QXO - NASDAQ

Good afternoon, ladies and gentlemen. Welcome to the Beacon Third Quarter 2023 Earnings Call. My name is Matt, 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. [Operator Instructions] 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 of Capital Markets and Treasurer. Please proceed, Mr. Sanghvi.

Thank you, Matthew. Good afternoon, everybody. And as always, thank you for taking the time to join us on our call today. Julian Francis, Beacon's Chief Executive Officer; and Frank Lonegro, our Chief Financial Officer, will begin 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 2 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 historical or current facts and use the words such as anticipate, estimate, expect, believe and other words of similar meaning. Actual results may differ materially from those indicated by such forward-looking statements, as a result of various important factors, including, but not limited to, those set forth in the Risk Factors section of the company's 2022 Form 10-K. Second, the forward-looking statements contained in this call are based on information, as of today, November 2nd, 2023. 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 this call. Both the press release and the presentation are available on our website at becn.com. Now let's begin with opening remarks from Julian.

Thanks, Binit, and good afternoon, everyone. I'll begin on Slide 4. Once again, Beacon's third quarter results reflect our team's collective ability to execute on our Ambition 2025 strategic plan and the power of our business model and the resiliency of our core markets. Once again, we demonstrated that we have multiple paths to growth and can deliver results in a variety of conditions. The foundation of our end markets are the repair and replacement of exterior weatherproofing products on residential and commercial buildings. This activity is driven primarily by necessity and is much less subject to interest rate changes, consumer sentiment or commercial financing. While core demand for residential housing remains robust, clearly, macroeconomic factors are negatively impacting both new builds and existing for-sale units. Commercial construction activity has been slower than we anticipated at the start of the year and channel destocking has been a larger headwind. Nevertheless, the Beacon team has delivered yet another record quarter, aided by tailwinds from storms, but primarily as a result of executing well on our strategic plan. In the third quarter, we grew daily sales by approximately 9% year-over-year, at the high end of our 7% to 9% expectations. Our gross margin came in at 26%, above our guidance of mid to high 25% range. As our team worked diligently to execute on the August shingle price increase, manage a dynamic non-res market and mitigate product cost increases. In addition, we delivered value to our customers, especially in the essential products and services we provide in storm-impacted areas. We stayed focused on labor productivity and carefully managed our indirect cost inputs in the face of continued inflation. As a result, we achieved record-setting top-line and strong bottom line performance, including a record for quarterly adjusted EBITDA and the highest calendar third quarter EBITDA margin in our history. Operating profits and our active management of working capital, in particular, our inventory continued to generate substantial cash flow, allowing us to deploy capital to both growth initiatives and returns to our shareholders. We continue to execute on the acquisition pipeline with five, since the end of the second quarter. And in October, we added to our industry-leading waterproofing footprint by acquiring Garvin Construction Products. The Garvin acquisition adds strength to our position in the Northeast, adding five locations from the D.C. Metro up to Boston, as we continue to develop and enhance our capabilities in the growing waterproofing category, which we believe like roofing is largely non-discretionary. As discussed in the last earnings call, we also continued returning capital to shareholders. In July, we deployed a little over $800 million to repurchase all of the outstanding preferred shares on top of the $100 million of common share repurchases that we've completed so far this year. Impressively, we have invested nearly $1.1 billion this year in shareholder returns and growth capital, including the highest CapEx in our history, while at the same time maintaining our net debt leverage at less than 2.7x, a true testament to the cash generating ability of our business. At our Investor Day last year, we said that we would unlock the potential of Beacon, and I can confidently say today that we are well on the way to achieving that goal. Now, please turn to Page 5 of the deck. Early last year, we laid out our targets to drive above-market growth, deliver 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 has 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. Our branches are heavily trafficked with large pieces of equipment and heavy materials. Our findings show that newer employees are at greater risk of injuring themselves and we continue to enhance our onboarding practices. One way this manifests itself is that our new employees now wear a Green Hardhat for the first 90 days with us. This signals to teammates that they are in a learning phase and require additional direction and coaching on safe and efficient operations, as well as preparing these employees to be top-notch operators and coaches themselves. In addition to caring for our people, we are caring about the environment to support the communities in which we work and live. During the quarter, our Corporate Social Responsibility Council developed a program to engage all employees in building better for the environment, a program designed to create ownership and accountability and ask our employees to be an active environmental steward at all levels of the organization. We are already generating ideas and buy-in on how we can engage more deeply with local environmental initiatives. And for example, in Canada, we have introduced an EV car program for our sales force. 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 greenfield team continues to execute on our pipeline. Year-to-date, we have opened 19 new branch locations, which enhances our ability to serve new and existing customers. We started the year with plans for at least 15 locations. And each time we add a new location, we are adding sales resources and reducing the average distance and time for us to serve our customers' orders. This enhances our overall value proposition, giving us the opportunity to earn market share. We have now opened 36 new branches since the beginning of last year and will exceed our initial Ambition 2025 goal. These new branches are ramping up ahead of expectations and will contribute nearly $250 million to the top line this year alone. On acquisitions, we discussed the recent purchase of Garvin, providing a delivery footprint for waterproofing products in the Northeast. But we also completed four other acquisitions since the end of the second quarter, including All American Vinyl Siding Supply, S&H Building Materials, Crossroads Roofing Supply, and this week, H&H Roofing Supply. I'm pleased to report that our acquisition portfolio is performing well and delivering better-than-expected results. Since announcing our Ambition 2025 plan, we have acquired 14 companies adding 43 branches, which together are generating around $400 million in annual revenues and like our greenfield strategy, expanding our ability to serve our customers across the country. Our online capability continues to be a clear competitive differentiator for Beacon since we provide the most complete digital offering in the industry. Sales through our online platform deliver approximately 150 basis points better margin compared to offline channels. We continue to expand our offering to serve customers in the ways that brings the customer the most value. Our digital integrations with solutions providers drove an impressive 22% year-over-year increase in digital sales in the third quarter and the highest percentage of residential sales ever at 22%. We have plans to build on our digital leadership by continuing to invest in this area of differentiation. Moving on, for those of you who have listened to our calls in the past, you know that we are enhancing productivity and expanding capacity through our continuous improvement and operational excellence initiatives. Our focus on the bottom quintile branches generated significant contributions to EBITDA in the third quarter. Our disciplined process for diagnosing and addressing issues has been core to our operational improvements the last two years. And I'm pleased to report that the process contributed approximately $10 million of EBITDA year-over-year in the third quarter. As we have discussed on previous calls, we have chosen to operate our branches, as a network in larger MSAs. They operate on a single P&L and work together to provide optimized service to the customer. We have coined this approach, OTC or on time and complete. OTC provides four key benefits: first, improved customer service levels; second, the lower cost to serve; third, the ability to optimize inventory levels; and fourth, it enhances local talent development critical to us achieving our Ambition 2025 goals. These initiatives, combined with our branch revitalization have been key to delivering on our productivity improvements and generating the operating leverage that Frank will discuss shortly. And lastly, I'll talk about how we are creating shareholder value. As we discussed on the last call, we successfully repurchased the entirety of the outstanding preferred shares, reducing the as-converted share count by 9.7 million or 13% of the equity outstanding and eliminated the related cash dividend of $24 million annually. In addition, we continue to execute on our current authorization to repurchase our common stock. Year-to-date through July 31st, we repurchased approximately $100 million or approximately 1.5 million shares. Since the start of Ambition 2025, we have deployed nearly $1.3 billion, reducing the as-converted share count by more than 21%. It is worth repeating the impressive highlights I mentioned in my opening remarks. Even with the purchase of our shares, the investment M&A and the record spending on growth CapEx, we have maintained leverage well within our stated target range of 2x to 3x. 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 has seamlessly stitched it all together to amplify the resiliency of our business model and unlock our potential. Now, I'll pass the call over to Frank to provide a deeper focus on our third quarter results.

Thanks, Julian, and good evening, everyone. Turning to Slide 7. We achieved nearly $2.6 billion in total net sales in the third quarter, up 7%, primarily driven by the impact of acquisitions. Adjusting for one less selling day in the third quarter of this year, net sales increased almost 9%. Organic volumes and slightly higher average selling prices for our products also contributed to the growth. Organic volumes, including those from Greenfields increased approximately 1% to 2%, while overall price contributed less than 1%. Acquisitions, including Coastal Construction Products are performing well and contributed nearly 5% to daily net sales year-over-year. Our backlog continued to convert in the quarter, as we entered the shorter season. While the backlog is slightly lower sequentially, it remains well above historical levels. Residential roofing sales per day were higher by more than 15%. Volume growth in the low double-digit range combined with higher prices, resulting from our diligent execution of the August shingle increase drove the revenue performance. Our resi volumes in the quarter were strong and adjusting for channel restocking, we estimate that we grew at least in line with the market. Non-discretionary residential R&R demand was supported by higher storm activity this year. 2023 storm demand continues to be stronger than our 10-year average planning assumption, more than offsetting new construction headwinds this year. Non-residential roofing sales declined by approximately 6% per day, as the expected destocking by our customers and lengthening project cycles continue to impact volumes in the quarter. That said, even in a period of significant channel destocking and lower volumes, overall non-residential prices were relatively stable sequentially and year-over-year. Complementary sales per day increased 14.5%. The growth was primarily driven by the Coastal acquisition, which drove higher sales of our waterproofing products. Higher overall siding volumes also contributed to the increase. Excluding lumber, overall complementary product prices were stable sequentially. As a reminder, with the addition of Coastal, our complementary product category now has approximately 70% residential and 30% non-residential exposure. Turning to Slide 8. We'll review gross margin and operating expense. Gross margin came in at 26% in the third quarter, nearly matching the year-ago quarter. While line of business mix provided gross margin favorability, overall price/cost was unfavorable by approximately 40 basis points. Higher average selling prices year-over-year were more than offset by higher product costs, especially in the non-residential line of business. Importantly, we surpassed the gross margin guidance we provided on the second quarter call. Efficient execution of the August shingle price increase yielded residential price cost favorability in the quarter. Gross margin performance in the quarter, essentially in line with the prior year quarter, is even more impressive when you consider the significant inventory profits generated in the year-ago period. Adjusted OpEx was $395 million, an increase of $21 million. Adjusted OpEx as a percentage of sales decreased to 15.3% or 20 basis points of leverage improvement versus the prior year quarter. The change in adjusted OpEx was driven primarily by expenses associated with acquired and greenfield branches. Together, these new branches accounted for approximately $30 million of the increase. Inflationary pressures in areas such as wages and benefits and travel and entertainment also contributed to the increase. These increases were offset by lower incentive compensation, selling expenses, bad debt and professional fees. Branch productivity continues to be a focal point and helped drive favorable operating leverage in the third quarter. As you can see, our sales per hour metric matched its highest level indexed back to the first quarter of 2020. Investment in Ambition 2025 initiatives 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 and e-commerce technologies. Notably, our adjusted operating expense to sales ratio reached its second lowest level in 10 years, proof of the team's focus on driving growth and delivering operating efficiency. Turning to Slide 9. Operating cash flow was solid for the third quarter at $167 million, as working capital benefited from continued inventory rightsizing. We had about $80 million less in inventory as compared to the prior year quarter, even with higher product costs, inventory acquired through M&A and new inventory to support greenfields. This is a testament to the collaborative efforts of the field management team and the supply chain organization to efficiently manage working capital in this dynamic environment. Over the past four quarters, we've generated $845 million of operating cash flow, converting nearly 95% of adjusted EBITDA. And we expect solid cash generation in the fourth quarter, as we begin to return to a more seasonal pattern of cash flow. While Julian previously mentioned share repurchases, let me give you some additional details that may be helpful. Common share repurchases in the third quarter were $25 million. They were made early in the quarter through a then existing Rule 10b5-1 plan. The repurchases resulted in the retirement of approximately 300,000 common shares. Net of share issuances for stock-based compensation, we reduced common shares outstanding to 63.2 million on September 30th versus 64.2 million at December 31st. Net debt leverage at the end of the quarter was less than 2.7x trailing 12 months adjusted EBITDA, squarely within the leverage range we laid out at Investor Day. As you know, the sequential tick up in leverage is attributable to the preferred redemption. We continue to have ample capacity to invest in greenfields and acquisitions, as well as upgrading our fleet and facilities to support our customers and employees. We are also continuing to invest to unlock service improvements, future growth and branch productivity. We remain confident in our ability to successfully operate in any environment and capitalize on growth opportunities, as we close out the year. With that, I'll turn the call back to Julian for his closing remarks.

Thanks, Frank. Please turn to Page 11 of the slide materials. Before we head to Q&A, I'd like to update you on our outlook for the remainder of the year. As we look forward, we expect current momentum will continue in the fourth quarter. We expect all three lines of business to show positive growth in the quarter, including our non-residential business, which has trailed all year. For the fourth quarter, we expect sales per day growth to be approximately 11% to 13% year-over-year, in line with our October pacing of approximately 13%. Keep in mind that the fourth quarter of last year included the acquisition of Coastal Construction Products. We expect gross margin to be in the 25.5% range. And remember that the prior year quarter had significant inventory profits. As we enter the winter months, we will balance product availability with our inventory reduction and productivity with growth investments. And importantly, as Frank mentioned, we expect to finish the year with significant cash flow. We are increasing our full-year 2023 adjusted EBITDA guidance in the range of $910 million to $930 million. This increase is an impressive accomplishment for the team, proving that we can navigate in any environment. I will remind you that we had confidence coming into the year that we could grow the top-line, and now we have line of sights to bottom line growth, too. I'm very pleased that we are guiding to full-year 2023 EBITDA that is likely to surpass our record year of 2022. Given our current valuation and our balance sheet strength, we expect to resume our share repurchase program under the remaining authorization granted earlier this year. Our focus remains on the areas within our control, including safety, customer experience, labor productivity and pricing execution. We will continue to deploy capital on initiatives that we expect will result in accelerated growth, including executing on acquisitions and delivering on our greenfield locations, which we now expect to be around 25 branches in 2023. Our results demonstrate that our strategy provides us with the ingredients for us to grow faster than the market. While we still have more to achieve, I'm pleased to say that we expect to exceed the revenue and shareholder return targets that we laid out in our Ambition 2025 plan in this year, a full two years ahead of plan. Looking forward, we plan to continue making investments in our sales organization and our service model, our digital offerings and our private brand categories. We're investing in improving our operations, delivering results today, but also getting ready for the future. We are adding platforms for growth that we expect will result in accelerated performance with targeted acquisitions and our greenfield locations. Our business model is resilient, leveraging predominantly non-discretionary R&R demand and our momentum is strong. We're looking forward to the rest of 2023 and helping our customers to build more. And with that, we will open it up for questions.

[Operator Instructions] The first question is from the line of Ketan Mamtora with BMO. Your line is now open.

Thank you. And congrats on another good quarter. Maybe, Julian, to start with, can you talk to sort of just regional trends this quarter, areas, where you saw things that were better than what you guys were expecting or areas, which were not as strong as you guys were expecting? Thank you.

Sure. Thanks for the question, Ketan. Thanks for the wishes. Yes, I mean, obviously, the storm impacted markets were the strongest markets we had, and that included the California from the rain earlier in the year. We saw that come through. We saw storms through the Front Range, Denver, so Colorado, strong, Texas was strong. And we saw continued strength in the Upper Midwest as well. The weaker markets, I mean, probably the surprise to us in the quarter was the softening in Florida. Obviously, we're seeing a little bit of a lapping of the Hurricane Ian impact. And I think we mentioned on the last call the impact of integration status, and there seems to have been a tightening labor market there that's reduced output in the state as well. So that has slowed down. And generally speaking, the northeast of the country has been final year, but it's not been as strong as some of the other areas. So we are seeing a very regional outlook. But we continue to believe that in general, we're outperforming across the country. We see very good trends in Beacon's performance really across the country. So we're very, very pleased, even in some of the weaker states, where we've seen good momentum with our marketing initiatives and our sales initiatives, greenfield acquisitions, et cetera. So we're really very, very pleased with the performance across the board.

Thank you for your question. The next question is from the line of Joe Ahlersmeyer with Deutsche Bank. Your line is now open.

Yes, thanks. Good evening everybody. Thanks for taking the question. And obviously, congrats on these strong results as well, certainly a favorable environment, but your action is clearly helping you capitalize. My question is on the market from here into next year. Julian, last year, you had offered some thoughts on volumes, market level volumes into next year and what that might mean for pricing. Wondering if you'd like to indicate how you're feeling about pricing and volumes into next year, just given the storm contribution in 2023.

Sure. We'd be happy to do some of that. Obviously, we're still a little ways away from providing guidance into 2024, but I'll give you some sort of thoughts on how we're thinking about it. First of all, we don't believe this is a particularly outstanding year in terms of the macro environment. Obviously, storms have had a positive impact. They are above the 10-year average. But they're not so far above the average that you'd say that it was an extraordinarily high year either. I mean rather there were no hurricanes this year, we're lapping some hurricanes from prior years. So while it was above the 10-year average, it's by no means an extraordinarily strong year. And we've obviously had macro headwinds in some other areas, higher interest rates, contracted destocking. So we believe that the market next year will probably see some retrenchment in some of the markets, but there will be some carryovers from storms as well. So we're still working through some of the plans. But we still believe, overall, it will be a very constructive market in historical terms, sort of a very decent overall residential outlook. We would expect to see solid new home starts. We would expect to continue to see the overall market for repair and replacement of necessary products that we carry to be -- to continue to see some growth in that area probably. I mean, we've been emphasizing the fact that the building stock is what we work on, and the building stock has never gone down. It goes up every year. There are more homes at the end of every year. There are more commercial buildings at the end of every year. And it's always been thus, and that's the market we work on. So we believe the market is going to be constructive. We think we'll see obviously less destocking in the non-res space. And we'll see what next year has in the residential space. It's going to be somewhat dependent on which direction interest rates go. We would expect them to remain in this range. We're not expecting them to tick up, but you'll have to ask Chair Powell to explain that one to you. But overall, we see a constructive environment, Joe. So we think that we will grow top-line next year. That's our going-in assumption right now.

Thanks for all the thoughts.

Thank you for your question. The next question is from the line of Mike Dahl with RBC. Your line is now open.

Thanks for taking my question. Interesting to hear in the near-term, the comments on kind of 4Q including positive growth from all of your business segments, so a transition from your non-res to some form of growth. I was wondering if -- presumably, that was going to be modest, which would imply your resi business is up maybe like high teens. But maybe you can give us a little bit more color, Julian or Frank, on the specifics in terms of growth across your segments for 4Q?

Thanks for the question, Mike. Yes. I mean, I'm glad you picked up on that. Yes. Obviously, we have seen the impact of the inventory that was in the channel dissipate. And so, we did -- we do indeed believe that we will see growth in the non-res channel. So that's important. Obviously, we've got growth in our complementary channel, as we acquire businesses as well. And we see particularly some strength coming in year-over-year on the residential side. Obviously, there's a little bit of a storm. But remember, there was Hurricane Ian had an impact on fourth quarter of last year as well. So we're excited about what we see for the fourth quarter, and I think our guidance would indicate that. So we feel very good. But I'll let Frank add a little bit more detail.

Sure, thanks. Hey, Mike. So October is probably a good place to start. So we gave you the 13% per day. And remember, there's one more selling day this year. So the total revenue is really 16%. But it's important to think about it on a daily basis, we'll give that -- we'll give that day back in December. But on a daily basis, in the month, resi was up double-digits. Commercial was up low singles and complementary was up mid-teens. So I think you're going to see a lot of those same trends. We got to lap Coastal. So obviously, you got to look at the complementary piece, as of November the 1st. But when we step back and look at the guide in -- at an LOB level for Q4, you're right, it's going to be resi up mid-teens. Most of that's going to be volume with a little bit of carryover price from the August increase. Non-res ought to be in that low single-digit range. And complementary, once you lap the Coastal piece ought to be up kind of high singles or low doubles. So it's a really good quarter for us. It's continuing all the trends that we've been seeing lately. And I think the highlight is really seeing all four lines of business turn green for us. It would be the first time all year that we've been able to do that.

Great. Thanks.

Thank you for your question. The next question is from the line of Ryan Merkel with William Blair. Your line is now open.

Hey, thank you. I wanted to ask on non-res, the project cycle times lengthening. What are some of the key drivers there? And any visibility to improvement?

Yes. I'll start and again, let Frank weigh in a little bit. So Ryan, I mean, one is labor. That's continuing to be a challenge too is really around and still some pockets of supply chain challenge, but that's eased considerably. I see the supply chain issues going away. I don't see the labor going away. So I think that some of the challenges in that space. And then the last piece would probably be around uncertainty in terms of financing, how that's going on, so projects coming out of the ground, getting bid and then sort of waiting to see how the interest rate environment evolves. So that's where we probably see it at the high level. Ultimately, the one that's the stickiest there is going to be the labor issue that's going to continue to be a long-term challenge. We see the others will ease, but they'll ease at different times.

Hey, Ryan, other context would be, we mentioned bidding and quoting activity last quarter being up double-digits. We've seen that same trend in this quarter. We are seeing a shift toward smaller projects. So even though the bidding and quoting activity itself is up double-digits, the actual dollar value is up more in the low single-digit range. What that tells us is the projects are more repair and remodel, repair and replace and smaller in size, which I mean, those projects are generally not going to have the same financing side items that Julian mentioned, but larger projects and newer projects are going to have ones that probably have a little bit of financing. So I see it as two phases of the project. One would be the kind of underwriting phase, where you've got to get financing. That's going to take a little bit longer with a little bit more rigor from either the bank or the non-bank lenders. And then the labor pieces really pick up after you've underwritten the project and try to get it through to completion. So I think there's a couple of different phases of that. And I do think to Julian's good point. I mean, those things are going to resolve themselves over time. The interest rates are going to be the driver of the first one and unemployment and other things are going to be the driver of the second one.

Helpful. Thank you.

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

Hi, guys. Doug Wardlaw on for Mike. Just looking at the Ambition 2025 drivers. Going into 2024, if you guys could give a little bit more color and sight on how much some of these initiatives could contribute to top line growth, for example, large account focus and profit. So shift to the digital, bottom quintile branch improvement and such?

Hey, Doug, I think it's -- most of those are going to be more margin related than anything. I mean, the bottom quintile branches in the current quarter, they did a nice job for us. They were worth about $10 million on the bottom line. They certainly grew on a year-over-year basis. They saw gross margin improvement on a year-over-year basis. They saw operating leverage on a year-over-year basis. So that initiative it was continuing to bear fruit. We would continue to expect that to bear fruit next year. From a digital perspective, I think the highlight for us in the quarter was that the residential digital sales were at 22% of total resi sales. That's a high watermark for us. And obviously, there's margin accretion from that. There's generally some basket size improvement as well. It's a little harder to glean out, but I think that will continue to help us. Private label will continue to grow. That grew year-over-year, and obviously, it was margin accretive as well. So I think what you're hearing us say is that these initiatives under the A25 or Ambition 2025 banner are all in flight. They're all working. They're all delivering benefits. The customer experience initiative is helping us drive that. The sales workforce having more boots on the ground is helping us. We're still in the middle of the sort of pricing model software work and procedural work here. So we're looking forward to that one into next year. So I'd say that the things that we have talked about consistently since Investor Day are the things that you'll hear us continue to talk about in the future, and they continue to have plenty of opportunity to be helpful to the P&L.

Yes. Doug, let me reference you back to some of our comments during the prepared remarks. Our Greenfields are going to continue to drive top line. We said that the Greenfields we've opened since we announced Ambition 2025 added around about $250 million to this year's top line. So in terms of total top line next year, obviously, we're going to add some more Greenfields. We're going to have more maturity in those. So that will tick up. We said our acquisitions were performing well, and we've added about $400 million of acquisition-related top line growth. We would expect to see growth coming out of those, as we continue to do it, and we expect to do more acquisitions, as we go through the year. The sales initiatives that we have in place, quite honestly, they've been mixed, and I'll tell you why? In some of the residential areas, we've -- there's been supply constraints. And so, adding additional salespeople doesn't yield more sales because we've been on allocation of product. So we would like to see an unallocated market, where the initiatives that we're driving and the success that we're having with these things can yield even better results. So we remain confident, as I said, that we will continue to drive top line growth next year, and we're focused on driving margin. We haven't yet fully implemented our pricing model that we think can drive margin. And as Frank said, we continue to grow private label. We continue to grow our national accounts business. We continue to grow our digital presence, all of which help with our margin profile. So we feel really good about what the future is. And eventually, we'll get a year, where everything goes our way, and we'll make these numbers look more paltry.

Got it. Thank you guys.

Thank you for your question. The next question is from the line of Trey Grooms with Stephens. Your line is now open.

Hey, good afternoon everyone. Congrats on the quarter. Real quick, I wanted to just dive in on maybe inventory. You guys have done a great job with inventory reduction through the year. And sorry if I missed this, but how are you guys expecting inventory to shake out kind of going into year-end? And it sounds like you're expecting to finish with a pretty strong free cash flow conversion in 4Q. So just wondering kind of how working capital or inventory is going to be playing a role here, as we kind of move into the 3Q to 4Q?

Yes. Hey, Trey, it's Frank. So we've done a really nice job on inventory since the middle of last year. I know you've watched us come down from the peak in Q2 of last year. We were at about $1.55 billion. We're down about $240 or so million from that point. I think you'll see us continue to come down in Q4, more based on seasonality and making sure we don't carry too much through the winter. We've already seen that in October relative to September. We were down a bit on a month-over-month basis. I think if you're trying to handicap where we'll end up in Q4, kind of quarter-over-quarter, it's probably in the $25-ish million range. We're trying to make sure that in the northern part of the country, northern half of the country that we don't care too much through the winter, no reason to do that and use the capital. I think on a cash flow basis, to your good point, I mean, we've got a really good free cash flow year. We're going to have a good Q4 cash flow. You heard Julian talked about some uses of that cash, which is going to be important for us. We want to stay within the -- in the leverage range, but we also want to make sure that we're deploying it to high-value items. And right now, we see those as being Greenfields M&A and CapEx and buybacks.

Perfect. Thanks for the color, Frank. That was exactly what I was looking for. Thank you.

Thank you for your question. The next question is from the line of Kathryn Thompson with Thompson Research Group. Your line is now open.

Hi, thanks for taking my question. Just following-up on the inventory question. Just to clarify, you're having supply chain still some supply constraints, but you've at the same time have done a great job of lowering inventory. What are the categories and areas, where you're seeing the supply constraints? And what -- and is it on the resi side, on the commercial side? And what does that speak to visibility going into the next calendar year? Thank you.

Yes, hey, Kathryn. So the supply chain on the commercial side of the business, so the non-res side of the business is largely fluid. Availability is back to what you would have expected in a kind of a pre-COVID world. I think regionally, where we have both, I'll say, secular growth, a bit of a spring in new housing relative to where it was earlier in the year and storm activity, I mean you're going to be somewhat hand-to-mouth in those geographies, assuming that we don't have an elongated winter, we would expect that to continue to be the case into the carryover of that activity into the first couple of quarters of next year. And then obviously, we'll see how the construction season plays out, as things reopen call it the March-April time frame.

Thank you.

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

Hi, thanks. And congrats on the quarter. Just wanted to ask on price cost. You've done a good job narrowing the spread there, just given the timing of the inventory profits. And as they move through, you also mentioned that you got better-than-expected traction of the August price increase. So just curious as to how to think about price cost in the fourth quarter, as it relates to your margin guide? And when do you expect to fully lap the inventory profits from the last year?

Yes. So the inventory profits from the last year, I mean, we should be at or close to fully lapping those at this juncture. The cost, if you think about it from the August 2022 price increase, let's call it, 90 days after that. We should be at the kind of fully loaded cost at that juncture, so call it, mid to late fourth quarter. And then we're going to have the same dynamic, but at a smaller scale given the differential between the May realization, the August realization this year. So I think on a year-over-year basis, it's probably Q4. We guided to that around 25.5% in the fourth quarter. You've got some normal geographic mix this time of year and seasonality and things like that. And then the cost associated with the August shingle increase from the manufacturers to us. Obviously, that continues to bleed into the net cost, as we go forward into Q4. So I think that probably gives you the context that you're looking for. I mean, it's going to be price cost negative in the fourth quarter because of those items and ought to be mix positive on a year-over-year basis.

Garik, I want to also add in terms of inventory profits. I mean, last year, we were pretty transparent in terms of that we were generating inventory profits in an inflationary period, which is something we felt was good management on our part. We scaled that in the $100 million range of additional profits generated through managing price cost. This year, we don't think, based on what we've seen that we've generated very many inventory profits at all. So when you think about the margin profile, that's really not impacted this year in any way, shape or form by the inventory profits that we did last year. So I think that, that's been a very different environment, one in which we've executed very, very well and demonstrated an ability to continue to deliver great results in an environment, where we didn't have the ability to generate the inventory profits that we did last year.

Understood. Thanks again.

Thank you for your question. The next question is from the line of Philip Ng with Jefferies. Your line is now open.

Hey, guys. Congrats on the strong quarter. Question for Frank. You guys have announced a handful of deals in the last month or two. Can you give a little color in terms of the contribution from a sales and EBITDA standpoint on an annualized basis, your fourth quarter as well as your full-year guide this could kind of help us unpack that. And then I think, Julian, you said you're expecting to grow in 2024. Would that comment more on an organic basis? Or that's inclusive of all the M&A as well for next year?

So I'll start with your question. It includes everything. We expect to continue to grow. I think we've been particularly pleased with our ability on executing our Greenfield strategy. Obviously, we've ramped that up. I think we said we'd be somewhat close to 35 now for the year. Obviously, we said we'd go from 19 to 25 by the end of the year. So we'll get to 40 in two years. Our original Ambition 2025 plan indicated 40 over the four year period. So we're particularly pleased on how that's generating growth. Those branches that we said were open will generate $250 million this year. So we believe we can grow. I don't think we need to do more acquisitions to continue to grow. We think that the market is going to give us the opportunity to earn market share. We think we're executing very well on that. We see that in our numbers. So we believe we can grow. Obviously, the Greenfield strategy is core to that, but acquisitions certainly will help. Now the flip side to that is we'll be lapping coastal, which was the largest one that we've done. So that's not going to provide it. They have to now continue to grow in their markets in order to generate additional growth year-over-year, but we think they can do that as well.

Hey, Phil, so maybe it's helpful for me to dimensionalize Q3 for you a little bit and then talk about Q4 on M&A. So the $114 million of M&A Q3 year-over-year about -- let me just break it down by LOB, because I think it would be helpful for you. There's probably about $25 million of that, that's in the resi side, $10 million or so, just a little less than that on the non-res side. And then predominantly, it's $80 million, $85 million of complementary. The majority of that is Coastal. So obviously, we're going to lap that to Julian's point a second ago. But I think it gives you a little bit of an LOB mix that will be helpful. We've added at least recently, Garvin and H&H that Julian mentioned, some of the other ones that Julian mentioned in his prepared remarks. So you're probably in the $60 million range, $55 million, $60 million range in Q4 on a year-over-year basis for acquisitions.

Okay. Great.

Thank you for your question. The next question is from the line of Marius Morar with

Good evening. Thank you for taking my question. Just a quick one on non-res. Are you seeing any grade down to lower-priced products, let's say, liquid supplied, where you're going to build up growth?

Marius, thanks for the question. No, I don't believe that we're seeing any abnormal shifts towards lower-priced products right now. We think that overall, we obviously came into the year and underestimated the amount of inventory that was at the contractor level. We've seen that. But that was primarily in the product categories of the insulation and the single-ply membranes. Obviously, that's been worked through. We've seen steady improvements in our overall marketplace. And as we said, we now see positive growth in the fourth quarter, as we expected. But we haven't seen any particular shift that I would call notable or noteworthy in terms of the types of products that are being used and certainly not one, where I would say it's clearly trending towards lower priced products.

Marius, the only thing we did see was as the contractors had primary products and destocked, they oftentimes came to us for adhesives or fasteners or cover boards or things like that, that go into items that we don't necessarily track as tightly as we do single-ply and ISO. So we -- that was very consistent with what we've been saying about contractor destocking, but nothing that's sort of a quantum shift in what's happening in the marketplace itself.

Thank you. Appreciate it.

Thank you for your question. The next question is from the line of Truman Patterson with Wolfe Research. Your line is now open.

Hey, good evening guys. Thanks for taking my question. You all have been able to grow your digital sales. I think you said it's 22% of residential now. Is there any way you could put out a target of where you think you could get that percentage to of the segment over time? And then also, what are some of the digital advantages that you all offer that some of your smaller competitors don't replicate or can't offer?

Sure, Truman. Thanks for the question. First of all, if you go back to our Ambition 2025 plan, we indicated that our target for the digital sales through our platform was around 25% of total sales. So if you think about the $9 billion that we said we were kind of targeting 25% of that $9 billion. What we've seen is residential sales to that have continued to grow and have been growing quickly. What we did see during the challenges on the supply chain side in the commercial product lines was an actual decline in that because of the supply chain, we believe, the tightness, people are actually picking up and calling and trying to get a hold of what was actually in inventory, shopping it around. So it was much less certain for people to -- for our contractor customers to come in and be certain that they could get all the products they wanted because things are so tight. So we actually saw a bifurcation in those two categories. So res has continued to grow. I think we also learned that we need to enhance our offering on the digital side in the commercial space, as well as some things that we learned through that whole process that suggest that we need to reinvest in that, and we are doing that. So hopefully, that gives you a sense. We're really targeting north of $2 billion of sales through that channel in our Ambition 2025 target. The longer-term target, look, we continue to see res grow fast. We need to pick it up. I don't see why it can't be north of 40%, 50% over the next five years, 10 years is -- I don't think there's any reason why not and probably beyond that. It's clear by the growth even in the residential side, particularly with integrations and things that are happening on direct connect to contractors that are becoming more sophisticated, that there is a real desire for it to go that way. So where the end game is on this, I mean it's -- I don't know that we know that it's anything less than 100, but it's certainly more than where we are today. In terms of the differentiation, I think that's really important. Look, when you can leverage the type of spend that you need to make across 500-plus locations, you can bring it into our acquisitions quickly. One of the key things that we hear from both acquisition targets and the companies that sell to us, is it something that they could not do. It wasn't a -- hey, we were trying it. It's just the investment is too large to make to scale over one, two, five, 10 branches. It just doesn't justify the return and their customers were demanding it. So it's one of the key -- the key differentiation point, now the smaller customers -- sorry, the smaller competitors that we have just aren't going to do it. When it comes to some of the larger space customers, obviously, they're going to build their digital capabilities. It's incumbent upon us to continue to maintain that lead. We think we have the most complete offering. We think that the learnings that we've had from being in it longer, give us an advantage by giving us greater insight. We've got more data that's going through it. This is something that Beacon is known for in the contractor base, and it's something that particularly the larger contractors value, they want that integration. They want to drive efficiencies in their operations. And they know they can get that with us because we have the most complete offering from quoting, all the way through to payment. So it's really a full service offering that we have. And we believe we've -- we'll continue to build on that lead. And as you rightly said, it's a -- it is a significant differentiator for us, particularly against the smaller competitors, but also, we believe against our larger competitors.

Great. Thank you all.

Thank you for your question. The next question is from the line of David MacGregor with Longbow Research. Your line is now open.

Yes, thanks for squeezing me in. Congratulations on the consistently strong execution. It's very impressive. I wanted to ask you to go back to the non-res and just talk about to what extent you're seeing any change in vendor incentives and anything that may be emerging there, particularly on the non-res side. I'm guessing on the res side, you've had allocation, probably not a lot there, but non-res, so that. Frank, you talked about smaller size of your average transactions in non-res. Can you also talk about just growth in the number of transactions you're seeing what that might look like? Thank you.

So I'll start, then pass it over to Frank for additional comment. No, I don't think we're seeing any different behavior than we've seen over the last couple of years. I think as supply has normalized, I think the manufacturers have taken a prudent approach of making sure that their operations are in good shape obviously during COVID. And the -- I mean, it was really initially caused by the Texas freeze that we had that shut down the chemical manufacturing that caused all the supply chain challenges. That was really a stressful time and put a lot of stress on the supply chain and particularly on the manufacturing side. I think they've done a really nice job working through that. I think that the manufacturers continue to believe that there's a tremendous amount of value, and there's a lot of demand in the marketplace for commercial buildings. Ultimately, as we've said, the bidding and the quoting has been strong. It's just the execution of those buildings and those quoting's it's -- that hasn't come through, as quickly as we hoped. And then obviously, we've been challenged with lots of inventory that was in places in the channel that was not usual. Now whether it was literally sitting on job sites in contractor warehouses, contractors taking out short-term leases on warehouses to bring in as much inventory, as they could. So we're not seeing any particular change in the manufacturer behavior to drive it. I think we've seen very rational behavior in a marketplace that's obviously been tricky to manage.

Yes. David, on the sizing, you might remember that the mix of new construction in non-res sort of ticked up pretty significantly in the late '21, early '22 time period and product began to flow that way and probably not enough flow to the repair and remodel segment. We've obviously seen as the supply chain has become more fluid, we've seen that come back the other way and get to kind of a more normalized maybe 70% to 80% R&R versus maybe 20% to 30%, knew we got a little bit more heavily levered toward new in the last couple of years. But we think it's back to roughly, where it was before as product has slowed that way. As the bidding and quoting activity is a bit of a proxy for the future couple of quarters, again, we've seen the actual activity, the bidding and quoting activity in the low double digits. And in order for that to be low singles on a dollar basis, then the order size has got to be down kind of high singles, low double. So that will give you some order of magnitude. But we see it being very consistent with the destocking coming to an end and more product flowing into the R&R spot.

Thanks very much.

Thank you for your question. The final question is from the line of Stanley Elliott with Stifel. Your line is now open.

Hey, everybody. Thank you, guys for fitting me in. A quick question on the private label side. I mean, is there a way any metrics you guys can share along the same lines of the digital? Just curious there. And then, as it relates to the growth that we've seen in the supply chain constraints, I guess, combined, I guess, with what you guys are doing from an organic space. Just curious kind of how all that blends together, where you are relative to those '25 targets? Thanks.

So on the private label, we had a good quarter. It was up year-over-year, ballpark kind of $250 million or so as a Q3 number for the current year. That will give you kind of a sense of where we are. Adoption rate is relatively stable. We're introducing new products. There's some inflation in there that's consistent with inflation in the branded products. So that's important to us. But we're continuing to push the adoption. As you know, this is more of a margin play than it is a revenue play, and it's a differentiator for our contractors. So continuing to introduce new products in the space becomes really important on a go-forward basis in many of the categories that are more mature in the private label space. We're already selling kind of one out of two that are private label versus branded. But we've got a really good team up against this and got a good pipeline of new products to begin to introduce into that space.

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

Thank you, Matt. First of all, I appreciate everyone attending the call this evening. And I want to go back to the things that we've really said at the beginning of our Ambition 2025 plan that was, we've got multiple paths to growing the top line and multiple paths to ensuring we're delivering higher and higher EBITDA margins. I think in a year that everyone thought coming in would be very much down, we projected that we would continue to grow, and we've demonstrated our ability to do that. Despite some obvious headwinds, I mean, interest rate increases, contractor inventory levels, inflation, labor availability and number of headwinds that we've seen. Obviously, we've had some tailwinds. Storms have certainly been there. But as I said at the outset, our ability to execute in multiple different environments is coming through. That's because we have a resilient business model and a great marketplace with non-discretionary products that people are going to need. They are going to replace roofs. They're going to replace their waterproofing when they need to. And I think that, that's a critical element of our overall plan. Obviously, we are executing very, very well. I want to thank almost 8,000 team members for their continued work and dedication to the cause, and it's been a dynamic environment and a tricky one to manage. And I wish all of them and all of you on the call today, the best for the remainder of the year and also the holiday season. So again, thank you for attending.