Beacon Roofing Supply Inc (BECN) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Beacon Roofing Supply's Second Quarter 2017 Earnings Conference Call. My name is Alex, and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

This call will contain forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore, actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including, but not limited to, those set forth in the Risk Factors 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, May 4, 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 Investor 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 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, and good afternoon, and welcome to our second quarter 2017 earnings call.

Similar to recent quarters, we'll be filing our 10-Q tomorrow. During today's call, we will provide a detailed review of our quarterly results, discuss current industry trends and update our expectations for the 2017 full year.

To start out, we believe our second quarter was very strong given the extremely difficult comparisons and more challenging weather versus Q2 of last year. As a reminder, last year during Q2, we had virtually no harsh weather in most regions of the country. This allowed new construction, reroof and complementary repair work to continue at a robust rate. As a result, we grew 25.7% organically on a daily basis in the quarter. This year, we delivered Q2 organic growth of 2.4%, which, on top of last year's rate, is extremely strong performance. In addition, adjusted EPS ended up at minus $0.04 versus the adjusted $0.03 positive we delivered last year. We view this as strong performance considering the seasonal impact.

We believe our strong revenue performance is from solid market demand and our execution on our growth initiatives. And as a reminder, our second quarter has always been our most challenging for sales and EPS, given the impact of harsh weather in many parts of our footprint. In the last decade, we've had positive EPS growth in only 2 of our second quarters.

Other Q2 highlights include our 12th consecutive quarter of residential sales growth. Over this 12th quarter stretch, we have averaged 10% organic same days growth per quarter. We also saw a mid-single digit sales increase within complementary products and solid gross margin performance above our 3-year second quarter average.

And our net debt ratio ended the quarter at 3x versus the 4.3x at the close of the RSG transaction. All in all, very good performance.

These positives were partially offset by daily sales declines of 9.6% within our nonresidential category. As we also noted on our Q1 earnings call, we're not surprised by these results given the difficult comparisons. Here are a few facts.

We are up approximately 25% organically in commercial last year in Q2, and heavy rainfall levels in our West region, and the colder temperatures impacting our northern markets during the March month impacted commercial sales heavily.

These northern markets were up 60% commercially last year in Q2. Based in our view that demand for commercial products should be positive in the second half and the sales comparisons are somewhat easier, we're very confident this line of business will resume its growth. Again, complementary products delivered an organic sales increase of 4.3% during the quarter. This growth is noteworthy when factoring in daily sales growth rates of 20% and 8% in the 2 previous years' second quarters. Growing our complementary business remains one of our key strategic focus areas for the future, both organically and from acquisitions. This is a very large and growing market and one of the elements that will fuel our growth moving forward.

On a geographic basis, we saw 5 of our 7 reported regions grow in the quarter organically. The Midwest region posted the strongest results growing 9.7%, fueled by early 2017 storm activity during March. Southeast delivered nearly 8% growth, boosted by strong residential reroofing demand and some storm-related repair. Sales in Canada jumped 8.2% on the strength of improved residential demand. The Southwest region posted 4.9% increase, the eighth straight gain within this important market. This region was impacted with significant storms in the spring of last year that has continued through Q2. And early 2017 storms suggest that reroof activity should remain high throughout the remainder of the year in this region. The Mid-Atlantic region remains one of our most consistent end-markets with 3.6% Q2 growth despite a very difficult 32% organic growth comparison in the prior year. And 2 of our 7 regions experienced sales declines during the quarter. I already mentioned the West, which saw a revenue drop of 18.8% during the quarter and 22.5% on a year-to-date basis. The region continued to face difficult comparisons, as El Nino fears spurred [per active] reroofing activity during Q1 and Q2 of last year. In addition, Q2 saw heavy levels of rain across both Northern and Southern California, which limited available roofing days. However, as weather normalizes, we believe this will drive strong reroofing activity in the second half. The Northeast reported a 6% decline in the quarter. This region saw much colder temperatures in the March month and greater levels of snowfall, which disrupted activity. And similar to the West, we are anticipating a second half rebound.

In terms of our total sales performance for the quarter, the breakdown of a 5.7% growth consists of the already mentioned 2.4% organic increase and 3.3% or a $27.4 million increase from acquisitions, very balanced and strong growth in the quarter.

And in terms of April, we continued our strong growth. Last year in April, we delivered organic growth of 14%. This year, we finished the month with approximately 4% organic growth. Solid year-over-year growth and a good start to the year, especially considering the heavy rains we saw in much of our footprint during the month.

In terms of gross margins, we ended up Q2 with GM of 23.5% and 24.3% for the first half 2017. Existing market gross margins declined slightly versus the prior year, 50 basis points, while strong acquisition margins pushed the company-wide decline to more modest 30 basis points versus the year-ago period. Considering seasonality, we believe we delivered solid performance here, and Joe will go through more detail during his portion of the call.

Related to greenfield activity, we've opened 2 new branches year-to-date. And as we said in our Q1 call, the year should end with 5 to 10 new branches who are on track. As we've said in the past, we will continue to balance our branch opening strategy with acquisitions and we've been very successful closing on attractive acquisitions thus far in 2017 as well as what we did in 2016.

We believe we are very effective at utilizing these 2 levers of growth.

And related to acquisitions, with the closing of Lowry's of California, earlier this week, we've completed 5 acquisitions in fiscal 2017 with a cumulative sales run rate of more than $130 million of annual sales with 23 added branches. Our latest 2 transactions, Acme Building Materials and Lowry's, that I mentioned, closed since our last quarterly call. Acme was completed on March 1 and consists of 3 branches in Michigan, bringing our state total to 9. Similar to our recent buildup in the Pacific Northwest, our branch count 13 months ago in the State of Michigan was relatively low at 2. One year ago, we added Fox Brothers, which added to the total. Both Fox and Acme added complementary and residential roofing products to the commercial roofing we have traditionally sold in the state.

And Acme serves the dual purpose of building up our geographic presence in Eastern Michigan near Detroit, one of the largest MSAs and by adding a higher mix of residential roofing to our offering in the state.

The second acquisition, Lowry's, operates 11 locations in the Western United States, including 2 in Hawaii, a new market for Beacon. Lowry's is a 100% focused within complementary products. They sell waterproofing and related products, which adds to similar Beacon legacy product sales, including products from the ProCoat acquisition out of Denver. Waterproofing and related products is a large and growing market. We've wanted to add this to our building envelope products for some time and Lowry's is an excellent platform to launch from. They have a very strong presence in their Western markets and we look forward to growing their business with their very skilled team.

Also, I think it's very important to note that, since closing the RSG transaction in October of 2015, when our debt leverage ratio was 4.3x, we have made 11 acquisitions, investing approximately $230 million in acquiring these companies. They've added approximately $265 million of sales and 54 new locations at the end of Q2. And even with that strong acquisition activity, we ended Q2 with a 3x leverage ratio. Also during this time, we generated free cash flow of $220 million and had organic growth of nearly 6%. This demonstrates the strength of our balance sheet and our P&L, the quality of the companies we have acquired and the skill of our leadership team to execute our acquisition growth strategy. We're very pleased with our execution.

We've added a good mix of products from these acquisitions with many bringing complementary as well as roofing products to Beacon. Specific to complementary market, we believe we have the opportunity to grow our traditional core complementary products such as siding and windows and doors and also on the area such as waterproofing and insulation, where we can grow from a lower base of business. We believe complementary products may be comparable in size or greater than the North American roofing market. We believe these offer exciting adjacent expansion opportunities for Beacon, while we continue to focus heavily on our core roofing business.

And lastly, I want to provide an update on the current market conditions and our 2017 guidance expectations. As you know, our suppliers had announced price increases earlier in Q2 on a wide variety of products. In addition, we announced our own increase to take effect at the beginning of March. During our February call, we had expressed uncertainty regarding market acceptance of these increases, largely due to the seasonal timing of their implementation. And at this point in time, it's still a bit too early to see if earlier -- the earlier pricing actions are holding in the marketplace. But there are some positive signs. Our Q2 pricing total was down less than 1 point and for April, we are seeing price as sequentially better than Q2. Of course, these are 2 small data points, but they're trending in the right direction. And many of these same suppliers have announced the second round of pending price increases to be implemented over the next several months based on them seeing continued raw material inflation. Obviously, we will need more time to see if they hold in the market. In the past, we've suggested that announced price increases have the strongest probability of acceptance during times of significant highly visible raw materials inflation, coupled with high levels of demand. Oil prices have risen more than 50% from the January 2016 lows. And we have seen some inflation in asphalt also. And further, we do continue to anticipate solid end-market demand for our products for the remainder of the year.

Now I'd like to turn to our 2017 guidance. We are raising our 2017 sales growth outlook from a range of 3% to 7% to 6% to 9% to reflect contributions from the 5 acquisitions completed this year. But, as you know, acquisitions in year 1 are, for the most part, EPS neutral.

Our organic growth outlook remains largely unchanged at 3% to 5% or 4% to 6% on a daily basis. Remember, there are 2 fewer selling days in 2017. This implies a mid- to high single-digit organic growth rate during the second half.

We expect demand to improve, given several factors, which I've already mentioned, but they're worth repeating: easier year-over-year comparisons, especially in our fourth quarter; more favorable weather conditions in our northern and western markets; some carryover of the 2016 storm demand; a number of early 2017 storm events and stronger reroofing demand in many markets. Also the macroeconomic environment continues to be highly favorable as shown by recent housing market data involving new home construction and existing home sales. And as stated earlier, we're also optimistic that our commercial roofing business will grow during the second half. And we will see continued strong contributions from our various growth initiatives such as greenfields, national accounts and 2-step dealer sales. The current analyst's range for adjusted EPS is $2.21 to $2.45 with a midpoint of $2.34. Based on where we are at after 6 months and the demand we're seeing in most markets, we remain comfortable with this range.

In conclusion, we're very pleased with our first half 2017 results. Fueled by the successes from our various initiatives and execution of our growth strategy, we believe we are well positioned for the remainder of 2017 and beyond.

With that, I'll turn the call over to Joe, who'll provide more details on the financials. 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 Q2 slides that have 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.

We're pleased with our second quarter and first half 2017 results, as we continue to track towards another strong year. Our second quarter generated sales growth of 5.7% and represented a record Q2 revenue performance by Beacon. As Paul highlighted, acquisitions continue to play an important role in our growth strategy, adding $27 million to quarterly sales. Gross margins declined 29 basis points year-over-year in Q2, but still rose 49 basis points during the first half of 2017. Operating costs increased $15.7 million year-to-year, primarily attributable to acquisitions, volume-related variable costs and several nonrecurring items that I'll walk you through in greater detail later in my prepared remarks.

For the quarter, we achieved better-than-expected second quarter adjusted EPS at a loss of $0.04, which compares to a $0.03 profit in the prior year that was aided by favorable weather conditions.

Our second quarter adjusted EBITDA declined from $36.9 million to $31.8 million in the current period. Q2 had the same number of selling days, 64, as in the year-ago period. As Paul has already discussed, our Q2 revenues as shown in Slide 4, I won't repeat this information, but I will go through our monthly organic sales trends.

January daily sales were flat, February sales were up 4.8%, and March sales increased 3%. All 3 months had very challenging year ago comparisons, as we reported organic daily sales increases of 19.5%, 43.9% and 18.1% January through March 2016. We're particularly proud of our February results, as it compares to an extremely difficult comp in the year-ago period. We believe that the March increase can be viewed as even more impressive, given that many northern and eastern markets saw significant reductions in available roofing days from much colder temperatures and increased snow.

On a year-to-date basis, daily existing market sales growth increased 1%, led by strong residential and complementary growth rates of 7% and 4%, respectively. As a reminder, the first 6 months of 2016 produced a 17% company-wide existing markets growth rate, a difficult comp that we were able to beat.

We remain pleased with the trajectory of our 2017 gross margins, as our Q2 gross margins were solidly above our 3-year average for the second quarter. Our second quarter gross margin rate was 23.5%, a 29 basis point decrease from year-ago levels. And within existing markets, our gross margins declined by 48 basis points. Pricing and gross margins vary proportionally to the demand environment in our geographic markets. We continue to see improved pricing in our high demand markets, but where demand is soft, our pricing continues to be challenged.

Second quarter gross margins were favorably impacted by a mix shift to higher-margin residential roofing. Although it's in this category, the gross margin percentage was negatively impacted by growth in sales to our lumberyard customers. This channel carries a smaller markup than our traditional warehouse sales, but it also has a much lower cost to serve. We experienced the traditional seasonal volume increases in Q2 for this channel, as they gear up for the summer selling season.

Residential roofing represented 56% of sales, nonresidential 28% and complementary products were at 16% of quarterly sales. Direct sales were at 17.8% versus 18% in the year-ago period. For the first 6 months of fiscal '17, our overall gross margins improved 49 basis points and our existing markets are up 29 basis points. While our overall pricing declined modestly year-to-year, the change marked the smallest decline in 2 years. Overall, pricing was down under 1% in the second quarter. We continue to expect pricing to stabilize further during the remainder of 2017. In fact, as Paul mentioned earlier, in the month of April, we saw pricing improve further, which is a great sign.

By specific product category. For the quarter, our residential and commercial prices declined approximately 1%, and complementary was up slightly in the period. Product costs in the quarter were down only slightly over the prior year, both residential and commercial costs were down, which was offset by increases in complementary product costs.

Product and channel mix had a favorable impact in our business this quarter. The higher residential shingle mix improved margins, but this was slightly offset by a higher mix of sales through our lumberyard customers, as I previously discussed.

Now moving on to operating expenses. Total operating expenses were $207.5 million or 23.8% of sales. Excluding the nonrecurring costs of $9.5 million, adjusted operating costs was $198.1 million or 22.7% of sales. Operating expenses associated with our acquisitions were $8.7 million for the quarter. As noted on Slide 5, existing market operating expenses were $198.9 million for the quarter, when adjusting for the outlined nonrecurring charges, our adjusted existing market operating costs were $189.4 million or 22.5% of sales, an increase of 52 basis points year-over-year. While we had expected a sequential decline in overall SG&A, a number of factors are behind the resulting increase. We understand this could be an area of question therefore, I'm going to spend a little more time going into the details to explain the elements.

First, higher-than-expected sales, which drove up variable expenses, including warehouse and driver pay as well as fleet maintenance costs. Second, increased over time. A large portion of which was due to the move of our physical inventory process to the end of March versus our traditional September date. This was done to allow for us to focus in September on meeting the needs of our customers during the peak of our busy season. Third, the mild February temperatures followed by a cold March created challenging staffing decisions that impacted the timing around our seasonal staffing changes. Fourth, the product mix again negatively impacted overall SG&A, as strength in our residential business also raised costs in our highest cost-to-serve category. This was partially offset by the increase in volume of our lower cost-to-serve lumberyard business, as I previously discussed.

Fifth, annual increases in benefits plans and compensation costs. Sixth, higher bad debt expenses versus the prior year caused primarily by several non-recurring recoveries in 2016. And last, higher one-time internal and external costs aimed at future growth, acquisition analysis and margin improvement.

On a year-to-date basis, operating expenses were $411.6 million compared to $398.2 million in 2016. On an adjusted basis, SG&A was $393 million versus $361.3 million.

On a positive note, we're continuing to see favorable synergy benefits tied to October 2015 acquisition of RSG. As you can see on Slide 6, we remain on target to achieve $55 million in combined procurement and operating cost savings tied to the combination. With that said, we have shifted our focus now toward our organic growth initiatives that we discussed at the Investor Day in December.

Interest expense and other financing costs decreased from $13 million to $12.3 million in the current period. Adjusted for the one-time cost would result in an expense reduction from $11.8 million in the year ago quarter to $10.7 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 the paydown of outstanding debt, given principal payments.

Our effective tax rate for the quarter was 38.9% on a GAAP basis and 38.7% on an adjusted basis, which is in line with our expectations. We continue to anticipate the full year fiscal 2017 tax rate will be approximately 39%. During fiscal 2016, we were able to substantially lower our cash tax rate and we expect to generate savings from these tax benefits again in 2017. We're currently forecasting fiscal 2017 tax savings at $14 million to $15 million and a reduction in our cash tax rate into the low 30s.

Our net loss was $9.4 million for the quarter or $2.6 million loss on an adjusted basis compared to an adjusted profit of $1.7 million in the year-ago period. Diluted EPS was a $0.04 loss on an adjusted basis compared with our profit of $0.03 in the year-ago quarter.

Adjusted EBITDA for the quarter was $31.8 million, representing 3.7% of sales compared to $36.9 million in the prior year and 4.5% of sales. Our solid revenue growth came despite some difficult comps, but was offset by some lower year-over-year margins.

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 accompanying materials.

We incurred a pretax total of $11 million in nonrecurring costs in the quarter, $1.6 million of the costs are tied to nonrecurring SG&A, $1.5 million relates to the financing costs, and $7.9 million relates to the RSG amortization step up.

Regarding the status of our balance sheet. First, let me talk about cash flow generated.

As noted on Slide 8, year-to-date cash flow from operations has been excellent at $150.4 million compared to $80.7 million in the year-ago period. Solid operating results during the first half of the year have again combined with strong working capital management. Additionally, we also measure and track our performance in key areas such as inventory, accounts receivable and accounts payable plus more importantly, overall balance sheet metrics around working capital as a percentage of sales as shown on Slide 9.

Total inventory turns were 3.8x in the quarter versus 4.1x last year. Inventory turnover has been a key metric for us, as we've steadily improved during the past several years. We know Q2 can be a very volatile, as a result of weather and other demand factors.

Our accounts receivable days outstanding improved from 39 days last year to 38.3 days in Q2. Our working capital increased to $683 million at quarter end from $601 million in the comparable quarter a year ago. As a percentage of revenue, our average working capital increased only modestly from 16.8% in Q1 to 16.9% in the current quarter.

Year-to-date capital expenditures were $24.2 million compared to $11 million in the prior year. Although year-ago comparisons are somewhat distorted, as we had to put new capital spending on hold until we had a complete grasp on our fleet needs following the large RSG acquisition. For the full year, we still see capital expenditures at approximately 1% of sales.

Our debt leverage ratio remained unchanged sequentially at 3x, but was down nicely from the year-ago Q2 of 3.6x. We continue to steadily improve our net debt leverage ratio from the 4.3x levels immediately after the close of the RSG transaction.

To conclude my portion of our prepared remarks, I want to spend some time reviewing our 2017 expectations. As Paul mentioned earlier, we'll continue to focus our outlook around the sales and adjusted EBITDA metrics, while also providing color on the other line items to help analysts and investors construct their models.

Before I get [into our up-to-date view] I wanted to frame several items regarding our disclosures. First, our adjusted EBITDA calculations exclude noncash stock comp expenses. These are expected to approximate $15 million to $16 million for the 2017 year and were $7.6 million through the first half. We expect to exclude approximately $8 million per quarter related to RSG step up amortization for our adjusted EPS calculations. For Q2, this $7.9 million is included within our $28.5 million total D&A. 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. As Paul mentioned, we're raising our fiscal 2017 revenue target from the previous range of 3% to 7% up to 6% to 9%. As a reminder, we have 2 few days during the year, which will have nearly a 1% negative impact on the yearly revenue, but that's been factored into our expectations. The increase in our forecast is primarily the result of incremental revenue contributions from the 5 acquisitions completed during 2017.

We estimate their combined fiscal 2017 sales will add $70 million to $80 million. As Paul mentioned, within our existing markets, we expect demand trends to improve as comparisons ease during the second half of the year. We also believe first half pricing headwinds of approximately 1.5 will move towards a neutral impact, which will contribute to this upward shift in expected growth. Harsher weather in certain geographies like the Pacific and Northeast regions is expected to spur higher levels of reroof demand later in the season.

While 2016 was an active storm year, we believe the carryover demand in 2017 and new spring 2017 events will represent a partial offset. And the macroeconomic environment remains highly favorable for each of our core segments with new home and business construction and repair and remodel markets each continuing to demonstrate attractive cyclical traits.

On a company-specific basis, we remain comfortable that Beacon can continue to generate above market growth through a variety of initiatives, including our national accounts focus, expansion in alternate channels and complementary products. Despite the increase to our [revenue], we're maintaining our existing EBITDA targets of $365 million to $395 million. We're increasing our gross margin range slightly to 24.6% to 24.8%. Although operating costs are running higher than our initial estimates, attributable both to our existing operations and a result of the 5 acquisitions announced. We continue to expect attractive second half operating cost leverage, but anticipate the year being consistent with fiscal 2016 existing markets.

Slide 12 reiterates our investment thesis and long-term financial targets that we discussed at the Investor Day. I'll stop here, and we'll now respond to any questions you may have.

(Operator Instructions) Your first question comes from the line of Keith Hughes from SunTrust.

You had referred to some spring storms helping demand. I assume you target out some of the events in Texas in the last month or 2, I estimate 2 of them now. Could you kind of give your initial view of what kind of impact and relay them to what we saw this time of last year?

Yes, it's -- there is still -- Keith, they're still evaluating the total number of houses because it is relatively early. But it's very, very healthy. The best estimate that we have now is that it'll be close -- close, I say, to the Dallas-Fort Worth activity of last year because there were a couple of strikes actually this spring. In terms of last year's volume, as I said it ran through Q2, we think it's just because of the amount and the concentration that is relatively smaller that, that activity from last year will continue into Q3. We'll have to see what that means for Q4. And then as this -- the new activity heats up, it'll start -- the reroof will start probably within a month; if not, some of it's going on now, all right. It's starting to getting mixed obviously. But it's healthy. We also had some activity in Nebraska, Missouri and then, to a lesser extent, in our South region, little bit Mid-Atlantic, but they're adding some things. And then, Q2 did have some Hurricane Matthew activity, about 15 to 20 branches of ours saw volume from that. We think most of that is gone. There might be a little bit trailing into Q3. But so far, given that it's early in the season, we feel pretty good about the activity to date. And also I think it's important to note that, given our size in Dallas-Fort Worth, we have a very strong readiness to serve that customer base there.

Keith, this is Joe. The other part that I would add on that is also the -- out on the West Coast in our West division with the rains there. Obviously, not the same storms as you're referring to, but the heavy rain in the West, really was -- put a damper, no pun intended, on our business out on the West Coast and the California market, right? We just couldn't get a lot of shipping done. That will have a favorable benefit as we go into the back half of the year, as that will cause some additional demand, not only pent-up from the first half -- this last quarter, but also it will create some new demand. So that should help us well, too.

And just finally on the commercial business. It was down in the quarter. You have some optimism in your comments. Have you started to see that turn back up in April? I know the comps get a little bit easier as we go into this fiscal third quarter?

Yes, we don't have the line of business splits exact to report on. But there is no doubt that the activity we can see and then the quoting volume is up related to commercial. And the amount of work we see coming, large jobs that have gone through our [AR queue] is up. So there is no doubt, I mean, just the delta in Q2 year-over-year, over 1/3 was caused by California, just because of this extreme weather they saw, both years, right, nothing last year and then the prep in anticipation and then nothing but rain this year. So we're really confident they'll have a breakout. They actually -- I won't get into specific numbers, but it's one of the first months this year that they were equal to slightly above last year's numbers. So we're starting to see that come back out, even though there was, for them, a little bit of wetness in April.

And then the rest is really just -- we really look at what we did last year. It was mammoth when it came to the commercial, because we had no weather and then the weather that hit this area, were in areas where we're heavy with commercial, upper Midwest, Northeast and then the West Coast, which is heavy commercial. So that's what gives us the confidence besides what we see within the market in terms of that growth rate. So for the second half, we see them at mid- to high-single-digit growth rates, which will get the full year with the negatives at the lower single-digit total rate for the year. That's what we're thinking now, Keith.

Your comps is a valid one as well too because the commercial comps last year were up 24% for the quarter. So even when you consider the 9, 6 down this quarter, still on a 2-year basis you're still quite up. So, as Paul said, we're still fairly positive about going forward?

Yes.

Your next question comes from the line of Garik Shmois from Longbow Research.

My question is just on the operating expense line. By my math, it seems like you're calling for about 100 basis points decline year-on-year in the second half to get to your full year guidance. And recognizing in the second quarter, you had some timing issues that impacted that line. Assuming those timing issues resolved. Just wondering, if you could provide some more color on your confidence behind the operating expense guidance, and if it's anything more than just operating leverage?

Yes, this is Joe, I'll take that one, Garik. It is more than just operating leverage. Certainly, with the volume, as you know, it's a much heavy back half of the year, right? That's where the large proportion of our volumes will [ship]. So we'll certainly get the lot -- leverage from it in the back half of the year. But if you look at some of those items that I went through, many of them were items that were one-time for this particular quarter and you won't really see recurring, we talked about some of the spending that we did on some of the strategic investments I went through on the call. Also, we talked about the overtime, which was related in regards to our physical inventory process that we had a good portion. So you had a large amount that really were nonrecurring, that shouldn't recur as we get back into the next couple of quarters. If you look at our existing market operating expenses, last year for the third and fourth quarter, we were running around 17% pretty much for both of those 2 quarters in the existing SG&A numbers. And you're right, if you look at this year for the back half of the year and those second 2 quarters, we should be down probably 50 basis points in each of those 2 quarters versus where we were in the prior year; some from leverage, some from some of these nonrecurring items that won't come back again. Pretty confident, yes.

Your next question comes from the line of Bob Wetenhall from RBC Capital Markets.

I'm guessing your new guide is for EPS this year is like $2.40 to $2.45. But I really wanted to ask, it looks like your residential growth on an organic same-store sales basis is robust relative to everything we're seeing in a broader marketplace. So I was really trying to -- get a direct answer. I'm guessing you guys are taking a lot of share in residential and this is really becoming more of a market share growth story for you guys as much as it is about M&A. I was just looking for confirmation, if I'm thinking about this correctly? Any help would be appreciated.

Yes, it's very hard for us to measure the market share. For sure, our goal is to take market share, there's no doubt, without giving away price. We have a -- and have seen, as I said over those 12 quarters, very, very strong residential growth for a number of factors. And we think it's going to continue. Just let me make sure I clarify, our EPS comments with the current analyst midpoint range is in that $2.33, $2.34. That's what I had said in Q1 that we're comfortable with, the $2.21 to $2.45 is the total range. So I mentioned that we're comfortable with that range, which infers the midpoint. So that's the answer to that. But for sure, Bob, we are very interested in taking share. We want to grow above the market and that's why we put so much emphasis on these, both the existing work we've done, but the other channels, whether it be national accounts and the pressure there, additional complementary sales by getting them and additional branches, sales to lumber dealers, our 2-step activity, all those things are going to add to the growth for us, as we go in the out quarters.

And to reaffirm what Paul said earlier, so on the residential side, back half of the year, mid- to high single-digit growth.

And sorry, if I could just sneak one in, a housekeeping question. I thought your SG&A had some extra bad debt like $2 million and $3.5 million of extra D&A. Is that correct? Did you just have like a worse D&A because these transitory costs kind of like ongoing SG&A ratios better than in the quarter? Appreciate any guidance.

You bet, Bob. So on the D&A, so depreciation and amortization that you're referring to, yes, we were up on a year-over-year basis for the quarter. But it's really all on the A side, most of the amortization from a lot of the acquisitions we did from a year ago that [tripped] into existing markets versus acquisitions. So it's all on the amortization side of it and all related to the acquisitions from over a year ago. Hope that helps.

Your next question comes from the line of Will Randow of Citigroup.

On inventories, picked up a little bit there. You talked about pricing stabilizing. For lack of a better term, how do you feel about the cost basis of your inventory relative to current market prices? Or does another price increase need to go, or you might feel a little pinch short term?

We always feel good about the cost basis of our inventory because we have a great supply chain team versus pricing in the market. As I said in my portion, we do believe the market should increase prices. So we are supporting the activity of the manufacturers and pushing very hard to make that happen. There's no doubt. Oil is up. Asphalt is up. Other commodities, diesel is up for both manufacturers and us, right? So there's no doubt we're going to push extremely hard to make that happen. And in terms of just if I can comment on our inventory in the quarter, we also feel extremely good about our inventory, even given some of the odd weather we saw at the end of March, which did tamp down sales and really tamped down that 2.4% organic growth, we would have been in even better shape. So we are prepared just because of what we see in this back half really on all of our product lines, primarily the growth in our inventory with shingles, we get that, and accessories. But given the growth we've seen, the growth we anticipate, some of the storm volume and turnaround in the West, et cetera, we feel extremely, extremely good about where our inventory is right now.

And just to follow up on some prior commentary and questions. In terms of -- so you're not necessarily moving the EBITDA range. Amortizations have picked up, but implicit EPS guidance is pretty much where it was at. Can you go through that walk again? Is it lower taxes? Or what offsets the increased amortization?

So higher sales, higher gross margin, slightly worse -- or higher operating expenses should get you there.

I meant between EBITDA and EPS, because if you have higher amortization, EPS should actually be a bit lower. But I haven't done the math yet.

Yes, the amortization was the same number that we were anticipating from the last time. So from the EBITDA from last time to this time, our expectation on D&A hasn't changed. The other question was why was it up year-over-year. From my expectation (inaudible) number.

Your next question comes from the line of Ryan Merkel from William Blair.

So in April, was price flat year-over-year, or was it up slightly?

It was still slightly negative, Ryan. We -- I've said in my comments, and I think Joe said the same thing, that it was slightly improved from Q2, but it's not to the 0 mark. But we're encouraged, especially -- but again, as I said, we know it's only -- Q2 and April are 2 data points. We're encouraged given the fact that April wasn't the greatest month for clear weather. There was a tremendous amount of rain in different parts of the country that tamped down volume. So it's encouraging. Now of course, region-by-region, as Joe commented, we see some very competitive pricing, et cetera, where we are seeing robust demand. We feel good about our opportunity to push price through, which we're going to continue to do. And as I said, support the manufacturing base.

Okay. And then you said price was down 1% in the quarter. But what was COGS down? Are you still managing that price cost spread well? And then just comment on how that looks in the second half as well?

Sure. Cost was not down as much as price, so we didn't quite manage the spread on that part. But as you know, it's usually more challenging during this quarter of the year, especially as you go through the year. As you know, a lot of our vendor incentives are based on hitting gates. So as we hit certain of our target volume gates as we go through the year, usually our vendor incentives will increase as we go through the period. So to your second half of your question, is our confidence on the second half of the year that's going to improve, absolutely. That's why our gross margin range is higher in that second half of the year.

Your next question comes from the line of Matt McCall from Seaport Global Securities.

So maybe ask it this way. So you said that you've seen some good pricing in some of the stronger markets. If you strip out the West, you strip out the Northeast, and were you positive from a pricing perspective in total in those [out] markets? And I guess the second part is, given your bullishness for those 2 other markets, are you kind of baking in that, that full pricing transitions to positive just as the strength in those other markets comes in the back half?

Yes, in terms of the balance of the year, I mean, we've got price in these numbers at basically flattish. And I won't start picking apart every one of our regions based on price. But I can tell you, where we saw strong volume, we did see positive price, albeit slight, but we saw positive pricing.

Okay. So in total in those other markets, pricing was up?

Slightly, yes.

Okay. So -- and I'm not trying to pick this apart, but you didn't change your organic growth outlook. But if I look at the, I guess, Slide 10, residential, up; complementary, up; non-res ticked a little bit lower. Did you -- is maybe the way to think about it that you moved toward the high end of that organic range in your outlook given that 70% of your business you just kind of took the outlook up for '17?

Yes, I think that's a good way to think about it. I think you're right. That is correct. (inaudible), Matt. You're right on it.

Okay. Okay. So the last question. The commercial outlook, a little bit softer. I think I asked last quarter if there was any policy uncertainty that was kind of driving some delays. I think the answer was no. But is there anything that you can talk about that's really maybe impacting trends near term? And then maybe what are the assumed drivers as we move to the back half and see some improvement?

Yes, as I mentioned, of course, and you folks know because you look at the numbers, the comparisons get a tad easier. But also from the facts we mentioned, last year the Northeast had no weather and pulled forward a lot of volume. That was at 60-or-so, 50-plus percent growth they saw. And then through the end of the year, because they didn't have any of that damage, they ran out of gas a bit. So [them having] winter in and the Upper Midwest is going to bode well for just reroof for us in general. We already gave you the California story in terms of that being a bigger commercial market for us and then what happened last year. And this year, with the tremendous rain, we're definitely going to see a turn. So if you look at the commercial market, it's still a very healthy market. It's still a huge part of our sales. We're extremely focused on it. But I think like in any other product line, there's also competitive pressures. So we have to make sure we're [playing] at the right margin level, and I think we -- and that's nothing new. That's been going on forever and -- but our folks are extremely positive that they're going to be able to grow commercial in this mid- to high-organic percentage rate in the back half, which gets us the lower single digits for the full year.

Your next question comes from the line of Jim Barrett from CL King & Associates.

Could you talk about the Lowry acquisition, waterproofing, sealants. I assume -- is that largely nonresidential? And do those types of distributors represent an incremental pool of acquisition candidates for Beacon?

Yes, Jim, great question. Lowry's, I'll first say again, Lowry's is an outstanding company. They've done a phenomenal job running that business out there. They have great placement. They've expanded in the last few years with a couple of smaller acquisitions, and they're very well known on the West Coast. Yes, they mostly play on the commercial side. There's a lot of new construction involved, but also R&R with some of the restoration products. So it's a good mix of waterproofing, vapor barrier, sealants, restoration-type work. And yes, we're looking at it as a platform. There is some pull-along sales with our commercial roofing work either through contractors that do that work or GCs that left both of those projects. So we can see some attachment to our existing commercial business in the West. We also see us opening up -- potentially opening up greenfields to expand that business and also to -- look, yes, it gives us a grouping of potential targets to acquire, and we'll be evaluating that. And of course, as always, we base those decisions, as I commented about what we've done since RSG, on what -- the strength of those companies and what they can bring to us. But yes, it is another opportunity for us to acquire, Jim.

Your next question comes from the line of David Manthey from Baird.

As it relates to the inventory situation, you say that you're comfortable with your inventory level. But if you look at the ARMA data and the OC uncertainty, is there a chance that others have more than you do and that could create a situation as we get deeper into the season?

Dave, we -- I don't believe so at all. We -- if you look back to 2014 where there was that huge buy and things were so different then, economic indicators were flat or down, there was just no opportunity to do anything. And then you look at where we're at today with the robust sales especially, as I said, over the last few quarters, the -- and there were no storms actually late '13, '14 at all. So that well was dry. So things are completely different in that reference. So in terms of like how we view our inventory. We did not view this as, at all, as a winter buy. We viewed it as we have demand, we have a lot of activity. Remember, we have over 600 sales folks that are extremely active selling, and we just see it as an opportunity. And if weather hadn't hit that bad at the end of March like it did, it'd be lower than it is right now just because we would've sold a heck of a lot more. So I don't have a crystal ball on everything, but I have a high confidence factor on the inventory we have. We are going to sell. I can't -- it's difficult for me to speak about our competition, right, because I don't have their numbers. But I think they all -- including -- Joe referenced the 2 step in lumber dealers and our sales and that impact that had on gross margin, that was because they're enthusiastic. Their volumes are up. So they're stocking product in their lumberyards, right, which we sell to, but outside the range of our 1-step contractors, and we've been doing that for years. So I think all the indicators are really different than in the past, even last year. Time will tell, of course. But if you just look at what we're seeing from a demand perspective in most of our regions, we feel very comfortable about where we're at with inventory right now.

Okay. It sounds good. Just final question on greenfields. If my numbers are right, and correct me if they're not, that you opened 6 in 2015. I only have 1 in '16, and then I think you mentioned how many in '17. If you could help me with that number. And then second, has there been any change in the growth trajectory when you opened those new locations?

Okay. Yes, hey, your numbers are right: 6, 1, 2 year-to-date, and we've got a number of others that are -- actually, we're ready to sign leases. I won't tell you where they're at. But we feel pretty confident that we're going to be in this 7 to 8 range for the end of this year. And really, it's balanced -- actually, I think it's quite well balanced against all these acquisitions that we've also executed this year. And I'll let Joe talk about the profitability and growth.

Yes, the growth trajectory, we've talked about that and had in our materials for a while. And it's a really good question. We actually have seen them grow a little bit faster in the last ones that have come up. As you know, RSG had a really good strategy around the greenfields, focused development of them. And we're taking some of that at heart with our new ones that we put out there as well, too. So we've seen them grow a little bit faster than before. Some of it's some seeded volume to get them going, but more of it is our purposeful intent to drive more volume to move quicker. And obviously, with that comes the profitability. So yes, they are growing a little faster than they had in the past.

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

Great. Thank you. We got a very strong start to fiscal 2017, featuring record first half revenue and strong gross margins. We're very proud of our sales performance as the year-ago first half grew 18% organically, making the comparisons difficult. However, we still managed to grow nearly 1% during the first half this year, improving to 2.4%, as we've said, in Q2 against an even more challenging comparison. Year-to-date gross margins at 24.3% are very strong.

We continue to be successful in finding strong companies to acquire both inside our traditional roofing distribution business and in adjacent complementary products categories. We have now closed 13 transactions in fiscal 2016 and during the first part of 2017 and during this period, we've kept our eyes serving our customer and delivering financial results through disciplined and focused execution. And we've maintained our focus on being good stewards in reducing our debt leverage ratio in combination with the acquisitions.

We're in a very exciting, large market, a market that consists of a large portion of repair and replacement and new construction. This market is growing, and the economic indicators point to continued growth. Beacon has a great geographic footprint, product offering and talented team that will continue to deliver excellent differentiated service to our large customer base and also deliver solid financial results to our investor base. As I've said many times in the past, our future is very, very bright.

I'd like to thank the employees of Beacon for their hard work and dedication. And I also want to thank both our customers and shareholders for their continued loyalty to Beacon. Thank you, and have a very nice evening. This concludes the call.