Beacon Roofing Supply (BECN) Q4 2019 Earnings Call Transcript

Beacon Roofing Supply (BECN 1.22%)
Q4 2019 Earnings Call
Nov 25, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Beacon Roofing Supply fourth-quarter 2019 earnings conference call. My name is Justin, and I'll be your coordinator for today. [Operator instructions] As a reminder, this conference call is being recorded for replay purposes. This call will contain forward-looking statements, including statements about its plans and objectives and future economic performance.

Forward-looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore, actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including, but not limited to, those set forth in the Risk Factors section of the company's latest form 10-K. These forward-looking statements fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company's financial outlook. The forward-looking statements contained in this call are based on information as of today, November 25, 2019, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements.

Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release. This company has posted a summary financial slide presentation on the investors section of its website under events and presentations that will be referenced during management's review of the financial results. On the call today for Beacon Roofing Supply will be Mr.

Julian Francis, president and CEO; and Mr. Joe Nowicki, executive vice president and CFO. I would now like to turn the call over to Mr. Julian Francis, president and CEO.

Please proceed, Mr. Francis.

Julian Francis -- President and Chief Executive Officer

Thank you, Justin. Well, good evening, and welcome to our fourth-quarter 2019 earnings call. I'm pleased to be here today for my first investor call as Beacon CEO. I have had a busy 90 days visiting our customers and branches while getting to know the employees whose passion for their work is clearly a differentiator in the marketplace.

During my visits, I've also confirmed the reasons that I joined Beacon. First and foremost, it's an incredible opportunity to lead one of the building material industry's storied companies. The chance to build on Beacon's history is a great honor. The industry is attractive, and the company is well positioned after more than a decade of consolidation.

Beacon's customer base is better served by a distributor that understands local market issues and build relationships at a local level while also leveraging geographic scope and scale. Beacon's customers are also best served by a distributor that can invest in a full suite of products and has the ability to tailor the offering to each customer, adding services that simplify operations for contractors so that they can build more. Beacon understands what it means to be a value-added distributor. We enable contractors to do the work the way they want to, both today and in the future, ordering at the counter, by phone, by fax, email or via our industry-leading e-commerce platform.

We have the ability to serve a small local business focused on roof repair, at the same time, we are delivering for large multistate contractors in both residential and commercial construction markets. One more reason I joined Beacon is that its business model has tremendous ability to withstand economic cycles. The roofing market has shown great resilience across time. The purchase of a replacement roof which represents more than 80% of the market is largely nondiscretionary.

We also participate in new construction, both in roofing and interior products. While more cyclical, we benefit from customers that work in both areas. As proof of this resilience, the company's track record of growth relative to market was maintained during the housing downturn in the 2009 recession. Beacon's EBITDA margins have been similarly consistent and never below mid-single digits.

Operating cash flow has always been positive with greater potential demonstrated in the past three years. What I have seen during the first 90 days are strengths for Beacon to build on. First off, our people are top-notch. The employees I have met have a visible drive to serve customers and a competitive desire to win in the market.

Our strategy will be executed through our teams, so developing our team members' capabilities will be critical to success. Second, our residential and commercial customer list has room for growth. Beacon has one of the largest sales forces in our industry with the potential to have tremendous impact for our customers. Our systems are now completely integrated across all branches, so we can refocus efforts on reaching more contractors who could benefit from our products and services.

We want doing business with us to be easy. So we have optimized our processes with customer priorities in mind. So with people, systems and processes all in lockstep, our teams are ready to take up the challenge and redouble efforts with our customers. Third, there is a significant opportunity to improve on operational performance.

With over 500 branches, we must ensure expectations and accountability are clear. There is dispersion in our profitability within our network, both on the interiors and exteriors sides of the business. All branches will have renewed focus on continuous improvement, with more emphasis on providing support to those whose financial performance is below average. It is clear to me that optimizing our 500-plus branches is a greater value-creating opportunity today than additional acquisitions.

Fourth, we must also capture the power of Beacon's scale. Our scale represents an opportunity to create incremental value and differentiate Beacon. We have a strong position in both interiors and exteriors that we must capitalize on. As an example, we have previously spoken of our regional service area model, which is now branded as Beacon's on-time and complete network in order to serve customers better, particularly in large markets.

Customers choose a preferred branch through which to buy, while we use the network to make a wider breadth of stock immediately available and to increase the number of short-cycle deliveries. In addition, it can be a driver of improved fleet utilization, reduced vehicle miles traveled and lower inventory requirements branch by branch, positively impacting our cost to serve. Fifth, our digital platform is now delivering several hundred million in e-commerce-related sales, and there is opportunity for much more. We continue to see more customers register and buy online.

Established users are demonstrating their appreciation for the platform by using the functionality to a large degree for their purchases, and we are having great success attracting new customers to the platform. The ability for a contractor to use digital tools to estimate, quote, order materials and pay the bill is unique in the industry. Now while our outlook is bright, our recent financial performance and shareholder return has not been. I am confident that today's results are not indicative of Beacon's capacity for success.

I have kicked off a review of our strategy to identify and remove the barriers, which have been impeding the company from reaching its full potential and to uncover fresh opportunities for growth and margin expansion. It's clear to me that there are several levers to pull to improve performance, some of which I have discussed here. Let me now comment on Beacon's fourth-quarter results. Residential roofing market volumes were down single digits through the first nine months of our fiscal year.

In the fourth quarter, the market rebounded quite strongly to produce an about flat year overall. Beacon's fourth-quarter residential roofing results were lined up with the overall market, we believe. From a top-line perspective, Beacon's organic sales growth produced its strongest performance in seven quarters. Organic daily sales grew 3.2%, driven by residential roofing organic growth of 11.5%.

Gross margins declined 110 basis points as the impact of manufacturer rice increases was only partially offset in a competitive market. However, on a sequential basis, pricing improvements almost completely offset additional cost. For three quarters of our fiscal year, we had an inflationary environment and a declining market that squeezed margins. In Q4, our margins stabilized as the market trended up.

With no inflation and a stable market, we would expect to expand margins, but in this period, our operating income fell short of expectations, driven by the gross margin miss. Operating expenses were in line with projections and provided positive leverage year over year. Last quarter, Beacon announced fixed cost structure actions to reduce operating costs to $25 million, with a two-month impact, we were able to reduce Q4 fixed expenses by about $4 million. Adjusted operating costs improved 40 basis points year over year.

Given the higher cost to serve residential roofing, which represented a greater portion of our market mix this quarter, this is trending in the right direction. Free cash flow was excellent and exceeded prior expectations with the debt leverage ratio declining sequentially. Additionally, we made improvements to our capital structure, allowing us to lower interest expense, extend the maturities and create a more fixed interest environment. I was particularly pleased with the level of demand investors demonstrated for our bonds, which helped us drive a lower interest rate than our initial estimates.

Now I will pass the call over to Joe to provide additional details on the fourth-quarter results.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Thanks, Julian, and good evening, everyone. First, I'll provide additional color on our quarterly results, and then I'll conclude with comments involving our fiscal 2020 outlook. As Julian mentioned, overall organic daily sales increased 3.2% during the fourth quarter. The period had one extra selling day compared to the year-ago quarter.

Residential roofing was the primary driver of quarterly growth with an organic daily sales increase of 11.5%, levels in line with the overall market. Within this category, all six of our U.S. regions delivered positive year-to-year performance and four of these six grew double digits. We experienced broad-based strength after the rain and other disruptions ended in June.

We are also pleased to see strong performance out of our Southwest and Midwest regions, suggesting that these traditional hail areas are seeing improvement following the prior -- post -- prior period post-hail declines. Commercial roofing generated positive daily sales growth in the period. While only modest, it represents a return to positive growth in this category. We expect this to continue through the efforts of our dedicated commercial sales centers.

These centers are a one-stop does-it-all experience for the contractors where all of their commercial roofing needs are handled by a single location. This includes quoting, engineering, product support and order fulfillment. We've increased their number from seven in 2018 to over 27 currently. Next, I wanted to touch on our complementary product sales.

You'll see from our release that our complementary product sales daily organic were down 5.6% in the fourth quarter. This category includes our interiors business as well as our exterior complementary products such as siding, windows and doors. This business has much greater exposure to discretionary R&R and new construction. When adjusted for the traditional lag of 60 to 90 days, the decline here matches the patterns seen in the new construction and housing data, which were also down mid-single digits.

As we're now seeing improving macro and housing trends, we anticipate this will be a boost to these areas in the future. Now I want to speak about our fourth-quarter margins. Our gross margins were down 110 basis points versus last year. The decline was driven by an unfavorable price-cost relationship occurring primarily within our residential roofing category.

While the higher product costs were not surprising, we are unable to get the necessary price increase to fully offset the higher shingle costs. For the first three quarters of this fiscal year, we experienced a declining market, coupled with inflation, that made it very difficult to get incremental price. We entered the current quarter with the goal of raising prices in excess of product purchase costs so that we could recover that price-cost disconnect. The good news is that during Q4, we were able to get price.

We experienced an increasing market, coupled with moderate inflation as a result of the manufacturer cost increases from Q3 that rolled through our inventory. Unfortunately, the magnitude of the price realization was not large enough to offset the higher product cost we again experienced during the third quarter. The negative price-cost ramifications partially offset the impact of our incremental sales. And that's why you only see a net $2 million fall through to gross margins from the incremental sales.

As we move forward, we're optimistic that Q4's demonstrated positive pricing trend, coupled with lower input inflation, will translate to a favorable impact for margins. Adjusted operating costs improved as a percentage of sales on a year-to-year basis from 17.4% to 17%, showing favorable cost leverage of 40 basis points. We are on track to realize our targeted $25 million fixed cost reduction. We still have more work to do here, but we're clearly on the right path.

Now moving on to the balance sheet. We're pleased with our quarterly balance sheet improvement and cash flow performance. Fourth-quarter free cash flow was nearly $400 million, levels that exceeded our expectations, solid execution by our entire team. And probably most important, Beacon has delivered free cash flow, averaging more than $300 million annually during the past three years.

That's over 160% cash conversion, free cash flow to adjusted net income for the last three years, which is well above our 14-year historical average of 110%. We're very proud of this accomplishment and something we consider an important component to our long-term strategy. As a result, our net debt declined approximately $350 million or $393 million when you include the increase in cash on hand, and our net debt leverage ratio declined sequentially from 6.1 to 5.2 times. Beacon has always been a consistent free cash flow generator, with operating cash flow having been positive in 15 straight years.

If you think about all the external events we've seen, the housing downturn in the 2009 recession and the weather volatility, we believe this performance is relatively unique among building products distributors. On the financing side, we completed two significant activities. In the quarter, we issued $300 million of new senior secured high-yield bonds with a yield of 4.5% maturing in 2026. These replace our unsecured high-yield bonds with a yield of 6.375%, maturing in 2023, a great accomplishment that decreases our interest rate on the bonds by almost 190 basis points, yielding almost $6 million annual interest savings and extends the maturity three years.

In addition, we saw an opportunity to lock in part of our term loan B debt with two interest rate swaps totaling $500 million. We were able to fix our interest rate on this debt to approximately 3.75%. These are opportunistic financing moves that reduce our borrowing costs, provide us with longer durations and remove some of our variable interest rate exposure. To summarize our fourth quarter, we ended with a solid sales growth rate, operating cost management and as is our legacy strong cash flow.

While we are pleased with these areas of quarterly performance, we also recognize that the fourth quarter and full-year 2019 results do not come close to matching the underlying earnings power of our company. Most specifically, we are not satisfied with our full-year 2019 gross margin and operating costs. Last, I want to address our 2020 outlook. We have decided to delay providing formal 2020 sales and EBITDA guidance.

Julian's arrival and the strategy review that he described will take a little more time to work through the specific impacts to 2020. We're anticipating providing a more specific outlook later in the fiscal year. With that said, I did want to point out some key items that will help you with your models and our general thinking about 2020. From a market perspective, we're coming off a choppy 2019, particularly for our residential end-markets.

Housing starts and existing home sales declined while home improvement spending slowed. Now these indicators have stabilized and the markets move through fiscal 2019 and consensus expectations call for a modest improvement for these indicators for 2020. Also remember, the market is facing difficult hurricane comparisons with the year-ago period. Irma was still providing incremental demand in early fiscal 2019, and the industry also benefited from Hurricanes Florence and Michael.

Current year's hurricane season, by comparison, was largely uneventful. All that said, we'd expect the market to see softer sales during the first half of the fiscal year as a result of those prior-year comps, followed by a stronger second half as macro drivers improve, leading to a relatively flat fiscal year-over-year market demand. Now our company-specific actions, as Julian outlined, will drive full-year improvements to both top and bottom line, even in this flat macro environment. We see our fiscal year 2020 as a story with two parts.

Our first quarter is expected to experience less storm volume due to the timing of last year's hurricane demand. We also anticipate similar price-cost and gross margin challenges to those seen in the second half of 2019. Basically, a sequentially flat gross margin environment. This combination is expected to result in a year-over-year EBITDA decline during the quarter.

As you may recall, we had an unusually high gross margin in Q1 of last year as a result of timing of some of our vendor incentives. However, we expect to effectively hit the reset button in the new calendar year with both improving year-over-year macros and our initiatives driving performance. As we enter the spring 2020 selling season, we expect a strong demand in my rent, coupled with no incremental inflation, which will allow us to improve on our cost position, resulting in more attractive gross margins. As a result, our fiscal 2020 second through fourth quarters should see cumulative EBITDA improvements, driven by higher gross margins, stronger sales growth and positive operating leverage.

Now, before I hand it over to Julian, one final note. You have likely seen in press release, the announcement of my plans to depart the company later this fiscal year. We've been able to accomplish a lot at Beacon during my almost seven years here. Growing the company from $2 billion revenue to now over $7 billion and a Fortune 500 ranking.

I'm very proud of the team at Beacon and what we have achieved. Now after over 37 years in my working career, it's time for me to shift gears. I am very excited to enter the next chapter of my life and to begin to spend more time with my family, more time in charitable work and also continue on my board service. While Beacon searches for my successor, I'll continue with my duties and provide all the support necessary to ensure a smooth transition.

It has been a pleasure to serve Beacon, and I look forward to seeing the continued success under Julian's leadership. I'll now turn the call back over to him before we move to questions. Julian?

Julian Francis -- President and Chief Executive Officer

Thanks, Joe. And on behalf of the board of Directors and the entire management team, I'd like to thank Joe for his contributions and dedication to the company for nearly seven years. He's been integral to Beacon's growth, having executed on the integration processes and capital structure for 20 acquisitions, including RSG and Allied Building Products that more than tripled the company's revenues. I look forward to working with Joe's, we identify a successor, who he will partner with me leading the company forward.

Now let me reiterate how I see the future of the Beacon. With the integration of the Allied acquisition largely behind us, our ability to focus on our customers and drive execution at the branch level will be renewed. The potential to upgrade financial performance is before us. Deep dives to drive sales, operational improvements and all the benefits afforded by our scale are under way.

I look forward to providing guidance that takes these efforts into account when we speak early next year. I believe the future is promising for Beacon. I hope that my comments give you a sense of my first takes on the business to date and the go-forward opportunities in front of us. And with that, I'll open it up for questions.

Justin?

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Ryan Merkel with William Blair. Your line is now open.

Ryan Merkel -- William Blair and Company -- Analyst

Hey. Good afternoon, everyone.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Good afternoon.

Julian Francis -- President and Chief Executive Officer

Good afternoon.

Ryan Merkel -- William Blair and Company -- Analyst

So well, first, Joe, congrats on retirement. It's been great working with you.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Thank you very much. I appreciate it.

Ryan Merkel -- William Blair and Company -- Analyst

So I have just a couple of questions on gross margin. First, what was price cost impact in the quarter? I don't think you said it?

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Yes, pretty much -- on the price cost piece of it, pretty much the entire decline in gross margin was a result of the price cost piece. The mix, two step-in kind of acquisition elements to it pretty much all netted. So really, if you look at it, the entire 110-basis-point decline in gross margin was the price cost issue for the quarter. We had roughly around 30-ish basis points of price that we got and the rest was cost that offset the other way.

It was all -- as I mentioned, the year-over-year decline was pretty much all price-cost driven. It was primarily in the residential side of our business as well to the residential roofing piece.

Ryan Merkel -- William Blair and Company -- Analyst

OK. And it sounds like into the next quarter, you're going to see a similar impact on price cost since you -- it sounds like you raised price a little bit sequentially. Are you starting to ease into that price cost a little bit this quarter?

Julian Francis -- President and Chief Executive Officer

Ryan, this is Julian. Yeah, I think that -- obviously, the sequential comments that I made are important to us. I mean, we did see sequential pricing positive in the residential segment quarter over quarter, and we were able to obtain virtually all of that to offset additional increases that we saw come through our inventory. And so it's clearly important for us can do that.

And I think that's what we would expect going forward. I think the -- as you look back, the inflationary environment we saw in the first three quarters of the year, coupled with that weaker market, you'll remember all of the rain we had earlier in the year that I think dampened the market with the inflation that came through was certainly a drag for us for a full-year basis, but I was encouraged to see in my first 90 days that sequentially, we've been able to improve pricing. And I think we see about a flat gross margin environment in the next quarter.

Ryan Merkel -- William Blair and Company -- Analyst

OK. And then just lastly, I think you made a comment about no new inflation as you get into the spring of next year. Why do you -- why is that your outlook and have the OEMs told you anything about price increases?

Julian Francis -- President and Chief Executive Officer

No, I think that the statement was really around assuming -- I know I wouldn't make any comment about what we're seeing today.

Ryan Merkel -- William Blair and Company -- Analyst

Got it. OK. Thanks. I'm passing on.

Operator

[Operator instructions] Our next question comes from Trey Grooms from Stephens. Your line is now open.

Trey Grooms -- Stephens Inc. -- Analyst

Hey. Good morning, everyone. Or sorry, good afternoon.

Julian Francis -- President and Chief Executive Officer

Good afternoon, Trey.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Good afternoon, Trey.

Trey Grooms -- Stephens Inc. -- Analyst

OK. So, Julian, one thing you mentioned was barriers, I guess you've been here 90 days or so now, you mentioned barriers that have been impeding the company from reaching its full potential. Can you discuss some of these barriers, as you see it, now that you've spent a little bit of time in the seat? I know you touched on a few things that you're looking at that can help improve those. But any other color around any levers you can pull that you see now that you've had some time in the seat.

Julian Francis -- President and Chief Executive Officer

Thanks for the question, Trey, I'd be happy to address that. I mean, clearly, the results are not what we want. And I think we've got an opportunity now to really pivot from the necessary work of integrating two large acquisitions in a row, both RSG and Allied and are really getting back to basics. So really that the focus on the market.

I do think there is an opportunity in multiple areas. So first of all, expecting to grow sales. I think that we've got to get our sales team active in the marketplace, facing customers, looking for how we can drive that sales, making sure that we've equipped them post-acquisition with the tools they need to succeed. So that would certainly be the one area where I see some real opportunities to really drive -- to drive improvement at the top line, the sales force more active in the market.

The second area, I think, and mentioned it again, focusing resources on branches that are in bottom half of our performance distribution. I tend to think about it in quintiles. We've got 500 branches. So think about it in terms of 100 branches in each of those quintiles.

We've got great performance in the top 100, the lower 100s, really looking and focusing on those in terms of improvement, a clear upside for margin. Absent any market pull, I think that really getting into there and understanding what's causing them. They tend to be the smaller branches overall, but not in total. But if you think about how our revenue is split in those quintiles, we're talking about as much as $10 million per branch, $1 billion across those 100 branches where our average margins are substantially below our top quintile.

So really driving into that I think is important. Let's break that down. And in part, the review that I've kicked off will help us quantify how we get after the short, the medium and the long-term impact of improving on those branches. And then lastly, I think it's important for us not to lose sight of the fact that our business is a local one.

We have to be active in the market. It's a local business. But we've got to find ways for our scale to be meaningful to our branches and to our operations. So really leveraging that scale to provide value to the customers at the local branch level, investment in our operating model, in our digital tools, that's I think, becoming a big differentiator for us.

So those are the sort of the key areas that I'm particularly excited of and I think offer us the biggest opportunity certainly over the next 12 months but I think even beyond that.

Trey Grooms -- Stephens Inc. -- Analyst

OK. And so with some of these initiatives, as a follow-up, I think, Joe, I think your comment on kind of the progression as we go through fiscal '20 was that you should start to see some margin improvement. I think I understood somewhere in the kind of 2Q and beyond. The initiatives that you're talking about now, is that something that will begin to impact but then? Or in order to see that margin rebound, are we kind of looking more toward a catch-up on price cost? Or what's, I guess, driving the expectation for kind of that rebound in margin as we look into 2Q and beyond?

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Yeah. To follow up on that one, kind of trait, you're right. The rebound in the margin really is anticipated toward primarily the third and the fourth quarter. That's where you'll see: One, as we talked about, the demand, so we'll see the stronger demand kind of shape up during that third and fourth quarter.

That will help drive it. And the second big item really is, as Julian went through each of those initiatives. Everyone's from our branch performance operations that we're looking at others, you'll really start to see the impact of all those initiatives start to kick in more in the third and the fourth quarter. That second quarter really is impacted a lot by the weather, as you know, some of the winter environments.

So you never have too much of an impact there. The increased volumes and really the initiatives taking hold in the third and fourth quarters where you'll see the improvement.

Trey Grooms -- Stephens Inc. -- Analyst

Got it. I'll pass along. Thanks.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Thank you, Trey.

Operator

Thank you. And our next question comes from Keith Hughes from SunTrust. Your line is now open.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. Can you give us any kind of idea in residential roofing or just company as a whole, what units were versus price impacting revenue?

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Sure. Keith, this is Joe. I can give you that viewpoint. They were pretty close.

Actually, the price in the quarter on the residential side was pretty minimal. So it wasn't a significant kind of impact to it. Most of what you saw was in the units piece to it. So it was a little bit of price but not too much.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

So why can't the -- roofing, most of the 11 and a half was units. Is that correct?

Joe Nowicki -- Executive Vice President and Chief Financial Officer

For the most part, correct.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

And then final question, your comment on the first quarter being affected by hurricane -- excuse me, hail comps. I was a little confused by that. I mean, we had -- you had pretty strong hail numbers two years ago, I believe it was. And then first quarter last year was -- fiscal was pretty weak.

So I'm not understanding what the comp issue is.

Julian Francis -- President and Chief Executive Officer

So, Keith, it's Julian. The first quarter last year for us was impacted by the hurricanes that we saw coming through Irma. So we had some good fourth quarter -- sorry, first-quarter volume at the end of 2018 that came through. So obviously, we don't see any particular hurricane activity or storm activity that's impacting our first quarter this year.

We're largely done with that. So we would see somewhat down storm demand for the first quarter, not hail-related but more hurricane-related.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

OK. Thank you.

Julian Francis -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Trey Morrish from Evercore ISI. Your line is now open.

Trey Morrish -- Evercore ISI -- Analyst

Thanks very much, guys. I wanted to go back to price cost. Last quarter, you said it was down 50 bps. And this quarter, it's looking like it's down over 100 bps.

And you talked about resi roofing continues to be an area of headwind. But we don't believe that the manufacturer's price increase was actually that successful earlier this year, a couple of months ago. So was -- did you see something different flow through on your P&L? Was there a timing of when a certain increase was effective, that was the challenge here in the quarter. I'm just kind of wondering if you could explain what the difference was this quarter versus last quarter?

Julian Francis -- President and Chief Executive Officer

Yeah. So, Trey, let me address that one. I think you're exactly right. I think it's timing.

So we agree that the second price increase that was announced by the manufacturers didn't impact us in the same way as early in the year. But the way it flows through our inventory, we saw it sort of creeping again into our fourth quarter. So there was a little bit of sort of lag. So it's not a new increase.

And this is where I think we were able to get some additional price in our fourth quarter that we did implement in that. And so really, it's not new increases. It's the way that the increase and the timing of the increases flows through our P&L.

Trey Morrish -- Evercore ISI -- Analyst

OK. Thanks. And I just want to also take a step back on profitability. About a year ago, Beacon had an investor day, putting out EBITDA margin targets of 9% to 11%.

And I know that you haven't given guidance for this year. But I guess, Joe or Julian, is -- do you guys still have a degree of comfort with that being a targeted profitability range? Or is that something that you think is also under review?

Julian Francis -- President and Chief Executive Officer

Certainly -- this is Julian. Certainly, I'd like to make sure that I can back up that statement. That's why we've got a review under way and seeing it. But as a high-level target, sort of that double-digit range, that 9% to 11%, certainly, at first blush, it's not out of the realm of possibility.

I think it's entirely within possibility, in fact. What I do want to do is make sure that we can get to that, what's the right structure, how will we build on our current performance to get there?

Trey Morrish -- Evercore ISI -- Analyst

OK. Thank you very much, guys.

Julian Francis -- President and Chief Executive Officer

You bet. Thank you.

Operator

Thank you. And our next question comes from Kathryn Thompson from Thompson Research. Your line is now open.

Kathryn Thompson -- Thompson Research Group -- Analyst

Hi. Thank you for taking my questions today. Just revisiting the operational improvement. In order to focus on the top buckets and really get a better sense as we move into fiscal '20 and really over the next 12 to say, 18 months, how much is within your control? And how much is outside of your control? So in other words, if we had a year -- another year with flat volumes, help us understand what you could do beyond help from volumes?

Julian Francis -- President and Chief Executive Officer

Thanks, Kathryn. Again, Julian. The way I think about that is partly -- I'm trying to get a good come to grips with what we have in our control, partly the reason for the strategic review. Certainly, we're not expecting a lot of lift from the market.

We're expecting a go-forward about flat market next year. I do think that we have some elements in our control. Certainly, there's marginal impact of pricing. As we get better, it's a pricing discipline.

I think there's things there that are in our control. I certainly think there's opportunity with our branch network, as I've hinted at. I think that really being disciplined about that, and that's, again, very much in our control. And then third is the opex.

We've taken action on that. I think we can continue to drive that. That is a focus area for us. How do we make sure we're more efficient? How do we ensure that we're driving efficiencies at the branch level and across the corporate operations? I think that the digital platform is showing good strength in that area, which is allowing us to be more efficient, allowing our customers to be more efficient with their ordering.

I think there's an emphasis on some of the areas that we can place -- private label is an opportunity for us to continue to grow that as even in a flat market, grow that as a share of our business. So I think there's a number of levers that we can pull, even if we didn't see an improving market that would impact positively our gross margins and our net.

Kathryn Thompson -- Thompson Research Group -- Analyst

OK. Helpful. And I wanted to get your thoughts on the further consolidation of the wallboard industry with Saint-Gobain announced acquisition of Continental. What, if any, impact you see this happening on your interior products business? And perhaps drawing some parallels with the roofing side in this consolidation and what you could see for your -- on the wallboard side?

Julian Francis -- President and Chief Executive Officer

Sure. Obviously, it's a market that's very important to us. I don't think that that's been -- it's not closed yet, but I think that overall, it's a positive move for the industry to see that a little bit of consolidation. I mean, it's a relatively small acquisition, but obviously, it's an important one in this space.

I think as we get back, our interiors business is really a platform for growth for us. I think it's really important for us to continue to drive that business. I think we've got a little bit of a different market mix, it faces the new construction. But I think it's really some of the same issues that we have across all of our business, which is executing our sales plan, get price to what we think will be in improving market.

New residential market, we think that we will have an improving market there and a focus on branches where we've got lower performance. I think it's sort of same theme across all of those things. And I think that we're well positioned to see growth in that platform as the macros improve.

Kathryn Thompson -- Thompson Research Group -- Analyst

OK. Great. Thank you very much.

Julian Francis -- President and Chief Executive Officer

Thank you, Kathryn.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Thanks, Kathryn.

Operator

[Operator instructions] And our next question comes from Garik Shmois from Longbow Research. Your line is now open.

Garik Shmois -- Longbow Research -- Analyst

Hi. Thank you. I want to ask on complementary. You cited the lagged housing weakness is the driver for the weaker sales in the quarter.

Really, it was soft several quarters. Just curious, given housing has started to perk up, are you expecting to see growth in complementary in the first part of fiscal '20? Or will it be similar to the roofing business, and will be a little bit more back-half weighted?

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Hey, Garik, Joe. Good question. And your answer is right. We do expect that the current trends in those macros, which have started to trend in the opposite direction, you've said, they're going to provide a good kind of tailwind for us as we go into next year.

So yes, we do think they're going to be a benefit to us. Timing-wise, certainly, we'll see it in the back half of the year. I'm not so much -- how much we'll see it, some improvement in this quarter, the first and the second, but more of it will also be in the back half of the year based on what we see so far. But certainly, that improving macros, based on the housing elements, will help us in the complementary products.

Both of those two areas are heavily impacted by them.

Julian Francis -- President and Chief Executive Officer

And, Garik, I'll add to that. There's -- the SAW number, the seasonally adjusted rate, the absolute numbers at this time of year, still trend down even in that market. So we still have some seasonality in it, but it's I'd like to reiterate what Joe said, certainly, as we see the pick up through the year, we would expect to see good growth opportunities.

Garik Shmois -- Longbow Research -- Analyst

OK, thanks. And then was there any mix impact on gross margin? I think in previous quarters, geography plays a role, and that has weighed on gross margin performance. It didn't seem like that was the case, but I just wanted to be clear, that mix, if that had a role in gross margins?

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Yeah, this is Joe again. No, it did not play much of an impact at all on the gross margin. There was a little bit more, obviously, as the residential than of the complementary and the commercial -- or the commercial parts of our business. But overall, the mix part was pretty neutral.

Garik Shmois -- Longbow Research -- Analyst

Great. Thanks, and Joe, best of luck in the future.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Thank you very much, Garik.

Operator

Thank you. And our next question comes from Mike Dahl from RBC Capital Markets. Your line is now open.

Mike Dahl -- RBC Capital Markets -- Analyst

Hi. Thanks for taking my questions. First question, just a follow-up on a couple questions and remarks about the strategic review. So Julian, how wide-ranging should we think about this review being? Does it include any potential portfolio shifts? I know you just mentioned to a prior caller that you view interior as core.

But just any thoughts on just how you see the portfolio? And is that going to be part of this review process at all?

Julian Francis -- President and Chief Executive Officer

Well, thanks for the question. So I can make sure I can be clear on this. But no, I think our current portfolio is the one that will be the one going forward. We like our position in the exteriors market.

We think there's great opportunity for us to grow in that space. And there's clearly opportunity for us to grow in the interiors business. Obviously, the interiors business is the one that I know particularly well. It is exposed to more new construction.

We've got a good commercial business there as well. So it's a little bit of a different market mix? No, I think that, as I said earlier, the theme for our interiors business is similar. There's a little bit of a geographic difference. I mean, we've got some real market-leading positions in some of our regions, not so much in others.

But -- and I think there's real opportunity for us to strengthen that business piece across the entire geography that we have and that we serve. So I certainly think of that it is core to the business. I'd like to see it grow, and I think there's plenty of opportunity for us to do that inside of that business.

Mike Dahl -- RBC Capital Markets -- Analyst

OK, thanks for that. And my second question is on gross margins and price cost. I guess, if we think about the competitive environment, you got a little price in the fourth quarter in a growing market, but still not as strong as you expected. When we look at the first half of the year and your expectation for the market to be softer year on year, what's giving you the confidence that pricing is going to hold or improve versus backsliding a bit potentially? And is there anything you're doing internally when you're kind of directing the field or any behavioral changes like that that would help to support that? Or any differences you're seeing in the underlying competitive environment that give you confidence about that?

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Sure. This is Joe. Just to provide a little more detail on that. You're correct.

Our view is that right now, we'll see sequentially similar margins in the first quarter and then when you get to the back half of the year is when we'll start to see the improvement. It's driven a lot on the gross margin side, really based on some of the increasing demand, as we had talked about it, coupled with an assumption around a lower inflation environment, too. Those are that give us a lot of opportunity or optimism as we get to the back half of the year. Your question in regards to are there actions that we're taking, absolutely.

I think Julian mentioned several that we do on the gross margin side from focusing on private label. We also have a very focused effort internally around our pricing tools that we utilize to systematically establish pricing across the company, too. So there are several things that we're doing internally and then some of the additional initiatives, as Julian went through, are the -- are really what gives us the optimism as we look forward to drive the gross margins. Does that help?

Mike Dahl -- RBC Capital Markets -- Analyst

Yeah, it does, but maybe I didn't ask the question clearly enough. I guess I was thinking more specifically to the competitive environment in a down year-on-year market, whether price will actually hold or improve or whether there's risk on the pricing side sequentially.

Julian Francis -- President and Chief Executive Officer

No, I think that overall, we're seeing today a stable environment on pricing. I think that we've experienced a down market for three quarters of the year. I think we did see decent markets. But overall, I think that we're seeing now much more stability in price than we've seen.

We're not seeing additional competitive actions. And I think that that bodes positively -- the sequential price improvement that we've seen, obviously, was an upmarket. But I do think that we're seeing a reasonably decent market, and this is fairly typical for this time of year. Obviously, the market slows a little bit.

But I do think we're seeing a more stable environment today than we were when there was additional while earlier in the year.

Mike Dahl -- RBC Capital Markets -- Analyst

OK. Got it. Thanks for that additional detail. And, Joe, best of luck on your semiretirement.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Thanks. I appreciate.

Operator

Thank you. Our next question comes from Truman Patterson from Wells Fargo. Your line is now open.

Truman Patterson -- Wells Fargo Securities -- Analyst

Hi. Good afternoon, guys. First, I just wanted to touch on the increased amortization costs and acquisition-related costs, just what really drove those? And will these persist going forward into 2020?

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Yeah, the amortization -- Truman, this is Joe, by the way. The increased amortization is really based on the accelerated tables that are used for driving your amortization. So it's all related to the Allied kind of acquisition. And that's a table that's been established.

We can get you some more specific numbers on the amortization numbers going forward for the '20. I don't have those on the tip of my analysis right now, but I can get you the amortization numbers for next year.

Truman Patterson -- Wells Fargo Securities -- Analyst

OK. The reason that I'm really asking is that the adjusted amortization costs impacted your adjusted EPS. And I'm just wondering if that's going to persist going forward into 2020, whether or not we need to adjust for that?

Joe Nowicki -- Executive Vice President and Chief Financial Officer

I think -- I actually think it will start to go down in 2020 because it's all based on the cash flow analysis that you come up with the amortization table sport. But what I can do is I can get you some specific data on that one, Truman.

Truman Patterson -- Wells Fargo Securities -- Analyst

OK, OK. And then, Julian, one of your key goals is to grow your customer base. Could you maybe just walk through that a little bit more of what that entails at a high level? And judging by the residential roofing growth this quarter, you'll stabilize your market share after losing a bit of share in the past one to two years. I'm wondering, near term, if you all adjusted your pricing strategy at all? And the reason I am asking -- fourth-quarter gross margin guidance or the results actually came in probably 60 bps below guidance.

So I'm trying to understand what all was market versus your alls, maybe pricing strategy?

Julian Francis -- President and Chief Executive Officer

Sure. I appreciate the opportunity to talk about that. So let me, first of all, take the first part of your question about sort of strategy and then take the second part of the question. As I look at the businesses I've come in, I think the ability of whole organization to turn its focus away from the large integrations that we've done back to the market, really be very active in the market with our sales organization calling on customers day in and day out, making sure that we're very active as they.

I think there's two ways that you want to grow. There's new customers that are coming in and there's a larger share of wallet. I think how we go after those two components is important. I think that as we articulate more about our strategy in this space, those are the two elements that I'm really talking about in terms of our sales organization, just being a little more active, more focused on the marketplace.

And probably, to be frank. post-acquisition, now that those are behind us, a little more focused on the marketplace overall. And I think that's really important -- earning back and earning more share of the customers that we do business with I think is really important. In terms of overall pricing in the quarter, I don't think that we've changed our posture in terms of our pricing outlook, in terms of our pricing strategy.

I think we do have to be very active on that. Obviously, it's a very local business. We do need to be competitive in the marketplace. We do need to make sure that we're responding to competition appropriately.

We also think that one of the benefits to scale, one of the returns to scale, is the ability to capture more market information and deploy tools that help us manage price more actively than really a local competition. And that's something that I think we're still in the early stages of, but really, we want to drive home.

Truman Patterson -- Wells Fargo Securities -- Analyst

OK. Thank you guys.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Thanks, Truman.

Operator

Thank you. And our next question comes from Michael Rehaut from J.P. Morgan. Your line is now open.

Michael Rehaut -- J.P. Morgan -- Analyst

Great. Thanks for fitting me in. And congrats, Joe, again on your retirement from the company, best of luck going forward.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Thanks, Mike.

Michael Rehaut -- J.P. Morgan -- Analyst

First question, I wanted to try and get a sense -- I know, Julian, you talked at length on this call around trying to refocus the company or increase the focus on organic growth. Obviously, going back to your Analyst Day, you talked a lot about the different initiatives, even at that point in terms of a lot around digital and leveraging the branch network. I guess, you're starting to turn the corner, growing the residential roofing, roughly in line with the market this quarter, maybe as opposed to losing a little bit of share over the last year or 2. I guess my question is really, when would we expect to see some of those gains in digital and some of the other initiatives, turn the corner to actually gain some share? I'm just kind of curious about if you parse out the initiatives that you're rolling out, how does that reconcile with some of the share losses in the past or roughly in line with the market growth this quarter? And I know we've talked a lot about geographic mix.

But I was wondering if there's any other way to kind of work it through and detail some of the progress you've been making in in those initiatives that you've been pointing to?

Julian Francis -- President and Chief Executive Officer

Well, thanks for the question. I appreciate the opportunity to answer that. It's -- but -- I mean, part of the reason that we've delayed providing some of the guidance is really around our ability to articulate how this is going to come through. We've said now that we would expect our first quarter and second quarter to be -- first quarter down based on the comps, based on gross margin progression being about flat.

We would see second through fourth quarters start to see improvement. I think that it's -- where we would start to see the impact of initiatives is as we come out of the winter months when the volume starts to improve, the initiatives will have much bigger impact across a larger amount of sales. So really, it's starting to build over the next six months. And then really start to hit the market in the next -- the six months following that.

So now I do not want to get into quantifying that right now because we're really still in the process of reviewing this and seeing what's possible. I do want to emphasize that the opportunity is, again, to be more active with our sales organization in the field to improve our branch operations, particularly those that are today at the bottom end of our scale and then to drive differentiation home. I think that -- I do emphasize on the digital side, I've been very impressed with our position there. I talk to both customers about how they interact with us through that platform.

And that's been really encouraging for me to see growth rates in that space I mean, up well over several hundred million dollars now on that platform and growing rapidly. I think that we can find ways to drive margin there to ensure that we're picking up share of wallet. So I think that it takes -- it will take a little bit of time to really quantify where that is. But I do see some rays of hope in that space that are really important for us to do.

In terms of timing, I'll wait until early next year to provide additional color on that.

Michael Rehaut -- J.P. Morgan -- Analyst

Great. Thank you, Julian. I guess, secondly, just maybe a point of clarification on the gross margin. You said that in the quarter -- in this fourth quarter, you did get some sequential pricing improvement, but gross margins sequentially did slip 30 basis points.

So is that 30 basis points additional kind of negative mix driven? And as you kind of kindly laid out some of your thoughts going forward in terms of the first quarter and into the second -- two out of the last three years, you've had a nice sequential decline 1Q to 2Q, would you expect that to be a similar type of decline? Or would you expect to continue to see the 24.3% kind of remain pretty stable, at least, over the next couple of quarters?

Julian Francis -- President and Chief Executive Officer

I think we typically do see a small decline this time of year in gross margins as they come through. So I think we're probably anticipating something in the range. Obviously, we're -- it's early on, but I do think that that would be fairly typical for us. So without providing any real more insight than that, I do think we'll see that continue.

I think, this time of year, we get some -- we get a little bit of leverage -- deleveraging coming through. So -- and then overall, I think that the mix for the winter is probably unfavorable but I think that we're going to continue to see progress through the end of this calendar year and then further progress as we come out of the new year and seeing improving margins as we start to get into next year.

Joe Nowicki -- Executive Vice President and Chief Financial Officer

I'll take the first half of your question, which is related to the Q4 numbers. And really, it was not a mix-related issue causing the year-over-year decline in GM. It really was all in the price-cost spread and really was about as I mentioned, cost was 30, but it was really about the cost rolling through from the third quarter. So those costs in the third quarter, as Julian mentioned, got into our inventory and then they rolled through our P&L.

That's what drove the price-cost spread being a little bit higher this quarter.

Operator

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

Julian Francis -- President and Chief Executive Officer

Thank you, Justin. I appreciate that. Look, I appreciate everyone joining our call. Certainly, my first call as the CEO.

And I'm very optimistic about Beacon's position going forward. Within the industry, we have excellent strategic positioning. I think we remain one of the leaders in providing value-added solutions to our customers. Now our new tack toward organic growth and honing sales and operations, leveraging our scale provides structure for a new chapter of Beacon.

We continue to appreciate the support from the investment community as well as our valued customers, suppliers and employers. And I thank you very much this evening for joining our call. Thank you.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Julian Francis -- President and Chief Executive Officer

Joe Nowicki -- Executive Vice President and Chief Financial Officer

Ryan Merkel -- William Blair and Company -- Analyst

Trey Grooms -- Stephens Inc. -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Trey Morrish -- Evercore ISI -- Analyst

Kathryn Thompson -- Thompson Research Group -- Analyst

Garik Shmois -- Longbow Research -- Analyst

Mike Dahl -- RBC Capital Markets -- Analyst

Truman Patterson -- Wells Fargo Securities -- Analyst

Michael Rehaut -- J.P. Morgan -- Analyst

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