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Beacon Roofing Supply, Inc. (NASDAQ:BECN)
Q4 2018 Earnings Conference Call
November 19, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 will be your coordinator for today. At this time, all participants are in listen-only mode.

We will be conducting a question and answer session toward the end of this conference. At the time, I will give you instructions on how to ask questions. If at any time during the call you require assistance, just press * followed by 0 and the coordinator will be happy to assist you. 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 risks and uncertainties, therefore, actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to those set forth in the risk factors section of the company's latest Form 10-K.

These forward-looking statements 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 19th, 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 that in today's press release, this company has posted a financial presentation on the investor section of its website under events and presentations that will be referenced during management's review of the financial results.

On the call 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.

Paul Isabella -- President and Chief Executive Officer

Thanks, Justin. Good afternoon and welcome to our third quarter 2018 earnings call. 2018 was a year of two unique halves. One half, it started out with solid revenue trends and good storm volume carryover. 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 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 in our western markets caused by the prior two-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 the eastern US 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 have 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 a highly strategic acquisition of allied, as I mentioned earlier. Allied as propelled us to nearly $7 billion in 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%+ 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. 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 additions such as interior products, private label, waterproofing, insulation, and solar, was 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 private label products, national account expansion, complementary products expansion, two-step dealer sales, and our continued focus on residential and non-residential roofing organic growth.

Our e-commerce sales continue to grow and we envision a billion-dollar 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 the last two years.

Other strategic growth focuses are greenfield branch openings -- we plan on opening 10-15 new locations during Fiscal 2019. While we have excellent national penetration currently, there continue to be adjacent markets that we can better serve with additional locations across our multiple platforms, the traditional roofing branch and the waterproofing or insulation location or an interiors branch. Our combined company has opened 77 over the last five 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 and 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 non-discretionary. 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.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

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 4.2 times.

Although some of this reflects favorable time beyond 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 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 meaningful business disruption from persistent rains in Texas and across the large portion of Eastern US from the Carolinas into New England. We had seen sales improvement from the July to August months and we were 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 benefit 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 a 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 significant pressure during the period, with our volume down in those states close to 20%. Hail comparisons have been a challenge 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 companywide gross margins benefited from strong profitability at our acquired businesses in 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 the past two 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 because we still had the traditional 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 into the integration and so far, 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 will 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.

Lastly, 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 two 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 two 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 hail storms 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 has 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 of two really strong hail events in the years 2016 and '17. These are difficult to repeat. They also pull forward business into those years as roofs were replaced earlier in their lifecycle.

The midpoint of our focus, therefore, assumes a weather year similar to 2018 will 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 the 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 a 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 2019. With this level of EBTIDA, this supports an adjusted EPS range of $2.90 to $3.35.

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

Paul Isabella -- President and Chief Executive Officer

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 of 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.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question, please press * followed by the 1 on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queued questions, please press the # key. Each caller is limited to one question and one follow-up. One moment for questions...

And our first question comes from Garik Shmois from Longbow Research. Your line is now open.

Garik Shmois -- Longbow Research -- Analyst

Hi, thanks. I'm just wondering 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 complementary business.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Hey, Garik, this is Joe. I'll give you a little bit more detail. Hopefully, you caught the overall framing of the organic growth. It's basically a flat overall growth. You've got the weather impact on the downside. That's a down mid-single. Then the core initiatives in growth, which I think we're trying to get at, up mid-single-digits range. It's those two weather offsetting those core initiatives part.

If I look at and try to break down that core initiatives piece a little bit more, that mid-singles, it's roughly about half of that is from price and then half of that would be from a unit or volume growth. So, the volume growth then really is a combination of both market growth and our traditional market over-performance 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 similarly at this point in time in terms of their growth rates. In total, as I mentioned, the unit growth rates, the volume piece of it, up roughly in that 2% to 3% range. That's the combination of our market growth and market-overperformance.

Garik Shmois -- Longbow Research -- Analyst

That's helpful. I guess follow-up would be on price cost in fiscal '19, can 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?

Paul Isabella -- President and Chief Executive Officer

Yeah, I think the overarching view we have is that we won't gain anymore. So, it will just be the continuation and then hitting the comps to get to that two 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. We feel good about that just based on the fact that we believe inflation is going to continue to put pressure on the manufacturers.

Operator

Thank you. Our next question comes from Jay McCanless from Wedbush.

Jay McCanless -- Wedbush Securities -- Analyst

Good afternoon. 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 years. Could you talk about what's going on there and how you guys are thinking about inventory levels now?

Paul Isabella -- President and Chief Executive Officer

Yeah. I'll give you 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. 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. We feel good about it as we're entering the winter period. Joe, I don't know if you have anything to add.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

That's exactly right. We were a little bit high when we entered the quarter, so the end of Q3 and we talked about that. The teams did an excellent job working it down. We would have done even better except for the weather and rain in September. Great job by the team.

Jay McCanless -- Wedbush Securities -- Analyst

The second question I had is are there any price increases you guys are trying to push through now or are those largely stopped? It sounds like the manufacturers have not tried to push through their price increases.

Paul Isabella -- President and Chief Executive Officer

Yeah. I think for the most part, they've stopped. We'll see what the winter Jan, February, 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. For now, they've stopped.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

I would suggest also that in the organic growth numbers I went through, I talked about that core and initiatives piece being up, that mid-single digits, half of that being price, that half price element really is just the carryover of what we saw in 2018 just rolling through the rest of the year. As you know, we started with the price increases in that January-February timeframe. This is just rolling the rest of those right on through. There's no new price increases incorporated.

Operator

Our next question comes from Michael Rehaut from J.P Morgan. Your line is now open.

Elad Hillaman -- J.P. Morgan -- Analyst

Hi, this is Elad on for Mike. I was first wondering -- you guys mentioned that price cost was positive across the industry. I was wondering what you saw from some of the competitors following the price increase, which is what it sounded like.

Paul Isabella -- President and Chief Executive Officer

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 in 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 -- not very much.

And so, my view is that the -- in my comment and my prepared text, 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.

Elad Hillaman -- J.P. Morgan -- Analyst

That's encouraging. Then the other thing is you mentioned you've got some significant actions to reduce cost in the western region. I was just wondering if you could expand a little bit on what are the actions that you took there and if there's maybe some upside to do that stuff in 2019 as well.

Paul Isabella -- President and Chief Executive Officer

Hey, we've always been a company that prides itself on running very lean. This isn't new to us. In the past, as we enter our winter period, we always reduce costs. We've done that well before I got here and will continue that. I think as the west regions looked 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. They drove as much cost out as they could to right size the business for the volume they see going forward.

Operator

Thank you. Our next question comes from Kathryn Thompson from Thompson Research Group. Your line is now open.

Kathryn Thompson -- Thompson Research Group -- Analyst

As you look into 2019, I appreciated the color that you gave on EBITDA and EPS and the topline, but could you give a framework for how to think about free cash flow generation for '19 and any thoughts on that reduction as part of that free cash flow framework? Thank you.

Paul Isabella -- President and Chief Executive Officer

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. We took inventory down, etc. I wouldn't say a huge portion of it is, but given that, there are so many ins and outs related to cash, whether it be inventory buildup, potentially next year depending on where net debt is, acquisitions, it's very difficult for us to give an estimate other than it's going to continue to be strong, as I said in my script.

Kathryn Thompson -- Thompson Research Group -- Analyst

Okay. There were quite a few -- it was a fairly competitive landscape as you had acquired Allied and there were several of your peers that also had some transactions this year. The feedback in the field that we've gotten is that it's fairly competitive as a 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 and the distribution landscape in general and your observations on the general competitive landscape? Thank you.

Paul Isabella -- President and Chief Executive Officer

Thanks, Kathryn. Yeah. As I said, I'll go back to my view, given our price performance, that 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. That's just the natural fact of home repair being pulled forward and the fact that at some point, it normalizes. We don't sit back and say we're waiting for that. As I listed in my initiatives, we're extremely aggressive by products and even by channels 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 competitiveness of the industry.

Operator

Thank you. Our next question comes from Ryan Merkel from William Blair. Sir, your line is now open.

Ryan Merkel -- William Blair & Co. -- Analyst

Thanks, guys. Good afternoon. So, just thinking about the cadence of organic growth by quarter, should we think about the start to 2019 being down mid-single-digits and then improving as you hit easier comparisons as the year goes on?

Paul Isabella -- President and Chief Executive Officer

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? Some of that weather carryover from the hailstorms is bigger in the first and the second quarter and that's when it starts to then mitigate after that. 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.

Ryan Merkel -- William Blair & Co. -- Analyst

Just as a follow-up, you mentioned September was pretty rough with the rain and then October was stable, I think, was the word. Is October the same as September in terms of that growth decline, I guess?

Paul Isabella -- President and Chief Executive Officer

The October rate of decline was improved over where September was. October was a low single-digit type of growth, negative low-single-digit drop-off in October, much better than September.

Ryan Merkel -- William Blair & Co. -- Analyst

Okay. Maybe 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?

Paul Isabella -- President and Chief Executive Officer

Ryan, 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. 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 offering. 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, as you know, they're very difficult to put a finger on in the near term.

Ryan Merkel -- William Blair & Co. -- Analyst

Right. Thanks. I'll pass it on.

Operator

Our next question comes from Keith Hughes with SunTrust. Sir, your line is now open.

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

Thank you. My question is on operating expenses. You highlighted in the organic numbers operating expenses as a percentage of sales op, but how do those numbers come in at Allied? That seems to be one of the biggest deviations of the models that are out there heading into this quarter.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Hey, Keith, Joe. You're right. Our Allied operating expenses came in a little bit higher than we had anticipated because if you're right, if you look at our existing market OpEx numbers, even when you adjust for some of the record -- so, our existing market expenses should have been 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 a half-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 some of their depreciation as we took the -- we completed the work on the step up of the depreciation or the asset value as that drove a little higher depreciation than we were expecting. They have a little bit older in age fleet, so we have a little bit higher cost on some of our maintenance and our fleet-related costs. Then there are a couple of other items that drove the fuel costs.

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, as I said, we're only 11 months in the integration. This is part of all we're getting at is continuing down the path of the remaining portion of our synergies plus, as we did with RSG, continuing to drive that synergy number even higher as we go into next year.

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

What kind of EBITDA percentage did Allied do in the quarter?

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

You broke up -- EBITDA percentage before we acquired them?

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

What kind of EBITDA percentage did Allied do in the quarter? You were 9.2% as a combined company. I assume it wasn't below that.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

In the proforma that we would have issued, 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 in that 9% to 10% range, if I remember correctly.

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

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

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

I think that's what I was referring to based on the proforma that we gave for that quarter.

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

So, that's for the fourth quarter you just reported?

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

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

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

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

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

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

Paul Isabella -- President and Chief Executive Officer

Keith, we're not concerned at all because as Joe just alluded to, we have the synergy piece and then, of course, as volumes normalize and that's why we gave this range, low, 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. So, our plan is intact and we are very positive about the combined company going forward.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Do keep in mind some of the synergies show up in our existing markets as well. They're not all just on the Allied piece.

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

Okay. Complementary products was up 2.8% organically. In the quarter, we've seen far better numbers than that for several quarters now. How much of a role did price play in that result and then could you give a sense of what the pacing in those goods?

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

So, the price piece was pretty consistent across our product categories. So, we don't really break down the price element by product category, but it was pretty consistent among them in terms of the total, as I said, was roughly 7.5%. If you look at the volume piece of it, the volume was kind of -- the unit volume of it was also impacted by a lot of those same weather elements that we mentioned before, from the rain, through also in the west. That would have been the driver you're referring to.

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

Yeah. You had pretty negative units in the quarter, is that fair to say, on complementary products?

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Certainly.

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

Did you get the sense that besides the weather impact, was there just a slowdown in spending in that area? We've seen that in some other companies as we've gone through earnings season.

Paul Isabella -- President and Chief Executive Officer

A slowdown, Keith, where?

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

Just in complementary goods in general. It's a little less weather sensitive than what we see in your roofing, in your roofing units, just a lower level spend, particularly becoming a negative.

Paul Isabella -- President and Chief Executive Officer

No. We think it's just in terms of the price costs, we believe it's just timing. I mean, 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.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

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

Operator

Thank you. Our next question will be from Phil Ng from Jefferies. Your line is now open.

Maggie -- Jefferies -- Analyst

Hey, guys. It's actually Maggie on for Phil. Thanks for taking my questions. 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? Should we expect that SG&A as a percentage of sales, should that be improving subtly throughout the year? Thanks.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Yes, in regard 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 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.

Maggie -- Jefferies -- Analyst

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

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Sure. One, as you've seen, we've had great free cash flow through the year, especially in the fourth quarter. I think what we did with that cash probably would 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 4.5 times 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, would be to work through and pay through our -- pay down the debt. That's the primary utilization of our cash flow at this point.

Operator

Thank you. Our next question comes from David Manthey from Baird.

David Manthey -- Robert W. Baird & Co. -- Managing Director

Thanks. Good afternoon, guys. Could you discuss the trends in pricing at the beginning of the quarter versus those at the end? What I'm getting at, did you end the quarter with pricing that was worse than what you started with?

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Hey, Dave, this is Joe. I can give you a general idea of the trend. While it did increase a bit, each of the months through there 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.

David Manthey -- Robert W. Baird & Co. -- Managing Director

As it relates to next year, I think I heard you say you're assuming 2% price. If we 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?

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Not at all, Dave. It's roughly 2% to 3%. So, maybe you're picking the low end of the range. If you think about it more as 2.5% or a little bit above that, it might get you more in the ballpark, but in total, although we did on pricing, our assumption is the price we have been getting, where we ended this quarter at this 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?"

David Manthey -- Robert W. Baird & Co. -- Managing Director

Then as it relates to your weather assumptions for next year, you're assuming no major weather events, is what you said, and you also said your 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?

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Yes, that would be correct, Dave. What we assumed in our forecast here was that the weather elements kind of a down, mid-single and there are two pieces to that. One of them is same type of hail year as we saw last year, which was a soft hail year. Keep in mind, last year, we did have some hail work that was being done in the west in the first and the second quarter as they're working through the remaining of the '16 and '17 hailstorms and then also keep in mind we had last year a large amount of the Irma volume that went through.

We're assuming a little bit more Irma. That gets finished up this quarter, but that's it. So, if you take those two things combined, that's what gets you this down mid-singles on the weather for next year as the midpoint of our organic growth.

Paul Isabella -- President and Chief Executive Officer

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

Operator

Thank you. Our next question comes from Trey Morrish from Evercore. Your line is open.

Trey Morrish -- Evercore ISI -- Analyst

Thanks for fitting me in, guys. I wanted to talk in 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 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 plan.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

I think our full pacing, as you know, is $120 million. This may be the difference in the math is for 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. I think if you take that into consideration, it might help you with your pacing piece to show you that we're going to continue to make improvements.

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 the RSG transaction and others. So, we're continuing to look for additional synergies as part of the integration work that's going on.

Paul Isabella -- President and Chief Executive Officer

Yeah. So, all that is 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.

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

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

Trey Morrish -- Evercore ISI -- Analyst

Then looking at your first fiscal quarter, some of the manufacturers are talking about their 4Q shipments being down potentially 25%. 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.

Paul Isabella -- President and Chief Executive Officer

I think what you have to remember is -- this is really important, we've said it a number of times -- you really have to detach, especially within a quarter, even within a year, detach the manufacturer's reported shipments at the distribution versus distribution sales. There's a lot going on. It's prior year volumes that were shipped in, current demand, i.e. we've been taking 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. It doesn't mean anything related to us. 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. That's the reality.

Operator

Our next question comes from Matt McCall from Seaport Global Securities. Your line is now active.

Matt McCall -- Seaport Global Securities -- Managing Director

Thanks, good afternoon, guys. Maybe go back to the deleveraging outlook a little bit, Joe. If I look at the EBITDA projections, you're going to get pretty close to a half a turn of net debt to EBITDA reduction without any actual debt reduction. What's the actual debt reduction outlook that you're targeting for '19?

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

So, again, we haven't given a specific free cash flow outlook number for it in there, but we went through the math based on those EBITDA numbers we just went through and 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 there is CapEx that takes some of that away as well too.

The CapEx year over year will probably be slightly up from where it was in the current year as we continue to 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, and maybe dive into it with your afterwards on some specifics that will help you get to it. It should be a line we can get down to half a turn each year. We're still on track.

Matt McCall -- Seaport Global Securities -- Managing Director

I think Paul, you made a comment around depending on net leverage, you may look at acquisitions, what did you mean there? When you get to a certain level and then you start to look at it again, I would assume that debt reduction would be the number one focus right now.

Paul Isabella -- President and Chief Executive Officer

Yeah. I said in my prepared remarks that when the timing is right -- that doesn't necessarily mean in 2019 -- related to free cash, I said based on other uses and that could be just inventory. I won't say it's highly unlikely we'll do an acquisition in 2019, but as we 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 pay down, but we have been an acquirer and will continue to be an 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.

There are no plans to necessarily do an acquisition in 2019. It was just more of a comment I made to say there could be other uses of cash like inventory drop if we found 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.

Operator

Thank you. Our next question comes from Scott Schrier from Citi. Your line is now open.

Tim Mazurczak -- Citigroup -- Analyst

Hi, it's Tim Mazurczak on for Scott. In terms of network rationalization, what is opportunity with that? Can you just kind of expand on that? You've combined 40 branches to date.

Paul Isabella -- President and Chief Executive Officer

Yeah. There are a couple of pieces. One, the 40 branches just allude to the synergy work in consolidation because if you have a branch a half a 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.

We think there's additional opportunity as we go through these next few years. We're 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, etc.

Tim Mazurczak -- Citigroup -- Analyst

One quick follow-up -- you said about $1 billion in business would come from e-commerce in the next few years. Are any of -- is any of that revenue coming from the rationalization of the networks, going from in store to more e-commerce or no?

Paul Isabella -- President and Chief Executive Officer

The assumptions I make when I say billion dollars is we're in pretty good shape in terms of where we're exiting the year and whether it's three to five years, that's that billion-dollar target. A lot of that will be cannibalization. There's 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 -- we really just went through our first fiscal year with the e-commerce platform still continuing to add functionality that it's going to grow customers like it, it helps them do their jobs better, we know that it will take existing product orders that are going through our regular process, convert them to ecomm and then we will naturally grow additional customers as we go through time.

Operator

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

Paul Isabella -- President and Chief Executive Officer

Thanks, Justin. Just briefly, thanks again for everyone participating in today's call. We appreciate the interest from investors, customers, suppliers, and our employees. As a reminder, our second investor day will be in New York City on December 13th 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.

Operator

Thank you. This concludes today's call. Everyone may disconnect.

Duration: 56 minutes

Call participants:

Paul Isabella -- President and Chief Executive Officer

Joseph Nowicki -- Executive Vice President and Chief Financial Officer

Garik Shmois -- Longbow Research -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Elad Hillaman -- J.P. Morgan -- Analyst

Kathryn Thompson -- Thompson Research Group -- Analyst

Ryan Merkel -- William Blair & Co. -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Managing Director

Maggie -- Jefferies -- Analyst

David Manthey -- Robert W. Baird & Co. -- Managing Director

Trey Morrish -- Evercore ISI -- Analyst

Matt McCall -- Seaport Global Securities -- Managing Director

Tim Mazurczak -- Citigroup -- Analyst

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