QXO, Inc. Q2 FY2024 Earnings Call

Good evening, ladies and gentlemen, and welcome to the Beacon Second Quarter 2024 Earnings Call. My name is Elliot. I’ll 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. 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, Elliot. Good evening, everybody. And as always, we thank you for taking the time to join our call. Today, I’m joined by Julian Francis, our Chief Executive Officer; and Prith Gandhi, Beacon’s Chief Financial Officer. Julian and Prith will begin today’s call 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 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 2023 Form 10-K. Second, the forward-looking statements contained in this call are based on information as of today, August 1, 2024, 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. Good afternoon, everyone. I’m pleased to say that we delivered another quarter of solid execution on our growth initiatives. But before I begin our review, let me remind you of the assumptions that underpinned our prior outlook. We expected the residential roofing market would be down year-on-year as storm-related demand declined substantially and more than offset the improvement in new residential construction and non-storm-related reroofing. In commercial roofing, we said that there would be a contraction in the installation activity in the first half of the year, but our volumes would grow because of last year’s contract destocking. We also expected a shift to more repair and reroofing activity rather than new commercial construction. That would impact product mix in this part of our business. By and large, end market demand has performed as we expected, with commercial slightly better than anticipated and new residential slightly worse, and we expect storm demand to be in line with the 10-year average. Now let’s begin on Slide 4. Against this backdrop, our team demonstrated that our Ambition 2025 plan has created multiple paths to growth, and we delivered a record for quarterly sales. In the second quarter, average selling prices were up low-single digits year-over-year, which combined with contributions from greenfields and acquisitions to drive net sales nearly 7% higher, although slightly lower than our initial expectations given the weather in the quarter. And once again, we delivered double-digit adjusted EBITDA margins. Our gross margin came in at 25.6%, approximately 20 basis points above the second quarter of last year but below our expectations, largely due to the lower-than-expected contribution from inventory profits related to our April single price increase. Adjusted OpEx increased primarily from additional headcount as we maintain staffing at our branches to meet a higher level of anticipated activity. Additionally, the impact of recent greenfield locations and M&A yet to be fully synergized also negatively impacted operating leverage. We continue to use our balance sheet capacity to reinvest in the business, conduct M&A and return capital to shareholders. Since the end of the first quarter, we have acquired 21 branches including the recent announcements of Roofers Mart of Southern California, Extreme Metal Fabricators and Integrity Metals. Roofers Mart has a 40-year history serving contractors in the Los Angeles metro market and demonstrates our focus on growing our commercial roofing business. Extreme Metal and Integrity Metals extend our residential and commercial roofing product offering to include metal solutions to meet the needs in Florida’s coastal regions. Entering the second half of the year, we will be proactive in responding to local market conditions by adjusting inventory and staffing levels while maintaining Beacon’s high-caliber customer service. We’re investing in improving our operations, delivering results today while also preparing for the future, including investments in our leading digital platform, private label offerings and our pricing model. Now please turn to Page 5. As many of you know, we laid out our targets to drive above-market growth, deliver consistent double-digit adjusted EBITDA margins, build a great organization and generate superior shareholder returns. A relentless focus on our customers is central to how we operate and to achieving these goals. Our team is working every day to deliver a great customer experience and ensure we are building on our legacy of service. Let me provide you with an update on our strategic initiatives, starting with how we are building a winning culture. As part of our commitment to our team members’ wellness, we recently launched an upgraded employee assistance program. The new program has added emphasis on mental health as well as physical health to recognize the challenge today’s employees and their families face. One of our core values is do the right thing, and this applies to our efforts to build better for the environment. In May, we issued our third Annual Corporate Social Responsibility Report, which demonstrated our commitment to action and transparency on environmental and social topics. We proudly reported three years of progress towards our goal of reducing our emissions intensity by 2030. In addition, we outlined our Scope 1 and 2 greenhouse gas emissions and our efforts to reduce those emissions by operating a more sustainable fleet and investing in renewable energy. Our 2023 CSR report highlights how we are progressing on our commitment. I encourage all of our stakeholders to go to our website and view the full report. Our second pillar is driving growth above market and enhancing margins through a set of targeted initiatives. Expanding our customer reach continues to be a major lever in our growth plans, including our investments in greenfields and acquisitions. Our greenfield team continues to execute on our pipeline of new locations and we have opened 13 branches year-to-date. Each time we have a new branch, we add sales resources and reduce the average distance and time it takes us to reach our customers. This enhances our overall value proposition giving us the opportunity to earn market share. We have now opened 58 new branches since the beginning of 2022, exceeding our original Ambition 2025 goal of 40 total. On acquisitions, we discussed our recent purchase of Roofers Mart, Extreme Metals and Integrity Metals earlier. And we highlighted the acquisitions of Roofers Supply of Greenville, General Siding and Smalley & Company on our call in May. However, it is worth mentioning again that with the acquisition of Smalley and its 11 locations spread throughout the West, we have built the leading national specialty waterproofing distribution platform, with a track record of providing value-added solutions to contractors in both new construction and restoration markets. Since announcing our Ambition 2025 plan, we have acquired 21 companies adding 71 branches. In total, we have deployed approximately $690 million in capital towards these acquisitions, adding base year revenue of more than $800 million. In total, these acquisitions are performing ahead of our expectations. Our online capability continues to be a clear competitive advantage for Beacon, and sales through our digital platform increase customer loyalty, generate larger basket sizes and enhance margin by roughly 150 basis points when compared to offline channels. In the second quarter, we grew digital sales approximately 22% year-over-year. Digital sales to our residential customers were a highlight as we achieved our highest quarterly adoption ever at nearly 26%. We continue to invest to strengthen our platform and just last week commenced an enhanced alliance with EagleView, a leading provider of aerial imagery, software and analytics. This collaboration makes it easier for contractors to quickly and accurately place digital orders, allowing them to run their businesses more efficiently and, as such, choose Beacon as their supply partner. Our focus on commercial roofing solutions is one of the key growth initiatives of our Ambition 2025 plan. We outlined above-market growth targets and have been taking steps to become the market leader. To achieve this goal, we must develop best-in-class talent. In the past year, we launched a new training program. Hundreds of employees have attended the e-learning and hands-on sessions with over 150 completing the advanced level certification. Team members improve their understanding of commercial roofing basics, including product details, installation techniques and all varieties of low-slope roof systems. Through a more knowledgeable and confident branch and sales team, we are better able to support the needs of our commercial contracted customers and create positive interactions that will increase loyalty, resulting in higher wallet share. Now, as we have discussed in several quarters, we are enhancing productivity and capacity through our continuous improvement and operational excellence initiatives. Our focus on the bottom quintile branch process has generated meaningful contributions to EBITDA and this year is no different. Through this process, we have already generated approximately $3 million additional dollars from the class of 2024. Our branch optimization efforts are also showing results, increasing storage capacity including yard flow and optimizing product placement for picking efficiency, all of which improves branch productivity and supports increased sales from existing assets. And all these tools are deployed to drive synergies from our acquisition portfolio. Through a systematic approach to integrating acquired branches, we are able to achieve top-line and bottom-line performance improvements. As we have mentioned on previous calls, our recent acquisitions that have yet to be synergized are likely to be dilutive in the near term. But I'm pleased to report that the margins in our portfolio as a whole continue to improve relative to the pro forma at the time of the transaction. And fourth, let's review how we are creating shareholder value. As previously announced during the quarter, we entered into an additional accelerated share repurchase program in the amount of $225 million. The buyback program demonstrates both our commitment to delivering value to shareholders and our confidence in the Ambition 2025 plan. As you can see, we truly have multiple paths to growth and margin expansion through the cycle. We have a differentiated approach and have built the tools to achieve our Ambition 2025 targets. Now many of you know or met Prith Gandhi, our CFO since May. I'm very pleased that Prith joined us and as I said in the last call, when I welcome him, Prith's proven track record in financial leadership, especially in the building products industry, makes him a great addition to our team. Now I'll pass the call over to Prith to provide a deeper focus on our second quarter results.

Thanks, Julian, and good evening, everyone. Turning now to Slide 7. We achieved almost $2.7 billion in total net sales in the second quarter, up nearly 70% year-over-year primarily driven by the impact of acquisitions and higher average selling prices. As Julian mentioned, we had wet weather and precipitation in large parts of the country, particularly in May, as well as excessive heat throughout the quarter that impacted the number of roofing days during Q2. Nevertheless, we were able to achieve organic sales growth across all three lines of business and set a new quarterly sales record. In the aggregate, price contributed over 2% to revenue growth, while organic volumes were up less than 1%, including contributions from greenfield. Acquisitions completed within the last 12 months are performing well and contributed more than 4% growth to daily net sales year-over-year. Residential roofing sales were higher by more than 2% as higher prices were partially offset by lower shipments in regions that are lapping higher storm and hail demand, including in Florida. Recall that Q2 2023 was a record second quarter for shingle shipments. And while our residential volumes were down on a year-over-year basis, the R&R market remains resilient and consistent with our planning assumptions. Beacon's volumes compared favorably to industry shipments or ARMA during the quarter, but it is always important to keep in mind that there is destocking or restocking at the distributor level in any given quarter. With that in mind, we estimate that we grew at least in line with the market. Our team executed the April shingle price increase to discipline, achieving good realization regionally. As a result, we achieved price growth in the low to mid-single-digit percentages year-over-year. Non-residential sales increased by more than 11% based on strong R&R activity and the comparison to low second quarter 2023 sales, which were influenced by destocking at the customer level. Prices declined in the low single digits year-over-year, but remained stable on a sequential basis. Bidding and quoting activity remains at healthy levels. We also continue to see a shift from new construction to repair and reroofing activity in the second quarter. Complementary sales increased by more than 12% year-over-year as acquisitions drove higher sales of our specialty waterproofing products. Selling prices were higher by low single digits year-over-year. Please keep in mind that our complementary product category now has approximately 70% residential and 30% non-residential exposure. Turning to Slide 8. We will review gross margin and operating expenses. Gross margin was 25.6% in the second quarter, up nearly 20 basis points year-over-year. Slower realization of the April shingle price increase was largely matched by the timing of the inflow of higher product costs. Therefore, we did not produce the level of inventory profits we initially forecast. That said, our gross margin performance in the quarter remains well above historical Q2 gross margin levels. In the aggregate, on a year-over-year basis, price/cost was positive by nearly 30 basis points in the second quarter. The execution of the April shingle price increase kept price above product inflation. In addition, higher digital channel sales and sales of our private label products continue to be accretive to Beacon's gross margin. However, these sales were offset by higher non-residential sales mix impacts and the dilutive impact of acquisitions and greenfields completed in the past year. Adjusted operating expense was $441 million, an increase of $63 million compared to the prior year quarter. The change in adjusted OpEx was driven primarily by additional head count in our existing branches. You will recall from our Q1 call in May that we made a conscious effort to ensure that we were appropriately staffed to meet the forecast ramp in seasonal activity. In addition, expenses associated with acquired and greenfield branches contributed approximately $27 million of the increase in total operating expenses. Inflation in wages, benefits, rent, professional fees and T&E also contributed to the increase in operating expenses. As a result, adjusted operating expenses as a percent of sales increased to 16.5%, up 140 basis points year-over-year. As mentioned earlier, demand in several key markets, including Florida, was either impacted by wet weather, severe heat overlapping record shingle volumes in the prior year, resulting in lower operating leverage than we expected on our call in May. As we have demonstrated in the past, we are adjusting to local market conditions and will balance operating efficiency and high service levels in the second half of the year. Investments in Ambition 2025 priorities to drive above-market growth and margin enhancement also continued in the quarter. These investments include initiatives related to our sales organization, private label pricing tools, e-commerce technologies and branch optimization. Now turning to Slide 9. Operating cash flow was negative $48 million in the quarter. As a reminder, given the seasonal pattern of working capital needs in our business, we typically use cash in the first half of the year and generate cash in the second half of the year. Net inventory reached a seasonal peak at the end of the second quarter, up $259 million compared to the end of the second quarter of 2023. As mentioned on the first quarter call, we built inventory to ensure adequate product availability to align with the hype of construction activity. Higher inventory year-over-year is also attributable to inventory acquired through M&A and to support greenfields. We continue to expect strong cash generation in the second half of the year, but now expected to be weighted towards the fourth quarter given the inventory build into Q2. While Julian previously covered the share repurchase program, let me provide some additional details that may be helpful. Share repurchases in the second quarter were made through a $225 million accelerated share repurchase plan and resulted in the retirement of approximately 1.9 million shares or $180 million during the second quarter. As a result, net of share issuances for stock-based compensation, we reduced our common shares outstanding to 61.9 million on June 30 versus 63.6 million at March 31. The remaining $45 million equity forward contract is expected to settle in the fourth quarter of 2024 and result in the estimated repurchase and retirement of approximately 500,000 additional shares as of June 30. We also continue to invest in organic growth, upgrading our fleet and facilities to support our customers and employees. In total, we expect to deploy approximately $125 million in capital expenditures during the full year of 2024. Our capital allocation will remain balanced between deploying cash in our business and executing on the active and robust value-creating acquisition pipeline. Net debt leverage at the end of the second quarter was 3.2 times trailing 12 months adjusted EBITDA. Given the substantial cash generation expected in the back half of the year, we are well positioned to pay down our seasonal borrowings and bring down net debt leverage closer to the midpoint of our targeted range. At the same time, we intend to continue to invest in the processes and technologies that will lay the groundwork for improved service, future growth and branch productivity. With that, I'll turn the call back to Julian for his closing remarks. Julian?

Thanks, Prith. Now please reference Page 11 of the slide materials. Before we head to Q&A, I'd like to update you on our outlook for the remainder of 2024. We expect the momentum we experienced in the first half and outlined at the beginning of this call to continue into the third quarter. We expect that the residential repair and reroof market demand will be lower this year, driven by lower storm demand which, at this point, appears to remain on track to meet our assumption of the 10-year average. We continue to believe non-storm related demand will be higher in both new construction and aged replacement despite higher interest rates. In our commercial roofing business, we monitor the Architectural Billing Index, which continues to remain significantly below 50, indicating contraction in activity. And while we expect better-than-expected repair and reroofing activity to continue, contracted destocking was largely over at the end of the second quarter of 2023, and so the year-on-year comps should return to more normal levels. For the third quarter, we expect total sales per day growth to be in the high single-digit range year-over-year, above the July sales growth of low single digits per day. We expect gross margin to be in the high 25% range, around 30 basis points higher than in our second quarter. This includes current expectations regarding our announced August price increase realization. Operating expenses are expected to increase year-over-year, largely attributable to the higher head count from greenfields and acquired branches. As mentioned earlier, our focus on operational efficiency and proactively managing resources will intensify. As a result, we expect adjusted operating expenses as a percentage of sales to be in line with the third quarter of last year. Regarding the second half of the year, we remain focused on areas within our control, including sales execution, inventory reductions and cost management. Our full year net sales expectation is for growth in the 6% to 8% range, including acquisitions announced year-to-date. Please note that we have two extra selling days in 2024 as compared to 2023. On gross margin, we continue to expect to be price/cost neutral, resulting in a full year gross margin percentage in the mid-25% range. We now expect that sales growth and cost discipline will result in full year adjusted EBITDA expectations of between $930 million and $970 million, inclusive of recently acquired businesses. And as Chris mentioned, our focus on working capital is expected to result in strong cash flow generation in the second half of the year. We have a resilient business model and a leadership team capable of adjusting quickly to take advantage of opportunities in the market as they develop. 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 greenfield locations, which we now expect to result in more than 25 branches in 2024. In summary, we're well positioned to continue to outperform the market in this dynamic demand environment, creating value for all our stakeholders. We are looking forward to the rest of 2024 and helping our customers to build better and build more. And with that, Elliot, I'll open it up for questions.

Thank you. We now turn to Michael Rehaut with JPMorgan. Your line is open. Please go ahead.

Hi, thanks, good afternoon and thanks for taking my question. Wanted to first zero in a little bit on the SG&A in 2Q, and you kind of reviewed in your prepared remarks on some of the drivers that appeared to be a bit higher than expected on a year-over-year basis and as a percent of revenue. At the same time, you said you're focused on driving efficiencies in the second half and expect percent of sales, SG&A to be flat year-over-year. So what's driving the, let's say, were there certain temporary elements that drove the higher expense in the second quarter relative to expectations and what are the actions that you're taking to maybe get that back in line on a percent of sales year-over-year basis for the back half or at least for the third quarter?

Thanks, Michael. This is Julian. That was a key question for our second quarter. It was a really difficult quarter to manage at a branch level. We saw record daily sales but it wasn't consistent because of the weather. We were staffed up to serve that high demand level, but it was never consistent. Managing that on a day-to-day basis, we didn't do it as well as I'd hoped, and that was a big driver of the higher OpEx. We also added a number of greenfields and acquisitions earlier in the year than we've done previously, which adds to our total OpEx. That drove a year-over-year increase as well. The variability in day-to-day volume meant the inventory and staffing were ready for higher demand, but the inconsistent demand made it tricky to manage, and we missed a bit on that side of things. Looking forward, we've sat down with our operating groups and decided we have to get this back in line and create operating leverage from sales growth. We've already started taking action in June and July to ensure that we have the right level of staffing for the demand in the market. We're seeing some variability in day-to-day sales, but we are being much more aggressive in managing staffing levels on a daily basis than we were in the second quarter. We think we'll work our way through that and get back to the proper level. Prith may add specifics.

Just a couple of points of color. The overall OpEx increase was $63 million year-over-year; $27 million of that came from M&A and greenfields. When we spoke in May, our expectation was that the destock component of OpEx would be relatively flat; remember that was $22 million in Q1. Some of the acquisitions we've done have significant work to bring them up to create value, and we've had some timing issues with that. So that's part of the reason as well.

Great. Now thank you for that. I appreciate all the detail there. I guess, secondly, just thinking about bigger picture on the gross margin side, I think you highlighted some of the incremental benefits that you continue to get from the bottom quintile work. Conceptually, how should we think about bottom quintile contributions over the next couple of years? Should they continue at a moderate size, perhaps given that low-hanging fruit has been addressed, or does it get incrementally tougher? And could you review other opportunities around gross margin over the next couple of years from a strategic initiative standpoint?

Certainly, we've seen dramatic improvement from our bottom-quintile branch initiative and it has been a real highlight. It is incrementally harder now to drive more, but we reset the branches each year so we still see opportunity. We've expanded our thinking to explore moving each quintile up to the next level. The pricing model, private label work and digital all contribute to margin. We were challenged this quarter on price coming through in the market. We implemented the April single price increase, but realization was variable across regions. We had strong realization where demand was strong and weaker realization in softer markets like Florida. There's still work to be done on pricing, private label and digital. We continue to believe these initiatives will drive margin and that our bottom-quintile branch process will continue to contribute. We are also looking for ways to expand that process to more branches to work the full gamut of the opportunity. Finally, note that mix has shifted more toward commercial; we believe that commercial has a great return on capital but lower gross margin, so we will continue to look for ways to improve margin there as well.

Great. Thanks so much.

We now turn to Garik Shmois with Loop Capital. Your line is open. Please go ahead.

Hi, thanks for taking my question. I was wondering if you could talk about the acceleration you're expecting on a daily sales basis here in the third quarter. Starting July was up low single digits and you expect to be up high single digits for the quarter. Can you unpack the drivers of the stronger expected August and September?

The market overall has been good. We saw record daily sales in Q2 on a day-to-day basis, but it wasn't consistent. We think some of the weather impact in Q2 will be pushed into Q3, so demand hasn't gone away. If you need a roof, you'll get a roof and some work shifts into later days. Also, there's an August 1 price increase on shingles, which went into effect and will show up on the top line this quarter. The back half of the year tends to be more biased toward activity, so we expect continued demand. We're somewhat more bullish on commercial than we were coming into the year, and residential reroof has been good. Storm demand should come in around the 10-year average, which aligns with our assumptions. Overall, some demand got pushed out of Q2 and is likely to appear in Q3.

We now turn to Adam Baumgarten with Zelman & Associates. Your line is open. Please go ahead.

Hey guys, give a sense for maybe how many days on the roof were lost in the second quarter? And was it across both residential and commercial? Or is it more focused on residential?

So Adam, I’ll let Prith touch on it. I try to avoid being a weatherman; we get weather every day. There was a well-reported impact, but in terms of the number of days, we do watch that, though it is less indicative than the total market. We think it did have an impact and that some of it was pushed into Q3. Prith?

It’s generally biased toward the residential market because many of our deliveries are on top of the roof. Between normal weeks and weeks where we've experienced weather, the demand difference is about low-single digits. We think about one-third of the weeks in the quarter were affected by weather.

Thank you.

Our next question comes from David Manthey with Baird. Your line is open. Please go ahead.

Yes. Thank you. Good afternoon. Relative to your comments on lack of expected inventory profits, I’m a bit confused as to what happened there. I think early in the year, no one really thought that the single price increase would fully stick and you’d be able to get low to mid-single digits, but the gross margin fell short of your expectations anyway. I’m assuming you didn’t play inventory timing games. Maybe you could help me understand the dynamic there.

I'll touch on it and Prith can quantify. Coming into the quarter, we expected better price realization than we saw. We normally see realization climb over several weeks as price implementation reaches the full customer base, which generates inventory profits early on. In this case, we got good realization in strong markets, but in weaker markets there was some delay in implementing the increases. As the quarter went on, we did not get it implemented consistently across the country. Demand remained weak in some markets, so we didn't generate the inventory profits we expected in those areas, even though we did in others. When you add it up, we expected a much better realization across the entire country than we actually achieved. Delays in implementation to match competitive situations meant we didn't get the typical early spike in inventory profits, and inventory costs rose through the quarter while prices only modestly exceeded costs.

The only thing to add is we use weighted average inventory costing. On days even when you're not selling, the weighted average cost of inventory, if you’re buying, continues to rise, and we were buying inventory throughout the quarter. That impacts the inventory profit dynamic.

Our next question comes from Mike Dahl with RBC. Your line is open. Please go ahead.

Yes. Thanks. Just a follow-up to that: given what you articulated around the path of realization on price and inventory profits, can you be more specific about what’s embedded in your 3Q and full-year guide with respect to the August price increase, both in terms of top-line help and inventory profit?

In terms of inventory profit for the quarter from the August price increase, we expect a progression similar to what we saw with the April price increase. In the prepared remarks we said roughly a 30-basis-point improvement, and we see a similar pattern with this price increase.

We now turn to Trey Grooms with Stephens. Your line is open. Please go ahead.

Yes. Thanks. On the free cash flow comment maybe being weighted a little more to 4Q, could you go into a little more detail on that? I know it can shift seasonally, but any more color on the timing there?

We bought inventory throughout the second quarter and, as we've discussed, we were targeting roughly $500 million of free cash flow for the full year. We burned about $250 million in the first half. We expect the back half of the year to produce roughly $750 million in free cash flow, roughly evenly spread between the two quarters.

Okay. Got it. Thanks for the clarity there.

Sorry, Trey, it's not unusual for us to build inventory in the first half. The back half is when most roofing activity gets done. We plan to continue bringing product in during Q3 because we believe demand will be strong. We expect to diminish inventory, but that will probably accelerate into Q4 as demand falls off unless we see more demand come in. That's why the shape of the free cash flow is the way it is.

Okay. So to clarify, is it that 3Q and 4Q will be roughly evenly split or is 4Q weighted? I might be misunderstanding.

More weighted to Q4; call it roughly 60/40 toward Q4.

All right. Well, thanks for clearing that up. Appreciate it.

Our next question comes from Philip Ng with Jefferies. Your line is open. Please go ahead.

Hey guys, this is Nagy on for Phil. Going back to the organic volumes in 2Q being roughly flat: any color on the breakout between the segments would be helpful. Also, could you give assistance on the magnitude of what greenfields are contributing? I know you did around 30 greenfield branches last year, so how much are those contributing on the organic side?

In terms of greenfields, Prith will touch on specifics, but since Ambition 2025 launched we've added many greenfields and it's been a very successful program. By the end of this year we estimate total revenue from greenfields started since Ambition 2025 to be substantial. Prith?

It's actually over $500 million in revenue contribution from greenfields overall. In terms of actual organic demand for the quarter, roughly 2.8% of the 6.8% revenue growth comes from organic, which includes both existing branches and greenfields.

We now turn to Kathryn Thompson with Thompson Research Group. Your line is open. Please go ahead.

Hey, thank you for taking my question. I want to focus on the commercial segment, which you pointed out is improving despite the ABI readings. We would argue ABI is less relevant because it doesn’t capture some mega projects. When you look at put-in-place numbers, the manufacturing subsegment alone has doubled to north of 15% of total mix since 2018. With that in mind, do you have additional color or numbers you can frame around the mix shift and types of projects you’re servicing today and maybe in the quarter in the commercial segment? In particular, can you parse out new versus repair and remodel within the commercial segment?

Coming into the year we expected installed volume to be down, but because of distributor and contractor behavior last year, we expected our volumes to grow. Overall demand has actually held up pretty well and bidding and quoting activity across the board has been good. We've seen a good amount of government work and school projects, which are generally repair and reroof. Reroof work has been a boost for us. New construction was biased more toward COVID-era projects, while now we're seeing more repair and remodel activity. Office and retail have been a bit softer, multifamily weaker, but manufacturing and warehouses remain pretty good. The ABI biases toward new construction, which is why it looks weak, but our experience shows repair and reroofing activity remains strong and is reflected in our commercial results. We continue to see good bidding activity going into the fourth quarter and even early next year. We've focused on this market as a growth area for several years and believe we are doing very well.

We now turn to Keith Hughes with Truist. Your line is open. Please go ahead.

Thank you. In the second half guidance, what do you have implied on units for residential roofing year-over-year roughly? Are units down low single digits or what's the view?

For Q3, in terms of residential, we're expecting price and volume that imply low single-digit price growth and slightly better volume. For Q4 we would expect mid-single-digit negative on volume year-over-year.

Q4 comps are tough because there was strong storm demand toward the end of last year, so we expect residential to be down in Q4 versus a strong prior-year quarter. But we still expect the overall quarter to see organic growth.

Okay, great. Thank you.

Our next question comes from David MacGregor with Longbow Research. Your line is open. Please go ahead.

Thanks. Good afternoon and thanks for taking the question. Julian, how do you respond to a changing macro and tactically what do you do differently to protect margins if we head into a harder landing macro?

We believe the macro economy is not the primary driver of reroofing demand, which is about 80% of our business. It's driven by the number and age of buildings. There's always more buildings at the end of the year than at the beginning. The aging housing and commercial stock presents opportunity. Tactically, we focus on driving branch efficiency, cost control, ensuring appropriate staffing levels day-to-day, and the bottom-quintile process to improve margins. We are also focused on private label, digital and our pricing model to deliver margin improvement. We have not yet seen the full impact of our pricing model; we expect to complete deployment around Q1 2025 and believe it could yield about 50 basis points of gross margin improvement. We continue to work on these initiatives to enhance and protect margins. We were disappointed in our OpEx performance in Q2 but expect to correct and drive operating performance higher.

Thanks, Julian.

Our final question comes from Reuben Garner with Benchmark Company. Your line is open. Please go ahead.

Thank you. Good evening, everybody. Forgive me if I mischaracterize this, but your outlook for organic top-line for the second half seems comparable to what you had before, maybe a touch better. In your remarks you mentioned being proactive to respond to market conditions by adjusting resources and inventory. Could you clarify that? It seems like you're bullish but also talking about adjustments.

Absolutely. The market is variable: some very good markets and some weak markets. Our branches are fixed geographically and we must operate in weak markets as well as strong ones. In markets like Florida, owner shipments are down significantly year-to-date, and we must adjust staffing and resources to that reality. We need to get staffing levels right in weak markets and ensure we can take advantage of strong markets. The comment about being proactive refers to improving our ability to manage variable demand by adjusting staffing and inventory locally and earlier than we did in Q2. We didn't execute as well in Q2 on that variability, and we will improve.

Got it. Very helpful. Thanks guys. Good luck going forward.

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

Thank you, Elliot. I just want to say thank you to all of you for your interest in Beacon and your continued support of our efforts to improve the business. We continue to be very pleased with our top-line performance and the growth that we are seeing. We believe we've demonstrated that we have multiple paths for growth. We also believe we've got multiple paths for margin-enhancing initiatives that are driving success at the bottom line as well, and we continue to believe that there's further opportunity in this business. So with that, thank you very much for your attention. Thanks very much for attending, and thanks. Bye.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.