Q4 2020 Beacon Roofing Supply Inc Earnings Call
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This call will contain forward looking statements, including statements and put its plans and objectives and future economic performance.
Forward looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore actual results may differ materially from those indicated by such forward looking statements as a result of various important factors, including but not limited to those set forth and the risk factors section of the company's latest form 10-K and form 10-Q four.
The quarter ended June Thirtyth Twentytwenty.
These forward looking statements fall within the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company's financial outlook.
The forward looking statements contained in this call are based on information as of today November 19th Twentytwenty and except as required by law. The company undertakes no obligation to update or revise the and the any of these forward looking statements.
Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release.
The company has posted a summary financial slide presentation on the investors section of its web site under events and presentations and will be referenced during management's review of and financial results.
On today's call for Beacon will be Mr., Julien, France's president and CEO, and Mr. Frankel and agro executive Vice President and CFO.
I would now like to turn the call over to Mr., Julien France's President and CEO. Please proceed.
Hey, good growth.
Thanks, Paul.
Hi, Paul.
Thanks, Paul to meet today's price from Andrew our Chief Financial Officer.
As for losses will correspond with the slide deck, which is posted to.
For the Investor Relations section.
Website, and I'll begin on page four and applied materials.
Okay.
2020.
We expect that.
For years.
For the company.
500 employees worked incredibly hard to provide strong service levels to customers book.
Those customers themselves and their colleagues joining and unprecedented environment.
Eric.
Yes Hello.
Yes, hi.
And could not pattern for the business results, we delivered and the second.
And the company.
Fully transition to new leadership and embrace and the strategy, we have implemented for key strategic initiatives generating meaningful contributions to our results.
Mike.
This is behind these initiatives, becoming put money and the comedy leadership at all levels.
Cash flow reported fourth quarter full year, adjusted EBITDA margins exceeded 2019, despite coated and.
For the operating cash flow.
In company history.
The cash to pay down our NGL and materially improve our balance sheet.
Delivering the type of results you should expect from Beacon.
And we will continue to improve and growth.
There are several important takeaways from the quarter as I want to emphasize.
And we have a resilient business for years.
The state government restrictions negatively impacting March and April we could be recovered and for this five consecutive months of stable year to year day sales rates.
This is doing for the characteristic of our underlying markets driven by the less cyclical repair and replacement cycle and our balanced exposure to both residential and commercial construction.
Second.
Execution is a critical focus for my leadership team.
Fourth quarter gross margins improved more than 100 basis points, both sequentially and year over year.
We have been intensely focused on making positive price to improve gross margin last year. After a couple of years in a challenging environment.
We are pleased short book traction from price increases and we implemented during the quarter.
Well some of the skew for gross margin benefit reflects favorable timing, we expect our price initiatives to be accretive to margins going forward.
Operating expense discipline continues as for.
I will discuss later, we are extremely pleased for for the sequentially flat adjusted Opex to sales percentage.
Let me as previously guided despite higher incentive compensation.
We continue to do an excellent job of managing headcount for posting a second consecutive quarter and the significant year over year employee productivity.
Fourth we delivered a strong cash flow here.
Fiscal 2012 operating cash flow at $479 million demonstrates really solid operating performance and a difficult environment.
We reduced spend debt leverage to 4.7 times as we continue to move towards our leverage goal of about three times.
And our strategic initiatives meaningfully comfort and easy to results.
I'll touch on each other before initiatives in more detail in a minute.
And quickly highlight the success of our digital platforms and underperforming branch initiatives.
Our industry, leading digital platform achieved the aggressive exit run rate and goal and percentage of sales and I've said for fiscal 2020.
Continue to emphasize our E commerce platform as a key differentiator for Beacon, and we'll invest and maintain our leadership position.
As for lets quick follow branches, they produce more than $20 million operating margin improvement for the fiscal year.
Well, it's difficult to separate from specific performance relative to the impact cost with reactions coded is clear, we are well and our weighted delivering the targeted $30 million to $60 million of margin benefit.
Moving to page five of our slides and cereals I want to highlight a couple of items related to our fourth quarter results.
In August we provide you with a framework as line on our expectations for the fourth quarter.
Our sales outlook called for low single digit revenue decline year over year, but increasingly difficult comparisons for the quarter progressed and limited incremental price contribution.
Commodity as we provided expectations for a slight sequential improvement in gross margins and a modest increase and adjusted Opex per sales with temporary costs for returning.
Fourth quarter sales modestly exceeded our expectations and August and September month sales for both slightly stronger than anticipated.
Both margin line that performed our public and the gross margin was up 140 basis points sequentially and adjusted operating costs for the percentage of sales flat with the third quarter.
Actual EBITDA margins finished at 9.5% up substantially both sequentially and year on year.
There were several moving parts within our Q4 gross margin performance and Frank will speak for those in more detail at.
And the completion of our prepared comments I will drive for future margin expectations.
Next I'll provide an update on our key initiatives. Please turn to page six of the slide deck.
These forward initiatives have become significant drivers of our sales and margins.
These initiatives credit multiple paths to drive value for customers and differentiate us from our competitors raise the quality and consistency and our customer service increase communications and interactions with customers and provide a clear focus areas for our employees.
The successful implementation and execution of these initiatives generating top line gross margin opex and cash flow benefits.
Our strong performance for the initial coated lost and in late March and April illustrates the benefits of our strategic direction and now I would like to provide more detail on each day.
And with our focus on organic growth.
Our sales team for actually to shift and marketing organizations are in lockstep driving sales growth.
Placed for the customer and the center of our business and our Resourcing, our inside and outside sales teams to support contractors, who want to save time and more efficient and grow their businesses.
We are helping our sales from present this by providing training development.
Developing productivity tools and supporting them with expanded lines of private label and branded products as well as the cooperate and ecommerce platform and coal sales personnel.
We believe the number of quality calls, we have with customers for the direct correlation to our sales performance.
We have established set of goals for our sales team for the number of interactions day as we move towards the thoughtful level. We believe the increased activity from price sales growth with both new and existing customers.
Next is our industry, leading digital platform and.
As I said I'm pleased to report that brick and digital platform exceeded 10% of company sales during September.
As you May remember this was an aggressive goal and I said shortly after joining the company a year ago.
We are the first mover advantage significant from the digital solutions and our offer a sales and marketing organization committed Sally Hansen, the platform and increasing volume from vendors and customers recognize us as the industry leader.
Customers and particularly enthusiastic about the benefits of online ordering and estimating channel tools during the pandemic.
Our customer surveys continue to reveal contract with high marks for the platform and user friendly order processing tracking and paving features.
Additionally, digital works in conjunction with other strategic objectives, and Beacon and is particularly affected driving growth and our private label operating.
As an example, and while a template for contractors given the ability for customers to our credit line of private label products. This has provided significant goods. The total sales, which increased 50% year over year in point slightly and have a positive impact on our gross margins.
Next moving to our on time and complete network.
Our LTC strategy is another significant differentiator relative to our competitors.
We believe it provides for key benefits to our business from.
This enables also improved relative platform, shortly and delivery cycles, and enhancing product availability, which contributes to our top line growth.
Second and optimize.
As in our net worth and delivery rising these expense reductions as the fleet and employee productivity.
David you can optimize our inventory position across multiple locations driving a permanent reduction and working capital and flow it significantly enhances our talent development pipeline.
Yes, the opportunity developed early create create powered and significant roles.
Currently the operating Ltcs, and 58 markets, having market based sales and the majority operating and centralized dispatch a key element and optimizing delivery performance for our customers in total these markets contain 260 branches representing more than half of our series locations.
We opened an office in publication earlier this year in Denver, which follows three legacy Hudson operation as well as to specialty siding hubs.
Lastly, I want to highlight our branch operating performance.
30 of this year, we introduced a new program focused on raising the operating performance and profitability of our lowest quintile branches.
We have publicly disclosed $830 million to $60 million bottom line improvement goal for this initiative.
As I mentioned earlier and for.
Pleased to report that our initial group delivered more than $20 million of operating income improvement during fiscal 2020.
And as a tremendous accomplishment given significant market challenges for the coated and we lease locations, having only a couple of quarters and operations with action plans fully implemented.
I'll now pass the call other Frank will discuss fourth quarter results in more detail.
Thanks, Julie and good evening, everyone before getting into the details of the quarter I thought it would be helpful to provide some perspective for the last seven months since joining beacon.
In mid April we were the depth of Covance and the future with uncertain at best.
Julien The board the Executive Committee and the Division Presidents for already fully engaged and cost reduction cash preservation and trade working capital management and.
It's a pleasure to work with a team that can and clearly and crisis execute the necessary actions radically and leverage those actions and sales improve.
There is no doubt and my mom.
Our experience and navigating the current environment has accelerated our performance and increase our potential for.
To that point, our second half operating expense performance demonstrates our ability to deliver efficiencies regardless of where the sales are declining or improvement.
Turning to page eight will review our quarterly sales performance.
During our past few earnings calls, we provided details for the disparate impact and coated on our business for their continued to be geographic performance gaps and covert the economic impacts from coated are also evident in our product and end market categories relative.
Residential roofing delivered 6% sales growth during the fourth quarter evidence of a rapid recovery following the initial uncoated lockdowns.
Housing market indicators for both new construction and repair and remodel activity for make quite positive as the consumer continues to concentrate discretionary spending on their homes.
Our contractors remain busy and we see the potential for an extended roofing season, but as always this will be dictated as much by weather as by underlying demand.
We are well positioned to capitalize on this favorable residential backdrop, and our single purchases and the core or slightly above the year over year growth from the orbit day that you've seen.
Commercial roofing sales declined 12% of the quarter with decline similar to what we experienced in Q3.
Continued uncertainty and the office and retail sectors and created select deferrals and re roofing, while new commercial construction has also experienced a slowdown.
Certain categories, including schools, which traditionally cookie complete and re roofing projects during the summer months for pull forward for to cope and related building closures.
We have recently seen some leading indicators improved and bidding has also stabilized but visibility remains limited going into the slower winter period.
Complimentary products were down 1.5% year over year, but improved significantly on a sequential basis. As a reminder, the complimentary category split relatively equally between exteriors and interiors and between residential and commercial.
Not surprisingly in Q4, complimentary sales and residential markets outperformed complimentary sales and commercial markets.
Turning to slide nine and we'll review gross margin.
We were delighted with our gross margin performance in Q4 for for gross margin of 25.5% for.
And 140 basis points sequentially, and 120 basis points year over year.
Getting into the details there were a number of items that favorably impacted gross margin performance for the quarter.
For the year over year basis price cost was positive by approximately 75 basis points driven by three primary factors. One our continued successful implementation of recent price increases to and timing benefit related to our pricing increases relative to the corresponding increased and our cost of goods sold at three and stronger.
Residential sales incentives based on increased shipments for our customers.
Also benefited from favorable product mix and the core as we experienced stronger sales from our higher margin residential roofing category.
Going forward, we should continue to experience and favorable mix as residential roofing is expected to see continued outperformance we.
We also expect to benefit from the recently announced price increases given our high level of execution and input and these increases across the network.
The timing benefit we experienced in the fourth quarter is likely to be smaller in the first quarter and we do not expect any meaningful timing benefits beyond fiscal Q1.
Finally, our vendor incentives and Q1 should reflect seasonally lower quarterly sales activity.
Julie will provide further details regarding our gross margin outlook and his wrap up comments.
As I mentioned in my opening comments, we are proud of our Q4 operating cost performance and appreciate the tremendous efforts for the entire beacon team managing costs tightly.
Adjusted Opex was $346 billion unchanged from last year.
From labor and free fleet productivity efforts were largely offset by higher incentive compensation and.
We finished fiscal 2000 to play with significantly stronger bottom line results and we had anticipated in the prior quarter as a percentage of sales expenses were largely unchanged both sequentially and year over year at 17% of sales.
During our Q3 call I highlighted three buckets of cost savings and active during code share.
For Aerie continue and temporary and permanent savings.
On a sequential basis fourth quarter operating costs reflect the return of the temporary cost actions we took during Q3.
For share of the continue and temporary costs also return.
And travel and entertainment expenditures remain below historic levels, and we'll provide year over year cost benefits in the first half of fiscal 2021.
And our per quarter release, we also introduced a new measure sales per hour work. We believe this metric provides useful insights into our efficiency efforts and.
And with labor being the most significant cost for any distributor driving efficiency and this area remains the central force.
Following an incredible third quarter performance, we are very pleased that we produce and 15% year over year improvement with 7% fewer employees and the fourth quarter.
We will get to leverage this important for efficiency metric going forward, but it is only one measure and what we're trying to accomplish more broadly with our operating expenses. We are focused on improving the efficiency and effectiveness of our sales personnel for driving asset utilization gains and our truck fleet and we're.
Working hard to offset inflation with productivity and each of our operating divisions functional departments and corporate teams.
Second code and has certainly created greater urgency and B and has helped us accelerate a continuous improvement evident in our results.
Turning to slide 10, we'll review our cash flow and balance sheet.
We finished 2020 with very strong Q for cash flow raising the full year operating cash flow to $479 million illustrating the benefits of favorable earnings and strong trade working capital management.
Quarterly cash flow was again driven by strong operating results from sequentially, improving sales strong growth margin performance and continued cost discipline.
And while we had previously anticipated working capital will be relatively neutral and Q4. We ended the period for the positive contribution from trade working capital primarily due to higher HIV at the end and at the end of the quarter.
And was slightly higher sequentially, given higher sales for the fourth quarter and inventory levels were better by 7% year over year stable sequentially as we continue to leverage the aggressive actions we undertook in Q3.
Importantly, our strong second half and cash generation produced significant debt reduction during Q4, we reduced total debt by $600 million and Beacon now has repaid the entire $725 million March JBL drawdown as a reminder, we drew down the JBL as a proactive measure given the economic uncertainty.
And for coated currently we have approximately $250 million outstanding on our EBITDA.
And would expect to pay that off during the first half of fiscal 2021.
For the team continues to do debt reduction and balance sheet strength as high priority to that and we are pleased to report that our net leverage declined to 4.7 times trailing 12 month EBITDA, reaching the lowest leverage levels as the Allied transaction, we are making good progress and operating performance cash generation and debt reduction and our cash.
Continuing to target net leverage for approximately three times EBITDA with that I'll turn the call back and Julian for his closing remarks.
Thanks, Greg I'll be providing a brief wrap up fiscal 2020 before setting to add 2021 outlook on page 12 of the slide materials.
Fiscal 2020 represented and transition year for became and would need to ship and the implementation of a new strategic direction.
This dividend strategy signaled Beacon has moved from a predominantly growth by acquisition companies small and renewed focus on organic sales growth and industry, leading operational execution.
The other one is shifted our leadership team established for many new strategic goals the guidance going forward.
Fiscal 2020 also presented beacon with our greatest challenge since the financial crisis mode, and a decade ago.
Because pandemic and calls demand to create and accompanies the sponsor this unprecedented environment has been incredible the for.
Third quarter highlights is our ability to control costs and improve productivity in the full quarter, we demonstrated strong pricing execution, resulting in a significant increase in gross margins.
Incidentally, we also.
On building, our company's culture around continuous improvement and operational excellence and we hope this is becoming increasingly credit for the investment community.
We made significant for next June 2020, but as I've repeatedly said since joining beacon, we want this company and its employees to realize that full potential.
Continued to do pursue a path to do both.
Now, let me provide from details and should help you frame Q1, and the 2021 fiscal year.
Our October sales improved approximately six and a half percentage year over year, reflecting the combination and strong residential volumes and higher pricing, partially offset by weaker commercial sales.
We have continued to see heightened demand within residential and markets, particularly residential roofing and insulation and are confident this strength will continue in fiscal 2021.
First quarter, we are expecting overall net sales to increase low to mid single digits largely dependent on the number of available roofing days before winter weather impact our customers.
For gross margin, we expect the first quarter of year over year improvements and tied to solid pricing execution and favorable net benefits. This is the prime day.
We anticipated for shipments of the favorable Q for timing benefits to continue into Q1, but it will have a smaller impact from prior quarter.
The combination of these factors are expected to result in first quarter margins of approximately 25%.
We will continue to actively manage operating costs will improve for the employee and Inc. Productivity.
During these past seven to eight months, we have gained valuable insights into our capacity for variabilizing certain expenses, which should be most evident as we winterized during December check for January and February.
For the 2021 fiscal year Cobiz creates uncertainty, particularly for non residential and box.
While we have seen some signals that non credit bidding activity may be bottoming debt remains appropriate to keep a cautious outlook and manage our business accordingly.
With this relative lack of visibility we are focused on what we control executing on our strategic initiatives driving sales growth above market, we still use pricing discipline and driving productivity gains throughout the organization patient.
Each of these reps into key elements, we put in motion during 2020 and expect further gains within the new year.
As a result, we currently expect to deliver.
Sales growth and the upper end of a low single digit range combined with gross margin expansion, yielding adjusted EBITDA in the range of $500 million to $525 million.
We're excited about 2021.
And they're off to a good stuff.
And gave and with that we're ready to open the line for questions.
Thank you, ladies and gentlemen, if you wish to ask a question Chris Star followed by one on your Touchtone telephone.
If your question has been answered or you wish to withdraw your question press the pound key.
Color is limited to one question nor for the question will come from the line Michael Rehaut of JP Morgan. Please go ahead.
Hi, good afternoon, everyone. Congrats on the results.
Werent too for growth delving, a little bit for the guidance for.
First quarter and the upcoming fiscal year.
A more focused on.
Hi debt.
How you're thinking about gross margins, obviously, you kind of gave the guidance for roughly 25% down from 45 five in the first in the fourth quarter 20 and.
And it would seem and from under current and make some proper assumptions about full year guidance that.
Perhaps you are looking for.
Gross margins for the high 24% range, so hopefully get just net.
The price on the map that correctly.
How to bridge the gap between for Q1, Q and also you know kind of let's.
Thats a one for you and the overall fiscal year, if you know.
Primarily due to.
Some of the timing benefits and maybe some positive mix reverting just trying to get the different drivers and buckets.
In terms of what what's what's driving those changes.
From Michael It's Frank Thanks for the question and the other congratulations.
So you're thinking about and the way that we're thinking about it.
Sure that makes sense to me when I look at the Q1 guidance relative to Q4 performance. Obviously, there's a couple of moving parts there the.
And continuing pricing execution is going to be important for us to continue and the first quarter, which is going to be helpful from a year over year perspective.
Our EBITDA temporary benefit that we mentioned that will impact Q1, maybe some other smaller than it was in Q4 that will certainly have some benefit there and Q1 for us.
And then continued mix obviously, the residential markets continue to be strong for us and net carries with it some marginal lift associated with that.
And we think about growth for the full year.
You know obviously the the here is about one month or one of the have nots into and so.
We're trying to figure out how long does the registry and go this commercial come back what is Cove and do what does the weather look like so there's a lot of things that go into other handicapping gross margin for the full year clearly we're off to a good start and.
For two updating you as the year goes on getting through the next few months of winter I think will give us a lot better insight into what the full year looks like but your numbers and access from our perspective at this point.
Great Great. Thank you Frank.
I guess secondly.
Love to get your thoughts also from a guidance perspective on the.
Line.
Guidance and in turn Mark.
First quarter sales up low to mid single digits.
And then the flow.
Full year being up you know.
For the upper end of low single digits and me sounds like 4%.
You know I guess that would imply maybe the rest of the year b and the middle or slightly less and I guess, depending on how the math works out.
Brad.
The assumptions behind that and look to get your sense that if youre thinking continued relative strength for growth in the red.
Residential roofing side, maybe non res continuing to be weak as is indicated for the per quarter.
And.
If I can just learning.
And second question or and element to this and love to hear your thoughts on and so on you mentioned that the single purchases slightly exceeded the arm of shipments.
And I was just curious on how that kind of flows through the numbers and if there was any type of inventory rebuild and.
You know how that might you know, how you're thinking about that impacting the first half for the year.
Got it.
If I Miss any other questions that were embedded in the mix really all cash, but let me let me take it from what I think was at the top of the question in terms of Q1 and the revenue piece. We gave you a fairly wide range and you can tell we.
He said low single digits to mid single digits and a lot of that just depends on how weather plays out.
In the second half and November and into December there is always a lot of other declined as we go through the fiscal Q1.
Which was really good to see is and so for throughout.
Throughout the first six weeks of growth of the quarter. We look like we're in good shape I mean October came and as you can see there and six I have for said.
And that continues obviously will be more towards the.
And as a vintage rather than the other low single digits. If we end up with a bunch of whether this is for the next six weeks and I.
I think the under.
So thats kind of the weighted Q1 wraps up we'll know a lot more here in the next couple of weeks as we get through Thanksgiving and lets the other November and we'll close that up and what a better view of exactly where the first quarter is going to shape up for us in terms of the full year just to give you aware head was only for the guidance out there we've got low single digits as kind of one to three so when we say upper end.
We are talking about within that above that.
And your point around non res is really the wildfire.
How how deep is non reds going to going to impact us in 2021, right now to Juliens points and his remarks, and we do feel like Theres a bottoming there with the code for the vaccine is it's possible that we could actually see some second half help on the commercial side, but it's just too early to call that one right now in terms of.
Pharma, what we were trying to explain to you is that our year over year purchases or slightly above the arm of data and the other data set for the year over year selling by the manufacturer that was in the 25% range. We purchased about 26% as we were just a little bit ahead of that from a purchasing perspective year.
Over year, hopefully thats helpful and Joe and filling the gaps, Iowa, Yes, I think as we thinking about and sales leasing and where we are today to strong fourth quarter. Obviously, we know the industry shipments in the full quota for the.
Actually slightly above the maximum production capacity. So you can actually sell more the fact that we will complete our inventory for credit. This is the strength in the back half of the year that we saw ex duty to April and May timeframe for duty difficult to be from a top line perspective should intend and number of.
A number of shipments and then the drag as Frank indicated you know there's a lot of uncertainty about commercial sales. We do think that it's been bottoming, but as we look year over year, we just focus on that as well.
And my last point, you asked about inventory levels, we essentially sold everything we bought.
And the quarter, so, we didnt build and eight and a single inventory and the quarter.
Your next question comes from the line of Mike Dahl with RBC. Please go ahead.
Hi, Thanks for taking my question I, just want to follow up line on that with my question in terms of the inventory and understanding the dynamic that you purchased above that 26%, but you're still out with 6%.
But understand that the yes.
And the lack of build and is there any difference when you're talking about.
Inventory.
Are you, saying specifically to residential single inventory build was flat.
And.
And partner or was it kind of ramping up and non write downs and art for.
From a bit.
Would then going to be as you think about that for part of the year. How are you planning your kind of inventory.
From credit for.
Yeah.
No good question like.
So remember that pharma is talking about the manufacturer of selling and and are buying.
Which is relative to where we both for a year ago.
So and year over year buying for us.
And then obviously the sales for the year over year sales. So a lot of it depends on what the benchmark for a year ago.
We did have strong shingle sales.
For single sales slip the arm and data.
Collapse, we were at about 8%.
Asphalt shingle sales.
In terms of inventory what you saw was we were flat on a sequential basis quarter over quarter.
From a year over year perspective, we were down about $100 million and inventory down about 7% year over year overall the.
The commercial inventory on a sequential basis was down about 10%. So we did see and reduction in there that I think it was important for us to capitalize on given the end market demand also was.
Was down pretty significantly and the second half of the year.
Our next question will come from the line of David Macgregor of Longbow. Please go ahead.
Yes, good afternoon.
You called out the price increases that you were particularly pleased with the execution on the price increase which seems to be maybe a little more focus around that and by the.
And part of your narrative and slow just wondering if there was something different about the way you want about securing the price increase is climb that.
They have made a difference.
Dave Thanks for the question, Yes, I think that said and we we do focus on those price increase obviously, we've seen price increases over the last several years to asphalt inflation I think this was a slightly different type of price increase and.
And we have seen historically the last year, we've seen a lot of.
Do you have been put in place to asphalt driven into a declining market environment. At this time I think we saw price increases into what was clearly a good market.
Thank goodness, we executed on that very very well, we set targets for each other divisions and got a lot of buying and across the organization for high Lugo and demand we put tracking in place to ensure that we would gain the REIT and things.
And we had day updates on and how do we were executed and make sure that we were following up on.
Opportunities and we're presenting themselves.
Our next question comes from the line of Kevin Hocevar of Northcoast. Please go ahead.
Hey, Larry.
Wanted to.
I wanted to come back to the gross margin outlook for the fiscal fourth quarter, I guess I just want to make sure I understood. It right because if I look at normal look like.
Bye for now present growth margin in the fourth quarter guidance around 25, and the first no decline of 50 basis points quarter over quarter.
Looks like normal seasonality dictate that usually they're pretty similar it looks like if I go back sometimes little bumps and some little below one Hubert for Q and it seems like maybe the one of the big drivers was that you know positive price cost and without a doubt one of only benefited a small part of the quarter in the back half of the debt.
Recent quarter.
So I would think that that would be a tailwind sequentially into the first quarter as you get the full quarter's benefit from that.
Versus what you saw in the fourth quarter so it.
Is that the normal seasonality and is it reasonable to think that normally it's flattish sequentially and then it would sound like then these.
These other one time items that go late and the timing benefits might be more than offsetting.
Having a full quarter price so.
Curious I just wanted to get your thoughts on make sure I'm understanding on moving pieces right as we think of a growth margin.
So thanks, Kevin.
So think about it I'd like to be price increase went into effect in mid August.
And so obviously as we start selling and our inventory at that point, we are getting a full benefit before all of that cost comes in and we wait for all of our inventory as it goes and so that back and waves weighted to be benefit comes from and Q4, we continued to see.
Some of that benefit in Q1, as we continue to work through the inventory that we had pre price increase as the bad obviously diminishes the full out of the fully moving cost outs to catch up a little bit. So that's really where and compression comes from yeah. Typically as you look at all.
And I think your rights through the sales subtitle flat sequentially and what really happens is that as we get into it and kind of other late November post Thanksgiving December timeframe, the residential mix tends to drop off pretty quickly.
And so we see that so that material that was good for high margin component of our business. So generally we see towards the end of the quarter that drop off so that combined with the timing of our inventory.
And for any kind of at least two other things sequentially down because of the timing benefits primarily goes away.
Your next question comes from the line and some quirk of Deutsche Bank. Please go ahead.
Hey, Thanks could you just help.
Help us think through the impact on.
On working capital next year, and maybe how we should think about free cash flow for coming from any line.
Yes, I think for the free cash flow side and might be easier and just think about conversion.
I think if you were in the and 60% range next year in terms of free cash flow conversion, you probably get to the other REIT neighborhood.
Obviously interest costs, you know what thats going to be just based on.
What you're seeing we're probably going to be a bit of a higher tax payer for next year and I think you'll see a little bit more capex. This one was a bit artificially low.
Capex, given that we really curtailed and capex spending.
Net cash or in the and Q3 and thank you for a little bit. So capex is going to be a little bit higher year over year, and then I think the book.
Conversion of about 16, and really talking about and EBITDA to free cash flow.
Should be in that and that 60% range.
Next question from from the line if the demand you Baird. Please go ahead.
Yes.
Thank you good evening everyone.
Two questions first off.
Could you give us price realization year over year Raz non res complimentary and then second on the gross margin can you.
Sales approximately what was the gross margin benefit from rebates and then also strength when you gave the list of positive.
Margin factors and you did not mention private label and Im just wondering why not for the two small or what.
Yes, I think on the other private label piece.
Anytime share private label sales increase which they clearly did as Julian mentioned, we do get some margin lift thats clearly embedded within that so apology for operating that went out and separately, but you know book digital is helpful. Their private label is helpful. There.
Mix is helpful. There, there's a lot of different back and we were trying to give you some of the kind of the major moving parts, there, especially the ones that maybe you need for the quarter and and not repetitive.
In terms of the vendor incentives.
No vendor incentives are largely derivative of and what we sell in the quarter as compared to what Wi Fi and for.
So for this particular.
Quarter, given the fact that we had significant year over year sales, we did have higher vendor incentives from those sales of the mail for the ability of catch up from Q3, just based on the outlook that we have for sales at that point in time, but largely it was because we had such a significant sell through of asphalt shingles and the core.
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Your next question comes from the line of Kathryn Thompson and TRG. Please go ahead.
Hi, Thank you for taking my question today, that's for sure.
It's really all and logistics could you give and status that I can constraints and how this has impacted your and curious business versus your exterior products and.
And then could you clarify differences and and and transportation and getting product from your suppliers and like.
How you doing and trends and just getting product to your and customers. Thank you.
Hi, So the question Kathryn and to be quite Frank with you and we have not experiencing a lot of inbound freight.
Challenges today and.
Oh, primarily on me.
Exterior side, it's more related to other.
And we will supply from the manufacturers in terms of that production capacity, obviously all of the manufacturers not just for next year the growth our interiors business cut and production and the April may timeframe and.
For the market rebound is within the residential space, obviously, the market got high mid and and get some disruption and Matt.
And is more related to supply from the manufacturers and it is directly to trucking and that we non having any problems once a day on.
Once we get the and man trucks into our facilities and getting them and.
And when we are having.
Few issues space, just around that supply and getting the inventory balance right across the country and Max that's probably a little bit.
Related to again, the supply situation not so much the inbound freight and challenges the kind and we were very happy with our ability to service all but customer demand.
Actually fewer trucks and fewer truck models for the for the fleet that we own and lease we actually delivered some pretty nice productivity and last couple of quarters operating for trucks fewer miles for essentially the same delivery, so well and so pretty good all around.
Our next question comes from the line and Ryan Merkel of William Blair. Please go ahead.
Hey, Thanks, two questions for me first I realize the commercial outlook is murky and things normalize there a meaningful pent up demand opportunity and your view and snack and how much was price adding to revvy sales in October.
Sure.
So I'll address the commercial question.
Just like you said the prepared remarks, we do think that we have seen and.
I will flow.
As stabilized and.
What we're seeing on a market basis is really about and Choppiness a way and whether the job is is to ship. It tends to go very quickly and right now and.
I do think we've seen some.
Some of the statistics that we follow the architectural billing index for example, less value back Thats studies and back to.
Kind of what we see is a more normal levels and say.
And I think we just reported see perhaps updated.
Steve double digit declines that we've seen for the last and.
Several for couple of quarters.
But I still think we're going to see it down.
For the next several quarters looking forward and a partly because a lot of that.
New construction that would normally flow through just some quick stop so I just think we're going to see it and in the intermediate soon.
And the longest sales I think it bounced back and I don't think there's anything about this.
And this time and Inc.
The soda fundamentally ulta and how good credit look ultimately I think in that and might be soon.
And delayed investments the sales in roofing and.
That might be pushed off for exports. So it is so big and certainly not going to be up.
Much as it has been and we think thats coming back a little bit, but certainly a little bit and leg and on your October question around credit and general as Julie mentioned.
Sales up double digits.
I'd say.
For two for a.
Wouldn't be would be the right way to look at a kind of one third price to start volume.
Your next question comes from other.
Line of Keith Hughes of Trust. Please go ahead.
Keith Hughes with Chris. Please go ahead.
I guess, you referred and the prepared comments on realizing $20 million.
On the branch.
And.
Oh Wow.
Net up in that range. Thank you get that the majority of it and then next fiscal year.
Thanks for the question Keith.
And I think you're right and just asking about our and opening branches and we say we got 20 of the 30 to 60 that we said we forecast or other.
Targeting I don't think it will get all of that still remain.
And the next year I mean, we've obviously that we're managing back a little bit from the Covance.
Installation, so I think there's a little bit of accounts I do think we can see continued progress among some of those branches.
We're also going to make sure that we expands the book.
The growth that we're working with two and.
I show that we are releasing this as quickly as possible.
I think we certainly see something similar.
I would say is getting a whole 60 is day, you indicated but into next fiscal year.
Your next question comes from the line and Silicon from Jefferies. Please go ahead.
Hey, good good evening, everyone. Congrats on a very strong quarter.
Single manufacturers and other 46% price increase for February I'm. Just curious you had increases yourself and you see as an opportunity to continue to drive further growth margin expansion and when we think about and just.
Other businesses, whether it's a commercial or your and your ex care business. The drywall healing non read and you know do you see in operating kind of replicates and that success, you've had on pricing and gross margin as we look at 2021.
Thanks for the question, but and then.
So let me start with shingles, and I'll broaden it out yes, we had one or two and manufacturers who have announced the February price increase and quite honestly sitting here in mid November I think it's a little early for me to prognosticate on how that would be as I said in prepared remarks as well as the the increase.
Yes, we did show good execution I don't see any reason why it increased goes into place and if the markets.
And you see why we should and execute very well and it's a little early to know this has been when placements and February is and.
And the strongest month for the year from a demand perspective, so our plan a little bit of a a wait and see attitude on where that goes.
With regard to the rest of the product line and we have seen price increase and announcements and it's still early in terms of execution and obviously the market and the residential side of things is that still reasonably good and so obviously price increases into a reasonably good.
Okay, and always have both chance of success.
And I think we're going to continue to emphasize that as I said in my prepared remarks, our leadership team is very focused on that and very focused on the execution and sizing that through the organization. So certainly if we do see price increases and we will.
We get some flow manufacturers, we would intend to push those price increases through into the marketplace and make sure that we can recover accounts and get paid so.
Value for what we do.
And I think other commercial side and again I I really do feel day that it's pretty murky debt.
Hey, Matt.
Good day, and so I think that we've got some opportunities and markets that I think there is also some some opportunities for leakage and that as well.
And next question comes from the line of Truman Patterson from Burton. Please go ahead.
Hi, good afternoon, everyone. Thanks for taking my question.
Just wanted to touch on your adjusted Opex.
You know as Pos and was essentially flattish year over year on very similar revenues you all mentioned that your lower quintile branches underperforming branches. I think you were able to drive 20 million and EBITDA improvement.
For the entire year, but you know I guess, where I would have expected no opex leverage in the fourth quarter. If that were the case, where what are the real offsets and how can we really think about this going forward as we move from your 21, I'm really thinking and some of those codes and costs coming back on line.
And terminal the price good question.
While other parts and Q4, let me walk you through those we were really happy with the labor productivity and the fleet productivity.
Fewer people lower overtime and better sales per hour work all the things for us talking about talk about lower fuel costs for TV costs.
Really good about the thing and we were doing other productivity side and then when you look at the primary offset to that it was really higher incentive compensation.
And what you saw back three or four months ago, and we were the death of of Cowen.
Ill incentive comp what that was.
Thanks.
Worried about time and.
A real good prognosis for the rest of the year, So obviously on a sequential basis.
And a very different place on incentive comp.
And the same cultural and year over year basis.
When I look at a 21, certainly the first quarter I would I would estimate for you that opex should be lower a year.
Year over year, both from a dollar perspective, and an opex for sales perspective.
And I would tell you the same on a quarter over quarter basis.
From a year over year perspective, you are going to continue to see the labor and the fleet productivity and you're going to see us deploy the lessons learned from co bid as we winterized, especially in them and the northern half of the country and you're going to see continued lower travel and entertainment costs.
If I looked at it on a quarter over quarter basis, So how do we do sequentially.
And so thats going to reset to target.
And we're going to have more variable costs, just given the fact that you got lower seasonal sales from Q1 and of course.
Versus Q4.
Your next question comes from the line of Trey Grooms and Stevens. Please go ahead.
Hi, Thanks for taking my question so.
I just wanted to touch on the supply situation you referred to.
Several times of course and.
And just more color if you could on that and and are you expecting this to impact or put a governor on your sales at all once and maybe new rents starts to ramp we've seen there really start flowing through to you guys or should that can normalize as we get into the seasonally slower demand period.
Thanks for that.
So essential elements and I think as I expect we sold everything we boards and the and the full quota and and we've seen a pretty strong start to Q1 and the same same vein inside sales items at 5% and now code and so obviously as we start to see winter impact.
Yes, the overall.
Sales side of things inevitably, we're going to be able to get exposure and goes and there is demand and marketplace I think thats going to and that's going to happen. So I think that and both manufacturers and the distribution channel is going to be able to replenish some of it.
And now I think we're at very low levels I think the manufacturers and very low levels today and I think the distribution channel is a very low levels today and so.
And there's some work to do food.
And to replenish and then I think it's a good question is as you emerge from and.
Okay. The February timeframe into March and we see sales pick up quite sharply between February and March and in March and April and.
Given the outlook for new housing and given the outlook for repair.
Repair and replacement, it's I think we could be looking at some and.
Some level of continued.
Supply challenges.
Oh, Yeah early part of the year.
Thats all assuming this and those sales do actually come to pass them and the housing market continues to be as strong as it is today I think we'll wait and see on that I think the lease and replenishment over the next couple of months for sales decline and then it will really be a tale of how how the spring selling season really starts to.
To break out the window.
Your next question comes from the line of Garrett minus the capital. Please go ahead.
Hi, Thanks, Congratulations I'm just wondering if you could talk about if there's any carryover storm demand impacting your guidance and.
And how to think about geographic mix and fiscal 21, just given especially the sharp decline in the spring and some of the north and West coast markets due to code.
Thank you Karen and.
Certainly we saw other see the storms those heads, Louisiana, particularly towards.
No for the back half of <unk>.
Q4.
And create some demand and in those markets, we would expect as sole hurricane related demand.
And good dry gas. So we would expect to see that continue given that into other parts of the of the U.S. and less impacted.
By whether we would expect to see some of that come through in the ER and.
And this quarter for sure Paul and we certainly anticipating that is.
And is going to be there those new supply as well and.
And making sure that we can get products and food into that region. Obviously for the heavy building materials B, we deal with and travel too far up effectively so we want to make sure that.
That is positioned appropriately and.
As we look as we saw sales the it's through last year.
The storms were of average I think that we would probably say given the hurricanes would be and good fiscal year. It might have been a stronger cash via the and all and you know, but I think the.
So far we saw growth.
Moving on physical yeah, pretty normal Colombia and.
And obviously, it's starting out a little bit stronger.
But its a.
For long time, you still got a lot of the other hailstorms in the spring moving to work through it and decided it had a meaningful impact on our outlook I would tell you. It creates a sort of planning process and this we always go back to an average soul man.
And page eight.
Top line based on what we think a normal storm year is.
That concludes the question and I would like to turn call back over to Mr. for instance for his closing comments.
And he Gabriel and thanks to everyone for joining our call.
Especially thank our customers.
Moving good very challenging environment and faced uncertainty with courage and.
Also lot supply line into phase one slowing demand and did they are opposed to ensure our partnership navigated the past few months successfully.
To our employees and incredibly grateful for your commitments to help our company fried and.
We hope all of you on the call and all of our employees customers and suppliers and things help and I hate and healthy.
Thanks, very much guidance.
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Growth.
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