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Beacon Roofing Supply Inc
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Good afternoon, ladies and gentlemen, and welcome to Beacon Roofing Supply's third-quarter 2019 earnings conference call. My name is Don, and I will be your coordinator for today. [Operator instructions] As a reminder, this conference call 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, August 6th, 2019, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures.
The reconsideration 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 and presentations that will be referenced during management's review of the financial results. On the call today for Beacon Roofing Supply will be Mr. Paul Isabella, President and CEO; Mr. Joe Nowicki, Executive Vice President and Chief Financial Officer; and Mr. Eric Swank, Chief Operating Officer. I would now like to turn the call over to Mr. Paul Isabella, president and CEO. Please proceed, Mr. Isabella.
Thank you. Good afternoon, and welcome to our third-quarter 2019 earnings call. Results this quarter fell short of expectations, but that was largely the result of weather, which we'll get into in a moment. I'd like to start by pointing to several positives that support optimism for the fourth quarter and next year.
First, residential roofing sales were up 3% in the quarter. Free cash flow was positive at $29 million during the quarter, something we've not accomplished in any third quarter dating back six years. On a sequential basis, we reduced debt, another excellent accomplishment that runs contrary to typical seasonality for our business. In July month sales growth has improved with an existing market sales increase of 3% to 4%.
Similar what we experienced in early January, and then in the second half of March, when the weather clears, levels of underlying demand improve. Residential sales were up 12% organically in July, very encouraging and speaks to the weather-reduced delay seen in Q3, 12% was the highest monthly growth for resi in 18 months. And the Allied integration continues as planned, and the synergy target of $120 million is on track versus the present target of $110 million. And now a few comments on cost reduction.
In addition to our focus on growth and debt reduction, in late Q3 and early Q4, we took aggressive actions to reduce our cost base by $25 million. These were personnel actions, permanent in nature, with the majority in non-customer facing positions. The actions will improve leverage and profitability, especially as volume increases, as we expect in Q4 and beyond. The benefits will be realized starting in Q4, and demonstrate our commitment to continuous improvement.
Actions like these are never easy, but they were needed to position our future for streamlined operations and enhance profitability. Now a little bit of weather commentary. Related to weather variability, we have done work over the last few months, and we now have a meaningful way to quantify the impact of harsh weather as mentioned in our press release. Joe will give more detail on this in his prepared remarks.
The summary being severe rain resulted in approximately 25% to 30% more rain days compared to the prior year. This impacted the quarter by approximately $0.20 of EPS and $85 million in sales. I will say that while we can't control extreme weather events, we also know, they will normalize over time. Keep in mind we have tremendous branch density across the country and a very diverse product offering.
We touch every major market in the U.S. and Canada. And as a reminder, 70% of our product we sell is roofing, which requires work on roofs to be done. Working at a roof in harsh weather can be dangerous and this naturally impacts demand.
Extreme weather events like we've seen in Q2 and Q3 are rare. And with our dense footprint, these events can impact our business as was the case the past two quarters. Conversely, when damage occurs due to severe weather in a market or multiple markets, our dense footprint works in our favor to drive superior sales, profit and cash flow as we service this hyper demand. That coupled with roofing nondiscretionary, makes for a great business model.
I've said it before and it's worth repeating, our future is very bright. And I will give an update on a few of our key strategic initiatives. I'll start with digital, which has made good progress during the quarter, and is a clear differentiate of our customers. I feel very comfortable stating that Beacon has the industry's leading e-commerce mobile app, Beacon Pro+ and the industry's best visualizer and estimating tool with Beacon 3D+.
From a sales perspective, we estimate digital sales will end the fiscal year at the proximately $350 million, which is triple our 2018 sales, and well on our way to our $1 billion goal. Quite possibly, the strongest indication of success is that we're seeing those customers who engage with us digitally outgrowing our in-store only customers. Meanwhile, those same customers are benefiting from our digital platform by saving time in the ordering process, becoming more efficient through a more precise delivery schedule system, and using our estimating and visualizer tools to raise their win percentages on bids. In turn, Beacon's benefit as a higher share of our customers total spend, as well as, having core customers helped out overall in the industry, big benefits for our customers and for Beacon.
The next initiative is our partnership with JobNimbus, which allows our contractor base using their project management software to seamlessly build orders, and directly link to our Pro+ digital ordering platform. Since the announcement of the partnership three months ago, we have continued to be very encouraged by the early utilization rates. As a result, I'm confident Beacon will enjoy strongest return in future quarters from this strategic software integration. The next initiative was the addition of delivery tracking, which includes on-demand notifications, friendly order was received, scheduled, and ultimately, when it was delivered to the job site.
I previously mentioned our delivery tracking solution timeline started with a pilot in January, and by early May, we have gone live in 15 markets. We're now operating delivery tracking in more than 100 markets and that number grows every week. And now an update on our regional service area market approach, which is also making great progress. We're on pace to roll this out to more than 50 markets consisting of approximately 250 branches.
We're focusing on centralized dispatch to drive an improved and more efficient customer experience. Specific benefits include reduced delivery cost, inventory and CapEx leverage, and more efficient use of our personnel. Most importantly, Beacon customers will benefit from better inventory access, greater delivery options, and an enhanced response time to their needs. We will keep you updated as we continue the plan to roll out additional markets.
Very good progress on some key strategic initiatives. To wrap up my comments, I would say, we have a well-thought-out strategy, and a skilled leadership team that's executing very well. Our products touch every segment of our economy. When healthcare facilities of all types are built, expanded or remodel, we supply the dry wall, ceiling tiles, roofing, and more.
When government grows, we grow. When the private sector grows, we grow. We don't rely specific segments of the economy to grow in order for us to grow. That's one of the reasons we're a fantastic investment.
Our industry will continue to grow as we will, and we'll stay focused on investing customer value-added offerings like our digital suite and overall contractor tools that help them grow and increase their profits. Now Joe will provide some additional color on a quarterly trends and outlook. Joe?
Thanks, Paul, and good afternoon, everyone. I'll now briefly walk you through some more detail on the positive accomplishments for the quarter that Paul described. I'll also talk you through the impact that heavy rainfall had on our quarter, and then provide an update of fiscal 2019 expectations. First, on the cost of operations for the quarter.
Residential revenues on a same-day basis were up in five of our seven reported geographic regions, and in total, we're up 3.1%. Most notably, our Southwest and Midwest regions were both up high single digits, representing return to growth after the post hailstorm impacts with previously discussed. Residential sales also grew in all three months of the quarter with June ending stronger almost 6% growth, and as Paul mentioned, July residential sales were up 12%. Second positive accomplish to highlight was our ability during a difficult weather-impacted quarter to drive price increases into the market.
Pricing continues to be competitive, but thanks to the value our customers place in our high level of service, we're able to pass along selling price increases of approximately 3% for the quarter. The third area to highlight is our balance sheet. This continues to be an area of focus, and you can see that in a solid third-quarter performance in both debt pay down, and free cash generation. Q3 is traditionally and negative free cash flow quarter, where we use cash to build inventory and accounts receivable as part of our busy season.
This unit teams did a great job collecting fast on our AR and improving our DSO, while at the same time, managing our inventory balance down year over year. This contributed to positive free cash flow of $29 million, and a net debt pay down of $24 million, strong performance for a seasonal third quarter. As a result, our free cash flow conversion net income continues to remain over 150%. Now I wanted to provide some more specific color on the weather challenges we've faced.
Similar to what you've heard from other building product company's, our third-quarter sales were materially impacted by the unfavorable weather. And with almost 70% of our sales from roofing, we have an even greater impact from rain as contractors are hesitant to begin a roofing project even with the threat of rain. This quarter represented the second rainiest June quarter during the past 100 years as reported by the National Weather Service, and was well above normal levels in nearly every region of the country. This compares to Q3 of 2018, which was more of a normal rain year.
Earlier in the year, we began engagement with the third-party weather analytics firm to obtain various weather data by ZIP Code for each of our specific branches. From that data, we were able to analyze the rainfall by ZIP Code this year compared to last for each of our branch locations. We used this to estimate the amount of incremental miss sales days across our footprint. In total, we estimated that the significant rain conditions cause an incremental three days of miss sales on average nationally.
Our most significant when impacts are felt from the Northeast to the Central part of the country and into the Southwest and Mountain regions. All of this tied very closely to our internal results. From this brand specific sales data we were able to complete at approximate $85 million negative impact on our revenue. Then using estimated gross margin and operating expense data, we were able to calculate an approximate negative $0.20 impact on our EPS.
I also want to comment briefly on the level of storm activity this season. Following the 2018's below normal hail season, we'd like to guide more conservatively around the 2019 expectations involving hail-related strong demand. Thus far, external data shows that the demand from hail-related events are down even further year over year, and we expect that to continue for the full year due to the softer damaged during the peak season of June and July months. Now let met go over updated guidance expectations.
Following the second quarter's harsh winter weather and the third quarter's rain-driven short fall, we're reducing our '19 outlook to an adjusted EPS range of between $2.30 and $2.50. This implies that Q4 guidance of same-day organic revenues up 5% adjusted EPS up 12% and increased EBITDA margins, all on a year-over-year basis. While improved performance year over year, we realized it would be difficult to make up for like Q2 and Q3 shortfalls in the remaining three months of the year, and we have adjusted our forecast accordingly. We are off to a good strong start with the July sales as the weathers improve.
We've also incorporated our recent cost reduction actions into this forecast. As Paul has as mentioned, our business and industry fundamentals are very solid. While there will always be quarterly volatility in our business due to the weather, over the long term, we'll benefit from the stability of our business model that's focused on a 70% repair and remodel customer base. I'm confident that our organic growth sales initiatives, coupled with our focus on lowering our fixed cost and reducing our debt, will drive improved levels of financial performance going forward.
I'll now turn the call over to the operator to take your questions.
[Operator instructions]
Your first question comes from Garik Shmois from Longbow Research. Please ask one question and one follow-up. Your line is open.
Thank you. Garik Shmois from Longbow. I wanted to ask on gross margins. First off, can you provide some color on what drove the variance on that line? And where you stood on price cost with - in particular on residential?
Certainly, Garik. To give you a little bit more detail on the gross margin. So the decline was really split between a slightly negative mix, coupled with a slightly negative price cost. Price was roughly around 3%, as I mentioned, and costs were up roughly around 3.5%.
As we've talked about before, a lot of that was driven by the difficulty of getting price in some specific volume-impacted markets. As we've always said, softer demand relates to more difficult pricing.
Okay. And my final question is, with the cost savings actions that are announcing, is it fair to assume that is coming out of the SG&A line? And if so, could you speak to, I think, there's some comments about improved operating leverage moving forward. Would these cost savings actions change the way we think about operating leverage on stronger sales relative to your prior targets?
So in your first question around the cost elements, yes, they - the cost actions were SG&A cost related. The second part, yes, they were geared toward lowering our fixed cost structure, which would help and improve our operating leverage going forward, correct.
Garik, that's why we said they were permanent in nature, right? So they are not variable at all. We thought that was important.
Your next question comes from Kevin Patterson from Wells Fargo. Please ask one question and one follow-up. Your line is open.
Hi, good evening, guys. Just first wanted to dig into your complimentary building segment. It looks like core rev sell, mid-single-digits while the wall board industry demand seems to be recovering a little bit. Can you just walk us through what's going on there? And how should we think about margins? Are they following a similar path as revenues? Or those margins down more severely than other two segments?
Yes. Truman, as we look - our complimentary business is very big within it is the interior biz, which we don't break out and talk about. But in general, I mean, the complimentary business saw the same pressure related to weather and or even prior-year comps. A little bit of impact based on what we've seen with some of the macro trends like new construction being slightly down, etc.
If from a margin perspective, again, we don't get into that level of detail, we can say it's performing very well. I mean that's the comment I'd make.
Okay. Okay. And then thank you for that. Just a kind of a big picture question. In the quarter, your revenues were flat year over year, EBITDA dollars fell about 16%. Could you just walk us through the moving parts there? And some of the bigger buckets as to what kind of went against you in a flat revenue environment?
Sure. This is Joe. Well, the two big items that drove that decline in the EBITDA, as you mentioned was, first one, we talked about the weather-related impact. So the weather-related impacts were one of the first big numbers to, as you know, our demand much higher in the summer.
Our anticipation was toward that higher demand and our revenues were off because of the weather mix. The second was really the decline in gross margin. As I walk through before with Garik, in regards to the mix in the negative price cost. It was really those two pieces combined, Truman, that drove the missed two, our - earnings on a year-over-year basis.
Your next question comes from Michael Eisen from RBC Capital Markets. Please ask one question and one follow-up. Your line is open.
Good afternoon. Thanks for taking the questions. Just wanted to start. Joe, you mentioned that pricing for the company was up 3% in the quarter. Can you give any more information about how pricing trends were across the different segments?
No. We - as you know, we traditionally do not provide any segment or specific data in regards to product lines or product categories for just in total.
I think, I'll add on and say, actually, considering we understand where the results in general ended up. But considering, and Joe talked through the amount of rain we saw, which was quite severe. What we saw in the pricing side was actually not bad, considering the amount of pressure we saw as we went through the quarter. So did we want more? Of course, but given that demand piece, I think we ended up quite well in the 3% range.
Got it. That's helpful. And then following up. Just looking at the updated guidance and fourth quarter in general, it looks like your spitting a bounce back in margin expansion, and where you sit.
So can you talk to if there's any lingering headwinds as you went into July and what we're looking for the last quarter? And then more broadly, when I'm thinking of the longer-term goals, you guys have set out the 9% to 11% EBIT margins, how does a situation like this or how does the shortfall of this year impact your ability to continue progressing to that number?
Lots of question in there, let me take the first part for it. In regards specifically to July, we don't really go into the details of any months in terms of where we currently at. I think we give you a revenue pieces we're at, which is a great strong start, as Paul have mentioned that, 3% to 4% revenue growth and 12% resi was super start to it. Overall for our forecast, if you look at that Q4 forecast, and yes, as you noted, it is down slightly.
It's really a little lower volume, mostly driven by some of that weaker hail demand that I talked about. On the gross margin rate, you're specific question. Yes, we are having our - the gross margin rate would be up roughly around 30 basis points sequentially. So the gross margin rate is improving in the fourth quarter, down a little bit from the prior year.
We're trying to be conservative with some of the expenditures on the third quarter. We do believe that some of the mix should improve, but we'll probably still face some of the same competitive market pressures. Overall, though, as you had mentioned, from a gross margin perspective, still pretty solid.
Yes. And in terms of your question about the prospect, and I think it's appointed to realize that, and I said in my prepared remarks, Q2 and Q3 have been extraordinary, very rare. And we know the impact. I talked about the 75% of the work being done on roofs, which can be dangerous in this type of weather.
What you've seen in the past, whether it was in the '08, '09 period, in the '11-ish period or event from '16, '17 and then '18, after we have the build up, either severe weather, damaging whether, there's usually rebound, but that's what we expect to happen. That's why, over time, we will perform - we have performed very well. We will perform, again, very well. I mean it's just - it's difficult to ship product to contractors who are not - who are delaying projects who are not going to get our roofs because of the weather.
But over time, we have proven that as we see that drop in EBITDA or EPS, we also see a pickup in the subsequent periods after.
Your next question comes from Kathryn Thompson from Thompson Research Group. Please ask one question and one follow-up. Your line is open.
Thank you for taking my questions today. A follow-up question on the cost cutting initiative. Could you outline how much of the efforts are interior versus exterior distribution focused? Really it's more on the nature of the cuts, administrative, field, I just want to get a better feel of the overall strategy and cuts, particularly, as we look forward. Thank you.
Hey, Kathryn, we are not going to break out the splits between exterior and interior. The majority of those fixed-cost cuts were in functional areas that were non - which are saying non-customer-facing type jobs. So all of them were, as I said, personnel or headcount related, and all are permanent. That's really the summary of all that cost cutting action.
Okay. Great. And then, just focusing on the end markets for resi versus non-resi, had a good start to July for resi as you have in your prepared commentary. But if you step back and look at overall trends, could you give more color on non-res trends versus resi as you look forward, not over just for the balance of calendar 2019, but perhaps in the next 18 months, in particular, if you did little bit more differentiation between interior products and exterior products too, when you look at the end market forecast. Thank you.
Yes. It would be difficult for us to talk out 18 months, and Carla, obviously, talked on their call about the market, which we believe, is still relatively healthy. I mean it's no doubt, from our perspective, there's still a lot of competitive pressure, we saw a bit of that in Q3. We haven't broken out what we've put in our estimate for Q4 that 5%, total 5% or so organic growth.
We do believe all three of our segments and within complimentary, of course, is interior, still very healthy. There's always going to be period changes based on a lot of different factors. Big jobs in, big jobs out, competitive pressures, but overall, we feel very good about all three lines of business. Of course, in Q3, and I alluded to it, I mean, the majority of pent up we saw in the impact is on the resi side of that $85 million, of course, not the entire amount.
So we should see - and it's difficult, and it won't even try to predict when that pent up would come out, but schedules were pushed, no doubt from Q2 to Q3, Q3 to Q4. So that should bode well for us through the balance of the calendar year on the residential side. That's our view right now.
Your next question comes from Michael Rehaut from JP Morgan. Please ask one question and one follow-up. Your line is open.
Hi, this is Elad for Mike. I wanted to understand better your inventory levels. You mentioned that - I think you did some stock in the quarter, like positive working capital. And especially given maybe the outlook for stronger pent up volumes in future quarters.
How are you thinking about your inventory levels? And lastly, does that - I apologize if I missed this, but could you provide an update on your free cash flow guidance for the full year? Thanks.
Yes. Inventory, we feel very good about our inventory level - levels. Sequentially, they were up slightly, year over year they were down slightly. We feel like we're in a very good position for the balance of the year, having the right amount of material to service the demand we see coming for fourth quarter, and then, of course, the - our view right now of Q1, which we're not going to talk about, but we're in very good shape on the inventory side. And Joe can talk through the cash piece.
The other parts in inventory, as you probably know, as our turns are up as well too. Again, as we talked about, and Paul mentioned the RSA approach of that model, just beginning to pick up, but it will continue to have favorable impacts on our inventory levels and returns as well, too. In regards to free cash flow, the previous guidance that we've given around the free cash flow outlook was roughly around $200 million. The EBITDA portion of it is down now a-vis with this forecast.
With that lower EBITDA, the free cash flow number now probably closer to a range around $150 million of free cash for the full year. As I mentioned, we did a great job in the third quarter. It was an unusual third quarter for us for free cash flow. We generated positive free cash flow for the quarter, which is uncommon as, traditionally, your building kind of working capital requirements during this time of the year.
So we're off to a good start in the second half of the year. That was a good solid third quarter on free cash flow.
Great. And if I could ask one more. Given all the moving pieces in for gross margin, are there any of the metrics or something you guys is following internally that you could provide? Or give us a sense of the benefits of the RSA model as you continue to roll it out? Maybe delivery time or something?
Yes. We haven't shared any specific metrics. In time, we will, but we do know that there's fleet and fuel savings that's occurring, as well as, better utilization of our people in those markets. And then of course, and we'll see it more as we go through time, better inventory utilization and usage, as well as, less CapEx because truck routing is being optimized much more effectively.
That's really the summary at this point. So we know there are going to be benefits. There are going to be big, big benefits, and we'll talk about that in the future.
Your next question comes from Keith Hughes from SunTrust. Please ask one question and one follow-up. Your line is open.
Thank you. Just back to the gross margin. You talked about negative mix impacting the margin in the quarter. Now historically, your - when Residential's up more than the other division, that's actually positive mix. So where is the negative mix coming in?
Hey, Keith, Joe here. A few elements on the mix part to it. Slightly negative mix, as you know, it's product, but it's also channel specific. So you have some negative mix in regards to channel.
We've talked about our two-step, one-step channel differences in the past. Also geographic, as the other element when we look at mix. When you look at where these sales kind of are - come from, which specific area. And even then, within a product category, there's mix between different types of products and manufacturers as well, too. All of that impact the mix elements to it, as we do the calculation, and that's what really flows into it.
And you had mentioned price cost is a negative as well. Was that in residential? And I assume your assumption is coming in better in the fourth quarter, correct?
Correct. If you look at the price cost in total, price was up 3%. The costs were up roughly around 3.5%. That's really more in global.
We don't get into the specifics by product category under that at all, Keith. And yes, as I mentioned, sequentially, we're expecting our gross margin rate to improve.
Your next question comes from Ryan Merkel. Please ask one question and one follow-up. Your line is open.
Hey, guys. So first off, how much cost savings are going to hit in the fourth quarter? And then when do you get to the full $25 million run rate?
So the cost actions that we took occurred right at the end of June and in the first half of July where they took place. So what you probably see on that $25 million is you'll get a couple of months of advantage in the fourth quarter here, and then you'll hit stride with a full run rate when you start to get into the first quarter next fiscal year.
Okay. That's helpful. And then just a follow-up to a previous question. I think mix within resi was a negative last quarter as well. I don't really remember this happening over my history covering the company. Is this a new phenomenon? Or has this always been the case? And if it's new, what's really changing?
Yes. No, it's not a new phenomenon. I think what we're seeing is, we have much more of a variety and much larger regions than we had previously. Some of them with very high resi content and very high margins as they get impacted because of what happened, not only Q2, but Q3 with weather.
Again, I'll go back to saying, very rare weather events that put a hurt on overall margin rate. And then in areas like Southeast, what we're seeing in the back side of that hurricane there's products being flipped, and switched to other products with stone at the same gross margin rate. The phenomena were pretty much been with us for - since I walked in the door. Where post storm, you're typically are digging for sales, you resell other product lines.
They can have different - well, they're going to have lower gross margins in resi, that's the highest LOB, and that's really what it is, Ryan. So it isn't anything that's unusual other than, hey, we've gotten more density, we've gotten some very big regions with the addition of Allied and some of our existing regions that play heavy on the resi side margin rates.
Plus channels well as product as well too, right? So broader breadth of product, broader channels as we've gotten bigger as well, too.
Your next question comes from Trey Morrish from Evercore ISI. Your line is open. Please ask one question and one follow-up.
Hey, thanks, guys. You mentioned the majority of the $85 million that was pushed out was in resi, but could you kind of bucket that and within the three parts, was it like 50%, 75% resi? And then where everything is is fall? Initially, was there any incremental damage that could be potentially added to future revenues from the high amount of rain that took place?
Yes. I mean, from the damage standpoint, always tough to determine, but with the amount of water we saw in some of these regions. Typically, that lends itself to causing some damage or opening up some roofs that eventually will have to be repaired. On your first part of the question, I mean, we're not going to get into detail on the specifics of LOB within the $85 million.
Just to say, think about it logically. Residential roof is sloped. And although it's dangerous to get on any roof when there's inclement weather, whether it's Q2 or Q3, it's even more dangerous on a sloped roof, right? Just because of the potential of one slipping off the other. The contractor not wanting to open up the roof because it would damage the inside of the house. So that just lends itself to the comment of, hey, the majority of that 85% was residential.
Okay. And then I'm going to try and ask the pricing question a different way, and hopefully get a different answer, a better answer for everyone. But could you rank order by your three product categories, which one had the best pricing, which one had the worst pricing year over year? So we can at least kind of see where things stacked up within the company?
Yes. I think directionally, we can say, just because of the nature of what we saw in the demand side, there is a little more pressure on the residential side. And that's really as much as I'll say without getting into the details of these product lines.
Your next question comes from Megan McGrath from Buckingham Research. Your line is open. Please ask one question and one follow-up.
Great. Thanks. I wanted to follow-up a little bit on your expectations for the fourth quarter. If I remember correctly, earlier in the year you had periods of bad weather, and you pointed out that when sort of weather cleared and demand opened up, you actually saw a bit more pricing pressure because everyone was kind of going after the same business, if I remember what happened earlier in the year correctly.
So I was just kind of curious what's different about fourth quarter this year? Is there a risk that that happens again? Or are you seeing different behavior from some of your competitors now that the weather has eased a little bit?
Hey, Meg. Just to get at your question kind of lower gross margins kind of applications, yes. I'm not sure your first statement was correct that during stronger demand periods we'd see a more difficult pricing demand. Usually it's the opposite.
During higher demand periods, you usually have the capability to drive more improved pricing during that kind of point in time. So that's traditionally what would occur, and that's what we've traditionally - what we have seen, and what we expect to see going forward as well too. Even in our Q4 and in future periods as well too. And we can see it even today when we have markets that have strong demand.
Even though I talked about the price of 3% it obviously, varies by geographic region and market. When we look at those markets, those that have soft demand or have been the most challenged or where you see the most difficult pricing and the opposite. And that's traditionally always the case.
Okay. Okay. Great. And then just as a quick follow-up, you mentioned that your July trend, thank you for that. I'm wondering if there was anything we need to think about in terms of the sort of ease or difficulty of compared by month as we make our way through the rest of the year with July and easy compares. Or should we expect that to kind of ease up? Or are we looking at kind of similar trends as we make our way through the quarter?
You know we had a good solid kind of trend that we started out in July with out growth rate. I'm trying to find the growth rate for prior year for that quarter.
You know, the comps get easier. August, last year, I think was three down, and then September, eight down in the quarter. So - And we talked about that on the last call, right? So that will help us. We kind of built that into the new estimate of the 5% or so organic growth.
Your next question comes from Phil Ng from Jefferies. Your line is open. Please ask one question and one follow-up.
Hey, guys. This is actually Maggie on for Phil. You just mentioned some competitive pricing with the headwind. So in line of those, is there any expected carryover impact into 4Q? And what's your sense of how your 3% pricing in the quarter stacked up with the industry?
Yes. I'll just say from that, it's very hard to know, obviously, what industry pricing is, right? We have no data points to talk about it. We had talked about we knew pricing would wane as we went through the year because we were lapping all of heavy pricing we got last year. I think we have commented that Q4 would be in that flattish zero area. So it's impossible for us to give you any industry pricing data.
Okay. Sure.
If I can go further on forecast to your question to the fourth quarter, as we mentioned, sequentially, it will get a little bit better. Sequentially, I think it would be up. Still be down on a year-over-year basis because we do think, maybe we're taking a conservative approach, but really expecting some of those competitive market pressures that we saw in three - in Q3 to continue a bit into Q4 as well. So now making up some progress, so sequentially it will get better, but we're trying in our - in the forecast that we gave to keep it conservative with those gross margin rates as well.
Okay. Got it. And then Paul, you mentioned some of the pent-up demand dynamics from the weather headwinds. Can you talk about what's going on in the labor market? And maybe, how you think about that as a potential constraint on growth from quarter to quarter?
Yes. My comments on pent-up, I think just facing the realism and it's one very difficult to figure out exactly when that work would come out, right? That's a massive calculation. I don't even know why you do it, because think about it, you have thousands and thousands of contractors. They have so many different schedules, so many different demands; they could be doing multiple products, right? So I think the point there's x number of days that the left in Q4 as we talked about fiscal.
The good news is that we get to keep going into Q1, right? And these folks were continuously from Q2 to Q3; now slide some cases into Q4. So there will be some natural constraints. They're working - already working full out, right? And doing the best we can - that they can. We're going to do the same thing where we have very strong demand, whether it's by moving people, moving trucks, working more overtime, to satisfy that demand.
But ultimately, there comes a time where contractors can only work seven days a week, theoretically, not 24 hours a day, but - and they're doing that now, I think, as they are trying to catch up. So I wouldn't say there's - speaking to a labor shortage. I'm not going to comment say that's the case. I think it's just the natural you have x many days in the three-month period for the contractors to work, and so many for us to ship product to those contractors, and that's - we're up against that every and any quarter.
And now, the good news is, as this rain abase, which we hope it does, we didn't see much in July, then August, September, October, November, it's set us up well to do much better in the future. And that's why, even we got a negative comp from last year in Q4, we're still talking about positive organic growth, and obviously, internally, we're working to overachieve that number.
Your next question comes from David Manthey from Baird. Please ask one question and one follow-up. Your line is open.
Thanks. First off, it would appear that your guidance implies that you expect to come in below where the street estimates were for the fourth quarter despite the strong July. And I'm just wondering, what factors - you mentioned weather, but beyond that, what factors are extending into fourth quarter that would lead to that kind of a shortfall?
Hey, Dave, Joe. Yes, the two items really that drove our forecast. One of them, the lower gross margin, as mentioned. On the volume piece of it, as you're describing, it's slightly lower volume that are in the street estimate, and it's mostly by the weaker kind of hail demand that we experienced that I mentioned.
Hail is - we've initially planned for hail to be the same as last year because it was a soft year. And what we've experienced and seeing you look at all the storm reports out there, and it's actually lower than last year on the hail part. That hail demand really is a work that would be getting done right now during this fourth quarter. So that slightly weaker hail demand is what causes to take our volumes down a little bit in our forecast.
Okay. Thank you. And then as a follow-up Paul, you mentioned - I think it was you Paul, you said the pricing was highest on residential pricing, but is it correct to think that even though there's more pressure on that the price attainment you're seeing in percentage terms on resi is higher than either non-resi or complementary. Is that right?
Say, Dave. Say that again.
Well, you said that when a question was asked about to rank the three categories in terms of pricing. You said that the pricing pressure was highest on residential. And I'm assuming what you meant is that the variant versus what you thought you're going to get might be higher there. But certainly, you're getting more price in residential than you are in either complimentary or non-res, correct?
Yes. That is correct. And again, I think yes - and that speaks to a couple of things. One that actually even with the demand pressures, right? And the competitive pressures related to the craziness of the rain, we did fairly well getting pricing in res higher than the other lines, yes. I think -
Okay. When you -
Yes. Go ahead.
When you said zero prices in the fourth quarter is your expectation, is that for residential? Or is that overall?
I don't think we said zero prices. I think we're expecting some price in the fourth quarter, but not much. Some of that would be carryover price; still, fourth quarter will lap a little bit of the prior-year price increases. And then there'll be a little bit of price increase from the 2019 price increases as well, too.
Yes, Dave. I thought - I think I was referring to earlier comments on our last earnings call, where we said, as we went through time, pricing was going to decrease to near zero in Q4. Obviously, now, with this new forecast, we're seeing some sequential gain. We do think there'd be some minimal price in the quarter. But obviously, we won't know until we finished the quarter.
Your next question comes from Ken Zener from KeyBanc. Please ask one question and one follow-up. Your line is open.
Just one question, gentlemen. First of all, I do empathize with the weather volatility that you have to deal with. Given that margins came down, you kind of talk to the price cost neutrality that you guys overcome last year. Could you, Paul, just kind of refresh us because your ability to get price last year was a big theme that you pursued and actually realized.
Could you talk about the lessons you learned last year when you had to after price, and how you got it? Just so we can have a sense of how that, Joe, your 3.5% cost, first 3% price dynamic. We get confidence that that will come back to neutrality. First let's go the other way and just refresh on last year's actions. Thank you.
Yes. Thanks. The process we use has not changed. We were very aggressive last year from an internal standpoint and an external standpoint, making sure that the price increases were passed along.
I think we did a very good job. The difference - and so that process this year has not changed. What changed was, and I'll say for the third or fourth time, the rare weather events that have happened in Q2 and Q3, right? That no one could have predicted. So when you look at those and frame it based on in that context, both Q2 with Q3, the performance of pricing is pretty darn good at 6% in roughly 3%.
So the delta between the 3% and 3.5% or so of inbound costs, I mean, it will end up being timing. The question is just when, right? Because we're working all the time with the end market to push pricing where we can push pricing, and at the same time, we're working with our vendor base, right? With inbound pricing. So I think, we've had a pretty good history through time of making up any of those deltas, and it's really a function of the timing within the 90-day period.
The other parts that I would add to it as well too, Ken, I think it speaks very highly of the strategic initiatives we've put in place on the revenue side to really drive value to the customer, right? You look at our digital platform, as Paul described, you look at everything that we've been doing, and we've been doing in regards to private labeled programs and other. We just got a great strategy around driving revenue growth through providing additional services to the customer. And I think that will help us big time going forward.
Your next question comes from Kevin Hocevar from North Coast Research. Please ask one question and one follow-up. Your line is open.
Hey, everybody. Question I - just for clarification, I think, you said July was up 12% for residential, right? What was the growth for the company as a whole in terms of existing branch sales growth? And then, how did that trend throughout the June quarter? I think April, the last call, you said it was up a little bit. How does that look in the balance of the quarter?
Yes. Total for July, companywide was up 3% to 4%. Joe, you have the splits for the -
What was the second question?
The splits by month in Q3.
Yes.
Oh, the splits by month in Q3 we had just finished. So April was up around 1.5%, May was down 2.5%, and June was down about 1.5%.
Okay. Very helpful. And then on - I believe on the residential side, there's some price increases in July. And I think distributors are trying to, obviously, pass along to securities.
What you're seeing there? Are manufacturers having any success? And you guys and your peers try and push pricing to offset the price cost pressures you felt. You know do you think you'd be able to, if July is having any success, push that long and maybe make up some ground, and pick up what you didn't get in the April increase. Or kind of curious if you could just comment on the dynamic?
Yes. We don't - internally, we don't believe the second price increase will hold at all for any other price increase that might be talking about. I just don't think there are enough drivers in the market. Asphalt is flattening out.
It actually, I think, is favorable in June or July to last year. So no, we don't think that the second or third will hit. I think there's an opportunity for us to pick up a bit of the first here and there, especially in those soft markets that you referenced. And that's more work on through Q4 and see a little bit of that in the small price we're assuming sequentially in Q4.
End of Q&A
That concludes the questions. Now, I would like to turn the call back over to Mr. Isabella for his closing comments.
Great. Thank you. Thanks to everyone for joining our call. As you know, I'll be officially leaving Beacon later this year, and this will be my final conference call.
Needless to say, I'm sure proud of what the team has accomplished during my time with the company. Beacon is in great hands with an incredibly strong board, a very talented executive leadership team, and a very talented incoming CEO Julian Frances. I'm confident the next several years are going to be very successful ones for Beacon. Our strategy is very sound, and we're in a highly attractive industry with steady repair and remodel content, historically, in the 70% to 75% range.
We are the innovation leader in our industry, and our digital suite offers much customer value adds that will drive future growth that outperforms the market. We appreciate the continued support from our investment community, as well as, our valued customer suppliers and employees. Thank you, and have a great evening.
Ladies and gentlemen, this concludes today's conference. Thank you for participation. And have a wonderful evening. You may all disconnect.