QXO, Inc. Q1 FY2021 Earnings Call

Good afternoon, ladies and gentlemen. And welcome to the Beacon First Quarter 2021 Earnings Call. My name is Cathy, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. At this time, I will give you instructions on how to ask a question. Operator provided instructions on how to ask a question. As a reminder, this conference is being recorded for replay purposes. This call will contain forward-looking statements, including statements about 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 8, 2021, and except as required by law, the company undertakes no obligations to update or revise any of the 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 & 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 Chief Executive Officer; and Frank Lonegro, Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Julian — Mr. Julian Francis, President and Chief Executive Officer. Please proceed, Mr. Francis.

Thank you, Cathy. And good evening, and welcome to our first quarter fiscal 2021 earnings call. On the call with me, as Cathy said, is Frank Lonegro, our Chief Financial Officer. Our prepared remarks will correspond with the slide deck, which is posted to the Investor Relations section of Beacon's website. Before I get into the details, as you know, we have announced the divestiture of our Interiors business. As such, we are providing two sets of financial information in today's earnings release. The primary focus will be on our continuing operations, which focuses solely on the exteriors business and treats interiors as discontinued operations. I know many of your models are still based on the combined company, so we've also provided summary information on the combined results. I hope the additional information will help you better gauge our first quarter performance and support your analysis going forward. On a continuing basis, we generated Q1 sales of $1.6 billion, an 11.4% year-on-year increase. Adjusted EBITDA improved to $143 million from $77 million the prior year. On a combined basis, so including interiors, sales were $1.8 billion, with 9% sales growth. Adjusted EBITDA for the combined business was $158 million compared to $94 million in fiscal Q1 last year. We believe both sets of numbers are important in understanding our first quarter results, but our remaining commentary this evening will focus on the continuing exteriors business. Within the appendix of our slide presentation, we've included supplemental 2019 and 2020 income statements for the continuing exteriors business that should help you in modeling our pro forma financials. I'll now begin on page four of the slide materials, which focuses on our first quarter continuing results. Our fiscal 2021 is off to a great start. First quarter continuing adjusted EBITDA increased 86%, driven by the strongest quarterly organic sales growth in more than 4 years and one of the best first quarter EBITDA margin percentages in over a decade. We have strong leadership, and I'm very proud of the team's execution the past three or four quarters. I believe that this quarter gives you a sense of what the company is capable of delivering. Now there are several important takeaways from the first quarter. First, the residential demand is strong. Residential roofing sales increased 21% in the quarter. Strong reroofing and new construction activity was paced by milder weather, which opened up additional workdays for our customers. In a few Gulf States, demand was boosted by hurricane-related repair work, and the strong demand environment provides a favorable backdrop for the successful price increase we implemented in August. The positive housing market fundamentals also helped boost exterior complementary products. With the divestiture of interiors, our product mix is now more residentially focused and biased towards repair and replacement activity. Second, we continue to demonstrate good execution on our price actions. As highlighted during our last quarterly call, our team moved quickly in response to the August shingle price announcement from the manufacturers. We implemented higher prices to essentially coincide with the timing of the supplier increases. And as we have discussed previously, the timing and execution of our price initiatives creates favorable timing benefits, which positively contributed to gross margins in Q4 '20 and continued in the first quarter of fiscal '21. First quarter gross margins were 25.4% for continuing operations, exceeding our expectations. We continue to see inflationary pressures across most product categories, and we are confident in the current environment we can capture additional pricing opportunities to more than offset the cost headwinds. Third, first quarter results demonstrate our ability to manage operating costs. One of our central goals as a leadership team is to aggressively manage costs in all demand environments. We are extremely proud of our expense management during the past three COVID-impacted quarters, but we recognize that with all that has passed during COVID and the year-end close, determining the impact of our actions has been difficult. We see the first quarter as an indication of the progress we've made. During Q1, continuing adjusted OpEx dollars declined 3% year-on-year despite an 11% sales increase and a higher than normal residential mix, which is typically higher cost to serve. In a growth environment, an important part of our focus is to generate significant operating leverage, closely watching costs and managing the controllable aspects of our day-to-day considerations as we run the business. Now please turn to page five of our slide materials. In our previous outlook commentary, we’ve taken a more cautious view on quarterly results, reflecting the potential impact of weather disruptions. However, our November and December monthly sales growth accelerated meaningfully, a reflection of strong underlying demand and favorable weather conditions. Our continuing business finished a strong 11.4% sales growth for the quarter. Gross margins at 25.4% were stronger than anticipated, with the upside from favorable residential mix, supplier incentives tied to higher volumes and continued price execution. Our first quarter operating expense performance centered on cost management tied to anticipated winterization during the quarter. As noted earlier, we're very pleased to report the meaningful OpEx decline, even with robust sales growth. Frank will share some of our specific productivity measures later. For the continuing business, adjusted EBITDA increased from $77 million to $143 million, and EBITDA margins increased from 5.4% to 9.1%. The favorable performance was driven by a combination of strong sales growth, a significant year-to-year increase in gross margin and a reduction in operating costs, resulting in significant OpEx leverage. Moving to page six of our slide materials. Let me provide you an update of our planned interior divestiture and a view of our business following the transaction closing. We announced in late December the sale of our interiors business to American Securities, who will subsequently integrate the transaction with their recently completed acquisition of Foundation Building Materials. We are making great progress and expect the deal will close later this week. The interiors business includes more than 80 branches focused on wallboard, ceiling tile and grid, steel studs and insulation products. Interiors operates from a separate branch network from our exteriors locations, making for a clean separation of the business. We were pleased with the outcome of the process and secured an attractive valuation of $850 million for the interiors business. Importantly, the proceeds allow us to improve our balance sheet, immediately lower our net debt leverage to very near our previously published targets and provide us with much greater financial flexibility. The divestment will return Beacon to its legacy position as a focused leader in exterior building products distribution. Eighty to 85% of our continuing business will be within residential and commercial roofing. We reviewed the roofing market attributes as relatively unique. More than 80% of residential and non-residential roofing is classified as repair and replacement, with the majority of that being non-discretionary and driven by the replacement of worn or damaged roofs. The remaining 15% to 20% of our exteriors business is complementary products, consisting largely of siding, windows and doors, lumber and wood roofing products. These exterior complementary products have some overlap with roofing customers and shared distribution facilities providing meaningful sales and operating synergies. To summarize, we feel the interiors divestiture represents a transformative strategic event for the company, narrowing management's focus, substantially improving our balance sheet and financial flexibility and concentrating the business around our core capabilities. Next, please turn to page seven of the slide deck. In recent quarters, we provided updates of each of these four strategic initiatives. In light of the interiors divestiture, we felt it was appropriate to reset our financial targets and metrics for each. These initiatives remain central to our improved sales growth, operational efficiency and profitability. Some of the impact can be directly measured. There are also additional benefits that are less obvious, but play an important role differentiating us from competitors and adding incremental value for customers. Let me begin with organic growth. This initiative is focused on improving both the number and the effectiveness of interactions between our sales organization and customers. We continue to invest in sales training programs, marketing support, and value-added tools that help our salespeople track their contacts with existing and potential new customers. And we have established targets for our sales team around the number of interactions daily, and we know that meeting these objectives strongly correlates to driving overall company sales performance. Next is our industry-leading digital platform. Digital is a clear differentiator in the marketplace for Beacon. During our last quarterly call, we disclosed that digital sales had reached a run rate of 10% of total company sales during the final month of fiscal 2020. Our exteriors business was further along the adoption curve than interiors, so we expect to see another bump in adoption this year. We have continued to leverage the customer adoption rates that accelerated during the early COVID environment, and are confident our current year and long-term growth trajectory will cement our leadership. Digital is an excellent example of how a sharpened post-divestiture focus should pay dividends for growth. Our marketing organization will now be able to devote 100% of their time to the exteriors products on the platform and develop new offerings. Next, moving to our On Time & Complete Network, our OTC strategy creates a network of branches in larger metropolitan areas. We operate in 58 distinct markets and have more than 250 exteriors branches participating in OTC. OTC provides four key benefits. First is improved customer service as we have created the flexibility to deliver from the branch with the best combination of product and service to support the customer’s needs. Second is a lower cost to serve. Since we can optimize across a network of branches, we get reduced delivery time and mileage, improving labor efficiency and reducing fleet costs and emissions. Third, reduced inventory levels. We previously indicated we believe we can permanently reduce our inventory by $50 million to $100 million as we optimize across our OTC branches, and we remain confident that we can hit that target. And fourth, we can accelerate our talent development. Our OTC creates opportunities for our people to explore a variety of roles at Beacon and build increasing levels of responsibility, allowing them to build great careers at our company and reach their full potential. Lastly, I want to update our branch operating performance targets. I talked extensively about our focus on the volume quintile branches and our goal to significantly improve the operating performance. We've developed a diagnostic tool and a reporting cadence that places emphasis on structural change to ensure we get sustained improvement. We previously guided to a $30 million to $60 million improvement at these branches that will be achieved over several years. We shared on our prior earnings call and in fiscal 2020 we've seen a more than $20 million year-over-year improvement, the majority of which came from exteriors branches. With the success we saw during the first year of the program, we are now resetting our 2021 target to a $20 million year-on-year improvement from the lowest quintile exteriors branches. Each year, we will continue to focus on driving sales and operating improvements to bring these branches over time up to at least our company average. To summarize, my update on our strategic initiatives, even the objectives and the anticipated impacts to Beacon, have not changed following the interiors divestiture. Instead, it has sharpened our focus on these programs and may be enhancing their effectiveness over time. Now, I will pass the call over to Frank to provide deeper focus on our first quarter continuing results.

Thanks, Julian. And good evening, everyone. As Julian highlighted, we are providing significant transparency this quarter, with first quarter results for both continuing operations, exteriors only, and combined results, exteriors plus interiors. This is designed to assist you as you compare our first quarter results with your current model and as you adjust your go-forward model for our continuing operations. Turning to slide nine. Sales within our continuing exteriors business improved to 11.4% year-over-year. Sales growth accelerated materially from the previous quarter, and our monthly growth rates accelerated throughout Q1. Residential roofing produced more than 21% sales growth, as housing market indicators remain favorable for new construction and core repair and remodeling. This year, we saw the roofing season extend further into the early winter months given the strong underlying demand and milder weather in many geographies. Sales also benefited from regional strength in several Southern states tied to hurricane-related repairs. Commercial roofing sales declined 3%, reflecting significant improvement from the double-digit decline we experienced in Q4. We believe the combination of milder temperatures and hurricane business were helpful to commercial roofing in the quarter. From a more fundamental perspective, the worst is likely behind us in commercial roofing and the comparison to these during the second half of fiscal 2021. However, there remains lingering uncertainty for new construction and reroofing within the office and retail markets. We continue to adopt a cautious commercial outlook until we see tangible evidence that demand differs from 2020 and that building owners return to more normal timetables for capital projects. Complementary product sales increased nearly 9% in the first quarter. Remember that this growth rate reflects only our complementary exteriors business, which has a higher residential end market exposure. As you think about the mix of complementary going forward, we view this as being approximately 80% residential and 20% commercial. Key complementary products for residential include vinyl siding, fiber cement siding, lumber, windows and exterior doors, while our complementary business for commercial is primarily waterproofing. Both categories are distributed through our traditional branches and share overlapping customers with our roofing business. Turning to slide 10, we'll review gross margins. Gross margin for continuing operations was 25.4%, increasing 140 basis points year-over-year and 30 basis points sequentially. The drivers of the strong year-over-year increase were equally split between favorable price-cost and favorable mix. On a year-over-year basis, price-cost for continuing operations was positive by approximately 70 basis points in Q1. By comparison, we experienced 90 basis points of year-over-year price-cost benefit in Q4. In the first quarter, price-cost was favorably impacted by our successful implementation of recent pricing increases, the remaining timing benefit related to the August increase and higher incentives based on stronger sales. We also benefited significantly from favorable product mix in the quarter, as we experienced stronger residential roofing sales. To sum up, first quarter gross margins were above our expectations, driven largely by the combination of sustained successful pricing execution and factors linked to our strong residential sales, including product mix and higher incentives. And as you know, there have been additional pricing increases announced across a broad range of our products. We are approaching those increases with the same level of rigor and execution we have demonstrated in recent periods. Now turning to operating costs. To add on to Julian's earlier comments, we made some tremendous strides in this area, particularly the past three quarters. In my opinion, our first quarter performance is a meaningful demonstration of what Beacon is capable of delivering. While third quarter 2020 highlighted our ability to make temporary cost reductions in a period of challenging demand, the first quarter shows our focus on managing expenses at times of significant growth. Adjusted OpEx for continuing operations was $276 million, a $9 million reduction from the year-ago quarter. Despite sales growth of more than 11%, we were able to generate a 3% reduction in adjusted operating costs, an accomplishment our entire organization is very proud of and is a testament to the dedication of our field leadership and thousands of Beacon employees delivering for our customers every day. We continue to focus on the elements of our business that we can control and improving productivity within our largest cost centers, including labor and fleet which are a major focus for Beacon. We have updated the headcount and sales per hour work data to reflect current and historical data specific to the exteriors business. As you can see, even with the significant uptick in demand over the past several quarters, we finished Q1 with headcount down more than 5% year-over-year. Our reduced headcount combined with 11% topline growth generated a significant increase in sales per hour worked, which is up 25% compared to last year and improved sequentially even with the typical challenges of seasonality. In terms of other operating costs, we continue to benefit from reduced travel and entertainment spending, which remains well below historic levels. We would expect a portion of these expenses to come back over time, but are unlikely to return to historic levels as we continue to leverage greater sales effectiveness and operating efficiencies. As we go forward, we will continue to implement improvements within our business as we fully embrace the continuous improvement mindset. Turning to slide 11. We'll review our cash flow and balance sheet. Importantly, I hope to accomplish three things with this balance sheet and cash flow overview. One, reset cash flow expectations for exteriors; two, discuss the use of transaction proceeds; and three, update our pro forma net leverage. During our previous calls, we commented on our expected cash flow performance for the combined company. Importantly, we expect our continuing exteriors business to have similar cash conversion to the combined company. Obviously, there will be unique working capital fluctuations from time to time that may impact us, but we remain comfortable with these expectations for cash conversion. We plan to deploy the divestiture proceeds, estimated to be $750 million, across a combination of debt reduction and growth investments. Our current thinking is that debt reduction will be concentrated on our ABL and term loan, with the remainder as cash on our balance sheet, providing us with the flexibility to invest in inventory as we did this quarter and the ability to selectively invest in organic and inorganic growth prospects. We have been effectively absent on acquisitions for the past few years because of a relatively high leverage. With the upcoming closing of the transaction, pro forma net leverage for the continuing business will decline to 3.2 times EBITDA as of the end of fiscal Q1. Remember that we previously had a standing target of three times EBITDA, and we're envisioning roughly three years to achieve this objective. We're delighted with the expected outcome of the interiors transaction and look forward to the financial flexibility that comes with lower leverage levels. With that, I'll turn the call back to Julian for his closing remarks.

Thanks, Frank. Before we turn the call over to questions, I want to update our fiscal 2021 outlook. Please reference page 13 of the slide materials. To begin with, it's important to clearly distinguish between our current fiscal year 2021 guidance and our previous outlook provided in November. The prior view of sales, margins and EBITDA included our interiors business whereas today's outlook excludes interiors and focuses solely on the continuing operations. With that, let me go to some additional details on 2021. January daily sales continued to see strong demand trends, similar to what we experienced during the November and December months. On a total sales basis, January sales increased about 6.5% versus January last year on two fewer selling days. A strong housing market continues to boost both repair and replacement and new construction, benefiting core residential roofing demand and the residential exposure within complementary products. January sales growth also reflects a positive contribution from our August 2020 residential roofing price increase and several smaller increases within our other product categories implemented over the past several months. For our fiscal second quarter ending in March, we expect total sales growth of mid to high single digits despite one less selling day than the prior year. We remain confident in the underlying demand, especially on the residential side, but are mindful of the impact of winter weather on the business like we saw last week. We continue to emphasize pricing execution and operating efficiency. Seasonality has historically reduced second quarter margins, but we believe the impact will be smaller than in recent years, and we expect a meaningful year-to-year gross margin increase of nearly 200 basis points. In early December, we announced a price increase for residential roofing products that became effective last week. We expect to implement this increase with the same level of execution as we did with the August increase. We continue to emphasize improvement in operating efficiency throughout the organization and have made tremendous strides in this area. You've heard us talk about the learnings from last year and the opportunity to apply those principles to our seasonal winterization efforts. While fully engaged in this effort, we are carefully balancing efficiency with customer service given the favorable residential demand picture we are experiencing. For fiscal 2021, we continue to take a balanced view on external market conditions, featuring a strong residential end market and continued uncertainty within our non-residential facing products. With that said, our confidence in the overall environment has clearly improved since November. Regardless of market demand, we remain focused on what we control: generating improved sales, gross margin and operating performance, continuing to execute our price actions to more than offset inflation and driving efficiency across the organization. We have emphasized these areas throughout 2020, and we'll continue to do so in 2021. Our updated 2021 outlook from continuing operations now assumes high single digit sales growth. We expect fiscal 2021 adjusted EBITDA to be between $500 million and $525 million for continuing operations, which represents a meaningful increase from the $399 million exteriors pro forma adjusted EBITDA for fiscal 2020. This improvement reflects a combination of strong sales growth, gross margin gains and favorable operating leverage. With that, Cathy, we're now ready to open the line for questions.

The conference is now open for questions. And your first question is from Garik Shmois from Loop Capital.

Congratulations on the quarter. My question is on gross margins. Could you flesh out a bit how much of the Q2 gross margin expansion is pricing versus mix? And how should we think about that relationship through the rest of the year as it relates to your guidance?

Garik, thanks for the question. I appreciate the comments on the quarter. We are very pleased. Obviously, we've got a very strong residential backdrop. We're still early in Q2 overall, so the sequential numbers are certainly positive, but I think that the meaningful improvements year-over-year are a balance between the two drivers: pricing and mix. Frank's got some specifics on that.

Yes. Garik, if you think about it, the second quarter is going to benefit from the combination of the August pricing increase plus the February pricing increase, with at least two-thirds of that impact in the quarter. And if you look at mix in the first quarter relative to the prior year, you're looking at about a 5 percentage point swing: residential is about 5 percentage points higher in mix than it was a year ago, and those trends will largely hold in the second quarter as well. So it's going to be a meaningful contribution from both price-cost and mix. We might get a little bit of timing benefit in the quarter as well. You might remember that we had some timing benefit from the August pricing increase between fiscal Q4 and fiscal Q1. So it's going to be healthy on both sides, and we look forward to sharing more when we get a couple of months down the road.

Your next question is from Phil Ng from Jefferies.

Hey, team. Just curious to get your view on channel inventory. It doesn't seem like there's much there just because demand has been pretty robust, but the ARMA data was pretty eye-popping. For you, your inventory level is only marginally up sequentially. So just curious to get your take on what you're seeing in the marketplace and how lead times are progressing on the residential side right now, relative to normal.

Thanks for the question, Phil. As I said in our prepared remarks, we believe the residential backdrop is strong. We continue to see extended lead times. We believe that both the channel and the manufacturers continue to have depleted inventory, particularly compared with where we would normally be at this point in the year. If you look at Q4, it was a very strong period for shipments and production; it was probably about all the manufacturers could produce and ship. The distribution channel, anticipating strong demand, is buying in as much as they can. Much of the industry on the shingle side was on allocation. So obviously, we did all we could, and we believe we did quite well during the quarter. But overall, where we would normally be at this time of year, inventories are low across the channel and low at the manufacturers. We think that's going to lead to a very positive environment provided you see continued strength in the residential market overall.

That's really helpful. And then any color on what you're baking in from a price-cost spread? You've seen about 70 basis points of improvement the last two quarters, and you're anticipating pretty good traction for some of these recent increases, notably on the residential side. Is that type of spread what you're baking in at this point in your guidance? And if it comes in better, is that an opportunity to see upside to your guidance?

Thanks, Phil. Certainly, we are focused on the execution of the price increases, and we believe there is expansion potential in our gross margin based on improving price. We just announced a price increase that went into effect last week, and execution is still underway. We still have a lot of the year to go, and it's early February. Calling exactly what that's going to be for the rest of the year is challenging, but given the backdrop — if demand remains solid and we don't see a resurgence of COVID — we do believe there can be positive upside in the overall pricing environment for the year.

Your next question is from Kevin Hocevar from Northcoast Research Partners.

Hey, good evening, everybody and nice quarter. You guys are raising the sales guidance for the full year to high single-digit percent growth from low single digits. Obviously, there's a lot of moving pieces in there. There's been a lot of price increases. So curious, if you could give us some idea of how much of that is price versus volume? And then within the segments, how do you expect the different segments to perform versus that? I'm assuming from all the commentary, residential above, non-residential below, and then complementary somewhere in between. But curious if you could give us a little bit more color on what that high single-digit percent growth is made up of?

Hi, Kevin. If I just think about the first quarter, the 11% you saw was primarily volume-driven, with some pricing in there from August. Going forward, we'll be layering additional pricing increases — February on top of August — and there's talk of more increases in spring and summer, which would be beneficial. We should essentially replay the playbook we did in August. Phil, to your earlier point, we sold everything we bought in both fiscal Q4 and fiscal Q1, so material availability is the only question mark in terms of fulfilling the demand that's out there. If we're able to continue to buy, we should be able to continue to sell. The backdrop is extremely strong. Whether or not cost dynamics change, and the length of winter, we'll see. But if construction season opens appropriately, we look forward to a really strong spring and summer, and we'll approach pricing increases the same way we've done before.

Kevin, to add to that: particularly as you get later in the year, volume becomes less of a growth driver compared with price because earlier in the cycle we were selling everything we could buy. So price will become a relatively more important driver later in the year.

Your next question is from Ryan Merkel of William Blair.

Hey, guys. Two questions from me. First off, can you break down the 21% residential growth into volume and price?

On the asphalt shingle side, which drove much of that category, the volume increase on a year-over-year basis was about 24.5%, if that's helpful. Obviously, you can do the math on pricing increases. We don't get full pricing increases on every shingle we sell given contracts and things that take time to roll over, but volume was really impressive in the quarter. What's your second question?

And the second question is, just curious if you have any updated thoughts on EBITDA margins long-term. You just put up a huge margin print this quarter, and some of the operational initiatives are clearly working. So an update there would be helpful.

Thanks, Ryan. I don't view this quarter as necessarily changing the long-term structural expectations dramatically, but it does reinforce the progress. Historically, the company has averaged around a 7.5% EBITDA margin. I continue to see plenty of upside from that through the initiatives we're implementing. That said, this is a seasonal business with some quarter-to-quarter variability and winterization dynamics, so it's a bit challenging to pin a single long-term number down today. We're focused on sustaining and building on the improvements and continue to explore the structural improvements that can take hold over time.

We have a question from Ketan Mamtora from BMO Capital Markets.

Thank you and congrats on a strong quarter. I want to come back to capital allocation. Following the pending divestiture of the interiors business, how do you think about the right leverage for Beacon? And then from an M&A standpoint, what areas are most interesting to you? Thank you.

On capital allocation, this transaction puts us into the range we previously discussed; pro forma leverage is around 3.2 times at the end of Q1. If you factor in cash flow through the remainder of 2021, you can imply a number below that. We haven't set a new rigid target yet, but looking at our peer set, somewhere in the 2x to 3x range is reasonable. It's an active conversation we'll have with the Board. We're in a much stronger position than without the divestiture, and we're delighted with that. I'll defer the M&A portion to Julian.

Thanks, Frank. Ketan, on M&A, we'll be focused on opportunities within our core markets: commercial and residential roofing and complementary exteriors. Having just exited interiors, we're going to sharpen around our existing businesses. We'll look for opportunities that align with our core customers and where we see operational or strategic synergies. Jumping into something outside our core in the near term is not our focus right now.

We have a question from David Manthey from Baird.

Hi, guys. First question, of your old revenue and EBITDA guidance, how much of that was for interiors?

We didn't parse it out in the guidance, but a helpful data point is last year's numbers: overall adjusted EBITDA was $472 million, of which $73 million was interiors and $399 million was exteriors. We did expect growth in both segments, but that should help you with the rough allocation.

Sure. And second, do you plan on ultimately filling the COO position? Or are you just going to eliminate that role?

Thanks for the question, David. We will be eliminating the COO role. The division presidents who currently reported to the COO will report directly to me.

You have a question from Keith Hughes from Truist.

Thank you. Frank, going back to one of your answers on volume and price in residential, did you say volume is up 24% to 25% in shingles because that’s what I heard?

Yes, on asphalt shingles specifically, volume was up about 24% to 25% year-over-year. That is above the overall residential revenue number since that category includes other roofing products like tile and wood that had different trends. Then you get the weighted average to the overall residential number. For pricing, if you look at announced increases, that gives you a top-line number, but realized pricing capture will be lower because of contracts and volume agreements. So you might assume we capture somewhere in the 50% to 60% range of announced increases, which gets you to a reasonable estimate.

You have a question from Kathryn Thompson from TRG.

Hi. On complementary products, you referred to it earlier. Could you flesh out the growth in that category, and more specifically the strategy not just geographically, but the types of products you may want to add to the overall mix?

Kathryn, the biggest piece of complementary for us is siding. Siding performed well in the quarter and was essentially in line with the overall complementary revenue number. A lot of that is in the North and Midwest geographically, and we would continue to see that grow with the residential environment. Lumber is another big piece that was up significantly — driven by both volume and the sharp spot-price increases we saw during the quarter. Those two are key inputs into complementary. Absent the lumber pricing dynamic, we'd expect complementary trends to follow roofing, but lumber spot price volatility did amplify the results this quarter.

In complementary exteriors we have vinyl siding and other siding types, windows and doors, waterproofing (primarily commercial-focused), and some other products. Strategically, we will focus on areas that overlap with our core roofing customers. Many contractors do both roofing and siding, and we follow our customers' needs. We'll invest where we believe we can build capabilities, have competitive advantage, and expand in markets where these products are logical extensions of our existing branch footprint. Now that we've improved our financial flexibility, we'll selectively pursue growth within our core markets.

To clarify, are you looking to move upmarket into more value-add specialty products like other distributors have done, or are you more focused on regionally relevant products and following your customers?

Our strategy is to follow our core roofing customers. If they expand into siding or other exterior categories, we'll serve those needs. Over time we'll evaluate adding more specialty or value-add offerings where it makes sense and where we can demonstrate differentiated value and clear overlap with our customer base. The initial focus is on strengthening our core roofing relationships and complementary products that share those customers and distribution synergies.

You have a question from Mike Dahl from RBC Capital Markets.

Thanks for taking my question. Julian, my first question is around demand sustainability. Part of the roofing story has been less cyclicality, but if you look at the industry ARMA shipments, they were very strong. How do you balance some of the tailwinds from new residential versus potentially having pulled forward some reroofing or storm demand in 2020 and thinking about continued growth beyond the near term from an industry level?

Thanks, Mike. Last year wasn't a particularly large storm year overall, so the strength we're seeing is more linked to housing fundamentals: housing turnover, demographics, low interest rates, people staying at home, and government stimulus. There's also a cohort effect that roofs installed around 20 years ago are due for replacement, so there's a cyclical element tied to past housing starts. All these factors support continued demand for roofing. We also see opportunities to grow share by improving our service and capabilities. Overall, we believe roofing is a large, attractive market with long-term tailwinds, and we are well-positioned to capture growth both organically and inorganically.

Thanks. And one more on complementary: could you quantify what percentage of complementary is lumber today? If lumber was, say, 15% and it doubled in revenue terms due to price and volume, that's a meaningful tailwind. Any detail there would be helpful.

Lumber is about 15% of the complementary category on a dollar basis. It was up meaningfully year-over-year in the quarter driven by both volume and spot-price increases, but it remains about 15% of that category overall.

Got it. Thanks.

You have a question from David MacGregor from Longbow.

Good afternoon, everybody. Congratulations on a great quarter. I wanted to start on the OTC network: can you talk about how comparable growth and gross profits compared in OTC stores versus non-OTC stores?

Thanks, David. OTC is focused on larger MSAs, and we've seen strong performance in those branches. OTC's advantages are about delivery flexibility and optimizing across branches, which improves customer service, reduces delivery time and mileage, improves labor efficiency, reduces fleet costs and emissions, and lowers inventory needs. We're seeing benefits in terms of reduced delivery distances, improved turns and lower warehouse costs. We're in the early innings, but the strategy is designed to be a differentiator, particularly against regional competitors who lack this network capability. So far, we have seen positive operational results and examples where OTC enabled us to serve customers we otherwise could not have served.

So the best is yet to come on this?

Absolutely.

Second, with the progress on strategic initiatives — digital, OTC, underperforming branches — can you talk about market share now and how it's been trending, and any competitive reaction you're seeing?

It's difficult to precisely measure market share in this environment because the industry has been tight on supply and many participants were on allocation. ARMA shipment data are informative but don't directly translate into timely market-share measures. That said, over the past 12 to 18 months we believe we've made incremental share gains. Our differentiated value proposition — digital capabilities, OTC network, better operational performance — should increasingly make it difficult for smaller or regional competitors to compete effectively. We are starting to build a competitive edge that we expect will translate into further share gains over time.

And David, to add: in the near term, when you're selling everything you're buying, market share is a tricky metric. We're focused on procuring as much product as we can and selling it. We look forward to competing in a more normalized environment where we can show clearer market share gains.

You have a question from Michael Rehaut of JPMorgan. Elad Hillman is on for Mike.

Hi. This is Elad Hillman on for Mike. Thanks for taking my question. First, I appreciate the color on operating expenses, which were much lower than many expected. Could you expand on the largest drivers there — volume leverage versus cost reductions — and how that compared with what you expected? And how should we think about OpEx on a more normalized basis?

This has been a major focus since I joined the company. We've learned a lot about how to operate in very different environments — both the downturn and the subsequent rapid recovery. We implemented metrics and reporting that allow us to manage productivity daily at the branch level, and that discipline helped us reduce costs when needed and then scale up more efficiently as demand recovered. We uncovered significant operational leverage in labor, fleets and other areas. Reduced travel and entertainment also contributed and are unlikely to return fully to historical levels. The improvements required a lot of day-to-day work by branch managers and field leadership, and we believe many of those practices will remain as part of our operating model. We haven't fully defined a normalized OpEx target yet, but we see continued opportunities to improve productivity and operating leverage over time.

If you think categorically, the $9 million year-over-year reduction in OpEx was driven by lower wages and overtime driven by improved sales-per-hour metrics, lower fleet maintenance and fuel costs (we had about 5% fewer trucks active in the quarter than a year ago) and lower travel and entertainment. Offsetting that, we will have higher incentive compensation given the strong start to the year. Those are the primary components of the change.

That's really helpful and encouraging. One more quick question: you mentioned November and December sales acceleration. How much of that was stronger new residential trends versus stronger repair/remodel and storm demand?

It was a combination of all those factors. We saw an extended construction season with milder weather in many areas, stronger housing fundamentals supporting both new construction and repair/remodel, and our execution on pricing and supply. November, December and January all showed stronger-than-prior-year performance, and that strength was broad-based, especially on the residential side.

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

Thank you, Cathy. And thanks to everyone for your interest. Before I close the call this evening, I want to say thank you to Brent Rakers, Head of Investor Relations. Brent is with us today, but he has decided that he will be leaving to pursue a personal passion after five years with Beacon. I know many of you have interacted with Brent and know him well over the years. We're excited about Brent's future and what he is going to be doing. I'd like to thank him for all of his efforts over the last several years at Beacon. Again, thanks to everyone for joining the call this evening. We believe we've delivered a strong quarter and think it's the foundation on which we can build a strong year, and we look forward to updating you on our next quarter's performance in a few months. In the meantime, we hope all of you stay safe and healthy, and enjoy the closing months of winter. Thank you all.

This concludes today's conference call. You may now disconnect.