Beacon Roofing Supply - Q2 2024

Executive Summary

• Record Q2 net sales of $2.67B (+6.8% YoY), driven by price execution, acquisitions (~4 pts) and modest organic growth; gross margin expanded 20 bps YoY to 25.6% but came in below internal expectations due to lower-than-expected inventory profits from the April shingle price increase.
• Diluted EPS was $1.99 (vs. $1.97 LY) and Adjusted EBITDA was $279.4M (vs. $290.3M LY), reflecting higher OpEx from staffing, inflation, and dilution from greenfields/M&A amid weather‑reduced roofing days and lower residential volumes.
• 2024 guidance: net sales growth 6–8% YoY; gross margin mid‑25%; Adjusted EBITDA $930–$970M (narrowed from $930–$990M in Q1), with Q3 gross margin expected in the high‑25% range and sales/day up HSD% (helped by August shingle price increase).
• Capital return and capacity: $225M ASR launched in May; $180M repurchased in Q2; shares outstanding decreased to 61.9M as of 6/30; net debt leverage 3.2x with >$800M liquidity, supporting ongoing M&A and greenfields.

What Went Well and What Went Wrong

• What Went Well

  • “Record quarterly net sales” on Ambition 2025 execution; organic growth across all lines despite disruptive weather; double‑digit Adjusted EBITDA margin.
  • Non‑residential and complementary lines strong: non‑res +11.1% and complementary +12.3% YoY; contributions from waterproofing acquisitions and robust commercial R&R demand.
  • Digital and strategic initiatives: digital sales +22% YoY with ~26% of residential via digital; continued private label/pricing model investments; expanded footprints with 21 acquired branches and 10 greenfields since Q1 end.

• What Went Wrong

  • Gross margin below internal expectations due to “lower‑than‑expected inventory profits” from the April price increase (timing/realization varied by market).
  • OpEx deleverage: Adjusted OpEx +$63M YoY (to 16.5% of sales) from staffing for higher anticipated demand, inflation, and greenfield/M&A costs; weather reduced roofing days, especially in residential, hurting leverage.
  • Residential volumes came in lower than expected amidst weather variability and weak markets (e.g., Florida), even as pricing disciplined; management acknowledged need for tighter local staffing/resource adjustments.

Transcript

Operator (participant)

Good evening, ladies and gentlemen, and welcome to the Beacon Q2 2024 Earnings Call. My name is Elliot, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a Q&A session towards the end of this call. At that time, I will give you instructions on how to ask a question. If at any time during the call you require operator assistance, please press Star followed by zero, and a coordinator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the call over to Mr. Binit Sangvhi, Vice President, Capital Markets and Treasurer. Please proceed, Mr. Sangvhi.

Binit Sanghvi (VP of Capital Markets and Treasurer)

Thank you, Elliot. Good evening, everybody, and as always, we thank you for taking the time to join our call. Today, I'm joined by Julian Francis, our Chief Executive Officer, and Prithvi Gandhi, Beacon's Chief Financial Officer. Julian and Prith will begin today's call with prepared remarks that will follow the slide deck posted to the investor relations section of Beacon's website. After that, we will open the call for questions. Before we begin, please reference slide two for a couple of brief reminders. First, this call will contain forward-looking statements about the company's plans and objectives and future performance. Forward-looking statements can be identified because they do not relate strictly to historic or current facts and use words such as anticipate, estimate, expect, believe, and other words of similar meaning.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including, but not limited to, those set forth in the Risk Factors section of the Company's 2023 Form 10-K. Second, the forward-looking statements contained in this call are based on information as of today, August 1, 2024, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in today's press release and the appendix to the presentation accompanying this call. Both the press release and the presentation are available on our website at becn.com. Now, let's begin with opening remarks from Julian.

Julian Francis (CEO)

Thanks, Binit. Good afternoon, everyone. I'm pleased to say that we delivered another quarter of solid execution on our growth initiatives. But before I begin our review, let me remind you of the assumptions that underpinned our prior outlook. We expected the residential roofing market would be down year-over-year as storm-related demand declined substantially and more than offset the improvement in new residential construction and non-storm-related reroofing. In commercial roofing, we said that there would be a contraction in the installation activity in the H1 of the year, but our volumes would grow because of last year's contractor destocking. We also expected a shift to more repair and reroofing activity rather than new commercial construction that would impact product mix in this part of our business.

By and large, end market demand has performed as we expected, with commercial slightly better than anticipated and new res slightly worse, and we expect storm demand to be in line with the 10-year average. Now, let's begin on slide 4. Against this backdrop, our team demonstrated that our Ambition 2025 plan has created multiple paths to growth, and we delivered a record for quarterly sales. In the Q2, average selling prices were up low single digits year-over-year, which combined with contributions from greenfields and acquisitions, to drive net sales nearly 7% higher, although slightly lower than our initial expectations, given the weather in the quarter. And once again, we delivered double-digit Adjusted EBITDA margins.

Our Gross Margin came in at 25.6%, approximately 20 basis points above the Q2 of last year, but below our expectations, largely due to the lower-than-expected contribution from inventory profits related to our April shingle price increase. Adjusted OpEx increased primarily from additional headcount as we maintained staffing at our branches to meet a higher level of anticipated activity. Additionally, the impact of recent greenfield locations and M&A yet to be fully synergized also negatively impacted operating leverage. We continue to use our balance sheet capacity to reinvest in the business, conduct M&A, and return capital to shareholders. Since the end of the Q1, we have acquired 21 branches, including the recent announcements of Roofers Mart of Southern California, Extreme Metal Fabricators, and Integrity Metals.

Roofers Mart has a 40-year history serving contractors in the Los Angeles metro market and demonstrates our focus on growing our commercial roofing business. Extreme Metal and Integrity Metals extend our residential and commercial roofing product offering to include metal solutions to meet the needs in Florida's coastal regions. Entering the H2 of the year, we will be proactive in responding to local market conditions by adjusting inventory and staffing levels while maintaining Beacon's high caliber customer service. We're investing in improving our operations, delivering results today, while also preparing for the future, including investments in our leading digital platform, private label offerings, and our pricing model. Now please turn to page 5.

As many of you know, we laid out our targets to drive above-market growth, deliver consistent double-digit Adjusted EBITDA margins, build a great organization, and generate superior shareholder returns. Our relentless focus on our customers is central to how we operate and to achieving these goals. Our team is working every day to deliver a great customer experience and ensure we are building on our legacy of service. Let me provide you with an update on our strategic initiatives, starting with how we are building a winning culture. As part of our commitment to our team members' wellness, we recently launched an upgraded employee assistance program. The new program has added emphasis on mental health as well as physical health, to recognize the challenge today's employees and their families face.

One of our core values is do the right thing, and this applies to our efforts to build better for the environment. In May, we issued our third annual corporate social responsibility report, which demonstrated our commitment to action and transparency on environmental and social topics. We proudly reported three years of progress towards our goal of halving our emissions intensity by 2030. In addition, we outlined our scope one and two greenhouse gas emissions and our efforts to reduce those emissions by operating a more sustainable fleet and investing in renewable energy. Our 2023 CSR report highlights how we are progressing on our commitment. I encourage all of our stakeholders to go to our website and view the full report. Our second pillar is driving growth above market and enhancing margins through a set of targeted initiatives.

Expanding our customer reach continues to be a major lever in our growth plans, including our investments in Greenfields and acquisitions. Our Greenfield team continues to execute on our pipeline of new locations, and we have opened 13 branches year to date. Each time we have a new branch, we add sales resources and reduce the average distance and time it takes us to reach our customers. This enhances our overall value proposition, giving us the opportunity to earn market share. We have now opened 58 new branches since the beginning of 2022, exceeding our original Ambition 2025 goal of 40 total. On acquisitions, we discussed our recent purchase of Roofers Mart, Extreme Metals, and Integrity Metals earlier, and we highlighted the acquisitions of Roofers Supply of Greenville, General Siding, and Smalley & Company on our call in May.

However, it is worth mentioning again that with the acquisition of Smalley and its 11 locations spread throughout the West, we have built the leading national specialty waterproofing distribution platform, with a track record of providing value-added solutions to contractors in both new construction and restoration markets. Since announcing our Ambition 2025 plan, we have acquired 21 companies, adding 71 branches. In total, we have deployed approximately $690 million in capital towards these acquisitions, adding base year revenue of more than $800 million. In total, these acquisitions are performing ahead of our expectations. Our online capability continues to be a clear competitive advantage for Beacon, and sales through our digital platform increases customer loyalty, generates larger basket sizes, and enhances margin by roughly 150 basis points when compared to offline channels.

In the Q2, we grew digital sales approximately 22% year-over-year. Digital sales to our residential customers were a highlight, as we achieved our highest quarterly adoption ever at nearly 26%. We continue to invest to strengthen our platform, and just last week announced an enhanced alliance with EagleView, a leading provider of aerial imagery, software, and analytics. This collaboration makes it easier for contractors to quickly and accurately place digital orders, allowing them to run their businesses more efficiently, and as such, choose Beacon as their supply partner. Our focus on commercial roofing solutions is one of the key growth initiatives of our Ambition 2025 plan. We outlined above-market growth targets and have been taking steps to become the market leader. To achieve this goal, we must develop best-in-class talent, and in the past year, we launched a new training program.

Hundreds of employees have attended the e-learning and hands-on sessions, with over 150 completing the advanced level certification. Team members improved their understanding of commercial roofing basics, including product details, installation techniques, and all varieties of low-slope roof systems. Through a more knowledgeable and confident branch and sales team, we are better able to support the needs of our commercial contractor customers and create positive interactions that will increase loyalty, resulting in higher wallet share. Now, as we have discussed for several quarters, we are enhancing productivity and capacity through our continuous improvement and operational excellence initiatives. Our focus on the bottom quintile branch process has generated meaningful contributions to EBITDA, and this year is no different. Through this process, we have already generated approximately $3 million additional dollars from the class of 2024.

Our branch optimization efforts are also showing results, increasing storage capacity, improving yard flow, and optimizing product placement for picking efficiency, all of which improves branch productivity and supports increased sales from existing assets. All these tools are deployed to drive synergies from our acquisition portfolio. Through a systematic approach to integrating acquired branches, we are able to achieve top-line and bottom-line performance improvements. As we have mentioned on previous calls, our recent acquisitions that have yet to be synergized are likely to be diluted in the near term. I'm pleased to report that the margins in our portfolio as a whole continue to improve relative to the performer at the time of transaction. Fourth, let's review how we are creating shareholder value.

As previously announced, during the quarter, we entered into an additional accelerated share repurchase program in the amount of $225 million. The buyback program demonstrates both our commitment to delivering value to shareholders and our confidence in the Ambition 2025 plan. As you can see, we truly have multiple paths to growth and margin expansion through the cycle. We have a differentiated approach and have built the tools to achieve our Ambition 2025 targets. Now, many of you know or have met Prithvi Gandhi, our CFO, since May. I'm very pleased that Prithvi has joined us, and as I said in the last call when I welcomed him, Prithvi's proven track record in financial leadership, especially in the building products industry, makes him a great addition to our team.

Now I'll pass the call over to Prith to provide a deeper focus on our Q2 results.

Prithvi Gandhi (CFO)

Thanks, Julian, and good evening, everyone. Turning now to slide 7. We achieved almost $2.7 billion in total net sales in the Q2, up nearly 70% year-over-year, primarily driven by the impact of acquisitions and higher average selling prices. As Julian mentioned, we had wet weather and precipitation in large swaths of the country, particularly in May, as well as excessive heat throughout the quarter that impacted the number of roofing days during Q2. Nevertheless, we were able to achieve organic sales growth across all three lines of business and set a new quarterly sales record. In the aggregate, price contributed over 2% to revenue growth, while organic volumes were up less than 1%, including contributions from Greenfields. Acquisitions completed within the last 12 months are performing well and contributed more than 4% growth to daily net sales year-over-year.

Residential roofing sales were higher by more than 2%, as higher prices were partially offset by lower shipments in regions that are lapping higher storm and hail demand, including in Florida. Recall that Q2 2023 was a record Q2 for shingle shipments, and while our residential volumes were down on a year-over-year basis, the R&R market remains resilient and consistent with our planning assumptions. Beacon's volumes compared favorably to industry shipments or ARMA during the quarter, but it is always important to keep in mind that there is destocking or restocking at the distributor level in any given quarter. With that in mind, we estimate that we grew at least in line with the market. Our team executed the April shingle price increase with discipline, achieving good realization regionally. As a result, we achieved price growth in the low- to mid-single-digit % year-over-year.

Non-residential sales increased by more than 11% based on strong R&R activity and the comparison to low Q2 2023 sales, which were influenced by destocking at the customer level. Prices declined in the low single digits year-over-year, but remained stable on a sequential basis. Bidding and quoting activity remains at healthy levels. We also continue to see a shift from new construction to repair and reroofing activity in the Q2. Complementary sales increased by more than 12% year-over-year, as acquisitions drove higher sales of our specialty waterproofing products. Selling prices were higher by low single digits year-over-year. Please keep in mind that our complementary product category now has approximately 70% residential and 30% non-residential exposure. Turning to Slide 8, we will review gross margin and operating expenses.

Gross margin was 25.6% in the Q2, up nearly 20 basis points year-over-year. Slower realization of the April shingle price increase was largely matched by the timing of the inflow of higher product costs. Therefore, we did not produce the level of inventory profits we initially forecast. That said, our gross margin performance in the quarter remains well above historical Q2 gross margin levels. In the aggregate, on a year-over-year basis, price cost was positive by nearly 30 basis points in the Q2. The execution of the April shingle price increase kept price above product inflation. In addition, higher digital channel sales and sales of our private label products continue to be accretive to Beacon's gross margin. However, these sales are offset by higher non-residential sales mix impacts and the dilutive impact of acquisitions and greenfields completed in the past year.

Adjusted operating expense was $441 million, an increase of $63 million compared to the prior year quarter. The change in adjusted OpEx was driven primarily by additional headcount in our existing branches. You will recall from our Q1 call in May that we made a conscious effort to ensure that we were appropriately staffed to meet the forecast ramp and seasonal activity. In addition, expenses associated with acquired and greenfield branches contributed approximately $27 million of the increase in total operating expenses. Inflation in wages, benefits, rent, professional fees, and T&E also contributed to the increase in operating expenses. As a result, adjusted operating expenses as a % of sales increased to 16.5%, up 140 basis points year-over-year.

As mentioned earlier, demand in several key markets, including Florida, was either impacted by wet weather, severe heat, or were lapping record shingle volumes in the prior year, resulting in lower operating leverage than we expected on our call in May. As we have demonstrated in the past, we are adjusting to local market conditions and will balance operating efficiency and high service levels in the H2 of the year. Investments in Ambition 2025 priorities to drive above-market growth and margin enhancement also continued in the quarter. These investments include initiatives related to our sales organization, private label, pricing tools, e-commerce technologies, and branch optimization. Now turning to slide nine. Operating cash flow was negative $48 million in the quarter.

As a reminder, given the seasonal pattern of working capital needs in our business, we typically use cash in the H1 of the year and generate cash in the H2 of the year. Net inventory reached a seasonal peak at the end of the Q2, up $259 million compared to the end of the Q2 of 2023. As mentioned on the Q1 call, we built inventory to ensure adequate product availability to align with the height of construction activity. Higher inventory year-over-year is also attributable to inventory acquired through M&A and to support greenfields. We continue to expect strong cash generation in the H2 of the year, but now expect it to be weighted towards the Q4, given the inventory build into Q2.

While Julian previously covered the share repurchase program, let me provide some additional details that may be helpful. Share repurchases in the Q2 were made through a $225 million accelerated share repurchase plan and resulted in the retirement of approximately 1.9 million shares or $180 million during the Q2. As a result, net of share issuances for stock-based compensation, we reduced our common shares outstanding to 61.9 million on June thirtieth versus 63.6 million at March thirty-first. The remaining $45 million equity forward contract is expected to settle in the Q4 of 2024 and result in the estimated repurchase and retirement of approximately 500,000 additional shares as of June thirtieth. We also continue to invest in organic growth, upgrading our fleet and facilities to support our customers and employees.

In total, we expect to deploy approximately $125 million in capital expenditures during the full year of 2024. Our capital allocation will remain balanced between deploying cash in our business and executing on the active and robust value-creating acquisition pipeline. Net debt leverage at the end of the Q2 was 3.2 times, trailing twelve months adjusted EBITDA. Given the substantial cash generation expected in the back half of the year, we are well positioned to pay down our seasonal borrowings and bring down net debt leverage closer to the midpoint of our targeted range. At the same time, we intend to continue to invest in the processes and technologies that will lay the groundwork for improved service, future growth, and branch productivity. With that, I'll turn the call back to Julian for his closing remarks.

Julian Francis (CEO)

Thanks, Prith. Please reference page 11 of the slide materials. Before we head to Q&A, I'd like to update you on our outlook for the remainder of 2024. We expect the momentum we experienced in the H1 and outlined at the beginning of this call to continue into the Q3. We expect that the residential repair and reroof market demand will be lower this year, driven by lower storm demand, which at this point appears to remain on track to meet our assumption of the 10-year average. We continue to believe non-storm-related demand will be higher in both new construction and aged replacement, despite higher interest rates. In our commercial roofing business, we monitor the Architectural Billing Index, which continues to remain significantly below 50, indicating contraction in activity.

While we expect better-than-expected repair and reroofing activity to continue, contract de-stocking was largely over at the end of the Q2 of 2023, and so the year-on-year comps should return to more normal levels. For the Q3, we expect total sales per day growth to be in the high single-digit range year-over-year, above the July sales growth of low single digits per day. We expect gross margin to be in the high 25% range, around 30 basis points higher than in our Q2. This includes current expectations regarding our announced August price increase realization. Operating expenses are expected to increase year-over-year, largely attributable to the higher headcount from Greenfields and acquired branches. As mentioned earlier, our focus on operational efficiency and proactively managing resources will intensify.

As a result, we expect adjusted operating expenses as a percentage of sales to be in line with the Q3 of last year. Regarding the H2 of the year, we remain focused on areas within our control, including sales execution, inventory reductions, and cost management. Our full-year net sales expectations is for growth in the 6%-8% range, including acquisitions announced year to date. Please note that we have two extra selling days in 2024 as compared to 2023. On gross margin, we continue to expect to be price cost neutral, resulting in a full-year gross margin percentage in the mid-25% range. We now expect that sales growth and cost discipline will result in full-year adjusted EBITDA expectations of between $930 million and $970 million, inclusive of recently acquired businesses.

As Prithvi mentioned, our focus on working capital is expected to result in strong cash flow generation in the H2 of the year. We have a resilient business model and a leadership team capable of adjusting quickly to take advantage of opportunities in the market as they develop. We will continue to deploy capital on initiatives that we expect will result in accelerated growth, including executing on our robust pipeline of acquisitions and delivering on our greenfield locations, which we now expect to result in more than 25 branches in 2024. In summary, we're well positioned to continue to outperform the market in this dynamic demand environment, creating value for all our stakeholders. We are looking forward to the rest of 2024 and helping our customers to build better and build more. And with that, Elliot, I'll open it up for questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone phone. If your question has been answered or you wish to withdraw your question, press star followed by two. Each caller is limited to one question. We now turn to Michael Rehaut with JP Morgan. Your line is open. Please go ahead.

Michael Rehaut (Equity Research Analyst)

Hi. Thanks, good afternoon, and thanks for taking my question. I wanted to first zero in a little bit on the SG&A in 2Q, and you reviewed in your prepared remarks some of the drivers that appeared to be, you know, a bit higher than expected on a year-over-year basis and a percent of revenue. You know, at the same time, you said you're focused on driving efficiencies in the H2 and expect percent of sales SG&A to be flat year over year. So what's driving the, you know, let's say, were there certain temporary elements that drove the higher expense in the Q2 relative to expectations?

you know, what are the actions that you're taking to maybe get that back online on a percent-of-sales year-over-year basis for the back half or at least for the Q3?

Julian Francis (CEO)

Thanks, Michael. This is Julian. And it's the question that's going to be on everyone's minds for our Q2. So it was a really difficult Q2 to manage at a branch level. So we saw record daily sales, but we didn't see it consistently because of the weather. So we were staffed up to serve that really high demand level, but it was never consistent. And managing that on a day-to-day basis, you know, we didn't do it as well as I'd hoped, but you know, I think that was a big driver of it. Obviously, we added a number of greenfields and acquisitions earlier in the year, this year than we've done previously, and so that adds to our total OpEx count.

And so we've flatlined it. This year will be similar number of branches opened in the H1 and the H2, which was a little bit more back-end weighted last year, so that drove the year-over-year increase as well. But the big thing was this variability in day-to-day volume. We were staffed ready, the inventory was ready for it, and we think it was, it was just so variable on a day-to-day basis in the markets that it became tricky to manage. And so we were a little bit, we missed a little bit on that side of things in terms of our overall management. Now, as you also asked about looking forward and how does that adjust?

You know, we've, we've sat down with our operating groups and sat down and said, "Look, you know, we've, we've got to get this, this back in line. We've got to create operating leverage from, from sales growth, and we're going to have to manage that, more aggressively." We've already started doing that. We've taken action in, in June and, and July to, to make sure that we've got the right level of staffing for the demand that's in the market. You know, we're seeing, you know, still seeing some variability, in terms of day-to-day sales, but, we are, we are being much more aggressive in terms of managing, levels of staffing on a day-to-day basis, than we were in the Q2.

Like I said, I don't think we missed it by much. We'd come into the year expecting a strong Q2 with storm carryover from last year. As I said, what we saw on really good days was what we had anticipated. You know, we called the market. What we obviously couldn't call was the weather, and that certainly had an impact on how we manage it. We think we'll work our way through that and get that back to where it should be. I don't know if Chris got anything to add in terms of specifics, but that's really what drove it.

Michael Rehaut (Equity Research Analyst)

Okay.

Julian Francis (CEO)

Just a couple of points of color. So, you know, a couple of other things in terms of, you know, the overall OpEx. It's a $37-$63 million increase year-over-year. 27 of that came from, you know, the M&A and greenfields. You know, I think when we spoke with you all in May, our expectation was that at least that component of the OpEx would be relatively flat. If you remember, that was $22 million in Q1. As we discussed, you know, some of the acquisitions that we've done have, you know, significant work to bring them up to the and create value. So we've, you know, we've had some timing issues with some of that. That's part of the reason as well.

Michael Rehaut (Equity Research Analyst)

Great. No, thank you for that. I appreciate all the detail there. I guess secondly, you know, just thinking about, you know, bigger picture on the gross margin side, you know, I think, Julian, you highlighted some of the incremental benefits that you continue to get from the bottom quintile work. And obviously, there are a lot of other, you know, initiatives, you know, that you have in place on the gross margin side. So, you know, conceptually, how should we think about, you know, bottom quintile contributions over the next couple of years? Should they continue moderate in size, perhaps just given low-hanging fruit impact from the prior year or from prior years, then it gets incrementally tougher as you go forward?

Maybe you could just review other opportunities around, you know, gross margin over the next couple of years from a strategic initiative standpoint.

Prithvi Gandhi (CFO)

Michael, I'll touch on that briefly. Certainly, we've seen dramatic improvement, as you know, in the bottom quintile contribution to EBITDA margins. I think it's been one of the, the real highlights of the last few years, how the team has really come together and, and driven that. It is incrementally harder now to, to drive, a little bit more, but we reset, the branches each year. So we still believe there's opportunity. We've also expanded our thinking on this and said: Look, what, what's the real opportunity if we can get each of the quintile groupings to get it up to the next quintile thing?

So we're exploring what it would take to really move all of those elements forward, and we think that the pricing model, the work we're doing on private label and digital, all of those initiatives are certainly contributing. I think. You know, we were probably challenged in the quarter on price coming through in the market. We saw, obviously, the shingle price increase in April. We had expectations probably for better realization in the quarter than we actually saw, and I think that was partly due to the variability of demand on a day-to-day basis in the market as well. We saw very good realization where we had very strong markets, and we saw very low realization in markets, as we mentioned.

You know, we've called out Florida before, and in fact, we called out Florida in our call in May, as a place that we weren't expecting to see a lot of price, and that actually materialized. So there's still a lot of work to be done on that, but I continue to believe that private label, digital, pricing model continue to drive margin, and our bottom quintile branch process will continue. And, like I said, I think we're looking for ways to expand that process to more branches to make sure that we're working the full gamut of the problem. So, I continue to believe that we've got room to expand our gross margin on a product line basis.

But as I said, the mix has shifted much more towards commercial. We were very deliberate about that. We think that it has a great profile for return on capital, but it does have lower gross margin. So we continue to look for ways to improve that as well.

Michael Rehaut (Equity Research Analyst)

Great. Thanks so much.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one on your touchtone phone. In order to allow everyone to ask a question, we please ask that you limit yourself to one question. Thank you. We now turn to Garik Shmois with Loop Capital. Your line is open. Please go ahead.

Garik Shmois (Analyst)

Oh, hi. Thanks for taking my question. I was wondering if you could talk about the acceleration you're expecting on a daily sales basis here in the Q3. You know, starting July, up low single digits, I think you're expecting to be up high single digits for the quarter. So if you can unpack the drivers of the stronger expected August and September, that'll be great.

Look, Garrett, the market overall is, is been good. Like I said, I mean, we saw record daily sales in the Q2 on a day-to-day basis. It just wasn't consistent, then we'd have a day where it dropped off. We think some of the weather impact in Q2 is gonna get pushed into Q3. So we're expecting that demand hasn't gone away. I mean, if you need a roof, you're gonna get a roof. And if it rains on one day, you're gonna, you're gonna get to it the next day. So, you know, we think there'll be some continued push into the Q3 with demand pretty good, and we're excited about that opportunity. We do think that there's, you know, there's an August first price increase.

The price increase went into effect today on shingles, so we'll see that pick up on the top line in the rest of this quarter as well. And then, the back half of the year tends to be a little bit more biased to activity. So, now, you know, if we're gonna get, you know, 100-degree days across the entire country for the entire Q3, we'll be watching that. But overall, like I said, we feel pretty good about the market. We're probably a little bit more bullish on what than we were coming into the year on commercial, as we've said. Residential reroof has been very good. You know, the storm demand, we think, is gonna come in around the 10-year average.

That's what we feel we're tracking on. You know, new res was slightly worse, but we came into the year calling for a very healthy market, and that's what we've got. We think some of the demands got pushed out of Q2, and it's probably gonna appear in Q3.

Operator (participant)

We now turn to Adam Baumgarten with Zelman & Associates. Your line is open. Please go ahead.

Adam Baumgarten (Equity Research Analyst)

Hey, guys. Do you have a sense for maybe how many days on the roof were lost in the Q2? Was it across both residential and commercial, or was it more focused on residential?

Julian Francis (CEO)

So Adam, you know, I'll let Prith touch on it, but you know, we do have some statistics. I mean, we – look, I've tried to avoid being the weatherman since I joined the company, and that's not it. We get weather every day. I mean, there was clearly some well-reported impact, but you know, in terms of the number of days, you know, we do watch that, but I think that's less indicative than the total of the market. As I said, we think it did have an impact. We think it's probably pushed some into Q3. Prith?

Prithvi Gandhi (CFO)

So look, it's generally biased towards the residential market because a lot of our deliveries are on top of the roof. So that's one point to make. The other thing is, you know, between normal weeks and weeks where we've experienced weather, the demand difference is, you know, about low single digits. And we think about a third of the weeks in the quarter were affected by weather, so.

Adam Baumgarten (Equity Research Analyst)

Thank you.

Operator (participant)

Our next question comes from David Manthey with Baird. Your line is open. Please go ahead.

David Manthey (Equity Research Analyst)

Thank you. Good afternoon. Relative to your comments on lack of expected inventory profits, I'm a bit confused as to what happened there. I think if you go back to the early part of the year, no one really thought that shingle price increase was going to stick, and you're able to get low to mid single digits, but the gross margin fell short of your expectations anyway. I'm assuming you didn't play inventory chicken like we used to in the old days, and maybe you could just help me understand the dynamic there.

Julian Francis (CEO)

I'll touch on it, and Prith can maybe quantify some things. But, you know, coming into the quarter, we did expect much better price realization than we actually saw. We came out of the gate on the pricing pretty healthy, but we normally see it climb over several weeks as we implement it across all of the customer base. So it usually takes some time to get it done. And so it continue to generate those inventory profits, but the spike is usually early on. In this one, we got good realization in markets where the demand was strong, but in weaker markets, there was some delay in getting the price put in place. And then as the quarter went on, we just didn't get it implemented throughout.

The demand remained weak in some of those markets, and so we didn't generate any of the inventory profits we thought in certain markets, and we generated, you know, a good amount in what we would have expected in others. So, you know, when you add it all up, we thought we were gonna get a much better realization across the entire country than we actually did. And so, both the delay in implementing some of the increases, you know, to meet some of the competitive situations, meant that we just didn't get the profits as our inventory cost rose through the quarter. The price rose slightly above it, but it didn't get the normal spike at the beginning and then flattening out.

We tailed up, and so you just don't generate inventory profits that way.

Prithvi Gandhi (CFO)

The only thing to add, as you guys know, we use weighted average inventory costing, right? And so on days, even when you're not selling, the weighted average cost of inventory, if you're buying, continues to go up, and we were buying inventory throughout the quarter. So that's the only thing to add.

Operator (participant)

Our next question comes from Mike Dahl with RBC. Your line is open. Please go ahead.

David Manthey (Equity Research Analyst)

Thanks. Just as a follow-up to that, just given what you just articulated around the path of realization on both the price and inventory profits, can you be more specific about what's embedded in your 3Q and full year guide, with respect to the August price increase, both in terms of top line help and inventory profit?

Prithvi Gandhi (CFO)

Well, in terms of, you know, the inventory profit for the, you know, the quarter, you know, the August price increase, we expect similar progression as we've seen with the April price increase. I think what we said in the prepared remarks was, you know, 30 basis points improvement. We see a similar pattern with this price increase.

Operator (participant)

We now turn to Trey Grooms with Stephens. Your line is open. Please go ahead.

Trey Grooms (Equity Research Analyst)

Thanks. Just a quick bit of clarity here on the free cash flow comment, maybe being weighted a little bit more to the Q4. Could you go into a little bit more detail on that? I know it can kinda shift around a little bit seasonally, but any more color on the timing there? Thank you.

Prithvi Gandhi (CFO)

It look, it's we bought inventory, inventory throughout, you know, the, the Q2. And, and as we've discussed we were expecting, you know, roughly, you know, in the order of $500 million of free cash flow for the full year more. And you know, we've basically burned cash in the H1 to the order of $250 million. So we expect the, the back half of the year to produce, you know, call it in the order of $750 million in free cash flow, and roughly evenly spread between the two quarters.

Trey Grooms (Equity Research Analyst)

Okay, got it. Thanks for the clarity there.

Julian Francis (CEO)

Trey, it's not unusual for us to build, obviously, inventory in the H1 of the year. I mean, it's, you know, the back half of the year is when most of the roofing activity gets done, so we come in a little heavy. And we expect to continue to bring product in during the Q3 because demand will be, we believe will be pretty good, and then we expect to. We'll certainly diminish the inventory we have, but that'll probably just accelerate into the Q4. As demand falls off, we'll reduce our purchases, unless we see some more demand come in. But that's why the shape of it is such.

Trey Grooms (Equity Research Analyst)

I'm just to, just to clarify again, is it when you say evenly split, it, 3Q and 4Q should be roughly evenly split, or is it going to be 4Q-weighted? I'm misunderstanding. Sorry for-

Prithvi Gandhi (CFO)

More in 4Q, but, but, you know, overall, you know, yes, let's call it 60/40 in that, in that order.

Trey Grooms (Equity Research Analyst)

Okay. Thanks for clearing that up. I appreciate it. Thank you.

Julian Francis (CEO)

Thanks, Trey.

Operator (participant)

Our next question comes from Philip Ng with Jefferies. Your line is open. Please go ahead.

Philip Ng (Equity Research Analyst)

Hey, guys, this is Maggie on for Phil. Just going back to the organic volumes in 2Q, flattish, any color on the breakout between the segments would be helpful. And then, could you give us a sense of the magnitude of what Greenfields are contributing? I know you did maybe around 30 Greenfield branches last year. So, you know, how much are those contributing on the organic side?

Julian Francis (CEO)

Maggie, the in terms of the greenfield, I'll let Prith touch on the rest of it. In terms of the greenfields, you know, we'd said that we initially launched Ambition 2025, that we would do 10 a year. And we ramped that up because it's been a very successful program for us. I think in the in total, for at the end of this year, we're estimating somewhere in the region, and Prith will correct me if I, if I get this a little bit wrong, but somewhere in the region of $400 million plus of total revenue from greenfields that we've started since Ambition 2025. I think that's our the number that we're looking at.

So it's pretty substantial, you know, across those 58+ by the end of the year, in terms of total revenue.

Prithvi Gandhi (CFO)

It's actually over $500 million. So good, it's a great contribution overall. In terms of the actual, you know, organic demand for the quarter, it's, you know, roughly 2.8% of the 6.8% in revenue growth comes from organic, and that includes both the existing branches as well as the greenfields.

Operator (participant)

We now turn to Kathryn Thompson with Thompson Research Group. Your line is open. Please go ahead.

Kathryn Thompson (Equity Research Analyst)

Hi, thank you for taking my question today. Just wanted to focus on the commercial segment, which, as you pointed out, is improving, despite the ABI readings. But we, you know, we would argue, and based on our some feedback from the field and the companies we talked to, the ABI is becoming less relevant, in part because it doesn't capture some of the mega projects. So for instance, when you look at put-in-place numbers, the manufacturing segment, sub-segment in and of itself has doubled to north of 15% of the total mix since 2018.

With that in mind, do you have any additional color or numbers you can frame around the mix shift and types of projects that you're servicing today, and maybe even in the quarter, in the commercial end segment, and how that has changed? And in particular, parsing out between new and repair in the model within the commercial segment. Thank you.

Julian Francis (CEO)

Kathryn, I'll try to get to some of that. So certainly what we have seen is, coming into the year, we were expecting the installed volume to be down, as we said, and, you know, specific to Beacon, because of the contractor behavior last year, we were expecting volumes to grow. But coming into the year, we were certainly watching the overall demand level very carefully, and it's actually held up pretty well. Our bidding and quoting activity across the board has been good. Look, You know, we've seen a good amount of government work. You know, schools have come through, and they are generally repair and remodel, repair and reroof markets. We think some of that got pushed out. As we said, it biased more towards new construction during COVID.

Those were the big jobs that were getting done. The reroof work is clearly getting done more now, and that's been a boost for us as well. It's a little bit of a mix shift in product, but overall, that's good. You know, obviously, office and retail has been a little bit softer. Certainly, you know, we get mixed with multifamily. Multifamily has been way off. Some of that is more commercial roofing than residential roofing. And then office has been a little bit soft, but most of the segments that we look at have actually been holding up pretty well, and it's more of this shift towards the repair and replace work than the new.

I think that's it reflected in the ABI index in terms of why it's so weak. There's more of this shift away from the new construction, which I think ABI biases towards. So, you know, I think if you think about the commercial real estate market as a whole, I think we reflect that pretty well. You know, where the segments are strong and where the segments are weak. So you mentioned manufacturing, you mentioned with data warehouses, warehouses in general. Those remain pretty good, and we continue to see, like I said, good bidding and quoting activity going out into the Q4 now and even early next year.

So we remain quite bullish, and I think that, you know, we began focusing on this a couple of years ago as a market that we thought we could create a lot of value in, and we think we've been doing very well in that market as well. So, we're very pleased with the results there.

Operator (participant)

We now turn to Keith Hughes with Truist. Your line is open. Please go ahead.

Keith Hughes (Equity Research Analyst)

Thank you. I guess in the H2, which built into this guidance, are you assuming your residential roofing units? Excuse me. You may have said this earlier. Are you assuming they're down, I think, low single digits, or let me get the words coming out. Just what's the view there?

Julian Francis (CEO)

Sorry, Keith, you weren't that clear coming through the

Keith Hughes (Equity Research Analyst)

Okay, let me, let me just say it again. In the second-half guidance, sales guidance, what do you have implied on units and residential roofing year-over-year, roughly?

Prithvi Gandhi (CFO)

So, you know, just one second, Keith,

Keith Hughes (Equity Research Analyst)

That's fine.

Prithvi Gandhi (CFO)

So for the full year for Q3, in terms of residential, you know, we're expecting, you know, in terms of, you know, price and volume, low single digits on price and a little bit better on volume. And, you know, and for the-

Keith Hughes (Equity Research Analyst)

You're pricing, I think it's

Prithvi Gandhi (CFO)

Go ahead. And on Q4 mid, you know, a negative mid single digits on volume for Q4 year-over-year.

Keith Hughes (Equity Research Analyst)

Okay, and you forecast, you did double-digit positives in the H2 in units last year. Is that, are those numbers about right?

Julian Francis (CEO)

That would have been about right, Keith. Obviously, we had a strong storm come through towards the end of last year, which was particularly a strong finish to the year, particularly in Q4. So Q4 residential comps this year are gonna be tough because there was such a, such a big stored demand towards the end of last year. So we would certainly expect that to be down, but we expect the overall quarter to see growth organically.

Keith Hughes (Equity Research Analyst)

Okay, great. Thank you.

Operator (participant)

Our next question comes from David MacGregor with Longbow Research. Your line is open. Please go ahead.

Reuben Garner (Equity Research Analyst)

Thanks. Good afternoon, and, thanks for taking the question. Apologies for the background noise here. But, Julian, I just wanted to ask you a question on how you respond to a changing macro, and I guess tactically, what do you do differently to protect margins if it becomes clear that we're heading into a harder landing macro?

Julian Francis (CEO)

Look, David, the fact is that, you know, we fundamentally believe that, you know, the macroeconomy is not the overall driver of reroofing demand, which represents 80% of the business. You know, it's really driven by the total number of houses out there, and the total number of buildings. And, you know, as I've said for several years now, there's always more buildings at the end of the year than there are at the beginning. We consistently build more. So we continue to expect to see a good demand environment. We believe that the aging housing stock, the aging commercial. Our stock presents real opportunity for us. But in terms of where I think your question is going, is really around our operating posture.

Look, you know, we've been very focused on driving efficiency at the branches, trying to make sure we've got good cost control. I think we had a very difficult Q2 to manage. I think we learned, you know, how to do that through the quarter, and, you know, we expect to get better. But really, it is hours management at the branch. Are we making sure that we're being efficient? Are we staffed at the right level on a day-to-day basis? You know, are we getting the right efficiency out of the branches? Are we focused on, you know, our bottom quintile process to yield the margins?

And then I think that, ultimately, you know, we are looking at, Private Label, digital, and our pricing model in order to, to give us a little bit of boost on the, on the margin side as well. We, we think these are all, you know, significant contributors. You know, we need to, we need to execute against those. We have not seen yet the impact of the pricing model that's, that we're putting in. We should be, we should be complete with that at the, the certainly the H1, maybe the end of the Q1 of 2025. We think that's exactly what we thought it was, and we said we believed it would, yield 50 basis points of improvement in Gross Margin.

So there's a lot of work that we continue to do, both at the gross margin level, but more importantly, at the EBITDA level, to enhance our margin, not just protect it, and we think we can do that. We were a little, I'll be honest, we were disappointed with the performance on OpEx in the Q2, but you know, we'll bounce back from that, and we'll get it right, and we'll move forward, and we'll continue to drive operating performance.

Reuben Garner (Equity Research Analyst)

Great. Thanks, Julian.

Julian Francis (CEO)

Thanks for the question, David.

Operator (participant)

Our final question comes from Reuben Garner with The Benchmark Company. Your line is open. Please go ahead.

Reuben Garner (Equity Research Analyst)

Thank you. Good evening, everybody. I forgive me if I mischaracterize this, but it would seem that your outlook, at least for organic top line for the H2, is pretty comparable to what you're looking for before, maybe a touch better. But in your prepared remarks, or in the press release, I can't remember where I got it, you mentioned something about being proactive to respond to market conditions by adjusting resources and inventory. I was just curious if you square up those comments, Julian, because it seems like, you know, you remain pretty bullish and things have been good outside of some weather, but you're talking about making adjustments. So if you could just clarify that for me, that'd be great. Thanks, guys.

Julian Francis (CEO)

Absolutely, Reuben. I mean, look, I think that the reality of the market today has been that we've got some very good markets, some particularly bad markets, and it's been, you know, very variable. And the difference is, that, you know, our branches aren't able to move around. I mean, the manufacturers can move shingle shipments around the country, they can waterfall it, and, they can flow where the demand is. We still have to operate branches, even in the weak markets, and serve those markets. I mean, if you pick Florida, for example, you know, I think you'd see that Owens shipments there, are off, you know, 40%-50%.

Maybe not 50%, 40% for the year, and, you know, it's still a very large market, and we have to adjust and make sure that we've got the right staffing levels in those markets, and we've got the right resources. But that market is off a lot, and making sure that, you know, you get ahead of it is important. We've got several markets that are quite weak. I think we've executed price in those markets and continue to see things go through, but we've got to be able to get staffing levels right.

The flip side is in markets where it's, it's been particularly good, we've got to make sure that we've got the right level of, of people in those markets as well, so that we can take advantage of, of strong markets. And I think that, you know, we will adjust after the Q2, where I don't think we executed on that as well as we could have done. We need to, we need to get better at that. We need to adjust, and, that's really where our comments come from. The variability of the markets, we've got to make sure we get it right.

Reuben Garner (Equity Research Analyst)

Got it. Very helpful. Thanks, guys. Good luck going forward.

Julian Francis (CEO)

Thanks very much for your question, Reuben.

Operator (participant)

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

Julian Francis (CEO)

Thank you, Elliot. I just want to say thank you to all of you for your interest in Beacon and your continued support of our efforts to improve the business. We continue to be very pleased with our top-line performance and the growth that we are seeing. We believe we've demonstrated that we have multiple paths to growth. We also believe we've got multiple paths for margin-enhancing initiatives that are driving success at the bottom line as well, and we continue to believe that there's further opportunity in this business. So with that, thank you very much for your attention. Thanks very much for attending, and thanks. Bye.

Operator (participant)

Ladies and gentlemen, today's call is now concluded.