Good afternoon, ladies and gentlemen, and welcome to the Beacon Third Quarter 2021 Earnings Conference Call. My name is Nye and I will be your 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 the company's plans and objectives and future economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts and often use words such as anticipate, estimate, expect, believe, will likely result, outlook, project and other words and expressions of similar meaning. 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, August 5, 2021. And except as required by law, the company undertakes no obligation 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. I would now like to turn the call over to Mr. Binit Sanghvi, Head of Investor Relations. Please proceed, Mr. Sanghvi.

Thank you, Nye. Good afternoon, and welcome to our fiscal third quarter 2021 earnings call. With me on the call today are Julian Francis, President and CEO; and Frank Lonegro, Chief Financial Officer. Our prepared remarks will correspond with the slide deck posted to the Investor Relations section of Beacon's website. After management's prepared remarks, there will be a question-and-answer session. I will now turn the call over to Julian.

Thanks, Binit. Our fiscal third quarter results are outstanding. Our team delivered record quarterly sales, net income and adjusted EBITDA. Sales increased approximately 21% as revenue grew across all three product categories. Adjusted EBITDA was more than 75% higher on significant gross margin expansion and operating cost leverage, and we delivered 12.3% adjusted EBITDA margin for the quarter. We continue to be thrilled with our team's execution. Beacon's performance is a result of every employee's hard work serving customers and living our values. I will begin on Page 4 of the slide materials and discuss the key highlights from our third quarter continuing results. Demand trends remain strong. Residential roofing sales increased 18% compared to the third quarter last year. New construction demand continued to be strong. The positive housing market fundamentals also provided a tailwind for our team to drive complementary product sales up 35%. In addition, we grew nonresidential sales by 16% compared to the COVID-impacted prior year period. Our price execution across all product categories delivered strong gross margin improvement, a critical focus area for us over the last 12 months. We continue to see inflationary pressure across most product categories. In this environment, it's critically important to stay ahead of the cost curve with cost increases across a number of product categories; 60 days apart, even slight delays in implementation can quickly erode profitability. So our focus has been on driving great execution at the branch level. Third quarter gross margins expanded to 27.6%. We expect to see cost pressure to continue but are confident that we can execute to capture additional pricing to offset the headwinds. Our actions in fiscal '21 have positioned us for growth. These include creating significant financial flexibility, assembling a new executive leadership team, optimizing our inventory levels and investing in new capacity to meet the anticipated growth. Let me touch briefly on each of these. As detailed on our Q2 call, we have restored financial flexibility through a combination of debt paydown and a series of refinancing transactions finalized in May. The results are a stronger balance sheet, lower cash interest and net debt leverage of 2.4x at the end of the quarter, less than half what it was a year ago. We now have ample ability to invest in value-creating growth opportunities going forward. As a leading distributor of exterior products, we are trusted by our customers to reliably deliver high-caliber service in any demand environment. We have proactively invested in inventory to ensure we are able to meet anticipated demand as we see it develop in local markets. Our backlog metrics are strong and continue to grow. For example, open orders, a key metric of future demand, is up significantly both year-over-year and sequentially at the end of the third quarter. Our growth and transformation story has allowed us to attract highly talented C-suite leaders bringing the team new capabilities in human resources, legal, marketing and supply chain that position us for the future. These individuals bring great talents to Beacon that are essential for our desire to innovate, deliver growth, improve operational performance and drive value for stakeholders. As part of our positioning for growth, we have commenced investments in greenfield capacity, including two locations opened so far in fiscal '21 and one additional location to be added before calendar year-end. These new locations not only enable us to meet additional demand but also allow us to further optimize our branch network and deliver more value to our customers. We will also deploy resources and our financial strength to add M&A to our growth toolbox. We have recently reactivated the process of reviewing acquisition opportunities. Our pipeline of potential targets is growing, and we are actively evaluating tuck-ins that are actionable, a good fit and available at the right price. We will be disciplined in our approach to inorganic opportunities. The final item I'd like to highlight from our third quarter is the progress we've made related to our diversity, equity and inclusion goals. Of particular note is that we announced the winner of the first annual Female Roofing Professional of the Year award to Stephanie Pouse. Stephanie leads Brahma Roofing & Construction based in Windsor, Colorado and is a powerful advocate for women and a role model to anyone who wishes to inspire young people. It is individuals like her and all our nominees that inspire the most skilled and talented people to join our industry. Let me summarize by saying that the confidence we have in our growth plan is underpinned by our team's demonstrated ability to react to a rapidly changing environment and to execute at a very high level simultaneously across multiple critical initiatives. Now please turn to Page 5 of the slide deck. As we have done in prior quarters, let me provide an update on our four strategic initiatives. These initiatives remain central to our improved sales growth, operational efficiency and profitability. Our approach is systematic, our plan measurable and progress tangible. Most importantly, our customers benefit from these initiatives as they are designed to make us more efficient and easier to do business with as well as differentiate us from our competitors. Let me begin with organic growth. As we've discussed on previous calls, our sales and operations team have thousands of interactions with our customers on a daily basis. Our plan has clearly defined initiatives, focused on improving both the number and the effectiveness of these interactions. We continue to invest in developing our sales team and providing value-added tools that improve their ability to manage customer relationships. One example is our investment in pricing capabilities. We have implemented tools and training to support enhanced pricing execution at the local level. Advanced analytics are allowing our team to develop value-based pricing models that are responsive to local market conditions and allow Beacon and our customers to realize value from the partnership. Next is our industry-leading digital platform. Digital is a clear differentiator for Beacon. Our adoption rates continue to rise, and we have nearly 50% more active users of our online platform in the third quarter compared to last year. Digital sales are trending around 14% of net sales in our fiscal third quarter and continue to grow. We are expanding our digital offering in value-added ways. In recent months, we announced a partnership with Estimating Edge, a provider of detailed construction measurement and project management software for our nonresidential customers. And we have recently integrated EagleView, a roof estimation tool, into our Pro+ platform. This gives customers access to high-resolution aerial images for measurement, which saves them time and money while minimizing the need to access the roof directly, supporting safety for their employees and convenience for the homeowner. Next, moving on to our On Time & Complete network. Our OTC strategy leverages the density of our branch network and larger MSAs. We operate in 58 distinct markets and have more than 250 branches participating in OTCs. OTC provides four key benefits. First is improved customer service as we have greater flexibility to deliver from the branch with the best combination of product and service. In this supply-constrained environment, we've leveraged our OTC network to ensure product availability issues are minimized for our customers. The second benefit is a lower cost to serve. Since we optimized across our network of branches, we reduced delivery time and mileage, improving labor efficiency and reducing fleet costs and emissions. I'm pleased to report that we have reduced hours per delivery by more than 4% and reduced fuel per delivery by nearly 3% in the trailing 12 months. The third benefit is inventory levels. We've previously indicated we can permanently reduce our inventory by $50 million to $100 million as we implement our OTC initiatives and remain confident that we can hit that target. One example is our state-of-the-art Houston hub expected to open later this year that has been designed from the ground up for speed and efficiency for our customers. And its prime location, large warehouse capacity and centralized dispatch center allows us to optimize our inventory position across the fifth largest MSA in the country. And the fourth benefit is that we can accelerate our talent development. Our OTC creates opportunities for our people to explore a variety of roles in the field. This way, we have better retention and development of talent in our logistics and field operations. Finally, I want to update our branch performance operating targets. I've talked extensively about our focus on the bottom quintile branches and our goal to significantly improve their operating performance. We've developed a diagnostic tool and a reporting cadence that places emphasis on structural change to ensure that improvements are sustainable. We continue to accelerate our progress and now expect at least $40 million year-on-year improvement from the lowest quintile branches in fiscal 2021, up from the previous guide of $30 million. We will continue to focus on driving sales and operating improvements to bring these branches over time up to at least our company average. In summary, our strategic initiatives continue to gain momentum and are delivering measurable results. Our new leadership team is energized and focused on accelerating our growth and profitability, creating meaningful improvement in shareholder returns. Now I'll pass the call over to Frank to provide deeper focus on our third quarter continuing results.

Thanks, Julian, and good evening, everyone. Turning to Slide 7. We achieved nearly $1.9 billion in total net sales in the third quarter, driven by strong sales and price execution across all three product categories. Roughly half of our 21% growth came from volumes as demand for our products continue to benefit residential tailwinds as well as significant growth in our nonresidential end markets. Residential roofing sales were up over 18% and robust demand from our new construction customers. Our largest national homebuilders were up more than 40% as the housing fundamentals continue to drive new housing starts. We also saw regional strength in repair and remodeling as homeowners continue to take advantage of rising home equity values, low interest rates and a number of secular trends, namely work from home, millennial household formation and deurbanization. The April and June shingle price increases also contributed to the residential revenue growth. Major storm-related activity was down year-over-year, impacting our volumes mainly in the Midwestern states. We estimate that our residential shingle volumes were down approximately 10 percentage points during the third quarter due to lower wind and hail storm activity as compared to the prior year. Nonresidential roofing sales were up more than 16% compared against the COVID shutdown trough in the year-ago period. We remain optimistic that nonresidential activity will continue to improve. Complementary product sales increased 35% in the third quarter. Keep in mind that our complementary product category has approximately 80% residential and 20% nonresidential exposure. Complementary benefits from the residential market tailwinds, including demand for key products such as siding, lumber, windows and doors. Siding sales, for example, were up more than 30% in the third quarter, and lumber had substantial price growth year-over-year. Turning to Slide 8, we'll review gross margins. Gross margin improved to 27.6% or 380 basis points year-over-year. The supply-demand environment remained conducive to the team's successful implementation of two price increases in the third quarter. Similar to the prior price increases, we quickly and thoroughly implemented our April and June shingle price increases. The execution of both price increases created favorable timing benefits, which also contributed to gross margin expansion during the quarter. In addition, our private label sales increased approximately 30% year-over-year, providing gross margin enhancement. As a result price-cost was positive by approximately 390 basis points in Q3. By comparison, we experienced 230 basis points of year-over-year price-cost benefit in Q2. Product mix was slightly unfavorable in the quarter due to the significant growth in the nonresidential and complementary product categories. Now shifting to our operating costs. Under Julian's leadership, we continue to see measurable progress in operating efficiency and remain focused at both the corporate and local level. We are leveraging many of the changes we implemented in response to COVID and are capitalizing on the opportunity to apply those principles in a stronger demand environment. Our third quarter results demonstrated our focus on managing expenses in times of growth. Adjusted OpEx was $309 million, a $52 million increase compared to the year-ago quarter, mainly due to volume-related expenses and higher incentive compensation. We are proud of this performance, given the unusually low comparable in the prior year. You may recall that we took significant and proactive cost reduction measures, including furloughs, salary cuts, reduced work weeks, the near elimination of overtime, travel and entertainment as well as reducing the truck fleet to curb fuel and repair costs. We continued to ramp headcount sequentially in the third quarter to meet the seasonal peak in activity. It is worth noting that headcount was up less than 6% compared to an increase in volumes of approximately 10%. Our Q3 adjusted OpEx to sales percentage improved by 10 basis points year-over-year as our team members manage both our fixed and variable costs with discipline. We continue to focus on the elements of our business that we can control. Improving productivity within our largest cost centers, including labor and fleet is a major focus for Beacon. As you can see, we generated nearly 50% improvement in sales per hour worked compared to the start of the pandemic and are even more productive than the third quarter of last year. This key productivity metric demonstrates that we are becoming more agile as an organization, and our productivity initiatives are continuing to deliver value. Going forward, we will continue to implement improvements throughout our organization as we fully embrace a continuous improvement mindset. Turning to Slide 9, we will review our financial flexibility. As we discussed on our second quarter call, the divestiture of the Interiors business yielded after-tax net proceeds of approximately $750 million. These funds plus balance sheet, cash and cash flow have allowed us to reduce gross debt by approximately $1.7 billion year-over-year, consistent with our commitment to restore financial flexibility to our company. During the third quarter alone, we reduced gross debt by $460 million as compared to the end of the second quarter. As a result, we lowered net debt leverage to 2.4x trailing adjusted EBITDA as of June 30, well below our 3x target and ahead of our expectations. What a difference a year makes. In addition, our comprehensive refinancing during the third quarter significantly eliminated refinancing risk as we have no meaningful debt due until 2026. At current debt levels and interest rates, you can expect go-forward cash interest to be $50 million lower than the trailing 12 months. Importantly, our strong liquidity position of more than $1.4 billion as of June 30 provides ample ability to invest in the growth of our core business. As Julian mentioned, we will be deploying capital to accelerate our growth. This includes investing in our inventory to ensure we can effectively and efficiently meet future demand in an inflationary environment with supply chain volatility. As you can see, our third quarter inventory is typically our peak level and positions us to meet the seasonal demands of our customers. This year is no different. If you account for the impact of recent manufacturer price increases, our inventory balance is right in line with the 2018 and 2019 non-COVID comparables. Adjusted operating cash flow was $125 million in the quarter, reflective of strong earnings and higher inventory levels. One housekeeping item, GAAP operating cash flows were adjusted in this view to account for items related to the sale of our Interiors business. We've included a reconciliation table in the appendix in this presentation so you can tie this out. We believe the adjusted view provides the best view of the operating cash flows of our continuing operations. In the coming quarters, we will be looking to use our financial flexibility to invest in both organic growth through the addition of greenfields and inorganic growth by starting to execute on our growing pipeline of tuck-in targets. To wrap up, we're very pleased with the performance in the quarter. We are well positioned to finish our fiscal year strong, and we are poised for growth in the coming quarters. With that, I'll turn the call back to Julian for his closing remarks.

Thanks, Frank. Before we turn the call over to question and answers, I want to update our fourth quarter outlook. Please reference Page 11 of the slide materials. As we look to the fourth quarter, demand remained solid. For our fiscal fourth quarter ending in September, we expect total sales growth in the mid-single-digit range. Keep in mind that this guidance is within the context of an extremely strong fiscal fourth quarter in 2020 that also benefited from a snapback in demand caused by the severe COVID-related shutdowns. It's also worth noting, we expect storm demand this quarter to be meaningfully below the prior year quarter that included the impact of wind storms and hurricane-related demand. Last week, we announced an early September price increase that we expect to implement with the same rigor as our prior increases. Our fourth quarter margins will reflect the positive contribution from the announced increases over the last three quarters. As a result, we expect a meaningful year-to-year gross margin increase of approximately 180 basis points to around 26.9%. We expect fourth quarter adjusted EBITDA to be between $190 million and $205 million, bringing the fiscal 2021 full year adjusted EBITDA to between $635 million and $650 million. This is a substantial increase from the outlook we provided on our Q3 call and for the full year represents more than 60% improvement over fiscal '20. While uncertainties continue to exist, including the ongoing threat of COVID, this outlook reflects our expectations for a combination of higher sales, gross margin expansion and continued cost discipline. Looking further out, we continue to have strong fundamentals in both new construction and the replacement market. In new home construction, the well-documented underbuilding of the last decade has created an undersupply of housing in the millions of units. Our homebuilding customers continue to try to meet this demand while managing the impact of lots, labor and material constraints. These constraints have led to elongated construction cycle times that appear to have limited impact on the demand side. Residential roofing demand will also continue to benefit from the multiyear repair and replacement cycle from housing stock built more than 20 years ago. Bear in mind that more than 90% of reroofing demand is nondiscretionary. Both our residential and complementary products business will benefit from these trends. Regarding nonresidential demand, commercial builder sentiment continues to improve. This is a positive trend that we have seen since our fiscal first quarter, and we would expect it to continue as it gradually benefits from the macros. The Architecture Billings Index is a good proxy for future demand, and it has been climbing. As we look forward to the coming quarters, we have confidence in our team's ability to execute at a very high level. We are poised for continued growth, and I thank our more than 6,000 team members for their efforts. I am excited about our progress towards achieving our full potential and believe we are strategically and financially positioned for growth as we help our customers build more. With that, Nye, we are now ready to open the line for questions.

The first question is from Kathryn Thompson with TRG.

In terms of the outlook, I know you gave it for your Q4, but thinking beyond that with the gross margin expansion guidance that you give and outlook beyond it, how much of that expansion is from pricing actions from 2020 versus 2021? And how much of it is just being able to focus and stick to your knitting now that you're a really exteriors-focused firm or other factors that we should take into consideration like in mix or an easing of some of the headwinds that we've seen from supply chain?

Thanks for the question, Kathryn. We've been very pleased, obviously, with the overall progress we've made. And I think if you go back two years, we said we thought there was margin compression due to some of the impact of a declining market and pressures from asphalt. I mean we've seen obviously that turn. We've seen this demand-related inflation come in, and we've shown our ability to execute really strongly in the marketplace to recover those cost increases that we've seen. I think as we go forward, we would anticipate that this repair in our margin is certainly somewhat sustainable. Certainly, over a period of time, we would expect things to fluctuate plus or minus depending on timing. But we certainly feel that the value we generate from the services we provide are incredibly powerful for us to realize gross margin and pricing. In terms of the overall sort of mix, as you'd highlighted, I think when you think about being able to stick to our knitting, as you said, I think that is incredibly valuable for us. I also think initiatives that we put in place, including private label, are ways for us to continue to expand. We talked a little bit about my prepared remarks. The investment we've put into pricing, I think that's another area where we see opportunity to continue to refine our local market initiatives and capture value in the marketplace.

Kathryn, the only two things I'd add would be digital, obviously, is a nice play for us. It's got a little bit of margin enhancement there. And then the work that we're doing on pricing broadly but also specifically to the underperforming branches has been really helpful this year as well. Those types of things are more structural in nature and not transitory depending on which way the pricing happens to be going at any given time.

The next question is from Mike Dahl with RBC Capital Markets.

I wanted to ask around inventory. I know you said it is kind of relative to the COVID-impacted period but year prior. At the same time, you are seeing sequential increases, and I think there's a comment in the release on the slides about investing in inventory. It's been a tough environment to do that in. So I just wanted to ask about kind of how you're thinking about your inventory levels today and where they stand relative to normal. And if you're at a point where given the some potential slowdown in volumes, given the tough comp in the upcoming quarter, will you look to continue to rebuild parts levels?

Thanks for the question, Mike. I think in Frank's prepared remarks, he commented that third quarter inventory tends to be our annual peak. Obviously, in this environment, when we've got an allocated situation on some product lines, our bias has been to ensuring that we've got the product availability to serve our customers. That's been very important. It's been something that we've really focused on, and we think that we've continued to take the opportunity to rebuild and replenish where we can. Certainly, on an annual basis, you would expect it to fluctuate with the seasonality of the businesses we're in. But we're also committed, as a leadership team, to ensure that we're managing it at the right levels on an ongoing basis. I think just in this environment, I would tell you that certainly my bias and Frank's bias has been to err on the side of having more rather than less inventory, given the current situation, the demand environment and the supply chain disruptions, quite frankly. The supply chain disruptions on the nonres side have been pretty substantial, and we act as a little bit of a shock absorber for our customers. And so having a little bit more inventory during that period of time helps us do that and helps us be a better supplier to our customers.

The next question is from Ketan Mamtora with BMO Capital Markets.

Congrats on a strong quarter. Maybe going back to the branch performance improvement that you've talked about, you are seeing more of that and you're in Year 2 and now you're expecting over $40 million versus the prior estimate. Can you highlight one or two things where you are seeing kind of more opportunity as you work through that? And as you look ahead, kind of talk about what is the further room for improvement on that side?

Ketan, it's Frank. Thanks very much for the question. When we turn the page into 2021, we mentioned that we thought there was a lot of room this year on gross margin and pricing and sales, and that's actually bearing fruit. It's coming through exactly the way that we thought it was going to come through, which obviously creates some operating expense leverage there as well. When we stand back and look at our analytical charts inside the company and we look at the performance of the underperforming branches relative to the remaining branches, we still see a huge opportunity really across the P&L. Whether it's sales, gross margin or OpEx, there is still a ton of opportunity there. Julian would tell you that in two years, we've kind of already hit its initial target, and that just means we're going to raise the bar. We're going to continue to work on this initiative, and we're going to expand it to the company in other ways. For example, a large branch may be performing but may not be performing at the potential that we think it has. So we're going to run that same diagnostic tool across the company, and we see tons of value still coming.

The next question is from Phil Ng with Jefferies.

Congrats on a really good quarter and really strong execution. Frank, I guess, your guidance for the fourth quarter for mid-single-digit sales growth, that's a noticeable deceleration. Can you talk about if you saw any pull forward in 3Q? Just given the strength you're seeing in nonres and complementary, I appreciate you got a tough comp in resi, I would have thought the demand profile might have been a little better. And it would be helpful to kind of parse out how much pricing contributed to 3Q.

Sure thing. Look, I think in terms of the Q4 guide, the mid-single digits that you mentioned, it's a strong comp as one of your peers, I mentioned that a few moments ago. July finished up consistent with the guide that we gave. What I think you're going to see in the quarter, if you want to parse it out, I think the complementary business will be the higher growth and then nonres and res will be in that kind of low to mid-single-digit range. I don't necessarily see pull forward. I see more elongation. You heard in Julian's remarks talking about project life cycle expansion. You're hearing that from a number of the different homebuilders. We're seeing it in our business as well. So we don't see this as any question around demand. It's just the ability to get things done. And remember that it's not just shingles as an example, that can get in the way of a project completion. It could be cabinets or paint or carpet or anything like that or it could be fasteners in a particular project instead of the actual membrane itself. So there's a lot happening in those supply chains right now. As Julian mentioned, we're going to err on the side of inventory. The storm hangover that Julian mentioned is real. We saw that. We called it out in the quarter. It'd be great if we could have had a strong hail season, we didn't. It would be nice if we get a nice hurricane season as well. So we feel good about the quarter, and we feel good about the multiyear demand run that you heard Julian talk about. In your volume question around the quarter, I think that's an important question. What we said was that the 21% growth, about half is volume and half is price in the aggregate. If you break it down by line of business, the residential side was more price than volume, and the nonres and the complementary side were more volume than price, all positive across the board, just inflections there that I thought you might enjoy having some color on.

The next question is from Trey Grooms with Stephens.

This is actually Noah Merkousko on for Trey Grooms. So again, I just want to echo, congrats on a strong quarter. Very impressive top line, really seeing growth across all segments, but I wanted to dig a little bit more in the nonres side. We've seen a lot of leading indicators improve, and it sounds like some of that volume is finally starting to come through. So I was wondering if you could break down sort of if you're seeing more repair and replacement activity or new construction, and then just kind of your thoughts on that end market demand as we go into next year.

Thanks for the question. So to start with, just to frame what we're seeing in the nonresidential construction market, the supply chain disruptions that started early in the year and to some degree were triggered by the weather events that hit Texas back in February where there were a lot of plant shutdowns on the supply chain have been real, and they've been continuing. We've had a lot of disruption in terms of project life cycle. The ability to get one product may be just fine, but the ability to get a full set of products that you can use to complete a job has been much more challenging. And so while we've seen the overall demand improve and the ability to get product onto a job and completed and off and then restock in a reasonable time has been a real challenge for us. This goes back to what we said regarding the stocking of inventory and how we act as a little bit of a shock absorber. Trying to assemble a full job packet has been a real challenge. So we've not seen any specific area sort of pickup. New construction is clearly improving. I referenced in my prepared remarks the ABI, the Architectural Billing Index, which is what we follow, and that's clearly an indicator of future demand for new construction generally. And that has been improving quite markedly. So I think that's good that we're starting to see bids coming through. And on the repair and replacement side, I think we're seeing perhaps a little bit of growth overall, but they're sector-specific. So I think on government-related work, schools, hospitals and then warehouses, we've seen continued demand, and that's been very positive. In some of the retail and office, we're seeing a little bit less and a little bit more caution. So we continue to see that. I think I said on the last call where sector-specific markets are improving probably more rapidly than some others. That's kind of the overall backdrop. I'll let Frank add anything that he feels is necessary.

Yes, but you covered it great, Julian. Only maybe one data point would be, if you look at kind of the year-over-year by geography, you'd probably see some additional growth in areas that were the hardest hit last year in COVID that are beginning to reopen.

The next question is from Truman Patterson with Wolfe Research.

Just wanted to understand on your residential sales volumes, it sounds like they were up mid- to high-single digits in the quarter. I'm just hoping you can discuss how much incremental inventory load-in you all had during the quarter and really trying to balance this with industry ARMA shipments as well? Any color you can give us there would be helpful.

Sure, Truman. Good question on ARMA. We're in this allocated environment, as I'm sure you all are very familiar with. So we bought right in line with ARMA, as you would expect us to. No one is saying no to their allocation these days. They want to make sure, like we do, that we all have inventory when our customers need it. We still see the strength in demand. We did sell less than ARMA, which is obviously one of the reasons why we built the inventory. The inventory is really a combination of both units and price, given the manufacturers' cost increases pass through to us. If you look at us on a two-year basis, which I think is an important thing to do, remember that last year, 2020, we monetized inventory pretty significantly. And what you generally monetize are the things that move the quickest. In our world, that generally is shingles. So if you look at Q3 2020 against Q3 2019, the inventory, again, we were down about 25% in terms of units. If you look at us this year against last year, we're up about 30% in units. But you've got to look at it on a bit of a longer-term view to get a good understanding of where we are from an inventory perspective.

Okay. That's exactly what I was trying to parse out there. So it seems like sales out the door kind of in line with the market.

I couldn't tell whether you were making a statement or asking the question, honestly, Truman. But look, I told you, we sold less than ARMA and we built the inventory. We feel like we're in a really good position given where things are, especially in the inflationary environment. We kind of expected some hail storms, didn't get it. We didn't expect necessarily a late cycle price increase, but now we're delighted to have some inventory to be able to sell it into the market at a market price at a lower cost. So we feel like we're in good shape there.

The next question is from Garik Shmois with Loop Capital.

Given the balance sheet and the significantly improved cash position and you spent the last two years delevering and focusing very strongly in operations. You touched on this a little bit. On the M&A side, you're starting to sniff around a little bit more than you have in the recent past. So Julian, Frank, if you guys can provide maybe a little bit more on what you're looking at from a high level and what the opportunity set is there.

Thanks for the question, Garik. We've said we would be absent from the market while we were fixing our balance sheet. Now that we've done that, we feel that we've got the company in a great spot. We're executing at a very high level at the local branch level. The teams really come together. We can now turn our focus back to real opportunities in the marketplace to grow. The way we're framing it is the way we framed our strategy. We're going to continue to focus on the core business. We're going to continue to be incredibly disciplined with shareholders' money, and we're going to look at great opportunities to continue to grow. So it's really about tuck-ins. It's really about local market position and how we can add and strengthen our position on a local level. That's really where the M&A opportunity lies for us inside of our core business. Obviously, in a market like this where valuations have been elevated, we're going to have to be incredibly disciplined and pick the right markets, pick the right targets where we think we can bring significant value. The work we've done to improve the business over the last two years is really going to reap benefits as we look at acquisition targets. We understand now what value we can bring. We can bring our digital. We can bring our sales knowledge. We can bring our pricing expertise. We can connect new branches we've acquired into our OTCs. We really feel that we've got a great new thesis that we can deploy in value-accretive ways through M&A. And obviously, the big thing here is we fixed the balance sheet. We've got a great business. It's performing very well. We're going to generate a ton of cash. Our shareholders want us to deploy that in ways that create value, and that's how we're approaching it.

The next question is from Keith Hughes with Truist.

Just a question on residential. You talked about some of the comps in the prior year. If we go back to fiscal fourth quarter 2020, what were units up year-over-year in that period that you're going to be comping against?

Let me ask a clarifying question, Keith. Are you saying what was our growth in 2020 over 2019 in our fourth quarter?

Yes. Adjusted some of your numbers. I have a 6% revenue growth for residential products in the fourth quarter of 2020 over 2019. I don't know what the unit number is. Can you talk about the unit number?

Yes. My recollection is we sold 8 million shingles in the fourth quarter of last year. I'm ballparking you, by the way, which was up pretty significantly, call it maybe 600,000 units or so on a year-over-year basis. I'm going 2020 against 2019. And that's the asphalt shingles, which is a component of residential.

Right. So what's the — I'm not following.

If you think about the market as a whole, Keith, last year when you look at ARMA shipments in our fiscal fourth quarter 2020, shipments were around the mid-40s million squares. I think that was the biggest shipping quarter, and I think there was also delevering of inventory. Demand was so high at that point last year. I think we exited the quarter with pretty much everyone out of inventory. The situation was a strong snapback and the demand was so high. Manufacturers shipped all they could produce, and the channel also shipped inventory. So it's difficult to repeat that because everyone has been struggling to get inventory as well. It's a really difficult comp and also difficult to parse across the different elements.

Your 8% — if you want clarity on that, the 8% number that you mentioned is correct for Q4 2020 versus Q4 2019 asphalt shingle units.

The next question is from Ryan Merkel with William Blair.

Just want to go back to the July commentary. So am I right that residential volumes are negative year-over-year, and that's your guide? And if I have that right, what's driving that? Is it lower storm demand? And it sounds like there's some elongated projects.

Yes. That's essentially what we said in terms of putting the guide together for Q4. The factors you mentioned — lower storm demand and elongated project timelines — are driving that. We see new housing construction staying strong and believe demand is there to support growth, but the supply chains will get back into equilibrium over time. The repair and replacement piece will continue to benefit from the housing cycle, and we think there's still a lot there. The comps do get harder, and the pricing environment will continue to allow us to pass through increases. We feel like we're in good shape. When I look at Q4 and you look at the homebuilder commentary and others' commentary, they talk about the difficulty in getting projects done as rapidly as before. That ultimately will solve itself as the supply chains return to balance.

I'll add that our business is not asphalt shingles solely. We're a supplier of many products. Storms this year are below a multi-year average, so we would expect that to return to normal over time. As supply chain disruptions on the commercial side get repaired, we can see more growth in that area. Our siding and complementary businesses have been strong and pace into new residential construction. We see a long runway of growth there. The replacement cycle on roofing is about 20 years, and we're entering a positive cyclical period as homes built 20-plus years ago age into reroofing needs. We see continued growth in repair and replacement, alongside new construction and improving commercial activity, so we're pretty bullish on the future for all of our businesses.

The next question is from Kevin Hocevar with Northcoast Research.

A quick question on the guidance. In most years, the fiscal fourth quarter is the strongest quarter of the year. And even when it's not, it's pretty close to the third quarter. But the guidance implies a pretty large step-down in EBITDA from the third quarter to the fourth quarter. You earned $229 million in the third quarter, guidance of $190 million to $205 million in the fourth. I'm curious on your thoughts on why that would be the case.

Normal seasonality has to probably be looked at versus pre-COVID, not post-COVID, at least for a few quarters. If you look at the sales guide we gave, normally you would see weather in certain geographies quite helpful in July, August and September relative to April, May and June. The COVID comps from the prior year and the differences in hail impact in Q3 are certainly affecting that normal pattern. You'll see a little bit of top-line pressure and some mix shift, which impacts margin. We're fighting hard for gross margin dollars, and on OpEx we have work to do; the guide implies a mid-to-high teens OpEx to sales percentage. So a mid-single-digit sales guide with an expected gross margin increase to around 26.9% supports the EBITDA guide range. Something with a two-handle on adjusted EBITDA margin feels reasonable given the environment, and we'll continue to seek every dollar of improvement.

The next question is from David MacGregor with Longbow Research.

Congratulations on all the progress. How are you thinking about your free cash flow conversion in the context of your 2021 guidance? And from an earnings standpoint, as you think through 2022, where is the lowest-hanging fruit now in terms of further cost reductions? I'm trying to get a sense of what are the most accessible opportunities for further cost reductions.

Two questions there. First, free cash flow: the business has a tremendous ability to generate significant free cash flow. We've talked about a long-term 60% free cash flow conversion of EBITDA, which assumes neutral net working capital. The inventory build in the current environment delays realization of some free cash flow, but we still feel good about the long-term 60% conversion and maybe even better given the refinancing and lower cash interest going forward. Second, on OpEx reductions: it's across the board. Incremental margins we're generating now are strong. We've leveraged fixed cost and been judicious adding variable costs as volumes increase. We added less than 6% headcount on about 10% volume increase this quarter. It's about leveraging what we have and minimizing the cost of growth.

We've learned a lot about running the company through COVID. Deploying learnings once across our branch network is a big opportunity. We've focused on the lowest-performing quintile; now we're broadening the perspective because we believe no branch can't improve. We're looking at what a great branch looks like, benchmarking across our network, and deploying improvements consistently. There's a lot of runway in operational excellence, and we'll continue to be disciplined in how we pursue it.

Is the $40 million year-over-year improvement from the lowest quintile branches that you upgraded from $30 million this quarter a sustainable pace? Should we think about that as an ongoing annual number, or was there something special this year?

We're going to look at this on an annual basis. We delivered over $20 million in 2020, then upped the target to $30 million and now to $40 million. We'll continue to push through the finish line and do everything we can. The recipe of success in the underperforming branches will be different every year as the population changes. There will always be a set of branches lower on the totem pole, and we believe we can extract more operating profit from those branches. Whether it's sales, product mix, gross margin, or OpEx, there's value every year. We'll reset targets annually and manage this tightly as we have been.

The next question is from Deepa Raghavan with Wells Fargo.

Strong positive price-cost spread here, Julian, but is there a meaningful difference across residential or nonresidential businesses? Are you able to push pricing in nonres as strongly as in resi, just given that nonres is witnessing nascent recovery?

Thanks for the question, Deepa. We've seen progress across all of our categories and price increases across all categories as well. We've executed very well across every single category. It's difficult to quantify product line-by-product line because the timing of shipments and pricing differs, especially with commercial jobs. There's more noise on the commercial side, but execution over the last six months has improved across all categories.

Deepa, if you look at the positive 390 basis points price-cost in the quarter, view residential as being more favorable than the corporate average on price-cost. Commercial nonres and complementary are both nicely positive on price-cost but are below the residential and corporate average. All of that blends to the 390 basis points you heard.

Got it. No, that's helpful. How long do you think this inflationary situation continues?

I think you're better off asking the manufacturers than you are us on timing. The market remains good, and we are seeing a settling out. Supply chain disruptions should abate over time. We've had a good run of inflation, and we continue to see opportunities to maximize pricing dynamics across the business without solely relying on manufacturer price increases. We're building capabilities and models around pricing, focusing on execution at the branch level, and ensuring we get paid for the value we provide while remaining competitive in local markets.

Deepa, we haven't seen the best out of nonresidential yet. That's still coming back. On the residential side, the number of homes required over the next five to ten years, combined with the underinvestment over the last decade, gives us a multiyear runway. Homebuilders' base price increases year-over-year and higher new order prices support the ability to pass through manufacturer increases. The economy still has COVID-related constraints, so we feel like we're not yet at full recovery and look forward to running on all cylinders.

The next question is from Michael Rehaut with JPMorgan.

This is Maggie on for Mike. On 3Q gross margins, you pointed to timing benefits and cost-effective procurement as being tailwinds. Can you talk about how long those benefits last?

We've mentioned a couple of things in the quarter that were helpful on the price-cost side. There was a little bit of a headwind on mix given differential growth rates and gross margins. With two price increases in the quarter, there were timing benefits and inventory profits. But looking at Q4, we're guiding to 180 basis points of gross margin benefit. We expect price-cost to be higher than that and mix somewhat negative, which tells you we continue to see positivity in price-cost in Q4.

The next question is from David Manthey with R.W. Baird.

I'll take my questions offline, guys. Thanks.

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

Thank you, Nye. And thank you, everyone, for joining this evening. We certainly appreciate your support. And my final statement is that we hope that the employees, our customers, our suppliers and all the investors are staying safe at this time. It's clearly a challenging time still. We're incredibly proud of the results in our fiscal third quarter. Again, I want to thank all of our employees for delivering such great results for the company. Thank you all and good night.

That concludes the Beacon Third Quarter 2021 Earnings Conference Call. Enjoy the rest of your day.