Beacon Roofing Supply, Inc. (BECN) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and welcome to the Beacon Second Quarter 2021 Earnings Conference Call. My name is May, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. At this time, I will give you instructions on how to ask a question. As a reminder, this conference call is being recorded for replay purposes. Binit Sanghvi: Thank you, May. Good evening and welcome to our fiscal second quarter 2021 earnings call. With me on the call today, are Julian Francis, President and CEO; and Frank Lonegro, Chief Financial Officer. Our prepared remarks will correspond with the slide deck posted to the Investor Relations section of Beacon's website. After management's prepared remarks, there will be a question-and-answer session. With that I will now turn the call over to Julian. Julian Francis: Thanks, Binit. Welcome to Beacon. It's great to have you on the team. I'll now begin on page 4 of the slide materials, which focuses on our second quarter continuing results. We had one less sales day in the second quarter of 2021, compared to the prior year quarter. So, I'll refer to the results on a sales per day basis for better comparability. Our team delivered impressive results in the fiscal second quarter, achieving record sales and adjusted EBITDA. Sales were up approximately 12% and adjusted EBITDA more than tripled on improved gross margins and operating cost leverage. In addition, we successfully closed on the divestiture of the Interior Products business, which sharpened our focus on exteriors. We continue to be very pleased with the team's execution in the past several quarters and believe that Beacon's performance is a result of their hard work, supporting our strategic agenda. Frank Lonegro: Thanks Julian and good evening everyone. Turning to Slide 7. We achieved over $1.3 billion in total net sales in the second quarter. We had one less sales day in the second quarter of 2021 compared to the prior year quarter. So I will speak to our sales drivers on a sales per day basis for better year-over-year comparability. Strong demand within our residential roofing end market grow sales higher than we had anticipated in our previous outlook commentary. Weather disruptions impacted a number of our markets in February which was followed by a rebound in March, a reflection of the strong fundamentals underpinning residential demand. Our continuing business finished with a strong 12% daily sales growth for the quarter with approximately 40% due to price and approximately 60% due to volume. Residential roofing sales were up nearly 21% on robust demand from new construction and repair and remodeling. The February shingle price increase also contributed to the residential revenue growth. Nonresidential roofing sales were down less than 3% as declines not only continued to narrow but also finished the quarter with a strong March. This uptick which has continued into April has us cautiously optimistic that the worst is behind us in commercial roofing especially as we begin to cycle last year's COVID-impacted comparables. Complementary product sales increased 11% in the second quarter. Keep in mind that our complementary product category has approximately 80% residential and 20% commercial exposure. Complementary benefits from the residential market tailwinds including demand for key products such as siding lumber windows and doors. Our nonresidential product offering within complementary is primarily waterproofing which like a broader non-res category was down year-over-year. Our complementary products are distributed through our branch network and share overlapping customers with our residential and nonresidential roofing businesses. Turning to Slide 8, we'll review gross margin. Gross margin improved to 25.3% or 270 basis points year-over-year. The strong year-over-year increase was driven by favorable price/cost as well as favorable sales mix. Price/cost was positive by approximately 230 basis points in Q2 due to the successful implementation of our August and February price increases and favorable timing. By comparison we experienced 70 basis points of year-over-year price cost benefit in Q1. Favorable product mix in the quarter also contributed to the year-over-year margin lift as we experienced stronger sales of our higher-margin residential roofing products. There have been additional price increases announced across a broad range of our products including the April shingle price increase mentioned by Julian. We are approaching those increases with the same level of rigor and execution we demonstrated in our approach to the August and February price increases. Julian Francis: Thanks, Frank. Before we turn the call over to Q&A, I want to update our fiscal 2021 outlook. Please reference page 11 of the slide materials. In April, we continued to see strong sequential demand improvements and even stronger growth year-over-year versus a COVID-impacted prior year period. The housing market continues to provide tailwinds for both repair and replacement and new construction markets. Residential roofing demand and the residential exposed areas within our complementary products will continue to benefit from these fundamentals. Commercial builder segment continues to improve and we would expect activity to follow continuing the positive trends that we have seen in March and April. We've implemented our April shingle price increase with the same level of rigor as the August and February residential roofing price increases. Our sales growth in Q3 will reflect the positive contribution from our August, February and April increases as well as several smaller increases within other product categories implemented during the past several months. For our fiscal third quarter ending in June, we expect total sales growth of mid- to high teens reflecting our continued confidence in the underlying demand in residential markets and an improving outlook for commercial. Our emphasis remains on pricing execution and operating efficiency as we enter the construction season. We expect a meaningful year-to-year gross margin increase of approximately 200 basis points to around 25.8% in Q3. For the full year, we now expect growth in the low double-digit range assuming no additional supply chain disruptions. We are now targeting fiscal 2021 adjusted EBITDA between $560 million and $585 million, which represents a significant increase from the outlook we provided on our Q1 call. While uncertainties continue to exist, this outlook reflects our expectations for a combination of strong sales growth, gross margin gains and favorable operating leverage. More broadly, there are many levers within our control as we continue to execute on our strategic initiatives. We will build upon the gains we've achieved in the first half of the year and look forward to a very successful 2021. With that operator, we're now ready to open the line for questions. Operator: First is Mike Dahl from RBC Capital Markets. Your line is now open. Chris Swon : Hi. This is actually Chris Swon for Mike. Thanks for taking the question. First hoping you could touch on the success of the April price increase. Is there any way you can maybe provide additional quantification how much of that announced pricing was realized and then what your thoughts are on relative pricing power for the summer increases announced? Julian Francis: Thanks for your question, Chris. It's still early in terms of the execution of that. It's not as though we throw a switch and everyone moves up at the same time. There's plenty of opportunity for us to continue to see improvements. I think that our prepared comments indicated that we still believe that in this environment we're going to be able to more than offset the cost inputs. So I think that it should be accretive overall. But again, it's still early on from our perspective in terms of the execution. And it's -- there's multiple. I mean we saw it across residential shingles. We've seen it commercial increase. We've seen increases in other exterior products. So there's multiple things going on in April quite frankly. Frank Lonegro: Chris, it's Frank. To your point around the summer increase obviously, we're aware of the manufacturers and what they put out there. We have not made our announcement yet. Chris Swon : Understood. That makes sense. And for my follow-up I was wondering if you guys could maybe provide a bit more detail on the monthly cadence embedded in your third quarter guide. If April was up 40% year-over-year it would imply that May, June you're expecting some moderation down to potentially high single-digit and that seems fairly conservative. I just want to get your thoughts on that? Julian Francis: Yes. Sure. You'll remember that we're really on comps versus last year. I mean April was the bottom of the market last year as COVID impacted and we sort of locked everything down and the market changed. I think we saw sequential improvement last year as April continued. But obviously, we saw that also continue through May last year and June last year. So I think more of what you're seeing in terms of our outlook is rather improving last year and so the comps get harder as we go forward. So I don't think it's a diminution in many of things we see in the market. It's more the base of which we're calculating the improvement from prior year. Chris Swon: Got it. Makes sense. Thank you. Operator: Next is Brian Biros from TRG. Your line is now open. Brian Biros: Hey, good afternoon. This is Brian on for Kathryn. Thank you for taking my questions. On the non-res environment, can you talk about what you're seeing specifically in the Northeast region around like New York and Boston? It kind of seems that region is about back to pre-COVID levels for certain companies based on some of the conversations that we've had with our contacts. And I guess, I wonder if you guys are seeing the same thing up in that region. Julian Francis: Brian, thanks for the question. Obviously, again, we're really coming off the base of last year. And obviously, the Northeast was the one that was hit most dramatically in -- not just in April, May, but through most of the year. From Philadelphia up through Boston was really impacted by COVID last year. So are we seeing a significant improvement in that market? Yes. Clearly, we are. Now it's difficult to really get a handle on the specifics on a market-by-market basis. That is a particularly strong area for us in the commercial construction arena. We like our position up there. So I think we are benefiting from the recovery. But I still think overall as we've said the markets have been down year-over-year so far in commercial buildings across the country. I would say that we are becoming a little bit more optimistic at this point in time than we have been previously on commercial. I think we're starting to see more activity. But there's also a longer build cycle in commercial. So I still think there's going to be nowhere near the type of improvement we're seeing on the residential side because of the sales cycle and the build cycle is so much longer. Brian Biros: Understood. And then maybe just on the resi side and the demand. I guess, is there a way to parse out if there was any kind of weather demand impact from all the numerous weather events in the quarter and if that was a material driver if it was just general overall better environment and the pent-up demand? Julian Francis: Yes. So we certainly saw impact from last calendar years hurricanes that hit the Gulf and also some of that has continued to come through. Obviously, the southern part of the US gets less impacted by cold weather in the winter. So we certainly have seen that come through. If you were referring to weather that we've seen this year, we've not seen anything come through yet. And I would say, it's going to be really difficult to tease that out this year from the underlying demand that we see from new construction and general repair and replacement anyway. But certainly we expect to see continued roofing activity, building construction activity from the storms we saw last year both in the Midwest and in the Gulf Coast. Brian Biros: Thank you. Operator: We have our next question from Michael Rehaut from JPMorgan. Your line is now open. Elad Hillman: Hi. Good afternoon. This is Elad Hillman on for Mike. Thanks for taking my questions. So first, Q2 gross margins were significantly higher than you had guided last quarter, and it seems like a lot of it was driven by price/cost. But maybe you could talk about where you saw the greatest -- sort of the greatest areas of upside relative to your original outlook. Frank Lonegro: Yes. I think it was largely on the residential side to your point. We went through the August price increase. We learned a lot in terms of our own execution there and you're seeing us apply that in February and you'll see us apply that in April as well. So I'd say it was largely on the residential side. But again, we approached the increases on the commercial and the complementary products with the same level of rigor and execution. As Julian and I said in our prepared remarks, the end markets there depending on whether you're on the res or the non-res are a little more receptive or a little less receptive to the price increases. But I think I keep your focus on the residential piece. Elad Hillman: Got it. Okay. Thank you. That's helpful. And then just moving over then to -- I mean, kind of like on shipments more on volume. So if resi sales were up 19% this quarter and it sounds like pricing was quite positive and ARMA shipments were up 27%, I was wondering how your purchasing activity kind of compared to ARMA shipments this quarter and how that compared to sellout trends. Frank Lonegro: Yes. So we were essentially perfectly aligned on what we bought with ARMA, which is consistent with essentially where we've been the last couple of quarters. Remember the manufacturers have us all on allocation. So I don't think you're going to see huge shifts in terms of market share on the purchasing side, and I think you should expect that to continue. As Julian and I have talked about this, our belief is the manufacturers are pretty much running full tilt. So you could expect something $40-ish million per quarter. And then obviously we're looking for our fair share as a result of that. But yes, we purchased very much in line with that. In terms of your question around residential asphalt shingles specifically, our volumes were up 14%. So that's the out -- what we call the out-the-door volume. That's what we ship to our customers. So hopefully that gives you a little bit of a flavor. And then the difference between the year-over-year revenue and that volume number is a combination of price and mix. Elad Hillman: Great. Thank you. Operator: We have our next question from Keith Hughes from Truist. Your line is now open. Keith Hughes : Thank you. So we talked a lot about price increases in residential. I guess, my question is the pricing and complementary, I think, some of those products are going up a lot too. If you could talk about that and what the price/cost dynamic looks like in that segment. Julian Francis: Sure. I'll touch on that Keith. I think that our price/cost dynamic across all of the categories today is positive, whether it's the residential non-shingle categories that we participate in. There has been a lot of activity. There's probably a little more noise in those numbers. There's some mix. There's some regional-specific categories in there. But generally speaking price/cost has been positive across all those categories as well. Frank Lonegro: Keith just a little bit of detail might be helpful for you. If you think about our overall price/cost of being plus 230, you should handicap that as sort of residential being above that and commercial and complementary being positive but below that. Keith Hughes: And that's the year-over-year delta, you're saying correct? Frank Lonegro: Price/cost in the quarter year-over-year correct. Keith Hughes : Okay. All right. Thank you. Just one quick one. There was a commentary of 60% volume 40% price. Was that referring to a segment or company-wide? It wasn't clear. Frank Lonegro: Company. Keith Hughes: Company-wide. Okay. Thank you. Operator: Next in line is David J. Manthey from Baird. Your line is now open. Quinn Fredrickson: Hi. This is Quinn Fredrickson on for Dave. Just wanted to, talk about, OpEx sequentially. Obviously really strong performance here this past quarter, it sounds like you're expecting a lot of the productivity programs to continue. Just are there any step-up in expenses outside the typical seasonal increase that we should be aware of? I know that you added some headcount this past quarter. Do you feel you have the capacity to meet demand with what you have now, or will you look to add more? Julian Francis: Thanks for the question, Quinn. Look, this time of year we ramped hiring pretty significantly as we go into the year. I think along with not just others in the construction industry but others across the entire economy. It's certainly difficult to get all of the help we need on the days we need it. But I don't think that is translating into lost sales in this demand environment. I think we're able to get what we needed. We do have a little bit of flexibility, but it certainly is challenging to add all of the heads you need on the days you need them. But we're certainly making progress. And we're certainly adding. Now, I'd also tell you we're not adding as quickly as our sales are growing. So we do expect to see leverage from the entire organization. And believe, like I said, as you correctly said, that our productivity initiatives are yielding great results for us. Frank Lonegro: Yeah. But where dynamic for us, in Q3 is going to be the year-over-year, because we're lapping the COVID quarter where we had obviously a lot of focus on both temporary and permanent cost reductions last year. So just factor that into your model. And then to Julian's good point, I mean, we're very focused on continuing to generate labor productivity. The sales per hour work measure that, he put in place is really continuing to drive management behavior in the field and it's being quite helpful. Keep in mind that, we will be adding costs back-in, when we have sales growth year-over-year of mid-to-high teens as Julian guided to. That certainly brings with it some cost pressure as well. Quinn Fredrickson: Right. Thank you. And then just final question, I just wanted to ask about the digital progress that you guys made this quarter. Just anything you would call out with that ramping as quickly. And also with adding some new leadership focused on that just any key, goals or metrics that we should be focused on from here. Julian Francis: Thanks for bringing that up. Look, we've seen a step change this calendar year as well. I mean, we were -- we set an aggressive target a sort of 10% run-rate in September last year which we hit as a total company slightly higher on exteriors slightly lower on the interiors business. So -- but we've seen another step change this year. And to go from sort of 10% doing 15% of sales in March through that channel has been really, really encouraging to us. I think it's starting to yield great benefits. Like I said, it's clearly a differentiator. It is something we're going to continue to focus on. I think the talent that we're bringing into the organization is going to have an increased focus on that. Our marketing team is being built out. We're focusing on our ability to generate more through that. Our sales force is incented to do so. We think it's an incredibly powerful competitive tool as well as a great convenience and aid to our customers. So we continue to believe, it's going to be a significant portion of our growth agenda over the next several years. Quinn Fredrickson: Thank you very much. Operator: Next is Phil Ng from Jefferies. Your line is now open. Phil Ng: Hey guys. Congrats on a really excellent quarter. Frank, last quarter I believe, you mentioned free cash flow conversion, just roughly about 60% of EBITDA. Is that still a good way to think about things? And then, with a much improved balance sheet now, can you kind of highlight some of your big priorities in terms of capital deployment? And Julian, if I heard you correctly, you were talking about investing for growth. Is that going to be more on the M&A side or organically? Frank Lonegro: Hey, Phil thanks for the question. Yeah, I think that 60% handle for free cash flow conversion of EBITDA is still a good number. The refinancing if that takes hold, as we get into next year that should be helpful to that number assuming all other things equal. Capital allocation clearly is a threshold question for us now. We haven't even closed the refinancing transaction. So we're just kind of getting to these leverage levels which open up a fair amount of opportunities for us and again, active conversation which I would say is across the board. We're looking at everything from M&A to shareholder returns as well as paying back additional debt. So we've got all those options on the table. In terms of the overall M&A focus the way that Julian is thinking about, it is largely kind of a market-by-market focus. All battles will fall locally at the end of the day. So we've got to make sure, we've got a good competitive position in the best markets. So we'll be looking at it from that perspective and then staying true to our knitting. We know what we're good at in terms of residential and commercial roofing. So we'll likely stick to our knitting in those places. And then, looking at the product portfolio, in some places we offer some of those complementary products and have a leading market share there. And in other places, we're just not as penetrated. So we'll be looking at it from that perspective too. Phil Ng: That's really helpful. And then Julian since you've embarked on this improving the performance in these underperforming branches, you've been getting $20 million or $30 million of improvement each year. One is that a sustainable level? And when, we think about OpEx leverage going forward is there a good way to think about it? Appreciating you got some of these costs coming back but you guys have been really diligent in terms of how to manage that. Julian Francis: Yeah. Look, it's -- certainly, I've been thrilled with the progress we've made on those lower quintile branches that we've talked about. And I've always deliberately talked about the lowest quintile. We will always have a lower quintile branches however good they're performing. So this is going to be a continuous improvement initiative that we're going to drive the business towards. I think obviously, as I joined the company 18 months ago, we saw a significant opportunity there. The initial guide was sort of $30 million to $60 million over a time frame. I'd be lying, if I said that, all of this was due to our improvement initiatives. Clearly the market is giving us some tailwind and giving us some opportunity. But it's also highlighting the opportunity we really have to drive efficiencies. And I think that as I've said a number of times now, we've built a diagnostic tool that we review very frequently to focus attention on our lowest quintile branches. We see steady improvement in many of them and dramatic in a few. So I think that as we start to sort of improve a lot of these branches, as we start to get to -- it gets harder-and-harder. So I would expect that to be diminished to some degree over time. But I really do think that it's been somewhat transformative to really think about this and get that focused. So I do think that improvements in those branches and continuous improvement across the entire company is not only possible but likely. Phil Ng: Super helpful guys. Thanks a lot. Operator: Next is Ryan Merkel from William Blair. Your line is now open. Ryan Merkel: Hi, guys. Thanks for taking the question. Frank, you mentioned that the OEs have you on allocation. Just what are lead times today? And then are we really looking at next winter when these OEs will catch up? Frank Lonegro: Yes. I haven't seen any meaningful push out of lead times based on where we were last quarter. As, I think, I've mentioned and Julian has mentioned a number of times to both analysts and investors the manufacturers are handing them out. I mean they're shipping everything that they are making. And with the exception of, sort of, the slow season so call it our fiscal Q2, we would expect to ship everything to our customers that we receive from the manufacturer. So we think we're going to be in this environment certainly through 2021. 2022 assuming the demand environment holds. We get a little bit of storm activity. We get a decent winter. This thing could hold for a couple of years. We're excited about the opportunity that this environment presents to us and you're obviously seeing the execution on both the gross margin and the OpEx side, which is really helping deliver the EBITDA margins and getting those on the trend that we are looking forward to achieving. Ryan Merkel: Yes. Yes. The pricing environment is clearly very good and it sounds like it's going to continue. And then on non-res you mentioned that you think the worst is over. Just what are you seeing? Is it re-roofing jobs that were delayed coming back? Is new construction coming back? Just talk about the profile of what you're seeing there. Julian Francis: Sure. Thanks, Ryan. On the commercial business side when you think about it clearly right now you've got reroof that's coming back. I mean that's something that's obviously really hard to delay. The building owners and the managers, they're going to put on a new roof if they have to because there's damage or leaks or it's aged at. I do think we still see a little bit of an air pocket in some areas of the commercial construction market. I mean, as I've said new construction almost stopped. So stuff that was in process really slowed down. I don't think anyone was really thinking about how they were going to put up new office buildings in the last six months. I think people have been managing that. Now the sectors of the construction market that have withheld withstood this probably better. Data centers warehouses that type of category has been -- has remained quite strong all the way through. And all of those still have roofs on them obviously. So that's been good. So I think it's a little bit of a mixed bag. I look very closely at the architectural billing index and that finally went above 50 I think in the last report. So I think there's, sort of, green shoots on the new construction site. But as we keep saying this -- a good chunk of our business is nondiscretionary. So we're going to see it continue. And I think that we're now probably a little bit more positive about the new construction market. But it's a long cycle in commercial construction. It's not the sort of 60-days – 90-days in residential. It's six months to a year or longer. Ryan Merkel: Great. Thanks. Operator: Next question is from the line of Ketan Mamtora. Your line is now open. Ketan Mamtora: Thank you and congrats on all the progress. Very impressive. Maybe to start with I'm just curious how much of the February price increase on the resi side was kind of -- was there in your Jan to March quarter the fiscal second quarter? And how much of it is kind of left to be realized in the coming quarters? And is there a way to think about the cadence of the April price increase? Frank Lonegro: Yes. Ketan in terms of the timing benefit the timing benefit is going to last somewhere between 60 days and 90 days as you replenish inventory. The actual price itself benefit we did a really good job in February learning from August to ramp the entire branch network up quickly so that we were able to implement the price increase very quickly across the branches more quickly probably in February than we did in August. And I believe what you'll see in April we will ramp that or have ramped that more quickly than we did in February. So we are learning a lot as we go in implementing those learnings as we apply each price increase. So the speed with which we are able to achieve the price increase is getting better. Ketan Mamtora: Understood. That's helpful. And then coming back to capital allocation you said kind of all options on the table. I'm just curious with the trend that you are seeing by the end of this year your leverage will be one significantly lower than kind of what you have right now which is below your target. Is there a way you think about, sort of, building cash cushion kind of absent any opportunities, or another way do you have kind of sort of a leverage target in mind below which you think kind of absent M&A you need to return cash to shareholders? Julian Francis: Again thanks for the question. Look we -- as Frank said we're not yet closed with the refinancing. We've certainly got all options. We're going to discuss this with the management team and obviously with our Board of Directors with regard to how we should think about that. And we'll be getting back to you with more specifics as we get later in the year. Frank Lonegro: Yes. Ketan, one final point on that one. As we set up the refinancing one of the things that we did was created an initial draw on the ABL revolver which gives us the ability to in essence prepay without penalty some debt while maintaining liquidity and additional dry powder. So we've tried to set up a mechanism to make sure that we have the ability to deploy capital when the options are decided and the opportunities present themselves. Ketan Mamtora: All right. Appreciate the thoughts and good luck back of half of the years. Frank Lonegro: Next question. Operator: Next is Garik Shmois from Loop Capital. Your line is now open. Garik Shmois: Hi. Thanks for taking my question and congrats on the quarter. Just given the magnitude of the gross margin improvement and the improved outlook going into 3Q just how should we think about gross margins? And maybe a little bit more long-term do you think this level is sustainable when you look out into next year? Julian Francis: Thanks for the question, Garik and thanks for the sentiments. Certainly, we've been impacted positively on the gross margin side by the price increase and our ability to pass through those price increases and improve price cost position. Clearly the market is giving us some tailwinds to do that. But I think we're also improving our capability in this space. I think that this is -- the thesis that we had maybe 18 months ago on how the market was going to shape up our margins have been compressed because of an interesting dynamic where you had asphalt inflation and a declining market where we get squeezed in the middle of that and our thesis was in a better market will improve our margins anyway. So, it's difficult to tease out one from the other right now, but I do think that we've got the ability to sustainably improve our margins from there where they were certainly 18 months ago. And obviously, we've seen the benefit over the last 12 months of a strong market where we've been able to do that. But I mean fundamentally, when you think about a lot of the things that we've put in place and our ability to continue to sustain and in fact improve, our margins we think that there's plenty of opportunity to do that. Whether it's through our private label business expansion, whether it's through our digital initiatives, whether it's through improving customer service and creating value and selling that value of the Beacon operating system that we're developing here. We think there's a lot of ways that we can do that. I think that we're in a great place. Certainly, we've got some tailwind behind us. I think we're executing very well. But behind all that we're also learning a lot about how to operate better in this environment. And obviously from where we were two years ago the ability to pass through increases and take the opportunity to improve our margins is something that's radically different now than it was back then. Garik Shmois: Yes, for sure. My follow-up question is on -- you talked about inventories and allocation obviously on the residential roofing side. It's pretty well known by now. But can you speak to your inventory positions in complementary? And as we get into the season given the strong demand environment is there any risk of stock-outs that are material? Frank Lonegro: I don't think so, Garik. I mean, we obviously -- on the residential side -- let me just walk you through. On the residential side there's a couple of elements to the inventory build there. When you see the dollar values in the 10-Q, some of that is just increasing cost of goods sold, because of the manufacturers and some of its volume given the dynamics of February. So, we feel like we're in a good position from a shingle basis as we get into the busy part of the season and we're looking for every load we can get of additional shingles to make sure that we can serve our customers. We feel good about where we are right now. The commercial side again, Julian, gave you sort of a more cautiously optimistic view in the second half, and we have inventory there, and orders in place to make sure that we can fulfill that demand and feel the same way on the siding. And a lot of the windows and doors are obviously special order, but we feel good about siding and we feel good about the lumber. That's just the side product that we offer to our customers as well. But we have a very active supply chain group. They're doing a great job in working with the manufacturers to make sure we understand exactly what the time lines are and making sure we communicate those with our customers. But right now, and you heard Julian say in his prepared remarks around the guidance, that assuming we don't get anything additional that we feel like we're in good shape to support the guidance we put out there. Garik Shmois: Great, thanks for help. Julian Francis: And the one thing I would add Garik is that -- and Frank referenced in the -- my prepared remarks, we did say absent any significant supply chain disruptions. We have seen in pockets some supply chain disruptions. We think those were tied to the February weather that hit Texas and caused some outages down there in some of the raw material supply lines. That's trickling through right now. It's not significant. But given the demand environment, those tend to ripple pretty quickly through to the front end of the supply chain right now. Operator: Next is Joseph Nolan from Longbow Research. Your line is now open. David MacGregor: Yes. This is David MacGregor. I hope you could hear me okay. Good afternoon. I wanted to start off by just asking you about the online sales program and you talked about a 15% increase. And you made reference to the digital opportunity when you were talking earlier about gross profit upside. So, I'm just trying to get a sense of given that it is a premium profitable -- premium profitability revenue stream, how is that gap versus the walk-in business playing out? Is this a leverageable revenue stream from a margin standpoint? And then secondly, as well just as commercial comes back, how do you think about acceptance among commercial contractors for your online? And do you think that you can continue to maintain growth with that segment of the market as well? Julian Francis: Thanks for the question David. There was a lot to unpack in that question. So, let me start with... David MacGregor: Sorry. Julian Francis: No, no, no. That's fine. But, first of all, we're up to 15% from 10%. So, it's not 15% growth. It's actually -- we've gone from 10% to 15%. So 15% growth in -- into that channel, and that's significant obviously. So, let me be clear. We don't -- we do not charge different rates for the products through any of the channels. We have an omnichannel approach. So, it is not that. But we are able to make sure we capture the full basket. So often when we see people either walk in to our branches or people over the phone sometimes what we find is that, items are left off their list. They forget -- it should have been 10 boxes of nails and screws and six vents and they leave some of those things out. Online, we are able to better capture that. So we see that as an opportunity to make sure that we're giving better service make sure that the customer doesn't have to go and run -- make another run to a local store to pick-up those items. And obviously, it's a better basket size for us. But also often those tend to be good margin products as well. Secondly, we see online our ability to offer our private label products differentially. We create templates for our customers to make the ease of ordering simple for them. And we certainly want to make sure that we're positioning our private label products which have higher margin differentially. So there is a sustainable we believe difference between the two. And not because we charge different rates, but because the mix is different, the basket size is different. And it's a more complete order. So as we see this channel grow, we do think that it's a meaningful difference. And as importantly, if not more importantly, we think it's a real competitive differentiator certainly against our largest competitors, but even more so against some of the small fragmented customers around the country. If you're a one or two branch local distributor, I just don't see how they can afford to build out the type of capabilities that we have. I mean, we're able to leverage those capabilities across 450 locations. And obviously, the cost becomes manageable for us. So as a competitive dimension, we think this is also very, very significant opportunity for us. And we are certainly not satisfied with 15% of sales going through this channel. I would love to see it much higher. David MacGregor: Yeah. And what about acceptance amongst commercial contractors, how do you feel about that as that category comes back? Julian Francis: That's -- generally commercial contractors larger more sophisticated businesses than the residential commercial contractors in terms of their operations. In some cases we're able to sort of tie into them through AVI, API. So actually we think it's a significant opportunity to be well positioned with them as well. And we see no issues there whatsoever. David MacGregor: Okay. Just a follow-up question, I guess, just you addressed earlier the whole notion of OEMs and the allocation that they've got distributors on right now. I guess, as you think about capacity sort of ARMA capacity, what's your best estimate on the growth in ARMA capacity over the next 12 months to 24 months? Are you seeing capacity announcements or just maybe just gradually grinding away at de-bottlenecking? But just to what extent do you think we could see incremental capacity to market next 12 months to 24 months? Julian Francis: I think you're best off asking about the price. That question to be honest. I think they understand the market dynamics. I'm sure they're working hard to as you said de-bottleneck. I think a lot of the supply tightness right now is also associated with the capacity that we've taken out at the start of COVID. I mean everyone sort of reacted by taking out that production to make sure the cost structure was right. And flipping the rebound in demand I think caught us all unawares. And I think that the supply tightness you see is that. So look, I came from manufacturing sites. You've always got sort of 1% to 2% improvement in productivity every year. You're trying to get throughput. You're trying to run the lines quicker. I'm sure they're all working on that. But it ends-up being a regional game. Shingles particularly, don't ship very far. And so even if someone puts it down, it's a local market supply and demand situation as opposed to a national solution. David MacGregor: Okay. Thanks a lot. Operator: That concludes the questions. Now I would like to turn the call back over to, Mr. Francis Lonegro for his closing comments. Julian Francis: Actually it's Julian. Thank you, May. Thanks everyone for joining this evening. We appreciate your support. Certainly, as we continue to face the pandemic, we hope that certainly our employees, customers, suppliers, and investors, are all keeping safe and healthy in these continuing challenging situations. Again, thank you for listening. Thank you for your interest in Beacon. Have a wonderful evening. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.BECN Ratings Summary
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