Beacon Roofing Supply Inc (BECN) 2016 Q1 法說會逐字稿

Good morning ladies and admin welcome to the Beacon Roofing Supplies FY15 first-quarter earnings conference call. My name is Nicole and I will be your coordinator today.

(Operator Instructions)

As a reminder this conference call is being recorded for replay purposes. This call will contain Forward-looking statements that fall within a 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. Bear in mind that such statements are only predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual FCC filings. The Forward-looking statements contained in this call are based on the information as of today, February 5, 2016 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.

On this call, Beacon Roofing Supply may make Forward-looking statements including statements about its plans and objectives, and future economic performance. Forward-looking statements are subject to risks and uncertainties. As a results may differ materially from those indicated by such for 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 10K.

The company has posted a summary financial slide presentation on the investor section of its website under event and presentations. That will be referenced during the management's review of the financial results.

On the call today for Beacon Roofing Supply will be Mr. Paul Isabella, President and CEO and Joe Nowicki, EVP and CFO. I would now like to turn the call over to Mr. Paul Isabella, President and CEO. These proceed Mr. Isabella.

Thank you. Good morning and welcome to our 2016 first-quarter call. As mentioned in our press release this morning, we started the year off with a very solid first quarter.

Sales for the quarter were approximately $976 million, which represents total growth of almost 64% over prior-year, and organic same-days growth of approximately 12%. We delivered $0.41 of adjusted EPS for the quarter, strong growth versus last year.

Our team did an excellent job of growing sales and margin, controlling cost, integrating RSG, and the three additional acquisitions we executed in December. And as always focused on servicing our loyal customer base. We formally closed on the RSG transaction on October 1st and then acquired the three companies in December, RCI Roofing Supply of Omaha, Roofing and Insulation Supply of Dallas, and Statewide Wholesale of Denver. These three solid companies give us additional geographic and product density and it also demonstrates our commitment to adding tuck-in acquisitions as part of our growth plans as we had mentioned previously.

And now I will give a little more color on the quarter. As we mentioned on our last earnings call, the first quarter started strong with October sales up 58%. November was up 64% and December up 74% all on the same-days pieces. The acquisitions completed during 2015 and Q1 of 2016 combined with our Greenfield branch growth and existing branch sales were all positive drivers of the 64% total growth.

Positive sales growth during the first quarter was delivered by five of our seven reported regions. In our west, southwest, and southeast regions, we saw strong double-digit sales growth. In addition we saw solid contributions from the northeast and mid-atlantic. All three of our product lines grew over the prior-year residential up almost 77%, commercial up 59%, and complementary up over 37%.

Demand in general was strong in the quarter, and milder weather also was a contributing factor in this growth. Existing same-day sales were up for all three product lines as well. Residential existing sales were up over 15% in the quarter. This was mainly driven from same-store sales, as well as Greenfield's open in the prior years.

Our complimentary sales grew approximately 14% on an existing same-day basis. Growth in the quarter was driven in large part by our applicators acquisition made last year, but we also experienced growth within our existing business as well. Six of our seven reported regions had strong complimentary with five registering double-digit gains.

From a trending perspective, this product line has seen positive existing sales growth in 10 of the last 11 quarters. We will continue to focus on growing this product line.

Our commercial product line registered 6.4% sales growth for existing same-days in the quarter. We experience growth in our northeast region and registered double-digit gains in our southwest and west regions. The gains were offset somewhat from our midwest and southeast regions.

It's worth noting that commercial sales have grown in eight of the ten prior quarters on existing basis. Along with a solid sales growth, gross margins increased nicely over the prior year. This is the fifth consecutive quarter in which the gross margin percent increased over the prior year. Excluding the fourth quarter of last year, the 23.9% gross margin rate is the highest in 12 quarters.

From an operating expense standpoint, we experienced excellent leverage as we grew sales. When excluding one-time cost related to the RSG acquisition, our operating expense as a percent of revenue declined over 100 basis points to 17.9% for the quarter. We're very encouraged by the leverage gain this quarter.

Our balance sheet remains strong. Inventory per-branch increased 11.5% from the prior-year, mostly due to the RSG acquisition. The legacy RSG branches are on average larger, and carry more inventory then typical legacy Beacon branch.

We increase cash flow from operations and we were able to fund three acquisitions from cash generated in Q1, while keeping our revolver right around our initial draw. This is a good example of our strong ability to generate cash. Looking ahead at the current quarter, we expect to generate strong cash flows and make progress on our commitment to de-lever.

I would now like to provide an up date on the RSG integration. As mentioned in prior calls, the integration process has been in full force since the October 1st close. Three major categories of savings were branch consolidation, SG&A, and procurement.

We completed major milestones in each, and are leveraging a proven framework that we follow rigorously to ensure all deliverables are being met. We are on track for all elements. We have accelerated and completed our branch consolidations.

We are on track with SG&A savings as the majority of overlapping positions have been reduced with completion anticipated by Q3. Other indirect savings have been identified and are in the process of being implemented and we're making good progress with direct material cost savings as we align our buy.

We have converted over 50% of the RSG branches to our IT system and the remainder will be complete by April. The combined team is doing a great job executing our plan, while driving excellent financial results with the combined company. We are committed to achieving our stated $30 million in savings for this fiscal year, ramping-up to $50 million in the second year. And Joe will provide more detail into the acquisition related costs.

Now on to the outlook for 2016. For January we had same-days organic growth of approximately 20%. This is a very good start to the quarter, and indicative of the continued strong demand, and milder weather during the month. Looking at the combined company we see revenue in the range of $3.8 billion, to $4 billion for 2016. And in terms of gross margin, we expect to be in the range of 23% 24% for the full year. This estimate has no impact from pricing in it.

In regards to new branch openings for 2016, we will continue to evaluate potential openings in markets where it fits our strategy. Our focus for 2016 is to ensure RSG in the three acquisitions made in December are integrated properly, as well as driving profitable growth from the existing Beacon and RSG Greenfield's. Greenfield branches have been and will continued to be over time a solid growth mechanism. The investment required to open these branches is favorable and provides the opportunity for strategic placement in areas we want to grow in.

In terms of additional acquisitions, the structure of our financing allows us to effectively meet our working capital needs and continue with our acquisition strategy. We have the flexibility to continue making acquisitions while maintaining ample liquidity as working capital needs increase. As we have said in the past, it is difficult to predict what sellers will sell. Our pipeline remains full and we should be able to close additional deals in the fiscal year.

Regarding our SG&A expenses, excluding one-time costs and incremental purchase accounting related to the RSG transaction, we expect to be in the range of 18% of revenue. Related to EPS, the current range of estimates $1.80 to $2.06. As we've said in the past it's very difficult for us to give full-year guidance with the unknown variables we face such as pricing, demand, and storm repair this early in the year. Especially entering a historically weather-impacted second-quarter, as we have said in the past, we do believe RSG will add approximately 30 sets of EPS in 2016, that's without the impact of one-time costs and incremental amortization.

On the last earnings call I stated I felt would be in the range of $1.80. I am not changing their view at this point. And as we have done in the past, we will update this on the next earnings call.

As always, we are working diligently to maximize earnings for the year. By executing the fundamental of our business plan, focusing on superior customer service, sales growth, cost control and making sure the integration is successful.

And now I'm going to turn the call over to Joe, and he can go over a little more detail on the financial highlights of the quarter. Joe.

Thanks Paul, and good morning everyone. Now I will highlight a little more detail on a few key financial results and metrics that are contained in our earnings press release and the first quarter slides that were posted to our website this morning.

Overall as Paul said, it was very good quarter. We had strong top-line growth of 63.8% for record first-quarter sales of $976.5 million. This is driven primarily by our acquisitions of RSG, ProCoat, WRS, RCI, RAS and Statewide, but even excluding these, we still had existing market growth of 11.8%.

Gross margin increased over the prior year by 80 basis points. Operating expenses were up in total, mainly due to cost related to the RSG acquisition. Excluding these costs, our existing market operating expense as a percentage of sales, declined 120 basis points. Demonstrating rate leverage.

As a result, for the quarter we achieved a record EPS of $0.41, an improvement of $0.15 for almost 59% of the prior year. For comparison purposes, there were the same number of days in Q1 of FY15 as in Q1 of FY16, 62 days. Paul already went through our Q1 and sales in detail, so I will not repeat any of that information here, but I will go through our monthly sales trending.

As compared to our prior year, our average sales per-day on an existing branch basis were higher in each of the three months of the quarter. October sales were up 7.7%. November sales were up 13.1%. And we finished the quarter strong in December with sales up over the prior year by 17.3%, driven primarily by a 21.4% increase in residential sales. On a very positive note, the gross margin rate was 23.9% for the quarter which is up 80 basis points from one year ago.

In summary, pricing declined slightly quarter from the prior-year. This was more than offset by an even greater product cost decline.

Mix within the legacy Beacon branches drove a slightly favorable impact to the gross margins. The addition of RSG to the gross margins down slightly. As we previously discussed legacy RSG business carries a lower gross margin percentage but provides us with an opportunity as we move forward -- part of our integration plan.

We experienced a slightly negative impact on gross margin due to the increase in direct sales versus the prior year. The percentage of direct sales increased to 15%, from 14.7% in the prior year. As we previously mentioned, our direct sales have lower gross margins and operating expenses, as compared to our warehouse sales.

Commercial and residential prices declined a proximally 2% compared to the prior year. This was partially offset by complimentary prices that were up over 1%. Sequentially overall prices are down less than 1%.

Our product mix had a slightly favorable impact on existing gross margin, as volumes shifted from commercial roofing to residential and complimentary products. Residential roofing increased to 48.7% of our sales, versus 47.2% in the prior year. While commercial declined to 35%, from 36.8% in the prior year. And complimentary increased slightly to 16.3%, from 16% in the prior year. The diversification of our product line is something we focused on across our existing branches and through our acquisitions.

Now on to operating expenses. Total operating expenses were $206.3 million or 21.1% of sales. This represents a year-over-year increase of $92.6 million. This amount includes operating expenses from acquisitions of $94.8 million, of which, $26 million was RSG acquisition costs.

Excluding the acquisition costs, our existing market operating expenses were up $5.5 million over prior-year Q1, but, were down 120 basis points as a percentage of sales. As previously discussed, within existing markets we do include Greenfield's; $1.4 million of existing market operating expense increase can be attributed to the six Greenfield's opened up last year. As we mentioned, Greenfield branches is have a slightly higher operating cost as a percentage of sales until the branch is running at our average branch volumes.

There was also an increase in volume related payroll and benefits costs of $3.3 million. Bad debt expense was up $2.2 million from the prior-year, primarily as a result of select customer account reserve, and the fact that in the prior-year there was a credit balance die to some favorable collections. But overall we continue to have a very low, trailing 12-month bad debt expense of under. 2% of sales.

We continue to look for ways to leverage our cost structure, cost controls at a historic strength for Beacon. With the acquisition of RSG, we're already seeing a significant improvement in our operating cost leverage.

Interest expense and other financing costs were up $13.6 million versus the prior year. This increase is primarily driven from our debt balances increasing over $900 million in conjunction with the RSG acquisition. We are managing this very closely, and making every effort to de-lever and reduce this cost.

During the quarter we paid down over $100 million of our debt. That allowed us to make three acquisitions that we now announced in December, and still end the quarter with the same balance we started with. We intend to meet our commitment of reducing our leverage to under 2, in three years. Our income tax benefit reflected a much lower effective tax rate of 32.8% for the year compared to 39% last year. This was driven primarily by treatment of one-time RSG acquisition costs another discrete items. When you adjust for these, our effective tax rate would be a proximally 39%, which is consistent with the prior year.

Our net adjusted earnings were $24.7 million for the quarter, compared to $12.9 million last year. An increase of almost 59%, diluted, adjusted net earnings per-share were $0.41 compared to $0.26 same period last. Our adjusted EBITDA for the quarter was $73.4 million, which is 7.5% of sales. Compared to $34.3 million in the prior-year, or 5.8% of sales. It's an increase of 113.4%.

Now I want to provide some more clarity on the $29 million nonrecurring charges and incremental amortization that we show on the earnings per-share and EBITDA tables included in the press release. Approximately $1.2 million of those costs are related to the extinguishment of our prior debt and interest rate swap. $4.3 million is related to the acceleration of the stock options due to RSG employees that have left the company.

$5.7 million is related to the step-up in amortization with the increased customer intangible assets from the RSG acquisition. For the full-year, we expect this number to be a proximally $23 million.

$3.4 million is related to the cost of the new debt issuance, both one-time expenses and the amortization over the life of the debt agreement. And the remaining $14.9 million is related to nonrecurring costs associated with completing the transaction such as legal accounting and consulting fees. In addition, this amount of includes cost to implement our synergies such as the severance and lease termination costs.

Regarding the status of our balance sheet, cash flow from operations for the quarter was a positive $44.7 million, compared to $40.2 million last year. Inventory was up $151 million from Q1 last year. And a by branch basis was up 11.5% primarily from the RSG acquisition and also the three other acquisitions we made in December.

Capital expenditures excluding acquisitions in Q1, were $2.2 million, compared to $3.1 million in Q1 2015. We are carefully evaluating our fleet with the addition of RSG. For FY16 though we still expect capital expenditures to be close to 1% of sales.

Net cash used for investments was $941 million reflecting our acquisitions during the quarter. Keep in mind that $307 million of the RSG acquisition was funded for the issuance of common stock and is not reflected in the cash flow statement. As I mentioned earlier, we pay down about $100 million of our debt during the quarter, and we still intend to meet our commitment, reducing our leverage to under two in three years.

Current ratio was a strong 2.28 to 1 verses 2.53 to 1 at Q1 2015. As Paul mentioned, we've made great progress on the integration and in taking the actions necessary to achieve this synergy. We are still very confident in -- amounts as stated.

We will now respond to you and take any questions you may have.

(Operator Instructions)

Our first question comes from David Manthey of Robert Baird. Your line is now open.

Thank you; good morning, guys.

Good morning, Dave.

First question on the second quarter, obviously seasonal impact strong here, and you are a bigger business, so I assume you will be making larger losses in the off-season, but just outside of the normal seasonality and the addition of RSG, is there anything else that we should be thinking about as we model that quarter? I am really fishing here, but I am just looking for anything else that you think would be helpful as we're thinking about that quarter, given that you are a different company this year than you have been in the past.

Well, for sure, Dave, we will have to see the balance of Feb and March from a seasonality standpoint. January was somewhat mild right across the country, even though on the east coast we had that storm a couple of weeks ago that did impact sales. That would be one factor.

The other piece is RSG brings with us a lot of southern exposure, which could be helpful in the quarter. But again, it will also depend on demand in those areas, weather in those areas, because, as you know, even from last year, Texas, et cetera, had some pretty rough weather southeast US as we went through the winter period.

Joe, I don't know if you have anything to add in terms of differences?

The other two pieces I would add, David, as you know, traditionally margin is a little bit softer during the second quarter. Always happens -- demand down a bit, pricing can get a little bit more aggressive. So, usually you'll traditionally see a little bit lower gross margins in Q2. And from a cost structure perspective, again, the percent to sales will usually kind of go up as a result of less volume.

But keep in mind -- here's the other one, which is the new one to think about, Dave, is the benefits from the synergies and the transaction. We had a lot of cost this quarter that started to occur; some of the benefits you didn't see as much this quarter. Towards the end of the quarter we started to see some, but not as much. In the second quarter, you'll start to see some of the benefits, meaning lowering our operating expenses as we go through the second, third, but definitely by the fourth, but you will see some in the second beginning.

Okay, thank you for that.

Second, it was interesting that your strongest organic growth rate seemed to be in the south and the west part of the country, versus the northeast, mid-atlantic and midwest, which is where you'd think that the mild winter weather would have the biggest positive impact. You mentioned RSG's exposure to the south. Are there any thoughts that you can provide relative to that geographic balance, just positives, negatives that influence those numbers this quarter?

Yes, Dave, it is interesting because there are so many; one are the comps of course from prior year. And then the other piece is we saw -- actually if you look at Q1 across the country in general, it was above average rain, so that did impact some of the numbers. But then, as that dried out and/or on the west coast because of the fear I guess of El Nino, there was a lot of work that was generated out west. Some of that drying period in the southeast/southwest did generate an awful lot of volume. And we saw some slight storm volume that we picked up.

So, I don't -- I mean, as we look at the most maybe telling region, our reported region that we look at that might be different than just the ups and downs of those things I just mentioned was the midwest coming out of some of the strong, strong storm volume they had last year, which happens every year if there isn't a repeat within that time frame. We're not concerned at all about it.

Speaking -- and it really speaks to your first question, there's relative optimism across the country on volume, even if it, for instance, is Canada where they are talking about slight increases. But for all three of our product lines, there's relative optimism on the growth side. And then what changes that, of course, is going to be what's going to happen in the spring.

Will any of this good weather now pull work forward? What will happen in April, May, June to that? But even with that, contractor sentiment is positive. So, I don't have anything else to add from a geographic standpoint, Dave.

All right, I appreciate it. Thank you.

I will add, the west was up the most, and that really is a function of folks getting ready for the rains that occurred in January, where they got hurt, because obviously contractors aren't running out to do the work because it rained most of that month out there.

Our next question come from Ryan Merkel, William Blair. Your line is now open.

Thanks. Good morning, guys, and very nice quarter.

Hi, Ryan, thanks.

So, the 12% organic growth was really the headline for me -- really strong number. I am wondering how much of that you think was the market improving, how much do you think was weather, and then how much do you think was share gains? I know that's a hard question, but do the best you can.

Yes, that is a tough one. I think if you look at -- I will start as best we can tell, right, but it's also blended. You look at the greenfield element of that, but you'd have to go back almost to 2012, and take all those greenfields that we started opening in 2012, 2013 -- 2014 was the biggest year, last year smaller of [5%], that might be 50% of that total growth. But again, you're going back four years.

If just take last year's greenfield, it is very, very small. So, you could imply then, if you go down the path, right, existing sales, same-store, were stronger, and then you could say a chunk of that is the element you talked about. And that's very hard for us to determine.

I could say half of it was weather, but I just don't know. There is no doubt there was an impact, especially in December, on not having the heavy, heavy snows we had in previous years. There is just no doubt about it. For me to bust it out, it is very hard.

On the greenfield piece though going back to 2012, there is definitely, has to be share gain, because they were new branches that we put in, and they continue to grow. And they're actually positive OI now.

Okay.

Ryan, if you look at last year's numbers as well, too, it might give you a little of the story, because last year for the first quarter we were up 4.4% underneath it, Ryan, the commercial was actually down roughly 1%. This year, the commercial is actually up 6%, so that is one thing I would kind of consider in the answer to it.

The second is the other element is kind of residential. The residential piece that last year for the quarter up 7%; this year up 15%.

What you also saw last year was October and November were really soft. October was up 3%; November almost kind of flat at 1%. And what we really had is a much stronger October and November, and I think those helped carry us through a bit.

(Multiple speakers) bottom line, weather helped, but you are sensing there is underlying improvement in industry demand. Is that fair?

Yes, I think so. Carlisle talked a bit about it yesterday in their projection for 2016; obviously, they have done some great things on the profit line. So, we feel good about the commercial, in terms of being consistent. And I think we could see stronger growth.

And again, time will tell as we get though the spring on residential and complementary, which has done very well. Some of it due to the acquisition, and some of it due to new construction, which is tied typically more to, let's say, vinyl and windows and things like that.

So, as I said earlier to Dave, the indicators, the optimism, and the view coming from the field is firmer, stronger; some of it, of course, you're seeing because of weather, but even beyond that, backlogs are fairly healthy. But again, Ryan, time will tell as we go through these next months, and that is why I said I am going to stay on the $1.80. Of course, we're working as hard as we can to beat that. But we just have to see what the spring brings.

Yes, no, I get that. I think that's appropriate.

The second question -- price. Just talk to us about what the shingle OEMs are saying. And then, as we think about modeling the rest of the year, my understanding is shingle prices have been flat now for a few quarters.

So, I'm thinking, while we had year-over-year declines in selling prices in this current quarter, should that go to more neutral, assuming we don't have more down price, if we just extrapolated the current trends? And then we can have more volume points; is that the way to think about it?

Yes, that's good. We certainly hope that price gets back to neutral.

If I could summarize from my vantage point, certainly can't talk for the manufacturers -- the shingle manufacturers -- but my view is that things will stay much the same, the same activity, posture in the winter buy from last year. The same pricing posture -- they want to be consistent. I said it a year ago, when folks were talking about -- oh my Lord, oil is down, asphalt is down, what is going to happen to pricing?

And our view was that manufactures would want to take those input costs to counteract the difficult 2014 they had. And they did, and I think they are going to continue to do it. Carlisle said it yesterday, and I think that is great.

So, yes, our best, I guess, hope is that price is neutral for the balance of the year. But again, we'll just have to see. I wouldn't be totally surprised if we went through Q2 and saw a bit of negative pricing, just because, again, it will depend on Feb and March in terms of the weather demand, all that good stuff. But I'm not concerned at all about the current trending. We will just have to see as we go through time.

Joe, do you want to add anything?

If you look at the historical data as well, too, Ryan, you'll see, our worse quarters on the residential that you're asking about, from a price perspective, was really the fourth quarter of 2014 and the first quarter of last year where it was down roughly 4% both of those two. Since then, each of the last three or four quarters now have moderated a bit, and gotten a little bit better.

So, you have seen some improvement. Still negative, but it really hit the low point for decreases of it back about a year ago, and has gotten a little bit better every quarter.

Our next question comes from Sam Darkatsh with Raymond James. Your line is now open.

Good morning, Paul, Joe; how are you?

Hi, Sam.

Morning, Sam.

A couple of questions here -- with respect to your per-branch inventory, Joe, I think you mentioned that the change year on year was essentially, or entirely, due to the acquired impacts. Does that mean that your sell-through was the 12% organic? You drew down organic inventories as the quarter progressed, because you would imagine that inventories would normally be up similar to where your residential sales might be to support that sales level. And you're saying, I think, that the only change was acquired impacts; is that the way to look at it?

Approximately. You're on the right ballpark there, Sam, absolutely. We did see some slight increase in the Beacon branches though as well, too.

So, even the Beacon branches were up a little bit in year-over-year inventory per branch. But the bulk of what drove that 11% year-over-year increase was mostly from the RSG and the size of those branches.

Do you think that was endemic, Paul, in the industry, that the channel worked inventories lower, which also would be I think favorable for your pricing impact, or outlook, as you suggested earlier?

Yes, you would intuitively think that, but again, I don't have any data points. We know the ship-to, based on ARMA data we've heard was high. And we ended the year close on the shingle base, 112 million squares versus the 106 million last year. A lot of that was in that Q4.

So, there was a lot of inventory in the channel, but I'm sure other folks saw similar sell-though, which is encouraging. To get to their exact numbers would be impossible for me to comment on, other than what I just said.

The other problem looking forward we will have to be cautious of as well, too, is -- it will have a little impact, as we talked about how we consolidated or combined some of the branches between RSG and Beacon. So, we have Beacon now also added 26 bigger branches than what we had before as well, too. So, that will be bigger inventory. So, we might see a slight impact on our inventory per branch, on the consolidated numbers go up, which, yes, from the RSG side, but we have some bigger branches now, too, that we combined in as well.

And I think that just naturally there is going to be an improvement, too, Sam, as we go through the 20 plus branches that we put together. There will be efficiencies driven, but that won't occur for a number of months as we go through the year. (Multiple speakers).

Last question, if I could? EBITDA multiples from prospective selling businesses that you're looking at, and the acquired pipeline -- are they -- what are they looking like, perhaps pre -- prior to when you made the RSG deal? Are they starting to come in? Is the appetite for sellers to sell a little bit bigger now? What are your thoughts? I know you said the pipeline was full, but if you could put some color around that?

If you went back probably to every call I have done for the last three years, I've said the pipeline is full because it has been. And it was no different this year. And they do come in waves.

I think, there might have been a little bit more activity after the RSG deal went through. We were able to purchase some very, very good companies.

I won't comment on the multiples, other than to say we're very, very conservative in our approach, and it's all based on the value that company is going to bring to Beacon. We spend an awful lot of time analyzing it, looking at the trailing, as well as the future. So, from that standpoint, it is in the range of what we have done in the past.

That's probably the biggest point. There's been no material, to your question of is there anything significantly happening in the pricing of acquisitions in the market? No, not really. Same as we have seen, but as Paul said, the significant part that's been happening is, it seems like a lot more people are really interested and we're getting a lot of calls and it's all really good.

Thank you.

We will continue to do what we do. We are going to evaluate all of those companies that come through, and look at placement density, our geographic footprint because, as you know, we are a growth company. We want to grow, and we are going to grow.

The next question comes from Garik Shmois, Longbow Research. Your line is now open.

Hi, thank you. Congratulations on the quarter.

I just want to dive in a little bit more on inventory, just to get some clarification on your prior comments. Understanding that your inventory per branch is starting to move up a little bit with the RSG acquisition, and you're now consolidating into larger branches. But what is your expectation with inventories over the next several quarters? How long will it take, if it will take at all to get inventories per branch back down?

And I guess, secondly, maybe a little bit more color, because I think it might be unclear because the market now is starting to take some of your inventory comments negatively. Is there a disconnect between where channel inventories are right now, mainly on the shingle side, and where you think they need to be over the next several months to position yourself for the spring season?

Yes, I mean, our inventory has a typical trending as you go through time anyway, typically, where we close very hard in the fourth quarter. And then even last year was somewhat flattish as we went through first quarter, build in the second, build in the third, because that is our season, and then typically the drop-off in the fourth. So, I would expect the same thing to happen as we go through the year this year. As we get ready for the season towards the end of Q2, and then build through Q3, and close the year in Q4.

I don't know what you're referring to with my inventory comments, other than the ARMA data, which is a good sign that there was pull and demand because distributors have to order material from manufacturers. And we have, I think, a strong distribution channel that is smart about the money they spend on inventory, because they -- and they buy because they believe they're going to sell it. So, I would think the sell-through for them, as I said on the previous question, was strong in the quarter, as it was for us. The connotation there for me is a positive.

I don't know if you have any follow-on to that.

No, that is how I interpreted it. But the stock price is now down about 3% after starting the day strong. I figured it was related to that.

But just wanted to shift gears just real quickly on the -- some of the acquisitions that you made inter-quarter, RIS in particular. You've talked about building out complementary products. Now you've taken on some insulation. Just wondering if this is maybe a shift in strategy in which you are looking to take on additional complementary products, and penetrate deeper into those verticals.

Yes, our complementary business has been strong for years. We have also sold insulation for years. RIS came available, and we saw a great opportunity with their large branch footprint across the country to bolster the legacy insulation sales we have, and to even expand that. So, when you look at the percent of complementary to our total, it is still relatively small. We would, however, entertain other complementary acquisitions, whether it be windows, vinyl, insulation, of course, because we think it is a good LOB, line of business, to be in to grow, but it's not going to dramatically change the mix of our products.

ProCoat was another example of that, that we did earlier last year. That was also sidewall, exterior products, finished wall products, stucco. That was new for us but it's small, and I wouldn't expect to see any grand expansion there. But it just helps in certain geographies pick up additional sales; it is exterior and it fits in our complementary basket. It's a consistent strategy I think that will help us grow.

Hey, Garik. This is Joe. One other item I will go back to was the whole question regards to inventory per branch. The other thing we spent a lot of time on, as I mentioned, because some of the size of our branches are growing, is just watch our inventory turns as well, too.

If you look underneath it, our inventory turns in total they're roughly around the same as they were last year for this quarter as well, too. As our branches change and the size of inventory changes, turns will be another metric that we will pay attention to, to help also drive to assure we have the right levels there.

Okay, thank you; that makes sense.

Our next question comes from Keith Hughes, SunTrust. Your line is now open.

Thank you. Building on the last question, are you starting to see more contractors really go multi-product at this point? There has always been some, and I know they exist in the market, but is there a trend that way at this point, or is it more what we have seen historically?

Yes, nothing that I could speak to. So, I would have to say it's just what we've seen historically. But these folks are very adaptable, and if there's an opportunity for them to do other work, they're going to. But there is no data that tells me that anything has changed dramatically.

So, with you getting, or at least dabbling in some other product areas, of course one of your big competitors has done it in a bigger way. Is this something that is a test phase for you, will we see more of, and what would be your long-term view?

In terms of what products?

You've got insulation distribution, some stucco -- I mean, these are fairly small in terms of the mass (multiple speakers).

The stucco element of ProCoat is small. And that is a smaller market, but still a very good market. There could be some more activity there, but again, in terms of the total company we're going to end the year at this $3.8 billion to $4 billion, it would be small.

And as I said on the insulation piece, we already sell insulation; it is a natural complement to home building. And so, that is something we've done for years. And adding RIS is just a nice, solid business that we added to an existing product line already.

The piece I would just add to it, Keith, is the bulk of our Business is, and will continue to be, in the roofing part of it. Residential, commercial, that is where you will continue to see a lot of our focus and energy. Complementary we said is a great diversifications part of it, but roofing.

That points to RSG with a heavier percent of resi and commercial, very little complementary. And then, of course, if you just look at the history of the greenfield's we've opened from 2012, they initially all start as 100% residential roofing.

There is no intent -- to clarify -- at all to change our strategy at all. We are a roofing company, but we are going to sell complementary products because it's a nice add-on for contractors that do both and contractors that only do complementary.

Okay. Final question, Joe, what will be the run rate interest expense moving forward?

The run rate? (Multiple speakers). As you know, our run rate cost of debt is -- total weighted average cost of debt is roughly around that 4% number. And we've got that $1.1 billion-ish of debt is the current balance. So, use the 4% on it.

And as we've said, we are trying to -- we will be de-levering over the course of the next three years. We've said $100 million a year trying to get that balance down to start to de-lever a bit. So, you can kind of phase something like that in over the remainder part of the year, Keith, and use that 4% weighted average cost of debt and should get you in the ballpark.

Okay, thank you.

Our next question comes from Jim Barrett, CL King and Associates. Your line is now open.

Good morning, Paul and Joe.

Morning.

Paul, in realizing the synergies from buying RSG, and specifically employing greater buying leverage with vendors, can you give us any color on how that is progressing, and are there any differences between the vendors who sell residential versus non-residential versus complementary products?

It would be difficult for me to get into any level of detail, just given the confidential nature of the lines of business. Of course, though, there are going to be differences between what RSG did and what we did -- size, terms of their relationship with a vendor, et cetera, even incentives, pricing. And all we're doing is really aligning those so that we are consistent. That's it. And that is part of that $50 million -- we have said in the past, that those three big buckets that I talk about, a third of it for each is a good way to look at it.

Okay. Is it fair to say the majority of your vendors provide volume discounts?

Yes, within the industry. (Multiple speakers).

Okay. And then on a related note, will the benefit from having this greater scale and increased buying leverage, should I assume that will happen essentially immediately? There is no lag to that process?

There is a lag typically, because you have inventory on hand that has to -- the way our accounting works. So, any new purchases that are made that are aligned to new contracts, etcetera, have to also then sell through. So, there is a (multiple speakers) lag.

So, if you think about it, most of the contracts we did all the work early on in the quarter; by the end of the quarter we are probably starting to buy under those new contracts. We've got some inventory that's at the new contract and the old, and then we'll start to work it off as we go through the second quarter.

Okay. Okay, that is helpful; thank you, both.

Thanks.

Thanks.

Our next question comes from Ken Zener, KeyBanc. Your line is now open.

Good morning, gentlemen.

Good morning, Ken.

We talked about this last quarter; I just want to go into it again because it's impressive. Your organic in res was about 15% on your existing base -- closer to 18% when accounting for the year-over-year price deflation; so, very strong. Obviously, how you talked about your greenfields and stuff, people have asked the question about trying to break it out, but it's so strong. And that same number last year was about 10%, significantly outpacing the industry.

If you could go into just, again, maybe if you can try to parse that out, how you're able to get that type of momentum from the greenfields? If it was 2 or 3 points from all those greenfields you've opened up that are continuously expanding?

And if my math is right, Joe, if you could comment, it looks like RSG was up 21% year over year? Organically I think you've given a number of [340] this year versus the implied [280] last year. If you could comment on how they grew so fast, considering they might not have had those greenfields. Just trying to understand how the different businesses are giving us insight there through execution.

Sure. From a greenfield perspective, you are right. As the greenfields have grown, and not even just the six from last year, but you have to go back to the 40 of them that we've done over the last three years, right, and all of those are in the growth phases where they're growing faster than our average organic growth rate in the market today.

I don't know if I have -- there is 46 of them in total. I don't know if I have at my fingertips what the exact growth impacts were of those greenfields in total for all of them.

But if I look at them in some of the pieces, they did have great growth. In fact, going back from last year if I look at all 46 of them that we did, it looks like it was almost -- those guys might've almost come close to doubling in size year over year. So, they had a lot of good growth from those 46 greenfields. But again, small numbers in total, but they had good, solid growth.

Your second question in regards to the RSG growth first quarter to first quarter. I don't know where that number you mentioned came from.

Here is the one part where I would say is in there that we need to be kind of cautious of is, when we talk about RSG or the numbers as we talk about in acquisitions for RSG, we also have some of these combined branches in here. You know we talked about we combined branches right, so there was volume from Beacon branches that were mixed in with RSG branches. So, we put that and we call that as part of that RSG business in total as well, too. So, some of it is, yes, they have had continued growth; some of it is these combined branches that are also adding to their growth -- it's really some Beacon volume has been there as well, too.

Yes, we obviously want to stay focused on talking about total Beacon, but there is no doubt the RSG core branches to the quarter did well. The greenfields grew. And that team did a very, very good job of growing.

I think when you really look at the RSG branches, excluding the consolidated ones, their revenue growth would be pretty much aligned with where the Beacon-based revenue growth was as well. I just kind of look -- found the reports or look at the Beacon for the legacy RSG branches excluding the ones that were consolidated in, and their growth was pretty much in line and similar to the Beacon legacy branches as well.

Okay, good. I appreciate that. I was just using some numbers from the queue, maybe I misinterpreted them.

The second question then, given their view that if you think the retail place deflation might be flattening out and you had gross margin expansion due to your lower input costs, ie, from the manufacturer side -- when you talk, and I realize it's very difficult, does that imply all else equal that if your price deflation is slowing, but your also price deflation from your manufacturers, that would come in a little bit. So, you're positioned to have lower, I guess, res gross margins, is that the right way to interpret your comments, Paul, or --?

No, not necessarily. Not at all. This moves, in fact, both ways. It's a function of strength or weakness in any given region. How the manufacturers want to play within that region. And then, the competitive nature of the distribution base there.

No, they are not necessarily connected, so if it goes the other way, it could also mean that gross margins increase. That is something I can't predict. That is why we give the range at 23% to 24% with no price impact for the balance of the year. But if price, if there is an impact for whatever reason in the balance of the year, of course we're going to work very hard to try to offset it with reduced COGS to get a relative same rate and of course grow sales to make up the dollar piece.

Thank you very much.

Thanks, Ken.

The next question comes from Jason Marcus, JPMorgan. Your line is now open.

Good morning. First question on energy costs: Do you have a sense as to how much of a benefit lower fuel costs impacted the quarter, and then what do you think the challenge for that could be in 2016 based on current oil prices?

That is a good question. What we saw this quarter was somewhat similar to what we've seen the last quarters. It was about $1 million. So, we saw about $1 million benefit in our cost structure as a result of the lower fuel costs year over year. Given where it's at versus last year, I think, from my perspective, I think we'll probably see that continue through each of the next few quarters as well, too, as long as the fuel costs continue on the same kind of trend year over year.

Okay, great. Next question on complementary products pricing -- that has been a nice positive over the last several quarters. I was just hoping you could maybe break out which products you're seeing the largest price increases as you look across that business and if it's more focused on the residential side or on the commercial side?

Yes, it's more focused on the residential side. I can't get into the individual pricing of products. I think it's somewhat uniform across many of the major products like siding and windows. It is good news for us; it's good to see that grow.

I think there is some, whether it's overall economic health and trends, indicators that we see getting better, and/or, tied to new construction, which we also see. And then internally we continue to work to, let's say, improve our methodology for pricing to eliminate manual overrides in terms of pricing. All those things are a factor within it.

Okay, and then just lastly, for depreciation and amortization, is that $24 million in 1Q -- is that a good run rate for the rest of the year or was there anything one-time in that?

No, that is probably a pretty good number. If I look at the full-year numbers.

Keep in mind, there's three elements to it. There's our historical depreciation, which runs around $8.5 million, and then there's the historical amortization that runs around $9.5 million, and then you've got the incremental amortization, which is the step-up piece of it and that is the $5.7 million. You put those two together and, yes, you're getting that combined D&A number of somewhere around $24 million, and that is pretty consistent with what I would expect to see through the rest of the year. It might step up a little bit, but I think it's going to be right in that range.

All right, thanks.

Thank you.

Our next question comes from Will Randow, Citigroup. Your line is now open.

Congratulations on the quarter.

Thank you.

It has been hit on a number of times, but just to be more clear, could you talk about drivers of gross margin improvement for existing stores? Year on year particularly, how much of it was the prices you paid versus the pricing they came in, as well as mix?

Sure. We can give you a little bit more color on that as we talked about before.

From a price perspective, we will talk about that piece first. From a price perspective, we saw roughly around 150-ish basis point decline in margins as a result of the price impact. Commercial and residential both down, offset by the complementary being up. And commercial and residential both down somewhere around 200 basis points, and complementary up somewhere around 100 basis points. Put all that together, we lost about 150 basis points as a result of pricing.

On the cost side, we made up around 260 basis points on the cost side from it. Commercial and residential were the two biggest kind of drivers to it, both up somewhere between 2.5% and 3%, and the complementary cost actually down slightly.

Mix is the third element. And mix actually shows up as a negative; you lost 30 basis points due to mix, but there's really two pieces in there. On the legacy Beacon branches, we actually made up around 40 basis points of mix, because of that shift towards more residential, right? That was good, but then when you pull out the RSG element to it, we talked about that slightly lower gross margins, that probably from a mix perspective cost us 70 basis points.

So, you got the 40 basis points from Beacon legacy, 70 basis points from RSG, going the opposite direction is a negative impact of mix of 30 basis points. So, just to recap, price hurt us about 150 basis points, cost helped us about 260 basis points, mix hurt us by about 30 basis points, and that gets us from 23.1% to 23.9%.

Thanks for that. Then as a follow-up, it's been talked about on several related, I'll call it building calls, but the stock market has not been performing well. There are some questions whether or not consumer confidence will break down, however, you're delivering some good numbers, potentially somewhat due to weather in terms of year-on-year organic comps, which are surprisingly positive. Can you talk about how you think about the market today, given the economic backdrop and the questions that at least investors are having in regards to the sustainability of economic recovery?

Yes. Of course, I can't, as I've said on a number of other answers, I can't predict the future related to the economy, at all. But what I do know, and I think it's very, very important to continue to remember, and we say it on almost every call, the majority of our product is a re-roof type of product, type of a repair. And 15% plus or so is new construction.

So, when you think about a roof, they are going to continue to deteriorate. They are going to continue, on the commercial side, to be repaired and or replaced, and on the residential side replaced. And that fact will not change regardless of what is happening in the economy.

It could be slowed, as it was maybe three or four years ago, a couple of years ago, because folks want to wait maybe another season, et cetera. But I still am bullish overall on our industry and on our market, and then of course, with our size, density, all those things, the amount of roofing we have in our sales, we are optimistic. But again, it's hard to predict what exactly is going to happen with storm volume, how much pull forward on weather, things like that, but we are still very optimistic. And that is why we're talking about $3.8 billion to $4 billion in sales, and still anchored on that $1.80 range of EPS, and as I said, we'll update that in Q2. (Multiple speakers).

Thank you, and congrats again.

Thanks.

Our next question comes from Robert Wetenhall, RBC Capital Markets. Your line is now open.

Good morning. How are you?

Good morning. Good, how are you?

Good. Thanks. I just wanted to ask a question. I think you're targeting $30 million of synergies this year with the RSG acquisition. You've owned the asset now for a couple of months. What is the likelihood that you realize those synergies, and is there a chance that you beat those synergies? I was just thinking about where you are in the process of integration, if there is upside to the $30 million figure?

Yes, we have said [$30 million and $20 million]. We are at the 99.999% view that we are going to achieve those. So, I will just say 100% because we are just not going to miss them.

We have a number of great leaders driving them. We have a tremendous amount of planning that is involved in this, and tracking. We are doing the right things so we don't upset sales.

So in terms of that, we feel extremely good about what we've done from a process standpoint and execution to get the $30 million this year and the $20 million next year, with a lot of that being run rate exiting the year at the $50 million rate. Is there a chance we could have some upside? There is. It's difficult to quantify right now because there are things that might go bump.

So, there is some protection we have in the $50 million. But we'll just have to go through the year. We probably wouldn't be able to tell until the fall of exactly where we're going to end up. But in terms of the target, we are on it and we're working to make sure we execute it.

All right. So that is pretty encouraging.

And obviously there is some movement; it sounds like big pull forward in 4Q ahead of estimates for storm demand and maybe some stuff in the channel right now. Talk to me about your internal expectations for same-store organic growth during the balance of the year. Because there's obviously a bit of noise right now, and it's showing up in your share price -- you post a great quarter and the stock is getting hit. What's the right way for us to model the same-store sales piece outside of RSG?

I think it's roughly, as I alluded to on the last call, as best we can tell now for the full year in the 5% range -- same-store existing, what we'd call organic.

So, you just feel like that is on track and you are just having basically a bit of a time shift between prior quarter and this quarter effectively?

Yes, as we see it now. We will obviously update that guidance as we get in and do our Q2 earnings call, because we will have that behind us and we will be in the season a bit. So, we will know what is happening as best we can.

We do believe the other good news is that the winter buy behavior that was muted last year and exhibited by the channel, we believe it's going to occur again this year, and there is not going to be a lot of sell-through of inventory from manufacturers to disrupt the channel. But as demand firms up in March, April, we should see some of that buying pattern increase by everybody, because assuming that we're going to have a strong year, we'll see stronger sales.

The part I would just add to that, Bob, as well, too, is that we won't stop when we get to 5% on the growth. Trust me. If the market continues to grow and we're seeing the strength like we did this quarter at the 11.8% organic growth, you bet we will keep driving the Business as far as we can.

No throttle on that, that's right.

I like it, guys. Congratulations on a nice print, and good luck.

Thanks.

Thank you. That concludes the questions. Now I would like to turn the call back over to Mr. Isabella for any closing remarks.

Great,, thanks.

Here are a few highlights from our earnings release. Our first-quarter sales were a record, to repeat, $976 million, up almost 64% from the prior year, with great gain obviously from the RSG branches -- that acquisition -- in addition to same-store and greenfield growth. Resi sales were up 77%, commercial up 54%, complementary up 37%, as we said. This is a great example of our product diversification and the strength of the RSG acquisition.

Gross margins improved versus the prior year to 23.9%, and to be clear, inventory is positioned well. And we believe the winter buy will be like last year, muted. Our per-branch inventory did increase from $1.2 million to $1.3 million, but as Joe said and I said, that was a function of the RSG acquisition and we're going to continue to manage inventory very, very well.

Our balance sheet is healthy and will allow us to deliver on our near- and long-term growth goals. We feel good about our capital structure and cost of capital. And as we said, we generated enough cash in Q1 to pay for the three additional companies we purchased after the RSG close.

We are in a great market that's going to continue to grow for the elements I just talked about in that last answer. We are well positioned to capitalize on this growth with our branch count, product placement, and density in large markets. We are executing the elements of our strategic plan and will continue to focus on this.

Our integration efforts are on track related to RSG. We are very focused on this and are following a detailed planning process, as I said, to ensure customer satisfaction and sales growth is always number one, and that we hit the synergies we committed to hitting.

RSG is an excellent company and makes the combined Company even better. They have added a very hard-working, winning-oriented group to Beacon. And our team has risen to many challenges over the last 3 to 4 months, and they've done an outstanding job. And our customers have also responded very positively to the combined Company, as we work to provide as much value for them as possible.

I would like to thank all of our investors for their interest in our Company, as well as our customers and our 4,000 plus employees for their loyalty. This concludes our earnings call. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Have a great day, everyone.