QXO, Inc. Q1 FY2023 earnings call

• Building a winning culture: Focus on health and safety, with Dan Worley as VP of Environmental Health and Safety, and annual company-wide safety standard. - Driving growth and margins: Delivering industry-leading customer experience by creating actionable plans, rolling out best practices to markets, expanding customer reach via greenfields and acquisitions, growing digital sales 11% year-over-year with 19% of residential sales through digital platform, improving bottom quintile branch performance, optimizing fleet productivity, and creating shareholder value through share repurchases. - Strategic initiatives: Emphasizing accountability teams, customer issue resolution, leveraging OTC network, seeking feedback for continuous improvement, and investing in technology like the Beacon Pro+ mobile app.

Total net sales in the first quarter were nearly $1.7 billion, up over 2.5%. Residential roofing sales per day were lower by ~1% due to high single-digit price increases offset by low double-digit volume declines in regions with high single-family new construction exposure. Non-residential roofing sales per day declined 9% due to customer destocking partially offset by mid-teens price increases. Complementary sales per day increased 21% year-over-year, driven by the acquisition of Coastal and strength in siding products. Gross margin was 25.5%, in line with February guidance and solidly above pre-COVID Q1 levels. Adjusted OpEx was $357 million, an increase of $34 million year-over-year, driven by expenses from acquired and greenfield branches and inflationary pressures. Operating cash flow was a record $102 million in the first quarter, with net inventory lower by ~$170 million year-over-year.

• For the second quarter, expect total sales growth of approximately 3% to 5% year-over-year, slightly better than April's 2% to 3% pacing. - Gross margins expected to be in the mid- to high 25% range, down from prior year due to inventory profit roll-off. - Full year net sales growth expected in the range of 2% to 4% including acquisitions. - Adjusted EBITDA expectations remain between $810 million and $870 million for 2023. - Anticipate shingle price increase effective later this month, with realization reflecting local market conditions.

Actual results may differ materially from forward-looking statements due to various factors including those in the Risk Factors section of the company's 2022 Form 10-K. Uncertainty in market demand, regional variations in market performance, supply chain dynamics, and potential impact of higher interest rates on business operations.

Q: Could you give more color on market by market in terms of resi trends and how that impacts Beacon, and on the non-res side regarding mega projects and working with companies like Samsung?

A: Julian Francis discussed that Texas has been down but sentiment on new residential construction is improving, Florida has been up due to storm rebuilding, California is expected to recover, and commercial market is shifting towards repair and replace with a national account group working with large developers.

Q: Where do you stand in terms of residential shingle inventory today? Are you still destocking? Could you split out resi sales per day in April?

A: Frank Lonegro said on volume side, residential shingle volumes were down high teens to low 20s percent year-over-year, started to build some inventory in the quarter, with geographic and line of business changes. In April, overall sales per day up 2.5%, shingles effectively flat, resi and complementary side favorable due to contract destocking, commercial volumes down mid-teens.

Q: How much do the storms contribute to demand, and are we getting to the end of contractor destocking on the commercial side?

A: Julian Francis said storms seen in first few months of the year make them confident of at least average storm year, biased to upside. Frank Lonegro said contractor destocking on non-res expected to lessen through end of second quarter, with single-ply element finishing destocking earlier than insulation or ISO piece.

Q: Does the 2Q sales and margin guidance contemplate traction on the May price increase, and can you compare best and worst markets in terms of pricing and see competitive behavior?

A: Julian Francis said pricing has been relatively stable, environment is benign. Frank Lonegro said gross margin guide for second quarter considers inventory profit roll-off, mix help, and late quarter help from May price increase, with pricing holding up sequentially in demand environment.

Q: How are you thinking about targeting resources towards new markets versus existing markets, managing cannibalization of new stores?

A: Frank Lonegro said new stores are targeted with thoughtful exercise, no real cannibalization as new branches serve white space between existing ones, with OpEx impact from new store program expected to be mid- to high single-digit millions year-over-year.