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Edited Transcript of BECN earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q3 2019 Beacon Roofing Supply Inc Earnings Call

PEABODY Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Beacon Roofing Supply Inc earnings conference call or presentation Tuesday, August 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph M. Nowicki

Beacon Roofing Supply, Inc. - Executive VP & CFO

* Paul Isabella;President and CEO

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Conference Call Participants

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* David John Manthey

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Elad Elie Hillman

JP Morgan Chase & Co, Research Division - Analyst

* Garik Simha Shmois

Longbow Research LLC - Senior Research Analyst

* James A. Morrish

Evercore ISI Institutional Equities, Research Division - Analyst

* Kathryn Ingram Thompson

Thompson Research Group, LLC - Founding Partner, CEO and Director of Research

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Kenneth Robinson Zener

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Kevin William Hocevar

Northcoast Research Partners, LLC - VP & Equity Research Analyst

* Margaret Eileen Grady

Jefferies LLC, Research Division - Equity Associate

* Megan Talbott McGrath

The Buckingham Research Group Incorporated - Director

* Michael Benjamin Eisen

RBC Capital Markets, LLC, Research Division - Senior Associate

* Ryan James Merkel

William Blair & Company L.L.C., Research Division - Research Analyst

* Truman Andrew Patterson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Beacon Roofing Supply's Third Quarter 2019 Earnings Conference Call. My name is Tom, 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 its plans and objectives and future economic performance. 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 6, 2019, and except as required by law, the company undertakes no obligation to update or revise any of these 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. The company has posted a summary financial slide presentation on the Investors Section of its website under Events and Presentations that will be referenced during management's review of the financial results.

On the call today for Beacon Roofing Supply will be Mr. Paul Isabella, President and CEO; Mr. Joe Nowicki, Executive Vice President and Chief Financial Officer; and Mr. Eric Swank, Chief Operating Officer.

I would now like to turn the call over to Mr. Paul Isabella, President and CEO. Please proceed, Mr. Isabella.

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Paul Isabella;President and CEO, [2]

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Thank you. Good afternoon, and welcome to our third quarter 2019 earnings call.

Results this quarter fell short of expectations, but that was largely the result of weather, which we'll get into in a moment. I'd like to start by pointing to several positives that support optimism for the fourth quarter and next year. First, residential roofing sales were up 3% in the quarter. Free cash flow was positive at $29 million during the quarter, something we've not accomplished in any third quarter dating back 6 years. On a sequential basis, we reduced debt, another excellent accomplishment that runs contrary to typical seasonality for our business. And July month sales growth has improved with an existing market sales increase of 3% to 4%. Similar to what we experienced in early January and during the second half of March, when the weather clears, levels of underlying demand improve. Residential sales were up 12% organically in July, very encouraging and speaks to the weather-induced delay seen in Q3. 12% was the highest monthly growth for resi in 18 months. And the Allied integration continues as planned, and the synergy target of $120 million is on track versus the original target of $110 million.

And now a few comments on cost reduction. In addition to our focus on growth and debt reduction, in late Q3 and early Q4, we took aggressive actions to reduce our cost base by $25 million. These were personnel actions, permanent in nature, with the majority in noncustomer-facing positions. The actions will improve leverage and profitability, especially as volume increases as we expect in Q4 and beyond. The benefits will be realized starting in Q4 and demonstrate our commitment to continuous improvement. Actions like these are never easy, but they were needed to position our future for streamlined operations and enhanced profitability.

Now a little bit of weather commentary. Related to weather variability, we have done work over the last few months, and we now have a meaningful way to quantify the impact of harsh weather, as mentioned in our press release. Joe will give more detail on this in his prepared remarks, the summary being severe rain resulted in approximately 25% to 30% more rain days compared to the prior year. This impacted the quarter by approximately $0.20 of EPS and $85 million in sales. I will say that while we can't control extreme weather events, we also know they will normalize over time.

Keep in mind we have tremendous branch density across the country and a very diverse product offering. We touch every major market in the U.S. and Canada. And as a reminder, 70% of our product we sell is roofing, which requires work on roofs to be done. Working at a roof during harsh weather can be dangerous, and this naturally impacts demand. Extreme weather events like we have seen in Q2 and Q3 are rare. And with our dense footprint, these events can impact our business as was the case the past 2 quarters. Conversely, when damage occurs due to severe weather in a market or multiple markets, our dense footprint works in our favor to drive superior sales, profit and cash flow as we service this hyper demand. That, coupled with roofing nondiscretionary, makes for a great business model. I've said it before and it's worth repeating, our future is very bright.

And now I'll give an update on a few of our key strategic initiatives. I'll start with digital, which has made good progress in the quarter and is a clear differentiator for our customers. I feel very comfortable stating that Beacon has the industry's leading e-commerce mobile app, Beacon Pro+, and the industry's best visualizer and estimating tool with Beacon 3D+. From a sales perspective, we estimate digital sales will end the fiscal year at approximately $350 million, which is triple our 2018 sales and well on our way to our $1 billion goal.

Quite possibly, the strongest indication of success is that we're seeing those customers who engage with us digitally outgrowing our in-store only customers. Meanwhile, those same customers are benefiting from our digital platform by saving time in the ordering process, becoming more efficient through a more precise delivery schedule system and using our estimating and visualizer tools to raise their win percentages on bids. In turn, Beacon's benefit is a higher share of our customers' total spend as well as having core customers that we've helped out through the overall industry, big benefits for our customers and for Beacon.

The next initiative is our partnership with JobNimbus, which allows our contractor base using their project management software to seamlessly build orders and directly link to our Pro+ digital ordering platform. Since the announcement of the partnership 3 months ago, we have continued to be very encouraged by the early utilization rates. And as a result, I'm confident Beacon will enjoy strong return in future quarters from this strategic software integration.

The next initiative was the addition of delivery tracking, which includes on-demand notifications of when the order was received, scheduled and ultimately when it was delivered to the job site. I previously mentioned our delivery tracking solution time line started with a pilot in January. And by early May, we had gone live in 15 markets. We're now operating delivery tracking in more than 100 markets, and that number grows every week.

And now an update on our regional service area market approach, which is also making great progress. We're on pace to roll this out to more than 50 markets consisting of approximately 250 branches. We're focusing on centralized dispatch to drive an improved and more efficient customer experience. Specific benefits include reduced delivery cost, inventory and CapEx leverage and more efficient use of our personnel. Most importantly, Beacon customers will benefit from better inventory access, greater delivery options and an enhanced response time to their needs. We will keep you updated as we continue with our plan to roll out additional markets. Very good progress on some key strategic initiatives.

To wrap up my comments, I will say we have a well-thought-out strategy and a skilled leadership team that's executing very well. Our products touch every segment of our economy. When health care facilities of all types are built, expanded or remodeled, we supply the drywall, ceiling tiles, roofing and more. When the government grows, we grow. When the private sector grows, we grow. We don't rely on specific segments of the economy to grow in order for us to grow. That's one of the reasons we're a fantastic investment. Our industry will continue to grow as we will, and we'll stay focused on investing in customer value-added offerings like our digital suite and overall contractor tools that help them grow and increase their profits.

Now Joe will provide some additional color on our quarterly trends and outlook. Joe?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [3]

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Thanks, Paul, and good afternoon, everyone. I'll now briefly walk you through some more detail on the positive accomplishments for the quarter that Paul described. I'll also talk you through the impact the heavy rainfall had on our quarter and then provide an update to our fiscal 2019 expectations.

First, on the positive accomplishments for the quarter. Residential revenues on a same-day basis were up in 5 of our 7 reported geographic regions and, in total, were up 3.1%. Most notably, our Southwest and Midwest regions were both up high single digits, representing return to growth after the post-hailstorm impacts we've previously discussed. Residential sales also grew in all 3 months of the quarter, with June ending strong with almost 6% growth. And as Paul mentioned, July residential sales were up 12%.

The second positive accomplishment to highlight was our ability during a difficult weather-impacted quarter to drive price increases into the market. Pricing continues to be competitive. But thanks to the value our customers place in our high levels of service, we're able to pass along selling price increases of approximately 3% for the quarter.

The third area I want to highlight is our balance sheet. This continues to be an area of focus, and you can see that in our solid third quarter performance in both debt pay-down and free cash flow generation. Q3 is traditionally a negative free cash flow quarter where we use cash to build inventory and accounts receivable as part of our busy season. This year, the teams did a great job collecting faster on AR and improving our DSO while, at the same time, managing our inventory balance down year-over-year. This contributed to positive free cash flow of $29 million and a net debt pay-down of $24 million, strong performance for a seasonal third quarter. As a result, our free cash flow conversion of net income continues to remain over 150%.

Now I wanted to provide some more specific color on the weather challenges we have faced. Similar to what you've heard from other building products companies, our third quarter sales were materially impacted by the unfavorable weather. And with almost 70% of our sales from roofing, we have an even greater impact from rain as contractors are hesitant to begin a roofing project even with the threat of rain. This quarter represented the second rainiest June quarter during the past 100 years as reported by the National Weather Service and was well above normal levels in nearly every region of the country. This compares to Q3 of 2018, which was more a normal rain year.

Earlier in the year, we began engagement with a third-party weather analytics firm to obtain various weather data by zip code for each of our specific branches. From that data, we were able to analyze the rainfall by zip code this year compared to last for each of our branch locations. We used this to estimate the amount of incremental missed sales days across our footprint. In total, we estimated that the significant rain conditions caused an incremental 3 days of missed sales on average nationally. Our most significant rainfall impacts were felt from the Northeast to the Central part of the country and into the Southwest and mountain regions. All of this tied very closely to our internal results. From this branch-specific sales data, we were able to calculate an approximate $85 million of negative impact on our revenue. Then using estimated gross margin and operating expense data, we were able to calculate an approximate negative $0.20 impact on our EPS.

I also want to comment briefly on the level of storm activity this season. Following the 2018's below normal hail season, we looked at the guide more conservatively around our 2019 expectations involving hail-related storm demand. Thus far, external data shows that the demand from hail-related events are down even further year-over-year, and we expect that to continue for the full year due to the softer damage during the peak season of June and July months.

Now let me go over our updated guidance excitations. Following the second quarter's harsh winter weather and the third quarter's rain-driven shortfall, we're reducing our 2019 outlook to a new adjusted EPS range of between $2.30 and $2.50. This implies a Q4 guidance of same-day organic revenues, up 5%; adjusted EPS, up 12%; and increased EBITDA margins, all on a year-over-year basis. While improved performance year-over-year, we realized it will be difficult to make up for the Q2 and Q3 shortfalls in the remaining 3 months of the year, and we have adjusted our forecast accordingly.

We're off to a good, strong start with the July sales as the weathers improve. We've also incorporated our recent cost reduction actions into this forecast. As Paul has mentioned, our business and industry fundamentals are very solid. While there will always be quarterly volatility in our business due to the weather, over the long term, we'll benefit from the stability of our business model that's focused on a 70% repair and remodel customer base. I am confident that our organic growth sales initiatives, coupled with our focus on lowering our fixed cost and reducing our debt, will drive improved levels of financial performance going forward.

I'll now turn the call over to the operator to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Garik Shmois from Longbow Research.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [2]

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I wanted to ask on gross margins. First off, can you provide some color on what drove the variance on that line and where you stood on price cost with -- in particular on residential?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [3]

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Certainly, Garik. To give you a little bit more detail on the gross margin, so the decline was really split between a slightly negative mix coupled with a slightly negative price cost. Price was roughly around 3%, as I mentioned, and costs were up roughly around 3.5%. As we've talked about before, a lot of it was driven by the difficulty of getting price in some specific volume-impacted markets. As we've always said, softer demand really relates to more difficult pricing.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [4]

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Okay. And my follow-up question is, with the cost savings actions that you're announcing, is it fair to assume that is coming out of the SG&A line? And if so, could you speak to -- I think there are some comments about improved operating leverage moving forward, whether these cost savings actions change the way we think of operating leverage on stronger sales relative to your prior targets.

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [5]

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So in your first question around the cost elements, yes, the cost actions were SG&A cost related. The second part, yes, they were geared towards lowering our fixed cost structure, which would help improve our operating leverage going forward, correct.

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Paul Isabella;President and CEO, [6]

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Garik, that's why we said they were permanent in nature, right? So they're not variable at all. We thought that was important.

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Operator [7]

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Your next question comes from Truman Patterson from Wells Fargo.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [8]

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Just first wanted to dig into your Complementary building segment. It looks like core rev sell, mid-single digits, while the wallboard industry demand seems to be recovering a little bit. Can you just walk us through what's going on there? And how should we think about margins? Are they following a similar path as revenues? Are those margins down more severely than the other 2 segments?

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Paul Isabella;President and CEO, [9]

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Yes. Truman, as we look -- our Complementary business is very big. Within it is the interior biz, which we don't break out and talk about. But in general, I mean the Complementary business saw the same pressure related to weather and/or even prior year comps, a little bit of impact based on what we have seen with some of the macro trends like new construction being slightly down, et cetera. If from a margin perspective, again, we don't get into that level of detail, I can say it's performing very well. I mean that's the comment I'll make.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [10]

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Okay. Okay. And then just kind of a big picture question. In the quarter, your revenues were flat year-over-year. EBITDA dollars fell about 16%. Could you just walk us through the moving parts there? And some of the bigger buckets as to what kind of went against you in a flat revenue environment?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [11]

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Sure. This is Joe. Well, the 2 big items that drove the decline in the EBITDA, as you mentioned, was, first one, we talked about the weather-related impacts. So the weather-related impacts were one of the first big numbers, too. As you know, our demand is much higher in the summer. Our anticipation was towards that higher demand, and our revenues were off because of the weather mix. The second was really the decline in gross margin, as I walked through before with Garik, in regards to the mix and the negative price cost. It was really those 2 pieces combined, Truman, that drove the miss to our earnings on a year-over-year basis.

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Operator [12]

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Your next question comes from Michael Eisen from RBC Capital Markets.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [13]

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Just wanted to start, Joe, you mentioned that pricing for the company was up 3% in the quarter. Can you give any more information about how pricing trends were across the different segments?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [14]

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No. We -- as you know, we traditionally do not provide any segment or specific data in regards to product lines or product categories, just in total.

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Paul Isabella;President and CEO, [15]

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I think the -- I'll add on and say, actually, considering -- we understand where the results in general ended up. But considering -- and Joe talked through the amount of rain we saw, which was quite severe, what we saw in the pricing side was actually not bad considering the amount of pressure we saw as we went through the quarter. So did we want more? Of course. But given that demand piece, I think we ended up quite well in the 3% range.

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Michael Benjamin Eisen, RBC Capital Markets, LLC, Research Division - Senior Associate [16]

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Got it. That's helpful. And then following up, just looking at the updated guidance and fourth quarter in general, it looks like you're expecting a bounce-back in margin expansion and where you sit. So can you talk to if there's any lingering headwinds as you went into July, in what we're looking for the last quarter? And then more broadly, when I'm thinking of the longer-term goals you guys have set out, the 9% to 11% EBITDA margins, how does a situation like this -- or how does a shortfall this year impact your ability to continue progressing to that number?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [17]

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Lots of question in there. Let me take the first part of it. In regards specifically to July, we don't really go into the details of any months in terms of where we're currently at. I think we gave you the revenue pieces we're at, which is a great strong start, as Paul have mentioned that 3% to 4% revenue growth and 12% resi was a super start, too. Overall, for our forecast, if we look at that Q4 forecast -- and yes, as you noted, it is down slightly. It's really a little lower volume mostly driven by some of that weaker hail demand that I talked about. On the gross margin rate, your specific question, yes, we are having our -- the gross margin rate would be up roughly around 30 basis points sequentially. So the gross margin rate is improving in the fourth quarter, down a little bit from the prior year. We're trying to remain conservative, similar to some of the experience we saw in the third quarter. We do believe that some of the mix should improve, but we'll probably still face those same competitive market pressures. Overall though, as you had mentioned, from a gross margin perspective, still pretty solid.

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Paul Isabella;President and CEO, [18]

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And in terms of your question about the bounce-back, and I think it's important to realize that -- and I said it in my prepared remarks, Q2 and Q3 have been extraordinary, very rare. And we know the impact. I talked about the 70% of the work being done on roofs, which can be dangerous in this type of weather. What we've seen in the past, whether it was in the '08, '09 period, in the '11-ish period or even from '16, '17 and then '18, after we had the buildup, either severe weather, damaging whether, there's usually a rebound. That's what we expect to happen. That's why, over time, we will perform -- we have performed very well. We will perform again very well. I mean it's just -- it's difficult to ship product to contractors who are not -- who are delaying projects and are not going to get on roofs because of the weather. But over time, we have proven that as we see that drop in EBITDA or EPS, we also see a pickup in the subsequent periods after.

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Operator [19]

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Your next question comes from Kathryn Thompson from Thompson Research Group.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [20]

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A follow-up question on the cost-cutting initiatives. Could you outline how much of the efforts are interior versus exterior distribution focused? Really, it's more the nature of the cuts, administrative, build. I just want to get a better feel of the overall strategy of the cuts, particularly as we look forward.

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Paul Isabella;President and CEO, [21]

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Hey, Kathryn, we're not going to break out the splits between exterior and interior. The majority of those fixed cost cuts were in functional areas that were non -- which we're saying noncustomer-facing type jobs. So all of them were, as I said, personnel or head count related, and all are permanent. That's really the summary of that cost-cutting action.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [22]

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Okay. Great. And then just focusing on the end markets for resi versus nonres, had a good start to July for resi as you have in your prepared commentary. But if you step back and look at overall trends, could you give more color on nonres trends versus resi as you look forward, not over just for the balance of 2019 but perhaps over the next 18 months? In particular, if you can dig a little bit more on differentiation between interior products and exterior products, too, when you look at that in your market forecast.

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Paul Isabella;President and CEO, [23]

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Yes. It'll be difficult for us to talk out 18 months. And Carlisle, obviously, talked on their call about the market, which we believe is still relatively healthy. I mean there's no doubt, from our perspective, there's still a lot of competitive pressure. We saw a bit of that in Q3. We're having to break out on what we've put in our estimate for Q4 that 5% -- total 5% or so organic growth. We do believe all 3 of our segments and within Complementary, of course, is interior, still very healthy. There's always going to be period changes based on a lot of different factors, big jobs in, big jobs out, competitive pressures. But overall, we feel very good about all 3 lines of business. Of course, in Q3, and I alluded to it, I mean the majority of pent-up we saw and the impact is on the res side of that $85 million, of course, not the entire amount. So we should see -- and there's -- and it's difficult, and I won't even try to predict when that pent-up will come out, but schedules were pushed, no doubt, from Q2 to Q3, Q3 to Q4. So that should bode well for us through the balance of the calendar year on the residential side. That's our view right now.

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Operator [24]

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Your next question comes from Michael Rehaut from JPMorgan.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [25]

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This is Elad on for Mike. I wanted to understand better your inventory levels. You mentioned that -- I think you did some sort of destocking in the quarter, and that gave you some positive working capital. And especially, given maybe the outlook for stronger pent-up volumes in future quarters, how are you thinking about your inventory levels? And lastly, does that -- I apologize if I missed this, but could you provide an update on your free cash flow guidance for the full year?

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Paul Isabella;President and CEO, [26]

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Yes. Inventory, we feel very good about our inventory level -- levels. Sequentially, they were up slightly. Year-over-year, they were down slightly. We feel like we're in a very good position for the balance of the year, having the right amount of material to service the demand we see coming for fourth quarter and then, of course, the -- our view right now of Q1, which we're not going to talk about, but we're in very good shape on the inventory side. And Joe can talk through the cash piece.

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [27]

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The other part in inventory, as you probably know, is our turns are up as well, too. Again, as we've talked about, and Paul mentioned the RSA approach, that model is just beginning to pick up, but it will continue to have favorable impacts on our inventory levels and turns as well, too. In regards to free cash flow, the previous guidance that we've given around our free cash flow outlook was roughly around $200 million. The EBITDA portion of it is down now obviously with this forecast. With that lower EBITDA, the free cash flow number now probably closer to a range around $150 million of free cash flow for the full year. As I mentioned, we did a great job in the third quarter. It was an unusual third quarter for us for free cash flow. We generated positive free cash flow for the quarter, which is uncommon as, traditionally, you're building kind of working capital requirements during this time of the year. So we're off to a great start in the second half of the year. That was a good solid third quarter on free cash flow.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [28]

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Great. And if I could ask one more, given all the other moving pieces impacting margin, are there any other metrics or something you guys are following internally that you could provide or give us a sense of, of the benefits of the RSA model as you continue to roll it out, maybe delivery time or something?

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Paul Isabella;President and CEO, [29]

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Yes. We haven't shared any specific metrics. In time, we will. But we do know that there's fleet and fuel savings that's occurring as well as better utilization of our people in those markets. And then, of course, and we'll see it more as we go through time, better inventory utilization and usage as well as less CapEx because truck routing is being optimized much more effectively. That's really the summary at this point. So we know there are going to be benefits. There are going to be big benefits, and we'll talk about that in the future.

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Operator [30]

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Your next question comes from Keith Hughes from SunTrust.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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Just back to the gross margin. You had talked about negative mix impacting the margin in the quarter. Now historically, you're -- when residential is up more than the other division, that's actually positive mix. So where is the negative mix coming in?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [32]

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Hey, Keith, Joe here. A few elements on the mix part, too. A slightly negative mix, as you know, it's product, but it's also channel specific. So we had some negative mix in regards to channel. We've talked about our 2-step, 1-step channel differences in the past. Also geographic is the other element. When we look at mix, when you look at where these sales kind of are, come from and which specific area. And even then, within our product category, there's mix between different types of products and manufacture as well, too. All of that impacts the mix elements to it as we do the calculation. And that's what really flows into it.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [33]

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And you had mentioned price cost is a negative as well. Was that in residential? And I assume your assumption is it's going to get better in the fourth quarter. Correct?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [34]

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Correct. If you look at the price cost in total, price was up 3%. The costs were up roughly around 3.5%. That's really more in global. We don't get into the specifics by product category under that at all, Keith. And yes, as I mentioned, sequentially, we are expecting our gross margin rate to improve.

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Operator [35]

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Your next question comes from Ryan Merkel from William Blair.

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [36]

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So first off, how much cost savings are going to hit in the fourth quarter? And then when do you get to the full $25 million run rate?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [37]

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So the cost actions that we took occurred right at the end of June and in the first half of July where they took place. So what you'll probably see on that $25 million is you'll get a couple of months of advantage in the fourth quarter here. And then you'll hit stride with the full run rate when you start to get into the first quarter next fiscal year.

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [38]

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Okay. That's helpful. And then just a follow-up to a previous question. I think mix within resi was a negative last quarter as well. I don't really remember this happening over my history covering the company. Is this a new phenomenon? Or has this always been the case? And if it's new, what's really changing?

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Paul Isabella;President and CEO, [39]

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Yes. No, it's not a new phenomena. I think what we're seeing is we have much more of a variety and much larger regions than we had previously, some of them with very high resi content at very high margins as they get impacted because of what happened not only Q2 but Q3 with weather. Again, I'll go back to saying, very rare weather events. That puts a hurt on the overall margin rate. And then in areas like the Southeast where we're seeing the backside of that hurricane, there's products being flipped and switched to other products which don't have the same gross margin rate. That phenomena has pretty much been with us for -- since I walked in the door where post storm, you typically are digging for sales. You're going to sell the product lines. They could have different -- well, they're going to have lower gross margins in res and set the -- that's the highest LOB, and that's really what it is, Ryan. So it isn't anything that's that unusual other than, "Hey, we've gotten more density. We've gotten some very big regions with the addition of Allied and some of our existing regions that play heavy on the resi side margin rates."

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [40]

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Plus channels and also product as well, too, right? So a broader breadth of product, broader channels that we're serving as we've gotten bigger as well, too.

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Operator [41]

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Your next question comes from Trey Morrish from Evercore ISI.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [42]

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You mentioned that the majority of the $85 million that was pushed out was in resi. But could you kind of bucket that within the 3 parts? Like was it like 50%, 75% resi? And then where does everything else fall? Additionally, was there any incremental damage that could be potentially added to future revenues from the high amount of rain that took place?

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Paul Isabella;President and CEO, [43]

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Yes. From a damage standpoint, always tough to determine. But with the amount of water we saw in some of these regions, typically, that lends itself to causing some damage or opening up some roofs that eventually will have to be repaired. On your first part of the question, I mean we're not going to get into detail on the specifics of LOB within the $85 million, just to say, think about it logically, residential roof is sloped. And although it's dangerous to get on any roof when there's inclement weather, whether it was in Q2 or Q3, it's even more dangerous on a sloped roof, right, just because of the potential of one slipping off, the other -- the contractor now wanting to open up the roof because it could damage the inside of the house. So that just lends itself to the comment of, hey, the majority of that 85% was residential.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [44]

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Okay. And then I'm going to try and ask the pricing question a different way and hopefully get a different answer, a better answer for everyone. But could you rank order by your 3 product categories which one had the best pricing, which one had the worst pricing year-over-year so we can at least kind of see where things stacked up within the company?

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Paul Isabella;President and CEO, [45]

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Yes. I think directionally, we can say, just because of the nature of what we saw in the demand side, there was a little more pressure on the residential side. But that's really is as much as I'll say without getting into the detail of these product lines.

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Operator [46]

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Your next question comes from Megan McGrath from Buckingham Research.

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Megan Talbott McGrath, The Buckingham Research Group Incorporated - Director [47]

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Great. I wanted to follow up a little bit on your expectations for the fourth quarter. If I remember correctly, earlier in the year, you had periods of bad weather. And you pointed out that when sort of weather cleared and demand opened up, you actually saw a bit more pricing pressure because everyone was kind of going after the same business, if I remember what happened earlier in the year correctly. So I was just kind of curious what's different about the fourth quarter this year? Is there a risk of that happening again? Or are you seeing different behavior from some of your competitors now that the weather has eased a little bit?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [48]

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Hey, Megan, just to get at your question on the lower -- or the gross margin kind of implications here, I'm not sure your first statement was correct that during stronger demand periods, we'd see a more difficult pricing environment, usually it's the opposite. During higher demand periods, you usually have the capability to drive more improved pricing during that kind of point in time. So that's traditionally what would occur. And that's what we've traditionally -- what we have seen, and what we would expect to see going forward as well, too, even in our Q4 and in future periods as well, too. And we can see it even today when we have markets that have strong demand. Even though I talked about the price of 3%, it obviously varies by geographic region and market. If we look at those markets, those that have soft demand or have been the most challenged or what you say the most difficult pricing, in the opposite. And that's traditionally always the case.

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Megan Talbott McGrath, The Buckingham Research Group Incorporated - Director [49]

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Okay. Great. And then just as a quick follow-up, you mentioned your July trends, thank you for that. I'm wondering if there was anything we need to think about in terms of the sort of ease or difficulty of compares by month as we make our way through the rest of the year. With July in easy compares, should we expect that to kind of ease up? Or are we looking at kind of similar trends as we make our way through the quarter?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [50]

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We had a good solid kind of trend that we started out in July with our growth rate. I'm trying to find the growth rates from the prior year for that quarter.

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Paul Isabella;President and CEO, [51]

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Yes, the comps get easier. August, we were -- last year, I think, we're like 3 down and then September, 8 down, in the quarter. So -- and we had talked about that on the last call, right? So that will help us. And we've kind of built that in to the new estimate of the 5% or so organic growth.

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Operator [52]

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Your next question comes from Phil Ng from Jefferies.

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Margaret Eileen Grady, Jefferies LLC, Research Division - Equity Associate [53]

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Hey, guys, this is actually Maggie on for Phil. You just mentioned some competitive pricing with the weather headwind. So in light of those, was there any expected carryover impact into 4Q? And what's your sense of how your 3% pricing in the quarter stacked up with the industry?

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Paul Isabella;President and CEO, [54]

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Yes. I'll just say from that, it's very hard to know, obviously, what the industry pricing is, right? We have no data points to talk about it. We had talked about we knew pricing would wane as we went through the year because we were lapping all of the heavy pricing we got last year. I think we even commented that Q4 would be in that flattish 0 area. So it's impossible for us to give you any industry pricing data.

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [55]

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If I can go further on the forecast to your question in the fourth quarter, as we mentioned, sequentially, it will get a little bit better. So sequentially, we think it will be up. Still would be down on a year-over-year basis because we do think -- maybe we're taking a conservative approach, but we're really expecting some of those competitive market pressures that we saw in 3 -- in Q3 to continue a bit into Q4 as well, too. Now we're making up some progress, so sequentially it'll get better. But we're trying in the forecast that we gave to keep it conservative with those gross margin rates as well.

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Margaret Eileen Grady, Jefferies LLC, Research Division - Equity Associate [56]

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Okay. Got it. And then Paul, you mentioned some of the pent-up demand dynamics from the weather headwinds. Can you talk about what's going on in the labor market and maybe how you think about that as a potential constraint on growth from quarter-to-quarter?

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Paul Isabella;President and CEO, [57]

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Yes. My comments on pent-up were, I think, just facing the realism that it's, one, very difficult to figure out exactly when that work could come out, right? That's a massive calculation. I don't even know how you do it. Because think about it, you have thousands and thousands of contractors, they have so many different schedules, so many different demands, they could be doing multiple products, right? So I think the point there is there's x number of days that are left in Q4, as we talked about fiscal. The good news is we get to keep going into Q1, right? And these folks' work continue -- has slid from Q2 to Q3, now sliding some cases into Q4. So there will be some natural constraints. They're working -- already working full out, right, and doing the best that they can. We're going to do the same thing where we have very strong demand and whether it's by moving people, moving trucks, working more overtime to satisfy that demand. But there -- ultimately, there comes a time where contractors can only work 7 days a week, theoretically, not 24 hours a day, but -- and they're doing that now, I think, as they're trying to catch up.

So I wouldn't say there's -- speaking to a labor shortage, I'm not going to comment say that's the case. I think it's just the natural -- you have x many days in the 3-month period for the contractors to work and so many for us to ship products to those contractors. And that's -- we're up against that every and any quarter. And now the good news is, as this rain abates, which we hope it does, right, we didn't see much in July, in August, September, October, November, it sets us up well to do much better in the future. And that's why, even though we got a negative comp from last year, in Q4, we're still talking about positive organic growth and, obviously, internally, working to overachieve that number.

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Operator [58]

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Your next question comes from David Manthey from Baird.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [59]

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First off, it would appear that your guidance implied that you expect to come in below where The Street estimates were for the fourth quarter despite the strong July. And I'm just wondering what factors -- you mentioned weather, but beyond that, what factors are extending into fourth quarter that would lead to that kind of a shortfall?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [60]

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Hey, Dave, Joe. Yes, 2 items really that drove our forecast. One of them, the lower gross margin I mentioned. On the volume piece of it, as you're describing, slightly lower volume than our -- The Street estimate, and it's mostly by the weaker kind of hail demand that we experience that I mentioned. Hail is -- we initially planned for hail to be same as last year because it was a soft year, and what we've experienced and seen if you look at all the storm reports out there is actually lower than last year on the hail part. That hail demand really is the work that we'd be getting done right now during this fourth quarter. So that slightly weaker hail demand is what caused us to take our volumes down a little bit in our forecast.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [61]

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Okay. And then as a follow-up, Paul, you mentioned -- I think it was you Paul, you said that pricing was highest on residential pricing. But is it correct to think that even though there's more pressure on that, the price attainment you're seeing in percentage terms on resi is higher than either nonres or Complementary? Is that right?

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Paul Isabella;President and CEO, [62]

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Say that again.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [63]

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Well, you said that -- when a question was asked about to rank the 3 categories in terms of pricing, you said that the pricing pressure was highest on residential. And I'm assuming what you meant is that the variants versus what you thought you were going to get might be higher there. But certainly, you're getting more price in residential than you are in either Complementary or nonres, correct?

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Paul Isabella;President and CEO, [64]

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Yes. That is correct. And again, I think -- yes, and that speaks to a couple of things. One, that actually even with the demand pressures, right, and the competitive pressures related to the craziness of the rain, we did fairly well getting pricing in res higher than the other lines, yes.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [65]

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Okay. When you said 0 price in the fourth quarter is your expectation, is that for residential? Or is that overall?

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [66]

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I don't think we said 0 price. I think we're anticipating some price in the fourth quarter, but not much. Some of that will be carryover price still, fourth quarter will lap a little bit of the prior year price increases. And then there'll be a little bit of price increase from the 2019 price increases as well, too.

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Paul Isabella;President and CEO, [67]

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Yes, Dave. I thought -- I think I was referring to earlier comments on the last earnings call that we said, as we went through time, pricing was going to decrease to near 0 in Q4. Obviously now, with this new forecast, we're seeing some sequential gain. We do think there'll be some minimum price in the quarter. But obviously, we won't know till we finish the quarter.

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Operator [68]

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Your next question comes from Ken Zener from KeyBanc.

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Kenneth Robinson Zener, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [69]

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Just one question. First of all, I do empathize with the weather volatility that you have to deal with. Given that margins came down, you kind of talked to the price cost neutrality that you guys had to overcome last year. Could you, Paul, just kind of refresh us because your ability to get price last year was a big theme that you pursued and actually realized? Could you talk about the lessons you learned last year when you had to go after price and how you got it just so we can have a sense of how that, Joe, your 3.5% cost, first 3% price dynamic, we get confidence that, that will come back to neutrality versus go the other way? Just to refresh last year's actions.

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Paul Isabella;President and CEO, [70]

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Yes. Thanks. Ken, the process we used has not changed. We were very aggressive last year from an internal standpoint and external standpoint, making sure that the price increases were passed along. I think we did a very good job. The difference -- and so that process this year has not changed. What changed was, and I'll say for the third or fourth time, the rate weather events that have happened in Q2 and Q3, right, that no one could have predicted. So when you look at those and frame it based on -- in that context, both Q2 and Q3, the performance of pricing was pretty darn good at 6% and roughly 3%. So the delta between the 3% and the 3.5% or so of inbound costs, I mean it will end up being timing. The question is just when, right, because we're working all the time with the end market to push pricing where we can push pricing. And at the same time, we're working with our vendor base, right, with inbound pricing. So I think we've had a pretty good history through time of making up any of those deltas, and it's really a function of the timing within the 90-day period.

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [71]

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The other parts that I would add to it as well too, Ken, as I think it speaks very highly of the strategic initiatives we've put in place on the revenue side to really drive value to the customer, right? You look at our digital platform, as Paul described, you look at everything that we've been doing in regards to our private label programs and others, we've just got a great strategy around driving revenue growth through providing additional services to the customers. And I think that will help us big time going forward.

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Operator [72]

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Your next question comes from Kevin Hocevar from Northcoast Research.

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Kevin William Hocevar, Northcoast Research Partners, LLC - VP & Equity Research Analyst [73]

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Question -- just a clarification, I think you said July was up 12% for residential, right? What was the growth for the company as a whole in terms of the existing branch sales growth? And then how did that trend throughout the June quarter? I think April, on your last call, you said it was up a little bit. How did that look in the balance of the quarter?

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Paul Isabella;President and CEO, [74]

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Yes. Total for July, company-wide was up 3% to 4%. Joe, you have the splits for the...

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [75]

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What was your second question that you asked?

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Paul Isabella;President and CEO, [76]

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The split by month in Q3.

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Joseph M. Nowicki, Beacon Roofing Supply, Inc. - Executive VP & CFO [77]

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The splits by months for Q3 that we just finished, so April was up around 1.5, May was down around 2.5 and June was down about 1.5.

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Kevin William Hocevar, Northcoast Research Partners, LLC - VP & Equity Research Analyst [78]

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Okay. Very helpful. And then I believe on the residential side, there's some price increases in July. And I think distributors are trying to, obviously, pass some of those along, too, so curious what you're seeing there. Are manufacturers having any success? And then you guys and your peers try and push pricing to offset the price cost pressures you felt. Do you think you'll be able to, if July is having any success, push that along and maybe make up some ground to pick up what you didn't get from the April increase? Or kind of curious if you could just comment on the dynamic.

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Paul Isabella;President and CEO, [79]

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Yes. We don't -- internally, we don't believe a second price increase will hold it off or any other price increase they might be talking about. I just don't think there's enough drivers in the market. Asphalt is flattening out. It actually, I think, is favorable in June or July to last year. So no, we don't think that the second or third will hit. I think there's an opportunity for us to pick up a bit in the first here and there, especially in those soft markets that you referenced, and that's what we're working on through Q4, and we see a little bit of that in the small price we're assuming sequentially in Q4.

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Operator [80]

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That concludes the questions. Now I would like to turn the call back over to Mr. Isabella for his closing comments.

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Paul Isabella;President and CEO, [81]

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Great. Thank you. Thanks to everyone for joining our call. As you know, I'll be officially leaving Beacon later this year, and this will be my final conference call. Needless to say, I'm extremely proud of what our team has accomplished during my time with the company. Beacon is in great hands with an incredibly strong Board, a very talented executive leadership team and a very talented incoming CEO in Julian Francis. I am confident the next several years are going to be very successful ones for Beacon. Our strategy is very sound, and we're in a highly attractive industry with steady repair and remodel content, historically, in the 70% to 75% range.

We are the innovation leader in our industry, and our digital suite offers many customer value-adds that will drive future growth that outperforms the market. We appreciate the continued support from our investment community as well as our valued customer, suppliers and employees. Thank you, and have a great evening.

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Operator [82]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful evening. You may all disconnect.