Beacon Roofing Supply, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Beacon Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Donyell, and I will be your coordinator for today. At this time, our participants are in listen-only mode. We will be conducting a question and answer session towards the end of this call. At that time, I will give you instruction on how to ask questions. 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 is being recorded for replay purposes. I would now like to turn the call over to Mr. Bennett Songvi, Vice President, Capital Market and Treasurer. Please proceed, Mr. Songvi.

Thank you, Daniel. Good afternoon, everybody, and thank you for taking the time to join us on our call today. Julian Francis, the Chief Executive Officer, and Frank Linegro, our Chief Financial Officer, we'll begin with prepared remarks that will follow the slide deck posted to our investor relations section of PECAN's website. After that, we will open the call for questions. Before we begin, please refer to slide two for a couple of brief reminders. First, this call will contain forward-looking statements about the company's plans and objectives and future performance. Forward-looking statements can be identified because they do not relate strictly to historic or current facts and use words such as anticipate, estimate, expect, believe, and other words of similar meaning. Actual results may differ materially from those indicated by those 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. Second, the forward-looking statements contained in this call are based on information as of today, February 23, 2023. And except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. This call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures to the most comparable GAAP measures 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 at BECN.com. I just want to remind everyone again that we have changed our fiscal year end to coincide with the calendar year end. As a result, today we're reporting our calendar year 2022 result as our fiscal year, as well as the results of our fiscal fourth quarter, which is comparable to our transition period in the prior year period. Now, let's begin with opening remarks from Julian.

Thanks, Bennett, and good afternoon, everyone. Let's begin on slide four. I'm very pleased to report that we finished the year with another outstanding quarter. The team delivered fourth quarter records for net sales, net income, and adjusted EBITDA. Sales today were up 14% year-over-year as pricing execution drove higher net sales across all three lines of business, despite volume being lower by mid-single digits. While we did see progressively weaker demand through the fourth quarter, Pricing held up and remained stable sequentially. Residential volumes were lower as compared to a strong prior year, and markets exposed to higher volume of new residential construction did slow more sharply. But I remind you that 80% of our sales come from repair and replacement activity. Non-residential demand remained solid despite destocking at the contractor level, and commercial roofing supply chain problems eased, with lead times on the majority of products returning to more normal levels. This helped us to unlock more of the backlog that has built up over the past two years. We delivered higher than expected gross margin and recorded our 12th straight quarter of year-over-year increase in adjusted EBITDA, continuing our track record of profitable growth. We also delivered our best quarterly cash flow since the second quarter of 2020, as we focused on right-sizing our inventory and getting to jobs that had been delayed due to supply chain problems, as we said we would on both our second and third quarter calls. We used the cash generated in the quarter to invest in value-creating initiatives towards achieving our ambition 2025 targets, while maintaining steady net debt leverage, preserving our balance sheet flexibility. During the fourth quarter, we made two acquisitions, Coastal Construction Products and Whitney Building Products. Whitney is a distributor of commercial and multifamily waterproofing and restoration products located in Boston, Massachusetts. And we discussed the acquisition of Coastal on our November earnings call. We welcomed the Whitney and Coastal teams and their customers to Beacon. We also accelerated our Greenfield investments. expanding our branch footprint and enhancing service to our customers. Our dedicated Greenfield team is executing at a very high level, which we will highlight later in our remarks. Our share buyback program continues to be an important part of our balanced capital allocation approach, demonstrating our commitment to creating shareholder value and confidence in our ambition 2025 strategic plan. You may recall that the buybacks are part of a $500 million share repurchase authorization announced at the investor day, of which we have completed more than 75% in 2022. In the fourth quarter, we made significant progress towards our goals, and we will continue to invest to generate profitable growth and returns for our shareholders, make meaningful contributions to the communities in which we operate, and build more for our customers and our employees so that they too can fulfill their potential. Now please turn to page five. For those of you who have listened to our calls or attended our investor day, you know that we have a detailed strategy called Ambition 2025. It is a structured growth roadmap with initiatives that are targeted and measurable. The goals we laid out are to grow the business to more than $9 billion in sales, by 2025, an 8% compound annual growth rate from our 2021 baseline, and to deliver EBITDA of about $1 billion in 2025, approximately a 10% annual growth rate. Now on page six, I'll provide a brief update on our strategic initiatives, which will give you insight on how we are achieving our plan. Let me first highlight a couple of ways that we are building a winning culture. As you may recall, we announced a year ago that we have a goal to reduce the intensity of our Scope 1 and 2 greenhouse gas emissions by 50% by the year 2030. I'm pleased to report that we have begun to take steps on this journey by piloting the use of electric vehicles in three areas of our operations. First, two electric delivery cranes, which eliminate job site idling, reduce fuel usage and noise pollution, are deployed in a small number of markets. Second, we are testing electric forklifts in our warehouse. And third, we are using electric vans for express customer deliveries in California markets. Collectively, these initiatives demonstrate our commitment to leverage available technology to build a more sustainable future for all stakeholders. I'd also like to highlight how we have enhanced our capabilities and diversity at the board with the recent additions of Melanie Hart and Raquel Mason. Melanie has a wealth of distribution industry experience, having spent 16 years with Pool Corp, as well as financial and operational expertise that will no doubt be valuable as we progress towards our ambition 2025 financial targets. Raquel's depth of management and marketing experience with some of the world's most iconic brands like Coca-Cola, as well as her work architecting cross-enterprise digital transformation, will benefit us as we drive growth and value for our customers. We welcome Melanie and Raquel and look forward to their contributions to our company. We're also driving above-market growth and enhancing margins through a set of targeted initiatives. Expanding our footprint is a major lever in our growth plans, which includes strategic investments in greenfields and tuck-in acquisitions. Our success in ramping up our dedicated greenfield team and accelerating investments in our pipeline is paying off. We added 12 greenfields during the fourth quarter of the year in key growth markets, improving efficiency and enhancing customer service. This brought our total for the year to 16 locations and 15 As a reminder, our original Ambition 2025 target was to add 10 facilities to our footprint each year, including 2022. As mentioned previously, a dedicated M&A team also completed two acquisitions in the quarter, adding 19 branches, with the majority of locations being in the rapidly growing southeast markets. Our set of initiatives designed to grow margins is also gaining momentum. Our digital capability continues to be a clear competitive differentiator for Beacon, and sales on our online platform increase customer loyalty, generate larger basket size, and deliver approximately 150 basis points of gross margin enhancement compared to offline channels. We are confident that we provide the most complete digital offering and continue to expand our capabilities to serve customers wherever and whenever they need. At the same time, we are building upon our technology leadership by continuing to invest in making it easier for customers to do business with us anywhere and anytime. The actions include our recent digital integration with AccuLynx and the launch of our new Beacon ProPlus mobile app and our examples of how we are extending our leadership position. Through our continued investment, we achieved 26% digital sales growth year over year, with nearly 19% of residential sales now going through our digital platform. As we have discussed for several quarters, we are driving operational excellence through our continuous improvement and productivity initiatives. Our focus on the bottom quintile branches has consistently generated significant improvements to our service levels, as well as tangible contribution at both the sales and EBITDA lines. Our process is designed to improve the performance of 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 supported to remedy the issues. This initiative continues to deliver tangible bottom line results and contributed approximately $4 million to the EBITDA line at the fourth quarter year on year. One area where there was more opportunity for us in the quarter was branch productivity. As volumes softened month over month, we could have worked more quickly to adjust our capacity to more appropriately match supply and demand. Lastly, our strategic initiatives are designed to create shareholder value, and we are committed to continuing to improve our returns for all owners of our stock. During the fourth quarter, we completed our second accelerated share repurchase program, retiring an additional 1.1 million shares. The share repurchases demonstrate both our commitment to delivering value to shareholders and our confidence in the future. As you can see, we have multiple paths to growth and margin expansion through the cycle. We have a differentiated approach and have built the tools needed to achieve our ambition 2025 targets. Now let me pass the call over to Frank to provide a deeper focus on our fourth quarter results.