Beacon Roofing Supply Inc

NASDAQ:BECN

Earnings Call Analysis

Beacon Reports Resilient Q3 Performance Amid Market Challenges

In the third quarter, Beacon achieved nearly $2.8 billion in net sales, up 6% year-over-year, driven by acquisitions. Gross margins rose to 26.3%, exceeding guidance, demonstrating disciplined cost management. Although organic volumes decreased slightly, the company focused on lowering operating expenses, estimating a $45 million annualized impact from recent adjustments. For the fourth quarter, sales growth is expected in the mid-single digits, with full-year adjusted EBITDA anticipated in the lower half of $930 million to $970 million. Beacon continues to invest in growth initiatives and plans to open around 20 new branches in 2024 as part of its Ambition 2025 strategy.

Steady Top-Line Growth Driven by Acquisitions

In the third quarter, the company reported total net sales of nearly $2.8 billion, reflecting a growth of over 7%. When adjusted for an extra day in the quarter, this translates to a nearly 6% year-over-year increase. This growth was primarily attributed to successful acquisitions completed in the last year, which contributed approximately 5.5% to total sales. However, organic volumes dipped by around 1% to 2% per day, indicating a modest decrease in underlying demand despite rising average selling prices.

Resilient Margins Amidst Market Pressures

The gross margin for the third quarter was reported at 26.3%, which is an improvement of 30 basis points year-over-year and surpassed prior expectations. Notably, this marks the fourth consecutive year where gross margins have remained above 26%. The increase in margin was supported by effective price management and the introduction of higher average selling prices, despite facing product inflationary pressures. The adjustments made in operational expenses, along with increased digital sales and a successful private label expansion, have also favorably impacted margins.

Operational Efficiency Targets and Cost Management Strategies

Adjusted operating expenses increased to $443 million, which is about $48 million more than the previous year's quarter. This rise reflects the costs associated with newly acquired branches and increased warehouse operating expenses. Despite these increases, the management has taken proactive steps to align operating expenses with market conditions, emphasizing the need for agility amidst fluctuating demand levels. The company aims to achieve annualized savings of approximately $45 million, with efforts focused on optimizing branch productivity and reducing overall operational costs.

Fourth Quarter Guidance and Future Outlook

Looking toward the fourth quarter, the company anticipates growth in total sales per day will be in the mid-single digits percentage year-over-year. While the first three quarters presented challenges with volume pressures, especially in Florida, management remains optimistic about the remaining periods, buoyed by ongoing demand in nonresidential markets driven by repair and reroofing activities. The company maintains its overall guidance for the year, projecting full-year sales per day growth in the mid-to-high single digits, with gross margins expected to remain in the mid-25% range.

Strategic focus on Acquisition and Digital Sales

The company's strategy to acquire new branches has intensified, with a total of 24 companies acquired since the implementation of its Ambition 2025 plan, adding 83 branches and generating about $1 billion in annual revenue. Moreover, digital sales have surged by 28% year-over-year, highlighting a shifting customer preference to online channels. The successful launch of private label products, particularly the TRI-BUILT brand, has seen substantial growth—up 12% year-over-year—demonstrating strong market demand for affordable alternatives.

Shareholder Value Creation Through Strategic Initiatives

The company has initiated an accelerated share repurchase program amounting to $225 million, showcasing confidence in its growth trajectory and commitment to shareholder returns. Since the commencement of the Ambition 2025 plan, over $1.5 billion has been returned to shareholders through share buybacks. These measures reflect the company's proactive approach to enhancing shareholder value while pursuing growth through strategic investments and operational enhancements.

Conclusion and Strategic Directions Ahead

Beacon's comprehensive approach to navigating current market environments through acquisitions, operational efficiency, and digital transformation has positioned the company favorably for future growth. The management's disciplined focus on cost management and capacity building, along with the planned Investor Day in 2025, suggests a forward-thinking approach aimed at continuous improvement and value creation, laying a solid foundation for resilience in the face of evolving industry dynamics.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Beacon Third Quarter 2024 Earnings Call. My name is [ Ezra], and I'll be your coordinator for today. [Operator Instructions]. We will be conducting a question-and-answer session towards the end of this call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the call over to Mr. Binit Sanghvi, Vice President, Capital Markets and Treasurer. Please proceed, Mr. Sanghvi.

[Binit Sanghvi, executive]

Thank you, Ezra. Good morning, everybody, and as always, we thank you for taking the time to join our call. Today, I'm joined by Julian Francis, our Chief Executive Officer; and Prith Gandhi, Beacon's Chief Financial Officer. Julian and Prith will begin today's call with prepared remarks that will follow the slide deck posted to the Investor Relations section of Beacon's website. After that, we'll open the call for questions.

Before we begin, please reference Slide 2 for a couple of brief reminders. First, this call will contain forward-looking statements about the company's plans and objectives and future performance. Forward-looking statements can be identified because they do not relate strictly to historical or current facts and use words such as anticipate, estimate, expect, believe, and other words of similar meaning. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including, but not limited to, those set forth in the Risk Factors section of the company's 2023 Form 10-K.

Second, the forward-looking statements contained in this call are based on information as of today, October 31, 2024. Except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements.

And finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in today's press release and the appendix of the presentation accompanying this call. Both the press release and the presentation are available on our website at becn.com. Now let's begin with opening remarks from Julian.

[Julian Francis, executive]

Thanks, Binit, and good morning, everyone. Let's begin on Slide 4. Beacon's third quarter results continue to demonstrate the resilience of our industry and this team's execution on our Ambition 2025 plan. We have multiple pads to top line growth and margin expansion and continue to deliver record numbers for the company.

Our end markets are underpinned by the repair and replacement cycle of exterior weatherproof products on residential housing and commercial buildings. The majority of this demand is nondiscretionary. And while core demand remains good, the overall level of activity came in lower than we anticipated in the third quarter. Nevertheless, the Beacon team has delivered by continuing to focus on our strategic plan and areas within our control.

In the third quarter, we grew daily sales by nearly 6% year-over-year driven primarily by our acquisitions. Our gross margin came in at 26.3% above our prior guidance through our team's disciplined margin management. Notably, we were price cost positive across all 3 lines of business. We stayed focused on cost management and continuous improvement.

During the quarter, we took action to lower operating expenses and align cost with market conditions. As a result, we achieved record top line and strong bottom line performance, including a record for quarterly adjusted EBITDA. We continue to use our cash flow and balance sheet capacity to reinvest in organic growth, conduct M&A and return capital to shareholders.

We have acquired 7 companies since the end of the second quarter. I'd like to highlight the addition of [ Persec Matalan building supplies]. Headquartered in Clifton, New Jersey, [ Pacific ] adds strength to our commercial solutions footprint with 8 branches in New Jersey and Win New York.

For more than 100 years, the Goodman family has built a reputation for providing commercial contractors in the region, the most professional service and technical support. This acquisition significantly strengthens our position in commercial roofing and related businesses in the state.

Our Ambition 2025 plan is entirely about [ on ] the potential of Beacon. I can confidently say today we are well on our way to achieving that goal.

Now please turn to Page 5. As most of you know, we laid out our targets in that Investor Day to drive above-market growth deliver consistent double-digit adjusted EBITDA margins, build a great organization and generate superior shareholder returns. A relentless focus on our customers is central to how we operate and achieving those goals. Our team works every day to deliver a great customer experience.

Let me provide you with an update on our strategic initiatives, starting with a few ways that we are building a winning culture. One of our community support pillars is empowering people to build skills and achieve their goals. In the past few quarters, we have delayed funds and expertise to the Roofing industry Center at [ Clemson University]. The [ sensors ] top goals in [ tracking ] training professionals in the industry.

I'm pleased to say that online courses are already available to anyone considering a career in roofing and a number of our own employees have advanced their skills by completing the 8-week course. Further, in September, our team announced that Beacon has officially partnered with the U.S. Army's Partnership for your success or [ PAs ] approach. This exciting new collaboration highlights our unwavering commitment to supporting veterans by providing them with rewarding career opportunities across our nationwide footprint.

The [ PACE ] program connects soldiers with top employers, ensuring that they have a clear path to civilian careers after their military service. As a pays partner, we can guarantee, soldiers and interview that allows them to showcase their skills, discipline and leadership in addition to learning about career opportunities.

And for those of you who listened to our calls in the past, you may recall that we established Beacon Cares 4 years ago. Beacon Cares is an employee crisis relief support fund that provides grants to employees coping with unexpected financial powerships resulting from natural disasters or other personal situations. Hundreds of our team members live and work in the past of the recent storms. And during the quarter, the Beacon team donations totaling $100,000 to the fund. I'm thankful that all of our employees [indiscernible] and that we have a program in Beacon cares to ease some of their hardship.

Our second pillar is driving above-market growth and enhancing margins through a set of targeted initiatives. Our greenfield team continues to execute on our pipeline of new locations, and we have opened 17 branches year-to-date. Each time we open a new location, we had sales resources and reduced the average distance and time it takes us to reach our customers. This enhances our overall value proposition, giving us the opportunity to earn market share. We have now opened 62 new branches since the beginning of 2022, well ahead of our original Ambition 2025 goal of 40 total.

Turning to acquisitions. We discussed our recent purchase of [ Persec ] earlier. We also highlighted the acquisition of [ Rufesmart], Extreme Metal and integrity metals on our call in August. We completed 3 other acquisitions since the end of the second quarter, including SSR in Canada, Chicago Metallic Supply and Ryan Building Products in Massachusetts. Collectively, these acquisitions add to our commercial footprint and enhance our customer solutions.

I'm pleased to report that our acquisition portfolio is performing well and delivering better-than-expected results. Since announcing our Ambition 2025 plan have acquired 24 companies adding 83 branches, which together are generating around $1 billion in annual revenue.

In the third quarter, we grew digital sales approximately 28% year-over-year. Digital sales to our residential customers were once again highlighted as we achieved our highest quarterly adoption ever at more than 28%. Our online capability continues to be a clear competitive advantage for Beacon and sales through our digital platform increased customer loyalty, generate larger basket sites and enhanced margin by roughly 150 basis points when compared with off-line channels.

And in September, we announced the launch of Beacon Pro+ in Canada. Now our customers there can enjoy our robust no-cost digital tool that is used by thousands of [indiscernible] roofing contractors to manage their business and sales process anywhere at any time. Many of you know that our private label line of products sold under the TRI-BUILT brand delivers professional results for customers at a competitive price and yields between 500 and 2,000 basis points of additional margin versus branded alternatives.

I'm pleased to report that TRI-BUILT ISO, our newest addition to our expanding private label line launched in the second quarter is up to a great start and helped drive private label higher by 12% year-on-year. As customers have come to rely on TRI-BUILT products available exclusively through Beacon, and we will continue to support them through our extensive and growing catalog of product offerings.

Third, and as we have discussed in several quarters, we are enhancing productivity, capacity and safety through our continuous improvement and operational excellence initiatives. Our focus on the bottom quintile branches has generated meaningful contributions to EBITDA, and this year is no different. A disciplined process for diagnosing and addressing issues have been core to our operational improvement in the last 4 years.

I'm pleased to report that the process contributed approximately $9 million of EBITDA year-over-year in the third quarter. And as you may recall from our first quarter call, we held our annual company-wide safety standard in which all of our branches and employees paused and recommitted to making everyday safer.

This year, spotlights on newer employees who are greater risk of injuries through strains and sprains. And I'm pleased to report that our focus has already resulted in tangible improvements. We are well on our way to achieving our goal of reducing the strains and sprains by 50% this year.

Fourth, let's review we are creating shareholder value. As previously announced, during the second quarter, we entered into an additional accelerated share repurchase program in the amount of [ $225 million]. The share buyback program demonstrates both our commitment to delivering value to shareholders and our confidence in the Ambition 2025 plan.

Since the start of Ambition 2025, we have deployed more than 1.5 billion to share buybacks, reducing the as-converted share count by approximately 23%. In summary, we have a differentiated service model and have built the tools to enable multiple paths to growth, margin expansion and value creation through the cycle. Our Ambition 2025 plan is seamlessly [indiscernible] all together into an operating model to amplify the resiliency of our business model and unlock our potential. Now I'll pass the call over to Prith to provide a deeper focus on our third quarter results.

[Prithvi Gandhi, executive]

Thanks, Julian, and good morning, everyone. Turning to Slide 7. We achieved nearly $2.8 billion in total net sales in the third quarter, up more than 7%, primarily driven by the impact of acquisitions. Adjusting for the 1 additional day in the third quarter of this year, net sales increased by almost 6%. Higher average selling prices also contributed to the annual growth in sales.

Organic volumes, including those from greenfields, decreased approximately 1% to 2% per day while overall price contributed 1% to 2%. Acquisitions completed within the last 12 months are performing well and contributed a little more than 5.5% in total sales year-over-year.

Residential roofing sales per day were higher by less than 1% as higher prices resulting from our diligent execution of the August price increase contributed low single digits percent year-over-year. Acquisitions also offset lower organic volumes versus a high single comparable in the prior year period. While our residential volumes were down in the quarter, we estimate that our volumes were in line with the overall market.

Nonresidential sales per day increased by nearly 8% based on strong R&R activity and a solid market execution by our team. Prices remained stable on a sequential basis and declined in the low single digits year-over-year. Bidding and quoting remain at healthy levels. We also continued to see a shift from new construction to repair and reroofing activity in the third quarter.

Complementary sales per day increased by more than 15% driven by acquisitions. We have acquired 20 new waterproofing branches in the last 4 quarters, significantly expanding our specialty waterproofing products division. Selling prices in complementary were flat year-over-year. Please keep in mind that our complementary product category now has approximately 70% residential and 30% nonresidential exposure.

Turning to Slide 8. We'll review gross margin and operating expense. Gross margin was 26.3% in the third quarter, up 30 basis points year-over-year and higher than our forecast. It is worth noting that this is the fourth consecutive third quarter gross margin of 26% or higher. As Julian highlighted, this was driven by higher price costs across all 3 lines of business. In total, price cost was up approximately 50 basis points year-over-year as higher average selling prices were partially offset by product inflation.

In addition, higher sales through our digital channel and growth of our private label products continue to be accretive to Beacon's gross margin. These favorable contributions were partially offset by higher nonresidential sales and the dilutive impact of M&A we've conducted in the past that has yet to be fully synergized.

Adjusted operating expense was $443 million, an increase of approximately $48 million compared to the prior year quarter. Adjusted operating expense as a percentage of sales increased to 16%, up 70 basis points year-over-year. Expenses associated with acquired and greenfield branches contributed approximately $34 million or about 70% of the increase in adjusted OpEx.

Inflationary wages and benefits as well as warehouse operating costs also contributed to the increase in adjusted OpEx. As you may recall from our second quarter call, we said that we would adjust to market conditions and balance operating efficiency and high service levels in the second half of the year. And in the third quarter, we did exactly that by taking action to align our OpEx at the level of activity that we are seeing in our markets.

Restructuring charges associated with the cost actions consisting of onetime [indiscernible] employee benefit costs were approximately $11 million in the quarter, and the full impact of the savings will be only realized in Q4 and beyond. We estimate the annualized impact of these actions to be approximately $45 million and reduced operating expenses.

Going forward, we will continue to build on our track record of agility and stand ready to respond to changing market conditions. At the same time, we are focused on investing to drive and support above-market growth and margin enhancement as part of the Vision 2025. These investments include initiatives related to our sales organization, private label pricing tools, e-commerce technologies and branch optimization.

Turning now to Slide 9. Operating cash flow in the quarter was solid at nearly $250 million, largely attributable to the $117 million sequential reduction in net inventory. That said, as a result of the recent hurricane activity, we will be balancing conversion of inventory with ensuring we have adequate product availability for our customers in the storm-impacted regions of the country.

On a year-over-year basis, inventory was higher by $186 million, driven mostly by inventory from acquired branches and greenfield load-ins. Inflation and our product costs also contributed to the increase. As of the end of the third quarter, our net debt leverage at approximately 3.1x was slightly above our targeted 2 to 3x range.

We continue to expect solid cash generation in the fourth quarter the majority of which will be used to pay down our seasonal borrowings and bring net debt leverage within our targeted range. More generally, our capital allocation will continue to be balanced between deploying cash in our existing business, executing on the active value-creating acquisition pipeline and providing returns to our shareholders in the form of share repurchases.

For 2024, we expect to invest approximately $125 million in capital expenditures to drive organic growth and to upgrade our fleet and facilities in support of our customers and employees. While Julian previously covered the share repurchase program, let me remind you of some additional details that may be helpful.

In the second quarter, we entered into a $225 million accelerated share repurchase plan that resulted in the retirement of approximately 1.9 million shares or $180 million. As a result, net of share issuances for stock-based compensation, we reduced our common shares outstanding to 61.9 million on September 30 versus $63.6 million at March 31.

The remaining $45 million equity forward contract is expected to settle in the fourth quarter of 2024 and result in the estimated repurchase and retirement of approximately 600,000 additional shares based on our stock price as of the end of the quarter. With that, I'll turn the call back to Julian for his closing remarks.

[Julian Francis, executive]

Thanks, Chris, and please reference Page 11 of the slide materials. So before we head to Q&A, I'd like to update you on our outlook for the remainder of the year.

As we look forward, we expect that current conditions will continue in the fourth quarter. New housing starts and existing home sales are expected to remain subdued. Commercial sentiment remains favorable and we continue to expect repair and reroof to outpace new construction in this area. With respect to hurricane demand, let me first say that the communities impacted are in our thoughts and we will continue to support local communities as they recover.

In terms of business impact, initial estimates show the volumes required to repair and reconstruct will be approximately 3 million square or around 2% of annual industry shipments. Keep in mind that these volumes will be spread over the next 6 quarters.

In October, we believe we will set a record for monthly sales of more than $1 billion, up 6% year-over-year on a daily basis. For the fourth quarter, we expect total sales per day growth to be up mid-single digits percentage year-over-year. Please remember that we will be lapping a record fourth quarter in which we saw significant volumes across all 3 lines of business. We expect gross margin to be in the mid-25% range.

For the full year, assuming a normal seasonal slowdown, we now expect adjusted EBITDA in the lower half of our previously communicated guidance. And importantly, as Prith mentioned, we expect to finish the year with significant cash flow. Our focus remains on the areas within our control in safety, customer experience, operational excellence and pricing execution.

We will continue to deploy capital on initiatives that we expect will result in accelerated growth, including executing on acquisitions and delivering on our greenfield locations, which we expect to be around 20 branches in 2024.

Looking forward, we plan to continue making investments in our sales organization and our service model, our digital offering and our TRI-BUILT private brand categories. As we end the year, I'm pleased with the progress this team has made. Over the last 3 years, we have improved our operations, delivered results and invest into the future. We have built capabilities resulting in accelerated performance.

We have demonstrated that our business model is resilient and we can deliver strong results in any market. We're looking forward to a strong finish to the year and helping our customers build more. And with that, [ Ezra], we'll open it up for questions.

[Operator]

[Operator Instructions]. Our first question comes from Philip Ng with Jefferies.

[Philip Ng, analyst]

Congrats on a solid quarter in a choppy environment. I guess first question, and obviously uncomfortable to ask about hurricanes. But from a setup standpoint for you guys, Florida has generally been a little weaker market for you and just broader industry, lack of storm demand. I'm curious, how you set up from an inventory standpoint to kind of meet that demand? And just more broadly, the industry is pretty tight from an allocation standpoint.

So just kind of help us think through what this could mean for you from an uplift standpoint and how this kind of ramps up. You're guiding a mid-single-digit growth number in the fourth quarter. Are you going to see that kind of pick up as well in the fourth quarter?

[Julian Francis, executive]

So thanks for the question, a few comments. So let me take a step back and to set it up and then I'll touch on what we saw. I mean we've seen Florida weak all year, and we've commented on it pretty much for the whole year. Obviously, this was coming off hurricane even a couple of years ago. So -- so that was it.

I mean coming into Q3, we were sort of expecting a pickup in demand across the entire country from the weather we've seen in Q2, we thought that was going to be more delayed into Q3. So we expected a bigger pickup in Q3 than we actually saw and we saw additional softening in some markets, including Florida. And that's ultimately why we decided to make the adjustments with our cost structure as well.

But as the storms rolled in, coincidentally, I think we had 3 hurricanes impact to U.S. during Q3. Debby, Francine and Helene also rolled through in the quarter. And obviously, that shuts things down as well. Obviously, Helene was pretty devastating. And then Milton came through at the start of the fourth quarter and obviously impacted that.

With -- so getting back to kind of your original question around the impact that we'll see. So look, the -- Helene to us, like it did -- there was a lot of flooding, obviously, Western North Carolina was impacted pretty dramatically. There's a lot of infrastructure work that needs to get done with Helene. We don't expect that to have a significant impact on demand this year. There's just so much rebuilding that has to get done before it really impacts our results.

And quite frankly, in the first few weeks of the quarter in October, it was difficult. We couldn't get trucks on the road and stuff because of that, because of all the infrastructure damage. So that's going to be a very slow -- in terms of Milton, obviously, that sort of rolled into impact the majority of Florida.

Again, there was a lot of disruption what we're seeing and what we experienced with Ian is that it took 2 to 3 months for the demand to really start pick up. We see an immediate impact on sort of somebody to repair, but necessary tops and stuff that people have to do to sort of remediate immediate problems. But the reconstruction doesn't really start for probably a couple of months.

So we would expect to see something in December, but we don't believe we'll see a lot of demand pick up in the region until next year. And that's why we sort of indicated that it would be sort of 4 to 6 quarters before we really see the full impact come through. So getting back to sort of the product side of things.

Obviously, the Southeast has been weak all year. The manufacturers that had some availability. We've been managing that very carefully. Obviously, in the fourth quarter now, we want to make sure that we're getting the product that we need into the markets that need it. We're also redirecting products from other parts of the country, both from manufacturers and through what we have in other parts into the storm-impacted regions.

So it will -- we do believe it will be tight, and this will certainly have an impact, but it's impacting a part of the country that was already slow. So we think that in the short term, availability will be okay. But obviously, going into 2025, things will continue to be relatively tight. Hopefully, that gives you some color.

[Philip Ng, analyst]

That's super up. Julian, I'm sorry to sneak one more in. Would your waterproofing business benefit from some of the recovery work or largely on residential single side of things?

[Julian Francis, executive]

Look, our total businesses work. Obviously, with -- when you talk about sort of the infrastructure work for commercial construction, I mean, it's not just about shingles. Obviously, the hosing damage is what you see. But Windows getting blown out, things needing to get recouped some of the work that needs to get done on a lot of this business.

So yes, we would expect to see it in commercial and in our waterproofing division. We would expect to see a pickup from this impact. And obviously, with the acquisition of Coastal a couple of years ago, they had a tremendous strength in Florida. So we would expect to see some benefit from that.

[Operator]

Our next question is from Kathryn Thompson with Thompson Research Group.

[Brian Biros, analyst]

This is actually Brian Biros on for Catherine. On the [ nonerosmarket], can you maybe just touch on how maybe specific verticals are performing and kind of that gifts from new to R&R? I think you mentioned in the prepared remarks, you mentioned you're seeing commercial or care demand accelerating? Or maybe is that pent-up demand? Or is that storms or it's only in certain verticals? I guess just how would you characterize the [ nonres ] market heading into 2025.

[Julian Francis, executive]

Yes, absolutely. Thanks for the question. We've touched on this a little bit before, but I'll rewind a little bit give you, hopefully, some of the color you need. [indiscernible] hit you had all the supply chain disruptions and the product availability was really challenging new construction was prioritized over repair and replace because obviously, I mean, there's so much more money tied up in getting that finished into completion.

With the disruptions in the sort of supply chain there and the product availability, the new construction side of things got prioritized. So that was done. So as that -- all of that eased and we sort of came out of the stocking, destocking and all of the movement in the supply chain that we saw.

The new construction started to fade a little bit, but the delayed repair and replace on the commercial side has really started to pick up. And that's been actually particularly strong. You'll remember during -- I think it was a sort of '22 time period. There was an explosion in warehouse construction, and that is eased a little bit. But it's still a very large portion of the overall industry that's being developed, warehouse these data centers.

These tend to be low flat buildings, which demand a lot of roofing. And so the shift towards sort of repair and replace is a little bit of a product mix shift for us, a little less insulation relative to new construction. But overall, we've seen that be probably hold up a little bit better than we had anticipated.

If you remember the comments on the first quarter call, actually, the Q4 call, so the area that I was most concerned about was the commercial segment. But in fact, it's held up very well. Repair and release has been good. And I think as a company, we're executing very, very well in that space. So I actually remain sort of again, to use a well-worn phrase cautiously optimistic about the commercial outlook. I think it's actually been quite constructive.

[Brian Biros, analyst]

Yes. A couple of these small asks, what Julian said, other vertical areas that we've had good strength is in hospitals and the school segments, just a lot of infrastructure rebuild and retrofit and so forth. And then the other thing is with the high interest rate environment, we expect the new construction side to remain somewhat muted. So that could change towards the second half of next year as interest rates come down for expectations. So I mean that's all I would ask.

[Operator]

Our next question is from Ryan Merkel with William Blair.

[Ryan Merkel, analyst]

I wanted to ask about fourth quarter gross margin guidance is for mid-25. Is that normal seasonality? Because it looks like it's a little more than normal seasonality. So talk about some of the drivers there, please?

[Julian Francis, executive]

Yes. I'll touch on it and then Prith extend it in some more detail. I mean, the part of this is normal seasonality the high-margin regions of the countries, as we've talked about before are in the north. You need higher gross margins in that part of the country because rents in the larger cities in the North tend to be much higher, so we need to cover them.

So as those start to slow down in the winter months, you start to see growth to deteriorate a little bit. But it doesn't mean the EBITDA margin deteriorate, but it does mean gross margin to deteriorate. So there's a little bit of a shift in geography, both on the P&L and in terms of the product shipments. So some of it is just sort of normal product flows.

The other part of it would be as price increases finally flush through the system and making sure that we've got the product cost flowing through fully. There's a piece of that that's still out there. But for the most part, it's primarily geography.

The other thing that happens is a little bit of product mix. the product mix tested sales a little bit back towards commercial and complementary a little bit more than sort of the shingle side and the residential side, which has higher gross margin. Again, we don't believe it impacts bottom line margin in the same way as it does gross margin.

[Prithvi Gandhi, executive]

Yes. Just again, just a couple of other points of color in the south, there is more new construction. So that also tends to be a little bit lower gross margins. And then if you look at the -- what's implied in the guidance and the Q4 margin, it's consistent with our post-COVID margins with the exception of the really high inflationary environment of 2021 and 2022.

[Operator]

Our next question is from Ketan Mamtora with BMO.

[Ketan Mamtora, analyst]

Perhaps, Julian, can you talk a little bit about sort of underlying growth trends in the waterproofing business excluding kind of the hurricane impact in Q3. I'm just curious kind of how that business is performing, your growth expectations in that? And how are the margins in that business relative to sort of the Beacon average?

[Julian Francis, executive]

Yes. I really appreciate the question about [indiscernible]. So -- as you know, we acquired Coastal, which is the first of our acquisitions in this space at the end of 2022. We can had a West Coast presence in specialty waterproofing distribution, but we really felt we needed to grow that segment.

We fundamentally believe that it's a higher growth segment than the core roofing business. And the post tragic side condominium collapse, the [ Champlain ] towers, if you'll remember, has really emphasized the importance of this category to construction. That tragedy was fundamentally blend on lack of waterproofing remediation and that needed to be done that wasn't.

We've seen local municipalities as well as Florida county, things like this impose new requirements on buildings in terms of backing up the reserves in order to ensure that they get spent on waterproofing to maintain the integrity of the building. So we think that, that, along with the sort of recognition of changes in climate, significant weather conditions is going to continue to drive that.

And it's a little bit poorly understood that this is not something that is just related to sort of the coast and the [indiscernible]. This goes all across the country. We operate pretty much everywhere now. And it's been -- we're excited about where that's taking us. Gone from roughly give or take, mid-$100 million of sales towards the end of 2022 to a run rate of $700 million plus.

So we've really grown that business. We've acquired multiple businesses to build out the only nationwide specialty waterproofing distribution platform. And that's been really exciting.

In terms of the margin profile, it's more like residential than it is commercial. And we're very pleased with that. We expect to see that be enhanced over time. The leadership team there has got a plan and they want to make sure that they are operating above our average gross margins and EBITDA margins for the company in the long run.

We've got some work to do to get there. I mean, the acquisitions that we brought in this year, particularly, we need some work to get there, but we're excited about that platform. And like I said, it's -- we think it's a fundamentally faster-growing segment of the construction market, it ties in very nicely with our commercial roofing business as well. So very excited about it, and thank you for the question.

[Operator]

Our next question is from Michael Rehaut with JPMorgan.

[Michael Rehaut, analyst]

Maybe kind of a 2-parter, if I may. Just first off, I wanted to get better understanding and I apologize if you hit on this earlier on the drivers of now expecting to achieve the full year EBITDA guidance in the lower half of the prior range. And secondly, I know it's a little early perhaps to look into 2025.

But at the beginning of the year when you gave the initial guidance for '25 -- I'm sorry, 2024, you cited with margins actually expected to come down a little bit. A headwind from a lot of new branches and M&A and maybe temporarily having those margins being a little dilutive as one of the challenges that you saw going into this year.

So the core of my question is, going into '25 with a continued high level of acquisitions, I was wondering if we should expect a similar type of drag or given your continued focus on your various profit improvement initiatives, we should expect margin expansion to resume?

[Julian Francis, executive]

Thanks, Mike. So I'll let Prith talk about the Q4 guidance some of that, but let me just touch on sort og the big picture thing about margin expansion. I mean that's one of our key focuses. And yes, this year, with particularly with the greenfields that we launched really early in the year, which was a little bit of a shift from prior years where it was so early in the year. They were a little bit of a drag.

We had softer market conditions and some of the acquisitions that we completed this year were mid to low single-digit EBITDA margin. So you end up with -- there was a drag there. We haven't obviously fully synergized those. I think Prith mentioned them in his comments and we would not expect to see quite such a drag going forward. And we also think that with the improvement initiatives, which we are seeing come through.

I mentioned that we're very pleased with our performance of our acquisitions. They're ahead of our plans, and we are seeing demonstrable results from the acquisitions we've done this year, both in terms of top line growth and in bottom line improvement. So that's been good.

The first half of the year when you're bringing them in and getting them on our platform and then working on what needs to get done to improve them. There's still work to be done there. We came into the year, expect to see some margin pressure because we saw some of the overall market dynamics coming in.

I think our original guide on margin was about flat year-over-year for the full year. I think that we feel pretty good about that. We think we got that. And then for the guide overall, before I hand it over to Prith to touch on fourth quarter. Look, I think we're one of the few companies actually maintained our guide for the full year. It's certainly coming in lower than anticipated. We would certainly like the market to have been a little bit better, but we've maintained broadly our guidance for the full year.

[Prithvi Gandhi, executive]

Yes. Thanks, Julian. So Mike, thanks for the question. So if you look, I think your question was about the full year guidance. And so if you go back to kind of what we said on the Q2 earnings call, what we said was that for Q3, we expected high single-digit growth in sales per day on a year-over-year basis. Well, we actually finished the quarter at about 6%. And so therefore, that's one of the big drivers to now expect that the full year sales per day growth on a year-over-year basis will be in the mid- to high single digits where we previously thought we would finish the year in the high single digits.

On a gross margin basis, we really haven't changed anything. We continue to expect our full year gross margin rate in the mid-25% range. And then on the OpEx side, the actions we took in Q3, we expect to finish the full year at an adjusted OpEx to sales rate in the low to mid-17% range, which is slightly above our targeted annual adjusted OpEx rate.

We try to manage the business to about 17%. And so we'll be well positioned at the end of the year to bring it down within the target of 2025. So when you put all of this together, you should end up within the lower half of our previously communicated guidance of $930 million to $970 million of adjusted EBITDA.

[Operator]

Our next question is from Mike Dahl with RBC.

[Michael Dahl, analyst]

Thanks. Julian, I want to pick up on the OpEx comments. Obviously, that's been kind of a pain point in the last couple of quarters, a focus area for you. The actions you're taking, you're characterizing as kind of head count actions. So that could be construed as maybe somewhat temporary and you bring those back on as -- or if volume comes back.

But what can you tell us about kind of how you're thinking about this or structurally, are there more structural parts of what you're doing? And as you look at next year, kind of Mike's prior question and Prith's comment, managing back towards that lower target? I mean what else are you thinking about in terms of programmatic actions to bring that back down?

[Julian Francis, executive]

Thanks, Mike. [indiscernible] recall from previous earnings calls that we highlighted things like sales for our work and sales productivity and the progress we've made. I think this year, certainly, it's been a question mark around our performance, and we're very aware of it. Part of this is that we came into the year expecting good demand from sort of some carryover storms in the west. And we were expecting to see more of that in Q1, and we thought it would come in Q2 and it never did.

In Florida, which we talked about all year as being particularly weak, the Southeast more broadly was weak, but Florida was particularly weak. We've been taking actions in Florida almost from the start of the year in order to maintain our OpEx ratio from a head count standpoint.

So part of this is you need to make sure you've got the people to deliver the product. And in the end, as we went through the year and particularly as we went into the third quarter, we realized that even on what we thought was sort of a regular day, the demand levels were below what we had anticipated.

So we took action in the fourth quarter that we adjust -- sorry, the third quarter to adjust down what we needed to. So we just -- this was a little bit of a reset, making sure we see it. I want to emphasize, outside of Florida, our volumes grew. If you strip Florida out of our numbers, volumes grew in the rest of the country. I mean Florida was just a really, really tough market this year. But we feel really good about what we were seeing elsewhere. And I guess our volumes were growing elsewhere.

So you'd expect in order to do that and deliver more volume, we've got to have more people. It was difficult to get Florida where we needed to. And then as we slowed down during the third quarter, we just decided that we needed to take action and just sort of have a reset. Obviously, as we grow, we're going to need more people to service the business and make sure we're maintaining our a high level of service to our customers.

I mean that's sort of fundamental in the distribution business as we add greenfields, as we add acquisitions, we will bring people in. But as Prith mentioned, we are looking at making sure that we're driving productivity in the branches. We're driving productivity in sales and we're trying to manage the business to around about that 17% target that we set. We think ultimately, there's probably more in there. But on a quarter-to-quarter basis on a business like ours, there's going to be some times when we miss it.

[Prithvi Gandhi, executive]

Yes. And just a couple again points of color. So one thing is this year 2024, we've done a lot of acquisitions. We've done a lot of greenfields. Just as you enter into 2025, we do expect to get synergy realization. And as the branches continue to mature, structurally, that will help the overall margin rate. So that's one thing just to keep in mind.

And then secondly, we've had some learnings from this year. And so we will, through the budgeting process and so forth, be more circumspect around how we add on operating costs in anticipation of the busy season, probably more biased towards bringing on the resources in line with the demand versus what we anticipate will come. So that's kind of some of the principles that we'll put into our processes going forward. And then Mike, it wasn't just the field resources that were by the head count actions. We took actions in the corporate functions as well, and we expect to drive leverage from those going forward.

[Operator]

Our next question is from David Manthey with Baird.

[David Manthey, analyst]

I just had 3, but they're all just factual. So I'll group them. Based on the deals you've done to date, what is the incremental revenue carryover you would expect into '25? Second is the lift in interest expense guidance from last quarter to this quarter, like $177 million to $184 million? Just wondering if you could touch on that. And then TRI-BUILT, you said grew 12% year-on-year. If my math is right, that's what like $280 million and just over 10% today. Just I could check those 3 facts.

[Prithvi Gandhi, executive]

Okay. Mike, let me start with your first question in terms of the revenue carryover from the transactions this year, it should be in the ballpark of 3% to 4% of total revenue going into next year. On your question about -- sorry, could you -- the first part of the question was?

[David Manthey, analyst]

The third was TRI-BUILT. Is that running like $280 million?

[Prithvi Gandhi, executive]

I'll try to yes, you're right. Your math is in the ballpark in terms of the total sales in the quarter. So that's correct as well. And then on the interest expense, what were you asking whether the total dollars or? Yes. So it's $184 million -- and now -- yes, so that's kind of what we expect for the full year.

[David Manthey, analyst]

And can you tell me why? I mean it was $177 million last quarter, I believe.

[Prithvi Gandhi, executive]

Yes. So 2 things, you've been carrying a higher debt balance through the year with the share buyback and some of the other actions we've taken over the course of the 12 months. So that's one reason. And then the [ REITs ] have gone up, right? It's a floating rate that some of it is hedged, but overall [ REITs ] have gone up. And so those are the 2 reasons.

[Operator]

Our next question is from Garik Shmois with Loop Capital.

[Garik Shmois, analyst]

I was hoping you can expand on the 50 basis points of positive price cost you talked about in the quarter. Is that mainly inventory profits from the August price increase? And maybe more broadly, how should we think about price cost moving forward?

[Julian Francis, executive]

Thanks, Garik. Again, I'll let Prith to give you some detail, but it was multiple factors. We worked very hard on the August single price increase. And we think we executed that very well. Again, this was a little bit of a challenging market because you've got some -- we had some really weak markets where we saw price under pressure in some residential markets, obviously, particularly Florida, but taking advantage of really leaning into the other markets where things are strong.

So I thought our execution on the August price increase was good. And we realized about what we did from the April price increase I'm sure there's a little bit of inventory profits in there, but it's not a huge amount. It's more around the execution. We work very diligently on commercial in terms of managing what was, again, a softer overall demand environment relative to new, but constructive, this was an area where coming into the year, we had concern about pricing.

We executed very well in terms of managing our price cost in the commercial markets and tilt felt very good about that as well. So it really came from multiple areas. And like I said, we were very pleased with the overall execution during the quarter.

[Prithvi Gandhi, executive]

Yes. The only thing to add, Garik, on residential, the price realization was similar to what we saw in the August price increase. And so that's a big driver there. And then on the commercial side, look, it's our first time in a while where we've seen favorable price/cost even in a declining price environment. So it's really kudos to the team in terms of managing the mix and the operations there.

[Julian Francis, executive]

Yes. And then I think you had the second part of the question about the go forward. Obviously, we're -- the storms are going to have an impact on product availability going forward. We would expect that to be -- have a meaningful impact in terms of pricing dynamics going forward and looking into next year.

The new construction market, there's been -- there's certainly been pressure there because that's been a little bit weaker than we've seen over the last 12, 24 months. I'd like to see some more progress in that space. And then we're going to have a different dynamic going into 2025 when storms in the Southeast now are going to firm up that part of the country, but you've got some storm areas in the Western of the country that are coming down.

So we're going to be managing it again, but we also see this as what we do. And I think the -- in a difficult environment. I think in a choppy environment that we've seen this year with a lot of different moving parts. We've executed really well in that area, and that was not a given coming into the year given all the dynamics we saw. So I'm actually very, very pleased with how we've managed the price/cost dynamic this year. And we'll continue to emphasize that as a key element of our strategy going forward.

[Operator]

Our next question comes David MacGregor with Longbow Research.

[David S. MacGregor, analyst]

Yes. I wanted to ask about the private label business were 12% sales growth, obviously, very impressive. I'm wondering if you could just unpack that for us. I'd like to understand how much of that growth is associated with maybe adding SKUs versus evolving contractor preferences. If there's any way you can help us understand kind of the residential versus nonresidential versus complementary kind of breakdown on that. And I guess, to some extent, there's kind of a thorny issue of competing with your vendors as you go to market with a private label product and how you're navigating or managing that.

[Julian Francis, executive]

Thanks, Dave. First of all, we have been biased towards residential products, and we -- but we are expanding it. We talked about the introduction of the commercial insulation product this year. And that's been -- that did help us drive growth. It's a large category for us. We're not going to get enormous penetration in that category. It's not going to be 50% of all the sales we make in that category is ever going to be there, but it's a significant driver in a large category. So that's really our first, I'd say, foray into the commercial arena.

We like what we see so far, and we've been very pleased with the results. We're very pleased with our sales organization, the way they've adopted it. Look, I mean, part of the growth in private label is also the ability of our customers to offer something different to their customers. if they're competing on these various job sites and spec, they can offer something our customers [indiscernible] offer something that our competitors they're [indiscernible] offer, which is tribal.

So we focus very much on the high-quality and differentiated products that work in these markets, and it's been very successful. Look, I think that you asked about is it existing product lines growing new addition going forward? It's going to be both. It's actually been very balanced so far. We're growing in the categories we're already in. But adding new categories is going to be an important element for going forward.

As to the management of the vendor relationships look, this is a well-known strategy in multiple retail outlets. I mean it's not like we don't have the ability to manage those relationships. I think we do it very well. Obviously, we source products from well-known companies that are looking to make sure that they've got some volume going through their networks. That's why we're able to do this. We manage that very well. They know there's competitive product out there anyway. So I don't think that's a problem going forward.

Obviously, it's a conversation that we have with our vendor partners. But I also think that we've got great relationships with them and they understand our strategy in this space, and we've been clear with them. And we coexist quite well.

[Operator]

Our next question is from Adam Baumgarten with Zelman & Associates.

[Adam Baumgarten, analyst]

Just on the greenfield, you guys have already pretty meaningfully eclipsed your Ambition 2025 target doing about 20 this year. Any initial thoughts on how that may look next year?

[Julian Francis, executive]

Yes, and we do. What we've found is that this has been a pretty significant opportunity for us. So I think that sort of in the "Ambition 2025" portfolio of actions we were taking is that we were really under leveraged. We had a little bit of catching up to do, I think, from the prior few years. But our intent would be to keep this rate going.

We think that as we look around the country and we see markets, we see opportunities in not just the first tier markets, but also second-tier markets to add this. Fundamentally, as a team, we believe that the service proposition by adding locations really enhances the offering.

Labor is the scarce resource having people sit around and wait on job sites for deliveries is not what the tractors need. Labor is the critical component. So our ability to capture some of the labor from the contractors and really make them more efficient is fundamental to what we do. And adding additional locations or whether they need -- whether they pick up or they need short-cycle deliveries is something that we believe is absolutely critical to our strategy going forward because we believe this is actually a high-service business.

And providing that high-touch service is going to allow us to earn market share and capture value over a period of time. So you should expect us to be adding 20-plus branches next year, and we believe we can continue to do that going forward. The one caveat I'll add to that is we toggle that with M&A. When we look at markets, if there's branches that we can acquire in the market that fill in our footprint and allow us to offer that service, then we will continue to look at how that impacts our decisions to add a greenfield. But we certainly don't believe that the market is saturated from the number of Beacon branches that are available to our service proposition.

[Adam Baumgarten, analyst]

Okay. Got it. And then just on the topic of pricing, given the hurricanes and the expected demand over the next year plus, would you anticipate additional price increases maybe either later this year or early next year in residential from the manufacturing?

[Julian Francis, executive]

I would -- so obviously, I'm not going to comment on what the manufacturer's strategies are going to be in this space. We have not seen any announced increases from the manufacturers. We have seen increases from sizing manufacturers, but not on the single side of things. So we would expect to see some.

But look, there's a supply and demand dynamic. And so I wouldn't expect to see anything from the manufacturers this year. Normally, there's at least a 30- to 60-day lag between announcement and an increase or we're getting to a point where there's not going to be anything this year, I don't think. I think going into next year, I think the supply/demand dynamics are going to determine whether the manufacturers think there should be another price increase.

[Operator]

Thank you very much, everyone. That concludes the questions. Now I would like to turn the call back over to Mr. Francis for his closing comments.

[Julian Francis, executive]

Thanks, Ezra, and thanks to everyone for joining us today. I know many of you expressed an interest in hearing more about our future plans and one of the things that we've been thinking about is we've really locked down most of the Ambition 2025 goals is updating mid-range plans.

And I'm happy to say that we are planning to have an Investor Day in the first half of 2025 to update our longer-term range goals. And so stay tuned for that for additional details. So ultimately, thanks again for joining us today. I do want to express my gratitude to our 8,000 associates and team members, particularly those impacted most recently by the storms. But other than that, I wish you all a very happy Halloween and the best for the remainder of the year and happy holidays.

[Operator]

Thank you very much, everyone. That concludes today's call. You may now disconnect your lines.