Beacon Roofing Supply, Inc.

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. I would now like to turn the call over to Mr. Benit Sanghavi, Vice President, Capital Markets and Treasurer. Please proceed, Mr. Sangibi.

Thank you, Ezra. Good morning, 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 that I posted to the investor relations section of Beacon's website. After that, we'll 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, October 31st, 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, and good morning, everyone. Let's begin on slide four. BEACON's third quarter results continue to demonstrate the resilience of our industry and this team's execution on our Ambition 2025 plan. We have multiple paths to top line growth and margin expansion and continue to deliver record numbers for the company. Our end markets are underpinned by the repair and replacement cycle of exterior weatherproofing products on residential housing and commercial buildings. The majority of this demand is non-discretionary. And while core demand remains good, the overall level of activity came in lower than we anticipated in the third quarter. Nevertheless, the Beacon team has delivered. by continuing to focus on our strategic plan and areas within our control. In the third quarter, we grew daily sales by nearly 6% year over year, driven primarily by our acquisitions. Our growth margin came in at 26.3% above our prior guidance through our team's disciplined margin management. Notably, we were price-cost positive across all three lines of business. We stayed focused on cost management and continuous improvement. During the quarter, we took action to lower operating expenses and align costs with market conditions. As a result, we achieved record top-line and strong bottom-line performance, including a record for quarterly adjusted EBITDA. We continued to use our cash flow and balance sheet capacity to reinvest in organic growth, conduct M&A, and return capital to shareholders. We have acquired seven companies since the end of the second quarter. I'd like to highlight the addition of Passaic Madeline Building Supplies. Headquartered in Clifton, New Jersey, Passaic adds strength to our commercial solutions footprint with eight branches in New Jersey and one in New York. For more than 100 years, the Goodman family has built a reputation for providing commercial contractors in the region the most professional service and technical support. This acquisition significantly strengthens our position in commercial roofing and related businesses in the state. Our Ambition 2025 plan is entirely about unlocking the potential of Beacon, and I can confidently say today we are well on our way to achieving that goal. Now please turn to page five. As most of you know, we laid out our targets in that investor day 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 for achieving those goals. Our team works every day to deliver a great customer experience. Let me provide you with an update on our strategic initiatives, starting with a few ways that we are building a winning culture. One of our community support pillars is empowering people to build skills and achieve their goals. In the past few quarters, we've donated funds and expertise to the Roofing Industry Center at Clemson University. The center's top goal is attracting and training professionals in the industry. I'm pleased to say that online courses are already available to anyone considering a career in roofing and a number of our own employees have advanced their skills by completing the eight-week course. Further in September, our team announced that Beacon has officially partnered with the U.S. Army's Partnership for Your Success, or PAYS, program. This exciting new collaboration highlights our unwavering commitment to supporting veterans by providing them with rewarding career opportunities across our nationwide footprint. The PAYS program connects soldiers with top employers, ensuring that they have a clear path to civilian careers after their military service. As a PAYS partner, Beacon guarantees soldiers an interview that allows them to showcase their skills, discipline, and leadership, in addition to learning about career opportunities. And for those of you who have listened to our calls in the past, you may recall that we established Beacon Cares four years ago. Beacon Cares is an employee crisis relief support fund that provides grants to employees coping with unexpected financial hardships resulting from natural disasters or other personal situations. Hundreds of our team members live and work in the past of the recent storms. And during the quarter, the Beacon team made donations totaling $100,000 to the fund. I'm thankful that all of our employees are safe and that we have a program in Beacon Cares to ease some of their hardship. Our second pillar is driving above market growth and enhancing margins through a set of targeted initiatives. Our Greenfield team continues to execute on our pipeline of new locations and we have opened 17 branches year to date. Each time we open a new location, 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 62 new branches since the beginning of 2022, well ahead of our original Ambition 2025 goal of 40 total. Turning to acquisitions, we discussed our recent purchase of Passaic earlier. We also highlighted the acquisition of Rufus Mart, Extreme Metal, and Integrity Metal to our call in August. We completed three other acquisitions since the end of the second quarter, including SSR in Canada, Chicago, Metallic Supply, and Ryan Building Products in Massachusetts. Collectively, these acquisitions add to our commercial footprint and enhance our customer solutions. I'm pleased to report that our acquisition portfolio is performing well and delivering better than expected results. Since announcing our Ambition 2025 plan, we have acquired 24 companies, adding 83 branches, which together are generating around $1 billion in annual revenue. In the third quarter, we grouped digital sales approximately 28% year-over-year. Digital sales to our residential customers were once again a highlight, as we achieved our highest quarterly adoption ever at more than 28%. Our online capability continues to be a clear competitive advantage for Beacon, and sales through our digital platform increase customer loyalty, generate larger basket sizes, and enhance margin by roughly 150 basis points when compared with offline channels. In September, we announced the launch of Beacon ProPlus in Canada. Now our customers there can enjoy our robust, no-cost digital tool that is used by thousands of U.S. roofing contractors to manage their business and sales process anywhere at any time. Many of you know that our private label line of products sold under the Tribelt brand delivers professional results for customers at a competitive price and yields between 500 and 2,000 basis points of additional margin versus branded alternatives. And please report that Tribuilt ISO, our newest addition to our expanding private label line, launched in the second quarter, is off to a great start and helped drive private label sales higher by 12% year on year. Our customers have come to rely on Tribuilt products available exclusively through Beacon, and we will continue to support them through our extensive and growing catalog of product offerings. Third, and as we have discussed for several quarters, We are enhancing productivity, capacity, and safety through our continuous improvement and operational excellence initiatives. Our focus on the bottom quintile branches has generated meaningful contributions to EBITDA, and this year is no different. A disciplined process for diagnosing and addressing issues has been core to our operational improvement in the last four years. I'm pleased to report that the process contributed approximately $9 million of EBITDA year over year in the third quarter. And as you may recall from our first quarter call, we held our annual company-wide safety stand down in which all of our branches and employees paused and recommitted to making every day safer. This year, we put a spotlight on newer employees who are at greater risk of injuries through strains and sprains. And I'm pleased to report that our focus has already resulted in tangible improvements. We are well on our way to achieving our goal of reducing the strains and sprains Fourth, let's review how we are creating shareholder value. As previously announced, during the second quarter, we entered into an additional accelerated share repurchase program in the amount of $225 million. The share buyback program demonstrates both our commitment to delivering value to shareholders and our confidence in the Ambition 2025 plan. Since the start of Ambition 2025, we have deployed more than $1.5 billion to share buybacks, reducing the as-converted share count by approximately 23%. In summary, we have a differentiated service model and have built the tools to enable multiple paths to growth, margin expansion, and value creation through the cycle. Our Ambition 2025 plan has seamlessly stitched it all together into an operating model to amplify the resiliency of our business model and unlock our potential. Now I'll pass the call over to Pris quarter results.

Thanks, Julian, and good morning, everyone. Turning to slide 7, we achieved nearly $2.8 billion in total net sales in the third quarter, up more than 7%, primarily driven by the impact of acquisitions. Adjusting for the one additional day in the third quarter of this year, net sales increased by almost 6%. Higher average selling prices also contributed to the annual growth in sales. Organic volumes, including those from green fields, decreased approximately 1% to 2% per day, while overall price contributed 1% to 2%. Acquisitions completed within the last 12 months are performing well and contributed a little more than 5.5% in total sales year over year. Residential roofing sales per day were higher by less than 1% as higher prices resulting from our diligent execution of the August price increase contributed low single digits percent year over year. Acquisitions also offset lower organic volumes versus a high shingle comparable in the prior year period. While our residential volumes were down in the quarter, we estimate that our volumes were in line with the overall market. Non-residential sales per day increased by nearly 8% based on strong R&R activity and the solid market execution by our team. Prices remained stable on a sequential basis and declined in the low single digits year over year. Bidding and quoting remain at healthy levels. We also continue to see a shift from new construction to repair and re-roofing activity in the third quarter. Complementary sales per day increased by more than 15% driven by acquisitions. We have acquired 20 new waterproofing branches in the last four quarters, significantly expanding our specialty waterproofing products division. Selling prices in complementary were flat 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 eight, we'll review gross margin and operating expense. Gross margin was 26.3% in the third quarter, up 30 basis points year over year and higher than our forecast. It is worth noting that this is the fourth consecutive third quarter gross margin of 26% or higher. As Julian highlighted, this is driven by higher price costs across all three lines of business. In total, price costs was up approximately 50 basis points year over year as higher average selling prices were partially offset by product inflation. In addition, Higher sales through our digital channel and growth of our private label products continue to be accretive to Beacon's gross margin. These favorable contributions were partially offset by higher non-residential sales and the dilutive impact of M&A we've conducted in the past year that has yet to be fully synergized. Adjusted operating expense was $443 million, an increase of approximately $48 million compared to the prior year quarter. Adjusted operating expense as a percentage of sales increased to 16%, up 70 basis points year-over-year. Expenses associated with acquired and greenfield branches contributed approximately $34 million, or about 70% of the increase in adjusted OPEX. Inflationary wages and benefits as well as warehouse operating costs also contributed to the increase in adjusted OPEX. As you may recall from our second quarter call, we said that we would adjust market conditions and balance operating efficiency and high service levels in the second half of the year. And in the third quarter, we did exactly that by taking action to align our OPEX with the level of activity that we are seeing in our markets. Restructuring charges associated with the cost actions consisting of one-time severance and employee benefit costs were approximately $11 million in the quarter, and the full impact of the savings will be only realized in Q4 and beyond. We estimate the annualized impact of these actions to be approximately $45 million in reduced operating expenses. Going forward, we will continue to build on our track record of agility and stand ready to respond to changing market conditions. At the same time, we are focused on investing to drive and support above-market growth and margin enhancement as part of Vision 2025. These investments include initiatives related to our sales organization, private label, pricing tools, e-commerce technologies, and branch optimization. Turning now to slide nine, operating cash flow in the quarter was solid at nearly $250 million, largely attributable to the $117 million sequential reduction in net inventory. That said, as a result of the recent hurricane activity, we will be balancing conversion of inventory with ensuring we have adequate product availability for our customers in the storm-infected regions of the country. On a year-over-year basis, inventory was higher by $186 million, driven mostly by inventory from acquired branches and greenfield load-ins. Inflation and our product costs also contributed to the increase. As of the end of the third quarter, Our net debt leverage at approximately 3.1 times was slightly above our targeted two to three times range. We continue to expect solid cash generation in the fourth quarter, the majority of which will be used to pay down our seasonal borrowings and bring net debt leverage within our targeted range. More generally, our capital allocation will continue to be balanced between deploying cash in our existing business, executing on the active value creating acquisition pipeline, and providing returns to our shareholders in the form of share purchases. For 2024, we expect to invest approximately $125 million in capital expenditures to drive organic growth and to upgrade our fleet and facilities in support of our customers and employees. While Julian previously covered the share purchase program, let me remind you of some additional details that may be helpful. In the second quarter, we entered into a $225 million accelerated share repurchase plan that resulted in the retirement of approximately 1.9 million shares or $180 million. As a result, net of share issuances for stock-based compensation, we reduced our common shares outstanding to $61.9 million on September 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 600,000 additional shares based on our stock price as of the end of the quarter. With that, I'll turn the call back to Julian for his closing remarks.

Thanks, Chris, and please reference page 11 of the slide materials. So before we head to Q&A, I'd like to update you on our outlook for the remainder of the year. As we look forward, we expect the current conditions will continue in the fourth quarter. New housing starts and existing home sales are expected to remain subdued. Commercial sentiment remains favorable, and we continue to expect repair and reroof to outpace new construction in this area. With respect to hurricane demand, let me first say that the communities impacted are in our thoughts and we will continue to support local communities as they recover. In terms of business impact, initial estimates show the volumes required to repair and reconstruct will be approximately 3 million squares, or around 2% of annual industry shipments. Keep in mind that these volumes will be spread over the next six quarters. In October, we believe we will set a record for monthly sales of more than $1 billion, up 6% year-over-year on a daily basis. For the fourth quarter, we expect total sales per day growth to be up mid-single digits percentage year-over-year. Please remember that we will be lapping a record fourth quarter in which we saw significant volumes across all three lines of business. We expect gross margin to be in the mid-25% range. For the full year, assuming a normal seasonal slowdown, We now expect adjusted EBITDA in the lower half of our previously communicated guidance. And importantly, as Prith mentioned, we expect to finish the year with significant cash flow. Our focus remains on the areas within our control, including safety, customer experience, operational excellence, and pricing execution. We will continue to deploy capital on initiatives that we expect will result in accelerated growth. including executing on acquisitions and delivering on our greenfield locations, which we expect to be around 20 branches in 2024. Looking forward, we plan to continue making investments in our sales organization and our service model. Our digital offering and our private built private brand categories. As we end the year, I'm pleased with the progress this team has made. Over the last three years, we have improved our operations, delivered results, and invested for the future. We have built capabilities resulting in accelerated performance. We have demonstrated that our business model is resilient and we can deliver strong results in any market. We're looking forward to a strong finish to the year and helping our customers build more. And with that, Ezra, we'll open it up for questions.

Thank you, Mr. Francis. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Each caller is limited to one question. Our first question comes from Philippe NG with Jefferies. Philippe, your line is now open. Please go ahead.

Hey, guys. Congrats in a solid quarter in a choppy environment. I guess first question, and it's obviously uncomfortable to ask about hurricanes, but from a setup standpoint for you guys, Florida has generally been a little weaker market for you in just the broader industry, lack of storm demand. I'm curious, how are you set up from an inventory standpoint to kind of meet that demand? And just more broadly, the industry is pretty tight from an allocation standpoint. So just kind of help us think through what this could mean for you from an uplift standpoint and how this kind of ramps up. a mid-single-digit growth number in the fourth quarter. Are you going to see that kind of pick up as well in the fourth quarter?

Phil, thanks for the question and for your comments. So let me take a step back and sort of set it up and then touch on what we saw. I mean, we'd seen Florida weak all year, and we commented on it pretty much for the whole year. Obviously, this was coming off Hurricane Eden a couple of years ago. So that was it. I mean, and coming into Q3, we were sort of expecting a pickup in demand across the entire country from, you know, the weather we'd seen in Q2, we thought that was going to be more delayed into Q3. So we expected a bigger pickup in Q3 than we actually saw. And we saw additional softening in some markets, including Florida. And that's ultimately why we decided to make the adjustments with our cost structure as well. But as the storms rolled in, coincidentally, I think we had three hurricanes impact the US during Q3. Debbie, Francine, and Helene All sort of rolled through in the quarter and obviously that shuts things down as well. Obviously Helene was pretty devastating. And then Milton came through at the start of the fourth quarter and obviously impacted there. So getting back to kind of your original question around the impact that we'll see. Helene looks to us like it did a lot of flooding. Obviously, Western North Carolina was impacted pretty dramatically. There's a lot of infrastructure work that needs to get done with Helene. We don't expect that to have a significant impact on demand this year. There's just so much rebuilding that has to get done before it really impacts our results. And quite frankly, in the first few weeks of the quarter in October, it was difficult. We couldn't get trucks on the road and stuff because of that, because of all the infrastructure damage. So that's going to be a very slow burn. In terms of Milton, obviously that sort of rolled in to impact the majority of Florida. Again, there was a lot of destruction. What we're seeing and what we experienced with Ian is that it took two to three months for the demand to really start to pick up. We see an immediate impact on sort of, not so much repair, but necessary tops and stuff that people have to do to sort of remediate immediate problems. But the reconstruction doesn't really start for probably a couple of months. So we would expect to see something in December, but we don't believe we'll see a lot of demand pick up in the region until next year. And that's why we sort of indicated that it would be sort of four to six quarters before we really see the full impact come through. So getting back to sort of the product side of things, obviously the Southeast has been weak all year. The manufacturers have had some availability. We've been managing that very carefully. Obviously, in the fourth quarter now, we want to make sure that we're getting the product that we need into the markets that need it. We're also redirecting... product from other parts of the country, both from manufacturers and through what we have in other parts into the storm-impacted regions. So, you know, it will – we do believe it will be tight, and this will certainly have an impact, but it's impacting a part of the country that was already slow. So we think that in the short term, availability will be okay, but obviously going into 2025, things will continue to be relatively tight. Hopefully, that gives you some color.

That's super helpful. Gillian, I'm sorry to sneak one more in. Would your waterproofing business benefit from some of the recovery work or largely on the residential shingle side of things?

Look, our total business sees work. Obviously, when you talk about the infrastructure work, the commercial construction, it's not just about shingles. Obviously, the housing damage is what you see. windows getting blown out, things needing to get re-corked, some of the work that needs to get done on a lot of this business. So yes, we would expect to see it in commercial and in our waterproofing division. We would expect to see a pickup from this impact. And obviously, with the acquisition of Coastal a couple of years ago, they had a tremendous strength in Florida. So we would expect to see some benefit from that.

Okay, thank you for all the great color.

Our next question is from Catherine Thompson with Thompson Research Group. Catherine, your line is now open. Please go ahead.

Hey, good morning. This is actually Brian Byros on for Catherine. Thank you for taking my question today. On the non-nurse market, can you maybe just touch on how maybe specific verticals are performing and kind of that gifts from new to R&R, I think you mentioned in the prepared remarks. You mentioned you're seeing commercial repair demand accelerating, and maybe is that from pent-up demand, or is that storms, or it's only in certain verticals? I guess just how would you characterize the non-res market heading into 2025? Thank you.

Yeah, absolutely. Thanks for the question. We touched on this a little bit before, but I'll rewind a little bit and give you hopefully some of the color you need. During when COVID hit and you had all the supply chain disruptions and the product availability was really challenging, new construction was prioritized over repair and replace because obviously, I mean, there's so much more money tied up in getting that finished into completion that with the disruptions in the supply chain there and the product availability, the new construction side of things got prioritized. So that got done. So as all of that eased and we sort of came out of the stocking, destocking, and all of the movement in the supply chain that we saw, the new construction started to fade a little bit, but the delayed repair and replace on the commercial side has really started to pick up. And that's been actually particularly strong. You'll remember during, I think it was a 22-time period, there was an explosion in warehouse construction. And that has eased a little bit, but it's still a very large portion of the overall industry that's being developed. Warehouses, data centers, these tend to be low-flat buildings, which demand a lot of roofing. And so the shift towards repair and replace is a little bit of a product mix shift for us. a little less insulation relative to new construction. But overall, we've seen that be probably hold up a little bit better than we'd anticipated. If you remember the comments on the first quarter call, actually the Q4 call, I said the area that I was most concerned about was the the commercial segment. But in fact, it's held up very well. Repair and replace has been good. And I think as a company, we're executing very, very well in that space. So I'm actually remain, again, to use a well-worn phrase, cautiously optimistic about the commercial outlook. I think it's actually been quite constructive.

A couple of just small adds to what Julian said. Other vertical areas that we've had good strength is in hospitals and the school segments, just a lot of infrastructure rebuild and retrofit and so forth. And then the other thing is with the high interest rate environment, we expect the new construction site to remain somewhat muted. So that could change towards the second half of next year as you know, interest rates come down per expectations. So, I mean, that's all I would ask.

Is there any other question? Yeah, our next question is from Ryan Merkle with William Blair. Ryan, your line is now open. Please go ahead.

Hey, thanks. Good morning. I wanted to ask about fourth quarter gross margins. Your guidance is for mid-25. Is that normal seasonality? Because it looks like it's a little more than normal seasonality. So talk about some of the drivers there, please.

Yeah, Ron, I'll touch on it, and then Bruce can extend it into more detail. I mean, part of this is normal seasonality. The higher margin region of the countries, as we talked about before, are in the north. You need higher gross margins in that part of the country because rents in the larger cities in the north tend to be much higher, so we need to cover them. As those start to slow down in the winter months, you start to see gross margin deteriorate a little bit. That doesn't mean if it's our margin deteriorates, but it does mean gross margin deteriorates. There's a little bit of a shift in geography, both on the P&L and in terms of the product shipment. So some of it is just sort of normal product flows. The other part of it would be as price increases finally flush through the system and making the product cost flowing through fully. There's a piece of that that's still out there. But for the most part, it's primarily geography. The other thing that happens is there's a little bit of product mix. The product mix tends to tilt a little bit back towards commercial and complementary, a little bit more than sort of the shingle side and the residential side, which has higher gross margins. Again, we don't believe it impacts bottom line margin in the same way as it does gross margin?

Again, just a couple of other points of color. In the South, there is more new construction, so that also tends to be at a little bit lower gross margins. And then if you look at what's implied in the guidance and the Q4 margin, it's consistent with our post-COVID margins, with the exception of the really high inflationary environment of 2021 and 2022.

All right, that's clear. Thanks. Thanks, man.

Our next question is from Keaton Mamtora with BMO. Keaton, your line is now open. Please go ahead.

Good morning, and thanks for taking my question. Julian, can you talk a little bit about underlying growth trends in the waterproofing business? You know, excluding kind of the hurricane impact in Q3, I'm just curious kind of how that business is performing, your growth expectations in that, and how are the margins in that business relative to, you know, for the beacon average?

Yeah. I really appreciate the question about waterproofing. As you know, we acquired Coastal, which was the first of our acquisitions in this space, at the end of 2022. Beacon had a West Coast presence in specialty waterproofing distribution, but we really felt we needed to grow that segment. We fundamentally believe that it's a higher growth segment than the core roofing business And the post-tragic Surfside condominium collapse, the Champlain Towers that you'll remember, has really emphasized the importance of this category to construction. That tragedy was fundamentally blamed on a lack of waterproofing remediation that needed to be done that wasn't. We've seen local municipalities as well as Florida, Dade County, things like this, impose new requirements on buildings in terms of backing up the reserves in order to ensure that they get spent on waterproofing. to maintain the integrity of the building. So we think that that, along with the sort of recognition of changes in climate, significant weather conditions, is going to continue to drive that. And it's a little bit poorly understood that this is not something that is just related to sort of the coast and the south. This goes all across the country. We operate pretty much everywhere now. And we're excited about where that's taken us. We've gone from roughly, give or take, mid $100 million of sales towards the end of 2022 to a run rate of $700 million plus. So we've really grown that business. We've acquired multiple businesses to build out the only nationwide specialty waterproofing distribution platform, and that's been really exciting. In terms of the margin profile, it's more like residential than it is commercial, and we're very pleased with that. We expect to see that be enhanced over time. The leadership team there has got a plan, and they want to make sure that they're operating above our average gross margins and EBITDA margins for the company in the long run. We've got some work to do to get there. I mean, the acquisitions that we brought in this year particularly need some work to get there, but we're excited about that platform. And like I said, we think it's a fundamentally faster-growing segment of the construction market. It ties in very nicely with with our commercial roofing business as well. So very excited about it, and thank you for the question.

Thanks, Julien.

Our next question is from Michael Rohut with JP Morgan. Michael, your line is now open. Please go ahead.

Thanks. Good morning, everyone. Thanks for taking my questions. Maybe kind of a two-parter, if I may. Just first off, wanted to get better understanding, and apologize if you hit on this earlier, on the drivers of now expecting to achieve the full year EBITDA guidance in the lower half of the prior range. And secondly, I know it's a little early perhaps to look into 2025, but at the beginning of the year when you – gave the initial guidance for 25, I'm sorry, 2024, you cited with margins actually expected to come down a little bit, a headwind from a lot of new branches and M&A and maybe temporarily having those margins being a little dilutive as one of the challenges that you saw going into this year. So the core of my question is, you know, going into 25 with a continued high level of acquisitions, I was wondering if we should expect a similar type of drag or given, you know, your continued focus on your various profit improvement initiatives, we should expect margin expansion to resume.

Thanks, Mike. So I'll let... Prith, talk about the Q4 guidance, some of that. But let me just touch on sort of the big picture thing about margin expansion. I mean, that's one of our key focuses. And yes, this year, particularly with the green fields that we launched really early in the year, which was a little bit of a shift from prior years, where it was so early in the year, they were a little bit of a drag. We had... softer market conditions and some of the acquisitions that we completed this year were mid to low single-digit EBITDA margins. So you end up with, there was a drag there. We haven't obviously fully synergized those. I think Prince mentioned that in his comments. And we would not expect to see quite such a drag going forward. And we also think that with the improvement initiatives which we are seeing come through. I mentioned that we're very pleased with our performance of our acquisitions. They're ahead of our plans and we are seeing demonstrable results from the acquisitions we've done this year, both in terms of top line growth and in bottom line improvement. So that's been good. The first half of the year when you're bringing them in and getting them on, our platform and then working on what needs to get done to improve them. There's still work to be done there. We came into the year expecting to see some margin pressure because we saw some of the overall market dynamics coming in. I think our original guide on margin was about flat year over year. for the full year. I think that we feel pretty good about that guide. We think we got that. And then for the guide overall, before I hand it over to Prith to touch on fourth quarter, I think we're one of the few companies that actually maintained our guide for the full year. It's certainly coming in lower than anticipated. We would certainly like the market to have been a little bit better, but we've maintained broadly our guidance for the full year.

Thanks, Julian. Mike, thanks for the question. I think your question was about the full-year guidance. If you go back to what we said on the Q2 earnings call, what we said was that for Q3, we expected high single-digit growth in sales per day on a year-over-year basis. We actually finished the quarter at about 6%. Therefore, that's one of the big drivers to now expect that the full-year sales per day growth on a year-over-year basis will be in the mid to high single digits, where we previously thought we would finish the year in the high single digits. On a gross margin basis, we really haven't changed anything. We continue to expect a full year gross margin rate in the mid 25% range. And then on the OPEX side, the actions we took in Q3, we expect to finish the full year at an adjusted OPEX to sales rate in the low to mid 17% range. which is slightly above our targeted annual adjusted office rate. We try to manage the business to about 17%. And so we'll be well positioned at the end of the year to bring it down within the target of 2025. So when you put all of this together, you should end up within the lower half of our

Great.

Thank you. Our next question is from Mike Doll with RBC. Mike, your line is now open. Please go ahead.

Hey, thanks, Julian and Chris, for taking the question. I want to pick up on the OpEx comments. Obviously, that's been kind of a pain point the last couple quarters, a focus area for you. The actions you're taking, you're characterizing as kind of headcount. actions so you know that could be construed as maybe somewhat temporary and and you'd bring those back on as or if volume comes back but what can you tell us about kind of how you're thinking about this or structurally are there more structural parts of what you're doing and as you look at um as you look at next year kind of mike's prior question and print your comment you know managing back towards that lower target and what else are you thinking about in terms of programmatic actions to bring that back down.

Thanks, Mike. So you'll recall from previous earnings calls that we highlighted things like sales per hour work and sales productivity and the progress we've made. I think this year certainly has been a question mark around our performance, and we're very aware of it. Part of this is that we came into the year expecting good demand from some carryover storms in the West. And we were expecting to see more of that in Q1, and we thought it would come in Q2, and it never did. In Florida, which we talked about all year as being particularly weak, the Southeast more broadly was weak, but Florida was particularly weak. We'd been taking actions in Florida almost from the start of the year in order to maintain our, you know, OpEx ratio from a headcount standpoint. So part of this is, you know, you need to make sure you've got the people to deliver the product. And in the end, as we went through the year, and particularly as we went into the third quarter, we realized that even on what we thought was sort of a regular day, the demand levels were below what we had anticipated. And so we took action. down what we needed to. This was a little bit of a reset, making sure we see it. I want to emphasize, outside of Florida, our volumes grew. If you strip Florida out of numbers, volumes grew in the rest of the country. Florida was just a really, really tough market this year, but we felt really good about what we were seeing elsewhere. Like I said, our volumes were growing elsewhere, so you'd expect In order to do that and deliver more volume, we've got to have more people. It was difficult to get Florida where we needed to, and then as we slowed down during the third quarter, we just decided that we needed to take action and just sort of have a reset. Obviously, as we grow, we're going to need more people to service the business and make sure we're maintaining our... a high level of service to our customers. I mean, that's sort of fundamental in a distribution business. As we add green fields, as we add acquisitions, we will bring people in. But as Prith mentioned, we are looking at making sure that we're driving productivity in the branches, we're driving productivity in sales, and we're trying to manage the business to around about that 17% target that we set. We think ultimately that there's probably more in there, but on a quarter-to-quarter basis on a business like ours, there's going to be some times when we miss it.

Yeah, and just a couple, again, points of color. So one thing is this year, 2024, we've done a lot of acquisitions. We've done a lot of greenfields. So just as you enter into 2025, we do expect to get synergy realization. And as the branches continue to mature structurally, that'll help the overall margin rate. So that's one thing just to keep in mind. And then second, look, we've had some learnings from this year. And so we will, through the budgeting process and so forth, be more circumspect around how we add on operating costs in anticipation of the busy season. you know, probably be more biased towards bringing on the resources in line with the demand versus, you know, what we anticipate will come. So that's kind of some of the principles that, you know, we'll put into our processes going forward. And then, you know, Mike, it wasn't just the field resources that were affected by, you know, the headcount actions. We took actions in the corporate functions as well, and we expect to drive leverage from those going forward.

Very helpful, thank you. Thanks for the question, Mike.

Our next question is from David Manthe with BIRD. David, your line is now open. Please go ahead.

Thanks very much. Good morning, everyone. I just had three, but they're all just factual, so I'll group them. Based on the deals you've done to date, what is the incremental revenue carryover you would expect into 25? Second is the list in interest expense guidance from last quarter to this quarter, like 177 to 184. Just wondering if you could touch on that. And then Tribuilt, you said, grew 12% year on year. If my math is right, that's what, like 280 million and just over 10% today. Just if I could check those three facts.

Okay. Hey, Mike, let me start with, Your first question, in terms of the revenue carryover from the transactions this year, it should be in the ballpark of 3% to 4% of total revenue going into next year. The third part of the question was,

The third was tribal. Is that running like $280 million?

Yeah, you're right. Your math is in the ballpark in terms of the total sales in the quarter. So that's correct as well. Okay. And then on the interest expense, what were you asking? Whether the total dollars were – yeah, so the rate and the forecast. Yeah, so the – Yeah, so it's 184, and now, yeah, so that's kind of what we expect for the full year.

Okay, and can you tell me, like, why? I mean, it was 177 last quarter, I believe.

Yeah, so two things. You've been carrying a higher debt balance through the year with the share buyback and some of the other actions you've taken over the course of October. Rates have gone up, right? It's a floating rate that, you know, some of it is hedged, but overall rates have gone up. And so those are the two reasons.

Very helpful. Thank you. Yep.

Our next question is from Garrett Schmoys with Loop Capital. Garrett, your line is now open. Please go ahead.

Oh, hi. Thank you. I was hoping you can expand on the 50 basis points of positive price cost you talked about in the quarter. Is that mainly inventory profits from the August price increase? And maybe more broadly, how should we think about price cost moving forward?

Thank you, Eric. Again, I'll let Brooke give you some detail. But it was multiple factors. We worked very hard on the August shingle price increase. that very well. Again, this was a little bit of a challenging market because you've got some really weak markets where we saw price under pressure in some residential markets, obviously particularly Florida, but taking advantage of really leaning into the other markets where things were strong. So I thought our execution on the August price increase was good and we realized about what we did from the April price increase. I'm sure there's a little bit of inventory profits in there, but it's not a huge amount. It's more around the execution. We worked very diligently on commercial in terms of managing what was again a a softer overall demand environment relative to new but constructive. This was an area where coming into the year we had concern about pricing. We executed very well in terms of managing our price cost in the commercial markets and felt very good about that as well. So, you know, it really came from multiple areas. And like I said, we were very pleased with the overall execution during the quarter.

Yeah, the only thing to add, Gary, on the residential, the price realization was similar to what we saw in the August price increase. And so that's a big driver there. And then on the commercial side, look, it's the first time in a while where we've seen favorable price costs, even in a declining price environment. So it's really kudos to the team in terms of you know, managing the mix and the operations there.

Yeah, and then I think you had a second part of the question about the go-forward. You know, obviously, the storms are going to have an impact on product availability going forward. We would expect that to have a meaningful impact in terms of pricing dynamics going forward and looking into next year. The new construction market, there's certainly been pressure there because that's been a little bit weaker than we've seen over the last 12, 24 months. I'd like to see some more progress in that space. And then we're going to have a different dynamic going into 2025 when storms in the southeast now are going to some of that part of the country, but you've got some storm areas in the western third of the country that are coming down. So we're going to be managing it again, but we also see this as what we do. And I think that in a difficult environment, I think in a choppy environment that we've seen this year with a lot of different moving parts, You know, we've executed really well in that area, and that was not a given coming into the year, given all the dynamics we saw. So I'm actually very, very pleased with how we've managed the price-cost dynamic this year, and, you know, I will continue to emphasize that as a key element of our strategy going forward.

Great. Thank you.

Our next question comes from David McGregor with Longbow Research. David, your line is now open. Please go ahead.

Thank you very much and good morning to everyone. I wanted to ask about the private label business where 12% sales growth, obviously very impressive. I'm wondering if you could just unpack that for us. I'd like to understand how much of that growth is associated with maybe adding SKUs versus evolving contractor preferences. If there's any way you can help us understand kind of the residential versus non-residential versus complementary kind of breakdown on that. And I guess to some extent, there's kind of a thorny issue of competing with your vendors as you go to market with a private label product and how you're navigating or managing that. Thank you.

Thanks, Dave. First of all, we have been biased towards residential products, but we are expanding it. We talked about the introduction of the commercial insulation product this year, and that did help us drive growth. It's a large category for us. We're not going to get enormous penetration in that category. It's not going to be 50% of all the sales we make in that category is ever going to be that, but it's a significant driver in a large category. So that's really our first, I'd say, foray into the commercial arena. We like what we see so far, and we've been very pleased with the results. We're very pleased with our sales organization, the way they've adopted it. But, I mean, part of the growth in private label is also the ability of our customers to offer something different to their customers. You know, if they're competing on these various job sites in spec building, they can offer something, our customers can offer something that our competitors, if they're buying from them, can't offer, which is tribal. So we focus very much on the high-quality, differentiated products that work in these markets, and it's been very successful. Look, I think that you asked about, is it existing product lines growing, new addition going forward? It's going to be both. It's actually been very balanced so far with growing in the categories we're already in, but adding new categories is going to be an important element for us going forward. As to the management of the vendor relationships, this is a well-known strategy in multiple retail outlets. It's not like we don't have the ability to manage those relationships. I think we do it very well. Obviously, we source products from well-known companies that are looking to make sure that they've got some volume going through their networks. That's why we're able to do this. We manage that very well. They know there's competitive product out there anyway. So I don't think that's a problem going forward. Obviously, it's a conversation that we have with our vendor partners, but I also think that we've got great relationships with them and they understand our strategy in this space and we've been clear with them. And we coexist quite well.

Thank you very much.

Our next question is from Adam Baumgarten with Selman and Associates. Adam, your line is now open. Please go ahead.

Hey, good morning, guys. Just on the greenfields, you guys have already pretty meaningfully eclipsed your Ambition 2025 target, you know, doing about 20 this year. Any initial thoughts on how that may look next year?

Yeah, we do. You know, what we've found is that this has been a pretty significant opportunity for us, and I think that sort of in the quote-unquote pre-Ambition 2025 portfolio of actions we were taking is that We were really under-leveraged. We had a little bit of catching up to do, I think, from the prior few years. But our intent would be to keep this rate going. We think that, you know, as we look around the country and we see markets, we see opportunities in not just the first-tier markets, but also second-tier markets to add this. Fundamentally, as a team, we believe that the service proposition by adding locations really enhances the offering. You know, labor is the scarce resource. Having people sit around and wait on job sites for deliveries is not what the contractors need. Labor is the critical component. So our ability to capture some of the labor from the contractors and really make them more efficient is fundamental to what we do. And adding additional locations or whether they need pickup or they need short cycle deliveries is something that we believe is absolutely critical to our strategy going forward because we believe this is actually a high service business. And providing that high touch service is going to allow us to earn market share and capture value over a period of time. You'd expect us to be adding 20-plus branches next year, and we believe we can continue to do that going forward. The one caveat I'll add to that is we toggle that with M&A. When we look at markets, if there's branches that we can acquire in the market that fill in our footprint and allow us to offer that service, then we will continue to look at how that impacts our decisions to add a greenfield. We certainly don't believe that the market is saturated from the number of beacon branches that are available to our service proposition.

Okay, got it. Thanks. And then just on the topic of pricing, just given the hurricanes and the expected demand over the next year plus, would you anticipate additional price increases maybe either later this year or early next year in residential from the manufacturers?

Obviously, I'm not going to comment on what the manufacturer's strategies are going to be in this space. We have not seen any announced increases from the manufacturers. We have seen increases from siding manufacturers, but not on the single side of things. We would expect to see some But, you know, look, there's a supply and demand dynamic. Like I said, I wouldn't expect to see anything from the manufacturers this year. Normally, there's at least a 30- to 60-day lag between an announcement and an increase, so we're getting to a point where there's not going to be anything this year, I don't think. I think going into next year, I think the supply-demand dynamics are going to determine whether the manufacturers think they're there should be another price increase.

Thank you very much, everyone. That concludes the questions. Now I would like to turn the call back over to Mr. Francis for his closing comments.

Thanks, Ezra, and thanks to everyone for joining us today. I know many of you expressed an interest in hearing more about our future plans. And one of the things that we've been thinking about as we've really locked down most of the Ambition 2025 goals is updating our mid-range plans. And I'm happy to say that we are planning to have an investor day. in the first half of 2025 to update our longer-term range goals. And so stay tuned for that for additional details. So ultimately, thanks again for joining us today. I do want to express my gratitude to our 8,000 associates and team members, particularly those impacted most recently by the storms. But other than that, I wish you all A very happy Halloween and the best for the remainder of the year and a happy holidays.

Thank you very much, everyone. That concludes today's call. You may now disconnect your lines.