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Beacon Roofing Supply Inc
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Good afternoon, ladies and gentlemen. And welcome to the Beacon First Quarter 2021 Earnings Call. My name is Cathy, 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 the conference. At this time, I will give you instructions on how to ask a question. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.
This call will contain forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore, 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 latest Form 10-K.
These forward-looking statements fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company’s financial outlook. The forward-looking statements contained in this call are based on information as of today, February 8, 2021, and except as required by law, the company undertakes no obligations to update or revise any of the forward-looking statements.
Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today’s press release. The company has posted a summary financial slide presentation on the Investors section of its website, under Events & Presentations, that will be referenced during management’s review of the financial results.
On the call today for Beacon will be Mr. Julian Francis, President and CEO; and Frank Lonegro, Executive Vice President and CFO.
I would now like to turn the call over to Julian - Mr. Julian Francis, President and CEO. Please proceed, Mr. Francis.
Thank you, Cathy. And good evening, and welcome to our first quarter fiscal 2021 earnings call. On the call with me, as Kathy said, is Frank Lonegro, our Chief Financial Officer. Our prepared remarks will correspond with the slide deck, which is posted to the Investor Relations section of Beacon's website.
Before I get into the details, as you know, we have announced the divestiture of our Interiors business. As such, we are providing two sets of financial information in today's earnings release. The primary focus will be on our continuing operations, which focuses solely on the exteriors business and treats interiors as discontinued operations.
I know many of your models are still based on the combined company, so we've also provided summary information on the combined results. I hope the additional information will help you better gauge our first quarter performance and support your analysis going forward.
On a continuing basis, we generated Q1 sales of $1.6 billion, an 11.4% year-on-year increase. Adjusted EBITDA improved to $143 million from $77 million the prior year. On a combined basis, so including interiors, sales were $1.8 billion, with 9% sales growth.
Adjusted EBITDA for the combined business was $158 million compared to $94 million in fiscal Q1 last year. We believe both sets of numbers are important in understanding our first quarter results, but our remaining commentary in this evening will focus on the continuing exteriors business.
Within the appendix of our slide presentation, we've included supplemental 2019 and 2020 income statements for the continuing exteriors business that should help you in modeling our pro forma financials.
I'll now begin on page four of the slide materials, which focuses on our first quarter continuing results. Our fiscal 2021 is off to a great start. First quarter continuing adjusted EBITDA increased 86%, driven by the strongest quarterly organic sales growth in more than 4 years and one of the best first quarter EBITDA margin percentages in over a decade.
We have strong leadership, and I'm very proud of the team's execution the past three or four quarters. I believe that this quarter gives you a sense of what the company is capable of delivering.
Now there are several important takeaways from the first quarter. First, the residential demand is strong. Residential roofing sales increased 21% in the quarter. Strong reroofing and new construction activity was paced by milder weather, which opened up additional workdays for our customers.
In a few Gulf States, demand was boosted by hurricane-related repair work, and the strong demand environment provides a favorable backdrop for the successful price increase we implemented in August.
The positive housing market fundamentals also helped boost exterior complementary products. With the divestiture of interiors, our product mix is now more residentially focused and biased towards repair and replacement activity.
Second, we continue to demonstrate good execution on our price actions. As highlighted during our last quarterly call, our team moved quickly in response to the August shingle price announcement from the manufacturers. We implemented higher prices to essentially coincide with the timing of the supplier increases.
And as we have discussed previously, the timing and execution of our price initiatives creates favorable timing benefits, which positively contributed to gross margins in Q4 '20 and continued in the first quarter of fiscal '21.
First quarter gross margins were 25.4% for continuing operations, exceeding our expectations. We continue to see inflationary pressures across most product categories, and we are confident in the current environment, we can capture additional pricing opportunities to more than offset the cost headwinds.
Third, first quarter results demonstrate our ability to manage operating costs. One of our central goals as a leadership team is to aggressively manage costs in all demand environments. We are extremely proud of our expense management during the past three COVID impacted quarters, but we recognize that with all of them is passed during COVID and the year end close, determining the impact of our actions has been difficult. We see the first quarter as an indication of the progress we've made.
During Q1, continuing adjusted OpEx dollars declined 3% year-on-year despite an 11% sales increase and a higher than normal residential mix, which is typically higher cost to serve.
In a growth environment, an important part of our focus is to generate significant operating leverage, closely watching costs and managing the controllable aspects our day-to-day considerations as we run the business.
Now please turn to page five of our slide materials. In our previous outlook commentary, we’ve taken a more cautious view on quarterly results, reflecting the potential impact of weather disruptions. However, our November and December monthly sales growth accelerated meaningfully, a reflection of strong underlying demand and favorable weather conditions.
Our continuing business finished a strong 11.4% sales growth for the quarter. Gross margins at 25.4% was stronger than anticipated, with the upside from favorable residential mix, supplier incentives tied to higher volumes and continued price execution.
Our first quarter operating expense outlook, centered on cost management tied to anticipated winterization during the quarter. As noted earlier, we're very pleased to report the meaningful OpEx decline, even with robust sales growth. Frank will share some of our specific productivity measures later.
For the continuing business, adjusted EBITDA increased from $77 million to $143 million, and EBITDA margins increased from 5.4% to 9.1%. The favorable performance was driven by a combination of strong sales growth, a significant year-to-year increase in gross margin and a reduction in operating costs, resulting in significant OpEx leverage.
Moving to page six of our slide materials. Let me provide you an update of our planned interior divestiture and a view of our business following the transactions closed.
We announced in late December, the sale of our interiors business to American Securities who will subsequently integrate the transaction with their recently completed acquisition of Foundation Building Materials. We are making great progress and expect the deal will close later this week.
The interiors business includes more than 80 branches focused on wallboard, ceiling tile and grid, steel starts and insulation products. Interiors operates from a separate branch network from our exteriors locations, making for a clean separation of the business. We were pleased with the outcome of the process and secured an attractive valuation of $850 million for the interiors business.
Importantly, the proceeds allow us to improve our balance sheet, immediately lower our net debt leverage to very near our previously published targets and provides us with much greater financial flexibility.
The divestment will return Beacon to its legacy position as a focused leader with an exterior building products distribution. 80% to 85% of our continuing business will be within residential and commercial roofing.
We reviewed the roofing market attributes as relatively unique. More than 80% of residential and non-residential roofing is classified as repair and replacement, with the majority of that being non-discretionary and driven by the replacement of worn or damaged roofs.
The remaining 15% to 20% of our exteriors business is complementary products, consisting largely of siding, windows and doors, lumber and wood roofing products. These exterior complementary products have some overlap with roofing customers and shared distribution facilities providing meaningful sales and operating synergies.
To summarize, we feel the interiors divestiture represents a transformative strategic event for the company, narrowing management's focus, substantially improving our balance sheet and financial flexibility and concentrating the business around our core capabilities.
Next, please turn to page seven of the slide deck. In recent quarters, we provided updates of each of these four strategic initiatives. In light of the interiors divestiture, we felt it was appropriate to reset our financial targets and metrics for each. These initiatives remain central to our improved sales growth, operational efficiency and profitability.
Some of the impact can be directly measured. There are also additional benefits for which are less obvious, but play an important role differentiating us from competitors and adding incremental value from customers.
Let me begin with organic growth. This initiative is focused on improving both the number and the effectiveness of interactions between our sales organization and customers. We continue to invest in sales training programs, marketing support, and value added tools that help our sales people track their contacts with existing and potential new customers.
And we have established targets for our sales team involved in the number of interactions daily, and we know that meeting these objectives strongly correlates to driving overall company sales performance.
Next is our industry-leading digital platform. Digital is a clear differentiator in the marketplace for Beacon. During our last quarterly call, we disclosed that digital sales had reached a run rate of 10% of total company sales during the final month of fiscal 2020. Our exteriors business was further along the adoption curve than interiors, so we expect to see another bump in adoption this year.
We have continued to leverage the customer adoption rates that accelerated during the early COVID environment, and are confident our current year and long-term growth trajectory will cement our leadership.
Digital is an excellent example of how a sharpened post divestiture focus should pay dividends for growth. Our marketing organization will now be able to devote 100% of their time to the exteriors products on the platform and develop new offerings.
Next, moving to our On Time & Complete Network, our OTC strategy creates a network of branches in larger MSAs. We operate in 58 distinct markets and have more than 250 exteriors branches participating in OTC.
OTC provides four key benefits. First is improved customer service as we have created the flexibility to deliver from the branch with the best combination of product and service to support the customer’s needs.
Second is a lower cost to serve. Since we can optimize across a network of branches, we get reduced delivery time and mileage, improving labor efficiency and reducing fleet costs and emissions.
Third, reduced inventory levels. We previously indicated we believe we can permanently reduce our inventory by $50 million to $100 million as we optimize across our OTC branches, and we remain confident that we can hit that target.
And fourth, we can accelerate our talent development. Our OTC creates opportunities for our people to explore a variety of roles at Beacon and build increasing levels of responsibility, allowing them to build great careers at our company and reach their full potential.
Lastly, I want to update our branch operating performance targets. I talked extensively about our focus on the volume quintile [ph] branches and our goal to significantly improve the operating performance. We've developed a diagnostic tool and a reporting cadence that places emphasis on structural change to secure we get sustained improvement.
We previously guided to a $30 million to $60 million improvement at these branches that will be achieved over several years. We shared on our prior earnings call and in fiscal 2020 we've seen a more than $20 million year-over-year improvement, the majority of which came from exteriors branches.
With the success we saw during the first year of the program, we are now resetting our 2021 target to a $20 million year-on-year improvement from the lowest quintile exteriors branches. Each year, we will continue to focus on driving sales and operating improvements to bring these branches over time up to at least to our company average.
To summarize, my update on our strategic initiatives, even the objectives, nor the anticipated impacts to Beacon, have changed following the interiors divestiture. Instead, it has sharpened our focus on these programs might be enhancing their effectiveness over time.
Now, I will pass the call over to Frank to provide deeper focus on our first quarter continuing results.
Thanks, Julian. And good evening, everyone. As Julian highlighted, we are providing significant transparency this quarter, with first quarter results for both continuing operations, exteriors only, and combined results, exteriors plus interiors. This is designed to assist you as you compare our first quarter results with your current model and as you adjust your go-forward model for our continuing operations.
Turning to slide nine. Sales within our continuing exteriors business improved to 11.4% year-over-year. Sales growth accelerated materially from the previous quarter, and our monthly growth rates accelerated throughout Q1.
Residential roofing produced more than 21% sales growth, as housing market indicators remain favorable for new construction and core repair and remodeling. This year, we saw the roofing season extend further into the early winter months given the strong underlying demand and milder weather in many geographies. Sales also benefited from regional strength in several Southern states tied to hurricane-related repairs.
Commercial roofing sales declined 3%, reflecting significant improvement from the double-digit decline we experienced in Q4. We believe the combination of milder temperatures and hurricane business were helpful to commercial roofing in the quarter.
From a more fundamental perspective, the worst is likely behind us in commercial roofing and the comparison to these during the second half of fiscal 2021. However, there remains lingering uncertainty for new construction and reroofing within the office and retail markets.
We continue to adopt a cautious commercial outlook until we see tangible evidence that demand differs from 2020 will occur this year and building owners return to more normal timetables for capital projects.
Complementary product sales increased nearly 9% in the first quarter. Remember that this growth rate reflects only our complementary exteriors business, which has a higher residential end market exposure. As you think about the mix of complementary going forward, we view this as being approximately 80% residential and 20% commercial.
Key complementary products for residential include vinyl siding, fiber cement siding, lumber, windows and exterior doors, while our complementary business for commercial is primarily waterproofing. Both categories distributed through our traditional branches and share overlapping customers with our roofing business.
Turning to slide 10, we'll review gross margins. Gross margin for continuing operations was 25.4%, increasing 140 basis points year-over-year and 30 basis points sequentially. The drivers of the strong year-over-year increase were equally split between favorable price cost and favorable mix.
On a year-over-year basis, pricing cost for continuing operations was positive by approximately 70 basis points in Q1. By comparison, we experienced 90 basis points of year-over-year price cost benefit in Q4.
In the first quarter, price cost was favorably impacted by our successful implementation of recent pricing increases, the remaining timing benefit related to the August increase and higher incentives based on stronger sales. We also benefited significantly from favorable product mix in the quarter, as we experienced stronger residential roofing sales.
To sum up, first quarter gross margins were above our expectations, driven largely by the combination of sustained successful pricing execution and factors linked to our strong residential sales, including product mix and higher incentives.
And as you know, there have been additional pricing increases announced across a broad range of our products. We are approaching those increases with the same level of rigor and execution we have demonstrated in recent periods.
Now turning to operating costs. To add on to Julian's earlier comments, we made some tremendous strides in this area, particularly the past three quarters. In my opinion, our first quarter performance is a meaningful demonstration of what Beacon is capable of delivering.
While third quarter 2020, highlighted our ability to make temporary cost reductions in a period of challenging demand, the first quarter shows our focus on managing expenses at times of significant growth.
Adjusted OpEx for continuing operations was $276 million, a $9 million reduction from the year ago quarter. Despite sales growth of more than 11%, we were able to generate a 3% reduction in adjusted operating costs, an accomplishment our entire organization is very proud of and is a testament to the dedication of our field leadership and thousands of Beacon employees delivering for our customers every day.
We continue to focus on the elements of our business that we can control and improving productivity within our largest cost centers, including labor and fleet are a major focus for Beacon. We have updated the headcount and sales for our work data to reflect current and historical data specific to the exteriors business.
As you can see, even with the significant uptick in demand over the past several quarters, we finished Q1 with headcount down more than 5% year-over-year. Our reduced headcount combined with 11% topline growth generated a significant increase in sales per hour work, which is up 25% compared to last year and improved sequentially even with the typical challenges of seasonality.
In terms of other operating costs, we continue to benefit from reduced travel and entertainment spending, which remains well below historic levels. We would expect a portion of these expenses to come back in overtime, but are unlikely to return to historic levels as we continue to leverage greater sales effectiveness and operating efficiencies. As we go forward, we will continue to implement improvements within our business as we fully embrace the continuous improvement mindset.
Turning to slide 11. We'll review our cash flow and balance sheet. Importantly, I hope to accomplish three things with this balance sheet and cash flow overview. One, reset cash flow expectations for exteriors, two, discuss the use of transaction proceeds, and three, update our pro forma net leverage.
During our previous calls, we comment on our expected cash flow performance for the combined company. Importantly, we expect our continuing exteriors business to have similar cash conversion to the combined company. Obviously, there will be unique working capital fluctuations from time to time that may impact us, but we remain comfortable with these expectations for cash conversion.
We plan to deploy the divestiture proceed - proceeds estimated to be $750 million, while a combination of debt reduction and growth investments. Our current thinking is that debt reduction will be concentrated on our ABL and term loan, with the remainder that was cash on our balance sheet, providing us with the flexibility to invest in inventory as we did this quarter and the ability to selectively invest in organic and inorganic growth prospects.
We have been effectively absent on the acquisition from the past few years because of a relatively high leverage. With the upcoming closing of the transaction, pro forma net leverage for the continuing business will decline to 3.2 times EBITDA as of the end of fiscal Q1.
Remember that we previously had a standing target of three times EBITDA, and we're envisioning roughly three years to achieve this objective. We're delighted with the expected outcome of the interiors transaction and look forward to the financial flexibility that comes with lower leverage levels.
With that, I'll turn the call back to Julian for his closing remarks.
Thanks, Frank. Before we turn the call over to questions, I want to update our fiscal 2021 outlook. Please reference page 13 of the slide materials. To begin with, it's important to clearly distinguish between our current fiscal year 2021 guidance and our previous outlook provided in November.
The prior view of sales, margins and EBITDA included our interiors business where today's outlook excludes interiors and focuses solely on the continuing.
With that, let me go to some additional details on 2021. January daily sales continued to see strong demand trends, similar to what we experienced during the November and December months. On a total sales basis, January sales increased about 6.5% versus January last year on two fewer selling days. A strong housing market continues to boost both repair and replacement and new construction, benefiting core residential roofing demand and the residential exposed areas within complementary products.
January sales growth also reflects a positive contribution from our August 2020 residential roofing price increase and several smaller increases within our other product categories implemented over the past several months.
For our fiscal second quarter ending in March, we expect total sales growth of mid to high single digits despite one less selling day than the prior year. We remain confident in the underlying demand, especially on the residential side, but are mindful of the impact of winter weather on the business like we saw last week. We continue to emphasize pricing execution and operating efficiency.
Seasonality has historically reduced second quarter margins, but we believe the impact will be smaller than in recent years, and we expect a meaningful year-to-year gross margin increase of nearly 200 basis points.
In early December, we announced a price increase for residential roofing products that became effective last week. We expect to implement this increase with the same level of execution as we did with the August increase.
We continue to emphasize improvement in operating efficiency throughout the organization and have made tremendous strides in this area. You've heard us talk about the learning’s from last year and the opportunity to apply those principles to our seasonal winterization efforts. While fully engaged in this effort, we are carefully balancing efficiency with customer service given the favorable residential demand picture we are experiencing.
For the fiscal 2021 year, we continue to take a balanced view on external market conditions, featuring a strong residential end market and continued uncertainty within our non-residential facing products.
With that said, our confidence in the overall environment has clearly improved since November. Regardless of market demand, we remain focused on what we control, generating improved sales, gross margin and operating performance, continuing to execute our price actions to more than offset inflation and driving efficiency across the organization. We have emphasized these areas throughout 2020, and we'll continue to do so in 2021.
Our updated 2021 outlook from continuing operations now assumes high single digit sales growth. We expect fiscal 2021 adjusted EBITDA to be between $500 million and $525 million for continuing operations, which represents a meaningful increase from the $399 million exteriors pro forma adjusted EBITDA for fiscal 2020. This improvement reflects a combination of strong sales growth, gross margin gains and favorable operating leverage.
With that, Cathy, we're now ready to open the line for questions.
[Operator Instructions] And your first question is from Garik Shmois from Loop Capital.
Congratulations on the question. My question is on gross margins. Could you flesh out a bit how much of the Q2 gross margin expansion is pricing versus mix? And how should we think about that relationship through the rest of the year as it relates to your guidance?
Garik, thanks for the question. I appreciate the comments on the quarter. We are very pleased. Obviously, we've got a very strong residential backdrop. We're still in Q2 overall. So the sequential numbers are certainly positive overall, we believe. But I think that the meaningful improvements on year-over-year is a balance between the two numbers. Frank's got some specifics on that, I believe.
Yes. Garik, if you think about it, the second quarter is going to benefit from the combination of the August pricing increase, plus the February pricing increase, at least two thirds of that in the quarter. And if you look at mix in the first quarter relative to the prior year, you're looking at about a 5 percentage point swing. So resi is 5 percentage points higher in terms of mix than it was a year ago, and those trends will largely hold in the second quarter as well.
So it's going to be a meaningful part of both price, cost and mix. We might get a little bit of timing benefit in the quarter as well. You might remember that we had some timing benefit from the August pricing increase between fiscal Q4 and fiscal Q1. So it's going to be obviously healthy on both sides, and we look forward to sharing that with you when we get a couple of months down the road.
Your next question is from Phil Ng from Jefferies.
Hey, guy. Just curious to get your view on channel inventory. It doesn't seem like there's much there just because demand has been pretty robust, but the ARMA data was pretty eye-popping. And for you, your inventory level is only marginally up, I think, up sequentially 90% [ph]. So just curious to get your take on what you're seeing in the marketplace and how are lead times kind of progressing on the residential side right now, relative to what you deem as normal.
Thanks for the question, Phil. Yes. Look, as I said in our prepared remarks, we believe the residential backdrop is strong. We continue to see extended lead times. We believe that both the channel and the manufacturers continue to have depleted inventory, particularly where we would normally be at this point over the year.
And I think that if you looked, as you said, the Q4 was a little eye-popping. I think that if you look at it, it was probably about all the manufacturers could produce and ship. And I think that the distribution channel, knowing that sell or the leading at least that the future [indiscernible] is going to buy in as much as they can. Much of the industry on the shingle side was on allocation.
So obviously, we did all we could, and we believe we did quite well during the quarter. But you're right. I think that overall, where we would normally be at this time of the year and what we would be looking at in terms of inventory; it's probably low in the overall channel. We believe it' low in manufacturers. So we think that's going to lead to a very positive environment provided you see continued strength in the residential market overall.
That's really helpful. And then any color on what you're baking in from a price, cost spread? I mean, you've obviously seen 70 basis points of improvement the last two quarters, and you're anticipating pretty good traction for some of these recent increases, notably on the residential side.
Is that type of spread what you're baking in at this point in your guidance? And if it comes in better, I guess, is that an opportunity to see upside to your guidance? Thanks a lot.
Thanks, Phil. So certainly, we are focused on the execution side of the price increases. And we certainly believe that, as I said, that there is expansion potential in our gross margin based on improving price.
What I think we've got to be aware of is, we just had a price increase announcement that went through last week. That's still in the execution phase. We've still got a lot of the year to go. We're still in early February. And so calling what that's going to be for the rest of the year is going to be a challenge.
But we certainly think that given the backdrop, if it remains where it is, if we don't see a resurgence of COVID, if all of the things that we believe about the market today, which is that the underlying demand is strong, we certainly believe that there can be positive upside to the overall pricing environment for the year.
Okay. Super helpful. Thanks for that.
Your next question is from Kevin Hocevar [Northcoast Research Partners]
Hey, good evening, everybody and nice quarter. You guys are raising the sales guidance for the full year to high single digit percent growth from low single digits. Obviously, there's a lot of moving pieces in there. There's been a lot of price increases. So curious, if you could give us some idea of how much of that is price versus volume?
And then within the segments, how do you expect the different segments to perform versus that? I'm assuming from all the commentary, resi above, non-resi below, and then complementary somewhere in between. But curious if you could give us just a little bit more color on what that high single digit percent growth is made up of?
Hi, Kevin. It's Frank. If I just think about the first quarter, the 11% that you saw, that was primarily volume-driven. And certainly, there was some pricing in there from August. And what's going to be interesting to see is the layering all of additional pricing increases. Obviously, you get February on top of August. And then who knows what's going to happen? There's talk of additional pricing increases in the spring and the summer. So that'll certainly be beneficial.
And as Julian mentioned, we'll be looking at how we approach that, and you should see us essentially replay the playbook that we did back in August that we're doing now in February.
So if you look at it from that perspective, we should be good. In a little bit of an answer to Phil's question a second ago, Phil, we sold everything we bought in both fiscal Q1 and fiscal Q4. And so material availability is the only question mark we have in terms of being able to fulfill the demand that's out there.
So if we're able to continue to buy, we're going to be able to continue to sell. The backdrop is extremely strong, as you know. Whether or not cost on it [ph], Phil was correct in terms of the length of winter, we'll have to see. But if the construction season opens, appropriately, we look forward to a really strong spring and summer, and we'll look forward to those pricing increases and approach them in the same way that we've done before.
Thank you…
Kevin, I may add to that. Particularly as you get later in the year, that becomes more challenging in terms of volume because if you think about where we were as an industry in Q4, and basically, as Frank said, we were selling everything we could buy. So, volume will become less of a growth driver later in the year than price will.
Okay. Got it. Thank you.
You have a question from Ryan Merkel of William Blair.
Hey, guys. Two questions from me. First off, can you break down the 21% residential growth into volume and price?
In the shingle side, which obviously was higher than the numbers that you saw there, the volume number on a year-over-year basis was about 24.5%, if that's helpful to you. Obviously, you can do the math on pricing increases. We don't get full pricing increases on every shingle that we sell given contracts and things like that, which take time to roll over, but the volume was really impressive in the quarter. Your second question?
Yes. And the second question is, just curious if you have any updated thoughts on EBITDA margins long-term. I mean, you just put up a huge margin print this quarter, and some of the operational initiatives are clearly working. So, just an update there, I think, would be helpful.
Thanks, Ryan. Well, as I've said before, look, we don't believe there's anything structural to going beyond and going back to kind of what we've indicated historically, and the last quarter just prove that. And I continue to believe that the historical performance on average has been around the 7.5% EBITDA margin.
Look, I continue to see plenty of upside from that. And obviously, one of the things that we got to work through is that it is a seasonal business, how we manage to - we drive is a little bit of an odd quarter. Normally, we would see more winterization. The demands remain strong. We're concerned about making sure that we've got people available to serve the customers through this winter.
And so this is a little bit of a difficult one to gauge as well. But fundamentally, we're looking long-term. It's substantially improved overall EBITDA margin on a continuing basis, and that's what Frank and I are working on.
As to the actual guidance around that, we haven't settled on it yet. I think that there's just a lot of optimism that we can see some structural improvements that are starting to take hold in the company.
Very helpful. Thank you.
We have a question from Ketan Mamtora from BMO Capital Markets.
Thank you and congrats on a strong quarter. I want to come back to capital allocation again. So following the pending divestiture of the interiors business, how do you think about sort of the right leverage for Beacon? And then from an M&A standpoint, what areas are sort of most interesting to you guys? Thank you.
So, on the capital allocation question - good question, this certainly puts us into a range that we had previously discussed, three point times - two times on a pro forma retrospective from the end of Q1. Obviously, you can imply some cash flow throughout the remainder of 2021 and get to another number that's below that.
We haven't really thought much about our next target. If you look at our peer set, somewhere in the 2x to 3x range is probably fair, but not a commitment more just looking at the peer group. It's an active conversation that obviously we're going to have with the Board, but we're in a tremendously different place than where we thought we were going to be at this juncture without the divestiture where we thought it was going to take us probably 3 years to even get to the first target that we set. So delighted with that. And then the next part of your question, I'll defer over to Julian.
Thanks, Frank. Yes, Ketan, in terms of the areas of M&A, obviously, we've just divested the interiors business. We're going to consolidate around the business. We have, make sure we can improve that. We see areas that are - opportunities for us to grow in the businesses that we are in commercial, residential roofing and complementary exteriors. Certainly, that's an area where we will be focused.
And I don't think that we're going to explore most beyond that and then in the near term, particularly given as we've just exited interiors jumping back into something else that's outside of our core probably isn't where we're focused right now. But we see plenty of opportunity for growth within the core markets that we have, certainly roofing and then the complementary exterior products that we're in today.
We have a question from David Manthey from Baird.
Yes. Hi, guys. First question, of your old revenue and EBITDA guidance, how much of that was for interiors?
Yes. We didn't parse it out like that. Look, I guess, the best data point to give you is when you look at the breakdown of last year's numbers, you had 472 was the overall number, 73 of that was interiors and 399 of that was exteriors. Not surprisingly, we expected growth in both segments. So that should help you a little bit.
Sure.
But I'd say the predominant aspect of the new guidance, obviously, is coming from the strong backdrop, the pricing, et cetera, but just did not parse out the budget numbers or anything like that in the guidance.
Okay. And second, do you plan on ultimately filling the COO position? Or are you just going to eliminate that role?
Thanks for the question, David. We will be eliminating the COO role. The division presidents who currently report to Eric Swank will report directly to me.
Great. Thank you.
And you have a question from Keith Hughes from Truist.
Thank you. Frank, going back to one of your answers to another question on the volume and price in residential, did you say volume is up 24%, 25% in shingles because that’s…
Asphalt…
I'm sorry?
Yes. Asphalt shingles. Where you're going to go is [indiscernible] that's above the overall revenue in there. And remember, in that category, you've got all sorts of wood products, clay products, med products. You've got all sorts of other residential roofing products. And certainly on the tile side, those were down. So you're getting the sort of throughput of that, but you should anticipate that my comments were on asphalt, volume up 24%, 25%, and then pricing on top of that. And then you got to do the math in terms of the weighted average to get back down to the residential revenue number that I gave you.
And that pricing - are you willing to say about how much pricing was up for shingles?
Well, if you look at it on an announced basis, that's going to give you one number, which will be too high. If you look at it on a kind of a 50% to 60-ish percent capability there, because we've got contracts, we've got volume-based customers that obviously, do a little better, et cetera, and then you probably get down to about the right number.
Okay.
Your price, cost number will be helpful as well.
Okay. And then final question on non-residential. In your guidance, do you anticipate that turning positive in the second half of the fiscal year?
Not really. I mean, could it happen? Yes. We're not banking on that. We're assuming that it's going to be flat to down pretty much the whole year. If you listen to some of the commentary from some in our peer set, they're projecting maybe a better second half than we are. We'd be delighted if they're right, but that's not what our guidance is based on.
Okay. Thank you.
And remember, we had a little bit of pull-forward in the product for the next quarter. And so there is a number of things going on in commercial that we're still taking a balanced view on.
Okay. Thank you.
And you have a question from Kathryn Thompson from TRG.
Hi. Thank you for squeezing in the end. On complementary products, you referred to it a little bit earlier in the Q&A and talked about it in your prepared commentary. But could you flesh out in terms of your - the growth in that category, and more specifically the strategy not just from a geographic standpoint, but also help us better understand the type of products that you may want to add to the overall mix? Thank you.
So Kathryn, let me take the first part, and then Julian can talk strategy and products. Probably the biggest piece of the puzzle there is siding. Siding is well for us in the quarter, essentially, kind of, in line with the overall complementary revenue number that you saw. A lot of that is in the sort of, North and the Midwest in terms of geography and we would continue to see that grow with the residential environment.
Lumber is another big piece of that. That was up significantly, i.e., a lot higher than the revenue number that you heard us talk about in the line of business. It's a combination of both volume on applied with the OSB side, as well as the pricing you've seen the spot prices of lumber there, which are, gosh, probably up 70% or 80% from the beginning of the quarter to the end of the quarter.
So those are two, I think, big inputs into complementary. And we would essentially see those trends maybe - but for the pricing on the lumber side, we would expect those trends to continue along with the roofing piece that we've already talked about.
Yes. So in our complementary exteriors category, we've certainly got vinyl siding, other forms of siding as well. And we've got some windows and doors business. We've got the waterproofing business that is probably more on the commercial focus side. And then we've got some solar products, windows.
As we think about, sort of, strategy going forward, I mean, obviously, the focus that we're going to provide within this business is really around some of those areas where we think we can be a better company and leverage the skills.
Some of the products that we have are very regional, and we've acquired our way into those businesses, making sure that we have competitive advantage, that we have a different value proposition and that we can build out our capabilities in that space is going to determine where we continue to invest. And we're going to continue to explore those options now that we've got some flexibility with our financial strength.
And pulling the strings a little bit more on that, Julian thank you for that explanation, do you propose to have - when I think about other distributors, specialty distributors that have gotten more into complementary products, they tend to have a strategy of going after more value-add and trying to diversify away from, say, more kind of, a more commoditized by lumber.
Is that part of it? Or is it more regional? Because that's when nature, you're selling now, but really kind of into - from a strategic standpoint, kind of how do we think about it?
So let me try and answer it this way, Kathryn. As our core business, obviously, more than our 80% of our business is focused on roofing. Our core customer is the roofing contractor. Where they go, we tend to follow. If they're in the siding business, which many of them are, we fold them into the siding business, and we'll continue to serve their needs.
So we're looking for those opportunities that really overlap with our core customers. And as we grow from there, we think we can build capabilities and maybe into more specialty businesses. But today, we're really focused on our core roofing customer and building out those capabilities in that space.
Okay. Great. Thank you.
And you have a question from Mike Dahl from RBC Capital Markets.
Thanks for taking my question. Julian, my first question is around demand kind of big picture and just your views on kind of sustainability and durability of demand. I certainly appreciate the enthusiasm around resi, but part of the roofing story in the past has been less cyclicality. And if you look at the industry and the ARMA shipments, we just put up the highest number of shipments since Katrina.
So how do you balance kind of some of the tailwinds that you might see from new res versus potentially having pulled forward some demand on reroofing or storm in 2020 and thinking about kind of continued growth beyond the near term from an industry level?
Thanks for the question, Mike. Certainly, there is an element of what you said there. But let's be honest, I mean, last year wasn't a huge storm year either. And so the residential demand is related to housing turnover. It's related to sort of demographics. It's clearly related to low interest rates, people force to stay at home, government stimulus. We've got all of those things going on. Many of those certainly will act.
But I wouldn't have said it was a particularly strong storm here, and you referenced the best year since Katrina, but there's still some of that, that's going on. If you go back 20 years, you've got the peak roofing - sorry, the peak housing cycle coming up. We're sort of going into what we believe is a cyclical upturn in reroofing demand based on the housing starts that were 20 years ago, as roofs slots 20 years.
And so we continue to look into the roofing market and think there is great opportunities. We also think that there is great opportunities to share. I mean, as we think about where we've been and what the opportunities are, we think that as we continue to be - build our capabilities in this area that we can grow both organically and inorganically in this space. And we continue to think that overall, the roofing market will continue to grow. Demographics continue to add houses. We'll continue to see those houses turnover. And we believe that fundamentally, it's a great business to be in.
It's also the largest category of building materials you can be in. It's such a large market that the opportunities here are as good as anywhere we see across other categories. So we think it's a great place to be in. We think we're advantaged in this space, and we think we've got plenty of room to grow over the next several years.
Thanks. That's helpful. And it makes sense. To be clear, the reference I made was to the number of overall squares that we shipped that year, not specific to storm, but understood.
The other question, just going back to the complementary side. I think it's really helpful detail breaking that out. I wanted to press a little more on just - if you could break out specifically how much of your complementary business is lumber today because it usually wouldn't be that big of a deal. But even if it's, say, 5% and your lumber sales are 2x between price and volume today, that's a pretty nice mid single digit plus tailwind and just kind of - numbers here on what percentage actually represents, but it is - should probably be up 2x. So could you give us a little more detail on what exactly the percentage mix is of lumber in there?
Yes. So lumber on a dollar basis is about 15% of the complementary category, and it was up meaningfully. I wouldn't necessarily put the best biggest number on it as you just did, but it was a big number. I mean, it was up meaningfully on a year-over-year basis. But even with that higher number in fiscal '21, it's still only 15% of that category.
Got it. Okay. And we should expect that, I mean, given the pricing dynamics we're seeing on...
Watch the pricing. Yes. You got it.
Yes, yes. It should continue at least the next couple of quarters. It seems, right?
Yes. The spot price is awfully high. It does have volatility, as you can see, on literally a week-to-week basis. But yes, we would consider that should follow the residential cycle as well as the new construction cycle. So I would assume that it would stay elevated hopefully throughout 2021.
It's a very regional business for us. It's not a broad-based category. There's a little bit obviously that we carry. So there is some new builders in there - new homebuilders that we service in that category. So it's - it would be a niche category for us. But obviously, it's - with the pricing dynamic and the new housing construction dynamic, it has impacted the numbers.
Okay. Great. Thank you.
And you have a question from David MacGregor from Longbow.
Yes. Good afternoon, everybody. Congratulations on a great quarter. I guess, I wanted to just start off with a question on the OTC networks and just if you could talk about how comp growth and gross profits compared in the OTC networks versus the non-OTC networks stores?
Thanks for the question, David. Yes. Look, we tend to focus the OTC network on larger MSAs, as I said. So we tend to be focused on those. So as we've seen sort of the housing turnover, we've certainly seen strong performance in those branches.
What we're really focused on there is the differential between those in the non-OTC branches. We believe this is really about competitive advantage differentiating, particularly against smaller regional competitors that wouldn't have the ability to network their branches and deliver.
And I highlight and talk about areas like Atlanta and New York City when getting around a city at a particular time of day is a real challenge. If you want to be the first delivery of the day at 7 A.M., the reach that you have out of a branch in Atlanta at 7 A.M. on a normal week day, it's not very far. And so the ability to move our product around and still serve the customer is what we're looking for.
And we're still early in this. We believe that we're seeing the benefits in terms of the length of delivery. We've seen - we've got specific examples of customers that we've been able to serve that would not - we would not have been able to serve because of it.
And we've seen our warehouse costs decline. We've see our inventory turns improve. We're in the early innings here. We're not fully developed in this space, but we're very committed and believe that this is a great differentiating strategy for us, particularly against the regional competitors.
So the best is yet to come on this, is that how we should take it?
Absolutely.
Okay. And then second question, just with all the progress on the strategic initiatives, you're building up your online, the OTC we talked about and the underperforming, that bottom quintile stores, obviously, a stronger value proposition.
Can you just talk about your market share right now? And how that might be growing? And also to the extent you're comfortable, talk about kind of the competitive reaction to all your progress? Thanks.
Look, I'd tell you, David, in this environment, it's very difficult. We've been on allocation from the standpoint of the manufacturers. The entire industry has been very tight. In that environment, it's very difficult to determine market share. Obviously, we base - the best proxy we have is looking at some of the ARMA shipments, but they do not correspond on a quarterly basis to market shares in any way, shape or form. They tend to move around. Industry buys in normal times. I mean, it's been really difficult.
We certainly think that over the past 12 to 18 months that we've seen some incremental gains. In this market, it's going to be very difficult, but we think that, like I said, that we're starting to build a differentiated value proposition for the customer base. And we think that, particularly going forward, it's increasingly difficult for the smaller and the regional companies to compete in this space. And I always like to cite things like in our digital area, we continue to see threat actors in this space, looking for ways to hack companies.
And if you're a contractor and you're totally dependent on your credit rating, making sure you're dealing with a company that can assure usually your data is well protected and your - can demonstrate how they're doing that, it's going to be a meaningful differentiator going forward. So we think that our strategies and initiatives will continue to build on the success we've had over the last 12, 18 months or so.
And David, one thing to keep in mind, just to add on Julian's point. When you're selling everything you're buying. Market share is a little bit of a misnomer in terms of what we're focused on. Obviously, we're focused on procuring everything we can possibly get our hands on and selling every shingle as we can.
And right now, that's successful. We look forward to the opportunity to compete in an environment that allows us to show the market share gains. It's just - with all the volatility norms, it's kind of hard to parse that out right now.
All right. That makes sense. Congratulations on all the progress.
Thank you.
Thank you, David.
And you have a question from Michael Rehaut of JPMorgan.
Hi. This is Elad Hillman on for Mike. Thanks for taking my question. First, I appreciate all the color so far on the operating expenses, which I think was much lower than most of us had expected, and especially in such a short time.
I was wondering if you could expand on the largest drivers there, either in terms of just volume leverage or reduced cost, and how that compared with what you may be expected? And lastly, how we should think about OpEx on a more normalized basis?
Yes, I think this has been a big focus for us. Assumedly, since I joined the company, 15, 16 months ago now, was around the operating performance of our branches, whether it's our underperforming branches, or whether it's our entire network.
As we've said, we learned a lot about how to operate in two very different environments, so if you think about a normal cycle, you will see a drop and then a peak. That would normally be 3 to 5 years. We've seen that in 3 to 4 months. And we think we demonstrated that we can operate and get the compensation we needed to in the sort of the March, April timeframe.
So, in a environment where you saw demand collapsing, even if it was only for a short period of time, we were able to take our own cost actions and get our business in the right place. And then, the opposite happens within 2 months of that and you're looking at us all bad [ph] environments and you've got to be able to continue to serve the customers.
I think what we've learned is really around some of the metrics that we put in place over the last 6 months or so, and I'm particularly I'm proud of our branch managers and field district managers, vice presidents, who've been on this every day. I mean, the great thing about our systems capability is that we can actually show on a daily basis. The productivity metrics that we have and we can report them day over day – and if we have a wet day in - in a market if we get the head count down as we needed for us.
Obviously, some of the areas have been sort of in the center, where during the COVID environment you will get travel and expenses. You're [indiscernible] meal bags. You're not hosting the customers in the same way. We expect those decrees back in overtime.
But we think that what we've uncovered is a tremendous amount of leverage in the operating facilities, but also in how – it has been a lot of work. A lot of our team at the branch level has been doing just a tremendous amount of juggling over the last 6 months, 12 months because of the environment we're in where we, like I said, had both a crash and a boom within a very short period of time.
But the learning’s that we've taken from that and how we're going to continue to implement them, we continue to see opportunities to improve these numbers over time. I don't know that we found kind of what we think is the right number to target yet, but we continue to see opportunities to improve these numbers overall. Frank?
Yes. I think if you want to just talk categorically real quick. It was $9 million lower on a year-over-year basis. To think about that as being lower wages and over time based on the headcount and the sales per hour work measures that we put in the deck, lower fleet maintenance cost and lower fuel costs, we did have about 5% fewer trucks active in the quarter than we did the prior year and then the lower travel and entertainment that we've mentioned in the prepared remarks.
The offsetting ones there are really the incentive comp. We're off to a really strong start this year. So that will be reflected in higher incentive comp than the just normal wage inflation every year. So those are the offsetting numbers. But obviously, that's down to a really good result for us.
Thanks. That's really helpful and really encouraging. I just have one more quick one, if I could squeeze it. I thought it was really interesting that you guys talked about accelerating sales trends in November and December. And I was wondering if you could just break out how much of that was due to maybe stronger new resi trends versus also strength in repair model and stronger storm demand?
Yes. I think it was all of the above. We had a longer construction season, which allowed us to - from a year-over-year basis, November was stronger than - last November. December was stronger than last December. January is stronger than last January.
So we're continuing to see that really across the board. The pricing is an element. The volume is an element, and our execution is an element. So we're continuing to see very, very positive trends, especially on the residential side.
Great. Thank you.
That concludes the questions. Now I would like to turn the call back over to Mr. Francis for his closing comments.
Thank you, Cathy. And thanks to everyone for your interest. Before I close the call this evening, I do want to say thank you to Brent Rakers, Head of Investor Relations. Brent is with us today, but he has decided that he will be leaving to pursue a personal passion after 5 years with Beacon. I know many of you have interacted with Brent and know him well over the years. So we're excited about the future for Brent and what he is going to be doing. But I'd like to thank him for all of his efforts over the last several years of Beacon. So thanks very much, Brent.
And again, thanks for everyone for joining the call this evening. Obviously, we believe we've delivered a strong quarter. We think it's the foundation on which we can build a strong year, and we look forward to updating you on our next quarter's performance in a few months. And we hope all of you in the meantime stay safe and healthy, and enjoy the closing months of winter. Thank you, all.
This concludes today's conference call. You may now disconnect.