Yahoo Finance Beacon Roofing Supply, Inc. (NASDAQ:BECN) Q1 2024 Earnings Call Transcript
Beacon Roofing Supply, Inc. (NASDAQ:BECN) Q1 2024 Earnings Call Transcript May 2, 2024
Beacon Roofing Supply, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for your patience. Again, welcome to today’s Beacon First Quarter 2024 Earnings Call. I would now like to hand the call over to Binit Sanghvi with Beacon. You may proceed.
Binit Sanghvi: Thank you, Joel. 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; Carmelo Carrubba, Beacon’s Interim Chief Financial Officer. Julian and Carmelo 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 always relate strictly to historic 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, May 2, 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.
Julian Francis: Thanks, Binit, and good afternoon, everyone. We are beginning on Slide 4. The team executed well to start the year, delivering record first quarter sales. Once again, we demonstrated that our Ambition 2025 plan has created multiple paths for us to grow. Sales increased by more than 10%, with all three lines of business posting growth year-over-year. This was slightly higher than expected and as indicative of a supportive market environment. Non-discretionary repair and reroofing demand continues to underpin the need for our products and services. Acquired and greenfield branch locations contributed more than 5% growth in the first quarter. Our strategy to grow in any environment is proven and we have recorded 15 consecutive quarters of year-over-year sales growth.
This is because we continue to add value to our customers, enhancing our service proposition and allowing them to maximize the productivity of their scarce resource labor. Our gross margin came in at 24.7%, approximately 80 basis points below the first quarter of last year. But above the guidance of 24.5% that we provided on our fourth quarter call. In February, we highlighted the expected impact to both the gross margin and OpEx of recent greenfield additions and M&A that are not yet fully mature. As a reminder, this reflects 21 acquired branches and 28 newly opened locations over the last 12 months through March 31. Our dedicated teams have been executing at a high level since we announced our Ambition 2025 plan 2 years ago. And I’m pleased to say that both our acquired and greenfield portfolios are performing better than expected and creating value for our shareholders, which I will comment on more later in the call.
We continue to invest in future growth and expand our footprint. Year-to-date, we opened five greenfields and have made four acquisitions, significantly enhancing our customer service and reach. We took an important step yesterday, adding to our rapidly growing nationwide waterproofing platform with the acquisition of Smalley & Company, an industry leader in both new construction and restoration markets. Headquartered in Denver, Smalley has 11 locations throughout Colorado, Arizona, California, Nevada, New Mexico, and Utah. Since 1967, the Smalley team has built a track record of providing value added technical know-how in waterproofing solutions to contractors. As we enter a key part of the construction season, our team members are well positioned to provide our customers the high caliber of service they expect.
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 offering, commercial acceleration initiatives, and our pricing model. Coming into the year, we said that residential reroofing market demand would be lower, driven by our assumption that storm activity would revert to the 10-year average. At the same time, non-storm repair and reroofing will grow, as the number of older roofs grows, and we also expected new residential construction to improve over last year. Regarding commercial roofing, we said that there will be a contraction in install activity in the first half of the year based on the architectural billing index, but that our volume would grow because of last year’s destocking.
In summary, the fundamentals of end market demand have performed as we expected and our team has executed well. Now, please turn to Page 5 of the deck. 2 years ago, we laid out our target to build a great organization, drive above market growth, deliver consistent double-digit adjusted EBITDA margins, and generate superior shareholder returns. Creating value for our customers is central to achieving these goals, and our team is relentlessly focused on doing that every day. Let me provide you with an update on our strategic initiatives, starting with how we are building a winning culture. One of our core values is to make every day safer. And as you may recall from prior calls, newer employees are at greater risk of injuring themselves. In March, we held our annual company-wide safety stand-down, in which all of our branches and 8,000 employees paused and recommitted to making every day safer with a focus this year on strains and sprains.
We will continue to emphasize the importance of stretching and lifting safely, as well as using innovative tools and techniques to reduce injuries. We have set a goal to reduce sprain and strain injuries occurring amongst our newest employees by 50% this year. We have also begun piloting AI-enabled dashcams in our fleet to further influence safe driving behavior. These cameras use technology to continuously analyze road and cab conditions, helping drivers reduce unsafe practices by flagging these types of behaviors in real time and providing alerts and warnings, drivers and fleet managers have another tool to prevent accidents. Another of our core values is to put people first. And in February, we held our inaugural Women’s Summit, bringing together female leaders from across the organization in a forum to learn and network.
This event and our sponsorship of National Women in Roofing will foster a more diverse and inclusive culture and help us to compete for, hire, retain and develop the best talent in the industry. 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 leader in our growth plans, including our investments in greenfields and acquisitions. Our dedicated greenfield team continues to execute on our pipeline of new locations, and we have opened five branches year-to-date. Each time we add 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 open 50 new branches since the beginning of 2022, exceeding our original Ambition 2025 goal of 40 total. On acquisitions, we discussed our purchase of Smalley earlier and we highlighted the acquisition of Roofers Supply of Greenville and of Metro Sealant on our call in February. We have also acquired General Siding Supply in April, strengthening our complementary building product offering and adding locations in the Midwest, including Omaha and the surrounding areas. Since announcing our Ambition 2025 plan, we have acquired 18 companies, adding 66 branches to date. In total, we have deployed approximately $640 million in capital towards these acquisitions, adding base year revenue of more than $750 million. Our online capability continues to be a clear competitive advantage for Beacon and sales through our digital platform, increases customer loyalty, generates larger basket sizes, and enhances margin by 150 basis points when compared to offline channels.
In the first quarter, we grew digital sales nearly 28% year-over-year. Digital sales to our residential customers were a highlight, as we achieved our highest quarterly adoption ever at 23%, close to our Ambition 2025 target of 25%. We have plans to build on our digital leadership by continuing to invest in this area to differentiate ourselves and build upon our competitive advantage. Commercial roofing is one of the key growth initiatives of our Ambition 2025 plan. In the last year, we launched our commercial acceleration initiative in pilot markets. We gathered best practices from our top performing commercial locations and are systematically replicating them throughout the organization. I’m happy to report that where we have adopted these practices, we are seeing above market growth.
We have plans to extend this program through the year, touching the top 20 commercial roofing markets. Furthermore, we have a full line of products for our commercial customers and insulation is a growing part of the commercial roofing system. Evolving building codes and a focus on sustainability has increased the amounts of insulation required for the typical roofing job. At the same time, our customers have come to rely on the quality of our private label, TRI-BUILT branded products to grow their business. So I’m pleased to announce that TRI-BUILT ISO is the newest addition to our expanding commercial product line. TRI-BUILT ISO is a professional grade roof insulation designed to meet the specifications of a diverse range of commercial roofing systems.
Not only does it offer energy efficiency, but also benefits our contractor and building owner customers. Its eco-friendly features make it a sustainable choice for our customers’ projects and our customers have come to rely on TRI-BUILT products. We will continue to support them through our expanding catalog of product offerings. Our third pillar involves driving operational excellence through continuous improvement initiatives. Now, let me give you an update on the rollout of our pricing model. This is much more than just pricing an individual product. It involves strategy, goals, and positioning, as well as governance, tools, and processes. And most importantly, it is not just a new system, but a fundamental shift in our approach and a new way of thinking that is supported by technology.
I am pleased to say that our initial pilot results are delivering on our Ambition 2025 expectations of achieving a 50 basis point lift in margin. We are still early in migrating our branches, but I am confident that the new system will elevate Beacon’s competitive edge and help us respond to market dynamics and structurally improve performance. Let me also take a minute to talk a little bit about how our new fleet telematics software will improve efficiency. Leveraging this technology enables real time fleet monitoring from heartbreaking to speeding and idling. The resulting data enables improvement in fleet operations, including route optimization, reduction in fuel usage, and a reduction in emissions. And fourth, let’s review how we’re creating shareholder value.
As mentioned earlier, we have acquired 18 companies, adding 66 branches since the beginning of 2022. Our dedicated M&A team is executing at a high level and exceeding our original targets. I’m happy to report that our disciplined approach is paying off, and the acquisition portfolio is performing above our growth expectations. Our actual sales for the acquired branches exceeded our performance by more than 10%. Through strong employee retention and talent development, and faster closing and integration, we are becoming an acquirer of choice, which will continue to provide a pipeline of value-creating opportunities going forward. Next, we took advantage of a window of opportunity to refinance our term loan, reducing interest rate spreads. The favorable market was due in part to economic factors, and we’d also received an upgrade from one of our credit rating agencies.
As a result, we were able to reduce pricing by more than 65 basis points on our $975 million outstanding term loan B, saving more than $25 million in cash interest over the remaining full-year life of the loan, generating additional free cash flow per share. And lastly, although there were no share repurchases in the first quarter of this year, we remain committed to shareholder returns and are evaluating the timing and amounts of additional buybacks. As a reminder, we have approximately $390 million in remaining authorization granted by our board in February of last year. In summary, we’re off to a good start to the year, and the market is developing at least as well as we anticipated. Now, let me pass it over to Carmelo for more details on the quarter.
Carmelo Carrubba: Thanks, Julian, and good evening, everyone. Turning to Slide 7, we achieved over $1.9 billion in total net sales in the first quarter, up more than 10% year-over-year, primarily driven by organic volume growth as well as contributions from acquisitions. In the aggregate, average selling prices for our products were slightly positive year-over-year. Organic volumes, including greenfield, increased approximately 6% to 7%, while overall price contributed less than 1%. As we discussed, our acquisition portfolio is performing well and branches acquired over the last 12 months contributed more than 3% to daily net sales year-over-year. Residential roofing sales were higher by more than 9%, as volume were driven by resilient underlying repair and remodel demand combined with the higher prices in the low-single-digit range.
Resi volumes in the quarter were strong, and adjusting for channel risk stocking, we estimate that we grew in line with the market. We continue to see improvement in demand from new residential construction, in particular single-family homebuilders. Non-residential sales increased nearly 18% on solid R&R activity and destocking at our customer level that we experienced in the prior year period. And while prices declined in the mid-single-digits year-over-year from a high comparable, they remained stable on a sequential basis. Bidding and quoting remains at healthy levels, which we expect would also be supportive of pricing and we also see a continued shift from new construction to repair and reroofing activity as the year progresses. Complementary sales increased by more than 5% year-over-year as our specialty waterproofing platform continues to grow.
Lower volume of siding products partially offset the growth. Selling prices were stable 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’ll review gross margin and operating expense. Gross margin was 24.7% in the first quarter, down approximately 80 basis points year-over-year, but higher than our expectations and solidly above pre-COVID Q1 gross margin levels. Slightly positive average selling prices were more than offset by higher product costs, especially in the non-residential line of business. Price cost was down approximately 40 basis points year-over-year and line of business mix also contributed to the declining gross margin percentage.
And as we mentioned, new greenfield locations and the M&A we’ve conducted in the past year has yet to be fully synergized and were diluted as a percentage of sales. Higher digital and private level sales partially offset the declines. Adjusted OpEx was $404 million, an increase of $47 million compared to the prior year quarter. Adjusted OpEx as a percentage of sales increased to 21.1% or up 50 basis points year-over-year. The change in adjusted OpEx was driven primarily by expenses associated with acquired and greenfield branches, which contributed approximately $22 million of the increase. Additional account in our existing branches year-over-year also contributed to the increase. You will recall from our call in February that given the tight labor markets, we consciously made an effort to ensure that we are properly staffed to meet the ramp in seasonal activity and provide the high level of service our customers expect.
Inflationary wages and benefits as well as rents also contributed to the increase in adjusted OpEx. We continue to focus on productivity initiatives with the goal of offsetting these inflationary pressures and we have completed diagnostics on improvement and improvement plans for our bottom-quintile branch of 2024. This initiative has contributed to the bottom-line for many years and is already showing favorable results also in 2024. Investments in Ambition 2025 priorities to drive above market growth and margin announcement continued in the quarter. These investments include initiatives related to our sales organization, customer experience, pricing tools, e-commerce, technologies and branch optimization. Turning to Slide 9, operating cash flow was negative $141 million in the quarter.
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 was $245 million higher compared to the end of the first quarter of 2023 to ensure that we have adequate product for the demand ramp and in advance of the manufacturing price increases. Higher inventory year-over-year is also attributable to inventory acquired through M&A and to support greenfields. Net debt leverage stood at 2.7 times as of the end of March, well within our stated target range of 2 to 3 times EBITDA. As Julian mentioned, in March we took advantage of the opportunity to reprice and refinance our term loan. At the same time, Moody’s upgraded our long-term credit rating one notch, which will improve our access to capital and lower our overall costs of debt going forward.
Given the strong demand, we decided to upsize and raise an incremental $300 million. The additional funds were used to pay down a portion of our revolving line of credit balance, which provided us with approximately $1.3 billion in liquidity at the quarter end. We continue to balance our capital allocation between organic and inorganic growth opportunities, as well as shareholder returns. Our ability to invest in value creating acquisitions is underpinned by ample balance sheet capacity and liquidity. We are also investing record amounts in our business and expect to deploy approximately $125 million in capital expenditures during full year 2024. This has not only included the investments in the greenfields already discussed, but also the upgrading of our fleet and facilities, as well as building out the technology tools that will benefit us in 2024 and beyond.
To wrap up, we are very pleased about the performance in the first quarter. We have significant momentum, and we are well-positioned to realize our objectives by continuing disciplined execution of our strategic priorities as we enter the most important part of the year. Now, let me turn the call back to Julian for his closing remarks.
Julian Francis: Thanks, Carmelo. 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 2024. We continue to believe that non-discretionary residential market demand will be lower, driven by lower storm demand year-over-year, which at this point appears to be on track to meet our assumptions of the 10-year average. We believe non-storm-related demand will be higher in both new construction and aged replacement, despite the higher interest rates. In our commercial roofing business, we see sentiment improving, but the Architectural Billing Index remains below 50, indicating contraction in activity. However, our volumes are expected to be higher year-over-year as we lap the contractor destocking effect that impacted us last year.
For the second quarter, we expect total sales to growth to be in the high-single-digit range year-over-year, in line with the April sales growth of 7% per day. We announced a shingle price increase effective April 1, corresponding to the manufacturer’s announcement. Our team is executing with discipline, and realization will be determined by local market conditions. As a result, we expect gross margins to be in the 26% range, higher than in our first quarter and the prior year, and include inventory profit. Operating expenses as a percentage of sales is expected to increase year-over-year, largely attributable to the higher expenses related to headcount from greenfields and acquired branches. We expect adjusted operating expenses as a percentage of sales to be modestly higher than the second quarter of last year.
Our full year net sales expectation is for growth in the mid-single-digit range, including acquisitions announced year-to-date. On gross margin, we continue to expect structural improvements from our initiatives, including higher private label and digital sales, to be somewhat offset by higher non-residential mix relative to last year. Important to note that we expect price cost to be neutral, resulting in a full year gross margin percentage in the mid-25% range. We are raising our full year adjusted EBITDA expectations to be between $930 million and $990 million, inclusive of recently acquired businesses. Meeting our customers’ needs when and where they need our services is our priority. Near-term cash flow will continue to depend on the seasonal working capital requirements.
For the full year, though, we expect to convert above 50% of adjusted EBITDA to free cash. Our focus will remain on the areas within our control, including enhancing our customer experience, 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 a target of 25 greenfield locations for 2024, as well as investing in our branches to improve their quality for our customers and our employees. And we continue to be committed to generating returns for our shareholders, and we will be balancing growth investments with share repurchases. In summary, we are well positioned to outperform the market in any demand environment, creating value for all our stakeholders.
We are looking forward to the rest of 2024 and helping our customers build more, as we enter a key part of the construction season. And with that, Joel, we’ll open it up for questions.
Operator: Absolutely. [Operator Instructions] The first question is from the line of Kathryn Thompson with Thompson Research Group. Your line is now open.
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