QXO, Inc. Q1 FY2023 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Beacon First Quarter 2023 Earnings Call. My name is Bethany, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this call. At that time, I will give you instructions on how to ask a question. Operator instructions were provided. As a reminder, this conference call is being recorded for replay purposes. 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, Bethany. 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'll 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 relate strictly to historical 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 2022 Form 10-K. Second, the forward-looking statements contained in this call are based on information as of today, May 4, 2023. 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 those 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. Good afternoon, everyone. Let's begin on Slide 4. The team executed well in an uncertain environment to start the year, delivering record first quarter net sales and cash flow. Average selling prices were up high single digits year-over-year. This, combined with acquisitions, more than offset lower volumes. Daily sales increased approximately 1% year-over-year, slightly lower than our initial expectations given well-publicized weather and non-residential contracted destocking in the quarter. Residential volumes were down compared to a strong prior year comparable as we expected. Markets with higher exposure to new residential construction remained weak during the quarter. In particular, Texas, one of the largest single-family new construction markets in the country, contributed to the decline. Storm-exposed areas such as Florida showed growth during the quarter due to the volumes associated with the rebuilding from Hurricane Ian. And it's important to remember that 80% of our sales come from repair and replacement activity. Non-discretionary demand from reroofing end markets showed resilience during the quarter. As we had expected, non-residential volumes were down. We believe largely as a result of continued destocking at the contractor level as opposed to a decline in end market demand. Commercial roofing supply chains continue to ease, and we are seeing normal lead times on the majority of products. Our complementary products business benefited from the acquisition of Coastal Construction Products in November of last year. We are pleased with the performance of our new waterproofing division, and it represents a significant growth opportunity for Beacon. Growth in our siding products also contributed to the higher complementary sales year-over-year. Gross margin reflected the inventory profit roll-off that we expected in a mostly stable price environment, and we recorded our second highest first quarter adjusted EBITDA in history. We also delivered strong first quarter cash flow as we continue to right-size our inventory, which we began in the third quarter of last year. We used cash flow generated in the quarter to invest in value-creating initiatives towards achieving our Ambition 2025 targets while maintaining net debt leverage at the low end of our target range. During the quarter, we acquired Coastal Exteriors, Prince Building Systems and Al's Roofing Supply, adding a total of seven branches, expanding our customer reach. We welcome their employees to the Beacon team. We have also come out of the box quickly this year on greenfields, adding five new branches and enhancing service to our customers. Our share buyback program continued under the expanded $500 million authorization announced on our fourth quarter conference call. In summary, the fundamentals of end market demand have performed as we outlined on our call in February. As a reminder, what we said was the overall residential market will be down in the mid to high single digits, led by new residential construction. We said storm demand would be a tailwind on a return to the 10-year average and the non-residential markets would be about flat, but volumes would be affected in the first half by contracted destocking. And despite a weaker demand environment, we expected price stability. In the first quarter, the market has broadly met our expectations, and our team has executed well. Now please turn to Page 5 of the deck where I'll provide a brief update on our strategic initiatives. First, let me highlight a couple of ways that we are building a winning culture. There's nothing more important than the health and safety of our team members. During the first quarter, we tapped one of our top field operators to lead an area fundamental to what we do and announced that Dan Worley has taken a critical role as Vice President of Environmental Health and Safety. Dan's passion for safety and extensive operations experience in his role running our Mid-Atlantic region will be invaluable as we advance our focus on safety. We also held our annual company-wide safety stand-down, in which all 490 branches and 7,500 employees paused and recommitted to making every day safer. The power of caring for one another and getting our employees home safely every night is a top priority, and we will focus every day on improving our employees' ability to recognize hazards and avoid them. We're also driving growth above market and enhancing margins through a set of targeted initiatives. Many of you will recall from our Investor Day last year that delivering an industry-leading customer experience is central to achieving our goals. Our customers have shared what is most important to them, and we are able to use this feedback to differentiate our value proposition. Based on that feedback, we created a detailed and actionable plan that we replicate across our markets. We are building accountable teams with multiple points of customer contact, we are investing in quickly and effectively resolving issues for our customers, we are leveraging our OTC network to improve service, and we are seeking feedback from our customers and employees to identify wins and opportunities, driving a continuous improvement mindset. Engaging with our customers during the most important moments and leveraging our strategic advantages to solve the most pressing needs when and where they need it is the basis for our success. Since the beginning of last year, we have rolled out these best practices to eight markets and have launched in an additional six markets during the first quarter. We are seeing tangible improvements in on-time delivery, photo drop confirmations, sales growth and wallet share. Customers have told us they want a better customer experience, and we are uniquely positioned to deliver on that need. Expanding our customer reach is also a major lever in our growth plans, which includes investments in greenfields and tuck-in acquisitions. Our dedicated greenfield team is executing on a robust pipeline. We added five greenfields year-to-date, improving efficiency and enhancing customer service, a solid start to our goal of adding at least 15 locations in 2023. We have now opened 21 new branches since the beginning of last year, well on pace to exceed our Ambition 2025 goal. Our M&A team also completed three acquisitions in the quarter, adding seven branches. And in total, we have acquired eight targets, adding 29 branches since announcing our Ambition 2025 plan, expanding our opportunity in markets across the country. Our set of initiatives designed to grow margins is also showing results. Our digital capability is a clear competitive differentiator for Beacon and sales through our online platform increases customer loyalty, generates larger basket sizes and delivers 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 committed to building upon our technology leadership by further investing to make it easier for customers to do business with us. The launch of our new Beacon Pro+ mobile app late last year is an example of how we are extending our leadership position. During the first quarter, we grew digital sales 11% year-over-year and achieved an all-time high of more than 19% of residential sales through the digital platform. And as I've said since I joined the company, we will drive operational excellence through continuous improvement initiatives. Our focus on the bottom quintile branches has generated significant improvements to our service levels as well as contribution at both the sales and EBITDA lines. The improvement benchmark is relative to the company's average branch performance. And as the performance of the average branch moves higher, so does the threshold for the bottom quintile. For 2023, our so-called Mendoza Line, the cutoff that selects branches for the performance improvement plan is higher than the prior year by approximately 125 basis points. Through this rigor and discipline, we will continue to drive the performance of the overall company higher. In addition, our initiatives to improve our fleet productivity, uptime and reliability are also showing results. We have metrics and goals to increase productivity and reduce the average age of our tractors. In the past two years, we have upgraded 60% of our tractor fleet, reducing the average age by more than three years, providing a more efficient fleet and the added benefit of improving driver retention while reducing emissions. We are also optimizing utilization of our current assets, moving existing tractors to our greenfield branches at every opportunity. Lastly, our strategic initiatives are designed to create shareholder value. And we are committed to improving our returns for all owners of our stock. During the first quarter, we retired nearly 400,000 shares. The share repurchases demonstrate both our commitment to delivering value to shareholders and our confidence in the future. It continues to be an important part of our balanced capital allocation, demonstrating our commitment to creating shareholder value and confidence in Ambition 2025. Our balance sheet has become a real strength for us, allowing us to invest in our capital allocation priorities and maintain the flexibility to adjust quickly to opportunities as they arise. We continue to 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 I'll pass the call over to Frank to provide a deeper focus on our first quarter results.

Thanks, Julian, and good evening, everyone. Turning to Slide 7. We achieved nearly $1.7 billion in total net sales in the first quarter, up a little more than 1% on a per day basis year-over-year as higher average selling prices combined with the impact of acquisitions more than offset lower organic volumes. Total reported net sales were up more than 2.5%. As a reminder, we had one additional selling day in the 2023 first quarter versus the prior year. As I'm sure you are aware, we had winter weather and precipitation in large swaths of the country during the quarter, especially in March. In the aggregate, price contributed approximately 9% to 10% to revenue growth, while organic volumes per day were down 12% to 13%. Acquisitions, including Coastal Construction Products, are performing well and contributed more than 4% to daily net sales year-over-year. Our backlog, which remains weighted toward non-residential orders, continued to convert in the quarter and continued to come down from its peak in the second quarter of last year, while it remains approximately twice what it was before COVID. Residential roofing sales per day were lower by approximately 1% as higher year-over-year prices in the high single-digit range were offset by low double-digit volume declines in part from lower shipments in regions with higher exposure to single-family new construction. It should also be noted that the prior year quarter was a record first quarter of shingle comparable. And while our residential volumes were down, we compare favorably to industry volumes, continuing a trend that started approximately four quarters ago. Non-residential roofing sales declined by 9% on a per day basis, driven by the lower shipments as destocking by our customers was partially offset by higher prices in the mid-teens year-over-year. Complementary sales per day increased 21% year-over-year as the acquisition of Coastal drove higher sales of our waterproofing products year-over-year. Strength in siding products as well as higher selling prices across all of our complementary product lines with the exception of lumber also contributed to the growth. 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 8, we'll review gross margin and operating expense. Gross margin was 25.5% in the first quarter, in line with the guidance we put out in February and solidly above pre-COVID Q1 gross margin levels. Price/cost was unfavorable by approximately 75 basis points as higher average selling prices were offset by higher product costs year-over-year. You will recall that we had broad-based inflation across our products in the year-ago period, including a shingle price increase in January of 2022, which led to significant inventory profits. Partially offsetting the year-over-year roll-off of inventory profits was lower non-residential sales mix and higher digital and private label sales. Adjusted OpEx was $357 million, an increase of $34 million compared to the year-ago quarter. OpEx as a percentage of sales increased to 20.6% or 140 basis points year-over-year. The year-over-year change in adjusted OpEx was driven primarily by expenses associated with acquired and greenfield branches. Together, these branches accounted for approximately $20 million of the year-over-year increase. Inflationary pressures, wages, benefits, insurance, fleet, fuel and travel and entertainment as well as lease-related rents, real estate taxes, utilities and maintenance costs also contributed to the increase. These increases were partially offset by the resetting of our variable compensation accruals to the 2023 incentive targets. Our focus on branch productivity remains a priority. And while the chart reflects the typical seasonal pattern, we are confident that we are properly staffed to meet the ramp in the construction activity we are seeing in Q2 and provide the high level of service our customers expect. Our team remains watchful of changing market conditions and is ready to respond to the impact of higher interest rates on our business. At the same time, we are focused on investing in initiatives through the cycle to drive above-market growth and margin enhancement as part of Ambition 2025. Our investments in projects related to future growth, including our sales organization, customer experience initiative, dedicated M&A and greenfield teams, pricing tools, e-commerce and branch optimization continued during the quarter. Ambition 2025 investments totaled approximately $9 million within the operating expense line in the first quarter. Turning to Slide 9. Operating cash flow was a record for the first quarter at $102 million as we continued with the inventory rightsizing initiative we started mid last year. On a year-over-year basis, first quarter net inventory was lower by approximately $170 million, even with higher product costs year-over-year, inventory acquired through M&A and new inventory to support our greenfield branches. It is also worth noting that we have generated $667 million in adjusted operating cash flow over the last four quarters, a true testament to how hard our team has been working. Our capital allocation approach remains consistent with what we laid out at Investor Day. We will deploy cash in a balanced manner between organic and inorganic growth opportunities and shareholder returns. With ample balance sheet capacity, we are not only well positioned to invest in greenfield and M&A, but also the upgrading of our fleet and facilities to support our customers and employees. We are also investing in the process and technologies that will lay the groundwork for improved service, future growth and branch productivity. Net debt leverage at the end of the first quarter was at the low end of the 2x to 3x range outlined at Investor Day. And our available liquidity stands at more than $1.1 billion. Share repurchases in the first quarter were made through a Rule 10b5-1 plan and resulted in the retirement of approximately 400,000 shares. Net of share issuances for stock-based compensation, we reduced our common shares outstanding to 64.0 million at March 31 versus 68.7 million at the same time last year. We continue to have approximately $477 million remaining on the recently refreshed $500 million buyback authority we announced in February of this year. We have ample capacity to invest and remain confident in our ability to successfully capture opportunities in changing market conditions as they develop throughout the year. With that, I'll turn the call back to Julian for his closing remarks.

Thanks, Frank. Please turn to Page 11 of the slide materials. Before we head to Q&A, I'd like to update you on our expectations for the remainder of 2023. We continue to expect overall market demand to remain healthy, albeit lower than the last two years. We expect new residential construction to be down significantly, but the overall sentiment has improved through the first quarter. Residential reroofing end markets will be down, but total volume will be better than pre-pandemic levels, supported in part by the 20-year reroofing cycle. Given all the storm activity in Q1, we now have higher confidence in our assumption of a return to the 10-year average storm demand. We continue to see the non-res markets about flat. However, our volumes will be down year-on-year as contracted destocking was more than originally anticipated. For the second quarter, we expect total sales growth to be approximately 3% to 5% year-over-year and slightly better than the April pacing of 2% to 3%, given the record comparable month a year ago. Keep in mind that the second quarter of 2022 and 2021, we reported 28% and 21% net sales growth, respectively. We recently announced a shingle price increase effective later this month corresponding to the manufacturer's announcement. Our expectation is that our team will execute with the same discipline and rigor as we have in the past, and we expect realization to reflect local market conditions. We expect gross margins to be in the mid- to high-25% range, which is down relative to the record prior year quarter, which you will recall had significant inventory profits. Our full year expectations remain unchanged. We continue to expect net sales growth in the range of 2% to 4%. This includes contributions from acquisitions previously announced. Regarding gross margin, we expect inventory profit roll-off on a year-over-year basis, partially offset by our improvement initiatives, including higher private label and digital sales. Adjusted EBITDA expectations remain between $810 million and $870 million for the full year 2023. Meeting our customers' needs when and where they need our products and services is our priority. We will balance those needs with disciplined inventory management and other working capital initiatives to drive higher cash conversion compared to 2022. Our focus will continue to be on the areas within our control, including productivity improvements, delivering operational excellence, pricing and daily execution on safety, service and efficiency. We will continue to deploy capital on initiatives that we expect will result in accelerated growth, including executing on our robust pipeline of acquisitions and delivering on our target of at least 15 greenfield locations as well as investing in our branches to improve their quality for our customers and our employees. We're investing to improve our operations, delivering results today but building the organization to enhance our growth tomorrow. We remain committed to generating returns for our shareholders and will continue to repurchase shares. In summary, we are well positioned to outperform the market in this complex demand environment, creating value for all our stakeholders. We are looking forward to the rest of 2023 and helping our customers build more as we enter a key part of the construction season. And with that, Bethany, I'd like to open the lines for questions.

Thank you. Operator instructions were provided. Our first question comes from the line of Kathryn Thompson with Thompson Research Group. Please go ahead.

Hi. Thank you for taking my question today. In your prepared commentary, you acknowledge that your May shingle price realization would be based on local market conditions and today with heavy material producer earnings releases, we saw a wide variability in terms of residential, some markets recovering like Houston and other markets, like Salt Lake City still lingering. Could you give more color on market-by-market in terms of what you're seeing with residential trends and how that impacts you? And then on the residential side — and then on the non-res side, really more, how are the mega projects that are sort of pervasive in the market? What is Beacon's role in these types of projects? And can you work with companies like Samsung for these mega projects? Thank you.

Thank you, Kathryn. There's a lot to unpack in the question. Let me start on the residential side and the market-by-market view. As we said in our prior call and in our communications, this year is very different from the last couple of years when market conditions were fairly consistent across markets. So we have seen differences so far this year, and I highlighted them in my prepared remarks. Texas has been down. Florida has been up. We've seen significant weather across the country. California was weak in the first quarter, but we would expect that to recover quite strongly given the rain and snow that fell, and we are starting to see that return. We would expect California to be strong. I think Texas will recover as sentiment on new residential construction has improved and we saw some significant weather activity in Texas. Florida has been affected by storm activity, as well as carryover from Hurricane Ian last year. We expect to see some carryover in the Upper Midwest from storms that happened there last year. Broadly, we expect decent markets in the larger areas of the country where a lot of shingles move. There are a couple of smaller markets with continued weakness, but they are generally smaller. We remain confident that the overall demand environment across the country on the residential side has probably improved since the beginning of the year. On commercial and mega projects, we do have a national account group that works directly with some of the large developers, and we certainly play a role in going to market with our contractor customers on the commercial side of the business. What we're seeing in commercial is likely a shift away from large new construction projects toward more repair and replace activity, which we think was delayed during COVID and the supply chain constraints over the last couple of years. During that period, contractors, manufacturers and developers focused on completing large projects, with less emphasis on repair and replace. We see a return to more repair and replace activity, which tends to be made up of many smaller projects that we can serve well. We remain fairly optimistic. As we said, we've maintained our forecast for the overall commercial market to be about flat year-over-year, with some mix shift away from new construction toward repair and replace. Contractors were likely holding more inventory than we had anticipated at the start of the year, and we have seen that deplete during the first quarter. I hope that insight was helpful.

Yes, that's super helpful. Thank you very much.

Thank you. Our next question comes from the line of Mike Dahl with RBC. Please go ahead.

Hi. Thanks for taking my questions. On the residential side specifically, obviously there's been a few periods of inventory management and destock across distribution. Where do you stand in terms of residential shingle inventory today? Are you still destocking? Have you started to restock at all given some of the storm demand? And tying into that, you disclosed the sales per day in April in total. Could you split out where residential stood on sales per day?

Yes. Hi, Mike. On the inventory piece on the volume side, forget about dollars for a minute, but on the volume side, we were down significantly on a year-over-year basis on shingles. Think in the high teens to low 20s percent volume decline. On a sequential basis, we did start to build some inventory in the quarter. In storm markets and some of the recovering markets Julian talked about, you'll see us add product in those markets. At the same time, where we have markets that are on the softer end, we're likely going to continue to shape inventory there. On the non-res piece, as you look at the contractor destocking, that will probably allow us to be stocked a little bit in the second quarter as well. I wouldn't expect huge moves on inventory in the aggregate, but you will see some geographic changes and some line-of-business changes. In terms of April, yes, we gave the sales per day, up 2.5%. When you break it down, overall we were up on price about 4% and down low singles on volumes. Shingles were effectively flat, just fractionally down. Overall, the residential and the complementary side were favorable because of the continued contraction of destocking that you heard Julian mention. The commercial volumes were down in the mid-teens. So overall, commercial—with the addition of price—was down in the mid-single digits. But you're seeing the residential and the complementary piece, which is largely residentially exposed, do quite well.

I'd emphasize, Mike, that last year's April was a very, very strong month. So to see that type of relatively flat number on residential shingles in April is an extremely positive sign for us.

Yes. For sure. All right. Thanks, Julian. Thanks, Frank.

Thank you. Our next question comes from the line of Marius Morar with Zelman and Associates. Please go ahead.

Good evening, gentlemen.

Marius, how are you?

Good. Thank you for taking my question. We've had a few large storms over the last two months. Do you have any insight into how much these storms are going to contribute to demand, how meaningful they are?

It's still early and these things tend to build over time, but we came into the year saying we expected a return to the 10-year average storm demand, which is our planning assumption. That represented a tailwind to us this year because last year's storm demand was well below the 10-year average. We've seen a very active storm season through the first few months of the year: some in the Midwest, Texas, Florida, and the California storms with significant rain and snow that will inevitably lead to additional demand. While we don't have a complete view today, as of now we are confident that the storms we've seen in the first few months of the year are likely to lead to at least an average storm year, and with eight months to go we are biased to the upside relative to the 10-year average.

Marius, when you look at the insurance claims data, you see a bell curve where the second and third quarters are the really meaningful insurance claims quarters and the first and fourth quarters are lower. When we look specifically at the first quarter, we're up nicely over the 5-year average for the first quarter. There's a lot that has to happen in the second and third quarters, which are the big hail quarters. We did see some storms in April, which will help us as we progress through the second quarter. To Julian's point, we're more confident in our planning assumption now that we've seen some early storms.

Okay. That was very helpful. And then on commercial, any way you could maybe quantify the size of the destocking by the contractors? And do you have a sense of are we getting to the end of that? Or how long do you think it's going to take to play out?

On the destocking, in the Q4 call we called contractor destocking and thought it would last through the first half. We feel good about recognizing the issue and telegraphing it. If you think about it in terms of our internal targets versus where we ended up, we were probably a little bit understated on how much contractor destocking happened in the first quarter—maybe 3, 4, or 5 percentage points on the non-res side specifically. We do see that lessening through the second quarter month over month. We expect the single-ply element to finish destocking earlier than the insulation or ISO piece. Internally, we have that destocking going pretty much through the end of the second quarter and then getting back to where end market demand and our sell-through look very much the same.

To round that out, when you think of the supply chain disruption that impacted commercial product lines dramatically over the last couple of years, everyone was defensive and taking what they could get and holding it. Now supply chains are normalizing. We see the vast majority of products on normal lead times. Contractors tell us they are working through their inventory, and we would expect, as we said on the fourth quarter call, that destocking would deplete in the first half of the year. We still remain with that guidance.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Trey Grooms with Stephens. Please go ahead.

Hi. Thanks for taking my question. This is Noah Merkousko on for Trey. I wanted to touch on pricing. You've announced the price increase for May. Does the second quarter sales and margin guidance contemplate any traction on that increase? I know it will vary by market. And can you compare your best markets and your worst markets in terms of pricing? Are you seeing any competitive behavior today?

I'll let Frank provide some quantification, but on the second part: we expected relatively stable pricing and that's what we've seen. Over the fourth quarter and first quarter we've had a weak demand environment and seen stable pricing across markets. Overall I would characterize it as pretty benign. We've seen manufacturers pass through inflation; our cost structures are impacted by inflation in wages, rents and other areas. It's important for us to capture that pass-through. Overall, this is an environment where price stability has been important for us.

On quantification and the competitive landscape: we've been talking about inventory destocking in the resi channel for quarters, and demand out the door in the first quarter was lower year-over-year. In those situations pricing held up sequentially, which indicates where prices are holding. For the gross margin guide for the second quarter, we guided mid- to high-25s versus 27.6% last year. Last year you had follow-on pricing increases in January/February and April of a magnitude you rarely see, and cycling those inventory profits is at least a 200-basis-point headwind. We have a little mix help this quarter and some late-quarter help from the May increase, market by market. Given the mid-May timing of the announcement and items under contract where we must give notice, I would see the pricing impact more blended between the second and third quarters rather than a large immediate benefit in the second quarter.

Got it. That's really helpful. Thanks guys. I'll leave it there.

Thank you. Our next question comes from the line of Philip Ng with Jefferies. Please go ahead.

Hi, guys. This is Maggie on for Phil. If you can just talk about the pace of greenfields — we've seen that step up in the first quarter and you have another, I think, 10 planned for this year. How does that factor into your full year guide and are there margin implications as those ramp up?

We committed to a greenfield program last year and it took some time to stand up the team and get activity going. Last year the bulk of our greenfield activity happened later in the year; this year we expect to spread it more evenly and we pulled the trigger on a number in Q1. We expect a relatively similar pace quarter-to-quarter. Our goal is at least 15 locations in 2023, but this is a long-term commitment. When we see opportunities to get great locations in underserved markets where we can make a good return, we will take them. In the first couple of years these greenfields are dilutive to margin: we put capital in, they need to ramp operations and sales. The impact is relatively small at the company level but not zero. Our goal is to get them to breakeven and full operating levels as quickly as possible. In some markets we've done that in as little as 12 months; on average we think it's about three to five years. We work to shorten that cycle so they contribute positively sooner.

Great, thanks so much.

Thank you. Our next question comes from the line of Garik Shmois with Loop Capital. Please go ahead.

Hi, thanks. I was wondering if you could speak a little more on the supply chain on the residential side. Are you expecting to see any change there given some of the restocking and stronger storm demand? Will supply get tight again or will underlying dynamics on new residential and reroofing offset that?

We are seeing a more normal pattern of supply and demand, moving away from the tight environment of the last couple of years. Many manufacturers have committed to holding more inventory than historically. The first quarter was fairly normal with winter and then demand ramping into the second quarter and late summer/early fall. I expect manufacturers to be able to build some inventory over recent months. The wildcard is regional demand patterns this year: some regions will be tighter where there has been significant storm activity. I do not see total demand exceeding total supply in 2023; I don't expect industry shipments to tap out manufacturing capacity. So overall, a balanced environment with regional tightness where storms occurred.

Garik, I'd follow the storms and follow the exposure to new residential versus R&R, and you'll get pretty close to where it might be tight.

Okay. Thanks.

Thank you. Our next question comes from the line of Truman Patterson with Wolfe Research. Please go ahead.

Hi. Good afternoon, guys. Julian, I enjoy your baseball references. Question: you've been talking about price stability in the channels, especially on the commercial side. Have you seen any sequential moderation or pricing competition there from the OEMs on the non-res side? I'm trying to understand dynamics given lower volumes in Q4 and what looks like a 20% year-over-year decline including destocking in Q1.

Truman, as we've said in the prepared remarks and in Q&A, pricing has remained relatively stable sequentially in a demand environment that has been mixed. I wouldn't say we've seen no competition, but it's within a normal competitive range. I haven't seen anything that suggests unusual competitive pricing behavior from OEMs, distributors, or contractors. We control our pricing and intend to be disciplined and thoughtful about execution. I feel good about the call we made three months ago on expectations for this year.

Perfect. Thanks guys.

Thank you. Our next question comes from the line of David MacGregor with Longbow Research. Please go ahead.

Yes, good evening gentlemen. I wanted to ask about new stores. From a strategy standpoint, how are you thinking about targeting resources towards new markets versus existing markets, targeting new openings within existing OTC networks, and how you manage cannibalization? Could you talk about that?

Our branches in OTC markets are networked, so there's not really cannibalization. We develop a map of deliveries and understand what revenues and deliveries ought to belong to the new branch versus the existing branch, primarily for customer service and efficiency. A closer branch can support the customer better rather than running a truck 50 or 100 miles. The geographic aperture is wide. At Investor Day we said we had 60 or 70 target locations; that remains true and we've already deployed 20. It's a market-by-market, locally cultivated exercise to create local leadership in a market where we want to be more penetrated. Finding lease space today is easier than a year or two ago, though still tight in some places. When we open a new branch, in the pro forma we may transfer some revenue to that new branch to give it a head start. But it's not cannibalization nor new capacity into the market. We're trying to find white space between branches so they can support one another with inventory, trucks and people and ultimately improve service and drive sales.

Can you speak to the expected impact to OpEx this year just from the new store program?

Using Q1 as an example, the OpEx for greenfields specifically was about $5 million for the quarter. We'll cycle last year's greenfields as we go throughout the year. You heard Julian talk about the number we'll deploy this year. The cadence will be difficult to predict precisely, but if you think mid- to high-single-digit millions of incremental OpEx on a year-over-year basis, you'll be in the right neighborhood.

Thanks, Frank.

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Please go ahead.

Hi, guys. Doug Wardlaw for Mike. I wanted a little more insight on the first quarter and market demand. You stated storms were a bit heavier than anticipated. Could you break out more trends the quarter showed outside of weather being heavier?

If you break down the first quarter year-over-year by line of business: residential dailies were down a little over 1%—that's pricing up high single digits and daily volumes down low double digits, largely a new construction story, not an R&R story. Prior year was a record first quarter of shingle comparable. Non-res was down about 9% on a daily basis, probably 3-5 percentage points worse than we originally expected given the extent of contractor destocking. We called contractor destocking but may have understated magnitude. Complementary was up about 21% daily largely because of Coastal and Whitney acquisitions; the waterproofing platform is performing well and siding did well, particularly vinyl and fiber cement. The drag in that line was lumber and lumber pricing. I hope that color helps.

We called the markets at the end of the fourth quarter: new residential construction markets would be off substantially, residential reroofing is largely non-discretionary but could be impacted at the margin by higher interest rates and lower housing turnover, and commercial markets about flat. We may have underestimated contractor destocking, but we called it. We said storms would return to the 10-year average, which we feel good about now given the first quarter. April felt really good coming out of a weaker first quarter impacted by weather and destocking. Overall, we are confident about where we stand for the year and about what we can produce as a company.

Great, thank you guys.

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

Thank you, Bethany. In closing, we feel good about the macro environment and the company's performance. I want to thank our employees for their work over the last several months to start the year on a positive note. We've delivered record sales for the first quarter, record cash flow for the first quarter, and the second highest EBITDA number we've delivered in a first quarter. We have multiple paths to growth. In a lower demand environment, we were able to grow sales, and we believe we have multiple paths to margin expansion. We will be disciplined about capital deployment, looking at M&A, acquisitions and reinvesting in our branches to improve customer service. We're excited and thank you for your interest in Beacon. Have a wonderful evening.

That concludes today's conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.