Q3 2021 Beacon Roofing Supply Inc Earnings Call
It's a number of product categories 60 days apart even slight delays in implementation can quickly erode profitability.
So our focus has been on driving great execution at the branch level.
Third quarter gross margin expanded to 27, 6%.
We expect to see cost pressure to continue but are confident that we can execute to capture additional pricing to offset the headwinds.
Our actions in fiscal 'twenty, 1 have positioned us for growth.
These include creating significant financial flexibility assembling a new executive leadership team optimizing our inventory levels on investing in new capacity to meet the anticipated growth.
Let me touch briefly on each of these.
As detailed on our Q2 call, we restored financial flexibility through a combination of debt paydown on a series of refinancing transactions finalized in may.
The results are a stronger balance sheet lower cash interest and <unk>.
Net debt leverage of 2.4 times at the end of the quarter less than half what it was a year ago, we now have ample ability to invest in value creating growth opportunities going forward.
As a leading distributor of exterior products, we are trusted by our customers to reliably deliver high caliber service in any demand environment. We.
We have proactively invested in inventory to ensure we are able to meet anticipated demand as we see it developing local markets.
Our backlog metrics are strong and continue to grow.
For example, open orders a key metric of future demand is up significantly both year over year and sequentially at the end of the third quarter.
Our growth and transformation story has allowed us to attract highly talented C suite leaders, bringing the team new capabilities and human resources legal marketing and supply chain that position us for the future.
These individuals bring great talents to beacon that are essential for our desire to innovate deliver growth improve operational performance and drive value for stakeholders.
As part of our positioning for growth we've commenced investments in greenfield capacity, including 2 locations opened so far in fiscal 'twenty, 1 and 1 additional location to be added before calendar year end.
These new locations not only enable us to meet additional demand, but also allow us to further optimize our branch network and deliver more value to our customers.
We will also deploy our resources and our financial strength to add M&A to our growth toolbox.
We have recently reactivated the process of reviewing acquisition opportunities.
Our pipeline of potential targets is growing and we are actively evaluating tuck ins that are actionable a good fit and available at the right price.
We will be disappointed on our approach to inorganic opportunities.
The final item I would like to highlight from our third quarter is the progress we've made related to our diversity equity and inclusion goals.
A particular note is that we announced the winner of the first annual female roofing professional of the year Award to Stephanie Paris Steph.
Stephanie leads Brahma roofing and construction based on when the Colorado and is a powerful advocate for women and a role model to anyone who wishes to inspire young people.
It is individuals like on all of our nominees that inspire the most skilled and talented people to join our industry.
Let me summarize by saying that the confidence we have on our growth plan is underpinned by our team has demonstrated the ability to react to a rapidly changing environment and to execute at a very high level simultaneously across multiple critical initiatives.
Now please turn to page 5 of the slide deck.
As we have done in prior quarters, let me provide an update on our 4 strategic initiatives. These initiatives remain central to our improved sales growth operational efficiency and profitability.
Our approach is systematic plans measurable and progress tangible.
Most importantly, our customers benefit from these initiatives are designed to make us more efficient and easier to do business with as well as differentiate us from our competitors.
Let me begin with organic growth.
As we've discussed on previous calls our sales and operations team have thousands of interactions with our customers on a daily basis.
Our plan is clearly defined initiatives focused on improving both the number on the effectiveness of these interactions.
We continue to invest in developing our sales team on providing value added tools that improve their ability to manage customer relationships.
1 example is our investment and pricing capabilities.
We've implemented tools and training to support enhanced pricing execution at the local level.
Advanced analytics are allowing our team to develop value based pricing models that are responsive to local market conditions and allow beacon and our customers to realize value from the partnership.
Next is our industry, leading digital platform.
Digital is a clear differentiator for beacon.
Our adoption rates continue to rise and we have nearly 50% more active users of our online platform in the third quarter compared to last year.
Digital sales are trending around 14% of net sales in our fiscal third quarter and continued to growth.
We are expanding our digital offering in value added ways in recent months, we announced the partnership with estimating edge a provider of detailed construction measurements and project management software for our non residential customers.
And we've recently integrated Eagle view, the roof estimation tool into a probe plus platform.
This gives customers access to high resolution aerial images from measurement, which saves them time and money, while minimizing the need to access the roof directly supporting safety for their employees and convenience for the homeowner.
Next moving on to our on time and complete network.
Our OTC strategy Leverages the density of our branch network and larger Msas.
We operate in 58 distinct markets and have more than 250 branches participating in OTC.
OTC provides 4 key benefits.
First is improved customer service as we have greater flexibility to deliver from the branch with the best combination of products and service.
And this supply constrained environment, we've leveraged our OTC network to ensure product availability issues on minimized for our customers.
The second benefit is a lower cost to serve.
Since we optimize across our network of branches, we reduced delivery time, and mileage, improving labor efficiency and reducing fleet cost and dimensions.
I'm pleased to report that we have reduced hours per delivery by more than 4% on reduced fuel per delivery by nearly 3% in the trailing 12 months.
The third benefit is inventory levels. We previously indicated we can permanently reduce our inventory by $50 million to $100 million as we implement our OTC initiatives. We remain confident that we can hit that target.
1 example is our state of the Houston hub expected to open later this year that has been designed from the ground up for speed and efficiency for our customers and.
And its prime location large warehouse capacity from centralized dispatch center allows us to optimize our inventory positioning across the fifth largest MSA in the country.
On the fourth benefit is that we can accelerate our talent development, our OTC creates opportunities for our people to explore a variety of roles in the field. This way, we have better retention and development of talent and our logistics and field operations.
Finally, I want to update our branch performance operating targets.
I've talked extensively about our focus on the bottom quintile branches and our goal to significantly improve their operating performance.
We've developed a diagnostic tool and are reporting cadence that places emphasis on structural change to ensure that improvements are sustainable.
We continue to accelerate our progress and now expect at least $40 million year on year improvement from the lowest quintile branches in fiscal 2021 up from the previous guide of $30 million.
Impacting our volumes mainly in the Midwestern States, we estimate that our residential shingle volumes were down approximately 10 percentage points during the third quarter due to lower wind and hail storm activity as compared to the prior year.
Nonresidential roofing sales were up more than 16% compared against the Covid shutdown trough in the year ago period.
We remain optimistic that nonresidential activity will continue to improve.
Complementary products sales increased 35% in the third quarter keep in mind that our complementary product category has approximately 80% residential and 20% non residential exposure.
Implemented benefits from the residential market tailwind, including demand for key products, such as siding lumber windows and doors.
<unk> sales for example were up more than 30% in the third quarter and lumber had substantial price growth year over year.
Turning to slide 8 we will review gross margin.
Gross margin improved to 27, 6% or 380 basis points year over year.
The supply demand environment remains conducive to the team's successful implementation of 2 price increases in the third quarter.
Similar to the prior price increases we quickly and thoroughly implemented our April and June shingle price increases.
The execution of both price increases created favorable timing benefits, which also contributed to gross margin expansion during the quarter.
In addition, our private label sales increased approximately 30% year over year, providing gross margin enhancement.
As a result price cost was positive by approximately 390 basis points in Q3.
By comparison, we experienced 230 basis points of year over year price cost benefit in Q2.
Product mix was slightly unfavorable in the quarter due to the significant growth in the non residential and complementary product categories.
Now shifting to our operating costs on a julie's leadership, we continue to see measurable progress on operating efficiency and remain focused on both the corporate and.
And local level.
We are leveraging many of the changes we implemented in response to Covid and are capitalizing on the opportunity to apply those principles and a stronger demand environment.
Third quarter results demonstrated our focus on managing expenses in times of growth.
Adjusted Opex was $309 million or $52 million increase compared to the year ago quarter, mainly due to volume related expenses and higher incentive compensation.
We are proud of this performance given the unusually low comparable in the prior year.
You may recall that we took significant and proactive cost reduction measures, including furloughs salary cuts reduced work weeks, the near elimination of over time traveling and entertainment as well as reducing the truck fleet to curb fuel and repair costs.
We continued to ramp headcount sequentially in the third quarter to meet the seasonal peak in activity it.
It is worth noting that head count was up less than 6% compared to an increase in volumes of approximately 10%.
Our Q3, adjusted Opex to sales percentage improved by 10 basis points year over year as our team members manage both our fixed and variable costs with discipline.
We continue to focus on the elements of our business that we can control improving.
On improving productivity within our largest cost centers, including labor and fleet. There is a major focus for beacon as.
As you can see we generated nearly 50% improvement in sales per hour work compared to the start of the pandemic and are even more productive in the third quarter of last year. This key productivity metrics demonstrates that we are becoming more agile as an organization and our productivity initiatives are continuing to deliver value.
Moving forward, we will continue to implement improvements throughout our organization as we fully embrace a continuous improvement mindset.
Turning to slide 9 we will review our financial flexibility.
As we discussed on our second quarter call. The divestiture of the interiors business yields after tax net proceeds of approximately $750 million.
These funds plus balance sheet cash and cash flow have allowed us to reduce gross debt by approximately $1.7 billion year over year, consistent with our commitment to restore financial flexibility to our company.
During the third quarter alone, we reduced gross debt by $460 million as compared to the end of the second quarter. As a result, we lowered net debt leverage to 2.4 times trailing adjusted EBITDA as of June 30th.
Well below our 3 times target and ahead of our expectations, what a difference a year mix.
In addition, our comprehensive refinancing during the third quarter significantly eliminated refinancing risk as we have no meaningful debt due until 2026 at.
At current debt levels and interest rates you can expect go forward cash interest to be $50 million lower than the trailing 12 months importantly, our strong liquidity position of more than $1.4 billion as on June 30 provides ample ability to invest in the growth of our core business.
As Julian mentioned, we will be deploying capital to accelerate our growth. This.
This includes investing in our inventory to ensure we can effectively and efficiently meet future demand in an inflationary environment with supply chain volatility.
As you can see our third quarter inventory is typically our peak level and positions us to meet the seasonal demands of our customers. This year is no different if you account for the impact of recent manufacturer price increases our inventory balances right in line with the 2018 in 2019 non Covid comparables.
Operating cash flow was $125 million in the quarter reflective of strong earnings and higher inventory levels..1 housekeeping item GAAP operating cash flows were adjusted in this view to account for items related to the sale of our interiors business. We've included a reconciliation table in the appendix in this presentation. So you can tie this out.
We believe the adjusted view provides the best view of the operating cash flows of our continuing operations.
In the coming quarters, we will be looking to use our financial flexibility to invest in both organic growth from the addition of Greenfields and inorganic growth by starting to execute on our growing pipeline of tuck in targets to wrap up we're very pleased with the performance in the quarter, we are well positioned to finish our fiscal year strong and we are poised for growth in the coming quarters with.
That I will turn the call back to Julian for his closing remarks.
Thanks Frank.
Before we turn the call over to question and answers I want to update our fourth quarter outlook. Please reference page 11 of the slide materials.
As we look to the fourth quarter demand remains solid.
For our fiscal fourth quarter ending in September we expect total sales growth in the mid single digit range.
And continued cost discipline.
Looking further out we continue to have strong fundamentals in both new construction and the replacement market and new.
New home construction, but well documented on the building of the last decade has created an under supply of housing and the millions of units.
Our homebuilding customers continued to try to meet this demand while managing the impact of lost labor and material constraints.
These constraints have led to elongated construction cycle times, but the T, but appear to have limited impact on the demand side.
Residential roofing demand will also continue to benefit from our multi year repair and replacement cycle from housing stock both more than 20 years ago.
Bear in mind that more than 90% of re roofing demand is non discretionary.
Both our residential and complementary products business will benefit from these trends.
Regarding non residential demand commercial builder sentiment continues to improve.
This is a positive trend that we've seen since our fiscal first quarter and we would expect it to continue as it gradually benefits from the macros.
The architectural billing index is a good proxy for future demand and it has been climbing.
As we look forward to the coming quarters, we have confidence in our team's ability to execute at a very high level. We are poised for continued growth and I think on more than 6000 team members for their effort on.
Im excited about our progress towards achieving our full potential and believe we are strategically and financially positioned for growth as we help our customers build more.
With that night, we are now ready to open the line for questions.
Ladies and gentlemen, if you wish.
To ask a question. Please press star followed by 1 on your Touchtone telephone of your question has been answered or you wish to withdraw your question press the Star T. T. Each caller is limited to 1 question.
The first question is from Kathryn Thompson with CRD. Please proceed.
Hi, Thank you for taking my questions today.
In terms of the outlook I know you gave it for your Q4, but thinking beyond that with the gross margin expansion guidance that you give an outlook beyond debt how much debt expansion is from pricing actions from 2020.
Versus 'twenty, 1 and how much of it is.
Just being able to focus and stick to your knitting now that you're really exterior focused firm or other factors that we should take into consideration I cannot net.
Mix or an easement of some of the headwinds that we've seen from supply chain. Thank you.
Thanks for the question Catherine.
We've been very pleased obviously with the overall progress we've made and I think if you go back 2 years.
We said, we thought there was margin compression.
Due to some of the impact of a declining market and.
Yes.
Pressures from asphalt I mean, we've seen obviously that 10 I mean, we've seen the demand related inflation came in and we've shown our ability to execute really strongly in the marketplace to recover those those costs.
B.
Digital obviously is it.
On a nice play for us, it's got a little bit on margin enhancement. There and then the work that we're doing on pricing broadly, but also specific.
To the underperforming branches has been really helpful. This year as well.
Those types of things are more structural in nature.
On that transitory, depending on which way the pricing happens to be going in on any given time.
Yeah.
Thank you very much.
Thank you MS. Thompson. The next question is from Mike Dahl with RBC capital markets. Please proceed.
Afternoon. Thanks for taking my question I wanted to ask around inventory on.
So it is kind of relative to.
Covid impacted on peer.
Period year prior at the same time <unk> seen sequential increases and I think theres a comment in the.
Release on the slides about investing in inventory it it's been a tough environment to do that and side just wanted to ask.
About kind of how you are.
Youre thinking about.
Your inventory levels today, and where they stand relative to normal.
And.
If you're at a point where given the.
Some potential.
Flow down in volumes, given the tough comp in the upcoming quarter.
Will you look to continue to rebuild.
Thanks.
Thanks for the question Mike.
I think in Franks prepared remarks, he commented that third quarter inventory tends to be our annual peak.
Obviously in this environment.
And when we've got unallocated situation on some product lines.
Our bias has been to ensuring that we've got the product availability to serve our customers.
That's been very important and that's been something that we've really focused on and we think that.
We've continued to take the opportunity to to rebuild and replenish where we can.
Certainly on a.
Alright, and then annual basis, you would expect it to fluctuate.
Seasonality of the businesses we're in.
But we're also committed as a leadership team to ensure that we're managing it at the right levels on an ongoing basis I think just in this environment I would tell you that is certainly my bias in France bias has been to err on the side of having more rather than less inventory given the current situation the demand environment and the supply.
Chain disruptions quite frankly.
The supply chain disruptions on the non res side has been pretty substantial and we act as a little bit of a shock absorber for our customers and so having a little bit more inventory during that period of time.
Helps us do that and helps us be a better supplier to our customers.
Great. Thanks, Sean.
Thank you Mr. Dahl. The next question is from Keith from mandatory <unk> with BMO capital markets. Please proceed.
Yes.
Good afternoon, and congrats on a strong quarter.
<unk>.
Maybe.
Going back to the branch performance improvement that you've talked about.
Youre seeing more of that on <unk> on year, 2 and now you're expecting over $40 million versus.
The prior estimate from highlight 1 or 2 payments, where you are seeing kind of more opportunity as you as you work through that.
And as you look ahead, you know kind of talk about what is there further room for improvement on that side. Thank you.
Take your tenants Frank Thanks, very much for the question.
When we turn the page into 2021, we mentioned that we thought there was a lot of room this year on gross margin and pricing.
And sales and that's actually bearing fruit coming through exactly the way that we thought it was going to come through.
Which obviously creates some operating expense leverage there as well.
We stand back and look at our analytical charts inside the company and we look at the performance of the underperforming branches relative to the.
The remaining branches, we still see a huge opportunity really across the P&L.
Whether it's sales gross margin or Opex, there is still a ton of opportunity there.
Julian will tell you that in 2 years, we've kind of already hit his initial target and that just means we're going to raise the bar.
We're going to continue to work on this initiative and we're going to expand it.
Across the company in other ways for example, a large branch.
May be performing but may not be performing at the potential that we think it. So we're going to run that same diagnostic tools across the company and we see tons of value still come on.
Understood. Thank you.
Thank you Mr. <unk>. The next question is from say a win with Jefferies. Please proceed.
Hey, guys congrats on a really good quarter and English on execution.
Frank I guess your guidance for the fourth quarter from mid single digit sales growth that's noticeable deceleration.
Can you talk about if you saw any pull forward in <unk>.
Just given the strength you're seeing in non res and complementary I appreciate you've got a tough comp in Brazil, I would've thought the demand profile might have been a little better.
And it would be helpful kind of parse out how much pricing contributed to <unk>. Thank you.
Sure thing.
I think in terms of the Q4 guide of mid single digits that debt you mentioned, it's a strong comp is 1 of your peers I mentioned a few moments ago.
July finished up consistent with the guide that we gave what I think youre going to see in the quarter. If you want to parse it out I think the complementary business will be the higher growth in the non resin resin will be in that kind of low to mid single digit range I don't necessarily see pull forward I see more elongation on your hurdle Julien.
Remarks talking about project.
Lifecycle expansion Youre hearing that from a number of the different homebuilders.
In our business as well so we don't see this as any question around demand. It's just the ability to get things done.
Remember that it's not just shingles as an example that can get on the way of a project completion, we could be cabinets or paint or corporate or anything like that or.
Or it could be fasteners in a particular project instead of the actual membrane itself. So there's a lot happening in the supply chain right now as Julian mentioned, we're going to err on the side of inventory.
On Hangover Julian mentioned is real we saw that we called out in the quarter. It would be great. If we could have had a strong half season, we didn't.
It'd be nice if we are if we get a nice hurricane season.
Season, as well so we feel good about the quarter and we feel good about the multiyear demand run that you heard Julian talk about.
And your volume question around.
The quarter I think Thats an important question, what we said was of the 21% growth about half was volume.
Half was price in the aggregate if you break it down by line of business. The regicide was more price than volume in the non res and the complementary side, we're more volume than price all positive across the board just inflections there that I thought you might enjoy items from Colorado.
Thank you for profit.
Thank you Mr win. The next question is from Trey Grooms with Stephens. Please proceed.
Thanks, This is actually Noah cosco on for Trey grooms.
So again just want to echo congrats on a on a strong quarter.
Very impressive top line really same gross across.
All segments, but I wonder if you dig a little bit more in the non res side, you know we've seen a lot of leading indicators improve and it sounds like some of that volume is finally, starting to come through so I was wondering if you could break down sort of what you are seeing more repair and replacement activity on new construction and then just kind of your thoughts.
On that end market demand as we go into next year.
Okay.
Thanks for the question.
So to start with I just.
Frame, what we're seeing in the.
The nonresidential construction market and I'll pass it over to Frank <unk>.
The supply chain disruptions that started early in the year and to some degree were triggered by the weather events that.
Hit Texas back in February when there were a lot of plant shutdowns on the supply chain have been have been real and they have been continuing.
We've had a lot of disruption.
In terms of project lifecycle.
The ability to get 1 product.
Maybe just fine, but the ability to get a full set of products that you can be used to complete the job has been much more challenging.
And so while we've seen the overall demand improve.
And the ability to get products onto a job and completed an off and then restock.
Reasonable time has been a real challenge for us and again this goes back to.
What we said regarding the.
Stocking of inventory and how we act as a little bit of a shock absorber trying to assemble a full job pack. It has been a real challenge.
So we've not seen any specific.
Area.
Pick up.
New is the new construction side is clearly improving.
I referenced in my prepared remarks.
The Abi.
Architectural billing index, which is what we follow on and that's clearly an indicator of future demand.
For new construction generally.
And that has been improving quite markedly. So I think that's good that we're starting to see bids coming through.
And on the repair and replacement side I think we're seeing that.
Perhaps a little bit of.
Growth overall, but the sector specific so I think on government related work schools hospitals.
And then our warehouses, we've seen continued demand and thats been very positive and some of the retail and office, we are seeing a little bit less on a little bit more caution.
So we continue to see that and I think I said that on the last call.
Sector specific.
Markets are improving probably more rapidly.