Beacon Roofing Supply Inc (BECN) 2017 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Beacon Roofing Supply's first-quarter 2017 earnings conference call. My name is Catherine 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 in forth in the risk factor section of the company's latest form 10K.

These forward-looking statements fall within the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, regarding future events and the future financial performance of the Company, including the company's financial outlook. The forward-looking statements contained in this call are based on information as of today, February 2, 2017. 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. The company has posted a summary financial slide presentation on the investors section of its website under events and presentations. This 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 Mr. Joe Nowicki, Executive Vice President and Chief Financial Officer.

I would now like to turn the call over to Mr. Paul Isabella, President and CEO. Please proceed, Mr. Isabella.

Thank you. Good afternoon and welcome to our first-quarter 2017 earnings call. Similar to the recent quarters, we'll be filing our 10 Q in a few days. During today's call we'll provide a detailed review of our quarterly results, discuss earn current industry trends and provide an update on our 2017 outlook.

As outlined in our press release, 2017 is off to a very solid start with our third consecutive quarter of sales greater than $1 billion. A few noteworthy Q1 highlights include our 11th consecutive quarter of residential organic sales, and our ninth straight quarter of year-to-year gross margin gains, with first quarter gross margin improvement over 100 basis points.

In the quarter adjusted EBITDA grew 9% versus the prior year, this is very solid progress. Company wide sales growth was 2.6% during the first quarter including acquisition growth of approximately $44 million. Our RSG related sales are now included as part of Beacon's existing markets as the acquisition reached its one year anniversary at the start of the first quarter.

On the same day basis, organic sales were flat during the quarter driven by primarily by the more normal winter weather in November and December in many markets and heavy rain in the West. Last year as you might recall, Q1 weather patterns were very mild.

Following the demand patterns similar to Q4, the first quarter saw strength in residential, modest declines in complimentary and decreased revenues within commercial. Residential organic daily sales increased 6.5%. These gains came on top of a 15% growth rate in the year ago quarter, which demonstrates solid, consistent growth in this product line. Residential roofing volumes grew 8.1% when factoring in the 1.6% price deflation we saw in the quarter.

Commercial sales declined approximately 9% during Q1. This was mainly driven by the more difficult weather comparisons, some non-repeating large jobs and 2% price deflation. As a reminder, in Q1 of 2016 commercial products had organic growth of 6.4%. During the first half of FY16 commercial sales increased 14%, providing an indication of both the challenging comparisons in last year's increase and available work days given the milder temperatures. The December 2016 month was particularly difficult, as temperatures in Northern markets were much colder than a year ago levels.

Our West Coast branches, which have a heavy commercial sales component, have also faced difficult comparisons as El Nino fears boosted reroofing demand. The West also saw heavy rains in Q1 and as I mentioned in 2017, which further pressured sales. And you may recall in Q1 of 2016, our West region grew 40% organically. As we have previously indicated, we expect commercial growth to be strong in the second half of the year. We view the items that have impacted commercial sales as normal variations we see over time and we are confident we will see growth for the full-year 2017.

Our complimentary products group saw daily sales decline approximately 1.6%. However this product group has shown growth in 12 of the last 15 quarters. Complimentary product expansion remains one of our key growth initiatives and we're expecting strong second half sales increases.

On a geographic basis, regional performance variations during Q1 are primarily tied to weather effects and timing. Our Southwest region posted Beacon's strongest growth rate for the third consecutive quarter with a 16% increase. Texas in particular has been a significant beneficiary of heavy and concentrated hail damage repair work throughout most of calendar 2016. We also posted mid-high single-digit total organic sales increases in the mid-Atlantic and Southeast markets, with some benefit there coming from hurricane Matthew.

Our other four geographic regions each experienced sales declines during the quarter. These four markets have higher percent exposure to commercial products. Further, these regions, with the exception of the West, are typically the most influenced by winter seasonality. We believe the prior year's mild winter demand pull forward and difficult year-ago comparisons impacted sales growth in these regions, as I previously stated.

Specifically, the December month slowed considerably versus the trends we saw in October and November. For January just completed, we saw basically flat organic same day sales growth for the total company. As a reminder, last year in January we saw 20% organic growth, so this was a good sign for the start of Q2. And in terms of gross margins and operating expenses, Joe will go into some detail during his remarks.

Now I'll recap our fiscal-year-to-date for greenfield and acquisition strategy. We opened one greenfield location during the first quarter in the Northeast with two additional ready to be announced soon. As we've said, we are targeting 5 to 10 total openings for FY17. And as we've also said in the past, we will continue to balance our year-to-year branch opening strategy with potential acquisitions.

Following a strong 2016 where we completed eight acquisitions, we were able to close three purchases during the first four months of FY17. In December we completed the act acquisition of BJ Supply, and in January we added American Building and Roofing and Eco Insulation Supply. The combined sales from these companies is approximately $40 million to $50 million annually.

Both BJ and Eco are complimentary product focused businesses with singular branch locations in Pennsylvania and Connecticut respectively. We continue to look for strong complementary product businesses to expand our product line and geographic reach in this important category.

ABR has seven branches located throughout Washington state with a heavy emphasis on residential roofing. ABR provides an important presence in the Pacific Northwest, which will nicely complement our 2016 purchase of Woodfeathers out of Portland, Oregon and the three locations acquired with RSG in Washington state.

Prior to FY16 Beacon had no locations in either Oregon and Washington. The company now has 14 branches in the two states and we're working to expand our footprint in this geography. Our acquisition pipeline remains very full. We will continue to pursue selective acquisitions that make sense for us both strategically and financially, as we've said in the past.

As you know, in addition to growth through acquisitions, we're deploying other initiatives to grow organically. Utilizing technology, we continue to drive selling effectiveness through our CRM platform. We now have over 1000 key employees utilizing this tool. In addition, we are in the early stages of our e-commerce rollout, which will enhance customer productivity and sales.

In addition to our sales effectiveness we have made solid progress on our two step selling to lumber dealers and national account expansion businesses. As noted on the prior calls and during our investor day, these are important elements of our growth strategy along with acquisitions, greenfield branches and existing branch organic growth.

Lastly I want to provide an update on current market conditions on our 2017 outlook. As many of you are aware, our suppliers have announced a series of price increases, with scheduled implementation days from January to March 2017 on most product lines. Given the announced timing and seasonal demand picture, as you would expect, market acceptance of these increases remains uncertain. While saying that, we are cognizant of potential inflationary pressures building for manufacturers later in the year, including higher freight pieces and rising raw material input costs.

As we exit the slower winter demand period, we believe rising cost could create a more favorable environment for inflation. And as we typically do each year, we will be announcing our own price increase to be effective March 1. As I've stated in the past, there are many factors impacting pricing and we will keep you updated as we move through the year.

Now would like to turn to our 2017 outlook. At this point we're still comfortable with the sales outlook we established on the last earnings call. As a reminder in November we provided the sales growth outlook of 3% to 7%, consisting of 2% to 5% organic growth and 1% to 2% incremental contribution from our 2016-2017 acquisitions.

The current Street-adjusted EPS range is $2.18 to $2.54, with a midpoint of $2.33. At this point in year we're comfortable with that midpoint, as we've stated previously. We view the back half of the year as being very strong, based on all the factors we have mentioned. Economic indicators continue to suggest the continued recovery for our residential and commercial end markets. Although repair remodel represents the majority product demand, we also recognize the timing of these replacement decisions can vary due to economic factors and weather conditions.

We expect the 2017 housing backdrop to remain favorable and economists are anticipating a low double digit increase in single-family housing starts and a low to mid-single-digit increase in existing home sales. We believe housing turnover can represent a catalyst that spurs reroofing activity.

Commercial indicators are also positive, with business estimate expected to increase in the low to mid single digits on an inflation adjusted basis. And we expect overall asphalt shingle demand to be relatively flat in calendar 2017, boosted by growth in single-family starts and non-storm base reroofing activity, but largely offset by challenging 2016 storm comparisons. We believe that our growth initiatives will boost our residential sales growth to levels consistent with our previous low to mid-single-digit growth targets.

Now a little bit on our investor day: in December we sponsored our first investor day. We're pleased with the positive feedback we received from many of you. We believe the roofing industry remains highly attractive for its recurring revenue stream and favorable cyclical characteristics. We like our position as a leading consolidator of the market, but also as a company that has attractive organic growth initiatives in place. We remain highly confident in the strategic direction of our Company and our future growth trajectory.

In summary, we are very pleased with our performance this quarter. We are confident with our ability to grow and are fully engaged in many initiatives to achieve that goal. With that, I'll now turn the call over to Joe for his remarks. 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 the Q1 slides that a been posted to our website. In my prepared remarks, I'll go into greater detail on gross margins, operating expenses and our balance sheet metrics. As Paul said, were pleased with first quarter results, which put us on track for another great year in 2017.

Our first quarter produced sales growth of 2.6% with over $1 billion in revenue, representing a first quarter record for Beacon. Acquisitions continue to play an important part of our growth, adding $47.1 million to quarterly sales. Gross margins increased by a strong 117 basis points over the prior year, adjusted operating costs increased year-to-year, primarily ties to the above mentioned acquisitions.

For the quarter, we achieved record first quarter adjusted EPS of $0.44, which compares favorable to the $0.41 in the prior year. And our first quarter adjusted EBITDA grew 9% to $80 million from $73.4 million in the prior year. Q1 2017 had one fewer selling days than in the year ago period, 61 days versus 62, which limited sales growth by approximately 1.5 percentage points.

Paul already went through our Q1 sales results as shown in slide 4, so I won't repeat any of that information here, but I will go through our monthly organic sales trends. October daily sales increased 2.3%, November sales were up 3.4% and December sales declined 8.6%. Keep this December data point in mind, as this will be one of the drivers of our operating expense miss that I will just discuss later.

As Paul mentioned, the just completed January month saw organic same day sales approximately flat to the prior year, which is a good accomplishment, given the prior year Q1 was up 20%. December 2016 weather conditions returned to historic average levels, in sharp contrast with record mild temperatures in the year ago period. Remember that each of the past two December months, we posted strong existing market growth rates, 12.4%, 17.3%, further highlighting the difficult comparisons. The January and February months face similar challenging year ago winter comparisons, where Beacon posted organic growth rates of 20% and 44% in the comparable month of 2016.

We continue to be pleased with our strong gross margin performance. Our first quarter gross margin rate increased 117 basis points to 25.1%, Beacon's strongest Q1 performance since our initial quarter as a public company. Within existing markets, gross margins improved 96 basis points versus last year and solid margins within our acquired businesses provide a 21-basis point additional benefit. A favorable mix shift to our higher-margin residential products provided the primary margin lift overall during the quarter. Residential roofing represented 53% of sales, nonresidential 31%, and complimentary products were at 16% of quarterly sales.

Direct sales declined from 15% of sales to 14.1%, which also contributed positively to our gross margin performance. In addition, approximately 30 to 50 basis points of the improvement was a result of our traditional true-up for annual vendor incentives.

Our pricing declined modestly sequentially by less than 1%, an occurrence we consider normal seasonality. On a year-over-year basis our pricing declined approximately 1.5% to 2%, which has declined similar to what we've observed in the fourth quarter.

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 improve through 2017, but we expect them to become directionally clear after the seasonally slower second quarter.

By specific product category, our residential and commercial average prices declined 1.5% to 2%, while complimentary pricing declined less than 1%. Residential roofing costs declined approximately 1% and nonresidential costs were down roughly 2% and complimentary product costs were flat on a year-to-year basis.

Now moving on to operating expenses, total operating expenses were $204.1 million, or 20.4% of sales. Excluding the nonrecurring costs of $9.1 million, adjusted operating costs was 19.5% of sales. The $9.1 million consists of $1.1 million of nonrecurring acquisition costs, and $8 million of amortization step up from the RSG deal.

As noted on slide 5, existing market operating expenses were $191.1 million for the quarter. When adjusting for the outlying nonrecurring charges, our adjusted existing marketing operating costs were $181.9 million, or 19.1% of sales, an increase of 59 basis points year-over-year.

A variety of mix and timing factors contributed to the higher first quarter operating expenses. First the sales mix shift, the higher costs to server residential roofing products drove approximately $700,000 increase in costs. Second, demand erosion occurred late in the quarter in December, as I mentioned, which made it difficult to react quick enough to get our seasonal cost reductions required in order to achieve the leverage we wanted.

During the quarter, we also incurred unfavorable expenses related to insurance, sales meetings and fleet expenses of approximately $5 million, that we don't believe should be extrapolated at those same levels into future periods. Many are timing related issues.

On a positive note, we are continuing to see favorable synergy benefits tied to the October 2015 acquisition of RSG. As noted on slide 6 we are we remain on target to achieve $55 million in combined procurement and operating costs savings tied to the combination.

Incremental synergies during FY17 are largely concentrated in the first half the year as we expect to anniversary the majority of our savings by Q3. Additionally, while 2016 saw 40% to 50% of the synergies benefiting our gross margin line, a larger percentage of the current year benefits are expected to be reflected within SG&A. We anticipate providing our final RSG cost synergy update in conjunction with our second quarter conference call.

With that said, we have shifted our focus towards our organic growth initiatives that we discussed at the investor day in December, and which Paul provided an update on in his opening remarks. Interest expense and other financing costs decreased from $16.3 million to $13.6 million in the current period, adjusted for the one-time costs results in expense reduction from $12.5 million in a year ago quarter to $12 million in the current quarter.

This reduction is primarily attributable to a lower interest rate from the September 2016 refinancing of our term loan and also a paydown of our outstanding debt given recent principal payments. We will continue to deleverage our balance sheet over time and I'll address this further when I talk about our balance sheet metrics.

Our effective tax rate for the quarter was approximately 38.8% on both a GAAP and adjusted basis, it which is in line with our expectations. As a reminder, during FY16 our cash tax rate was substantially lower as we were able to utilize over $30 million in tax benefits from NOLs and next day rule costs related to the purchase of RSG.

For 2017 we project will be able to utilize an additional $14 million to $15 million in tax benefits primarily from NOLs, lowering our cash tax rate into the low 30s. This is another benefit to our purchase of RSG which has allowed us to further pay down our debt.

Our net earnings were $20.4 million for the quarter or $27 million on an adjusted basis, compared to $24.7 million adjusted earnings in the year ago period. Diluted EPS were $0.33 or $0.44 on an adjusted basis, compared to an adjusted $0.41 from the year ago period. Adjusted EBITDA for the quarter was $80 million representing 8% of sales, compared to $73.4 million in the prior year and 7.5% of sales. Solid year-to-year improvement driven primarily by our strong gross margin gains.

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 7 of the earnings release. We incurred a pretax total of $10.7 million in nonrecurring costs in the quarter. $1.1 million of the costs are tied to non-recurring SG&A cards, $1.6 million related to financing costs, and $8 million relates to the RSG amortization step up.

Now moving on to the status of our balance sheet: first let me talk about the cash flow generated. As noted on slide 8, cash flow from operations for Q1 was $78.1 million compared to $44.7 million in the year ago period, great cash flow driven by our solid operating results and also working capital management. Additionally, we also measure and track our performance in key areas such as inventory, AR, AP, plus overall balance sheet metrics and our working capital as a percentage of our sales. All is shown on slide 9.

Total inventory turns were 4.8 in the quarter versus 5.0 times in the last quarter. Inventory turnover has been a key metric for us and we've improved during the past several years. This year's slight decline reflects the December sales slow down compared to last year's December surge in demand.

Our accounts receivable days sales outstanding improved from 35.8 days last year to 30.7 days in Q4. Our working capital increased to $784 million at quarter end, from $625 million in the comparable quarter a year ago. As a percentage of revenue, average working capital increased from 16.3% last year to 16.8% this year, driven by the combination of our acquisitions and the higher inventory level.

Capital expenditures were $7.3 million for the quarter compared to $2.1 million in the prior year. We did a good job rationalizing the fleet over the course of the past year, as you may recall last year for Q1 we had just begun the RSG integration and put a lot of new capital spending on hold until we figured out what our true needs were. For the full-year we still see capital expenditures at approximately 1% of sales.

We continue to steadily improve our net debt leverage ratio, at the close of the RSG deal we were 4.3 times. We've made steady progress to where we finished the FY16 at 3.3 times and we continue that progress in FY17, as our leverage is now down to three times. We remain on track to meet our commitment of reducing our leverage to under 2.

To conclude my portion of our prepared remarks, I want to spend some time reviewing our 2017 expectations. As we discussed during the Q4 16 call, we plan to continue to build our framework around the sales range and our adjusted EBITDA expectations. As a highly acquisitive company, we believe the EBITDA measure provides a good indicator of overall operating performance.

Several items we remind analyst and investors regarding our disclosures. First, our adjusted EBITDA calculations exclude non-cash stock compensation, which is expected to approximate $15 million to $16 million for 2017. Second, we expect to exclude approximately $8 million per quarter related to the RSG step up amortization for our adjusted EPS calculation. For Q1, this $8 million is included in the $28.4 million in D&A that is shown in our cash flow statement. And third, our adjusted EBITDA excludes other nonrecurring items identified in our press release and supplemental slide materials.

Now turning to slide 10 to walk through our revenue expectations. Paul mentioned we're targeting revenue growth 3% to 7% for 2017. And it's also important to know there are two less selling days in 2017; which will have a negative impact of almost 1% on the year. We have factored this into our total sales projections.

While commercial business started the year slower than anticipated, we remain confident in its ability to improve performance during the second half of 2017. In addition we believe the sales contributions from the three recent acquisitions provide some support in the event of modest commercial sales downside versus our original expectations.

We expect EBITDA to be in the range of $365 million to $395 million or 8.6% or 8.9% of revenue. As noted on slide 11, during our investor day, we also provided expectations for gross margins in the range of 24.5% to 24.6%, up modestly from FY16. Given our Q1 performance, we're off to a good start with regards to this line item.

We also framed SG&A as a percentage of sales to improve by 20 to 40 basis points year to year. As discussed throughout this call, SG&A as a percentage of sales for the quarter was challenged by several isolated timing related items, demand erosion late in the quarter that made it difficult to react quick enough to get the leverage we wanted, and a mix shift to higher cost to serve residential roofing products during the period.

We're still confident in our ability to deliver on our improvement goals for 2017 and our long-term cost leverage targets. Slide 11 reiterates our investment thesis in long-term financial targets that we discussed at the investor day.

We'll now respond to any questions that you may ask.

(Operator Instructions)

Jason Marcus, JPMorgan.

Hi, my question is on some of the regional trends that you've been seeing. Obviously there's a pretty big disparity in certain regions versus other. So I want to get a sense of some of the pricing differentials that you're seeing across the footprint. And if your pricing power has improved more in certain areas that have seen more storm activity relative to some of the other regions? Any color around that would be helpful.

There's no doubt we've seen -- without going through the specific numbers by region, we've seen in pricing power in Texas where we continue to see great demand both on residential and commercial. To a lesser extent of course, you can imagine we're going to see more negative price out in California, which was impacted pretty heavily in the quarter. And even as I mentioned about January number, even with us being flat organically, they were still impacted pretty heavily because of the rains early in the month. We saw little bit of goodness at the end of the month. Joe, I don't know if you want to --

The other part I would add, Jason, is that really now the trends [are] different from what we've traditionally seen on a pricing perspective, as we've always described, biggest driver of price for any of our markets is really the demand. When we see great demand, whether it's from storm or other issues in a particular region, we usually do much better on price and then other areas where there's more market competition, we're softer demand in it. And really this quarter, the same kind of trends occurred as well, so nothing really different from what we have seen before.

Okay, great. Thanks.

Matt McCall, Seaport Global.

Hey, Matt.

Thanks. So maybe hit the commercial market for a second. I was encouraged to hear that you're encouraged about the back half of this year, but are you seeing anything -- any concerns from commercial customers, hearing any concerns from commercial customers about uncertainty around tax policy? Could that maybe extend this period of softness a little bit longer than you had expected?

That one would be tough for me to predict. I have not heard that, I haven't heard that from any of my people. If you look at our commercial performance, we can clearly lay out, as we talk internally, of course we do our checks, that we have -- there is no doubt the pull forward last year with the milder weather impacted us as we went through the year and towards the end of the year. I think we've even commented about that on our fourth quarter call. That was primarily in the Northeast, upper Midwest.

And then you add some of the large jobs [that repeat] in the Southeast, even though they had reasonable quarter and the heavy, heavy rains out West, that all added up to that complete commercial negative organic growth. None of us here are concerned at all. We've seen variations in the past, we know what our backlog is. This is a product line like most of ours that are negotiated and sales are driven at the local level, we have a fantastic commercial team. And I'm sure we're going to see a turnaround. And of course, in the back half the comps are going to ease as we get through some of the tougher comps we've seen for last year, especially in California when they're up 40% or so in total. Commercial was a little less, but still extremely robust for Q1.

So no, I haven't heard anything macro based at all. I think that given that 80% of the commercial market is reroof, we are going to see roofs fail. And if anything they spend more time and effort on the inspections and the replacement activity. And we still have the same outlook for the back half. Which means were going to see robust activity in the back half. That's our view right now.

And Matt, this is Joe. The piece I would add, as Paul said, when you really dissect our commercial business it was in just a few specific areas that Paul mentioned, it wasn't broad, it was in a few highlighted areas. And what really makes us optimistic, as Paul talked about, I think the one big example about California on the West Coast, where that was one of the areas that drove one of the larger amounts of our decrease in commercial business in the first quarter. And boy, when we think about the weather and the rain that's occurred there, we're very optimistic as we look at the second half of the year and that demand coming back even beyond what we've seen before. So that gives us a lot of optimism there, especially this one example, but that's why we're optimistic.

I think the set up on that is the opposite of what I alluded to on the pull forward from last year. Even though it impacts us in the quarter, we're seeing a little bit more winter, it's normal compared to last year, which -- and/or the rain in California, which is actually normalized, because they typically see rain late in the year. Not for the last six or seven or so years, but that should bode well as we go through the year, as Joe said.

Okay, thank you.

Ryan Merkel, William Blair.

Thanks. First I want to start with gross margin. I was hoping for a little help modeling the second quarter, just given how strong the first quarter was. And last year gross margin went flat sequentially in the second quarter. But tell me, what's different about this year and what's the same about this year?

Sure. This is Joe. I can give you a few highlights.

Traditionally, second quarter's sequentially is always a little bit lower margin than first-quarter, primarily seasonality, soft demand during that period causes that. So if you go to this quarter, 25.1% margins that we had, right? But as I mentioned, we had some lift in the quarter from some more unusual items. More timing related true-ups of vendor incentives and others. If you take that out and try to get some more normalized kind of rate, I think you will see our probably lowest rate of the year will be in the second quarter and then it will probably start to come back up in the third and fourth quarter.

Still being where we had previously described. We talked about it 24.5%, 24.6% range. I think you'll see it dip down in the second quarter and then come back in the third and fourth quarter to end us at that 24.6% full year range.

And the second half you're thinking will be down year over year a little bit and that's just because non-resi, the mix there starts to go the other way and competitive pressures, you're expecting that all year. Is that a commentary?

A little bit, you're right. Because last year in the second half of the year, I think we were 25.1% for the whole second half the year. So yes, I would expect this second half of the year to be a little bit less than that as well, too, and for the reasons that you mentioned. Mix will be a little bit probably more commercial to it and I think you're absolutely right on.

Okay. And lastly on SG&A, it continues to be a little heavier than I was thinking and I can see from guidance that you're assuming better SG&A leverage in the second half. But beyond accelerating sales growth, is there anything else that you're doing that we can think about that should give us some confidence there?

Yes, sure. One of the things I'll mention, and I alluded to it in the call, we had some items that in this quarter were more timing or unusual in nature that we don't really see, [I'd want to] use as a recurring or items to extrapolate going forward. Take, as an example, one of the items, we had a significant amount of fleet repair and maintenance costs that occurred, right? Much more so than in the prior year.

A lot of that's timing of when those come into play and when we get them done as well, too. Were also spending on new CapEx as well too. So that and the new trucks will hopefully reduce some of that in the future. We also had a larger one-time adjustment related to some insurance related costs, which really, more of a true-up of our accruals than anything else.

Then we had the timing, we had some sales meetings that took place that were really in the first quarter, December period, that last year were in the first period. So timing wise will wash out. All those, it doesn't mean that $5 million will come out, but you won't see nearly that significant of an increase or that $5 million pace through in the remaining three quarters. That's the other thing, is some of the unusual items.

Ryan, to get at the broader aspect to your question. Every branch, every regional manager, every Executive Vice President is tasked with a cost budget and a cost out budget by element within that P&L. They have defined actions to get at all those pieces in the absence or in the gain of volume. So we are continually searching to be productive us as we can, I think Joe already alluded to.

Very difficult to react to a sales drop that you had planned before you see a little bit of inventory going up. That's what you saw turns slightly down, although almost flat on an existing basis. And then costs get impacted also. But as we look at it through the course of the year, because we're balancing out with a readiness to serve which we absolutely have to have, we'll be fine. We believe we have a very good process for controlling costs and reducing costs.

Okay, helpful. Thank you.

Al Kaschalk, Wedbush Securities.

Good afternoon guys. I appreciate that you don't want to talk so much about pricing. But I was wondering if you could provide a little bit of color I guess, but 80% of the commercial demand is reroof, and you posted -- I think in this quarter a little bit lighter pricing. I'm not sure how that was relative to your expectations. But why shouldn't we see a little bit better pricing or expect a little bit better pricing if we are seeing the shift or push out in demand for volume, for lack of a better word?

Yes. Our pricing Q1 to Q4 sequentially was flattish, year over year it's down the same 2%. And it is purely a function of the competitive nature of every region, and it's been that way for a number of quarters if you go back. I think for us as we talk about the balance of the year, we've talked about no impact related to pricing, which implies were going to see improvement as we go through the year because of that firming. So I think our thoughts are very similar to yours to get to our overall -- an overall pricing scenario of flattish.

Now within, of course, comes the other aspect of the balance of cost being lower also, which at least buffets some of the negative price we might be seeing. And so time will tell on that. If, as we believe, the markets are going to firm because we are seeing a little more harsher winter, meaning going to be more pent-up et cetera, as we're seeing, it could imply that we see some improvement. But again we already have no price built in, positive or negative, into out model. And then we've offset it with either cost out or some other elements.

That's a great question and it's a difficult one to respond to at this point. Again, as we see more about how demand shapes up as you go into the spring, it'll give us a better picture. Demand is the biggest driver. I can tell you we're optimistic that the January numbers came in better than we expected. Being at where they were last year, given that 20% year-over-year increase last year is positive. So cautiously optimistic on that one.

Okay. Just to make sure I hear you, if you're modeling flat pricing, one of the things in your pocket as you continue -- as you grind on the cost side of things, cost efficiencies, cost improvements, scale from larger procurement, those could help you in terms of good guides in terms of the top line number? Fair?

You mean if we were to continue to get additional cost improvements as we get larger through acquisitions and scale and get better buying improvements that way, will that help us to drive more in the margins fees? Is that your question?

Yes, more of if pricing is where it's at, your ability to meet your goal can be near term aided by just cost efficiencies.

(multiple speakers) Yes, historically, over the last four or five [quarters], you're right. We've proven that if price is down [one five cost has been down to seven, flattish, down 2.2, down 2.8] on the cost side. So we've proven that we can do that.

Our expectation would be going forward that if price were to-- and that's what I said on previous calls, and of course we're always mindful of this, and we work very hard and we want to see flattish or positive price in the absence of that because of the market because we want to continue to drive sales. Because that drives gross margin dollars. We continue to work on the material side, so yes what you're saying is correct. We believe we can do it because we have done it in the past and we've shown we can do it.

Great. Thanks for the color guys. Good luck.

Kathryn Thompson, Thompson Research.

Hello, thank you for taking my questions today. There's a lot of focus on pricing and price increases in the market but one thing just on the margin side. Last year obviously you got a boost from volume, but you also got a boost to gross margins from just better negotiated pricing, particularly post RSG.

So we think that we're in an inflationary environment, and we can model that. But the area where there's a gap is that better negotiated pricing with manufacturers. How should we think about framing that benefit as we head into FY17, so in other words, where much of the gains, for instance from [March you] realized last fiscal year. And with the acquisitions that were made later in 2016, should we see a benefit from better negotiated pricing among other factors as we go into 2017?

That's a complicated question. And I think as we said, we've shown a great history of being able to take material cost out, as we've seen pressure on the price side. Trying to model the cause-and-effect of what price is going to do and then what material cost is going to do is very difficult. I mean that's why we revert back to -- we think we'll be price neutral for the year.

I think typically in inflationary environments, we do see the costs go up. And there's all relative degrees of the how well do we negotiate within that, how big is our scale within that vendor, even as we are seeing, let's say, prices passed down to us. Is very difficult to answer that model of what would happen if we raise prices and were able to get two points of price, what would happen to the cost base. Because we believe inherently because of our size, Kathryn, that were going to be able to negotiate very effectively. Our vendors like to do business with us because we pull a lot of volume through for them, we're very reliable. Joe I don't know if you have anything --

Yes, another two pieces I would add is one, yes, you are correct on the synergies part. Most of the synergies on the buying power, they start to run themselves out around now. Because last year at about this time was when all of the contracts with RSG kicked into gear. So we really started to see all of the benefits to procurement already in the numbers. So you're right, that piece of it has worked his way through.

But the other part that I would add on is we're not done yet in terms of our acquisitions and our growth strategy part. As Paul mentioned, our pipelines is still full. We've done three so far this year already, and as he said, we've got a broad pipeline with others. So expect us to continue to grow, continue to scale up and that will provide us the opportunity to continue to have discussions with the vendors around our size and scale and taking as much opportunity as we possibly can.

Thank you so much.

Phil Ng, Jefferies.

Good to see inventory down in the quarter, but I'm curious if you're seeing any winter buy in the marketplace and you have a view on inventory levels in the channel?

Very hard for me to comment what the channel looks like. I mean we feel very good about where we are at, we're always driving of course for improvement in turns, et cetera. That's just the nature of trying to generate cash. But as both Joe and I talked about earlier, with the slight drop off we saw in December, we obviously held more inventory through the end of the quarter. Even with that, on existing basis turns were flat, so that's good news.

There's really no talk of a winter buy, at least coming through my ears and my folks, their contacts in the market. My view is the manufacturer is going to be -- manufacturers are going to be as prudent as they have been in the past couple of years to maintain a logical buy for the winter. So, yes, I feel good. It's impossible for me to comment on my competitors' inventory levels and/or the industry shipments of squares of shingles because there's so much variability quarter to quarter. It's difficult to track anything from a one quarter base, even two.

Got it. That's really helpful. Obviously you have a price increase in the marketplace, in part due to just broad-based inflation, and manufacturers have one as well. Are the manufacturers seeing any traction? And historically for you guys more importantly, inflation is generally a positive for your bottom line, is that the case?

Yes, inflation has typically been a positive for us. And the price increases that have been announced, either put in the market in January, or of course that will be put in March, it's way too early to tell about any impact. We're still in the lowest quarter for everybody in the industry, January, February, March. So we won't see really anything until April.

I mean the good news is the view, year-over-year shingle shipments, the view as I alluded to, there's a view that it could be flat. Storm volume from 2016 at least anticipated to be down in 2017 but reroof up, new construction slightly up, which gets us to a flat square count year-over-year. That's a view that many of the manufacturers hold and that's where I get my information from. We'll just have to see how that bears out.

So far if we look at some of the regions that did very well in our Q1 that weren't impacted by this crazy weather, that's bearing out. And then in January we saw again, more strength, a number of our reported regions are shipping above. We haven't gotten a pure breakout of resi, commercial, complementary for January, but I think we made progress in all three fronts.

Very helpful, and just one last one for me. Sorry if I missed this on the call, did you guys give any breakout in terms of the sales contribution or impact of mix on margins for some of your recent acquisitions you've done? Thanks and good luck on the quarter.

No, we didn't get specifically to the impact on margins or the mix of the acquisitions, but if you take all three of them -- the two of the three of them were complementary products for the most part. And the larger one, which is on the West Coast -- you're talking about the new acquisitions, which what I'm referring to so the --

That's right, the new ones that you've done recently.

All right. So BJ Supply and Eco were really more complementary in product and then ABR on the West Coast primarily all residential.

Okay.

Sam Darkatsh, Raymond James.

Good afternoon Paul, Joe, how are you?

Great Sam, how are you?

A couple real quick clarification questions. First off Joe, at least by my math, acquired SG&A in the quarter was about $12.8 million, $13 million or so on $47 million of acquired sales? If I'm right, that seems a little high as a percent of sales and I was curious as to the driver of that.

And then my follow-up question would be resi pricing down was it 1.6? A little bit worse than what your costs were, I think that's a reversal of a recent trend. I'm just curious as to whether that was driven by the December and a desire to move volume or what was happening there?

Yes, I will answer the first on the resi piece. Sam, that's really just the timing of being so close into the quarter and how things fell. It really didn't have anything necessarily to do with us driving more volume. Of course our two step business has lower commercial volumes, but that wouldn't necessarily even impact the pricing side. So that is more just timing and has nothing to do with any other purposeful moves on our part.

In regards to the operating expenses on the acquisitions, your math was appropriate. The acquisition operating expenses in the quarter, roughly $13 million on that acquired revenue of $47 million in total. Keep in mind that had a lot of one-time costs -- or transaction costs associated with them. Legal costs, also some of the first amortization costs as well, that's what drove it a little bit higher. Shorter periods, some of those are more fixed cost early on, that what drove it a little higher. Nothing too unusual though.

For them, Sam, nothing at all unusual about their business. Their -- ABR was almost 100% residential, the other two are complimentary, and you know the spend on complimentary gross margin costs and OI, which is very similar across all three of them.

Sam, I'm looking at the detail right now, that amortization part, it was almost 6 points of that. So if you do the math, you were roughly around 27%, 28% OpEx on those acquired ones. And of that 28%, almost 6% which was amortization, so a big number. But keep in mind, those did have a really did good gross margin as well. So you've got to look at both of those pieces.

Got it. Thank you very much, gentlemen.

David Manthey, Baird.

Hi, good evening guys. What percentage of second fiscal quarter sales does January typically represent?

Of a traditional quarter, January sales out of the quarter, they're clearly not a third of it. You're right. I'd have to look up the data. Why don't you let us try to find the exact data on that one. Did you have a second question while to try to find that one?

Sure. Joe, you mentioned a number of benefits to the gross margin and a few drags on SG&A, could you discuss the magnitude of those unusual items in aggregate if you want, but just in terms of basis points or millions of dollars just so we have an idea of what the moving parts are there?

Sure, you bet. On the gross margin side it was between 30 and 50 basis points, really more one-time or timing issues around the some of these vendor [gates] and our accruals for them. So 30 to 50 basis points. That's the amount that if you think about it --I wouldn't expect those to recur going forward. So when we talked about, in the question we had earlier, about lower margins in the second quarter, that's one of the elements which will drive margins lower in the second quarter in addition to the traditional seasonality to it.

The second part of your question, in regards to the operating expenses, there were somewhere around $5 million, as I mentioned, of more timing or unusual costs that they won't fully accrue to that level, maybe 50% to 75% of them won't recur, just because they'll be spread and the timing of when they happened.

So now going back to your initial question on the expenses by quarter. For the quarter, it looks like roughly around 30% of the sales are from January.

Okay, great. Thanks a lot, guys.

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

Sure, just a few highlights, as we believe, as I said, we had a very, very strong opening quarter to the year. The $1 billion sales was a record for first quarter, as I mentioned and our third consecutive quarter in over $1 billion in sales. Residential sales on a volume base grew 8% and represents our 11th consecutive quarter for growth. As Joe talked through, gross margin as a percent of sales outpaced the prior year at close to 120 basis points, and is our highest first quarter margin percent since our IPO.

We continue to acquire great businesses, adding three companies and nine branch locations since the beginning of the year. As Joe talked about our net debt leverage decreased to 3 times, in a year has moved down from 4.3 times. We are on track to hit our full-year synergy target of $55 million and as always, we are driving to attempt to add more there. And we opened up one greenfield in the quarter, 2 to come very soon with our plan of 5 to 10 for the current year.

I'd like to thank our approximately 5,000 employees for their hard work and dedication that made this possible. The Beacon team continues to work closely with our suppliers to serve the needs of our tens of thousands of Beacon customers on a daily basis. And I also want to thank our customers and shareholders for their continued loyalty. Thank you and have a great evening.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, you may all disconnect. Everyone, have a great day.