QXO, Inc. Q1 FY2020 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Beacon's First Quarter 2020 Earnings Conference Call. My name is Josh, and I will be your conference coordinator for today. As a reminder, this conference call is being recorded for replay purposes. This call will contain forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore, actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to those set forth in the Risk Factors section of the Company's latest Form 10-K. These forward-looking statements fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, regarding future events and the future financial performance of the company, including the company's financial outlook. The forward-looking statements contained in this call are based on information as of today, February 3, 2020. And except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release. The company has posted a summary financial slide presentation on the Investors section of its website under Events and Presentations that will be referenced during management's review of the financial results. On the call today for Beacon will be Mr. Julian Francis, President and CEO; and Mr. Joe Nowicki, Executive Vice President and CFO. I would now like to turn the call over to Mr. Julian Francis, President and CEO. Please proceed Mr. Francis.

Thank you, Josh and good evening, and everyone, welcome to our first quarter 2020 earnings call. Following the completion of my first full quarter as Beacon's CEO, I'm excited to share our progress against the goals we've set for ourselves. I'll start with a few comments about Q1 and then get right into a strategy review update before passing to Joe for financial details and fiscal year 2020 guidance. I'm pleased to report the first quarter, in line with our expectations despite a weaker market environment, both sequentially and year-over-year. We talked on our last call about seasonally difficult comparisons due to a year-ago re-roof demand associated with hurricanes. So, although our sales were down, we believe we tracked with the market. We also talked about expecting an about flat gross margin profile sequentially during the first quarter period, with flat results representing good performance during the quarter that typically sees sequential decline in that metric. We outperformed on this, with gross margins of 24.5% in the first quarter, which is up marginally compared to Q4 2019. I'm pleased with our ability to execute on a critical indicator that we focused on. I was also pleased to see growth in our commercial roofing piece of business with the second consecutive quarter of year-on-year growth. Although modest, this represents a positive trend in an important part of our exterior products business that has recently underperformed. Our adjusted operating expenses came in higher than anticipated on additional health care costs and other timing-related expenses. Joe will elaborate on these in his comments. In summary, Q1 represented performance in line with our expectations. I'm particularly encouraged with our gross margin progress although there is clearly improvement to be made in many areas. Now let me talk about the strategic work that we're doing, which is really what will drive our future performance. On the last call, we signaled the strategic shift was underway with the pivot from large scale acquisition integrations to focus on our current operations. The recent history of our company has been acquisition-driven growth. It's been important for us to build scale in order to establish our competitive position for the future. Going forward, our scale represents competitive advantage that we must capitalize on to enable us to grow faster than the market. By investing in sales and service models that benefit our customers so that they choose to make us their preferred supplier, we can outperform. It will also enable us to use our assets more efficiently and control our expenses to drive operating leverage. Where Beacon is most successful, we differentiate our offer with strong customer relationships and an ability to serve their unique needs every day. We also built strong partnerships with suppliers, who rely on us to position their products advantageously in the market, supporting innovation in product and service to benefit our customers. We were able to provide value to our customers; strong supplier partnerships will create opportunities for us to grow together. So that Beacon becomes a significantly different distributor from others and the distributor of choice, we are increasing customer interaction, improving operations, partnering with our suppliers and differentiating our service proposition. The strategic review I launched upon joining Beacon is focused on improving the sales and operating performance at our network of exteriors and interior branches and enhancing the overall customer experience using our scope and scale to differentiate our offering in the market. While the review is not yet final, we have moved ahead on several fronts. The strategic review work is making clear to me that as Beacon integrated 40 companies over the years, we've missed some opportunities. Now with major acquisitions behind us, we are determined to grow organically and expand our position. It is critical that our sales team is more active in the marketplace, asking for orders and following up with the service in order to drive top-line growth. As I mentioned on our last call, we have the opportunity to grow our residential and commercial customer lists organically. From my first days with the company, I've been impressed with the team's drive to win; they are committed to developing their skills and increasing customer interactions and we will provide tools to support them. We will expand the use of advanced analytics and pricing tools to segment our customer base and target the most profitable opportunities. The development and deployment of these tools is underway and I believe will enhance our capabilities, ensuring consistency in our execution. Last month, I had the opportunity to enhance our new branding at our Annual Managers Meeting. It was exciting to share that we are unifying our company under the Beacon Building Products brand to reflect our portfolio of exterior, interior, solar and weatherproofing products. This move reflects our ability to supply customers with a broad range of both residential and commercial building products and the unique service offering across North America. Beacon's customers will benefit in many ways. Our research has shown that as customers expand their businesses, they want a recognized and trusted partner who makes it simple for them to grow across the region or across the country. On a local level, customers want to do business with a known market leader they can rely on. Internally, this is a new chapter for our employees, who all now proudly represent Beacon from coast to coast. The team is already rallying around a common brand and common goals. While the 40 legacy company names have had an important role in our history and success, there is shared belief in the value of coming together to better serve our customers. I also talked previously about operational performance and now I tend to think about our branch network in quintiles. All branches have operational improvement opportunities that are being addressed continuously. We have intensified our focus on the bottom quintile. Each branch is unique but often has common causes for underperformance such as footprint, market access and operational capabilities. To improve the profitability of these locations, we are beginning to have in-depth reviews among local, region and corporate leadership to determine the appropriate actions and establish plans for each individual location. While it's important to recognize these changes won't occur overnight, where we have developed and executed against the plan, we do see upticks in core metrics. I believe there is an opportunity for mid-single-digit improvement in operating income from these branches alone, resulting in $30 million to $60 million in incremental annual adjusted EBITDA performance. Capturing this as well as improved performance at the remaining 400-plus branches is a core strategic imperative that will yield significant improvements over current results. We've also been reviewing how to capitalize on our market scale and scope to enhance and differentiate our service offering. Ultimately, our ability to serve customers in a way that brings more value to them is how we differentiate ourselves in the market. Our operating model is one that puts customers and market at the center of our business by networking branches together in major MSAs to be more responsive. This network now called Beacon's On Time and Complete or OTC Network, shares inventory, fleet, equipment and employees in a manner that materially raises customer service. Our network's Central Dispatch phase is now live in 30 markets with more than 20 additional markets planned for the remainder of 2020. The results are very encouraging. Aside from the customer service benefit, we have seen average delivery miles decline by 12% in Q1 year-over-year. Inventory metrics are also showing improved results with approximately an additional full turn achieved in 14 of our more mature OTC markets. We will open a hub location in the important Denver market in Q2 and have identified 10 to 15 additional areas that could best utilize this customized concept over the next several years. We believe there is an opportunity to pull $50 million to $100 million positive impact on inventory balances from the more efficient turns in addition to cost savings associated with the more efficient use of our assets. Finally I'll highlight our continued commitment to transact with customers the way they prefer, be that at our sales counter, by phone or online. What we do see is that their adoption of our digital solution continues to grow. We have talked previously about a $1 billion annual goal for e-commerce sales. I see the majority of our customers wanting to conduct at least a portion of their business with us in a digital fashion. There is currently a window for us to create preference for our digital solution, which we believe translates to improved customer retention. Customers also order larger baskets with an improved mix of products on the Beacon Pro+ platform. We are targeting to exceed 10% of sales on Beacon Pro+ this fiscal year up from mid single digits last year. We are the clear leader in this value-added area and are investing in upgrades and expanded functionality to maintain that leadership. As an example, this month we are launching Beacon Pro+ for our interiors customers; being able to utilize our solutions through every aspect of a job's lifecycle including quoting, ordering and final payment is a unique distinction from our competitors. In summary, our strategic review is not yet fully complete, but I believe it is uncovering the true potential of Beacon to grow both top and bottom line. Our scale advantage will allow us to expand margins by improving our sales and service model, reduce costs to serve by our efficient use of our assets and generate more cash through inventory optimization and improved financial performance. Our strategies are designed to help our customers build more with superior service levels throughout the contract lifecycle. I'm enthusiastic about what the future holds. I will now pass the call over to Joe to provide additional details on the first quarter and our view of 2020.

Thanks Julian, and good evening everyone. First I'll provide additional color on our quarterly results and then I'll conclude with details on our fiscal 2020 outlook. Overall, organic daily sales decreased 2.7% during the quarter. The period had 62 selling days, the same number as the prior year quarter. As we highlighted during our last quarterly call, the year-ago hurricane impact from Irma, Michael and Florence made for challenging quarterly comparisons within our Mid-Atlantic and Southeast regions. These two regions were down 14% and 5% respectively during the quarter. It's important to note that organic growth in our five geographic regions unaffected by hurricane comparisons was essentially flat during the quarter. Total residential roofing recorded a 4.1% sales decline in the first quarter, levels we believe to be in line with the overall distribution market. We delivered much stronger performance when excluding the two hurricane-impacted regions. In the five other regions, residential roofing increased 3.5%, volume growth we view as more indicative of core demand during the quarter. Commercial roofing generated positive daily sales growth for the second consecutive quarter. We believe this accomplishment represents a significant positive for Beacon following four quarters of sales decline. Our Q1 results are also more consistent with the overall market growth rate providing further evidence that the disruptive elements associated with Beacon's large acquisitions are increasingly behind us. An important part of our commercial roofing strategy involves our dedicated commercial sales centers. As a refresher, these centers handle all commercial roofing needs at a single location including quoting, engineering project support, and order fulfillment. We're currently at 27 locations and have plans to add to this over the coming quarters and to eventually operate this at all major MSAs. In some cases we've opted to use one of our existing branches and dedicate it entirely to commercial roofing but in other locations the operations have a carve-out within an existing branch. We see this approach as providing a more efficient operating model for commercial roofing customers and also one that closely aligns with our broader OTC network. Complementary product sales declined 3.1% in the quarter, the result of modest volume declines and deflationary pricing in select categories, including steel studs, lumber and wallboard. As a reminder, complementary products are more cyclical than roofing with higher exposure to both new construction and discretionary spending. Single family starts were soft earlier in the year and only began to recover in the September quarter. Consistent with our traditional lag relative to starts, we also began to see volume declines stabilize in the quarter. This trend bodes well for future quarters. Now I want to speak about our first quarter margins. As Julian noted, we're pleased to produce a 20 basis point gross margin increase sequentially. The gain was entirely tied to an improvement in price-cost execution. As a historical reference point, seasonal declines in gross margin are normal between Q4 and Q1. In fact, during the past five years, we have averaged a 30 basis point decline. This further highlights our gross margin accomplishment for the quarter. We've been working diligently to recover from the price-cost impacts of the Spring-Summer 2019 inflationary environment that was coupled with lower demand. While we're not where we want to be with gross margins, we're certainly moving in the right direction, and the first quarter performance raises our confidence for the second half of fiscal 2020 margins. Adjusted operating costs were $342.1 million, up from $336.4 million in the year-ago quarter. The year-to-year increase is primarily due to incremental investments in our fleet, coupled with the shift in timing of other expense items. Increasing fleet investment is the key focus for Beacon and supports our industry leading service levels. The new capital expenditures made at the end of last year resulted in higher depreciation expense in the current quarter. Additionally, we incurred higher-than-anticipated timing-related costs for some fleet repairs, health care cost and customer-specific event expenses that we do not believe will repeat at the same level going forward. It's also important to note that the cost actions we took in the fourth quarter helped us substantially reduce the inflationary pressures we experienced on our wages and facility costs. We remain committed to driving positive adjusted operating leverage over the remaining quarters of 2020 and we'll get there through our overall focus on continuous improvement, coupled with the strategic initiatives around OTC and branch operational improvement that Julian previously reviewed. Now moving on to the balance sheet and cash flows. We had excellent cash flow performance during the first quarter with operating cash use improving by more than $200 million year-over-year, driven both by timing-related factors and performance improvement. In addition, I'd highlight that our total debt declined more than $300 million versus the prior year quarter. From fiscal 2017 to fiscal 2019, Beacon has averaged more than $300 million annually in free cash flow or operating cash flow less capital expenditures. And during the most recent trailing 12-month period, we continue to repeat this solid performance with $367 million of free cash flow. This type of execution has been a hallmark for Beacon since our IPO. And we have regularly posted positive operating cash flow during our time as a public company. We believe this remains an important differentiator for us. To summarize our first quarter, we recorded a very important sequential improvement in gross margins along with a significant year-to-year reduction in total debt. In geographies not impacted by hurricane comparisons, we saw a more stable sales performance and our overall sales growth rates were in line with the market. Last, I want to provide our 2020 expectations. We are comfortable with the current range of analyst consensus sales and adjusted EBITDA estimates for fiscal 2020. We continue to forecast flat full year market demand and believe we will modestly outperform the overall market. We expect the market to be driven by lower storm demand offset by higher repair and remodel and increased new construction. During our last call, we emphasized that the year would unfold in two parts. A softer first half as a result of lower hurricane demand and a much stronger second half on improving repair and remodel and new construction. Within that flat market environment, we're still confident that the second half will deliver year-to-year adjusted EBITDA gains, higher gross margins as a result of a less inflationary environment and higher demand and also favorable operating cost leverage, driven by the initiatives we previously reviewed. One final comment related to the rebranding announcement that Julian discussed. We wanted to remind you that the relevant cost information was all outlined in the 8-K filing that coincided with the January announcement. Remember, that we will exclude all of these costs from our future adjusted non-GAAP disclosures. I will now turn the call back to Julian before we move to questions. Julian?

Thanks Joe. It all comes back to what differentiates one company from another in the distribution business. We want to have strong relationships with customers and the ability to serve them in a unique way that helps them grow in order to be their distributor of choice and we want to build on our strong relationships with our valued suppliers. We have much more work to do to demonstrate our full potential. By focusing on organic growth and expanding our service proposition while driving operational performance, the foundation for solid top and bottom line growth this year is in place. And with that, we're ready to open up the line for questions.

Your first question comes from Keith Hughes with SunTrust Robinson Humphrey. Please go ahead, your line is open.

Two questions. First, your commentary on hitting analyst consensus views for the year—consensus on EBITDA is about $508 million—came in a good bit low where consensus was at first. Where do you expect to make that up? Is that still a second-half phenomenon when you think it will start to accelerate year-over-year? How is it going to play out?

Keith, this is Joe, great question. And yes, we believe it's a second-half phenomenon where you'll really see it start to improve a lot is in the second half of the year. As we mentioned, in the first half of the year, you really have the impact of the hurricane comps, which creates more pressure on it. In the second half of the year is when we really believe we'll see some of the increasing improvement, not only in the market conditions but also in some of our performance for the reasons we highlighted with some of the initiatives going on as well too. So that's correct.

And then my second question: where do you think you stand on inventory right now? Inventory was up a little bit year-over-year while sales were down. I don't know which product that's in and where do you think channel inventory is now?

Keith, this is Julian. So, it's a great question. On a dollar value, our inventory is up. I think as we look at inventories overall, certainly our volume of inventory is down. Remember, we did have an inflationary environment last year so that did drive some of the overall difference. I would say that the question is also related to where we were relative to last year. We do believe that last year there was some elevated inventory as we left the calendar year. We did not participate in any additional large buys towards the end of the year. We think there were likely some additional purchases out there in the channel. But I think overall, our inventories, we believe are well positioned and evenly balanced for the outlook going forward.

If I could sneak one final one in and just a technical question on the dividends for the preferred shares. Joe, I know you reported a loss this quarter with all the charges. If you exclude those, would you assume the dividend has been paid and unconverted or how would that look if we didn't adjust EPS? How would it look?

I'm not quite sure I followed the question, but I'll give it a shot. Keith, I think you're trying to get at what an adjusted EPS number would be. Is that your question?

Correct, correct, would we assume the converts—or the preferred shares are converted or not converted?

Yes. As we talked about, our focus is really going to be about adjusted EBITDA going forward. That's where we're putting all the focus and attention on the numbers. We did provide, as you saw in the press release, the adjusted net income numbers of $28.3 million. In the footnotes you'll also see the share count numbers. So in the income statement, it has common. And then in the footnotes of the income statement, it shows the preferred shares. Traditionally in the past, what the analysts have done for this quarter would have been to add those share counts.

Your next question comes from Trey Grooms with Stephens. Please go ahead. Your line is open.

So just a couple from me. One, on the gross margin—Joe, you mentioned that you're confident in the second-half gross margin improvement. Can you go a little bit deeper into what's driving that confidence? I know you had a little bit of an outperformance here in Q1. But as we look into the second half, just some of the things that you're expecting—could you maybe go a little deeper into some of the moving pieces there? Maybe the price-cost scenario you're baking in? Just any of the moving factors where we could get a little more color?

Sure, you bet. I'll provide a little more detail. I think you're right: if you look at last year's performance, in 2019 you started to see the negative price-cost impacts in the back half of the year. So, we'll have that on the favorable side this time. Last year was driven by an inflationary environment coupled with low demand. This year, how we've positioned it and our view is that you're going to see a lower inflationary environment as we go into the third and fourth quarter period with what we believe will be better demand as well. Putting those two pieces together is why we believe we'll see a much stronger price-cost position going into the back couple of quarters. That's what drives our optimism.

And with the comment of being comfortable with consensus on sales and adjusted EBITDA, as we're looking at the free cash flow for this year—over the last few years you've had some pretty large swings in working capital, sometimes positive, sometimes not. But you've had some improvement in inventory as you talked about. As we look at working capital and try to triangulate into what all of this means for free cash flow this year, how should we be thinking about the working capital piece of free cash flow? Could it be a tailwind for you guys this year possibly with some of the benefits you're seeing? Any help there, Joe?

So Trey, it's Julian. Overall, the working capital position we believe will improve through the year—that's a major focus area for us. I talked about it in our remarks about our ability to drive that lower and that is something that remains a big focus area for us. I do think that overall, we will see that as a tailwind for the remainder of our fiscal year and then going forward as we implement our strategic initiatives.

And just housekeeping on CapEx for this year—any update on how we should think about CapEx for this year?

Sure. We're still trending toward roughly 0.9% to 1% of sales for CapEx expenditures during the current year. I'll caveat that as Julian said, we're working through a lot of strategic initiatives specifically on the OTC. We're seeing some gains there, like the improvements Julian talked about regarding decreases in miles driven per order, all of which will help us. I don't know if it will be as much this year, but going forward this should have a benefit on our CapEx numbers, potentially lowering them.

And another housekeeping question: as we're looking at adjusted EBITDA, are there any other cash charges in adjusted EBITDA that could weigh on the free cash flow number that we need to be aware of this year?

From a cash charge perspective, not much at all. You saw some of the branding costs, but they were pretty minimal. Our branding rollout from a cash perspective might be around the $5 million number we had talked about. Outside of that, our integration costs from acquisitions are pretty much gone. You'll see in the 10-Q that we actually have existing markets in all of it, so you won't see acquisitions even noted in there, which is good. So there won't be much significant cash impact that will affect it.

Your next question comes from Truman Patterson with Wells Fargo. Please go ahead. Your line is open.

First, just wanted to talk about your adjusted OpEx—I believe it was up about 90 basis points year-over-year even after you removed the $25 million in annual costs. Could you walk us through what's happening there? Are you paying up for employees to keep them in the branches, etc.? What's going on there? And how should we think about your ability to lever the OpEx line in 2020?

So Truman, this is Julian—thanks for the question. I did say in my comments that we were a little disappointed with our overall OpEx performance in the quarter. We did see that it was higher than anticipated. We believe a lot of it is associated with timing-related issues. There are some things in there: we talked about additional depreciation associated with fleet. We think that the newer fleet ultimately translates into lower maintenance expense. We also had higher healthcare costs come through. I think that's a frustration across many businesses. We changed our medical plans starting in the new calendar year, so we think there is some opportunity for us to address that head-on. In addition, our maintenance costs were somewhat counter-seasonal. As we see the market slowdown, our branches tend to put the vehicles into more maintenance to make sure that we are ready for the pickup. We saw a little bit of that move from what we believe were future quarters and sort of pulled back into this quarter. So we would expect to get that back in line over the coming quarters. We do think that there is leverage in that area as well. Overall, we are committed to getting operating leverage this year from our operating expenses. Given the labor rate inflation impact we've seen, our operational continuous improvement initiatives become critical to our future performance. We have to be able to offset that with productivity. I think we've lagged in that area a little recently. But that's where improving at our branch level, focusing on continuous improvement, and focusing branch management training is critical to our future performance, and it is something we are determinedly focused on to ensure that we get it in line and actually drive it down overall over the next several years as a percent of sales.

And then on a follow-up, you mentioned you're targeting bringing your bottom-quintile branches up to normal operating levels and that could be a $30 million to $60 million EBITDA tailwind. Could you give a little color on how you're going to target that?

Yes. We tend to think about this in quintiles; we see the bottom quintile of our performance of about 100 branches or so as a significant opportunity. They are below our average operating margin, so the ability to improve their performance is meaningful. There are some very unique situations, so we have to go down and get at individual reasons at each branch. But there are underlying causes that are somewhat common. Are we in the right position in the market? Do we have the right scale in that market to compete successfully? Do we have the capabilities and the right talent in those markets to drive the results forward? What we're doing differently is we've asked the local operating teams to really focus on providing the resources necessary to those roughly 100 branches to drive improvement. I did say we see $30 million to $60 million of operating improvement once we get to all of these initiatives, but it's really branch by branch and it doesn't happen overnight. The additional focus, tools, resources, training, upskilling, and branch management training are all part of the effort. We've been doing this now for a few months and we are seeing improvements in the overall metrics of those branches. So we believe the early indications show we do have the ability to affect outcomes at these branches as well.

I'll add that the level of focus is right from the highest levels of the organization down. That level of focus is having an impact—people see it, they understand it. It's been talked about throughout the organization and as Julian said, we're starting to see the impact already.

Your next question comes from Kevin Hocevar with Northcoast Research. Please go ahead, your line is open.

I wonder if you could talk about the gross margin side—up 20 basis points sequentially. Normally there is a little bit of a fade from December to the March quarter. It sounds like price-cost was the main driver there. Could you give some color on whether pricing was the primary lever—were you able to go out and get some price improvements or push back on manufacturers? What allowed you to get that? And could you give us a sense of the progression—did gross margins get better as you went through the quarter and you exited with a better gross margin which bodes well for the March quarter? Just any more color on what's driving that?

Sure, Kevin. You're absolutely right. All of that sequential gain was primarily the result of more favorable price-cost. That was the big driver. It was an area that we focused a lot of attention on through the quarter. Normally during this period, prices get a bit more constrained and that's usually why gross margin can be a bit more challenged. Our benefits were in both price and cost. We saw a good quarter on the price-cost element, and it was a combination of price being better than we had normally seen and costs being better as well. So we put a lot of focus on it and the balance of both pieces worked in our favor. Now, it's not yet where we want it, so we have some work to do, but it's clearly trending in the right direction. There were no real trends by product line or month that would give an indication of a particular directional shift—it was consistent performance across product lines and through the quarter.

And on the quintile targeting and that $30 million to $60 million over time, are there investments you need to make first with costs that come before the benefits? Is that $30 million to $60 million a net number after any investments you might need to make in staffing or other areas? Any color on costs associated with achieving those targets?

Thanks Kevin. I don't see significant additional costs. The way we would target these is by reallocating resources rather than large new investments. There may be some spread across branches for training and resources to support those branches, but I don't see a large unique investment. All of our branches are now on our systems. There may be areas where we would invest in some improved opportunities at an individual branch, but I don't see that as a significant drag on costs. We will see some additional costs associated with investing in our OTC network early on—like the Denver hub—but that should have a broad impact on the market and improve operations in that market, including some of the underperforming branches. Fundamentally, it's a reallocation of resources versus additional resources. The $30 million to $60 million is a gross number; I don't see a particular cost associated other than redirecting resources we're already deploying.

Your next question comes from Garik Shmois with Loop Capital. Please go ahead, your line is open.

Question on complementary products: is this the only segment where you saw weaker pricing? You cited some softness in steel studs and wallboard. Given expected improvement in demand with a lag, what is your outlook on the pricing side? Would you anticipate it firming or continued deflation moving forward?

On complementary products, the decline was focused in a few key areas—steel studs, lumber and wallboard—not across the board. There were slight volume declines plus some pricing pressure in those categories. At this point, I don't have a specific view on how those categories will play out in the immediate term—those categories each respond to different market dynamics, and it's a bit early to comment definitively on the pricing trajectory ahead of the spring season.

And just following up on gross margins—historically Q1 to Q2 you tend to see about a 100 basis point sequential decline. Would that be a fair assumption to use for Q2 this year, or is something different this time around?

Yes, that's traditionally been the trajectory between Q1 and Q2, so that is a reasonable baseline assumption.

Your next question comes from Mike Dahl with RBC Capital Markets. Please go ahead, your line is open.

On the fiscal 2020 guide: there's a wide range of consensus out there and I think Q1 came in a bit light of consensus. So are you saying look at the consensus range and you're comfortable with it, or are you saying look at the prior average consensus and that's the number you think you can achieve?

I think the way Joe characterized it is accurate: we're comfortable with the current range of consensus estimates for sales and EBITDA. We are not guiding to a single specific number; we believe we are within that consensus range, which spans the mid-hundreds of millions for EBITDA and roughly $7.1 billion to $7.4 billion in revenue estimates.

Just to clarify that. And then on the branding initiative: aside from simplification and a one-team go-to-market approach, are there financial benefits to Beacon from doing this? Could you talk through what may or may not impact the P&L from this aside from the initial one-time cost?

A couple of areas: in the long run, this is focused on growth. Our research indicates that as customers expand, they want to work with a recognized, trusted partner regionally or nationally. Anecdotally, we've had customers move into other regions and look for Beacon but couldn't find it despite us having branches there under different brand names. We see top-line opportunity from a unified brand. On the cost side, we had 40 different brand names, which required maintaining multiple websites and producing brand-specific literature. That was a resource and financial challenge. While it's difficult to quantify specifics, we expect some cost benefits over time from consolidating marketing, and we'll redeploy resources into building capabilities and differentiating in the market. Ultimately, we believe top-line benefits are most important, but we also see opportunities to be more efficient with marketing spend.

Your next question comes from Michael Rehaut with JPMorgan. Please go ahead, your line is open.

This is Elad on for Mike. I wanted to get into the drivers of the better cost outlook in the second half and whether you're baking any benefits from IMO 2020 and the expected cost deflation that may help this year. Also, if asphalt prices come down, how much do you think could flow through in terms of price reduction from manufacturers? Is there a timing lag for when these potential benefits could flow through to your P&L?

Thanks for the question. Our point of view: the first half of the year will be softer due to storm comps. As we move into the second half, we expect a more robust environment driven by improved repair and remodel and new construction, along with a lower inflationary environment. Last year was particularly challenging from inflation with several price increases coming through, which compressed margins. We do not expect a similar inflationary environment this year, so we expect to see margin repair and improvement. Regarding IMO 2020, it's likely to have some impact but I view it more as a short-term change; I don't expect a rapid large change in asphalt pricing to immediately move through our P&L. We expect more difficult comps in the first half and a better environment in the second half with lower inflation than prior year, and we'll continue to work on margins and our value proposition to drive improved results.

And then on mix in the quarter—were there any headwinds or tailwinds by product, geography or channel? Any mix expectations for the full year?

For the first quarter on a year-over-year basis there was a slight mix negative impact, but not material. Sequentially, there was not a big difference by mix. Looking forward, I don't foresee a big mix shift impact in the remaining quarters of the year, so I don't expect much change from that perspective.

Your next question comes from Philip Ng with Jefferies. Please go ahead, your line is open.

Organic growth has been a little choppy for you; appreciate the strategic focus going forward. Julian, could you reaccelerate on that element—any big buckets that would be a big driver? Do you see pricing being a larger element of that story, or is it more demand side?

Thanks Phil. Both elements are important. There are two elements I mentioned in my prepared remarks. First is overall activity level: we have roughly 110,000 customers and a portion of that base represents significant opportunity—more proactive outreach, asking for the order, and following up to drive top-line growth. Second is analytics and pricing tools; we're developing and deploying these tools to enhance our pricing capabilities. Pricing will be a focus area for top-line growth, and we can pursue both activity and pricing in parallel. We must also build our service proposition to be differentiated to capture value as we enhance pricing capabilities.

With all the change you're planning to implement, will you need new external talent to execute? Will you implement any new metrics, whether at senior management or further down, to align compensation to these strategic goals?

Yes. The strategic review is defining and quantifying the opportunity. As we finalize it, we'll establish the focus areas and metrics to drive results. Naturally, that will set a high bar for talent—both developing internal talent and potentially bringing in additional external talent to complement our current people.

Your next question comes from Jay McCanless with Wedbush. Please go ahead, your line is open.

First one: what's annual depreciation going to be?

I was looking at that. In the first quarter we ran around $19 million in depreciation; for the full year we'll be somewhere around $76 million. Depreciation plus amortization—amortization in the first quarter was roughly $45 million and for the full year it will be somewhere around $178 million.

And then with four months under your belt for the fiscal year, I would have expected a bit more certainty or forcefulness around guidance and how you're thinking about the rest of the year. Is the hesitancy I perceive around the strategic review and where you are going with that, or are you seeing a more competitive marketplace as the spring season gets underway in certain parts of the country?

Jay, this is Julian. I don't think it's hesitancy; it's still early in the year. This is the slow part of the year and we're still working through winter in the northern states. Overall, we've seen activity in line with what we anticipated. We did see a sharp slowdown around the holiday period that bounced back. I don't see anything in the first few months that would indicate a more competitive environment than expected. We've laid out that we believe the environment will be flat and that consensus estimates for sales and EBITDA are in line. I would characterize our view as within a normal range at this point in the year.

One technical item: the amortization number I provided reflects our current level of trade name amortization. When we finalize the write-off of those trade names that will change the amortization piece, and we'll update the numbers when we finalize the write-off.

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

Well, thank you all for joining our call. I really believe that our first quarter represents a step forward for Beacon and we are well positioned as the building product leader empowering our customers to build more. We are restoring our focus to our existing exterior and interiors products business, where we see substantial opportunity for both sales growth and margin enhancement. I really believe the future for Beacon is bright. We appreciate the continued support of our customers, suppliers and employees, and from the investment community as a whole. So thank you for listening to us this evening. Have a great evening.

This concludes today's conference call. Thank you for joining. You may now disconnect.