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spk08: Good afternoon, ladies and gentlemen, and welcome to the Beacon Second Quarter 2022 Earnings Conference Call. My name is Tamia 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 for the end of this call. 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 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, will likely result, outlook, project, and other words and expressions 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 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 2021 Form 10-K and subsequent filings with the U.S. 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 the 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, August 4th, 2022, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures to the most comparable measures calculated and presented in accordance with GAAP is set forth in today's press release and the appendix to the presentation accompanying this call. Both the press release and the presentation are available on our website, www.becn.com. I would now like to turn the call over to Mr. Bennett Songfi, Vice President, Capital Reserve. Please proceed, Mr. Songfi.
spk01: Thank you, Tamia. Good afternoon, and welcome to our second quarter 2022 earnings call. With me on the call today are Julian Francis, President and CEO, and Franklin Egro, Chief Financial Officer. Our prepared remarks will correspond with the slide deck posted on 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.
spk03: Thanks, Bennett. Good afternoon, everyone. Let's begin on slide four of this presentation. Beacon delivered a strong financial performance in Q2 with record-setting top-line and bottom-line results and ahead of our expectations outlined during our earnings call in May. Our team's commitment to deliver great value to our customers combined with solid end-market demand enabled us to continue our track record of growth. And our focus on margin-enhancing initiatives and excellent pricing execution allowed us to deliver the 10th straight quarter of year-over-year increase in adjusted EBITDA. In a challenging inflationary environment, we continued to be price-cost positive and achieved the highest profits and margin in our history. The fundamentals of both residential and commercial roofing demand remained healthy across our end markets. and we have yet to be meaningfully impacted by rising interest rates. We continually monitor market conditions and remain watchful for changes in the macro indicators. We continue to believe that the replacement cycle that underlies approximately 80 percent of our business has a multi-year growth trajectory. If you look back 20 years, you see the beginning of a historic surge in the residential construction. Keep in mind that the expected life of a roof is around 20 years, And as those roofs begin to fail, the replacement cycle will begin anew. I'm also very pleased with the early progress towards our Ambition 2025 goals. Central to achieving our targets is our relentless customer focus. Our customers trust us to reliably deliver high-caliber service in any demand environment, and they can be assured that we are prepared with great products and services when and where they need them. We also have a clear and balanced capital allocation plan that consists of strategic investments in greenfields and acquisitions, our existing branches and our fleet, as well as returns to shareholders. We have restored financial flexibility to our company, and today our balance sheet provides the ability to deploy capital in value-creating projects throughout the cycle. In the first half of 22, we have rapidly accelerated the pace of investments in our fleet, greenfields, and share repurchases, in addition to actively pursuing a strong pipeline of tuck-in acquisitions. Please turn to page five of the slide deck, where you will find an overview of our strategic plan. Named Ambition 2025, it is intended to unlock the potential of our people, our growth engine, and our operations in order to deliver superior shareholder returns. We have structured our roadmap in four areas with detailed initiatives that are systematic and measurable. The first area is about building a winning culture. Our business is driven by our people working together. Second is a comprehensive set of measures to drive above-market growth, serving our markets in unique ways. Third is our continuous improvement process, which drives our operational performance. And fourth, by doing these things well, we will create value for our shareholders. The goals we laid out on Investor Day are to grow the business to more than 9 billion of sales by 2025, an 8% compound annual growth rate from our 2021 baseline, and to deliver EBITDA of about $1 billion, approximately a 10% annual growth. Now please turn to page 6 of the deck. I'll provide a brief update on our strategic initiatives, which will give you insight on how we intend to achieve our plan. Let me highlight a couple of ways that we are building a winning culture. Two of our core values are putting people first and our commitment to do the right thing. We believe that everyone deserves a safe home, and that is why we established a national partnership with Rebuilding Together, a nonprofit organization providing home repairs for underserved neighbors in Beacon's communities. As a distributor of essential building products such as roofing and siding, this partnership allows us to work with these local community champions to create an impact. I'd also like to highlight our continued progress related to our diversity, equity, and inclusion. During the second quarter, we announced Michelle Mulder as the winner of Beacon's second annual North American Female Roofing Professional of the Year competition. Michelle is the founder and owner of Nailed It Roofing, which has been one of the top roofing companies in North Bay, Ontario for the past seven years. Michelle's interest in the trade started in high school, which led to finding a passion in roofing. We applaud her work on the job site and devotion to mentoring young women in the community. Her story of determination and perseverance will surely inspire other women to become trailblazers in our industry. We are also driving growth above market and enhancing margins through a set of targeted initiatives. You may recall from our Invest Today that expanding our footprint is a major lever in our growth plans, which includes strategic investments in greenfields and tuck-in acquisitions. I'm pleased to report that we have quickly ramped up our ability to move forward on our pipeline of greenfield candidates. And while we had originally discussed opening 10 facilities in 2022, we are now targeting approximately 15 new branches located in key markets. Our focus on national accounts is also generating results. We grew sales to our largest customers by approximately 37% in the second quarter. Through our scale and capabilities, we not only serve national home builders, but also large professional repair and re-roofing contractors in both the residential and commercial roofing end markets. Our ability to invest in specialized account representatives who focus on the operational dynamics in each of these end markets offers a differentiated value proposition to these high volume customers. We also have a set of initiatives that support margin growth. Our digital capability continues to be a clear competitive differentiator for Beacon, and sales on our online platform deliver approximately 150 basis points better margin compared to offline channels. In the second quarter, 17% of residential sales went through this platform. We provide the most complete digital offering and continue to expand our capabilities to serve customers in the way that brings them the most value. Our most recent digital integration with Acculinks, a leading provider of all-in-one business management software for roofing contractors, is off to a great start. And I'm pleased to report that we achieved more than $100 million of sales through our digital channel in the month of June. This is a major milestone and one we intend to build upon by making it easier for customers to do business with us anywhere and anytime. Our private label line of high-quality building products sold under the Tribuilt brand deliver professional results and permit our customers to differentiate themselves from their competitors. For Beacon, these products yield between 500 and 2,000 basis points of additional margin versus the alternatives. Sales of our private label are up 37% in the quarter versus the prior year. Tribelt is becoming a recognized and trusted name by professional contractors across our residential, commercial roofing, and complementary end markets. As we have discussed for several quarters, We are enhancing productivity and capacity through our continuous improvement and operational excellence initiatives. Our focus on the bottom quintile branches has generated meaningful contribution to EBITDA, and this year is no different. We have a process to improve these branches, and the structure is simple and repeatable. We diagnose the root cause of the problem and ensure that branch managers at these locations are properly resourced to remedy the issues. Through this process, we have generated approximately $20 million year-on-year EBITDA improvement year-to-date, a strong start on our way to our $75 million Ambition 2025 target. And finally, our strategic initiatives are designed to create shareholder value, and we are committed to improving returns. During the second quarter, we entered into a second accelerated share repurchase program in the amount of $250 million. And this was in addition to the $125 million ASR completed in the second quarter. The repurchases are part of a $500 million share buyback authorization announced at the investor day. The buyback program demonstrates both our commitment to delivering value to shareholders and our confidence in the plan. As you can see, We truly have multiple paths to growth and margin expansion through the cycle. We have a differentiated approach and have built the tools to achieve our ambition 2025 targets. Now I'll pass the call over to Frank to provide a deeper focus on our second quarter results.
spk13: Thanks, Julian, and good evening, everyone. Turning to slide eight, we achieved nearly $2.4 billion in total net sales in the second quarter, up 26% year over year. primarily due to higher average selling prices for our products. In the aggregate, price contributed approximately 24% to 25% to revenue growth, and estimated volumes contributed slightly less than 1% as higher demand in our residential and complementary lines of business was partially offset by lower volumes in some aspects of our non-residential line of business. Our acquisitions continued to perform well in the quarter. Revenue from acquisitions more than offset the divestiture of our solar business late last year. As a reminder, our solar business is reflected in our prior year numbers as part of continuing operations. The fundamental drivers of our residential line of business remained healthy as re-roofing activity and new units under construction supported growth and favorable pricing. Residential roofing sales were up approximately 22%, primarily due to shingle price execution including successful implementation of the April shingle increase. Shingle volumes grew by low single digits, well ahead of ARMA shipments, which were down approximately 3%. This year-over-year growth is all the more impressive, given the strength of the prior year shingle comparable, which had the benefit of the COVID snapback. Additionally, we continue to have below-average hail and major storm volume year-to-date. Non-residential roofing sales were up approximately 40%, as price execution more than offset inflationary pressures. While overall non-residential volumes were down versus a very strong prior year quarter, certain elements of the non-res portfolio had positive volumes in the quarter, reflecting re-roofing contractors shifting to products with higher availability. Our quarter end backlog reached record levels, with the majority of the backlog weighted toward non-residential orders. Complementary sales increased approximately 19% year over year, as we achieved higher prices across nearly all product categories. Higher volumes in siding and lumber also contributed to the growth. As you may recall, our complementary product category has approximately 80% residential and 20% non-residential exposure. Turning to slide nine, we'll review gross margin and operating expense. The execution of price increases across many product categories, including the April shingle price announcement, once again kept price above product inflation and created favorable timing benefits. In the aggregate, price cost was positive by approximately 25 basis points in the second quarter on a year-over-year basis. I would like to highlight that our team has stayed ahead of the cost curve in the last eight quarters, an impressive track record in a challenging inflationary environment. Strong sales of our higher margin private label products also contributed to gross margin, higher non-residential sales mix, offset the price cost and private label improvements, and maintained gross margin at 27.6%, equivalent to last year's record performance. Higher sales drove adjusted OPEX to sales down 80 basis points year over year. Adjusted OPEX was $370 million, an increase of $61 million compared to the year-ago quarter. The increase was driven primarily by increased headcount, inflationary pressures in wages, fuel, and lease-related expenses, such as rents, real estate taxes, utilities, and maintenance costs, as well as higher incentive compensation given the strength of the company's performance. Commissions, credit card fees, and travel and entertainment spending also contributed to the increase. The year-over-year change in OPEX also includes approximately $8 million in costs associated with recently acquired branches, as well as Greenfields and OTC hubs opened in the last 12 months net of our solar divestiture. Excluding the acquisitions, our headcount was up year over year as we continue to make sure that we are staffed for the remainder of the selling season in what remains a tight labor market. As we have demonstrated in the past, we stand ready to adjust to changing market conditions as we balance our productivity efforts with our investment to drive and support above-market growth and margin enhancement as part of Ambition 2025. For example, we have completed building out our dedicated M&A and Greenfield teams, and have invested in their sales organization, customer service initiative, and digital platform. These and other Ambition 2025 investments total approximately $12 million within the operating expense line in the second quarter. Turning to slide 10, net inventory reached a seasonal peak at the end of the second quarter, up approximately $380 million year over year, largely driven by product cost inflation, which accounted for about two-thirds of the increase We continue to carry portions of our inventory longer than expected due to lengthening project cycles and to ensure material availability to support our healthy backlog. Inventory from acquisitions and greenfield load-ins also contributed to the increase. After investing in rebuilding our inventory for many quarters following the COVID snapback to ensure we were able to effectively meet demand, we now expect to reduce inventory in the second half as we follow a more normal pattern of seasonality and experience potential softness in residential new construction. Our capital allocation is balanced between organic and inorganic growth opportunities and shareholder returns. As Julian mentioned, our Greenfield team is executing on a pipeline of projects to deliver approximately 15 new locations this year. You will also recall that our Ambition 2025 plan calls for us to invest up to 2% of our revenue in CapEx, with emphasis on driving and servicing organic growth. We continue to evaluate a full pipeline of potential acquisition targets. We have a rigorous set of criteria and will remain disciplined in order to ensure that we create shareholder value through acquisitions. Our recent tuck-ins are good examples of the types of deals that we are looking at. They must be actionable at the right price, have the right fit, benefit from the scale and capabilities we have built, and offer efficient integration to ensure the expected returns. As outlined at our investor day, Through 2025, we intend to allocate $1 billion in capital to acquisitions within our three existing lines of business, and we are actively pursuing a healthy pipeline of targets. Turning to shareholder returns, as Julian mentioned, we entered into an additional accelerated share repurchase agreement in the second quarter. Year to date, the buyback program has allowed us to retire over 5 million shares, reducing our common shares outstanding to 65 million at quarter end. We look forward to finishing the second ASR in the fourth quarter, after which we will have completed just over 75% of the $500 million buyback authorization announced in the first quarter. Our capital allocation plans are underpinned by renewed financial flexibility restored last year when we divested our interiors business and completed a comprehensive refinancing. As you can see on the charts, our balance sheet has undergone a complete transformation over the last 10 quarters. and we essentially have no near-term refinancing risk, a good position to be in given the current rate environment. As of the end of the second quarter, our net debt leverage sits squarely at our target of 2.5x, well within the range of 2 to 3x we outlined at the investor day. Operating cash flow in the quarter was marginally negative. That said, we continue to have ample liquidity of approximately $800 million at quarter end. and we expect cash generation in the second half of the year to significantly exceed the second half of last year. Our balance sheet strength and liquidity enable us to take advantage of opportunities even in a changing economic environment. We are pleased with our performance in the first half of 2022, are beginning to make progress toward our ambition 2025 goals, and are confident in our ability to successfully compete in and adjust to changing market conditions. With that, I'll turn the call back to Julian for his closing remarks.
spk03: Thanks, Frank. Before we turn the call over to Q&A, I would like to discuss the remainder of 2022. Please reference page 12 of the slide materials. For the third quarter, we expect end market demand to remain supportive, even as headwinds such as rising interest rates, inflation, supply chain disruptions, and labor shortages persist. Non-discretionary R&R demand underpins our residential and commercial roofing and markets and will continue to provide opportunities to grow sales across all three of our lines of business. We expect total sales growth in our third quarter to be in the 23 to 25% range year over year. This guidance reflects our recent acquisitions and the divestiture of our solar business. We have a track record of disciplined price implementation, which has resulted in several quarters of positive price cost. Staying ahead of inflation remains a priority, so we continue to emphasize price execution to our teams while being mindful of our organic growth objectives. With that in mind, gross margin for the third quarter is expected to be in the 26% range. and reflects our expectation for price increases across all product categories from the beginning of the year as well as the anticipated inventory profits. Regarding the second half of the year, we remain focused on areas within our control, including sales and operational execution, product availability, inventory reductions, and cost management. Please remember that we will be lapping significant inflation, particularly within the commercial roofing product lines. As a result, we are increasing our full year 2022 sales growth expectations to slightly above 20% versus the prior year period. We expect that sales growth and continued cost discipline will result in adjusted EBITDA in the range of $825 million to $875 million. And as Frank mentioned, we expect significant cash flow in the second half of the year. Although we continue to believe that the demand environment will be constructive, our forecast range accounts for greater uncertainty going forward. We have also taken into account the fact that we have seen below average storm activity so far this year, which will affect our second half demand projections, which were originally based on prior five-year averages. With respect to gross margin, we expect to see a roll-off of inventory timing benefits in the fourth quarter and expect heavier non-residential sales mix compared to the prior year. We have a resilient business model and a leadership team capable of adjusting quickly to take advantage of opportunities in the market as they develop. More broadly, we are confident that our Ambition 2025 plan provides us with multiple paths to achieve our growth and margin targets. we remain focused on executing at a high level, delivering value to customers, shareholders, employees, and communities. And with that, Tamia, I'd like to open it up for questions.
spk08: Absolutely. 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. This caller is limited to one question. The first question comes from Keith Hughes with Truist. Your line is open. Keith, your line is open.
spk17: I'm sorry, can you hear me now? We can. Okay, great. I have a question on non-residential. Going up against some tough comps, as you said. Do you expect that volume to fall off in the second half of the year? And I guess why? It seems like non-residential is moving in mostly a positive direction in many markets.
spk03: Yeah, look, Keith, I think there's still a lot of uncertainty. There's still supply chain challenges. We're certainly seeing labor have an impact on project cycles, cycle times. I think we remain positive on the overall outlook for non-residential construction. I think it's going to be a choppy environment, and that's going to continue for a little while.
spk13: Keith, in the third quarter, we certainly have non-res growth built into the numbers that Julian gave you and You know, the performance that we've seen so far in July would indicate that, you know, those numbers are going to continue to be positive, certainly through the third quarter. What I think you should read into the guide as you do your math and think about Q4, that's where the uncertainty is. So we continue to see a strong non-res environment and should benefit from that.
spk17: Okay. Thank you.
spk07: Thank you. Our next question comes from Ryan Merkel with William Blair.
spk08: Please proceed.
spk09: Hey, guys. I had a question on price-cost, I guess a two-parter. Julian, you mentioned you might start to give it back in the fourth quarter. Can you give us a sense of the magnitude? And then I believe 90 basis points was sort of the give-back that you quantified before. Is that still the same number, or has it gone higher at this point?
spk03: I think that what we said last time around was that we estimated that the inventory profits we saw represented about a 90 basis point benefit that we'd seen going forward and that it would eventually start to roll off, assuming that there were no more price increases that were announced and we weren't going to continue to benefit. This year has been a little different than we thought at the start of the year. We've continued to see those inventory profits as we've taken advantage of timing of the price increases, making sure that we're in a great spot as we go forward. And we think that's actually a good part of how we manage the business and thinking about generating those inventory profits by buying at the right time at the right price in the marketplace. And then as price increases roll through, you know, we're not seeing so much going forward. We would expect that to roll off, and certainly it will have an impact in the fourth quarter.
spk09: Thank you.
spk08: Thank you. Our next question comes from Truman Patterson with Wolf Research. Your line is open.
spk14: Hey, good afternoon, everyone. Thanks for taking my question. Just wanted to follow up on Keith's question on the non-residential side of the business. You mentioned that backlogs remain large. Have you actually been able to work those down a bit, or are they still elevated where incoming work has outpaced out-the-door sales? And then secondly, we've always thought of non-residential kind of EBITDA margin relatively at parity with residential, given the strong pricing, have you actually seen non-residential margins, you know, go above the residential side, at least on the EBITDA line?
spk13: Hey, Truman, in the backlog, the backlog peaked in the middle of the quarter. It still ended up at the end of the quarter higher than the end of the first quarter. So it is coming off, but very slightly so far. So we're continuing to see a really healthy backlog, and it continues to be mostly non-res. So we continue to see strength in that. Back to Keith's initial question. In terms of the relative profitability, we've talked about that at the gross margin level with non-res gross margins lower than resi gross margins. Obviously, that gap has closed some by virtue of the inflationary environment that we've been in. Remember, though, that on the OPEC side, we do experience lower OPECs associated with the non-res business. And so it's in the right neighborhood, especially in the areas where we perform really well on the non-res side. So some of the regions of the country that have a really strong non-res business, it certainly rivals the best of our residential business. So it just depends on which region you're talking about.
spk14: Perfect. Thank you, and good luck in the upcoming quarter.
spk13: I appreciate it.
spk08: Thank you. The next question is from Mike Dahl with RBC Capital Markets. Please proceed. Hi.
spk16: Thanks for taking my question. So a follow-up question, you know, you're talking about not expecting inventory benefits going forward. There is a price increase in the market in August, but you've also got kind of channeled these stocks, so some moving pieces. And I guess wondering, you know, specific to your comments about inventory and price cost, how should we interpret that in terms of your approach to the current price increase or what you think the acceptance will be in the market?
spk03: Thanks, Mike. We will continue to execute on our pricing strategy as we see the price increases come in. This has been a strength of our execution over the last two years. We think this has been one of the keys to us unlocking a lot of value at Beacon and really good management of that. As I said in my prepared remarks, we continue to emphasize to our field teams the importance of making sure that we're communicating to our customers about the price increases and we're passing them through. So we'll continue to work on that. Obviously, the environment to some degree dictates the success or the failure of price increases. I do think that there's a little bit more uncertainty going forward about this increase. I think we've seen announced numbers that I don't believe are going to be transmitted into the marketplace either by us or by the vendors that are supplying us.
spk16: Okay. Thanks, Joey.
spk08: Thank you. The next question is from Philip Dean with Jefferies. Please proceed.
spk12: Hey, guys. It sounds like you're going to be destocking inventory in the back half. Julian, do you expect it to be normalized by the end of the year? And then from a financial impact, Frank, any way to think about decremental margins when you kind of draw down inventory in any color in terms of product categories where you have the most work to do in terms of managing that inventory back to a pretty healthy level?
spk03: Thanks for the question. Look, we're going to do it across all of the product categories as we sort of match demand and supply. Obviously, the last two years, again, has been sort of chaos in the supply chain in many categories, in many product lines from many, many factories. We've been on planned availability and allocation. And that obviously means that you're trying to get as much into stock as you can to ensure that you have it to sell. We're seeing those supply chain issues ease. And as those supply chain issues ease, we want to get back to a more normalized level of inventory and inventory management. We think we're well positioned. The good news is we do see short-term additional price increases that are announced, so we're going to take advantage of that. We also think that we need to manage it through to get to somewhere towards the end of the fourth quarter. We would be back closer to what we would consider normal levels. One of the things that we're still watching very, very carefully is some supply chain disruptions that probably remain certainly more on the commercial roofing side than the residential side. So we're watching that carefully, and we want to make sure that we've got product available when our customers show up at the branches.
spk13: Hey, Phil, it's going to be regional. It's going to be vendor-specific, product-specific. We're at a place now – given the demand environment and where we are from a stocking perspective to right size in some areas. But there are going to be other areas which are heavier demand or maybe storm related that we're going to be buying as much as we can get in those markets. So it's really the net impact of all of that that we're trying to illustrate in the way that we telegraphed the reduction in the second half. In terms of the incremental, decremental, I don't think it's going to have a significant impact on that because we are going to be buying call it at still a high replenishment rate and be sub 100%, but it's still going to be at a fairly high replenishment rate. So I still think it's going to be driven by what you see on the revenue change and what you see on the EBITDA change.
spk12: Thanks, Locke. Great call.
spk08: Thank you. The next question comes from Deepa Raghavan with Wells Fargo. Your line is open.
spk11: Hi. Thanks for taking my question. I appreciate it. The ASR and growth initiatives, both green or brown, are nice to see so far, but given that we're going into a slowdown, could you wait for better opportunities and timings, perhaps? Just curious how you're thinking about managing the slowdown on these capital deployment initiatives. Thank you.
spk03: Thanks for the question. If I understood it correctly, it's really coming down to capital deployment in terms of shareholder returns and our share buyback program. Remember, we were authorized, the board authorized a $500 million share buyback program. Given what we've seen in the first half of the year, given the performance of the company, we thought it was a great opportunity for us to actually accelerate that much quicker than we thought. We put in $125 million accelerated share repurchase program shortly after our investor day in February. And I think that as we saw the opportunities with some of the market conditions and some of the assumptions going ahead as that rolled off, we thought it was a great opportunity to go ahead and put another one in place twice the size. By the end of the year, we will have spent in excess of $375 million of that $500 million authorization. I think that going forward, as we continue to be successful and drive this company forward, I would expect to see additional programs authorized by the board going down the road.
spk13: Yeah, Deep, the only thing I would add is, you know, certainly the company looks at its valuation and ultimately has to make a decision in terms of capital deployment. And, you know, we felt like the stock is a good buy at its current valuation, and that fed into our decision in terms of capital allocation. At the same time, we have the ample dry powder that I mentioned. We have additional balance sheet capacity. And, you know, when there are opportunities, whether they be Greenfields or M&A, and it makes sense for us through that discipline criteria that I mentioned on the prepared remarks, we're going to jump in. So we think we can create value in both ways.
spk11: Got it. Good luck.
spk03: Thank you.
spk08: Thank you. The next question comes from Michael Rehat with J.P. Morgan. Your line is open.
spk05: Hi. Doug Wardlow on for Mike. Just briefly, you guys touched on – it was on slide 12, product availability. I'm just curious if you could give more color on where you guys are relative to the supply chain and how difficult it has been getting all of the materials in the past quarter and where you see that moving forward.
spk03: Yeah, thanks for the question. We certainly see – The supply chain challenges that we've faced over the last couple of years easing, you know, both residential and on the commercial roofing side and the complementary. I mean, it's been, one, an incredibly tight market. There's been a lot of supply disruptions in terms of – you know, chemical supply lines that feed into our suppliers' raw materials and manufacturing base that dried up and caused plants to shut down, which obviously has a ripple effect through the supply chain and is a real challenge because it shorts the entire industry at a time when demand had picked up. We've seen most of that go away. If you remember, that really started back in that February, was it February 21 freeze in Texas that shut down. Then you've got the hurricanes that impacted the Louisiana coast that shut down some chemical facilities. All of that had a huge impact. Some of the supply chain disruption out of China during COVID, and even to the extent of the the Russian invasion of Ukraine, we saw some grades of metals get impacted in terms of supply chain. So it's really been a crazy couple of years to try and get all of these things arranged. And that's partly why we were trying to get our inventory levels up and trying to take advantage of our scale and power in terms of buying to get preferential treatment in terms of getting access to materials that were in short supply. We're seeing all of those elements ease. We're seeing more capacity coming online. We're seeing the capacity that had to be shut down because of shortages come back. We're seeing the manufacturers run better. It's very disruptive in COVID. You get an outbreak at a plant and the entire plant has to shut down. So All of those elements are starting to come back in line, but not all of the supply chains have gotten to a point where we feel completely comfortable that we're in the right space, that when we place an order, we know we'll get it in the timeframe that we would expect to in what we'll call normal conditions. So we continue to manage that, but I would tell you, whereas it was probably 80, 90% of products that were impacted a year ago, we're probably reverse of that now. It's probably 10, 20% of products that are impacted, and even those 10, 20% are much less impacted than they were 12 months ago. Is that helpful?
spk05: Great, very helpful. Thank you. Okay.
spk08: Thank you. The following question comes from David Manthe with Baird. Please proceed.
spk04: Yes, thank you. Good afternoon, everyone. On slide 9, I believe it shows your organic headcount. It looks like it's up pretty significantly. Could you outline your thoughts behind that uptick relative to the current slattish volume trends? Yeah, David.
spk13: Hey, it's Frank. So, in terms of the organic headcount, which obviously we've pulled out the M&A piece for you there. The hourly workforce is the predominant impact there. We wanted to make sure that we had the drivers and the helpers and the warehouse men on property. And as you know, it's been an extremely tight labor market. So making sure that we had the right folks to support the growth in the future was the important thing there. I would also tell you that if you go back and recall the Investor Day outline, we certainly wanted to you know, to increase the capability of our sales workforce. And we've done some of that as part of that headcount. And we've, you know, bolstered the field management and added some corporate capabilities all toward the Ambition 2025 goals that we laid out. So, you know, we feel good about the investments that we've made. Obviously, if it softens up a little bit, you might say that we got a little ahead. But, you know, we hopefully have shown you in the past our ability to toggle as necessary, depending on what the environment looks like.
spk17: All right, thank you.
spk07: Thank you. The next question comes from Keaton Momotora with BMO Capital Markets.
spk08: Your line is open.
spk10: Thank you, and good evening, Frank and Julian. When I think about your, you know, S522 EBITDA guidance, you know, I'm just curious kind of what gets you to the, you know, top end versus the bottom end of your range, Is it really kind of, you know, what happens to demand, especially in Q4, or is it, you know, the market's getting competitive? And I'm curious if the August price increase is included in your guidance right now. Thank you.
spk13: Hey, Keetan. So, look, the macro is certainly on our minds as we put that guide forward. If, you know, we end up with a little bit later impact, or a little lesser impact, then we'd be more toward the top end of that range. If we're more successful in the August increase than we are currently thinking, then, you know, that obviously helps as well. If we get some storms in the third quarter and fourth quarter, as you know, it's been a lighter storm year. If we get some more storms, you know, that'll certainly be helpful. A lot of it's going to depend on what Q4 looks like. You know, we're off to a good start in Q3. When you run your math, Q3 – will be a good quarter for us. So it really depends on, you know, the impact that I mentioned in Q4. The other thing about Q4 that's always hard to handicap is when does winter start. So, you know, if it starts early, you know, that's a tougher part. As you know, the last couple of years, we've had some really strong fourth quarters. Last year was a great fourth quarter for us. So we're not going to have a poor fourth quarter this year. We're just up against some tough comps and have put a little bit of hesitation in there in terms of where the macro is going to be. In terms of the August increase, I think Julian mentioned already that he would expect a little bit lower realization this go-round, given where we are in the timeframe of the year and also the macro. We had a great go of it with the April increase and obviously did very well there. We know how to exercise the muscle, so if the macro is more supportive, then we'll lean in more to the August price increase.
spk10: That's very helpful. I've done it all over.
spk07: Thank you. The next question comes from Garrett Schmore with Loop Capital.
spk08: Your line is open.
spk15: Oh, hi. Thanks for taking my question. I'm wondering what you're seeing in the re-roofing market right now on the residential side. Obviously, you know, on the new housing piece, some of the indicators have slowed and you've got a below average storm year so far. But how stable has re-roofing held up and what do you expect moving forward in the more uncertain markets?
spk03: Thanks for the question, Garrick. Like we've said, demand's great. I mean, it's been very robust. It's a good market. I think probably nine of the past ten years we would have taken this market, and the one we wouldn't was last year. It really is a good market, and the re-roof market is strong. I think that, as we've said, it remains pretty stable. There's a couple of areas where we look at it and we think to ourselves that interest rates, given that a lot of rules do get financed, have got to have some marginal impact. But at the same time, as we remain confident, A lot of it's non-discretionary. Once that roof starts to fail, and as I said in my prepared remarks, we look back 20 years because of the 20-year life of a roof, and you see all the surge in new construction back then. We believe there's going to be a strong cycle for the re-roof market, which we think is relatively non-discretionary. Like I said, a lot of roofs get financed. A lot of prices have gone into the roofs. Most building materials now are a lot more expensive than they were 24, 36 months ago. A lot of roofs get financed. And so do I think the increase in interest rates is having a marginal effect? Yeah, but I think it's a really marginal effect if it is at all. And look, I think our contractors remain confident. They're active. They're busy. July was good. I mean, really good. In fact, it's really been a strong, probably better July than we would have anticipated coming in. Typically, that's a hot month and people don't like to be up on roofs and it slows down ever so slightly. And we've seen strong growth. So we're excited about where we are. Like I said, we're We're cautious looking forward, but we have not yet been impacted by these interest rates as far as we can see.
spk15: I appreciate that. Thanks a lot.
spk08: Thank you. Ladies and gentlemen, once again, as a reminder, if you would like to ask a question, please press star followed by one on your touchtone telephone. The next question comes from David McGregor with Longbow Research. Your line is open.
spk02: Yes, good afternoon, everyone. I guess I have a question for you on incoming order patterns. And you had addressed a question earlier on backlog, but let me maybe come at this a little bit differently. I'm just wondering if you could talk about incoming order patterns and isolating that variable, what you're seeing. Are you seeing deceleration in certain areas? And if so, could you elaborate on where those decelerations are occurring? Thanks.
spk13: In the daily orders, we're really not seeing any deceleration. I mean, a lot of our business is short-cycle business where folks come in and pick up or order something. So the very near-term view of things is continuing to be strong. And remember, you're in the middle of the construction season here, so absent some weather patterns, like Julian mentioned, whether it be heat or something like that, but we haven't experienced that. And the longer backlog, again, it's just barely tapering off a little bit. So I'm not terribly concerned about the order pattern. We're continuing to see a good, vibrant business. I mean, Julian and I look at the trends literally every day. You know, my cup of coffee is with what we call the tripwire. So we're watching them on a daily basis. And really continuing to see every day some good numbers coming through. So we're pretty excited about where we are. But again, the caution is out there, and we're ready to react when we need to.
spk03: Yeah, David, I'd add. Let me just add something quickly. We do have a more regional business. There was a storm in Minneapolis. So if you ask me about what's going on in Minneapolis, I'm like it's – Our daily order intake there is enormous. I mean, it's coming in. Rue's getting fixed because of a hail pattern that ran through. If I look at heavy new construction markets, yeah, things are starting to, you know, they're not yet slowing because the seasonal construction markets are continuing to get fulfilled. But we're watching those carefully. And, you know, like I said, we continue to see robust demand across the majority of the country. And like Frank said, we've got a cautious outlook in terms of what we're seeing because we're not blind to the macros. We're not blind to what the builders are saying about expected flow through and their demand. And that's got to show up in our new construction phase at some point. But that's 20% of our residential business, not 80%. So the re-roof market remains good. We've seen a couple of storms that have impact where demand has been terrific, and we've got parts of the country that are just humming along.
spk02: Julian, if I could just on a follow-up just ask you, where within the overall mix of your various lines of business would you watch for the first signs of maybe things starting to roll over?
spk03: One that we're watching carefully is the ones that are going to be most impacted by interest rates. So that would be mortgage originations. So the canary in the coal mine there is more around builders, their backlogs, their orders, order cancellations. At the builder level, that would be an indication of perhaps a softening in new residential. Again, it's a much smaller part of our business. We would be looking at longer cycle, things like the ABI, the Architectural Billing Index. I do think that, again, interest rates on debt-financed commercial construction projects, new. And then on the repair side in commercial, there's still large jobs. We would be looking at mix of products. So are they doing a re-roof, which would take off insulation and go down to the subframe and then build it back up? Are they re-skinning, which would be more patch and repair, which doesn't last as long, but maybe a cheaper way to do it? So mix of products that are used on particular jobs would be an important gauge for the commercial re-roof market. And then obviously, we've got 800 dedicated field salespeople out there every day knocking on doors, talking to contractors, and hearing about their backlogs is something that's really important to our field folks. And that would be important for us to maintain good connection with our customer base.
spk02: Absolutely. Thanks for the candor.
spk08: Thank you. The next question comes from Catherine Thompson with Thompson Research Group. Please proceed.
spk06: Hi. Thank you for taking my question today. A lot of focus on the macro, obviously. It's top of mind. But two different types of questions along that line. Perhaps we don't have a recession, but it's just more sluggish, you know, like we saw in the early 70s. How does your business operate against that environment? And then the other distinct difference today versus that time period is just the massive population shift that's just structurally different to the southeast and to the southwest. Are you seeing any different types of product demands that are different than, say, five to seven years ago? And how does that change how you manage your business? Thank you.
spk03: Thanks, Kirsten. That's an interesting question. Maybe one day we can get a glass of wine and talk about all those shifts because there's a lot going on in that question. So let me take the shift in product. I mean, asphalt shingles on the residential side, which I think you're focused on here, continues to be the dominant product that's used in the marketplace. You know, if you think about... shifts to the southeast and maybe to the southwest. You certainly see more tile used in those markets, but I wouldn't say we're seeing any particular shift. We don't look at that on a daily basis and think to ourselves, boy, there's a real dramatic shift going on in any of that. We've seen some growth in, and I would say it's very slow growth in metal roofs, but it's been very slow growth in metal roofs. I don't think that's related to geography. I don't think there's any product shift that's going on that would ultimately affect our business model today. I think that it's pretty straightforward. I think as you look at where the new construction is going, it's It's going into those markets. Certainly the new construction market tends to favor asphalt shingles as well, and we continue to see great strength in that market. So I don't see any particular shift. We've got some secular shifts in some of the other product lines. Fiber cement has been a growing category for us for years, That's been a good category for the siding market for, boy, 20 years now. It continues to grow. It continues to do well. But I don't see any fundamental product shift that is going to affect our business in any meaningful way. And the great thing about it is that to some degree we're product agnostic. You know, if there was a product shift, we would be the people to deliver routes. The equipment's important. People still need to get up there. And that's going to drive it. As we go back to our Ambition 2025 initiatives and all of those things, you know, we say nothing about the dependence on asphalt shingles or – poly iso or single ply tpo versus epdm we see more shifts probably in the commercial side of things and we do the residential but overall that's not something we sort of get up and think about day to day but like i said maybe you and i can sit down sometime and have that conversation maybe you're seeing something different okay perfect and any other just going back going way back to the uh and beacon was branded a completely different company back then but
spk06: Any color, exclude the recession, but think about several years of just sluggish economy and growth. How did the business operate in that environment?
spk03: I'm not going to talk a lot about the history side of it. I know that what we would do is we believe that we've got competitive advantages. We would emphasize that. You know, we do think that the overall growth of the roofing business is tied very closely to population growth in the U.S. ultimately. I mean, it's all about demographics. It is to some degree a slower growth market because it's household formation and the number of houses that are going on. We will continue to look at what we can do to build a great company that can compete in any market and win. The one big difference that you go back any era in Beacon's history is and it's really about the consolidation that's taken place both at the manufacturer level but also at the distributor level. It's a very different competitive environment than it was 30 years ago, 50 years ago. So I think that is something that's dramatically different. And so how we would operate, our scale advantages, how we run the business, our networks, the investment in digital and private label products, are things that we couldn't have done 30, 50 years ago, and now we're a leader in those areas.
spk13: Hey, Catherine, just to add on two quick things. In an environment that was sluggish, we would still generate some significant cash flow, and that would give us the opportunity to both deploy greenfields as well as to continue to be acquisitive on a tuck-in basis. So one of the things we tried very hard to do in investor day was, was to illustrate the multiple levers for growth that we have and the multiple levers for margin enhancement that we have. We know that we're going to entertain business cycles over this Ambition 2025 or beyond timeframe, and we know that we're going to need to adjust how we deploy capital and where we provide our emphasis over that period of time, but it's all going to be toward the key things of above-market growth and driving the bottom-line margins higher and higher.
spk06: Okay, great. Thank you so much. Appreciate it. Best of luck.
spk08: Thank you. There are no further questions in the queue. So now I would like to turn the call back over to Mr. Francis for his closing comments.
spk03: Thanks, Samia. Thank you, everyone, for your interest in BEACON and our results in the second quarter. We're incredibly proud of the results that we've delivered. As we said, we had a record performance for the company. We believe that we're off to a great start on our Ambition 2025 plan. Certainly, with the raising guidance, we're expecting to see strong performance in the second half of the year, and we believe the market remains productive in terms of the markets that we serve And we're excited to continue to deliver for our shareholders and our employees and our customers. Thank you all. Have a good evening.
spk07: This concludes the Beacon second quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect your line.
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