between ourselves and other suppliers that they have, and be able to make that a much more seamless and efficient process. And that’s why I’ve got great confidence that what I’ve described to you is going to work, and it’s gonna work quite well.
Over the next, you know, couple of years, as I described, we’re going to be investing in building out this capability that I just described, and hopefully we’ll get some proof points here in the not-too-distant future that, that underscores, you know, that what we believe can happen will actually materialize here over time. Obviously, the proof’s in the pudding, but we believe we’re on the right track.
MDM: Well Dave, we have, we’ve covered a lot today — from organic growth to M&A to digital. You know, I always like to kind of go out with this question: Is there anything I forgot to ask you? Is there anything about the Builders FirstSource story that you want to share with our audience of distributors?
Flitman: Yeah, I‘d love to just, you know, reinforce and kind of bring together some of what we’ve talked about. I, you know, I love this industry. There’s actually not another industry I’d rather be in at the moment. And there’s certainly not another place in this industry that I’d rather be. I think we have a great platform for our customers and an exciting time where homebuilding has got a lot of tailwinds, both on the demand side, as well as, you know, on our side. And our capability to deliver what our customers need. We’ve got a great platform; we’re investing heavily in it.
And I’ve got great confidence, Eric, that regardless — I know we’re in a cyclical industry here — but given the strength of our position, given the capability and the products and the people that we have here, I’ve got great confidence that this company will outperform in any market environment. And our ability to take share, even in a down market will prevail. And we’ve got the right offerings and the right customers in our portfolio and just a tremendous platform to build from, so I couldn’t be more excited about the future of the company.
MDM: Well, Dave, thank you so much for sharing some thoughts with us today on the MDM podcast and I look forward to continuing to cover the company and your successes and, you know, look forward to checking in again soon.
Flitman: Appreciate it, appreciate the opportunity. Had a lot of fun. Thanks for the invite.
Read the latest articles and see your reports.