QXO, Inc. Q3 FY2024 earnings call

• Beacon's third quarter results demonstrate resilience, with multiple paths to top-line growth and margin expansion. End markets are underpinned by non-discretionary repair and replacement of exterior weatherproofing products. - Grew daily sales by nearly 6% Y/Y driven by acquisitions. Gross margin was 26.3% above prior guidance due to disciplined margin management. - Took action to lower operating expenses and aligned costs with market conditions, achieving record top-line and adjusted EBITDA. - Acquired 7 companies since the end of the second quarter, including Passaic Metal and Building Supplies. - Focused on strategic initiatives like building a winning culture, driving above-market growth, enhancing margins through targeted initiatives, improving productivity/capacity/safety, and creating shareholder value via share buybacks. - Digital sales growth and private label product growth were accretive to gross margin. - Disciplined process for diagnosing and addressing issues contributed ~$9 million of EBITDA Y/Y in the third quarter. - Safety stand-down resulted in tangible improvements in reducing strains and sprains.

In the third quarter, Beacon achieved nearly $2.8 billion in total net sales, up more than 7% primarily driven by acquisitions. Adjusting for the additional day, net sales increased almost 6%. Gross margin was 26.3%, up 30 basis points year-over-year. Residential roofing sales per day were higher by less than 1% due to higher prices from the August price increase. Non-residential sales per day increased by nearly 8% based on strong repair and reroof activity. Complementary sales per day increased by more than 15% driven by acquisitions. Acquisitions completed within the last 12 months contributed a little more than 5.5% to total sales year-over-year. Digital sales grew approximately 28% year-over-year, with residential customer adoption reaching over 28%. TRI-BUILT private label sales grew 12% year-on-year.

• Expect current conditions to continue in Q4 with subdued new housing starts and existing home sales, but commercial repair and reroof expected to outpace new construction. - Q4 total sales per day growth expected mid-single-digits Y/Y. - Gross margins expected mid-25% range in Q4. - Full-year adjusted EBITDA expected in the lower half of prior guidance. - Plan to deploy capital on acquisitions and greenfield locations, with expected ~20 branches in 2024. - Expect solid cash generation in Q4 to pay down seasonal borrowings and bring net debt leverage within targeted range.

• Market conditions with overall activity lower than anticipated in Q3. - Hurricane impact on volumes, with initial estimates showing repair/reconstruction volumes spread over next 6 quarters, and short-term availability concerns in storm-impacted regions. - Inflationary pressures affecting operating expenses. - Potential delays in demand from storms as reconstruction takes time to ramp up.

Q: Philip Ng asked about hurricane impact on inventory, how Beacon is set up to meet demand, and if Q4 growth will pick up.

A: Julian Francis responded that Florida has been weak all year, hurricanes impacted Q3, with demand from storms like Milton and Helene taking 2-3 months to ramp up, and product being redirected to storm-impacted regions.

Q: Brian Biros asked about non-res market verticals and how they're performing.

A: Julian Francis said post-COVID, new construction was prioritized over repair/replace, but now repair/replace on commercial side has picked up, with strong performance in warehouses, data centers, hospitals, and schools. Prithvi Gandhi added on high interest rates affecting new construction.

Q: Ryan Merkel asked about Q4 gross margin guidance.

A: Julian Francis said part is normal seasonality with geography shift, product mix, and price increases clustering, and Prithvi Gandhi added about South having lower gross margins and Q4 margin consistent with post-COVID margins except 2021-2022.

Q: Ketan Mamtora asked about underlying growth trends in waterproofing business.

A: Julian Francis said waterproofing is a higher growth segment, acquired Coastal, and it's grown from mid-$100 million to $700 million run rate, with margin profile more like residential and expected to enhance over time.

Q: Michael Rehaut asked about full-year EBITDA guidance and 2025 margins.

A: Julian Francis and Prithvi Gandhi discussed that Q3 sales per day growth was lower than expected, leading to full-year adjusted EBITDA in lower half of prior guidance, and expect less margin drag in 2025 with acquisition performance and improvement initiatives.

Q: Mike Dahl asked about OpEx actions and structural thinking.

A: Julian Francis said actions were due to softer markets and acquisitions, with plan to drive productivity and manage OpEx to 17% target, and Prithvi Gandhi added on synergy realization from acquisitions and more circumspect budgeting.

Q: David Manthey asked about incremental revenue carryover from deals, interest expense, and TRI-BUILT sales.

A: Julian Francis said incremental revenue carryover from 2024 deals is ~3-4% of total revenue, interest expense increased due to higher debt balance and rates, and TRI-BUILT sales grew 12% Y/Y.

Q: Garik Shmois asked about 50 basis points of positive price cost and future price cost.

A: Julian Francis and Prithvi Gandhi said it came from execution on price increases in residential and commercial, with storms impacting future pricing dynamics.

Q: David MacGregor asked about private label business growth.

A: Julian Francis said growth is from expanding into commercial products, customers using TRI-BUILT for differentiation, and good management of vendor relationships.

Q: Adam Baumgarten asked about greenfield plans and future pricing.

A: Julian Francis said expect 20+ branches next year, and on pricing, wouldn't expect manufacturer increases this year, with supply-demand dynamics determining next year's increases.