Beacon Roofing Supply - Q1 2021
February 8, 2021
Transcript
Speaker 0
Good afternoon, ladies and gentlemen, and welcome to the Beacon First Quarter 2021 Earnings Call. My name is Kathy, 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 is being recorded for replay purposes. This call will contain forward looking statements, including statements about its plans and objectives and future economic performance. Forward looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore, actual results may differ materially from those indicated by such forward looking statements as a result of various important factors, including, but not limited to, those set forth in the Risk Factors section of the company's latest Form 10 ks. These forward looking statements fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company's financial outlook.
The forward looking statements contained in this call are based on information as of today, February 8, 2021, and except as required by law, the company undertakes no obligations to update or revise any of the forward looking statements. Finally, this call will contain references to certain non GAAP measures. The reconciliation of these non GAAP measures is set forth in today's press release. The company has posted a summary financial slide presentation on the Investors section of its website under Events and Presentations that will be referenced during management's review of the financial results.
Speaker 1
On the
Speaker 0
call today for Beacon will be Mr. Julian Francis, President and CEO and Frank La Negro, Executive Vice President and CFO. I would now like to turn the call over to Mr. Julian Francis, President and CEO. Please proceed, Mr.
Francis.
Speaker 2
Thank you, Kathy, and good evening, and welcome to our Q1 fiscal 2021 earnings call. On the call with me is Cathy Seggs, Frank Monagro, our Chief Financial Officer. Our prepared remarks will correspond with the slide deck, which you posted to the Investor Relations section of Beacon's website. Before I get into the details, as you know, we have announced the divestiture of our Interiors business. As such, we are providing 2 sets of financial information in today's inventories.
The primary focus will be on our continuing operations, focuses solely on the Exteriors business and treats the interiors as discontinued operations. I know many of your models are still based on the combined company, so we've also provided summary information on the combined results. I hope the additional information will help you better gauge our Q1 performance and support your analysis going forward. On a continuing basis, we generated Q1 sales of $1,600,000,000 an 11.4% year on year increase. Adjusted EBITDA improved to 140 $3,000,000 from $77,000,000 the prior year.
On a combined basis, so including interiors, sales were $1,800,000,000 with 9% sales growth. Adjusted EBITDA for the combined business was $158,000,000 compared to $94,000,000 in fiscal Q1 last year. We believe both sets of numbers are important understanding our Q1 results, but our remaining commentary this evening will focus on the continuing exteriors business. Within the appendix of our slide presentation, we've included supplemental 2019 2020 income statements for the continuing Xterius business that should help you in modeling our pro form a financials. I'll now begin on Page 4 of the slide materials, which focuses on our Q1 continuing results.
Our fiscal 2021 is off to a great start. 1st quarter continuing adjusted EBITDA increased 86%, driven by the strongest quarterly organic sales growth in more than 4 years and one of the best first quarter EBITDA margin percentages in over a decade. We have strong leadership and I'm very proud of the team's execution in the past 3 or 4 quarters. I believe that this quarter gives you a sense of what the company is capable of delivering. There are several important takeaways from the Q1.
First, the residential demand is strong. Residential roofing sales increased 21% in the quarter. Strong rebooting and new construction activity was aided by milder weather, which opened up additional work days for our customers. In a few Gulf states, demand was boosted by hurricane related repair work. And the strong demand environment provided a favorable backdrop for the success price increase we implemented in August.
The positive housing market fundamentals also helped boost exterior complementary products. With the divestiture of interiors, our product mix is now more residentially focused and biased towards repair and replacement activity. 2nd, we continue to demonstrate good execution on our price actions. As highlighted during our last quarterly call, our team moved quickly in response to the August shingle price enhancement from the manufacturers. We implemented higher prices to essentially coincide with the timing of the supplier increases.
And as we have discussed previously, the timing and execution of our price initiatives creates favorable timing benefits, which positively contributed to gross margins in Q4 'twenty and continued in the Q1 of fiscal 'twenty one. 1st quarter gross margins were 25.4% for continuing operations, exceeding our expectations. We continue to see inflationary pressures across most product categories, and we are confident in the current environment we can capture additional pricing opportunities to more than offset the cost headwinds. 3rd, Q1 results demonstrate our ability to manage operating costs. One of our central goals as the leadership team is to aggressively manage costs in all demand environments.
We are extremely proud of our expense management during the past 3 COVID impacted quarters, but we recognize that the ball we've been passed during COVID and the year end close, determining the impact of our actions has been difficult. We see the Q1 as an indication of the progress we've made. During Q1, continuing adjusted OpEx dollars climbed 3% year on year despite an 11% sales increase and a higher than normal residential mix, which is typically higher cost to serve. In a growth environment, an important part of our focus is to generate significant operating leverage, closely watching costs and managing the controllable aspects are day to day considerations as we run the business. Now please turn to Page 5 of our slide materials.
In our previous outlook commentary, we've taken a more cautious view on quarterly results, reflecting the potential impact of weather disruptions. However, our November December monthly sales growth accelerated meaningfully, a reflection of strong underlying demand and favorable weather conditions. Our continuing business finished a strong 11.4 percent sales growth for the quarter. Gross margins at 25.4 percent stronger than anticipated with the upside from favorable residential mix, supplier incentives to tighter higher volumes and continued price execution. Our Q1 operating expense outlook centered on cost management tied to anticipated winterization during the quarter.
As noted earlier, we're very pleased to report a meaningful OpEx decline even with robust sales growth. Frank will share some of our specific productivity measures later. For the continuing business, adjusted EBITDA increased from $77,000,000 to $143,000,000 and EBITDA margins increased from 5.4% to 9.1%. The favorable performance was driven by a combination of strong sales growth, a significant year to year increase in gross margin and a reduction in operating costs resulting in significant OpEx leverage. Moving to Page 6 of our slide of materials, I did provide you an update of our planned interior divestiture and a view of our business following the transaction's close.
We announced in late December the sale of our interiors business to American Securities will subsequently integrate the transaction with their recently completed acquisition of Foundation Building Materials. We're making great progress and expect the deal will close later this week. The interior business includes more than 80 branches focused on wallboard, steel and tile and grid, steel studs and insulation products. Interiors operates from a separate branch network from our exterior locations, making for a clean separation of the business. We were pleased with the outcome of the process to secure an attractive valuation of $850,000,000 for the interiors business.
Importantly, the proceeds allowed us to improve our balance sheet, immediately lower our net debt leverage to very near our previously published targets and provides us with much greater financial flexibility. The divestment will return Beacon to its legacy position as a focused leader within exterior building products distribution. 80% to 85% of our continuing business will be within residential and commercial roofing. We view the roofing market attributes as relatively unique, while the 80% of residential and non residential roofing is classified as repair and replacement, with the majority of that being non discretionary and driven by the replacement of warm or damaged roofs. The remaining 15% to 20% of our Exteriors business is complementary products consisting largely of siding, windows and doors, lumber and waterproofing products.
These exterior complementary products have some overlap with roofing customers and shared distribution facilities providing meaningful sales and operating facilities. To summarize, we feel the interior survestiture represents a transformative strategic event for the company, narrowing management's focus, substantially improving our balance sheet and financial flexibility and concentrating the business around our core capabilities. Next, please turn to Page 7 of the slide deck. In recent quarters, we provided updates for each of these 4 strategic initiatives. In light of the interior divestiture, we felt it was appropriate to reset our financial targets and metrics for each.
These initiatives remain central to our improved sales growth, operational efficiency and profitability. Some of the impacts can be directly measured. There are also additional benefits also less obvious, but play an important role differentiating us from competitors and adding incremental value from customers. Let me begin with organic growth. This initiative is focused on improving both the number and the effectiveness of interactions between our sales organization and customers.
We continue to invest in sales training programs, marketing support and value added tools that can help our sales people track their contacts with existing and potential new customers. And we have established targets for our sales team involving a number of interactions daily. And we know that meeting these objectives strongly correlates to driving overall company sales performance. Next is our industry leading digital platform. Digital is clear differentiator in the marketplace for Beacon.
During our last quarterly call, we disclosed that digital sales had reached a run rate of 10% of total company sales during the final month of fiscal 2020. Our Exteriors business was further along the adoption curve by the interiors, so we expect to see another bump in adoption this year. We have continued to leverage the customer adoption rates that accelerated during the early COVID environment and are confident our current year and long term growth trajectory will cement our leadership. Digital is an excellent example of how Sharpen post divestiture focus should pay dividends for growth. Our marketing organization will now be able to devote 100% of their time to the experience products on the platform and develop new offerings.
Next, moving to our on time and complete network. Our OTC strategy creates a network of branches in large earth MSAs. We operate in 58 distinct markets and have more than 2 50 Exteriors Branches Participating in OTC. OTC provides 4 key benefits. 1st is improved customer service as we have created the possibility to deliver from the branch with the best combination of product and service to support the customers' needs.
2nd is a low cost to serve. Since we can optimize across a network of branches, we can reduce delivery time and mileage, improving labor efficiency and reducing peak costs and emissions. 3rd, reduce inventory levels. We previously indicated we believe we can permanently reduce our inventory by $50,000,000 to $100,000,000 as we optimize across our OTC branches and we remain confident that we can hit that target. And 4th, we can accelerate our time development.
Our OTC creates opportunities for our people to explore a variety of roles at Beacon and build increasing levels of responsibility, allowing them to build great careers in our company and reach their full potential. Lastly, I want to update our branch operating performance targets. I talked extensively about our focus on the bottom quintile of branches and our goal to significantly improve the operating performance. We've developed a diagnostic tool and a reporting cadence that places emphasis on structural change to ensure we get sustained improvement. We previously guided to a $30,000,000 to $60,000,000 improvement at these branches that we achieved over several years.
We shared on our prior earnings call that in fiscal 2020, we've seen more than $20,000,000 year over year improvements, the majority of which came from Exteriors branches. With the success we saw during the 1st year of the program, we are now resetting our 2021 target to a $20,000,000 year on year improvement from the lowest quintile exterior franches. Each year, we will continue to focus on driving sales and operating improvements to bring these branches over time up to at least our company average. To summarize, I update on our strategic initiatives, neither the objectives nor the anticipated impacts to be given a change following the interiors divestiture. Instead, it is sharp that our focus on these programs might be enhancing their effectiveness over time.
Now I will pass the call over to Frank to provide deeper focus on our Q1 continuing results. Thanks, Julian, and good evening, everyone. As Julian highlighted, we are providing significant transparency this quarter with 1st quarter results for both continuing operations, exteriors only, and combined results, exteriors plus interiors. This is designed to assist you as you compare our Q1 results with your current model and as you adjust your go forward model for our continuing operations. Turning to Slide 9.
Sales within our continuing exteriors business improved 11.4% year over year. Sales growth accelerated materially from the previous quarter and our monthly growth rates accelerated throughout Q1. Residential Roofing produced more than 21% sales growth as housing market indicators remain favorable for new construction and core repair and remodeling. This year, we saw the roofing season extend further into the early winter months, given the strong underlying demand and milder weather in many geographies. Sales also benefited from regional strength in several southern states tied to hurricane related repairs.
Commercial roofing sales declined 3%, reflecting significant improvement from the double digit decline we experienced in Q4. We believe the combination of milder temperatures and hurricane business were helpful to commercial roofing in the quarter. From a more fun development perspective, the worst is likely behind us in commercial roofing and the comparison to ease during the second half of fiscal twenty twenty one. However, there remains lingering uncertainty for new construction and reroofing within the office and retail markets. We continue to adopt a cautious commercial outlook until we see tangible evidence that demand deferred from 2020 will occur this year and building owners return to more normal timetables for capital projects.
Complementary product sales increased nearly 9% in the Q1. Remember that this growth rate reflects only our complementary exteriors business, which has a higher residential end market exposure. As you think about the mix of complementary going forward, we view this as being approximately 80% residential and 20% commercial. Key complementary products for residential include vinyl siding, fiber cement siding, lumber, windows and exterior doors, while our complementary business for commercial is primarily waterproofing. Both categories are distributed through our traditional branches and share overlapping customers with our roofing business.
Turning to Slide 10, we'll review gross margins. Gross margin for continuing operations was 25.4%, increasing 140 basis points year over year and 30 basis points sequentially. The drivers of the strong year over year increase were equally split between favorable price cost and favorable mix. On a year over year basis, price cost for continuing operations was positive by approximately 70 basis points in Q1. By comparison, we experienced 90 basis points of year over year price cost benefit in Q4.
In the Q1, price cost was favorably impacted by our successful implementation of recent pricing increases, the remaining timing benefit related to the August increase and higher incentives based on stronger sales. We also benefited significantly from favorable product mix in the quarter as we experienced stronger residential roofing sales. To sum up, the Q1 gross margins were above our expectations, driven largely by the combination of sustained successful pricing execution and factors linked to our strong residential sales, including product mix and higher incentives. And as you know, there have been additional pricing increases announced across a broad range of our products. We are approaching those increases with the same level of rigor and execution we have demonstrated in recent periods.
Now shifting to operating costs. To add on to Julian's earlier comments, we've made some tremendous strides in this area, particularly the past 3 quarters. In my opinion, our Q1 performance is a meaningful demonstration of what Beacon is capable of delivering. While Q3 2020 highlighted our ability to make temporary cost reductions in a period of challenging demand, the Q1 shows our focus on managing expenses in times of significant growth. Adjusted OpEx for continuing operations was $276,000,000 a $9,000,000 reduction from the year ago quarter.
Despite sales growth of more than 11%, we were able to generate a 3% reduction in adjusted operating costs, an accomplishment our entire organization is very proud of and is testament to the dedication of our field leadership and the thousands of Beacon employees delivering for our customers every day. We continue to focus on the elements of our business that we can control and improving productivity within our largest cost centers, including labor and fleet, our major focus for Beacon. We have updated the headcount and sales per hour work data to reflect current and historical data specific to the Exteriors business. As you can see, even with the significant uptick in demand over the past several quarters, we finished Q1 with headcount down more than 5% year over year. Our reduced headcount combined with 11% top line growth generated a significant increase in sales per hour work, which is up 25% compared to last year and improved sequentially even with the typical challenges of seasonality.
In terms of other operating costs, we continue to benefit from reduced travel and entertainment spending, which remains well below historic levels. We would expect a portion of these expenses to come back in over time, but are unlikely to return to historic levels as we continue to leverage greater sales effectiveness in operating businesses. As we go forward, we will continue to implement improvements within our business as we fully embrace continuous improvement mindset. Turning to Slide 11, we'll review our cash flow and balance sheet. Importantly, I hope to accomplish 3 things with this balance sheet and cash flow overview.
1, reset cash flow expectations for exteriors 2, discuss the use of transaction proceeds and 3, update our pro form a net leverage. During our previous calls, we commented on our expected cash flow performance for the combined company. Importantly, we expect our continuing Exteriors business to have similar cash conversion to the combined company. Obviously, there will be unique working capital fluctuations from time to time that may impact us, but we remain comfortable with these expectations for cash conversion. We plan to deploy the divestiture proceeds estimated to be $750,000,000 on a combination of debt reduction and growth investments.
Our current thinking is that debt reduction will be concentrated on our ABL and term loan with the remainder of those cash from our balance sheet, providing us with the flexibility to invest in inventory as we did this quarter and the ability to selectively invest in organic and inorganic growth prospects. We have been effectively absent on the acquisition front the past few years because of a relatively high leverage. With the upcoming closing of the transaction, pro form a net leverage for the continuing business will decline to 3.2x EBITDA as of the end of fiscal Q1. Remember that we previously had a standing target of 3x EBITDA and we're envisioning roughly 3 years to achieve this objective. We're delighted with the expected outcome of the Interiors transaction and look forward to the financial flexibility that comes with lower leverage levels.
With that, I'll turn the call back to Julian for his closing remarks. Thanks, Frank. Before we turn the call over to questions, I want to update our fiscal 2021 outlook. Please reference Page 13 of the slide materials. To begin with, it's important to clearly distinguish between our current fiscal year 2021 guidance and our previous outlook provided in November.
The prior year of sales, margins and EBITDA included our interiors business where today's outlook excludes interiors and focuses solely on the continuing business. With that, let me go to some additional details on 2021. January daily sales continue to see strong demand trends similar to what we experienced during the November December months. On a total sales basis, January sales increased about 6.5% versus January last year on 2 fewer selling days. A strong housing market continues to boost both repair and placement and new construction, benefiting core residential roofing demand and the residential exposed areas within complementary products.
January sales growth also reflects a positive contribution from our August 2020 residential roofing price increase and several smaller increases within other product categories implemented over the past several months. For our fiscal Q2 ending in March, we expect total sales growth of mid to high single digits despite one less selling day in the prior year. We remain confident in the underlying demand, especially on the residential side, but are mindful of the impact of winter weather on the business like we saw last week. We continue to emphasize pricing execution and operating efficiency. Seasonality has historically reduced 2nd quarter margins, but we believe the impact will be smaller than in recent years and we expect a meaningful year to year gross margin increase of nearly 200 basis points.
In early December, we announced the price increase for residential roofing products that became effective last week. We expect to implement this increase with the same level of execution as we did with the August increase. We continue to emphasize improvements in operating efficiency throughout the organization and have made tremendous strides in this area. You heard us talk about the learnings from last year and the opportunity to apply those principles to our seasonal winterization efforts. While fully engaged in this effort, we are carefully balancing efficiency with customer service given the favorable residential demand picture we are experiencing.
For the fiscal 2021 year, we continue to take a balanced view on external market conditions, featuring a strong residential end market and continued uncertainty within our non residential facing products. With that said, our confidence in the overall environment has clearly improved since November. Regardless of market demand, we remain focused on what we control, generating improved sales, gross margin and operating performance, continuing to execute our price actions to more than offset inflation and driving efficiency across the organization. We have emphasized these areas throughout 2020 and will continue to do so in 2021. Our updated 2021 outlook on continuing operations now assumes high single digit sales growth.
We expect fiscal 2021 adjusted EBITDA to be between $500,000,000 $525,000,000 for continuing operations, which represents a meaningful increase from the $399,000,000 Exterior pro form a adjusted EBITDA for fiscal 2020. This improvement reflects a combination of strong sales growth, gross margin gains and favorable operating leverage. With that, Kathy, we're now ready to open the line for questions.
Speaker 0
And your first question is from Garik Schmorsetz from Loop Capital.
Speaker 3
Congratulations on the quarter. My question is on gross margins. Could you flesh out a bit how much of the Q2 gross margin expansion is pricing versus mix? And how should we think about that relationship through the rest of the year as it relates to your guidance?
Speaker 2
Well, Carrick, thanks for the question. I appreciate the comments on the quarter. We're very pleased. Obviously, we've got a very strong residential backdrop. We're still in Q2 overall.
So the sequential numbers are certainly positive overall, we believe. But I think that the meaningful improvements on year over year is a balance between the two numbers. Frank's got some specifics on that, I believe. Yes, Gary. If you think about it, the 2nd quarter is going to benefit from the combination of the August pricing increase plus the February pricing increase, at least 2 thirds of that in the quarter.
And if you look at mix in the first quarter relative to the prior year, you're looking at about a 5 percentage point swing. So rent is 5 percentage points higher in terms of mix than it was a year ago. And those trends will largely hold in the Q2 as well. So it's going to be a meaningful part of both price cost and mix. We might get a little bit of timing benefit in the quarter as well.
You might remember that we had some timing benefit from the August pricing increase between fiscal Q4 and fiscal Q1. So it's going to be obviously healthy on both sides, and we look forward to sharing that with you when we get a couple of months down the road.
Speaker 0
Your next question is from Dale Ng from Jefferies.
Speaker 4
Hey, guys. Just curious to get your view on channel inventory. It doesn't seem like there's much there just because demand's been pretty robust, but the ARM and data was pretty eye popping. And for you, your inventory level was only marginally up, I think, up sequentially 90%. So just curious to get your take on what you're seeing in the marketplace?
And how are lead times kind of progressing on the residential side right now relative to what you deem as normal?
Speaker 2
Thanks for the question, Phil. Yes, look, as I said in our prepared remarks, we believe the residential backdrop is strong. We continue to see extended lead times. We believe that both the channel and the manufacturers continue to have completed inventory, particularly where we would normally be at this point of the year. I think that if you look that you said the Q4 was a little eye popping.
I think that if you look at it, it was probably about all the manufacturers could produce and ship. And I think that the distribution channel, knowing that or believing at least that the future looks rosy is going to buy in as much as they can. Much of the industry on the shingle side was on allocation. So obviously, we did all we could, and we believe we did quite well during the quarter. But you're right, I think that overall, where we would normally be at this time of the year and what we would be looking at in terms of inventory.
It's probably low in the overall in the overall channel. We believe it's low in the manufacturers. So we think that's going to lead to a very positive environment provided you see continued strength in the residential market overall.
Speaker 4
That's really helpful. And then any color on what you're baking in from a price cost spread? I mean, you've obviously seen 70 basis points of improvement the last two quarters, and you're anticipating pretty good traction for some of these recent increases, notably on the residential side. Is that type of spread what you're baking in at this point in your guidance? And if it comes in better, I guess, is that an opportunity for us to see upside to your guidance?
Thanks a lot.
Speaker 2
Thanks, Phil. So certainly, we are focused on the execution side of the Certainly, we are focused on the execution side of the price increases. And we certainly believe that, as I said, that there is expansion potential in our gross margin based on improving price. What I think we've got to be aware of is we just had a price increase announcement that went through last week. That's still in the execution phase.
We still got a lot of the year to go. We're still seeing early February. So call it what that's going to be for the rest of the year a challenge. But we certainly think that given the backdrop, if it remains where it is, beyond serious surges to COVID, All of the things that we believe about the market today, which is that the underlying demand is strong. We certainly believe that there can be positive upside to the overall pricing environment for the year.
Speaker 4
Okay, super helpful. Thanks a lot.
Speaker 0
The next question is from Kevin Hocevar.
Speaker 1
Hey, good evening, everybody, and nice quarter. You guys are raising the sales guidance for the full year to high single digit percent growth from low single digits. Obviously, there's a lot of moving pieces in there. There's been a lot of price increases. So curious if you could give us some idea of how much of that is price versus volume?
And then within the segments, how do you expect the different segments to perform versus that? I'm assuming from all the commentary resi above, non resi below and then complementary somewhere in between. But curious if you
Speaker 2
could give us just a
Speaker 1
little bit more color on what that high single digit percent growth is made up of?
Speaker 2
Kevin, it's Mike. If I just think about the Q1, the 11% that you saw, that was primarily volume driven. And certainly, there was some pricing in there from August. And what's going to be interesting to see is the layering on of additional pricing increases. Obviously, you get February on top of August, and then who knows what's going to happen.
There's talk of additional pricing increases in the spring and the summer, so that will certainly be beneficial. And as Julian mentioned, we'll be looking at how we approach that, and you should see us essentially replay the playbook that we did back in August and we're doing now in February. So if you look at it from that perspective, we should be good. In a little bit of an answer to Phil's question a second ago, ago, we sold everything we bought in both fiscal Q1 and fiscal Q4. So material availability is the only question mark we have in terms of being able to fulfill the demand that's out there.
So we're able to continue to buy, we're going to be able to continue to sell. The backdrop is extremely strong, as you know. Whether or not Positano fill was correct in terms of the length of winter, we'll have to see. When the construction season opens appropriately. We look forward to a really strong spring and summer, and we'll look forward to those pricing increases and approach them in the same way that we've done before.
Speaker 1
Okay. Thank you.
Speaker 2
Kevin, I'll add to that. As you get later in the year, that becomes more challenging in terms of volume because if you think about where we were as an industry in Q4, And basically, as Frank said, we were selling everything we could buy in. So volume will become less of a growth driver later in the year than price will.
Speaker 1
Hold. Okay, got it. Thank you.
Speaker 0
You have a question from Ryan Merkel of William Blair.
Speaker 5
Hey, guys. Two questions from me. First off, can you break down the 21% residential growth into volume and price?
Speaker 2
In the shingles side, which obviously was higher than the numbers that you saw there, the volume number on a year over year basis was about 24%, 25%, if that's helpful to you. Obviously, you can do the math on the pricing increases. We don't get full pricing increases on every shingle that we sell given good contracts and things like that, which take time to roll over. But the volume was really impressive in the quarter. Your second question?
Speaker 5
Yes. And the second question is just curious if you have any updated thoughts on EBITDA margins long term. I mean, you just put up a huge margin print this quarter, and some of the operational initiatives are clearly working. So just an update there, I think, would be helpful.
Speaker 2
Thanks, Ryan. Well, as I've said before, look, we don't believe there's anything structural going beyond and going back to kind of what we've indicated historically. And so the last quarter just proved that. I continue to believe that the historical performance on average has been around the 7.5% EBITDA margin. I continue to see plenty of upside from that.
Obviously, one of the things that we've got to work through is the seasonal business, how we manage to winterize. It's still a little bit of an odd quarter. Normally, we would see more winterization. The demand remains strong. We're concerned about making sure that we've got people available to serve customers through this winter.
And so this is a little bit of a difficult one to gauge as well. But fundamentally, we're looking long term. It's substantially improved overall EBITDA margin on a continuing basis and that's what Frank and I are working on. As to the actual guidance around that, we haven't settled on it yet. I think that there's just a lot of optimism that we can see some structural improvements that are starting to take hold in a double
Speaker 5
Very helpful. Thank you.
Speaker 0
We have a question from Ketan Mamtora from BMO Capital Markets.
Speaker 1
Congrats on a strong quarter. I want to come back to capital allocation again. So following depending divestiture of the interior business, how do you think about sort of the right leverage for Beacon? And then from an M and A standpoint, what areas are sort of most interesting to you guys?
Speaker 2
So on the capital allocation question, good question. This certainly puts us into a range that we had previously discussed, 3.3x on a pro form a retrospective from the end of Q1. Obviously, you can apply some cash flow throughout the remainder of 2021 and get to another number that's below that. We haven't really thought much about a next target. If you look at our peer set, somewhere in the 2x to 3x range is probably fair, but not a commitment, more just looking at the peer group.
It's an active conversation that obviously we're going to have with the Board, but we're in a tremendously different place than where we thought we were going to be at this juncture without the divestiture, where we thought it was going to take us probably 3 years to even get to the first target that we set. So delighted with that. And then the next part of your question, I'll defer over to Julien. Thanks, Frank. Yes, it's the it's just the areas of M and A.
Obviously, we just divested into the consolidated end of the business we have, make sure we can improve that. We see areas that are opportunities for us to grow in the businesses that we are in, commercial, residential, roofing and complementary exteriors. Certainly, that's an area where we will be focused. And I don't think that we're going to explore much beyond that in the near term, particularly given as we've just exited interiors, jumping back into something else that's outside of our core probably isn't where we're focused right now. But we see slightly of opportunity for growth within the core markets that we have, certainly roofing and then the complementary exterior products that we're in today.
Speaker 0
We have a question from David Manthey from Baird.
Speaker 1
Yes. Hi, guys. First question, of your old revenue and EBITDA guidance, how much of that was for interiors?
Speaker 2
Yes. We didn't parse it out like that. I guess the best data point to give you is when you look at the breakdown of last year's numbers, you had 4.72 was the overall number, 73 of that was interiors and 3.99 of that was exteriors. Not surprisingly, we expected growth in both segments. So that should help you a little bit.
But I'd say the predominant aspect of the new guidance obviously is coming from the strong backdrop, the pricing, etcetera, but just did not parse out the budget numbers or anything like that in the guidance.
Speaker 1
Okay. And second,
Speaker 3
do you plan on ultimately filling
Speaker 2
the CLO position?
Speaker 1
Or are you just going to eliminate that role?
Speaker 2
Thanks for the question, David. We will be eliminating the COO role. The division president who currently reports to Eric Swank will report directly to me.
Speaker 5
Great. Thank you.
Speaker 0
And you have a question from Keith Hughes from Truist.
Speaker 3
Thank you. Frank, going back to one of your answers to another question on the volume and price in residential. Did you say volume is up 24%, 25% in shingles? Because of the potential business I'm sorry?
Speaker 2
Asphalt shingles, where you're going to go is how come that's above the overall revenue in there. And remember in that category, you've got all sorts of wood products, clay products, cement products, you've got all sorts of other residential roofing products. And certainly on the tile side, those were down. So you're getting the sort of throughput of that, but you should anticipate that my comments were on asphalt volume up 24%, 25% and then pricing on top of that. And then you got to do the math in terms of the weighted average to get back down to the residential revenue number that I gave you.
Speaker 3
And that pricing, are you willing to say about how much pricing was up for shingles?
Speaker 2
Well, if you look at it on an announced basis, that's going to give you one number which will be too high. If you look at it on a kind of a 50% to 60% -ish capability there because we've got contracts, we've got volume based customers that obviously do a little better, etcetera, then you probably get down to about the right number. Your highest cost number will be helpful as well.
Speaker 3
Okay. And then final question on non residential. In the guidance, do you anticipate that turning positive in the second half of the fiscal year?
Speaker 2
Not really. I mean, could it happen? Yes. We're not banking on that. We're assuming that it's going to be flat to down pretty much the whole year.
If you listen to some of the commentary from some of our peer said, they're projecting to get better second half than we are. We'd be delighted if they're right, but that's not what our guidance is based on. Okay. Thank you. And you remember, we had a little bit of pull forward in the prior to the next quarter.
And so there's a number of things going on in commercial that we're still taking a balance in Q1.
Speaker 1
Okay. Thank you.
Speaker 0
And you have a question from Kathryn Thompson from TRG. Hi. Thank you for squeezing me in, Dan. On complementary products, you may have referred to it a little bit earlier in the Q and A and talked about it in the prepared commentary. But could you flesh out in terms of your the growth in that category and more specifically strategy, not just from a geographic standpoint, but also help us better understand the type of products that you may want to add to the overall mix?
Thank you.
Speaker 2
So Kevin, let me take the first part and then Julian can talk strategy and products. Probably the biggest piece of the puzzle there is Siding. Siding did well for us in the quarter essentially kind of in line with the overall complementary revenue number that you saw. A lot of that is in the sort of North and the Midwest in terms of geography I think we continue to see that grow with the residential environment. Lumber is another big piece of that.
That was up significantly, I. E, a lot higher than the revenue number that you heard us talk about in the line of business. It's a combination of both volume on the plywood, the OSB side, as well as the pricing. You've seen the spot prices of lumber there, which are probably up 70% or 80% from the beginning of the quarter to the end of the quarter. So those are 2, I think, big inputs into complementary.
So we would essentially see those trends maybe but for the pricing. On the lumber side, we would expect those trends to continue along with the roofing piece that we've already talked about. Yes. So in our complementary exterior category, we've certainly got vinyl sliding, other forms of siding as well. We've got some windows and doors business.
We've got the waterproofing business that is probably more on the commercial focus side. Then we've got some solar products windows. As we think about sort of strategy going forward, I mean, obviously, the focus that we're going to provide within this business is really around some of those areas where we think we can be a better company and leverage more still. Some of the products that we have are very regional, and we've acquired our way into those businesses Making sure that we have competitive advantage, that we have a different value proposition and that we can build out of our capabilities in that space is going to determine where we continue to invest. And we're going to continue to explore those options now that we've got some flexibility with our financial strength.
And I'm
Speaker 0
trying to stream a little bit more on that, Julien. Thank you both for that explanation. Do you propose to have when I think about other distributors, specialty distributors that have gotten more into complement rate products, they tend to have a strategy of going after more value add and trying to diversify away from, say, more kind of more commoditized by lumber. Is that part of it or is it more regional? Because that's a note you're selling now, but really kind of into from the strategic standpoint, kind of how do we think about it?
Speaker 2
So let me try and answer it this way, Catherine. As our core business, obviously, 80% of our business is focused on roofing. Our core customer is the roofing contractor. Where they go, we tend to follow if they're in the siding business, which many of them are. We follow them into the siding business and we'll continue to serve their needs.
So we're looking for those opportunities to really overlap with our core customers. And as we grow from there, we think we can build capabilities and maybe into more specialty businesses. But today, we're really focused on our core roofing customer and building out those capabilities in that space.
Speaker 0
Okay, great. Thank you. And you have a question from Mike Dahl from RBC Capital Markets.
Speaker 1
Hi. Thanks for taking my questions. Julian, my first question is around demand kind of big picture and just your views on kind of sustainability and durability of demand. I certainly appreciate the enthusiasm around resi, but part of the roofing story in the past has been less cyclicality. And if you look at the industry and the armor shipments, we just put up the highest number of shipments since Katrina.
So how do you balance kind of some of the tailwinds that you might see from new res versus potentially having pulled forward some demand on reroofing or storm in 2020 and thinking about kind of continued growth beyond the near term from an industry level?
Speaker 2
Thanks for the question, Mike. Certainly, there is an element of what you said now. But let's be honest, I mean, last year wasn't a huge storm here either. So the residential demand is related to housing turnover, it's related to demographics. It's clearly related to low interest rates, people supposed to stay at home, government stimulus.
We've got all of those things going up. Many of those certainly will act. But I would just say it was a particularly strong storm here, and you referenced the best year since Katrina. But there's still some of that that's going on. If you go back 20 years, you've got the peak housing cycle coming up with sort of going into what we believe is a cyclical upturn in rerooping demand based on the housing starts total 20 years ago, it's roots last 20 years.
And so we continue to look into the roofing market We think there's great opportunities. We also think that there's great opportunities for share. I mean, as we think about where we've been and what the opportunities are, we think that as we continue to be build our capabilities in this area that we can grow both organically and inorganically in this space. And we continue to think that overall, the roofing market will continue to grow. And demographics continue to add houses.
We'll continue to see those houses turnover. And we believe that fundamentally, it's a great business to get. It's also the largest category of building materials you could be in. It's such a large market that the opportunities here are as good as anywhere we see across other categories. So we think it's a great place to be in.
We think we're advantaged in this space, and we think we've got plenty of room to grow over the next several years.
Speaker 1
Thanks. That's helpful and makes sense. To be clear, the reference I made was to the number of overall squares that we shipped that year, not specific to school, but understood. The other question, just going back to complementary side, it's really helpful detail breaking that out. I wanted to press a little more on just if you could break out specifically how much of your complementary business is lumber today because it usually wouldn't be that big of a deal.
But even if it's say 5% and your lumber sales are 2x between price and volume today, that's a pretty nice mid single digit plus tailwind. And just kind of make numbers here on what percentage actually represents, but it is should probably be up 2x. So could you give us a little more detail on what exactly the percentage mix is of lumber in there?
Speaker 2
Yes. So lumber on a dollar basis is about 15 percent of the complementary category and it was up meaningfully. I wouldn't necessarily put the biggest number on it as you just did, but it was a big number. I mean, it was up meaningfully on a year over year basis. But even with that higher number in fiscal 'twenty one, it's still only 15% of that category.
Speaker 1
Got it. Okay. And we should expect that, I mean, given the pricing dynamics, we're seeing
Speaker 2
more Watch the pricing, if You got it.
Speaker 1
Yes, yes. It should continue, I think, the next couple of quarters, it seems, right?
Speaker 2
Yes. The spot price is awfully high. It does have volatility, as you can see, on literally a week to week basis. But yes, we would consider that should follow the residential cycle as well as the new construction cycle. So I would assume it will stay elevated hopefully throughout 2021.
It's a very regional business for us. It's not a broad based category. There's a little bit, obviously, that we carry some there's some new builders and new home builders that we service in that category. So it's it would be a niche category for us. But obviously, it's with the pricing dynamic and the newer housing construction dynamic, it has impacted the numbers.
And
Speaker 0
you have a question from David MacGregor from Longbow.
Speaker 3
Yes. Good afternoon, everybody. Congratulations on a great quarter. I guess I wanted to start off with a question on the OTC networks. If you could talk about how comp growth and gross profits compared in the OTC networks versus the non OTC networks stores?
Speaker 2
Thanks for the question, David. Yes, look, we tend to focus the OTC network on larger MSAs, as I said. So they tend to be focused on those. So as we've seen sort of the housing turnover, we've certainly seen strong performance in those branches. What we're really focused on there is the differential between those and the non OTCnet branches.
We believe that this is really about competitive advantage and differentiating particularly against smaller regional competitors that wouldn't have the ability to network their branches and deliver. And I like to talk about areas like Atlanta and New York City when getting around the city at a particular time of day is a real challenge. If you want to be the 1st delivery of the day at 7 am, the reach that you have out of the branch in Atlanta at 7 am on a normal weekday, it's not very far. And so the ability to move our product around and still serve the customer is what we're looking for. So we're still early in this.
We believe that we're seeing the benefits in terms of the length of delivery. We've seen and we've got specific examples of customers that we've been able to serve that we would not have been able to serve because of it. And we've seen our warehouse costs decline. We saw inventory turns improve. We're in the early innings here.
We're not fully developed in this space, but we're very committed and believe that this is a great differentiated strategy for us, particularly against the regional competitors.
Speaker 3
So the best is yet to come on this. Is that how I should take it?
Speaker 2
Absolutely.
Speaker 3
Okay. And then second question, just with all the progress on the strategic initiatives, you're building out your online, the OTC we talked about and the underperforming up on quintile stores. Obviously, a stronger value proposition. Can you just talk about your market share right now and how that might be growing? And also to the extent you're comfortable, talk about kind of the competitive reaction to all your progress.
Speaker 2
Look, David, I'd tell you, David, in this environment, it's very difficult. We've been on allocation from the standpoint of the manufacturers. The entire industry has been very tight. In that environment, it's very difficult to determine market share. Obviously, we base the best proxy we have is looking at some of the armor shipments, but they do not correspond on a quarterly basis to market shares in any way, shape or form.
They tend to move around industry buys in normal times. I mean, it's been really difficult. We certainly think that over the past 12 to 18 months that we've seen some incremental gains. In this market, it's going to be very difficult. But we think that, like I said, that we're starting to build a differentiated value proposition for the customer base.
And we think that particularly going forward, it's increasingly difficult for the smaller and the regional companies to compete in this space. And I would like to cite things like in our digital area, we continue to see threat actors in this space looking for ways to hack companies. And if you're a contractor and you're totally dependent on your credit rating, making sure you're dealing with a company that can assure you that your data is well protected and you can demonstrate how they're doing that. It's going to be a meaningful differentiator going forward. So we think that our strategies and initiatives will continue to build on the success we've had over the last 12, 18 months or so.
David, one thing to keep in mind, just to add on to Julian's point, when you're selling everything, you're buying market shares, is a little bit of a misnomer in terms of what we're focused on. Obviously, we're focused on procuring everything we can possibly get our hands on and selling every single weekend. And right now, that's successful. We look forward to the opportunity to compete in an environment that allows us to show the market share gains. It's just with all the volatility in the ARPU, it's kind of hard to parse that out right now.
All
Speaker 3
right. That makes sense. Congratulations on all the progress.
Speaker 2
Thank you.
Speaker 0
And you have a question from Michael Rehaut of JPMorgan.
Speaker 4
Hi, this is Elad Hillman on for Mike. Thanks for taking my questions. First, I appreciate all the color so far on the operating expenses, which I think was much lower than most of us had expected and especially in just a short time. I was wondering if you could expand on the largest drivers there, either in terms of just volume leverage or reduced cost and how that compared with what you maybe expected? And lastly, how we should think about OpEx on a more normalized basis?
Speaker 2
Yes. Well, I think that this has been a big focus for us certainly since I joined the company 15, 16 months ago now was around the operating performance of our branches, whether it's our underperforming branches or whether it's our entire network. As we've said, we've learned a lot about how to operate in the into very different environments. So if you think about a normal cycle, you see a drop and then and then a peak. That would only be 3 to 5 years.
We've seen that in 3 to 4 months. And we think we demonstrated that we can operate and get the cost out we needed to in the sort of March, April timeframe. So it's in an environment where you saw demand collapsing even if it was only for a short period of time, we were able to take the right cost actions and get our business in the right place. And then the opposite happens within 2 months of that, and you're looking at a sold out environment, and you've got to be able to continue to serve the customers. I think what we've learned is really around some of the metrics that we put in place over the last 6 months or so.
Particularly, I'm proud of our branch managers and our fields, district managers, vice presidents who've been on this every day. I mean, the great thing about our systems capability is that we can actually show on a daily basis the productivity metrics that we have and we can report them day over day and are we taking the right actions. If we have a wet day in the market, did we get the headcount down as we needed to? Do we manage the hours appropriately? So those things have been really critical drivers for us.
Obviously, some of the other areas have been sort of in the center where during the COVID environment, you get travel on expenses, you're not doing your meal plans, you're not hosting the customers in the same way. We expect those to creep back in over time. But we think that what we've uncovered is a tremendous amount of leverage in the operating facilities, but also how we want to operate the company going forward. It has been a lot of work. A lot of our team at the branch level has been doing just a tremendous amount of juggling over the last 6 months, 12 months because of the environment we've had, where we, like I said, had both a crash out of boom within a very short period of time.
But the learnings that we've taken from that and how we're going to continue to implement them. We continue to see opportunities to improve these numbers over time. I don't know that we've found what we think is the right number to target yet, but we continue to see opportunities to improve these numbers overall. Frank? I think if you want to just talk categorically real quick, it's $9,000,000 lower on a year over year basis.
Let's think about that as being lower wages and over time based on the headcount and the sales per hour work measures that we put in the deck, lower fleet maintenance costs and lower fuel costs. We did have about 5% fewer trucks active in the quarter than we did the prior year and then the lower travel and entertainment that we mentioned in the prepared remarks. The offsetting ones there are really the incentive comp. We're off to a really strong start this year. So that will be reflected in higher incentive comp and then just normal wage inflation every year.
So those are the offsetting numbers, but obviously it's headed out to a real good result for us.
Speaker 4
Thanks. That's really helpful and really encouraging. I just have one more quick one if I could squeeze it in. I thought it was really interesting that you guys talked about accelerating sales trends in November December. And I was wondering if you could just break out how much of that was due to maybe stronger new resi trends versus also strength in our Perra model and stronger storm demand?
Speaker 2
Yes, I think it was all the above. We had a longer construction season, which allowed us to from a year over year basis, November was stronger than last November, December was stronger than last December, January is stronger than last January. So we're continuing to see that really across the board. The pricing is an element, the volume is an element and our execution is an element. So we're continuing to see very, very positive trends, especially on the residential side.
Speaker 4
Great. Thank you.
Speaker 0
That concludes the questions. Now I would like to turn the call back over to Mr. Francis for his closing comments.
Speaker 2
Thank you, Kathy, and thanks for everyone for your interest. Before I close the call this evening, I do want to say thank you to Brent Brinkerts, our Head of Investor Relations. Brent is with us today. But he has decided that he will be leaving to pursue a personal passion after 5 years with Beacon. I know many of you have interacted with Brent and know him well over the years.
So we're excited about the future for Branson and what he's going to be doing. But I'd like to thank him for all of his efforts over the last several years of Beacon. So thanks very much, Brent. And again, thanks for everyone for joining the call this evening. Obviously, we believe we've delivered a strong quarter.
We think it's the foundation on which we can build a strong year. And we look forward to updating you on our next quarter's performance in a few months. And we hope all of you in the meantime stay safe and healthy and enjoy the closing months of winter. Thank you all.