QXO, Inc. Q2 FY2023 earnings call

• Building a winning culture: Released second annual corporate social responsibility report, reduced scope one and two GHG emissions intensity by 5.7% in 2022 relative to 2020 base, and launched an employee stock purchase program with over 20% of employees participating.
• Driving growth: Digital sales increased 28% year-over-year with 21% of residential sales through online platform; customer experience (CX) initiative rolled out to 6 new markets, with average on-time delivery percentage increasing; added 14 green fields and 31 branches since last year; completed purchase of Silver State Building Materials and acquired 9 companies adding 30 branches.
• Operational excellence: OTC network with nearly 280 branches, leveraging BeaconTrack software for improved network speed and delivery tracking; executing Strategic Branch Optimization Initiative to improve productivity and reduce wait times.
• Shareholder value: Repurchased entirety of outstanding preferred shares owned by CD&R for over $800 million, retired ~9.7 million common shares; repurchased ~$100 million of common stock year-to-date through July 31, reducing common shares outstanding.

In the second quarter, Beacon achieved over $2.5 billion in total net sales, a little more than 6% year-over-year growth driven by acquisitions and higher average selling prices. Residential roofing sales per day were higher by 8.5%, with volume up mid-single digits and price up low-single digits. Non-residential roofing sales declined by less than 2% per day, with higher prices offsetting lower volumes. Complimentary sales per day increased nearly 12% year-over-year due to the acquisition of coastal and higher prices across most complementary product lines. Revenue contribution: Price contributed approximately 2%-3% to growth, acquisitions including coastal construction products contributed ~4% to daily net sales year-over-year, and organic volumes per day were flat to down 1%.

• Full-year net sales guidance raised to 4%-6% from prior 2%-4% due to better Resi volumes in second half and August price increase.
• Adjusted EBITDA expected to be $850M-$890M for full year 2023, an increase from pre-release guidance.
• Gross margin expected mid to high 25% range, with inventory profit roll off partially offset by improvement initiatives.
• Expect sales per day growth 7%-9% year-over-year in Q3, slightly better than July pacing of ~7%.
• Plan to execute on greenfield locations with more than 20-25 branches in 2023.

• Market conditions changing, including excess contractor inventory headwinds (largely behind us but still a factor).
• Labor market tightness affecting staffing and costs.
• Supply chain tightness, with manufacturers low on inventory, regional product differences, and manufacturer inventory levels impacting residential supply.
• Impact of weather events and regulatory changes on specific regions and product segments, such as Florida labor laws affecting market and energy efficiency regulations impacting waterproofing and insulation segments.

Q: Drivers of the new guidance range?

A: Better Resi volumes in the second half of the year and the August price increase.

Q: Inventory and margin in Q3?

A: Less inventory profit compared to last year, and not a huge driver of inventory profits in Q3.

Q: Region trends?

A: Mixed, with storms impacting various regions, some market changes from Q1 to Q2.

Q: Supply chain in residential?

A: Tight market, manufacturers low on inventory, regional product differences.

Q: Storm contribution to growth?

A: Above 10-year average, but hard to quantify exactly.

Q: OpEx leverage in the back half?

A: Continued leverage expected, with lower incentive compensation and fuel costs helping.

Q: Non-Res segment outlook?

A: Bidding activity up, project sizes smaller, with R&R more significant than new Res.

Q: Gross margin differential between segments?

A: Resi and complementary higher, non-Res lower due to more inflation.

Q: Variables affecting EBITDA guidance?

A: Price increase execution, storm activity, and performance of greenfields and acquisitions.

Q: Impact of energy efficiency regulations?

A: Seen in waterproofing repair work and commercial insulation, tied to regulations and long-run trends towards more insulation.