Q4 2022 Beacon Roofing Supply Inc Earnings Call
Yeah.
Good afternoon, ladies and gentlemen, and welcome to the <unk> fourth quarter and full year 2022 earnings Conference call. My name is Danielle and I will be your coordinator for today.
At this time, all participants are in listen only mode.
We will be conducting a question and answer session towards the end of this call.
At that time, I will give you instructions on how to ask questions.
At any time during the call you require assistance. Please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the call over to Mr. Bennett Sandy.
Sandy.
Vice President capital market and Treasurer.
Please proceed Mr Sandy.
Thank you Danielle and good afternoon, everybody and thank you for taking the time to join US on our call today, Julian Francis Chief Executive Officer, and Frank <unk>.
Our Chief Financial Officer will begin with prepared remarks that will follow the slide deck posted to our Investor Relations section of <unk> website.
After that we will open up the call for questions before we begin.
Please refer to slide two for a couple of breakthrough minors first this call will contain forward looking statements about the company's plans and objectives and future performance are forward looking statements.
That because they do not relate strictly to historical perfect newsworthy.
Estimated expense related.
Other words of similar meaning.
Actual results may differ materially from those indicated by such forward looking statements as a result of various important factors.
But not limited to those set forth in the risk factors section of the company's 2021 and Form 10-K.
Okay.
The forward looking statements contained in this call are based on information as of today February 23rd 2023.
As required by law.
It takes no obligation to update or revise any of these forward looking statements.
This call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in today's press release and the appendix to the presentation accompanying this call.
Both the press release and presentation are available on our website at PTC.
Dot com.
And finally, I just want to remind everyone again that we haven't changed our fiscal year end to coincide with the calendar year and as a result today, we're reporting our calendar year 2022 result.
Our fiscal year as well as the results of our fiscal fourth quarter, which is comparable to our transition period in the prior year period.
Now, let's begin with opening remarks from Julien. Thanks.
Thanks, Bennett and good afternoon, everyone.
Let's begin on slide four.
I'm very pleased to report that we finished the year with another outstanding quarter.
The team delivered fourth quarter record sales rep.
Our records for net sales net income and adjusted EBITDA.
Sales per day were up 14% year over year as pricing execution drove higher net sales across all three lines of business, despite volume being lower by mid single digits.
While we did see progressively weaker demand through the fourth quarter pricing held up and remained stable sequentially.
Residential volumes were lower as compared to a strong prior year and markets exposed to higher volume of new residential construction did slow more sharply but.
But I'll remind you that 80% of our sales come from repair and replacement activity.
Nonresidential demand remained solid despite destocking at the contractor level and commercial roofing supply chain problems eased with lead times on the majority of products returning to more normal levels.
This helped us to unlock more of the backlog that has built up over the past two years.
We delivered higher than expected gross margin and recorded a 12 straight quarter of year over year increase in adjusted EBITDA, continuing our track record of profitable growth.
We also delivered our best quarterly cash flow since the second quarter of 2020, as we focused on right sizing our inventory and getting to jobs that have been delayed due to supply chain problems. As we said we would on both our second and third quarter calls.
We used the cash generated in the quarter to invest in value, creating initiatives towards achieving our ambitious 2025 targets, while maintaining steady net debt leverage preserving our balance sheet flexibility.
During the fourth quarter, we made two acquisitions coastal construction products and Whitney building products with me as a distributor of commercial and multifamily waterproofing and restoration products located in Boston, Massachusetts and.
And we discussed the acquisition of coastal on our November earnings call.
We welcome the Whitney and coastal teams and their customers to beacon.
We also accelerated our greenfield investments expanding our branch footprint and enhancing service to our customers. Our dedicated Greenfield team is executing at a very high level, which we will highlight later in our remarks.
Our share buyback program continues to be an important part of our balanced capital allocation approach, demonstrating our commitment to creating shareholder value and confidence in our ambition 2025 strategic plan.
You may recall that the buybacks are part of a $500 million share repurchase authorization announced at the Investor day of which we have completed more than 75% in 2022.
In the fourth quarter, we made significant progress towards our goals and we will continue to invest to generate profitable growth and returns for our shareholders make meaningful contributions to the communities in which we operate and build more for our customers and our employees. So that they too can fulfill that potential.
Now please turn to page five.
So those of you who have listened to our calls or attended our Investor Day, you know that we have a detailed strategy called ambition 2025.
It is a structured growth roadmap with initiatives that are targeted and measurable.
The goals, we laid out to grow the business to more than $9 billion in sales by 2025, and 8% compound annual growth rate from our 2021 baseline and to deliver EBIT of about $1 billion in 2025, approximately a 10% annual growth rate.
Now on page six I'll provide a brief update on our strategic initiatives, which will give you insights on how we are achieving our plan.
Let me first highlight a couple of ways that we are building a winning culture.
As you May recall, we announced a year ago. So we have a goal to reduce the intensity of our scope, one and two greenhouse gas emissions by 50% by the year 2030.
I am pleased to report that we've begun to take steps on this journey by piloting the use of electric vehicles in three areas of our operations.
<unk>, two electric delivery cranes, which eliminate job site idling reduce fuel usage and noise pollution are deployed in a small number of markets.
Secondly, we are testing electric forklifts in a warehouse and third we are using electric vans for express customer deliveries in California markets.
Collectively these initiatives demonstrate our commitment to leverage available technology to build a more sustainable future for all stakeholders.
I would also like to highlight how we have enhanced our capabilities and diversity at the board level with the recent additions of Melanie Hot and Raquel Mason.
Melanie has a wealth of distribution industry experience, having spent 16 years with pool Corp, as well as financial and operational expertise that will no doubt be valuable as we progressed towards our ambition in 2025 financial targets.
<unk> depth of managing management and marketing experience with some of the world's most iconic brands like Coca Cola as well as the wealth architect and cross enterprise digital transformation will benefit us as we drive growth and value for our customers.
We welcome Melanie and Raquel and look forward to their contributions to our company.
We're also driving above market growth and enhancing margins through a set of targeted initiatives.
Our footprint is a major lever in our growth plans, which include strategic investments in Greenfields and tuck in acquisitions.
SaaS and ramping up our dedicated greenfield team and accelerating investments in our pipeline is paying off.
We added 12 greenfields during the fourth quarter of the year in key growth markets, improving efficiency and enhancing customer service. This brought our total for the year to 16 locations and as a reminder, our original ambition 2025 target was to add 10 facilities to our footprint each year, including 2020.
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As mentioned previously a dedicated M&A team also completed two acquisitions in the quarter, adding 19 branches with the majority of locations being in the rapidly growing southeast markets.
A set of initiatives designed to grow margins is also gaining momentum of.
A digital capability continues to be a clear competitive differentiator for beacon and sales on our online platform increased customer loyalty generate larger basket size and deliver approximately 150 basis points of gross margin enhancement compared to offline channels.
We are confident that we provide the most complete digital offering and continue to expand our capabilities to serve customers wherever and whenever they need.
At the same time, we are building upon our technology leadership by continuing to invest in making it easier for customers to do business with us anywhere and anytime.
The actions include our recent digital integration with <unk> and the launch of our new Beacon Pro plus mobile App and are examples of how we are extending our leadership position.
Through our continued investment we achieved 26% digital sales growth year over year with nearly 19% of residential sales now going through a digital platform.
As we have discussed for several quarters, we are driving operational excellence through our continuous improvement and productivity initiatives.
I'll focus on the bottom quintile branches has consistently generated significant improvements to our service levels as well as tangible contribution at both the sales and EBITDA lines.
Processes designed to improve the performance of these branches and the structure is simple and repeatable we diagnosed the root cause of the problem and ensure that branch managers at these locations are properly supported to remedy the issues.
This initiative continues to deliver tangible bottom line results and contributed approximately $4 million to the EBITDA line at the fourth quarter and year on year.
One area, where there was more opportunity for us in the quarter was branch productivity as volume softened month over month, we could've work more quickly to adjust our capacity to more appropriately match supply and demand.
Lastly, our strategic initiatives are designed to create shareholder value and we are committed to continuing to improve our returns for all owners of our stock.
During the fourth quarter, we completed our second accelerated share repurchase program retiring an additional one 1 million shares.
The share repurchase demonstrates both our commitment to delivering value to shareholders and our confidence in the future.
As you can see we have multiple paths to growth and margin expansion through the cycle. We have a differentiated approach and have built the tools needed to achieve our ambition 2025 targets now.
Now, let me pass the call over to Frank to provide a deeper focus on our fourth quarter results.
Thanks, Julian and good evening, everyone turning to slide eight let me start by reminding everyone that we had one less day in the quarter versus the prior year quarter.
We achieved nearly $2 billion in total net sales in the fourth quarter up more than 14% on a per day basis year over year as higher average selling prices for our products drove sales growth in all three lines of business in the aggregate price contributed approximately 17% to 18% to revenue growth.
Backlog conversion was a highlight in the quarter and while it remained elevated compared to pre pandemic levels. It continued to come down from its peak in the second quarter and continues to be weighted towards nonresidential orders acquisitions, including midway wholesale and coastal construction products are performing well and more than offset that.
Stitcher of our solar business on December one 2021 as a reminder, the results of the solar business are reflected in our prior year numbers as part of continuing operations.
Year over year pricing drove residential roofing sales per day higher by approximately 7% I also want to highlight that the average selling price was stable sequentially from the third quarter to the fourth quarter as mentioned earlier weakness in demand from our single family homebuilding customers cause shingle volumes to be lower by high single.
Digits year over year. Please keep in mind that the prior year comparable was a strong volume quarter largely attributable to the late onset of winter, allowing for additional roofing days last year.
Nonresidential roofing sales per day were up 27% driven by price execution.
Single ply volumes per day were higher year over year as the non res supply chain began to normalize during the quarter. However, destocking at the contractor level and tight material availability of certain accessories continued to impact project cycle times, resulting in lower overall non res volumes down about 4%.
5% year over year comp.
Our complementary sales per day increased 16% year over year with higher selling prices across all of our complementary product lines with the exception of lumber.
Sales increased in our siding products and our recent coastal acquisition is performing well coastal which closed on November one contributed two months of revenue driving sales of our water proofing products higher year over year. Please.
Please keep in mind that with the addition of coastal our complementary product category now has approximately 70% residential and 30% nonresidential exposure.
Turning to slide nine we'll review gross margin and operating expense.
Gross margin was 26, 2% in the fourth quarter exceeding the guidance, we put out in November price cost was slightly favorable as higher average selling prices more than offset product inflation year over year.
Higher nonresidential sales mix also contributed to the 10 basis point decline year over year.
Adjusted Opex was $364 million, an increase of $58 million compared to the prior year quarter Opex as a percentage of sales increased to 18, 5% or 100 basis points year over year.
Year over year change in Opex was driven by inflationary pressures in areas, including wages and benefits insurance fleet and fuel and travel and entertainment as well as lease related expenses, such as rents and real estate taxes utilities and maintenance cost.
In addition, with persistent tightness in the labor markets. We continued to err on the side of ensuring we have the resources necessary to deliver for our customers.
Variable expenses related to higher sales and profitability, including commissions and incentive compensation and stock based compensation also contributed to the increase.
In addition, recently acquired branches and Greenfields opened in the last 12 months accounted for approximately $13 million of the year over year increase.
Although we continue to be ready to adjust to changing market conditions and respond to the impact of higher interest rates on our business. We remain focused on investing in initiatives through the cycle to drive above market growth and margin enhancement as part of ambition 2025, we.
We are continuing to invest in projects related to our sales organization customer experience initiative pricing tools ecommerce and branch optimization.
These and other ambition 2025 investments totaled approximately $11 million within the operating expense line in the third quarter.
Fourth quarter.
Turning to slide 10 operating cash flow in the fourth quarter was strong at $320 million, our highest cash generation since the second quarter of 2020.
This follows a tremendous cash quarter in the third quarter, resulting in nearly $600 million in cash generation in the back half of the year.
As you can see on the chart. This is attributable in part to the reduction in net inventory as we return to a more normal seasonal pattern.
On a year over year basis fourth quarter inventory was higher by approximately $160 million driven by product cost inflation inventory from acquisitions and Greenfield loadings also contributed to the increase.
We continue to balance our capital allocation between organic and inorganic growth opportunities and shareholder returns as Julian mentioned, our ability to invest in greenfields and value, creating acquisitions is underpinned by our ample balance sheet capacity.
We are investing higher amounts on our business deploying more than $90 million in capital expenditures in 2022.
This not only included the investments in Greenfields, but also the upgrading of our fleet and facilities as well as building out the technology tools that will benefit us in 2023 and beyond.
As of the end of the fourth quarter, our net debt leverage was at the low end of the two to three X range outlined at Investor day, and we retain liquidity of more than $1 billion.
Turning to shareholder returns, we completed the second accelerated share repurchase program in the fourth quarter, which resulted in the retirement of slightly more than 1 million additional shares.
Net of share issuance for stock based compensation, we reduced our common shares outstanding to $64 2 million at December 31 versus $70 4 million at the same time last year.
We exhausted just over 75% of the $500 million buyback authorization, we announced in February of last year. In summary, we continue to have ample capacity to invest in opportunities through the cycle and active acquisition pipeline and a significant jump start towards achieving our ambitious 2025 goals we are confident.
And our ability to successfully compete in and react to changing market conditions and look forward to a successful start to the year now I will turn the call back to Julian for his closing remarks.
Thanks, Frank Please turn to page 12 of the slide materials.
Before we move to our outlook I would like to take a minute to reflect on the impressive results of 2022 and the progress we've made towards the ambition 2025 targets, we can phase one year ago.
In 2022, we produced sales growth of 24% with higher revenue across all three of our lines of business.
We delivered $910 million and adjusted EBITDA, and our second consecutive calendar year of double digit EBITDA margins.
We delivered record sales in our national accounts private label and digital initiatives, which delivered both enhanced growth and margin.
We generated $36 million in additional adjusted EBITDA from our bottom Quintile branch initiative nearly half of our $75 million ambition 2025 target first year.
We welcomed five new acquisitions, adding 22 branches and new markets and capabilities.
And we opened 16 greenfields across 12 states enhancing our service to our customers.
We filled several key leadership positions within our sales force lines of business and leadership ranks while at the same time advancing our diversity equity and inclusion initiatives.
We repurchased and retired six 8 million shares.
Representing more than three quarters of the $500 million share repurchase authorization announced at the Investor day last year.
In summary.
Our performance in 2022 has created significant value for our customers and shareholders and positioned us to deliver on our ambition 2025 targets.
Now turning to page 13.
Before we head to Q&A I'd like to provide a 2023 market expectations unless you wish to remain consistent with our remarks from November .
Market demand will very likely be lower this year, especially in new residential construction.
And we do not expect to see the broad based inflation in products or labor markets as we have experienced over the last two years.
We've been preparing for these market changes for several months and we will of course continue to monitor market conditions and take appropriate actions.
We expect aggregate demand to remain above pre pandemic levels, indicating a healthy end market.
Supported by non discretionary repair and replacement activity as well as storm related demand in parts of Florida, California, and the Midwest.
For the first quarter, we expect total sales growth to be approximately 5% year over year or around three 5% on a sales per day basis.
This is somewhat less than the five 5% growth per day that we saw in January largely due to the lapping of a late January shingle price increase in the same period last year.
Our first quarter guidance reflects the continued weakness in single family, New construction and a strong single comparison in the prior year quarter.
Additionally, we expect softness in our commercial roofing shipments, mainly resulting from continued destocking at the contractor level, rather than a step down in construction activity.
With respect to gross margin, we expect to be in the 25, 5% range, which is down relative to the record prior year quarter, which had significant inventory profits.
Before we talk about the full year, let me take a minute to give you a base case assumptions that will underpin the guidance as.
As mentioned, we expect rising interest rates to bring softness in the regions that have higher exposure to new residential construction, although I would like to note that sentiment has significantly improved recently.
The majority of the air pocket in homebuilder demand should be felt in the first half of the year.
With respect to the residential re roofing end market, we expect very good demand as compared to historical levels supported impact from storm demand and the re roof cycle.
Regarding commercial roofing, we are closely monitoring the architectural billing index, which is down from last year's highs, but has seen steady improvement since November .
We also see a shift from new construction to repair and re roofing activity as the year progresses.
With the addition of coastal construction products and Whitney building products. We will also leverage the enhanced offering within complementary products to help us grow above market.
For the full year, we expect net sales growth in the range of 2% to 4%. This includes contributions from acquisitions previously announced.
Regarding gross margin inventory profit roelof will more than offsets the structural improvements from our initiatives, including higher private label in digital sales.
With all that in mind, we expect adjusted EBITDA between 810 and $817 million in 2023.
We continue to expect inventory to follow a more normal pattern of seasonality as material availability continues to improve.
We expect this to contribute to higher cash flow conversion compared to 2022.
The difference between a low and high end of the range will largely be dependent on storm volumes and the extent to which the downturn in new construction persists.
More importantly.
I will focus will continue to be on the areas within our control, including enhancing our customer experience delivering operational excellence pricing and daily execution on safety service and efficiency.
We will continue to invest in initiatives that we expect will result in accelerated growth with acquisitions and at least 15 additional greenfield locations.
We're investing in improving our operations delivering results today, but also getting ready for the future.
And last but certainly not least we continue to be committed to generating returns for our shareholders and are announcing an increase in our existing stock repurchase plan.
The new approval from our board is in the amount of $500 million.
Inclusive of the remaining $112 million outstanding authorization at the end of the fourth quarter of 2022.
In summary, our business model is resilient and we are positioned to outperform the market and this dynamic demand environment, creating value for all our stakeholders. We are looking forward to the rest of 2023 and there is always helping our customers build more.
With that I'd like to open the lines for questions.
Ladies and gentlemen, if you wish to ask a question. Please press star followed by one.
Telephone.
If your question has been answered or you wish to withdraw your question. Please press star followed by one.
Each caller is limited to one question.
Yes.
The first question comes from the line of Kathryn Thompson.
Thompson Research group. Please proceed.
Hi, Thank you for taking my question today.
Just a clarification on.
What you said.
Thank you Ian.
Okay. Thank you your outlook.
You had indicated that.
Thank you.
Hi.
That out a little bit more in terms of what.
What are the factors that are driving.
This observation.
Against that backdrop.
We do have inventory are up year over year.
Okay.
How much of that is volume versus price.
Where do you think we are right now.
Okay.
And demand with your inventory.
Very much.
Thanks, Catherine there is a lot wrapped up in the question.
I think that the first part of that was related to the trends that we're seeing in the marketplace.
And.
Sort of.
Belief in our optimism.
Obviously, we said that we believe that volumes will be down year over year.
Think that is.
We indicated in prior calls as well, but that is primarily related to.
New residential construction that we think will be down double digits plus.
We do think the re roof markets.
On the residential side will be down mid single digits give or take.
And <unk>.
Commercial we still believe.
That was going to see about a flat market.
We are anticipating we've had.
Lower levels of storm over the past couple of years and we're expecting that the way. We're forecasting it is to return to the 10 year average so we see a little bit of lift in that and obviously with the.
With the storms, we saw in Florida at the end of last year the.
The weather that we've seen in California over the winter.
<unk>.
So the continuation of some of the storms that hit the Midwest the upper Midwest less last.
Last year, we expect all of those markets to be relatively relatively stronger.
Obviously, the sentiment coming out of.
First.
First months of the year I think there was a lot of commentary about the build the show being.
But much more positive certainly our contacts in the billed as the builder community.
Much more positive than they were perhaps two or three months ago. So we're seeing that trend.
Come through.
I'd say, we're not seeing that in the business today, it's still obviously down but it is also February .
I think overall, what we're also seeing is execution on our initiatives.
We're seeing the traction that we expected to see we.
We got from that.
The plans that we announced in the actions that we've been taking were seeing great results we're seeing.
Terrific results from.
The acquisitions, we were terrific. We pleased to add 10, Greenville, sorry, 12, greenfields in the fourth quarter.
I don't know that we can keep up that torrid pace for a whole year I'm not sure that would be the right answer either but.
Those are going to contribute more this year than they did last year and we're going to add additional greenfields.
And this year, so we've got lifts from.
Those activities as well so.
Overall, I feel like we're executing very very well.
I think that we're seeing the customers respond to the improved service levels with we're delivering on and overall, it's a healthy market.
The overall levels of market demand, while down from the last.
Two years.
Yes.
High levels relative to pre pandemic and we think there are constructive markets.
I'll, let frank weigh in on on inventory levels, but overall pretty positive yeah, Hey, Catherine So youre right its up $160 million year over year, when you break that down.
About 200 million is inflation.
About $40 million to $50 million is M&A and Greenfields. So youre looking at at least $80 million from lower units. If you just look at it Q4 Q4 ending year over year.
In terms of the forward view, obviously, we're balancing a couple of different things we want to make sure. We have the products available for our customers. We also want to improve our turns in 2023 relative to where we were in the last couple of years and that supply chains are normalizing there not normalize but they are normalizing. So we want to take advantage of the lower lead times I would expect.
US to continue to rightsize inventory, maybe not as much in Q1, just given the lower sales level, but you should continue to expect us to.
To get a little bit better on inventory as we progress to the midpoint of the year, obviously, assuming we get a decent sales season in the spring.
Yeah.
Thank you. The next question comes from Michael Dahl of RBC. Please proceed.
Hi, Thanks for taking my question.
And here I guess just to follow up.
Julien that was helpful. The additional color on the end markets.
Correct me, if im wrong, but it sounds like Youre planning than for a volume environment, that's down maybe mid to high single digits on a blended basis guide.
<unk> sales growth of 2% to 4% acquisitions added.
A few percent so I guess the delta has to be some combination of price mix in the Greenfield contributions. So maybe can you help walk us through your expectations for price mix contribution if you could by segment and then if you could maybe help us just ballpark all these greenfield.
What the cumulative contribution is expected to be this year.
Youre right Theres, a loving that.
I'll touch on it in general I know frankly.
Frank level, a bit more detail for you in.
But.
Yes.
I think as we think about the the greenfield.
Stuff there.
<unk>.
We see the sales began on day, one we had a ramp that was built into.
Forecast.
So led to.
Stable normalized business after three years to five years I think in the last.
12 months or so with this greenfields ramping up in the demand environment that we've seen.
Had a little bit of a quicker ramp in many of these branches and then we anticipated so.
They've been more productive sooner that we're anticipating for sure obviously the demand environment. The pricing environment has been positive to that as well, we would expect to see that roll off.
As we said we continue to see a good demand environment I mean, if you look back historically.
This type of market would have been productive for both price and volume.
So we're expecting to see.
So relatively sideways movement on most of the most of the business volumes will be down we'll have price carryover.
In all segments of business.
All the lines of business.
So that will give us a little bit of a lift as well with that price carryover, obviously that it will come mostly in the first quarter and the first half will ease off given.
How pricing shaped up last year, but.
The the one area I think that I can elaborate a little bit more on might be in the commercial roofing segment. I mean, one of the things that we saw there and we've emphasized this a few times now is that as the supply chain really locked up froze up during the pandemic.
Sure.
There was a shift to the new construction market.
And away from the re roofing market.
Which just didn't get done quite frankly, there was a lot of backlog.
Built in the re roof side, we expect to see that re roof unlock now in.
In a more normal environment with.
The volumes coming through with the supply chain sort of Unfreezing.
<unk>.
That will allow us to unlock a lot of the backlog.
So we believe that that's going to be a constructive environment.
As we said we follow the architectural billing index the dip in that.
Down off the highs in the middle of last year and the year before.
A lot of that work just didn't get done and what we've seen over the last.
90, 120 days in that segment of the market in the in the Abi.
It's really a reflection of things starting to just.
Get backed up and that air pocket that was in that is actually being filled by work that didn't get done so we see a pretty constructive environment.
Now, we're not seeing dramatic changes in inflation.
In the manufacturer base, so we're not seeing.
A lot of inflation come through in their raw materials, but neither are we seeing.
Almost amount of deflation come through there. So I don't think the manufacturers have got a lot of incentive.
Two.
So try to move some things in the demand levels remain like I said pretty constructive.
Hey, Mike I'll try to unpack a little bit more for you.
In terms of the market so take this as a proxy for.
Volumes to the point you were making its probably on an ex storm basis something in the down mid to high single digits revenues, probably more toward the upper end of that commercials.
Relatively flat as Julian mentioned and then complementary is obviously a blend in that 730 70 30 that we mentioned in the prepared remarks, so probably down in the mid range.
Once you start from there then we start to build a bit.
The storm planning assumption that we have is the 10 year average so that adds two years or 3% there you've got <unk>, you've got the the hailstorms in the Midwest from last year, and then the California rainstorms. So we are expecting some lift.
Their relative price stability is certainly helpful. The ambition 2025 initiatives, which would include the Greenfield initiative customer experience.
Sales workforce improvements and additions that were doing probably add something in the in the mid singles range there order of magnitude for the Greenfields.
In absolute sense, we were at about $35 million in Q4, if you looked at that on a year over year basis, because we did have a few greenfields in the prior year was about 30% we're going to begin to lap some of those later in the year given the pace of Greenfield openings that we did this year.
Coastal and some of the smaller acquisitions that we did in 2022 should add about 2% or 3% will get 10 months worth of coastal <unk>.
Quite well for us in Q4.
Put all that together and you are looking at that 2% to 4%.
Revenue growth that we mentioned in the prepared remarks, and then remember we are going to continue to be acquisitive, so future acquisitions.
In 2023 are not part of this guide not understanding exactly when the timing and the magnitude of those will be it's hard to bake those in but just know that those are not in there at present.
Thank you. The next question comes from the line of Ryan Merkel with William Blair. Please proceed.
Hey, guys. What is your outlook for gross margin in 'twenty three and then what is your estimate for price cost.
Yeah, Hey, Brian I'd say mid 20 fives on gross margin down obviously about a $100 million.
Excuse me 100 basis points apologies about 100 basis points against last year.
The big driver there is inventory profits I mean, we're going to roll off something around 130 basis points.
And most of that is going to be in your price cost is not that the selling prices impacted it's just that the cost catch up finally, given all the manufacturer increases.
Last year.
But that's going to be partially offset by a couple of different things the structural improvements that we.
We are making in the bottom quintile branches digital private label et cetera, and some accretion from the acquisitions.
Coastal's and margin accretive acquisition for us.
And then we likely will have especially in the second half of the year.
Higher commercial mix impact as well so you roll all that through and Youre going to see the inventory profit roll off show up largely in price cost.
Thank you. The next question comes from Eric Schmidt with.
Loop capital. Please proceed.
Hi, Thanks for having me I'm, just wondering how to think about operating expenses.
2023, given all the puts and takes.
Yes.
Yes.
Yes.
And the overall.
I would put it in the if you looked at or an opex to sales ratio Garik I think it's somewhere in that 17 to 17, 5% range as Julian mentioned, we're going to continue.
Focus hard on productivity.
If if and when volumes.
But one way or another we're going to have to variable is with those were.
We're resetting the bonus targets inflation is still in the business on the cost side. So we've got a lot to lot to stomach there.
I read off a litany of things in the prepared remarks, those are going to be the same inflationary items as we go forward into next year, and we did say and believe strongly that we need to continue to invest through the cycle. So youre going to see us invest in the 825 ambition 2025 initiatives. So the greenfields the sales and sales support teams the M&A teams to serve.
This capabilities that we're creating branch optimization OTC I mean, all the things that you've heard us talk about we're going to continue to invest in those.
If volumes take a dramatic step down obviously that will pull out the <unk> playbook and work from that but we don't see that happening in 2023, so managing them, but also investing is going to be the important thing for us to do.
And as a part of our ambition 2025 planning that we've committed to opex levels of productivity to get US. There. So it is something that we're focused on but we remain confident that we can deliver against that plan and that sort of level of spending relative to relative to sales.
Thank you.
Question comes from Truman Patterson of Wolfe Research. Please proceed.
Hey, good afternoon, guys. Thanks for taking my question.
Wanted to discuss the bottom quintile branch performance.
Think EBITDA benefit was $36 million in 2022 is that purely on kind of the relative improvement versus other branches and how are you all thinking about.
The potential there in 2023.
<unk> to your bottom line.
Hey, gentlemen, so good good call out on the <unk>. So you have $36 million and again on the backs of I think 50 or more million dollars last year and 25 in <unk> and.
In 2020, so that initiative continues to bear fruit on an annual basis.
That is the year over year change in Bottomline dollars profitability dollars of that same set of branches in the prior year versus that same set of branches in the current year. So it is true bottom line improvement.
From that group of the bottom quintile branches.
Unpack that a little bit.
The EBITDA margin improvement was over 200 basis points in those branches. So we did a really nice job of of driving that it is both on the gross margin.
<unk> line as well as on the Opex leverage line, probably a little bit more on the opex side in those set of branches in 2022.
And interestingly the sales growth in those branches on a full year basis was higher than the company average. So those branches really did a nice job. We still think there's a ton of opportunity. There. There is hundreds of basis points difference between the bottom quintile in what we call the performing branches. So the other 80% of the branches. So we still think there's a lot of fruit there.
Thank you. The next question comes from the line.
Indeed with Jefferies. Please proceed.
Hey, guys congrats on another strong quarter great execution.
Julian you mentioned that you are seeing some destocking at the contracted all over on the commercial side can you expand on kind of where you guys are in that process seeing any other areas, where youre seeing destocking.
Certainly on the commercial side. The reason why I ask is because pricing has been so explosive and any concerns that you could see some degradation there this year.
Yes so.
It's a great question Philip in the visibility and contractor inventories, which is first of all not something that I would've been saying three years ago.
Just an unusual situation that they would be taking in inventory and managing that.
Sure.
I just think that emphasizes how different is this environment has been.
So.
We believe that the first quarter. This year Youll see a good deal of Destocking. There I don't think the contract is particularly want to hold that.
The information that we have suggests that they took out short term leases on warehouse locations just talking to they are starting to get a job sites, which has risk to it as well so.
We think this will be a relatively short lived phenomenon, we should be through it hopefully soon.
Certainly by I think the middle of the year, we would expect to see the majority of that get worked through.
<unk>.
But it is something that say no we're not.
Not been typical to see I do want to emphasize there was a good deal of Destocking in Q4.
The contractor level and at the distributor level.
I think that's reflected in the manufacturer shipment data that you saw.
And again.
Your question related to the pricing I mean pricing was pretty stable year over year.
Sequentially.
The other thing is that we're seeing is the key.
Keep emphasizing the end markets.
Pretty solid we expect a pretty good year.
In both the commercial markets in the residential markets, we think there'll be a little bit of a move away from new construction to repair and replacement.
In in both of those those markets.
I think that on the commercial side, particularly.
That usually benefits us and that's a lot more goes through warehouses as we fulfill.
Replacement roof as opposed to some of the direct ship that goes to new so we still we believe we saw a shift there. So like I said I think it's been positive youre right that has been explosive growth.
The pricing in the commercial arena, but so far we've seen a relatively constructive market I think that the fact that.
There is a bunch of inventory.
<unk> creates some incentives to make sure that you don't see.
Degradation in.
And that level of pricing so overall.
Look things can change, but we.
We believe today that we're seeing a pretty constructive market with good end use demand.
And.
Generally a positive environment.
Thank you next question comes from Keith Hughes of Truest. Please proceed.
Thank you you talked on the first quarter guidance about the level of Opex, that's up a good bit year over year. Some of the <unk> could you talk about what's driving that up and it does any of those costs abate to get to this mid 17 number we're talking about as the year goes along.
Hey, Keith So yes, I think if you go back and look at the prepared remarks on Q4, youre going to see pretty much. The exact same set of factors in in Q1.
As Julian and I, both mentioned in our remarks.
Holding onto employees and what is still a very persistent labor market, especially in the trucking and warehousing helper.
All the folks who deliver for US every single day, I mean that job market is still tight and we don't want to put ourselves in a situation, where we make our shortsighted decisions in the winter and end up coming out in the spring and not having enough folks to handle the demand that we would expect on a kind of a normal spring.
Construction season basis.
Maybe one data point that might be helpful.
And the implication of about $40 million year over year about half of that is going to be the payroll and benefit side in half of that is going to be from M&A. So don't forget about the fact that we've got M&A and Greenfield et cetera that are going to continue to add to the Opex line. We will begin to cycle. Some of those investments as we go throughout the year, obviously, you're not we're not going to run out of 'twenty or 'twenty one leverage.
Throughout the year in order to get down to.
At 17 to 17, five that I mentioned in response to the earlier question.
Thank you. The next question comes from the line of Trey Grooms of Stephens. Please proceed.
Hey, good afternoon.
So Julian and Frank.
Mentioned on the on the guide there new rents down double digit plus I think I heard that right, which makes sense.
And ran its re roofing down I think it was high single digits give or take.
But given the highly non discretionary nature of re roofing and some storm related demand you talked about.
Is this pullback in re roofing in 'twenty three more of a function of.
Some some pull forward of demand over the last few years or are you are you starting to see homeowners start to try to delay some of these are payers or replacement projects given.
Uncertainty.
Higher cost to borrow if you could just help us understand kind of some of those drivers on the weaker re roof portion of the business.
Yes look I think that's.
The last couple of years have been.
Pretty unique in terms of what we've seen with people being literally forced stay at home.
I think theres been a little bit of.
Work that got done there that was perhaps more discretionary and non discretionary.
The non discretionary.
It's not discretionary so we would continue to see that the storm related demand.
As.
We do think that is up that's in our guide as we said we always go back to the.
The 10 year average there so.
That is that is a little bit of a lift I don't know that were seeing.
<unk>.
Consumers pulled back I think was the word that you used but inevitably higher rates when a lot of roofs refinance is going to have an impact at the margin.
I think that we see that the other thing that you would typically see.
As part of the re roof demand is created by the turnover in housing.
So how does this change hands. That's when you do the inspection the inspection comes back and says yes.
So you should do that as houses turnover less and obviously there is a little bit of.
Jam up in that market as you don't want to leave you, 3% mortgage home and go get one right now because youre going to pay 6%. So that crimps you. So we're going to see we think we're going to see a little bit of.
Lower turnover in the housing stock and that will lead to slightly lower.
Level of demand.
Re roof gets done on turnover, so thats really yet so I don't see that as consumer pull back and saying I was going to do a roof im not going to do it now because I'm trying to something its more related to housing stock turnover.
And the ability then of.
The homeowners to get the highest inspected and to drive that so that's where I think this this forecast is really coming from and hopefully hopefully that's helpful.
Thank you. The next question comes from the line David Macgregor of Longbow Research. Please proceed.
Yes, good afternoon, everybody and Julian congratulations on all the progress its really remarkable what you've accomplished here in last couple of years.
I guess I wanted to ask you about price discipline.
<unk>, obviously demonstrated over the past couple of years the positive impact.
Disciplined on pricing, but at the same time, we all realize it anymore.
<unk> volume environment promotional programs will become more pervasive so how do you balance the need for pricing discipline in the slower macro with the need to maintain or grow your market share.
Yeah.
It's a great question.
And I think it comes back again too.
We actually think demand is pretty good.
Yes.
If we were looking at this demand environment.
Coming from.
A.
135.
Number and the Abi index and lowered coming up we'd be talking completely differently about it.
And I think that what we see is that that is the reality of the marketplace.
When you get that type of price competition is when people that can't come from a fixed cost.
Worried about this the manufacturers are making moves me I don't think <unk> got that environment overall demand levels are pretty good get it down but that it is still higher than it was pre pandemic and I think other than.
2017, which was a big storm yet.
I think we're all in.
The frame of mind that this is probably going to be as good a year as we've had in the last 15 other than maybe 2017 and the last pillar. So.
So I do think that we've got a little bit of that.
So distorted perspective on what's going on in.
In the market I think it's a constructive environment.
I think that it's not we're starving for volume and we need to cover fixed costs I don't think that we're facing that I don't think any of the manufacturers are facing that so I think the environment is.
It's probably more supportive.
I think people are managing given that we're talking about double digit declines in new housing.
Yeah.
We're watching it carefully obviously.
The run up in pricing has been incredibly supportive, but also remember this is inflation that ran through raw materials as well. It's yes, we've enhanced our margins I think the manufacturers of probably enhance this as well but.
We're not talking so far out of sort of historical norms that it's just inevitable that it's going to come back.
I still continue to believe that it's going to be.
Yes, there is going to be a sense that.
Yes.
This is a sustainable market our costs are up.
I think that a lot of what we've seen particularly of beacon.
The last two to three years, the inflation has masked the improvement that we've done.
Our self help initiatives.
So.
Thank you Sir.
Yes.
I can't I'm, not going to look into the crystal ball and say it will ever happen, but.
The environment just doesn't seem to me to be <unk> two.
Two disruptive actions in the marketplace right now.
One other point, maybe is just what we did on inventory I mean, we took a very constructive view on inventory in the middle of 2020 to realize that things were likely going to soften up as the fed engaged in its pace of rate increases and as you can see we methodically work that down over the past couple.
A quarters and I think Abbott in a much better place than it was in the middle of the year in 2022.
And that that framework and that methodology that we use I think was very constructive.
Where things are from a pricing perspective.
Yes, we said destocking throughout the fourth quarter not just in us volumes sedan manufacturer shipments were down in prices.
Stable sequentially.
So I think thats.
An element of that as a proof point of what we continue to believe the market.
The market will bear.
Thank you. The next question comes from <unk> <unk>.
<unk>.
Please proceed.
Thank you and congratulations on a strong 2022.
I just wanted to ask.
Bob.
In demand.
EMEA opportunity within your portfolio and how do you think about it in the context of.
Balance sheet leverage given the.
The economic environment is looking back.
Thanks for the question keeps on it.
It's an issue.
<unk>.
The opportunities manifold across all segments of business.
I think the acquisition of coastal was a little bit of a game changer in this.
Waterproofing and.
The repair markets for those product lines, I think that has sort of increased.
The the opportunities we have in that space, obviously shortly after that we completed another acquisition in there.
That era.
Area of our business.
So we're seeing the opportunities there, perhaps ramp up a little bit.
Obviously, we've had.
Several terrific years.
In all of our markets and I think it's.
As we start to think about what the future holds.
We believe is going to be M&A opportunity.
Sure.
A lot of different areas I think in the segments, obviously, we committed to.
<unk>.
Being disciplined we're very conscious of our trading multiple and the commitment we made to ensure that we will synergize levels, we could we.
We could get acquisitions done that.
Reasonable cost we are going to remain disciplined.
We believe that.
We're still a great buy and this in this marketplace and we've got a share buyback program now.
And so our capital.
Our capital allocation approach is flexible.
We don't see the opportunity to.
Through what we believe is significantly accretive M&A then we've got the option to toggle more toward share buybacks and we think that's the right approach, but it's really across everything I would say that.
The acquisition, we made in the waterproofing space is probably opened up a little bit of our aperture that hey.
Hey, Kevin.
I think on the M&A side, you should just know that as we have said in prior quarters, we have a very active pipeline.
And a number of both bilateral as well as process oriented conversations with potential sellers your leverage question.
Just like we said at Investor Day, we are going to be very disciplined in terms of capital allocation, we're going to still stay well within the two to three X range.
Two dot O coming out of the prior year, we've got a strong cash generation year ahead of us in 2023. So we feel like we have some deployable capital and as Julian mentioned, we will toggle back and forth between.
M&A and buybacks, just depending on the availability and the timeframe.
Thank you.
Our next question comes from Stanley Elliott with Stifel. Please proceed.
Thanks, Hello, everybody. Thanks for the question.
Can you talk a little bit about kind of what's happening with national Catholic My math, if my math is right you're basically at the $1 billion number.
Almost right now.
Some of that is.
With the move into coastal in the water remediation piece.
What sort of having more of a national footprint is helping that and really just any curious do you have on the national accounts. Thanks.
Sure.
Look our national accounts.
Business has been terrific.
They are executing very well.
And I think that the value proposition that we bring as a national.
Supplier is being recognized by by those against you are right. We set at 1 billion number and that broadly at a $1 billion.
Obviously, we're going to push them.
To raise their numbers so that we can continue that growth, but we do think that.
It is a.
It is an area where.
Our competitive advantages that we articulated at Investor day around the scale advantages that we have.
The network model, where our branches act as.
As a market as a team in our market and our ability to make sure we can serve customers market to market.
Sure.
Is a tremendous advantage to national account type customers.
And then the investments that we make in.
Private label digital these are things that the national account customers value greatly.
So I think that's.
That has been a tremendous success.
Obviously inflation has also played a big part in that growth.
So I won't I won't discount that it's not been all all volume related but we're very pleased now inside of that I would tell you that.
The large homebuilder segment as a part of our national accounts team. So we're watching that very carefully obviously, we've seen it down in terms of volume.
The more positive sentiment starting the year has been has.
There's been good news, but again, we believe we provide tremendous value.
In terms of the waterproofing.
Segment of the business post coastal.
We were very very thoughtful and going into this as we thought about portfolio.
A couple of years ago, obviously, we divested interiors, we divested the solar business, we were very conscious about keeping our <unk>.
Existing waterproofing business that we had primarily on the west coast.
We believe this was a great segment for us to to invest and we thought the market dynamics.
Dynamics, we're going to be pro growth.
We did not see any players on a national basis.
And we thought we had the opportunity to build.
The nation's leading waterproofing specialty distributor.
The overlap with the roofing business is high.
There's a lot of vacuum for on that.
But the coastal acquisition has opened our aperture and I think we believe that theres, probably more opportunity now than we thought going in.
It's a terrific team.
A very technical sale, it's a highly specified sale.
And that tends to lead to good repeat business.
And given like you said the trends.
Climate related moves certainly the.
The tragedy in <unk>.
In Florida with the collapse of the condo building that was related to waterproofing all of these we believe.
To a segment of the market that we will see enhanced growth over the next several years and we believe that we're the leading player in the market.
Thank you and our final question comes from Michael Rehaut with Jpmorgan. Please proceed.
Hi, guys. Thank Gordon on for Mike.
Wondering regarding your 2023 EBITDA guidance, how much contribution are you assuming from ambition 2025, particularly as it relates to the lower quintile outperformance.
Digital initiatives.
Hey, Bob.
Ed.
Are there.
Good point.
Yes, I think the easiest way to Dimensionalize that for you is to just think through the revenue element of things and then you can imply.
A fairly standard EBITDA margin to it.
But if you think about <unk>.
Greenfields.
<unk> is the customer experience initiative things that are excluding M&A, you're probably in that 4% to 5%.
Revenue growth range.
And then you think about M&A that we've already done how that carries over into the year 2023 would be in that 2% to 3% range. So I think if you. If you took that and dimensionalize that into dollars and then implied your sort of average contribution.
So the bottom line you get to a pretty good number.
Thank you and with that we will conclude our question and answer portion of today's call.
Like to pass the conference back over to the management team for closing remarks.
Thank you Danielle.
<unk> all of the questions today and all of you attending I do want to reflect on what was a really terrific 2022.
Market conditions were obviously.
Helpful, but the execution the team demonstrated I think was really outstanding and delivered results that I think.
Well beyond what was anticipated 12 months ago.
We're certainly excited.
To offer my sincere thanks to all of our 7000 plus team members for a really outstanding 2022.
On the call for your interest in Beacon and we wish you the best in this year.
And with that we'll conclude today's conference call. Thank you for participating you may now disconnect your line.