Q2 2023 Beacon Roofing Supply Inc Earnings Call
Yes.
Yeah.
Good afternoon, ladies and gentlemen, and welcome to the <unk> second quarter 2023 earnings call.
My name is Sam I'll be your coordinator for today.
Time, all participants are in listen only mode. We will be conducting a question answer session towards the end of this call.
At that time I'll 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 a coordinator will be happy to assist you.
As a reminder, this conference call is being recorded for replay purposes, I would now like to turn the call over to Mr. Sandy Vice President capital markets and Treasurer. Please proceed Mr. Sundry.
Yeah.
Thank you Sam good afternoon, everybody and thank you for taking the time to join US on our call today, Julian Francis Chief Executive Officer, and Frank will 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. The use of words, such as anticipate estimate 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 comp.
<unk> 2020 to Form 10-K.
Second the forward looking statements contained in this call are based on information as of today August three 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 these non-GAAP measures to the most comparable GAAP measures.
As set forth in today's press release, and the appendix of the presentation accompanying this call. Both the press release and the presentation are available on our website at <unk> Dot com.
Let's begin with opening remarks from Julien.
Thanks, Ken Good afternoon, everyone I'm.
I'm pleased to say that we delivered another good quarter with strong execution on key initiatives and disciplined cost management.
Before I begin a review of the quarter, let me remind you of the assumptions that underpin our prior outlook.
We said that the overall residential market will be down mid to high single digits with me.
Okay down double digits and replacement activity down mid single on lower existing home sales.
We said storm demand would be a tailwind on a return to the 10 year average.
Significantly above prior year.
And we expect to the nonresidential end market would be about flat, but volumes would be affected in the first half by contracted destocking and we expected price stability.
In the first half of the year end market demand has largely performed as we outlined with the residential market slightly exceeding our expectations on stronger than expected storm demand and while we believe the nonresidential end market is broadly flat excess contracted inventory was significantly higher than anticipated, which created this first half.
Headwinds that we believe are now largely but not completely behind us.
Against this backdrop, we continue to focus on the areas within our control and our teams strong execution on our ambition 2025 initiatives resulted in record record second quarter net sales.
Average selling prices were up low single digits year over year, and combined with contributions from Greenfields and acquisitions drove net sales more than 6% higher year over year.
We once again delivered double digit adjusted EBITDA margins in the second quarter through a combination of disciplined market execution and productivity gains and we generated substantial cash flow in the quarter.
Having the right products in the right place and the right quantity to meet customer needs as a core competence at.
At the same time balancing inventory to local demand conditions is critical to ensure we manage working capital and create value for our shareholders.
As we saw market conditions changed in the middle of last year, we began to proactively and methodically reduce inventory unlocking substantial cash flow.
We converted operating cash flow at over 100% of adjusted EBITDA in the trailing 12 months ended June 30th demonstrating the resiliency of our business model in changing market conditions.
We use that cash flow to create balance sheet capacity to reinvest in the business conduct M&A and return capital to shareholders, which I will discuss in more detail on the following slide.
As I said at the outset I am pleased with the team's execution in what turned out to be a pivotal few months for the company.
Now please turn to page five of the deck.
As you are aware 18 months ago, we laid out our medium range targets to drive above market growth delivered double digit adjusted EBITDA margins build a great organization and generate superior shareholder returns.
We can only do this if we deliver a great value proposition to our customers and our teams are doing that every day.
So let me provide you with an update on our strategic initiatives, which will give you a better idea of how we are accomplishing these goals.
Let me start by highlighting how we are building a winning culture.
In May we released our second annual corporate social responsibility report consistent with our values and our commitment to transparency and continuous improvement.
We reported early progress on our goal to reduce scope, one and scope two GHT emissions intensity, 50% by 2030 relative to our base year of 2020.
We are focusing on our fleet and facilities to improve fuel efficiency and reduce energy consumption.
And I am pleased to share that we reduced our emissions intensity by five 7% in 2022 relative to the 2020 base.
We also announced an employee stock purchase program. So that employees can be further invested in the success of the company. They work for every day.
This benefit allows team members to buy our shares at a discount and is available to all employees, including drivers branch personnel sales and functional roles. We are aligning the entire company to our mission and to creating shareholder value.
In fact more than 20% of our employees, including more than 10% of our frontline workforce enrolled in the inaugural period and are taking advantage of this opportunity.
I am, particularly pleased that hundreds of our drivers warehouse team and the inside sales organization are participating a real commitment to our company and to their teammates.
Next we are driving growth above market and enhancing market margins through a set of targeted initiatives.
Our digital capability continues to be a clear competitive differentiator for beacon and sales through our online platform delivered approximately 150 basis points better margin compared to offline channels.
We provide the most complete digital offering in the industry and continue to expand our capabilities to serve customers in the way that brings them the most value.
Our most recent digital integration with <unk>, a leading provider of all in one business management software for roofing contractors drove an impressive 28% year over year increase in digital sales in the second quarter.
And the highest percentage of residential sales ever at 21%.
We intend to build upon our leadership by continuing to invest in this capability.
Last quarter, we highlighted the rollout of our customer experience or as we call. It CX initiative.
Engaging with our customers during their most important moments and leveraging our strategic advantages to solve their most pressing needs is one of the pillars of our competitive differentiation.
We continue to rollout these best practices to 60 markets in the second quarter.
I am happy to report that one of our key metrics of customer satisfaction average on time delivery percentage.
Showing a meaningful increase in CX markets sustainably, improving our reliability relative to our past and to our competitors.
We are also seeing tangible improvements in other key metrics, including sales growth and customer wallet share custom.
Customers have told us they are willing to reward a better service experience and we are building our capabilities leveraging our competitive advantages of scale and our network model.
Expanding our customer reach is also a major lever in our growth plans, which include investments in Greenfields and acquisitions.
A dedicated Greenfield team is executing on a robust pipeline.
We added 14, greenfield through the second quarter, improving efficiency and further enhancing customer service.
For reference we have now opened 31, new branches since the beginning of last year, well on pace to exceed our ambition 2025 goal.
On acquisitions, we completed the purchase of silver state building materials during the second quarter, providing access to the market in Reno in Lake Tahoe.
In total we have acquired nine companies, adding 30 branches since announcing our ambition 2025 plan expanding our opportunity in markets across the country.
Now those of you have listened to our calls know that we have discussed our efforts to drive operational excellence through our continuous improvement initiatives.
Our OTC network Leverages the density of our branch network and larger Msas.
Currently we operate in 57 markets with nearly 280 branches participating where our teams work together to deliver on our service model to address our customers' needs.
Key to achieving these improvements as our routing software beacon track enhancing the speed and reliability of our network and providing delivery tracking capabilities for our customers.
In addition, we leveraged logistic capabilities across our network of branches to reduce delivery time, and mileage improved labor productivity and reduce fleet costs and emissions.
We continue to execute on the strategic branch optimization initiative that we highlighted at our Investor day and are developing a comprehensive standard methodology.
We utilize value stream mapping for truck and order flows leading to optimized processes and branch layout, which increases productivity and reduces wait times.
The benefits of tangible improving throughput capacity and sales per hour worked.
And finally, I will talk about how we are creating shareholder value and give you. Some details on the transaction completed last week to repurchase the entirety of the outstanding preferred shares owned by <unk>.
We knew that the opportunity would eventually presents itself and.
Pairing for it by restoring our balance sheet flexibility and maintaining strong liquidity.
We recently saw the opportunity to reach out to our largest shareholder and we're able to reach an agreement in early two July to redeem the shares for just over $800 million.
Retiring the equivalent of $9 7 million common shares.
In addition, we continue to execute on our current authorization to repurchase our common stock year to date through July 31.
We repurchased approximately $100 million.
Or approximately one 5 million shares.
Many of you will recall that we first announced our share repurchase program in February of 2021 as part of our ambition 2025 plan.
I am very pleased to report that we have since deployed $1 3 billion to repurchase approximately 21% of the shares on an as converted basis, while maintaining net debt leverage within our stated target range.
As a result of this significant return of capital we have announced that we do not expect additional repurchases during the rest of the year under the remaining authorization.
We remain confident that 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 I'll pass the call over to Frank to provide a deeper focus on our second quarter results.
Thanks, Julian and good evening, everyone turning to slide seven we achieved more than $2 5 billion and total net sales in the second quarter up a little more than 6% year over year, driven by the combined impact of acquisitions and higher average selling prices for our products.
In the aggregate price contributed approximately 2% to 3% to revenue growth, while organic volumes per day were flat to down 1% acquisitions, including coastal construction products are performing well and contributed approximately 4% to daily net sales year over year.
Our backlog continued to convert in the quarter as we entered the heart of the selling season, and while lower sequentially remains well above historical levels.
Residential roofing sales per day were higher by eight 5%.
Year over year volume growth in the mid single digit range combined with higher prices in the low single digit range drove the year over year revenue performance.
Whereas the volumes came in better than expected versus a very strong shingle comparable in the prior year quarter, while industry volumes were higher it is important to keep in mind that armor shipments were aided by distributor restocking during the quarter with that in mind, we estimate that we grew at least in line with the market.
As Julian mentioned previously <unk> R&R demand bolstered by higher storm demand in the first half was stronger than our planning assumptions and more than offset new construction decline year over year.
Nonresidential roofing sales declined by less than 2% on a per day basis, driven by lower shipments as the expected destocking by our customers continued through the quarter higher prices in the mid single digits year over year, partially offset the lower volumes.
Complementary sales per day increased nearly 12% year over year as the acquisition of coastal drove higher sales of our water proofing products year over year higher.
Higher selling products excuse me higher selling prices across all of our complementary product lines with the exception of lumber also contributed to the growth.
As a reminder, with the addition of coastal our complementary product category now has approximately 70% residential and 30% nonresidential exposure.
Turning to slide eight will review gross margin and operating expense grew.
Gross margin was 25, 4% in the second quarter down more than 200 basis points year over year, given we are cycling the significant inventory profits generated in the year ago quarter.
That said, our gross margin performance in the quarter remains well above historical Q2 gross margin levels.
While we were then guidance range. We discussed in May we ended up at the lower end of that range due to slower realization of the may shingle price increase which largely match the timing of the inflow of higher product costs.
Therefore, we did not produce the level of inventory profits we were initially expecting.
On a year over year basis price cost was unfavorable by approximately 230 basis points as higher average selling prices were more than 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 sizeable shingle price increase in April of 2022, which led to significant.
Inventory profits at a high watermark for gross margin in Q2 of 2022.
Adjusted Opex was $378 million, an increase of $8 million compared to the year ago quarter adjusted Opex as a percentage of sales decreased to 15, 1% or 60 basis points of leverage improvement versus the prior year quarter. The.
The year over year change in adjusted Opex was driven primarily by expenses associated with acquired in Greenfield branch.
These new branches accounted for approximately $24 million of the year over year increase.
Inflationary pressures and wages and benefits as well as lease related rents real estate taxes utilities and maintenance costs also contributed to the increase.
These combined increases were partially offset by lower incentive compensation accruals and decreases in selling expenses largely fuel related.
Given the continued tightness in the labor markets, we made an effort to ensure that we're properly staffed to meet the ramp and seasonal activity and provide the high level of service our customers expect at the same time, our focus on branch productivity remains a priority and we were able to drive productivity and operating leverage in the second quarter.
As you can see our sales per hour metric reached its highest level index back to the first quarter of 2020.
And notably our operating expense to sales ratio reached its lowest level in 10 years, a testament to our team's focus on driving growth and delivering operating efficiency.
While we remain watchful of changing market conditions, we are continuing to invest in initiatives through the cycle to drive above market growth and margin enhancement as part of our ambition 2025.
These ambition 2025 investments totaled approximately $6 million within the operating expense line in the second quarter.
Turning to slide nine operating cash flow was impressive for the second quarter of $257 million as we.
<unk> to benefit from the inventory right sizing we started mid last year.
As you can see on the chart, we experienced the normal seasonal ramp in inventory between the first and second quarters. However on a year over year basis second quarter net inventory was lower by nearly $200 million.
Even with the combined impact of higher product costs year over year inventory acquired through M&A and new inventory to support our greenfield branches. It.
It is also worth noting that we have generated nearly $950 million in operating cash flow over the last four quarters, a conversion rate of over 100% compared to adjusted EBITDA.
We expect strong cash generation in the second half of the year weighted towards the fourth quarter given the inventory build in late Q2, and early Q3 to support the stronger selling season.
While Julian previously cover the share repurchase program, let me give you some additional details that may be helpful.
Share repurchases in the second quarter were made through a rule <unk> one plan and resulted in the retirement of approximately 800000 shares during the second quarter.
Net of share issuances for stock based compensation, we reduced our common shares outstanding to $63 4 million on June 30 versus $64 2 million at December 31.
<unk> five one plan terminated on July 31, with approximately $25 million of share repurchases. During July and we have mentioned several times, we do not expect any further share repurchases for the remainder of the year.
Net debt leverage at the end of the second quarter was one nine times trailing 12 months adjusted EBITDA or slightly below the low end of the two to three times target range and approximately two eight times after giving pro forma effect to the preferred repurchase transaction.
We remain well positioned to continue to invest in greenfields and acquisitions as well as upgrading our fleet and facilities to support our customers and employees. We are also investing in the processes and technologies that will lay the groundwork for improved service future growth in branch productivity, we remain confident in our ability to successfully leverage in it.
Proving residential backdrop and continued to capitalize on growth opportunities in the second half of the year.
With that I'll turn the call back to Julian for his closing remarks.
Thanks, Frank Please reference page 11 of the slide materials.
Before we head to Q&A I'd like to update you on our outlook for the remainder of 2023.
We expect the momentum we experienced in the first half and outlined at the beginning of the call to continue into the third quarter.
Non discretionary R&R demand is expected to continue to improve including carryover from the storm activity we've experienced in the first half of the year.
Residential homebuilder demand is expected to be stronger in the second half year over year as build a sentiment has improved.
And nonresidential bidding and quoting activity and backlog is expected to remain healthy but cycle times continue to extend and while we believe contracted destocking is largely over some pockets of excess inventory remained.
And we do expect the market opportunity to be lower year on year on a tough comparable.
For the third quarter, we expect sales to date growth to be approximately 7% to 9% year over year and slightly better than the July pacing of approximately 7%.
Keep in mind that the third quarter of 2022 was a strong comparable in which we reported net sales growth of approximately 29%.
We have announced a single price increase effective next week corresponding to the manufacturers enhancements.
A team will execute with discipline and rigor as we have in the past.
Given the market developments that we are seeing through July we expect that realization will be better than the may price increase and will result in sequential margin improvement.
We expect gross margin to be in the mid to high 25% range and keep in mind that prior year quarter had significant inventory profits.
We are also increasing our full year guidance.
We now expect net sales growth to be in the 4% to 6% range versus 2% to 4% previously announced.
This includes contributions from acquisitions previously announced.
Regarding gross margin, we continue to expect inventory profit roll off on a year over year basis, partially offset by our improvement initiatives, including including higher private label and digital sales.
Adjusted EBITDA is expected to be between $850 million and $890 million for the full year 2023, an increase compared to our guidance announced at our prerelease on July seven.
As always our focus will continue to be on the areas within our control, including safety customer experience labor productivity and pricing execution.
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 greenfield locations, which we now expect to result in more than 20 to 25 branches in 2023.
We are investing in improving our operations delivering results today and investing to generate growth tomorrow. In summary, we are well positioned to continue to outperform the market in this dynamic demand environment, creating value for all our stakeholders. We're.
We're looking forward to the rest of 2023 and helping our customers to build more.
And with that we'll open it up for questions.
Thank you, ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your Touchtone telephone.
If your question has been answered.
Your question. Please press star one.
Each caller is limited to one question.
Our first question is from Garrett Moise from loop capital. Your line is now open. Please go ahead.
Oh, hi, thanks, Thanks for having me on those quarters.
Hoping you could speak to the drivers of the new guidance range.
Narrowed the range about three weeks ago now you are raising.
Wondering if you can itemize some of the drivers into just assuming the August price increase there is some volume in there.
Additional detail would be great.
Hey, Thanks, Gary Yes.
As we said.
Prerelease on July seven we hadn't done the analytics yet in terms of where we were and we werent really closed on the June numbers. So.
We've been able to do additional analytics on this.
Obviously, we're raising it.
Somewhat we brought into that we certainly brought in the top line.
The top of the range out as well and I'll, let Frank give you some specific details but.
We continue to see.
Productive marketplace ahead of us.
And we think we're executing well.
And as we said in our prepared remarks, we do think the environment is more conducive to a solid price increase and execution in this time.
Hey, Gary as I think I've mentioned, we really werent able to engage the full complement of the team both in the headquarters environment in the field environment, while we were getting.
Getting ready for the preferred transaction in the pre release. So that's why we put the qualifiers in the prerelease wanted to make sure people knew that we were going to come out with a more refined range I would say the conversations that we have had internally around the resi backdrop, and obviously that translates into better resi volumes in the second half that maybe we would anticipate.
<unk>.
As well as the August price increase I would say those are the two big things I'd tell you that we also did a really nice job in the second quarter on Opex leverage and would expect that to continue to be helpful. For us as we go forward, but I think it really comes down to the.
The June close of the July we obviously got another couple of weeks under our belt on July after the pre release.
That look good and then the forecast all of that forward and you get a little bit of lift. So we're excited about the second half.
Okay. Thank you.
Okay.
Our next question come from other small from Deutsche Bank. Your line is now open. Please go ahead.
Yes, thanks, very much I wanted to talk about the comments around the lack of inventory profits in the second quarter and then just the expectation that with better realizations in the <unk>.
You would perhaps see sequential margin expansion is it right to assume that in addition to sort of lapping the comp from the prior year inventory profits. There is also a consideration around faster turns of inventory that maybe would mute that sequential increase.
Yes, So let me go back and talk about the May increase and then sort of.
Forward view.
If you remember the manufacturers came out and announced and we followed on with Iron enhancements for mid May I would say at that time the market was.
Probably still a little bit uncertain about the direction.
We have obviously seen some storms, but the way it got executed was that there was some price holds for some contractors and some builders.
So it went beyond the mid May increase and so as we started taking price from the manufacturers.
The market just wasn't realizing that we did see sequential price improvement through the quarter month to month.
But the fact was that that was sort of timed with the increases that we saw from the manufacturers working its way through our inventory. So when we originally came out with the guide we expect it to generate some inventory profits from the May increase.
Didn't happen, mainly because of the price holds.
And how.
The timing of the price increase our price increase to our customers went through so we really weren't able to generate anything.
From that tour.
Now to sort of the future look I think that the demand environment is much stronger I think with where more resolve around this increase in terms of.
What we believe we see in the marketplace the demand environment that we see on the resi side of the business.
Storm activity is sort of materialized and we're going to continue to see sort of back half demand improve I think that's.
<unk>.
Is inside of the four walls of Beacon.
A real determination about executing much better on this price increase.
We did on the May increase.
Hey, Joe on the inventory point, obviously, we have less.
Units in inventory this year relative to last year, given all of the Destocking that you mentioned, we've actually built some inventory in June and we would expect to build some more in July so.
I see your point academically I don't think its going to be a huge driver of inventory profits on a year over year basis in Q3.
Thanks, a lot Frank.
The detail just one other maybe housekeeping item I think I missed the price on the commercial the non res business in the quarter and then just thinking about the quarter ahead.
Just any idea on the mix between volume and price within your 7% to nine daily sales guidance.
On the non res you didn't miss anything because we didnt get it but.
Happy to provide some color there.
In terms of the.
The pricing in the quarter.
Think of it as being up mid singles in.
In Q2, and then asked me your next question again.
Just the balance of volume versus price within your third quarter daily sales guidance.
Yes, so there is a seven.
7% to 9% in the in the daily let me break it down a little bit for Ya amongst a line of businesses because theres. Some theres some significant moving parts that you would miss if you ended up doing it on an average basis.
On the resin side, you should think about.
Sort of high single digit volume in low single digit price.
Year over year numbers, obviously on the commercial side volumes down high singles to low double digits with price up low to mid singles year over year.
And then on the complementary side, it's largely going to be coastal plus a little bit on the siding side. So I think on a revenue basis for complementary on low double digits.
Alright, thanks for all the great detail.
Our next question comes from Katahdin Montara from BMI Cattaneo line is now open. Please go ahead.
Thank you and congrats on a good quarter.
I'm curious if you can talk to.
Talk a little bit about kind of region.
In this quarter and what you've seen so far in July .
Are there any regions that are performing better than what you expected or kind of worse than you expected.
Yes, thanks, Kevin.
Yes. It is actually there are some significant regional differences across the country and actually through the first half of the year.
Shifted as well so.
As we expected the storm related markets are the ones that were.
The strongest through the first half of the year.
Youll remember all of the weather that we saw in California at the start of the year that actually was down in the first quarter because of all the rain and all the weather that was happening there, but was a strong rebound in the second quarter. So, California was was up substantially in the west coast.
Texas experienced some some of that as well we expect it down a lot of new residential construction.
Was was impacting Texas in the first quarter changed in the second quarter storms impacted that.
Midwest had storm carryover from last year. So we saw that carry through we saw that actually dissipate a little bit through the end of the second quarter, and then Florida had a lot of carryover from last year Interestingly there we saw.
Some declines later in the in.
In the second quarter in the Florida market as.
Some of the new labor laws that came into.
The effect and so have impact that.
We saw bring it down there was some significant storms in Tennessee, and Kentucky, we saw that.
Good and then we saw a relatively I'd say stable and quiet in the northeast.
But having said all that we also saw storms throughout the second quarter that impacted pretty wide swath of the country.
<unk> say there was any one particular storm that was.
Very large, but we saw a number of decent size storms really across the entire country that we believe is going to have impact.
Through the rest of the year so.
It's an interesting question, but it was a really really a mixed bag.
Crossing MISO markets change from first quarter to second quarter.
And as we're progressing through the year.
And some of the claims data just if you look at that.
In the second quarter. The insurance claims data was up about 25% year over year and that was a low comp last year. As we said many times that 2022 was not a very good storm year for us, but certainly the claims in Q2 were a nice lift.
Alright.
This is a very helpful perspective, Thank you I'll jump back in the queue. Good luck.
Thank you.
As a reminder, please note each caller is limited to one question.
Next question comes from Michael Rehaut from JP will open market. You're line is now open. Please go ahead.
Sure.
Hi, Doug.
Sure.
I was wondering if you will.
Any color on any potential.
Great.
The supply chain.
Sure.
So breaking.
Breaking up there a little bit Doug, but I think you said it and seeing any changes in the supply chain on the residential side. So.
And then the.
The short answer to that would be yes, a 48 million square AMA shipment quarter would imply.
The manufacturers.
<unk> not just all of the available production, but also.
Some of their inventory so you would expect them to be fairly low on inventory.
Inventory coming into the third quarter.
Obviously, we don't have a lot of visibility into how theyre running day to day.
But I'll tell you.
Overall the market is tight.
Been that way now for a little while we're seeing differences across.
And our manufacturers and that's it.
Seeing some regional product differences.
You're probably not asking about tile in Florida.
We're seeing tightness in tile in Florida.
And things ease up but in general.
The market is tight.
Many of the.
Manufacturers around planned availability and that's something that we've been dealing with for the last almost three years now so.
It's not something that I think is especially difficult right now we're managing it we've been used to managing it but and <unk>.
Supply is generally tight.
Great, Thanks, and just stand out with <unk>.
Sure.
Talking a little bit earlier.
Are there any estimation.
Is that fair.
Back half a year and if so.
Good morning.
Yes, just quickly on that one.
He said that we think that the destocking is largely behind us I think.
Everyone was surprised.
By the amount of inventory that was held at the contractor locations we knew that.
Some builds at the end of last year.
We've called it in the middle of last year that we saw the market.
Leasing up and supply, becoming a little bit easier.
Manufacturers continue to ship in I think that the contract is at that time.
Continuing to take jobs.
To take shipments that they didn't actually have jobs for them.
It filled up pretty quickly.
We think that's mostly behind us it is not everywhere. Obviously, we don't have visibility into every contract is warehouse.
Right now.
But we think it's coming back to normal.
We do think the overall commercial market will probably be down a little bit in the second half of the year relative to sort of original expectations, but that's more to do with cycle times expanding.
Labor availability I mean, you can imagine in the last I mean, both on residential commercial.
Some of the heat related.
Issues through the southern.
And the states, particularly Texas.
In Arizona over the last several weeks have been significant and you can't get up on a roof and do that type of work in that type of heat. So we're going to see that come down we're not sure that gets.
Get all caught up.
In the back half of the year, because labor is pretty tight as well so, but we think most of the supply chain issues and most of the most of the.
Contract the stock has been depleted.
Our next question comes from Mario <unk> from Zelman and associates.
Your line is now please go ahead.
Thank you for taking my question.
Just a quick one on storms.
Six months ago.
You said that you expected.
2% to 3% contribution to growth from storms normalizing on a year over year basis.
Given the strength, we've had I'm just curious.
Thank you.
Sure.
Got it.
Thank you.
Thanks Mary.
So we did say that we.
Our planning assumption was always going to be and we will always be at the start of any year, our assumption will be 10 year average storm cycle.
In the first half of the year.
We've probably seen enough storms that would probably carry us through and that if we saw nothing the rest of the year.
But nothing the rest of the year is probably not a totally reasonable assumption so.
If we saw a reasonable amount of storm activity in the second half of the year you'd expect it to be up.
Quantifying exactly what that looks like.
Right now is still probably a little bit too early I mean, I think that's.
We certainly see it as better than.
Average, we would expect that to be.
But even on the storms that have occurred in the first half of the year, we're still getting numbers that are coming in and it's difficult to quantify based on kind of best knowledge in.
And how we think about the markets.
We would expect it to be above the 10 year average, but how far above we're not quite sure right now.
Alright I appreciate it.
Okay.
Thanks Magnus.
Thanks.
Our next question comes from Mike Dahl from RBC. Your line is now open. Please go ahead.
Alright, Thanks for taking my question.
Just on that last point Julien.
It seems like the industry has still been largely hand to mouth I know Frank mentioned a little.
Restocked about manufacturers kind of producing oil.
Williams has kind of match the broadly.
That strength Youre, just heading into hurricane season.
So when we're thinking about clearly this year could end up significantly above.
Normal storm demand.
Turns out there that still exists on roofing now has kind of shifted too.
How do you comp again next year to the extent that there was additional storm demand.
Form of Hurricanes. This year is that something that can get served in 'twenty three.
That helps kind of buffer some of the comps as we look out to 2004.
Maybe if you can just talk about that and maybe we will.
Ben what you're actually able to do on.
Restocking into the back half of the year and that kind of safety stock that you can build.
Sure.
My short answer would be yes, yes, and yes, I think to some of the comments you made I mean, it's.
If we were to see.
Significant storm activity in the second half of the year.
Given the current environment I think it would be difficult to imagine us fulfilling all needs I don't remember if you see I mean hurricanes, particularly take a while to deal with because of <unk>.
Because usually there's a lot of devastation people are out of the market and you've got to get back into it it takes a little while for them to ramp up.
They generally materialize over four quarters as it is.
I think that the you should assume that the shipments in Q2 from the manufacturers a good chunk of that went into inventory.
Not all of that got shipped out of the door and gone on to job sites. There is there is some inventory.
Sitting in distributors' warehouses right now certainly.
Our balance sheet reflects that as well.
So that's going to be a part of it.
The next piece would be.
The manufacturers are still going to produce.
How they run.
It is going to determine a lot of.
The marginal output if you like.
102 million squares here or there but.
It's really difficult to determine but any significant storm.
Yes.
There's probably a difference between when that hits, Texas, and one that hits, Louisiana as well so.
But any stone of any size that has real impact and has.
Significant wind win.
Damage is certainly going to carryover and bolster our 2020 for demand from a storm perspective.
But look I mean, our planning assumption is always going to be 10 year average and we there is usually storm carryover, we had storm carryover into this year from Ian last year. So.
These things tend to even out over time.
But yes any store in the second half of this year will be difficult to service.
Hey, Mike just a couple of thoughts in addition to Julians comments <unk>.
<unk> was up 13% I mean, everyone.
Knows that one.
Our volume out the door on shingles was about 6% up so that difference you could largely see as folks restocking in the quarter. We made a pivot kind of mid quarter to knowing that the demand environment was going to be better and started to restock and we'll continue to do that until we get to the right point in the kind of late summer early fall, we don't want to carry that much through the.
A winter depending on what happens in winter.
The manufacturers, probably built a little bit of inventory in the in the late winter early spring, which is one of their abilities to be able to.
Put out a 48 million squares in the second quarter, if they build more inventory then that will give us the buffer that we need we certainly have the balance sheet to be able to do it if we need to we'll lap hurricane in September although we think theres probably more.
Then a year's worth of demand there, but it will subside as we begin to lap. The early days of that one hurricane season will obviously have a watchful eye on that one as we go forward. So we think we're in a good position and we're ready to pivot and hopefully you've seen us by virtue of the inventory levels over the last year or so that we can pivot pretty pretty quickly and be responsible.
Awesome.
Okay. Thanks for the thoughts.
Okay.
Our next question comes from Truman Patterson of Wolfe Research.
One is now open. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my question.
So you will drove some nice leverage on the Opex line year over year this quarter.
Frank.
Mentioned lower incentive compensation payroll benefit costs and I think also lower fuel.
As we're thinking through the back half of the year do you still generally expect continued leverage year over year or were there any kind of onetime items in the second quarter results to think about.
Yes, I think on the on the Opex levers look we're excited about what we did we did get help obviously and the incentive comp accrual reset last year was.
An awfully awfully big year for us and we reset the targets as we put the budget together. This year. So you should assume that the year over year reduction in incentive comp should should continue although it should get smaller as the rest of the year progresses.
If fuel stays relatively where it is we should continue to get a little bit of benefit.
On that one I think.
The Big thing for me on Opex is when you look at the nominal quarterly number the.
The $3 78, and then you back out the Greenfields and the acquisition related costs, you really see the leverage in the existing branches thats pretty impressive.
We will continue to battle inflation like everybody does but but I think the team did a really nice job of being able to handle the additional volume that came in and look where these are bread and butter and we did a really nice job of doing that the field team.
Team did a nice job of keeping an eye on its cost when the when the volumes came in and we should be able to continue to put something call. It in the mid <unk> or so.
In the third quarter, and then we'll see what the fourth quarter holds.
Perfect. Thanks, guys.
Our next question comes from Philip <unk> from Jefferies. Philip Your line is now open. Please go ahead.
Hey, guys congrats on a really strong quarter.
Frank if I heard you correctly, it sounds like Youre expecting.
Volumes to worsen in your non res segment, and <unk> that might just be simply comps, but curious what you're seeing in terms of.
Bidding activity, how you kind of see fourth quarter shaping up and then do you expect 2024 from a demand standpoint, returning back to growth certainly there were some concerns about tighter lending and what that could mean for non res market.
Yes, so good good set of questions and Youre, absolutely right I'm glad you brought it up so the Q3 volumes are much more around last year's comp. It was an extremely strong comp on the non res side in Q3 of last year, we're not seeing sequential degradation as a matter of fact, it kind of gets less and less negative as you get.
Through the months in the second half of the year.
Bidding and quoting activity is actually up kind of low double digits. So we feel good about the project sizes are a little bit smaller.
But we're seeing a lot of activity on the R&R side of.
Non res, so a little bit less on the new resin a little bit more on the R&R. That's a pivot that we thought was going to happen is material became.
Available and as interest rates ticked up a little bit.
Certainly when you look at non res in 2024, and we really haven't put our minds totally around next year, yet, but the comps in the first half will certainly be ones that.
Hopefully, we'll be able to grow off of.
Is there any mix nuances between the R&R versus the new construction side for non res.
Yes.
New res piece youre going to get a little bit higher ISO to single ply ratio.
Given the fact that you are putting pretty high or factor on there. So you might get a couple of layers of ISO before you put the membrane on in R&R. It really depends on the extent of the re roof. If theyre only going to tariff of membrane then they might not get as much ISO and it obviously if they go all the way down you might be able to get some more so generally the relationship between ISO and single Quad is going to.
Going to be different in R&R versus new reps.
Yes, Phil this is John it's not a.
Switch between different types of products its more of as Frank said the ratio of installation to the skin material.
Okay, Alright, thank you great color I appreciate it.
Okay.
Our next question comes from David Manthey from Baird. Your line is now open. Please go ahead.
Hey, guys good afternoon.
Just a quick one here could you level set us on the current gross margin differential between resi and non res roofing.
Yeah, Hey, Dave.
There is the same general differential that you have seen.
Throughout history, it obviously ebbs and flows depending on the.
The quarter in the mix and whether it's R&R versus new and whether it's.
Direct versus warehouse shipments so.
No real change in the rack and stack on that one.
As I think you know and I will just blend in the complementary real quick.
The coastal acquisition was was helpful. On the complementary side, so I would say the resident complementary or at the top end of the range and then.
You get the commercial on the lower end.
And Dave.
Remember that there was a lot more inflation on the non res side than there was the residential side.
So in terms of mix of business.
Half.
Tilted a little bit more towards the.
The non res side, but.
But also remember.
That the opex associated with delivery in.
In non res is lower relative to the performance. So we see margins bottom line margins are about the same.
On the commercial.
Actual the nonresidential side of the business.
Inventory turns generally ever better as well so we can manage that there's some direct ships. So we get credit for that so we can try to drive really nice return on capital.
In that business as well.
That's great. Thank you very much.
Our next question comes from Trey Grooms from Stephens. Your line is now I think please go ahead.
Good afternoon. This is <unk> on for Julian Thanks for taking my question.
I just wanted to ask what do you see as the biggest variables that get you to the high end versus the low end of EBITDA guidance range for the full year.
Yes.
Yes.
Probably the first thing would be the most immediate thing top of mind would be the price increase.
Execution on that.
And.
That will be that will be critical like I said.
With you to execute on that starting early next week, so that will be that will be a really important.
Factor in terms of.
Both top and bottom line.
Obviously, the the extent of any additional.
Storms.
And look I mean, one of the things that we're looking at as you said, we've we've added a number of Greenfield start of the year, we work very very hard on making sure they ramp up quickly.
Getting them to profitability seeing.
The acquisitions that we've done.
Drive forward in and perform better than our outlook would would also help towards.
The top end.
Execution at the branches.
Making sure we can maintain the leverage that we generated in the second quarter. So it's a little bit of everything.
<unk> mind right now in terms of the top end versus others would be the price increase.
No. The only other thing to keep in mind is just the end of the fourth quarter is always a tough period of time to handicap once you get past Thanksgiving as it is at winter time or not.
But that's always in our thinking as we project the second half of the year.
Got it that all makes sense and I appreciate the color I'll leave it there.
Thanks.
Our next question comes from Kathryn Thompson from Thompson Research Group. Your line is now open. Please go ahead.
Okay. This is actually Brian Biros on for Catherine. Thank you for taking my question.
On the nonferrous side or maybe even the complementary product side.
Little bit bigger picture are you seeing any impact or consideration yet from regulus.
Regulations that are aimed at renovating buildings for improved energy efficiency.
Some of these I think a big one is in New York, So just curious to see.
When you might have in your business. Thank you.
So let me give you a little bit of color Brian on what we are seeing.
In in our complementary business, particularly around the water proofing and this was one of the thesis that we had.
We are seeing significant uptick in terms of repair work in the waterproofing space.
And that we believe is coming from a lot of concerns about the maintenance of waterproofing.
Post the first have condo collapsed couple of years ago.
We believe that it has taken some time, we think that theres going to be some new regulations coming in around that so the one that we've we've had a thesis around in.
But sort of underpinned the acquisition of coastal and our belief in the waterproofing.
Is a great business for us to be in it ties very very closely to repair and replacement on the roofing side. It ties very nicely in with the overall non res roofing market as well.
Our overlapping businesses.
But the specialty part of our business on that side of it is certainly seeing.
Impact from.
From what we believe is probably a tighter regulation and people sort of going back condo associations building Mona is going back and taking a look at.
Maintenance schedules with regards to waterproofing.
And an uptick in terms of what we see that and beyond that I think that there's a.
A very long run trend towards more installation.
Obviously in terms of building energy efficiency codes.
Johnny Code 70 point in one direction and that's been to higher value.
So the installation that we ship into into commercial buildings has been.
<unk> only been increasing.
Certainly municipalities.
They don't all implement the same building code at the same time.
But that's been something that's been a long run trend towards more and more installations. So I think you see it in the commercial segment of our business.
And then the other one we see is things like title 24 in California, where mandate.
Mandate cool roofs.
The demand for that product. So there are certainly building.
Building codes that impacted I would say that we're seeing it probably most in waterproofing and in commercial installation.
Thank you.
And that concludes the questions now I would like to turn the call back over to Mr. Francis for his closing remarks.
Thank you Sam.
Thank you to everyone for.
Dialing into our call this evening.
We were tremendously excited about both the second quarter and the transaction at the beginning of the third quarter that allowed us to repurchase all of the outstanding preferred shares we think there's a significant moment for beacon and the work that we've done over the last several years to build the flexibility in the balance sheet capacity.
The city to execute a transaction like that.
It's been a tremendously rewarding last month or so and I'm excited for both our shareholders and employees of the company and with that thank you.
<unk> of Beacon.
Yeah.
This concludes today's call. Thank you everyone for joining you may now disconnect.
Yeah.
Yeah.
You may now disconnect.