Beacon Roofing Supply Inc (BECN) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply's Fourth Quarter and Fiscal 2018 Earnings Conference Call. My name is Justin and I'll 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 plan and objectives and future economic performance. Forward-looking statements are only predictions and are subject to a number of risk 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 will fall within the safe harbor provision 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, November 19, 2018. And except as required by the law, the company undertakes no obligation to update or reverse 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. This company has posted a summary of financial presentation on the Investors section on its website under Events and Presentations that will be referenced during the 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.

I would now like to turn the call over to Mr. Paul Isabella, President and CEO. Sir, you may begin.

Thanks, Justin. Good afternoon, and welcome to our fourth quarter 2018 earnings call. 2018 was a year of 2 unique halves, one half that started out with solid revenue trends and good storm volume carryover, and all of that was reflected in our financial performance. And in January, we successfully closed on the Allied acquisition and have made tremendous progress throughout the year with the integration.

Conversely, the second half of the year was volume challenged as weather had a considerable impact on our business. Simply put, these challenges in the second half drove our sales and EPS miss. We know what happened, as seasonal fluctuations are not new to our business. A dramatic drop-off in demand on our Western markets caused by the prior 2-year hail damage and repair in 2016 and '17, and subsequent lack of hail events in 2018 drove our miss in the second half. In addition, our fourth quarter was severely impacted by Hurricane Florence, and extensive rain in the Eastern U.S. and Texas during September, after starting the quarter basically on track in July and August. That summarizes the 2018 results.

As I said previously, we know what happened, we know the impact weather can have on our business quarter-to-quarter. That said, our strategy remains sound, and over time we have proven that we can grow consistently both sales and profit. I expect that to be the case moving forward.

It's important to note, nothing has changed with industry fundamentals in our view, anchored by our 70% roofing sales, and close to 75% reroof repair and remodel content. Our future is bright, and as always, we have high expectations for 2019. And now I'll tell you why, starting with some 2018 positives and a review of a few strategic elements.

First, 2018 was a transformative year for Beacon with the highly strategic acquisition of Allied, as I mentioned earlier. Allied has propelled us to nearly $7 billion of 2018 sales, and has added density in existing geographies and added enviable new markets like New York and New Jersey. We have made tremendous progress since the January close, and are through most of the heavy lifting with the integration. Our team is energized and well positioned for 2019.

For the quarter and full year, we had record adjusted EBITDA performance. Year-over-year, we delivered a 30% plus improvement, which marks the fourth consecutive year of gains. Our price-cost performance was again positive during the quarter, building on our success from the third quarter. This not only reflects the discipline of our organization, but also the healthy and rational behavior by the entire industry. We view this as a very good sign, especially given the second half weather challenge the industry saw. And gross margins improved year-over-year, and this is the third consecutive quarter of improvement.

Another positive from Q4 in 2018 was our very strong free cash flow performance. It enabled us to pay down debt substantially, and lower our debt leverage. We will continue this focus in 2019 and beyond, balancing it with our business needs.

While 2018 was a strong year for cash flow generation, it follows a very consistent long-term track record. In fact, fiscal 2018 represents the 13th-consecutive year that our operating cash flow has exceeded net income, an accomplishment that demonstrates our strong cash flow performance in all environments, but specifically illustrating how much free cash we generate during these weather-impacted demand periods.

In terms of the Allied integration, the progress has been tremendous, as I pointed out earlier. The combined team is executing very well as we complete the work of systems integration and upgrades, and remain committed to servicing our customer base without disruption. In 2019, our team will continue their dedicated intense work as we continue sharing the best of the best from both companies, with a continued laser focus on adding value to our customers' businesses. This includes our product line addition such as interior products, private label, waterproofing, insulation and solar as well as innovation in the supply chain, distribution network and our digital platform.

Our strategic path is well defined and we remain fully committed to our innovative growth initiatives, including our industry-leading digital platforms, Beacon Pro+ and Beacon 3D+; Our TRI-BUILT private label products, national account expansion, complementary products expansion, 2-step dealer sales, and our continued focus on residential and nonresidential roofing organic growth.

Our e-commerce sales continued to grow and we envision $1 billion business in the next few years. The addition of expanded customer offerings such as delivery notification and additional product lines will support this growth and augment the most complete digital offering in the industry.

Within Complementary products, the available market opportunity remains very large and highly diverse, including interior products, siding, trim and accessories, windows and doors, waterproofing, insulation and solar. These combined markets are in the tens of billions of dollars annually, and represent a strategic opportunity for Beacon to add to our current position and continue the consistent growth we have experienced in this category in the last 2 years.

Another strategic growth focus is our retail branch openings. We plan on opening 10 to 15 new locations during fiscal 2019. While we have excellent national penetration currently, there continues to be adjacent markets that we can better serve with additional locations across our multiple platforms. The traditional roofing branch, a new waterproofing or insulation location, or an interiors branch. Our combined company has opened 77 over the last 5 years, and we have become very efficient with both the launch and the development phases.

As you can see, we have many avenues to grow, we'll have our team very focused on each of them. In addition, we will continue to develop our pipeline of acquisition candidates, and when the timing is right, I'm confident we'll add solid companies.

In 2019, we expect the industry to provide a healthier backdrop as weather-impacted markets normalize. Regardless of weather, we anticipate another strong year through our continued focus on profitable sales, EPS and EBITDA growth, driving attractive levels of free cash flow and improving our balance sheet through debt paydown.

In closing, I think it's important that I repeat that our company is still approximately 75% reroof, repair and remodel. And 70% of our sales are roofing-related, which is highly nondiscretionary. There are tens of millions of roofs in our geographies, and simply put, they will fail and we'll be there to help reroof them.

And now I'll turn the call over to Joe for some more details.

Thanks, Paul, and good afternoon, everyone. I'll now provide some additional details related to our fourth quarter results and our 2019 guidance.

Adjusted EPS finished fiscal 2018 at $2.70, another record for Beacon. And our adjusted EBITDA was also a record at $484 million.

Our free cash flow performance was also very strong, nearly reaching $500 million for the full year and represents a high teens free cash flow yield. This allowed us to significantly pay down our debt, and lower our debt leverage ratio to 4.2x. Although some of this reflects favorable timing on key working capital items, we're nevertheless expecting another strong year in 2019 supporting further balance sheet improvements.

We produced strong fourth quarter revenue growth of 50%, as the results included contributions from the strategic acquisitions of Allied, Tri-State and Atlas.

Organic sales declined 5.6%, driven by significant volume challenges across the historical hail markets, a factor we discussed last quarter. This was partially offset by mid- to high single-digit price increases and a continued strong contribution in Florida following Hurricane Irma.

The September month also saw a meaningful business disruption from persistent rains in Texas, and across the large portion of the Eastern U.S. from the Carolinas into New England. We have seen sales improvement from the July to August months, and we are positioned well to hit our revenue guidance. But the higher levels of precipitation hurt the quarter's final month, and was a primary driver of the miss to our forecasted revenues.

It's important to note that we're seeing stabilization during October, which is right in line with what we were expecting. Business that was deferred as a result of September rainfall is now getting completed.

Our Complementary products segment was a positive highlight during Q4 and posted 8.1% organic growth for the full year. This segment does not have the same storm exposure as our roofing lines, and positive growth clearly benefited from our heightened focus on this category, as Paul mentioned during his remarks.

Overall, pricing was up almost 7.5 percentage points, with gains across all product categories. This is a significant positive not only for Beacon but for our industry in total.

Florida was the standout performer again, primarily as a result of Hurricane Irma. And we estimate a year-to-year Q4 revenue benefit to Beacon in the low single digits. The positive incremental contribution from Irma, however, has slowed since peaking in our fiscal second quarter.

Hail states saw a significant pressure during the period, with our volume down in those states close to 20%. Hail comparisons have been challenged for our industry, as Paul has mentioned.

Now shifting to gross margins. During the fourth quarter, we increased our gross margin percentage year-over-year from 25% to 25.4%. Our company-wide gross margins benefited from strong profitability at our acquired businesses and a favorable price-cost spread. Quarterly gross margins would have been higher, but results were negatively impacted by an unfavorable product mix as our higher-margin residential roofing products saw volume decline in the period. This shows up clearly in our Q4 existing market gross margin that declined year-over-year.

As Paul mentioned, our selling prices were slightly more than our increases in product costs. Given all that's happened with industry demand challenges in the past 2 quarters, Beacon has still been successful at passing on higher supplier pricing. Truly a great accomplishment from our organization.

It's probably also important to note that even in the markets that were the most challenged by post-storm weather, like Texas and Colorado, we were still able to get price increases. As you know, we'll continue to supplement solid price-cost discipline with other gross margin initiatives. Examples include the Allied-related procurement synergies and the expansion of our private label product lines.

Our operating expenses were higher than our forecast, and did not reflect our traditional rates of leverage. But it's important to note that while our total GAAP operating expenses increased by approximately $148 million from 18.2% to 19.9%, the majority of that is related to our Allied acquisition. Our adjusted existing market operating expenses were actually down by approximately $6 million, and only up 40 basis points to 16.5%, all as a result of the lower volume.

While we did take significant actions to reduce costs in the Western hail markets, it was not enough to offset the quick drop in volume that occurred. We found it very difficult to react as quickly as the weather changed, specifically the rain in Texas and on the East Coast, coupled with the impact of Hurricane Florence. In addition, we didn't want to overreact as we still had the traditionally-strong month of October ahead of us.

Beacon has always been known for our lean operating expense structure, this will be an area of continued focus in 2019 as we look to drive additional cost synergies.

As you know, we're only 11 months in the integration, and so far are less than halfway through the synergy realization. Our operating expense rate is high right now due to the Allied cost structure, we know that and we're not done yet. We'll also work to more aggressively and quickly align our costs to volume changes.

In regard to synergies, the team did an excellent job delivering on our synergy commitments. We drove approximately $50 million in synergies for the year, ahead of our initial estimates of $40 million.

Last, I want to spend a few minutes providing an overview of our fiscal 2019 guidance expectations. The current Street estimates have a very wide range for sales and EPS, our intent today is to reset those expectations and narrow that range based on the market conditions we experienced in 2018.

For 2019, we're targeting revenues between $7 billion and $7.35 billion. From an acquisition perspective, Allied will provide an incremental contribution during Q1 of approximately $600 million, while our 2 smaller acquisitions that we made in 2018 are expected to add approximately $30 million incrementally during the full year.

Our estimate for organic sales is therefore basically flat year-over-year. But this is really the net impact of 2 offsetting factors. All the positive initiatives we are undertaking to grow organically are being offset by our assumption of no major weather events in 2019, and therefore, suffering from the negative drag of 2016 and '17 hailstorms and the 2018 hurricanes.

The implementation of the organic growth initiatives that Paul described, combined with the successful execution of last year's price increases, will drive a 2019 mid-single digit organic growth rate. This is all before the negative impact of the weather factored in, which I'll talk about next.

So this is on track with our long-term organic growth rates, nothing's changed at Beacon on our growth strategy.

The challenge that we ran into in 2018, and we believe will continue in 2019 for the industry, is the weather impact. We came off to real strong hail events in the years 2016 and '17, these are difficult to repeat. And they also pulled forward business into those years as roofs were replaced earlier in their life cycle. The midpoint of our forecast therefore assumes a weather year similar to 2018 with no major hail events and the continued weakness in the West due to the post-2016 and '17 hail impact, and the end of the favorable hurricane impact from Irma in Florida. This weather impact will offset the growth initiatives discussed above, and when combined, drives an overall flat organic growth rate for the midpoint of our range.

The low end of the revenue was developed in event of a soft economy and therefore softer demand environment, while the high end of the range assumes a return to normal storm demand in the second half of the year. As a result, our adjusted EBITDA is expected to range between $540 million and $610 million, the lower end reflects the bottom of our revenue expectations and weaker gross margins tied to higher competitive pricing pressure that would be expected with the sustained softer demand environment. The upper end of our EBITDA range reflects a return to a normal storm demand in the second half of 2019, which would also likely provide firmer gross margins.

These results also assume approximately $100 million in Allied synergy realization for the full year, or an incremental $50 million relative to 2018. At this level of EBITDA, this supports an adjusted EPS range of $2.90 to $3.35.

I'll now turn it back to Paul before taking your questions.

Thanks, Joe, just a couple of comments before we go to Q&A. While it certainly wasn't our plan to have the second half fiscal 2018 that we had, these challenges were the result of unfavorable weather events that I've already mentioned.

We do remain confident in this industry and our company's outlook going forward. The integration is going very well, our outstanding team of extraordinary people will continue to work tirelessly to add value to our customers. This effort will only get more intense. Our future is bright.

With that, I'd like to turn the call back to the operator to initiate the Q&A portion of the call.

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

Just wondered if you could provide a little more color just on the organic growth target for fiscal '19, if you could provide maybe some of the different end-market buckets that you're assuming there, whether it's residential, commercial or the other Complementary businesses?

Garik, this is Joe. I'll give you a little bit more detail. So hopefully you caught the overall framing of the organic growth, right? So it's basically a flat overall growth, you've got kind of the weather impact on the downside, so that's a down kind of mid-single, but then the core initiatives in growth, which, I think, was really what I'm trying to get at, upper mid-single-digits range. And it's those 2 weather -- offsetting those core initiatives part. If I look at it and try to break down that core initiatives piece a little bit more, that up mid-singles, it's roughly about half of that is from price, and then half of that would be from a unit or a volume growth. So the volume growth then really is a combination of both market growth and our traditional market overperformance based on the growth initiatives that Paul said. At this point, when you look across product categories, so to your point of commercial versus residential, we view them all pretty similar at this point in time in terms of that growth rate. In total, as I mentioned, the unit growth rates, the volume piece of it, up roughly in that 2% to 3% range. And that's the combination of our market growth and market overperformance.

Okay, that's helpful. And I guess just a follow-up would be just on price-cost in fiscal '19, could you provide a little bit more granularity on how you expect -- you made good progress in '18 in a tough market, how should we think of price-cost moving forward?

Yes, I think the overarching view we have is that we won't gain any more, so it'll just be the continuation and then hitting the comps to get to that 2-and-change-or-so price, with cost being basically neutral to it, as we go through the year, Garik. That's the assumption we made. And we feel good about that just based on the fact that if we believe inflation is going to continue to put pressure on the manufacturers.

Our next question comes from Jay McCanless from Wedbush.

So the first question I had, the decline from 3Q to 4Q in your inventory numbers, was a little bit higher on a percentage basis than what we've seen in the last couple of years. Could you talk about what's going on there? And how you guys are thinking about inventory levels now?

Yes, I mean I'll give you just a quick high level. One, we think we're in a really good position as we exit the year. I think it was really just a function of us being from our Q3 in very good position to sell through. I mean, it would have been even lower, quite frankly, if September hadn't happened with all the intense rain, because that obviously impacted our resi sales for the most part, that's where most of that inventory is. So we feel good about it as we're entering the winter period. Joe, I don't know if you have anything to add.

No, I think that's -- is absolutely right, we were a little bit high when we entered the quarter, so at the end of Q3, and we talked about that. And the teams did an excellent job working it down. As Paul said, we would have done even better except for the weather and the rain in September. But great job by the team.

Okay. And the second question I had is, are there any price increases you guys are trying to push through now? Or are those largely stopped since it sounds like the manufacturers have not tried to push through their price increases?

Yes, I think for the most part they have stopped, right, and we'll see what the winter, Jan, Feb, March time period brings, I mean, I can't even comment on that. Other than as I said earlier, I think the manufacturers will continue to see inflation pressure but time will tell with that. But for now, they've stopped.

The add I would suggest also is that in the organic growth numbers that I went through, I talked about that core initiatives piece being up that mid-single digits, half of that being price. That half-priced element really is just a carryover of what we saw in 2018, just rolled into the rest of the year. As you know, we started with the price increases in that January, February time frame, so this is just rolling the rest of those right on through, there's no new price increases incorporated.

Our next question comes from Michael Rehaut from JPMorgan.

This is Elad on for Mike. I was first wondering, you guys mentioned that price-cost is positive, really across the industry, and I was wondering what you saw maybe from some of the competitors since you saw them following the price increases, which is just what it sounded like?

Yes, no, the implication -- we obviously don't have any competitive data. The implication was that even with the down volume caused by whether you look at September month because of the rains and Florence or the Western markets because of the hail comps year-over-year, we were able to get price in those markets and pretty much flattish or positive price costs, not very much. And so my view is that the -- in my comment, in my prepared text for that -- my feeling is that the industry is more rational. It's pretty rare for us to be able -- at least in my 11-year orientation, to get price in a down market. So I think that speaks well to rational behavior. That was the extent of my comment.

That's encouraging. And then the other thing is, you mentioned that you guys took significant actions to reduce costs in the Western region. And I was just wondering, if you could expand a little bit on what are the actions that you took there? And if there is maybe some upside to do that kind of stuff in 2019 as well?

Yes, hey, we've always been a company that prides itself on running very lean, so this isn't new to us. And in the past, as we enter our winter period, we always reduce costs, we've done that well before I got here and we'll continue that. I think as the West regions look at the extent of the hail drop-off and the fact that the repair work got done quicker, they took that type of action just quicker. So we're really talking about all the cost buckets that could be actioned related to sales. I mean, it really isn't any more complicated than that. And they drove as much cost out as they could to rightsize the business for the volume they see going forward.

Our next question comes from Kathryn Thomas (sic) [Kathryn Thompson] from Thompson Research Group.

As you look into 2019, I appreciated the color that you gave on EBITDA and EPS in the top line, but you give a framework of how to think about free cash flow generation for '19? And any -- and a follow on with that, any thoughts on debt reduction as part of that free cash flow framework?

Yes, Kathryn, I'll just say, we're not going to put out a specific number right now. We do know that the 500 or thereabouts was impacted because of timing, right? We took inventory down, et cetera. I wouldn't say a huge portion of it is, but given that there's so many ins and outs related to cash, whether it be inventory buildup, potentially next year depending on where net debt is, acquisitions, right? It's very difficult right now for us to give an estimate other than it's going to continue to be strong as I said in my script.

Okay. And there were quite a few kind of puts -- there was a fairly competitive landscape as you had -- you had acquired Allied and there were several of your peers that also had some transaction this year. And the feedback and the feel that we've gotten is that it's fairly competitive in the landscape for much of the year, but it appears to be settling down as we come to the back half of the year. Would you be willing to give any commentary, just about what you're seeing in the distribution landscape in general? And your observations on the general competitive landscape?

Thanks, Kathryn. Yes, as I said, I'll go back to my view, given our price performance, that the -- that landscape is becoming more rational. I think it's still competitive, it was competitive 11 years ago, it was competitive 20 years ago. That's just the nature of distribution. I think a lot of it has to do with when the West is going to recover, right, and that's just the natural fact of home repair being pulled forward, and the fact that at some point it normalizes. Now we don't sit back and say we're waiting for that, or as I listed in my initiatives, we're extremely aggressive by product and even by channel to drive organic growth. Again, I think if you just fall back to our pricing performance, with that normal competition that occurs, I think that's a good sign for the overall competitors of the industry.

And our next question comes from Ryan Merkel from William Blair.

So just thinking about the cadence of organic growth by quarter. Should we think about the start to 2019 being down sort of mid-single digits? And then improving as you hit easier comparisons as the year goes on?

I think, in general, you're correct. It starts out much lower in the first quarter of the year because if you think about it, one of the items impacting our revenues is the weather, right? And some of that weather carryover from the hail storms in the West is bigger in the first and the second quarter, and that's when it starts to then mitigate after that. So you're correct, we'll see more of a negative impact in the first half of the year than the second half of the year.

And then just as a follow-up, you mentioned September was pretty rough with the rain, and then October was stable, I think was the word. So is October the same as September? In terms of that growth decline, I guess.

No, the growth -- the October rate of decline was improved over where September was. October was a low-single-digit type -- kind of growth -- negative low-single-digit type drop-off in October, so much better than September.

Okay. And then maybe just lastly, on share gains, with organic growth down about 5.6%, is your sense that, that's in line with the market? Or better than the market?

Ryan, it's -- I mean, we're not going to try to forecast what the market has done. I know some folks are using certain indicators that we don't believe are valid. I mean, we continue to do the sanity check internally by customer, what the customer is seeing, and our view is that we have not lost share. We think we have a very strong operating -- sorry for the noise, it's not us. We believe that we have a strong customer offering, so we think we're keeping pace or doing better than any of the market numbers. Again, they're -- as you know, they're very difficult to put a finger on, in the near term.

Our next question comes from Keith Hughes with SunTrust.

The question is on operating expenses. You had highlighted in the organic numbers, operating expenses as a percentage of sale is up. But how did those numbers come in at Allied? That seems to be the -- one of the biggest deviations from the models that are out there heading into this quarter?

Keith, it's Joe. Yes, you're right, our Allied operating expenses came in a little bit higher than we had anticipated, because you're right, if you look at the -- our existing market OpEx numbers, we -- even when you adjust for some of the weather, right, so our existing market expenses should have down, they were down $6 million. They should have been down probably about $6.5 million, when you account for our traditional fixed variable relationships. So we might have been off $0.5 million, maybe $1 million on our existing markets because of the weather issues I mentioned. We ran into some challenges more on the Allied side of our operating expenses. Things like, one, some of their depreciation, as we took the -- we completed the work on the step-up with the depreciation of their asset values that drove a little higher depreciation than we were expecting, they have a little bit older and aged fleet, so we had a little bit higher cost on some of our maintenance and our fleet-related costs. And then there were a couple of other items that drove -- fuel costs, one, as an example, we saw some incremental fuel costs with the diesel prices up as well too, which caught us a little bit off guard as well too. So yes, you're right, a lot of the expenses came from the Allied piece. But as you know, we're -- as I said, we're only 11 months in the integration, so this is part of all we're getting as continuing down the path of the remaining portion of our synergies. Plus as we do with RSG, continuing to drive that synergy number even higher as we go into next year.

So what kind of EBITDA number did -- or EBITDA percentage of Allied do in the quarter?

Sorry, you broke up -- their EBITDA percentage for the full...

Yes, what kind of EBITDA percentage did Allied do in the quarter? You were 9.2% as a combined company, I assume it was below that?

Yes, in the pro forma that we would've issued, that was the public document, you would have seen they were slightly below our EBITDA numbers, pretty close, but they were slightly below our EBITDA numbers. I think they were running somewhere -- what we reported, somewhere in that 9% to 10% range, if I remember correctly. I'd have to look up specifically...

I'm asking on this fourth quarter, the quarter you just reported. What kind of EBITDA margin did Allied do?

In the fourth quarter, yes, I think that's what I was referring to, based on the pro forma that we gave for that quarter.

Okay, so that's for the fourth quarter you just reported, is that correct?

Correct. Not that we just reported, but for last year, we don't provide Allied-specific ranges by quarter and break them out that way. But when we did the pro forma for last year, that's roughly what they were running, correct.

Okay. That's what I'm trying to get a sense for is which direction is this heading because you've been very positive on the synergies from this. And we understand what happened in roofing on the quarter. And I think there was an expectation that Allied would be on the upside here, but it doesn't really appear to be as -- are all your synergies being offset by the cost you highlighted?

On the Allied side, yes. Not all offset, not at all because it's a significant amount of synergies that we've seen. But clearly, we did get some offset from those Allied costs. But this is part of the -- we're still working through the rest of the synergies. They're only halfway through of all the synergy realization, Keith, and I think you'll see us get at all those other elements as we go through the rest of the year. I think it will get better.

Yes -- so Keith, we're not concerned at all, right? Because as Joe just alluded to, we have the synergy piece. And then of course, as volumes normalize, right, and that's why we gave this range of mid-high, we would expect to see their performance continue to improve. I mean, they're a great company, great products, great people, not part of us, right? So our plan is intact and we are very positive about the combined company going forward.

And do keep in mind, some of the synergies showed up -- show up in our existing market numbers as well, not all, just on the Allied piece.

Okay. Complementary products was up 2.8% organically in the quarter, we've seen far better numbers on that for several quarters now. I guess number one, how much of a role did price play in that result? And then could you just give us kind of a sense what the pacing is in that -- in those goods?

So the price piece was pretty consistent across our product categories. So we don't really break down the price element by a product category. But it was pretty consistent amongst them in terms of our other total, as I said, it was at roughly 7.5%. If you look at the volume piece of it, the volume was kind of -- or the unit volume of it was also impacted by a lot of those same weather elements that we mentioned before, right, from the rain through also in the West, where we saw some of that down as well too. And that would have been the driver I think you're referring to.

Yes, so it had pretty negative units in the quarter, is that fair to say on Complementary products?

Certainly, yes.

All right. And did you get the sense that besides the weather impact, was there just a slowdown in spending in that area? You know we've seen that in some other companies as we've gone through earnings season.

A slowdown, Keith, where?

Just in Complementary goods, in general. Maybe it's a little less weather sensitive than what we see in your roofing units? Just a lower level spent, particularly becoming a negative.

No. I think no. We think it's just -- in terms of the price-cost, we're just -- we believe it's just timing. I mean, that thing is -- Complementary has performed very well for us as we've gone through the year. So no, I wouldn't necessarily say there's any slowdown or any change other than just timing would hit.

And the weather impact. It was -- a lot of the Complementary declines were in those same weather markets as well too, Keith, so if anything, we're quite optimistic on the growth we've seen on the Complementary side.

And our next question will be from Phil Ng from Jefferies.

It's actually Maggie on for Phil. Going back to SG&A leverage and the Allied synergies, how should we think about the cadence of that incremental $50 million in 2019 of those Allied synergies? And should we expect that -- SG&A as a percentage of sales, should that be improving steadily throughout the year?

Yes, in regards to the Allied synergies, I think your assumption is correct. I would assume that it is primarily even through the course of the year. Maybe a little bit more front-end loaded as we get a few more of some of the SG&A benefits that we have kind of put in place running through, combined with some more of the supply chain purchasing synergies, will come through a little bit earlier. But overall, I think it's a fair assumption to assume level through the year.

Okay. And then can you just talk about your comfort around leverage? And then in general your capital allocation priorities in 2019?

Sure. One, as you've seen, we had a great free cash flow through the year, especially in the fourth quarter. And I think what we do with that cash probably will describe our priorities, we used it to pay down the debt. You saw our debt levels go from roughly $3.1 billion at the end of the third quarter to $2.65 billion at the end of this quarter. So we took that free cash flow and used it to pay down our debt accordingly. As we said at the Allied acquisition, when we bought Allied initially, we had an initial debt leverage ratio around 4.5x, and our intent was to work it down roughly a half a turn a year, that's still our intent. Our primary utilization of cash, as Paul mentioned, will be to work down and pay through our – pay down the debt. So that's the primary utilization of our cash flow at this point.

And our next question comes from David Manthey from Baird.

So could you discuss the trends in pricing at the beginning of the quarter versus those at the end? And what I'm getting at, did you end the quarter with pricing that was worse than what you started with?

Dave, this is Joe. Yes, I can give you a general idea of the trend. While it did increase a bit each of the months through there, it really started to level off through the quarter, it did not decline at all in the last month. But it certainly did -- the rate of increase kind of started to level off as we went through the quarter. It was pretty consistent with the level of -- no decline.

As it relates to next year, I think I heard you say you were assuming 2% price. And if we sort of look at the comparisons with this year and carry that forward, doesn't that imply that pricing for fiscal '19 is actually lower than it was in the fourth quarter specifically, that it comes off of these current prices?

No, not at all David. It's roughly 2% to 3%., so maybe they're picking the low end of the range. If you think about it more, it's 2.5% or a little bit above that might get you more in the ballpark. But in total, all that we did on pricing is -- our assumption is the price we have been getting, so where we ended this quarter at that 7.5% range, we looked at every quarter through the year, and said all right, in order to get back to -- every quarter up to the 7.5%, where we're at now, what does that mean in incremental price?

Okay. And then as it relates to your weather assumptions for next year, you're assuming no major weather events, is what you said. And then you also said you're assuming the weather is similar to fiscal '18. I guess I'm trying to understand, are you saying that you're assuming another below-average weather year? And that any major storm activity would be upside to your guidance, is that what you're implying?

Yes, that would be correct, Dave. Because what we assumed in our forecast here was that the weather element's kind of a down mid-single, and there's 2 pieces to that. So one of them is same type of hail year as we saw last year, which was a soft hail year. But keep in mind, last year we did have some hail work that was being done in the West in the first and the second quarters, as they were working through the remaining of the '16 and '17 hailstorms. And then also keep in mind, we had last year a large amount. The second one is of the Irma volume that went through, so we're assuming a little bit more Irma that gets finished up this quarter, but that's it. So you take those 2 things combined and that's what gets you this down mid-singles on the weather for next year as the midpoint of our organic growth.

Yes, David. I think the key is that's that midpoint, and again, we just think it makes sense to talk about the year as we framed and exited '18. And then to your point, if any of those events happen, based on our assumptions, right, that will drive us up closer or to the higher end. And then again, just for clarification, all the lower end in it is -- is if there's some softening at all in the economy, et cetera, et cetera, or even "worse weather" meaning winter is very severe or not severe, right, it depends on a lot of different elements within normalized weather in the different markets.

Our next question comes from Trey Morrish from Evercore.

So I wanted to talk on the synergies real quick. You mentioned that you're running slightly ahead of your expectations this year, realizing $50 million in synergies. But your commentary for next year of realizing about $100 million all-in, including this year, seems back to be about in-line with your pace? So I'm wondering, why you have a bit of a slowing from moving ahead of plan to moving to in-line with the plan?

I think our full pacing, as you know, is $120 million, so this may be the difference. And the math is, from next year we won't see the full $120 million, but we'll get it up to $100 million. And then in the first quarter of the following year, we'll add the extra $20 million on there that gets to the $120 million number. So I think if you take that into consideration, that might help you with your pacing piece to show you that we're going to continue to make improvements. And by the way, as I also said in my prepared comments, our intent is to continue to work those synergy numbers as well too, as we did with Allied -- as we did with the RSG transaction and others, so we're continuing to look for additional synergies as part of the integration work that's going on.

Yes, so all that is -- I'll just add, is just the timing of some of those actions hitting as we go through the beginning of this year, and then they turn through next year or even later, let's say, the second quarter of '19. And then as they go into '20, that's when we continue to see that benefit.

The other impact to keep in mind what impacts the synergy realization is the seasonality of our business, right, with slower revenues in this December quarter and primarily in that March quarter, that means you won't realize as much too. So you can't just take the pacing that you have in the fourth quarter here. And then we'll look forward, that might help as well too.

Okay. And then looking at your first calendar or first fiscal quarter, some of the manufacturers are talking about their 4Q shipments being down potentially 25%. And I'm just wondering, if you think it's possible for your volumes to be down that magnitude in resi roofing or do you think it's going to be something a little bit better than that?

Yes, I think what you have to remember is -- and this is really important, and we've said it a number of times is, you really have to detach, especially within a quarter, even within a year, detach the manufacturers-reported shipments at the distribution versus distribution sales, right? Because there's a lot going on, it's prior year volumes that were shipped in, current demand, i.e. we've been talking about the back, even the beginning of this year, potentially through our Q2 of the Western hail market, still being soft. So all of that plays into that element of the manufacturer shipping product or not, into distribution and it doesn't mean anything related to us, right? We still have our sales initiatives, we said on this call, we'll still be impacted in Q1 by the fact that last year, our Western markets were still shipping and doing repair work for that damage. So to try to draw a parallel between them saying they're down 25 and where we'll be, is impossible. Now, maybe over time, decade, half a decade, there might be some parallel but in the near term, there's virtually nothing. Because we still have inventory on hand that we're shipping, we're still naturally going to buy inventory because we have to keep product in stock for our customer base, right, that's the reality.

Our next question comes from Matt McCall from Seaport Global Securities.

Maybe go back to the deleveraging outlook a little bit, Joe, I mean if I look at the EBITDA projections, you're going to hit pretty close to half a turn of net debt-to-EBITDA reduction without any debt -- without any actual debt reduction. What's the -- what's kind of the actual debt reduction outlook that you're targeting for '19?

So again, we haven't given a specific free cash flow outlook number for it, Matt, in there. But when we went through the math based on those EBITDA numbers we just went through, when you look at the approximate free cash flow that it generates based on some of the metrics that Paul talked about, we can pretty much get back in line with what we had said about taking just a turnout. Don't forget, we raise CapEx, that takes some of that away as well too. And the CapEx year-over-year will probably be slightly up from where it was in the current year as we continue to kind of work through and manage that part of it. So I think if you look at the metrics, Matt, I can take a look at it deeper, Matt, maybe dive into it with you afterwards on some specifics that will help you get to it. But it should be aligned that we can get down a half a turn each year, and we're still on track.

Okay. And then -- and I think Paul, you made a comment, I think it was to Kathryn's question around -- I think you mentioned it should -- depending on net leverage that you may look at acquisitions, what did you mean there? What -- would you get to a certain level and then you start to look at it again? I would assume that debt reduction would be the #1 focus right now?

Yes, as I said in my prepared remarks that at the right -- when the timing is right, so that doesn't necessarily mean in 2019, related to free cash, I said based on other uses, right? And that could be just inventory, and I won't say it's highly unlikely we'll do an acquisition in 2019. But as we've said, our primary goal is to pay down debt and then as a result -- drive EBITDA of course, and as a result net debt will reduce. I think if we were to do any acquisition, it would be very strategic and very small, what we've called a tuck-in. So for those on the call, I would not be concerned about that, our primary focus is continued debt paydown, but we have been an acquirer and we'll continue to be acquirer, we just have to balance everything to make sure we're doing the right thing for all the metrics. That's all I meant. So there's no plans to necessarily do an acquisition in 2019. It was just more of a comment I made to say, hey, there could be other uses of cash like inventory drop, if we found that's the -- or think that's the right thing to do, as we enter or get to the midpoint of next year. But any acquisition that we would potentially do would be very, very small and not have a major impact.

Our next question comes from Scott Schrier from Citi. If your phone is on mute, could you please unmute it?

It's Tim Mazurczak on for Scott. Can you hear me now?

Yes, we can.

Okay, perfect. So in terms of network rationalization, what is the opportunity with that? Can you just kind of expand on that? You've combined 40 branches to date?

Yes, well there's a couple of pieces. One, the 40 branches just allude to the synergy work and its consolidation. Because if you have a branch 0.5 mile away, and everything lines up, of course, we're going to take the opportunity to consolidate, that's what we've done. Beyond that, it's just -- especially now with us having so many dense markets, so many dense MSAs with multiple branches, we need to continue our work to maximize shipments, use of branch personnel, all those things, which we've begun. Some of that is baked into our synergy target within the $120 million. We think there's additional opportunity as we go through these next few years. So we're just really targeting -- again, it's separate from the branch consolidations, targeting our MSAs where we have multiple locations, much like Allied has done, to drive efficiencies within our network, fuel, freight, inventory, et cetera.

Okay, then just one quick follow-up. You said about $1 billion in business will come from e-commerce in the next few years. Are any of -- is any of that revenue coming from the rationalization of the networks? Are some going from in-store to more e-commerce or no?

Yes, the assumptions I make when I say $1 billion is we're in a pretty good shape in terms of where we're exiting the year, and whether it's 3 to 5 years, that's that $1 billion target. A lot of that will be cannibalization, I mean, there is a piece of that, that will be new because we'll attract new customers. Again, it's not an exact number, but right now we're targeting 10% to 15% new, potentially some of that could come from that. But we know as we have rolled this out and we really just went through our first fiscal year, with the e-com platform, still continuing, as I mentioned in my prepared remarks, continuing to add functionality that it's going to grow customers like it, it helps them do their jobs better. We know that will take existing product or orders that are going through our regular process, convert them to e-comm and then we will naturally grow additional customers as we go through time.

Thank you. And that concludes the questions. Now I'd like to turn the call back over to Mr. Isabella for closing comments.

Thanks, Justin. Just briefly, thanks again for everyone participating in today's call. We appreciate the interest from investors, customers, suppliers and our employees. And as a reminder, our second Investor Day will be in New York City on December 13, and this event will also be webcast. We wish all of you and your families a happy Thanksgiving. Have a good rest of the evening. Thanks.

Thank you. And this concludes today's call. Everyone may disconnect.