Q1 2022 Beacon Roofing Supply Inc Earnings and Transition Period Call

Statements as a result of various important factors, including but not limited to those set forth in the risk factors section of the company's 2021 Form 10-K , and subsequent filings with U S Securities and Exchange Commission.

These forward looking statements within the Safe Harbor provisions of the private Securities Litigation Reform Act of 1095 regarding future events and future financial performance of the company, including the Companys financial outlook. The forward looking statements contained in this call are based on information as of today.

<unk> third 2022, and expect 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.

Conciliation of these non-GAAP measures to those 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 in dot.

Com I would now like to turn the conference over to Mr. Bill <unk> head of Investor Relations. Please proceed Mr. Sandy.

Thank you Tim good afternoon, and welcome to our transition period in calendar year 2021 earnings call.

On the call today are Julian Francis President and CEO , and Frank La Negra Chief Financial Officer.

Our prepared remarks, well first off the slide deck posted to the Investor Relations section.

The web site.

Management's prepared remarks, there will be a question and answer session I will now turn the call over to Julian.

Thanks, Brad and good afternoon, everyone.

Before I provide my comments on the quarter I just wanted to remind everyone that we changed our fiscal year end.

The calendar year and as a result of the reporting calendar fourth quarter today, which is referred to in our earnings release and other materials that are transitioning.

Now let's begin.

Paul.

I am very pleased to report that we finished the year with record.

The team delivered calendar fourth quarter records for sales net income and adjusted EBITDA.

I also want to highlight that we achieved double digit EBITDA margins for the calendar year 2021, a significant milestone for the company.

For the quarter sales were up 11% year over year.

<unk> 2020 comparison in which we had high single.

Shingle demand driven by housing investment and strong volumes.

We exceeded the expectations, we set in November our net sales growth.

High single digits, largely due to the later onset.

Which allowed for an extended roofing season, particularly in the northeast.

The fundamental drivers of residential demand remained strong.

Despite continuing supply chain issues commercial activity continues to show an improving trend as evidenced by our strong year end backlog.

We also continue to experience inflationary pressure across most product categories.

Our focus continues to be on great execution at the branch level and staying ahead of the cost curve, while ensuring we have product available when and where our customers need it.

As a result gross margins in the quarter expanded year over year by more than 90 basis points to 26, 3%.

We expect the cost pressure to continue and are confident that we can execute to capture additional pricing to offset the headwinds.

Impressively, we increased adjusted EBITDA by 21% in the calendar fourth quarter and yielded nearly a 10% margin.

We continue to focus on our portfolio and our renewed financial flexibility provided the capacity to add tuck in M&A as another lever to our growth ambition.

We successfully closed on two acquisitions recently, expanding our presence in key markets.

As we announced on our prior earnings call on November 1st we acquired Midway.

The premier distributor of roofing products and a broad offerings of complementary building materials with annual sales of approximately $130 million and 10 locations across the Midwest, we expanded our presence in growing markets and Kansas, Missouri and Nebraska.

Additionally, on January 1st we acquired craft, Trieste, siting and supply a distributor who's built trusted relationships with customers and suppliers located between Nashville, and Knoxville Crabtree has annual sales of approximately $1 million.

We welcome the midway and crack treat teams to beacon and look forward to leveraging their reputation for quality service and reliability to it.

Further enhance our combined market positions.

During the quarter, we also announced that we divested our solar products business further focusing our resources on delivering high caliber services to our core roofing customers.

Overall, the solar business was dilutive to our margins and we determined that the buyout was better position for long term growth in the category.

Now I'd also like to take time to highlight critical non financial initiatives that demonstrates how we continue to build the organization.

Putting people first as a core value and we believe in attracting developing and retaining a workforce that is representative of the communities in which we work and live.

Last year, we created a cross functional diversity equity and inclusion council comprised of employee volunteers, who provide expertise and advice on D Eni strategies.

The Council has made significant progress laying the groundwork and its aim to foster a culture, where all voices can be hood.

In recent months, we've conducted focus groups with leaders in underrepresented groups and rolled out training and education on diversity equity and inclusion to all our employees.

In addition, we widen the lens by partnering with inroads a nonprofit organization that create athletes to Korea is ethnically diverse students across the country.

Our progress on the Eni has begun with meaningful impact and we've seen our assets advance throughout the company, but we recognize we have much more to do.

We also believe that putting people first means recognizing the efforts of our employees who have demonstrated tremendous resilience in the beginning of the pandemic.

As part of our annual safety stand down this quarter, we celebrated and rewarded the exceptional contributions of all up front line employees during 2021.

The only true outlet assets that we're able to help our customers build mode.

The performance improvements we have delivered in the past 12 months gives us great confidence in our future plans.

We look forward to sharing our longer term strategic plan that we have called ambition 2025 with the investment community later this month.

Now please turn to page five of the slide deck.

As always I will provide a brief update on our four strategic initiatives.

Our organic growth initiatives continues to focus on enhancing the customer experience and the effectiveness of our sales organization.

Over the past year, we continued to invest in sales training programs marketing support and value added tools that help our salespeople grow our business.

These initiatives are paying off for example.

Phil about private label are up nearly 30% in the quarter versus the prior year.

Our line of high quality building products sold under the <unk> label deliver professional results at a competitive price.

<unk> is becoming a recognized and trusted name by professional contractors across our residential commercial and a complementary end markets.

I'll focus on our National accounts is also generating results.

Calendar year, 'twenty, one sales to our largest customers increased by 25%.

We continue to build an experienced team with a proven track record focused on developing long term trusted relationships to be the supplier of choice.

These examples provide an idea of the significant opportunities we have available to further partner with existing customers.

Business with new customers and grow organically as we accelerate these types of investments in the near term.

That's a digital capability continues to be a clear competitive differentiator for <unk>.

We provide the most complete digital offerings and continuous to expand our capabilities to make it easier for our customers to do business with us.

We achieved digital sales of nearly 16% in our residential line of business in the calendar fourth quarter.

Nearly 50% more active users of our online platform compared to this time last year.

I would remind you that this sales channel as both revenue and margin accretive.

Our OTT strategy is an operating model in which branches on networks and larger msas.

And OTC provides four key benefits.

First is improved customer service levels in our OTC is we have greater flexibility to deliver from the branch, but the best combination of product and service to support the customers' needs.

The second benefit is a lower cost to serve by leveraging resources logistics across a network of branches, we are able to reduce delivery time, and mileage improved labor efficiency and reduce fleet costs and admissions.

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 maintaining service levels.

And fourth critical through our ambition is there'll be accelerate our talent development.

Our OTC initiative creates opportunities for the people at beacon to build fulfilling careers and for us to unleash local talent enhancing our ability to execute on our plans.

We are very pleased with the recent launch of our Houston hub designs for efficiency and capacity improving our position in one of the largest markets in the country.

We also anticipate opening one of the largest exterior products distribution centers on the west coast without Los Angeles hub expected to be operational in the first half of this year.

And finally operating performance I'll focus on the bottom quintile branches is producing meaningful results we.

We generated approximately $50 million year on year EBITDA improvement in calendar year 2021.

The two year total to over $70 million in summary.

Our strategic initiatives have delivered measurable results in 2021, and we remain focused on accelerating our growth and profitability.

These strategies will continue to be foundational as we launch our ambition 2025.

Now I'll pass the call over to Frank to provide deeper focus on our fourth quarter continuing results.

Thanks, Julian and good evening, everyone two housekeeping items before we get started.

As you know, we divested our solar products business on December one.

Given its relatively small size. It is included in the results of continuing operations.

Therefore, our reported results for calendar Q4 include two months of contribution from solar within our complementary line of business.

So it is important to note that the comparable results from the prior year quarter includes three months solar results.

Similarly, we close on the Midway acquisition on November one.

In our reported results. This quarter include two months of mid ways results.

While these two items in the aggregate are not material to our bottom line results for the year over year comparison, we thought it would be helpful to level set on these items prior to discussing the quarterly results.

Turning to slide seven we achieved nearly $1 8 billion and total net sales in the calendar fourth quarter up more than 11% year over year, driven primarily by higher average selling prices for our products.

In the aggregate price contributed approximately 15% to 16% to revenue growth, partially offset by lower volumes of around 4% to 5% largely attributable to the continued supply constraints in the current period combined with a strong prior year comparable.

Residential roofing sales were up approximately 9% on a single price execution throughout the year, including the recent September increase.

<unk> volumes were down about 10% year over year in line with army and slightly better than our expectations.

You know the strong prior year shingle comparable benefited from the Covid snapback and stronger storm demand in 2020.

We estimate that about a third of the shingle volume decline in the quarter was related to lower wind and hail storm activity as compared to the prior year.

The fundamental drivers of the residential market remains strong with approximately 80% of demand coming from re roofing activity, which is largely non discretionary.

An important indicator of the strength in the residential market as the comparison to the fourth quarter of 2019.

Residential shingle volumes were 12% higher than the reported quarter versus the calendar fourth quarter of 2019.

Non residential roofing sales were up approximately 13% and a challenging supply chain environment.

Our team did a great job of providing as much product as possible given those challenges and staying ahead of inflation.

Continue to see longer project cycle times, which added to our strong pipeline a positive indicator of future demand.

Complementary sales increased approximately 16% in the calendar fourth quarter as we achieved higher prices across nearly all products, including citing in Lubbock.

As you May recall, our complementary line of business is roughly 80% exposure to the residential market and allows us to be the supplier of choice to the exterior focused customer.

Turning to slide eight we will review gross margin.

Gross margin improved to 26, 3% up nearly 95 basis points year over year.

Execution of the price increases early in the year.

Tribute to the improvement.

In the aggregate price cost was positive by approximately 110 basis points in the calendar fourth quarter on a year over year basis.

Sequentially product costs increased as the inventory timing benefits largely rolled off by the end of the quarter mix.

Mixed in the quarter was negative and slightly more unfavorable than we initially expected given relatively higher sales growth in our non residential and complementary lines of business.

Combined with higher direct sales to customers.

Adjusted Opex was $306 million, a $30 million increase compared to the year ago quarter, mainly due to inflation and wages rent and fuel costs.

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.

We also made the conscious decision to undertake less winter recession. This year, given the favorable fall selling season, and our desire to be adequately staffed a labor constrained environment to handle the demand we expect in the upcoming construction season.

Our head count was up a little more than 2% year over year, excluding our recent bid way acquisition and we continue to focus on labor productivity.

As a result of these factors combined with higher sales our adjusted Opex to sales ratio was in line with the prior periods.

Turning to slide nine we will review our financial flexibility.

Operating cash flow adjusted for items related to the sale of our interior products business was a positive $60 million in the quarter. This compares favorably to our typical calendar fourth quarter, which has negative operating cash flow.

Recent quarters. This restored financial flexibility has enabled us to open new greenfields, such as the Houston OTC hub Reengage in tuck in M&A transactions like midway and craft and.

And rebuild our inventory to ensure we can effectively meet demand.

Net inventories of $200 million higher year over year reflective of several factors.

Cost inflation rebuilding inventory levels from post Covid lows.

Being certain elements of inventory longer than expected due to lengthening project cycles.

Ensuring material availability to support our long excuse me strong backlog and buying inventory ahead of price increases.

'twenty, one with a truly transformational year for beacon for many reasons not the least of which was the divestiture of the interiors business and more recently the solar products business.

In addition to focusing the company on our core exteriors customers. The proceeds along with balance sheet cash and free cash flow allowed us to reduce gross debt by more than $1 billion a year over year.

Net debt leverage stood at two one times trailing 12 months adjusted EBITDA at quarter end compared to four eight times a year ago.

In addition, we derisked our debt maturities through a comprehensive refinancing earlier in the year, which essentially eliminated near term refinancing risk we.

We have no meaningful debt maturities until 2026, and our liquidity position of approximately $1 5 billion at quarter end provides a significant ability to invest in our future.

This renewed balance sheet strength has given us the opportunity to thoroughly review our existing capital allocation framework, we look forward to laying out our new capital allocation strategy in more detail at the upcoming Investor day.

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 briefly wrap up our 2021 and turn your attention to 2022. Please reference page 11 of the slide materials.

2021 was transformational and we begin 2022 with great optimism.

The underlying pace of demand remains positive and residential even as our new homebuilding customers continue to manage through constraints, such as labor and material shortages.

Regarding non residential demand.

The macro environment continues to remain supportive.

Rising demand trends, we saw it begin in late 2020 is expected to continue in line with the architectural billing index.

Though we believe supply chain disruptions will continue to impact lead times excuse me lead times in project cycle times.

Overall sentiment remains positive and our strong backlog is indicative of the future demand.

And our first quarter ending in March we expect total sales growth to be in the high single digits range year on year. After a strong performance in January .

This guidance also reflects our recent acquisitions and the divestiture of our solar business.

Gross margin will reflect our expectations for positive price cost contribution.

You may recall that we are lapping price inflation as well as the related timing benefits from price increases in the prior year quarter.

Nevertheless, we expect solid price execution to result in a year to year gross margin percent increase of approximately 40 to 60 basis points.

For the full year 2022, we will continue to execute our strategy and focus on controllable areas of our business.

These include ensuring product availability remaining ahead of inflationary pressures as well as furthering our productivity gains and cost management.

We expect full year 2022 sales to be up mid to high single digits versus calendar year 2021.

We expect higher sales and continued cost discipline to more than offset gross margin decline as inventory profits roll off.

And will result in adjusted EBITDA in the range of $685 million to $725 million.

We're excited about 2022 and they're off to a good start as we look forward our team is energized and ready to execute on our longer term strategic plan called ambition 2025.

I'm pleased to hear that many of you will join us at our Investor Day on February 23rd in 'twenty, four and Houston, whereas you will hear details about our growth strategy market execution capital allocation plans.

And and have the opportunity to see our newly opened Houston hub.

I'm confident that you will come away with an understanding of how we intend to achieve our full potential.

With that operator, 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 Touchtone telephone. If your question has been answered or you wish to withdraw your question press the pound key each caller is limited to one question.

The first question is from the line of Kathryn Thompson with Thompson Research Group. Your line is open.

Hi, Thank you for taking my question today.

A lot of topics I'd like to ask I think you will most likely copper at the Investor day, but one I wanted to touch on capacity in the Carson inventory near term and I'm looking at the bigger picture.

Just a clarification of how much the inventory.

<unk> versus volume and then when.

<unk> from truly mode.

The growth in shifting from just confirm to us have had.

To capture share with me Jeff.

The case, there is an increasing value placed on company to carry inventory.

So obviously your distribution model how has this shifted impacted how beat consensus and some inventory management enhanced cash burn going forward.

Thank you.

Okay.

Well Katherine I'll take the first.

Frank answer some of the details on the.

Difference between.

Price and volume in a kind of inventory.

Look I think we've all been challenged with.

The current inventory situation in the supply chain challenges and they've been meaningful.

Certainly we've taken advantage of our scale to ensure that we.

We are managing them, probably a little bit higher than we would normally through this.

Period of time.

Both are deliberately and probably on a on a base in some cases project cycle delays as Frank mentioned in his prepared remarks are causing us to hold some inventory as we assemble the pieces together, but I think your question really emphasizes the value of distribution I mean, we are the ones.

So in aggregate the demand and from.

From the marketplace and from various suppliers and are able to deliver that and do just that and I think the distribution at this point in time is really proving its value.

I think we're going to see what happens down the road, we're going to manage our inventories.

To best enable us to capture.

As much of the share of the market as we can in a reasonable fashion.

If that means long term, we're going to carry a slightly higher balances.

That'll be determined as much by the marketplace.

But certainly we think that this period of time has emphasized the value of distribution and building.

The aggregator of demand and for the suppliers as well, Yeah, Hey, Catherine So conscious decision obviously to invest in inventory for all the reasons.

You know that you are implying in your question a couple of numbers that might be helpful.

Rough order of magnitude overall, the build is about half price half volume.

It's a little bit different depending on the product that you are asking about shingles, maybe on your mind, that's about 50 50 between price and volume.

The other bigger categories on the single.

A single ply side. So the commercial piece is probably the element that we'd like to get more of it we could.

So that volumes.

A bit on the insulation piece of commercial that volumes up a little bit more than the 50% that I mentioned on the shingle side.

And then they decided it would be another good category two dimension.

That's about two thirds on the pricing side about a third on the volume side. So hopefully that gives you a bit of a walk around the inventory situation.

That does thank you very much.

Thank you Ms Thompson.

The next question is from the line of Mike Dahl with RBC capital markets. Your line is open.

Hi, Thanks for taking my questions.

Just as a as.

As a follow up to kind of price mix I wanted to ask it around.

The full year guide.

Uh huh.

Some of the some of the moving pieces around sales and margin within the sales guide for <unk> for both the upcoming quarter and the year can you help us think about what's contemplated price versus <unk>.

Volume.

Yeah.

So might be alright anticipated price increases we see contemplated in the guide.

If there are no other price increases announced we don't even when not to covering additional ones that.

But we all covering the ones that we know about as of today and are implemented.

High level like on the <unk>.

Current quarter, So Q1 'twenty two.

Volume will be down talking broad strokes of your company average not any specific product category.

In the low single digit range, which pushed price obviously.

Up in the low double digit range, which gets you to the high singles guide on the sales side for the full year of the mid to high <unk> Guide.

Guy that Julien.

But it really is it's a combination of price and volume it is positive volume.

Positive price is about two thirds price one third volume again, I'm, giving you rough broad strokes here at a company level not any specific product category.

Okay. Thanks.

The second question earlier, you talked about kind of recalibrating on the bottom quintile and that's supposed to be kind of at this time.

Structural thing that you guys manage.

Each year or it's just part of system now any any early thoughts on what the runway is as you look out to this year from the new batch.

Batch of underperforming branches.

Yes.

Thanks for the question, Mike certainly no. It's just just by the law of mathematics, you end up with the bottom quintile of room to improve just to get to the company average in there that's the theory behind this.

This is something that we will share.

Some targets on at our Investor Day.

We've got a well thought out plan and we think we've demonstrated that there's a significant opportunity and ultimately we think significant opportunity remains and we will we will be more.

Transparent on that in a few weeks' time.

Okay. Thanks, Sean.

Thank you Mr Dong.

The next question is from the line of Keeton lump ore with BMO capital markets. Your line is open.

Okay.

Thank you and good afternoon.

Just coming back to the balance sheet flexibility, obviously net leverage is down quite nicely.

As you look ahead can you talk about you know kind of a you know sort of the priorities.

Managing kind of M&A and absent M&A I don't know if you know how how do you how would you think about capital allocation.

Okay.

Sure.

As Julian mentioned it I mentioned in the prepared remarks that will be up.

A key element of the conversation that will happen with everyone in about three weeks at the Investor day.

We've mentioned a number of times in the last few quarters that that everything is on the table in terms of.

Consideration as we lay out the capital allocation capital structure frameworks going forward, so rather than tip. Our hand now it's probably worth asking that same question. It's about 20 days.

Sounds good.

The M&A pipeline pretty robust at this point Frank.

It is we we obviously had a couple of good acquisitions late last year.

I'd say the first couple of weeks of January is always a little bit of a reset periods, but things have kicked back into gear pretty quickly here and we're actively in conversations with.

Or are companies as we always as we always are but.

If the environment doesn't seem to have slowed down at all as a matter of fact, you know Julien.

Are actively engaged with a number of folks and Oh well.

We'll see how many cross the finish line.

Certainly like what we see out in the market in terms of the geographies that we're looking at in the products suite that we're looking at and hopefully will be the acquirer of choice and look forward to integrating those companies with us.

Throughout the year.

Sounds good thank you.

Thank you Mr Mom quota.

The next question is from the line of Truman Patterson with Wolfe Research. Your line is open.

Hey, good afternoon, everyone. Thanks for taking my question.

So just wanted to touch on.

Residential volumes have been down the past couple of quarters.

But pricing is stuck extremely well I'm, hoping you can give us some thoughts on the price hike here early in the year.

Whether you expect it to stick and then.

Just some color moving through 'twenty two.

Assuming that volumes stay below last year's levels, just trying to understand your confidence in.

Keeping pricing.

David.

Thanks for the question Truman.

I said in my prepared remarks, but we remain confident that we can.

To implement price increases to offset inflation I do think that we will continue to see inflation throughout the year.

I don't think that given the overall dynamic.

We will see the same type of year, we saw last year with multiple price increases in very short 60 day periods.

Across multiple product categories, I think the supply chain.

Is easing but.

It is still relatively tight and you got to remember I think as you look out.

Our 2022.

Demand is going to be across most of our categories. We think demand is going to be one of the highest we've seen in the last.

10 plus years.

So maybe last year.

So you end up with it's going to be a very good demand environments. I think supply chain challenges are still out there I think that certainly.

All of the manufacturers across all product categories.

I have room to improve their inventory position I think they're going to run so that they can that they can continue to do it unless we have.

I think that the underlying demand is good we had a relatively slow storm year last year on the Grand scheme of things I think we would assume that that will return to about average, which is probably a little bit of a tailwind in our assumptions here going forward.

So I think we will see a good environment overall.

I, just managing the pricing environment, and I think that with the demand levels, we see.

Like I said, we ultimately remain confident that we can offset inflation.

Perfect. Thank you.

Thank you Mr Patterson.

The next question is from the line of Depot, Brad Hoffman with Wells Fargo. Your line is open.

Okay.

Hi, good afternoon, everyone. Thanks for taking my question.

My first question is on your Oh quarter current quarter.

Yeah January is growing double digits, but you're guiding to high single digit so you're obviously expecting a moderation.

But you also had a place in Queens levied in January So just curious why are you assuming a moderation.

A deep it's Frank.

So remember last year, there were some really interesting dynamics in the quarter January was a pretty good bump last year February was difficult on whether you might remember the kind of deep freeze that reached all the way down into.

Texas. So our sense is that the January and February will be strong this year relative to last year more Chad what I'll say is some snapback demand from the February difficulties. So I think the March month ended up itself will be a tough comp for us and when you blend all that together you get to the high <unk>.

The range that we mentioned.

Okay, that's fair.

Yes gross margin expansion for the same upcoming quarter plenty to 16 bit is this mostly pricing driven or.

Are there any other benefits in there I'm curious what would that mean to your EBITDA.

Expansion.

Yeah, we didn't give EBITDA guidance, but clearly your question.

Hinted that I'd say the gross margin is a combination of the.

The carryover price increases from last year, obviously, those begin to roll off as we go through the year the January price increase.

Julian just referenced and spoke about in answer to the prior question.

We are now getting those higher product costs into the mixes inventory profit.

Rolled off from the from the prior.

This increases were always going to be working on private label digital and things like that which had.

Margin accretive benefit there.

From an Opex perspective, if you just kind of walk down the P&L I wouldn't.

I wouldn't anticipate huge changes on a year over year basis on an opex to sales base.

Basis, and obviously you can do the math on the EBITDA, which which obviously would be a nice lift from from last year without dimensionalize. It.

Yes.

Alright Thats helpful. Thanks, very much good luck I'll pass it on.

Thank you. Thank you Mr <unk>.

The next question is from the line of Keith Hughes with Truth. Your line is now open.

Thank you courses on nonresidential.

Several quarters here with some positive results in.

The segment has a history of kind of be it up and down.

Is there anything thats change in how you run the business to get a little bit more consistent results.

And do you think as you go through 'twenty, two we see the volume there inflect higher given some of your commentary earlier about some commercial activity really starting Mr.

Thanks for the question Keith.

Very insightful.

Yes. The answer is we do think that.

We're running the business a little bit differently.

We do think of our business is having to call.

Businesses, the residential focus and the commercial business and that they're not the same.

And so we do think about them as different businesses and run them as such.

Look I think that the supply chain challenges.

Commercial have been manifest across so many different categories, it's difficult to put your finger on it its gone from it.

It's gone from installation to fasteners backing slate I mean, it's been all over the place and compiling the jobs.

It's been a real challenge and then getting labor to get it on the jobs and the timing of the projects it's really been.

Uh huh.

Catherine's earlier question the value of distribution in this time of the contract and for the manufacturers is highest we compile those jobs and hold them until we can get job packets as the adult.

That's that's really important.

I think that we will see some easing as we go through the year of supply chain challenges and some product categories.

We're very conscious of some products.

Shifts trends Continentally.

And disruptions in that supply chain.

While it's been busy.

Leasing a little bit more recently.

Containers is the cost of containers is the inflation that that drives the ability to get them.

There's still a tremendous amount of uncertainty.

What I do think as positive overall is that I don't think that there is a sudden belief that commercial construction.

<unk> going to go away and I think there was a lot of talk early in the pandemic that anyone ever go back to offices, what would happen to retail it seems to be a lot of construction going on at that and I think its in categories that are very beneficial for us. There's a lot of investment going on in that space, There's a lot of investment going on.

So as the data centers.

And those are generally low rise large spaces with large groups.

So overall I think we feel very good about the position with thinking about the commercial business differently. We think the underlying demand trend is extremely positive for.

The longer term outlook.

I remain extremely cautious about short term predictions because the supply chain is just the challenge right now.

Okay. Thank you.

Okay.

Yes.

Thank you Mr Hu.

The next question is from the line of Michael Rehaut with Jpmorgan. Your line is open.

Thanks, Good afternoon, everyone.

Thanks for taking my question.

I wanted to just drill down a little bit on the 22, EBITDA guidance or guidance in general but.

From a couple of different angles.

And I apologize if you covered this earlier.

In the call if I missed it but.

If I'm doing the math right and you're saying sales were up you expect mid to high single digits. So if you assume a 7% sales growth kind of in the middle of that and take the midpoint of your EBITDA guidance I'm getting to a margin of 9.6, which I believe is down.

50 bps year over year.

So I was just curious on it you know if I have that math roughly right.

And what's driving that.

EBITDA margin.

Interaction.

Okay.

Yeah, Hey, Michael So that's all I'll give you a directional accuracy, obviously, it's not too hard to put those numbers together remember something that we have talked quite a bit about in the last three or so quarters.

Concept of inventory profits.

So, it's obviously going to hit the gross margin line as the replacement costs for of the inventory as we go throughout 2022 is going to be significantly higher than the inventory costs associated with those same products in 2021. So the pricing environment continues to be robust, we're only really handicap.

<unk> in the guide, but January increases that have already been announced we don't have any other ones built into that so obviously that can change the dynamic we get inventory profits in 2022 that begin to build in rival those in 2021 and that dynamic in your math would change, but based on what we see right now.

There is that kind of 50 to 100 basis points.

Headwind that we have and it's probably more towards the northern end of that as we've redone the math for the full calendar 2021 that we have to overcome in 2022 and then we've got obviously the pricing mechanism in January we've got the private label and the digital and other things, but it's really the product costs for the full year at a much higher level in 'twenty two.

Then we had in 'twenty one.

Okay.

That's helpful. Frank and I guess, just kind of also thinking about it from another angle.

Just wanted to make sure that included in your guidance, obviously, you have the divestiture and the acquisitions so far.

But would that also include a.

And I know you're going to go into it later at the analyst day, but would that also include planned improvement from the bottom quintile of our branches.

Sure Yeah. So.

Let's go back to the first part of your second question.

So obviously, we have a full year of mid ways.

Results in Grad <unk> results in that guide.

In terms of the launching point 2021, one of the housekeeping out as I said in my prepared remarks was the solar as part of continuing operations. So that is part of the 2021 comparable.

So so realize that.

The growth rates or better over that organic basis, but obviously, we have solar in 2021 was just a couple of the fire.

And the bottom quintile.

Yes.

Productivity is a big part of what we do we continue to believe that.

The bottom quintile branches have huge opportunity not just on the Opex line.

Expect good sales growth out of those branches, we accept expect margin gross margin accretion there theres still as I've mentioned on prior calls literally hundreds of basis points of difference between the unemployment branches of the performing branches. When you look at the gross margin line as well as on the Opex line. So both of those are in.

Play anytime we look at are at another point in branch as it is just the general sales.

You know rates that we're seeing there in 2020 , one we saw higher growth rates in the underperforming branches on the sales line and obviously, we saw a nice accretion from both the gross margin and the Opex line as well.

Okay.

Thanks, so much.

Thank you Mr Reinhardt.

The next question is from the line of Philip <unk> with.

Jeffrey Your line is open.

Hey, guys.

Can you provide any color on the volume expectations by segment for your full year guidance I'm, particularly curious about rather than just giving your tough comps and weaker storm.

Carrier demand and on the flip side commercial.

Underlying demand as you kind of pointed out has been pretty robust, but some of these supply chain challenges have weighed on volumes. So I'm. Just curious does that start off kind of negative or flattish and then build through the year and somebody who was born ex ease so any color would be really helpful. Here.

Yeah, no good good and fair question.

I have a couple of unique dynamics by its line of business next year I'm talking full year.

While the revenue side.

We're probably in that volume piece of the low single digits overall, it's going to be a first half second half dynamic.

Because if you go back to the Covid period, the second half of 'twenty and the first half of 2021 were really strong volume quarters, and we've tried to call that out over that period of time, but obviously flips a little bit as we get into the second half of 2021. So the comparable is not easy, but on a relative basis, they're easier than the first.

I have a 2021, so I think youll see some so progress throughout the year from a baby starting out negative in an ending up positive all the non res side.

You know its probably.

A higher growth rate like mid single digits, probably on the volume side on the non res piece again, there's going to be first half second half.

Dynamics.

Remember that there wasn't any real supply chain challenges.

In the first half of last year, whereas there were supply chain challenges in the second half of last year. So it's gonna be a little bit of a different dynamic there.

Complementary again is up as you go through the.

A large set of disparate businesses soldiers in the prior year, So I'd, probably give that a flattish type of an outlook on complementary.

Okay, but if I heard you correctly, you're expecting low single digit volume growth in resi for the full year I mean, I think most people were expecting correct more muted backdrop.

Is that driven by anything in particular, I guess, you mentioned storms, maybe being normal and driving that new construction can be helpful to kind of unpack that a rosy growth.

Yeah, I mean, I think it's all of the things that you mentioned and so obviously mid way. The acquisition is helpful. Crabtree is helpful.

And expectation that storms will revert to the 10 year average which will provide some.

Some help for us as well as with housing.

Is there still.

Lou.

The cycle of new housing 20 years ago was still in the Lyft period of time, So there's a fair number of factors in there.

And we're hopeful that the supply chain will present us any challenges as we fulfill the demand that we believe is up at the other point and this goes.

So both Michaels and Keiths questions as well, we mentioned a couple of times in our remarks about the backlog.

The backlog, which is about two thirds non res and about one third residential and complementary.

What are the highest.

That we.

We haven't ever in our history as far as we can tell.

It was up 14% quarter over quarter, so a little unusual given the time of year, but it was up on a quarter over quarter basis, and it's literally triple in the year over year period.

So we have we have really good insight into what the next six months to 12 months look like when we look at those backlog than we realized.

Okay.

Got it got it Frank sorry to Nitpick is there any way to parse out that Rajiv volume piece organically without the acquisition, how we should think about it.

Well we mentioned.

Yeah, So we mentioned that.

Midway is about $130 million in annual revenues.

Revenues, we've got a couple of months in 2021 that's in the comparable given what we said about that.

There's a little bit of a split though with you. If you remember some of the press releases that we put out.

The royalty piece of midway is kind of a third ish of that business and complementary.

About two thirds of them.

Alright, great. Thank you.

Thank you Mr Lynch.

Again to ask a question. Please press star one on your Touchtone telephone.

Next question is from the line of David Manthey with Baird.

Your line is open.

Thank you I was wondering if I hit the numbers incorrectly so.

Here, we are so a question on <unk>.

You were talking before about the 50 to 100.

Basis point gross profit.

Margin inventory benefit.

In 2021, and then now you're guiding the first quarter slightly higher year over year.

And it sounds like you continue to chase price higher I mean, obviously you raised price again here.

Would it stand to reason that you probably won't give all of that back in the coming calendar year.

Or do you think it'll still unwind by the time, we get.

At the end of 2022.

Yes.

David Thanks for the question.

As I said in my prepared remarks, we remain confident that we can more than offset inflation with our actions.

We're very focused on pricing execution, we think we've done that very well over the last.

18 months or so as we've seen rapid inflation obviously.

We're keen to take advantage of inventory profits, but we certainly don't want to let that go with it we continue to look at the opportunities to do that.

The pricing dynamic over the last.

At 12 to 18 months as it has been.

Pretty unique.

With just about every product category seeing rapids back to back increases.

And executing on Mac requires a tremendous amount of work you were pricing so many skus.

And so I think our execution on that has been really really strong.

We will continue to execute at a high level. We think there's continued opportunities to enhance our overall pricing dynamic as well we think that base.

And as Frank said in his remarks as well.

Now when you think about <unk>, when we think about the digital.

Think about underperforming branches, when we think about the pricing dynamic overall as well as our execution. We think there's a lot of ways that we can have a really good influence.

Both gross margin and EBITDA margins going forward.

Okay.

Alright.

Right and just some technical questions here.

Capex.

Youre thinking right now unless that reveals too much since you don't want to talk about capital allocation and then your expected tax rate and I was also hoping you could disaggregate, the $151 million depreciation and amortization separately.

Yeah.

Gosh, Okay, yes.

Yes, yes is the answer we can handle all of that Capex.

If you think about 2021, which I know it wasn't the basis of your question, but in 2021, we were about 1% of sales, which is essentially what we guided for.

Throughout the year.

Are going to discuss capex at the Investor day, as part of our broader capital allocation perspective, and so I'd rather not say.

My hand quite yet on that one tax rate generally you can always handicap us in the 25% to 26% range you know the federal a 'twenty one in the states usually gotta be 4% to 5% is a federal benefit.

If I if I look at 2020.

Two on.

Depreciation and amortization.

That 151 breaks down something in the kind of 65 ish range on depreciation and the 85 ish range on amortization.

Amortization.

That's helpful. Okay. Thank you very much.

Thank you Mr Manthey.

Next question is from the line of David Macgregor with Longbow Research. Your line is now open.

Okay.

Hi, This is Joe Nolan on for David.

I just had a quick follow up on the non res backlog can you just give any sense of how far those extend into 2022 at this point based on your current expectations for a.

Raw material availability.

And then with recent price increases on the non Reg side are those taking a bit longer to see traction given how extended backlogs are at this point.

Yeah.

I'll start with the second one the answer to that is no.

Generally the increases.

Tied to shipments.

Not to orders placed so.

We do look out one of the challenges we are finding with that.

Is that we do have to reprice quota jobs, it's one of the big challenges with the supply chain right now.

Quoting jobs to get till age you have to recall that causes a lot of angst with the boat.

Both for us and our customers the suppliers, but the general contractors.

The building owner as a that's one of the dynamics that is.

It's really up in the air and difficult to manage right now.

But with.

Ultimately.

Long backlogs and long lead times of less indicative.

Price increases.

So that's kind of where we are overall I think that we feel pretty good about where we stand. The challenge is really managing the overall supply chain is getting to the jobs.

So the backlogs that we have.

Yes.

These are all real orders that are out there for jobs that are going to ship at some point in the year.

Putting all these things together and.

Is the real challenge.

And we've got the lead times on some products that is still a six to nine months.

And that's it's just difficult to manage.

Inventory.

And that type of environment.

We certainly think it's going to ease as we come through the use of manufacturers.

Get that production right.

As we start to work off of these backlogs, but.

And in this industry with such.

With jobs shipping for installation days, when you've got six months.

Longer lead times on certain materials logistics credibly difficult to manage.

Joe in terms of the overall backlog that I mentioned not parsing it between a resident and nonresident this remark.

Yes.

So the last few quarters.

As we've looked at this the <unk>.

<unk> has been about 50% to 60% of that backlog was scheduled to ship within 90 days.

The resi piece of that would naturally be on the shorter end and the non res would likely be able to walk around with it.

Got it that's very helpful. Thanks.

Thank you Mr Mcgregor.

The last question is from Jeff Stevenson with loop capital Your line is open.

Hi, Thanks. This is Jeff on for Eric. Thanks for taking my question today I'm. Just wondering have you seen any improvement in the residential roofing supply environment and are you still on allocation from manufacturers and then what's your current expectation on when we could return to more normalized supply environment.

And residential.

Yeah.

Thanks, Jeff.

Yes look I mean, I think that actually in this sense, but one summer or is it.

Good merger for Us I mean on the shipments in the last.

Quota were below what we believe is total production.

I think the manufacturers took the opportunity to do some of the maintenance that they're required to do on their plans to keep them running.

I think that's their plan would be to run full.

Colette.

Uh huh.

Pockets of real tightness around the country and there are pockets where supply has eased.

Obviously this time of year.

It's really difficult to call a full year and how that's going to shape out.

But I think we know we would expect to see it.

Probably a slight drop in overall shipments year over yet.

Allowing the manufacturers probably to rebuild some of the inventory I think that.

But my guess is the distribution channels and what we did as best they could in the quarter and put as much inventory as they could into them.

Their warehouses in a quite a period of time.

You said that before.

Yes.

Water accounted for what it was actually very strong so probably less than we thought on the residential side.

So I think that early in the year, it's going to remain tight.

I think the manufacturers are going to catch up I think they're going to put a little bit of inventory.

But I think that as we get out of this period of time in winter.

The storms that we've seen over the last.

A few weeks.

Bad for short term shipments and really good for long term demand.

It generally cause.

With vantage so.

I expect us to see a decent pick up and overall I think like I said I think the overall demand levels going to be strong I think it gets a little bit easier as we go through the year, but I don't expect a sudden wide open market.

To reappear.

Anytime.

And the next several months at least.

Very helpful. Thank you.

Thank you Mr <unk>.

That concludes the questions now I would like to turn the call back over to Mr. Julian for his closing remarks.

Okay.

Thanks, Tim and I appreciate everyone's attention to our call today I do want to reiterate.

Friday have and the team's performance in 2021.

This is an incredibly challenging environment still as we articulated a number of times on this call and for us to deliver the type of transformational year that we have and set the building blocks for our.

Future ambition is something that I'm incredibly proud of and we're really looking forward to talking to you all on at the end of the month at our Investor day and with that Thank you all for your attention Goodnight.

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