Beacon Roofing Supply, Inc.

based off which we're calculating the improvements from prior year. Got it. Makes sense. Thank you.

Next is Brian Piros from TRG. Your line is now open.

Hey, good afternoon. This is Brian. I'm for Catherine. Thank you for taking my questions. On the non-res environment, can you talk about what you're seeing specifically in the Northeast region around like New York and Boston? It kind of seems that region is about back to pre-COVID levels for certain companies based on some of the conversations that we've had with our contacts. And I guess I wonder if you guys are seeing the same thing up in that region.

Brian, thanks for the question. Obviously, again, We're really coming off the base of last year, and obviously the Northeast was the one that was hit most dramatically in not just in April, May, but through most of the year. uh you know all from philadelphia up through boston was was really impacted by covert last year so are we seeing a significant improvement in that market yes clearly we are um now you know it's difficult to really get a handle on the specifics on a market by market basis that is a particularly strong area for us in the commercial uh construction arena we know we like our position up there And so I think we are benefiting from the recovery. But I still think overall, as we've said, you know, the markets have been down year over year so far in commercial buildings across the country. I would say that we are becoming a little bit more optimistic at this point in time than we have been previously on commercial. I think we're starting to see more activity. But there's also a longer build cycle in commercial. So I still think there's going to be nowhere near the type of improvement we're seeing on the residential side because the sales cycle and the build cycle is so much longer.

Understood. And then maybe just on the resi side from the demand, I guess, is there a way to parse out if there's any kind of weather demand impact from all the numerous weather events in the quarter and if that was – a material driver, or if it was just general overall better environment and the pent-up demand?

Yeah, so we certainly saw impact from last calendar year's hurricanes that hit the Gulf. And also some of that has continued to come through. Obviously, the southern part of the U.S. gets less impacted by cold weather in the in the winter. So we certainly have seen that come through. If you were referring to weather that we've seen this year, we've not seen anything come through yet. And I would say it's going to be really difficult to tease that out this year from the underlying demand that we see from new construction and general repair and replacement anyway. But certainly we expect to see continued roofing activity, building construction activity from the storms we saw last year, both in the Midwest and in the Gulf Coast.

Thank you.

We have our next question from Michael Rehout from JP Morgan. Your line is now open.

Hi, good afternoon. This is Elad Hillman on for Mike. Thanks for taking my questions. So first, QQ gross margins were significantly higher than you guys last quarter. And it seems like a lot of it was driven by price cost. But maybe you could talk about where you saw the greatest areas of upside relative to your original outlook.

Yeah, I think it was largely on the residential side, to your point. You know, we went through the August period. price increase. We learned a lot in terms of our own execution there, and you're seeing us apply that in February, and you'll see us apply that in April as well. So I'd say it was largely on the residential side. But again, we approached the increases on the commercial and the complementary products with the same level of rigor and execution, as Julian and I said in our prepared remarks. You know, the end markets there, depending on whether you're on the res or the non-res, are a little more receptive or a little less receptive to the price increases. But I think I keep your focus on the residential piece.

Got it. Okay, thank you. That's helpful. And then, Just moving over then to, I mean, kind of like on shipments more or on volume. So it's read these sales are up 19% this quarter and sounds like pricing was quite positive. And Arma shipments are up 27%. I was wondering how your purchasing activity kind of compared to Arma shipments this quarter and how that compared to sellout trends.

Yeah, so we were essentially perfectly aligned on what we bought with ARMA, which is consistent with essentially where we've been the last couple of quarters. Remember, the manufacturers have us all on allocation, so I don't think you're going to see huge shifts in terms of market share on the purchasing side, and I think you should expect that to continue. You know, as Julian and I have talked about this, you know, our belief is the manufacturers are are pretty much running full tilt. So, you know, you could expect something, you know, 40-ish million per quarter. And then, you know, obviously we're looking for our fair share as a result of that. But yeah, we purchased very much in line with that. In terms of your question around residential asphalt shingles specifically, our volumes were up 14%. So that's what we call the out-the-door volume. That's what we ship to our customers. So hopefully that gives you a little bit of a flavor. And then you know, the difference between the year-over-year revenue and that volume numbers, you know, a combination of price and mix.

Great. Thank you.

We have our next question from Keith Hughes from Truist. Your line is now open.

Thank you. We've talked a lot about price increases in residential. I guess my question is the pricing and complementary. I think some of those products are going up a lot, too. If you could talk about that and what the price-cost dynamic looks like in that segment.

Sure. I'll touch on that, Keith. You know, I think the price-cost dynamic across all of the categories today is positive. You know, whether it's the residential non-shingle categories that we participate in, There has been a lot of activity. There's probably a little more noise in those numbers. There's some mix. There's some regional specific categories in there. But generally speaking, price cost has been positive across all those categories as well. Keith, just a little bit of detail might be helpful for you. If you think about our overall price cost of being plus 230, you should handicap that as sort of residential being above that and commercial and complimentary being positive but below that.

And that's the year-over-year delta you're saying, correct? Price cost in the quarter year-over-year, correct. Okay. All right. Thank you. Oh, just one quick one. There was a commentary of 60% volume, 40% price. Was that referring to a segment or company-wide? I wasn't really clear.

Company.

Company-wide. Okay. Thank you.

Next in line is David J. Mancy from Bayard. Your line is now open.

Hi, this is Quinn Fredrickson on for Dave. Just wanted to talk about OpEx sequentially, obviously really strong performance here this past quarter. Sounds like you're expecting a lot of the productivity programs to continue. Are there any step up in expenses outside the typical seasonal increase that we should be aware of? I know that you added some headcount this past quarter. Do you feel you have the capacity to meet demand with what you have now or will you look to add more?

Thanks for the question, Quinn. Look, this time of year we ramp hiring pretty significantly as we go into the year. I think along with not just others in the construction industry but others across the entire economy, It's certainly difficult to get all of the help we need on the days we need it. But I don't think that is translating into lost sales in this demand environment. I think we're able to get what we need. We do have a little bit of flexibility, but it certainly is challenging to add all of the heads you need on the days you need them. But we're certainly making progress and we're certainly adding. Now, I'd also tell you we're not adding as quickly as our sales are growing. So we do expect to see leverage from the entire organization and believe, like I said, as you correctly said, that productivity initiatives are yielding great results for us. Yeah, the weird dynamic for us in Q3 is going to be the year-over-year because we're lapping the COVID quarter where we had a obviously a lot of focus on both temporary and permanent uh cost reductions last year so uh you know just factor that in to your model and then to julian's good point i mean we're very focused on continuing to generate labor productivity the sales per hour work measure that that he put in place is really continuing to drive management behavior, you know, in the field, and it's being quite helpful. Keep in mind that, you know, we will be adding costs back in when we have sales growth year over year of mid to high teams, as Julian guided to, that certainly brings with it some cost pressure as well.

Right. Thank you. And then just a final question, just wanted to ask about the digital progress that you guys made this quarter. Just anything you would call out with that ramping as quickly and also with adding some some new leadership focused on that. Just any key goals or metrics that we should be focused on from here.

Thanks for bringing that up. Look, we've seen a step change this county year as well. I mean, you know, we were we'd set an aggressive targets It's a 10% run rate in September last year, which we hit as a total company. It's slightly higher on Xerius, slightly lower on the interiors business. But we've seen another step change this year. And to go from 10% to doing 15% of sales in March through that channel has been really, really encouraging to us. I think it's starting to yield great benefits. Like I said, it's clearly a differentiator. It is something we're going to continue to focus on. I think the talent that we're bringing into the organization is going to have an increased focus on that. Our marketing team is being built out. We're focusing on our ability to generate more through that. Our sales force is incented to do so. We think it's an incredibly powerful, competitive tool, as well as a great convenience and aid to our customers. So we continue to believe it's going to be a significant portion of our growth agenda over the next several years.

Thank you very much.

Next is Phil Nang from Jefferies. Your line is now open.

Hey, guys. Congrats on a really excellent quarter. Frank, last quarter, I believe, you mentioned free cash flow conversions, roughly about 60% of EBITDA. Is that still a good way to think about things? And then with a much improved balance sheet now, can you kind of highlight some of your big priorities in terms of capital deployment? And, Jillian, if I heard you correctly, you were talking about investing for growth. Is that going to be more on the M&A side or organically?

Hey, Phil, thanks for the question. Yeah, I think that's 60% handle for free cash flow conversion, but that's still a good number. You know, the refinancing, if that takes hold as we get into next year, that should... be helpful to that number, assuming all other things equal. You know, capital allocation clearly is a threshold question for us now. We haven't even closed the refinancing transaction, so we're just kind of getting to these leverage levels, which open up a fair amount of opportunities for us and, again, active conversation, which I would say is across the board. You know, we're looking at everything from – from M&A to shareholder returns, as well as paying back additional debt. So we've got all those options on the table. In terms of the overall M&A focus, the way that Julian's thinking about it is largely kind of a market-by-market focus. All battles are fought locally at the end of the day, so we've got to make sure we've got a good competitive position in the best markets. So we'll be looking at it from that perspective. And then staying true to our knitting, we know what we're good at in terms of residential and commercial roofing. So we'll likely stick to our knitting in those places. And then looking at the product portfolio. In some places, you know, we offer some of those complementary products and have a leading market share there. And in other places, you know, we're just not as penetrated. So we'll be looking at it from that perspective too.

That's really helpful. And then, Julian, since you've embarked on this, improving the performance in these underperforming branches, you've been getting $20 million and $30 million of improvement each year. One, is that a sustainable level? And when we think about OpEx leverage going forward, is there a good way to think about it? I'm appreciating you got some of these costs coming back, but you guys have been really diligent in terms of how to manage that.

Yeah, look, it's – Certainly, I've been thrilled with the progress we've made on those lower quintile branches that we've talked about. And I've always deliberately talked about the lowest quintile. We will always have a lower quintile branches, however good they're performing. So, you know, this is going to be a continuous improvement strategy. initiative that we're going to drive the business towards. I think obviously, as I joined the company 18 months ago, we saw significant opportunity there. You know, the initial guide was 30 to 60 million over a timeframe. I'd be lying if I said that all of this was due to our improvement initiatives. Clearly, the market's giving us some tailwind and giving us some opportunity. But it's also highlighting the opportunity we really have to drive efficiencies. And I think that, as I've said a number of times now, we've built a diagnostic tool that we review very frequently to focus attention on our lowest quintile branches. We see steady improvement in many of them and dramatic in a few. So I think that as we start to improve a lot of these branches, as we start to get to – it gets harder and harder. So I would expect that to be diminished to some degree over time. But I really do think that it's been somewhat transformative to – to really think about this and get that focus. So I do think that improvements in those branches and continuous improvement across the entire company is not only possible, but likely.

Super helpful, guys. Thanks a lot.

Next is Ryan Merkel from William Blair. Your line is now open.

Hey, guys, thanks for taking the question. Frank, you mentioned that the OEs have you on allocation. Just what are lead times today, and then are we really looking at next winter when these OEs will catch up?

Yeah, I haven't seen any meaningful push out of lead times, you know, based on where we were last quarter. As I think I've mentioned and Julian's mentioned a number of times to both analysts and investors, you know, the manufacturers are hand-in-mouth. I mean, they're shipping everything that they are You know, making and with the exception of, you know, sort of a slow season, so call it our fiscal Q2, we would expect to ship everything to our customers that we receive from the manufacturer. So we think we're going to be in this environment certainly through 2021. You know, 2022, assuming the demand environment holds, we get a little bit of storm activity, we get a decent winter. You know, this thing could hold for a couple of years. We're excited about the opportunity that this environment presents to us, and you're obviously seeing the execution on both the gross margin and the OPEX side, which is really helping deliver the EBITDA margins and getting those on the trend that we are looking forward to achieving.

Yep. Yeah, the pricing environment is clearly very good, and it sounds like it's going to continue. And then... On non-res, you mentioned that you think the worst is over. Just what are you seeing? Is it re-roofing jobs that were delayed coming back? Is new construction coming back? Just talk about the profile of what you're seeing there.

Sure. Thanks, Ryan. On the commercial business side, when you think about it, you know, clearly right now you've got re-roof that's coming back. I mean, that's something that's obviously really hard to delay. You know, the building owners and the managers, they're going to put on a new roof if they have to because there's damage or leaks or it's aged out. I do think we still see a little bit of an air pocket in some areas of the commercial construction market. I mean, as I've said before, New construction almost stopped, so stuff that was in process really slowed down. I don't think anyone was really thinking about how they were going to put up new office buildings in the last six months. I think people have been managing that. Now, the sectors of the construction market that have withheld have stood this probably better. data centers, warehouses, that type of category has remained quite strong all the way through. And all of those still have roofs on them, obviously. So that's been good. So I think it's a little bit of a mixed bag. I look very closely at the Architectural Billing Index, and that finally went above 50, I think, in the last report. So I think there's, you know, there's sort of green shoots on the new construction side. But as we keep saying, you know, this good chunk of our business is non-discretionary. So we're going to see it continue. And I think that, you know, we're now probably a little bit more positive about the new construction market, but it's a long cycle in commercial construction. It's not the sort of 60, 90 days in residential. It's six months to a year or longer.

Great. Thanks.

Next question is from the line of Keetan Mumtara. Your line is now open.

Thank you and congrats on all the progress. Very impressive. Maybe to start with, I'm just curious how much of the February price increase on the resi side, you know, was kind of, you know, was there in your jan to march quarter the fiscal second quarter uh and how much of it is kind of left to be realized in the coming quarters and uh is there a way to think about the cadence of the uh april price increase in terms of the timing benefit uh the timing benefit is going to last somewhere between 60 and 90 days as you replenish uh inventory

The actual price itself benefit, we did a really good job in February, learning from August, to ramp the entire branch network up quickly so that we were able to implement the price increase very quickly across the branches, more quickly probably in February than we did in August. And I believe what you'll see in April, we will ramp that or have ramped that more quickly than we did in February. So we are learning a lot as we go and implementing those learnings as we apply each price increase. So the speed with which we are able to achieve the price increase is getting better.

Understood. That's helpful. And then coming back to capital allocation, you said, you know, kind of all options on the table. I'm just curious, you know, with the trend that you all are seeing, by the end of this year, your leverage will be, you know, quite significantly lower than kind of what you have right now, which is below your target. Is there a way you think about, you know, sort of building cash cushion, you know, kind of absent any opportunities? Or in other way, do you have kind of, you know, sort of a leverage target in mind below which you think, you know, kind of absent that many you need to return cash to shareholders?

Again, thanks for the question. Look, as Frank said, you know, we're not yet closed with the refinancing. We've certainly got all options. We're going to discuss this with the management team and obviously with our board of directors with regard to how we should think about that. And we'll be getting back to you with more specifics as we get later in the year. One final point on that one. As we set up the refinancing, one of the things that we did was created a an initial draw on the ABL revolver, which gives us the ability to, in essence, prepay without penalty some debt while maintaining liquidity and additional dry powder. So we've tried to set up a mechanism to make sure that we have the ability to deploy capital when the options are decided and the opportunities present themselves.

Got it. Appreciate the thoughts, and good luck in the back half of the year. Thanks much.

Next is Garak Shmoy from Loop Capital. Your line is now open.

Hi, thanks for taking my question and congrats on the quarter.

I'm just given the magnitude of the gross margin improvements and the improved outlook going into 3Q, just how should we think about gross margins and maybe a little bit more long-term? Do you think this level is sustainable when we look out into next year? Thanks for the question, Garak, and thanks for the sentiments. Certainly, we've been impacted positively on the gross margin side by the price increase and our ability to pass through those price increases and improve our price-cost position. Clearly, the market's giving us some tailwinds to do that, but I think we're also improving our capability in this space. You know, I think that this is the thesis that we had maybe 18 months ago on how the market was going to shape up. Our margins had been compressed because of an interesting dynamic where you had asphalt inflation and a declining market where we got squeezed in the middle of that, and our thesis wasn't about a market. We'll improve our margins anyway. So it's difficult to tease out one from the other right now, but I do think that we've got the ability to sustainably improve our margins from where they were certainly 18 months ago, and obviously we've seen the benefit over the last last 12 months of a strong market where we've been able to do that but i mean fundamentally when you think about a lot of the things that we put in place and our ability to continue to sustain and in fact improve our margins we think that there's plenty of opportunity to do that whether it's through our private label business expansion whether it's through our digital initiatives whether it's through improving customer service and creating value and selling that value of the beacon operating system that we're developing here. We think there's a lot of ways that we can do that. I think that we're in a great place. Certainly, we've got some tailwind behind us. I think we're executing very well. But behind all that, we're also learning a lot about how to operate better in this environment. And obviously, from where we were two years ago, the ability to pass through increases and take the opportunity to improve our margins is something that's radically different now than it was back then. Yeah, for sure. My follow-up question is on You talked about inventories and allocation, obviously, on the residential side. It's pretty well known by now. But can you speak to your inventory positions in complementary?

And as we get into the season, given the strong demand environment, is there any risk of stock outs that are material?

No, I don't think so, Garrett. I mean, we obviously, on the residential side, let me just walk you through. On the residential side, you know, there's a couple elements to the inventory build there. When you see the dollar values in the 10Q, you know, some of that is just increasing cost of goods sold because of the manufacturers and some of its volume given, you know, the dynamics of February. So we feel like we're in a good position from a shingle, you know, basis as we get into the busy part of the season and we're You know, we're looking for every load we can get of additional shingles to make sure that we can serve our customers. We feel good about where we are right now. The commercial side, again, Julian gave you sort of a more cautiously optimistic view of the second half, and we have inventory there and, you know, orders in place to make sure that we can fulfill that demand and feel the same way on the, you know, the siding. And a lot of the windows and doors are obviously, you know, special order. But, you know, we feel good about siding, and we feel good about – You know, the lumber, you know, that's just a side product that we offer to our customers as well. But we have a very active supply chain group. They're doing a great job in working with the manufacturers to make sure we understand exactly what the, you know, the timelines are and making sure we communicate those with our customers. But right now, and you heard Julian say in his prepared remarks around the guidance that, you know, assuming we don't get anything additional, that we feel like we're in good shape to support the guidance we put out there. Great. Thanks for the help. One thing I would add, Garrick, is that Frank referenced in the remarks, we did say, you know, absence any significant supply chain disruptions. We have seen in pockets some supply chain disruptions. We think those were tied to the February weather that hit Texas and caused some outages down there in some of the raw material supply lines. That's trickling through right now. It's not significant. But given the demand environments, those tend to ripple pretty quickly through to the front end of the supply chain right now.

Next is Joseph Nolan from Longbow Research. Your line is now open.

yeah this is david mcgregor uh i hope you can hear me okay uh good afternoon i i wanted to start off by just asking you about uh the online sales program and you talked about a 15 increase and you know you you made reference to the digital opportunity uh when you were talking earlier about gross profit upside so i'm just trying to get a sense of Given that it is a premium profitability revenue stream, how's that gap versus the walk-in business playing out? Is this a leverageable revenue stream from a margin standpoint? And then secondly, as well, just as commercial comes back, how do you think about acceptance among commercial contractors for your online? And do you think that you can continue to maintain growth with that segment of the market as well?

Thanks for the question, David. There's a lot to unpack in that question. So let me start with that. That's fine. But first of all, we're up to 15% from 10. So it's not 15% growth. It's actually we've gone from 10% to 15%. So 50% growth into that channel. And that's significant, obviously. So let me be clear. We do not charge different rates for the products through any of the channels. We have an omni-channel approach, so it is not that. But we are able to make sure we capture The full basket, so often when we see people either walk in to our branches or pre-orders over the phone, sometimes what we find is that items are left off their list. They forget it should have been 10 boxes of nails and screws and six vents, and they leave some of those things off. Online, we are able to better capture that. So we see that as an opportunity to make sure that we're giving better service, make sure that the customer doesn't have to go and make another run to a local store to pick up those items. And obviously, it's a better basket size for us. But also, often those tend to be good margin products as well. Secondly, we see online our ability to offer our private label products differentially. We create templates for our customers to make the ease of ordering simple for them. And we certainly want to make sure that we're positioning our private label products, which have higher margin, differentially. So there is a sustainable, we believe, difference between the two, and not because we charge different rates, but because the mix is different, the basket size is different, and it's a more complete order. So, you know, as we see this channel grow, we do think that it's a meaningful difference. And as importantly, if not more importantly, we think it's a real competitive differentiator, certainly against our largest competitors, but even more so against some of the small fragmented customers around the country. If you're a one or two branch local, distributed, I just don't see how they can afford to build out the type of capabilities that we have. I mean, we're able to leverage those capabilities across 450 locations, and obviously the cost becomes manageable for us. So as a competitive dimension, we think this is also a very, very significant opportunity for us And we are certainly not satisfied with 15% of sales going through this channel. I would love to see it much higher.

And what about acceptance amongst commercial contractors? How do you feel about that as that category comes back?

Generally, commercial contractors are larger, more sophisticated businesses than the residential commercial contractors generally. in terms of their operations. In some cases, we're able to tie into them through EDI API. So actually, we think it's a significant opportunity to be well positioned with them as well. And we see no issues there whatsoever.

There's a follow-up question. I guess just you addressed earlier the whole notion of OEMs and the allocation that they've got distributors on right now. I guess as you think about capacity, sort of ARMA capacity, what's your best estimate on the growth in ARMA capacity over the next 12 to 24 months? Are you seeing capacity announcements or just maybe just gradually grinding away at de-bottlenecking? But just to what extent do you think we could see incremental capacity about to market next 12, 24 months?

I think you're best off asking my suppliers that question, to be honest. I think they understand the market dynamics. I'm sure they're working hard to, as you said, be bottleneck. I think a lot of the supply tightness right now is also associated with the capacity that was taken out at the start of COVID. I mean, everyone sort of reacted by... taking out that production to make sure the cost structure was right. But then the rebound in demand, I think, caught us all unawares. And I think that the supply tightness you see is that. So, you know, I came from the manufacturing side. You know, you've always got sort of 1% to 2% improvement in productivity every year. You're trying to get throughput. You're trying to run the lines quicker. I'm sure they're all working on that. But, you know, it ends up being a regional game you know shingles particularly don't ship very far and so even if someone puts it down it's uh you know it's a local market supply and demand situation as opposed to a national solution thanks that concludes the questions now i would like to turn the call back over to mr francis lonegro for his closing comments Actually, it's Julian. Thank you, May. Thanks, everyone, for joining this evening. We appreciate your support. Certainly, as we continue to face the pandemic, we hope that certainly our employees, customers, suppliers, and investors are all keeping safe and healthy in these continuing challenging situations. Again, thank you for listening. Thank you for your interest in Beacon. Have a wonderful evening.

this concludes today's conference call thank you for participating you may now disconnect