Q3 2019 Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to be calling roofing supplies third quarter 2018 earnings Conference call. My name is dawn and I will be your coordinator for today.
At this time, all participants are entities and only mode. We will be conducting a question and answer session toward again, if these conference.
At this time I will give instructions on how to ask a question.
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As a reminder, this conference call is being recorded for replay purposes.
This call will contain forward looking statements, including statements about the expense and objectives and future economic performance.
Forward looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore actual results may differ materially from those indicated by such forward looking statements as a result of ice important factors, including but not limited to those set forth in the risk factors section of the company's greatest form 10 Dosh game.
These forward looking statements fall within the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the common if its financial outlook.
The forward looking statements contained in this call are based information that's all for today August six 2018, and except as required by law. The company undertakes no obligation to update or revise any of these forward looking statements.
Finally, this call will contain references to certain non G.P. measures.
The reconciliation of these Saatchi 18 measures is set forth in today's press release.
The company has posted a summary financial slide presentation.
On the investors section of its website onto <unk> events and presentations that will be referenced during management's review of the financial results.
On the call today for be Conducing supply will be Mr., Paul Isabella.
President and CEO .
Mr., Joe No Vicki Executive Vice President and Chief Financial Officer, and Mr., Eric Frank.
Chief operating officer, I would now like to turn the call over to Mr., Paul Isabella President and CEO . Please proceed mr. Isabella.
Thank you good afternoon, and welcome to our third quarter 2019 earnings call.
Results this quarter fell short of expectations, but that was largely the result of weather, which will get into in a moment.
I'd like to still by pointing to several positives that support optimism for the fourth quarter and next year.
First residential roofing sales were up 3% in the quarter.
Free cash flow was positive at $29 million during the quarter something we've not accomplished in any third quarter dating back six years.
On a sequential basis, we reduce debt.
Another excellent accomplishment that runs contrary to typical seasonality for our business.
Enjoy much sales growth has improved with an existing mortgage sales increase of 3% to 4%.
Similar to what we experienced in early January and during the second half of March.
When the weather clears levels of underlying demand improve.
Residential sales were up 12% organically in July .
Very encouraging and speaks to the weather induced delays seen in Q3.
12% was a highest monthly grades for resi in 18 months.
In the Allied integration continues as planned.
And the synergy target of 120 million is on track versus the original target of $110 million.
And now a few comments on cost reduction.
In addition to our focus on growth and debt reduction in late Q3, and early Q4, we took aggressive actions to reduce our cost base by $25 million.
These were personnel actions permanent in nature with a majority of non customer facing positions.
The actions will improve leverage and profitability, especially as volume increases as we expect in Q4 and beyond.
The benefits will be realized starting in Q4 and demonstrate our commitment to continuous improvement.
Actions like these are never easy.
But they were needed to position our future for streamlined operations and enhance profitability.
Now a little bit of weather commentary.
Related to weather variability, we have done work over the last few months and we now have a meaningful way to quantify the impact of harsh weather as mentioned in our press release, Joe will give more detail on this in his prepared remarks, the summary, being severe rain resulted in approximately 25% to 30% more rain days.
Compared to the prior year.
This impacted the quarter by approximately 20 cents of vps and $85 million in sales.
I will say that while we can't control extreme weather events. We also know they will normalize over time.
Keep in mind, we have tremendous branch density across the country in a very diverse product offering.
We touch every major market in the U.S. and Canada.
And as a reminder, 70% of our product we sell.
His roofing, which requires work and.
Have loose to be done.
Working out it was very harsh weather can be dangerous and this naturally impacts demand.
Extreme weather events like Weve seen in Q2 and Q3 are aware.
And with our dense footprint. These events can impact our business as was the case the past two quarters. Conversely, with damage occurs due to severe weather in a market or multiple markets are dense footprint works in our favor.
To drive superior sales profit and cash flow as we service this hyper demand.
That coupled with roofing being non discretionary makes for a great business model.
I've said, it before and it's worth repeating our future is very bright.
And I will give an update on a few of our key strategic initiatives I'll start with digital which has made good progress in the quarter and is a clear differentiator for our customers.
I feel very comfortable stating that beacon as the industry's leading ecommerce mobile app beacon for plus.
Yeah, the industry's best Visualizer in estimating tool with Beacon three D plus.
From a sales perspective, we estimate digital sales will end the fiscal year at approximately $350 million.
Which is triple R 2018 sales and well on our way to our $1 billion goal.
Quite possibly the strongest syndication of success is that we're seeing those customers, who engage with us digitally outgrowing our in store only customers.
Meanwhile, those same customers are benefiting from our digital platform by saving time and the ordering process.
Becoming more efficient through a more precise delivery schedule system and using our estimating and visualize your tools to raise their win percentages on bids.
In turn beacons benefit as a higher share of our customers sort of spend as well as having core customers.
That we've helped out for the overall industry big benefits for our customers and for Beacon.
The next initiative is our partnership with job Nimbus, which allows or Patrick the base using their project management software to seamlessly build orders and directly linked to our deferred plus digital ordering platform.
Since the announcement the announcement of the partnership three months ago.
We have continued to be very encouraged by the early utilization rates as a result, I'm confident beacon will enjoy strong returns in future quarters from this strategic software integration.
The next initiative was the addition of delivery tracking which includes on demand notifications from the order was received scheduled and ultimately when it was delivered to the job site.
I previously mentioned our delivery tracking solution timeline started with a pilot in January .
And by early May we had gone live in 15 markets. We're now operating delivery tracking in more than 100 markets and now that number grows every week.
And now an update on a regional service area market approach, which is also making great progress.
Well placed pace to roll this out to more than 50 markets consisting of approximately 250 branches.
We're focusing on centralized dispatch to driving improved and more efficient customer experience.
Specific benefits include reduced delivery costs inventory capex leverage and more efficient use of our personnel.
Most importantly, beacon customers will benefit from better inventory access greater delivery options and an enhanced response time to their needs.
We will keep you updated as we continue with our plan to roll out additional markets.
Very good progress on some key strategic initiatives.
To wrap up my comments I will say, we have a well thought out strategy in a skilled leadership team that's executing very well.
Our products touch every segment of our economy.
When healthcare facilities of all types are built expanded or remodeled we supply the drywall ceiling tiles roofing and more when government grows we grow with the private sector grows we grow we don't rely on specific segments of the economy to grow in order for us to grow.
That's one of the reasons were a fantastic investment our industry will continue to grow as we will.
And we'll stay focused on investing in customer value added offerings like our digital suite.
And overall contract or tools that help them grow and increase their profits.
Now Joe will provide some additional color on our quarterly trends and outlook.
Joe.
Thanks, Paul and good afternoon, everyone.
I'll now briefly walk you through some more detail on the positive accomplishments for the quarter that Paul described.
I'll also talk you through the impact the heavy rainfall had another quarter.
And then provide an update to our fiscal 2019 expectations.
First on the positive accomplishments for the quarter.
Residential revenues on a same day basis were up in five of our seven reported geographic regions and in total were up 3.1%.
Most notably our southwest and Midwest regions were both up high single digits, representing returned to growth after the post hailstorm impacts we've previously discussed.
Residential sales also grew in all three months of the quarter.
With June ending strong with almost 6% growth.
And as Paul mentioned July residential sales were up 12%.
Second positive accomplish the highlight was our ability during a difficult weather impacted quarter to drive price increases into the market.
Pricing continues to be competitive, but thanks to the value our customers place on our high levels of service, we are able to pass along selling price increases of approximately 3% for the quarter.
The third area I want to highlight the balance sheet.
This continues to be an area of focus and you can see that in our solid third quarter performance in both debt Paydown and free cash flow generation.
Q3 is traditionally a negative free cash flow quarter, where we use cash to build inventory and accounts receivable spider busy season.
This year the teams did a great job collecting faster on a R and improving our DSO.
Well at the same time, managing our inventory balance down year over year.
This contributed to positive free cash flow of 29 million.
And a net debt pay down of 24 million.
Strong performance for a seasonal third quarter.
As a result, our free cash flow conversion of net income continues to remain over 160%.
No I wanted to provide some more specific color on the weather challenges we face.
Someone or what you've heard from other building products companies, our third quarter sales were materially impacted by the unfavorable weather.
And with almost 70% of our sales from roofing, we haven't even greater impact from rain as contractors are hesitant to begin a roofing project, even with the threat of rain.
This quarter represented the second rainiest June quarter during the past hundred years as reported by the National weather service and was well above normal levels in nearly every region of the country.
This compares to Q3 of 2018, which was more of a normal range here.
Early on the year, we began engagement with a third party weather analytics firms to obtain various weather data by ZIP code for each of our specific branches.
From that data, we were able to analyze the rainfall by ZIP code this year compared to last for each of our branch locations.
We use this to estimate the amount of incremental missed sales days across our footprint.
In total we estimated that the significant rain conditions caused an incremental three days of missed sales on average nationally.
Our most significant rainfall impacts were felt from the northeast to the central part of the country.
In into the southwest and mountain regions.
All of this tied very closely to our internal results from this branch specific sales data, we were able to calculate an approximate $85 million a negative impact on our revenue.
Then using estimated gross margin and operating expense data, we're able to calculate an approximate negative 20 cents impact on our EPS.
I also want to comment briefly on the level of storm activity. This season.
Following the 2000 eighteens below normal hail season, we elected to guide more conservatively around our 2019 expectations involving hail related storm demand.
Thus far external data shows that the demand from hail regular events are down even further year over year.
And we expect that to continue for the full year due to the softer damaged during the peak season.
As of June and July months.
Now, let me go over our updated guidance expectations.
Following the second quarter is harsh winter weather in the third quarter's rain driven shortfall, we're reducing our 2019 outlook to a new adjusted EPS range of between $2.30 in $2.50.
This implies a Q4 guidance of same day organic revenues up 5%.
Adjusted EPS up 12% and increased EBIT da margins, all on a year over year basis.
Well improved performance year over year, we realized it would be difficult to make up for the Q2 Q3 shortfalls in the remaining three months of the year and we have adjusted our forecast accordingly.
We're off to a good strong start with the July sales as the weather's improved.
We've also incorporated our recent cost reduction actions into this forecast.
As Paul has mentioned our business and industry fundamentals are very solid.
Well, there will always be quarterly volatility or business due to the weather over the long term will benefit from the stability of our business model that is focused on a 70% repair and remodel customer base.
I am confident that our organic growth sales initiatives, coupled with our focus on lowering our fixed costs and reducing our debt will drive improved levels of financial performance going forward.
I will now turn the call over to the operator to take your questions.
Ladies and gentlemen, if you wish to ask a question. Please press star followed by one or your Touchtone telephone.
Hi, My question has been answered or you wish to which I had a question press the pound key.
Your first question comes from Jerry.
This morning from Longbow Research.
Please ask your one question and one follow up your line is open.
Thank you for your commercial form but wanted to ask on gross margins of first off can you provide some color on what drove the variance.
On that line in where you stood on price cost.
With.
In particular on residential.
Certainly geared to give you a little bit more detail on the gross margin. So.
The decline was really split between a slightly negative mix, coupled with a slightly negative price cost.
Price was roughly around 3% as I mentioned and costs were up roughly around 3.5%.
As we've talked about before.
A lot of that was driven by the difficulty of getting price in some specific volume impacted markets. As we've always said softer demand really relates to more difficult pricing.
Okay and my follow portion is what's the cost savings actions that you're announcing.
Is it fair to assume that is coming out of the SG and they line and if so could you speak to think there's some comments about improved operating leverage moving forward.
These cost savings actions changed the way, we think of operating leverage on stronger sales relative to your prior targets.
So in your first question around the the cost elements, yes, the the cost actions were SGN a cost related.
The second part, yes, they were geared towards lowering our fixed cost structure, which would help and improve our operating leverage going forward correct. I guess, that's why we said they were permanent nature right. So they're not variable at all.
We thought that was important.
Okay. Thank you.
Thank you.
Your next question comes from Truman Patterson from Wells Fargo. Please ask your one question and one follow up your line is open.
Hi.
Good news good evening, guys, just first wanted to dig into your complimentary building.
Segment, it looks like core run so.
Mid single digits, while the wallboard industry demand seems to be recovering a little bit can you just walk us through what's going on there and how should we think about margins are the following a similar path of Ams revenues are.
Those margins down more severely than the other two segments.
Yes.
Sure Matt you know as we look our complimentary businesses, it's very big within it is the interior business, which we don't break out and talk about.
But in general I mean, the complimentary business saw the same pressure.
Related to weather and or even prior year comps.
A little bit a little bit of impact based on what we've seen.
With some of the macro trends like new construction being slightly down et cetera.
From a margin perspective again, we don't we don't get into that level of detail. We can say, it's performing very well I mean, that's that's that's the comment I'll make.
Okay. Okay. Thank you for that and then <unk>.
Just a.
Kind of a big picture question.
In the quarter your revenues were flat year over year.
EBITDA dollars fell about 16%.
Could you just walk us through the moving parts there and.
Some of the bigger buckets as to what kind of went against you in a flat revenue environment.
Sure. This is Joe the two big items that drove the decline in the EBITDA as you mentioned was.
First one we talked about the weather related impact so the weather related impacts were one of the first big drivers to it as you know our demand much higher in the summer our anticipation was towards that higher demand in our revenues were off because of the weather mix. The second was really the decline in gross margin as I walked through before with Garrick in regards to the mix and the negative price cost. It was really those two pieces combined Truman that drove the miss to our.
Earnings on a year over year basis.
Okay. Thank you guys.
Thanks drew.
Your next question comes from Michael.
Eisen from RBC capital markets.
Please ask your one question and one follow up your line is open.
Good afternoon. Thanks for taking the questions just wanted to start Joe you mentioned that pricing for the company was up 3% in the quarter can you give any more information about how pricing trends were across the different segments.
No. We as you know we traditionally do not provide any segment or specific data in regards to product lines or product categories for just in total.
I think I'll add on and say actually you know considering we understand where the results in general ended up.
But considering wood and Joe talked through the amount of rain, we saw which was quite severe.
What we saw on the pricing side was actually.
Not bad considering the amount of pressure we saw.
As we as we went through the quarter so.
Did we want more of course, but given that demand piece I think we ended up quite well in the 3% range.
Got it that's helpful. And then following up just looking at the updated guidance and fourth quarter in general it looks like you're expecting a bounce back in margin expansion and where you said. So can you talk to if there was any lingering headwinds as you went into July and what we're looking for the last quarter and then more broadly when I'm thinking of the longer term goals you guys have set out at a 9% to 11% EBITDA margins, how does a situation like this or how does a shortfall of this year impact your ability to continue progressing to that number.
Lots of questions in there let me take the first part for it.
In regard specifically to July we don't really go into the details of any months.
In terms of where we're currently at I think we gave you the revenue pieces route which is a great strong start as Paul had mentioned that 3% to 4% revenue growth and 12% of resi was superstar to it.
Overall for our forecast if we look at that Q4 forecast and yes. As you noted it is down slightly it's really a little lower volume, mostly driven by some of that weaker hail demand that I talked about.
On the gross margin rate. Your specific question, yes, we are having on the gross margin rate would be up roughly around 30 basis points sequentially. So the gross margin rates improving in the fourth quarter down little bit from the prior year, we're trying to remain conservative similar to some of the experience. We saw in the third quarter. We do believe that some of the mix should improve but we'll probably still face some of the same competitive market pressures overall, though as you had mentioned from a gross margin perspective still fairly small and in terms of your question about the bounce back I think it's it's important to realize that.
And I said it in my prepared remarks, Q2, or three have been extra ordinary very rare.
We know the impact I talked about the 70% of the work being done on groups, which can be dangerous in this type of weather what we've seen in the past whether it was in the eight nine period and the 11 ish period or even from 16 17, and then 18. After we have the build up of either severe weather damaging whether there's usually rebound, but that's what we expect to happen that's why over time.
We will perform we have performed very well, we will perform again very well.
I mean, it's just it's difficult to ship product to contractors, who were not were delaying projects that are not going to get on roofs because of the weather, but over time, we have proven.
That as the as we see that drop in EBITDA or EPS, we also see a pickup and the subsequent periods after.
[noise].
Got it thank you.
Thank you you bet Mike.
Your next question comes from Kathryn Thompson from Thompson Research Group. Please ask your one question and one follow up your line is open.
Hi, Thank you for taking my questions today, a follow up question on the cost cutting initiatives of could you outline how much of the effort interior versus exterior distribution focused really it's more in the nature of the cuts ministry to the field just want to get a better better feel that overall strategy and cuts, particularly as we look for thank you.
Okay, so you're not going to break out the splits between exterior and interior. The majority of those fixed cost cuts were in functional areas that were non well just saying noncustomer facing.
Type jobs.
So all of them were as I said personnel or head count related and all are permanent.
That's really the summary of that cost cutting action.
Okay.
Great and then just focusing on the end markets for resi versus non res had a good start to July progressing as you have your prepared commentary.
But if you step back and look at.
Overall trends you give more color on non res trends.
Ah versus resin as you look for not over just for the balance of calendar 2019, but perhaps in the next 18 months in particular I'm going to look a little bit more differentiation between interior products and exterior products too when you look at that end market forecast. Thank you.
Yes, it will be difficult for us to talk out 18 months and Carlyle obviously talked on there.
Call about.
The market, which we believe is still relatively.
Healthy I mean, it's no doubt from our perspective, there's still a lot of competitive pressure, we saw a bit of that in Q3.
I would have any breakout what we've put in our estimate for Q4 that 5% total 5% or so organic growth.
We do believe.
All three of our segments and within complimentary of course is interior still very healthy theres always going to be period changes based on a lot of different factors big jobs in big jobs out competitive pressures, but overall, we feel very good about all three lines of business of course in Q3, and I alluded to it I mean, the majority of the pent up we saw in the impact is on the red side of that 85 million of course, not the entire amount. So we should see you know and there's it's difficult and I won't even try to predict when that pent up we'll come out with schedules were push no doubt from Q2 to Q3 Q3 to Q4, so that should bode well for us through the balance of the calendar year on the residential side. That's so that's our view right now.
Great. Thank you.
Thank you.
Your next question comes from Michael Rehaut from JP Morgan. Please answer one question and one follow up your line is open.
Hi, This is a lot on for Mike.
I wanted to understand better your inventory levels, you mentioned that.
Oh, I think you did some.
The stocking in the quarter that give you some positive working capital.
And especially given maybe the outlook for stronger pad the volumes in future quarters.
How are you thinking about your inventory levels and then lastly does that I apologies I apologize I missed it but did you provide an update on your free cash flow guidance for the full year.
Yes inventory, we feel very good about our inventory level levels.
Sequentially.
They were up slightly year over year, they were down slightly we feel like we're in a very good position for the balance of the year, having the right amount of material to service the demand we see coming for.
Fourth quarter, and then of course the.
Our view right now of Q1, which we're not going to talk about but we're in very good shape on the inventory side.
And Joe can talk through the cash piece the other part and inventories as you probably know is our turns are up as well too again as we've talked about and Paul mentioned. They are say approach that model is just beginning to take off but it will continue to have favorable.
Impacts on our inventory levels and turns as well too.
In regards to free cash flow.
And the previous guidance that weve given around the free cash flow outlook was roughly around $200 million that EBITDA portion of it is down now obvious with this forecast.
With that lower EBITDA, the free cash flow number now probably closer to a range of around $150 million in free cash flow for the full year.
As I mentioned, we did a great job in the third quarter. It was a unusual third quarter for us from free cash flow, we generated positive free cash flow for the quarter, which has in common is traditionally you're building kind of working capital requirements. During this time of the year soft we're off to a great start in the second half of the year that was a good solid third quarter on free cash flow.
Great and if I just ask one more.
Given all the other moving pieces impacting margins are there any other metrics that are something you guys are falling internally.
That you could provide or or give us a sense of the benefits of the same model as you continue to roll it out any delivery time, we haven't seen it yeah, we haven't shared any specific metrics.
In time.
We will but we do know that there's.
Fleet and fuel savings, that's occurring as well as better utilization of our people.
In those markets and then of course, and we will see it more as we go through time.
Better inventory utilization and usage as well as less capex because truck routing is being optimized much more effectively.
That's really the summary at this point. So we we know there are going to be benefits there are going to be big benefits and we'll talk about that in the future.
Great. Thank you.
Your next question comes from Keith Hughes from Suntrust.
Please ask your one question and one follow up your line is helping.
Thank you just back to the gross margin.
You were talking about negative mix impacting the margin in the quarter now historically.
Your residential lot more than the other.
It is mix in regards to channel we've talked about our two step one step channel differences in the past.
Also geographic is the only element when we look at mix. When you look at where these sales kind of are come from which specific area.
And even then with enough product category, there's a mix between different types of products and manufacturer as well to all of that impact the mix elements to it as we do the calculation and that's what really flows into it.
And you had mentioned price costs as a negative as well.
With that in residential.
I assume your assumption is it's going to get better in the fourth quarter correct.
Correct. If you look at the price cost in total price was up 3% the costs were up roughly around three and a half thats really more in global we don't get into the specifics by product category under that at all Keith and yet as I mentioned sequentially, we are expecting our our gross margin rate to improve.
Okay. Thank you.
Thanks Keith.
Your next question comes from Ryan Merkel. Please ask your one from William Blair. Please ask your one question and one follow up your line is open.
Hey, guys. So first off how much.
How much cost savings are going to hit in the fourth quarter and then when do you get to the full 25 million run rate.
So the cost actions that we took occurred right at the end of June in the first half of July where they took place so what you'll probably see on that.
$25 million as you'll get a couple of months of advantage in the fourth quarter here and then you'll hit stride with the full run rate when you start to get into the first quarter of next fiscal year.
Okay. That's helpful. And then just a follow up to a previous question I think mix within ready with a negative last quarter as well I don't really remember this happening over my history covering the company is this a new phenomenon or has this always been the case and if it's new what's really changing.
No I don't it's not it's not a new phenomenon I think phenomenon I think what we're what we're seeing is you know we have.
Much more variety in much larger regions than we had previously some of them with very high resi content at very high margins as they get impacted because of what happened not only in Q2 Q3 with weather again I'll go back to saying very rare weather events that puts our heard on the overall margin rate and then in areas like the southeast.
Where we're seeing the backside of that hurricane there's there's products being flipped the switch to other products with stone have the same gross margin rate that phenomenon has pretty much been with us for since I walked in the door. We're post storm you typically are digging for sales you're going to sell the product lines that could have different.
Well, they're going to have lower gross margins in breast and set the that's the highest LTV and that's really what it is right. So it isn't.
Anything that's that unusual other than hey, we've gotten more density and we've got some very big regions with the addition of allied and some of our existing regions that that play heavy on the resi side margin margin rates plus channels and also product as well too right. So broader breadth of product broader channels that we're serving as we've gotten bigger as well too.
Okay, great. Thanks.
Thanks, Ryan Thanks.
Your next question comes from chain Marange from Evercore ISI.
Your line is open please ask only one question and one follow up.
Hi, Thanks, guys.
You mentioned that the majority of the 85 million that was pushed out.
Wasn't ready to see but you could you kind of bucket that within the three products like was it like 50, 75% rising then where is everything else fall. Additionally was there any incremental damage that could be potentially add to future revenues from the high amount of rain that took place.
Yes, I mean from the damage standpoint, always tough to determine but the but with the amount of water. We saw in some of these regions typically that lends itself to causing some damage or opening up some groups that eventually will have to be repaired on your first part of the question I mean, we're not going to get into detail on the specifics of.
LLP within the 85 million just to say think about it logically residential Rufus sloped and although it's dangerous to get on any roof. When theres inclement weather weather, some Q2 or Q3, it's even more dangerous on a sloped roof right just because of the potential of one slipping off the others. The contractor not wanting to open up the roof because it could damage inside of the house. So that just lends itself to the comment of Hey, the majority that 85 was residential.
Okay, and then I'm going to try to ask the pricing question, a different way and hopefully get it get a different answer veterans for everyone.
But could you rank order by year, three product categories, which one had the best pricing, which one had the worst pricing year over year. So we can lease kind of see where things stacked up.
Within the company.
Yes, I think Directionally, we can say just because of the nature of what we saw on the demand side. There was a little more pressure on the residential side.
That's really as much as I'll say without getting into the detail of these product lines.
Okay. Thank you very much.
Thanks.
Your next question comes from Megan Mcgrath from Buckingham Research. Your line is open. Please answer one question and one follow up.
Great. Thanks.
I wanted to follow up a little bit on your expectations for the fourth quarter.
If I remember correctly earlier in the year, you had periods of bad weather and you pointed out that when sort of weather cleared a demand open up you actually saw a bit more pricing pressure because everyone was kind of going after the same business if I remember what happened earlier in the year correctly.
So I was just kind of curious what's different about the fourth quarter. This year or is there risk that that happens again or are you seeing different behavior from some of your competitors now that the weather has eased a little bit.
Hey, maybe just to get at your question on the lower further gross margin kind of implications here I'm not sure. Your first statement was correct that during stronger demand periods, we'd see a more difficult pricing environment, usually it's the opposite during higher demand periods, you usually have the capability to drive more improved pricing during that kind of point in time. So that's traditionally what would occur.
That's what we've traditionally seen what we have seen in what we would expect to see going forward as well too even in our Q4 and in future periods as well too.
We can see it even today when we have markets that have strong demand, even though I talked about the price of 3%. It obviously varies by geographic region in market.
We look at those markets those that have soft demand or have been the most challenged or where you see the most difficult pricing and the opposite.
And that's traditionally our pace.
Okay, Great and then just as a quick follow up you mentioned your July trends. Thank you for that.
I'm wondering if there was anything we need to think about in terms of that that's sort of either difficulty of compares.
By month, as we make our way through the rest of the year with July an easy comparison, we should expect that to kind of use that bar or are we looking at kind of similar trends as we make our way through the quarter.
You know we had a good solid kind of.
Trend that we started out in July with our growth rate.
I'm trying to find the growth rates from prior year for that corridor.
Now the comps the comps get easier August we were.
Last year I think we are like three down and then September eight down to us in the quarter. So and we have talked about that on the last call rights. So that'll help us and we've kind of built that in.
So the to the new estimate of the 5% or so organic growth.
Okay, great. Thanks very much.
Thank you.
Thanks.
Your next question comes from Phil Ng from Jefferies.
Please ask your one question and one follow up your line is open.
Hey, guys. This is actually Maggie on for Phil.
You just mentioned from competitive pricing with the weather headwinds. So you know in light of those if there are any expected carryover impact into Fourq Hill, and what's your sense of how youre, 3% pricing in the quarter stacks up with the industry.
Yeah, I'll, just say from that it's very hard to know obviously with industry pricing is right. We have no data points to talk about it we have talked about we knew.
Pricing would wane as we went through the year, because we were lapping all the heavy pricing. We got last year I think we even commented that Q4 would be in that flattish zero area.
So it's it's impossible for us to give you any industry pricing David.
If I could go further on the forecast to your question in the fourth quarter as we mentioned our sequentially, you'll get a little bit better. So sequentially, we think it'll be up still be down on a year over year basis, because we do think maybe we're taking a conservative approach, but we're really expecting some of those competitive market pressures that we saw in three in Q3 to continue a bit into Q4 as well too now making up some progress so sequentially. It will get better but were trying and are in the forecast that we gave to keep it conservative with those with those gross margin rates as well.
Okay got it and then Paul you mentioned some of the pent up demand dynamics from.
The weather headwinds can you talk about what's going on in the labor market and maybe how you think about thought of a potential constraint on growth from quarter to quarter.
Yes, Mike My comments on pent up for them.
I think just facing the realism as its one very difficult.
To figure out exactly when that will come out right that that's a massive calculation I don't even know how you do it because think about it you have thousands and thousands of contractors. They have so many different schedules. So many different demands that could be doing multi products right. So I think the point. There is there's X number of days that are left in Q4 as we talk about fiscal the good news is we get to keep going into Q1 right and these folks work continue has slid from Q2 to Q3 now slide and some.
Cases into Q4, so there will be some natural constraints are working already working full out right.
And doing the best we can they can we're going to do the same thing where we have very strong demand in whether it's by moving people moving trucks working more overtime to satisfy that demand, but they're ultimately there comes a time, where contractors can only work seven days a week theoretically not 24 hours a day, but and they are doing that now I think as they're trying to catch up so I wouldn't say there's.
Speaking to a labor shortage I'm not going to comment and say that's the case I think it's just a natural yes X. Many days in the three month period for the contractors to work in so many for us to ship product to those contractors and that's you know we're up against that every in any quarter and now the good news is as this rain abates, which we hope it does right. We didn't see much in July and August September October November it sets us up well.
To do much better in the future and that's why you know even if we got a negative comp from last year and Q4, we're still talking about positive organic growth and obviously internally, we're working to overachieve that number.
Okay, great. Thanks, guys.
You bet. Thank you.
Your next question comes from David Manthey from Baird.
Please ask your one question and one follow up your line is open.
Yes. Thanks.
Your first thought that it would appear that your guidance.
Implies that you expect to come in below where the street estimates were for the fourth quarter. Despite the strong July .
And I'm just wondering what factors you mentioned weather, but.
Beyond that what factors are extending into fourth quarter that would lead to that kind of a shortfall.
Hey, Dave Joe Yep, two items really that drove our forecast one of them the lower gross margin as I mentioned on the volume piece of it.
As you were describing and slightly lower volume than our in the street estimate as mostly by the weaker kind of hail demand that we experienced that I mentioned tail is no. We initially planned for hailed to be same as last year, which was a soft here and what we've experienced and seen when you look at all the storm reports out there, it's actually lower than last year on the hail part that hail demand really is the work that would be getting done right now during this fourth quarter. So thats slightly weaker hail demand is what caused us to take our volumes down a little bit in our forecast.
Okay. Thank you and then as a follow up.
Paul You mentioned that I think it was you Paul you said that pricing was highest on residential pricing.
But is it correct to think that even though there is more pressure on that the price attainment youre seeing in percentage terms on Ramsey is higher.
Then either non res are complimentary that right.
He said they say that again.
So you said that when a question was asked about to rank the three categories in terms of fixing. It you said that the pricing pressure was highest on residential and I'm, assuming what you meant is that the.
The variance versus what you thought you were going to get might be higher there, but certainly you're getting more price in residential then you aren't either complimentary are we're on.
Nonres correct.
Yes that is correct and again I think.
Yes.
And that speaks to a couple of things one that actually even with the the demand pressures right and the competitive pressures related to the craziness of the rain, we did fairly well.
Getting getting.
Pricing in Red is higher than the other the other lines yes.
Okay.
Yes go ahead.
When you said zero price in the fourth quarter is your expectation is that for residential or is that overall.
I don't think we said zero price I think we're anticipating some price in the fourth quarter, but not much some of that will be carryover price still as you know fourth quarter, we'll lap a little bit of the prior year price increases and then there will be a little bit of price increase from the 2019 price increases as well too yes, Dave I thought I think I was referring to earlier comments on the last earnings call that we said as we went through time pricing was going to decrease to to near zero Q4, obviously now with this new forecast.
We're seeing some sequential gain we do think there'll be some minimal price in the quarter, but obviously, we won't know until we finished the quarter.
Okay. Thank you.
Thanks, Dave.
Your next question comes from Ken Zener from Keybanc. Please ask your one question and one follow up your line is open.
Just one question gentlemen.
First of all I do advertisement that weather volatility that you have to deal with.
Given that margins came down you kind of talk to the price cost neutrality that you guys had.
Overcome last year could you call. It just kind of refresh us because you know your ability to get price last year was a big theme that you pursued and actually.
Realized could you talk about the lessons you learned last year. When you have after price and how you guided to semi can have a sense of how that Joe your 3.5% cost.
First 3% price dynamic, we get confidence that that will come back to neutrality first that go the other way just refresh last year's actions. Thank you.
Yes, and the.
The process. We use has not changed we were very aggressive last year from an internal standpoint in external standpoint, making sure that the price increases were passed along I think we did a very good job.
The difference and so that process. This year has not changed what changed was.
I'll say for the third or fourth time, the rare weather events that happened in Q2, and Q3 right that no one could have predicted so when you look at those and frame it.
Based on in that context, both Q2 and Q3 the performance of pricing was pretty darn good at six and roughly 3%. So the delta between the three the three and a half or so of inbound cost I mean, it will end up being timing. The question is just when right. Because we were working all the time, where the end market to push pricing, where we can push pricing and at the same time, we're working with our vendor base right within bomb pricing. So I think we've had a pretty good history.
Through time of making up any of those delta so that should really a function of the timing within a 90 day period.
The other part that I would add to it as well to cans I think it speaks very highly of the strategic initiatives that we've put in place on the revenue side to really drive value to the customer right. You look at our digital platform as Paul described you look at everything that Weve doing fun doing in regards to our private label programs and others. We've just got a great strategy around driving revenue growth through providing additional service to the customers and I think that will help us big time going forward.
Thank you.
Thanks, Ken.
Your next question comes from Kevin Hocevar from Northcoast Research.
Please ask your one question and one follow up your line is open.
Hey, everybody.
Question.
Well just for clarification I think you said July was up 12% for residential right what was the.
The growth for the company as a whole in terms of existing brand sales growth and then how did that trend throughout your the June quarter. I think April on your last call. You said it was up a little bit of that look in the balance of the quarter.
Yes total for July companywide was up three to four.
Sure you have the splits for the.
What was your second question to add a split in five months in Q3, yeah.
Oh, the splits by month for the Q3 that we just finished so April was up around a point and a half.
May was down around two and a half and June was down about a point and a half.
Okay very helpful and then.
I believe on the residential side.
There is some price increases in July .
And I think distributors are trying to obviously pass those along to some curious.
What you're seeing there are manufacturers, having any success in it.
You guys and your parents try and push pricing to offset the price cost pressures you felt.
Do you think you'll be able to.
In July as having any success push that along and maybe make up some ground to.
Pick up what you didn't get in from the April increase or kind of curious if you could comment on that dynamic.
Yes, we don't internally, we don't believe the second price increase will hold at all or any other price increase they might be talking about I, just don't think theres enough.
Drivers in the market asphalt is flattening out it actually I think is favorable in June or July to last year.
So no we don't think that the second or third we'll we'll hit I think there is an opportunity for us to pick up a bit of the first here there, especially in those soft markets that Joe referenced and that's what we'll work on.
Through Q4, and you see a little bit a little bit of that in the small price we're assuming.
Sequentially in Q4.
Gotcha, Okay. Thank you very very helpful.
Thanks.
That concludes the questions now I would like to turn the call back over to Mr., you said Bella for his closing comments.
Great. Thank you.
Thanks to everyone for joining our call as you know all be officially leaving Beacon later this year and this will be my final conference call.
Needless to say I'm extremely proud of what our team has accomplished during my time with the company.
Beacon is in great hands with an incredibly strong board a very talented executive leadership team and a very talented incoming CEO and Julie inferences.
I am confident the next several years are going to be very successful ones for beacon our strategy is very sound.
And we're in a highly attractive industry with steady repair and remodel content historically in the 70% to 75% range.
We are the innovation leader in our industry and our digital suite offers many customer value adds that will drive future growth that outperforms the market.
We appreciate the continued support from our investment community as well as our valued customers suppliers and employees. Thank you and have a great evening.
Ladies and gentlemen. This concludes today's conference. Thank you for participation and have a wonderful evening you may all disconnect.