Beacon Roofing Supply, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Beacon Transition Period and Calendar Year 2021 earnings conference call. My name is Tania, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question and answer session toward the end of this conference. At that time, I will give 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 the company's plans and objectives and future economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts, and often use words such as anticipate, estimate, expect, believe, who likely result, outlook, project, and other words and expression of similar meaning. Forward-looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore, actual results may differ materially from the 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 2021 form of 10K and subsequent filings with US Securities and Exchange Commission. These forward-looking statements fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and future financial performance of the company, including the company's financial outlook. The forward-looking statements contained in this call are based on information as of today, February 3, 2022, and expect 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-GAP measures. Use recalculations of these non-GAP measures to those most comparable measures calculated and presented in accordance with GAP as set forth in today's press release and the appendix to presentation accompanying this call. Both the press release and the presentation are available on our website, .becn.com. I would now like to turn the conference over to Mr. Bennett Sangwee, Head of Investor Relations. Please proceed, Mr. Sangwee.

Thank you, Sonia. Good afternoon, and welcome to our transition period and calendar year 2021 earnings call. With me on the call today are Julian Francis, President and CEO, and Franklin Egroom, Chief Financial Officer. Our prepared remarks will correspond to the slide deck posted to the Investor Relations section of Beacon's website. After management's prepared remarks, there will be a question and answer session. I will now turn the call over to Julian.

Thanks, Ben, and good afternoon, everyone. Before I provide my comments in the quarter, I just want to remind everyone that we've changed our fiscal year ends to coincide with the calendar year ends. As a result, we're reporting our calendar fourth quarter today, which is referred to in our earnings release and other materials as our transition period. Now let's begin on slide four. I'm very pleased to report that we finished the year in record fashion. The team delivered calendar fourth quarter records for sales, net income, and adjusted EBITDA. I also want to highlight that we achieved double-digit EBITDA margins for the calendar year 2021, a significant milestone for the company. For the quarter, sales were up 11% -over-year against a strong 2020 comparison in which we had high single demand driven by housing investment and storm volumes. We exceeded the expectations we set out in November of net sales growth in high single digits, largely due to the later onset of winter weather, which allowed for an extended roofing season, particularly in the Northeast. The fundamental drivers of residential demand remain strong. And despite continuing supply chain issues, commercial activity continues to show an improving trend as evidenced by our strong year-end backlog. We also continue to experience inflationary pressure across most product categories. Our focus continues to be on great execution at the branch level and staying ahead of the cost curve while ensuring we have products available when and where our customers need it. As a result, gross margins in the quarter expanded -over-year by more than 90 basis points to 26.3%. We expect cost pressure to continue, but are confident that we can execute to capture additional pricing to offset the headwinds. Impressively, we increased adjusted EBITDA by 21% in the calendar fourth quarter and yielded nearly a 10% margin. We continue to focus on our portfolio and our renewed financial flexibility provided the capacity to add tuck-in M&A as another lever to our growth ambition. We successfully closed on two acquisitions recently, expanding our presence in key markets. As we announced in our prior earnings call, on November 1st, we acquired Midway Wholesale, a premier distributor of roofing products and a borrowed offering of complimentary building materials. With annual sales of approximately 130 million and 10 locations across the Midwest, we expanded our presence in growing markets in Kansas, Missouri, and Nebraska. Additionally, on January 1st, we acquired Crabtree Siding and Supply, a distributor who's built trusted relationships with customers and suppliers. Located between Nashville and Knoxville, Crabtree has annual sales of approximately $1 million. We welcome the Midway and Crabtree teams to Beacon and look forward to leveraging their reputation for quality, service, and reliability to further enhance our combined market positions. During the quarter, we also announced that we divested

our solar products business, further focusing our resources on delivering high-carburet services to our core roofing customers. Overall, the solar business was diluted to our margins, and we determined that the buyer was better positioned for long-term growth in the category. Now, I'd also like to take time to highlight critical non-financial initiatives to demonstrate how we continue to build the organization. Putting people first is a core value, and we believe in attracting, developing, and retaining a workforce that is representative of the communities in which we work and

live. Last year, we created a cross-functional Diversity, Equity, and Inclusion Council comprised of employee volunteers who provide expertise and advice on DE&I strategies. The council has made significant progress, laying the groundwork, and it's aimed to foster a culture where all voices can be heard. In recent months, we have conducted focus groups with leaders in underrepresented groups and rolled out training and education on diversity, equity, and inclusion to all our employees. In addition, we widened our hiring lens by partnering with Inroads, a non-profit organization that creates pathways to careers for ethnically diverse students across the country. Our progress on DE&I has begun with meaningful intent, and we've seen our efforts advance throughout the company, but we recognize we have much more to do. We also believe that putting people first means recognizing the efforts of our employees who have demonstrated tremendous resilience in the beginning of the pandemic. As part of our annual safety stand-down, this quarter we celebrated and rewarded the exceptional contributions of all our frontline employees during 2021. It is only through their tireless efforts that we are able to help our customers build more. The performance improvements we have delivered in the past 12 months gives us great confidence in our future plans. We look forward to sharing our longer-term strategic plan that we have called Ambition 2025 with the investment community later this month. Now please turn to page five of the slide deck. As always, I'll provide a brief update on our four strategic initiatives. Our organic growth initiative continues to focus on enhancing the customer experience and the effectiveness of our sales organization. Over the past year, we continue to invest in sales training programs, marketing support, and value-added tools that help our salespeople grow our business. These initiatives are paying off. For example, sales of our private label are up nearly 30% in the quarter versus the prior year. Our line of high-quality building products sold under the TriBuild label deliver professional results at a competitive price. TriBuild is becoming a recognized and trusted name by professional contractors across our residential, commercial, and complementary end markets. Our focus on our national accounts is also generating results. In calendar year 21, sales to our largest customers increased by 25%. We continue to build an experienced team with a proven track record focused on developing long-term trusted relationships to be the supplier of choice. These examples provide an idea of the significant opportunities we have available to further partner with existing customers in the business of new customers and grow organically as we accelerate these types of investments in the near term. Next, our digital capability continues to be a clear competitive differentiator. We provide the most complete digital offering and continue to expand our capabilities to make it easier for our customers to do business with us. We achieved digital sales of nearly 16% in our residential line of business in the calendar fourth quarter, and we have nearly 50% more active users of our online

platform compared to this time last year. I'd remind you that this sales channel is both revenue and margin accredited. Our OTC strategy is an operating model in which branches our network in larger MSAs, and OTC provides four key benefits. First is improved customer service levels in our OTCs. We have greater flexibility to deliver from the branch the best combination of product and service to support the customer's needs. The second benefit is a lower cost to serve. By leveraging resources and logistics across a network of branches, we are able to reduce delivery time and mileage, improve labor efficiency, and reduce fleet costs and emissions. The third benefit is optimizing inventory levels, and we continue to believe there is potential to cut our inventory investments by around $50 to $100 million while maintaining service levels. And fourth, critical to our ambition is that we accelerate our talent development. Our OTC initiative creates opportunities for the people at Beacon to build fulfilling careers and for us to unleash local talent, enhancing our ability to execute on our plans. We are very pleased with the recent launch of our Houston Hub, designed for efficiency and capacity, improving our position in one of the largest markets in the country. We also anticipate opening one of the largest exterior product distribution centers on the West Coast with our

Los Angeles Hub expected to be operational in the first half of this year. And finally, operating performance. Our focus on the bottom quintile branches is producing meaningful results. We generated approximately $50 million -on-year EBITDA improvements in calendar year 2021, bringing the two-year total to over $70 million. In summary, our strategic initiatives have delivered measurable results in 2021, and we remain focused on accelerating our growth and profitability. These strategies will continue to be foundational as we launch our ambition 2025. Now I'll pass the call over to Frank to provide deeper focus on our fourth quarter continuing results.

Thanks, Julian, and good evening, everyone. Two housekeeping items before we get started. As you know, we divested our solar products business on December 1st. Given its relatively small size, it is included in the results of continuing operations. Therefore, our reported results for calendar Q4 include two months of contribution from solar within our complimentary line of business. Also, it is important to note that the comparable results from the prior year quarter include three months of solar results. Similarly, we closed on the Midway acquisition on November 1st, and our reported results this quarter include two months of Midway's results. While these two items in the aggregate are not material to our bottom line results or the -over-year comparison, we thought it would be helpful to level set on these items prior to discussing the quarterly results. Turning to slide seven, we achieved nearly $1.8 billion in total net sales in the calendar fourth quarter, up more than 11% -over-year, driven primarily by higher average selling prices for our products. In the aggregate, price contributed approximately 15% to 16% to revenue growth, partially offset by lower volumes of around 4% to 5%, largely attributable to the continued supply constraints in the current period, combined with a strong prior year comparable. Residential roofing sales were up approximately 9% on shingle price execution throughout the year, including the recent September increase. Shingle volumes were down about 10% -over-year in line with ARMA, and slightly better than our expectations. As you know, the strong prior year shingle comparable benefited from the COVID snapback and stronger storm demand in 2020. We estimate that about a third of the shingle volume decline in the quarter was related to lower wind and hailstorm activity as compared to the prior year. The fundamental drivers of the residential market remain strong, with approximately 80% of demand coming from re-roofing activity, which is largely non-discretionary. An important indicator of the strength of the residential market is the comparison to the fourth quarter of 2019. Residential shingle volumes were 12% higher in the reported quarter versus the calendar fourth quarter of 2019. Non-residential roofing sales were up approximately 13% in a challenging supply chain environment. Our team did a great job of providing as much product as possible, given those challenges, and staying ahead of inflation. We continue to see longer project cycle times, which added to our strong pipeline, a positive indicator of future demand. Complementary sales increased approximately 16% in the calendar fourth quarter, as we achieved higher prices across nearly all products, including siding and lumber. As you may recall, our complementary line of business has roughly 80% exposure to the residential market, and allows us to be the supplier of choice to the exterior focused customer. Turning to slide eight, we'll review gross margin. Gross margin improved .3% of nearly 95 basis points year over year. The execution of the price increases early in the year contributed to the improvement. In the aggregate, price cost was positive by approximately 110 basis points in the calendar fourth quarter, on a year over year basis. Sequentially, product costs increased as the inventory timing benefits largely rolled off by the end of the quarter. Mix in the quarter was negative and slightly more unfavorable than we initially expected. Given relatively higher sales growth in our non-residential and complementary line of business, combined with higher direct sales to customers. Adjusted op-ex was $306 million, a $30 million increase compared to the year-ago quarter, mainly due to inflation in wages, rent, and fuel costs. Selling expenses such as travel and entertainment were also higher as we cycled the impact of certain COVID-related cost actions taken in the prior year. We also made the conscious decision to undertake less winterization this year, given the favorable fall selling season and our desire to be adequately staffed in labor-constrained environment to handle the demand we expect in the upcoming construction season. Our headcount was up a little more than 2% year over year, excluding our recent midway acquisition, and we continue to focus on labor productivity. As a result of these factors, combined with higher sales, our adjusted op-ex to sales ratio was in line with the prior period. Turning to slide nine, we will review our financial flexibility. Operating cash flow adjusted for items related to the sale of our interior products business was a positive $60 million in the quarter. This compares favorably to our typical calendar fourth quarter, which has negative operating cash flow. In recent quarters, this restored financial flexibility has enabled us to open new green fields, such as the Houston OTC Hub, reengage in tuck-in M&A transactions like Midway and Crab Trea, and rebuild our inventory to ensure we can effectively meet demand. Mid inventory is $200 million higher year over year, reflective of several factors. Product cost inflation, rebuilding inventory levels from post-COVID lows, carrying certain elements of inventory longer than expected due to lengthening project cycles, ensuring material availability to support our long, excuse me, strong backlog, and buying inventory ahead of price increases. 2021 was a truly transformational year for many reasons, not the least of which was the divestiture of the interior's business, and more recently, the solar products business. In addition to focusing the company on our core exterior's customers, the proceeds, along with balance sheet cash and free cash flow, allowed us to reduce gross debt by more than $1 billion a year over year. Net debt leverage stood at 2.1 times, trailing 12-month adjusted EBITDAI quarter end, compared to 4.8 times a year ago. In addition, we de-risked our debt maturities through a comprehensive refinancing earlier in the year, which essentially eliminated near-term refinancing risk. We have no meaningful debt maturities until 2026, and our liquidity position of approximately $1.5 billion a quarter end provides significant ability to invest in our future. This renewed balance sheet strength has given us the opportunity to thoroughly review our existing capital allocation framework. We look forward to laying out our new capital allocation strategy in more detail at the upcoming investor day. With that, I'll turn the call back to Julian for his closing remarks.

Thanks, Frank. Before we turn the call over to Q&A, I want to briefly wrap up our 2021 and turn your attention to 2022. Please reference page 11 of the slide materials. 2021 was transformational, and we begin 2022 with great optimism. The underlying pace of demand remains positive in residential, even as our new home building customers continue to manage through constraints such as labor and material shortages. Regarding non-residential demand, the macro environment continues to remain supported. The rising demand trend we saw begin in late 2020 is expected to continue in line with the architectural billing index. Although we believe supply chain disruptions will continue to impact lead times and project cycle times, overall sentiment remains positive, and our strong backlog is indicative of future demand. In our first quarter ending in March, we expect total sales growth to be in the high single digits range year on year after strong performance in January. This guidance also reflects our recent acquisitions and the divestiture of our solar business. Gross margin will reflect our expectations for positive price cost contribution. You may recall that we are lacking price inflation as well as the related timing benefits from price increases in the prior year quarter. Nevertheless, we expect solid price execution to result in a year to year gross margin percent increase of approximately 40 to 60 basis points. For the full year 2022, we will continue to execute our strategy and focus on controllable areas of our business. These include ensuring product availability, remaining ahead of inflationary pressures, as well as furthering our productivity gains and cost management. We expect full year 2022 sales to be up mid to high single digits versus calendar year 2021. We expect higher sales and continued cost discipline to more than offset gross margin decline as inventory profits roll off and will result in adjusted EBITDA in the range of 685 to $725 million. We're excited about 2022 and we're off to a good start. As we look forward, our team is energized and ready to execute on our longer term strategic plan called Ambition 2025. I'm pleased to hear that many of you will join us at our investor day on February 23rd and 24th in Houston, where you will hear details about our growth strategy, market execution, capital allocation plans, and have the opportunity to see our newly opened Houston Hub. I'm confident that you will come away with an understanding of how we intend to achieve our full potential. With that, Operator, we're now ready to open the line for questions.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press the pound key. Each caller is limited to one question. The first question is from the line of Katherine Thompson with Thompson Research Group. Your line is open.

Hi, thank you for taking my question today. A lot of topics I'd like to ask, I think you'll most likely cover at the investor day, but one I wanted to touch on today in regards to inventories for the near term and looking at the bigger picture. It's just a clarification of how much of inventory is price versus volume. And then when just strategically from, this is really most post COVID world, and shifting from adjusting time to, as I've had some contactors share with me, just in case, there's an increasing value placed on companies that carry inventory. So obviously a distribution model. How has this shift in thinking impacted how beacon processes on inventory management and hence cash flows going forward? Thank you.

Well, Katherine, I'll take the first one. I'll let Frank answer some of the details on the difference between price and volume in our current inventory. Look, I think we've all been challenged with the current inventory situation and the supply chain challenges, and they've been meaningful. Certainly we've taken advantage of our scale to ensure that we are managing them probably a little bit higher than we would normally through this period of time. Both deliberately and probably on a base, in some cases, project cycle delays, as Frank mentioned in his prepared remarks, are causing us to hold some inventory as we assemble all of the pieces together. But I think your question really emphasizes the value of distribution. We are the ones that aggregate the demand from the marketplace and from various suppliers and are able to deliver that and do just that. And I think that distribution at this point in time is really proving its value. But I think we're gonna see what happens down the road. We're gonna manage our inventories to best enable us to capture as much of the share of the market as we can in a reasonable fashion. If that means long term, we're gonna carry slightly higher balances. That'll be determined as much by the marketplace. But certainly we think that this period of time has emphasized the value of distribution in building the aggregator of demand and for the

suppliers as well. Yeah, hey, Catherine. So conscious decision, obviously, to invest in inventory for all the reasons that you're implying in your question, a couple of numbers that might be helpful. Rough order of magnitude overall, the build is about half price, half volume. It's a little bit different depending on the product that you're asking about. The shingle is maybe on your mind. That's about 50-50 between price and volume. Some of the other bigger categories. On the single fly side, so the commercial piece, that's probably the element that we'd like to get more of if we could. So that volume's down a bit. On the installation piece of commercial, that volume's up a little bit more than the 50% that I mentioned on the shingle side. And then maybe siding would be another good category to mention. That's about two thirds on the pricing side, and about a third on the volume side. So hopefully that gives you a bit of a walk around the inventory situation.

That does. Thank you very much.

Thank you, Ms. Thompson. The next question is from the line of Mike Dahl with RBC Capital Markets. Your line is open.

Hi, thanks for taking my questions. Just as a follow-up to kind of price mix, I want to ask you to round the full year guide. You've given some of the moving pieces around, sales and margin, within the sales guide for both the upcoming quarter and the year. Can you help us think about what's contemplated, price versus volume?

So Mike, the current anticipated price increases we see are contemplated in our guide. If there are no other price increases announced, we're not covering additional ones there. But we are covering the ones that we know about as of today and have implemented. Yes,

I love the likes on the current quarter, so Q1 22. Volume will be down, I'm talking broad strokes here, company average, not any specific product category, in the low single digit range, which puts price obviously up in the low double digit range, which gets you to the high singles guide on the sales side. For the full year, the mid to high guide that Julian gave is really a combination of price and volume. It is positive volume, and obviously positive price. It's about two thirds price, one third volume. Again, I'm giving you rough, broad strokes here at a company level, not any specific product category.

Okay, thanks. A second question, I know you're kind of recalibrating on the bottom quintile, and that's supposed to be kind of this ongoing structural thing that you guys implement each year is just part of your system now. Any early thoughts on what the runway is as you look out to this year from the new batch of underperforming branches?

Thanks for the question, Mike. Certainly, just by the law of mathematics, you end up with a bottom quintile every group just against the company average, and that's the theory behind this. This is something that we will share some targets on at our invest today. We've got a well thought out plan, and we think we've demonstrated that there's significant opportunity. Ultimately, we think significant opportunity remains at the bottom of the market. We're going to be looking at some of the gains, and we will be more transparent on that in a few weeks'

time. Okay,

thanks,

Jeroen.

Thank you, Mr. Daal. The next question is from the line of Keaton Mamtura with BMO Capital Markets. Your line is open.

Thank you, and good afternoon. Just coming back to the balance sheet flexibility, obviously, net leverage is down quite nicely. As you look ahead, can you talk about the priorities and managing M&A, and absent M&A, how would you think about capital allocation?

Sure, as Julie mentioned, and I mentioned in the prepared remarks, that will be a key element of the conversation that we'll have with everyone in about three weeks at the investor day. We've mentioned a number of times in the last few quarters that everything is on the table in terms of consideration as we lay out the capital allocation, capital structure frameworks going forward. So rather than tip our hand now, it's probably worth asking that same question in about 20 days.

Is the M&A pipeline pretty robust at this point, Frank?

It is. We obviously had a couple of good acquisitions late last year. I'd say the first couple of weeks of January is always a little bit of a reset period, but things have kicked back into gear pretty quickly here, and we're actively in conversation with a number of companies, as we always are, but the environment doesn't seem to have slowed down at all. As a matter of fact, Julian and I are actively engaged with a number of folks, and we'll see how many cross the finish line. We certainly like what we see out in the market in terms of the geographies that we're looking at and the products suite that we're looking at, and hopefully we'll be the acquirer of choice, and look forward to integrating those companies with us throughout the year.

Sounds good, thank you.

Thank you, Mr. Montora. The next question is from the line of Truman Patterson with Wolf Research. Your line is open.

Hey, good afternoon, everyone. Thanks for taking my question. So just wanna touch on, residential volumes have been down the past couple quarters, but pricing has stuck extremely well. I'm hoping you can give us some thoughts on the price hike here early in the year, whether you expect it to stick, and then just some color moving through 22, assuming that volumes stay below last year's levels, just trying to understand your confidence and keeping pricing elevated.

Thanks for the question, Truman. I said in my prepared remarks that we remain confident that we can implement price increases to offset inflation. I do think that we will continue to see inflation throughout the year. I don't think that given the overall dynamic, we will see the same type of year we saw last year with multiple price increases in very short 60-day periods across multiple product categories. I think the supply chain is easing, but it's still relatively tight. And you gotta remember, I think as you look out at 2022, demand's gonna be across most of our categories. We think demand's gonna be one of the highest we've seen in the last 10 plus years, except for maybe last year. So you end up with, it's going to be a very good demand environment. I think supply chain challenges are still out there. I think that certainly all the manufacturers across all product categories have room to improve their inventory positions. I think they're going to run so that they can continue to do it. I think that the underlying demand is good. We had a relatively slow storm year last year on the grand scheme of things. I think we would assume that that will return to about average, which is probably a little bit of a tailwind in our assumptions here going forward. So I think we'll see a good environment overall for managing the pricing environment. And I think that with the demand levels we see, like I said, we ultimately remain confident that we can offset inflation.

Perfect, thank you.

Thank you, Mr. Patterson. The next question is from the line of Deepa Rakhavan with Wells Fargo, your line is open.

Hi, good afternoon, everyone. Thanks for taking my question. My first question is on your quarter, current quarter. January is growing double digits, but you're guiding to high single digits, so you're obviously expecting a moderation. But you also had a price increase, levied in January, so just curious, why are you assuming a moderation?

Hey, Deepa, it's Frank. So remember last year, there were some really interesting dynamics in the quarter. January was a pretty good month last year. February was difficult on weather. You might remember the kind of deep freeze that reached all the way down into Texas. So our sense is that January and February will be strong this year relative to last year. March had, what I'll say is some snap back demand from the February difficulties. So I think the March month end of itself will be a tough top for us, and when you blend all that together, you get to that high single range that we mentioned.

Okay, that's fair. Your gross margin expansion for the same upcoming quarter, 20 to 60 bids, is this mostly pricing driven, or are there any other benefits in there? I'm curious, what would that mean to your EBITDA expansion?

Yeah, we didn't give EBITDA guidance, but clearly your question sort of hints at that. I think the gross margin is a combination of the carryover price increases from last year. Obviously those begin to roll off as we go through the year, the January price increase. As Julian just referenced and spoke about in answer to the prior question, we are now getting those higher product costs into the mix as inventory profits have rolled off from the prior price increases. We're always going to be working on private labels, digital, and things like that, which have a margin of creative benefit there. From an OPEX perspective, if you just kind of walk down the P&L, I wouldn't anticipate huge changes on a year over year basis on an OPEX to sales basis, and obviously you can do the math on the EBITDA, which obviously would be a nice lift from last year without dimensionalizing it.

All right, that's helpful. Thanks very much. Good luck, I'll pass it on.

Thank you. Thank you, Mr. The next question is from the line, it's Keith Hughes with Truist. Your line is now open.

Thank you. Questions on non-residential. You've had several quarters here with positive results. The segment has a history of kind of being up and down. Is there anything that's changed in how you've run the business to get a little bit more consistent results? And do you think as you go through 22, could we see the volume there inflect higher given some of your commentary earlier about some commercial activity really starting to stir?

Thanks for the question, Keith. It's very insightful. Yes, the answer is we do think that we're running the business a little bit differently. We do think of our business as having two core businesses, the residential focus and the commercial business, and they're not the same. And so we do think about them as different businesses and run them as such. But I think that the business is still the same. The supply chain challenges on commercial have been manifest across so many different categories. It's difficult to put your finger on it. It's gone from insulation to fasteners back to insulator. I mean, it's been all over the place. And compiling the jobs has been a real challenge. And then getting labor to get it on the jobs and the timing of the projects, it's really been like to Catherine's earlier question, the value of distribution in this time for the contractor and for the manufacturer is as high as we compile those jobs and hold them so we can get job packets out the door. That's really important. I think that we will see some easing as we go through the year of supply chain challenges and on some product categories. And look, I think we're very conscious of some products that are shipped transcontinently and disruptions in that supply chain while it's been easing a little bit more recently. Containers, the cost of containers, the inflation that drives, the ability to get them. There's still a tremendous amount of uncertainty. What I do think is positive overall is that I don't think that there is a sudden belief that commercial construction is just gonna go away. I mean, I think there was a lot of talk early in the pandemic that would anyone ever go back to offices? What would happen to retail? There seems to be a lot of the construction going on out there. And I think it's in categories that are very beneficial for us. There's a lot of investment going on in warehouse space. There's a lot of investment going on in data centers. And those are generally low-rise, large spaces with large rooms. And so overall, I think we feel very good about the position. We're thinking about the commercial business differently. We think the underlying demand trend is extremely positive for the longer-term outlook. And I remain extremely cautious to make short-term predictions because the supply chain is just a challenge right now.

Okay, thank you.

Thank you, Mr. Hughes. The next question is from the line of Michael Rahat with JP Morgan. Your line is open.

Thanks, good afternoon, everyone. Thanks for taking my question. I wanted to just drill down a little bit on the 22 EBITDA guidance or guidance in general, but from a couple different angles. And I apologize if you had covered this earlier in the call if I missed it. But if I'm doing the math right and you're saying sales are up, you expect up mid to high single digits. So if you assume a 7% sales growth kind of in the middle of that and take the midpoint of your EBITDA guidance, I'm getting to a margin of 9.6, which I believe is down 50 bips year over year. So I was just curious on if I have that math roughly correct and what's driving that EBITDA margin contraction.

Yeah, hey Michael. So Matt, I'll give you directional accuracy. Obviously, it's not too hard to put those numbers together. Remember something that we have talked quite a bit about in the last three or so quarters is this concept of inventory profits. So it's obviously gonna hit the gross margin line as the replacement costs for the inventory as we go throughout 2022 is going to be significantly higher than the inventory costs associated with those same products in 2021. So the pricing environment continues to be robust. We're only really handicapping in the guide that January increases that have already been announced. We don't have any other ones built into that. So obviously that can change the dynamic that we get inventory profits in 2022 that begin to build and rival those in 2021 and that dynamic in your map would change. But based on what we see right now, there is that kind of 50 to 100 basis points of headwind that we have and it's probably more toward the northern end of that as we redone the map for the full calendar 2021 that we have to overcome in 2022. And then we've got obviously the pricing mechanism in January, we've got the private label and the digital and other things, but it's really the product cost for the full year at a much higher level in 22 than we had in 21.

Okay, that's helpful Frank. And I guess just kind of also thinking about it from another angle, I just wanted to make sure that included in your guidance, obviously you have the divestiture and the acquisitions so far, but would that also include a, and I know you're gonna go into it later at the analyst day, but would that also include planned improvement from the bottom quintile of brands and

branches? Sure, so let's go back to the first part of your second question. So obviously we'll have a full year of midways results and graph trees results in that guide. In terms of the launching point 2021, one of the housekeeping as I said, in my prepared remarks was that solar is part of continuing operations. So that is part of the 2021 comparable. So realize that the growth rates are better over that organic basis, but obviously we have solar in 2021 which is just a couple of higher.

And in the bottom quintile?

Yeah, I mean, again, productivity is a big part of what we do. We continue to believe that, you know, the bottom quintile branches have huge opportunity. That's not just on the OPEX line. We expect good sales growth out of those branches. We expect margin, gross margin, accretion there. There's still, as I mentioned on prior calls, literally hundreds of basis points of difference between the under-performing branches and the performing branches when you look at the gross margin line as well as on the OPEX line. So both of those are in play anytime we look at an under-performing branch as is just the general sales rates that we're seeing there. In 2021, we saw higher growth rates in the under-performing branches on the sales line. And obviously we saw nice accretion from both the gross margin and the OPEX line as well.

Thanks so much.

Thank you, Mr. Rahat. The next question is from the line of Philip Ninge with Jeffries, your line is open.

Hey guys, can you find any color on the volume expectations by segment for your full year guidance? You know, I'm particularly curious about Red as just given your tough comps and just weaker storm carrier demand. And on the flip side, commercial, you know, I think underlying demand, as you kind of pointed out, it's been pretty robust, but some of these supply chain challenges have weighed on volumes. So I'm just curious, does that start off kind of negative or flattish and then build through the year as some of those bottlenecks ease? So any color would be really helpful here.

Yeah, no, good and fair question. We're gonna have a couple of unique dynamics by line of business next year, I'm talking full year. On the Red-E side, you know, we're probably in that volume piece of the those things that it's overall. It's gonna be a first half, second half dynamic because if you go back to the COVID period, the second half of 20 and the first half of 2021 were really strong volume quarters and we've tried to call that out over that period of time. That obviously flips a little bit as we get into the second half of 2021. So the comparable is not that they're easy, but on a relative basis, they're easier than the first half of 2021. So I think you'll see some progress throughout the year from maybe starting out negative and ending up positive. On the non-res side, you know, it's probably a higher growth rate, I think mid-single digits probably on the volume side on the non-res piece, again, there's going to be first half, second half dynamics. Remember that there wasn't any real supply chain challenges in the first half of last year, whereas there were supply chain challenges in the second half of last year. So it's gonna be a little bit of a different dynamic there. Complementary again is a large set of disparate businesses, solvers in the prior year. So I'd probably give that a flattish type of an outlook on complementary.

But if I heard you correctly, you're expecting low single digit volume growth in resi for the full year? I mean, I think most people are expecting more muted backdrop. Is that driven by anything in particular? I guess you mentioned storms maybe being normal, driving that new construction and be helpful to kind of unpack that resi growth.

Yeah, I mean, I think it's all of the things that you mentioned. So obviously midway, the acquisition is helpful. Crabtree is helpful. We have an expectation that storms will revert to the 10 year average, which will provide some help for us as well. Housing is there. So the cycle of new housing 20 years ago was still in the lift period of time. So there's a fair number of factors in there. And we're hopeful that the supply chain won't present us any challenges as we fulfill the demand that we believe is out there. The other point, and this goes to both Michael's and Keith's questions as well. We mentioned a couple of times in our remarks about the backlog. The backlog, which is about two thirds non-res and about one third residential and complimentary is literally the highest that we have in our history as far as we can tell. It was a 14% quarter over quarter. So a little unusual given the time of year, but it was up on a quarter over quarter basis. And it's

literally tripled

in the year over year period. So we have really good insight into what the next six to 12 months look like when we look at those backlogs and we realize what's

in. Got it. Frank, sorry, in the net pic. Is there any way to parse out that resi volume piece organically without the acquisition? How we should think about it?

So we mentioned that Midway's about 130 million in annual revenues. We've got a couple of months in 2021 that's in the coppable given what we said about. There's a little bit of a split though, if you remember some of the press releases that we put out. The resi piece of Midway is kind of a thirdish of that business and complimentary's about two thirds of

it. All right, great, thank you.

Thank you, Mr. Ninge. Again, to ask a question, please press star followed by one on your touchtone telephone. The next question is from the line of David Manfey with Baird, your line is open.

Thank you. I was wondering if I hit the numbers incorrectly. So here we are. So a question on what you were talking before about the 50 to 100 basis point gross profit margin inventory benefit in 2021. And then now you're guiding the first quarter slightly higher year over year. And it sounds like you continue to chase price higher. I mean, obviously you raised price again here. Would it stand to reason that you probably won't give all of that back in the coming calendar year? Or do you think it'll still unwind by the time we get the end of 2022?

Thanks for the question. Look, as said in my prepared remarks, we made confidence that we can more than offset inflation with actions. We're very focused on pricing execution. We think we've done that very well over the last 18 months or so as we've seen rapid inflation. Obviously, we're keen to take advantage of inventory profits and we certainly don't wanna let that go. We continue to look at the opportunities to do that. The pricing dynamic over the last, I said 12 to 18 months has been pretty unique. With just about every product category, seeing rapid factor back increases and executing on that requires a tremendous amount of work. You're replacing so many SKUs. And so I think our execution on that has been really, really strong. We will continue to execute at that high level. We think there's continued opportunities to enhance our overall pricing dynamic as well. We think that there's, as Frank said in his remarks as well, that when you think about tri-bills, when we think about the digital, when we think about underperforming branches, when we think about the pricing dynamic overall as well as our execution, we think there's a lot of ways that we can have a really good influence on both gross margin and even down margins going forward.

Okay. All right, and Frank, just some technical questions here. Cap-backs that you're thinking right now, unless that reveals too much that you don't wanna talk about capital allocation and then your expected tax rate. And I was also hoping you could disaggregate the $151 million depreciation and amortization separately.

Gosh, okay. Yes, yes is the answer. We can handle all that. Cap-backs, if you think about 2021, which I know wasn't the basis of your question, but in 2021, we were about 1% of sales, which is essentially what we guided for throughout the year. We are going to discuss Cap-backs at the investor day as part of the broader capital allocation perspective. And so I'd rather not set my hand quite yet on that one. Tax rate, generally you can always handicap us in the 25 to 26% range. The federal is 21 and the state's usually gonna be four to 5% as a federal benefit. If I look at 2022 on depreciation and amortization, that 151 breaks down something in the 65-ish range on depreciation and 85-ish range on amortization.

That's helpful. Okay, thank you very much.

Thank you, Mr. Manfee. The next question is from the line of David McGregor with Long Depot Research. Your line is open.

Hi, this is Joe Nolan on for David. I just had a quick follow-up on the non-REDS backlog. Can you just give any sense of how far those extend into 2022 at this point based on your current expectations for raw material availability? And then with recent price increases on the non-REDS side, are those taking a bit longer to see traction given how extended backlogs are at this point?

I'll start with the second one. The answer to that is no. Generally the increases tied to shipments not to orders placed. So we do look out. One of the challenges we are finding with that is that we do have to reprice quoted jobs. It's one of the big challenges with the supply chain right now. Quoting jobs that get delayed, you have to recrote them. That causes a lot of angst with both for us, our customers, the suppliers, the general contractors, and building owners. That's one of the dynamics that is really up in the air and difficult to manage right now. But ultimately, long backlogs and long lead times are less indicative of price increases. So that's kind of where we are overall. I think that we feel pretty good about where we stand. The challenge is really managing the overall supply chain, getting to the jobs. So the backlogs that we have, we think these are all real orders that are out there, but jobs that are gonna ship at some point in the year, it's putting all these things together and is the real challenge. And we've got lead times on some products that are still at six to nine months. And it's just difficult to manage

inventory in that type of environment. We certainly think it's going to ease as we come through the years. The manufacturers get their production right as we start to work off these backlogs. But in this industry with such, with jobs shipping for installation in days, when you've got six months and longer lead times on certain materials, it's just incredibly difficult to manage. Joe, in terms of the overall backlog that I mentioned, not parsing it between resi and non-resi in this remark, the last few quarters, as we've looked at this, the trend has been about 50 to 60% of that backlog was scheduled to ship within 90 days. The resi piece of that would naturally be on the shorter end and the non-res would likely be on the longer end of

that. Got it, that's very helpful, thanks.

Thank you, Mr. McGregor. The last question is from Jeff Stevenson with Luke Capital, your line is open.

Hi, thanks, this is Jeff on for Garrix Mois, thanks for taking my question today. I'm just wondering, have you seen any improvement in the residential roofing supply environment and are you still on allocation from manufacturers? And then what's your current expectation on when we could return to a more normalized supply environment in residential?

Thanks.

Thanks, Jeff. Yeah, look, I think that actually in this sense, one summer is a good measure for us. I mean, number of shipments in the last quarter were below what we believe is total production. I think the manufacturers took the opportunity to do some of the maintenance that they're required to do and their plans to keep them running. I think that their plan would be to run full-out. There are pockets of real tightness around the country and there are pockets where supply has eased. Obviously, this time of year, it's really difficult to call a full year and how that's gonna shape out. But I think we would expect to see probably a slight drop in overall shipments year over year allowing the manufacturers probably to rebuild some of their inventory. I think that my guess is the distribution channel did what we did as best they could in the quarter and put as much inventory as they could into their warehouses in a quieter period of time. As it turned out, the fourth quarter calendar, fourth quarter was actually very strong, so probably less than we thought on the residential side. So I think that early in the year, it's gonna remain tight. I think the manufacturer's gonna catch up. I think they're gonna put a little bit of inventory in space, but I think that as we get out of this period of time in winter and the storms that we've seen over the last few weeks, bad for short-term shipments and really good for long-term demand, it generally causes damage, winter damage. So I expect us to see a decent pickup. And overall, I think, like I said, I think the overall demand level's gonna be strong. I think it gets a little bit easier as we go through the year, but I don't expect a sudden wide-open market to reappear at any time in the next several months, at least.

Very helpful, thank you.

Thank you, Mr. Stinson. That concludes the question. Now I would like to turn the call back over to Mr. Julian for his closing remarks.

Thanks, Tania. I appreciate everyone's attention to our call today. I do wanna reiterate the pride I have in the team's performance in 2021. It is an incredibly challenging environment still, as we've articulated a number of times on this call, and for us to deliver the type of transformational year that we have and set the building blocks for our future ambition is something that I'm incredibly proud of, and we're really looking forward to talking to you all on. At the end of the month that I invest today. And with that, thank you all for your attention. Good night.