Good afternoon, ladies and gentlemen, and welcome to the Beacon Third Quarter 2021 Earnings Conference Call. My name is Nye and I will be your coordinator for today. [Operator Instructions]. As a reminder, this conference call is being recorded for replay purposes. This call will contain forward-looking statements, including statements about the company's plans and objectives and future economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts and often use words such as anticipate, estimate, expect, believe, will likely result, outlook, project and other words and expressions of similar meaning. Forward-looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore, actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including, but not limited to, those set forth in the Risk Factors section of the company's latest Form 10-K. These forward-looking statements fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, regarding future events and the future financial performance of the company, including the company's financial outlook. The forward-looking statements contained in this call are based on information as of today, August 5, 2021. And except as required by law, the company undertakes no obligation to update or revise any of the forward-looking statements. Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release. I would now like to turn the call over to Mr. Binit Sanghvi, Head of Investor Relations. Please proceed, Mr. Sanghvi.

Thank you, Nye. Good afternoon, and welcome to our fiscal third quarter 2021 earnings call. With me on the call today are Julian Francis, President and CEO; and Frank Lonegro, Chief Financial Officer. Our prepared remarks will correspond with the slide deck posted to the Investor Relations section of Beacon's website. After management's prepared remarks, there will be a question-and-answer session. I will now turn the call over to Julian.

Thanks, Binit. Our fiscal third quarter results are outstanding. Our team delivered record quarterly sales, net income and adjusted EBITDA. Sales increased approximately 21% as revenue grew across all 3 product categories. Adjusted EBITDA was more than 75% higher on significant gross margin expansion and operating cost leverage, and we delivered 12.3% adjusted EBITDA margin for the quarter. We continue to be thrilled with our team's execution. Beacon's performance is a result of every employee's hard work serving customers and living our values. I will begin on Page 4 of the slide materials and discuss the key highlights from our third quarter continuing results. Demand trends remain strong. Residential roofing sales increased 18% compared to the third quarter last year. New construction demand continued to be strong. The positive housing market fundamentals also provided a tailwind for our team to drive complementary product sales up 35%. In addition, we grew nonresidential sales by 16% compared to the COVID-impacted prior year period. Our price execution across all product categories delivered strong gross margin improvement, a critical focus area for us over the last 12 months. We continue to see inflationary pressure across most product categories. In this environment, it's critically important to stay ahead of the cost curve with cost increases across a number of product categories, 60 days apart, even slight delays in implementation can quickly erode profitability. So our focus has been on driving great execution at the branch level. Third quarter gross margins expanded to 27.6%. We expect to see cost pressure to continue but are confident that we can execute to capture additional pricing to offset the headwinds. Our actions in fiscal '21 have positioned us for growth. These include creating significant financial flexibility, assembling a new executive leadership team, optimizing our inventory levels and investing in…

Thanks, Julian, and good evening, everyone. Turning to Slide 7. We achieved nearly $1.9 billion in total net sales in the third quarter, driven by strong sales and price execution across all 3 product categories. Roughly half of our 21% growth came from volumes as demand for our products continue to benefit residential tailwinds as well as significant growth in our nonresidential end markets. Residential roofing sales were up over 18% and robust demand from our new construction customers. Our largest national homebuilders were up more than 40% as the housing fundamentals continue to drive new housing starts. We also saw regional strength in repair and remodeling as homeowners continue to take advantage of rising home equity values, low interest rates and a number of secular trends, namely work from home, millennial household formation and deurbanization. The April and June shingle price increases also contributed to the residential revenue growth. Major storm-related activity was down year-over-year, impacting our volumes mainly in the Midwestern states. We estimate that our residential shingle volumes were down approximately 10 percentage points during the third quarter due to lower wind and hail storm activity as compared to the prior year. Nonresidential roofing sales were up more than 16% compared against the COVID shutdown trough in the year ago period. We remain optimistic that nonresidential activity will continue to improve. Complementary product sales increased 35% in the third quarter. Keep in mind that our complementary product category has approximately 80% residential and 20% nonresidential exposure. Complementary benefits from the residential market tailwinds, including demand for key products such as siding, lumber, windows and doors. Siding sales, for example, were up more than 30% in the third quarter, and lumber had substantial price growth year-over-year. Turning to Slide 8, we'll review gross margins. Gross margin improved to…

Thanks, Frank. Before we turn the call over to question and answers, I want to update our fourth quarter outlook. Please reference Page 11 of the slide materials. As we look to the fourth quarter, demand remained solid. For our fiscal fourth quarter ending in September, we expect total sales growth in the mid-single-digit range. Keep in mind that this guidance is within the context of an extremely strong fiscal fourth quarter in 2020 that also benefited from a snapback in demand caused by the severe COVID-related shutdowns. It's also worth noting, we expect storm demand this quarter to be meaningfully below the prior year quarter that included the impact of wind storms and hurricane-related demand. Last week, we announced an early September price increase that we expect to implement with the same rigor as our prior increases. Our fourth quarter margins will reflect the positive contribution from the announced increases over the last 3 quarters. As a result, we expect a meaningful year-to-year gross margin increase of approximately 180 basis points to around 26.9%. We expect fourth quarter adjusted EBITDA to be between $190 million and $205 million, bringing the fiscal 2021 full year adjusted EBITDA to between $635 million and $650 million. This is a substantial increase from the outlook we provided on our Q3 call and for the full year represents more than 60% improvement over fiscal '20. While uncertainties continue to exist, including the ongoing threat of COVID, this outlook reflects our expectations for a combination of higher sales, gross margin expansion and continued cost discipline. Looking further out, we continue to have strong fundamentals in both new construction and the replacement market. In new home construction, the well-documented underbuilding of the last decade has created an undersupply of housing in the millions of units. Our…

[Operator Instructions]. The first question is from Kathryn Thompson with TRG.

In terms of the outlook, I know you gave it for your Q4, but thinking beyond that with the gross margin expansion guidance that you give and outlook beyond it, how much of that expansion is from pricing actions from 2020 versus '21? And how much of it is just being able to focus and stick to your knitting now that you're really exteriors-focused firm or other factors that we should take into consideration like in a mix or an easement of some of the headwinds that we've seen from supply chain?

Thanks for the question, Kathryn. We've been very pleased, obviously, with the overall progress we've made. And I think if you go back 2 years, we said we thought there was margin compression due to some of the impact of a declining market and pressures from asphalt. I mean we've seen obviously that turn. I mean we've seen this demand-related inflation come in, and we've shown our ability to execute really strongly in the marketplace to recover those cost increases that we've seen. I think as we go forward, we would anticipate that this repair in our margin is certainly somewhat sustainable. Certainly, over a period of time, we would expect things to fluctuate plus or minus depending on timing. But we certainly feel that the value we generate from the services we provide are incredibly powerful for us to realize gross margin and pricing. In terms of the overall sort of mix, as you'd highlighted, I think when you think about being able to stick to our knitting, as you said, I think that is incredibly valuable for us. I also think initiatives that we put in place, including private label, are ways for us to continue to expand. We talked a little bit about my prepared remarks. The investment we've put into pricing, I think that's another area where we see opportunity to continue to refine our local market initiatives and capture value in the marketplace.

Kathryn, the only two things I'd add would be - digital, obviously, is a nice play for us. It's got a little bit of margin enhancement there. And then the work that we're doing on pricing broadly but also specifically to the underperforming branches has been really helpful this year as well. And it's - those types of things are more structural in nature and not transitory depending on which way the pricing happens to be going at any given time.

The next question is from Mike Dahl with RBC Capital Markets.

I wanted to ask around inventory. I know you said it is kind of relative to the COVID-impacted period but year prior. At the same time, you are seeing sequential increases, and I think there's a comment in the release on the slides about investing in inventory. It's been a tough environment to do that in. So I just wanted to ask about kind of how you're thinking about your inventory levels today and where they stand relative to normal. And if you're at a point where given the - some potential slowdown in volumes, given the tough comp in the upcoming quarter, will you look to continue to rebuild part levels?

Thanks for the question, Mike. I think in Frank's prepared remarks, he commented that third quarter inventory tends to be our annual peak. Obviously, in this environment, when we've got an allocated situation on some product lines, our bias has been to ensuring that we've got the product availability to serve our customers. That's been very important. It's been something that we've really focused on, and we think that we've continued to take the opportunity to rebuild and replenish where we can. Certainly, on an annual basis, you would expect it to fluctuate with the seasonality of the businesses we're in. But we're also committed, as a leadership team, to ensure that we're managing it at the right levels on an ongoing basis. I think just in this environment, I would tell you that certainly my bias and Frank's bias has been to err on the side of having more rather than less inventory, given the current situation, the demand environment and the supply chain disruptions, quite frankly. I mean the supply chain disruptions on the nonres side have been pretty substantial, and we act as a little bit of a shock absorber for our customers. And so having a little bit more inventory during that period of time helps us do that and helps us be a better supplier to our customers.

The next question is from Ketan Mamtora with BMO Capital Markets.

Congrats on a strong quarter. Maybe going back to the branch performance improvement that you've talked about, you are seeing more of that and you're in Year 2 and now you're expecting over $40 million versus the prior estimate. Can you highlight 1 or 2 things where you are seeing kind of more opportunity as you work through that? And as you look ahead, kind of talk about what is the further room for improvement on that side?

Ketan, it's Frank. Thanks very much for the question. When we turn the page into 2021, we mentioned that we thought there was a lot of room this year on gross margin and pricing and sales, and that's actually bearing fruit. It's coming through exactly the way that we thought it was going to come through, which obviously creates some operating expense leverage there as well. When we stand back and look at our analytical charts inside the company and we look at the performance of the underperforming branches relative to the remaining branches, we still see a huge opportunity really across the P&L. Whether it's sales, gross margin or OpEx, there is still a ton of opportunity there. Julian would tell you that in 2 years, we've kind of already hit its initial target, and that just means we're going to raise the bar. We're going to continue to work on this initiative, and we're going to expand it to the company in other ways. For example, a large branch may be performing but may not be performing at the potential that we think it has. So we're going to run that same diagnostic tool across the company, and we see tons of value still coming.

The next question is from Phil Ng with Jefferies.

Congrats on a really good quarter and really strong execution. Frank, I guess, your guidance for the fourth quarter for mid-single-digit sales growth, that's a noticeable deceleration. Can you talk about if you saw any pull forward in 3Q? Just given the strength you're seeing in nonres and complementary, I appreciate you got a tough comp in resi, I would have thought the demand profile might have been a little better. And it would be helpful to kind of parse out how much pricing contributed to 3Q.

Sure thing. Look, I think in terms of the Q4 guide, the mid-single digits that you mentioned, it's a strong comp as one of your peers, I mentioned that a few moments ago. July finished up consistent with the guide that we gave. What I think you're going to see in the quarter, if you want to parse it out, I think the complementary business will be the higher growth and then nonres and res will be in that kind of low to mid-single-digit range. I don't necessarily see pull forward. I see more elongation. I mean you heard in Julian's remarks talking about project life cycle expansion. You're hearing that from a number of the different homebuilders. We're seeing it in our business as well. So we don't see this as any question around demand. It's just the ability to get things done. And remember that it's not just shingles as an example, that can get in the way of a project completion. It could be cabinets or paint or carpet or anything like that or it could be fasteners in a particular project instead of the actual membrane itself. So there's a lot happening in those supply chains right now. As Julian mentioned, we're going to err on the side of inventory. The storm hangover that Julian mentioned is real. We saw that. We called it out in the quarter. It'd be great if we could have had a strong hail season, we didn't. It would be nice if we get a nice hurricane season as well. So we feel good about the quarter, and we feel good about the multiyear demand run that you heard Julian talk about. In your volume question around the quarter, I think that's an important question. What we said was that the 21% growth, about half is volume and half is price in the aggregate. If you break it down by line of business, the resi side was more price than volume, and the nonres and the complementary side were more volume than price, all positive across the board, just inflections there that I thought you might enjoy having some color on.

The next question is from Trey Grooms with Stephens.

This is actually Noah Merkousko on for Trey Grooms. So again, I just want to echo, congrats on a strong quarter. Very impressive top line, really seeing growth across all segments, but I wanted to dig a little bit more in the nonres side. We've seen a lot of leading indicators improve, and it sounds like some of that volume is finally starting to come through. So I was wondering if you could break down sort of if you're seeing more repair and replacement activity or new construction, and then just kind of your thoughts on that end market demand as we go into next year.

Thanks for the question. So to start with, just to frame what we're seeing in the nonresidential construction market, and I'll pass it over to Frank. The supply chain disruptions that started early in the year and to some degree, were triggered by the weather events that hit Texas back in February where there were a lot of plant shutdowns on the supply chain have been real, and they've been continuing. We've had a lot of disruption in terms of project life cycle. The ability to get one product may be just fine, but the ability to get a full set of products that you can use to complete a job has been much more challenging. And so while we've seen the overall demand improve and the ability to get product on to a job and completed and off and then restock in a reasonable time has been a real challenge for us. And again, this goes back to what we said regarding the stocking of inventory and how we act as a little bit of a shock absorber. Trying to assemble a full job packet has been a real challenge. So we've not seen any specific area sort of pickup. New is - the new construction side is clearly improving. I referenced in my prepared remarks, the ABI, the Architectural Billing Index, which is what we follow, and that's clearly an indicator of future demand for new construction generally. And that has been improving quite markedly. So I think that's good that we're starting to see bids coming through. And on the repair and replacement side, I think we're seeing perhaps a little bit of growth overall, but they're sector-specific. So I think on government-related work, schools, hospitals and then warehouses, we've seen continued demand, and that's been very positive. In some of the retail and office, we're seeing a little bit less and a little bit more caution. So we continue to see that. And I think I said that on the last call where sector-specific markets are improving probably more rapidly than some others. So that's kind of the overall backdrop, I'll let Frank add anything that he feels is necessary.

Yes, but you covered it great, Julian. Only, maybe, data point would be, if you look at kind of the year-over-year by geography, you'd probably see some additional growth in areas that were the hardest hit last year in COVID that are beginning to reopen.

The next question is from Truman Patterson with Wolfe Research.

Just wanted to understand on your residential sales volumes, it sounds like they were up mid-, high single digits in the quarter. I'm just hoping you can discuss how much incremental inventory load-in you all had during the quarter and really trying to balance this with industry ARMA shipments as well? Anything - any color you can give us there would be helpful.

Sure, Truman. Yes, good question on ARMA. We're in this allocated environment, as I'm sure you all are very familiar with. So we bought right in line with ARMA, as you would expect us to. No one is saying no to their allocation these days. They want to make sure, like we do, that we all have inventory when our customers need it. We still see the strength in demand. We did sell less than ARMA, which is obviously one of the reasons why we built the inventory. The inventory is really a combination of both units and price, given the manufacturers' cost increases pass through to us. If you look at us on a 2-year basis, which I think is an important thing to do, remember that last year, 2020, we monetized inventory pretty significantly. And what you generally monetize are the things that move the quickest. And in our world, that generally is shingles. So if you look at Q3 '20 against Q3 '19, the inventory, again, we were down about 25% in terms of units. If you look at us this year against last year, we're up about 30% in units. But again, you've got to look at it on a bit of a longer-term view to get a good understanding of where we are from an inventory perspective.

Okay. Okay. Yes, that's exactly what I was trying to parse out there. So it seems like sales out the door kind of in line with the market. Yes, that was it.

I couldn't tell whether you were making a statement or asking the question, honestly, Truman. But look, I told you, we sold less than ARMA and we built the inventory. We feel like we're in a really good position given where things are, especially in the inflationary environment. We kind of expected some hail storms, didn't get it. We didn't expect necessarily a late cycle price increase, but now we're delighted to have some inventory to be able to sell it into the market at a market price at a lower cost. So we feel like we're in good shape there.

The next question is from Garik Shmois with Loop Capital.

Just given the balance sheet and the significantly improved cash position and you spent the last two years delevering and focusing very strongly in operations. You touched on this a little bit. On the M&A side, you're starting to kind of sniff around a little bit more than you have in the recent past. So just, Julian, Frank, if you guys can provide maybe a little bit more on what you're looking at from a high level and what the opportunity set is there.

Thanks for the question, Garik. Yes. Obviously, we've said we would be absent from the market while we were fixing our balance sheet. And now that we've done that, we feel that we've got the company in a great spot. We're executing at a very high level at the local - at the branch level. The teams really come together. We can now turn our focus back to real opportunities in the marketplace to grow. The way we're framing it is the way we framed our strategy. We're going to continue to focus on the core business. We're going to continue to be incredibly disciplined with shareholders' money, and we're going to look at great opportunities to continue to grow. So it's really about tuck-ins. It's really about local markets position and how we can add and strengthen to our position on a local level. That's really where the M&A opportunity lies for us inside of our core business. Obviously, there's - in a market like this where valuations have been elevated, we're going to have to be incredibly disciplined and pick the right markets, pick the right targets where we think we can bring significant value. The work we've done to improve the business over the last several - 2 years is really going to reap benefits as we look at acquisition targets. We understand now what value we can bring. We can bring our digital. We can bring our sales knowledge. We can bring our pricing expertise. We can connect branches - new branches we've acquired into our OTCs. And so we really feel that we've got a great new thesis that we can deploy now in really value-accretive ways through M&A. And obviously, I mean, the big thing here is we fix the balance sheet. We've got a great business. It's performing very well. We're going to generate a ton of cash. And so I think that our shareholders want to really - for us to deploy that in ways that create value for them, and that's how we're coming at it.

The next question is from Keith Hughes with Truist.

Just a question on residential. You talked about some of the comps in the prior year. If we go back to fiscal fourth quarter '20, what were units up year-over-year in that period that you're going to be comping against?

Let me ask a clarifying question, Keith. Are you saying what was our growth in 2020 over 2019 in our fourth quarter?

Yes. Adjusted some of your numbers. I have a 6% revenue growth for residential products in the fourth quarter of '20 over '19. I don't know what the unit number is. Can you talk about the unit number?

Yes. My recollection is we sold 8 million shingles in the fourth quarter of last year. I'm ballparking you, by the way, which was up pretty significantly, call it, maybe 600,000 units or so on a year-over-year basis. I'm going '20 against '19. And that's the asphalt shingles, which is a component of residential.

Right. So what's the - I'm not following.

If you think about the market as a whole, Keith, last year, I mean, when you look at ARMA shipment, some shipments, I think, last year were in the fourth - our fiscal fourth quarter '20, we're around 44-plus million squares. I mean - I think that was the biggest shipping quarter, and I think there was - the shipments from the manufacturers was pretty much everything they could produce. I think there was also delevering of their inventory. I think that the channel was also delevering industry. Demand was so high at this point last year. I think we exited the quarter with pretty much everyone out of inventory. So I think the situation was such a strong snapback and the demand was so high. But literally, there was all - everything shipped from the manufacturers. I think they shipped all their inventory, and I think that we - the channel also shipped all of inventory. So it's difficult to repeat that because you can't get the inventory shipments because we've been - everyone has been struggling to get the inventory as well. So it's a really difficult pump but it's also so difficult to pass it out into the different elements that I think you're looking for.

Your 8%, if you just - if you want clarity on that, your 8% number that you mentioned is correct against - Q4 '20 against Q4 '19 asphalt shingle units.

The next question is from Ryan Merkel with William Blair.

Just want to go back to the July commentary. So am I right that residential volumes are negative year-over-year, and that's your guide? And if I have that right, what's driving that? Is it lower storm demand? And it sounds like there's some elongated projects.

Yes. I mean that's essentially what you just said is what we said in terms of putting the guide together for Q4.

Okay. And I guess what turns the volumes back positive again because the compares keep getting harder in the next couple of quarters?

Yes, I think that's fair. I mean, obviously, continuing to see new housing construction stay strong. We believe the demand is there to support that. The supply chains will get back into equilibrium over time. The R&R piece of the equation, I think, will continue to benefit from the housing cycle back in the early 2000s that you heard Julian mention in his prepared remarks. So I think there's still a lot there, but the comps do get harder. And I do think the pricing environment is going to continue to be conducive for us to pass things through. Is it going to be 5 price increases in 13 months? Probably not, but we're going to continue to leverage that. So we feel like we're in good shape. It - when I look at Q4 and you look at the homebuilder commentary and other's commentary, they just talk about the difficulty in getting projects done in as rapid a fashion as they've been used to. That ultimately will solve itself as the supply chains continue to get back to balance.

And Ryan, I mean I'll add to this. I mean our business is not asphalt shingles solely. We are a supplier of a lot of different products, and there's multiple. I mean there's - as we said, the storms, well, this year are below kind of a 5-, 10-year average. So we would expect to see that to return to normal. We think that as the supply chain disruptions we've seen on the commercial side of the business go away, as that gets repaired, we can see more growth in that area of the business. Our siding business and our complementary business, as Frank said, has been strong. We continue to see that pacing into new residential construction that we see growth for, and we see a long runway of growth in that area. And the other piece of it that we hinted at, that I have mentioned, I mean, the replacement cycle on roofing is about 20 years. That's, give or take - if you go back 20 years and you look at what the builds were, we're entering a really positive cyclical period of strength in the 20-year-old groups. And I think that what we're going to see is as that starts to filter into the marketplace, we've got the 1.5 million, 2 million starts single-family homes back in the 2001 to 2005 time period. So I think we're going to see continued growth in the repair and replacement market. I just think that we've got a really good cycle going here. We've got on the building of new homes. We've got a great replacement cycle. We've got an easing supply chain challenge on the commercial side. And we've got weather-related demand that we think is slightly depressed this year and will return to normal over a period of time. So we're pretty bullish on the future for all of our businesses right now.

The next question is from Kevin Hocevar with Northcoast Research.

A quick question on the guidance. In most years, the fiscal fourth quarter is the strongest quarter of the year. And even when it's not, it's pretty close to the third quarter. But the guidance, it implies a pretty large step-down in EBITDA from the third quarter to the fourth quarter. So you earned $229 million in the third quarter, guidance of $190 million to $205 million in the fourth. So I guess that's a bigger step-down than we usually see from the June to the September quarter. So I'm curious on your thoughts on why that would be the case.

Normal seasonality has to probably look at pre-COVID, not post-COVID, at least, for a few quarters for us. But I think if you look at the sales guide that we gave, you're going to see - normally, you would see weather in geography are quite helpful in July, August and September relative to April, May and June. I think the COVID comps from the prior year and the hail differences in Q3 are certainly impacting that normal one, I think about more of a flat to down slightly on a quarter-over-quarter basis with less resi mix. So you're going to lose a little bit on the top line. The gross margin that Julian quoted in his guidance would tell you that you're going to lose a little bit on gross margin. We're going to fight tooth and nail for every dollar we can get on the gross margin line, which hopefully can help us a little bit there. And then on the OpEx side, again, we've got some work to do. We had a hard comp last year in the mid-16s. If you do your math on the guide there, it's in the mid-17s. We're going to continue to look for every dollar there as well. So something with a 2 handle feels pretty good, given the environment that we're in and we're going to continue to scratch for every dollar.

The next question is from David MacGregor with Longbow Research.

Congratulations on all the progress. I guess how are you thinking about your free cash flow conversion in the context of your 2021 guidance? And just from a - I guess, from an earnings standpoint, as you think through in 2022, where is the lowest hanging fruit now in terms of further cost reductions? I mean you comped so much already, but I'm just trying to get a sense of from this point forward, how we should be thinking about what are the most accessible opportunities from further - from the standpoint of further cost reductions?

So you really asked two different questions in there. Let us tackle both of them. The first one on free cash flow and then the other one on cost reductions. The business, as you have seen in the last 6 or so quarters has a tremendous ability to generate significant free cash flow. You've heard us talk about kind of a long-term 60% free cash flow conversion of EBITDA, that assumes a bit of neutrality in net working capital, as you've seen on the inventory build side. It hasn't necessarily been neutral, given the environment that we're in. It just delays the realization of some of that free cash flow. We still feel good about that long-term 60% type of a number may even be a little bit better, given the fact that we've done the refinancing. You heard me mention the lower cash interest costs going forward. So we feel good about that one. But we also have to be attentive to our customers and make sure that we have the inventory that they need in periods of demand. In terms of the OpEx, I'd say it's across the board. The incremental margins that we're generating right now, I think we've thrown up 240s in the last couple of quarters and 30 this quarter. So we're continuing to leverage the fixed cost and being judicious about adding variable costs in as volumes are there. I think we did a good job of that this quarter, adding less than 6% headcount on 10% volume, so that feels pretty good. I'd say it's more around leveraging what we have and making sure that we minimize the cost of growth.

And I'll add, David, that as - we've learned so much about running the company as we've come through COVID and had to face crisis and make tough decisions going through that. We see tremendous benefit from the network of branches that we have and really optimize them, taking the learning once and deploying 450x across our network is a huge opportunity for us. So we've focused because we certainly felt that we had to on the lowest performing quintile of branches that we have. But as Frank hinted to, I mean we're starting to broaden that perspective. There's no branch we think can't get better. We're looking at all elements of how we can deploy this new learning that we've had. What does a great branch look like going forward? How can we benchmark across our own network and make sure, like I said, we're deploying it once? And so we think there's still a lot of runway in terms of operational excellence at the company. And we think that both deploying that through our branches, but also leveraging some of the capabilities we have in terms of the OTC. We don't think we're anywhere near mature on that approach to how we leverage the marketplace either. So we see, again, a lot of opportunity to continue to leverage this. We also want to make sure that we're managing the cost side of it carefully as we do this, and we'll continue to be disciplined in how we do that.

That being the case, is $40 million a year from the OTC networks and the - or from the - I guess, some of these underperforming branches, you upgraded that number from $30 million to $40 million this quarter, is that a sustainable rate? Is that how we should be thinking about 2022 as kind of a $40 million rate? Or was there something that made this year kind of special that might be a little bit less than that going forward?

Yes. We're going to look at this on an annual basis. We delivered over 20 in 2020. We then kind of restacked the branches based on their performance in 2020, created the new goal, which we thought was going to be about the same as 2020. We've now upped that twice from 20 to 30 and 30 to 40. We're going to continue to push through the finish line and do everything we can. The recipe of success in the underperforming branches is going to be different every year. The population is going to be different every year. I think the important thing is it's an enduring strategy. There will always be a set of branches which are kind of lower on the totem pole, so to speak. And we believe that we can get more operating profit out of those branches. Again, whether it's going to be a combination of doing more on the sales side, it could be a product mix change, it could be something on the gross margin side, the OpEx side, there's going to be value every year. And it's something that we're going to reset every time we come out with our final year earnings and give you guidance for the following year. We're going to set targets. We're going to manage it just as tightly as we have been that has delivered the value that you've seen so far.

The next question is from Deepa Raghavan with Wells Fargo.

Strong positive price-cost spread here, Julian, but is there a meaningful difference across residential or nonresidential businesses? That's one. Are you able to push pricing in nonres as strongly as in resi, just given that nonres is witnessing nascent recovery?

Thanks for the question, Deepa. We've seen progress across all of our categories. We've seen price increases across all of our categories as well. But we've seen - we've certainly executed very well across every single category. In terms - it's difficult to quantify it on a case-by-case basis from a product line just because the timing of each of them, the timing that the jobs ship on commercial jobs is a lot different from when they're priced. So there's a little bit more noise on the commercial side, but I've been incredibly pleased and I think our execution over the last 6 months or so has gotten better and better across all of these categories.

Yes, Deepa, I think if you look at the positive 390 price-cost in the quarter that we mentioned in the prepared remarks, you should view resi as being more favorable than the corporate average on price-cost in both the commercial nonres as well as the complementary. While both nicely positive on price/cost are just less than the residential and less than the corporate average, but all of that blends together to the 390 that you heard.

Got it. No, that's helpful. How long do you think this inflationary situation continues?

I think you're better off asking the manufacturers than you are us right now on this - on that question, Deepa. I think that the market remains good. Clearly, we are seeing a settling out. And I think that the supply chain disruptions that we've spoken about likely abate over a period of time. So I think that we've had a good run here. And I think that we continue to see opportunities. But we continue to see opportunities to maximize our pricing dynamics across the business without necessarily getting into price increases from the manufacturers either. We think we've got - we're building capabilities, we're building models around this. As I said, we're really focused on executing at the branch level, making sure that we get paid for the value we provide, and we remain competitive in the marketplace. We deal every day at a local level with customers coming in who have the ability to make a choice of where they buy the product from. And we want to make sure that we are that choice and that we get paid appropriately for the services we provide.

Deepa, we haven't seen the best out of nonresidential clearly. That's still coming back. On the residential side, when you think about the sheer number of homes that are going to be required over the next 5 to 10 years for all the household formation that's believed to be coming, combined with the underinvestment in that area over the last 10 or 15 years, it gives us a real good feeling for a multiyear play. We look at the homebuilders and their base price increases year-over-year and the new order price is higher than the current closing price, which tells us there's a fundamental support there as we begin to receive price increases from the manufacturer that gives us the confidence that we'll be able to pass that through. And the economy is still not clicking on all cylinders. So we feel like we're not yet out of the tougher part of COVID and look forward to the opportunity to run on all cylinders.

The next question is from Michael Rehaut with Morgan with JPMorgan.

This is Maggie on for Mike. On 3Q gross margins, you pointed to timing benefits and cost-effective procurement as being tailwinds. Can you talk about how long those benefits last?

Well, sure. I mean we've mentioned a couple of things in the quarter that were helpful on the price-cost side. We mentioned that there was a little bit of a headwind on mix just given the differential growth rates and gross margin rates there. When you look at 2 price increases in the quarter, there were certainly some timing benefits and inventory profits, so to speak. But to me, when you look at Q4, we're guiding to 180 basis points of gross margin benefit. I think that the price-cost will be higher than that and the mix will be somewhat negative. So that will tell you that we continue to see positivity in price-cost in Q4.

The next question is from David Manthey with R. W. Baird.

Yes. I'll take my questions off-line, guys. Thanks.

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

Thank you, Nye. And thank you, everyone, for joining this evening. We certainly appreciate your support. And really the last statement I would make is that we hope that the employees, our customers, our suppliers and all the investors are staying safe at this time. It's clearly a challenging time still. We're incredibly proud of the results in our fiscal third quarter. And again, I want to thank all of our employees for delivering such great results for the company. Thank you all and good night.

That concludes the Beacon Third Quarter 2021 Earnings Conference Call. Enjoy the rest of your day.