Beacon Roofing Supply, Inc.

to the Beacon Fourth Quarter and Fiscal Year 2020 Earnings Call. My name is Gabriel, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of the conference, and at that time, I will give you instructions on how to ask a question. If at any time during the call you require assistance, please press star followed by zero, and a coordinator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes. This call will contain forward-looking statements, including statements about its plans 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 various important factors, including but not limited to those set forth in the risk factors section of the company's latest Form 10-K and Form 10-Q for the quarter-ended June 30, 2020. 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 company's financial outlook. forward-looking statements contained in this call are based on information as of today november 19 2020 and except as required by law the company undertakes no obligation to update or revise the any of these forward-looking statements finally this call will contain references to certain non-gap measures the quick conciliation of these non-gap measures is set forth in today's press release the company has posted a summary financial slide presentation on the investor section of its website under events and presentations that will be referenced during management's review of the financial results. On today's call for Beacon will be Mr. Julian Francis, President and CEO, and Mr. Frank Lonegro, Executive Vice President and CFO. I would now like to turn the call over to Mr. Julian Francis, President and CEO. Please proceed.

Thank you, Gabriel. Good evening and welcome to our fourth quarter 2020 earnings call. Let's get real set on the call. With me today is Franklin Agro, our Chief Financial Officer. Our prepared remarks will correspond with the slide deck, which is posted to the investor relations section of Beacon's website, and I'll begin on page four of our slide materials. 2020 was not the year we expected, but Beacon exits the year a significantly stronger company. Our 7,500 employees worked incredibly hard to provide strong service levels to customers while keeping those customers and themselves and their colleagues safe during an unprecedented environment, a pandemic, wildfires, hurricanes, and social unrest. I could not be prouder of the business results we delivered given the circumstances. As a company, we have successfully transitioned to new leadership and embraced a new strategy. We have implemented four key strategic initiatives, generating meaningful contributions to our results. And I see the mindset and processes behind these initiatives becoming quickly ingrained in the company's leadership at all levels. Kept up by a record fourth quarter, full-year adjusted EBITDA margins exceeded 2019 despite COVID, and our 2020 operating cash flow was the second highest in company history. We've used the cash to pay down our ABL and materially improve our balance sheet. We are delivering the type of results you should expect from Beacon, and we will continue to improve and grow. There are several important takeaways from the quarter that I want to emphasize. First is that we have a resilient business mix. After state government restrictions negatively impacted March and April, we quickly recovered and delivered five consecutive months of stable year-to-year daily sales rates. This is an important characteristic of our underlying markets, driven by the less cyclical repair and replacement cycle and our balanced exposure to both residential and commercial constructions. Second, price execution is a critical focus for my leadership team. Fourth quarter gross margins improved more than 100 basis points, both sequentially and year over year. We have been intensely focused on making positive strides to improve our gross margin the past year after a couple of years in a challenging environment. We are pleased to report traction on price increases we implemented during the quarter. While some of this Q4 gross margin benefit reflects favorable timing, we expect our price initiatives to be accretive to margins going forward. Third, our operating expense discipline continues. As Frank will discuss later, we are extremely pleased to report a sequentially flat adjusted OPEX to sales percentage. That's as we have previously guided, despite higher incentive compensation. We continue to do an excellent job of managing headcount while posting a second consecutive quarter with significant year-over-year employee productivity. Fourth, we deliver a strong cash flow year. Fiscal 2020 operating cash flow at $479 million demonstrates really solid operating performance in a difficult environment. We reduced net debt leverage to 4.7 times as we continue to move towards our leverage goal of about three times. Our strategic initiatives meaningfully contributed to results. I'll touch on each of the four initiatives in more detail in a minute, but I wanted to quickly highlight the success of our digital platform and underperforming branch initiatives. Our industry-leading digital platform achieved the aggressive exit run rate goal of 10% of sales that I set for fiscal 2020. We continue to emphasize our e-commerce platform as a key differentiator beacon and will invest to maintain our leadership position. As for our lowest quick file branches, they produced more than $20 million of operating margin improvement for the fiscal year. While it's been difficult to separate branch-specific performance relative to the impact of our swift reaction to COVID, it is clear we are well on our way to delivering the targeted 30 to 60 million of margin benefit. Moving to page five of our slide materials, I want to highlight a couple of items related to our fourth quarter results. In August, we provided you with a framework outlining our expectations for the fourth quarter. Our sales outlook called for a low single-digit revenue decline year over year with increasingly difficult comparisons as the quarter progressed and limited incremental price contribution. For margins, we provided expectations for a slight sequential improvement in gross margins and a modest increase in adjusted off-ex to sales with temporary costs returning. Fourth quarter sales modestly exceeded our expectations, as August and September month sales were both slightly stronger than anticipated. Both margin lines outperformed our public outlook, with gross margins up 140 basis points sequentially and adjusted operating costs of a percent of sales flat with the third quarter. Actual EBITDA margins finished at 9.5%, up substantially both sequentially and year-on-year. There were several moving parts within our Q4 gross margin performance, and Frank will speak to those in more detail. At the completion of our prepared comments, I will address our future margin expectations. Next, I'll provide an update on our key initiatives. Please turn to page six of the slide deck. These four initiatives have become significant drivers of our sales and margins. These initiatives create multiple paths to add value for customers and differentiate us from our competitors, raise the quality and consistency of our customer service, increase communications and interactions with customers, and provide clear focus areas for our employees. The successful implementation and execution of these initiatives generate top-line, gross margin, op-ex, and cash flow benefits. Our strong performance of the initial COVID lockdowns in late March and April illustrates the benefits of our strategic direction, and now I'd like to provide more detail on each. Let me begin with our focus on organic growth. Our sales team, branch leadership, and marketing organizations are in lockstep driving sales growth. We have placed the customer at the center of our business and are resourcing our inside and outside sales teams to support contractors who want to save time, be more efficient, and grow their businesses. We are helping our sales representatives by providing training, development, developing productivity tools, and supporting them with expanded lines of private label and branded products, as well as a cooperative e-commerce platform and call center personnel. We believe the number and quality of calls we have with customers has a direct correlation to our sales performance. We have an established set of goals for our sales team for the number of interactions daily. As we move towards this optimal level, we believe the increased activity will drive sales growth with both new and existing customers. Next is our industry-leading digital platform. As I said, I'm pleased to report that Breakin's digital platform exceeded 10% of company sales during September. As you may remember, this was an aggressive goal that I set shortly after joining the company a year ago. We have a first mover advantage, significant breadth of digital solutions in our offering, a sales and marketing organization committed to enhancing the platform, and increasing buy-in from vendors and customers who recognize us as the industry leader. Customers have been particularly enthusiastic about the benefits of online ordering and estimating tools during the pandemic. Our customer service continues to reveal contractors' high marks for the platform's user-friendly order processing, tracking, and payment features. Additionally, digital works in conjunction with other strategic objectives at Beacon and is particularly effective at driving growth in our private label offering. As an example, online order templates for contractors give us the ability to orient customers to our private line of private label products. This has provided a significant boost for tribal sales, which increased 50% year-over-year in 2020 and has a positive impact on our gross margins. Next, moving to our on-time and complete network. Our OTC strategy is another significant differentiator relative to our competitors. We believe it provides four key benefits to our business. First, It enables us to improve our service platform, shortening delivery cycles and enhancing product availability, which contributes to our top-line growth. Second, by optimizing our network and delivery routing, we see expense reductions such as fleet and employee productivity. Third, we can optimize our inventory position across multiple locations, driving a permanent reduction in working capital. And fourth, it significantly enhances our talent development pipeline, giving us the opportunity to develop early career talent in significant roles. Currently, we operate OTCs in 58 markets, each having market-based P&Ls, and the majority operating centralized dispatch, a key element in optimizing delivery performance for our customers. In total, these markets contain 260 branches, representing more than half of our exterior locations. We opened our first new hub location earlier this year in Denver, which follows three legacy hubs in operation, as well as two specialty siding hubs. Lastly, I want to highlight our branch operating performance. Earlier this year, we introduced a new program focused on raising the operating performance and profitability of our lowest quintile branches. We have publicly disclosed a $30 to $60 million bottom line improvement goal for this initiative. As I mentioned earlier, I'm pleased to report that our initial group delivered more than $20 million of operating income improvements during fiscal 2020. This is a tremendous accomplishment given significant market challenges tied to COVID, and with these locations having only a couple of quarters of operations with action plans fully implemented. I'll now pass the call over to Frank, who will discuss full quarter results in more detail. Thanks, Julian, and good evening, everyone. Before getting into the details of the quarter, I thought it would be helpful to provide some perspective on the last seven months since joining Beacon. In mid-April, we were in the depths of COVID, and the future was uncertain at best. Julian, the board, the executive committee, and the division presidents were already fully engaged in cost reduction, cash preservation, and trade working capital management. It's a pleasure to work with a team that can think clearly in a crisis, execute the necessary actions rapidly, and leverage those actions as sales improve. There is no doubt in my mind that our experience in navigating the COVID environment has accelerated our performance and increased our potential. To that point, our second half operating expense performance demonstrates our ability to deliver efficiencies regardless of whether sales are declining or improving. Turning to page eight, we'll review our quarterly sales performance. During our past two earnings calls, we provided details on the disparate impact of COVID on our business. While there continue to be geographic performance gaps due to COVID, the economic impacts from COVID are also evident in our product and end market categories. Residential roofing delivered 6% sales growth during the fourth quarter, evidence of a rapid recovery following the initial COVID lockdowns. County market indicators for both new construction and repair and remodel activity remain quite positive as the consumer continues to concentrate discretionary spending on their homes. Our contractors remain busy, and we see the potential for an extended roofing season. But as always, this will be dictated as much by weather as by underlying demand. We are well positioned to capitalize on this favorable residential backdrop, and our single purchases in the quarter were slightly above the year-over-year growth from the arm of data you've seen. Commercial roofing sales declined 12% in the quarter, with declines similar to what we experienced in Q3. Continued uncertainty in the office and retail sectors have created select deferrals and re-roofing, while new commercial construction has also experienced a slowdown. Certain categories, including schools, which traditionally complete re-roofing projects during the summer months, were pulled forward due to COVID-related building closures We have recently seen some leading indicators improve, and bidding has also stabilized, but visibility remains limited going into the slower winter period. Complimentary products were down 1.5% year-over-year, but improved significantly on a sequential basis. As a reminder, the complimentary category is split relatively equally between exteriors and interiors and between residential and commercial. Not surprisingly, in Q4, complimentary sales in residential markets outperformed complimentary sales in commercial markets. Turning to slide nine, we'll review gross margin. We were delighted with our gross margin performance in Q4. Four-quarter gross margin of 25.5% improved 140 basis points sequentially and 120 basis points year over year. Getting into the details, there were a number of items that favorably impacted gross margin performance. In the quarter, on a year-over-year basis, price cost was positive by approximately 75 basis points, driven by three primary factors. One, our continued successful implementation of recent price increases. Two, a timing benefit related to our pricing increases relative to the corresponding increase in our cost of goods sold. And three, stronger residential sales incentives based on increased shipments to our customers. We also benefited from favorable product mix in the core as we experienced stronger sales from our higher margin residential roofing category. Going forward, we should continue to experience favorable mix as residential roofing is expected to see continued outperformance. We also expect to benefit from the recently announced price increases. Given our high level of execution in implementing these increases across the network, The timing benefit we experienced in the fourth quarter is likely to be smaller in the first quarter, and we do not expect any meaningful timing benefits beyond fiscal Q1. Finally, our vendor incentives in Q1 should reflect seasonally lower quarterly sales activity. Julian will provide further details regarding our gross margin outlook in his wrap-up comments. As I mentioned in my opening comments, we are proud of our Q4 operating cost performance and appreciate the tremendous efforts of the entire Beacon team in managing costs tightly. Adjusted OpEx was $346 million unchanged from last year. Strong labor and fleet productivity efforts were largely offset by higher incentive compensation as we finished fiscal 2020 with significantly stronger bottom line results than we anticipated in the prior quarter. As a percentage of sales, expenses were largely unchanged, both sequentially and year-over-year, at 17% of sales. During our Q3 call, I highlighted three buckets of cost savings enacted during COVID, temporary, continuing temporary, and permanent savings. On a sequential basis, four and a quarter operating costs reflect the return of the temporary cost actions we took during Q3. A portion of the continuing temporary costs also returned, That said, travel and entertainment expenditures remain below historic levels and will provide year-over-year cost benefits in the first half of fiscal 2021. In our third quarter release, we also introduced a new measure, sales per hour work. We believe this metric provides useful insights into our efficiency efforts. And with labor being the most significant cost for any distributor, driving efficiency in this area remains a central focus. Following an incredible third quarter performance, we are very pleased that we produced a 15% year-over-year improvement with 7% fewer employees in the fourth quarter. We will continue to leverage this important efficiency metric going forward, but it is only one measure of what we're trying to accomplish more broadly with our operating expenses. We are focused on improving the efficiency and effectiveness of our sales personnel, their driving asset utilization gains, and our truck fleet. And we are working hard to offset inflation with productivity in each of our operating divisions, functional departments, and corporate teams. The impact of COVID has certainly created greater urgency and beef and has helped us accelerate the pace of continuous improvement evident in our results. Turning to slide 10, we'll review our cash flow and balance sheet. We finished 2020 with a very strong Q4 cash flow, raising the full-year operating cash flow to $479 million, illustrating the benefits of favorable earnings and strong trade working capital management. Quarterly cash flow was again driven by strong operating results from sequentially improving sales, strong gross margin performance, and continued cost discipline. And while we had previously anticipated working capital would be relatively neutral in Q4, we ended the period with a positive contribution from trade working capital, primarily due to higher AP at the end of the quarter. AR was slightly higher sequentially, given higher sales in the fourth quarter, and inventory levels were better by 7% year-over-year, stable sequentially, as we continued to leverage the aggressive actions we undertook in Q3. Importantly, our strong second half cash generation produced significant debt reductions. During Q4, we reduced total debt by $600 million. And Beacon now has repaid the entire $725 million March PBL drawdown. As a reminder, we drew down the ABL as a proactive measure given the economic uncertainty from COVID. Currently, we have approximately $250 million outstanding on our ABL and would expect to pay that off during the first half of fiscal 2021. Our management team continues to view debt reduction and balance sheet strength as high priorities. To that end, we are pleased to report that our net leverage declined to 4.7 times trailing 12-month EBITDA, reaching the lowest leverage level since the Ally transaction. We are making good progress in operating performance, cash generation, and debt reduction, and are continuing to target net leverage of approximately three times EBITDA. With that, I'll turn the call back to Julian for his closing remarks. Thanks, Frank. I'll be providing a brief wrap-up to fiscal 2020 before sending to 2021 Outlook on page 12 of the slide materials. Fiscal 2020 represented a transition year for Beacon with new leadership and the implementation of a new strategic direction. This evident strategy signals Beacon's move from a predominantly growth by acquisition company to one with renewed focus on organic sales growth and industry-leading operational execution. As part of this shift, our leadership team established four major strategic goals to guide us going forward. Fiscal 2020 also presented Beacon with our greatest challenge since the financial crisis more than a decade ago. The COVID pandemic caused demand to crater. Our company's response to this unprecedented environment has been incredible. The third quarter highlighted our ability to control costs and improve productivity. In the fourth quarter, we demonstrated strong pricing execution, resulting in a significant increase in gross margins. Internally, we are focused on building our company's culture around continuous improvement and operational excellence, and we hope this is becoming increasingly clear to the investment community. We made significant progress here in 2020, but as I've repeated since joining Beacon, we want this company and its employees to realize their full potential. We continue to pursue a path to do both. Now let me provide some details that should help you frame Q1 and the 2021 fiscal year. Our October sales improved approximately 6.5% year-over-year, reflecting the combination of strong residential volumes and higher pricing, partially offset by weaker commercial sales. We have continued to see heightened demand within residential and markets, particularly residential roofing and insulation, and are confident this strength will continue in fiscal 2021. In our first quarter, we are expecting overall net sales to increase low to mid single digits, largely dependent on the number of available grouping days before winter weather impacts our customers. For gross margin, we expect a first quarter year-over-year improvement tied to solid pricing execution and favorable next benefits versus the prior year. We anticipate a portion of the favorable Q4 timing benefits to continue into Q1, but it will have a smaller impact than prior quarter. The combination of these factors are expected to result in first quarter margins of approximately 25%. We will continue to actively manage operating costs while improving employee and peak productivity. During these past seven to eight months, we have gained valuable insights into our capacity for variabilizing certain expenses, which should be most evident as we winterize during December, January, and February. For the 2021 fiscal year, COVID creates uncertainty, particularly for non-residential end markets. While we have seen some signals that non-red bidding activity may be blossoming, it remains appropriate to keep a cautious outlook and manage our business accordingly. With this relative lack of visibility, we are focused on what we control, executing on our strategic initiatives, driving sales growth above market, instilling pricing discipline, and driving productivity gains throughout the organization's patience. Each of these represent key elements we put in motion during 2020 and expect further gains within the new year. As a result, we currently expect to do a sales growth at the upper end of a low single-digit range, combined with gross margin expansion, yielding adjusted EBITDA in the range of $500 to $525 million. We're excited about 2021 and are off to a good start. And getting over that, We're ready to open the line for questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, press star followed by one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, press the pound key. Each caller is limited to one question. Your first question will come from the line with Michael Reho of J.P. Morgan. Please go ahead.