Beacon Roofing Supply Inc. Q1 2023 Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Beacon at first quarter 2023 earnings call. My name is Bethany and I'll be your coordinator for today at this time all participants are in listen only mode. We will be conducting a question and answer session tore.
At the end of this call at that time I will give you instructions on how to ask a question if at any time during the call you require assistance. Please press star followed by zero and Accordingly, we will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes.
I'd like to turn the call over to Mr. Bennett Sundby, Vice President capital markets and Treasurer. Please proceed Mr. Asami.
Thank you Bethany and good afternoon, everybody and thank you for taking the time to join US on our call today, Julian Francis <unk>, Chief Executive Officer, and Franklin that grow our Chief Financial Officer will begin with prepared remarks that will follow the slide deck posted to the Investor Relations section of <unk> website.
After that we will open the call for questions before we begin please reference slide two for a couple of brief reminders first this call will contain forward looking statements about the companys plans and objectives and future performance forward looking statements can be identified because they do not relate strictly to historical or current facts and use the words such as anticipate Esther.
Expect believe and 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, including but not limited to those set forth in the risk factors section of the company's 2022 Form 10-K.
Second the forward looking statements contained in this call are based on information as of today may 4th 2023, and except as required by law. The company undertakes no obligation to update or revise any of these forward looking statements.
And finally this call will contain references to certain non-GAAP measures. The reconciliation of those 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 the presentation are available on our website at <unk> Dot com.
Now, let's begin with opening remarks from Julien. Thanks.
Thanks, Pat good afternoon, everyone.
Let's begin on slide four.
The team executed well in an uncertain environment to start the year delivering record first quarter net sales and cash flow.
Average selling prices were up high single digits year over year.
This combined with acquisitions more than offset lower volumes.
Daily sales increased approximately 1% year over year slightly lower than our initial expectations, given well publicized whether in nonresidential contracted destocking in the quarter.
Residential volumes were down compared to a strong prior year comparable as we expected and markets with higher exposure to new residential construction remained weak during the quarter.
In particular, Texas, one of the largest single family new construction market in the country contributed to the decline.
Storm exposed areas, such as Florida showed growth during the quarter due to the volumes associated with the rebuilding from Hurricane Ian.
And it's important to remember that 80% of our sales come from repair and replacement activity.
Non discretionary discretionary demand from re roofing end markets showed resilience during the quarter.
As we had expected nonresidential volumes would then we believe largely as a result of continued destocking at the contractor level as opposed to a decline in end market demand.
Commercial roofing supply chains continue to ease and we are seeing normal lead times on the majority of products.
Our complementary products business benefited from the acquisition of coastal construction products in November of last year. We are pleased with the performance of our new Waterproofing Division and it represents a significant growth opportunity for beacon.
Growth in our siding products also contributed to the higher complementary sales year over year.
Gross margin reflected the inventory profit roll off that we expected and mostly stable price environment and we recorded our second highest first quarter adjusted EBITDA in history.
We also delivered strong first quarter cash flow as we continue to right size, our inventory, which we began in the third quarter of last year we.
We used cash flow generated in the quarter to invest in value, creating initiatives towards achieving our ambitious 2025 targets, while maintaining net debt leverage at the low end of our target range.
During the quarter, we acquired first coastal experience prints building systems, and Alex roofing supply, adding a total of seven branches expanding our customer reach we welcome their employees to the Beacon team.
We have also come out of the box quickly this year on Greenfield, adding five new branches and enhancing service to our customers.
Our share buyback program continued under the expanded $500 million authorization announced on our fourth quarter conference call.
In summary, the fundamentals of end market demand has performed as we outlined on our call in February .
As a reminder, what we said was the overall residential market will be down in the mid to high single digits led by new residential construction.
We said storm demand would be a tailwind on a return to the 10 year average and the nonresidential markets would be about flat, but volumes would be affected in the first half by contracted destocking.
And despite a weaker demand environment, we expected price stability.
In the first quarter the market has broadly met our expectations and our team has executed well.
Now please turn to page five of the deck, where I'll provide a brief update on our strategic initiatives.
First let me highlight a couple of ways that we are building a winning culture.
There's nothing more important than the health and safety of our team members. During the first quarter, we tapped one of our top field operators to lead an area of fundamental to what we do and announced that <unk> has taken a critical role as vice president of environmental Health and safety fans' passion for safety and extensive operations experience in his role running our mill.
Atlantic region will be invaluable as we advance our focus on safety.
We also held our annual company wide safety stand down and which all 490 branches and 7500 employees paused and recommitted to making everyday safer.
The power of caring for one another and getting our employees home safely every night is a top priority and we will focus everyday on improving our employees ability to recognize hazards and avoid them.
We're also driving growth above market and enhancing margins through a set of targeted initiatives.
Many of you will recall from our Investor day last year, but delivering an industry, leading customer experience is central to achieving our goals.
Our customers have shared what is most important to them and we are able to use this feedback to differentiate our value proposition.
Based on that feedback, we created a detailed and actionable plan that we replicate across our markets.
Building accountable teams with multiple points of customer contact we were investing in quickly and effectively resolving issues for our customers.
We are leveraging our OTC network to improve service and we are seeking feedback from our customers and employees to identify wins and opportunities driving a continuous improvement mindset.
Engaging with our customers during the most important moments and leveraging our strategic advantages to solve the most pressing needs when and where they need it is the basis for our success.
Since the beginning of last year, we have rolled out these best practices to eight markets and have launched in an additional six markets. During the first quarter. We are seeing tangible improvements in on time delivery photo dropped confirmations sales growth and wallet share.
Customers have told us they want a better customer experience and we are uniquely positioned to deliver on that need.
Expanding our customer reach is also a major lever in our growth plans, which includes investments in greenfields and tuck in acquisitions.
A dedicated Greenfield team is executing on a robust pipeline.
We added five greenfields year to date, improving efficiency and enhancing customer service a solid start to our goal of adding at least 15 locations in 2023, we.
We have now opened 21, new branches since the beginning of last year, well on pace to exceed our ambition 2025 goal.
Our M&A team also completed three acquisitions in the quarter, adding seven branches and in total we have acquired eight targets, adding 29 branches since announcing our ambition 2025 plan expanding our opportunity in markets across the country.
A set of initiatives designed to grow margins is also showing results.
Digital capability is a clear competitive differentiator for beacon and sales through our online platform increased customer increases customer loyalty generates larger basket sizes and delivered 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 committed to building upon our technology leadership by further investing to make it easier for customers to do business with us.
The launch of our new <unk> Pro plus mobile App late last year as an example of how we are extending our leadership position.
During the first quarter, we grew digital sales, 11% year over year and achieved an all time high of more than 19% of residential sales through the digital platform.
And as I've said since I joined the company, we will drive operational excellence through continuous improvement initiatives.
Focus on the bottom quintile branches has generated significant improvements to our service levels as well as contribution at both the sales and EBITDA lines.
The improvement benchmark is relative to the Companys average branch performance and as the performance of the average branch moves higher so does the threshold for the bottom quintile.
For 2023 also called Mendoza line, the cutoff that select branches for the performance improvement plan is higher than the prior year by approximately 125 basis points.
Through this rigor and discipline, we will continue to drive the performance of the overall company higher.
In addition, our initiatives to improve up fleet productivity uptime and reliability is also showing results.
We have metrics and goals to increase productivity and reduce the average age of our practice.
In the past two years, we've upgraded 60% of our attractive fleet, reducing the average age by more than three years, providing a more efficient fleet and the added benefit of improving driver retention, while reducing emissions.
We are also optimizing utilization of our current assets moving existing trackers to our greenfield branches at every opportunity.
Lastly, our strategic initiatives are designed to create shareholder value and we are committed to improving our returns for all owners of our stock.
During the first quarter, we retired nearly 400000 shares.
The share repurchases demonstrate both our commitment to delivering value to shareholders and our confidence in the future.
It continues to be an important part of our balanced capital allocation, demonstrating our commitment to creating shareholder value and confidence and ambition 2025.
Our balance sheet has become a real strength for us, allowing us to invest in our capital allocation priorities and maintain the flexibility to adjust quickly to opportunities as they arise.
We continue to 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 I'll pass the call over to Frank to provide a deeper focus on our first quarter results.
Thanks, Julian and good evening, everyone turning to slide seven we achieved nearly $1 7 billion and total net sales in the first quarter up a little more than 1% on a per day basis year over year as higher average selling prices combined with the impact of acquisitions more than offset lower organic volumes tote.
Reported net sales were up more than two 5% as a reminder, we had one additional selling day in the 2023 first quarter versus the prior year.
As Im sure you are aware, we had winter weather and precipitation and large swathes of the country during the quarter, especially in March.
In the aggregate price contributed approximately 9% to 10% to revenue growth, while organic volumes per day were down 12% to 13% acquisitions, including coastal construction products are performing well and contributed more than 4% to daily net sales year over year.
Our backlog, which remains weighted toward nonresidential orders continue to convert in the quarter and continued to come down from its peak in the second quarter of last year, while it remains approximately twice what it was before COVID-19.
Residential roofing sales per day were lower by approximately 1% as higher year over year prices in the high single digit range were offset by low double digit volume declines in part from lower shipments in regions with higher exposure to single family New construction it.
It should also be noted that the prior year quarter was a record first quarter shingle comparable and while our residential volumes were down we compare favorably to industry volumes continuing a trend that started approximately four quarters ago.
Nonresidential roofing sales declined by 9% on a per day basis, driven by lower shipments as destocking by our customers was partially offset by higher prices in the mid teens year over year complementary.
Our complementary sales per day increased 21% year over year as the acquisition of coastal drove higher sales of our waterproofing products year over year.
Strength in siding products as well as higher selling prices across all of our complementary product lines with the exception of lumber also contributed to the growth.
Please keep in mind that with the addition of coastal complementary product category now has approximately 70% residential and 30% nonresidential exposure.
Turning to slide eight we will review gross margin and operating expense.
Gross margin was 25, 5% in the first quarter in line with the guidance, we put out in February and solidly above pre Covid Q1 gross margin levels.
Price cost was unfavorable by approximately 75 basis points as higher average selling prices were offset by higher product costs year over year, you will recall that we had broad based inflation across our products in the year ago period, including a single price increase in January of 2020.
Which led to significant inventory profits.
Partially offsetting the year over year roll off of inventory profits was lower nonresidential sales mix and higher digital and private label sales.
Adjusted Opex was $357 million, an increase of $34 million compared to the year ago quarter Opex.
Opex as a percentage of sales increased to 26% or 140 basis points year over year.
The year over year change in adjusted Opex was driven primarily by expenses associated with acquired in Greenfield branches. Together. These branches accounted for approximately $20 million of the year over year increase in.
Inflationary pressures wages benefits insurance fleet fuel and travel and entertainment as well as lease related rents real estate taxes utilities and maintenance costs also contributed to the increase.
These increases were partially offset by the resetting of our variable compensation accruals to the 2023 incentive targets.
Our focus on branch productivity remains a priority and while the chart reflects the typical seasonal pattern. We are confident that we are properly staffed to meet the ramp and the construction activity. We are seeing in Q2 and provide the high level of service our customers expect.
Our team remains watchful of changing market conditions and is ready to respond to the impact of higher interest rates on our business at.
At the same time, we are focused on investing in initiatives through the cycle to drive above market growth and margin enhancement as part of ambition 2025, our investments in projects related to future growth, including our sales organization customer experience initiative dedicated M&A and greenfield team's pricing tools e-commerce.
And branch optimization continued during the quarter ambition 2025 investments totaled approximately $9 million within the operating expense line in the first quarter.
Turning to slide nine operating cash flow was a record for the first quarter at $102 million as we continued with the inventory right sizing initiative, we started mid last year.
On a year over year basis first quarter net inventory was lower by approximately $170 million, even with higher product cost year over year inventory acquired through M&A and new inventory to support our greenfield branches.
It is also worth noting that we have generated $667 million and adjusted operating cash flow over the last four quarters, a true Testament to how hard our team has been working on.
Our capital allocation approach remains consistent with what we laid out at Investor day, we will deploy cash in a balanced manner between organic and inorganic growth opportunities and shareholder returns with ample balance sheet capacity, we are not only well positioned to invest in greenfield and M&A, but also the upgrading of our fleet and facilities to support our customers and.
Employees.
We are also investing in the process and technologies that will lay the groundwork for improved service future growth in branch productivity.
Net debt leverage at the end of the first quarter. It was at the low end of the two to three X range outlined at Investor day, and our available liquidity stands at more than $1 1 billion.
Share repurchases in the first quarter were made through a rule <unk> one plan and resulted in the retirement of approximately 400000 shares net of share issuances for stock based compensation, we reduced our common shares outstanding to 64.0 million at March 31 versus $68 7 million at the same time last year.
We continue to have approximately $477 million.
Remaining on the recently refreshed 500 million buyback authority, we announced in February of this year, we have ample capacity to invest and remain confident in our ability to successfully capture opportunities and changing market conditions as they develop throughout the year with that I'll turn the call back to Julian for his closing remarks.
Thanks, Frank Please turn to page 11 of the slide materials.
Before we head to Q&A I'd like to update you on our expectations for the remainder of 2023.
We continue to expect overall market demand to remain healthy, albeit lower than the last two years.
We expect new residential construction to be down significantly. So the overall sentiment has improved through the first quarter.
Residential re roofing end markets will be down, but total volume will be better than pre pandemic levels supported in part by the 'twenty year re roofing cycle.
Given all the storm activity in Q1, we now have higher confidence in our assumption of a return to the 10 year average storm demand.
We continue to see the non res markets about flat. However, our volumes will be down year on year as contracted destocking, which was more than originally anticipated.
For the second quarter, we expect total sales growth to be approximately 3% to 5% year over year and slightly better than the April pacing of 2% to 3% given the record comparable months a year ago.
Keep in mind that the second quarter of 2022, and 2021, we reported 28% and 21% net sales growth respectively.
We recently announced a single price increase effective later this month corresponding to the manufacturers announcements.
Our expectation is that our team will execute with the same discipline and rigor as we have in the past and we expect realization to reflect local market conditions.
We expect gross margins to be in the mid to high 25% range, which is down relative to the record prior year quarter, which you will recall had significant inventory profits.
Our full year expectations remain unchanged.
We continue to expect net sales growth in the range of 2% to 4%. This includes contributions from acquisitions previously announced.
Regarding gross margin, we expect inventory profit roll off on a year over year basis, partially offset by our improvement initiatives, including higher private label and digital sales.
Adjusted EBITDA expectations remain between $810 million and $870 million for the full year 2023.
Meeting, our customers' needs, when and where they need our products and services is our priority.
We will balance those needs with disciplined inventory management and other working capital initiatives to drive higher cash conversion compared to 2022.
Our focus will continue to be on the areas within our control, including productivity improvements delivering operational excellence pricing and daily execution on safety service and efficiency.
We will continue to deploy capital on initiatives that we expect will result in accelerated growth, including executing on a robust pipeline of acquisitions and delivering on our target of at least 15 greenfield locations as well as investing in our branches to improve their quality for our customers and our employees.
We're investing to improve our operations delivering results today and building the organization to enhance our growth tomorrow.
We remain committed to generating returns for our shareholders and we'll continue to repurchase shares.
In summary, we are well positioned to outperform the market in this complex demand environment, creating value for all our stakeholders.
We are looking forward to the rest of 2023 and helping our customers build more as we enter a key part of the construction season.
And with that Bethany I would like to open the lines for questions.
Thank you.
Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on here.
<unk> telephone.
If your question has already been answered or you wish to withdraw your question. Please.
The star.
Right.
Each caller is limited to one question.
Our first question comes from the line of Kathryn Thompson with Thompson Research Group. Please go ahead.
Hi, Thank you for taking my question today.
In your prepared commentary.
Is that your.
Shingle price realization will be based on local market conditions.
Today.
Let's see heavy material.
Good morning.
These releases.
Yes.
A wide variability.
Thank you.
Markets recovering like Houston, and other markets like Salt Lake City.
Lingering.
Could you give more color on market by market in terms of what youre seeing with leisure trends and how that impacts you and then when the budget got it and then on the non.
On that side.
More.
How are you.
Mega projects.
In our market.
Right.
We can rule in these type of projects.
Can you work with companies like Samsung Tour.
For these mega projects. Thank you.
Thank you Catherine.
Obviously, a lot of too.
To unpack in the question. So let me start on the residential side in the market by market I think as we said.
Protocol and certainly in our communications.
It's a very different year this year than we've seen in the last couple of years when the market conditions were pretty common across all of the markets. So we have seen.
Differences, so far this year and I highlighted them in my prepared remarks taxes would have been down Florida has been up.
We've seen.
Obviously significant weather across the country.
Obviously, California was weak in the first quarter, but we would expect that to recover quite strongly given.
All of the weather they had the rain that fell the snow that fell thats certainly we.
We are seeing that.
Start to return so we would expect to see California to be strong.
And the.
I think that what we're going to see is Texas recover I mean, the sentiment on new residential construction has improved.
We saw some significant weather activity in Texas, So I expect that to.
To be an improving improving market.
We saw we've seen Florida hit by both weather as well as more recently as well as the activity obviously from Hurricane Ian last year.
We expect to see some carryover in the upper Midwest from some of the markets and the storms that happened.
Last year.
So broadly speaking I think we're going to see.
Decent markets and the larger areas of the country, where there is a lot of shingles that are moving.
And so broadly I think it's going to be okay. There are a couple of markets, where we're seeing continued weakness.
But they're generally smaller markets.
So we remain confident that the overall demand environment across the country on the residential side has probably improved since the beginning of the year.
To address what I think your question was on commercial.
The.
Russell sort of Mega projects, we do have a national account group that works directly with.
Some of the large developers.
And we certainly play a role in going to market with our contractor customers.
The commercial side of the business, what we're seeing in commercial is that there'll probably be a shift away from large new construction projects and probably more activity around the repair and replace.
Which we think was delayed during the COVID-19 and the supply chain issues over the last couple of years.
Because there was a much greater focus on completing projects and that's where both the contractors and the manufacturers and obviously the the developers will focus there was less focus on the repair and replace market. We see a return to like I said more of the repair and replace we think Thats a great place for us to be.
That's.
There's a lot more probably smaller projects that we will see get executed.
So we remain.
Fairly optimistic as we said we've maintained sort of forecast for the overall commercial market to be about flat year over year, a little bit of a mix shift away from new construction to residential but we do think that the contract is we're holding probably a little.
More inventory than we had anticipated start of the year and we have seen active fleet during the first quarter. So.
Hopefully that inside was insight was somewhat helpful.
Yes Super helpful. Thank you very much.
Thank you.
Our next question comes from the line.
Mike Dahl with RBC. Please go ahead.
Thanks for taking my questions.
On the <unk>.
Resi side, specifically, obviously there has been a few periods of kind of inventory management and Destocking.
Across distribution, where do you stand in terms of residential single inventory today.
Destocking have you started to restock at all given some of the storm demand.
And just kind of tying into that.
Did you disclose the sales per day in April in total could you split out.
Randy.
Sales per day.
Yes, So hey, Mike it's Frank on the inventory piece.
On the volume side forget about dollars per minute, but on the volume side, we were down significantly on a year over year basis on shingles think about something in the kind of high teens low 20% volume.
When you think about it on a sequential basis, we did start to build some inventory.
In the quarter and obviously when you think about storm markets as an example, and some of the recovering markets that Julian talked about youre going to see us add product in those markets at the same time when we have markets that are on the softer end of things were likely going to continue to.
To shave some there and then on the non res piece again as we look at the contract of Destocking that will probably allow us to destock, a little bit in the second quarter as well so.
Wouldn't expect huge moves on inventory in the aggregate, but you will see some geographic changes at some in some lines of business changes.
In terms of April your question, Yes, we did give you the sales per day.
Two 5% when you when you break it down.
We were overall up on price about 4% and down-low singles on volumes.
Shingles were effectively flat.
Fractionally.
So overall the resi on the complementary side were favorable.
The continued contract of Destocking that you are Julian mentioned.
The commercial volumes were down.
Down in the mid teens. So overall commercial with the addition of price was down in the in the mid single digits, but youre seeing the resi and the comp piece, which is largely residential exposed do quite well.
And I would emphasize Mike, but last year's April was very very strong months.
To see that type of.
Relatively flat number on residential shingles in April I would say it was an extremely positive sign for us.
For sure Alright, Thanks, Julian Thanks, Frank.
Thank you.
Our next question comes from the line.
Mora with Zelman and associates. Please go ahead.
Good evening gentlemen.
Yeah.
I guess how are you.
Good. Thank you for taking my question.
I was just wondering.
We've had a few large storms over the last two months.
Is there do you have any insights into.
How much.
These storms are going to contribute to demand.
Meaningful there.
Yes, I'd be happy to touch on that obviously, it's still early so.
These things tend to build over time, and we will see it but.
We came in into the year.
Saying that.
We expected a return to the 10 year average storm demand, which is always our planning assumption and we sort of based on that.
Yes.
That represented a tailwind to us this year because last year's storm demand, we think was well below the 10 year average.
I would say that we've seen a very active storm season through the first few months of the year we've seen it.
We've seen some in the Midwest.
We've seen certainly some through.
As I said, Texas, and Florida more recently.
Then as everyone hopefully will remember.
The California storms, the rain that inundated, California, and the snow storms that will inevitably lead to some additional demand. So while we don't have a complete.
Our view today.
We do think that <unk>.
As of today, we would be very confidence that.
The storms that we've seen through the first three months of the year is going to lead to at least an average storm year and we are probably biased with with.
With eight months to go.
To the upside rather than the downside relative to that sort of 10 year average.
So when you look at the insurance claims data.
You would see is a bit of a bell curve, where the second half of the third quarter or Youre really meaningful insurance claims quarters in the first and the fourth quarters are lower than that but when we look specifically at the first quarter I mean were up nicely over the five year average there for the first quarter again, there's just so much so that has to happen here in the second and the third.
Quarter, which is the big headquarters, we did see some storms in April , which obviously is going to help us as we progress through the second quarter, but I think to Julians point, where we're more confident in the planning assumption, there's always risk in every planning assumption you put into.
You guide, but we feel more confident in that planning assumption now that we've seen some early storms.
Okay.
Cool.
And then on the <unk>.
Marshall.
Any.
You could.
Quantify.
Size of the Destocking by the contract terms and then do you have a sense of are we getting to the end of that or.
How long do you think it's going to take.
Take to play out.
Yes.
The Q4 call, we called contract with Destocking and we thought it would last.
Through the first half so we feel good about our recognition of the issue and are telegraphing of the issue.
If you think about it in terms of where our internal targets were relative to where.
We ended up we were we were probably a little bit understated on how much contract or destocking happened in the first quarter.
Maybe maybe 345 percentage points on the on the non res side, specifically, we do see that.
Lessening as you go through the second quarter literally month over month over month, we would see the single ply element of things.
Finishing destocking earlier than the installation or ISO piece of things, but we do internally have that going pretty much through the end of the second quarter, and then obviously getting back to where the end market demand and our sell through.
Look very much the same.
Yes.
Ryan that I think that when you think of the supply chain disruption.
Really impacted the commercial.
The commercial product lines pretty dramatically during the last couple of years I think everyone was being defensive.
And taking what they could get their hands on and holding it and I think what we're seeing now is supply chain has normalized.
Said in our prepared remarks that we now see the vast majority of products in that size on what we would call normal lead times.
People are now working through their inventory as we talk to the contractors.
They tell us they are doing exactly that and so we would expect as we said.
Last earnings call on the.
Fourth quarter earnings call that we would expected to complete in the first half of the year and we still remain.
With that type of guidance.
Very helpful. Thank you.
Thank you.
Our next question comes from the line of Trey Grooms with Stephens. Please go ahead.
Alright, Thanks for taking my question. This is actually known accounts growing portray.
So I'll touch.
Hey.
I wanted to touch on on the pricing you've announced the price increase for me.
I guess does the does the <unk> sales and margin guidance contemplate is that making any traction on that increase I know, it's going to probably vary by market.
And then just a quick second part can you compare your best markets and your worst markets in terms of pricing are you seeing any competitive behavior today.
Yes.
Yes.
So ill, let frank into some of the quantification I'll start with the second part so as we've said we believe that we.
We called for relatively stable pricing and that was that's what we've seen if you think about what happened in the fourth quarter of last year and now the first quarter, we've actually had a pretty weak demand environment.
And we've seen stable pricing broadly across all markets.
We've we've seen obviously.
Some of the some of activity out there, but I would characterize it overall is a pretty benign environment I think everyones.
Really in a place where we see the inflation that has hit on the manufacturer side, we've seen that pass through.
And we've seen the inflation that's impacted.
<unk>.
Our cost structure more broadly and wages inflation rents all of those things I mean, I think it's a it's a really important time for us to ensure that we have.
We're making sure that we can capture that as it's passing through and these are things that are not.
Not impacting just beacon and.
We believe that overall.
It's an environment in which priced abilities.
It's been important for us.
Some of the quantification and then the I guess the overall competitive landscape I mean, we have been talking about inventory destocking.
In the channel on the Resi for example, Forbes.
Two or three quarters now.
And then you saw demand.
Overall out the door demand in the first quarter being lower than year over year and in all of those situations. The pricing held up sequentially, which should give you some indication of where prices are holding.
When you look at the gross margin guide for the second quarter. Let me just start from the top on that one so the mid to high 20 fives versus the $27 six last year last year remember that you had the follow on from the January early February increase plus the April increase and remember that those were of a magnitude that.
The industry hasn't seen maybe ever but certainly in a really long time in the double digit range.
So you've got the cycling of those inventory profits, which will be at least 200 basis points just from that alone.
And then we've got a little bit of mix help this quarter and then we do have some some late quarter helps them that may increase again market by market and the fact that it's mid may in terms of its announcements.
We've got items under contract and we have to get certain notice two et cetera, So I would see it more blended between.
The second quarter in the third quarter, rather than a whole lot of impact in the second quarter by itself.
Got it that's really helpful. Thanks, guys I'll leave it there.
Thank you.
Our next question comes from the line of.
Sure.
With Jefferies. Please go ahead.
Hey, guys. This is maggie on for Phil.
I guess, Jeff.
Yes.
Talk about the Greenfield.
And that in the first quarter.
And you have.
Other I think 10 planned for this year. So maybe if you could just talk about how that factors into your full year guide and maybe any margin implications.
Are getting ramped up.
Sure I'll give you a little bit of color on it.
As we announced that we were sort of returning to our commitment to the Greenfield program.
Last year at the beginning I would tell you it took us a little while to get the team stood up and give activity going so if you looked at last year.
The bulk of our Greenfield activity happened later in the year.
We're going to spread that out a little bit more evenly this year.
But we were excited about the fact that we're able to pull the trigger on a number of these in the first quarter.
We want to keep up that pace, we would expect to see.
A relatively similar pace quarter over quarter over quarter. So you might see five you might see for.
Hopefully we can get a couple more done in the in the markets that we feel are really important to us but this is a long term commitment this isn't a.
We're going at it now and then we're going to shut it down if we get to 15. This is something that we believe when we see the opportunity to get great great locations in markets that we believe are underserved, where we can make a good return on the investment we're going to take that opportunity to do that.
Overall.
In the first couple of years certainly the Greenfields.
Greenfields are dilutive to margin.
Obviously, we put some capital in there they need to ramp up their efficiencies and get going with the sales. So they are dilutive it's relatively small.
In terms of the total company.
But it's certainly not a zero impact.
Our goal is to get them to profitability breakeven.
And.
Two sort of full operating levels as quickly as possible.
In some markets, we've been able to do that in as little as 12 months on average we think its probably about three to five.
But we work we work really hard everyday to try and shorten that cycle. So that it has.
Both positive impact on the company sooner.
Great. Thanks, so much.
Thank you.
Our next question comes from the line of Eric Smith with Loop capital. Please go ahead.
Oh, hi, Thanks, I'm, just wondering if you could speak a little bit more on the supply chain on the residential side.
Are you seeing or expecting to see any change there just in light of some of the restocking that you mentioned and some of the stronger.
<unk> demand will be the situation in which supply gets tight again or just.
Hawaii dynamics on the on the new residential re roofing side kind of offset Shaw.
Thanks, Karen.
So yes.
Yes.
It's interesting because I think what we're seeing is a more normal pattern of.
So supply and demand getting away from what we saw over the last couple of years when not only was it really tight you had this.
Very mild winters.
And.
The typical behavior of both.
The sort of demand side on the supply side.
Just really out of whack on the residential side I think what we've seen is a fairly normal maybe a little bit more aggressive destocking in the fourth quarter of last year, a fairly normal start to the year, where you've got some winter. So I'm assuming that the manufacturers were able to run assets build.
Inventory.
Any of them have committed to holding more inventory.
Than they had historically, so I would expect them to be able to build some of that inventory.
Over the last few months.
We typically see a lower first quarter.
Demand ramping up through the second quarter into kind of the late summer early fall season, where it gets really that's where the heaviest demand is and that feels about how this year is going to play out.
I think the wildcard in all this will be it's much more regional in terms of demand patents. This year than we've seen over the last maybe three or four years, even even longer than that where its been fairly uniform.
So I do think you're going to see.
The southeast for instance, picking up in hurricane in demand the Hailstorms.
That hits, Florida, I think Florida is going to be probably.
And tight.
I think we've seen the.
Other areas of the country, where the plant servicing those areas have been maybe a little bit underutilized and we will see that cascade through the country into into those demand areas. So I don't see.
The total demand environment being above the total supply environment.
So I don't think anyone's going to forecast a shingle shipments in 2023 of north of 160 million squares that would sort of tap out.
Matt in shingle production.
So there is going to be available capacity I think what we're going to see is regional tightness, where <unk> seen significant storm activity.
But as we know they know the manufacturers are able to turn then their assets fairly efficiently and I think we will see a fairly balanced environment overall.
Probably some regional tightness in some regional opportunities for us.
Derek I'd follow the storms.
All of.
The new resin exposure versus the R&R exposure and you'll get pretty close to where it's going to be tight.
Okay sounds like a plan.
Thank you.
Our next question comes from the line.
Truman Patterson with Wolfe Research. Please go ahead.
Hey, good afternoon, guys and Julian I enjoy your spacing up.
The call with some baseball references so I hope youre not a cardinals fan this year.
Question.
It's been a rough season.
You all have been talking about the kind of price stability.
In the channels and everything.
Especially on the commercial side.
Im trying to understand have you seen any sequential moderation or pricing competition there from the Oems.
On the non res side I'm really just trying to understand with you mentioned lower volumes in <unk> and it looks like <unk> volumes were down maybe 20% year over year, including the Destocking. So trying to understand some of those dynamics.
Look tremendous.
As we said.
Throughout the prepared remarks, and Q&A session here.
Pricing has remained relatively stable sequentially.
In a demand environment that there's been relatively wide open.
I wouldn't say, we've seen no competition I'd also tell you that.
It is nothing above what I would call normal I haven't seen anything that suggests to me either from an OEM standpoint, a distributor standpoint, a contract standpoint.
It's a pretty benign environment from that standpoint, I mean, obviously, we only are able to control our price pricing.
We intend to be very disciplined around this we intend to be very controlled about it and be very thoughtful and look I feel I feel.
Pretty good about the coal that we made.
Three months ago on what we expected to see for this year.
Perfect. Thanks, guys.
Thank you.
Our next question comes from the line of David Macgregor with Longbow Research. Please go ahead.
Yes, good evening gentlemen.
I wanted to ask about new stores.
Just from.
From a strategy standpoint, how are you thinking about.
The resources towards new markets versus existing markets targeting new openings within existing OTC networks.
Do you manage the cannibalization, but if you could just talk about that.
That will help us.
So hey, David our branches in the OTC markets are networked as you know so there is there is no real cannibalization, we do develop.
The map of deliveries and we understand with revenues and what deliveries auto really belong to the new branch versus the existing branch just honestly for the customer service element of things and the efficiency element of things. We can do it better from a branch that's a lot closer rather than having to run a truck 50 or 100 miles from a further way branch the aperture in terms of Geos.
Graffiti is pretty wide I mean, I think we said at Investor Day, we had.
60, or 70 target locations out there, it's as big as Big now as it was then and we've already deployed.
'twenty into the environment. So it's very much a market by market in a local cultivation of where we need to be where we need to create.
Kind of local leadership.
In that particular market, we know where we're underpenetrated in where we want to be more penetrated. So there's a very thoughtful exercise that we go through.
I'd say that the ability to find lease space today is a lot easier than it was a.
A year to two years ago, it's still tightened some places, but it's much easier than it has been.
In the past so we're being pretty.
We're pretty thoughtful about how we do that so what we do when we open one is in the pro forma let's say that there is sales that really belonged to that new branch, we may put a $1 billion and just transfer that over.
Into the new branch, which gives it gives them a head start, but it's not cannibalization and it's not new capacity into the market. What we're trying to do is to look for the white space in between our branches. So they can support one another with inventory in trucks and people.
Ultimately service the customer better and drive sales.
Can you speak to the expected impact to your Opex. This year just from the new store program.
Yes. So if you think about the quarter itself. So let's just use Q1 as an example.
The opex side of Greenfield, specifically was about $5 million.
So we will cycle last year's Greenfields as we go throughout the year, obviously, you heard Julian talk about.
The number that we were going to deploy this year the cadence is going to be difficult to predict with the level of accuracy, but I think if youre in the kind.
Kind of mid to high single digit millions on a year over year basis, you'll be in the right neighborhood.
Thanks Frank.
Thank you.
Our next question comes from the line of Michael Rehaut with JP Morgan. Please go ahead.
Hi, guys Award law for Mike.
I just wanted a little bit more insight on the first quarter end market demand. Obviously, you guys stated that storm.
A bit heavier than you anticipated I just wanted to know if you guys could break out some more trends you saw within the quarter outside of weather being a little bit heavier.
Yes, so if I broke down.
The quarter, the first quarter year over year by <unk>.
Our line of business.
Dailies on Ramsey.
We're down one little over 1% as you saw in the in the prepared slides.
It's really a combination of pricing being up high single digits in daily volumes being down.
Low doubles, there really wasn't any M&A impact in the in the resi side. The acquisitions there were were fairly small.
So I mean, I think the trends were exactly what we expected it was largely a new construction story not a not an R&R story.
Theres, obviously, a little bit of discretionary R&R that might get impacted by higher interest rates, but the big story was new.
And you heard Julian talk about some of the markets there on the non res side.
Down about 9% or so on a on a daily basis again that was probably three or four five percentage points higher than what we had originally expected given the extent of the contract or Destocking I think we called contracted Destocking, we may not have called the magnitude all that well and no real M&A.
M&A in that environment either.
We are seeing volumes continue to be negative, but less so as the months go by is that destocking.
We'll come to a conclusion at the end of the second quarter on the complementary side, it's largely the M&A story there.
The bulk of the of the 21% or so dailies there was because of the coastal and the Whitney acquisitions.
So we're seeing that that perform quite well with coastal we're excited about the waterproofing platform that we've created citing did well in the quarter as well that was up nicely on both the vineland fiber fiber cement side.
The only thing that was really the drag in that particular line of business was lumber in specifically lumber price I mean, you can look at the futures and see what the drag is.
There so hopefully that gives you some color overall.
Yes, I would go to the prepared remarks, we said I mean, we.
Coal the market.
At the end of the.
Fourth quarter call and we said look we know new residential construction markets.
Going to be off substantially.
We don't forecast themselves we look at.
We look at consensus so the consensus there was probably off 20% plus.
When we've talked about.
The residential re roofing markets, we said look it's largely non discretionary but at the margin higher interest rates are going to close less housing turnover and housing turnover causes re roofing as well as inspections are done in insurance requirements. So we would.
<unk> that to be down a little bit you said commercial markets would be about flat as Frank and we've said multiple times now, we probably underestimated the contracts of Destocking, but we'd call that and we said that storms would return to their <unk>.
10 year average, which we feel pretty good about it now given everything we've seen in the first quarter.
So.
In terms of our overall planning assumptions, we think we've been pretty good.
Of articulating what assumptions, we've made in order to hit.
Our guidance.
We feel right now as we sit here pretty good about that April felt really good coming out of probably a weaker first quarter that was impacted by weather and some destocking.
But overall, we are really confident by where we stand for the year and like I said reiterate our feelings on what we can produce as a company.
Great. Thank you guys.
Thank you.
That concludes the question now I would like to turn the call back over to Mr. Francis for his closing remarks.
Thank you Bethany.
My closing really as I, just mentioned as I say to think that overall, we feel pretty good about the macro environment. We think the company is performing well we want to thank our.
Our employees for the work that they've put in over the last several months to start the year in a really positive note.
We've just delivered.
Record sales for first quarter, a record cash flow for the first quarter. The second highest EBITDA number that we've delivered in the first quarter as well so we feel pretty good about it.
We have multiple paths to growth as we've demonstrated in a low demand environment, we were able to grow sales and we've got multiple pads, we believe to margin expansion.
And with that we will be disciplined about our capital deployment looking at M&A acquisitions and reinvesting in our branches to improve our overall customer service. So we're excited we thank you for your interest in Beacon have a wonderful evening.
That concludes today's conference call I Hope you all enjoy the rest your day you may now disconnect your lines.