Beacon Roofing Supply Inc (BECN) 2016 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Beacon Roofing Supply's fourth-quarter and FY16 earnings conference call. My name is Carmen, and I'll be your coordinator for today.

(Operator Instructions)

As a reminder, this conference call is being recorded for replay purposes.

This call will contain forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are only predictions, and are subject to a number of risks and uncertainties. Therefore, actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to those set forth in Risk Factors sections of the Company's latest Form 10-K.

These forward-looking statements fall within the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the Company, including the Company's financial outlook. The forward-looking statements contained in this call are based on information as of today, November 21, 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. This Company has posted a summary financial slide presentation on the Investors section of its website under Events and Presentations that will be referenced during Management's review of the financial results.

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

Thank you. Good afternoon, and welcome to our 2016 fourth quarter earnings call. Similar to recent quarters, we'll be filing our 10-K later this week.

As described in our press release, 2016 was an excellent year for Beacon, a year that resulted in record-setting performance. The year began with our successful acquisition of RSG, and then we closed and integrated another seven acquisitions over the course of the year. During the year, we delivered exceptional growth, increased margins, we reduced our debt ratio per our plan and efficiently integrated the eight acquisitions.

At the beginning of the year, we laid out many deliverables related to the RSG acquisition and we achieved or overachieved on all of them. In total, sales were up 64%, with approximate 10% organic growth. Gross margins increased by 80 basis points, and gross margin dollars exceeded the $1 billion mark for the full year and existing market expenses declined 50 basis points.

We had adjusted net income growth of 83% over the prior year and 106% growth in adjusted EBITDA. More importantly, we have remained extremely focused on our customers. I can't say enough about Beacon's loyal customers and employees that made 2016 a great year, and we are looking forward to a successful 2017.

Q4 saw Beacon produce another record quarter for both sales and earnings. Quarterly revenue growth increased nearly 49%, driven by the FY16 acquisitions and organic growth of 2.4%, which adjusted for price was approximately 4% unit growth.

Growth in the quarter was fueled by strong residential organic growth of 9.1%. Our fourth-quarter residential organic growth represents our ninth consecutive quarter of mid- to high single-digit sales growth within this segment.

Q4 revenue of nearly $1.2 billion represents our second quarter in a row of sales over $1 billion. We had expected higher organic growth in the quarter, but a number of factors including extreme heat in some markets and the impact of the milder winter and resulted demand pull forward impacted sales. As we have said before, these near-term impacts we believe will balance out over the course of the year, and we're proud to have reported another record quarter of EPS which Joe will detail in his remarks.

Four of our seven reported regions reported positive growth during the quarter. As with Q3, our Southwest region produced the strongest geographic growth rate at 25.4%, driven in large part by the Texas storm related demand. The Southeast also delivered good growth of approximately 7%, driven from strong residential sales.

We also posted positive year-over-year growth in the Midwest and mid-Atlantic regions. Our West, Northeast and Canadian regions saw negative organic growth during the quarter, driven primarily by commercial products which these regions have heavier concentration of. Again, as I said, we have seen these fluctuations in the past by quarter and by region, and know they will improve as we go through the year and beyond.

On an organic basis, sales were mixed among our three primary product lines. With strong sales growth within residential, as already noted, flat sales at complimentary and modest declines for commercial. As I mentioned earlier, organic sales were 9.1%, with particular strength in storm-impacted regions.

Reroofing trends remained positive in most markets, and we continued to experience positive contributions from greenfields opened in previous years. Q4 marked 10 consecutive quarters of positive growth within this product segment.

Complimentary sales were essentially flat year to year. We have seen this product line fluctuate quarter to quarter over time, and have confidence we will continue to see growth here. We believe this segment has strong growth potential as remodeling spends improve, and we work to drive sales across our branch footprint. In particular, and as we have mentioned in the past, we continue to drive cross-selling of complimentary products within the RSG footprint.

Our commercial product line experienced approximately 6% sales decline in Q4. Adjusted for price loss in the quarter, unit volume was down approximately 4%.

The combination of tougher comps in some markets, pull-forward sales in the impacted areas, which I mentioned. And recall, Q2 of 2016 was up organically 24% for commercial products noting the pull forward. However, commercial market indicators remain attractive and we expect improved sales performance in the future.

I think a broader indicator is full-year sales growth for our product lines. Full-year organic growth was up 9.5%. Residential organic sales were up 14.1%, very strong, and commercial products were up nearly 5% and complimentary up 7.6%.

Very strong performance for all three lines of business, and I'm confident that all three of these product lines will continue to be positive in 2017. As I said, quarterly sales trends will fluctuate based on many factors. We believe we can deliver solid yearly results regardless of the quarter-to-quarter changes, due to the factors I mentioned.

We had exceptional gross margins in the quarter, ending at 25.7%, which Joe will detail during his portion. And as has been the case throughout, 2016 we experienced a low single-digit price decline in Q4. However as highlighted by our gross margin strength, we were more than able to offset this headwind with lower product costs.

Importantly, the rate of roofing price declines has slowed in the last few months. Sequentially from Q3, we gained approximately 90 basis points on residential pricing. In summary, our residential roofing segment was a stand out performer in Q4, both in terms of top line performance and gross margin contribution.

For the quarter, operating expenses were up 30 basis points in existing markets. The increase in the quarter was driven primarily by the softer than expected sales volume, as per my earlier remarks, and a higher cost to serve due to the residential mix being higher. For the full year, as I mentioned, we saw a solid decrease in existing expenses, good leverage as we continue to make prudent reinvestments in the business.

With regard to acquisitions, we completed eight total transactions during 2016, as I mentioned. Excluding the RSG transaction, these other seven deals have added annual revenues of approximately $200 million. Even more important, these acquisitions have allowed us to further expand the geographic geographies such as the Pacific Northwest, Colorado, and Michigan and also expand our product diversity. This expansion will continue as we look to strengthen various markets across the country. And as we have said in the past, we will continue to open greenfields. We have already opened one this year.

Related to acquisitions, the timing of them remains difficult to predict, as I've said in the past, but our pipeline remains full and our dialogue with owners remains active. We will remain aggressive on the M&A front, as well as fund our internal growth initiatives while still managing to reach our 2018 targeted leverage ratio.

And now a little bit on 2017 guidance expectations. We're providing an initial total revenue growth range of 3% to 7% for 2017, which assumes 2% to 5% organic and an approximate $75 million contribution from the seven transactions completed in 2016. And we have intentionally expanded the guidance range to begin FY17, but with plans to narrow it steadily as we obtain increased visibility throughout the year.

For adjusted EPS, the current published range is $2.26 to $2.65. At this point in the year, we believe the lower end of the range is reasonable. We will tighten this range as we go through the year. Similar comments I made on sales. We are committed to growing sales and margin for the year, and we have our teams very focused on doing just that.

Key industry metrics appear favorable for 2017. New residential and commercial starts, remodeling spend, existing home sales, to mention a few, are all projected to increase during the year. This shows the continued strength of our industry. And as a reminder, we are 80% reroof which highlights the non-discretionary nature of roofing.

In summary, we're very pleased with our full-year and fourth-quarter performance, and are very excited about 2017 and beyond. We remain confident in our growth path for years to come.

With that, I'll turn the call over to Joe for his additional comments. Thanks.

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 the Q4 slides that have been posted to our website. Similar to the past several quarters, we've included a few extra slides to help explain the results in more detail and in my prepared remarks I'll go into greater detail on gross margins, operating expenses, inventory synergies and our outlook for 2017.

As Paul said, it was a very solid quarter that topped off an outstanding year. For the quarter, we delivered strong top line growth of 49.1% for record fourth-quarter sales of $1.17 billion. This was driven primarily by the eight acquisitions we made in 2016. Gross margin increased over the prior year by 140 basis points. Operating expenses were up overall, but primarily related to our active acquisition program.

For the quarter, we achieved a record adjusted EPS of $0.88, an improvement of $0.13 versus the prior year. And our fourth-quarter adjusted EBITDA grew 64% to $127.5 million from $77.7 million in the prior year. For comparison purposes, there were the same number of days, 64, in both Q4 of 2016 and Q4 of 2015.

Paul already went through our Q4 sales results as shown in slide 3, so I won't repeat any of that information here. But I will go through our monthly organic sales trends, all of which increased on a year-to-date basis. July daily sales grew 5.1%, August sales were up 0.6% and September sales were up 1.9%. That growth continued in October with organic sales up 2.3%. The slightly softer growth in August was primarily a result of the very hot temperatures across most of the nation which makes roofing very difficult.

Within the quarter, our residential business had consistently high growth rates in every month, up 11% in July, 7% in August, and 9% in September and that high growth continued in October where residential sales were up 10%. On a very positive note, the gross margin rate was 25.7% for the quarter, which is up 140 basis points from a year ago. This marks the highest gross margin rate since the second quarter of 2004, going back prior to our initial public offering.

The majority of our gross margin gains resulted from a product cost decline of roughly 3%, mostly from residential products, which aligns with our purchasing synergies as a result of the acquisitions. Product pricing declined approximately 1.5%, although pricing continues to show sequential improvement. Price changes can vary significantly between geographies based on a variety of factors, including market demand, competition, and storm-related demand.

Our expectations are for prices to continue to stabilize through 2017. By specific product category, our residential and commercial average prices declined 1.5% to 2% while complimentary pricing declined 0.75 of a point on a year-to-date basis. We point out that this residential roofing price decrease represented the smallest decline in 2.5 years. As Paul mentioned, sequentially, we continue to see improvement.

Our commercial product costs declined 200 to 300 basis points, while residential product costs dropped 400 to 500 basis points during the fourth quarter. Complimentary product costs declined comparable with our pricing decrease.

The mix impact in our business drove approximately a 20 basis point improvement in our gross margin, as our mix shifted to a higher proportion of residential roofing products which carries significantly higher GM rates. Residential represented 54.5% of sales versus 49.9% last year, and commercial was 30.2% compared to 34.7% a year ago. Direct sales declined 60 basis points from the prior year, which also contributed to increased margin in the quarter.

Now moving on to operating expenses. Total operating costs were $206.2 million, 17.6% of sales. Excluding the non-recurring costs of $7.1 million, adjusted operating costs were 16.95% of sales. The $7.1 million consists of $1.4 million of non-recurring acquisition costs, and $5.7 million of amortization step up from the RSG deal.

As you can see on slide 4, existing operating expenses as a percentage of revenue for the quarter increased by 30 basis points year over year. The primary driver was in compensation-related costs as a result of the higher mix of residential volume during the quarter and the slightly lower volumes than anticipated. These were partially offset by declines in our bad debt expense and business insurance, combined with the leverage of our operating costs across the new acquisitions.

In total, we were not able to get the full amount of leverage we were looking for in the quarter. As mentioned above, the two key factors were the mix of business and the lower than planned sales volume.

As we've previously discussed, our residential business has higher gross margin but also higher operating expenses. The mix shift this quarter residential volumes drove almost 30 basis points of difference in operating expenses.

In addition, we anticipated a slightly busier quarter and had the staffing and related costs ready to handle it. When it didn't occur, we wanted to keep the headcount on board as we are still in our prime selling season through October and early November.

As shown on slide 5, the Beacon and RSG integration teams did an outstanding job of exceeding our synergy targets for the year. As you may recall, our initial estimate when we completed the deal was for synergies of $30 million, then in Q3 we revised that upward to $35 million. We were able to achieve approximately $40 million in cost benefits for the year, and we continue to target $55 million in savings through 2017. Essentially representing a full-year run rate of our most current second-half 2016 trends.

As you may recall, we have previously identified three major areas of synergies, branch consolidations, procurement, and other SG&A benefits. To date, we've consolidated 30 branches, with one location closed during Q4. We continue to review all remaining overlapping RSG Beacon locations, and will make decisions based on economics in a similar manner to how we evaluate all of our branches. Currently, we have three to five additional branches under consideration for consolidation, approximately a third of our year-to-date savings came from branch consolidations.

Regarding procurement, we've made great progress there as well. As we've purchased material on new contracts and sell-through inventory, we realize the purchasing savings. As we commented last quarter, our procurement savings accelerated significantly during Q3 and it's expanded further in Q4. A significant portion of our fourth-quarter synergy upside was tied to this gross margin line benefit. For the year, procurement savings accounted for over 45% of the total synergies.

Finally, we've captured significant operating cost savings tied to the elimination of duplicate headcount at the corporate level. As Paul mentioned previously, we've now shifted our focus toward the realization of revenue synergies between the two entities. While this was not part of our formal budgeted RSG opportunity, we believe there will be a meaningful sales benefit for both the RSG and Beacon platforms in the future.

Interest expense and other financing costs increased $13.9 million versus the prior year, but there was $2.1 million of one-time costs related to the repricing of our term loan B facility. In the year, our borrowings have increased over $900 million tied to the purchase of RSG and the seven other acquisitions completed during the year. We will continue to make efforts to deleverage our balance sheet over time, and I'll address this further when I talk about our balance sheet in a few minutes.

Our effective tax rate for the quarter was approximately 40%. After adjusting for the one-time RSG related expenses, our adjusted effective rate would have been a little over 39% which is essentially in line with our expectations. But as a reminder, our cash tax rate was substantially lower for the year at 18.2%. We were able to utilize nearly $40 million of NOLs during the 2016 related to the RSG acquisition. This was a significant part of our acquisition strategy, and an attractive addition to cash flow. It's allowed us to further pay down our debt.

Our net earnings were $47.4 million for the quarter or $53.6 million on an adjusted basis compared to $37.8 million adjusted earnings in the year-ago period. Diluted EPS were $0.78, that's $0.88 on an adjusted basis compared to an adjusted $0.75 in the year-ago quarter.

Adjusted EBITDA for the quarter was $127.5 million, representing 10.9% of sales compared to $77 million in the prior year, 9.9% of sales. It's outstanding year-to-year improvement driven by higher revenues and excellent operating performance.

Now I want to provide some clarity on the one-time expenses that we show on the adjusted EPS and EBITDA tables within our press release and also on slide 6 of the earnings release. We incurred a pretax total of $9.3 million in one-time costs in the quarter and $59.5 million year to date. For the quarter, $1.5 million of the costs are tied to the integration including severance costs and lease terminations, $2.1 million relates to the financing costs and other expenses from the RSG acquisition and $5.7 million relates to the RSG amortization step up. Slide 7 provides even a little more detail breakdown of our total amortization costs for the year, including and excluding this incremental amortization cost.

Regarding the status of our balance sheet, first let me talk about cash flow generation. As noted on slide 8, cash flow from operations for 2016 was $120.6 million compared to $109.3 million in 2015. Great cash flow, driven primarily by our strong operating results. Additionally, we also measure and track our performance in key areas such as inventory, AR, and AP. Plus, overall balance sheet metrics around working capital as a percentage of our sales.

Slide 9 provides more detail on our inventory. Total inventory turns were 5 in the quarter versus 4.9 times last year. Inventory turnover has been a key metric we have focused on through out the year and we've made great progress. Our accounts receivable day sales outstanding improved from 36.1 days last quarter to 34.4 days in Q4. Our days payable outstanding have remained consistent at around 30 days.

Our working capital increased to $765 million in 2016 from $467 million in the prior year. But as a percentage of revenue, average working capital declined from 17.6% last year to 15.6% this year. We're making great progress here through the leverage of our acquisitions, combined with tighter controls.

CapEx, excluding acquisitions for the 2016 year, was $26.3 million compared to $20.8 million in the full year 2015. We continue to carefully evaluate our fleet with the addition of RSG. For 2017, we expect CapEx to be approximately 1% of sales. Net cash used for investment remained at $1 billion for the 2016 year, as we did not close any additional acquisitions during the fourth quarter. The year's amount included the acquisition of these eight distinct companies.

As shown in slide 10, we continue to steadily improve our net debt leverage ratio throughout 2016. After beginning the year at 4.3 times, that's the pro forma numbers with the RSG acquisition, we ended 2016 at 3.3. We remain on track to meet our commitment of reducing our leverage to under 2 during the next two years.

To conclude my portion of our prepared remarks, I want to spend some time on two remaining items. First, our planned go-forward supplemental adjusted EPS disclosures, and second, a review of our initial 2017 expectations.

During the past several months, we spent a significant amount of time studying the approaches of different companies regarding their use of non-GAAP numbers, specifically the treatment of intangible amortization. For FY17, we have elected to again provide non-GAAP supplemental information excluding the RSG related amortization step up. However, we anticipate eliminating the supplemental non-GAAP disclosures when we enter the FY18 and beyond, at that point we expect the RSG related amortization patterns to be more consistent for analysts and investors.

We will also begin this year to spend more time discussing EBITDA as a key metric for us. As a highly acquisitive Company, we believe this measure provides a great indicator of overall operating performance. Given the ongoing transition in our supplemental materials, we will be providing specific revenue and EBITDA guidance ranges for FY17. We are also providing color on other line items so that you'll have a clear understanding of the impacts of these on the analyst's earnings forecast for Beacon.

As a reminder, the RSG 2016 amortization amount excluded from our non-GAAP disclosures was $22.6 million. For 2017, the excluded amount will be slightly higher at $32 million, all based on the accelerated method of amortization that we traditionally use with all acquisitions. For further perspective, Companywide amortization was $68.3 million in 2016, and we expect this to be $79.4 million in 2017. With the year-to-year increase tied to the combination of a full run rate from the 2016 acquisitions, and the aforementioned RSG amortization increase.

Finally, spending a little bit more time walking through our initial expectations for 2017. As Paul mentioned, we're targeting revenue growth of 3% to 7% for 2017, which assumes 2% to 5% organic growth and approximately 1% to 2% from our 2016 acquisitions. It's also important to note that there are two less selling days in 2017 which will have a negative impact of almost 1% on the year.

We expect EBITDA to be in the range of $365 million to $395 million or 8.6% to 8.9% of revenue, an improvement of 5% to 15% over the current year and represents another Company record. We're hopeful that this expanded guidance commentary is beneficial, we'll provide even more detail at our upcoming Investor Day in New York City on December 14.

We will now respond to any questions you may have.

(Operator Instructions)

Our first question is from the line of Keith Hughes with SunTrust.

Thank you. Based on what you said for October, it sounds like the commercial business is still seeing the same trends that we saw in the reported period. Can you give us any more detail on what you're seeing, what's weak and how long do you think this will last?

Keith, we've seen similar quarters in the past, again this is one month, obviously, tacked on to the quarter. There's a lot of reasons. We know for sure and we talked about it a bit back after the second-quarter call that there was pull forward. At that time, it was very difficult to measure.

Again, that's why I mentioned the 25% organic growth we saw during that quarter. That's obviously unusual for us, and it just means contractors got on roofs. I think some of that is continuing.

I think the other thing we're seeing, and it's by region whether it's Southeast or in the West, some large jobs that didn't repeat. Some of those were lower margin jobs which I think in some total will help our gross margin as we go through time.

I'm not at all concerned about our commercial growth, of course we're working very hard to counter that. But again as I said, we balanced that with gross margin gain and our need to continue to keep that where it is in the range we've talked about, and to grow the other pieces of our business too.

So I would think it's difficult to tell what's going to happen as we go through these next four months just because we can't telegraph how the winter is going to be. And that's why I said we're just going to have to go through each quarter, and we'll continue to give you the guidance as we see it and of course, we'll report the results.

We do know, as I said, we had a very mild winter last year and that could affect sales as we go through Q2, but then again it might not. So I think it's a question of will we see a strong first half and maybe not as strong second half like this past year, or the opposite as we go through this year.

But we aren't concerned at all. We are pleased though with the strong residential growth, and complimentary I believe is going to continue to rebound as we go through 2017. That's why it's important for all of us to look at 2017.

Okay. And then the guidance you gave for 2017 in terms of the organic growth number, can you give us just a feel among the three segments which of those would be above or below that 2% to 5% you talked about on the organic?

Yes, I think without getting into too much detail and I certainly can hand it over to Joe. My belief is that residential will continue to outperform just because we still have the tail end of some of the storm repair work that we started in the April/May timeframe that will go through. And again, that's very difficult to tell, but it could go through April or so of next year.

And then the balance of the year for res could be a little softer, we'll just have to see with the new storms and then the rest of all of the indicators with existing home sales, et cetera bring in general reroof happens. But I would think with some normal storm volume like there was this year, we would see res potentially be strong as we go through the year. But again, we're going to have to give you tighter guidance as we get through the next three months as we have more visibility to exactly what we're seeing.

Okay. Final question, Joe, on the $365 million to $395 million of EBITDA, what D&A is assumed in that number?

Hey, Keith. So the A numbers I would have given you, so those are the ones that I talked about in the end of my discussion there. So the amortization for 2017, expect it to be somewhere around $80 million, and the depreciation number will be similar to what this year's depreciation number as well too.

Is that [$20 million] I guess?

I'm looking that up right now even as we speak. I may have to find that direct number on the depreciation for you next year, so I'll get you a specific number on the depreciation, and Keith can get back to you on that.

All right, thank you.

You bet.

Our next question is from the line of Kathryn Thompson from Thompson Research.

Hello, thank you for taking my questions today.

Sure.

One thing, not that we can shake the most recent Presidential election, but the one thing that is fairly clear from our policy research is that a top priority for President-elect Trump is to lower corporate tax rates. While he's focusing on 15% the House is focusing on 20%, it will likely end up just north of that. But either way, it paints an interesting picture for a potential lower tax rate.

Two part question for you. One, how would you think -- how does a lower tax rate impact you, given that your cash tax rate is actually pretty low this year, given your heavy use of NOLs?

And then just theoretically, how would a lower structural tax rate impact how you think about capital allocation? So in other words, would that extra cash flow be more for growth, or would you consider share buybacks or a possible one-time dividend? Thank you.

I can answer a bit on two if it were, again, we're talking about things that we don't know if they'll happen or not, certainly we're going to pay keen attention to that. But on the what would we do with the cash, I think there's probably lower probability of, right now anyway, of dividend and buybacks and we would be much more interested using that for growth primarily. Given that we want to continue to help the consolidation within the industry, and we believe that profitable growth as we have done and demonstrated this past year is a key to our success long term.

I'll follow-up just a little bit more, and as Paul said, I think it's difficult to speculate on what might happen but certainly lower tax rates being are an advantage to us, right? We're a high taxpayer, at 40% tax rate we're pretty much at the top. So lower tax rates would certainly help us altogether, think about it, and certainly it would drive additional cash flow to us.

So I think this would strengthen our plan to, as Paul said, continue our growth options, but also continue our plan to pay down some of our debt as well too. So it would be good news all around. But as Paul said, tough to speculate on it, I think it would help us obviously from a cash generation perspective.

Ladies and gentlemen, as a courtesy to other analysts, please limit your questions to one. Our next question is from the line of Phil Ng with Jefferies.

Hey, guys. Joe, really appreciate the color on EBITDA and some of the noise around amortization. But can you help us frame how we should think about the front half versus back half?

Certainly back half of the year is usually a bigger year, but there's some noise in the first half due to a mild winter, some storm activity. And how should we think about the synergies that you have laid out for something flowing through over the course of the year?

Yes, I'll just comment on the first half, second half. It's, as you can imagine, it's extremely difficult to predict, and all I can say is that it really depends on what's going to happen. For instance, through December, we already saw a little bit of harsh weather but it's in the northern regions and not necessarily where it's impacting us, and then what's going to happen in Jan through March.

Obviously if it's as last year, then we could have a consistent year again. But then the factor of what happens with storm repair kicks in, in the March/April/May time period in terms of counteracting what happened down in Texas this past year. So it's very difficult to say.

I think the scenario paints the picture of if it's a harsher winter this year, which I think longer term of course is good for the industry. Because it also has the same impact that hail does on many of the roofs putting stress on it, then you'd see first half, that was obviously with the difficult comps lower than last year and then you'd see, more than likely, a back end that was much more positive.

That's why we try to pull back and focus on the total year picture given the variability within these quarters. And again, that's not a -- certainly, it's not an excuse, it's just pointing to the reality of winter and what happens within these quarters based on weather, things we can't predict. Now of course, we still encourage our folks to go get as many orders and to push as hard as they can regardless of what's happening outside, but then there's a reality of contractors getting on roofs.

Yes, two other pieces I would add, you asked about the synergies element. Synergies, they're pretty much pacing at their full-year run rate right now, so that $55 million, just divide it by four and that will give you a good idea of the quarterly synergies.

On top of that, I mentioned we have three to five additional branch consolidations we're looking at. Each of those branches gets you somewhere around $0.5 million of operating cost improvement when you do a consolidation, it varies, but that's a good approximation. Assume those, if they occurred, would likely be towards the second half of the year not the first half of the year.

Our next question -- .

Just to one follow-up note, hey, Mr. Keith Hughes, listening out there. The depreciation number to give you an estimate of that, it's roughly between $30 million and $35 million is what the depreciation number will be next year.

Thank you. Our next question is from the line of Jason Marcus with JP Morgan.

Hello, good afternoon. So my question is around the gross margin. Obviously you had a pretty nice improvement in the quarter.

And given that most of it was really mix driven, wanted to get a sense as to as you look across different segments, what type of improvement do you see in residential versus commercial versus complimentary? And then as you sit here today and thinking about 1Q, I'm noting that residential could continue to improve at a better rate. How should we think about the gross margins as we go through 2017?

First thing, just to correct, really the gross margin improvement was very little from mix. It was really more driven by cost improvement. So if you look at the breakdown as I mentioned in my call of what -- as I mentioned my comments of what drove it, it was the biggest factor, contributing factor, really had to with the cost improvement pieces.

So if you look at it by various segments to it and break it down between residential, commercial, and complimentary. On the residential side, I think as we've talked about, you saw great -- we saw the price declines more than offset about the cost declines as well too, 400 to 500 points cost improvements there.

The price on the residential was at 1.5 to 2 points; commercial, as we talked about, again, they were also on the price in that 1.5 to 2 point decline; and the costs down between 200 and 300 basis points. And complimentary, pretty much the price and costs piece offset each other there quite a bit, and that drives the breakdown between our key elements.

The second part of your question was focusing on 2017. So stay tuned, we look forward to seeing you at the investor conference coming up on December 14 in New York, we'll go through that in a lot more detail. But overall, we would expect to see some slight improvement in gross margin as we go forward into next year.

Our next question comes from the line of Ken Zener with KeyBanc.

Afternoon, gentlemen.

Hey, Ken.

So this year ended up obviously very well in terms of RSG the acquisition. You continue to gain share, and, Joe, as you highlighted, you're ahead of your synergies [a variety of] things moving there but largely procurement, and we saw that in this quarter with costs falling more than the price you gave up. Given how tough the weather, its concerns around weather, the comps, Paul, you sounded very constructive about residential being positive due to the tailwind, I believe you said of the storm slowing through.

Does that indicate -- and pricing is up sequentially, so my question is this. Did you think residential will comp negative despite the strength we had last year on weather? And if price is moving positive, does that mean your gross margins in that res will be improving steady or improving through the year? Just trying to get a read on those two metrics given the tough seasonal business with last year. Thank you very much.

Thanks, Ken. Well again, it's difficult as I said earlier, it's very difficult to predict what's going to happen over the next, let's call it, four months, the December through March period. I think if things are mild, we'll comp very well. Because again, we have some tailwinds, at least right now, as I said going into April/May.

At the same time, some good indicators as we look at some of the manufacturer reported data and we have to wait till the end of the year to get the full view of what's been reported on the residential side related to shingle square volume. But it appears reroof has taken a nice tic up, especially if we add that 125 million to 130 million squares for the year, and 10 or so, let's say, are storm. That denotes between new construction and reroofs some decent growth that we hadn't seen in 2014 and 2015.

So that could also aid in, one, just demand being stronger. Two, us continuing hopefully, again it's difficult to predict, but we see a good trend with sequential pricing improving, especially residentially. But again, I think the wildcard here is what's going to happen exactly in the winter. Because if winter is difficult like it was three, four years ago, competition gets more heated up and then it's difficult to say what's going to happen.

Our next question comes from the line of David Manthey with Baird.

Thank you. Hello, guys, good evening.

Good evening.

I'll try to squeeze two in here at once so I don't get cut off. First off, Joe, I was wondering you mentioned the days in FY17. Could you give us how that flows by quarter?

And then second, a more general question, you mentioned potential sales synergies between RSG and Beacon. And I'm wondering if you'd give us some examples of what that potentially might look like in terms of what those would be, not the amount?

Dave, I'll consider this an A and a B question, so it's still one and I'll answer B first. On the sales synergies, the comment was intended to really depict what we're doing on the complimentary side. We've had good growth through the years.

Again, I think the market will improve. The remodeling index is positive, and at the same time we've launched complimentary sales via our RSG outside sales folks utilizing current Beacon branches within those metroplex areas to push that product. And it certainly added in 2016 small albeit, and I think it's just another aspect of our growth in 2017, but it will be small.

It's just something that we're working on, and really I wouldn't say it's material. It will continue to grow, and as we get in the out years it will turn into something much more substantial. I'll let Joe talk about the days for 2017.

Paul usually memorizes the accounting calendar, but I'll give you that one anyways. The days for 2017 Q1 will be 61 days, in 2016 it was 62 so we're losing a day in the first quarter. Second quarter, same 64 as the prior year, third quarter same 64 as the prior year, and fourth quarter 63 days versus 64 days in Q4.

So we lose a day in the fourth quarter as well too, so total 252 days, 2016 was 254. Hope that helps.

And our next question comes from the line of Garik Shmois with Longbow Research.

Hello, thanks. Just I have a question, if we're thinking about residential sales and that continues to out pace into FY17 given the trends that you're seeing thus far, just wondering how we should think about operating expense leverage in 2017? I had some -- I guess a good problem to face here in the fourth quarter because of the stronger residential growth, but does carry I guess a negative mix and put it on the leverage side. Should that continue into 2017, and how should we think about that?

That's a great question. And if you look at the full year 2016 numbers, when you consider that mix shift, for full year that mix shift residential was up about 2% or so over the prior year. That and the fact that our operating costs, as we've described before, our operating cost like our margins are almost a 1,000 basis points higher on residential business versus the commercial business. That would say that for the 2016 number, it drove about a 20 basis point change.

As you know, we try to get roughly 60% variable cost structure in place and 40% fixed. If you do all of the math on that and you take into consideration that mix shift in the business, we get to right the spot that we had wanted to. So we actually demonstrated for the full year roughly that same 60% variable cost structure as we had described.

Going forward to next year and 2017, same intent, same plan. Difficult to do quarter by quarter, there's too many things that impacted like they did in the fourth quarter and others. But on a full-year basis, our intent is to again target that same 60% variable structure. Hope that helps.

And the reality is of course we're going to continue to push all three of our lines of business. Right now, we have a little bit of tailwind on resi, I am sure commercial and complimentary are going to bounce back and we're going to put as much energy on those two product lines as we have in the past.

So if commercial ends up growing throughout the course of 2017 greater than residential at the end of the year, so be it. Our OI is very similar, and the same for growth in complimentary.

Our next question is from the line of Ryan Merkel with William Blair.

Hey, guys, I'll ask an A and a B question too if I could fit it in. So A, it sounds like pull forward demand was still an issue in October, and I'm wondering when do you think you move past the pull forward and we get that back into the mid- single-digit organic growth territory?

Then the second question, what is your view for potential inflation next year? It sounds to me like you aren't expecting a whole lot.

I'll start with the pull forward Ryan. Again, I think a lot of it -- this is the third or fourth time or maybe fifth time I mentioned, a lot of it depends on what we see in terms of weather in our face in December, Jan, Feb, March right? Because as that occurs, you're going to be -- sales would be impacted as they naturally are, and but then you're also creating more volume as you breakthrough whether it's March or April. So it's very, very difficult to say.

I think they are also in addition to the things I talked about some of the large jobs not repeating and the pull forward, there was some delay in public funding. And some regions that we know is also going to come out because the work has to be done. We know the nature of reroof. I think this is just a cycle we'll go through, whether it lasts in November, December, it's difficult to predict.

We certainly are very active with our outside sales folks going after work, and I expect that we'll be successful as we do that. I think again the thing that would potentially impact that is just what happens with snow and ice in December through March. And then, Joe, I don't know if you want to comment on the inflation? I certainly can.

No, our assumption, you're right, is that we aren't anticipating any significant impact of inflation in the estimates that we were talking about earlier.

And as we've looked at whether it's let's say asphalt pricing, we aren't concerned at all. It's somewhat bottomed, and even if there's still some short supply, so even if it increased, it wouldn't be concerning for us at all. Manufacturers if they felt pressure would do what they normally do, and they would I'm assuming would attempt to pass price on to us and then hopefully we could pass it on if that were the case.

Ladies and gentlemen, this concludes the question session. Now I would like to turn the call back over to Mr. Isabella for his closing comments.

Great, thanks, Carmen. Great questions. Let me close it down.

Here's some of the highlights from the call, some repeats. Our full year was outstanding in all respects. Sales, growth margin enhancement, debt ratio reduction, and acquisition integration were executed extremely well.

Fourth quarter sales, as we've talked about, were close to $1.2 billion, up over 49% from the prior year. attributed to the acquired RSG branches, the benefit of storm repair, and same-store and greenfield growth.

As Joe talked through, our balance sheet is healthy and will allow us to deliver on our near- and long-term growth goals. We've made good progress on our debt leverage, and ended the year at 3.3 times and we're on our way to achieving our overall goal of 2 times by FY18.

Total revenue for the year was in the $4.1 billion range. This is a record and a great accomplishment for the Beacon team. This is a strong 64% growth over the prior year.

As I have said many times before, we're in a great market that will continue to see growth. We're well positioned to capitalize on this growth with our enhanced branch count, product placement, and density in many markets. We are executing on the elements of our strategic plan, and will continue to focus on our customers, employees, investors and our financial results.

I also want to give a huge thank you to all of Beacon employees, both Beacon legacy and acquired employees, who worked countless extra hours in extremely dedicated fashion to make the RSG and other acquisitions a great success. Related specifically to RSG, we were able to take two very large organizations and effectively combine them to form a much stronger Company, as you can see from the results. The legacy RSG team has been and continues to be outstanding.

We were very fortunate that their culture of hard work, team spirit and intense customer focus is now part of the total Company. We are proud we are now one team. And as always, I want to thank all of our investors for their interest in our Company as well as our customers and all of our employees for their loyalty.

This concludes our earnings call. Have a great night.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect.