Q4 2021 Beacon Roofing Supply Inc Earnings Call
Events and the future financial performance of the company, including the company's financial outlook.
The forward looking statements contained in this call and based on information as of today November 18th 2021, and except as required by law. The company undertakes no obligation to update.
Or revise any of these forward looking statements.
Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures to the most comparable measures calculated and presented in accordance with GAAP is set forth in today's press release and the appendix to the presentation accompanying this call.
Both the press release and the presentation are available on our website www Dot B E C Dot com.
I would now like to turn the call over to Mr. Bennett R&D head of Investor Relations. Please proceed Mr. Sotheby.
Thank you Celina, good afternoon, and welcome to our fourth quarter and fiscal 'twenty One earnings call with me on the call today are Julian Francis President and CEO, and Franklin Hydro Chief Financial Officer.
<unk> remarks will correspond with the slide deck posted to the Investor Relations section.
<unk> web site.
After management's prepared remarks, there'll be a question and answer session I will now turn the call over to Julian.
Thanks, Pat and good afternoon, everyone, let's begin on slide four.
10 years ago I hosted my first investor call as <unk> CEO.
On that call I spoke with the opportunity for growth and margin expansion that I believe is in front of us.
Focusing on the customer improving our branch operations capitalizing on our scale and driving shareholder value.
Today I'm pleased to say that we have made significant progress on these commitments and 2021 has been nothing short of transformational.
We have continued to leverage the strength of the platform to generate record full year sales and adjusted EBITDA.
In fiscal 'twenty, one we produced sales growth of approximately 12% with higher revenue across all three of our lines of business.
I'll focus on pricing analytics and operational execution showed results in a challenging supply environment.
The focus we've had on improving the performance of our bottom quintile branches contributed to that revenue growth.
All of these branches increased 15% for the full year 300 basis points faster than the other branches.
We also expanded our focus our OTC branch network, adding hub investments and Greenfields in key growth markets.
The divestiture of the serious business return just to being a focused leader within exterior building products.
About 80% of our business today is residential or commercial roofing.
These are large attractive markets more than 80% of roofing is classified as repair and replacement and the vast majority of which is non discretionary.
We've restored financial flexibility through a combination of debt pay down from the proceeds of the divestiture and a series of refinancing transactions.
The result is a stronger balance sheet lower cash interest and net leverage of two one times at the end of the fourth quarter.
We now have ample ability to invest in value, creating growth opportunities going forward.
And took with leadership, we revitalized our team.
The capabilities that these individuals bring to beacon are essential to the execution of our strategic initiatives.
These initiatives are ones that will drive our long term ambition to demonstrate that we have multiple paths to grow and enhance our customer experience driving top line and margin expansion, creating value for customers suppliers employees and shareholders.
And lastly, we have transformed the business while actively living our values.
Today, we are engaging every employee and what it means to work at Beacon.
How do we celebrate what makes us proud of as well as how we face challenges.
We're looking on social efforts to support our communities and recognized diverse talent in our company and our industry.
We made progress on initiatives that will reduce our carbon footprint.
And we've made advances in both diversity and ESG oversight.
We recognize the importance of our value to stakeholders and believe they are a source of differentiation for beacon.
In summary, our team executed at a very high level in a dynamic market environment delivering record financial results as well as building tool for our customers and shareholders.
Moving to slide five we finished the fiscal year with a strong performance, including record sales and adjusted EBITDA.
I am pleased with the outstanding execution of about maybe 7000 team members, who delivered high value solutions to our customers and our supplier challenge an inflationary environment.
Sales were up 7% in the fourth quarter over a very difficult comparable in the prior year period, which you will recall had record shingle demand is driven by housing investments combined with higher storm volumes.
Although we are seeing project cycle times, lengthen and market demand for new housing remains high.
Commercial activity is also showing solid strength as evidenced by our growing year end backlog.
We saw inflationary pressure across most product categories and our priority has been pricing execution.
Our local management is focused on staying ahead of the cost curve, while ensuring we have product availability, when and where our customers need it.
As a result fourth quarter gross margins expanded year over year by 200 basis points to 27, 1%.
We increased adjusted EBITDA by 23% and yielded an 11, 1% margin the second consecutive quarter of double digit adjusted EBITDA margins.
I would also like to take a minute to highlight a couple of initiatives that demonstrate how committed we are to building an organization based on our balance.
Putting people first is at the top of our list and we believe that everyone deserves a safe home, especially the men and women who have given so much by serving our country. The.
The nationwide Beacon contest supports veterans with new routes. It is our privilege to give back to the veterans and their families.
We also believe that putting people first means empowering our employees and customers to reach that full protection we.
We are further that endeavor by launching the inaugural year Robert outlook scholarship program to assist children of employees continue their education at the high school.
We rely on our dedicated team members tireless efforts every day and I'm delighted to help their children secure an equal opportunity.
We stated on our last call that we would seek to strategically add tuck in M&A towards toolbox.
Very happy to report that we recently completed our first acquisition since 2018.
Earlier this month, we acquired midway wholesale a premier distributor of high quality roofing products and a broad offering of complementary building materials.
With annual sales of approximately $130 million and 10 locations across the Midwest, We expanded our presence in key growth markets in Kansas, Missouri and Nebraska.
We welcome the midway team to Beacon and look forward to capitalizing on that stellar reputation for customer service to further enhance our combined market position.
Now please turn to page six of the slide deck.
I will provide a brief update on our four strategic initiatives.
Our organic growth initiative is focused on enhancing the customer experience and the effectiveness of our sales organization.
For the past year, we continued to invest in sales training programs marketing support and value added tools that help our salespeople grow our business.
We are implementing 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.
We also began to add locations in target growth markets.
2021, our strategic investments, including opening branches in southwest, Florida, Dallas Fort worth.
In metro areas.
These examples provide an idea of the significant opportunities we have available to further partner with existing customers, but it is a business with new customers and grow organically as we accelerate these types of investments in the near future.
That.
Digital capability continues to be a clear competitive differentiator for beacon.
We provide the most complete digital offering and continue to expand those capabilities.
We are leveraging these digital capabilities to make it easier for our customers to do business with us.
Digital sales are trending around 13% of net sales in our fourth quarter.
And we have nearly 50% more active users of our online platform compared to this time last year.
Our OTC strategy, as an operating level and which branches on network and larger msas.
OTC provides full key benefits.
First is improved customer service levels.
OTC is we have greater flexibility to deliver from the branch with the best combination of products and services to support the customer's needs at.
The second benefit is cost to serve by leveraging resources and logistics across our network of branches, we are able to reduce delivery time, and mileage improved labor efficiency and reduce fleet cost and emission.
I'm also pleased to report that we recently became an EPA smartway partner, allowing us to benchmark our fleet emissions against those of other companies.
The third benefit is optimizing inventory levels and we continue to believe there is potential to cut our inventory investment by around 50 million to $100 million while.
Painting on service levels.
Critical to our ambition is that we accelerate our talent development.
Our OTC initiative creates opportunities for people that build the beacon to build fulfill inquiries and trust us to unleash local talent speeding our ability to execute on our plans.
Finally on French operating performance I'll focus on the bottom quintile branches is producing tangible results.
We generated more than $50 million year on year EBITDA improvements in fiscal 2021, bringing the two year total tons contribution to over $17 billion.
As mentioned these branches reported an impressive 15% growth in full year net sales.
In summary, our strategic initiatives have delivered measurable results in 2021, and we remain focused on accelerating our growth and profitability.
Now I'll pass the call over to Frank to provide a deeper focus on our fourth quarter continuing results.
Thanks, Julian and good evening, everyone turning to slide eight we achieved nearly $1 $9 billion in total net sales in the fourth quarter up 7% year over year.
Primarily by higher prices.
Revenue growth across all three lines of business led by our complementary products.
Price contributed approximately 14% to revenue growth, partially offset by lower volumes versus a strong prior year comparables.
Market fundamentals remain strong as evidenced by our growing backlog open orders for example continue to run well.
On a year over year basis, the backlog more than doubled and also rose 15% sequentially.
Residential roofing sales were up more than 3% on shingle price execution from earlier in the year together with our September increase.
<unk> volumes were down about 14% year over year as expected given the record comparable which benefited from the COVID-19 snapback and stronger hail demand.
Specifically, we estimate that about a third of the shingle volume decline in the quarter related to lower wind and hail storm activity as compared to the prior year.
Demand from new residential construction remains strong.
Sales to our largest national homebuilders were up more than 50% in the fourth quarter.
Although the headline single family starts number remains constrained by supply chain bottlenecks, the fundamental demand trends remain prevalent including millennial household formation work from home.
Organization, and historically low interest rates.
Early demand for residential repair and replacement remains favorable.
Homeowners experienced higher home prices and increased home equity.
Residential roofing sales were up approximately 7% and a material constrained environment. Our teams did a great job of securing material and staying ahead of inflation.
And the longer project cycle times have backlogs continue to rise a positive indicator of future demand.
<unk> sales increased 17% in the fourth quarter as we achieved higher prices across nearly all products, including citing in lumber as you may recall, our complementary products allow us to be the supplier of choice exterior focused customers and has a greater end market exposure to new construction.
Turning to slide nine we'll review gross margin.
Gross margin improved to 27, 1% up 200 basis points year over year.
Execution of the September price increase contributed to the improvement.
With a favorable timing benefit of inventory profits in the quarter.
Private label sales increased approximately 20% versus the prior year.
Our private label offering sold under the Tri built brands offers customers a high quality superior value products, while delivering higher margins for beacon.
In the aggregate price cost was positive by approximately 220 basis points in the fourth quarter.
Product mix was slightly unfavorable due to relatively higher sales growth in nonresidential and complementary.
Adjusted Opex was $321 million or $29 million increase compared to the year ago quarter, mainly due to higher incentive compensation and inflation and fuel wages and rent.
Selling expenses, such as travel and entertainment were also higher as we cycle the impact of certain COVID-19 related cost actions taken in the prior year.
As a result, our adjusted Opex to sales ratio was up 50 basis points, although slightly better than expected.
Our head count was up less than 1% sequentially as we continued to fill vacancies and staff to meet demand.
In addition, we have been proactive in our efforts to retain team members in critical positions such as drivers of sales personnel and warehouse workers to ensure a high caliber service for our customers.
As you may have heard us say on prior calls we endeavor to offset opex inflation with productivity. We have continued to drive sales per hour improvements on a year over year basis in every period in 2021.
At the end of the fourth quarter, we are achieving achieved a 46% improvement in sales per hour work compared to the start of the pandemic risk.
This key productivity metrics demonstrates that we are becoming structurally more agile as an organization.
We will continually strive to be more efficient as we fully embrace a continuous improvement mindset.
Turning to slide 10, we will review our financial flexibility.
As we discussed on the third quarter call, we intend to use our restored financial flexibility to accelerate our growth.
In recent quarters. This has included rebuilding our inventory to ensure we can effectively meet demand.
Operating cash flow adjusted for items related to the sale of our interior products business was $167 million in the quarter as strong earnings were partially offset by higher working capital this year.
Net inventory is up approximately $200 million year over year reflective of several factors product cost inflation for building inventory levels for post COVID-19 load carrying certain elements of inventory longer than expected due to lengthening project cycles, and ensuring material availability and a challenging supply chain environment.
Additional working capital requirements included higher yearend AOR balances related to higher sales and a reset of our days payable to pre COVID-19 levels.
We expect to generate positive operating cash flow and our calendar fourth quarter, which represents the transition period to our new calendar reporting process in 2022, as you know the December quarter, and generally operating cash flow negative.
Okay.
2021 was a transformative year for many reasons not the least of which was the divestiture of the interiors business. In addition to focusing the company on its core exteriors business the deal netted approximately $750 million in cash and.
These funds plus balance sheet cash and free cash flow allowed us to reduce gross debt by approximately $1 $1 billion year over year.
We lowered net debt leverage to two one times trailing adjusted EBITDA as of quarter end.
You may recall that a year ago, our expectation was to reduce net leverage to less than three times. So we are well ahead of that target.
We completed a comprehensive refinancing in the third quarter, which essentially eliminated refinancing risk as we have no meaningful maturities until 2026.
Our liquidity position of approximately $1 $5 billion at quarter end.
Significant ability to invest for growth.
And this is exactly what we intend to do Julian spoke about our greenfield branches. The opening of our Houston hub and our recent acquisition of Midway. These investments are a good indication of how we will be looking to use our liquidity to accelerate growth. We have an active pipeline of targets and we are confident that there are actionable tuck ins that will position us.
The supplier of choice in key markets.
In summary, we're very pleased with our record performance in the fourth quarter and are poised to finish the calendar year strong with that I'll turn the call back to Julian for his closing remarks.
Thanks Frank.
Before we turn the call over to Q&A I want to update our outlook for the fiscal year transition period.
Calendar Q4.
Please reference page 12 of the slide materials.
Quarter to date same day sales grew high single digits versus the prior year.
We expect that rate to decelerate as we go into Thanksgiving and the holiday season.
Underlying demand trends remain positive and residential even as our new homebuilding customers continue to manage through constraints, such as labor and material shortages.
Regarding nonresidential demand, we expect the macro environment will remain supportive we.
<unk> seen a solid demand trend for more than four quarters in line with favorable moves in the architectural billing index.
Although we expect to continue to see lead times and overall project cycle times lengthen the improvement in sentiment has corresponded with the growth in our backlog metrics.
For the three months and fiscal year transition period, ending in December we expect total sales growth to be mid single digits year on year over a strong prior year comparable.
This guidance includes the benefits of incremental volumes in the Gulf Coast Post Hurricane Isaac.
It also includes the acquisition of Midway wholesale earlier this month.
Midway will contribute approximately $20 million in sales during this quarter and is expected to be breakeven EBITDA, which means margin dilutive in the quarter.
Gross margins will reflect our expectations of positive price cost contribution.
We expect year to year gross margin percent to increase by approximately 100 basis points to around 26, 4% and third consecutive quarter of gross margins above 26%.
We expect adjusted EBITDA to be between $155 million and $165 million compared to $143 million last year.
We expect that higher sales gross margin expansion and continued cost discipline will result in approximately 8% to 15% growth in adjusted EBITDA as outlined.
In characterizing the results to notice provided annualized comparable for a new year, and we expect adjusted EBITDA between $667 million and $677 million in calendar 2021, compared to $465 million in calendar 2020, an increase of more than 40.
3%.
As we look forward I'm confident that we have the right team to execute on our long term ambition.
I'm also pleased to announce that we will give you an opportunity to hear directly from our leaders at an investor day expected to be held on February 27, and 24 in Houston.
That you will hear details about our growth strategy market execution capital allocation plans and have the opportunity to see our newly opened Houston hub.
I am confident that you will come away with an understanding of how we intend to achieve our full potential as we help our customers build mode.
With that Selena, we're now ready to open the line for questions.
Thank you.
Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your touch tone telephone.
Question has been answered or you wish to withdraw your question Chris start to ease.
Each caller is limited to one question.
First question is from Kathryn Thompson with Thompson Research Group. Please proceed.
Oh, hi, Thank you for taking my questions.
In terms of non res non benchmark of turnpike in the first half.
Fiscal year for Beacon.
And could you give an oven turned positive.
Second half could you give an update on the pace of business in particular.
And you know you mentioned that pricing was a significant factor for all.
All lines of business, but how much was volume growth in the quarter and how much was price and mix contributing to gains in what you're seeing in the non rents and market as you look over the next 12 months.
Thank you for the questions Catherine.
Certainly on the non res side of the business the market has been very difficult to manage and we.
We did see growth in the second half of the year, but.
But the supply chain challenges have been medical I mean its.
It started off with.
Although the installation products are being challenged we've got fasteners that are being challenged.
We've seen the most.
Most most of the materials in some way shape or form.
Difficult to obtain and.
Part of it has been in trying to create a package. So that we can actually get into the job site.
And they can be installed as a single job as opposed to shipping piece by piece.
It's the value that the distribution channel provides for the most part and like I said, it's been a it's been a very very challenging market to manage overall, we do see as we said in our prepared remarks are positive indicators backlog continues to grow and I think we remain positive.
On the outlook for the future. We continue to see what we think is the need for repair and replacement Bruce I'll just see those continue to age.
We see growth in certain segments of the market that we believe.
<unk> and secular trends that are remained good. So overall, we remain very positive and I think the sort of the future bodes well for the commercial construction market.
And then a follow up question is on inventory.
4% year over year increase.
Balance sheet excuse me by inflation versus volumes first thing.
Scott can you can keep up with future demand or are there pockets, where you may not have taken hold.
Great.
Hey, Katherine Thanks. Good question when you dissect that between price and volume. It's about 50 50 on the price side and the volume side within volume some of that is rebuilding from last year. Given the fact that that was in essence, the low point post COVID-19 for <unk>.
Inventory some of that is the backlog the Julian mentioned, what how they would get as much out the door, especially on the commercial side given.
Some of the challenges, we have with fasteners and adhesives. So there's a portion of that volume build that.
That has been more because of supply chain challenges and some of it has been just rebuilding from last year, given how low we work.
Okay.
Okay, great. Thank you for answering my questions.
Right.
Thank you Mr. Thompson.
Next question comes from Mike Dahl with RBC capital markets. Please proceed.
Yeah.
Hey, this is actually Ryan coming down from my Thanks for taking my question.
So as we look towards 'twenty, who and another year of patents using the bottom quintile and trying to improve that.
How should we think about the incremental improvement to be equal magnitude.
Or will that kind of decrease over time.
Hey, Ryan.
Okay.
Branches had a great year. This year you know Julian started this initiative now a couple of years ago in the last year iterations of 2020.
We reported over 20 million of savings this year of over 50 million of savings.
That's really a derivative of.
All three aspects of the P&L sales were better than the average gross margin of improvement was better than the average opex was better than the average so you're seeing the benefit of it of it come through on the bottom line.
That said when we look at the trajectory and the absolute.
The differences on each of those lines, especially gross margin and Opex. There is still hundreds of basis points of improvement capability in those branches to catch up with our what.
What we call the performing branches.
So we think this is a multiyear runway and look forward as we get into the Investor day conversation to give you some trajectory there that has some.
Futuristic.
He is behind what we think we can we can generate but this is going to be a multi year initiative, we're going to be talking about the bottom quintile for a number of years to come there's still a lot here to go after.
So but would it be fair to say that that is roughly equal in magnitude each year not something like because you improve them last year, the new group should be better and it'll be a smaller magnitude is that fair to say.
No I think we're going to we're going to re stack. It every year. So there'll be branches that are part of the lowest quintile again next year there'll be others that will graduate so to speak so we'll re rack and re stack those will raise the bar obviously as the company continues to perform better and as I mentioned when you have hundreds of.
Basis points of room on gross margin in the hundreds of basis points of room on Opex, there's plenty of opportunity here I don't think it will be lumpy because we're going to go after it every year in the same fashion, we're going to continue to set aggressive goals and we're going to continue to update you as we set those and deliver against those.
Okay.
Got it that's very helpful.
Thank you.
Thank you Mr Dahl.
The next question comes from Keith <unk> with BMO capital markets. Please go ahead.
Thank you.
First question on mid to me.
I'm, just curious kind of what do you expect to generate in terms of EBITDA from mid May I know, you said cross border or the coming quarter, it's going to be breakeven.
And then is it fair to say that you know.
Midway site acquisition is kind of you know what you think you would do at tuck ins.
You find the right opportunity in terms of size.
Okay got it thanks for the question.
At the midway.
It generates about $150 million of annual sales.
The reason for that.
But the EBITDA breakeven in the current quarter is primarily around give there in Kansas City.
In Nebraska, Missouri, it's the weather impacted so that's cycling down right now and.
Obviously, we expect to see that recover as we emerge from winter.
We're very pleased with the with that business, we think it's a great business and it's certainly right in the middle of the sweet spot of where we would expect our acquisitions to be obviously with newfound financial flexibility.
We're going to take the opportunity to make sure that we're participating across all elements of the market.
But it's certainly something that is going to be profitable. We think we can enhance profitability over time.
Bringing them onto our digital platform, including our private labeled products that and also learning from them. I mean, they are are they are a market leader in the markets in which they operate.
And we think leadership economics matter.
Yeah.
Got it that's very helpful. I turn it over thank you.
Yes.
Thank you Mr <unk>.
The next question comes from Garik.
With loop capital markets. Please go ahead.
Oh Hi. Thanks. My question is on the topic of organic growth and you've cited a pretty meaningful step up.
National account penetration with homebuilders, just wondering as we look out into calendar 'twenty two.
How much more runway do you have there and then maybe just speak to.
Any initial views of kind of organic.
Growth opportunities next year.
Thanks, Terry I appreciate that.
But I think the again, but it's.
Our ability to invest our ability to make.
Make sure we're reinvesting in the business.
Our ability to continue to grow the top line is critical to what our future is and we believe we've got multiple paths to be able to do that.
Suddenly with we've talked about investments in sales capability. We will continue to do that we think there's a lot of runway for us to improve overall sales capability expand our sales capability.
Now that we're more focused business, making sure that.
We've got clear lines of communication into these markets that are we think with.
We're able to penetrate.
We think enhancing our overall customer experience.
We brought in a chief commercial officer, whose job is to deliver against our customer experience and enhance it.
We spent the beginning of this week with a bunch of customers that are voice of a customer event and.
Got a lot of feedback on what we can do to to enhance our value proposition to those customers.
We certainly think that we can continue to.
Expand our footprint, both through Greenfield and M&A.
Those two really separate and we've set up organizations to really deliver against that promise going forward.
Our digital platform is another one we continue to see growth there it's been a little choppy here in the second half of the year as the.
As the supply chain challenges.
I pushed a little bit on that as inventory availability.
Its been more complex.
And then you know we're also looking at our ability to serve our customers core customers are always going to look at complementary product lines and our ability to continue to grow our complementary product categories.
Expand them with things like the Midway acquisition, where there is some.
Some product lines that are different from where we are and that will be another avenue for growth. So we certainly think there's room for growth.
We know this market is still highly fragmented and we think that the returns to scale can be leveraged.
And we're very very excited about what the future holds for us.
Great.
Thanks Scott.
Thank you Mr. Smith.
The next question comes from Michael Rehaut with Jpmorgan. Please proceed.
Hey, Thanks, good afternoon, everyone.
Two.
Possible.
Drive down a little bit on the top line guidance.
For the.
Calendar fourth quarter.
Up mid single digits, including mid way.
Hum.
In the.
Prior quarter in this most recent quarter.
I'm kind of thinking about you know the residential business, where he said that.
Volumes were down 14%.
How should we think about you know volumes either on a consolidated basis, but particularly in the residential roofing side in the in the first quarter.
How is that driving the.
Maybe if you could kind of go into a little bit.
Driving up the.
The quarterly view.
And if possible.
Maybe just some broad strokes on.
How you're thinking about 2022, I know, you're not ready to give guidance yet but just.
Any kind of broad thoughts on the roofing industry perhaps.
Hey, Michael so on the volumes, which I think was the root of your question.
Maybe you should you should expect in the transition period on the shingle side down in the same neighborhood kind of mid to high teens year over year. If you go back and you look at the comp.
From last year that prior year quarter was the highest December quarter ever.
It's up 25% over the ditch.
December 2019 quarter for us in terms of volumes. So the residential side on shingles is going to be more of a price story.
Into our into the stuff Julian mentioned in his remarks October finished quite well November is starting off quite well as well. So we're kind of heading into that high single digit clip right now the second half of the quarter as the more volatile period, given the holidays and winter, it's hard to handicap that.
But we feel like we're doing pretty well so far in the first half of the quarter and look forward to a good finish.
Gross margins are on track to.
The guy that Julian game.
You know the Opex feels like it's in line as well so we feel pretty good about that guidance, it's going to be dilutive a little bit because of the seasonality from the midway business that Julian mentioned, so think about 'twenty. There and then all in mid single and hopefully we'll have a little higher than that depending on how we finish up the last six weeks.
Yeah.
Alright, perfect. Thanks, so much.
[noise]. Thank you Mr Reinhardt.
The next question comes from Deepa Raghavan with Wells Fargo. Please proceed.
Okay.
Hi, Good evening, everyone. Thanks for taking my question Jeff.
Follow up to the prior one the high single digits October November comment that was residential mostly or does it cut across the variety of non res businesses and complementary businesses as well.
It's a good blend depot across that we're seeing good traction pretty much across the board.
So I don't know that I'll parse it any particular any particular way.
We've seen good weather in the first half of the quarter, which has been helpful. We've seen some good.
Traction on the pricing increase that we've talked about in September.
We're obviously seeing the a b I come out and we're seeing a number of different.
Macro measures, which continue to give us a good feel for where we are in the backlog continues to grow at some point in time that will unlock as we get some of the key elements of the supply chain, especially on the commercial side that the cooperative.
So we continue to believe that what we're seeing is going to translate into good results horse.
As Julian mentioned, we're bullish on 2022, we need to get through winter and figure out what the construction season looks like how.
How early it is going to start et cetera, and what the you know the.
Environment looks like in an inflationary perspective so.
So far so good and we're looking forward to turning to page 22.
That's great.
But yeah.
Alright, I appreciate that you're not giving us too much on 2022, but would you point us to.
Things that we should be mindful off.
As we carry forward comps from 2021, what would you guide us not to carry forward what would you guide us to be more optimistic about any any puts and takes in 2021 that should I should not translate into countries that would be helpful color.
Yeah, I think on the residential side.
2000, 22020, and then certainly the second half of calendar 2020 in the first half of calendar 2021.
We're strong single comps.
So that I think is an important thing.
Keep in mind from a quite.
A lot of business perspective commercial is one of the folks I think it was Catherine said earlier in the call. The first half comps will be a little bit easier than the second half comps. If you think about it at all in 2022 versus 2021, a lot of next year is going to depend on the supply chain.
If it is more fluid than it is now obviously that should translate into more sales for us if it is continuing to be challenged.
Then the backlog is going to continue to grow and it will unlock at some point in time, but the thing that we're feeling and seeing is the demand is there.
The supply side of the equations ability to really fulfill that demand is what the constraint is.
Currently as you think through your model and there's a couple of things to point out obviously, we had a very nice incentive comp.
Year in 2021 will cycle back to a target level in 2022, we did experience as we've called out a number of times inventory profits.
This year that.
Obviously, we won't have next year unless again, an inflationary environment, we've got our eyes on lumber and what happens with lumber prices, even though it's a small portion of our business. That's at wild swings in terms of gross margin given where spot prices have been.
Then we will handicap storms sort of 10 year average in terms of the way that we plan for things on the hurricane side and the hail side. So a lot of work to be done still in putting those numbers together some of the costs from COVID-19 like travel and entertainment that we speak about from time to time that will come back into the equation. Some next year as well given the fact that.
Hopefully vaccinations will continue to provide the population and we'll get back to across the table selling in some respects.
This is helpful color, but can you just provide a little bit more detail on the inventory comment that you made I mean last time, you talked about having some inventory.
You know in select regions.
The country, just curious where we stand there and I'll pass it on with that thank you very much.
Sure so inventory in the aggregate is higher for the reasons that we mentioned earlier some of that is just the inflation in the product itself. Some of that is rebuilding inventories from a very low point last year. Some of it is we're carrying inventory longer because of the length of the project cycles in some of the.
Supply chain challenges, we think we are in relatively good shape in the aggregate, we do have situations where we.
No. We don't have the the last product in order to be able to ship. The full complement of the job we have situations, where we have a particular.
No location that might be a little light at another location.
Heavy.
So I think the inventory piece is in.
In decent shape, but we're going to continue to take allocation, we're going to continue to look for opportunities to get ahead of price increases to the extent those are announced.
I do think that there's one thing as you model it out deeper as I've mentioned in the past the inventory profits equation.
In 2020, one has yielded somewhere in the 50 to 100 basis points of gross margin accretion in 2021 debt unless we get into another inflationary environment in 2022 won't repeat.
That's great thanks very much.
Thank you Mr. Zhang.
The next question comes from Keith Hughes.
Please proceed.
Yeah.
Thank you.
The guidance you gave for 'twenty, one adjusted EBITDA of calendar 'twenty, one to just move it up.
Comparing that to.
Hopefully in calendar 2021.
It's sort of flattish I think I'm doing these numbers right, but I guess my question is as you go through the year. What do you think the puts and takes on the EBITDA, we're going to be that are going to push that individual quarters up or down with the prior.
Prior year.
Hey, Keith just to clarify what Julian gave was a calendar organization of 2021 not a guide for 2022.
Okay, Alright, well I guess my question is going into 'twenty, two what's going to be pushing the numbers up or down as you go through the year.
He says he says.
Sure.
Listen to Frank's answered the prior question that was some of the questions Deepa had I mean, it's intense.
Incentive comp will change.
Inventory profits will change.
Depending on the inflationary environment.
I think that we'll see those things continue to evolve.
But overall as Frank said I think that we remain bullish about the market environment, we see.
Housing starts and so on.
Our investment in housing in general residential roof re roof market is positive and we think provided we can work our way through the <unk>.
The supply chain challenges that are primarily today in the.
The commercial space some in the complementary product category as well.
The ultimate demand that's underlying this space remains robust.
You can put shingle volume will turn back positive once you get through these tough comps.
Calendar 'twenty two.
They should the case.
You know the question will be how long does it take the supply chain to reach a level of fluidity.
We do have situations across the branch footprint, where we still have extremely low inventories are very specific products for very specific manufacturers.
We've really got to work our way through that the manufacturers have to work our work their way through that we know theyre going to take some downtime here hopefully they come out next year with good production.
In productivity and production.
You know, we all I think on the distributor distribution side to build some inventory. This year. The question is how much more important can be able to build next year. Some of that's going to depend on.
How long winter last winter construction season unlocks, but one thing to just keep in mind is Julian and I were talking about this earlier.
There are millions of houses that need to be built to get back to you.
Where we need to be from a long term housing perspective so.
That's got to wrap itself up to be able to.
For us to be able to have the homebuilders are really fulfill that demand and the backlog that we're seeing that we mentioned like the setup is good from a demand perspective, we just have to be able to fulfill that demand and right now there's quite a bit of challenge in the supply chain that you see and it's not just building products with all the transportation related items as resident plastics.
Clients and all the things that go into building either on the commercial side on the residential side.
The manufacturers and the builders are just not able to cycle their capital as quickly as they had been in the past because of the projects were taking longer to complete.
Yeah.
Okay. Thank you.
Okay.
Thank you Mr Hughes.
The next question comes from David Macgregor with Longbow Research. Please go ahead.
Yeah.
Yeah. Thanks for taking my question and good afternoon, everyone. I guess I wanted to ask you a question about market share and if you think about kind of the extent to which you see Oems focusing their fulfillment capabilities under the law.
Largest customers like Beacon.
I guess, one would think that would give you more in stock and as a result of an ability to win share and so I guess, how do you think about kind of your ability.
When new customers, whether it's the small guy or whether it's at the national account level. It sounds like you've made some pretty good progress there.
And your ability to retain those new customers.
Ultimately could that contribute to 2022 growth.
David Thanks for the question certainly, it's an important metric for us.
I would say that.
The past year year, and a half we've focused very much on staying ahead.
Being inflation could making sure that's.
We've got that so nothing.
It's been very difficult to sort of see through the channel over the past 12 months and the supply chain challenges, what's that certainly we think we've got a.
Our scale advantages.
And as we are.
Positioned to sort of pivot towards investing in and growth.
We think we've got a great ability to.
Okay.
Sure. This was as we go forward.
But you know one of the things that we're most focused on is really delivering.
A great experience for our customers and we think over time that will.
That will help us in the long run.
Okay.
It would seem as though there's got to be some incremental accounts that you're bringing on but it's got to be some incremental volume did you carry over into the new year and I guess I'm, just trying to dimension that or get some sense from you what did you.
That might represent.
Okay.
Hey, David.
We continue to believe as I said that.
This is a this is.
The focus for us serving our customers growing up business. We think we've got multiple paths to growth. We think that's a whether it's a customer experience.
Our ability to service our customers through our OTC strategy, our sales capabilities.
Our digital offering.
And then suddenly M&A in our Greenfield strategy gives us the ability to continue to grow and grow market share.
Okay.
As a follow up is there any way you can talk about price cost.
Residential versus commercial versus complementary.
What you're seeing there.
Yeah.
Yeah, I'll give you some directional.
Commentary David.
As we mentioned quality.
Prepared remarks price cost was about.
220 basis points favorable if you want to break it down by.
Whereas at commercial and complementary.
On the resin side.
Pricing was higher than the average.
Which was about 1400 basis points from the average was about 1400 basis points of pricing was higher than the average but cost was also higher than the average.
On the commercial side.
Rice and the costs were lower than the average.
And the same holds true on the complementary side.
Terrific. Thanks, very much good luck.
Thank you Mr Macgregor.
It is star one to ask a question.
The next question comes from Trey Grooms with Stephens Inc. Please proceed.
Yes.
Great. Thank you.
You talked about this a little bit around roofing end and on the non res side, but can you talk about.
<unk> availability in the complementary business are you seeing any improvement there and then you know with all of the pricing action that we've seen with a lot of the complementary products.
And then also seeing a bit of a pause with housing starts understanding a lot of that goes into the new red how are you thinking about the the.
Ponant the complementary business.
Calendar <unk> and then as we kind of move into 'twenty two thank you.
Thanks Trey.
Certainly the.
Certain.
Inside our complementary business.
I definitely experiencing.
Inflation was.
We're seeing a challenging environment on the supply chain side as Frank said.
And some of the chemicals that go into those products are obviously lumber forms part of that so as well and it's a that's.
Adding to the opposite chat.
Challenge, but.
I think there is certainly opportunities for us to continue to.
It's continued to grow in that category like I said, we're excited about a new.
Midway acquisition, they've got some great lines of complementary products that we're excited about and I think that we're going to continue to see some inflation in that area over the next.
The next several quarters and obviously, we'll be very focused on staying ahead of that today I think that's it.
The supply chain challenges that we've seen that seem to be easing marginally.
Again, I think that some of that is probably related to a slight softening in demand as we come into the winter season, but we are staying very vigilant staying ahead of the cost cuts.
I think on the complementary side the.
The area that we probably have the most watchful eye on.
It is vital.
I didn't get in any number of things that have happened in Texas and more broadly.
So that's probably the area that we have are.
Our keen eye on.
We saw an interesting dynamic.
In the fiscal fourth quarter between the growth rates on vinyl and the growth rates on fiber cement.
Yeah.
A little bit easier to get cement than it has been to get the to get vinyl. So it'll be interesting to see that one play out next year.
That's helpful. Thanks for taking my questions I'll pass it on.
Sure.
Thank you Mr <unk>.
Next question comes from Kevin Hocevar, You May proceed.
Hey, everybody good afternoon.
A question for you on the Hum on the price cost side.
You know Frank I think you mentioned 50 to 100 basis points. This year of timing related price cost benefits and I know this quarter was 220 basis points of price cost benefits overall, I think last quarter was more to so there's some.
Pricing.
Exclusive of the timing related benefits is also you know you're realizing more pricing than cost it seems overall.
Overall, so as we think about 'twenty.
Going forward it sounds like inventories are maybe.
Getting back to pretty normal type level, maybe not quite there.
In some regions, but getting closer so I'm I'm curious your thoughts on the ability to hold on to those that kind of the non timing related price cost benefits.
You know.
Maybe not a little bit more normalized type environment in terms of the inventory.
Inventory positions.
Yeah No. Good question, Kevin I think what you're seeing in the last couple of quarters is actually that roll off of the inventory profits.
You know when you have a price increase in a in April and in June. So we got to in the fiscal third quarter, We got one in the fiscal fourth quarter.
Those take about 90 days or so each two to roll off the commentary around the 50 to 100 basis points was really thinking about on a full year over full year basis. So I'd almost think about that like a calendar over calendar basis. As you were thinking about how to model that you know the inventory again is only about half the volume and the other half is inflation.
So I don't I don't know that we're all the way back to where we need to be certainly there are lots of regions has lots of branches, who would say look we're at critical levels on certain aspects of inventory and there are other places maybe there are near to a shingle playing with demand may not be as strong in that particular location will there be flush with inventory as you know some of these products are very hard to transport.
Beyond a couple of 300 miles so.
So you end up with a little bit of a dichotomy between the branches that have in the branches that have thought.
So we're going to continue to look for opportunities to fill in where we need to regionally and then I can't over emphasize there are some elements.
That just are not available in any meaningful quantities a lot of that's happening on the commercial side, which is why we're seeing a lot of that backlog.
So we're gonna be very precise with inventory you can see that we've invested.
Dollar working capital on inventories for all the right reasons, it's because of what we're seeing on the demand side and then as we think about 2022, we have to give some thought to whether or not we're gonna be in an inflationary environment next year as well in which case you know continuing to exact a level of inventory profits slightly good economical thing to do as well.
And Kevin I'll add to that I, certainly don't want to give the impression that.
Margin expansion is solely a result of inventory profit suddenly we benefited from that this year, but.
As you yourself mentioned, we've executed ahead of.
Of the pricing inflation that we've seen.
But we've got multiple levers to pull on the margin side of things, including additional pricing.
Analytics and all.
Most skillful management of price overall.
M. A digital platform I tried built and then managing Opex and productivity all things that we believe the mean that where are we structurally changing our margin profile.
Okay. That's great. Thank you so much.
Okay.
Thank you Mr Hocevar.
The next question comes from Quinn Fredrickson with Baird. Please proceed.
Hey, guys good afternoon.
Just wanted to see is there any way you could quantify the impact that you mentioned are not being able to ship.
Complete products that for some of the commercial jobs that had on the.
The non drowsy business and then are you anticipating any catch ups in the calendar fourth quarter from being able to ship those that require the supply chain to get a lot better to meet that demand.
Yeah, so on the.
Question on the supply side, yes, it needs to get better in order for us to unlock a fair amount of that not only are we are we selling what we can that backlogs continuing to build and we havent given the dollarization of it so to speak but.
But there is certainly percentage points of growth associated on the on the commercial side and honestly, both on residential and complementary as well.
That's why that backlog as large as it is I mean, it's twice what it was a.
A year ago or more than twice what it was a year ago went up 50% on a quarter over quarter basis and that's with.
Pretty good core [laughter], so we're seeing some robust demand there.
It's down to some very specific products as I mentioned, that's a very specific locations.
Right now and everything that I read and we talk about internally and we hear from other companies.
There is not a silver bullet. This is something that we're gonna have all struggled with in the 2022.
But we're hopeful of is that we can unlock a lot of these jobs that are in the backlog as we turned the page into 2022 and that will certainly help on the non risk Brookside.
Alright, Thank you very much.
Okay.
Thank you Mr Fredrickson.
Okay.
That concludes the questions session now I would like to turn the call back over to Mr. Francis for his closing remarks.
Thank you Lena and thanks for everyone for joining us this evening.
This has been a transformational year for beacon.
I'm incredibly proud of the results that we've just delivered in a in a very challenging environment.
We built a new team at Beacon, our new portfolio.
<unk> transformed the balance sheet and we're now looking forward to the ability to invest in.
Gross.
And enhancing our overall margin profile for this business.
We hope that our employees customers suppliers and investors are all safe and happy and we wish you all a happy Thanksgiving. Thank you for joining us this evening.
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Okay.
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