Builders FirstSource, Inc. (BLDR) Earnings Call Transcript & Summary

Good day, and welcome to the Builders FirstSource Second Quarter 2026 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by management and the question-and-answer session. [Operator Instructions] 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 second quarter 2026 earnings call. With me on the call are Peter Jackson, our CEO; and Pete Beckmann, our CFO. The earnings press release and presentation are available on our website at investors.bldr.com. We will refer to the presentation during our call. The results discussed today include GAAP and non-GAAP results adjusted for certain items. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. You can find the reconciliation of these non-GAAP measures to the corresponding GAAP measures where applicable and 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 in our SEC filings for various factors that could cause our actual results to differ from forward-looking statements and projections. With that, I'll turn the call over to Peter.

Thank you, Heather, and good morning, everyone. Our second quarter results reflect the strength of our differentiated platform and the adaptability of our operating model. We remain focused on the factors within our control including managing the business with discipline and leveraging both our technology capabilities and our value-added solutions. This approach continues to strengthen our position as the partner of choice to homebuilders. While housing market conditions remain weak, we are continuing to invest in innovation and capabilities that enhance the customer experience, improve efficiency across the value chain and reinforce our competitive advantages. Our business model is built to perform through the cycle, and we are confident in our ability to outgrow the market over time and create sustainable long-term value for our shareholders. Now let's turn to Slide 4. Our second quarter performance underscores the resilience of our platform in a challenging housing environment. Sales and adjusted EBITDA were in line with expectations, supported by the strength of our team, our value-added solutions and the discipline embedded in how we run our business. Before turning to our strategic priorities, let me spend a moment on the market backdrop. Ongoing geopolitical uncertainty, persistent inflation, and elevated interest rates continue to weigh on affordability and consumer sentiment, creating a challenging demand environment for new residential construction. In response, we have lowered our full year guidance to reflect a more cautious view of housing starts. Pete will walk through the updated assumptions in his remarks. Despite these macro headwinds, we remain committed to executing our strategy with a sustained focus on share growth, continuous improvement and prudent capital allocation. We cannot control the market, while consistent execution against these priorities will strengthen how we operate today and position us to accelerate growth as conditions improve. In single family, builders are actively managing elevated inventory levels and costs in certain markets. At the same time, they are moving towards a greater mix of build-to-order homes versus specs. This environment plays to our strengths, and we expect to capture share by delivering outstanding customer service, bundling our broad product portfolio to drive affordability and applying technology in ways that make our sales teams more effective. Performance varied by region, with continued softness across Texas and Colorado, partially offset by relative strength in the Northeast. Multifamily, higher interest rates have pushed out project start dates and bidding remains competitive. As the industry works through existing projects and occupancy rates remain below desired levels in many markets, developers continue to take a cautious approach to new starts. Based on the current pipeline, we expect multifamily results to remain pressured through the balance of the year. Slide 5 highlights how we are navigating the current environment while preserving the flexibility to invest for the long term. Our operating model enables us to rightsize capacity, control spending, and align working capital with demand, all without compromising our commitment to customers. We have consolidated 36 facilities so far in 2026 and 91 in total over the last 3 years, while maintaining an on-time and in-full delivery rate above 90%. These actions build on the broader cost discipline that Pete will detail. Supported by our industry-leading scale and leadership team, we are confident in our ability to manage through today's environment, while strengthening the operating leverage we expect to realize as the market recovers. Slide 6 lays out the key initiatives underway across our 4 strategic pillars. This quarter, we believe we maintained our share in a challenging market, generating $28 million in productivity savings through targeted supply chain and logistics initiatives and made steady progress on our SAP implementation. Together, these efforts reinforce our ability to compound value over time. Turning to Slide 7. In the second quarter, we deployed approximately $50 million towards return-enhancing opportunities aligned with our capital allocation priorities. Strong free cash flow generation through the cycle gives us the flexibility to invest in the business, pursue accretive acquisitions and return capital to shareholders. Turning to Slide 8. M&A remains an important lever in our capital allocation framework. We are focused on pursuing acquisitions that enhance our value-added product offerings and strengthen our position in desirable geographies. In June, we acquired Precision Design & Trim, expanding our installation capabilities in the Boise area. Since the BMC merger in 2021, we have completed 42 acquisitions representing nearly $2.3 billion in annual sales, the equivalent of a top 6 LBM player. With the industry still fragmented, we see significant runway ahead and expect M&A to remain a key contributor to our long-term growth. Turning to Slide 9. As we continue to advance our digital strategy, we are sharpening our focus on the areas where we believe we can create the most meaningful near-term value. Based on what we have learned from our AI and digital investments to date, we are increasingly prioritizing initiatives that improve the effectiveness and efficiency of our sales teams, enhance customer connectivity and integrate seamlessly with the growing homebuilder technology ecosystem. We continue to direct our resources towards practical, scalable capabilities that support growth, improve execution and better serve our customers while protecting and building on the digital capabilities and IP we have developed. We remain confident that technology will be an important long-term differentiator for BFS, and we are ensuring our investments are aligned with opportunities that will drive the greatest value for our business. Highlighting one of our team members is something I look forward to every quarter. Today, I want to recognize Ralph Cummins, an inside sales representative at our Bainbridge Island, Washington location, who is celebrating 40 years with BFS and our legacy companies. In 1986, moviegoers were introduced to the original Top Gun. In that same year, Ralph began his journey with our company. Both has stood the test of time, although Ralph has had a much bigger impact on the people around it. Ralph has built his career in retail sales and takes pride in keeping the store's inventory aligned with what customers need. He maintains a close pulse on the local market, consistently sharing insights that help the Bainbridge Island team better serve the builders and contractors that count on us. Ralph is also known for one especially sweet tradition. Every week, he bakes cookies for the team and our customers. Thank you, Ralph, for all time sweetness. It's team members like you who make me proud to lead BFS. I'll now turn the call over to Pete to discuss our financial results in greater detail.

Thank you, Peter, and good morning, everyone. Our second quarter results reflect the continued discipline we are applying across costs, working capital and capital deployment. We remain focused on operating efficiently today while advancing the initiatives that support durable growth. Turning to the second quarter results on Slides 10 through 12. Net sales decreased approximately 9% to $3.9 billion, reflecting lower core organic sales and commodity deflation, partially offset by growth from acquisitions. Organic sales declined 8% in single-family, 10% in multifamily and 2% in repair and remodel. These results were generally in line with our expectations given ongoing market softness and consumer uncertainty. As we've noted on recent calls, several factors reconcile single-family starts to our core organic sales. First, there is an approximate 3-month lag between a start and our first sale. Second, the value of a comparable start has declined by roughly 10% on average since 2019 as homes have become smaller and more value engineered. Third, affordability pressure has extended into pricing across the supply chain, contributing to lower average selling prices per start. Against this backdrop, we believe that we have maintained share in the quarter, reflecting the competitiveness of our value proposition and our role as a trusted partner to homebuilders. For the quarter, gross profit was $1.1 billion, a decrease of 16.3% compared to the prior year period. Gross margin was 28.1%, down 260 basis points, primarily driven by a declining starts environment and related headwinds. Adjusted SG&A of $781 million decreased $37 million primarily due to lower variable compensation, reduced head count and the benefits of cost actions, partially offset by acquired operations and higher fuel and delivery expenses. Building on the actions we have already taken we remain on track to deliver our previously announced $100 million of cost reductions as we continue to proactively manage the business, we have identified an additional $40 million of run rate savings, increase in our total cost actions targeted for 2026 to $115 million. As a reminder, these specific actions include deeper cuts to overtime and temporary labor adjustments to incentive compensation plans, reduced merit and overhead spend, additional facility consolidations and tighter controls and discretionary spending. These incremental actions are reflected in our updated guidance and reinforce our ability to protect profitability, generate strong free cash flow and preserve the flexibility to invest in the business through the cycle. Adjusted EBITDA was $329 million, down 35% and adjusted EBITDA margin was 8.5%, down 350 basis points primarily due to lower gross profit and reduced operating leverage on the sales decline. Adjusted EPS was $1.17, a decrease of 51% compared to the prior year. Now let's turn to the cash flow, balance sheet,, and liquidity on Slide 13. Our second quarter operating cash flow was $68 million compared to $341 million in the prior year, reflecting lower net income. Free cash flow for the quarter was $32 million. On a trailing 12-month basis, our free cash flow yield was approximately 7%, and operating cash flow return on invested capital was 10%. Our net debt-to-adjusted EBITDA ratio was approximately 3.6x, while above our long-term target, we remain comfortable with our leverage position. Our position is supported by $1.6 billion in liquidity and our strong free cash flow generation. We expect to move back within our target range as EBITDA recovers with the market. Second quarter capital deployment included $36 million of capital expenditures and $14 million on acquisitions, with no share repurchases in the quarter. Slides 14 and 15 outline are updated 2026 outlook and assumptions. Our guidance reflects continued weakness in housing starts, ongoing affordability pressure and a more cautious consumer. Compared to 2025, we now expect single-family source to be down nearly 7%, multifamily starts down 4% and repair and remodel activity down 1%. As a result, we are guiding net sales in the range of $14 billion to $14.8 billion, adjusted EBITDA of $1 billion to $1.2 billion and adjusted EBITDA margin of 7.1% to 8.1%. We expect our 2026 full year gross margin to be in the range of 27.5% to 28.5%, reflecting below normal starts activity. We expect free cash flow of approximately $400 million to $500 million. Our guidance assumes average commodity prices in the range of $390 to $410 per thousand board foot in line with the long-term average of $400. While lumber prices have pushed slightly higher, OSB remains weak. For Q3, we expect net sales to be billion to $3.6 billion to $3.9 billion and adjusted EBITDA to be $275 million to $325 million. In closing, we are remaining agile to mitigate near-term pressures while investing strategically for the long term. Supported by strong liquidity, disciplined execution and consistent free cash flow, we continue to manage capital with rigor, drive organic growth and productivity and execute on our M&A pipeline. We remain well positioned to create long-term value for our shareholders. With that, I'll turn the call back over to Peter for some final thoughts.

Thanks, Pete. As the nation's largest supplier of building materials and value-added services, we combine national scale with strong local market relationships across the housing ecosystem. We maintain leading positions in manufactured components, windows, doors and millwork. Our footprint, digital platform and installation capabilities create a durable competitive advantage and strengthen our value proposition with customers. Backed by our experienced cycle-tested team, we are confident in our ability to deliver resilient results in the current environment and to capture meaningful upside as the housing market recovers. Later this year, we will host our investor deck where we plan to share more on our growth strategy, operational initiatives, capital allocation framework and long-term value creation opportunities. We are excited to discuss our vision of the future with the investment community. Thank you again for joining us today. Operator, please open the line for questions.

[Operator Instructions] Our first question will come from John Lovallo with UBS.

The first one is you reduced your single family starts outlook, and you now expect to mid-single digit to high single-digit declines. Your fourth quarter revenue outlook, though implies sales are up about 4% year-over-year. So if we think about roughly a 3-month lag between starts and revenue, wouldn't single family starts need to inflect positively year-over-year over the next few quarters to hit that target?

Yes, that's right. I think the context for this is the dramatic decline we saw in builder behavior last year. I think that's the right sort of lens to look at this through. It's not really an increase in this year would be a seasonal decline like you'd expect, compared against last year's precipitous decline, it looks a little bit better.

Okay. Understood. And then through some of our checks, it seems like some of the more recent high-cost market entrants that have been sort of competing on price have been flushed out of the market. I wonder if you could maybe confirm that. And then has this resulted in any easing and sort of the competitive dynamic in those markets?

Well, I don't know that I can speak to specifics about flushing out. I hope you're right. I think that the reality is, there's been some pretty aggressive price discovery. Folks have gotten -- have been absolutely focused on filling capacity around the industry. I think that people have made aggressive moves, sometimes too aggressive and shown meaningful regret. The ability of our team to be able to navigate through that, certainly, margins have been under pressure. That's obvious. But to be able to do that and hold share from our leadership position. I think our team is doing a great job on that. I also think there are some tailwinds coming, I mean we will all see lumber moving in a stronger direction. If OSB hadn't sort of eroded underneath it, I think that might be a nice story on the strength line. But all of this is really dependent on what the overall market is going to do, the sense of uncertainty that the consumer feels and what builders are trying to do to react. I think that's really what it blows down to.

Our next question will come from Matthew Bouley with Barclays.

I guess a question around, again, what your homebuilder customers are doing around trying to reduce their direct costs. Maybe you can update us on their pushback versus the sort of vendor price increases that we're seeing out there. Obviously, you're calling out lower price and, I think, manufactured products and specialty building products. Certainly in the market, we're seeing vendor price increases and siding, roofing, et cetera. So maybe just kind of update us kind of tick through all your major categories and what you're seeing from a pricing perspective and the ability to push that down to builders.

Yes. Thanks, Matt. That's a good question. There's been a lot of activity. Certainly, some categories are able to pass through just by virtue of what they are and what they're made of. The reality of petroleum internationally right now is under pressure. There are certain categories that are moving in response to that. I would say most of the other categories are pretty flat. There hasn't been much movement in terms of inflation. There are a couple of categories, some subcategories that on a year-over-year basis, are still showing pretty meaningful declines on the prices that the manufacturers are charging. You think about some of the things we've talked about in the past, an EWP on a year-over-year basis is still down. There are certain millwork subcategories that are still down. There are absolutely competitive dynamics in certain of the categories that have limited manufacturers' ability to pass through. I think that applies to us in some degree. We've, I think, done a good job of managing our capacity, but I think it's fair to say we have more capacity than we need for the existing market. So we're making the prudent steps necessary to resize down, but also trying to make sure we're prepared to take advantage of a return to growth, which we think is likely to happen, at some point in the future. So that there in lies kind of that challenge of finding the right pricing levels. We are seeing pass-through -- builders rightfully so, are fighting for every penny and trying to manage their own affordability, but this has to be a win-win. And I think as the market works through that price discovery process, we're getting to a more predictable outcome on margins. I'd say we're not quite where we want to be yet, but it's a lot more stable over the past 6 months than we've seen over the past few years.

Got it. Okay. Second one is on M&A. Obviously, from a leverage perspective, presumably, you're going to be more careful with share repurchase here. But I would think from an M&A perspective, certainly, you can acquire EBITDA and perhaps leverage neutral fashion. So what are you seeing out there in terms of the pipeline? And when you have the kind of challenging market conditions like this, whether from a historical perspective or sort of what you're actually seeing now, is there a scenario where you might see more assets come to market? And how would you be looking to approach that?

Yes. Thanks, Matt. Good question. We still think M&A is a great opportunity for us, right? There are a lot of players out there. There are a lot of desirable players out there in our space. So we're continuing to probe and stay close. We certainly have been speaking to a handful of players that are looking to make a move now various reasons. And think this is a good time for us to continue to lean into those opportunities. So we'll continue to do that. You're right. I mean, the elevated leverage not because of debt, but because of the cycle, certainly is something we're attentive to. I want to be respectful of it. But do not feel concerned with where we are. Liquidity is strong. Our maturities are strong. Our disciplines, our cash flows are still good. So our ability to take advantage of opportunities that present themselves at a time like this, in particular, absolutely. We are still interested. And there are some deals in the pipeline at this point, and we keep looking for the right ones to keep showing up. So looking forward to that opportunity to go down.

Our next question will come from Charles Perron-Piche with Goldman Sachs.

First, I'd like to touch on the commodity. Given the move in lumber that we've seen you to date, I would have expected maybe incremental upside to your commodity price outlook for this year and contributions to result, the fact that your outlook remains the same reflect more of an expectation of a moderation in lumber and commodity prices in the second half? Or are you seeing greater difficulty to pass on some of those cost increases to your customers in this environment?

So thank you for the question, Charles. So the commodity outlook is in line with what we had projected last quarter. We expected it to continue to float up through Q2 and then retreat a little in the second half of the year, and it's performing pretty much in line with that expectation. That's the reason for no change to that guidance.

Okay. Okay. That's good color, Pete. And then in your prepared remarks, you noted that builder increasingly offering build-to-order solutions to differentiate themselves. You're seeing increased traction to your digital offerings as a result. And how can you better serve your customers with your digital offering as a result of this shift?

Yes. We build to order is an obvious reaction from builders that have seen inventories grow, right? It's certainly a good discipline that they have displayed and I think will be effective in helping to manage the business over time, it will give us a more predictable target around which to make sure we're providing the right support. You're absolutely right. Our digital tools are particularly suited to people trying to do plans and designs and then trying to leverage the tools through to being able to offer the best possible service and value proposition for our builder customers. So we're continuing to find ways to refine those tools and to offer those 3-dimensionl digital twins in a way that is going to create value for builders. So at the end of the day, that has to be the deliverable and the commitment that we live up to is to make the builders' life easier as they're building those homes. So you hit the nail on the head. I think our tools are absolutely good for that and build for that. And this is the type of market we think that plays to our strengths. As does our value-added offering, as does our bundling package as does our extremely experienced sales team and the subject of matter expertise that we have, those are all reasons that this build to order trend is going to play well for us.

Our next question comes from Rafe Jadrosich with Bank of America.

On the market share commentary, I think you said you held share in the second quarter. If I remember right, in the first quarter, I thought you gained some share. Did the competitive environment change in the second quarter relative to 1Q? And what's sort of the outlook for that in the back half of the year?

If it changed meaningfully, I'd say it's ebbs and flows. What I would describe is that the overall market constricted a little bit in the second quarter. I would say the feel of the market, given the uncertainty and the volatility in the Middle East, I think the sense was, this is harder. That's more of an emotional comment to you than a data-driven comment. But the conversations that we have with builders, the conversations we're having in our operating review calls and speaking with the teams around the country, I think there was a sense of optimism at the beginning of the year that faded pretty meaningfully into the midst of the second quarter as things sort of ebbed and flowed pretty aggressively. But I don't know that there's more than that. I think that generally speaking, the holding share is just an indication of the competition day in, day out.

Okay. That's helpful. And then can you just talk about the inbound and outbound freight impact from higher diesel prices? How does that flow through your P&L? And then just the time like -- how much of a headwind was that to 2Q and what you're anticipating for the third quarter?

Yes. Thanks for the question. So we haven't changed our position on what we expect for the full year. We're still expecting about a $100 million headwind from the higher fuel costs, the combination of the inbound and the outbound. We did see a little bit of softening during some of the ceasefire periods during the quarter. But that doesn't give us enough visibility into the balance of the year with the increased tensions that we're holding on to that $100 million. We have seen our fuel surcharge and pass-through increased about 20% in the quarter. So we are effective at passing some of it through. We have more work to do. But the inbound, I think as we talked about last quarter, is really going to show up in the cost of inventory, the cost of the materials and that flows through cost of goods sold. The outbound will be more in the SG&A line. So that's certainly a headwind in SG&A and the recovery of that is going to be up in sales and margin. So there's a little bit of distortion and geography on the P&L. But I think we're -- the team's job managing the costs, and we have -- there's always more work to do but we're managing it on this kind of fluid situation pretty well.

Our next question will come from Mike Dahl with RBC Capital Markets.

First one on 3Q sales dynamic. Obviously, a little bit of a wide range. But given your normal bag to commodity prices and the blended lumber OSB basket, I would have thought that would flip to a pretty nice like low single-digit tailwind from an inflationary standpoint for commodities, which is been would imply at the midpoint or below sales that the volume would actually step worse on a year-on-year basis in 3Q. So I'm wondering, is that the case? Or is it something where like we did know your inventories up as a percentage of sales? Like is there still like a larger-than-normal kind of lag on commodities or some prebuying or contractual dynamic where it's just not impacting U.S. quickly in 3Q, yes?

Yes. I would say you're spot on. The lag on the commodities and seeing those higher prices coming through into our inventory is still the case. We anticipate to pass that through. It will flip even with the expectation of being at a $400 per thousand midpoint in our guide. That will be higher than the prior year on average for the year. So we should see a flip and a benefit in the back part of the year, but it's also on a lower sales activity level. So it's going to be muted from an overall contribution, but it will start to turn into a benefit.

Q3, kind of -- again, we are kind of slip from -- it was going well to the lights turned off happened in the third quarter. So you're also lapping that component. Obviously, it's more prevalent or more evident in the fourth quarter results, but there's a little bit of that there, too. So there's a couple of pieces that come into put.

Yes. No, I appreciate that. It seems like especially at the low end, it would imply the 3Q specific color that it would imply something that may be quite a bit worse on volume. And so I was trying to get at, like something unusual with the commodity relationship versus what we've normally seen? Or is that right that volume-wise, we should expect kind of almost like a worsening year-on-year trends within that guide. But the follow-up question then is on the gross margin dynamics, you're sitting at 28.2% in the first half of the year, your guide, obviously, at the midpoint 28.0%, I think last quarter, you talked about maybe it's down a little sequentially in 2Q, then up a little sequentially in 3Q, then seasonally down again in 4Q. Can you -- can you just talk with all the moving pieces now, what within the guide is the updated expectation for gross margin specifically in the second half and split between 3Q, 4Q?

Yes. So obviously, in the second half, that 28% midpoint would require a slightly below 28% in order to average down. We're seeing it kind of flat for the balance of the year at this point. There's still enough uncertainty on how it's really going to play out. But we took the approach based on where we exited Q3 and what we're seeing with the lower -- or Q2, excuse me, with the lower starts expectations for the full year, that it's going to be a continued competitive environment that we're going to have to continue to compete and win business every day. And so that's going to keep the pressure on the margins, but we're going to find a way to improve and capture every nickel we can.

I mean, hopefully, it's pretty we said in the past. I mean, Mike, the stronger markets allow for more opportunities to manage both mix and price in a way that gives us stable margins. If we're calling down the top line, it's a tougher environment. It's not dramatically tougher, but we're trying to signal that those 2 go together. And hopefully, that's clear on what we said. But we think it's pretty flat from where we're at now.

Our next question will come from David Manthey with Baird.

I was wondering if you could give us your thoughts on multi-family housing. And I don't know if you have any credence to the NAHB numbers, but you guys have multifamily down mid-singles this year. they're calling for up mid-singles this year and then down in '27. Just wondering if you could talk about why there would be that disconnect there? Why your view is different? And then given the long rates and affordability issues, it would seem like multi-family might be a reasonable relief valve, maybe short rates come down even if long rates don't. Could you talk about the medium term and maybe the prospects for multi-family?

Yes. No, absolutely. This one is a bit of an irritant for me. So I'm going to -- I'll say -- I'll anonymize this because it's not fair. We only play in a portion of the business. So I will readily admit that maybe my perspective is skewed because we're only in 5-storey and below wood structures. So that could be the beginning of the end of the explanation of the next thing I'm going to say. But the multi-family published numbers do not make sense to us. I believe they are incorrect. I believe something happened in the Fed numbers or the way they're doing their surveys or something, I don't think they're right. I don't think there's any way they can be right. And I've talked to a couple of other players, people in positions of authority that you would know their names, who do this for a living and they agree with me. This does not make sense. So maybe there's some aspect of the tower conversions or something that I'm not seeing that is causing these permits and starts numbers to be higher than what we are seeing. But I think we're actually doing decently in the multi-family space where we play. 100% agree with you that if rates turn a little, the short rates will absolutely release, and we will see an increase I think we're positioned well to be able to take advantage of that with both trust and millwork as well as some other product categories that we've been leaning into. So feeling like that's a good opportunity for us when the time comes.

Okay. Yes, that's good color. And then second, I wanted to just make sure I understand the cost actions here. So I think you realized $13 million in the first quarter. I believe you said $28 million in the second quarter. But then there was a comment about another $15 million. Now it's $115 million remaining or something. Could you just give us sort of what's been achieved so far? What is yet to come in the cadence through the remainder of the year? And then if you can just talk about how much of that is sort of variable, meaning comp and overtime and things like that versus structural that would remain in place even if the market gets better?

Yes. So there's two components. So I think what you were referencing was really the productivity savings that we've identified and called out. Those are separate and in addition to the cost actions that we are continuing to execute against. What we had stated previously was $100 million of cost actions, $75 million of those were cost out year-over-year, $25 million of cost avoidance. That number has now been increased to $115 million in 2026, but $140 million if you count the full run rate that we expect from the $40 million of new cost actions that we're putting in place immediately. Those are largely -- the original $100 million is largely complete and underway. It's just realizing it through the passage of time through the balance of this year. The $40 million, it's increasing what we were going after a bit more, and it's targeted specifically SG&A and more on the fixed cost side of the equation. So we see the reduction in the sales. We are very aware of the situation, and we're reacting to help make sure that we're not deleveraging more than we should. So that's the call and the reason for those cost actions, but they are separate from the productivity.

So I know how much you guys hate the cost avoidance, so I'll just take that out, right? We took the $75 million of cuts, got them done. We're adding another $40 million of cuts going to get them done. That is predominantly SG&A predominantly fixed. That's not the variable. The variable is already falling with the decline in sales and the work that the teams do day in, day out to run the business appropriately. So that $115 million annualized run rate of cuts is what we're executing because we're starting the $40 million right now in July, you're not going to get all $40 million this year. So that's where Pete says $15 million of that is going to hit this year. And the rest of it will flow through in the run rate into next year.

Our next question will come from Keith Hughes with Truist.

Just kind of building on the last question, it seems like at the end of the year. On the down note, will you have to -- in the beginning of the year, reassess more fixed cost, if there's no signs of life here for 2027?