Beacon Roofing Supply Inc (BECN) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Beacon Roofing Supply's FY16 third-quarter earnings conference call. My name is Mariama and I will 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, August 2, 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 those non-GAAP measures is set forth in today's press release. The Company has posted a summary financial slide presentation on the investor section of its website under events and presentations that will be referenced during Management's review of the financial results.

On the call for today Beacon Roofing Supply will be Mr. Paul Isabella, President and CEO, and Mr. Joe Nowicki, Executive Vice President and Chief Financial Officer. I would now like to turn the call over Mr. Paul Isabella, President and CEO. Please proceed, Mr. Isabella.

Thank you. Good afternoon and welcome to our 2016 third-quarter earnings call. Similar to last quarter, the 10-Q will be filed later this week and as such, Joe I will spend slightly more time on our prepared remarks to ensure we provide enough detail for the quarter. As you can see from our press release, we continued the momentum established in the second quarter and delivered very strong results in the third quarter.

Aided by the acquisitions made this year, most notably the RSG acquisition, good organic growth and benefit from increased storm activity, we achieved record sales in the quarter of over $1.15 billion. This is quite an accomplishment, as this quarter represents the first time we crossed over $1 billion of sales in a quarter. This represents over 60% growth over the prior-year, with existing same days growth of nearly 9%. We delivered record EPS of $0.68. That's $0.77 adjusted, representing a $0.12 improvement versus last year. Our team did an excellent job of delivering strong results, integrating our eight acquisitions made this year and as always, stay extremely focused on servicing our loyal customer base.

Now a little more color on the quarter before I provide updates on some of our strategic initiatives and what we are seeing in the industry. Five of our seven reported regions reported positive growth. Our Southwest region led the way with very strong double-digit growth fueled by storm demand in the North Texas and San Antonio markets. In addition, the Southeast and West regions saw strong double-digit sales growth as a result of strong demand. The Mid-Atlantic and Midwest grew single digits while the Northeast and Canada declined single digits. On an existing same-day basis, sales were up for all three product lines as well, demonstrating the strength of our diverse product lineup.

Residential existing sales were up over 13% in the quarter. This was mostly driven by storm activity, same-store sales and greenfield growth. Our complementary sales grew almost 7% on an existing same-days basis. Growth in the quarter was driven from our existing business across most of our footprint. This product line continues its steady increase and has seen positive existing sales growth in 12 of the last 13 quarters. We'll continue to focus on growing this product line across our footprint through strategic acquisitions and be a legacy RSG branches, with sales personnel adding this product to the sales offering. Economic indicators related to this product line are positive, and should mean solid demand for the foreseeable future.

Our commercial product line registered 3% sales growth for existing same days in the quarter. Five of our reported regions grew in the quarter and two of them experienced double-digit growth. It's worth noting that commercial sales have grown in 10 of the 12 prior quarters on an existing basis. This product line has been steady and we expect that will continue.

Along with the solid sales growth, gross margins increased nicely over the prior year. This is the seventh consecutive quarter in which the gross margin percent increased over the prior year. We are very pleased with this. We have seen steady progress of gross margin and as such will continue focusing on the levers of mix, product cost and pricing. Joe will provide more detail during his prepared remarks.

In terms of pricing, we saw a fight decline in the quarter much as we have the last few quarters. We were able to offset this entirely with reduced material cost. I'm not surprised that pricing was slightly down. Our announced price increases were effective early to mid-June. We wouldn't expect to see price realization in such a short window, between that time and the end of the quarter. Historically, there is always been a gap between distributor announced price increases and realization and this has ranged from 30 to 60 days. The exception, as you can imagine, is in the North Texas market, where demand is extremely strong. We are seeing sequential gains Q2 to Q3 across this region and a few others which is very -- which is a very encouraging sign.

As a reminder, two of our primary goals are to grow sales and gross margin. We were able to do both in the quarter. We will be smart about our approach to pricing, given our growth plans, and balance that with our solid management of material input cost. We believe we can keep gross margins in our stated range and we will work to maintain the balance between strong growth, solid gross margins and the resulting price movement. We did this in Q3. Pricing is an important element of our P&L, but staying focused on both strategic growth plans and gross margin consistency is critical for our financial performance.

Related to working capital, as has been the case historically, the third quarter is a peak working capital quarter and our team managed it very effectively. Inventory and payable performance was very good. Inventory turns continued to improve and were 12% better than the prior year and 17% better than the second quarter. This resulted in strong cash flow from operations of nearly $74 million on a year-to-date basis.

From an operating expense standpoint, we experienced leverage as we grew sales. When excluding one-time costs related to the RSG acquisition, our operating expense as a percentage of revenue declined nearly 30 basis points for the quarter compared to last year. As we have added over $1 billion of acquired revenue, we are intensely focused on minimizing cost increases as we grow the top line, while still modestly reinvesting as needed across the Company. The operating expense leverage should increase in the fourth quarter as the synergies continue to ramp to full run rate and sales increase.

Now I'd like to provide an update on the RSG integration and synergy plans. As I explained on our second-quarter call, we made excellent progress on the initial phase of the integration in our cost synergies. To date we are now tracking ahead of plan. The primary focus since deal close has been to fully execute on our synergy strategy, drive maximum efficiencies and cost savings in the business, and ensure positive customer impact.

Our estimate for 2016 synergy savings is on track to outpace our original target of $30 million. Joe will provide a breakout on where we are to date and the areas of improvement we are seeing. Overall, our field and headquarters team is handling the eight acquisitions we have executed on this year very well. We could not have achieved the excellent results for 2016 without the dedicated hard work of our team. In addition to executing on the synergies and leveraging our existing infrastructure, our number-one focus, as I've said in the past, continues to be on providing value-added customer service. In total, our acquired markets generated approximately 9% EBITDA in the quarter, a very good performance.

Related to growth, we have for the last several months stepped up our efforts related to sales synergies and initiatives in regards to the RSG acquisition. We have a dedicated 600-plus person outside selling team, which is one of the largest in the industry, and they are very focused on growth and customer value add. These, in addition to our 350-plus branch managers and a 500-plus person inside sales team, greatly enhances our ability to service customers and grow. We have a very diverse mix of business, with our three product lines and our team is focused on expanding these across our footprint. As part of that effort we have launched several growth initiatives and related follow-up tracking. We believe this and our combined sales force are differentiators in the marketplace.

And now a little information on greenfields and acquired growth. As you know, greenfield branches have been and will remain a key part of our growth strategy for many years, as have acquisitions. From FY12 to the current year, legacy Beacon and RSG has opened up 62 greenfield branches. As these mature they will continue to contribute to the top line as they gain market share, and the bottom line as the cost base is leveraged from the higher revenue. Legacy Beacon greenfields contributed approximately 24% of our existing growth in the quarter. Our strategy to pursue opening more greenfield locations three years ago and RSG's similar strategy continues to drive growth as they grow to maturity and contribute to our sales gains.

So far this year we have opened one branch, which has been our plan. We will most likely end this year with one, given the amount of acquisition activity we have been involved in. As of now for 2017, we are planning one to two openings based on our current strong acquisition volume and pipeline. As we've said in the past, this number will vary year to year based on our acquired business load and business conditions. There are many markets we want to expand in, and we will continue to evaluate these.

The other seven acquisitions we closed on this fiscal year are going extremely well. As a reminder, we closed RCI of Omaha, Nebraska, Roofing & Insulation Supply of Dallas, Texas, and Statewide Wholesale of Denver, Colorado, in December. In April we acquired Atlantic Building Products of Eastern Pennsylvania and Lyf-Tym of North Carolina. In May we announced the acquisition of Fox Brothers Company of Central Michigan. In June we announced our most recent acquisition of Woodfeathers of Portland, Oregon.

Woodfeathers has three locations in Oregon and one in Washington, selling mostly residential roofing products. Beyond purchasing a well-established solidly run business, Woodfeathers gives us presence in Oregon which expands Beacon's US coverage to 46 states, a great fit and a great opportunity to expand further in the Pacific Northwest. The seven acquisitions are all great companies that also give us the opportunity to expand all of our lines of business within their footprint. This will act as another growth lever for us in the markets they serve in the future.

To summarize acquisitions, as I've said in the past, it is difficult to predict the timing. The pipeline remains very full and since we announced the RSG acquisition, we have seen a noticeable increase in the level of acquisition-related activity. We will continue to make acquisitions where it makes economic sense, knowing at the same time we have to drive our debt leverage lower.

Since the close of RSG on October 1, we have been able to reduce our debt leverage and it remains at 3.6 times for the third quarter. This is a great accomplishment, as we purchased nearly $80 million of acquired businesses in Q3, and we are in the peak of working capital needs. We are very focused on our commitment of getting below two times in three years, and we are confident we can accomplish this while still being active in the acquisition market.

Before I get to our updated guidance, I would like to talk about -- a little bit about the significant storm activity in a few of our key markets. As you know in the early spring, there were major hail events in the North Texas and San Antonio markets, as well as to a smaller extent in the Southeast, parts of the Midwest and mid-Atlantic. Most of the spring storm activity should run through the fiscal year with the North Texas/San Antonio, storms most likely running into next calendar year.

We are seeing the benefits of great timing of the RSG and wholesale roofing supply deals. Wholesale roofing is also located in the Dallas area. Our market presence and capacity in this storm impacted area has been greatly increased post acquisitions. As we head into the fourth quarter of this storm activity could potentially help us achieve the top end of our guidance, which I will now update.

With an additional quarter of visibility, and coming off another solid quarter, I am very optimistic about the fourth quarter and anticipate earnings slightly above our prior estimates. Before I get to some of the specifics, I will set the table by saying that for July, we had existing same-days growth of approximately 7% over the prior year. We view this as very strong performance, considering the intense heat most of the country saw in July. We should see our growth rate accelerate through the quarter.

Based on what we have seen for the first three quarters and current trends, I expect full-year revenue to be in the range of $4.2 billion to $4.3 billion for 2016. In terms of gross margin, I expect us to be in the range of 24% for the full year. We should see the benefits from product cost and mix to achieve our gross margin range. Related to mix residential roofing will continue to be positive -- a positive impact on GM as the hail damage will drive higher levels of shingle repair. As I shared earlier, a key focus for us is gross margin consistency as well as strong sales growth. Working all the levers of gross margin is key and as I said, I believe we are accomplishing this.

Regarding our SG&A expenses, excluding one-time costs and new purchase accounting related to the RSG transaction, we expect to be in the range of 17.9% to 18.1% of revenue for the full-year. This is a solid improvement from the prior year. Related to EPS, I'm increasing the guidance I gave during our last earnings call, which was $2 to $2.10 to the new estimate of $2.05 to $2.15. With three quarters complete, market conditions appear favorable and storm demand should continue fully into the quarter. Synergies are tracking better than planned, and we are now on track to outpace our original estimate.

We are optimistic about the fourth quarter. We will continue executing the fundamentals of customer service, gross margin discipline, cash generation, cost control and continued synergy attainment with RSG and all of our acquisitions in order to finish the year as strong as possible. Now I'm going to turn the call over to Joe to provide further details on the financial highlights of the quarter. Joe?

Thanks, Paul, and good afternoon, everyone. Now I'll highlight a little more detail on a few key financial results and metrics that are contained in our earnings press release and also the third-quarter slides that were posted to our website. Similar to last quarter, we've included a few extra slides to help explain the results more detail and in my prepared comments I'll also go into more depth on a few of the key areas this quarter like gross margins, operating expense, inventory, and synergies.

Overall, as Paul said, it was a very solid quarter, producing several new records for the Company. Slide 3 provides an income statement for the quarter and slide 4 provides an adjusted income statement which excludes the one-time cost primarily associated with the RSG acquisition, as we've highlighted in our press release. We had strong top-line growth of over 60% for record third-quarter sales of $1.15 billion. As Paul mentioned, this was the first quarter of over $1 billion in sales, a great achievement. The growth was primarily driven by the nine acquisitions we made since Q3 of last year. In addition, we saw good growth in our existing markets of 8.7%.

Gross margin increased over the prior year by 90 basis points. Operating expenses were up in total, mainly due to higher volumes and cost related to the RSG acquisition. The operating expenses in our existing markets declined 30 basis points as a percentage of sales. As a result, for the quarter we achieved record EPS of $0.68, $0.77 on an adjusted basis. For comparison purposes there were 64 days in both Q3 of FY15 as in Q3 of 2016.

Paul already went through our Q3 sales results as shown on slide 5, so I will not repeat any of that information here, but I will go through our monthly sales trending. As compared to the prior year, our average sales per day on an existing branch basis were up in each of the three months of the quarter. April sales were up approximately 15%. May sales were up only 3% as they were impacted by record wet weather in many of our regions. We finished the quarter strong with June sales up 9%, driven by a 16% increase in residential sales.

On a very positive note, our total gross margin rate was 24.5% for the quarter, which is up 90 basis points from a year ago and on a existing market basis it is up 80 basis points. It's also the seventh quarter in a row that we've seen year-over-year improvement in gross margin and it represents the highest gross margin rate we have seen since December of 2012. Overall, we are very pleased with the improvements in our gross margin.

Most of the change was driven by a product cost decline of 280 basis points, primarily a result of the purchasing synergies from our acquisitions. Pricing declined in the quarter roughly 215 basis points from the prior year, although we are seeing improvement, as is up sequentially from Q2. As Paul mentioned, our price change has varied greatly by region, depending on competitive factors, demand and storm buy-in. We're optimistic that we will see continued favorable moment as our price increases that just become effective in June start to have an impact. The mix impact in our business drove 20 basis points of improvement as a result of the shift to more residential products sales.

There was a slight decrease in direct sales in the quarter compared to the prior year and that had a positive impact on gross margin as well. The percentage of direct sales decreased to 16% from 17% in the prior-year. As we've mentioned previously, our direct sales have a lower gross margins and also operating expenses as compared to our warehouse sales. Commercial and residential prices both declined approximately 2% to 2.5% compared to the prior year. Complementary prices were down approximately 1%.

Our product mix had a favorable impact on existing gross margins as volumes shifted to more residential products. Residential roofing increased to 52.4% of our sales versus 50.3% in the prior year. Commercial products declined to 32.7% from 34.5% in the prior year. Complementary decreased to 14.9% from 14.2% in the prior year.

Now moving onto operating expenses, total operating expenses were $203.7 million, or 17.7% of sales. This represents a year-over-year increase of $82.3 million, but let me walk you through now how this builds out. This includes $7.9 million of nonrecurring cost from the 2016 acquisitions. Excluding these amounts, our adjusted operating expenses are 17% of sales. These adjusted operating expenses include $75.5 million of new costs related to the acquisitions. Excluding these, our existing market operating expenses are $120.3 million, or 16.6% of sales. This represents a 30 basis point decline from the prior years.

We are definitely getting some leverage with the incremental volume and we believe there is opportunity to improve even more. As seen on slide 6, there was an increase in volume related payroll benefit and stock compensation cost of $7.5 million. Bad debt expense increased in the quarter by $1.9 million. These costs were partially offset by lower depreciation and amortization of $700,000 and lower selling expense of $1.2 million.

It should also be noted that we are seeing the benefit of our synergies take place. As Paul mentioned, as you can see on slide 7, the integration of the RSG business has gone very well and we have recognized approximately $25 million in synergies year to date. We worked aggressively to integrate the two companies quickly, and as a result we were able to accelerate the timing of the savings we initially estimated.

The three areas of synergies, as you recall, are branch consolidations, procurement and other SG&A savings. Today we've consolidated 29 branches, 26 in December and another 3 in the third quarter. We are starting to see the benefit of it this quarter. Potentially there are a few more branches that could be closed if the economics are right. Within our branch consolidation, savings come from lower headcount, lower fleet expense, lower rent expense, and other efficiencies that occur when combining two branches. More than a quarter of the year-to-date savings came from branch consolidations.

Regarding procurement, we've made great progress there as well. As we purchase material on the new contracts and sell-through inventory, we realized the purchase of savings. We saw some benefit start in the first half of this year but this increased in Q3 where we saw almost half of the savings coming from procurement. Finally, we've capture significant savings related to duplicate headcount. We been able to realize efficiencies through the combining of the two organizations.

As we look to the full year 2016, we see synergies of approximately $35 million. This is an increase from our previous estimate of $30 million, due primarily to the timing of our implementation of the integration. This allowed us to achieve more of the synergies in 2016 than we had initially anticipated and this progress that we've made so far is really giving us confidence to raise our FY17 target to $55 million. We continue to look for ways to leverage our cost structure. Cost control is historic strength for Beacon. With the acquisition of RSG, we are already seeing a significant improvement in our operating cost leverage.

Interest expense and other financing costs were up $10 million versus the prior year. This increase is primarily from our debt balances increasing over $900 million in conjunction with the RSG acquisition. We're managing this very closely and making every effort to de-lever and reduce this cost. I'll talk more about that when I review the balance sheet.

Our effective tax rate for the quarter was 37.8% compared to 37.7% last year. This change was driven primarily by the treatment of one-time RSG acquisition costs and other discrete items. Adjusting for these, our effective tax rate would be approximately 39%, which is consistent with the prior year. On a related note, it's important to also make you aware that our cash tax rate was approximately 10%. This includes the impact of the RSG NOLs and the other tax attributes that we acquired. This was a significant part of our acquisition strategy and there are a great benefit to our cash flow, which allows us to continue to pay down our debt.

Our net earnings were $41.1 million for the quarter, $46.6 million on an adjusted basis, compared to $28.3 million last year. Diluted net earnings per share were $0.68. That is $0.77 on an adjusted basis compared to $0.56 for the same period last year. Our adjusted EBITDA for the quarter was $109.6 million, 9.5% of sales compared to $60 million in the prior year, 8.3% of sales, outstanding year-over-year improvement driven by our strong sales and operating results.

Now I want to provide some clarity on the one-time expenses that we show on the earnings-per-share and EBITDA tables that are included in the press release and also on slide 8. We included a total of $8.3 million of one-time cost in the quarter and $50.2 million year to date. $1.5 million of cost or related to the integration, including severance and retention costs and also some lease termination costs $0.6 million is related to the transaction cost such as legal and accounting, and $0.5 million is related to the cost of the new debt issuance. Those are expenses that are amortized over the life of the debt agreements. $5.7 million is related to the step up and amortization with the increased customer intangible assets from the RSG acquisition.

For the full-year we expect these to be approximately $23 million. Slide 9 provides a more detailed breakdown of our total amortization cost including and excluding this incremental amortization cost. Regarding status of our balance sheet, as noted on slide 10, cash flow from operations year-to-date was a positive $74.4 million compared to $11.2 million last year.

Slide 11 provides more detail on our inventory. Total inventory turns were 4.8 in the quarter versus 4.3 last year. We demonstrated improvement in our legacy Beacon branches, the new RSG branches and in the branches we combined as part of the integration. We are very pleased with the increase in velocity of inventory through our branches. We do turns as a more relevant metrics for us to use as a measure of inventory efficiency and ultimately our ROIC performance. In addition, our accounts receivable days sales outstanding, DSO, was 36.1 days for Q3, an improvement from 39 days in Q2. It's also consistent with our prior-year performance of the pro forma Company.

The third key element of our working capital is accounts payable. Here we were able to maintain our days payable outstanding at a proximally 42 days, similar to Q3 and make solid improvement over the prior year. Capital expenditures, excluding acquisitions, in Q3 were $11.9 million compared to $8.4 million in Q3 of 2015. We've been carefully evaluating our fleet with the addition of RSG. For FY16, we still expect capital expenditures to be slightly less 1% of sales, which is a nice improvement over prior years. Net cash used for investments was slightly over $1 billion, reflecting not only RSG but also the additional seven acquisitions we made this year. Keep in mind that $307 million of the RSG acquisition was funded through the issuance of common stock and is not reflected in the cash flow statement.

As shown on slide 12, we were able to maintain our net debt leverage ratio from the second quarter at 3.6 times in what has traditionally been a peak use of working capital. We also purchased almost $80 million of acquired businesses during the quarter. We should see this ratio improve into next quarter as we generate strong cash flows and EBITDA. We are well on track to meet our commitment of reducing our leverage to under two by 2018. Our current ratio was a strong 1.92 to one versus 1.97 to one at Q3 2015.

Now I'd like to just quickly highlight some of the year-to-date results as shown on slides 13 and 14. For the first half of the year we had strong top-line growth of 70.9% for record sales of nearly $3 billion. This was driven primarily by the acquisitions we have made over the last year, but in addition we saw significant growth in our existing markets of 13.9%. Gross margin increased over the prior year by 70 basis points. Operating expenses, while up in total, were mainly due to higher volumes and costs related to the RSG acquisition. Excluding the RSG transaction cost, our existing market operating expense as a percentage of sales declined 140 basis points, demonstrating great leverage. As a result, we achieved EPS of $0.71, adjusted EPS of $1.21 as compared to $0.63 in the prior year. Great performance through nine months.

Now before we move onto Q&A I'd like to provide a little more detail on how we did in Q3 compared to the Street estimates and also discuss our current guidance going forward. We exceeded the average Street estimates for the quarter by $0.01. The variance is mostly driven from our gross margins, which were up significantly over the prior year and more than we had expected. Our team had done an outstanding job of executing on the plan synergies as part of the acquisitions and we benefit overall from increased mix into our residential product line.

The gross margin gain was partially offset by higher operating expenses. We did achieve operating expense leverage over the prior year but not as great as in Q2. Some of it was specific to an increase in AR reserves for identified accounts related to our acquisitions, which should not recur going forward. Some of this is whether related as our teams ramped up for the spring selling season and were met with a very wet May in some regions. This is temporary, and we are confident we'll additional operating expense leverage as a move forward as a result of our synergies and integration efforts. As Paul mentioned, given our performance in Q3, we are raising both our revenue and our EPS guidance. We expect revenues to be in the range of $4.2 billion to $4.3 billion and adjusted EPS to be in the range of $2.05 to $2.15.

Slide 15 provides more detail on the key assumptions underlying our sales guidance. Achieving the low end of the range of $4.2 billion assumes Q4 sales will be approximately 5% greater in sales per day than Q3. This is driven in large part by the seasonality of our business. It also assumes a low- to mid-single-digit existing market growth in the second half that results in full-year existing market growth of approximately double digits. In the low case, we do not assume any price increase will stick.

We've also included about $50 million in additional revenue due to acquisitions we completed so far this year. Achieving the high-end of the range assumes mid- to high-single-digit existing market growth in the fourth quarter, which results in mid-teens for the full year. It also includes an assumption that we will be able to pass along some price increases in selected store markets and a little higher volume from the acquisitions we completed.

Slide 16 goes on to list some of the key assumptions for our adjusted EPS guidance. You'll notice due to the seasonality in our business we count on driving almost 40% of our EPS in Q4. To hit the low-end of the range, we need approximately sales of approximately $1.2 billion in Q4. This case also assumes product mix is consistent with the year-to-date results and also assumes that gross margin will be consistent with Q3. That's primarily the result of continued impact of the RSG purchasing synergies. The low end also assumes we get back to our traditional operating expense leverage of 50% variable costs and that the total RSG synergy improvements continue at the same level as Q3.

To hit the high end of the adjusted EPS range will require sales of $1.3 billion in Q4, along with the ability to pass through some of the price increase in selected markets as previously noted. Gross margin is assumed to be up slightly over the prior year due to improve pricing. The high end also assumes we get back to our traditional operating expense leverage of 50% variable cost and also the RSG synergy improvements continue at the same level as Q3.

I know I spent a lot of time unpacking the current quarter and it forecast. As I mentioned last quarter, there's a lot of complexity in our financials right now, with many moving parts as a result of the acquisitions. I want to be sure to spend as much time as possible providing clarity to the quarter's results so all the investors will be as excited in our future as we are.

We'll now respond to and take any questions you may have. As Paul mentioned in his opening, due to time constraints, we are limiting questions to one per caller, please.

(Operator Instructions)

Keith Hughes with SunTrust.

Good afternoon Keith.

Looks like we lost Keith.

Ken Zener with KeyBanc.

Hello, gentlemen, can you hear me?

Yes, we can. How are you?

Okay, good. Wasn't sure if it was me.

Thank you very much for breaking out the guidance as well as the detailed working capital. Obviously with some manufacturers reporting a slowdown, there is been a lot of volatility, certainly on the residential side. The assumptions, if I could just delve a little bit, I think operationally you're obviously -- you have been working on these branch savings for the integration, you're moving on procurement.

Is that procurement in terms of rewriting contracts, or is it just the more generic stuff, because it seems like you've gotten ahead of the integration cost. If you could just go into a little of the details there like what surprised you, where do think some of those risks still are?

I'll take a first pass that and then I'm sure Paul will add some color as well, too. The synergies we're seeing on the procurement side are really from two areas. Yes, it is the contract switching as we talked about, moving everybody on to the lowest price contract, right, our contract or RSG, where ever was the lowest.

But in addition to that we're also seeing benefit from the scale buying as well, too. We talked about the early on, we mentioned we see some scale buying savings as well, too, and that's also beginning to roll into it. I think both of those have been positive from what we had expected through the initial work.

I would add that I think as we look at -- I wouldn't say there has been any issues at all. If anything, I think we are still early in the process, because the other big element for us, quite frankly, is to look at vendor consolidation. We still -- not even necessarily at the larger vendors but we have so many other vendors below that where we have multiples by region and we are working on that.

We have made progress, but it is still will be a good funnel because RSG had a list, we had a list and we are working very hard to consolidate that. We've made good progress and I think there is more as we continue, our supply chain team continues to dig deep for us to become as efficient as we can on the materials side.

Not to mention, even besides the material, Ken, we are also doing some work on the indirect contracts as well which is adding to our synergies. As we look across the indirect contracts outside of the materials that the Company has, we are consolidating those and driving some benefit there as well, too. It's been going very well.

Jason Marcus with JPMorgan.

Hi, my question is on the inventory levels that you had at the end of the quarter. Just wanted to get a sense of how much inventory was up on a per-branch basis when you look at legacy Beacon versus RSG, and then more generally how you are thinking inventory levels right now. Look at your Company and what you are seeing in the overall channel.

Yes. We feel -- I will start out with how we feel. We believe and we feel our inventory is in very good shape, well positioned. We also believe the key measure for us going forward is turnover, because it really speaks to velocity and that's what we want.

We showed great progress year over year and sequentially from a velocity standpoint. Per branch to us really as we looked at it doesn't really mean a lot. We have so many different diverse branches, so many different, diverse product lines and now with RSG having much larger branches, that tends to skew things and it even would skew it more as we have stocked up in our storm-related markets.

I think if you see the increase of our inventory, sequentially or year over year, I think it is very logical, and it supports higher sales volume. A lot of that driven by storms in Texas, but we have also seen storm activity in Southeast and the Midwest.

We typically in Q4 reduce inventory, which we will do and we should see continued turns improvement year over year and sequentially. All in all, we feel great about our inventory level and we believe we are doing the right thing, whether it is stocking up for service for our contractors, or buying a tad more due to price increases that the manufacturers have push through, and [supporting] that into the end market.

The key metric to really watch on the inventory is the turns, and 4.3 to 4.8, great progress, great improvement we've made. As Paul said, in fourth quarter you will see us continue to work down the inventory levels as we always do and we will make even better -- even more improvement on the inventory turns in the fourth quarter as well, too. Feeling really good about our inventory.

Kevin Hocevar with Northcoast Research.

Hey, good afternoon, everybody. Wondering if -- it sounded like you -- in terms of pricing, it sounded like had some optimism about the price increases you had in place throughout June and sounded like maybe they are getting some traction here so far into this quarter. Wondering if you could give me a sense for how those are going, your price increases to your customers as well as the price increases that the manufacturers have into distribution.

Yes, Kevin, pertinent topic. Again, I will go back a little higher level, because we think it is so critical for us, and that is to manage gross margin and within that of course we are going to continue to take advantage of our material cost strength, the continued mix we should see, and then the balancing effective of that is price. As we've said before, price is very, very specific to specific regions around the country based on competitive factors, amount of distribution and the economic health of that region.

We support the price increases from the manufacturers. They have pushed them through. They are going through in June and we will continue to support those.

We have raised price, we issued the price increases. I alluded to it in my prepared remarks, whether it was launching early June, mid-June, there is typically that gap. So we wouldn't expect to see any major year-over-year change when you really think about it, just given the fact that there is inventory in the channel priced lower.

That being said, we been measuring very, very tight our operating units on a sequential basis and by customer, because obviously as manufacturers push price to us, we need to offset it. That's the whole theory behind us and that's what we want to do. As you look sequentially, not necessarily our reporting units, but if you go across our discrete regions, a good -- about a half of those saw sequential gains Q2 to Q3, albeit a point.

That is very encouraging for us and then I think as we dig a little deeper into July we see the Texas market making even greater gains, so there is even more optimism there. As you can imagine, given the amount of homes that are being reroofed, given just the amount of the magnitude of the volume there in North Texas and San Antonio.

We should expect to see price increases. One, because the manufacturers have pushed those through and two, we are spending a tad more on the expense side bringing in equipment, people, the OT we're working, things like that. We feel pretty good.

Summery, sequentially we are seeing an uptick. We hope and believe that it will continue but again, I think the fallback is always we are not going to lose share.

We're going to continue to protect that and the offset and balance is mix and the material cost out to get us to the gross margin level we talk about for the fourth quarter which, is that 24.5% range, as Joe alluded to. That is our focus.

Philip Ng with Jefferies.

Hey, guys. I guess on the OpEx side, strong quarter. On the OpEx leverage side of things, I think you guys called out AR receivables being a bigger outlier this quarter.

Can you parse out how much of the hit was to that [particular] quarter and how should we think about OpEx leverage in the back half and going to 2017? Is that going to look more like the first half of this year? Thanks.

Good question. Thanks for asking. To give you a little better feel for that, we've traditionally talked about operating expenses being roughly 50% fixed, 50% variable in there, right?

This quarter didn't quite get to the level that we wanted to. We had roughly -- we make good leverage on it. If you look at our operating expenses from an existing market perspective, we moved from 16.9% down to 16.6%, which was great.

But if you do the math, if we wanted to try to get to our 50% variable we probably were about $3 million high. That's what it would have taken to get to 50% fixed and variable rate. It really results from two things.

One of them was the receivables, which were running about $2 million with over where we had expected they would be. This was the bad debt expense number. All of that was driven primarily by specific receivables or accounts and was all tied to some of the acquisitions we have done and just getting the initial reserves set up and establish. That was the biggest driver of it.

Besides that, some of it as I mentioned a little bit had to do with the timing of when we brought people on board and then some of the wetter weather in May that caused [an impact] to it. Overall, good performance, still got good leverage out of it. I think our improvement next quarter can be getting to that 50% variable rate as we've talked about.

David Manthey with Robert Baird.

Hey, guys, good afternoon.

Hey, David.

First off, I don't know if you can quantify or estimate the impact of the Dallas/Fort Worth and San Antonio storms in the quarter. Secondarily, Paul, I think you said that you expected that to stretch into 2017. Is it your belief that because of the labor constraints that we are seeing on the contracting side that this could stretch on longer? Maybe it does not have much of an acute impact in the given quarter but it stretches on longer than even historical experience?

Dave, I will start with the duration. Although very hard to predict the future, there are some factors at play here. One is for sure May tamped things down a bit with a bit of rain. That pushes things out and that's what you saw our number being a little down but we recovered some of that in June and then July, and then of course the heat.

You talked about labor. I think also for sure our belief is the San Antonio storm, just because of activity and some of the other reasons you talked about, will extend and given the overall size, the data we have is about 300,000 homes. This could at first blush go into our Q3 of next year.

We will have to continue to assess that. Again, Dave, it will be based on how fast things are reroofed, et cetera. It's difficult to influence that, so what it is, is what it is.

The good news for us, the first part of your question is we have great presence and density in Texas in general. We have close to 40 branches. We have a tremendous ability to serve the contractor base.

We've nearly tripled our capacity in North Texas post-acquisition. That's adding a wholesale roofing supply at Grand Prairie and RSG. So that all bodes well from an existing sales at 9% -- and there's no exact science, but as we try to eyeball it, we think 3 points of that came from that North Texas and to a lesser extent San Antonio because it hasn't fully aired out yet in San Antonio.

Overall, I think we've -- if you look at that existing sales, 3 points on storms, a couple points on greenfields, and then the rest, 4 points or so, normal market growth would be -- which would be share gain and just penetration in each of those legacy markets. All in all, I think pretty good performance, and if anything, that quarter, I don't think from a storm standpoint has reached it's peak. I think it will in Q4.

Depending on the weather in Q1, we could also see very strong sales that could be equal or greater than this quarter. We feel pretty good about what is happening. Again, given our -- whether it is Beacon legacy or RSG, branch size we are in great position to take care of our contractors that are servicing the storm.

Jim Barrett with CL King & Associates.

Hi, Paul and Joe.

Hey Jim.

Paul, you touched upon this briefly, but if we exclude the market growth and storm activities and Beacon's own market share gains from greenfields and other markets share initiatives, what is your sense as to the underlying growth volumetrically within the residential market across the US?

Within res? Again, we had in the quarter the 13% -- we didn't break it down to that level. I alluded to the bigger piece, the 4% total market.

If you took half of it, it is probably still in that 7%, 7%, 8%, which is healthy. We think most markets still have strong reroof demand, even outside of storm and again, Jim, this gets mixed because as you look at the Southeast, there is a storm in the South Carolina area and then Nebraska had some healthy activity and that tends to get mixed up a bit. But I would say of the 13%, close to three quarters of it was normal growth and then the balance, the storm and greenfields, roughly.

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

Thank you. All in all, an excellent quarter by our team. Let me just run through quickly some of the highlights again.

Our third quarter sales were a record $1.15 billion, up 60% from the prior year. Existing growth was 8.7%, as we said, fueled by storm repair, greenfield growth and existing branch sales. As Joe talked through, once again we managed working capital very effectively.

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 the cost of capital. As I said earlier, in the quarter we funded almost $80 million in acquisitions and we were still able to maintain our net debt leverage ratio of 3.6.

We are very fixated on getting it down to 2 in the coming years. As we said, we've made excellent progress on the integration and we are ahead of the original synergy targets and we won't stop. I also talked about raising our EPS estimate to the range of $2.05 to $2.15 and as I've said multiple times in the past, we are in great markets that will continue to grow.

We are well-positioned to capitalize on this growth with our enhanced branch count, product placement and density in many of these markets. We are executing the elements of our strategic plan and will continue to focus on our customers, employees and our financial results. Our overall integration efforts and actions are on track related to RSG.

We are very focused on this and are filing a detailed planning process to ensure customer satisfaction and sales growth is the focus as we execute the synergy attainment plan. As I said earlier, the organization is primed for continued growth. They are proving extremely resilient in the face of multifaceted change and are responding very well.

Our future is very bright as our team continues to grow and deliver on our commitments. Our customers have also responded very positively to the combined Company as we work to provide as much value for them as possible.

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