Good afternoon, ladies and gentlemen and welcome to the Beacon Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Daniel, 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, Vice President, Capital Markets and Treasurer. Please proceed, Mr. Sanghvi.

Thank you, Noel. 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 will 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 and objectives and future performance. Forward-looking statements can be identified because they do not strictly relate to historical 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, February 23, 2023 and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. 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. And finally, I just want to remind everybody, that we changed our fiscal year end to coincide with the calendar year end. As a result, today we’re reporting our calendar year 2022 results as our fiscal year, as well as the result of our fiscal fourth quarter which is comparable to our transition period in the prior year period. Now, let’s begin with opening remarks from Julian.

Thanks, Binit and good afternoon, everyone. Let’s begin on Slide 4. I'm very pleased to report that we finished the year with another outstanding quarter. The team delivered fourth quarter record results for net sales, net income and adjusted EBITDA. Sales per day were up 14% year-over-year as pricing execution drove higher net sales across all three lines of business, despite volume being lower by mid-single digits. While we did see progressively weaker demand through the fourth quarter, pricing held up and remained stable sequentially. Residential volumes were lower as compared to a strong prior year and markets exposed to higher volume of new residential construction did slow more sharply. But I remind you that 80% of our sales come from repair and replacement activity. Non-residential demand remained solid despite destocking at the contractor level and commercial roofing supply chain problems eased with lead times on the majority of products returning to more normal levels. This helped us to unlock more of the backlog that has built up over the past two years. We delivered higher-than-expected gross margin and recorded our 12th straight quarter of year-over-year increase in adjusted EBITDA, continuing our track record of profitable growth. We also delivered our best quarterly cash flow since the second quarter of 2020 as we focused on rightsizing our inventory and getting to jobs that have been delayed due to supply chain problems, as we said we would on both our second and third quarter calls. We used the cash generated in the quarter to invest in value-creating initiatives towards achieving our Ambition 2025 targets while maintaining steady net debt leverage, preserving our balance sheet flexibility. During the fourth quarter, we made two acquisitions: Coastal Construction Products and Whitney Building Products. Whitney is a distributor of commercial and multifamily waterproofing and restoration products located in Boston, Massachusetts. And we discussed the acquisition of Coastal on our November earnings call. We welcome the Whitney and Coastal teams and their customers to Beacon. We also accelerated our greenfield investments, expanding our branch footprint and enhancing service to our customers. Our dedicated greenfield team is executing at a very high level, which we will highlight later in our remarks. Our share buyback program continues to be an important part of our balanced capital allocation approach, demonstrating our commitment to creating shareholder value and confidence in our Ambition 2025 strategic plan. You may recall that the buybacks are part of a $500 million share repurchase authorization announced at the Investor Day, of which we have completed more than 75% in 2022. In the fourth quarter, we made significant progress towards our goals, and we will continue to invest to generate profitable growth and returns for our shareholders, make meaningful contributions to the communities in which we operate and build more for our customers and our employees so that they too can fulfill their potential. Now please turn to Page 5. For those of you who have listened to our calls or attended our Investor Day, you know that we have a detailed strategy called Ambition 2025. It is a structured growth roadmap with initiatives that are targeted and measurable. The goals we laid out are to grow the business to more than $9 billion in 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 Page 6, I'll provide a brief update on our strategic initiatives, which will give you insight on how we are achieving our plan. Let me first highlight a couple of ways that we are building a winning culture. As you may recall, we announced a year ago that we have a goal to reduce the intensity of our scope 1 and 2 greenhouse gas emissions by 50% by the year 2030. I'm pleased to report that we have begun to take steps on this journey by piloting the use of electric vehicles in three areas of our operations. First, two electric delivery cranes, which eliminate job site piling, reduce fuel usage and noise pollution are deployed in a small number of markets. Second, we are testing electric forklifts in our warehouse. And third, we are using electric vans for express customer deliveries in California markets. Collectively, these initiatives demonstrate our commitment to leverage available technology to build a more sustainable future for all stakeholders. I'd also like to highlight how we have enhanced our capabilities and diversity at the Board level with the recent additions of Melanie Hart and Raquel Mason. Melanie brings wealth distribution industry experience, having spent 16 years with POOLCORP as well as financial and operational expertise that will no doubt be valuable as we progress towards our Ambition 2025 financial targets. Raquel's depth in management and marketing experience with some of the world's most iconic brands like Coca-Cola as well as the work architecting cross-enterprise digital transformation will benefit us as we drive growth and value for our customers. We welcome Melanie and Raquel and look forward to their contributions to our company. 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. Our success in ramping up our dedicated greenfield team and accelerating investments in our pipeline is paying off. We added 12 greenfields during the fourth quarter of the year in key growth markets, improving efficiency and enhancing customer service. This brought our total for the year to 16 locations. And as a reminder, our original Ambition 2025 target was to add 10 facilities to our footprint each year, including 2022. As mentioned previously, our dedicated M&A team also completed two acquisitions in the quarter, adding 19 branches with the majority of locations being in the rapidly growing Southeast markets. Our set of initiatives designed to grow margins is also gaining momentum. Our digital capability continues to be a clear competitive differentiator for Beacon and sales on our online platform increase customer loyalty, generate larger basket sizes and deliver approximately 150 basis points of gross margin enhancement compared to offline channels. We are confident that we provide the most complete digital offering and continue to expand our capabilities to serve customers wherever and whenever they need. At the same time, we are building a technology leadership by continuing to invest in making it easier for customers to do business with us anywhere and anytime. The actions include our recent digital integration with AccuLynx and the launch of our new Beacon Pro+ mobile app and are examples of how we are extending our leadership position. Through our continued investment, we achieved 26% digital sales growth year-over-year with nearly 19% of residential sales now going through a digital platform. As we have discussed for several quarters, we are driving operational excellence through our continuous improvement and productivity initiatives. Our focus on the bottom quintile branches has consistently generated significant improvements to our service levels as well as tangible contribution at both the sales and EBITDA lines. Our process is designed to improve the performance of 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 supported to remedy the issues. This initiative continues to deliver tangible bottom-line results and contributed approximately $4 million to the EBITDA line in the fourth quarter year-on-year. One area where there was more opportunity for us in the quarter was branch productivity. As volumes softened month-over-month, we could have worked more quickly to adjust our capacity to more appropriately match supply and demand. Lastly, our strategic initiatives are designed to create shareholder value, and we are committed to continuing to improve our returns for all owners of our stock. During the fourth quarter, we completed our second accelerated share repurchase program, retiring an additional 1.1 million shares. The share repurchases demonstrate both our commitment to delivering value to shareholders and our confidence in the future. As you can see, we 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 let me pass the call over to Frank to provide a deeper focus on our fourth quarter results.

Thanks, Julian, and good evening, everyone. Turning to Slide 8. Let me start by reminding everyone that we had one less day in the quarter versus the prior year quarter. We achieved nearly $2 billion in total net sales in the fourth quarter, up more than 14% on a per day basis year-over-year as higher average selling prices for our products drove sales growth in all three lines of business. In the aggregate, price contributed approximately 17% to 18% to revenue growth. Our backlog conversion was a highlight in the quarter. And while it remained elevated compared to pre-pandemic levels, it continued to come down from its peak in the second quarter and continues to be weighted toward non-residential orders. Acquisitions, including Midway Wholesale and Coastal Construction Products, 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. Strong year-over-year pricing drove residential roofing sales per day, higher by approximately 7%. I also want to highlight that the average selling price was stable sequentially from the third quarter to the fourth quarter. As mentioned earlier, weakness in demand from our single-family homebuilding customers caused shingle volumes to be lower by high single digits year-over-year. Please keep in mind that the prior year comparable was a strong volume quarter, largely attributable to the late onset of winter allowing for additional roofing days last year. Non-residential roofing sales per day were up 27%, driven by price execution. Single-Ply volumes per day were higher year-over-year as the non-res supply chain began to normalize during the quarter. However, destocking at the contractor level and tight material availability of certain accessories continue to impact project cycle times, resulting in lower overall non-res volumes, down about 4% to 5% year-over-year. Complementary sales per day increased 16% year-over-year, with higher selling prices across all of our complementary product lines with the exception of lumber. Sales increased in our siding products and our recent Coastal acquisition is performing well. Coastal, which closed on November 1, contributed two months of revenue, driving sales of our waterproofing products higher year-over-year. Please keep in mind that with the addition of Coastal, our complementary product category now has approximately 70% residential and 30% non-residential exposure. Turning to Slide 9. We'll review gross margin and operating expense. Gross margin was 26.2% in the fourth quarter, exceeding the guidance we put out in November. Price/cost was slightly favorable as higher average selling prices more than offset product inflation year-over-year. Higher non-residential sales mix also contributed to the 10 basis point decline year-over-year. Adjusted OpEx was $364 million, an increase of $58 million compared to the prior year quarter. OpEx as a percentage of sales increased to 18.5% or 100 basis points year-over-year. The year-over-year change in OpEx was driven by inflationary pressures in areas including wages and benefits, insurance, fleet and fuel and travel and entertainment as well as lease-related expenses, such as rents and real estate taxes, utilities and maintenance costs. In addition, with persistent tightness in the labor markets, we continue to err on the side of ensuring we have the resources necessary to deliver for our customers. Variable expenses related to higher sales and profitability, including commissions, incentive compensation and stock-based compensation also contributed to the increase. In addition, recently acquired branches and greenfields opened in the last 12 months accounted for approximately $13 million of the year-over-year increase. Although we continue to be ready to adjust to changing market conditions and respond to the impact of higher interest rates on our business, we remain focused on investing in initiatives through the cycle to drive above-market growth and margin enhancement as part of Ambition 2025. We are continuing to invest in projects related to our sales organization, customer experience initiative, pricing tools, e-commerce and branch optimization—these and other Ambition 2025 investments totaled approximately $11 million within the operating expense line in the third quarter and fourth quarter. Turning to Slide 10. Operating cash flow in the fourth quarter was strong at $320 million, our highest cash generation since the second quarter of 2020. This follows a tremendous cash quarter in the third quarter, resulting in nearly $600 million in cash generation in the back half of the year. As you can see on the chart, this is attributable in part to the reduction in net inventory as we return to a more normal seasonal pattern. On a year-over-year basis, fourth quarter inventory was higher by approximately $160 million, driven by product cost inflation. Inventory from acquisitions and greenfield load-ins also contributed to the increase—we continue to balance our capital allocation 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 ample balance sheet capacity. We are investing higher amounts in our business, deploying more than $90 million in capital expenditures in 2022. This not only included the investments in greenfields, but also the upgrading of our fleet and facilities as well as building out the technology tools that will benefit us in 2023 and beyond. As of the end of the fourth quarter, our net debt leverage was at the low end of the 2 to 3x range outlined at Investor Day, and we retained liquidity of more than $1 billion. Turning to shareholder returns. We completed the second accelerated share repurchase program in the fourth quarter, which resulted in the retirement of slightly more than 1 million additional shares. Net of share issuance for stock-based compensation, we reduced our common shares outstanding to 64.2 million at December 31 versus 70.4 million at the same time last year. We exhausted just over 75% of the $500 million buyback authorization we announced in February of last year. In summary, we continue to have ample capacity to invest in opportunities through the cycle, an active acquisition pipeline and a significant jump start toward achieving our Ambition 2025 goals. We are confident in our ability to successfully compete in and react to changing market conditions and look forward to a successful start to the year. Now I will turn the call back to Julian for his closing remarks. Thanks, Frank. Please turn to Page 12 of the slide materials.

Before we move to our outlook, I'd like to take a minute to reflect on the impressive results of 2022 and the progress we have made towards the Ambition 2025 targets we conveyed one year ago. In 2022, we produced sales growth of 24% with higher revenue across all three of our lines of business. We delivered $910 million in adjusted EBITDA and our second consecutive calendar year of double-digit EBITDA margins. We delivered record sales in our national accounts, private label and digital initiatives, which deliver both enhanced growth and margin. We generated $36 million in additional adjusted EBITDA from our bottom quintile branch initiative, nearly half of our $75 million Ambition 2025 target in our first year. We welcomed five new acquisitions, adding 22 branches, new markets and capabilities. And we opened 16 greenfields across 12 states, enhancing our service to our customers. We built several key leadership positions within our sales force, lines of business and leadership ranks, while at the same time, advancing our diversity, equity and inclusion initiatives. We repurchased and retired 6.8 million shares, representing more than three quarters of the $500 million share repurchase authorization announced at the Investor Day last year. In summary, our performance in 2022 has created significant value for our customers and shareholders and positioned us to deliver on our Ambition 2025 targets. Now turn to Page 13. Before we head to Q&A, I'd like to provide our 2023 market expectations, much you wish to remain consistent with our remarks from November. Market demand will very likely be lower this year, especially in new residential construction. And we do not expect to see the broad-based inflation in products or labor markets as we have experienced over the last two years. We've been preparing for these market changes for several months and will, of course, continue to monitor market conditions and take appropriate actions. We expect aggregate demand to remain above pre-pandemic levels, indicating a healthy end market, supported by nondiscretionary repair and replacement activity as well as storm-related demand in parts of Florida, California and the Midwest. For the first quarter, we expect total sales growth to be approximately 5% year-over-year or around 3.5% on a sales per day basis. This is somewhat less than the 5.5% growth per day that we saw in January, largely due to lapping a late January shingle price increase in the same period last year. Our first quarter guide reflects the continued weakness in single-family new construction and a strong shingle comparison in the prior year quarter. Additionally, we expect softness in our commercial roofing shipments, mainly resulting from continued destocking at the contractor level rather than a step down in construction activity. With respect to gross margin, we expect to be in the 25.5% range, which is down relative to the record prior year quarter, which had significant inventory profits. Before we talk about the full year, let me take a minute to give you our base case assumptions that will underpin the guidance. As mentioned, we expect rising interest rates to bring softness in the regions that have higher exposure to new residential construction, although I would like to note that sentiment has significantly improved recently and the majority of the air pocket in homebuilder demand should be felt in the first half of the year. With respect to the residential reroofing end market, we expect very good demand as compared to historical levels supported in part from storm demand and the reroof cycle. Regarding commercial roofing, we are closely monitoring the Architectural Billing Index, which is down from last year's highs, but has seen steady improvement since November. We also see a shift from new construction to repair and reroofing activity as the year progresses. With the addition of Coastal Construction Products and Whitney Building Products, we will also leverage the enhanced offering within complementary products to help us grow above market. For the full year, we expect net sales growth in the range of 2% to 4%. This includes contributions from acquisitions previously announced. Regarding gross margin, inventory profit roll-off will more than offset the structural improvements from our initiatives, including higher private label and digital sales. With all that in mind, we expect adjusted EBITDA between $810 million and $870 million in 2023. We continue to expect inventory to follow a more normal pattern of seasonality as material availability continues to improve. We expect this to contribute to higher cash flow conversion compared to 2022. The distance between our low and high end of the range will largely depend on storm volumes and the extent to which the downturn in new construction persists. More importantly, our focus will continue to be on the areas within our control, including enhancing our customer experience, delivering operational excellence, pricing and daily execution on safety, service and efficiency. We will continue to invest in initiatives that we expect will result in accelerated growth with acquisitions and at least 15 additional greenfield locations. We're investing in improving our operations, delivering results today, but also getting ready for the future. And last, but certainly not least, we continue to be committed to generating returns for our shareholders and are announcing an increase in our existing stock repurchase plan. The new approval from our Board is in the amount of $500 million, inclusive of the remaining $112 million outstanding authorization at the end of the fourth quarter of 2022. In summary, our business model is resilient, and we are positioned to outperform the market in this dynamic demand environment, creating value for all our stakeholders. We are looking forward to the rest of 2023 and to always helping our customers build more. With that, I'd like to open the lines for questions.

The first question comes from the line of Kathryn Thompson of Thompson Research Group. Please proceed.

Thank you for taking my question today. Just a clarification on what you said in your prepared commentary and how it also bakes into your outlook. You had indicated that you had seen an improvement in trend. Could you just flesh that out a little bit more in terms of what are the factors that are driving this observation? And then against that backdrop, you do have inventories up year-over-year about 13%. How much of that is volume versus price? And where do you think we are right now in light of the current balance of supply and demand with your inventory tonnage? Thanks very much.

Thanks, Kathryn. There was a lot wrapped up in the question. I think that the first part of it was related to the trends that we're seeing in the marketplace and our optimism. We said that we believe that volumes will be down year-over-year. We think that, as we indicated in prior calls as well, that is primarily related to new residential construction that we think will be down double digit plus. We do think the reroof market on the residential side will be down mid-single digits, give or take. And commercial, we still believe that we're going to see about a flat market. We are anticipating we've had lower levels of storm over the past couple of years, and we're expecting that to return to the 10-year average. So we see a little bit of lift in that. And obviously, with the storms we saw in Florida at the end of last year, the weather that we've seen in California over the winter and continuation of some of the storms that hit the Upper Midwest last year, we expect all of those markets to be relatively stronger. The sentiment coming out of the first month of the year—I think there was a lot of commentary about the builder show being much more positive. Certainly, our contacts in the builders and the building community are much more positive than they were perhaps two or three months ago. So we're seeing that trend come through. I would say we're not seeing that in the business today. It's still obviously down, but it is also February. Overall, what we're also seeing is execution on our initiatives. We're seeing the traction that we expected to see from the plans that we announced and the actions that we've been taking. We're seeing great results. We're seeing terrific results from the acquisitions. We were very pleased to add 12 greenfields in the fourth quarter. I don't know that we can keep up that pace for a whole year. I'm not sure that would be the right answer either. But those are going to contribute more this year than they did last year, and we're going to add additional greenfields this year. So we've got lifts from those activities as well. Overall, I feel like we're executing very well. I think that we're seeing customers respond to the improved service levels we're delivering. And overall, it's a healthy market. The overall levels of market demand, while down from the last one to two years, are high relative to pre-pandemic and we think they're constructive markets. I'll let Frank weigh in on inventory levels. But overall, it's pretty positive.

Kathryn, you're right, inventory is up about $160 million year-over-year. When you break that down, about $200 million is inflation, about $40 million to $50 million is M&A and greenfields. So you're looking at at least $80 million from lower units if you just look at it ending year-over-year. In terms of the forward view, obviously, we're balancing a couple of different things. We want to make sure we have the products available for our customers. We also want to improve our turns in 2023 relative to where we were in the last couple of years. Supply chains are normalizing—they're not normalized, but they are normalizing. So we want to take advantage of the lower lead times. I would expect us to continue to rightsize inventory, maybe not as much in Q1 given the lower sales level, but you should continue to expect us to get a little bit better on inventory as we progress to the midpoint of the year, obviously assuming we get a decent sales season in the spring.

The next question comes from Michael Dahl of RBC. Please proceed.

Thanks for taking my question. A lot in here. I guess just a follow-up, Julian, that was helpful, the additional color on the end markets. Correct me if I'm wrong, but it sounds like you're planning then for a volume environment that's down maybe mid- to high single digits on a blended basis, you're guiding to sales growth of 2% to 4% with acquisitions adding a few percent. So I guess the delta has to be some combination of price/mix and the greenfield contributions. Can you help walk us through your expectations for price/mix contribution, if you could, by segment? And then if you could maybe help us ballpark all these greenfields, what the cumulative contribution is expected to be this year?

You're right. There is a lot in that. I'll touch on it in general and Frank will have a little more detail. On greenfields, we see sales begin on day one. We had a ramp that was built into forecasts that led to stable, normalized business after three to five years. In the last 12 months or so with the greenfields ramping up and the demand environment we've seen, we probably had a quicker ramp in many of these branches than we anticipated. So they've been more productive sooner than anticipated. The demand and pricing environment has been positive to that as well. We would expect to see that roll off. As we said, we continue to see a good demand environment. Historically, this type of market would have been productive for both price and volume. So we're expecting relatively sideways movement on most of the business. Volumes will be down; we'll have price carryover in all segments and lines of business. That will give us a lift, with that price carryover coming mostly in the first quarter and first half, then easing off. One area I can elaborate on is commercial roofing. As the supply chain locked up during the pandemic, there was a shift to new construction and away from reroofing, which didn't get done—lots of backlog built on the reroof side. We expect that reroof backlog to unlock now as the supply chain normalizes, allowing volumes to come through. We believe that's constructive. We follow the Architectural Billing Index; the dip off last year's highs is now steadily improving since November. We see a lot of the backlog being worked through. We're not seeing dramatic changes in manufacturers' inflation—neither a lot of inflation nor deflation. So I don't think manufacturers have incentive to move much. Demand levels remain constructive.

Mike, I'll unpack a bit more. In terms of the market as a proxy for volumes, on an ex-storm basis, it's probably down mid- to high single digits. Residential is probably toward the upper end of that, commercial relatively flat. Complementary is a blend given the 70/30 residential-to-non-res exposure, so probably down in the mid-range. Our storm planning assumption is the 10-year average, so that adds 2% to 3%. We've got Ian, the hailstorms in the Midwest last year and California rainstorms, so we're expecting some lift from those. Relative price stability is helpful. The Ambition 2025 initiatives—including greenfields, customer experience, sales workforce improvements—probably add something in the mid-single-digit range; that's the order of magnitude for greenfields. In an absolute sense, we were at about $35 million in Q4 incremental contribution; on a year-over-year basis because we had a few greenfields in the prior year, that was about 30% year-over-year for that cohort. We'll begin to lap some of those later in the year given the pace of openings we did. Coastal and some smaller acquisitions from 2022 should add about 2% to 3%—we'll get ten months' worth of Coastal that performed well for us in Q4. Put all that together and you're looking at the 2% to 4% revenue growth mentioned in the prepared remarks. Remember, we will continue to be acquisitive. Future acquisitions in 2023 are not part of this guide because timing and magnitude are uncertain, so they are not included at present.

The next question comes from Ryan Merkel of William Blair. Please proceed.

What is your outlook for gross margin in 2023? And then what is your estimate for price/cost?

Ryan, I'd say mid-25s on gross margin, down about 100 basis points relative to last year. The big driver is inventory profits rolling off—we expect to roll off something around 130 basis points. Most of that will show up in price/cost. It's not that selling price is impacted; it's that cost catch-up is occurring given the manufacturing increases last year. That will be partially offset by structural improvements from our initiatives, including higher private label and digital sales, and some accretion from acquisitions. Coastal is margin-accretive for us. We also expect, especially in the second half, a higher commercial mix impact. Roll all that through and you'll see the inventory profit roll-off largely reflected in price/cost.

The next question comes from Garik Shmois with Loop Capital. Please proceed.

I'm just wondering how to think about operating expenses in 2023, given all the puts and takes...

Garik, in the overall, if you looked at an OpEx-to-sales ratio, I think it's somewhere in that 17% to 17.5% range. We're going to continue to focus hard on productivity. If and when volumes move, we're going to have to variabilize with those; we're resetting bonuses to targets. Inflation is still in the business on the cost side, so we've got pressure there. We listed a range of inflationary items in the prepared remarks—wages, benefits, insurance, fleet, fuel, utilities, real estate taxes and maintenance. We do believe strongly that we need to continue to invest through the cycle. So you'll see us invest in the Ambition 2025 initiatives: greenfields, sales and sales support teams, M&A teams, service capabilities, branch optimization, order-to-cash improvements—these and the other initiatives we discussed. If volumes take a dramatic step down, we'd pull from the playbook and adjust accordingly. But we don't see that happening in 2023. Managing costs while investing is going to be the important balance for us.

As part of our Ambition 2025 plan, we've committed to OpEx levels of productivity to get us there. It is something we're focused on, and we remain confident that we can deliver against that plan and that level of spending relative to sales.

The next question comes from Truman Patterson of Wolfe Research. Please proceed.

I wanted to discuss the bottom quintile branch performance. I think EBITDA benefit was $36 million in 2022. Is that purely on the relative improvement versus other branches? And how are you all thinking about the potential there in 2023 improvement to your bottom line?

Truman, good call-out on the VQs. Yes, $36 million and again, on the backs of, I think, $50 million or more last year and $25 million in 2020. That initiative continues to bear fruit on an annual basis. That $36 million is the year-over-year change in bottom-line profitability dollars of that same set of branches versus the prior year. So it is true bottom-line improvement from that group of bottom quintile branches. Unpacking that, the EBITDA margin improvement was over 200 basis points in those branches. We did a really nice job driving that. It is both on the gross margin percentage line as well as on the OpEx leverage line—probably a little more on the OpEx side in those branches in 2022. Interestingly, the sales growth in those branches on a full year basis was higher than the company average. So those branches did a nice job. We still think there's a ton of opportunity there. There's hundreds of basis points difference between the bottom quintile and what we call the performing branches, so the other 80% of branches. We still think there's a lot of fruit to pick there.

The next question comes from the line of Philip Ng with Jefferies. Please proceed.

Congrats on another strong quarter, great execution. Julian, you mentioned that you're seeing some destocking at the contractor level on the commercial side. Can you expand on where you guys are in that process and whether you are seeing destocking in other areas? Also, given how strong pricing has been, are there any concerns about degradation in pricing this year?

It's a great question, Philip. Visibility into contractor inventories is unusual—prior to the pandemic this wasn't typical. We believe in Q1 this year you'll see a good deal of destocking at the contractor level. They generally do not want to hold inventory long-term. Information we have suggests some took short-term warehouse leases to stock at job sites, which carries risk. We think this will be relatively short-lived and should be largely worked through by mid-year. There was good destocking in Q4 at both contractor and distributor levels, reflected in manufacturer shipment data. On pricing, pricing was pretty stable year-over-year and sequentially. The end markets remain solid and we expect a good year for commercial and residential in spite of some shift from new construction to repair and replacement. On the commercial side, replacement work usually benefits our network because more product flows through warehouses rather than direct ship to new construction. We've seen a positive shift there. While there has been significant pricing growth in the commercial arena, so far we've seen a constructive market and good end-use demand. The inventory out there creates incentives to avoid price degradation. Overall, things can change, but today we see a constructive market with positive demand.

The next question comes from Keith Hughes of Truist. Please proceed.

You talked on the first quarter guidance about the level of OpEx, which goes up a good bit year-over-year, similar to the fourth. Can you talk about what's driving that up? And does any of those costs abate to get to this mid-17% number you're talking about for the year as well?

Keith, if you go back and look at the prepared remarks on Q4, you'll see pretty much the same set of factors in Q1. Holding on to employees in a persistent labor market—especially in trucking, warehouse and helper roles—remains important. We don't want to make short-sighted winter cuts and then not have enough people for the spring construction season. One data point: of about $40 million year-over-year OpEx increase, about half is payroll and benefits and half is from M&A. Don't forget that acquisitions, greenfields, and related investments add to the OpEx line. We will begin to cycle some of those investments as we go through the year. We are not going to run at the higher OpEx leverage all year; our intent is to manage toward the target 17% to 17.5% range for the full year.

The next question comes from the line of Trey Grooms of Stephens. Please proceed.

You mentioned on the guide that new residential is down double-digit plus and reroofing down high single digits. Given the nondiscretionary nature of reroofing and some storm-related demand you talked about, is this pullback in reroofing in 2023 more a function of pull-forward demand over the last few years? Or are homeowners starting to delay some repair or replacement projects given uncertainty and higher borrowing costs?

I think the last couple of years were unique with people staying at home, which led to some discretionary work that might otherwise not have happened. Nondiscretionary reroofing remains nondiscretionary and we expect that to hold up. Storm-related demand is included in our guide; we use the 10-year average as a baseline. I'm not seeing widespread homeowner delay of necessary reroofs; higher rates can have an impact at the margin, especially since part of reroof demand comes from turnover in housing. If turnover is lower—because homeowners are reluctant to give up a low-rate mortgage—that reduces reroof activity that is tied to a sale. So the forecast is influenced by lower housing turnover as much as any active homeowner decision to delay necessary work.

The next question comes from David MacGregor of Longbow Research. Please proceed.

Good afternoon, everybody. Julian, congratulations on all the progress. I wanted to ask about price discipline. Beacon has shown positive impact from disciplined pricing, but in a more challenging volume environment promotional programs can increase. How do you balance the need for price discipline versus the need to maintain or grow market share in a slower macro environment?

Great question. We think demand is still pretty good relative to history. While new housing may be down, aggregate demand remains above pre-pandemic levels. Promotional activity tends to happen when participants worry about covering fixed costs; we don't see that broadly today. The manufacturers also face cost pressures, so there's not an obvious incentive for aggressive promotional pricing at scale. That said, we watch it closely. The run-up in pricing reflected raw material inflation that also affected our costs. Much of our margin improvement also comes from our self-help initiatives, which were somewhat masked by inflation in recent years. We believe the environment remains supportive and we will continue to manage pricing discipline while competing for share where it makes strategic sense.

Another point: our inventory management. We took a constructive view in mid-2022 anticipating a potential softening as the Fed raised rates. We methodically worked inventory down over the past couple of quarters and have it in a much better place than in mid-2022. That framework has been constructive from a pricing perspective.

The next question comes from Ketan Mamtora of BMO. Please proceed.

Congratulations on a strong 2022. Where are you seeing the most M&A opportunity within your portfolio? And how do you think about pursuing M&A in the context of balance sheet leverage given economic uncertainty?

Ketan, opportunities are manifold across our segments. The Coastal acquisition was a game changer in waterproofing and repair markets, and it has increased opportunities in that space. We've had strong years in all our markets; as the future unfolds, we believe there will be M&A opportunities across many areas. We remain disciplined on trading multiples and synergies, committed to buying businesses at reasonable costs. We believe we're still an attractive buyer in this marketplace. Our capital allocation approach is flexible: if we don't see sufficiently accretive M&A, we can toggle more toward share buybacks. The waterproofing acquisition has probably opened our aperture a bit more in that vertical.

On M&A, we have an active pipeline with both bilateral and process conversations. On leverage, as we said at Investor Day, we will be disciplined and stay comfortably within the 2 to 3 times net debt range. We're at about 2.0x coming out of the prior year. We expect strong cash generation in 2023, so we have deployable capital and flexibility to allocate between acquisitions and buybacks depending on opportunity and timing.

The next question comes from Stanley Elliott of Stifel. Please proceed.

Can you talk about what's happening with the national accounts? My math suggests you're near the $1 billion target. Some of that is from Coastal and waterproofing. How is having more of a national footprint helping here, and what is your outlook for national accounts?

Our national accounts business has been terrific and is executing very well. The value proposition of being a national supplier is being recognized. We set out a $1 billion target and are broadly at that level; we will continue to push for growth. The scale advantage, our network model where branches act as a team in a market, and our ability to serve customers market to market is a strong advantage for national account customers. Investments in private label and digital are also highly valued. Inflation contributed to growth, so it's not all volume-driven, but we're pleased. Large homebuilder business is part of national accounts, and we watch it carefully given volume pressures. On waterproofing post-Coastal, we were thoughtful in entering this segment. We kept existing waterproofing and believed the market dynamics would be pro-growth. We didn't see a national player and believed we could build the nation's leading waterproofing specialty distributor. Coastal has broadened opportunity; it's a technical, highly specified sale that tends to create repeat business. Given climate-related trends and a large addressable market, we believe there's enhanced growth in that segment and that we're well positioned as a leading player.

And our final question comes from Michael Rehaut with JPMorgan. Please proceed.

I was wondering, regarding your 2023 EBITDA guidance, how much contribution are you assuming from Ambition 2025, particularly related to bottom quintile performance, the digital initiatives and private label? Could you add color around those points?

Yes. The easiest way to dimensionalize it is to think through revenue and imply a standard EBITDA margin. For Ambition 2025 initiatives excluding M&A, think of greenfields, OSRs, customer experience, and sales workforce improvements—those probably add in the mid-single-digit revenue range. M&A we've already done carries over about 2% to 3%. So if you take that and dimensionalize into dollars and then apply an average contribution to the bottom line, you get to a number that aligns with our guidance.

We will conclude our question-and-answer portion of today's call. I would now like to pass the conference back over to the management team for closing remarks.

Thank you, Daniel. I appreciate all of the questions today and everyone attending. I do want to reflect on what was a really terrific 2022—market conditions were obviously helpful, but the execution our team demonstrated was outstanding and delivered results beyond what was anticipated 12 months ago. I'm certainly excited and want to offer my sincere thanks to all of our 7,000-plus team members for a really outstanding 2022. Thank you all on the call for your interest in Beacon, and we wish you the best this year.

With that, we will conclude today's conference call. Thank you for participating. You may now disconnect your lines.