Beacon Roofing Supply, Inc.

At that time, I will give you instructions on how to ask a question. If at any time during the call you require operator assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference call has been recorded for replay purposes. I would now like to turn the call over to Mr. Binit Sanghvi, Vice President, Capital Markets and the Treasurer. Please proceed, Mr. Sanghvi.

Thank you, Elliot. Good evening, everybody. And as always, we thank you for taking the time to join our call. Today, I'm joined by Julian Francis, our Chief Executive Officer, and Prith Gandhi, Beacon's Chief Financial Officer. Julian and Prith will begin today's call with prepared remarks that will follow the slide deck posted to the investor relations section of Beacon's website. After that, we will open the call for questions. Before we begin, please reference 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 such forward-looking statements as a result of various important factors, including but not limited to those set forth in the risk factor section of the company's 2023 Form 10-K. Second, the forward-looking statements contained in this call are based on information as of today, August 1st, 2024, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. And finally, 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. Now, let's begin with opening remarks from Julian.

Thanks, Bennett. Good afternoon, everyone. I'm pleased to say that we delivered another quarter of solid execution on our growth initiatives. But before I begin our review, let me remind you of the assumptions that underpinned our prior outlook. We expected the residential roofing market would be down year on year as storm-related demand declined substantially and more than offset the improvement in new residential construction and -storm-related reroofing. In commercial roofing, we said that there would be a contraction in the installation activity in the first half of the year, but our volumes would grow because of last year's contract with the stocking. We also expected a shift to more repair and reroofing activity rather than new commercial construction that would impact product mix in this part of our business. By and large, end market demand is performed as we expected, with commercials slightly better than anticipated and new res slightly worse. And we expect storm demand to be in line with the 10-year average. Now, let's begin on slide four. Against this backdrop, our team demonstrated that our Ambition 2025 plan has created multiple paths to growth and we delivered a record for quarterly sales. In the second quarter, average selling prices were up low single digits year over year, which combined with contributions from Greenfield and acquisitions to drive net sales nearly 7% higher, although slightly lower than our initial expectations given the weather in the quarter. And once again, we delivered double-digit, a dusted EBITDA margins. Our gross margin came in at 25.6%, approximately 20 basis points above the second quarter of last year, but below our expectations, largely due to the lower than expected contribution from inventory profits related to our April shingle price increase. Adjusted op-ex increased primarily from additional headcount as we maintained staffing at our branches to meet a higher level of anticipated activity. Additionally, the impact of recent Greenfield locations and M&A yet to be fully synergized also negatively impacted operating leverage. We continue to use our balance sheet capacity to reinvest in the business, conduct M&A and return capital to shareholders. Since the end of the first quarter, we have acquired 21 branches, including the recent announcements of Roofers Mart of Southern California, Extreme Metal Fabricators and Integrity Metals. Roofers Mart has a 40-year history serving contractors in the Los Angeles metro market and demonstrates our focus on growing our commercial roofing business. Extreme Metal and Integrity Metals extend our residential and commercial roofing product offering to include metal solutions to meet the needs in Florida's coastal regions. Entering the second half of the year, we will be proactive in responding to local market conditions by adjusting inventory and staffing levels while maintaining Beacon's high caliber customer service. We're investing in improving our operations, delivering results today, while also preparing for the future, including investments in our leading digital platform, private label offering and our pricing model. Now, please turn to page five. As many of you know, we laid out our targets to drive above market growth, deliver consistent double digit adjusted EBITDA margins, build a great organization and generate superior shareholder returns. A relentless focus on our customers is central to how we operate and to achieving these goals. Our team is working every day to deliver a great customer experience and ensure we are building on our legacy of service. Let me provide you with an update on our strategic initiatives, starting with how we are building a winning culture. As part of our commitment to our team members wellness, we recently launched an upgraded employee assistance program. The new program has added emphasis on mental health as well as physical health to recognize the challenge today's employees and their families face. One of our core values is do the right thing, and this applies to our efforts to build better for the environment. In May, we issued our third annual corporate social responsibility report, which demonstrated our commitment to action and transparency on environmental and social topics. We proudly reported three years of progress towards our goal of halving our emissions intensity by 2030. In addition, we outlined our scope one and two greenhouse gas emissions and our efforts to reduce those emissions by operating a more sustainable fleet and investing in renewable energy. Our 2023 CSR reports highlights how we are progressing on our commitment. I encourage all of our stakeholders to go to our website and view the full report. Our second pillar is driving growth above market and enhancing margins through a set of targeted initiatives. Expanding our customer reach continues to be a major lever in our growth plans, including our investments in greenfields and acquisitions. Our greenfield team continues to execute on our pipeline of new locations, and we have opened 13 branches year to date. Each time we have a new branch, we add sales resources and reduce the average distance and time it takes us to reach our customers. This enhances our overall value proposition, giving us the opportunity to earn market share. We have now opened 58 new branches since the beginning of 2022, exceeding our original ambition 2025 goal of 40 total. On acquisitions, we discussed our recent purchase of Rufus Mart Extreme Mattels and Integrity Mattels earlier, and we highlighted the acquisitions of Rufus Supply of Greenville, General Siding and Smalley & Company on our call in May. However, it is worth mentioning again that with the acquisition of Smalley and its 11 locations spread throughout the West, we have built the leading national specialty waterproofing distribution platform with a track record of providing value added solutions to contractors in both new construction and restoration markets. Since announcing our ambition 2025 plan, we have acquired 21 companies, adding 71 branches. In total, we have deployed approximately 690 million dollars in capital towards these acquisitions, adding base year revenue of more than 800 million dollars. In total, these acquisitions are performing ahead of our expectations. Our online capability continues to be a clear competitive advantage to Beacon and sales through our digital platform increases customer loyalty, generates larger basket sizes and enhances margin by roughly 150 basis points when compared to offline channels. In the second quarter, we grew digital sales approximately 22 percent year over year. Digital sales to our residential customers were a highlight as we achieved our highest quarterly adoption ever at nearly 26 percent. We continue to invest to strengthen our platform and just last week announced an enhanced alliance with Eagleview, a leading provider of aerial imagery, software and analytics. This collaboration makes it easier for contractors to quickly and accurately place digital orders, allowing them to run their businesses more efficiently and as such choose Beacon as their supply partner. Our focus on commercial roofing solutions is one of the key growth initiatives of our ambition 2025 plan. We outlined above market growth targets and have been taking steps to become the market leader. To achieve this goal, we must develop best in class talent. And in the past year, we launched a new training program. Hundreds of employees have attended the e-learning and hands-on sessions, with over 150 completing the advanced level certification. Team members improve their understanding of commercial roofing basics, including product details, installation techniques, and all varieties of low slope roof systems. Through a more knowledgeable and confident branch and sales team, we are better able to support the needs of our commercial contractor customers and create positive interactions that will increase loyalty, resulting in higher wallet share. Now, as we have discussed several quarters, we are enhancing productivity and capacity through our continuous improvement and operational excellence initiatives. Our focus on the bottom quintile branch process was generated meaningful contributions to EBITDA and this year is no different. Through this process, we have already generated approximately three million additional dollars from the class of 2024. Our branch optimization efforts are also showing results, increasing storage capacity, improving yard flow, and optimizing product placement for picking efficiency, all of which improves branch productivity and supports increased sales from existing assets. And all these tools are deployed to provide synergies from our acquisition portfolio. Through a systematic approach to integrating acquired branches, we are able to achieve top line and bottom line performance improvements. As we have mentioned on previous calls, our recent acquisitions that have yet to be synergized are likely to be diluted in a year term, but I am pleased to report that the margins in our portfolio as a whole continue to improve relative to the performer at the time of transaction. And fourth, let's review how we are creating shareholder value. As previously announced during the quarter, we entered into an additional accelerated share repurchase program in the amount of $225 million. The buyback program demonstrates both our commitment to delivering value to shareholders and our confidence in the ambition 2025 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, many of you know or have met Prith Gandhi, our CFO since May. I'm very pleased that Prith has joined us. And as I said in the last call when I welcomed him, Prith's proven track record in financial leadership, especially in the building products industry, makes him a great addition to our team. Now I'll pass the call over to Prith to provide a deeper focus on our second quarter results.

Thanks, Julian. And good evening, everyone. Turning now to slide seven, we achieved almost $2.7 billion in total net sales in the second quarter, up nearly 70% year over year, primarily driven by the impact of acquisitions and higher average selling prices. As Julian mentioned, we had wet weather and precipitation in large swaths of the country, particularly in May, as well as excessive heat throughout the quarter that impacted the number of roofing days during Q2. Nevertheless, we were able to achieve organic sales growth across all three lines of business and set a new quarterly sales record. In the aggregate, price contributed over 2% to revenue growth, while organic volumes were up less than 1%, including contributions from Greenfield. Acquisitions completed within the last 12 months are performing well and contributed more than 4% growth to daily net sales year over year. Residential roofing sales were higher by more than 2%, as higher prices were partially offset by lower shipments in regions that are lapping higher storm and hail demand, including in Florida. Recall that Q2 2023 was a record second quarter for shingle shipments. And while our residential volumes were down on a year over year basis, the R&R market remains resilient and consistent with our planning assumptions. Beacon's volumes compared favorably to industry shipments or ARMA during the quarter, but it is always important to keep in mind that there is destocking or restocking at the distributor level in any given quarter. With that in mind, we estimate that we grew at least in line with the market. Our team executed the April shingle price increase with discipline, achieving good realization regionally. As a result, we achieved price growth in the low to mid single digit percentages year over year. Non-residential sales increased by more than 11% based on strong R&R activity and the comparison to low second quarter 2023 sales, which were influenced by destocking at the customer level. Prices declined in the low single digits year over year, but remain stable on a sequential basis. Bidding and quoting activity remains at healthy levels. We also continue to see a shift from new construction to repair and re-roofing activity in the second quarter. Complementary sales increased by more than 12% year over year as acquisitions drove higher sales of our specialty waterproofing products. Selling prices were higher by low single digits year over year. Please keep in mind that our complementary product category now has approximately 70% residential and 30% non-residential exposure. Turning to slide 8, we will review gross margin and operating expenses. Gross margin was .6% in the second quarter, up nearly 20 basis points year over year. Slower realization of the April shingle price increase was largely matched by the timing of the inflow of higher product costs. Therefore, we did not produce the level of inventory profits we initially forecast. That said, our gross margin performance in the quarter remains well above historical Q2 gross margin levels. In the aggregate, on a year over year basis, price cost was positive by nearly 30 basis points in the second quarter. The execution of the April shingle price increase kept price above product inflation. In addition, higher digital channel sales and sales of our private label products continue to be accretive to Beacon's gross margin. However, these sales are offset by higher non-residential sales mix impacts and the dilutive impact of acquisitions and green fields completed in the past year. Adjusted operating expense was $441 million, an increase of $63 million compared to the prior year quarter. The change in adjusted op-ex was driven primarily by additional headcount in our existing branches. You will recall from our Q1 call in May that we made a conscious effort to ensure that we were appropriately staffed to meet the forecast ramp and seasonal activity. In addition, expenses associated with acquired and green field branches contributed approximately $27 million of the increase in total operating expenses. Inflation in wages, benefits, rent, professional fees, and T&E also contributed to the increase in operating expenses. As a result, adjusted operating expenses as a percent of sales increased to .5% up 140 basis points year over year. As mentioned earlier, demand in several key markets, including Florida, was either impacted by wet weather, severe heat, overlapping record shingle volumes in the prior year, resulting in lower operating leverage than we expected on our call in May. As we have demonstrated in the past, we are adjusting to local market conditions and will balance operating efficiency and high service levels in the second half of the year. Investments in Ambition 2025 priorities to drive above market growth and margin enhancement also continued in the quarter. These investments include initiatives related to our sales organization, private label, pricing tools, e-commerce technologies, and branch optimization. Now turning to slide nine, operating cash flow is negative 48 million in the quarter. As a reminder, given the seasonal pattern of working capital needs in our business, we typically use cash in the first half of the year and generate cash in the second half of the year. Net inventory reached a seasonal peak at the end of the second quarter, up 259 million compared to the end of the second quarter of 2023. As mentioned on the first quarter call, we built inventory to ensure adequate product availability to align with the height of construction activity. Higher inventory year over year is also attributable to inventory acquired through M&A and to support green fields. We continue to expect strong cash generation in the second half of the year, but now expect it to be weighted towards the fourth quarter given the inventory build into Q2. While Julian previously covered the share repurchase program, let me provide some additional details that may be helpful. Share repurchases in the second quarter were made through a 225 million dollar accelerated share repurchase plan and resulted in the retirement of approximately 1.9 million shares or 180 million during the second quarter. As a result, net of share issuances for stock-based compensation, we reduced our common shares outstanding to 61.9 million on June 30th versus 63.6 million at March 31st. The remaining 45 million equity forward contract is expected to settle in the fourth quarter of 2024 and result in the estimated repurchase and retirement of approximately 500,000 additional shares as of June 30th. We also continue to invest in organic growth, upgrading our fleet and facilities to support our customers and employees. In total, we expect to deploy approximately 125 million in capital expenditures during the full year 2024. Our capital allocation will remain balanced between deploying cash in our business and executing on the active and robust creating acquisition pipeline. Net debt leverage at the end of the second quarter was 3.2 times trailing 12 months adjusted EBITDA. Given the substantial cash generation expected in the back half of the year, we are well positioned to pay down our seasonal borrowings and bring down net debt leverage closer to the midpoint of our targeted range. At the same time, we intend to continue to invest in the processes and technologies that will lay the groundwork for improved service future growth and branch productivity. With that, I'll turn the call back to Julian for his closing remarks.

Thanks, Prith. Please reference page 11 of the slide materials. Before we head to Q&A, I'd like to update you on our outlook for the remainder of 2024. We expect the momentum we experienced in the first half and outlined at the beginning of this call to continue into the third quarter. We expect that the residential repair and re-roof market demand will be lower this year driven by lower storm demand, which at this point appears to remain on track to meet our assumption of the 10-year average. We continue to believe non-storm related demand will be higher in both new construction and aged replacement despite higher interest rates. In our commercial roofing business, we monitor the architectural billing index, which continues to remain significantly below 50 indicating contraction in activity. And while we expect better than I expected repair and re-roofing activity to continue, contract to be stocking was largely over at the end of the second quarter of 2023. And so the year on year comps should return to more normal levels. For the third quarter, we expect total sales per day growth to be in the high single digit range year over year, above the July sales growth of low single digits per day. We expect gross margin to be in the high 25% range, around 30 basis points higher than in our second quarter. This includes current expectations regarding our announced August price increase realization. Operating expenses are expected to increase year over year, largely attributable to the mentioned earlier, our focus on operational efficiency and proactively managing resources will intensify. As a result, we expect adjusted operating expenses as a percentage of sales to be in line with the third quarter of last year. Regarding the second half of the year, we remain focused on areas within our control, including sales execution, inventory reductions, and cost management. Our full year net sales expectations is for growth in the 6 to 8% range, including acquisitions announced year to date. Please note that we have two extra selling days in 24 as compared to 23. On gross margin, we continue to expect to be price cost neutral, resulting in a full year gross margin percentage in the mid 25% range. We now expect that sales growth and cost discipline will result in full year adjusted EBITDA expectations of between $930 million and $970 million, inclusive of recently acquired businesses. And as Prith mentioned, our focus on working capital is expected to result in strong cash flow generation in the second half of the 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. We will continue to deploy capital on initiatives that we expect will result in accelerated growth, including executing on our robust pipeline of acquisitions and delivering on our greenfield locations, which we now expect to result in more than 25 branches in 2024. In summary, we're well positioned to continue to outperform the market in this dynamic demand environment, creating value for all our stakeholders. We are looking forward to the rest of 2024 and helping customers to build better and build more. And with that, Elliot, I'll open it up for questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone phone. If your question has been answered or you wish to withdraw your question, press star followed by two. Each caller is limited to one question. We now turn to Michael Rehort with JP Morgan. Your line is open. Please go ahead.

Hi. Thanks. Good afternoon and thanks for taking my question. Wanted to first zero in a little bit on the SG&A in 2Q and you kind of reviewed in your prepared remarks that some of the drivers that appeared to be, you know, a bit higher than expected on a -over-year basis and a percent of revenue. You know, at the same time, you said you're focused on driving efficiencies in the second quarter, in the second half and expect percent of sales as you need to be flat year over year. So what's driving the, you know, let's say with a certain temporary element that drove the higher expense in the second quarter relative to expectations? And, you know, what are the actions that you're taking to maybe get that back online and a percent of sales year over year basis for the back half or at least for the third quarter?

Thanks, Michael. This is Julian. And yeah, I mean, I think it's the question that's going to be on everyone's minds for our second quarter. So it was a really difficult sort of second quarter to manage at a branch level. So we saw record daily sales, but we didn't see it consistently because of the weather. So we were staffed up to serve that really high demand level, but it was never consistent. And managing that on a -to-day basis, you know, we didn't do it as well as I'd hoped, but, you know, I think that was a big driver of it. Obviously we added a number of green fields and acquisitions earlier in the year this year than we'd done previously. And so that adds to our total OPEX count. And so we've sort of flatlined it this year will be similar number of branches opened in the first half and the second half, which was a little bit more backend weighted last year. So that drove year over year increase as well. But the big thing was this variability in -to-day volume. We were staffed ready. The inventory was ready for it. And we think it was just so variable on a -to-day basis in the markets that it became tricky to manage. And so we were a little bit, we missed a little bit on that side of things in terms of our overall management. Now, as you also asked about sort of looking forward and how does that adjust? You know, we've sat down with our operating groups and sort of sat down and said, look, look, you know, we've got to get this back in line. We've got to create operating leverage from sales growth and we're going to have to manage that more aggressively. We've already started doing that. We've taken action in June and July to make sure that we've got the right level of staffing for the demand that's in the market. You know, we're seeing, you know, still seeing some variability in terms of -to-day sales, but we are being much more aggressive in terms of managing the levels of staffing on a -to-day basis than we were in the second quarter. Like you said, I don't think we missed it by much. We'd come into the year expecting a strong quarter with storm carryover from last year. As I said, with the, what we saw on really good days was what we had anticipated. You know, we called the market, what we obviously couldn't call was the weather. And that certainly had an impact on how we manage it. We think we'll work our way through that and get that back to where it should be. I don't know if Pris got anything to add in terms of specifics, but that's really what drove it.

Yeah, just maybe just a couple of points of color. So, you know, a couple of other things in terms of, you know, the overall OPEX, it's a 37, you know, $63 million increase year over year. 27 of that came from, you know, the M&A and Greenfields. And, you know, I think when we spoke with you all in May, our expectation was that at least that component of the OPEX would be relatively flat. And if you remember, that was $22 million in Q1. And as we discussed, you know, some of the acquisitions that we've done have, you know, have, you know, significant work to, you know, to kind of bring them up to the, and create value. And so we've, you know, we've had some timing issues with some of that. So that's part of the reason as well.

Great. Now, thank you for that. I appreciate all the detail there. I guess, secondly, you know, just thinking about, you know, bigger picture on the gross margin side. And I think Julie and you highlighted some of the incremental benefits that you continue to get from the bottom quartile work. And obviously, there are a lot of other, you know, initiatives, you know, that you have in place on the gross margin side. So, you know, conceptually, how should we think about, you know, bottom quartile contributions over the next couple of years? Should they, you know, continue moderate in size, perhaps, just given low hanging fruit impacts from the prior year, or, you know, from prior years, it kind of gets incrementally tougher as you go forward. And maybe you could just kind of review other opportunities around, you know, gross margin over the next couple of years from a strategic initiative standpoint.

Yeah, Michael, I'll touch on that briefly. Certainly, we've seen dramatic improvement, as you know, in the bottom quintile contribution to EBITDA margins. I think it's been one of the real highlights of the last few years, how the team has really come together and driven that. It is incrementally harder now to drive a little bit more, but we reset the branches each year. So, we still believe there's opportunity. We've also expanded our thinking on this and sort of said, look, you know, what's the real opportunity if we can get each of the sort of quintile groupings to get it up to the next quintile sort of thing? So, we're exploring what it would take to really move all of those elements forward. And we think that, you know, the pricing model, the work we're doing on private label and digital, all of those initiatives are certainly contributing. I think the, you know, we were probably challenged in the quarter on price coming through in the market. We saw, you know, obviously the shingle price increase in April. We had expectations, probably for a realization in the quarter than we actually saw. And I think that was partly due to the variability of demand on a -to-day basis in the market as well. We saw very good realization where we had very strong markets and we saw very low realization in markets, as we mentioned, you know, we've called out Florida before. And in fact, we called out Florida and our call in May is a place that we still have a lot of work to be done on that. But I continue to believe that private label, digital pricing model continue to drive margin and our bottom quintile branch process will continue. And like I said, I think we're looking for ways to expand that process to more branches to make sure that we're working the full gamut of the problem. So, I continue to believe that we've got room to expand our gross margin on a product line basis. But as I said, the mix has shifted much more towards commercial. We were very deliberate about that. We think that it has a great profile for return on capital, but it does have lower gross margin. So, we continue to look for ways to improve that as well.

Great. Thanks so much.

As a reminder, if you would like to ask a question, please press star one on your touch tone phone. In order to allow everyone to ask a question, we please ask that you limit yourself to one question. Thank you. We now turn to Gary with Loop Capital. Your line is open. Please go ahead.

Oh, hi. Thanks for taking my question. I was wondering if you could talk about the acceleration you're expecting on a daily sales basis here in the third quarter, starting July up those single digits. I think you're expecting to be up high single digits for the quarter. So, if you can unpack the drivers of the stronger expected August and September, they'll be great.

Yeah. Look, Gary, I mean, the market overall is been good. Like I said, I mean, we saw record daily sales in the second quarter on a -to-day basis. It just wasn't consistent and we'd have a day where it dropped off. We think some of the weather impact in Q2 is going to get pushed into Q3. So, we're expecting that demand hasn't gone away. I mean, if you need a roof, you're going to get a roof. And if it rains on one day, you're going to get a roof. So, we think there'll be some continued push into the third quarter with demand pretty good. And we're excited about that opportunity. We do think that there's an August 1st price increase. The price increase went into effect today on shingles. So, we'll see that pick up on the top line in the rest of this quarter as well. And then, yeah, the back half of the year tends to be a little bit more biased to activity. So, now, if we're going to get 100-degree days across the entire country for the entire third quarter, we'll be watching that. But overall, we, like I said, we feel pretty good about the market. We're probably a little bit more bullish on what, than we were coming into the year on commercial, as we've said. Residential re-roof has been very good. The storm demand, we think, is going to come in around the 10-year average. That's kind of what we feel we're tracking. And new res was slightly worse. But overall, we came into the year calling for a very healthy market. And that's what we've got. We think some of the demand got pushed out of Q2 and is probably going to appear in Q3.

We now turn to Adam Baumgarten with Sheldman and Associates. Your line is open. Please go ahead.

Hey, guys. Do you have a sense for maybe how many days on the roof were lost in the second quarter? And was it across both residential and commercial, or is it more focused on residential?

For Adam, I'll let Prith touch on it. But we do have some statistics. I mean, I've tried to avoid being the weatherman since I joined the company. And that's not it. We get weather every day. I mean, there was clearly some well-reported impact. But in terms of the number of days, we do watch that. But I think that's less indicative than the total of the market. As I said, we think it did have an impact. We think it's probably pushed some into Q3. Yeah.

Yeah. So look, it's generally biased towards the residential market because a lot of our deliveries are on top of the roof. So that's one point to make. The other thing is between normal weeks and weeks where we've experienced weather, the kind of demand differences about low single digits. And we think about a third of the weeks in the quarter were affected by weather. So.

Thank you. Our next question comes from David Manthe with Baird. Your line is open. Please go ahead.

Yeah. Thank you. Good afternoon. Relative to your comments on lack of expected inventory profits, I'm a bit confused as to what happened there. I think if you go back to the early part of the year, no one really thought that shingle price increase was going to stick. And you're able to load a single digits, but the gross margin fell short of your expectations anyway. I'm assuming you didn't play inventory chicken like we used to in the old days and maybe you could just help me understand the dynamic there.

Yeah, I'll touch on it and maybe quantify some things, but, you know, coming into the quarter, we did expect much better price realization than we actually saw. We came out of the gate on the pricing pretty healthy, but we normally see it climb over several weeks as we implemented across all of the customer base. So it usually takes some time to get it done. And so you continue to generate those inventory profits, but the spike is usually early on. In this one, we got good realization in markets where the demand was strong, but in weaker markets, there was some delay in getting the price put in place. And then as the quarter went on, we just didn't get it implemented throughout. The demand remained weak in some of those markets. And so we didn't generate any of inventory profits we thought in certain markets, and we generated a good amount in what we would have expected in others. So when you add it all up, we thought we were going to get a much better realization across the entire country than we actually did. And so both the delay in implementing some of the increases to meet some of the competitive situations meant that we just didn't get the profits as our inventory cost rose through the quarter. The price rose slightly above it, but it didn't get the normal spike at the beginning. And then flattening out, we sort of tailed up. And so you just don't generate inventory profits that way.

The only thing to add, as you guys know, we use weighted average inventory costing. And so on days even when you're not selling, the weighted average cost of inventory if you're buying continues to go up. And we were buying inventory throughout the quarter. So that's the only thing to add.

Our next question comes from Mike Dahl with RBC. Your line is open. Please go ahead.

Hi, thanks. Just as a follow up to that, just given what you just articulated around the path realization on both the price and inventory profits, can you be more specific about what's embedded in your 3Q and full year guide with respect to the August price increase both in terms of top line hope and inventory profit?

Well, in terms of the inventory profit for the quarter, in the August price increase, we expect similar kind of progression as we've seen with the April price increase. I think what we said in the prepared remarks was 30 basis points improvement. We see a similar pattern with this price increase.

We now turn to Trey Grooms with Stevens. Your line is open. Please go ahead.

Thanks. Just kind of a quick bit of clarity here on the free cash flow comment maybe being weighted a little bit more to the 4Q. Could you go into a little bit more detail on that? I know it can kind of shift around a little bit seasonally, but any more color on the timing there? Thank you.

Yeah, I mean, look, we bought inventory throughout the second quarter and as we've discussed, we were kind of expecting roughly in the order of $500 million of free cash flow for the full year. And we've basically kind of burned cash in the first half to the order of $250 million. So we expect the back half of the year to produce, call it in the order of $750 million in free cash flow and roughly evenly spread between the two quarters.

Okay, got it. Thanks for the clarity there. Yeah, sorry, it's not unusual for us to build obviously inventory in the first half of the year. I mean, the back half of the year is when most of the roofing activity gets done. So we come in a little heavy and we expect to continue to bring product in during the third quarter because demand will be, we believe will be pretty good. And then we expect to, you know, we'll certainly diminish the inventory we have, but that'll probably just accelerate into the fourth quarter as demand falls off, we'll reduce our purchases, unless we see some more demand come in. But that's why the shape of it is such.

Okay, so I guess just to clarify again, is it, when you say evenly split, three Q and four Q should be roughly evenly split or is it going to be four Q weighted? I'm misunderstanding, sorry. Yeah, more

in four Q, but, you know, overall, you know, yes, let's call it 60-40 in that order.

Okay, all right. Well, thanks for clearing that up. I appreciate it. Thank you.

Thanks, Frank. Our next question comes from Philip Ng with Jeffreys. Your line is open. Please go ahead.

Hey, guys, this is Maggie on Perfil. Just going back to the organic volumes in two Qs, kind of flattish, any color on the breakout between the segments would be helpful. And then, do you just have a sense of the magnitude of what green fields are contributing? I know you did maybe around 30 green field branches last year, so, you know, how much are those contributing on the organic side?

Yeah, I think, Maggie, in terms of the green field, I'll let Perth touch on the launched Ambition 2025 that we would do 10 a year. We ramped that up because it's been a very successful program for us. I think in total for at the end of this year, we're estimating somewhere in the region, and Perfil, correct me if I get this a little bit wrong, but somewhere in the region $400 million plus of total revenue from green fields that we've started since Ambition 2025. I think that's the number that we're looking at. So, it's pretty substantial, you know, and across those 58 plus by the end of the year in terms of total revenue.

Yeah, it's actually over $500 million. So, good, you know, it's a great contribution overall. In terms of the actual, you know, organic demand for the quarter, it's, you know, roughly .8% of the .8% in revenue growth comes from organic, and that includes both the existing branches as well as the green fields.

We now turn to Katherine Thompson with Thompson Research Group. Your line is open. Please go ahead.

Hi, thank you for taking my question today. I just wanted to focus on the commercial segments, which as you pointed out is improving despite the ABI readings. But we, you know, we talked to the ABI is becoming less relevant in part because it doesn't capture some of the mega projects. So, for instance, when you look at put in place numbers, the manufacturing segment, subsegment in and of itself has doubled to north 15% of the total megs since 2018. With that in mind, do you have any additional color or numbers you can frame around the next shift and types of projects that you're servicing today and maybe even in the quarter and the commercial end segment and how that has changed and in particular parsing out between new and repair and remodel within the commercial segment? Thank you.

Yeah, Katherine, I'll try to get to some of that. So, certainly what we have seen is coming into the year, we were expecting the installed volume to be down as we said, and, you know, specific to Beacon because of the contractor behavior last year, we were expecting volumes to grow. But coming into the year, we were certainly watching the overall demand level very carefully and it's actually held up pretty well. Our bidding and quoting activity across the board has been good. We've seen a good amount of government work. Schools have come through and they are generally repair and remodel, repair and reroof markets. We think some of that got pushed out, as we said, it biased more towards new construction during COVID. Those would be big jobs that were getting done. The reroof work is clearly getting done more now and that's been a boost for us as well. It's a little bit of a mixed shift in product, but overall that's good. Obviously, office and retail has been a little bit softer. Certainly, we sort of get mixed with multifamily. Multifamily has been way off. Some of that is more commercial roofing than residential roofing. And then office has been a little bit soft, but most of the segments that we look at have actually been holding up pretty well. It's more of this shift towards the repair and replace work than the new. I think that's reflected in the ABI index in terms of why it's so weak. There's more of this shift away from the new construction, which I think ABI bias is towards. I think if you think about the commercial real estate market as a whole, I think we reflect that pretty well where the segments are strong and where the segments are weak. You mentioned manufacturing, you mentioned data warehouses, warehouses in general. Those remain pretty good and we continue to see, like I said, good bidding and quoting activity going out into the fourth quarter now and even early next year. So we remain quite bullish and I think that we began focusing on this a couple of years ago as a market that we thought we could create a lot of value in. We think we've been doing very well in that market as well.

So open. Please go ahead.

Thank you. I guess in the second half, what's built into this guidance, are you assuming your residential rating units, I may have said this earlier, are you assuming they're down, I think it's low single digits or let me put words in your mouth, just what's kind of the view there?

Sorry, Keith, you didn't, you wouldn't.

Okay, let me just say it again. In the second half guidance, sales guidance, what do you have implied on units and residential ranking year over year, roughly? Okay.

Yeah, so I'm, you know, for, just one second, Keith.

Yeah, that's fine.

Yeah, so for, you know, for the full years, for the, you know, for

Q3 in terms of residential, you know, we're expecting, you know, in terms of, you know, price and volume, kind of low single digits on price and a little bit better on volume. And, you know, and for the- Yeah, go ahead. And on Q4, kind of mid, you know, negative mid single digits on volume for Q4 year over year. Okay. And

you were saying you did double digit positives in the second half in units last year, is that, is that numbers about right?

Yeah, that would have, that would have been about right, Keith. Obviously, we had a strong storm come through toward the end of last year, which was particularly a strong finish to the year, particularly in Q4. So Q4 residential comps this year are going to be tough because there was such a, such a big student demand towards the end of last year. So we would expect to, we would certainly expect that to be down, but we expect the the overall quarter to see growth organically.

Yeah. Okay, great. Thank you.

Our next question comes from David MacGregor with Longbow Research. Our line is open. Please go ahead.

Yeah, thanks. Good afternoon and thanks for taking the question. Apologies from the background noise here, but Julian, I just wanted to ask you a question on how you respond to a changing macro, and I guess tactically, what do you do differently to protect margins if it becomes clear that we're

the, the fact is that, you know, we, we fundamentally believe that, you know, the macro economy is, is not the overall driver of reroofing demand, which represents 80% of the business, you know, that it's, it's really driven by the total number of houses out there, and the total number of buildings. And, you know, as I've said for several years now, there's always more buildings at the end of the year than there are at the beginning. We, we consistently build more. So we continue to expect to see a good demand environment. We believe that the aging housing stock, the aging commercial stock presents real opportunity for us. But in terms of where I think your question is going is really around our operating posture. And, you know, we've been very focused on driving efficiency at the branches, trying to make sure we've got good cost control. I think we had a very difficult second quarter to manage. I think we learned, you know, how to do that through the quarter, and, you know, we expect to get better. But really, it's, yeah, it is hours management at the branch. Are we making sure that we're being efficient? Are we staffed at the right level on a -to-day basis? And, you know, are we getting the right efficiency at the branches? Are we focused on, you know, our bottom quintile process to yield the margin? And then I think that ultimately, you know, we are looking at private label digital on our pricing model in order to give us a little bit of boost on the margin side as well. We think these are all, you know, significant contributors. You know, we need to execute against those. We have not seen yet the impact of the pricing model that we're putting in. We should be complete with that at the, certainly the first half, maybe the end of the first quarter of 2025. We think that's exactly what we thought it was, and we said we believed it would yield 50 basis points of improvement in gross margin. So there's a lot of work that we continue to do both at the gross margin level, but more importantly, at the EBITDA level to enhance our margin, not just protect it. And we think we can do that. You know, I'll be honest, we were disappointed with the performance on Apex in the second quarter, but, you know, we'll bounce back from that, and we'll get it right, and we'll move forward, and we'll continue to drive operating performance.

Thanks, Joey. Thanks for the question,

David. Our final question comes from Ruben Garner with the Benchmark Company. Your line is open. Please go ahead.

Thank you. Good evening, everybody. Forgive me if I mischaracterize this, but it would seem that your outlook, at least for organic kind of top line for the second half, is pretty comparable to what you're looking for before. Maybe a touch better, but in your prepared remarks or in the press release, I don't know where I got it, you mentioned something about being proactive to respond to market conditions by adjusting resources and inventory. I was just curious if you could kind of square up those comments, Julian, because it seems like, you know, you remain pretty bullish and things have been good outside of some weather, but you're talking about kind of making adjustments. So if you could just kind of clarify that for me, that'd be great. Thanks, guys.

Yeah, absolutely, Ruben. I mean, I think that the reality of the market today has been that we've got some very good markets, some particularly bad markets, and it's been, you know, very variable. The differences are that, you know, our branches aren't able to move around. I mean, the manufacturers can move shingle shipments around the country, they can water fall it, and they can flow where the demand is. We still have to operate branches, even in the weak markets and serve those markets. I mean, if you pick Florida, for example, you know, I think you see that our shipments there are off, you know, 40, 50 percent, maybe not 50 percent, 40 percent for the year. And we still, it's still a very large market, and we have to adjust and make sure that we've got the right staffing levels in those markets and we've got the right resources. But that market is off a lot, and making sure that, you know, you get ahead of it is important. We've got several markets that are quite weak. I think we've executed price in those markets and continue to see things go through, but we've got to be able to get staffing levels right. The flip side is in markets where it's been particularly good. We've got to make sure that we've got the right level of people in those markets as well so that we can take advantage of strong markets. And I think that, you know, we will adjust after the second quarter where I don't think we executed on that as well as we could have done. We need to get better at that. We need to adjust. And that's really where our comments come from, the variability of the markets. We've got to make sure we get it right.

That was very helpful. Thanks, guys. Good luck going forward.

Thanks very much for your question, Ruben.

That concludes the questions. Now I would like to turn the call back over to Mr. Francis for his closing comments.

Thank you, Elliot. I just want to say thank you to all of you for your interest in Beacon and your continued support of our efforts to improve the business. We continue to be very pleased with our top line performance and the growth that we are seeing. We believe we've demonstrated that we have multiple paths for growth. We also believe we've got multiple paths for margin enhancing initiatives that are driving success at the bottom line as well. And we continue to believe that there's further opportunity in this business. So with that, thank you very much for your attention. Thanks very much for attending. And thanks. Bye.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.