Beacon Roofing Supply, Inc. (NASDAQ:BECN) Q4 2023 Earnings Call Transcript February 27, 2024
Beacon Roofing Supply, Inc. beats earnings expectations. Reported EPS is $1.72, expectations were $1.69. 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: Good evening, ladies and gentlemen, and welcome to the Beacon Fourth Quarter 2023 Earnings Call. My name is Victoria, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this call. [Operator Instructions] 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.
Binit Sanghvi: Thank you, Victoria. Good evening, everybody. And as always, we thank you for taking the time to join our call. Today I am joined by Julian Francis, our Chief Executive Officer; and 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 relate strictly to historical or current facts and use the 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, 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, February 27th, 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 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 the call. Both the press release and the presentation are available on our website at becn.com.
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Now let’s begin with opening remarks from Julian.
Julian Francis: Thanks, Binit. Good afternoon, everyone, and let’s begin on Slide 4. I’m very pleased to report that we had strong finish to the year. The Beacon team delivered a record fourth quarter as a result of executing on our strategic plan Ambition 2025. Sales were up nearly 17% year-over-year to $2.3 billion, a fourth quarter record and above our expectations from our third quarter call. Demand for our services drove organic sales growth across all three lines of business. We continue to create value for our customers, especially by enhancing our service proposition, allowing them to maximize the productivity of the scarce labor resources they have. Acquired and newly opened greenfield branches contributed approximately 6% growth to the top-line.
Our gross margin came in at 25.7%, above our guidance of 25.5% that we provided on our third quarter call. We stayed focused on labor productivity and our bottom quintile branches initiative delivered. As a result, we achieved a fourth quarter record for adjusted EBITDA of $217 million. I’m particularly pleased with our management of working capital, which generated record fourth quarter cash flow of $262 million. This enabled us to deploy capital towards our Ambition 2025, including greenfield locations and acquisitions, while maintaining our balance sheet capacity. We’ve completed four acquisitions since the end of the third quarter. This includes adding to our industry-leading waterproofing footprint by acquiring Metro Sealant & Waterproofing Supply earlier this month.
Metro, along with Garvin Construction Products acquired in October, enhances our position on the Eastern Seaboard as we continue to become recognized as a national leader in specialty waterproofing distribution. We also completed the acquisition of Roofers Supply of Greenville, adding commercial roofing branch locations in North and South Carolina. The Roofers Supply team has great talent and strong capabilities and we welcome them to Beacon. At our Investor Day two years ago, we said that we would unlock the potential of Beacon and I can confidently say today that we are well on our way to achieving that goal. We demonstrated once again that we have multiple paths to growth and can deliver results in a variety of conditions. Now please turn to Page 5.
At that Investor Day, 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. Creating value for our customers is central to achieving these goals and our team has 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 do the right thing and this applies to our efforts to build better for the environment by engaging our employees and improving the climate in our communities. During the quarter, we launched a ‘Turn it Off’ campaign to educate our truck and forklift drivers about their role in reducing non-productive engine idling.
Our drivers have pledged to turn off their vehicles whenever they can to contribute to cleaner air at our branches, on job sites and throughout the community. In addition, we contracted to power over 30 of our branches with renewable energy from community solar installations. We are proud to support investment in community solar, which allows underserved neighborhoods to receive discounts on their energy bills. 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. This includes our investments in greenfields and acquisitions. Our dedicated team continues to execute on our pipeline of greenfield locations. In the fourth quarter, we opened 11 new branches.
Each time we add a new location, we add sales resources and reduce the average distance and time for us to reach our customers. This enhances our overall value proposition, giving us the opportunity to earn market share. We have now opened 45 new branches since the beginning of 2022, exceeding our original Ambition 2025 goal. These branches have contributed more than $290 million to our top line over two years. It also demonstrates our ability to adjust to prevailing market opportunities. We’ve seen the impact these new branches have had on our results and accelerated the program. On acquisitions, we discussed the recent additions of Roofers Supply, and of Metro Sealant, as well as Garvin. We also acquired H&H Roofing Supply, strengthening our presence in the Central Valley of California, adding Bakersfield to our service area.
Since announcing our Ambition 2025 plan, we have acquired 16 companies adding 50 branches. Our online capability continues to be a clear competitive differentiator for Beacon. Sales through our online platform deliver approximately 150 basis points, better margin compared to offline channels. Our value-added integrations are driving performance and in the fourth quarter we grew digital sales nearly 28% year-over-year. Digital sales to our residential customers were a highlight as we achieved adoption of nearly 22%. We have plans to build on our digital leadership by continuing to invest in this area and to differentiate ourselves and build upon our competitive advantage in the marketplace. Our third pillar involves driving operational excellence and expanding capacity through our continuous improvement and productivity initiatives.
Our focus on the bottom quintile branches generated the significant contribution to EBITDA in the fourth quarter. Our disciplined process for diagnosing and addressing issues has been core to our operational improvements the last two years. I’m pleased to report that the process added approximately $15 million to the bottom line year-over-year in the fourth quarter. And fourth, let’s review how we’re creating shareholder value. In July, we deployed a little over $800 million to repurchase the entirety of the outstanding preferred shares from CD&R, reducing the as-converted share count by 9.7 million. Since then, CD&R sold off its remaining stake in our common stock and exited its board representation. In addition, we continue to execute on our current authorization to repurchase our common stock, retiring 8.4 million shares in the last two years.
Since the start of Ambition 2025, we have deployed more than $1.3 billion to shareholder returns, reducing the as converted share count by approximately 21%. And impressively, even with the purchase of our shares, the investment in M&A and the record spending on growth CapEx, we exited the year with net debt leverage at 2.4 times. In summary, we have a differentiated approach and have built the tools to enable multiple paths of growth, margin expansion and value creation through the cycle. Our Ambition 2025 plan brings it all together to amplify the resiliency of our business model and unlock our potential. Now, let me introduce our Interim Chief Financial Officer, Carmelo Carrubba. First, let me say that I am delighted that Carmelo has accepted this interim responsibility until a permanent CFO has been appointed.
Carmelo has extensive executive, functional and operational experience creating value serving in various roles. I was pleased when he joined us in April of 2022 as Vice President of Strategy and Transformation and as a member of Beacon’s Executive Committee. In these key leadership positions, Carmelo shares responsibility for creating and supporting the value creation framework to drive that successful execution of Beacon’s Ambition 2025 plan. With that, I’ll pass the call over to Carmelo to provide the details on our fourth quarter results.
Carmelo Carrubba: Thanks, Julian, and good evening, everyone. Turning to Slide 7. We achieved nearly $2.3 billion in total net sales in the fourth quarter, up nearly 17% primarily driven by organic growth volume across all three business lines as well as contributions from acquisitions. In the aggregate, average selling prices for our products were slightly positive year-over-year. Organic volumes, including those from greenfields, increased approximately 12% to 13%, while overall price contributed less than 1%. Acquisitions are performing well and contributed approximately 4% to net sales growth year-over-year. As a reminder, as of November 1, we lapped the acquisition of Coastal Construction Products, which has been the largest acquisition under our Ambition 25 plan.
A construction site with workers wearing hard hats and safety vests, installing roofing materials.
Our backlog continued to convert in the quarter and was lower sequentially but still well above historical levels. The mix of backlog is now more aligned with our sales mix with non-resi representing slightly less than 30% of the total. Residential roofing sales were higher by more than 20% as higher volumes were driven by resilient underlying R&R demand and storm activity, combined with higher prices in the low single-digit range. Already volumes in the quarter were strong and adjusting for channel restocking, we estimate that we grew in line with the market for the full year. We’re very pleased to see the improvement of demand in the new residential construction in particular, single-family homes. Nonresidential sales increased more than 11% on solid R&R activity.
As expected, destocking at our customer contractor level came to an end. Estimated volumes increased in the mid-teens and while prices declined in the low single digits year-over-year from a high comparable in the year prior, they remained stable on a sequential basis. Complementary sales increased by 16% year-over-year as our new waterproofing platforms continue to grow. Higher volume of sizing products also contributed to the growth. Selling prices across product lines with the exception of lumber were stable year-over-year. Please keep in mind that with the addition of Coastal, our complementary product category now has approximately 70% residential and 30% nonresidential exposure. Turning to Slide 8, we’ll review gross margin and operating expenses.
Gross margin was 25.7% in the fourth quarter, higher than our guidance on our third quarter call. Price cost was down approximately 50 basis points year-over-year as a result of stable average selling prices and higher product costs, especially in the nonresidential line of business. Keep in mind that we had significant inventory profits generated in the year ago period. Adjusted OpEx was $409 million, an increase of $45 million compared to the prior year quarter. Adjusted OpEx as a percentage of sales decreased to 17.8% or down 70 basis points year-over-year. The year-over-year change in adjusted OpEx was driven primarily by expenses associated with acquired and greenfield branches accounted for accounting for approximately $24 million of the year-over-year increase.
Increases in wages and benefits, including incentive comp, annual bonus true-up and commissions also contributed to the increase. These increases were partially offset by lower T&E and fleet expenses year-over-year. Branch productivity helped drive favorable operating leverage for year-over-year. As you can see, our sales per hour metric reached its highest fourth quarter level since we began tracking at the beginning of the first quarter in 2020. Investments in Ambition 2025 priorities to drive above-market growth and margin enhancement continued in the quarter. These investments include our dedicated greenfield and M&A teams as well as initiatives related to our sales organization, customer experience, pricing tools, e-commerce technologies and branch optimization.
Let’s turn now to Slide 9. Operating cash flow was strong in the fourth quarter at $262 million. We had about $95 million less in inventory as compared to the prior year quarter, even with inventory acquired through M&A and new inventory to support greenfields. This reflects our effective inventory management that continue into the year-end. Through close collaboration with the field management team and our supply chain organization, we efficiently managed working capital contributing to a strong finish to the year. Our fourth quarter cash conversion was impressive at more than 120% of adjusted EBITDA. In our full year 2023, we generated a record $788 million of operating cash flow with conversion of more than 84%. We continue to balance our capital allocation between organic and inorganic growth opportunities and shareholder returns.
Our ability to invest in greenfields and value creating acquisitions is underpinned by our ample balance sheet capacity and liquidity. As Julian mentioned, our former larger shareholder CD&R recently sold off its remaining stake in our common stock and exited its representation on our Board of Directors. At the same time, in February, Moody’s upgraded our long-term credit rating one notch, which will improve our access to capital and lower our overall cost of debt going forward. We are investing record amounts in our business, deploying more than $120 million in capital expenditures in 2023. This is 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.
Let me give you some of the details on our share buybacks. Share repurchases in the fourth quarter were made through open market repurchases and resulted in the retirement of 140,000 shares during the quarter. Net of share issuances for stock-based compensation, we reduced our common shares outstanding to 63.3 million on December 31 versus the 64.2 million at the same time the prior year. We are confident in our ability to successfully compete in and react to changing market conditions and look forward to a successful start of the year. We’re also investing in the processes and technologies in order to build upon the foundation of a high caliber service, future growth and operational excellence. Now, let me turn the call back to Julian for his closing remarks.
Julian Francis: Thanks, Carmelo, and please reference Page 11 of the slide materials. Before we move to the outlook, I’d like to take a minute to reflect on the impressive 2023 results and the progress we have made toward the ambition 2025 targets we conveyed two years ago. In 2023, we produced sales growth of over 8% to $9.1 billion. When we started the year, uncertainties around the economy, housing inflation and mortgage rates were all in the headlines. We remained confident that we could grow, and we did just that, despite headwinds from destocking at the commercial contractor level and sluggish new construction demand to start the year. We focused on delivering high caliber service to our customers and productivity and continuous improvement at our branches.
We delivered approximately $930 million of adjusted EBITDA and our third consecutive calendar year of double-digit EBITDA margins. We delivered record sales in our national accounts, private label and digital initiatives, which deliver both enhanced growth and margin. We generated $21 million in EBITDA contribution from our bottom quintile branch initiative, bringing the two-year total to $57 million, three quarters of our $75 million ambition 2025 target. We opened 28 greenfields across 17 states enhancing service to our customers. These new branches are ramping up ahead of expectations and in total, all new greenfield locations contributed nearly $200 million to the top line in 2023 alone. We welcomed nine new acquisitions heading 21 branches, new markets and capabilities.
I’m pleased to report that our acquisition portfolio is performing well and delivering results. Acquired branches contributed approximately $370 million to net sales in 2023 and, like our greenfield strategy expands our ability to serve our customers across the country. We filled several key leadership positions within our salesforce line of business and leadership ranks, while at the same time advancing our diversity inclusion and equity initiatives. We repurchased and retired 1.6 million shares for approximately $111 million and as discussed, redeemed the entirety of the preferred shares for a little over $800 million. In summary, our performance in 2023 has created significant value for our customers and shareholders, including achieving two of the Ambition 2025 targets, net sales of $9 billion and shareholder returns of more than $500 million, two years ahead of plan, as well as a third year of double-digit EBITDA margin, another of our A25 targets.
Please reference Slide 12. Before we head to Q&A, I’d like to provide our 2024 market expectations. We expect that residential re-roofing market demand will be lower this year, driven by our assumption that storm demand will revert to the ten-year average. At the same time, we expect non-storm repair and re-roofing to be higher as the number of older roofs grows, residential new construction and existing home sales are expected to improve also. Regarding commercial roofing, we are monitoring the Architectural Billing Index, which remains below 50, indicating contraction in activity in the first half of the year. We also see a continued shift from new construction to repair and re-roofing activity as the year progresses. Despite these modest market headwinds for the first quarter, we expect total sales growth to be in the high single-digit range year-over-year, demonstrating the value of our model.
And this is considerably more than the 4% sales per day decline we saw in January, which as you know had cold and wet weather in many parts of the country. Non-residential shipments are expected to be higher versus the prior year quarter in which we experienced considerable destocking at the commercial contractor level. With respect to the first quarter gross margins, we expected to be in the mid-24% range, which is down driven by line of business mix and the impact of both new greenfield locations and the M&A we’ve conducted in the past year that is yet to be fully synergized. Operating expenses as a percent of sales is expected to increase year-over-year, largely attributable to the higher expenses related to headcount from greenfields and acquired branches, but also given tight labor markets, we are making efforts to ensure that we are properly staffed to meet the ramp in seasonal activity to continue to provide the high level of service our customers expect.
For the full year, we expect net sales growth in the mid-single-digit percent range, including contributions from acquisitions previously announced. This is an upward revision to the expectations provided in January for low single digit growth, reflecting our recent acquisitions and our expectations for the announced April residential price increase. Regarding gross margin, structural improvements from our initiatives, including higher private label and digital sales are expected to be somewhat offset by higher non-residential mix. Important to note that we expect price costs to be neutral, resulting in a full year gross margin percentage in the mid-25% range. With all that in mind, we expect adjusted EBITDA range between $920 million and $980 million.
Regarding cash flow, we expect inventory to follow a more normal pattern of seasonality as we build inventory and working capital in the first half of the year. For the full year, we expect to generate strong cash flow with conversion from adjusted EBITDA above 50%. 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 invest in initiatives that we expect will result in accelerated growth with acquisitions and approximately 25 additional greenfield locations. We’re investing in improving our operations, delivering results today, but also getting ready for the future. And last, but certainly not least, we continue to be committed to generating returns for our shareholders, and we will be balancing growth investments with share repurchases.
We have approximately $390 million left remaining on the authorization from our board approval early last year. In summary, our business model is resilient and we are 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 as always, helping our customers build more. And with that, Victoria, I’ll turn it back to you and open up the question-and-answer session.
Operator: [Operator Instructions] Our first question comes from the line of Ryan Merkel with William Blair. Your line is now open.
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