Beacon Roofing Supply - Q4 2023

Transcript

Operator (participant)

Good evening, ladies and gentlemen, and welcome to the Beacon Fourth Quarter 2023 earnings call. My name is Victoria, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of 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 assistance, 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. I would now like to turn the call over to Mr. Binit Sanghvi, Vice President Capital Markets and Treasurer. Please proceed, Mr. Sanghvi.

Binit Sanghvi (VP of Capital Markets and Treasurer)

Thank you, Victoria. Good evening, everybody. 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 Carmelo Carrubba, Beacon's Interim Chief Financial Officer. Julian and Carmelo 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, in 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, but not limited to those set forth in the risk factor section of the company's 2022 Form 10-K. Second, the forward-looking statements contained in this call are based on information as of today, February 27th, 2024, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. And finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in today's press release and the appendix to the presentation accompanying the 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. Let's begin on slide four. I'm very pleased to report that we had strong finish to the year. The Beacon team delivered a record fourth quarter as a result of executing on our strategic plan, Ambition 2025. Sales were up nearly 17% year-over-year to $2.3 billion, a fourth quarter record and above our expectations from our third quarter call. Demand for our services drove organic sales growth across all three lines of business. We continue to create value for our customers, especially by enhancing our service proposition, allowing them to maximize the productivity of the scarce labor resources they have. Acquired and newly opened Greenfield branches contributed approximately 6% growth to the top line. Our gross margin came in at 25.7%, above our guidance of 25.5% that we provided on our third quarter call.

We stayed focused on labor productivity, and our bottom quintile branch initiative delivered. As a result, we achieved a fourth quarter record for Adjusted EBITDA of $217 million. I'm particularly pleased with our management of working capital which generated record fourth quarter cash flow of $262 million. This enabled us to deploy capital towards our Ambition 2025, including Greenfield locations and acquisitions, while maintaining our balance sheet capacity. We've completed four acquisitions since the end of the third quarter. This includes adding to our industry-leading waterproofing footprint by acquiring Metro Sealant and Waterproofing Supply earlier this month. Metro, along with Garvin Construction Products acquired in October, enhances our position on the Eastern Seaboard as we continue to become recognized as a national leader in specialty waterproofing distribution. We also completed the acquisition of Roofers Supply of Greenville, adding commercial roofing branch locations in North and South Carolina.

The Roofers Supply team has great talent and strong capabilities, and we welcome them to Beacon. At our investor day two years ago, we said that we would unlock the potential of Beacon, and I can confidently say today that we are well on our way to achieving that goal. We demonstrated once again that we have multiple paths to growth and can deliver results in a variety of conditions. Now, please turn to page 5. At that investor day, 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. Creating value for our customers is central to achieving these goals, and our team is relentlessly focused on doing that every day. Let me provide you with an update on our strategic initiatives, starting with how we are building a winning culture.

One of our core values is do the right thing, and this applies to our efforts to build better for the environment by engaging our employees and improving the climate in our communities. During the quarter, we launched a turn-it-off campaign to educate our truck and forklift drivers about their role in reducing non-productive engine idling. Our drivers have pledged to turn off their vehicles whenever they can to contribute to cleaner air at our branches, on job sites, and throughout the community. In addition, we contracted to power over 30 of our branches with renewable energy from community solar installations. We're proud to support investment in community solar, which allows underserved neighborhoods to receive discounts on their energy bills. 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. This includes our investments in greenfields and acquisitions. Our dedicated team continues to execute on our pipeline of Greenfield locations. In the fourth quarter, we opened 11 new branches. Each time we add a new location, we add sales resources and reduce the average distance and time for us to reach our customers. This enhances our overall value proposition, giving us the opportunity to earn market share. We have now opened 45 new branches since the beginning of 2022, exceeding our original Ambition 2025 goal. These branches have contributed more than $290 million to our top line over two years. It also demonstrates our ability to adjust to prevailing market opportunities. We've seen the impact these new branches have had on our results and accelerated the program.

On acquisitions, we discussed the recent additions of Roofers Supply and of Metro Sealant, as well as Garvin. We also acquired H&H Roofing Supply, strengthening our presence in the Central Valley of California, adding Bakersfield to our service area. Since announcing our Ambition 2025 plan, we have acquired 16 companies, adding 50 branches. Our online capability continues to be a clear competitive differentiator for Beacon. Sales through our online platform deliver approximately 150 basis points better margin compared to offline channels. Our valuated integrations are driving performance, and in the fourth quarter, we grew digital sales nearly 28% year-over-year. Digital sales to our residential customers were a highlight as we achieved adoption of nearly 22%. We have plans to build on our digital leadership by continuing to invest in this area and to differentiate ourselves and build upon our competitive advantage in the marketplace.

Our third pillar involves driving operational excellence and expanding capacity through our continuous improvement and productivity initiatives. Our focus on the bottom quintile branches generated a significant contribution to EBITDA in the fourth quarter. Our disciplined process for diagnosing and addressing issues has been core to our operational improvements the last two years. I'm pleased to report that the process added approximately $15 million to the bottom line year-over-year in the fourth quarter. And fourth, let's review how we're creating shareholder value. In July, we deployed a little over $800 million to repurchase the entirety of the outstanding preferred shares from CD&R, reducing the as-converted share count by 9.7 million. Since then, CD&R sold off its remaining stake in our common stock and exited its board representation.

In addition, we continue to execute on our current authorization to repurchase our common stock, retiring 8.4 million shares in the last two years. Since the start of Ambition 2025, we have deployed more than $1.3 billion to shareholder returns, reducing the as-converted share count by approximately 21%. Impressively, even with the purchase of our shares, the investment in M&A and the record spending on growth CapEx, we exited the year with net debt leverage at 2.4 times. In summary, we have a differentiated approach and have built the tools to enable multiple paths of growth, margin expansion, and value creation through the cycle. Our Ambition 2025 plan brings it all together to amplify the resiliency of our business model and unlock our potential. Now, let me introduce our interim Chief Financial Officer, Carmelo Carrubba.

First, let me say that I'm delighted that Carmelo has accepted this interim responsibility until a permanent CFO has been appointed. Carmelo has extensive executive, functional, and operational experience, creating value serving in various roles. I was pleased when he joined us in April of 2022 as Vice President of Strategy and Transformation and as a member of Beacon's Executive Committee. In these key leadership positions, Carmelo shares responsibility for creating and supporting the value creation framework to drive that successful execution of Beacon's Ambition 2025 plan. With that, I'll pass the call over to Carmelo to provide the details on our fourth quarter result.

Carmelo Carrubba (Interim CFO)

Thanks, Julian. Good evening, everyone. Turning to slide seven, we achieved nearly $2.3 billion in total net sales in the fourth quarter, up nearly 17%, primarily driven by organic growth volume across all three business lines as well as contributions from acquisitions. In the aggregate, average selling prices for our products were slightly positive year-over-year. Organic volumes, including those from Greenfields, increased approximately 12%-13%, while overall price contributed less than 1%. Acquisitions are performing well and contributed approximately 4% to net sales growth year-over-year. As a reminder, as of November 1st, we lapped the acquisition of Coastal Construction Products, which has been the largest acquisition under our Ambition 25 plan. Our backlog continued to convert in the quarter and was lower sequentially but still well above historical levels.

The mix of backlog is now more aligned with our sales mix, with non-Resi representing slightly less than 30% of the total. Residential roofing sales were higher by more than 20% as higher volumes were driven by resilient underlying R&R demand and storm activity, combined with higher prices in the low single-digit range. Our Resi volumes in the quarter were strong, and adjusting for channel restocking, we estimate that we grew in line with the market for the full year. We're very pleased to see the improvement of demand in the new residential construction, in particular single-family homes. Non-residential sales increased more than 11% on solid R&R activity. As expected, the stocking at our customer contractor level came to an end.

Estimated volumes increased in the mid-teens, and while prices declined in the low single digits year-over-year from a high comparable in the year prior, they remained stable on a sequential basis. Complementary sales increased by 16% year-over-year as our new waterproofing platform continued to grow. Higher volume of siding products also contributed to the growth. Selling prices across product lines, with the exception of lumber, were stable year-over-year. Please keep in mind that with the addition of Coastal, our complementary product category now has approximately 70% residential and 30% non-residential exposure. Turning to slide eight, we'll review gross margin and operating expenses. Gross margin was 25.7% in the fourth quarter, higher than our guidance on our third quarter call.

Price-cost was down approximately 50 basis points year-over-year as a result of stable average selling prices and higher product costs, especially in the non-residential line of business. Keep in mind that we had significant inventory profits generated in the year-ago period. Adjusted OPEX was $409 million, an increase of $45 million compared to the prior year quarter. Adjusted OPEX, as a percentage of sales, decreased to 17.8% or down 70 basis points year-over-year. The year-over-year change in adjusted OPEX was driven primarily by expenses associated with acquired and Greenfield branches, accounting for approximately $24 million of the year-over-year increase. Increases in wages and benefits, including incentive comp, annual bonus throughout, and commissions, also contributed to the increase. These increases were partially offset by lower T&E and fleet expenses year-over-year. Branch productivity helped drive favorable operating leverage for year-over-year.

As you can see, our sales per hour metric reached its highest fourth quarter level since we began tracking at the beginning of the first quarter in 2020. Investments in Ambition 2025 priorities to drive above-market growth and margin enhancement continued in the quarter. These investments include our dedicated Greenfield and M&A teams, as well as initiatives related to our sales organization, customer experience, pricing tools, e-commerce technologies, and branch optimization. Let's turn now to slide nine. Operating cash flow was strong in the fourth quarter at $262 million. We had about $95 million less in inventory as compared to the prior year quarter, even with inventory acquired through M&A and new inventory to support Greenfields. This reflects our effective inventory management that continued into the year-end.

Through close collaboration with the field management team and our supply chain organization, we efficiently managed Working Capital, contributing to a strong finish to the year. Our fourth quarter cash conversion was impressive at more than 120% of Adjusted EBITDA. In our full year 2023, we generated a record $788 million of operating cash flow with conversion of more than 84%. We continue to balance our capital allocation between organic and inorganic growth opportunities and shareholder returns. Our ability to invest in Greenfields and value-creating acquisitions is underpinned by our ample balance sheet capacity and liquidity. As Julian mentioned, our former largest shareholder, CD&R, recently sold off its remaining stake in our common stock and exited its representation on our board of directors.

At the same time, in February, Moody's upgraded our long-term credit rating one notch, which will improve our access to capital and lower our overall cost of debt going forward. We are investing record amounts in our business, deploying more than $120 million in capital expenditures in 2023. This is not only included in the investments in the Greenfields already discussed, but also the upgrading of our fleet and facilities as well, as well as building out the technology tools that will benefit us in 2024 and beyond. Let me give you some of the details on our share buybacks. Share repurchases in the fourth quarter were made through open market repurchases and resulted in the retirement of 140,000 shares during the quarter.

Net of share issuances for stock-based compensation, we reduced our common shares outstanding to 63.3 million on December 31st versus the 64.2 million at the same time in the prior year. We are confident in our ability to successfully compete in and react to changing market conditions and look forward to a successful start of the year. We're also investing in the processes and technologies in order to build upon the foundation of a high-caliber service, future growth, and operational excellence. Now, let me turn the call back to Julian for his closing remarks.

Julian Francis (CEO)

Thanks, Carmelo. Please reference page 11 of the slide materials. Before we move to the outlook, I'd like to take a minute to reflect on the impressive 2023 results and the progress we have made toward the Ambition 2025 targets we conveyed two years ago. In 2023, we produced sales growth of over 8% to $9.1 billion. When we started the year, uncertainties around the economy, housing, inflation, and mortgage rates were all in the headlines. We remained confident that we could grow, and we did just that despite headwinds from distocking at the commercial contractor level and sluggish new construction demand to start the year. We focused on delivering high-caliber service to our customers and productivity and continuous improvement at our branches. We delivered approximately $930 million of adjusted EBITDA and our third consecutive calendar year of double-digit EBITDA margins.

We delivered record sales in our national accounts, private label, and digital initiatives, which deliver both enhanced growth and margin. We generated $21 million in EBITDA contribution from our bottom quintile branch initiative, bringing the two-year total to $57 million, three-quarters of our $75 million Ambition 2025 target. We opened 28 Greenfields across 17 states, enhancing service to our customers. These new branches are ramping up ahead of expectations, and in total, all new Greenfield locations contributed nearly $200 million to the top line in 2023 alone. We welcomed nine new acquisitions, setting 21 branches, new markets, and capabilities. I'm pleased to report that our acquisition portfolio is performing well and delivering results. Acquired branches contributed approximately $370 million to net sales in 2023 and, like our Greenfields strategy, expand our ability to serve our customers across the country.

We filled several key leadership positions with our salesforce, line of business, and leadership ranks, while at the same time advancing our diversity, inclusion, and equity initiatives. We repurchased and retired 1.6 million shares for approximately $111 million and, as discussed, redeemed the entirety of the preferred shares for a little over $800 million. In summary, our performance in 2023 has created significant value for our customers and shareholders, including achieving two of the Ambition 2025 targets: net sales of $9 billion and shareholder returns of more than $500 million, two years ahead of plan, as well as a third year of double-digit EBITDA margin, another of our A25 targets. Please reference slide 12. Before we head to Q&A, I'd like to provide our 2024 market expectations.

We expect that residential reroofing market demand will be lower this year, driven by our assumption that storm demand will revert to the 10-year average. At the same time, we expect non-storm repair and reroofing to be higher as the number of older roofs grows. Residential new construction and existing home sales are expected to improve also. Regarding commercial roofing, we are monitoring the Architecture Billings Index, which remains below 50, indicating contraction in activity in the first half of the year. We also see a continued shift from new construction to repair and reroofing activity as the year progresses. Despite these modest market headwinds for the first quarter, we expect total sales growth to be in the high single-digit range year-over-year, demonstrating the value of our model.

This is considerably more than the 4% sales per day decline we saw in January, which, as you know, had cold and wet weather in many parts of the country. Non-residential shipments are expected to be higher versus the prior year quarter, in which we experienced considerable destocking at the commercial contractor level. With respect to the first quarter gross margins, we expected to be in the mid-24% range, which is down, driven by line of business mix and the impact of both new Greenfield locations and the M&A we've conducted in the past year that is yet to be fully synergized. Operating expenses, as a % of sales, are expected to increase year-over-year, largely attributable to the higher expenses related to headcount from Greenfields and acquired branches.

But also, given tight labor markets, we are making efforts to ensure that we are properly staffed to meet the ramp in seasonal activity to continue to provide the high level of service our customers expect. For the full year, we expect net sales growth in the mid-single-digit % range, including contributions from acquisitions previously announced. This is an upward revision to the expectations provided in January for low single-digit % growth, reflecting our recent acquisitions and our expectations for the announced April residential price increase. Regarding gross margin, structural improvements from our initiatives, including higher private label and digital sales, are expected to be somewhat offset by higher non-residential mix. Important to note that we expect price-cost to be neutral, resulting in a full-year gross margin percentage in the mid-25% range. With all that in mind, we expect Adjusted EBITDA range between $920-$980 million.

Regarding cash flow, we expect inventory to follow a more normal pattern of seasonality as we build inventory and working capital in the first half of the year. For the full year, we expect to generate strong cash flow with conversion from Adjusted EBITDA above 50%. Our focus will remain on the areas within our control, including enhancing our customer experience, pricing, and daily execution on safety, service, and efficiency. We will continue to invest in initiatives that we expect will result in accelerated growth with acquisitions and approximately 25 additional Greenfield locations. We're investing in improving our operations, delivering results today, but also getting ready for the future. And last but certainly not least, we continue to be committed to generating returns for our shareholders, and we will be balancing growth investments with share repurchases.

We have approximately $390 million left remaining on the authorization from our board approval early last year. In summary, our business model is resilient, and we are positioned to outperform the market in any demand environment, creating value for all our stakeholders. We are looking forward to the rest of 2024 and, as always, helping our customers build more. With that, Victoria, I'll turn it back to you and open up the question and answer session.

Operator (participant)

Of course. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. Apologies. If your question has been answered or you wish to withdraw your question, press the star key followed by two. Each caller is limited to one question. Our first question comes from the line of Ryan Merkel with William Blair. Your line is now open.

Ryan Merkel (Partner and Co-Group Head of Industrials)

Hey, thanks. Good afternoon. Thanks for taking the question. I wanted to ask on gross margin. You gave the reasons why in the first quarter it's going to be down year-over-year, but then it assumes that it'll be up year-over-year the rest of the year. Some of the factors you cited, like line of business and mix and the dilute of new Greenfields, do those things improve through the year, or are you counting on something else to drive the gross margin improvement through the year?

Julian Francis (CEO)

Thanks for the question, Ryan. I'm glad you asked that clarification. In the first quarter, what we've got is, as we've mentioned, we've got 11 Greenfields that we opened in the fourth quarter. Obviously, we don't get the full gross margin benefit of those. So that's a piece of it that's a drag in the first quarter. We would expect those to improve through the year and get better as we fully ramp them up and get their product mix right. So that's a piece of it. Similarly, with our acquisitions, particularly with some of the more recent ones, we're working very carefully on driving the performance that we expect.

But some of our larger acquisitions, apart from Coastal that's now included in our continuing results, some of the newer acquisitions, we've yet to fully synergize because they were done later in the year, and they were a little bit larger than others we'd done previously. So they're having more of an impact early on in the year. And again, we expect to see that improve year-over-year. Also, as we start to come out, if you look back beyond the last couple of years, which have been a little bit odd in terms of price carryover and inventory profits, we've returned to a sort of more normal seasonality. And so we normally would see a lower gross margin in the first quarter of the year.

That's a more typically seasonal basis that we recover through the rest of the year as the mix shifts more towards the residential side. So to answer your question relatively succinctly, it's mostly on improvements in what we have. And then the other piece of it would be a more typical selling season. As we get more into sort of the shingle reroof area, the margins go up. So it's just a more normal pattern of behavior. Excuse me. We're not relying on other elements. But thanks for the clarifying question.

Ryan Merkel (Partner and Co-Group Head of Industrials)

Perfect. Thank you.

Operator (participant)

Thank you for your question. The next question comes from a line of Michael Rehaut with JPMorgan. Your line is now open.

Doug Wardlaw (Research Analyst)

Hi, guys. Doug Wardlaw from Mike. I'm curious if you could give a little bit more color on some of the trends you saw throughout the quarter. And in addition to that, if any of that was surprising and any surprising variation in market, and just kind of your general view on how the market can kind of develop throughout 2024. Thanks.

Julian Francis (CEO)

Thanks for the question. I'd be happy to do that. So a couple of things, I think, were very evident to us throughout the fourth quarter. And I'll split it into residential and commercial. Residential remained strong. The season stretched out a little bit. Despite some cold weather, we saw contractors on the residential side working through, particularly in the western half of the country. Obviously, we'd seen significant storms out west last year. And I think there was a real opportunity for people to get some of that work done. And so residential demand held up through most of the fourth quarter. What we did see on the residential side was Florida came down hard after Hurricane Ian sort of rolled off.

You could see the difference kind of going into it a little bit in the third quarter, but certainly in the fourth quarter, the impact of Hurricane Ian was clearly done. So those two impacts, they weren't offsetting. The storms in the west were significantly greater. And so we've continued to see some really good demand. And quite honestly, we expect to see that rolling into the start of 2024 on the residential side, which is very encouraging and also why we wanted to maintain our workforce through the winter because we've seen the demand on the residential side, particularly when we have reasonably warm days in February, we've seen the demand be particularly good. So we're excited about that side. Switching to the commercial volumes, I think what we were convinced of in the fourth quarter was kind of the rebound we saw in the commercial business.

And we think that a lot of that is just the lapping some of the contracted, the stocking that I don't think we really captured in fourth quarter of last year, but was sort of evident in our numbers in the fourth quarter of 2023. So commercial volumes were good. We believe that the market's solid. There's a few headwinds out there, interest rates not being the least of them in terms of new projects. So we think that that will move the commercial low-slope roofing business a little bit more towards the repair and replacement than the new side. Obviously, the numbers we see in Q1. Q1's destocking last year was significant. So we're seeing significant uptick in volumes year-over-year in Q1. But obviously, that's not sort of market-related.

That's more distribution and probably manufacturing-related as opposed to total market because of the destocking that was so prevalent in the first quarter. I think the other thing to touch on is the growth in some of the waterproofing business as well. That's been very attractive for us. And we're seeing a shift there away from new commercial construction also to the repair and replace, which I think is a really underappreciated part of it. When you think of codes that are starting to be written around waterproofing, not just in coastal areas, but all across the country, we're starting to see the renovation of waterproofing become something that's really important to the code writers, but also to the buildings themselves, obviously. So exciting things there.

So we think that drawing conclusions from that, coming into the first of the year, we expect to get off to a decent start to the year, a little bit of pressure on gross margin. We've got higher OpEx in the first quarter, but we are absolutely ready for March, April, May, and the second quarter of the year.

Doug Wardlaw (Research Analyst)

Great. Thank you, guys.

Operator (participant)

Thank you for your question. The next question comes from a line of Trey Grooms, Stephens. Your line is now open.

Siddharth Ramesh (Associate Analyst)

Hey, guys. This is Sid Ramesh on for Trey. Thanks for taking my question. Could you guys talk through the cadence for OpEx? 1Q makes sense, but maybe 2Q onwards. Thanks.

Julian Francis (CEO)

Yeah. I'll add kind of a high-level sort of working theory of what we believe, and then I'll let Carmelo add some color. As we said, we do expect to have higher OpEx in Q1, mainly because we did not winterize the branches as much as we would normally do because of the scarcity of labor and our full belief that we're going to get off to a really good start to the year. Once the season breaks out and we get away from the cold, wet weather into sort of a more normal climate pattern, we'll start to see that. We've continued to invest in what we believe are growth-enhancing initiatives. So we believe that that's still important for us to continue to do.

So as we look at sort of the key initiatives we have, and particularly as we think about Greenfields and M&A, obviously, Greenfields use staff up first before you have any sales. We have to bring the branch managers in. We have to bring the drivers in, the warehouse people, the salespeople. So obviously, OpEx grows ahead of those Greenfields. And obviously, we just announced that we'd sort of committed to around 25 new branches. So there'll be additional OpEx coming in throughout the year as we build out new capabilities there. Then some key initiatives that we want to get done this year. I mean, we're getting really close to achieving the goals that we laid out in Ambition 2025. And we've seen the investments we've made in these initiatives really pay off over the last couple of years.

And so we certainly don't want to dial that back just yet. But I'll let Carmelo add a little bit of color.

Carmelo Carrubba (Interim CFO)

Yeah. I think Julian covered pretty well. I will just add that you were asking about the expected kind of evolution throughout the year, quarter-over-quarter. Of course, after Q1, we expect sales to ramp following the normal seasonal dynamic that we have in our business. So we will see some OPEX leverage in Q2 and Q3. I'd say for the full year, we will probably expect this to remain flat versus what we had in 2023.

Siddharth Ramesh (Associate Analyst)

Got it. Appreciate the color, guys. Thanks.

Operator (participant)

Thank you for your question. The next question comes from a line of Garik Shmois with Loop Capital. Your line is now open.

Garik Shmois (Managing Director)

Oh, hi. Oh, thank you. Just wondering if you could speak to your expectations for residential pricing, recognizing you're anticipating price-cost neutrality. But given there's a price increase in the market for April, wondering how that might influence your assumptions?

Julian Francis (CEO)

Yeah. I mean, we've factored in that price increase, Garick, in terms of what we've forecast going forward. I mean, the big question, I'll tell you, I don't want to be too aggressive in terms of forecasting it out. I mean, we don't know what the execution is going to be like. So we're encouraged by it. We've announced our own price increase on top of the manufacturers. So we certainly expect to recover the cost and hold on to gross margin. But we do believe that it's warranted. We're watching the commercial side closely. That's an area where with a slightly weaker demand that the stocking from the contractor level, volumes at the manufacturers and distributors are likely to be up this year. But we're watching the overall end market demand there. So we're feeling pretty good.

We do think we'll get some benefits in probably the second quarter from inventory profits as we go up and watch our weighted average cost of goods come in. Obviously, that will roll off probably in mid-third quarter. But overall, we're expecting it to be relatively neutral. I'd love to see some opportunity elsewhere. And I think the longer-term piece is we're starting to roll out our new pricing model. And that won't have a lot of impact in the first half of the year, but we hope to and expect to see some impact from that in the second half of the year as well. So hopefully, we'll see some good opportunity to improve on our overall numbers this year as well.

Garik Shmois (Managing Director)

Understood. Thank you very much.

Operator (participant)

Thank you for your question. The next question comes from a line of David Manthey with Baird. Your line is now open.

David Manthey (Senior Research Analyst)

Thank you. Good afternoon. Julian, I was wondering if I could get your view on a couple of industry factors. First, changes in homeowners insurance from replacement value to depreciated cash value, I think that was last year. And then second, E-Verify. And you mentioned labor issues in general, but if you could give us your thoughts on both of those issues.

Julian Francis (CEO)

You snuck in 2 questions there, David, but I'll be happy to do that. So first of all, on the insurance, look, this is part of our theory about our business, is that if you need a roof, you're going to figure out how you get a roof. If the insurance pays a portion of it or it pays all of it, if you need a new roof, you're going to get all of it. And this is the core piece of our model. I think many, many contractors and certainly distribution, we offer financing through a partner. So the ability to get the money to finance a roof one way or another is there. So while I think it puts a little bit of strain on homeowners in terms of cash position, what happens is that it's not the roof that they decide that they're not going to do.

It's other things. So it's less about roofing in that situation. So we don't think ultimately it creates challenges for the roofing business. We think that it's one of the great things about the roofing business that it really is nondiscretionary, and people will find ways. And there is financing out there. Customers' balance sheets, consumer balance sheets are strong, so they're able to borrow. So that's the first part. The second part regarding eVerify, I'd mentioned this on a prior earnings call maybe 2 or 3 quarters ago. We were asked specifically about the rule in Florida. And I'd say we did see an impact in the immediate aftermath of that, not so much on our business, obviously. We follow the verified programs, but we did see some activity in Florida decline. We believe a lot of that came back over probably a 5-6-month period.

We think that in general, the contractors found ways to mitigate some of the losses that you saw in Florida. Broadly, I think we're going to find ways to figure out some of the labor tightness. Fundamentally, I don't believe that the labor challenges we face is necessarily going to be solved by more labor. I think it's got to be driven by efficiencies, productivities. That's really what we're working on for our customers. If we can deliver on time and save them time, if we can do roof loading in those markets that require it, we save them time. We're working very hard to find ways to enable our contractors with better services.

David Manthey (Senior Research Analyst)

Very clear. Thanks, Julian.

Operator (participant)

Thank you for your question. Before we proceed to our next question, as a reminder, please hit star one to ask a question. Our next question comes from a line of David MacGregor with Longbow Research. Your line is now open.

David MacGregor (Managing Partner and Senior Analyst)

Yeah. Good afternoon, everyone, and thanks for taking my question. Julian, I wanted to go back to the new pricing model, which you mentioned in passing to a previous question. And you mentioned it'll be impactful to the second half of the year. Is there any way you can help us in terms of just quantifying how we should think about the expected impact to margins or EBITDA on a run-rate basis going forward? And also, is there any, or how confident are you around the risks associated with implementing a model and it being potentially disruptive on a short-term basis?

Julian Francis (CEO)

David, thank you for the question. It's a great question, and we've worked very hard to mitigate the downside of the new model. We committed during our Ambition 2025 Investor Day presentation to 50 basis points improvement through a better pricing model. We've been really diligent in terms of implementing that. We have begun rollouts in several trial markets to make sure that we're getting the right implementation. We're seeing good traction with our people, which is probably the most important thing in the early rollout. Difficult to pick out exactly the impact we're having on pricing in such a short period of time. But I'm very, very pleased with the fact that the usage of the tool that we are implementing has been very high. The adoption rate is good.

I was also concerned not just about the adoption, but the abandonment rate, so people going away from it. And I think that's been pretty good. It is still early. So we're not going to get through the bulk of the launch until probably through the end of the third quarter. We do expect and we continue to commit to that 50 basis points of run rate. And we do think we'll be seeing that come through. I have no reason to doubt it right now. I've been very pleased with the execution. We've been incredibly diligent about making sure that this isn't disruptive to our people or to the market. It's just our ability to respond better to inbound information.

The scale that we have, the information we have, the data that we have coming in, because of the size, we believe that we're getting much better market intel that we can feed into our model and deliver better results. You won't see a tremendous impact this year, maybe a little bit in the fourth quarter. I would expect us to be sort of up and running the beginning of next year and ramping up. We still are committed to at least 50 basis points of margin improvement for the whole company.

David MacGregor (Managing Partner and Senior Analyst)

Got it. Thanks for that. Good luck.

Julian Francis (CEO)

Appreciate it. Thanks for your questions.

Operator (participant)

Sorry about that. Thank you for your question. There are currently no questions registered. As a reminder, it is star one to ask a question. That concludes the questions for now. I would like to turn the call back over to Mr. Francis for his closing comments.

Julian Francis (CEO)

Thank you, Victoria. Once again, we thank you all for your interest in Beacon. 2023 was a truly inspiring year for our team. We've set records across the board, including record stock prices. I'm thrilled that we continue to be able to deliver on our Ambition 2025 goals. With that, thank you. Good night.

Operator (participant)

That concludes today's call. Thank you for your participation and enjoy the rest of your day.