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Beacon Roofing Supply Inc (NASDAQ: BECN) 2021 Third Quarter Earnings Conference Call, November 19, 2021, 5:00 PM Eastern Time
Good afternoon, ladies and gentlemen, and welcome to Beacon's fourth quarter and 2021 fiscal year earnings conference call. My name is Selena and I will be your coordinator today.
This conference call will contain forward-looking statements, including statements about the company’s plans and goals and future economic performance. Forward-looking statements can be identified by the fact that they are not strictly related to historical or current facts, and often use such as expectations, estimates, expectations, beliefs, possible results, prospects, projects and other words and expressions with similar meaning. Sexual statements are only predictions and are subject to many risks and uncertainties. Therefore, due to various important factors, including but not limited to the risk factors section of the company's latest 2020 Form 10-K and subsequent filings with the US Securities and Exchange Commission. These forward-looking statements are consistent with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the company’s future financial performance, including the company’s financial prospects. The forward-looking statements contained in this conference call are based on information as of November 18, 2021. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.
Finally, this conference call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures with the most comparable measures calculated and presented in accordance with GAAP is described in today’s press release and in the appendix to the presentation accompanying this conference call. Press releases and presentations can be found on our website www.becn.com
I now want to transfer the call to Mr. Binit Sanghvi, the head of investor relations. Please continue with Mr. Sanvi.
Binit Sanghvi - Head of Investor Relations
Thank you Selena. Good afternoon and welcome to our fourth quarter and fiscal 2021 earnings conference call. Today I spoke with Julian Francis, President and CEO, and Frank Lonegro, Chief Financial Officer. Our prepared comments will correspond to the slides posted in the Investor Relations section of the Beacon website. After the comments prepared by the management, there will be a question and answer session.
I will now transfer the call to Julian.
Julian G. Francis - President and Chief Executive Officer
Thanks Binite. good afternoon everyone. Let's start with slide 4. Two years ago, as the CEO of Beacon, I hosted my first investor conference call. In that conference call, I talked about the growth and profit margin expansion opportunities that I think are before us. I talked about focusing on customers, improving our branch operations, leveraging our scale, and driving shareholder value. Today, I am happy to say that we have made significant progress on these commitments, and 2021 will be a change. We continue to use the advantages of this platform to create record annual sales and adjusted EBITDA. In fiscal 2021, our sales have increased by approximately 12%, and revenues in all three business lines have increased. Our focus on pricing analysis and operational execution has yielded results in a challenging supply environment. We are focused on improving the performance of our bottom-fifth branches, which helps to achieve revenue growth. Sales of these branches increased by 15% throughout the year, which was 300 basis points faster than other branches. We have also expanded our focus on the OTC branch network and increased hub investment and green space in key growth markets.
The divestiture of the interior decoration business has made us a key leader in the field of outdoor construction products. About 80% of our business today is residential or commercial roofing. These are huge attractive markets. Over 80% of roofs are classified as repairs and replacements, the vast majority of which are non-discretionary. We regained financial flexibility through the debt repayment of the divestiture of proceeds and a series of refinancing transactions. The result is a stronger balance sheet at the end of the fourth quarter, lower cash interest, and a net leverage of 2.1 times. We now have enough space to invest in future value creation opportunities for growth.
In terms of leadership, we revitalized our team. The capabilities these people bring to Beacon are critical to the execution of our strategic plan. These initiatives will drive our long-term ambitions to prove that we have multiple ways to develop and enhance the customer experience, drive revenue and profit expansion, and create value for customers, suppliers, employees, and shareholders. Finally, we changed our business while actively practicing our values. Today, we let every employee understand the meaning of working at Beacon, how we celebrate what we are proud of, and how we face challenges. We are committed to social work to support our community and recognize the diverse talents in our company and industry. We have made progress in initiatives to reduce our carbon footprint. We have made progress in both diversity and ESG monitoring. We recognize the importance of our values to stakeholders and believe that they are the source of Beacon's differentiation.
All in all, our team performed well in a dynamic market environment, created record financial performance, and created more for our customers and shareholders.
Go to slide 5. We ended the fiscal year with strong performance, including record sales and adjusted EBITDA. I am satisfied with the excellent execution of our nearly 7,000 team members in providing our customers with high-value solutions in an environment of supply challenges and inflation. Compared with the very difficult comparison of the same period last year, sales in the fourth quarter increased by 7%. You will remember that due to housing investment and higher storm volume, there was a record demand for shingles. Although we are seeing longer project cycle times, the end-market demand for new housing remains high. Commercial activities also show a steady trend, as evidenced by the year-end backlog or increased backlog. We have seen inflationary pressures in most product categories, and our top priority is pricing execution. Our local management is focused on staying ahead of the cost curve while ensuring that we provide products when and where our customers need them. As a result, the gross profit margin in the fourth quarter increased by 200 basis points year-on-year to 27.1%. We increased the adjusted EBITDA by 23% and the profit margin was 11.1%. This is the second consecutive quarter that the adjusted EBITDA margin has reached double digits.
I also want to take a moment to highlight some initiatives that show how we are committed to building an organization based on our values. People-oriented is our top priority. We believe that everyone should have a safe home, especially those men and women who have made great contributions to our country. The nationwide beacon of hope competition supports the veterans of Xingen. It is our honor to give back to veterans and their families. We also believe that putting people first means enabling our employees and customers to reach their full potential. We have further promoted this effort in the first year of launching the Robert R. Buck Scholarship Program to help employees’ children continue their education after graduating from high school. We rely on the unremitting efforts of our dedicated team members every day and are happy to help their children get equal opportunities.
We stated in the last conference call that we will seek to strategically add M&A transactions to our toolbox. I am happy to announce that we recently completed our first acquisition since 2018. Earlier this month, we acquired Midway Wholesale, a major distributor of premium roofing products and a wide range of complementary building materials. With annual sales of approximately US$130 million and 10 locations in the Midwest, we have expanded our presence in key growth markets in Kansas, Missouri, and Nebraska. We welcome the Midway team to Beacon and look forward to using their excellent reputation in customer service to further enhance our overall market position.
Now please turn to page 6 of the slide. I will briefly introduce our four strategic initiatives. Our organic growth plan focuses on enhancing the customer experience and the effectiveness of our sales organization. In the past year, we have continued to invest in sales training programs, marketing support, and value-added tools to help our sales staff develop our business. We have implemented tools and training to support enhanced pricing enforcement at the local level. Advanced analytics enable our team to develop value-based pricing models that respond to local market conditions. We are also starting to add locations in target growth markets. In 2021, our strategic investments include opening branches in the metropolitan areas of Southwest Florida, Dallas Fort Worth, and Austin. These examples provide important opportunities that we can take advantage of to further cooperate with existing customers, win the business of new customers, and grow organically as we accelerate these types of investments in the near future.
Next, our digital capabilities continue to become Beacon's clear competitive advantage. We provide the most complete digital products and continue to expand these functions. We are using these digital features to make it easier for our customers to do business with us. In our fourth quarter, the trend of digital sales was approximately 13% of net sales. Compared with the same period last year, active users of our online platform increased by nearly 50%. Our over-the-counter trading strategy is an operating model in which the branch is a network in a large MSA [Phonetic]. Over-the-counter trading provides four main benefits. The first is to improve the level of customer service. In our OTC, we have greater flexibility to deliver the best combination of products and services from branches to support customer needs. The second benefit is the cost of service. By utilizing resources and logistics in the branch network, we can reduce delivery time and mileage, improve labor efficiency, and reduce fleet costs and emissions. I am also happy to report that we have recently become a partner of EPA SmartWay, which allows us to compare our lead emissions with those of other companies. The third benefit is to optimize inventory levels. We still believe that while maintaining our service levels, it is possible to reduce our inventory investment by approximately US$50 million to US$100 million. Fourth, what is essential to our ambitions is our acceleration of talent development. Our over-the-counter trading plan creates opportunities for Beacon employees, allows them to build a fulfilling career, and releases local talent for us to accelerate our ability to execute the plan. Finally, in terms of branch operating performance, our focus on the bottom quintile of branches is producing tangible results. Our EBITDA for fiscal year 2021 improved by more than US$50 million year-on-year, bringing the total contribution for two years to more than US$70 million. As mentioned above, the annual net sales of these branches increased by 15%, which is impressive. All in all, our strategic initiatives have achieved measurable results in 2021, and we remain focused on accelerating growth and profitability.
Now, I will forward the call to Frank to pay more attention to our continued performance in the fourth quarter.
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Thank you Julian and good evening everyone. Go to slide 8. We achieved net sales of nearly US$1.9 billion in the fourth quarter, an increase of 7% year-on-year, mainly driven by price increases. Driven by our complementary products, the revenue of all three business lines has increased. The contribution of price to revenue growth was approximately 14%, but the decline in sales compared with the strong comparable sales volume of the previous year partially offset the price. Our growing backlog is proof that market fundamentals remain strong. For example, open orders continue to increase. Compared with the same period last year, the backlog of orders has more than doubled and the chain has increased by 15%. Compared with the shingle price implementation earlier this year, residential roof sales increased by more than 3%, plus our September growth. Given the record-setting comparability, as expected, tile sales fell by approximately 14% year-on-year, thanks to a rebound in COVID and stronger hail demand. Specifically, we estimate that, compared with the previous year, about one-third of the decline in the number of shingles in this quarter was related to the decrease in wind and hail activity.
The demand for new residential construction remains strong. In the fourth quarter, the sales of our largest national homebuilder increased by more than 50%. Although the overall number of single-account operations is still limited by supply chain bottlenecks, basic demand trends are still widespread, including the formation of millennial families, working from home, de-urbanization, and historically low interest rates. Similarly, as homeowners’ house prices rise and home equity increases, the demand for residential repairs and replacements remains favorable. In a material-constrained environment, non-residential roof sales increased by approximately 7%. Our team does a good job of ensuring material safety and staying ahead of inflation. With the extension of the project cycle time, our backlog of orders continues to increase, which is a positive indicator of future demand. As the prices of almost all of our products (including siding and wood) have increased, supplementary sales in the fourth quarter increased by 17%. As you may remember, our complementary products enable us to become the preferred supplier of external key customers and have greater end market exposure in new buildings.
Turning to slide 9, we will review the gross margin. Gross profit margin increased to 27.1%, a year-on-year increase of 200 basis points. The implementation of the price increase in September, and the favorable timing of inventory profits this quarter, contributed to the improvement. Private label sales increased by approximately 20% compared to the previous year. We sell our own-brand products under the TRI-BUILT brand to provide customers with high-quality and value-for-money products, and at the same time bring higher profits to Beacon. Overall, the price-to-cost ratio in the fourth quarter is rising by approximately 220 basis points. Due to the relatively high sales growth of non-residential and complementary products, the product mix is slightly unfavorable.
Adjusted operating expenses were US$321 million, an increase of US$29 million compared to the same period last year, mainly due to higher incentive compensation and fuel, wages, and rent inflation. As we cycle through the impact of certain COVID-related cost actions taken in the previous year, sales expenses such as travel and entertainment are also higher. As a result, our adjusted operating expenses to sales ratio increased by 50 basis points, but slightly better than expected. As we continue to fill vacancies and employees to meet demand, our number of employees has continuously increased by less than 1%. In addition, we have been actively working to retain team members in key positions such as drivers, sales staff and warehouse workers to ensure that we provide high-quality services to our customers. As you heard in the previous conference call, we strive to offset operating expenditure inflation through productivity. In each period of 2021, we will continue to drive year-on-year growth in hourly sales. At the end of the fourth quarter, our hourly job sales increased by 46% compared to the beginning of the pandemic. This key productivity indicator shows that as an organization, we have become structurally more agile. We will continue to work hard to improve efficiency because we fully accept the mentality of continuous improvement.
Turning to slide 10, we will review our financial flexibility. As we discussed in the third quarter conference call, we intend to use our restored financial flexibility to accelerate our growth. In recent quarters, this includes rebuilding our inventory to ensure that we can effectively meet demand. Adjusted operating cash flow for the quarter based on items related to sales of our interior products business was US$167 million, as strong earnings were partially offset by higher working capital this year. Net inventory increased by approximately $200 million year-on-year, reflecting several factors: rising product costs, rebuilding inventory levels from post-COVID lows, and certain elements of inventory being longer than expected due to extended project cycles and ensuring material availability Challenging supply chain environment. Additional working capital requirements include higher year-end accounts receivable balances associated with higher sales and resetting our days due to pre-COVID levels. Importantly, we expect to generate positive operating cash flow in the fourth quarter of our calendar, which represents a transition period for our new calendar reporting process in 2022. As you know, operating cash flow for the December quarter is usually negative. For many reasons, 2021 is a transformative year, the most important of which is the divestiture of the interior business.
In addition to focusing the company on its core exterior business, the transaction also received approximately US$750 million in cash. These funds, combined with balance sheet performance funds and free cash flow, have allowed us to reduce total debt by approximately $1.1 billion year-on-year. As of the end of the quarter, we reduced our net debt leverage to 2.1 times of tracking adjusted EBITDA. You may remember that a year ago, our expectation was to reduce the net leverage ratio below 3 times. Therefore, we are far ahead of this goal. We completed a full refinancing in the third quarter, which basically eliminated the risk of refinancing because we have no meaningful maturity date before 2026. Our liquidity position at the end of the quarter was approximately US$1.5 billion, providing important capabilities for investment growth. And this is exactly what we intend to do. Julian talked about our new branch, the opening of the Houston hub, and our recent acquisition of Midway. These investments are a good indication of how we will use liquidity to accelerate growth. We have a positive target pipeline, and we believe that there is a workable compromise that will make us the preferred supplier in key markets.
All in all, we are very satisfied with the record performance in the fourth quarter and are ready to end the entire calendar year with strong momentum. With this, I will turn the call back to Julian's closing speech.
Julian G. Francis - President and Chief Executive Officer
Thank you Frank. Before we turn the call to Q&A, I want to update our outlook for the transition period of the fiscal year (the fourth quarter of the calendar). Please refer to page 12 of the slide material. Compared with the previous year, sales for the day have increased by high single digits since the current quarter. As we enter Thanksgiving and the holidays, we expect this rate to slow down. Although our new residential construction customers continue to be managed through labor and material shortages and other restrictions, the potential demand trend for residences remains positive. Regarding non-residential demand, we expect that the macro environment will remain supportive. For more than four quarters, we have seen a steady demand trend, which is consistent with the favorable trend of the Construction Billings Index. Although we expect the delivery time and the entire project cycle time will continue to extend, the improvement in sentiment corresponds to the growth of our backlog indicators. For the three-month fiscal year transition period ending in December, we expect total sales growth to reach mid-single digits year-on-year, which is strong compared to the same period last year. The guide includes the benefits of increased trading volume along the Gulf Coast after Hurricane Ida. It also includes the acquisition of Midway Wholesale earlier this month. Midway will contribute approximately US$20 million in sales in the quarter, and EBITDA is expected to reach breakeven, which means that the profit margin for the quarter will be diluted. The gross profit margin will reflect our expectation of positive price cost contribution. We expect gross profit margin to increase by about 100 basis points year-on-year to about 26.4%, and gross profit margin exceeds 26% for the third consecutive quarter. We expect adjusted EBITDA to be between US$155 million and US$165 million, compared with US$143 million last year. We expect higher sales, gross margin expansion and continued cost control will result in adjusted EBITDA growth of approximately 8% to 15%. In describing the results to provide our new year-end comparable data, we expect adjusted EBITDA for the 2021 calendar year to be between US$667 million and US$677 million, compared to US$465 million for the 2020 calendar year, an increase of more than 43%.
Looking ahead, I believe we have the right team to realize our long-term ambitions. I am also pleased to announce that we will give you the opportunity to hear directly from our leaders at the Investor Day, which is expected to be held in Houston from February 23rd to 24th. There, you will hear detailed information about our growth strategy, market execution, capital allocation plan, and have the opportunity to visit our newly opened Houston hub. I believe that when we help our customers build more products, you will understand how we intend to reach our full potential.
With this, Selena, we are now ready to open the question line.
The first question comes from Katherine Thompson of the Thompson Research Group. please continue.
Katherine Thompson-Thompson Research Group-Analyst
Hi. Thank you for answering my question today. In terms of non-resources, Beacon's non-resources market turned positive in the first half of the fiscal year. Can you give a [unrecognizable] heads in the second half? Can you provide the latest information on the pace of your business, in particular, I know that you mentioned that pricing is an important factor in the growth of all your businesses, but how much sales volume growth this quarter and how much price and combination contribute to revenue? Looking forward to the next 12 months, what do you see in the non-resolution terminal market?
Julian G. Francis - President and Chief Executive Officer
Thanks for your question, Catherine. Of course, the market has been difficult to manage in terms of non-resource aspects of the business. We did see growth in the second half of the year, but the supply chain challenges are multifaceted. I mean it started when many installed products were challenged. We have some fasteners that are being challenged. We have seen that most materials are already difficult to obtain in some way, shape or form. Part of it is to try to create a package so that we can actually deliver it to the job site and install them as a single job instead of shipping them one by one. This is most of the value provided by the distribution channel. Like I said, overall management is a very, very challenging market. As we said in the prepared comments, we did see positive indicators. Our backlog continues to grow. I think we remain optimistic about the future prospects. We continue to see what we think needs to be repaired and replaced the roof. Obviously, those people will continue to age. We see growth in certain market sectors that we consider to be positive, and the long-term trend remains good. So in general, we are still very positive. I think the future of the commercial construction market is a good sign.
Katherine Thompson-Thompson Research Group-Analyst
OK. Then there is a follow-up question. It is in stock. How much of the 24% year-on-year growth on the balance sheet is driven by inflation, volume, and inventory to keep up with future demand or other factors you might not have to consider?
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Hi Catherine. thanks. good question. When you analyze it between price and quantity, the price and quantity are about 50-50. In terms of quantity, considering that it is actually the low point of post-COVID inventory, some of them are being rebuilt from last year. Some of it is the backlog mentioned by Julian. In view of some of the challenges we face in fasteners and adhesives, we can not get as many results as possible, especially in business. Therefore, due to supply chain challenges, there are more parts of this batch build, and given how low our level is, some of them have only been rebuilt since last year.
Katherine Thompson-Thompson Research Group-Analyst
OK. great. Thank you for answering my question today. good luck.
Thank you Ms. Thompson. The next question comes from Mike Dahl of Royal Bank of Canada Capital Markets. please continue.
Ryan-Royal Bank of Canada Capital Markets-Analyst
Hi. I’m Ryan [Phonetic] and I’m Mike. Thank you for answering my question. Therefore, when we look forward to 2022 and another year using the bottom digits to try to improve it, how should we consider incremental improvements? Compared with this year, should it be about the same size? Or will it decrease over time?
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Hi Ryan. [Technical issue] The branch has had a good year. Julian started this project a few years ago. Last year, in the 2020 iteration, we reported saving more than 20 million U.S. dollars, and this year we saved more than 50 million U.S. dollars. This is actually a derivative of all three aspects of the income statement. Sales are better than average. The improvement in gross profit margin is better than average. Operating expenses are better than average. So you will see its benefits are realized on the bottom line. That being said, when we look at the trajectory and absolute difference of each line, especially gross margin and operating expenses, these branches still have hundreds of basis points of improvement capabilities that can catch up with what we call performance branches. So we think this is a runway for many years, and look forward to our entering the investor day dialogue, to provide you with some trajectories, and some futuristic ideas behind what we think we can generate. But this will be a multi-year plan. We will discuss the bottom quintile in the next few years. There is still a lot to do here.
Ryan-Royal Bank of Canada Capital Markets-Analyst
So-but is it fair to say that the number is roughly the same every year? Not because you improved last year, the new group should be better and smaller? Is it fair to say that?
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
I think we will restack it every year. Therefore, next year there will be branches once again becoming part of the lowest fifth. It can be said that there are others who will graduate. So we will rearrange and restack these. Obviously, as the company continues to perform better, we will raise the bar. As I mentioned, when you have hundreds of basis points in gross margin and hundreds of basis points in operating expenses, there are many opportunities here. I don't think it will be lumpy, because we pursue it in the same way every year. We will continue to set positive goals, and we will continue to provide you with the latest information as we set and deliver on these goals.
Ryan-Royal Bank of Canada Capital Markets-Analyst
understood. This is very helpful. I will pass it on. Thank you.
Thank you. Mr. Dahl. The next question comes from Ketan Mamtora of BMO Capital Markets. please continue.
Ketan Mamtora - BMO Capital Markets - Analyst
Thank you. The first question about Midway Island. I'm just curious about what you expect from Midway's EBITDA? I know you said that the first quarter or the next quarter will achieve a breakeven. Then it is fair to say that Midway's acquisition scale is something you think you will do as long as you find the right opportunity in terms of scale?
Julian G. Francis - President and Chief Executive Officer
Kaitan, thank you for your question. We said that Midway's annual sales are approximately US$130 million. The EBITDA breakeven in this quarter was mainly due to the weather in Kansas City, Nebraska, Missouri. So they are riding bicycles now. Obviously, when we come out of winter, we want to see this situation recover. We are very satisfied with this business. We think this is a great cause. It must be in the middle of the best position we expect to acquire. Obviously, with our newly discovered financial flexibility, we will take this opportunity to ensure that we participate in all elements of the market. But it is definitely profitable. We think we can increase profitability over time and bring them to digital platforms, including private label products there. Learn from them too. I mean they are the market leaders in the markets in which they operate. We believe that leadership economics is very important.
Ketan Mamtora - BMO Capital Markets - Analyst
understood. This is very helpful. I will turn it over. Thank you.
Thank you Mr. Mantola. The next question comes from Garik Shmois of Loop Capital Markets. please continue.
Garik Shmois - Loop Capital Markets - Analyst
Hi. thanks. My question is about organic growth. You mentioned a very meaningful improvement in the penetration of international accounts by residential builders. Just want to know, when we look forward to the 2022 calendar, how many tracks do you have? Then maybe just talk about any preliminary thoughts on next year's organic growth opportunities.
Julian G. Francis - President and Chief Executive Officer
Thanks, Garrick. I appreciate it. But I think, again, our ability to invest, our ability to ensure our ability to reinvest in our business, and our ability to continue to grow revenue is critical to our future. We believe that we can do this in multiple ways.
Of course, we have already talked about investing in sales capabilities. We will continue to do so. We think that we have many runways that can improve our overall sales capacity and expand our sales capacity. Now we are a more focused company, to ensure that we have clear communication channels in these markets that we think we can penetrate. We think to enhance our overall customer experience. We have brought in a chief commercial officer whose work is aimed at this The customer experience is delivered, enhancing it. Earlier this week, we spent time with a group of customers at the "Voice of Our Customers" event and got a lot of feedback on what we can do to enhance our value proposition for these customers.
We certainly think we can continue to expand our footprint through greenfields and mergers and acquisitions. These two are really separate. We have established an organization to truly fulfill this promise.
Our digital platform is another platform where we continue to see growth. As inventory availability is more complex and supply chain challenges are driving this, the situation is a bit unstable in the second half of the year.
Then we are also considering our ability to serve customers. Our core customers will always pay attention to complementary product lines, and our ability to continue to develop complementary product categories, expand them by acquiring Midway and other things, they are in some product lines that are different from ours, and will be another Increase value.
So we certainly think there is room for growth. We know that this market is still highly fragmented. We think we can take advantage of the returns to scale. We are very, very excited about our future.
Garik Shmois - Loop Capital Markets - Analyst
Thank you, Mr. Shmois. The next question comes from Michael Leihao and JPMorgan Chase. please continue.
Michael Rehaut - JPMorgan Chase - Analyst
Hello, thanks. good afternoon everyone. I just want to, if possible, lower the top-line guidance for the fourth quarter of the calendar a bit and raise the single digits, including Midway. In the last quarter, in the most recent quarter, especially when I was considering the residential business, you said that sales fell by 14%. How should we consider the total amount, whether on a comprehensive basis or in terms of residential roofs in the first quarter? How can this be pushed-maybe if you can go a little deeper and push the quarterly view? If possible, maybe just a cursory talk about your views on 2022? I know you are not ready to provide guidance, but maybe you just have any broad ideas about the roofing industry?
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Hi, Michael. So in terms of numbers, I think this is the source of your problem, and I think you should look forward to the transition period in the same neighborhood, in the transition period, year after year from mid to teenage years. If you look back at last year’s comparison, last year’s quarter was the highest ever December quarter, and in terms of transaction volume, it was up 25% from the December 2019 quarter. Therefore, the housing aspect of shingles will involve more price stories.
Julian mentioned in his speech that the October catch was quite good. November also started very well. So we are now entering that high-single-digit clip. Considering that holidays and winter are difficult to hinder this, the second half of this quarter is just a more turbulent period. But we feel that we did a good job in the first half of the quarter and look forward to a good ending.
The gross margin is in line with the guidelines given by Julian, and OpEx feels that it also meets the requirements. So we feel good about that guide. Due to the seasonality of the Midway business mentioned by Julian, it will be diluted a bit, so think about 20% there. Then, everything is in the mid lane, hope to be higher than this, it depends on how we finished the last six weeks of the game.
Michael Rehaut - JPMorgan Chase - Analyst
great. perfect. thank you very much.
Thank you Mr. Lei Hao. The next question comes from Deepa Raghavan of Wells Fargo Bank. please continue.
Deepa Raghavan-Wells Fargo Bank-Analyst
Hi. Good evening, everybody. Thank you for answering my question. It's just a follow-up to the previous one. The high single-digit reviews in October and November are mainly residential or does it also involve your non-resource business and supplementary business?
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Deepa, this is a good fusion. We almost saw good traction. So I don't know if I will parse it in any particular way. We saw good weather in the first half of the quarter, which was very helpful. We have seen some good traction for the price increase we talked about in September. We obviously saw the ABI coming out. We have seen many different macro measures, and they continue to give us a good sense of where we are. The backlog continues to increase. At a certain point in time, as we obtain some key elements of the supply chain, especially in business cooperation, this will unlock. Therefore, we continue to believe that what we see will translate into our good results. And, as Julian mentioned, we are optimistic about 2022. We need to get through the winter, figure out what the construction season looks like, when does it start, etc., and look at what the environment looks like from an inflation point of view. So far everything goes well, and we look forward to turning this page to 2022.
Deepa Raghavan-Wells Fargo Bank-Analyst
That's great. I am grateful that you have not given us much in 2022. But can you point out what we should pay attention to when we start the game from 2021? What will you guide us not to carry forward? What would you lead us to be more optimistic about? Should any put options in 2021 or should they be transformed into 2022, will this be a useful color?
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Yes. I think in terms of housing, 2020, of course, the second half of 2020 and the first half of 2021 will be a strong single combination. So, I think this is a very important thing from the perspective of the business line. Business is one of them-I think Katherine said on the conference call earlier that if you think about it in 2022 and 2021, the first half of the game will be easier than the second half. Many times next year will depend on the supply chain. If it is smoother than it is now, obviously this should bring us more sales. If it continues to be challenged, the backlog will continue to grow and will be unlocked at some point. But what we feel and see is that the demand is there, right. The ability of the supplier of the equation to truly meet the demand is the current constraint. When you think about the model carefully, there are a few things to point out. Obviously, we have a very good incentive compensation year in 2021. We will recycle it back to the target level in 2022. As we have repeatedly called for, we have indeed experienced this year’s inventory profit, and obviously we will not have next year unless it is, again, an inflationary environment. We are already concerned about the changes in timber and timber prices, even though this is only a small part of our business. I mean, considering the spot price, its gross profit margin fluctuates greatly. Then, we will reduce the storm to a 10-year average based on our planning for hurricanes and hail. Therefore, there is still a lot of work to be done to put these numbers together. Some of the costs of COVID, such as travel and entertainment that we talk about from time to time, will also be recalculated next year, because vaccination is expected to continue to spread among the population, and we will return to opposite sales in some ways.
Deepa Raghavan-Wells Fargo Bank-Analyst
This is a useful color. However, can you provide more details on the inventory review you made. I mean, last time you talked about having some inventory in a specific area of the country, just curious about where we are? I will pass it to this. thank you very much.
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
certainly. Therefore, due to the reasons we mentioned earlier, the overall inventory is relatively high. Some of these are simply inflations of the products themselves, and some of them are rebuilding inventories from last year's extremely low points. Due to the length of the project cycle and some supply chain challenges, some of these stocks are retained for longer periods of time. We think we are generally in a relatively good state. We do have such a situation, we do not have the last product, in order to be able to complete the full complement of the work. We have a situation where we have a specific location that may be a little lighter, and another location may be a bit heavier. So I think the inventory part is in good condition, but we will continue to allocate. We will continue to look for opportunities to seize the opportunity before the announced price increases. I do think, Deepa, you have one thing when modeling. As I mentioned in the past, the inventory profit equation for 2021 produces a gross margin increase of 50 to 100 basis points in 2021, unless we enter another in 2022. An inflationary environment will not repeat itself.
Deepa Raghavan-Wells Fargo Bank-Analyst
That's great. thank you very much.
Thank you Ms. Ragwan. The next question comes from Keith Hughes and Truist. please continue.
Keith Hughes-Faithful-Analyst
Thank you. Your guidance for the adjusted EBITDA of '21-the adjusted EBITDA of the 2021 calendar, if we compare it with the expected 2021 calendar, it is a bit flat. I think the numbers I made are correct. So I guess my question is, as you go through this year, what do you think EBITDA's bearishness and commitment will drive a single quarter up or down compared to the previous year?
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Hi Keith. To clarify, Julian gave a calendar for 2021, not a guide for 2022.
Keith Hughes-Faithful-Analyst
OK. OK. Well, I think my problem is 2022. As we go through this year, what will push the numbers up or down?
Julian G. Francis - President and Chief Executive Officer
Keith, I think that if you listened to Frank's answer to the previous question, that is some of the questions I think Dipa asked. I mean, incentive compensation will change. Inventory profits will vary according to the inflation environment. I think we will see these things continue to develop. But in general, as Frank said, I think we are still optimistic about the market environment. We believe that housing starts and the overall housing investment and residential renovation markets are positive. We believe that as long as we can solve the current supply chain challenges that mainly exist in the commercial sector, the same is true for some supplementary product categories. The final demand behind this is still strong.
Keith Hughes-Faithful-Analyst
Do you think that once you pass these difficult times in 2022, the number of shingles will become positive?
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
They should, Keith. The question is how long it will take for the supply chain to reach liquidity levels. In the entire branch, we have indeed encountered a situation where the inventory of very special products and very special manufacturers is still very low. So we really have to work hard to solve this problem. Manufacturers must work hard to solve this problem. We know they need some downtime here. I hope they can achieve good results in productivity and output next year. I think that in terms of distribution, we have established some inventory this year. The question is how much inventory we can build next year. Some of these will depend on how long winter will last when the construction season is unlocked. But one thing to keep in mind is that, as I said with Julian before, from a long-term housing perspective, millions of houses need to be built to get back where we need them. So this must improve our ability-so that we can make home builders really meet this demand. From a demand point of view, the backlog we have seen, such as the setup is good. We just need to be able to meet this demand. Now, there are quite a few challenges in the supply chain that you see. This is not just a construction product, it is all things related to transportation, it is resin and plastic, electrical appliances, and all things used in commercial or residential buildings. Manufacturing and construction companies cannot recycle their funds as quickly as they used to, because the project will take longer to complete.
Keith Hughes-Faithful-Analyst
Thank you Mr. Hughes. The next question comes from David MacGregor of Longbow Research. please continue.
David MacGregor - Longbow Research - Analyst
Yes. Thank you for asking my question, and good afternoon everyone. I think I want to ask you a question about market share. If you consider the extent to which you see OEMs focus their fulfillment capabilities on their largest customers or like Beacon, I think some people would think that this will give you more inventory and thus have the ability to win market share. So I think what do you think about your ability to win new customers, whether it's a small person or a national account level? It sounds like you have made some good progress there. And your ability to retain these new customers? What contribution will this ultimately make to growth in 2022?
Julian G. Francis - President and Chief Executive Officer
Dave, thank you for your question. Of course, this is an important indicator for us. What I want to say is that in the past year and a half, we have been very focused on staying ahead of the inflation curve and making sure we are prepared. In the past 12 months, it has been difficult to see through the channel and supply chain challenges. Of course, we think we have gained an advantage of scale. As our positioning is to shift to investment growth, we believe that we are capable of gaining share as we move forward. But one of our biggest concerns is to truly provide our customers with a great experience. We will think over time, which will help us in the long run.
David MacGregor - Longbow Research - Analyst
OK. I mean it looks like there will be some, with the incremental account you bring, you will have some incremental trading volume that will continue into the new year. And I think I just want to determine its size, or get some feeling from you what do you think this might represent?
Julian G. Francis - President and Chief Executive Officer
Again, I am willing. As I said, we still believe that this is our focus, serving our customers and developing our business. We think we have multiple growth paths. We believe that whether it is our customer experience, our ability to provide services to customers through OTC strategy, our sales capabilities or our digital products. Of course, mergers and acquisitions and our greenfield strategy enable us to continue to grow and expand market share.
David MacGregor - Longbow Research - Analyst
OK. And only as a follow-up. Is there any way to talk about the cost of housing, commercial and supplementary prices and what you see there.
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Yes. I will give you some directional comments, David. As we mentioned in the prepared comments, the price cost is about 220 basis points. If you want to subdivide by resource, business, and complementarity, in terms of resources, pricing is higher than average, about 1,400 basis points—about 1,400 basis points on average. So the pricing is above average, but the cost is also above average. In terms of business, prices and costs are below average. The same is true in terms of complementarity.
David MacGregor - Longbow Research - Analyst
OK. amazing. thank you very much. good luck.
The next question is from Trey Grooms with Stephens, Inc. Please continue.
Trey Grooms - Stephens, Inc. - Analyst
Hi. Thank you. So you talked about this in terms of rooftops and non-resources. But can you talk about product availability in complementary businesses? Do you see any improvement there? Then, with all the pricing actions we have seen in many complementary products and the suspension of housing starts, understanding that many of them have entered new resources. What do you think of the fourth quarter and the components of our complementary business that is about to enter 2022? Thank you.
Julian G. Francis - President and Chief Executive Officer
Thank you Trey. Of course, certain products in our complementary businesses will definitely experience inflation. We see a challenging environment in the supply chain, or as Frank said, some resins and some chemicals entering these products. Obviously, wood is also part of it, and is experiencing the opposite challenge. But I think we definitely have the opportunity to continue to grow in this category. Like I said, we are excited about the Midway acquisition. They have some great complementary product lines, and we are very excited about it. I think in the next few quarters, we will continue to see some inflation in this area. Obviously, we will be very focused on staying ahead. Today, I think the supply chain challenges we saw there seem to have eased slightly. Similarly, I think some of them may be related to the slight weakening of demand when we enter the winter, but we remain highly vigilant and stay ahead of the cost curve.
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Trey, I think in terms of supplements, considering the many things happening in Texas, the area we may be focusing on most is vinyl siding, which is broader. So this may be an area we pay close attention to. We saw an interesting dynamic between the growth rate of vinyl and the growth rate of fiber cement in the fourth quarter. Obviously, it is easier to obtain cement than vinyl. Therefore, it will be interesting to see someone perform next year.
Trey Grooms - Stephens, Inc. - Analyst
This is very helpful. Thank you for answering my question. I will pass it on.
Thank you Mr. Groom. The next question comes from Kevin Hocevar. You can continue.
Kevin Hocevar - Northcoast Research - Analyst
Hi everyone, good afternoon. Regarding the issue of price and cost. Frank, I think you mentioned the 50 basis points to 100 basis points of the time-related price cost benefit this year. And I know that the overall price cost benefit for the quarter was 220 basis points. I think there were more in the last quarter. So there is some pricing—not including time-related benefits, and you realize that pricing is more than the overall cost. Therefore, when we consider 2022, it sounds as if the inventory may return to a very normal type level. In some areas, it may not be fully recovered, but it will be getting closer. So I am curious about your views on the ability to maintain these, some price-cost advantages that have nothing to do with time, and a more standardized environment in terms of inventory positions.
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Yes. This is a good question, Kevin. I think what you have seen in the past few quarters is actually a decline in inventory profits. When you raised prices in April and June, we increased prices twice in the third quarter. We got one in the fourth quarter. These will take about 90 days or so to launch. The comments around 50 to 100 basis points are actually considered on a full year-full year [Phonetic] basis. Therefore, when you consider how to model it, I almost think of it as a calendar foundation on top of the calendar. Once again, the inventory is only about half of the quantity, and the other half is inflation. So I don’t know that we have returned to where we need to go. Of course, many regions and many branches will say, look, we are at a critical level in certain aspects of inventory. There are other places, maybe they are close to the shingle plan, because the demand in that particular location may not be so strong, well, they have less inventory. As you know, some of these products are difficult to transport more than 300 [Phonetic] miles. So you end up with a kind of dichotomy between branching and no branching. Therefore, we will continue to look for opportunities to fill our regional needs. Then I cannot overemphasize that some elements are not available in any meaningful quantity. A lot of things happen on the business side, which is why we see a lot of backlogs. Therefore, we will handle the inventory very precisely. You can see that we invested dollars and working capital in our inventory for all the right reasons. This is because of what we see in terms of demand. Then when we consider 2022, we must consider whether we will also be in an inflationary environment next year. In this case, continuing to ensure a certain level of inventory profit is a good thing for the economy to do the same.
Julian G. Francis - President and Chief Executive Officer
Kevin, I will add. I certainly don't want to give the impression that the expansion of profit margins is entirely the result of inventory profits. Of course, we benefited from it this year. But as you mentioned yourself, we have implemented it before the price inflation we see. But we have a variety of levers to drive profit margins, including additional pricing analysis and more skilled overall price management. Our digital platform, our TRI-BUILT, and managing operating expenses and productivity, we think all of this means that we are structurally changing our profit margins.
Kevin Hocevar - Northcoast Research - Analyst
OK. That's great. thank you very much.
Thank you, Mr. Hocevar. The next question comes from Quinn Fredrickson and Baird. please continue.
Quinn Frederickson-Baird-Analyst
Hi, everybody. good afternoon. I just want to see, is there any way to quantify the impact of the inability to provide a complete product set for some commercial jobs in the non-resin business? Then, do you expect anything to catch up in the fourth quarter calendar because they can be shipped? Or does it require a better supply chain to meet this demand?
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Yes. So the question about the supply chain, yes, it needs to get better so that we can unlock a considerable amount of the supply chain. We are not only selling what we can sell, but the backlog of things continues to increase. It can be said that we haven't dollarized it yet. But there must be a few percent growth in the commercial sector, and obviously, the same is true in the residential and supplementary sectors. This is why the backlog is so large. I mean, it is twice as much as a year ago or more than twice as much as a year ago, and it has increased by 15% from the previous month. It was a pretty good quarter. So we see some strong demand there. As I mentioned, it depends on some very specific products and some very specific locations. Now, everything I read, what we talk about internally, and what we hear from other companies, there is no panacea. This is a problem we will work hard to solve in 2022. We hope that when we turn this page to 2022, we can unlock a lot of backlogs. This will definitely help the non-res growth side.
Quinn Frederickson-Baird-Analyst
OK. thank you very much.
Thank you Mr. Frederickson. This concludes the question and answer session. Now I want to turn the call back to Mr. Francis’ closing speech.
Julian G. Francis - President and Chief Executive Officer
Thank you Selena, and thank you all for joining us tonight. This year is the year of Beacon's transformation. I am extremely proud of the results we have achieved in a very challenging environment. We have established a new team and a new investment portfolio in Beacon. We have changed our balance sheet, and we now look forward to being able to invest in growth and improve our overall profit margins for this business. We hope that our employees, customers, suppliers and investors are safe and happy, and wish you all a happy Thanksgiving. Thank you for joining us tonight.
Binit Sanghvi - Head of Investor Relations
Julian G. Francis - President and Chief Executive Officer
Frank A. Lonegro - Executive Vice President and Chief Financial Officer
Katherine Thompson-Thompson Research Group-Analyst
Ryan-Royal Bank of Canada Capital Markets-Analyst
Ketan Mamtora - BMO Capital Markets - Analyst
Garik Shmois - Loop Capital Markets - Analyst
Michael Rehaut - JPMorgan Chase - Analyst
Deepa Raghavan-Wells Fargo Bank-Analyst
Keith Hughes-Faithful-Analyst
David MacGregor - Longbow Research - Analyst
Trey Grooms - Stephens, Inc. - Analyst
Kevin Hocevar - Northcoast Research - Analyst
Quinn Frederickson-Baird-Analyst
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