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5 Trends Dealers Should Expect, Based on the Latest Earnings Reports and News Stories

The past week has given us solid indications of both how the LBM industry fared since April and what we can expect through this winter. On the earnings side, Builders FirstSource and Beacon Building Products expect more growth. Masonite's report gives a sign of how price hikes will keep working their way through the supply chain. And supply restrictions continue (intentionally) at builders and (unintentionally) at the nation's ports.

BFS Predicts a 10%+ EBITDA Year--Even with $400 Lumber

While touting its 15% EBITDA margin for the second quarter, Builders FirstSource also contended that it can keep flying high. The company included the slide shown above in its presentation to analysts following the Aug. 5 release of its 2Q earnings. "Given consistent single-family starts, we believe our 10.1% EBITDA margin on our base business is sustainable and can grow over time, as evidenced by our 240 basis points of growth since 2019," when the margin was 7.7%, President and CEO David Flitman told the analysts. "That’s a 31% improvement in profitability in two years."

Indeed, it's notable that neither BFS nor BMC topped 10% in their second quarters between 2017 and 2020. Here's how they did:

Lots of independent dealers are likely to say they also produced adjusted EBITDA margins above 10% in the second quarter and will stay above that level, but for BFS this is new territory--and it's a place BFS predicts it can hold on to even if lumber and sheet good prices average $400/mbf.

Critics also might point out that BFS' balance sheet includes $2.04 billion in long-term debt and $2.5 billion in goodwill. Nevertheless, today's BFS looks to be a more profitable operation than it and BMC were separately. That suggests it's becoming an even stronger rival to dealers that compete in its space.

Beacon Expects More Growth Ahead

Along with report robust sales and efficiencies gains in the fiscal 3Q ended June 30 (see slide above), Beacon Building Products, predicts sales growth for the fiscal fourth quarter ending Sept. 30 should be in the mid-single-digits, President and CEO Julian Francis said. This comes even though the company expects fewer revenue-generating storms and hurricanes this year than a year ago. Higher product prices will help, but so will improved efficiencies, especially among the bottom 20% of the company's stores, Beacon said.

"Looking further out, we continue to have strong fundamentals in both new construction and the replacement market," Francis continued. He cited an undersupply of housing aggravated these days by challenges builders face finding lots, labor, and materials. "These constraints have led to elongated construction cycle times," Francis said.

"Residential roofing demand will also continue to benefit from the multiyear repair and replacement cycle from housing stock built more than 20 years ago," Francis added. "Bear in mind that more than 90% of reroofing demand is nondiscretionary. Both our residential and complementary products business will benefit from these trends."

Stephen Kim, Evercore ISI

Big Builders' Sales Pace Will Rebound ... and Last

The contrary forces at work in new-home construction--with strong demand creating a tailwind from one direction and constraints in lots, crews, and materials generating headwinds from the other direction--have made it hard to assess how big builders really are doing. For instance, how should one read a decline in the growth rate for orders: Is it a sign that potential buyers are spooked by higher prices (caused in part by lumber's rise), or are builders purposely slowing order-taking because they can't erect houses fast enough?

Stephen Kim of Evercore ISI thinks it's the latter. He believes big builders have intentionally limited sales recently in the face of too-strong demand--and perhaps to give commodity prices a chance to settle down. The analyst believes that trend will end this month.

"The spigot is going to be turned back on in September ... and you'll see sales grow," he said in an Aug. 6 webcast.

Flitman echoed Kim's outlook. "We’ve been in contact with our customers quite regularly," Flitman told the analysts. "And almost without exception, you’ve seen them kind of slow the starts for this year with the intent of pushing demand into next year. And almost to a person, they said this is the strongest environment they have operated in many through their careers. Given the state of the demand--which is much, much different than it’s been in a very, very long time--we expect the continuation of what we’ve seen this year into next year."

The Inflation Train Keeps Moving Down the Track

Masonite's earnings report and analyst call give a sense of how price hikes are working their way along the supply chain. On Aug. 9, the door and window manufacturer said higher material prices stripped away about $31 million of the $71 million gain in adjusted EBITDA it had achieved from selling more products at higher prices.

EVP and CFO Russ Tiejema told analysts that he expects the hit from material price hikes to be even worse in the current quarter before moderating in the final three months of the year. Meanwhile, because the company has such an extended backlog on production, revenue from the price increase that Masonite imposed in June didn't hit the books until late July or early this month. Another price increase was implemented this month, but that one likely won't show up in sales revenue until the fourth quarter, Tiejema added.

Shipping Slowdowns Remain Chronic--and Will Remain for Months More

The number of shipping containers landing at America's biggest ports should total a record 2.37 million Twenty-Foot Equivalent Units (TEUs) in August, according to the monthly Global Port Tracker report released Aug. 6 by the National Retail Federation and Hackett Associates. They'll arrive at a time in which ports are congested, warehouses are full, and there's not enough labor to meet demand.

All this should make people construction supply dealers, home centers, and hardware stores extra nervous. August normally is the month when retailers stock up on holiday merchandise. Shippers usually can handle this surge because they aren't quite as busy in the previous months. But this year there hasn't been a spring and early summer lull, as has been clear to dealers waiting to get electrical goods, plumbing, lighting, fasteners and other products that are manufactured abroad. Now fears about slow deliveries of holiday goods will increase the tension.

“The railroads are full. The warehouses are full. Port terminals are full," Gene Seroka, executive director of the Port of Los Angeles, said in an Aug. 3 interview with "Ships are coming in and waiting to get worked. The factories are behind in orders. This incredible demand has got everybody in the entire value chain just clipping out at levels we never could have imagined — and it’s still not enough.

"We were on the phone with a big retailer this morning," Seroka added. "They said that they’re still going to need another year to get inventories up to a level they think is appropriate." Such talk suggests that backups will continue for quite a while.

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