Good afternoon, ladies and gentlemen, and welcome to the Beacon Second Quarter 2022 Earnings Conference Call. My name is Tamia, and I will be your coordinator for today. Operator provided instructions regarding the question-and-answer session. 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 historical 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 2021 Form 10-K and subsequent filings with the U.S. Securities and Exchange Commission. 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 4, 2022, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures to the most comparable measures calculated and presented in accordance with GAAP is set forth in today's press release and the appendix to the presentation accompanying this call. Both the press release and the presentation are available on our website, www.becn.com. I would now like to turn the call over to Mr. Binit Sanghvi, Vice President, Capital Markets and Treasurer. Please proceed, Mr. Sanghvi.

Thank you, Tamia. Good afternoon, and welcome to our second quarter 2022 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 on 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. Good afternoon, everyone. Let's begin on Slide 4 of this presentation. Beacon delivered a strong financial performance in Q2 with record-setting top line and bottom line results and ahead of our expectations outlined during our earnings call in May. Our team's commitment to deliver great value to our customers, combined with solid end-market demand, enabled us to continue our track record of growth. And our focus on margin-enhancing initiatives and excellent pricing execution allowed us to deliver the 10th straight quarter of year-over-year increase in adjusted EBITDA. In a challenging inflationary environment, we continue to be price/cost positive and achieved the highest profits and margin in our history. The fundamentals of both residential and commercial roofing demand remained healthy across our end markets, and we have yet to be meaningfully impacted by rising interest rates. We continually monitor market conditions and remain watchful for changes in the macro indicators. We continue to believe that the replacement cycle that underlies approximately 80% of our business has a multiyear growth trajectory. If you look back 20 years, you'll see the beginning of a historic surge in residential construction. Keep in mind that the expected life of a roof is around 20 years. And as those roofs begin to fail, the replacement cycle will begin anew. I'm also very pleased with the early progress towards our Ambition 2025 goals. Central to achieving our targets is our relentless customer focus. Our customers trust us to reliably deliver high-caliber service in any demand environment, and they can be assured that we are prepared with great products and services when and where they need them. We also have a clear and balanced capital allocation plan that consists of strategic investments in greenfields and acquisitions, our existing branches and our fleet as well as returns to shareholders. We have restored financial flexibility to our company. And today, our balance sheet provides the ability to deploy capital in value-creating projects throughout the cycle. In the first half of '22, we have rapidly accelerated the pace of investments in our fleet, greenfields and share repurchases in addition to actively pursuing a strong pipeline of tuck-in acquisitions. Please turn to Page 5 of the slide deck, where you will find an overview of our strategic plan. Named Ambition 2025, it is intended to unlock the potential of our people, our growth engine and our operations in order to deliver superior shareholder returns. We have structured our road map in four areas with detailed initiatives that are systematic and measurable. The first area is about building a winning culture. Our business is driven by our people working together. Second is a comprehensive set of measures to drive above-market growth, serving our markets in unique ways. Third is our continuous improvement process, which drives our operational performance. And fourth, by doing these things well, we will create value for our shareholders. The goals we laid out at Investor Day are to grow the business to more than $9 billion of sales by 2025, an 8% compound annual growth rate from our 2021 baseline and to deliver EBITDA of about $1 billion, approximately a 10% annual growth. Now please turn to Page 6 of the deck. I'll provide a brief update on our strategic initiatives, which will give you insight on how we intend to achieve our plan. Let me highlight a couple of ways that we are building a winning culture. Two of our core values are putting people first and our commitment to do the right thing. We believe that everyone deserves a safe home and that is why we established a national partnership with Rebuilding Together, a nonprofit organization providing home repairs for underserved neighbors in Beacon's communities. As a distributor of essential building products such as roofing and siding, this partnership allows us to work with these local community champions to create an impact. I'd also like to highlight our continued progress related to our diversity, equity and inclusion. During the second quarter, we announced Michelle Mulder as the winner of Beacon's second annual North American Female Roofing Professional of the Year competition. Michelle is the founder and owner of Nailed It Roofing, which has been one of the top roofing companies in North Bay, Ontario for the past seven years. Michelle's interest in the trade started in high school, which led to finding a passion in roofing. We applaud her work on the job site and devotion to mentoring young women in the community. Her story of determination and perseverance will surely inspire other women to become trailblazers in our industry. We are also driving growth above market and enhancing margins through a set of targeted initiatives. You may recall from our Investor Day that expanding our footprint is a major lever in our growth plans, which includes strategic investments in greenfields and tuck-in acquisitions. I'm pleased to report that we have quickly ramped up our ability to move forward on our pipeline of greenfield candidates. And while we had originally discussed opening 10 facilities in '22, we are now targeting approximately 15 new branches located in key markets. Our focus on national accounts is also generating results. We grew sales to our largest customers by approximately 37% in the second quarter. Through our scale and capabilities, we not only serve national homebuilders, but also large professional repair and reroofing contractors in both the residential and commercial roofing end markets. Our ability to invest in specialized account representatives who focus on the operational dynamics in each of these end markets offers a differentiated value proposition to these high-volume customers. We also have a set of initiatives that support margin growth. Our digital capability continues to be a clear competitive differentiator for Beacon, and sales on our online platform deliver approximately 150 basis points better margin compared to offline channels. In the second quarter, 17% of residential sales went through this platform. We provide the most complete digital offering and continue to expand our capabilities to serve customers in the way that brings them the most value. Our most recent digital integration with Acculynk, a leading provider of all-in-one business management software for roofing contractors, is off to a great start. And I'm pleased to report that we achieved more than $100 million of sales through our digital channel in the month of June. This is a major milestone and one we intend to build upon by making it easier for customers to do business with us anywhere and anytime. Our private label line of high-quality building products sold under the TRI-BUILT brand delivered professional results and allowed our customers to differentiate themselves from their competitors. For Beacon, these products yield between 500 and 2,000 basis points of additional margin versus the alternatives. Sales of our private label are up 37% in the quarter versus the prior year. TRI-BUILT is becoming a recognized and trusted name by professional contractors across our residential, commercial roofing and complementary end markets. As we have discussed for several quarters, we are enhancing productivity and capacity through our continuous improvement and operational excellence initiatives. Our focus on the bottom quintile branches has generated meaningful contribution to EBITDA, and this year is no different. We have a process to improve these branches and the structure is simple and repeatable. We diagnose the root cause of the problem and ensure that branch managers at these locations are properly resourced to remedy the issues. Through this process, we have generated approximately $20 million year-on-year EBITDA improvement year-to-date, a strong start on our way to our $75 million Ambition 2025 target. And finally, our strategic initiatives are designed to create shareholder value, and we are committed to improving returns. During the second quarter, we entered into a second accelerated share repurchase program in the amount of $250 million. And this was in addition to the $125 million ASR completed in the second quarter. The repurchases are part of a $500 million share buyback authorization announced at the Investor Day. The buyback program demonstrates both our commitment to delivering value to shareholders and our confidence in the plan. As you can see, we truly have multiple paths to growth and margin expansion through the cycle. We have a differentiated approach and have built the tools to achieve our Ambition 2025 targets. Now I'll pass the call over to Frank to provide a deeper focus on our second quarter results.

Thanks, Julian, and good evening, everyone. Turning to Slide 8. We achieved nearly $2.4 billion in total net sales in the second quarter, up 26% year-over-year, primarily due to higher average selling prices for our products. In the aggregate, price contributed approximately 24% to 25% to revenue growth and estimated volumes contributed slightly less than 1% as higher demand in our residential and complementary lines of business was partially offset by lower volumes in some aspects of our nonresidential line of business. Our acquisitions continued to perform well in the quarter. Revenue from acquisitions more than offset the divestiture of our solar business late last year. As a reminder, our solar business is reflected in our prior year numbers as part of continuing operations. The fundamental drivers of our residential line of business remained healthy as reroofing activity and new units under construction supported growth and favorable pricing. Residential roofing sales were up approximately 22%, primarily due to shingle price execution, including successful implementation of the April shingle increase. Shingle volumes grew by low single digits, well ahead of our other shipments, which were down approximately 3%. This year-over-year growth is all the more impressive, given the strength of the prior year shingle comparable, which had the benefit of the COVID snapback. Additionally, we continue to have below-average hail and major storm volume year-to-date. Nonresidential roofing sales were up approximately 40% as price execution more than offset inflationary pressures. While overall nonresidential volumes were down versus a very strong prior year quarter, certain elements of the nonres portfolio had positive volumes in the quarter, reflecting reroofing contractors shifting to products with higher availability. Our quarter-end backlog reached record levels with the majority of the backlog weighted toward nonresidential orders. Complementary sales increased approximately 19% year-over-year as we achieved higher prices across nearly all product categories. Higher volumes in siding and lumber also contributed to the growth. As you may recall, our complementary product category has approximately 80% residential and 20% nonresidential exposure. Turning to Slide 9, we'll review gross margin and operating expense. The execution of price increases across many product categories, including the April shingle price announcement, once again kept price above product inflation and created favorable timing benefits. In the aggregate, price/cost was positive by approximately 25 basis points in the second quarter on a year-over-year basis. I would like to highlight that our team has stayed ahead of the cost curve in the last eight quarters, an impressive track record in a challenging inflationary environment. Strong sales of our higher-margin, private-label products also contributed to gross margin. Higher nonresidential sales mix offset the price/cost and private label improvements and maintained gross margin at 27.6%, equivalent to last year's record performance. Higher sales drove adjusted OpEx to sales down 80 basis points year-over-year. Adjusted OpEx was $370 million, an increase of $61 million compared to the year-ago quarter. The increase was driven primarily by increased headcount, inflationary pressures and wages, fuel, and lease-related expenses such as rents, real estate taxes, utilities and maintenance costs as well as higher incentive compensation given the strength of the company's performance. Commissions, credit card fees and travel and entertainment spending also contributed to the increase. The year-over-year change in OpEx also includes approximately $8 million in costs associated with recently acquired branches as well as greenfields and OTC hubs opened in the last 12 months, net of our solar divestiture. Excluding the acquisitions, our headcount was up year-over-year as we continue to make sure that we are staffed for the remainder of the selling season in what remains a tight labor market. As we have demonstrated in the past, we stand ready to adjust to changing market conditions as we balance our productivity efforts with our investment to drive and support above-market growth and margin enhancement as part of Ambition 2025. For example, we have completed building out our dedicated M&A and greenfield teams and have invested in our sales organization, customer service initiative and digital platform. These and other Ambition 2025 investments totaled approximately $12 million within the operating expense line in the second quarter. Turning to Slide 10. Net inventory reached a seasonal peak at the end of the second quarter, up approximately $380 million year-over-year, largely driven by product cost inflation, which accounted for about two-thirds of the increase. We continue to carry portions of our inventory longer than expected due to lengthening project cycles and to ensure material availability to support a healthy backlog. Inventory from acquisitions and greenfield load-ins also contributed to the increase. After investing and rebuilding our inventory for many quarters following the COVID snapback to ensure we were able to effectively meet demand, we now expect to reduce inventory in the second half as we follow a more normal pattern of seasonality and experienced potential softness in residential new construction. Our capital allocation is balanced between organic and inorganic growth opportunities and shareholder returns. As Julian mentioned, our greenfield team is executing on a pipeline of projects to deliver approximately 15 new locations this year. You will also recall that our Ambition 2025 plan calls for us to invest up to 2% of our revenue in CapEx with emphasis on driving and servicing organic growth. We continue to evaluate a full pipeline of potential acquisition targets. We have a rigorous set of criteria and will remain disciplined in order to ensure that we create shareholder value through acquisitions. Our recent tuck-ins are good examples of the types of deals that we are looking at. They must be actionable at the right price, have the right fit, benefit from the scale and capabilities we have built and offer efficient integration to ensure the expected returns. As outlined at our Investor Day, through 2025, we intend to allocate $1 billion in capital to acquisitions within our three existing lines of business, and we are actively pursuing a healthy pipeline of targets. Turning to shareholder returns, as Julian mentioned, we entered into an additional accelerated share repurchase agreement in the second quarter. Year-to-date, the buyback program has allowed us to retire over 5 million shares, reducing our common shares outstanding to 65 million at quarter end. We look forward to finishing the second ASR in the fourth quarter, after which we will have completed just over 75% of the $500 million buyback authorization announced in the first quarter. Our capital allocation plans are underpinned by renewed financial flexibility restored last year when we divested our interiors business and completed a comprehensive refinancing. As you can see on the chart, our balance sheet has undergone a complete transformation over the last 10 quarters, and we essentially have no near-term refinancing risk, a good position to be in given the current rate environment. As of the end of the second quarter, our net debt leverage sits squarely at our target of 2.5x, well within the range of 2 to 3x we outlined at the Investor Day. Operating cash flow in the quarter was marginally negative. That said, we continue to have ample liquidity of approximately $800 million at quarter end, and we expect cash generation in the second half of the year to significantly exceed the second half of last year. Our balance sheet strength and liquidity enable us to take advantage of opportunities even in a changing economic environment. We are pleased with our performance in the first half of 2022, are beginning to make progress toward our Ambition 2025 goals and are confident in our ability to successfully compete in and adjust to changing market conditions. With that, I'll turn the call back to Julian for his closing remarks.

Thanks, Frank. Before we turn the call over to Q&A, I would like to discuss the remainder of 2022. Please reference Page 12 of the slide materials. For the third quarter, we expect end market demand to remain supportive, even as headwinds such as rising interest rates, inflation, supply chain disruptions and labor shortages persist. Nondiscretionary R&R demand underpins our residential and commercial roofing end markets, and we'll continue to provide opportunities to grow sales across all three of our lines of business. We expect total sales growth in our third quarter to be in the 23% to 25% range year-over-year. This guidance reflects our recent acquisitions and the divestiture of our solar business. We have a track record of disciplined price implementation, which has resulted in several quarters of positive price/cost. Staying ahead of inflation remains a priority, so we continue to emphasize price execution to our teams while being mindful of our organic growth objectives. With that in mind, gross margin for the third quarter is expected to be in the 26% range and reflects our expectation for price increases across all product categories from the beginning of the year as well as the anticipated inventory profits. Regarding the second half of the year, we remain focused on areas within our control, including sales and operational execution, product availability, inventory reductions and cost management. Please remember that we'll be lapping significant inflation, particularly within the commercial roofing product lines. As a result, we are increasing our full year 2022 sales growth expectations to slightly above 20% versus the prior year period. We expect that sales growth and continued cost discipline will result in adjusted EBITDA in the range of $825 million to $875 million. And as Frank mentioned, we expect significant cash flow in the second half of the year. Although we continue to believe that the demand environment will be constructive, our forecast range accounts for greater uncertainty going forward. We have also taken into account the fact that we have seen below-average storm activity so far this year, which will affect our second half demand projections, which were originally based on prior five-year averages. With respect to gross margin, we expect to see a roll-off of inventory timing benefits in the fourth quarter and expect a heavier nonresidential sales mix compared to the prior year. We have a resilient business model and a leadership team capable of adjusting quickly to take advantage of opportunities in the market as they develop. More broadly, we are confident that our Ambition 2025 plan provides us with multiple paths to achieve our growth and margin targets. We remain focused on executing at a high level, delivering value to customers, shareholders, employees and communities. And with that, Tamia, I'd like to open it up for questions.

The first question comes from Keith Hughes with Truist.

Okay. Great. I had a question on nonresidential. It's going up against some tough comps, as you said. Do you expect that volume to fall off in the second half of the year? And I guess why? It seems like nonresidential is mostly in a positive direction in many markets.

Yes, Keith, I think there's still a lot of uncertainty. There's still supply chain challenges. We're certainly seeing labor have an impact on project cycles and cycle times. I think we remain positive on the overall outlook for nonresidential construction, but it's going to be a choppy environment, and that's going to continue for a little while.

Yes, Keith, in the third quarter, we certainly have nonresidential growth built into the numbers that Julian gave you and the performance that we've seen so far in July would indicate that those numbers are going to continue to be positive, certainly through the third quarter. What I think you should read into the guide as you do your math and think about Q4, that's where the uncertainty is. So we continue to see a strong nonresidential environment and should benefit from that.

Our next question comes from Ryan Merkel with William Blair.

I had a question on price/cost. I guess a two-parter. Julian, you mentioned you might start to give it back in the fourth quarter. Can you give us a sense of the magnitude? And then I believe 90 basis points was sort of the giveback that you quantified before. Is that still the same number? Or has it gone higher at this point?

I think that what we said last time around was that we estimated that the inventory profits we saw represented about a 90 basis point benefit that we've seen going forward and that it would eventually start to roll off, assuming that there were no more price increases and we weren't going to continue to benefit. This year has been a little different than we thought at the start of the year. We've continued to see those inventory profits as we've taken advantage of timing of the price increases, making sure that we're in a great spot as we go forward, and we think that's actually a good part of how we manage the business — buying at the right time at the right price in the marketplace. As price increases roll through, we're not seeing as much going forward. We would expect that to roll off, and certainly it will have an impact in the fourth quarter.

Our next question comes from Truman Patterson with Wolfe Research.

Just wanted to follow up on Keith's question on the nonresidential side of the business. You mentioned that backlogs remain large. Have you actually been able to work those down a bit? Or are they still elevated where incoming work has outpaced out-the-door sales? And then secondly, we've always thought of nonresidential EBITDA margin relatively at parity with residential. Given the strong pricing, have you actually seen nonresidential margins go above the residential side, at least on the EBITDA line?

Truman, the backlog peaked in the middle of the quarter, but it still ended the quarter higher than the end of the first quarter. So it is coming off, but very slightly so far, and we're continuing to see a really healthy backlog, which continues to be mostly nonresidential. So we continue to see strength there. In terms of relative profitability, we've talked about that at the gross margin level with nonresidential gross margins lower than residential gross margins. That gap has closed somewhat due to the inflationary environment. Remember, though, that on the OpEx side, we do experience lower OpEx associated with the nonresidential business. So it's in the right neighborhood, especially in areas where we performed really well on the nonresidential side. Some regions with a strong nonresidential business certainly rival the best of our residential business. So it depends on the region you're talking about.

The next question is from Mike Dahl with RBC Capital.

So a follow-up question: you're talking about not expecting inventory benefits going forward. There is a price increase in the market in August, but you've also got kind of channel destock, so some moving pieces. I guess wondering, specific to your comments about inventory and price/cost, how should we interpret that in terms of your approach to the current price increase or what you think the acceptance will be in the market?

We will continue to execute on our pricing strategy as we see the price increases come in. This has been a strength of our execution over the last two years. We think this has been one of the keys to unlocking a lot of value at Beacon and good management of that. As I said in my prepared remarks, we continue to emphasize to our field teams the importance of communicating to our customers about the price increases and passing them through. We'll continue to work on that. The environment, to some degree, dictates the success of price increases. I do think there's a bit more uncertainty going forward about this increase. I've seen announced numbers that I don't believe are going to be transmitted into the marketplace either by us or by the vendors supplying us.

The next question is from Philip Ng with Jefferies.

It sounds like you're going to be destocking inventory in the back half. Julian, do you expect it to be normalized by the end of the year? And then from a financial impact, Frank, any way to think about decremental margins when you draw down inventory? Any color in terms of product categories where you have the most work to do in terms of managing that inventory back to a healthy level?

We're going to manage inventory across all product categories as we match demand and supply. The last two years have been chaotic in the supply chain across many categories and product lines. We've been on planned availability and allocation, which means trying to get as much into stock as you can to ensure you have it to sell. We're seeing those supply chain issues ease. As those issues ease, we want to return to a more normalized level of inventory and inventory management. We think we're well positioned. The good news is we do see short-term additional price increases that are announced, so we'll take advantage of that. We also think that we need to manage it through to get somewhere toward the end of the fourth quarter, where we'll be closer to what we consider normal levels. That said, some supply chain disruptions probably remain more on the commercial roofing side than the residential side, so we're watching that carefully and want to make sure we have product available when customers show up in branches.

Phil, it's going to be regional and vendor-specific and product-specific. We're at a place now given the demand environment and where we are from a stocking perspective to right-size in some areas, but there will be other areas with heavier demand or maybe storm-related where we're going to buy as much as we can get in those markets. It's the net impact of all that that we're illustrating with the planned reduction in the second half. In terms of decremental margins, I don't think it's going to have a significant impact because we will still be buying at a fairly high replenishment rate. So I still think the incremental impact is going to be driven by revenue change and what you see on the EBITDA change.

The next question comes from Deepa Raghavan with Wells Fargo.

The ASR and growth initiatives, both green or brown, are nice to see so far. But given that we're going into a slowdown, could you wait for better opportunities in timing perhaps? Just curious how you're thinking about managing to the slowdown on these capital deployment initiatives.

Thanks for the question. If I understood it correctly, you're asking about capital deployment in terms of shareholder returns and our buyback program. Remember, the Board authorized a $500 million share buyback program. Given what we've seen in the first half of the year and the company's performance, we thought it was a great opportunity to accelerate that more quickly than we originally planned. We initiated a $125 million accelerated share repurchase program shortly after our Investor Day in February, and then, seeing opportunities and market conditions, we put another one in place twice the size. By the end of the year, we will have spent in excess of $375 million of that $500 million authorization. Going forward, as we continue to be successful and drive the company forward, I would expect to see additional programs authorized by the Board.

Deepa, the company looks at its valuation and ultimately has to make decisions on capital deployment. We felt the stock was a good buy at its valuation and that fed into our capital allocation. At the same time, we have ample dry powder and additional balance sheet capacity. When there are opportunities, whether greenfields or M&A, that meet our disciplined criteria, we're going to act. We think we can create value in both ways.

The next question comes from Michael Rehaut with JPMorgan.

Just briefly, you touched on product availability on Slide 12. I'm curious if you could give more color on where you are relative to the supply chain and how difficult it has been getting materials in the past quarter? And where do you see that moving forward?

We have seen the supply chain challenges we faced over the last couple of years easing across residential, commercial roofing and complementary products. It had been an incredibly tight market with many supply disruptions, including chemical supply lines that feed into suppliers' raw materials and manufacturing base, which led to plant shutdowns. That created a ripple effect because demand had picked up. We've seen most of those issues improve. Remember, much of that disruption began with the February 2021 freeze in Texas, followed by hurricanes that impacted chemical facilities, COVID disruptions out of China, and the effects of the Russian invasion of Ukraine on some grades of metals. We've been trying to get inventory levels up to meet demand and to use our scale to access materials that were in short supply. We're seeing more capacity come online and plants run better. While not all supply chains are at the point where we feel completely comfortable that orders will arrive in normal time frames, the situation has improved significantly: where 12 months ago perhaps 80% to 90% of products were impacted, now it's probably more like 10% to 20% of products impacted and those are much less impacted than before. So yes, it's getting better.

The following question comes from David Manthey with Baird.

On Slide 9, I believe it shows your organic headcount. It looks like it's up pretty significantly. Could you outline your thoughts behind that uptick relative to the current flattish volume trends?

David, in terms of organic headcount, which excludes the M&A piece, the hourly workforce is the predominant impact. We wanted to make sure we had drivers, helpers and warehouse staff on property. It's been an extremely tight labor market, so making sure we have the right folks to support future growth was important. Also, recall our Investor Day outline where we planned to increase the capability of our sales workforce — we've done some of that as part of the headcount increase. We've bolstered field management and added corporate capabilities, all toward the Ambition 2025 goals. We feel good about the investments. If it softens a little bit, you might say we got a bit ahead, but we've shown our ability to adjust as necessary depending on the environment.

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

When I think about your FY '22 EBITDA guidance, I'm curious what gets you to the top end versus the bottom end of your range. Is it really what happens with demand, especially in Q4? Or is it the market getting competitive? And I'm curious if the August price increase is included in your guidance right now.

The macro is certainly on our minds as we put the guide forward. If we end up with a later impact or a lesser impact, we'd be more towards the top end of the range. If we're more successful in the August increase than we currently think, that helps as well. If we get storms in Q3 and Q4, that would be helpful, too. A lot depends on Q4. We're off to a good start in Q3 and Q3 will be a good quarter for us, but Q4 is harder to handicap — we have tough comps and the timing of winter matters. Regarding the August increase, you would expect a bit lower realization this go-around given the time of year and the macro. We had a great execution with the April increase and have the capability to do it again if the macro supports it.

Next question comes from Garik Shmois with Loop Capital.

Wondering what you're seeing in the reroofing market right now on the residential side. Obviously, on the new housing piece, some indicators have slowed and you've got a below average storm year so far. But how stable has reroofing held up? And what do you expect moving forward in a more uncertain market?

The reroofing market has been very robust. Over the past several years, it's been a strong market and the reroof market remains stable. While interest rate increases could have a marginal impact since many roofs get financed, we believe it's a marginal effect at most. A lot of reroofing is nondiscretionary — when a roof starts to fail, it needs replacing. As I said in my prepared remarks, looking back 20 years, the 20-year roof life cycle suggests a sustained replacement cycle. Our contractors remain confident, active and busy. July was a strong month for us — better than we anticipated. We remain cautious looking forward, but so far we have not been meaningfully impacted by rising interest rates.

The next question comes from David MacGregor with Longbow Research.

I had a question on incoming order patterns. You addressed backlog earlier, but what about incoming orders? Are you seeing deceleration in certain areas? If so, where are those decelerations occurring?

In daily orders, we're not seeing deceleration. A lot of our business is short-cycle where customers come in and pick up or order something, so the very near-term view of things remains strong. We are in the middle of construction season, so absent weather events, we haven't seen slowdown. The longer backlog is barely tapering off, so I'm not very concerned about the order pattern. We watch these trends daily and continue to see good numbers coming through.

To add, our business is regional. For example, a storm in Minneapolis led to huge daily order intake there as roofs get fixed. In heavy new construction markets, some signs of slowing might show up but not yet; seasonal construction is continuing to get fulfilled. We continue to see robust demand across most of the country. We remain cautious because we're aware of macro signals from builders, but new construction is about 20% of our residential business, not 80%. The reroof market remains strong and we've had parts of the country humming along.

Julian, as a follow-up, which parts of your business would you watch first for signs that things are starting to roll over?

We would watch those areas most impacted by interest rates, such as mortgage originations and builder backlogs and cancellations at the builder level, which would indicate softening in new residential. That's a smaller portion of our business. For commercial, we'd watch longer-cycle projects, the Architectural Billings Index, and whether projects are reskinning versus full replacements, which affects product mix. We also rely on our roughly 800 dedicated field salespeople to monitor contractor backlogs — their feedback is critical to understanding market direction.

The next question is from Kathryn Thompson with Thompson Research Group.

A lot of focus on the macro, obviously. Perhaps we don't have a recession but a more sluggish environment like the early '70s. How does your business operate in that environment? And the other difference today versus that period is a massive population shift, structurally different to the southeast — is that going to affect your business in any meaningful way?

That shift probably isn't going to affect our business in any meaningful way. The great thing is that, to some degree, we're product agnostic. If there's a product shift, we are the people to deliver roofs. Equipment remains important since people still need to get up there, and that drives demand. We may see more shifts on the commercial side than the residential, but overall it's not something that changes our day-to-day operations materially. We do focus on demographics and population trends over time, which drive household formation and the longer-term opportunity.

Okay. Perfect. And going back historically — excluding a recession but thinking about several years of sluggish economy and growth — how did the business operate in that environment?

I won't go too deep into history, but we would emphasize our competitive advantages. The overall roofing business growth ties closely to population growth and household formation. A big difference today compared with 30 years ago is industry consolidation at both manufacturer and distributor levels. That changes the competitive environment and makes our scale advantages, network, investments in digital and private-label products more valuable. Those are tools we have now that weren't as available decades ago.

Kathryn, to add a couple points: in a sluggish environment we would still generate significant cash flow, which gives us opportunities to deploy capital into greenfields and tuck-in acquisitions. At Investor Day we highlighted multiple levers for growth and margin enhancement. We know business cycles will happen during Ambition 2025, and we'll adjust capital deployment and emphasis to continue driving above-market growth and higher margins.

There are no further questions in the queue. I will now turn the call back over to Mr. Francis for closing comments.

Thanks, Tamia. Thank you, everyone, for your interest in Beacon and our results in the second quarter. We're incredibly proud of the results that we've delivered. As we said, we had a record performance for the company. We're off to a great start on our Ambition 2025 plan. With the raise in guidance, we're expecting to see strong performance in the second half of the year. We believe the markets we serve remain productive, and we're excited to continue to deliver for our shareholders, employees and customers. Thank you all. Have a good evening.

This concludes the Beacon Second Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.