QXO, Inc. Q3 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Beacon Third Quarter 2022 Earnings Conference Call. My name is Megan, and I will be your coordinator for today. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the call over to Binit Sanghvi, President, Capital Markets and Treasurer.

Thank you, Megan. Good afternoon, everybody, and thank you for taking the time to join us on our call today. Julian Francis, Beacon’s Chief Executive Officer, and Frank Lonegro, our Chief Financial Officer, will begin with prepared remarks that follow the slide deck posted to the Investor Relations section of Beacon’s website. After that, we will open the call for questions. Before we begin, please reference Slide 2 for a couple of brief reminders. First, this call will contain forward-looking statements about the company’s plans, objectives, and future performance. Forward-looking statements can be identified because they do not strictly relate to historic facts or current facts and use words such as anticipate, estimate, expect, believe, and other words of similar meaning. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including, but not limited to, those set forth in the risk factors section of the company’s 2021 Form 10-K. Second, the forward-looking statements contained in this call are based on information as of today, November 3, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. And finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in today’s press release and the appendix to the presentation accompanying this call. Both the press release and the presentation are available on our website at becn.com. Now, let’s begin with opening remarks from Julian.

Thanks, Binit, and good afternoon, everyone. Let’s begin on Slide 4. Today, Beacon reported record third quarter results from the top line to the bottom line, including our 11th straight quarter of year-over-year increase in adjusted EBITDA, continuing our track record of profitable growth. Our team’s focus on the day-to-day execution of our strategic initiatives delivered higher volumes across all three lines of business, driving our highest quarterly net sales in history. The strong volume growth also began to unlock the investment we have made in our inventory, resulting in our best quarterly cash flow since the second quarter of 2020. Non-discretionary reroofing demand continues to provide us with opportunities to deliver value to our customers. Commercial roofing demand remained healthy, while residential growth was supported by repair and reroofing activity across most markets. A few heavy new residential construction markets did slow, but I remind you that 80% of our sales come from repair and replacement activity. We continue to make strategic investments in value-creating initiatives toward achieving our Ambition 2025 targets, which are underpinned by the financial flexibility our balance sheet provides. We took an important step this week with the acquisition of Coastal Construction Products, one of the largest independent distributors of specialty waterproofing and associated products in the U.S., which we will discuss in detail a bit later. We also accelerated greenfield investments, creating capacity, expanding our branch footprint, and enhancing service to our core customers. Along with our share buyback program, our balanced capital allocation demonstrates our commitment to creating shareholder value and confidence in our Ambition 2025 strategic plan. I am very pleased with the progress we have made toward our goals and we will continue to invest in generating profitable growth and returns for our shareholders. Now please turn to Page 5. For those of you who’ve listened to our calls or attended our Investor Day, you are well aware that we have a detailed strategy called Ambition 2025. It is a structured roadmap with initiatives that are targeted and measurable. As a reminder, the goals we laid out 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 in 2025, approximately a 10% annual growth rate. Now on to Page 6, I will provide a brief update on our strategic initiatives, which will give you a better idea of how we attempt to achieve these goals. Let me start by highlighting a couple of examples of how we are building a winning culture. We established Beacon Cares two years ago to assist employees with unexpected financial crises and are proud that the fund is supporting our colleagues facing a variety of difficulties, including the impacts of Hurricane Ian. The program also gives our employees the opportunity to help teammates and have their support matched by the company. Also, as we discussed in our last quarterly call, we announced a new national partnership with the charity Rebuilding Together, a non-profit organization providing home repairs for underserved communities. Everyone deserves a safe home and I am pleased to report that volunteers from our field team, along with Rebuilding Together, recently held a volunteer day to make essential repairs to a home for a family in need. We started in Boston, where Beacon was founded over 90 years ago, and helped a couple improve the accessibility features of their home so that they can remain in the neighborhood that they love. We are also driving above-market growth and enhancing margins through a set of targeted initiatives. Expanding our footprint is a major lever in our growth plans, which includes strategic investments in greenfields and tuck-in acquisitions. I am very pleased to report that we have accelerated our investment in our pipeline of greenfield locations. Our team has ramped up quickly, commissioning nine branches since the beginning of the year. While we had originally discussed opening a total of 10 facilities in 2022, we are on track to deliver 15 new branches this year. Our set of initiatives designed to grow margin is also gaining momentum. We are confident that 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 AccuLynx, a leading provider of all-in-one business management software for roofing contractors, is another example of a value-added offering that is driving growth. This integration has helped us achieve a quarterly record with nearly 19% of residential sales going through our digital platform. We are building upon our technology leadership by continuing to invest in making it easier for customers to do business with us anywhere and any time. During the quarter, we announced the launch of our new Beacon Pro+ mobile app. The new app is custom designed for iPhone and Android devices specifically tailored to meet the needs of contractors who spend their days on the go. Likewise, we also had a record quarter for our higher-margin private label sales. Sold under the Tri Belt brand, these products deliver professional results and permit our customers to differentiate themselves from their competitors. As we have discussed for several quarters, we are enhancing productivity and capacity through our continuous improvement and operational excellence initiatives. Over the last two years, our focus on the bottom quintile branches has generated tangible results and this year is proving to be even better. We have generated approximately $32 million in year-on-year EBITDA improvements in the first nine months. You will recall that we targeted a total of $75 million contribution in our Ambition 2025 target. So we have a very strong start on that goal. Finally, our strategic initiatives are designed to create shareholder value, and we are committed to improving returns. Let me highlight that we have repurchased and retired nearly 6 million shares year-to-date. The share buybacks are part of a $500 million share repurchase authorization announced at Investor Day during the first quarter of this year. The share repurchases demonstrate both our commitment to delivering value to shareholders and our confidence in the future. 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 needed to achieve our Ambition 2025 targets. Now, please turn to Page 7 of the deck. As I mentioned earlier, this week we announced the acquisition of Coastal Construction Products, adding national capabilities in the growing and still fragmented $5 billion specialty waterproofing market. I’m thrilled to welcome the Coastal team of more than 200 employees to Beacon, and I look forward to the capabilities and accelerated growth opportunities that this combination brings. This acquisition fits squarely in the middle of our strategic plan. As most of you are aware, we have two core markets, residential and commercial roofing, and our complementary products overlap with the needs of both, providing us with above-market growth opportunities. As we mentioned at our Investor Day, one of the big areas within complementary that overlaps with commercial roofing is the waterproofing business. This includes caulking, sealants, and different types of barrier products, essential products and services to our commercial contractors building envelope solutions, both above and below grade. With Coastal, we acquired a team that is widely regarded as the leading technical authority in the field with specialized expertise. I am particularly pleased that Coastal’s senior team will be joining Beacon with CEO Martin Harold reporting to me, leading Beacon’s new specialty waterproofing division. Moving to Slide 8, Coastal is expected to have approximately $250 million in 2022 net sales with around $25 million in EBITDA. Coastal’s 18 locations serving the Southeast and Midwest will be combined with Beacon’s 13 branches that are dedicated to specialty waterproofing to form our new waterproofing division. The resulting combination creates an unparalleled coast-to-coast footprint to better serve customers locally, regionally, and nationally. At the same time, the waterproofing market is still highly fragmented, offering us ample opportunity to be acquisitive if we find the right fit and room to add new locations as we build on Beacon’s existing capabilities. This includes storm-exposed regions where waterproofing is essential to protecting buildings, adapting to stricter building codes and meeting heightened maintenance standards. After realizing synergies, which include plans for organic growth and footprint expansion, combined with our procurement capabilities, OTC network, digital platform, and private label offering, the pro forma transaction multiple is lower than Beacon’s current trading multiple. This is in line with the acquisition criteria we laid out at our Investor Day. Lastly, I would like to note that this is the fifth transaction we have done in the last 12 months. All have been made possible by the balance sheet strength that we restored early last year. With Coastal, we are able to create a platform for accelerated growth with a transaction that immediately enhances our bottom line while maintaining net debt leverage at less than 2.5x. I couldn’t be happier with the potential we have together. And now I will pass the call over to Frank for some more detail on our third quarter results.

Thanks, Julian, and good evening, everyone. Turning to Slide 10, we achieved more than $2.4 billion in total net sales in the third quarter, up nearly 29% year-over-year with higher volumes across all three lines of business and higher average selling prices for our products. In the aggregate, price contributed approximately 20% to 21% to revenue growth and estimated volumes contributed approximately 7% to 8%. Our backlog, which peaked during the second quarter, remained at a high level and continues to be weighted toward non-residential orders. Acquisitions over the last four quarters, including Midway, are performing well and more than offset the divestiture of our solar business on December 1, 2021. As a reminder, the results of the solar business are reflected in our prior year numbers as part of continuing operations. The drivers of our residential line of business remained healthy as re-roofing activity and units under construction supported growth. Single-family volumes grew by low single-digits year-over-year, well ahead of the market, even with below-average hail and major storm-related volumes year-to-date. In addition to volume growth, higher selling prices year-over-year, including the shingle price increase announced in August, helped drive the 22% residential net sales growth year-over-year. We also want to highlight that the average selling price for shingles increased sequentially from Q2 to Q3. Non-residential roofing sales were up more than 54%, driven by the combination of price execution and increased volumes. Supply chain loosened somewhat in the quarter with improving material availability. As a result, we started to see the conversion of our backlog, which helped drive one of the highest third-quarter volumes in our history. Complementary sales increased approximately 17% year-over-year due to higher volumes across our product categories, including siding and waterproofing. Higher selling prices across all of our complementary product lines, except lumber, also contributed to the growth. As you may recall, our complementary product category has approximately 80% residential and 20% non-residential exposure. The addition of Coastal will adjust these percentages to approximately 70% residential and 30% non-residential on a go-forward basis. Turning to Slide 11, we will review gross margin and operating expense. Gross margin was 26.1% in the quarter, slightly higher than our guide. Price/cost was unfavorable by about 60 basis points as higher average selling prices were more than offset by product inflation year-over-year. Higher non-residential sales mix also contributed to the 100 basis point year-over-year decline in gross margin. Higher sales drove favorable OpEx leverage with adjusted OpEx to sales down 160 basis points year-over-year. Adjusted OpEx was $374 million, an increase of $53 million compared to the year-ago quarter. The year-over-year change in OpEx also includes more than $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. The increase in OpEx in our existing business was driven by expenses related to the higher volumes and revenues, including delivery, commissions, incentive compensation, and travel and entertainment. In addition, inflationary pressures contributed to the increase in OpEx, including wages, fleet, fuel, and lease-related expenses, such as rents, real estate taxes, utilities, and maintenance costs. Labor markets for drivers, helpers, and warehouse workers remain tight and we continue to make sure that we are staffed to meet demand. As you can see on the chart, our headcount was up approximately 6% year-over-year, slightly less than our estimated volume growth. While we have not yet felt the impact of higher interest rates on our business, we have a track record of agile response and staying ready to adjust to changing market conditions. At the same time, we are focused on investing to drive and support above-market growth and margin enhancement as part of Ambition 2025. As you have heard, our dedicated M&A and greenfield teams are built out and executing, and we are continuing to invest in our sales organization, customer experience initiative, private label and digital platforms, and branch optimization. These and other Ambition 2025 investments totaled approximately $12 million within the operating expense line in the third quarter. Turning to Slide 12, operating cash flow in the quarter was strong at $268 million, the highest cash generation since the second quarter of 2020. This is largely attributable to the $160 million sequential reduction in net inventory as we return to a more normal seasonal pattern with our inventory. On a year-over-year basis, inventory this quarter was higher by $304 million, of which more than three-fourths was driven by product cost inflation. Inventory from acquisitions and greenfield load-ins also contributed to the increase. We continue to expect inventory to decline in Q4 as we follow a more normal pattern of seasonality and material availability continues to improve. We expect this to contribute to substantial cash flow conversion in the fourth quarter. Our capital allocation plan is balanced between organic and inorganic growth opportunities and shareholder returns. As Julian mentioned, our ability to invest in greenfields and value-creating acquisitions is underpinned by our prudent balance sheet management over the last 10 quarters. As of the end of the third quarter, our net debt leverage was at the low end of the 2 to 3x range outlined at Investor Day. After giving effect to the consideration paid for Coastal, pro forma net debt leverage remains less than 2.5x with liquidity of approximately $800 million. Turning to shareholder returns, we have retired 5.8 million shares, reducing our common shares outstanding to 65 million at the end of the third quarter. We look forward to finishing the second accelerated share repurchase in the fourth quarter, which is expected to result in the retirement of approximately 1 million additional shares by year end, after which we will have completed just over 75% of the $500 million buyback authorization we announced earlier this year. We continue to have ample capacity to invest in opportunities through the cycle and have laid significant groundwork toward achieving our Ambition 2025 goals. We are confident in our ability to successfully compete in and adjust to changing market conditions and look forward to a successful conclusion to 2022. With that, I will turn the call back to Julian for his closing remarks.

Thanks, Frank. Now before we turn the call over to Q&A, I’d like to discuss our outlook for the remainder of 2022. Please reference Page 14 of the slide materials. Going forward, we expect the market fundamentals to remain stable as non-discretionary R&R activity underpins our residential and commercial roofing demand. Commercial sentiment remains favorable, and our backlog remains at a high level, both of which are indicative of near-term demand. At the same time, we expect rising interest rates to bring softness in the regions that have heavy exposure to new residential construction. With respect to Hurricane Ian, let me first say that the communities impacted are in our thoughts. In terms of business impact, initial estimates show the volumes required to repair and reconstruct will be approximately 3 million squares or around 2% of annual industry shipments. Keep in mind that these volumes will be spread over the next couple of years. For the fourth quarter, we expect a solid finish to 2022. We expect total sales growth to be up between 15% and 17% year-over-year. Please remember that we will be lapping a record fourth quarter in which we saw significant inflation across all three lines of business. Last year, we also experienced additional volumes from Hurricane Ida and had two months of contribution from our Midway acquisition. Please note that our guidance includes two months of the Coastal acquisition with net sales contribution of approximately $35 million. With respect to gross margin, we expect to see a roll-off of inventory timing benefit in the fourth quarter and a heavier non-residential sales mix compared to the prior year. With that in mind, gross margin is expected to be in the 25% range. Our focus continues to be on the areas within our control, including delivering a high-caliber customer experience as well as daily execution on safety, service, efficiency, and pricing. As we enter the winter months, we will balance product availability with our inventory reduction and, at the same time, productivity with growth investments. We are increasing our full year 2022 sales growth expectations to 23% to 25% versus the prior year period and adjusted EBITDA in the range of $885 million to $910 million. And importantly, as Frank mentioned, we expect to finish the year with significant cash flow. Now before we head to Q&A, I thought I’d address our early thinking on 2023. Market demand will very likely be lower next year, especially new residential construction, and we may not see broad-based inflation like we have had the last two years. We will, of course, monitor market conditions and take appropriate actions as all good companies do. But more importantly, our Ambition 2025 strategy provides us the ingredients to grow faster than the market and I firmly believe our strategy is yielding results. We are making investments in our sales organization and our service model. We continue to enhance our digital offering and grow our private brand categories. We are investing in improving our operations, delivering results today, but also getting ready for the future. We are adding platforms for growth that we expect will result in accelerated performance, as with the acquisition of Coastal and our additional greenfield locations. Our business model is resilient, leveraging predominantly non-discretionary R&R demand and our momentum is strong. In summary, we are looking forward to 2023. With that, we will take your questions.

Our first question comes from the line of Michael Rehaut with JPMorgan Chase. Your line is now open.

Hi, good afternoon. I'm on for Mike. Regarding bottom quintile branches contributions, how are you thinking about that over the next one to two years?

Hi there. I think we have seen really good traction on that initiative. We started this shortly after I joined the company and it was a real focus area for us. We continue to believe that focusing on that bottom quintile, there will always be about a quintile. We reset that every year. I think we have underestimated the potential going forward. Overall, we continue to believe that there is plenty of room for improvement in all our branches and the focus on the bottom quintile is showing improvement across the entire range of branches from top to bottom.

Yes. What Julian said is we are off to a really good start. We set a target of $75 million contribution. We are in the early 30s here year-to-date. When we get to 75%, we are not going to stop. We are going to keep going.

Great. And then lastly, I was curious if you could give a little bit more color on customer backlogs across your business segments and how they supported sales trends this past quarter? Any insights in terms of the health of the backlog as you move into 2023?

In terms of the backlog, as I mentioned in the prepared remarks, it had peaked in about the middle of the second quarter. When you look at it relative to where backlogs were in the pre-COVID world, it’s still a multiple of that. So we still feel like there is plenty of room left in the backlog. It is more than 50% on the non-residential side. The other roughly 40% was split between the residential and the complementary piece, with the residential being the larger portion of that remaining 40%. It’s continuing to deliver for us. It was certainly helpful to unlock some of that in the third quarter and we will continue to unlock some of that in the fourth quarter.

Great. Thank you.

Our next question comes from the line of Ryan Merkel with William Blair. Your line is now open.

Hey, guys. Nice job this quarter.

Thank you.

So I wanted to ask about your commercial gross margins. I am hearing that commercial gross margins are pretty elevated given what’s going on with supply chain. Can you give us a sense for how much commercial margins are up since 2020 and then what are your thoughts on sustainability as we head into 2023?

Thanks for the question. I will start and let Frank touch on the details. Certainly, we have seen growth. We believe we have done a very good job in terms of executing on the price increases. We changed the behavior in terms of executing price increases on the day the manufacturers announced them instead of rolling it through. With the number, frequency, and scale of price increases, we have seen improvements. We believe that there is also a lot of value created in these. There has been a real need to improve the overall margin of this business and we have focused on that as much as capturing inventory profits as we have seen this inflationary environment roll through. We are going to do everything we can to sustain these margins. Obviously, the inventory profit side of it will roll off, but I remain confident that we are delivering exceptional value to the marketplace.

Ryan, depending on the quarter, there is some seasonality in all the businesses, and you’ve got to look at when the various price increases kicked in and when the inventory profits rolled off on a per-quarter basis, but you are in the probably 200 to 300 basis points range depending on where you are in that cycle.

Perfect. Thank you.

Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Your line is now open.

Hi, thank you for taking my questions today. Just a follow-on on the margin question, particularly related to non-residential. Of the 100 basis points down on the margin, how much of it was cost rising past the prices versus your mix shift to non-residential? Is there any way to separate the two? Also, are you seeing cycles where residential gets too pricey and drives strength in multifamily, then pings back? Are you seeing similar trends in fast-growing markets in the Southeast and Southwest?

Kathryn, let me start and then kick it to Julian. In terms of the 100 basis points year-over-year gross margin decline, price-cost was about 60 basis points of that and mix was about 40 basis points. The mix relates to the non-residential piece of the equation. By and large, average selling price for most, if not all, of our products was higher both year-over-year and quarter-over-quarter, with lumber being an exception.

In terms of the trends, we are seeing continued strength in multifamily. The residential single-family market has been impacted by interest rates and mortgage rate changes. There is some settling out to do. We all know about the under-building of single-family homes in the country, and I think we will get back to growth after a bit of an air pocket. I don’t think we are seeing a pronounced ping-pong effect regionally like you described. We see strength in multifamily, residential single-family has eased in certain parts of the country where mortgage rates have increased, and commercial—which typically lags residential construction by about 18 months—continues to show strength. As the supply chain eases, projects that were delayed are beginning to convert, which we are seeing in our backlog and volume growth in that sector. We think that will continue. The underlying fundamentals are strong across the board, though we will monitor how the economy plays out over the next six to 12 months.

Great. Thank you very much.

Our next question comes from the line of Ketan Mamtora with BMO. Your line is now open.

Thank you. Quick question on the Coastal acquisition: can you talk about some of the key attributes or drivers behind expanding in the waterproofing business in terms of relative attractiveness? Whether it’s end market or margin stability, anything of that kind would be helpful?

Sure. We have had a specialty waterproofing business out west from prior acquisitions—about 13 branches. As we rebalanced our portfolio a couple of years ago, we always felt waterproofing was a category to remain in. It has close ties to roofing contractors; many roofing contractors perform waterproofing work. It’s focused more on commercial than residential and correlates strongly with roofing and the replacement market. Given trends in climate and events like the Florida condominium collapse—tragic and related to waterproofing and maintenance—we were familiar with the significance of this category. Coastal presented an opportunity to add scale and technical leadership. From a business and margin profile, they are more commercial than residential, which matters. This is a highly technical sale and requires specialized expertise. We believe Coastal’s team is recognized as a leader in that technical capability, which creates barriers to entry and supports a strong margin profile. Overall, we think it’s a great strategic fit. We expect regulatory changes and heightened maintenance standards to increase demand for waterproofing products and services. This positions Beacon as a clear leader in specialty waterproofing distribution, complementing our roofing business and expanding our capabilities.

Our next question comes from the line of Garik Shmois with Loop Capital. Your line is now open.

Hi. Thanks. Congrats on the quarter. As you expect to draw down inventory here in the fourth quarter, do you expect to be largely complete by the end of the year? And then as you are engaging in that process, are you seeing any changes on the pricing side either from the suppliers or from the customers?

Thanks, Garik. We will re-evaluate where we are at the end of Q4. A lot of that will depend on the outlook for the market plus the momentum from our Ambition 2025 initiatives—greenfields and acquisitions. We are entering a period of more normalcy than the last couple of years, which allows us to be more surgical in what and when we buy. In terms of pricing, quarter-over-quarter we continue to see average selling prices increase. Even though we destocked by $160 million quarter-over-quarter, that did not materially reduce realized pricing. We continue to believe the environment is a good foundation for us.

I will add that manufacturing is still relatively tight—it’s not the strict allocation we saw 6 to 12 months ago—but overall the market fundamentals are sound and constructive for selling today.

Our next question comes from the line of Philip Ng with Jefferies. Your line is now open.

Hey Julian, hey Frank. Congrats on a really strong quarter. Julian, can you give us an early look at 2023? You alluded that you expect demand to be likely down. Can you size that up for us? Is that like a mid-single-digit decline? Any color on how you are thinking about between markets—commercial seems more upbeat—and in a declining demand backdrop, how should we think about decremental margins and your ability to ratchet back costs if needed?

Appreciate that. We expect the market may decline next year, particularly in new residential construction due to mortgage rates and builder decisions. The majority of our business is non-discretionary R&R, which provides resilience. We expect commercial construction to be flattish—could be up or down slightly—but we continue to see commercial unlocking as supply chains ease and delayed projects convert. Regarding incremental margins, we continue to believe we can grow. We are not currently planning for significant decremental margins because we believe we can continue to execute on Ambition 2025. The addition of Coastal is constructive, and we will add another year of maturity to the greenfields opened this year. We plan to continue adding greenfields next year. We believe there will be acquisition opportunities and ongoing productivity improvements at our branches. We remain confident in our ability to grow despite a possibly softer market.

Our next question comes from the line of David Manthey with Baird. Your line is now open.

Thank you. Good afternoon everyone. Julian, in your remarks you said that we may not see inflation next year, and historically this industry has lacked discipline in softer environments. Are you seeing any signs of intensification of shingle price competition in any of your markets today? If one or more competitors use price as a share-gain tool, how do you balance Ambition 2025 growth and margin targets relative to a market that may only provide an opportunity from one of those?

The answer to the first question is no. We do not see indications of aggressive price competition today. Sequential price is positive. The current demand level, even with an expected slight decline next year, remains higher than pre-pandemic levels and is constructive overall. That demand level doesn’t indicate to us a race to drive price down across manufacturing or distribution. We expect a more stable pricing environment and less inflation. If someone does try to compete on price, we will ensure we protect our margins. Our plan focuses on factors we control: greenfields, productivity, a new pricing model to enhance margins, digital growth, and private label expansion. Those are margin-enhancing initiatives that we can execute to defend performance.

Our next question comes from the line of Keith Hughes with Truist. Your line is now open.

Thank you. A question on a couple of points on the closing thought slide: you talked about October sales up high-20s and are looking for sales per day for the fourth quarter to be up 15% to 17% with the acquisition. That shows some deceleration—could you talk about what you are anticipating to sell by segment?

I will start and let Frank give detail. Remember last year’s fourth quarter was exceptionally strong. When we say decelerating, it’s off last year’s very high base. Markets are pretty good now. We are seeing seasonal slowdowns in the North as it gets colder, which is natural. Markets heavy in new residential exposure have slowed as builders close out their quotas for the year. Overall it’s still constructive. The deceleration is more to do with how strong last fourth quarter was than our view of this fourth quarter.

Keith, in your model remember a few things. We have Hurricane Ian this quarter and we lapped Hurricane Ida last year. Ida came out really strong. We think Ian will take a little longer to get going given the extent of damage and the insurance claim process. Coastal is helpful this quarter, but we are also lapping last year’s Midway acquisition. The only way to handicap the weather is go down the middle and assume a normal onset of winter in the North and in Canada, which has a revenue drag. If it turns out warm through Christmas, the equation changes.

Our next question comes from the line of David MacGregor with Longbow Research. Your line is now open.

Yes. Good afternoon everyone. My question is on the price-cost in the quarter, the negative 60 basis points. Can you unpack that for us? Between inventory gains, the shift to private label, digital, and other moving parts, what were the puts and takes behind that negative 60 basis points?

The price-cost was actually better than we had mentioned on the Q2 call. Negative 60 basis points was better than we had originally estimated. When I look at the three lines of business, remember we cycled a September shingle increase last year which had a high realization, more so than the August increase this year. The storyline this quarter is not price—it's cost. Costs are up higher on a year-over-year basis than price is up, which was prevalent in the residential space, also prevalent but less so in commercial. Complementary was actually up on price-cost.

Our next question comes from the line of Truman Patterson with Wolfe Research. Your line is now open.

Hey. Good evening everyone and thanks for taking my question. Julian, you discussed potential M&A into 2023. Can you give an update on the M&A pipeline? Is it still robust? Are sellers expecting rational multiples? Also, could you remind us how much your acquisitions year-to-date will benefit EBITDA on an annualized basis? I know Coastal had about $25 million of EBITDA annualized.

The pipeline is robust and we are active. We did five transactions in the last 12 months. We are targeting transactions where the synergized multiple is below our trading multiple, as we said at Investor Day, and we continue to see opportunities to deliver on that. We intend to remain active and competitive in the marketplace.

Truman, to dimensionalize things, the combination of the Midway acquisition, another recent acquisition, the Wichita Falls acquisition, and the Crabtree acquisition are in the roughly $120 million to $125 million range in terms of annualized revenue that we bought in year zero. Those companies have done quite well under our ownership, so on a going-forward annualized basis post-Beacon acquisition the revenue and EBITDA contribution is higher due to better execution, pricing, and margin. If you tack Coastal at $250 million and use a broad average EBITDA margin near 10%, you'll get close to where we are from an EBITDA perspective across our acquired companies.

Our next question comes from the line of Stanley Elliott with Stifel. Your line is now open.

Hey guys. Thank you for fitting me in. On Coastal, it sounds like a great fit. You had a similar business out on the West Coast. It sounded like you are thinking about expanding the Coastal business with greenfields—did I hear that correctly? And what has changed now compared to when you had those assets out West?

Thanks for the question. This acquisition was about timing and scale. Coastal was foundational to expanding our waterproofing footprint nationally. We believed we needed a Keystone acquisition to build a national platform and Coastal provided that: strong technical leadership, East Coast locations, and scale. When a $250 million company wants to grow, it does not target just a few greenfields; now we can expand meaningfully. Beacon brings digital, private label, and greenfield capabilities, plus distribution and national procurement that Coastal wanted to build out. We see strong overlap with our roofing customers and clear opportunities to expand via tuck-ins and greenfields. This positions us well to play in a fragmented market where technical capability matters.

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

Thank you, Megan, and thank you all for joining us today. Let me close by thanking more than 7,000 team members for their continued hard work and dedication in this dynamic environment. Again, our thoughts and prayers go out to the teams and all of the people affected by Hurricane Ian in Florida. We have many people in that area. There is a lot of devastation and we are open to providing support to both our employees and the communities down there. I wish you all the very best for the holidays. Be safe, and have a good evening.

That concludes the Beacon third quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect your lines.