Q1 2021 Beacon Roofing Supply Inc Earnings Call
Yeah.
Good afternoon, ladies and gentlemen, and welcome to the Beacon.
First quarter 'twenty 'twenty, one earnings call. My name is Cathy and I will be your coordinator for today.
At this time all participants are in a listen only mode.
We will be conducting a question and answer session towards the end of the conference at this time I will give you instructions on how to ask a question.
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As a reminder, this conference is being recorded for replay purposes.
Call will contain forward looking statements, including statements about its plans and objectives.
And future economic performance.
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 in the risk factor section of the company's latest form 10-K.
These forward looking statements fall within the Safe Harbor provision 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 Paul.
Looking statements contained in this call are based on information as of today February eight 2021, and except as weak.
By law the company undertakes no obligations to update or revise any other forward looking statements.
Finally, this call will contain references to certain non-GAAP measures.
It was a conciliation 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 website.
Under events and presentations that will be referenced during management's review of the financial results.
On the call today for Beacon will be Mr. Julian Francis President and CEO and Frank.
When they grow.
<unk>, Vice President and CFO.
I would now like to turn the call over to Julian Mr. Julian Francis President and CEO. Please proceed Mr. Francis.
Thank you Kathy and.
Good evening and welcome to our first quarter of fiscal 2021 earnings call on the call with me.
Franklin that growth, our chief financial Officer.
Our prepared remarks will correspond with the slide deck, which is posted to the Investor Relations section.
Website.
Before I get into the detail as you know, we have announced the divestiture of our interiors business.
As such we are providing to set some financial information.
Information in today's earnings release.
Our primary focus will be on a continuing operations, which focuses so moving on the exterior business entry into discontinued.
Operations.
I know many of your models are still based on the combined company. So we've also provided a summary information on the combined results I.
I Hope you additional information will help you better gauge our first quarter performance and supports our analysis going forward.
On a continuous basis, we generated Q1 sales of $1 6 billion.
Seven 4% year on year, Inc.
Adjusted EBITDA improved to us.
$243 million from $77 million the price yet.
On a combined basis, so including in serious sales were $1 8 billion with 9% sales growth.
Adjusted EBITDA for the combined business with $158 million compared to $94 million.
Fiscal Q1 last year.
We believe that the numbers are important and understanding our first quarter results.
The remaining commentary this evening will focus on the continuing X series business.
But in the appendix on slide presentation. We have included supplemental 2019, and 2020 income statements for the continuing X series business that should help you in modeling our pro forma financials.
I'll now begin on page four of the slide materials, which focuses on our first quarter continuing results.
Our fiscal 2021 is off to a great start.
First quarter adjusted EBITDA increased 86 percentage driven by the strongest quarterly organic sales growth and moving for us.
The best first quarter EBITDA margin percentage in over a decade.
From a leadership and I'm very proud of the team's execution the past three or four quarters I believe that this quarter. It gives you a sense of what the company is capable of delivering.
Now there are several important takeaways from the first quarter.
But residential demand is strong.
Residential roofing sales increased 21% in the quarter from re roofing and new construction activity was aided by milder weather, which opened up additional web page for our customers.
And if your Gulf States demand was boosted by hurricane related repair work in the store.
Long demand environment provided a favorable backdrop for the successful price increase we implemented in August.
The positive market fundamentals also helps boost exterior complementary products.
With the divestiture of interior products mix is now more residential be focused and biased towards replay and replacement activity.
Second we continued to demonstrate good execution on our price actions.
As highlighted during our last quarterly call. Our team moved quickly in response to the August shingle price announcement from the manufacturers.
We implemented higher prices to essentially coincides with the timing of the supply are increasing.
And as we've discussed previously the timing and execution of our price initiatives create favorable timing benefits, which positively contributed to gross margin in Q4 'twenty.
In the first quarter of fiscal 'twenty one.
First quarter gross margins were 25, 4% for continuing operations exceeding our expectations. We continue to see inflationary pressures across most product categories and we have confidence in the current environment, we can capture additional pricing opportunities to more than offset cost headwinds.
First quarter results demonstrated our ability to manage operating costs.
What about simple goals from the leadership team is to aggressively manage costs in oil demand environment. We are extremely proud of our expense management during the past three COVID-19 impacted quarters.
We recognized that with all the moving parts during Covid and the year end close determining the impact of our actions has been difficult.
We see the first quarter as an indication of the progress we've made.
During Q1, continuing adjusted Opex dollars declined 3% year on year, Despite an 11% sales increase and a higher than normal residential mix, which is typically higher cost to serve.
In a growth environment and important part of our focus is to generate significant operating leverage closely watching costs and managing the controllable aspects of our day to day considerations as we run the business.
Now please turn to page five slide materials.
In our previous commentary, we have taken a more cautious view, one quarterly results, reflecting the potential impact of weather disruptions.
However in November and December monthly sales growth accelerated meaningfully a reflection of strong underlying demand and favorable weather conditions.
Our continuing business finished the strong 11, 4% sales growth for the quarter.
Gross margins at 25, 4% the stronger than anticipated, but the upside from favorable residential mix supplier incentives tied to higher volume and continued price execution.
Our first quarter operating expense outlook same strong cost management tied to anticipated winterized nation during the quarter.
Very pleased to report a meaningful opex decline, even with robust sales growth free.
We'll share some of our specific productivity measures later.
From a continuing business adjusted EBITDA increased from $77 million.
$143 million and EBITDA margins increased from five 4% and nine 1%.
The favorable performance was driven by a combination of strong sales growth a significant increase in gross margin and a reduction in operating cost, resulting in significant opex leverage.
Moving to page six of our slides materials.
As you an update of our planned interiors divestiture.
Few of our business following the transaction's close.
We announced in late December the sale of our interiors business to American Securities will subsequently integrate the transaction with our recently completed acquisition of Foundation building materials, we're making great progress and expect the deal will close later this week.
The <unk> business includes building 80 branches focused on wallboard ceiling tile and grid steel studs and insulation products.
Serious operates from a separate branch network from our experienced locations, making for clean separation of the business.
We were pleased with the outcome.
That's a cute and attractive valuation of $850 million for the interior business.
Certainly the proceeds allowed us to improve our balance sheet.
You didn't lower our net debt leverage to three in Europe previously published targets and provides us with much greater financial flexibility.
The divestments will return beacon to its legacy position as a focused leader within exterior building products distribution.
80% to 85% of all continuing business will be within residential and commercial roofing.
The roofing market attributes is relatively unique with an 80% from residential and nonresidential roofing is classified as repair and replacement with the majority of that being non discretionary and driven by the replacement of worn or damaged routes.
The remaining 15% to 20% of our exterior business is complementary products, consisting largely of siding windows and doors lumber and waterproofing products.
These exterior complementary products have some overlap with roofing customers and shared distribution facilities, providing meaningful sales and the operating synergies.
To summarize we feel even serious divestiture represents a transformative strategic event for the company narrowing management's focus substantially improving our balance sheet and financial flexibility and concentrated in the business around our core capabilities.
Next please turn to page seven slide deck.
Yes.
In recent quarters, we provided updates on each of these four strategic initiatives and licensed the interiors divestiture. He felt it was appropriate to reset our financial targets and metrics for each of these initiatives remain central to our improved sales growth operational efficiency and profitability.
Some of the impacts can be directly measured there are also additional benefits from which are less obvious that play an important role differentiating us from competitors.
The incremental value from customers.
Let me begin with organic growth.
This initiative is focused on improving both the number and the effectiveness of interactions between our sales organization from customers. We continue to invest in sales training programs marketing support and value added tools to help our salespeople trackless contacts with existing and potential new customers.
And we have established targets for our sales team involved in the number of interactions daily and we know that meeting these objectives strongly correlates to driving overall company sales performance.
Next is our industry, leading digital platform.
A clear differentiator in the marketplace for Beacon.
During our last quarterly call, we disclosed the digital sales it reached a run rate of 10 percentage of total company sales during the final months of fiscal 2020.
Our exterior business was further along the adoption and interiors. So we expect to see another bump in adoption this year.
We have continued to leverage the customer adoption rates that accelerated during the early COVID-19 environment and are confident our current year and long term growth trajectory will cement our leadership.
Digital is an excellent example of how a shop as opposed to divestiture focus should pay dividends for growth.
The organization will now be able to devote 100% of the times the exterior products on the platform and develop new offerings.
Next moving to our on time and complete network, our OTC strategy creates a network of branches and larger Msas, we operating 58 distinct markets and have more than 250 exterior branches participating in OTC.
OTC provides full key benefit.
First is improved customer service as we have greater flexibility to deliver from the branch with the best combination of products and service to support the customers' needs.
Secondly, the low cost to serve.
Since we can optimize across our network of branches, we get reduced to delivery time, and mileage, improving labor efficiency and reducing fleet cost and emissions.
The reduced inventory levels. We previously indicated we believe we can reduce our inventory by $50 million to $100 million.
As we optimize across our OTC batches and we remain confident that we can hit that target.
And fourth we can accelerate our talent development, our OTC creates opportunities for our people to explore a variety of roles at beacon and build increasing levels of responsibility, allowing them to build great careers with our company and reach their full potential.
Lastly, I want to update our branch operating performance targets I've talked extensively about our focus from the bottom quintile branches and our goal is to significantly improve the operating performance.
We've developed a diagnostic tool and are reporting cadence the places emphasis on structural change excuse ensure we get sustained improvements.
We previously guided to a 30 million to $60 million improvement at these branches that we've achieved over several years.
We shared on our prior earnings call and in fiscal 2020, we've seen him more than $20 million year over year improvement the majority of which came from exterior branches.
With the success, we saw a true in the first year of the program. We are now resetting on 'twenty and 'twenty, one target to a $20 million year on year improvement from the lowest quintile exterior branches.
Yes, we will continue to focus on driving sales and operating improvements to bring these branches overtime up to at least our company average.
To summarize my update on our strategic initiatives and the objectives, nor their anticipated impact to beacon have changed following the interiors divestiture. Instead it has sharpened our focus on these programs like the enhancing their effectiveness over time.
Now I will pass the call over to Frank to provide deeper focus on our first quarter continuing results.
Thanks, Julian and good evening everyone.
Julian highlighted we're providing significant transparency this quarter with first quarter results for both continuing operations extra resulting in combined results exteriors plus it.
This is designed to assist you.
Our first quarter results with your current model.
You adjust your go forward model for our continuing operations.
Turning to slide nine.
Sales within our continuing exteriors business improved 11, 4% year over year.
Sales growth accelerated materially from the previous quarter at our monthly growth rates accelerated throughout Q1.
Residential roofing produced more than 21% sales growth.
As housing market indicators remain favorable for new construction and core repair and remodeling.
This year, we saw the roofing season extended further into the early winter months, given the strong underlying demand and milder weather in many geographies.
Sales also benefited from regional strength in several southern states touch hurricane related repairs.
Commercial roofing sales declined 3%, reflecting significant improvement from the double digit decline we experienced in Q4.
The combination of milder temperatures hurricane business were helpful to commercial roofing in the quarter.
From a more fundamental perspective, the worst is likely behind us commercial roofing and the comparisons ease during the second half of fiscal 2021.
However, there remains lingering uncertainty for new construction every roofing within the office and retail markets.
We continue to adopt a cautious commercial outlook until we see tangible evidence that demand deferred from 2020 will occur this year and building owners returned to more normal timetable for capital projects.
Complementary products sales increased nearly 9% in the first quarter remember that this growth rate reflects only our complementary exteriors business, which has a higher residential end market exposure.
As you think about the mix of complementary going forward, we view this as being approximately 80% residential and 20% commercial.
Key complementary products for residential include vinyl siding fiber cement siding lumber windows and exterior doors, while a complementary business for commercial is primarily waterproofing.
Both categories are distributed through our traditional branches and share overlapping customers without roofing business.
Turning to slide 10, we'll review of gross margins.
Gross margin from continuing operations was 25, 4%, increasing 140 basis points year over year, and 30 basis points sequentially.
Drivers of the strong year over year increase were equally split between favorable price cost and favorable mix.
On a year over year basis price cost for continuing operations was positive by approximately 70 basis points in Q1 by comparison, we experienced 90 basis points from year over year price cost benefit in Q4.
In the first quarter price cost was favorably impacted by our successful implementation of <unk>.
Recent pricing increases the remaining timing benefit related to the August increase and higher incentives based on stronger sales.
We also benefited significantly favorable product mix in the quarter as we experienced stronger residential roofing sales.
To sum up first quarter gross margins were above our expectations driven largely by the combination of sustained successful pricing execution and factors related to our strong residential sales, including product mix and higher incentives.
And as you know there have been additional pricing increases announced across a broad range of our products.
We are approaching those increases with the same level of rigor and execution, we have demonstrated in recent periods.
Now shifting to operating costs to add onto Julians earlier comments, we've made some tremendous strides in this area, particularly in the past three quarters in my opinion, our first quarter performance is a meaningful demonstration with beacon is capable of delivering.
While third quarter 2020 highlighted our ability to make temporary cost reductions at a period of challenging demand. The first quarter shows our focus on managing expenses in times of significant growth.
Adjusted Opex from continuing operations was $276 million, a $9 million reduction from the year ago quarter.
Despite sales growth of more than 11%, we were able to generate a 3% reduction in adjusted operating costs and accomplishment. Our entire organization is very proud of and is testament to the dedication of our field leadership and one thousands of beacon employees delivering for our customers every day.
We continue to focus on the elements of our business that we can control and improving productivity within our largest cost centers, including labor and fleet are a major focus for beacon.
We have updated the head count net sales per hour work data to reflect current and historical data specific to the exteriors business as you can see even with the significant uptick in demand over the past several quarters. We finished Q1 with head count down more than 5% year over year.
Our reduced head count combined with 11% top line growth generated a significant increase sales per hour work, which is up 25% compared to last year and improved sequentially, even with typical challenges of seasonality.
In terms of other operating costs, we continue to benefit from reduced travel and entertainment spending which remains well below historic levels. We would expect a portion of these expenses to come back in over time, but are unlikely to return to historic levels as we continue to leverage greater sales effectiveness and operating efficiencies as.
As we go forward, we will continue to implement improvements within our business as we fully embrace continuous improvement mindset.
Turning to slide 11, we'll review our cash flow and balance sheet.
Accordingly, I hope to accomplish three things with this balance sheet and cash flow overview.
One reset cash flow expectations for exteriors.
To discuss the use of transaction proceeds and three update our pro forma net leverage.
During our previous calls we comment on our expected cash flow performance for the combined company.
Importantly, we expect our continuing exteriors business have similar cash conversion for the combined company obviously.
Obviously, there will be unique working capital fluctuations from time to time that may impact us, but we remain comfortable with these expectations for cash conversion.
We plan to deploy the divestiture proceeds proceeds estimated to be $750 million on a combination of debt reduction and growth investments.
Our current thinking is that debt reduction will be concentrated on our ABL and term loans with the remainder held as cash from our balance sheet, providing us with the flexibility to invest in inventory as we did this quarter and the ability to selectively invest in organic and inorganic growth prospects.
We have been effectively absent from the acquisition from the past few years because of our relatively high levels with.
With the upcoming closing of the transaction pro forma net leverage for the continuing business with declines of three two times EBITDA as of the end of fiscal Q1.
Remember that we previously had a standing target of three times EBITDA and we're envisioning roughly three years to achieve this objective.
We're delighted with the expected outcome of the interiors transaction and look forward to the financial flexibility that comes with lower leverage levels with that I'll turn the call back to Julian for his closing remarks.
Yeah.
Thanks, Frank before we turn the call over to questions I want to update our fiscal 'twenty 'twenty one outlook. Please reference page 13 of the slide materials.
To begin with it's important to clearly distinguish between our current fiscal year 2021 guidance from our previous outlook provided in November.
The price view of sales margins and EBITDA included our interiors business with today's outlook excludes <unk> interiors and focuses solely on the continuing business.
With that let me go to some additional details on 2021.
January daily sales continued to see strong demand trends similar to what we experienced during the November and December months.
Total sales basis January sales increased about six 5% versus January last year on two fewer selling days.
A strong housing market continues to boost both repair and replacement and new construction.
Fitting core residential roofing demand and the residential exposed areas within complementary products.
January sales growth also reflects a positive contribution from our August 2020, residential roofing price increase and several smaller increases with our other product categories implemented over the past several months.
For our fiscal second quarter ending in March we expect total sales growth of mid to high single digits. Despite one less selling day in the prior year.
We remain confident in the underlying demand, especially on the residential side, but are mindful of the impact of winter weather on the business like we saw last week.
We continue to emphasize pricing execution and operating efficiency.
Seasonality has historically reduced second quarter margins, but we believe the impact will be smaller than in recent years, and we expect a meaningful yes, EBITDA gross margin increase of nearly 200 basis points.
In early December we announced the price increase from residential roofing products that became effective last week, we expect to implement this increase at the same level of execution as we did with the August increase.
We continue to emphasize improvements in operating efficiency throughout the organization and have made tremendous strides in this area.
You've heard us talk about the learnings from last year and the opportunity to apply those principles to our seasonal <unk> as well.
All fully engaged in this effort we are carefully balancing efficiency with customer service given the favorable residential demand picture we are experiencing.
Yes.
For the fiscal 2021, yet we continue to take a balanced view on external market conditions, featuring a strong residential end market and continued uncertainty within our nonresidential facing products.
With that said our confidence in the overall environment has clearly improved since November <unk>.
This is a market demand we remain focused on what we control control generating improved sales gross margin and operating performance continuing to execute on our price actions to more than offset inflation and driving efficiency across the organization.
We have emphasized these areas throughout 2020, and we'll continue to do so in 2021.
Our updated 2021 outlook.
Moving operations now assumes high single digit sales growth.
We expect fiscal 2021, adjusted EBITDA to be between 500 and $525 million from continuing.
<unk> operations, which represents a meaningful increase from the $399 million exterior <unk> pro forma adjusted EBITDA for fiscal 2020.
This improvement reflects a combination of strong sales growth gross margin gains and favorable operating leverage.
With that Kathy we're now ready to open the line for questions.
Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your telephone.
Question has been answered or you wish to win.
Whats your question press the pound key.
Each call.
One question.
Okay.
Yeah.
And your first question is from Gary.
Capital.
Congratulations on the quarter.
My question is on gross margins could you flush out a bit how much of the Q2 gross margin expansion is price.
I sing versus mix and how should we think about that relationship a toothbrush.
Through the rest of the year as it relates to your guidance.
Well Gary Thanks for the question I appreciate it.
The comments on the quarter, we're very pleased obviously, we've got a very strong residential backdrop.
We're still in a.
Q2 overall, so the sequential numbers.
Certainly a positive.
Overall, we believe.
I think that the meaningful improvements on a year over year. It is a balance between the two numbers Frank Scott some specifics on that I believe.
Yeah Gary.
If you think about the second quarter is going to benefit from the combination of the August pricing increase plus the February pricing increase at least two thirds of that in the quarter.
And if you look at mix in the first quarter relative to the.
The prior year Youre looking at about a five.
Percentage point swing, so <unk> five percentage points higher in terms of mix.
That it was a year ago and those trends will largely hold in the second quarter as well so it's going to be a meaningful part of both price cost.
Mix, we might get a little bit of timing benefit in the quarter as well you might remember that we had some timing timing benefit from the August pricing increase that between fiscal Q4 fiscal Q1, so it's going to be.
Obviously helped me on on both sides.
We look forward to sharing that with you when we get a couple of our sales group.
Your next question is from from.
From Jefferies.
Hey, guys I'm.
I'm just curious to get your view on channel inventory doesn't seem like there was much there just because of demand from pretty robust, but the army data was pretty eye popping.
For you your inventory levels only marginally up I think up sequentially, 19%. So just curious to get your take on what you're seeing in the marketplace and how are lead times kind of progressing on the residential side right now relative to what you deem as normal.
Thanks for the question, Phil Yes look as I said in our prepared remarks, we believe the residential backdrop is strong we continue to see extended lead times, we believe that.
Both the channel and the manufacturers continue to have depleted inventory, particularly where we would normally be at this point of the year.
I think that if you'd looked as he said the Q4 was a little light popping I think that if you looked at it it was probably about all the manufacturers could produce.
And ship and I think that the distribution channel knowing that so we'll believing at least that the future looks rosy who's going to buy in as much as they can and much of the industry on the shingle side was that it was on allocation. So obviously, we did all we could and we believe we did quite well during the quarter.
But you're right I think that overall way, we would normally be at this time of year and what we would be looking at in terms of inventory.
It's.
Probably a low in the overall and the overall channel and we believe it is low and the manufacturers.
So we think that that's going to lead to a very positive environment provided you see continued strength in the residential market overall.
That's really helpful. And then any color on what you're baking in from a price cost spread I mean, you've obviously seen seven basis points of improvement the last two quarters and you.
You're anticipating pretty good traction for some of these recent increases normally on a residential side is that type of is that type of a spread what you're baking in at this point in your guidance and if it comes in better I guess is that an opportunity to force.
See upside to your guidance thanks, a lot.
Thanks, Paul So [laughter].
Certainly.
We are focused on the execution side of the price increases and we certainly believe that as.
As I said that there is.
Yes.
Expansion potential in our gross margin based on improving.
Improving price.
Well I think we've got to be aware of as you know, we just had a price increase announcement. It went through last week, that's still in the execution phase.
We've still got a lot of the year to go we are still in early February and so call. It call. It well that's going to be for the rest of the year is going to be a challenge, but we certainly think that given the backdrop. If it remains where it is and we don't see a resurgence of COVID-19.
All of the things that we believe about the market today.
Is that the underlying demand is strong we certainly believe that they can be positive upside to our the overall pricing environment for the year.
Super helpful. Thanks, a lot.
Yes.
The next question is from Kevin Hocevar.
Yeah.
Hey, good evening, everybody and a nice quarter.
You guys are are raising the sales guidance for the full year to high single digit percent growth from low single digits.
Obviously, there's a lot of moving pieces in there there's been a lot of price increases. So curious if you could give us some idea of how much did that is price versus volume and then you know within the segments.
How do you expect to the different segments to perform versus debt.
I'm, assuming from all the commentary Reggie above non res you're below and then complementary somewhere in between but curious if you could give us just a little bit more color on.
What that high single digit percent growth as it is made up.
You know hey, Kevin it's Frank.
If I just think about the first quarter the.
The 11% that you saw that was primarily volume driven.
Certainly there were some pricing in there from.
August and what's going to be interesting to see is the layering on of additional price increases obviously you get February on top of August.
And then who knows what's going to happen. There is talk of additional pricing increases in the spring and the summer so that will certainly be beneficial.
As Julian mentioned, we will be looking at how we approach that and you should see us SL.
Essentially replay the playbook that we did back in August that we're doing now in February.
So if you look at it from that perspective, we should be good.
And a little bit of an answer to Phil's question, a second ago.
We sold everything we bought in both fiscal Q1 and fiscal Q4.
So material availability is the only question Mark we have in terms of being able to fulfill the demand that's out there.
So if we're able to continue to buy we're going to be able to continue to sell the backdrop is extremely strong as you know.
Whether or not punxsutawney, Phil was correct in terms of the likes of winter, we will have to see.
As the construction season opens.
Appropriately we look forward to a really strong spring and summer and.
We will look forward to those price increases in approximately the same way that we've done before.
I think.
Particularly as you get later in the year that becomes more challenging in terms of volume because if you think about where we were as an industry in Q4.
I mean basically as Frank said, we were selling everything we can buy it so.
Volume will become less of a growth driver later in the year, then price will be.
Okay got it thank you.
You have a question from Ryan Merkel William Blair.
Hey, guys two questions from me first off can you break down that 21% residential growth into volume and price.
Okay.
Yeah.
In the shingle side.
Which obviously it was higher than the numbers that you saw there.
The volume number on a year over year basis was about 24, 25%. If that's helpful to you.
Obviously, you can do the math on the pricing increases we don't we don't get full.
Full pricing increases on every single that we still given contracts and things like that which take time to rollover, but the volume was really impressive in the quarter. Your second question.
Yeah and the second question is just curious if you have any updated thoughts on EBITDA margins long term I mean, you just put up a huge margin print this quarter and some of the operational initiatives are clearly working so just an update there I think would be helpful.
Thanks, Brian well you know as I've said before look we we don't believe there's anything structural.
And beyond.
And getting back to kind of what we've indicated historically and so the last quarter just prove that.
You know I continue to believe that.
Yeah. The historical performance on average has been around seven 5% EBITDA margins I continue to see plenty of upside from that.
Obviously that one of the things that we've got to work through is that it is a seasonal business. How are how we manage to winterize or still a little bit of an odd.
Quarter normally we would see mortgage amortization demands remained strong but concerned about making sure that we've got people available to serve the customers is through this winter and so this is a little bit of a difficult one to gauge as well but fundamentally.
We're looking long term at <unk>.
Substantially improves.
Overall EBITDA margins on a continuing basis.
What Frank and I are working on and as to the actual guidance around that we haven't settled on it yet.
I think that day is just a lot of optimism that we can see some structural improvements that are starting to take hold in the company.
Very helpful. Thank you.
Yeah.
You have a question from Kian.
From BMO capital market.
Okay.
Thank you al Congrats on a strong quarter.
Wanted to come back to capital allocation again.
So following you know depending divestiture of the U S business, how do you think about sort of the light right leverage for Beacon.
And then from an M&A standpoint, you know what day 80 hours I was.
Most interesting to you guys. Thank you.
Yeah.
So on the capital allocation question a good question.
This certainly puts us into a range that we had previously discussed $3 times two times on a pro forma retrospective from the end of Q1.
Obviously, you can apply some cash flow from throughout the remainder of 2021 and get to a another number that's below that.
We haven't.
Really talk much about our next target.
If you look at our peer set somewhere in the two extra three X range is probably fair, but that's not a commitment more just looking at the peer group. It's an active conversation that obviously, we're going to have with our with the board but were at a tremendously different place.
Where we thought we were going to be at this juncture without the divestiture, where we thought it was going to take us probably three years to even get to the first target that we set so delighted with that and then the next part of your question I will defer over to Julian.
Thanks Frank.
Yes.
Areas of M&A, obviously, we just divested interiors business, we're going to consolidate around the business. We have make sure. We can improve that we see areas that are.
Opportunities for us to grow in the businesses that we're in.
Commercial residential roofing and complementary exterior is certainly that's a that's an area where we will be.
Focused and.
I don't think that we're going to slow much beyond that and it is needed in the near term, particularly given as we've just exited interiors jumping back into something else. That's outside about Covid, probably isn't where we're focused right now, but we see plenty of opportunity for growth within the core markets that we have suddenly roofing in them are complementary.
Exterior products that we're in today.
Yeah.
Okay.
You have a question from David Manthey from Baird.
Yeah, Hi, guys.
First question.
Your old revenue and EBITDA guidance, how much of that was for interiors.
Yeah.
Yeah, we didn't parse it out.
Like that I guess, the best data point to give you is when you look at the breakdown of the <unk>.
Last year's numbers.
He had 472 was the overall number 73 of that was interiors and 399 of that was exteriors not surprisingly we expected growth in both segments.
So that should help you a little bit.
Oh sure, but I'd say the predominant aspect of a new.
Our new guidance.
Obviously is coming from the strong backdrop, the pricing et cetera.
Yeah.
Just just did not parse out the budget numbers or anything like that in the guidance.
Okay.
Do you plan on ultimately filling the CLO position or are you just going to eliminate that role.
Thanks for the question David.
We will be eliminating the C O O roll the division Presidents, who currently reports to Eric Swank will report directly to me.
Great. Thank you.
Okay.
You have a question from Keith Hughes from two ways.
Thank you.
Frank going back to one of your answers to another question on the.
Volume and price in residential.
Did you say volume was up $24 25 per cent shingles.
Asphalt.
I'm sorry.
Asphalt shingles, where youre going to go as high from that so, but how come that's above the overall revenue in there and remember in that category, you've got all sorts of wood products clay products submitted products, you've got all sorts of other residential roofing products.
And certainly all the all the tile side those were down so youre getting the low sort of throughput of that but you should anticipate that my comments were on asphalt volume up 24, 25, and then pricing on top of that and then and then you got to do the math in terms of the weighted average to get back down to the the residential.
Revenue number that I gave you.
Net pricing are you willing to say about how much pricing was up for singles.
Yeah.
Well if you if you look at it on an honor that announced basis, that's going to give you one number which will be too high if you look at it on a.
Kind of a 50 to 60 ish percent.
Capability, there because we've got contracts, we've got volume based customers that obviously do a little better et cetera, then you'd probably get down to about the right number.
Okay.
Your price cost number would be helpful as well.
Okay.
Then final final question on nonresidential.
Do you anticipate that turning positive.
Okay.
Fiscal year.
You know not not really I mean could it happen, yes, we're not banking on that we're assuming that it's going to be.
Flat to down pretty much the whole year.
You listen to some of the commentary from.
Some of our peer set they're projecting maybe a better second half than we are we'd be delighted if theyre right.
But that's not what our what our guidance is based on.
Okay. Thank you may remember, we had a little bit of pull forwards.
The products the next quarter and so there's a number of things going on in commercial.
We're still taking a balanced view on.
Okay. Thank you.
I have a question from Kathryn Thompson from T.
Jim.
Hi, Thank you for squeezing me in again.
On complementary products.
Yeah.
Two a little bit earlier in the Q&A I talked about it in your prepared commentary, but could you flesh out in terms of your DAU growth and that cash.
Category.
<unk> strategy.
Not just from a geographic standpoint, but also help us better understand the type of products that you.
The overall mix.
Okay.
So Kevin let me, let me take the first part and then Julian can talk strategy.
Alex.
You know probably the biggest piece of the puzzle there is citing.
Siding.
Well for us in the ER.
In the quarter essentially.
Kind of in line with the overall.
Complementary.
Revenue number that you saw a lot of that is in the north in the Midwest in terms of.
Geography.
We would continue to see that grow with the residential environment lumber is another big piece of that that was that was up significantly I E. A lot higher than the revenue number that true that you heard us talk about in a line of business is a combination of both volume on the plywood the OSB side.
As well as the pricing <unk> seen the spot prices of lumber there which are.
Cash probably up 7% or 80% from the beginning of the quarter to the end of the quarter. So those are two I think big inputs into complementary and we would essentially see those trends, maybe but for the pricing on the lumber side, we would expect those trends to continue along with the roofing piece that we've already talked about.
Yeah, so and.
And our complementary serious category, we've suddenly got.
Vinyl siding other forms so exciting as well.
And we've got some windows and doors business, we've got the.
Waterproofing business, but she is probably more on the commercial commercial focus side and then we've got some.
Solar products Windows, as we think about sort of strategy going forward I mean, obviously the focus that we're going to provide within this business is really around some of those areas, where we think we can be a better company.
And leverage some of those skills some of the products that we have a very regional.
And we've acquired our way into those businesses.
And making sure that we have competitive advantage that we have a different value proposition.
And then we can build out our capabilities in that space is going to determine where we continue to invest and we're going to continue to explore those options now that we've got some flexibility EBITDA plus national strength.
Moving to shrink a little bit more on that.
That's true that explanation.
Do you propose to have Oh, when I think about other distributors, especially great theaters that have gotten more into complementary products Inc.
Tend to have a strategy of going after more value add and trying to diversify away from same more more come off line.
Is that part of it or was it more regional.
Because that's when no true you're selling now, but it's really kind of a day.
So from a can you just kind of how do we think about it.
So.
So let me try to answer it this way Kathryn.
As our coal business, obviously with closing 80% of our business is focused on roofing.
I'll call customer is the roofing contractor.
Where they go we tend to follow as Theyre in the siding business, which many of them.
We followed them in the siding business and will continue to serve that need so were looking for those opportunities that really overlap with our core customers and as we grow from that.
We think we can build capabilities and maybe get into more specialty businesses, but today, we're really focused on our core roofing customer and building out those capabilities in that space.
Okay, great. Thank you.
Yes.
And you have a question from Mike Dahl from RBC capital markets.
Hi, Thanks for taking my questions.
Julian My first question is around.
Kind of Big picture and.
Just your views on kind of sustainability and durability.
Demand is I certainly appreciate the enthusiasm around <unk>, but part of the roofing story in the past has been.
Less cyclicality and if you look at the industry and the arms shipments, we just put up the highest number of shipments since.
Trina So how do you balance kind of you.
You know some of the some of the tailwind that you might see from new Reds versus potentially having pulled forward.
Some demand on re roofing or store them in in 2020, and thinking about kind of continued growth beyond the near term from an industry level.
Thanks for the question Mike suddenly.
There is an element of what you said in that but let's be honest I mean.
Last year it wasn't a huge storm yet either.
So you know the residential demand is is related to housing turnover and it's related to sort of demographics.
Daily related to low interest rates people supposed to stay at home government stimulus. We've got all of those things going on many of those are certainly will act, but I wouldn't have said it was a particularly strong storm here and you referenced it was the best year since our since Katrina, but.
Yeah.
Still some of that that's going on.
And if.
If you go back 20 years.
You've got the peak roofing, sorry, the peak housing cycle coming up with sort of going into what we believe is a cyclical upturn in re roofing demand based on the housing starts that were 20 years ago as roofs last 20 years and so we we.
We continue to look into the roofing market and think there's great opportunities and.
We also think that there's great opportunities for sure.
As we think about where we've been and what the opportunities are we think that as we continue to be building capabilities. In this area, but we can put growth both organically and inorganically in this space.
And we continue to think that overall, the roofing market will continue to growth.
Demographics continue drive houses will continue to see those as it's been over a week.
We believe that fundamentally it's a great business Covid. It's also the largest category of building materials you could be it.
It's such a large market that the opportunities here are as good as anywhere we see across other categories. So we think it's a great place to be and we think we're advantaged in this space and we think we've got plenty of room to grow over the next several years.
Thanks, that's helpful and it makes sense to be clear that the reference I made was to the number of overall square that we shipped that year not specific.
Understood.
The other question just going back to the complementary side.
Really helpful detail breaking that out I wanted to price a little more on just if you could break out specifically how much of.
Of your complementary business is lumber today, because it usually wouldn't be that big of a deal, but even if it's eight 5% in your lumber sales. There are two acts between price and volume today that that's a pretty nice.
Mid single digit plus tailwind.
Okay.
Numbers here on what percentage of it actually represents but it.
It should probably be up to X. So could you give us a little more detail on what exactly.
The percentage mixes of lumber in there.
Yeah, so lumber on a dollar basis it was about 15% of the complementary.
Category.
What's up meaningfully I wouldn't necessarily put the.
Number one it is as you just did but.
But it was it was a big number I mean, it was up meaningfully on a year over year basis, but even with that higher number in fiscal <unk>.
'twenty, one it's still only 15% of that category.
Got it okay, and we shouldn't expect that I mean, given the pricing dynamics where sales.
What's the pricing you got yeah, yeah. It should continue at least for the next couple of quarters. It seems right.
Yeah, the spot price is awfully high though it does have volatility as you can see on literally a week to week basis, but.
But yes, we would consider.
That should follow the residential cycle as well as the new construction cycle. So I would assume it would stay elevated.
Throughout 2021.
It's a very regional business for us it's not a broad based category you theres a little bit obviously that we carry so theres some theres some new.
New build is and then new homebuilders that we service in that category. So it said it.
It would be a niche category for us, but obviously, it's a with them, but the pricing dynamic in the U S housing construction dynamic.
It has affected the numbers.
Right, Okay, great. Thank you.
Yeah.
And you have a question from David Macgregor from long.
Uh huh.
Yes, good afternoon, everybody congratulations on a great quarter.
I guess I wanted to start off with a question on the OTC networks and just if you could talk about you know how comp growth in gross profit compared in the OTC networks versus the non OTC networks.
Sports.
Thanks for the question David Yeah look we tend to focus the.
The OTC network on larger Msas as I said, so they tend to be focused on those so as we've seen the housing turnover, but we've certainly seen strong performance in our in those those branches.
What we're really focused on there is a differential between those and the non OTC that Brian shoes. We believe that this is really about competitive advantage and differentiating particularly against smaller regional competitors that wouldnt have the ability to.
Looked at branches and deliver and I like to talk about areas like Atlanta, and New York City with no getting around the city at a particular time of day is a real challenge if you want to be the first delivery of the day and at seven a M.
Rich you have out of a branch in Atlanta at seven a M on a normal week day.
It's not very fun and so the ability to move.
Move product around and still serve the customer is what we're looking for now we're still early in this we believe that said we're seeing the benefits in terms of the length of delivery, we've seen and we've got specific examples of customers that we've been able to save.
That would not we would not have been able to says because of it and we've seen a warehouse costs decline and we saw inventory turns improve.
We're in the early innings here, we're not we're not fully developed in this space, but we're very committed and believe that this is a great differentiating strategy for us, particularly against the regional competitors.
So the best is yet to come on this as I thought we should take it.
Absolutely.
Okay and then second question just you know with all the progress on the strategic initiatives, you've you're building up your online the OTC, we talked about and.
No the underperforming that bottom quintile stores.
A stronger value proposition can you just talk about your market share right now and how that might be growing and all sorts of expense you're comfortable talk about kind of the competitive reaction to all your progress.
Look I would tell you that in this environment, it's very difficult we have been on allocation from the standpoint of our of the manufacturers and the entire industry has been very tight.
In that environment.
It's very difficult to determine market share obviously, we base.
The best proxy we have.
Looking at some of the Ami shipments, but they do not correspond on a quarterly basis.
Two.
Two market shares in any way shape or form they tend to move around industry buys in normal times I mean, it's been really difficult.
We certainly think that's.
Over the past 12 to 18 months that we've seen.
And so some incremental gains in this market, it's going to be very difficult.
But we think that like I said so.
We are starting to build a differentiated value proposition for the customer base and we think that's particularly going forward, it's increasingly difficult for the.
The smaller the regional companies to compete in this space and I always like the site things like Digi.
Digital area.
We continue to see.
Threat actors in this space looking for ways to add companies and if you're a contractor and you are totally dependent on your credit rating you know, making sure youre dealing with a company that can assure you that your data is well protected in your.
Demonstrating how are they doing that is going to be a meaningful differentiator going forward.
So we think that our that our strategies and initiatives will continue to build on the success we've had over the last.
12 to 18 months or so in day, one thing to keep in mind just to add on to Julians point.
When you're selling everything you are buying.
You don't want low market shares.
Bit of a.
A misnomer in terms of what we're focused on obviously, we're focused on procuring everything we can possibly get our hands on and selling every single again right.
Right now.
Festival.
We look forward to the opportunity to compete.
In an environment that allows us to show the market share gains is just with all the volatility and harvest is kind of hard to debt.
Parts of that algorithm.
Alright that makes sense congratulations on all the products.
Thank you. Thank you David.
You have a question from Michael Rehaut from J P. Morgan.
Hi, This is a line on for Mike Thanks for taking my questions.
First I appreciate all the color so far on the operating expenses, which I think was much lower than most of us net expected, especially in such a short time I was wondering if you could expand on the largest drivers there either in terms of just volume leverage to reduce cost and how that compared with like you maybe expected and lastly, how we should think about opex kind of a more normalized basis.
Yeah, well I think that.
Yeah. This has been a big focus for us.
I think certainly since I joined the company in 15 16 months ago now was around the operating performance of our branches, whether it's our underperforming branches or whether it's our entire network.
As we've said we learned a lot about how to operate.
In the.
Two very different environments I mean, if you think about a normal cycle.
You see it drop and then.
And then a peak that would normally be three to five years, we've seen that in three to four months.
And we think we demonstrated that we can operate them and get the cost that we needed to in the sort of the March April timeframe. So that's in a environment, where you saw demand collapsing even if it was only for a short period of time, we were able to take the right cost actions.
Get our business in the right place and then the opposite happens within two months of that and you're looking at this whole bad environments and you've got to be able to continue to serve our customers.
What we've learned is really around some of the metrics that we put in place over the last six months or so.
I'm, particularly proud of.
Our branch managers and our.
Fields District manages vice present who've been on this every day I mean, the great thing about our systems capabilities that we can actually show on a daily basis, the productivity metrics that we have and we can report them day over day and I'll be taking the right actions. If we have a wet day in that in a market.
The head count down because we needed to do we manage the hours appropriately. So those those things have been really critical drivers for us obviously some of the other areas have been smoothed in the in the center, where junior Covid environments.
You don't get traveling expenses.
No meal bags youre not hosting the customers in the same way, we expect those to creep back in over time, and but we think that's what we've uncovered is a tremendous amount of leverage.
And the operating facilities, but also in how we want to operate the company going forward.
It has been a lot of work.
A lot of our team at the branch level has been.
Doing just a tremendous amount of juggling over the last six months 12 months because of the environment. We then will be bugs that had both that a crash out of boom.
Within a very short period of time.
But the learnings that we've taken from that and how we're going to continue to implement them. We continue to see opportunities to improve these numbers overtime.
I don't know that we've found.
<unk>.
Find what we think is the right number to a target yet, but we continue to see opportunities too.
To improve these numbers overall Frank.
Yeah, I think if you want to just talk categorically real quick.
It's 9 million lower on a year over year basis.
Let's think about that as being.
Lower wages and overtime based on all the head count in our sales per hour worked measures that we put up a debt lower fleet maintenance cost.
Fuel cost we did have about 5% fewer trucks are active in the quarter that we did the prior year and then the lower travel and entertainment debt.
We've mentioned in the prepared remarks, the offsetting ones. There are really the incentive comp we're off to a really strong start this year, so that will be reflected in higher incentive comp and then.
Just normal wage inflation.
Every year. So those are the offsetting numbers, but obviously it nets out to a real good result force.
Yeah.
That's really helpful and really encouraging.
I just have one more quick one if I could squeeze it in I thought it was really interesting that you guys talked about accelerating sales trends in November and December and I was wondering if you could just break out how much of that was due to maybe stronger new ready trends versus also strength in repair remodel and a stronger storm demand.
Yeah, I think it was all of the above you know we had a longer construction season.
Which allowed us to you know.
From a year over year basis November was stronger than last November December was stronger than last December January is stronger than last January. So we're continuing to see that really across the board of the pricing is an element of volume as an element.
And our execution is an element so we're continuing to see very very positive.
Trends, especially on the residential side.
Great. Thank you.
Okay.
That concludes the question.
I turn the call back over to Mr. Francis for his closing comments.
Thank you Kathy and thanks for everyone for your interest before I close the call. This evening I do want to say.
Say, thank you to Brent rakers head of Investor Relations.
It is is with US today, but he has decided that he will be leaving to pursue a personal passion at the five years with beacon and I know many of you have interacted.
With Brent and know him well over the years. So we're excited about the future for brands and what he said when he is going to be doing but.
But I'd like to thank him for all of his efforts over the last several years from Beacon. So thanks very much Brent.
And again, thanks for everyone to join our call. This evening, obviously, we we believe we've delivered a strong quarter. We think it's the foundation on which we can build a strong year.
And we look forward to updating you on our next quarters performance.
In a few months and we hope all of you in the meantime, stay safe and healthy and enjoy the.
The closing months of winter. Thank you will.
Today's conference call you may now disconnect.
Okay.
[music].