Beacon Roofing Supply - Q4 2021
February 2, 2022
Transcript
Speaker 0
Good afternoon, ladies and gentlemen, and welcome to the Beacon Transition Period and Calendar Year 2021 Earnings Conference Call. My name is Tania, 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 toward end of this conference. At that time, I will give instructions on how to ask a question.
Please press star followed by 0 and a coordinator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes. This call will contain forward looking statements, including statements about the company's plans and objectives and future economic performance. Forward looking statements can be identified by the fact that they do not relate strictly to historic or current facts and often use words such as anticipate, estimate, expect, believe, will likely result, outlook, project and other words and expression of similar meaning. Forward looking statements are only predictions and are subject to a number of risks and uncertainties.
Therefore, actual results may differ materially from the 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 2021 Form 10 ks and subsequent filings with U. S. Securities and Exchange Commission. These forward looking statements all within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and 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 3, 2022, and expect, 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. These reconciliations of these non GAAP measures to those most comparable measures calculated and presented in accordance with GAAP is set forth in today's press release and the appendix to presentation accompanying this call. Both the press release and the presentation are available on our website, www.beckn.com. I would now like to turn the conference over to Mr. Bennett Sangvi, Head of Investor Relations, please proceed Mr.
Sangvi.
Speaker 1
Thank you, Suneya. Good afternoon, and welcome to our transition period and calendar year 2021 earnings call. With me on the call today are Julian Francis, President and CEO and Franklin Negro, Chief Financial Officer. Our prepared remarks will correspond with the slide deck posted to the Investor Relations section on Beacon's website. After management's prepared remarks, there will be a question and answer session.
Speaker 2
I will now turn the call over to Julian. Thanks, Ben, and good afternoon, everyone. Before I provide my comments on the quarter, I just want to remind everyone that we've changed our fiscal year end to coincide with the calendar year end. As a result, we're reporting our calendar Q4 today, which is referred to in our earnings release and other materials of our transition period. Now let's begin on Slide 4.
I'm very pleased to report that we finished the year in record fashion. The team delivered calendar 4th quarter records for sales, net income and adjusted EBITDA. I also want to highlight that we achieved double digit EBITDA margins for the calendar year 2021, a significant milestone for the company. For the quarter, Sales were up 11% year over year against a strong 2020 comparison in which we had High shingle demand driven by housing investment and strong volumes. We exceeded the expectations we set out in November of net sales growth in the high single digits largely due to the later onset of winter weather, which allows for an extended roofing season, particularly in the Northeast.
The fundamental drivers of residential demand remain strong. And despite continuing supply chain issues, Commercial activity continues to show an improving trend as evidenced by our strong year end backlog. We also continue to experience inflationary pressure across most product categories. Our focus continues to be on great execution at the branch level and staying ahead of the cost curve, while ensuring we have products available when and where our customers need it. As a result, gross margins in the quarter expanded year over year by more than 90 basis points to 26.3%.
We expect cost pressure to continue, but are confident that we can execute to capture additional pricing to offset the headwinds. Impressively, we increased adjusted EBITDA by 21% in the calendar 4th quarter and yielded nearly a 10% margin. We continue to focus on our portfolio and our renewed financial flexibility provided the capacity to add tuck in M and A as another lever to our growth ambition. We successfully closed on 2 acquisitions recently, expanding our presence in key markets. As we announced on our prior earnings call, on November 1, we acquired Midway Total Sale, a premier distributor of roofing products and a forward offering of complementary building materials.
With annual sales of approximately $130,000,000 and ten locations across the Midwest, we expanded our presence in growing markets in Kansas, Missouri and Nebraska. Additionally, on January 1, we acquired Crabtree Siding and Supply, a distributor who has built trusted relationships with customers and suppliers. Located between Nashville and Knoxville, Crabtree has annual sales of approximately $1,000,000 We welcome the Midway and Crabtree teams to Beacon and look forward to leveraging their reputation for quality, service and reliability to further enhance our combined market positions. During the quarter, we also announced that we divested our solar products business, further focusing our resources on delivering by Carver Services to our core roofing customers. Overall, the solar business was dilutive to our margins We determined that the buyer was better positioned for long term growth in the category.
Now I'd also like to take time to highlight critical non financial initiatives to demonstrate how we continue to build the organization. Putting people first is a core value and we believe in attracting, developing and retaining a workforce that is representative of the communities in which we work and live. Last year, we created a cross functional diversity, equity and inclusion council comprised of employee volunteers who provide expertise and advice on DE and I strategies. The council has made significant progress laying the groundwork and is aimed to foster a culture where all voices can be heard. In recent months, we have conducted focus groups with leaders in underrepresented groups and rolled out training and education on diversity, equity and inclusion to all our employees.
In addition, We widened our hiring lens by partnering with Inroads, a non profit organization that creates pathways to careers for ethnically diverse students across the country. Our progress on DE and I has begun with meaningful intent and we've seen our efforts advance throughout the company, but we recognize we have much more to do. We also believe that putting people first means recognizing the efforts of our employees who have demonstrated tremendous resilience in the beginning of the pandemic. As part of our annual safety stand down, this quarter we celebrated and rewarded the exceptional contributions of all our frontline employees during 2021. It is only through their tireless efforts that we are able to help our customers build more.
The performance improvements we have delivered in the past 12 months gives us great confidence in our future plans. We look forward to sharing our longer term strategic plan that we have called ambition 2025 with the investment community later this month. Now please turn to Page 5 of the slide deck. As always, I'll provide a brief update on our 4 strategic initiatives. Our organic growth initiative continues to focus on enhancing the customer experience and the effectiveness of our sales organization.
Over the past year, we continue to invest in sales training programs, marketing support and value added tools that help our sales people grow our business. These initiatives are paying off. For example, sales of our private label are up nearly 30% in the quarter versus the prior year. Our line of high quality building products sold under the TriVille label deliver professional results at a competitive price. TriVille is becoming a recognized and trusted name by professional contractors across our residential, commercial and complementary end markets.
Our focus on our national accounts is also generating results. In calendar year 2021, Sales to our largest customers increased by 25%. We continue to build an experienced team with a proven track record focused on developing long term trusted relationships to be the supplier of choice. These examples provide an idea of the significant opportunities we have available to further partner with existing customers, through the business of new customers and grow organically as we accelerate these types of investments in the near term. Next, our digital capability continues to be a clear competitive differentiator for people.
We provide the most complete digital offering and continue to expand our capabilities to make it easier for our customers to do business with us. We achieved digital sales of nearly 16% in our residential line of business in the calendar Q4 and we have nearly 50% more active users of our online platform compared to this time last year. I'd remind you that this sales channel is both revenue and margin accretive. Our OTC strategy is an operating model in which branches our network and larger MSAs An OTC provides 4 key benefits. 1st is improved customer service levels in our OTCs.
We have greater flexibility to deliver from the branch with the best combination of product and service to support the customers' needs. The second benefit is a lower cost to serve by leveraging resources and logistics across a network of branches, we are able to reduce delivery time and mileage, improve labor efficiency and reduce fleet costs and emissions. The 3rd benefit is optimizing inventory levels, and we continue to believe there is potential to cut our inventory investments by around $50,000,000 to $100,000,000 while maintaining service levels. And 4th, critical to our ambition is that we accelerate our talent development. Our OTC initiative creates opportunities for the people at Beacon to build fulfilling careers
Speaker 1
and for
Speaker 2
us to unleash local talent, enhancing our ability to execute on our plans. We are very pleased with the recent launch of our Houston hub designed for efficiency and capacity, improving our position in one of the largest markets in We also anticipate opening 1 of the largest exterior products distribution centers on the West Coast with our Los Angeles hub expected to be operational in the first half of this year. And finally, operating performance. Our focus on the bottom quintile branches is producing meaningful results. We generated approximately $50,000,000 year on year EBITDA improvement in calendar year 2021, bringing the 2 year total to over $70,000,000 In summary, Our strategic initiatives have delivered measurable results in 2021 and we remain focused on accelerating our growth and profitability.
These strategies will continue to be foundational as we launch our ambition 2025. Now I'll pass the call over to Frank to provide deeper focus on our Q4 continuing results. Thanks, Julian, and good
Speaker 3
evening, everyone. Two housekeeping items before we get started. As you know, we divested our Solar Products business on December 1. Given its relatively small size, it is included in the results of continuing operations. Therefore, our reported results for calendar Q4 include 2 months of contribution from Solar within our complementary line of business.
Also, it is important to note that the comparable results from the prior year quarter includes 3 months of Solar's results. Similarly, we closed on the Midway acquisition on November 1st and our reported results this quarter include 2 months of Midway's results. While these two items in the aggregate are not material to our bottom line results or the year over year comparison, we thought it would be helpful to level set on these items prior to discussing the quarterly results. Turning to Slide 7, we achieved nearly $1,800,000,000 in total net sales in the calendar 4th quarter, up more than 11% year over year, driven primarily by higher average selling prices for our products. In the aggregate, price contributed approximately 15% to 16% to revenue growth, partially offset by lower volumes of around 4% to 5%, largely attributable to the continued supply constraints in the current period, combined with a strong prior year comparable.
Residential roofing sales were up approximately 9% on shingle price execution throughout the year, including the recent September increase. Shingle volumes were down about 10% year over year in line with ARMA and slightly better than our expectations. As you know, the strong prior year shingle comparable benefited from the COVID snapback and stronger storm demand in 2020. We estimate that about a third of the shingle volume decline in the quarter was related to lower wind and hailstorm activity as compared to the prior year. The fundamental drivers of the residential market remain strong with approximately 80% of demand coming from reroofing activity, which is largely non discretionary.
An important indicator of the strength of the residential market is the comparison to the Q4 of 2019. Residential shingle volumes were 12% higher in the reported quarter versus the calendar Q4 of 2019. Non residential roofing sales were up approximately 13% in a challenging supply chain environment. Our team did a great job of providing as much product as possible given those challenges and staying ahead of inflation. We continue to see longer project cycle times, which added to our strong pipeline, a positive indicator of future demand.
Complementary sales increased approximately 16% in the calendar 4th quarter as we achieved higher prices across nearly all products, including siding and lumber. As you may recall, our complementary line of business has roughly 80% exposure to the residential market and allows us to be the supplier of choice to the exterior focused customer. Turning to Slide 8, we'll review gross margin. Gross margin improved 26.3 percent, up nearly 95 basis points year over year. The execution of the price increases early in the year contributed to the improvement.
In the aggregate, price cost was positive by approximately 110 basis points in the calendar 4th quarter on a year over year basis. Sequentially, product costs increased as the inventory timing benefits largely rolled off by the end of the quarter. Mix in the quarter was negative and slightly more unfavorable than we initially expected, given relatively higher sales growth in our non residential and complementary line business, combined with higher direct sales to customers. Adjusted OpEx was $306,000,000 a $30,000,000 increase compared to the year ago quarter, mainly due to inflation in wages, rent and fuel costs. Selling expenses such as travel and entertainment were also higher as we cycle the impact of certain COVID related cost actions taken in the prior year.
We also made the conscious decision Undertake less winterization this year given the favorable fall selling season and our desire to be adequately staffed in a labor constrained environment to handle the demand we expect in the upcoming construction season. Our headcount was up a little more than 2% year over year excluding our recent Midway acquisition and we continue to focus on labor productivity. As a result of these factors combined with higher sales, our adjusted OpEx to sales ratio was in line with the prior period. Turning to Slide 9, we will review our financial flexibility. Operating cash flow adjusted for items related to the sale of our interior products business was a positive $60,000,000 in the quarter.
This compares favorably to our typical calendar 4th quarter, which has negative operating cash flow. In recent quarters, this restored financial flexibility has enabled us to open new greenfields such as the Houston OTC hub, reengage and tuck in M and A transactions like Midway and Crabtree and rebuild our inventory to ensure we can effectively meet demand. Net inventory is $200,000,000 higher year over year, reflective of several factors: Product cost inflation, rebuilding inventory levels from post COVID lows, carrying certain elements of inventory longer than expected due to lengthening project cycles, ensuring material availability to support our long excuse me, strong backlog and buying inventory ahead of price increases. 2021 was a truly transformational year for Beacon for many reasons, not the least of which was the divestiture of the interiors business and more recently the Solar Products business. In addition to focusing the company on our core Exteriors customers, the proceeds along with balance sheet cash and free cash flow, allowed us to reduce gross debt by more than $1,000,000,000 year over year.
Net debt leverage stood at 2.1 times trailing 12 month adjusted EBITDA at quarter end compared to 4.8 times a year ago. In addition, we de risked our debt maturities through a comprehensive refinancing earlier in the year, which essentially eliminated near term refinancing risk. We have no meaningful debt maturities until 2026 and our liquidity position of approximately $1,500,000,000 at quarter end provides significant ability to invest in our future. This renewed balance sheet strength has given us the opportunity to thoroughly review our existing capital allocation framework. We look forward to laying out our new capital allocation strategy in more detail at the upcoming Investor Day.
With that, I'll turn the call back to Julian for his closing remarks. Thanks, Frank.
Speaker 2
Before we turn the call over to Q and A, I want to briefly wrap up our 2021 And turn your attention to 2022. Please reference Page 11 of the slide materials. 2021 was transformational and we begin 2022 with great optimism. The underlying pace of demand remains positive in residential even as our new homebuilding Continue to manage through constraints such as labor and material shortages. Regarding non residential demand, The macro environment continues to remain supported.
The rising demand trend we saw begin in late 2020 is expected to continue in line with the Architectural Billing Index. Although we believe supply chain disruptions will continue to impact lead excuse me, lead times and project cycle times. Overall sentiment remains positive and our strong backlog is indicative of future demand. In our Q1 ending in March, we expect total sales growth to be in the high single digits range year on year after strong performance in January. This guidance also reflects our recent acquisitions and the divestiture of our solar business.
Gross margin will reflect our expectations for positive price cost contribution. You may recall that we are lapping price inflation as well as the related timing benefits from price increases in the prior year quarter. Nevertheless, we expect solid price execution to result in a year to year gross margin percent increase of approximately 40 to 60 basis points. For the full year 2022, we will continue to execute our strategy and focus on controllable areas of our business. These include ensuring product availability, remaining ahead of inflationary pressures, as well as furthering our productivity gains and cost management.
We expect full year 2022 sales to be up mid to high single digits versus calendar year 2021. We expect higher sales and continued cost discipline to more than offset gross margin to $725,000,000 We're excited about 2022 and are off to a good start. As we look forward, our team is energized and ready to execute on our longer term strategic plan called Ambition 2025. I'm pleased to hear that many of you will join us at our Investor Day on February 23, 24 in Houston, where you will hear details about our growth strategy, market execution, capital allocation plans and have the opportunity to see our newly opened Houston Hub. I'm confident that you will come away with an understanding of how we intend to achieve our full potential.
With that operator, We're now ready to open the line for questions.
Speaker 0
The first question is from the line of Kathryn Thompson with Thompson Research Group. Your line is open.
Speaker 4
Hi. Thank you for taking my question today. A lot of topics I'd like to ask, I think you'll most likely cover at the Investor Day, but one I wanted to touch on today in regards to inventory The near term and looking at the bigger picture, just a clarification of how much of inventory is price versus volume? And then when, just strategically from this is really most post COVID world and shifting from a just in time to as I've had Just in case, there's an increasing value placed on companies that carry inventory. So obviously a distribution model.
How has this shift in thinking impacted how Beacon focuses on inventory management and hence cash flows going forward? Thank you.
Speaker 2
Well, Catherine, I'll take the first one. I'll let Frank answer some of the details on The difference between price and volume in our current inventory. Look, I think we've all been challenged With the current inventory situation and the supply chain challenges, and they've been meaningful. Certainly, we've taken advantage of our scale to ensure that we are managing them probably a little bit higher than we would normally through this period of time, Both deliberately and probably on a base, in some cases, project cycle delays, as Frank mentioned in his prepared remarks, are causing us to hold some inventory as we assemble all of the pieces together. But I think your question really emphasizes the value We are the ones that aggregate the demand and from the marketplace and From various suppliers and are able to deliver that and do just that.
And I think that distribution at this point in time is really proving its value. Look, I think we're going to see what happens down the road. We're going to manage our inventories to best enable us to capture As much of the share of the market as we can in a reasonable fashion. If that means long term, we're going to carry slightly higher balances, That will be determined as much by the marketplace. But certainly, we think that this period of time has Emphasize the value of distribution in building the aggregator of demand and for the suppliers as well.
Speaker 3
Yes. Hey, Catherine. So conscious decision obviously to invest in inventory for all the reasons that you're implying in your question, a couple of numbers that might be helpful. Rough order of magnitude overall, the build is about half price, half volume. It's a little bit different depending on the product that you're asking about.
Shingles maybe on your mind, that's about fifty-fifty between price and volume. Some of the other bigger categories on The single ply side, so the commercial piece, that's probably the element that we'd like to get more of it
Speaker 2
if we could.
Speaker 3
So that volume is Down a bit on the insulation piece of commercial, that volume is up a little bit more than the 50% that I mentioned on the shingle side. And then maybe siding would be another good category to mention. That's about 2 thirds on the pricing side, about a third on the volume side. So hopefully that gives you A bit of a walk around the inventory situation.
Speaker 4
That does. Thank you very much.
Speaker 0
Thank you, Ms. Thompson. The next question is from the line of Mike Dahl with RBC Capital Markets. Your line is open.
Speaker 5
Hi. Thanks for taking my questions. Just as a follow-up To kind of price mix, I want to ask it around the full year guide. You've given
Speaker 2
Some of the
Speaker 5
moving pieces around sales and margin within the sales guide for both the upcoming quarter and the year, can you help us think about what's contemplated price versus volume.
Speaker 2
So Mike, the anticipated price increases we see are contemplated in our guide. If there are no other price increases announced, we don't we're not covering additional ones there, But we are covering the ones that we know about as of today and have implemented. Yes. High level, Mike, on the
Speaker 3
Current quarter, so Q1 2022, volume will be down. I'm talking broad strokes of your company average, not any specific product category, in the low single digit range, which puts price obviously up in the low double digit range, which gets you to The high singles guide on the sales side for the full year, the mid to high guide that Julian gave is really a It's a combination of price and volume. It is positive volume and obviously positive price is about 2 thirds price, 1 third volume. Again, I'm giving you rough Broad strokes here at a company level, not any specific product category.
Speaker 5
Okay, thanks. Second question, I know you're you talked about kind of recalibrating on the bottom quintile and that's supposed to be kind of this ongoing Structural thing that you guys implement each year is just part of your system now. Any early thoughts on what the runway is as you look out to this year from the new batch of underperforming branches?
Speaker 2
Thanks for the question, Mike. Certainly, it's just by the law of mathematics, You end up with a bottom quintile of room to improve just to get to the company average, and that's the theory behind this. This is something that we will share Targets on at our Investor Day. We've got a well thought out plan, and we think we've demonstrated that there's significant opportunity. Ultimately, we think significant opportunity remains, and we will be more transparent on that in a few weeks' time.
Speaker 6
Got it. Okay. Thanks, Julien.
Speaker 0
Thank you, Mr. Dahl. The next question is from the line of Ketan Mamtora with BMO Capital Markets. Your line is open.
Speaker 7
Thank you and good afternoon. Just coming back to the balance sheet flexibility, obviously, net leverage It's down quite nicely. As you look ahead, can you talk about kind of sort of The priorities and managing kind of M and A and absent M and A kind of How do you how would you think about capital allocation?
Speaker 3
Sure, Keith. And as Julie mentioned and I mentioned in the prepared remarks, That will be a key element of the conversation that we'll have with everyone in about 3 weeks at the Investor Day. We've mentioned a number of times in the last few quarters that everything is on the table in terms of consideration as we Lay out the capital allocation, capital structure frameworks going forward. So rather than tip our hand now, it's probably worth asking that same question in about 20 days.
Speaker 7
Sounds good. And is the M and A pipeline pretty robust at this point, Frank?
Speaker 3
It is. We obviously had a couple of good acquisitions late last year. I'd say the 1st couple of weeks of January is always a little bit of a reset period, but things that kick back into gear pretty quickly here. And we're actively in conversation with A number of companies as we always are, but the environment doesn't seem to have slowed down at all.
Speaker 2
As a matter of fact, Julian
Speaker 3
and I We're actively engaged with a number of folks and we'll see how many cross the finish line. We certainly like what we see out in the market in terms of the Geographies that we're looking at, the product suite that we're looking at and hopefully we'll be the acquirer of choice and look forward to integrating those companies with us Throughout the year.
Speaker 7
Sounds good. Thank you.
Speaker 0
Thank you, Mr. Mamtora. The next question is from the line of Truman Patterson with Wolfe Research. Your line is open.
Speaker 8
Hey, good afternoon, everyone. Thanks for taking my question. So just wanted to touch on residential volumes have been down the past couple of quarters, But pricing has stuck extremely well. I'm hoping you can give us some thoughts on the price hike here early in the year, whether you expect it to stick? And then just some color moving through 2022, assuming that volumes Stay below last year's levels.
Just trying to understand your confidence in keeping pricing elevated.
Speaker 2
Thanks for the question, Truman. I said in my prepared remarks that We remain confident that we can implement price increases to offset inflation. I do think that we will And you to see inflation throughout the year. I don't think that given the overall dynamic, We will see the same type of year we saw last year with multiple price increases in very short 60 day periods Across multiple product categories, I think the supply chain is easing, but is Still relatively tight. And you got to remember, I think as you look out
Speaker 3
at 2022,
Speaker 2
Demand is going to be across most of our categories. We think demand is going to be one of the highest we've seen in the last 10 plus years, except for maybe last year. So you end up with It's going to be a very good demand environment. I think supply chain challenges are still out there. I think that certainly All manufacturers across all product categories have room to improve their inventory position.
So I think they're going to Run so that they can continue to do it. Look, we I think that the underlying demand is good. We had a relatively slow storm year last year on the Simply slow storm year last year on the grand scheme of things. I think we would assume that, That will return to about average, which is probably a little bit of a tailwind in our assumptions here going forward. So I think we'll see a good environment overall for managing the pricing environment.
And I think that With the demand levels we see, like I said, we ultimately remain confident that we can offset inflation.
Speaker 8
Perfect. Thank you.
Speaker 0
Thank you, Mr. Patterson. The next question is from the line of Deepa Brakhavan with Wells Fargo, your line is open.
Speaker 9
Hi, good afternoon, everyone. Thanks for taking my question. My first question is on your quarter, current quarter. January is growing double digit, but you're guiding to high single digits. So you're obviously expecting a moderation.
But you also had a price increased, maybe in January. So just curious, why are you assuming a moderation?
Speaker 3
Hey, Deepa, it's Frank. So remember in the last year, there were some really interesting dynamics in the quarter. January was A pretty good month last year. February was difficult on weather. You might remember the kind of deep freeze that reached all the way down into Texas, so our sense is that January February will be strong this year relative to last year.
March had What I'll say is some snapback demand from the February difficulties. So I think the March month in and of itself will be a tough comp for us. And when you blend all that together, you get to that high single range that we mentioned.
Speaker 9
Okay. That's fair. Your gross margin expansion for the same upcoming quarter, 20 to 60 bps, is this mostly pricing driven or Are there any other benefits in there? I'm curious what would that mean to your EBITDA expansion?
Speaker 3
Yes, we didn't give EBITDA guidance, but clearly your question sort of hints at that. I'd say the gross margin is a combination of The carryover price increases from last year, obviously, those begin to roll off as we go through the year, the January price increase. As Julian just referenced and spoke about in answer to the prior question, we are now getting those higher product costs End of the mix as inventory profits have rolled off from the prior price increases. We're always going to be working on private labels and digital and things like that, Kevin, a margin accretive benefit there. From an OpEx perspective, if you just kind of walk down the P and L, I wouldn't anticipate huge changes on a year over year basis on an OpEx to sales basis.
And obviously, you can do the math on The EBITDA, which obviously would be a nice lift from last year without dimensionalizing it.
Speaker 9
All right. That's helpful. Thanks very much. Good luck. I'll pass it on.
Speaker 2
Thank you.
Speaker 0
Thank you, Mr. The next question is from the line of Keith Hughes with Truist. Your line is now open.
Speaker 6
Thank you. Questions on non residential. Several quarters here with some positive results. The segment has a history of kind of being up and down. Is there anything that's changed in how you run the business to get a little bit more consistent results?
And Do you think as you go through 'twenty two, could we see the volume there inflect higher given Terry earlier about some commercial activity really starting to stir.
Speaker 2
Thanks for the question, Keith. It's Very insightful. Yes, the answer is we do think that we are running the business a little bit differently. We do think of our business as having 2 core businesses, the residential focus and the commercial business, and they're not the same. And we do think about them as different businesses and run them as such.
But I think that The supply chain challenges on commercial have been manifest across so many different categories. It's difficult to put your finger on it. It's gone from insulation to fasteners, back to insulate. I mean, It's been all over the place and compiling the jobs has been a real challenge. And then getting labor to get it on the jobs And the timing of the projects, it's really been like Catherine's earlier question, the value of distribution in this time for the contractor and for the manufacturer is high as we compile all those jobs and hold them until we can get Job packets out the door.
That's really important. I think that we will see Some easing as we go through the year of supply chain challenges on some product categories. Look, I think we're very conscious of some products that are shipped TransContinental. Disruptions in that supply chain, while it's been easing a little bit more recently, Containers, the cost of containers, the inflation, the back drive, the ability to get them, There's still a tremendous amount of uncertainty. What I do think is positive overall is that I don't think that there is a sudden belief that commercial construction is just Going to
Speaker 3
go away. I mean, I
Speaker 2
think there was a lot of talk early in the pandemic that would anyone ever go back to offices, what would happen to retail. There seems to be a lot of the construction going on out there, and I think it's in categories that are very beneficial for us. There's A lot of investment going on in warehouse space. There's a lot of investment going on in sort of the data centers. And those are generally low rise, large spaces with large rooms.
So overall, I think we feel very good about the position. We're thinking about the commercial business differently. We think the underlying demand trend is Extremely positive for the longer term outlook. And I remain extremely cautious about short term predictions Because the supply chain is just a challenge right now. Okay.
Thank you.
Speaker 0
Thank you, Mr. Hughes. The next question is from the line of Michael Rehaut with JPMorgan. Your line is open.
Speaker 10
Thanks. Good afternoon, everyone. Thanks for taking my question. I wanted to just drill down a little bit on the 2022 EBITDA guidance or guidance in general, but from a couple of different angles. And I apologize if you had covered this earlier in the call if I missed it.
But if I'm doing the math right and you're saying sales are up, You expect up mid to high single digits. So if you assume a 7% sales growth kind of in the middle of that and take the midpoint of your EBITDA guidance. I'm getting to a margin of 9.6%, which I believe is down 50 bps year over year. So I was just curious on if I have that math roughly correct and what's driving that EBITDA margin contraction?
Speaker 3
Yes. Hey, Michael. So Matt, I'll give you directional accuracy. Obviously, it's not too hard to put those numbers together. Remember something that we have talked quite a bit about in the last 3 or so quarters is this concept of inventory profits.
So it's obviously going to hit the gross margin line as The replacement costs for the inventory as we go throughout 2022 is going to be significantly higher than the inventory costs associated with those same products in 2021. So the pricing environment continues to be robust. We're only really handicapping in the guide, The January increases that have already been announced, we don't have any other ones built into that. So obviously that changes the dynamic. If we get inventory profits 2022 that begin to build and rival those in 2021 and that dynamic and your math would change.
But based on what we see right now, There is that kind of 50 to 100 basis points of headwind that we have and it's probably more toward the northern end of that as we've redone the math for the full calendar 2021 that we have to overcome in 2022. And then we've got obviously the pricing mechanism in January. We've got the private label and the digital and other things. But it's really the product cost for the full year at a much higher level in 2022 than we had in 2021.
Speaker 10
Okay. That's helpful, Frank. And I guess just kind of also thinking about it from another angle, Just wanted to make sure that included in your guidance, obviously, you have the divestiture and the acquisitions so far, But would that also include a I know you're going to go into it later at the Analyst Day, but Would that also include planned improvement from the bottom quintile of branches?
Speaker 3
Sure, Ben. Yes, so let's go back to the first part of your second question. So obviously, we'll have a full year of Midway's results and Crabtree's results in that guide. In terms of the launching point 2021, one of the housekeeping items I said in my prepared remarks was that solar is part of continuing operations. So that is part of the 2021 comparable.
So realize that The growth rates are better on an organic basis, but obviously we have solar in 2021, which sits at the comparable higher.
Speaker 10
And the bottom quintile?
Speaker 2
Yes. I mean, again, productivity is
Speaker 3
a big part of what we do. We continue to believe that the bottom to the top branches have huge opportunity. That's not just on the OpEx line. We expect good sales growth out of those branches. We expect margin, gross margin Accretion there, there's still, as I mentioned on prior calls, literally hundreds of basis points of difference between the underperforming branches and the performing branches When you look at the gross margin line as well as on the OpEx line, so both of those are in play anytime we look at an underperforming branch as it is just the general sales Rates that we're seeing there, we in 2021, we saw higher growth rates in the underperforming branches on the sales line and obviously we saw nice Accretion from both the gross margin and the OpEx line as well.
Speaker 2
Great. Thanks so much.
Speaker 0
Thank you, Mr. Rehaut. The next question is from the line of Philip Ng with Jefferies. Your line is open.
Speaker 11
Hey, guys. Can you find any color on the volume expectations by segment for your full year guidance? I'm particularly curious about resi just given your tough comps and weaker storm carrier demand. And on the flip side, commercial, I think underlying demand, as you kind of point out, has been pretty robust, but some of these supply chain challenges have weighed on volumes. So I'm just curious, does that start off kind of negative or flattish and then build through the year as some of those bond exceeds.
So any color would be really helpful here.
Speaker 3
Yes. No, good and fair question. We're going to have a couple of unique dynamics by line of business next year, I'm talking full year. On the resi side, we're probably in that volume piece of the low single digits overall. It's going to be a first half, second half dynamic, because if you go back to the COVID period, the second half of twenty twenty and the first half of twenty twenty one Really strong volume quarters and we've tried to call that out over that period of time,
Speaker 2
but obviously flips a little bit as
Speaker 3
we get into the second half of twenty twenty 1, so the comparable is not that they're easy, but on a relative basis, they're easier than the first half of twenty twenty one. So I think you'll see So progress throughout the year from maybe starting out negative and ending up positive. On the non res side, It's probably a higher growth rate, I think mid single digits probably on the volume side on the non res piece. Again, there's going to be first half, second half Dynamics, remember that there wasn't any real supply chain challenges in the first half of last year, Whereas there were supply chain challenges in the second half of last year. So it's going to be a little bit of a different dynamic there.
Complementary again It's a large set of disparate businesses, solars in the prior year. So I probably give that a flattish type of an outlook on complementary.
Speaker 11
Okay. But if I heard you correctly, you're expecting low single digit volume growth in resi for the full year? I mean, I think most people are expecting more muted backdrop. Okay. Is that driven by anything in particular?
I guess you mentioned storms maybe being normal, driving that new construction and it'd be helpful to kind of unpack that raising growth?
Speaker 3
Yes. I mean, I think it's all of the things that you mentioned. So obviously midway the acquisition It's helpful. Crabtree is helpful. We have an expectation that storms will revert to the 10 year average, which will provide Some help for us as well.
Housing is there. So the cycle of new housing 20 years ago, we're still in The lift period of time, so there's a fair number of factors in there, and we're hopeful that the supply chain won't present us any Challenges as we fulfill the demand that we believe is out there. The other point and this goes to both Michael's and Keith's questions as well. We mentioned a couple of times in our remarks about the backlog. The backlog, which is about 2 thirds non res and about 1 third Residential and complementary is literally the highest that we had in our history as far as we can tell.
It was a 14% quarter over quarter. So a little unusual given the time of year, but it was up on a quarter over quarter basis and It's literally tripled in the year over year period. So we have really good insight into what the next 6 to 12 months look like when we look at those backlogs and we realize what's in.
Speaker 11
Got it. Frank, sorry, Nedpick. Is there any way to parse out that resi volume piece organically without the acquisition? How we should think about it?
Speaker 3
Well, we mentioned yes, so we mentioned that Midway is about $130,000,000 in annual revenues. We've got a couple of months in 2021, that's in the comparable given what we said about. There's a little bit of a split though, if you remember some of the press releases that we put out, The revenue piece of Midway is kind of a third ish of that business and complimentary is about 2 thirds of
Speaker 11
Okay. All right, great. Thank you.
Speaker 0
Thank you, Mr. The next question is from the line of David Manthey with Baird, your line is open.
Speaker 12
Thank you. I was wondering if I hit the numbers incorrectly. So here we are. So a Question on what you were talking before about the 50 to 100 basis point gross profit margin Inventory benefit in 2021. And then now you're guiding the Q1 slightly higher year over year.
And it sounds like you continue to chase price higher. I mean, obviously, you raised price again here. Would it stand to reason that you probably won't give all of that back in the coming calendar year? Or do you think it will still unwind by the time we hit the end of 2022?
Speaker 2
Thanks for the question. Look, I said in my prepared remarks, we remain confident that we can More than offset inflation with actions. We're very focused on pricing execution. We think we've done that very well over the last The 18 months or so as we've seen rapid inflation, obviously, we're keen to take advantage of inventory profits. We certainly don't want to let that go.
We continue to look at the opportunities to do that. The pricing dynamic over the last, I'd say, 12 to 18 months has been Pretty unique, with just about every product category seeing rapid back to back increases. And executing on that requires a tremendous amount of work. You're replacing so many SKUs. And so I think our execution on that has been really, really strong.
We will continue At that high level, we think there's continued opportunities to enhance our overall pricing dynamic as well. We think that there's Frank said in his remarks as well that when you think about TriBuild, when we think about the digital, When we think about underperforming branches, when we think about the pricing dynamic overall as well as our execution, we think there's a lot of ways that we can have A really good influence on both gross margin and EBITDA margins going forward. Okay.
Speaker 6
All right.
Speaker 12
And then, Frank, just some technical questions here. CapEx That you're thinking right now, unless that reveals too much that you don't want to talk about capital allocation and then your expected tax rate. And I was also hoping you could disaggregate the $151,000,000 depreciation and amortization separately.
Speaker 3
Gosh, okay. Yes, yes, yes, we can handle all that. CapEx, If you think about 2021, which I know wasn't the basis of your question, but in 2021, we were about 1% of sales, which is essentially what we guided for throughout the year. We are going to Discuss CapEx at the Investor Day as part of the broader capital allocation perspective. And so I'd rather not tip my hand quite yet on that one.
Tax rate, Generally, you can always handicap us in the 25% to 26% range, the federal at 21% and the state's usually going to be 4% to 5% and that's a federal benefit. If I look at 2022 on depreciation and amortization, That 151 breaks down something in the kind of 65 ish range on depreciation and 85 ish range on Amortization.
Speaker 12
That's helpful. Okay. Thank you very much.
Speaker 0
Thank you, Mr. Manthey. The next question is from the line of David MacGregor with Longbow Research. Your line is open.
Speaker 5
Hi. This is Joe Nolan on for David. I just had a quick follow-up on the non res backlog. Can you just give any sense of how far those extend into 2022 at this point based on your current expectations for Raw material availability. And then with recent price increases on the non res side, are those taking a bit longer to see traction given how extended backlogs are at this point?
Speaker 2
I'll start with the second one. The answer to that is Generally, the increase is tied to shipments, not to orders placed. We do look out. One of the challenges we are finding with that is that we do have to reprice Quoted jobs, it's one of the big challenges with the supply chain right now. Quoting jobs that get delayed, you have to requote them.
That causes a lot of angst With both for us, our customers, the suppliers, the general contractors and building owners is that's One of the dynamics that is really up in the air and difficult to manage right now. But ultimately, Long backlogs and long lead times are less indicative of price increases. So that's kind of where we are overall. I think that we feel pretty good about where we stand. The challenge is really managing the overall supply chain.
It's getting to the jobs. So the backlogs that we have, We think these are all real orders that are out there, but jobs that are going to ship at some point in the year, it's putting all these things together and is the real challenge. And we've got lead times on some products that are still at 6 to 9 months. And that's it's just difficult to manage inventory In that type of environment, we certainly think it's going to ease as we come through the years. The manufacturers Get their production right as we start to work off these backlogs.
But in this industry With such with jobs shipping for installation in days when you've got 6 months And longer lead times on certain materials, this is incredibly difficult to manage.
Speaker 3
Joe, in terms of the overall backlog that I mentioned, not parsing Between resi and non resi in this remark. So the last few quarters As we've looked at this, the trend has been about 50% to 60% of that backlog was scheduled to ship within 90 days. The resi piece of that would naturally be on the shorter end and the non res would likely be on the longer end.
Speaker 5
Got it. That's very helpful. Thanks.
Speaker 0
Thank you, Mr. McGregor. The last question is from Jeff Stevenson with Loop Capital. Your line is open.
Speaker 3
Hi, thanks. This is Jeff on for Garik I'm just wondering, have you seen any improvement in the residential roofing supply environment? Are you still on allocation from manufacturers? And then what's your current expectation on when we could return to a more normalized Supply environment and residential. Thanks.
Speaker 2
Thanks, Jeff. Yes, look, I mean, I think that Actually, in this sense, the 1 summer is a good measure for us. I mean, armor shipments in The last quarter were below what we believe is total production. I think the manufacturers took the opportunity to Do some of the maintenance that they're required to do on their plans to keep them running. I think that Their plan would be to run full add.
There are pockets of real tightness around the country and there are pockets Where supply has eased, obviously, this time of year, It's really difficult to call a full year and how that's going to shape out. But I think we would expect to see probably a slight drop in overall shipments year over year, Allowing the manufacturers probably to rebuild some of their inventory. I think that My guess is the distribution channel did what we did as best they could in the quarter and put as much inventory as they could into their warehouses in a quite a period of time. As it turned out, the 4th Quarter calendar Q4 was actually very strong, so probably less than we thought on the residential side. So I think that early in the year, it's going to remain tight.
I think the manufacturer is going to catch up. I think they're going to put a little bit of inventory It's safe, but I think that as we get out of this period of time in winter and the storms that we've seen over the last A few weeks. Bad for short term shipments and really good for long term demand. It generally causes damage, winter damage. So I expect us to see a decent pickup.
Overall, I think like I said, I think the overall demand level is going to be strong. I think we it gets a little bit easier as we go through the year. But I don't expect a sudden wide open market to reappear at any time In the
Speaker 3
next several months at least.
Speaker 12
Very helpful. Thank you.
Speaker 0
Thank you, Mr. Stevenson. That concludes the questions. Now I would like to turn the call back over to Mr. Julian for his closing remarks.
Speaker 2
Thanks, Daniella. I appreciate everyone's Attention to our call today. I do want to reiterate pride I have in the team's performance in 2021. It is an incredibly challenging environment still as we've articulated a number of times on this call And for us to deliver the type of transformational year that we have and set the building blocks for our future ambition is something that I'm We're really looking forward to talking to you all on at the end of the month at our Investor Day. And with that, thank you all for your attention.
Good night.