Beacon Roofing Supply Inc (BECN) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Beacon Roofing Supply's Third Quarter 2017 Earnings Conference Call. My name is Tonya, 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 the call are based on information as of today, August 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 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. Good afternoon, and welcome to our third quarter 2017 earnings call. During today's call, we have provided detailed review of our quarterly results and current industry trends, review Beacon's operational and strategic plans and update our expectations for the full year.

We believe our third quarter results were very solid. We achieved record sales, record adjusted EPS and record adjusted EBITDA in the quarter. In addition, we had strong sequential gross margin improvement and also stable gross margins versus Q3 of 2016. Our market pricing improved sequentially and was also flat year-over-year. This is very good news in the direction we have been forecasting. As a result, we are seeing positive price in some of our markets.

Operating cost performance was also positive, providing beneficial leverage. This is an indication of our ability to effectively control cost. In addition, as mentioned on our last earnings call, during the quarter we closed on the purchase of Lowry's, a premier California-based waterproofing company with 11 branches across 4 states.

Sales were up for the quarter, ended at 5.3% with organic growth coming in at 2.2%, which was slightly below our expectations. We saw challenging year-over-year comparisons. Last year Q3, we had organic growth of 9%, increased rainfall in the eastern United States and the demand impact of having a second consecutive mild winter across northern markets. While these short-term external factors impacted sales, we remain very pleased with the overall results and execution of our team and remain very bullish on the continued growth of organic sales.

It is also worth noting, as we have talked about for many quarters, roofing has a very high R&R content, 80%. And as our business is impacted by weather in any month or any quarter, that work does not go away, it is deferred. Might not all come back in the next month or even in the next quarter, but for the most part, it will come back. All you have to do is look at the variability of our organic growth rates quarter-to-quarter based on season and weather events and you can see this.

In addition, we're encouraged by the positive direction of pricing in our industry as well as Beacon's disciplined approach within those local markets where pricing behavior continues to be competitive. A few facts. Our positive Q3 organic sales represents the fifth year in a row where third quarter organic sales was positive. In fact, since 2013, we have had positive organic growth each year during Q3 and Q4. This demonstrates the consistency of our growth in the spring, summer quarters, which typically have less of a harsh weather that can create dramatic shifts in the available workdays. In addition, our strategic growth initiatives, a favorable residential backdrop and a stable to modest expansion of core reroofing demand are helping to provide greater consistency with our results.

Residential roofing produced organic sales growth of 5.5% in the quarter. This segment has grown in 17 of the past 18 quarters. This is very solid consistent results. As a comparison, last year in Q3, residential organic sales were up 13.2%. So a nice gain above that gain. Complementary products delivered our stronger -- strongest sales growth in the quarter at 6.3%. Complementary products performance was broad-based geographically and is the result of our increased focus in the category. Growing our complementary business remains a key strategic focus area for the future, both organically and through acquisitions. 4 of our 5 fiscal 2017 acquisitions have strong complementary sales. Our organic complementary products growth is also being boosted by strong market for single-family home construction, an important economic driver for this category.

The positive performance posted by our 2 residential-oriented businesses was partially offset by a 5.3% sales decline at commercial roofing. Importantly, each of our underperforming commercial segments we discussed during the last call, the Midwest, West Coast and Northeast, returned to positive growth in Q3. However, we saw pockets of softness emerge in other geographies. There are a number of reasons for this. The commercial roofing market has seen more heightened competitive pricing pressures of late than in our other 2 categories, and this segment was also impacted by all the wet weather we saw in our typically strong commercial regions; this deferred work I referred to. In addition, certain large jobs from previous quarters didn't repeat.

As we've said in the past, the commercial segment is a very important piece of our overall business, and we will continue to stay focused on driving profitable sales. As we are now passed the most challenging year-to-year comparisons, we expect to enter a period of positive growth for commercial roofing with gains in the low to mid-single digits, a level consistent with our long-term plan.

On a geographic basis, we saw 5 of our 7 reported regions post positive growth during the quarter. Our 2 strongest regions where the Midwest, up nearly 15%; and the West, up nearly 8%. Both of these areas were among the fastest-growing regions in each of our 3 product categories. The Midwest benefited from 2017 storm activity in areas including Denver and Kansas City, which were more than offset by a second consecutive mild winter. Within our West regions, Southern California showed a strong recovery fueled by deferred winter work and strong reroofing activity following the heavy winter rains. We had anticipated this would occur and mentioned it on our last earnings call.

Our 2 softest regions were the Southwest and Canada. Our Southwest region had a sales decline of 7.9%, reflecting difficult year-ago comparisons tied to hail damage in Texas. As a reminder, our third quarter last year increased 46% in the Southwest.

Storm work from last year's North Texas hail events has continued to aid demand with the area experiencing further hail damage from spring 2017 storms. However, we expect the year-over-year comparisons in the Southwest will remain difficult during the coming quarters because of the large nature -- expensive nature of last year's hail's damage.

Canada saw a 16.2% sales decrease during the quarter. Eastern Canada, in particular, is being negatively impacted by a variety of factors, including heightened competitive pressure; more limited, larger project work; and the 2 key weather-related factors mentioned earlier, increased levels of rain and 2 consecutive mild winters.

Weather occurrences are certainly not indicative of the overall health of the roofing market, as I alluded to earlier, which we are confident remains very strong. And as I said, they're short term in nature and we can have a quarterly impact that we have seen and stated previously. Despite these impacting items, we still delivered positive organic growth, sequentially up pricing, sequentially up GM and record adjusted EPS. Those indicators tell the story of our performance.

For July, we ended with organic daily sales of approximately 5%, up year-over-year, representing a good improvement versus our growth rate in Q3, even better when considering the first week of the month was impacted by a Tuesday holiday, which made for a slower first week than the balance of the month. We remain optimistic that July's improved revenue trend will accelerate modestly into August and September given the pent-up demand in the easier multiyear comparisons.

And in terms of gross margins, we ended Q3 with gross margins of 24.5%, flat versus the third quarter of 2016 and at levels in line with expectations. Existing market gross margins declined modestly year-to-year, reflecting competitive pricing pressures in certain softer demand markets as well as difficult comparisons with the year-ago Texas storm demand. We're very pleased with the gross margin outcome, as I said prior, prior the result of our successful pricing and procurement efforts, particularly in light of the softer sales and demand environment than we had originally anticipated.

We're also very proud of our SG&A performance in the quarter. We have previously expected to generate favorable operating leverage during the second half of 2017, but a target that's largely as a function of the mid- to high single-digit organic sales growth. Even with the top line shortfall, we were able to drive favorable leverage both within existing markets and for the company as a whole. Joe will discuss more detail during his portion of the call.

Now a few comments in greenfields and acquisitions. First, let me start with greenfields. We've now opened 4 branches year-to-date. Through the first half of fiscal 2017, we had opened 2 locations. In addition, we opened one branch in the third quarter in our mid-Atlantic region and a fourth branch in Canada during July. At this point in the year, we can say we will end the year with 5 to 6 new branch openings. And as we've stated in the past, we'll continue to balance our branch opening plans with acquisitions.

I also want to reiterate that growth by acquisition remains a key part of Beacon's long-term strategy. In the current fiscal year, we have completed 5 acquisitions for a combined sales run rate greater than $130 million. As a reminder, in 2016, excluding the RSG purchase, we completed another 7 acquisitions with approximately $200 million in annual sales.

Our acquired company results clearly demonstrates the quality of earnings they have brought to Beacon: very strong gross margins and operating income. It's worth noting that even with this robust acquisition activity since the RSG announcement in 2015, our net debt leverage ratio has been reduced from 4.5 to 3.4x. We're proud of this solid performance as we continue to grow.

And lastly, I want to provide you an update on current market conditions with our Q4 and 2017 guidance expectations. As you know, suppliers in both residential and nonres sectors have announced multiple price increases during 2017 in response to upward cost pressures from rising raw materials. While our Q3 pricing to customers and our Q3 product cost from suppliers remained flat to modestly down year-to-year in our roofing segments, we did see low single-digit price increases go through in our complementary products category. In certain regions of the country, mostly in strong demand areas, we have seen positive pricing across our roofing categories as well.

Most recently, several vendors have attempted to pass through low to mid-single-digit price increases in residential roofing and in other products. End market acceptance of these higher prices remains uncertain at this point and as always, we'll continue to monitor this as we balance our end market pricing with our organic sales growth plans.

Now I'd like to turn your attention towards our 2017 guidance. We're adjusting our 2017 expected revenue growth range from 6% to 9% to 5% to 6%, reflecting a narrowing of expectations and a move towards the lower end of our previous outlook. Essentially, this new range adjust for the lower-than-expected Q3 sales rate, which as discussed was driven by the higher rain and more limited reroof work tied to the milder winter weather. While we expect a more normal rainfall impacting Q4, we anticipate the drag effect from this past winter will continue in certain northern markets, reducing our Q4 sales outlook slightly from prior expectations. But again, as I said, this becomes also deferred work that we will see as we move into the future.

Our organic growth outlook for the full year is 2% to 4% on a daily sales basis. Our daily sales guidance was 4% to 6% following Q2 of '17. This implies an organic daily sales rate of approximately 7% in Q4.

As discussed previously, we're off to a strong start in the month of July and expect August and September growth to accelerate further. We also believe comparisons the next several months should prove more favorable than both Q3 and the July month.

In relation to my pricing commentary earlier, our updated revenue assumes the latest round of manufacturer price increases do not hold in the marketplace. Meaning, we're taking a midline view of the pricing dynamics that are still unfolding, and we think that's a prudent approach. And given our reduced revenue expectations, we're now -- we now expect adjusted full year EPS to be between $2.15 and $2.25. And Joe will go through the complete

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and the details of this for the balance of the year in his portion.

As stated, we believe the Q3 sales shortfall and our modest reduction in Q4 revenues resulted from unique weather events. Assuming normal conditions in 2018, we would anticipate a related revenue improvement in these impacted geographies and in part, as I've mentioned a few times, because of the deferred work. Nonetheless, we're still very pleased with our solid overall results, gross margin performance and operating cost controls despite the competitive end market demand environment.

With that, I'll turn the call over to Joe for additional color. 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 third quarter slides that have been posted to our website. In my prepared remarks, I'll go into greater detail on gross margins, operating expenses and key balance sheet metrics.

We're very pleased with the operational execution by our teams with our third quarter gross margin and operating expenses shining a positive spotlight on this performance. Existing market sales growth increased a solid 2.2%, and that's on top of a prior year 8.7% existing markets growth rate, although this is lower than expectations due to unfavorable weather conditions. For the quarter, we reported adjusted EPS of $0.84, which compares favorably with the adjusted EPS of $0.77 in the prior year. Our third quarter adjusted EBITDA increased to a record $120 million from $109.6 million with adjusted EBITDA margins improving 38 basis points year-to-year.

Regarding our monthly sales trends. Q3 had the same number of selling days, 64, as in the year-ago period. Paul has already discussed our third quarter revenues by geography and business line. Paul provided an overview of our monthly organic sales trends. April daily sales increased 2.8%, May increased 4.8% and the June month declined 0.9%. Multiyear comparisons were particularly difficult during the June month for residential roofing as the previous 2 years have seen 30% cumulative growth. In addition, the June month experienced the greatest weather disruptions during the quarter.

Our complementary products category posted consistent performance each month during the period. Paul commented earlier on the July month, but I did want to drop further attention to the fact that the heavy rains that negatively impacted June have also limited available workdays for our customers in July. Many of the same regions in the eastern and northeastern parts of the United States and Canada, which were negatively impacted in the third quarter, have also been affected in the July month. This is why we're particularly pleased to see the stronger underlying growth trend in July.

Now moving on to gross margins. As Paul highlighted, we're happy with the stability shown in our underlying gross margins, particularly given the east -- the increased competitive pressures in certain geographies. In fact, this represented the highest third quarter gross margin of any during the past 5 years.

Gross margins came in at 24.5%, up 6 basis points compared with year-ago levels. And within existing markets, gross margins declined a modest 13 basis points. Gross margin was largely in line with our expectations and the Street. Similar to recent quarters, a favorable mix shift aided overall gross margins. Residential roofing represented 55% of sales; nonresidential roofing was 28%; and complementary, 17%. Direct sales represented 14.9% of sales compared to 16.3% in the comparable year-ago quarter, which also contributed to our positive margin performance.

Company-wide selling prices and product costs were essentially flat versus last year. Roofing product pricing declined less than 0.5% in the quarter. Both residential and commercial roofing products has seen steady improvements the past 5 to 6 quarters. In fact, our residential roofing prices increased over 120 basis points sequentially from Q2. Product costs and roofing have closely mirrored our pricing, which has helped Beacon maintain solid gross margin performance. By comparison to roofing, complementary products have experienced 2% to 3% increases in both pricing and product costs as this area is experiencing greater inflationary price pressures, which we have been able to pass through to customers.

Now moving on to operating expenses. Total operating expenses were $212.9 million or 17.5% of sales. Excluding the nonrecurring cost of $9.9 million

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third quarter adjusted operating expense of $195.8 million or 17% of sales. The $9.9 million of nonrecurring cost includes $7.9 million additional amortization for the acquired intangibles from the RSG acquisition and $2 million of other nonrecurring charges associated with our acquisitions.

As noted on Slide 5, existing market operating expenses were $200.9 million for the quarter. When adjusting for the outlined nonrecurring charges, our adjusted existing market costs were $191 million or 16.4% of sales. That represents an improvement of 54 basis points over the year earlier.

Adjusted existing market SG&A actually declined $2.1 million year-to-year despite higher variable costs tied to our existing market sales growth and growth in the fixed portion of our overall expenditures. Several factors contributed to our exceptional existing markets operating cost performance. Bad debt expense declined $4 million year-to-year. Approximately half of this improvement reflects the easy comparisons as existing market allowance for uncollectible accounts increased $1.9 million in last year's comparable quarter, while the remainder reflects a reduction in our reserves attributable to our strong collections discipline in the field. Lower amortization expense. After moving the RSG step-up amortization, our existing market intangible amortization declined $1.2 million versus the year-ago period. This results from our accelerated amortization schedules on our older acquisitions; and last, beneficial compensation accrual adjustments as we trued up our year-end incentives to our current results.

Interest expense and other financing costs increased from $12.2 million to $13.4 million in the current period. Adjusted for one-time costs would result in a more moderate expense increase from $11.8 million in the year-ago quarter to $12.2 million in the current quarter. The increase is due to higher debt position primarily as a result of our recent acquisitions combined with our seasonally higher working capital requirements. The increased borrowing levels were partially offset by our refinancing of our term loan in September of 2016.

Our effective tax rate for the quarter was 37.5% on a GAAP basis and 37.7% on an adjusted basis, which is in line with our expectations. We anticipate our full year fiscal 2017 tax rate will be 38% to 39%. In addition, we anticipate tax savings of approximately $15 million related to the RSG acquisition, which will lower our fiscal 2017 cash tax rate into the low 30s.

Our net income for the quarter was $44.7 million or $51.4 million on an adjusted basis compared to an adjusted profit of $46.6 million in the year-ago period. Diluted EPS was $0.84 on an adjusted basis compared with an adjusted profit of $0.77 in the year-ago quarter. Adjusted EBITDA for the quarter was $120 million, representing 9.9% of sales compared to $109.6 million in the prior year and 9.5% of sales. We posted modest organic sales growth and benefited from strong operating margin performance.

Next, I want to spend some time talking about our cash flows and balance sheet. As noted on Slide 6, year-to-date cash flow from operations has been solid at $74.2 million, essentially flat with the year-to-date comparable cash flow in 2016. Additionally, we also measure and track our performance in key areas, such as inventory, AR and AP, plus overall balance sheet metrics around working capital as a percentage of sales as shown on Slide 7.

Total inventory turns were 4.6x in the quarter versus 4.8x last year. Inventory turnover has been a key metric for us, and we steadily improved during the past several years. Q3 turns were slightly lower than expected as a result of 2 primary factors: first, the inventory related to the acquisitions made during the year; and second, approximately half of the sequential inventory build was concentrated in our Mountain and Deep South regions corresponding with anticipated Q4 storm demand in those states.

Our accounts receivable days sales outstanding was largely unchanged, declining from 36.3 days last year to 36.2 days in Q3. Our working capital increased to $885 million at quarter end from $721 million in the comparable quarter a year ago. As a percentage of revenue, average working capital increased to 18% due primarily to higher inventory levels coupled with the timing of our purchases.

Year-to-date capital expenditures were $31.9 million compared to $21.6 million in the prior year. If you recall, the year-ago CapEx comparisons are somewhat distorted as we have put new capital spending on hold until we had a complete grasp of our fleet needs following the RSG acquisition.

For the full year, we now see capital expenditures at 0.8% to 0.9% of sales, slightly lower than our previous expectation. Our debt leverage ratio was 3.4x. While this increased sequentially as it normally does during the seasonal period with higher working capital requirements, it is still down nicely from 3.6x in Q3 of 2016.

Now turning to Slide 8. I want to walk you through our expectations in more detail. As Paul mentioned, we're narrowing our fiscal 2017 sales growth expectations from 6% to 9% to 5% to 6%. Our updated revenue outlook adjust the year to reflect our actual third quarter revenue and a modest reduction to our Q4 revenue picture.

For Q4, our organic daily sales guidance is for approximately 6% to 8% growth. Remember, there's one less selling day, so 63 days versus 64 days in the comparable year-ago quarter. In addition, we expect acquired sales to add approximately 3% to sales growth. So collectively, we're anticipating more company-wide sales growth range from 7% to 10%.

We've seen acceleration in the fourth quarter existing market sales for several reasons: strong underlying residential market trends and easier complementary product comparisons; benefits from the Denver hailstorm, which realized a 1-month benefit in Q3; a stronger start in the July month despite the continuation of heavy precipitation in many markets and the unfavorable timing of the July 4th holiday; easier multiyear comparisons in the August and September months; and a continued favorable move in product pricing.

We're now projecting 2017 full year gross margins at 24.5% to 24.6%, which are levels in line with fiscal 2016. As we have said throughout the past 6 to 9 months, the fourth quarter comparison is particularly difficult with Q4 2016 representing the highest gross margins [ever] dating back to our IPO. We're comfortable with the solid fourth quarter 2017 gross margin, but anticipate results closer to 25% levels that still represent one of our stronger quarterly performances.

For the 2017 year, we're moving our adjusted EBITDA range -- or guidance to a range of $360 million to $370 million. As of the third quarter, we expect to again generate positive operating cost leverage during Q4. Our Q4 and 2017 EPS commentary continues to be centered on adjusted EPS, and as Paul mentioned, we're targeting an updated range of $2.15 to $2.25. This will exclude the 3 major items we've noted throughout 2016 and 2017: nonrecurring charges and certain amortization for acquired intangibles and deferred financing charges. Slide 10 reiterates our investment thesis that we discussed at our Investor Day.

And with that, I'll now turn it back to Paul before we take your questions.

Thanks, Joe. Just a little bit of a summary before we go to Q&A. All in all, a great quarter: record sales, record EPS, record EBITDA, positive growth, great resi growth, great complementary growth and solid organic growth given the weather situation, which I talked about and this deferral that we will see in the future. We remain confident that the roofing industry is in the midst of a multiyear upturn in demand and that we are well positioned with our national footprint and talented team to benefit from this improvement as well as from our internal growth initiatives. We have a great a market, a great footprint, a great team and a great future.

With that, I'd like to turn the call over to the operator and open things up for the Q&A portion of the call. Thanks.

(Operator Instructions) Your first question comes from the line of Bob Wetenhall from RBC Capital Markets.

This is actually Michael Eisen on for Bob tonight. Just a quick question on the nonresidential segment. You guys are looking for an inflection point, talking about returning to growth moving forwards, but also highlights some competitive market conditions. Where are you guys seeing strength? And what gives us confidence in kind of reverting back to that prior levels of growth?

Yes, well, we have a history of pretty consistent commercial growth. If you look at last year, there's no doubt with the milder winter, we had some pretty heavy growth that pulled for a lot of demand and then even this year, beginning of the year, we had mild winter. I think that the bulk of our pain has been seen in these northern markets. We've seen a lot of strength that down south, Texas market, et cetera. I think just given the talented team we have of sales folks, product managers and then the balance we have with achieving sales growth along with our margin goals leads me to believe -- and a bump up against the comps coming up, that we'll start to see growth again. And I said it on the last call, this -- of course, we watch everything with a very keen eye, but to me this is not concerning. I mean, this is the beauty of having 3 big product lines. So we have many arrows in the quiver so to speak as we deal with our resi growth, our complementary growth and then even within complementary, many sub-buckets and then commercial. I think we've been pretty prudent about how we attack the commercial market in conjunction with some of the weather impacted issues we've seen. Meaning, we're just not going to go bump price to get it work, and we've been able to balance that with these other product lines. And I think in time, I'm very confident, I have no concern at all because I know all the internal initiatives we have going on, that this is going to return to our normalized growth rates.

Awesome. It's very encouraging. And then if I could just get a quick follow-up, just seeing kind of the pace of M&A that we've seen from you guys historically and where we are today, I was hoping you guys could touch on what kind of product segments you're seeing the best opportunities or what the pipeline looks like for M&A and how we should think about growth across the product lines?

Yes, very good question. I alluded to it a bit in our prepared remarks. I mean, we've said it every quarter, I think, since I had been here, which is going on 10 years. And it's true. Our pipeline is very full. It's very active. We have a number of folks working on potentials, and they really run the gamut of all the product lines. I think maybe one of the questions some of you folks might have is, geez, these last 2 acquisitions have been complementary in nature. But it goes back to, again, what I've said. It's hard to predict when sellers are going to sell. And when you see -- when we see a good company and it fits our profile from a product line standpoint, I mean, we're going to go ahead and do what we need to do to bring it into the fold. And if you look in the Q in our acquired segments for the results, you can see those acquired businesses, right, many of them complementary in the gross margin result for the quarter and the operating income result even with the impact to purchase accounting when you read the Q. Very, very encouraging, close to 30% GM and then over 5% operating income in the quarter, and that's with the purchase accounting impact. So I think it's -- the short answer is it runs the gamut of who we're talking to, and it really just depends on the timing on when they come out, as it has since Bob started with the acquisitions years ago.

Your next question comes from the line of Philip Ng from Jefferies.

Heading into the year, you obviously had some concerns around the level of storm demand last year being elevated. Just given the strength you're seeing in residential and your guidance thus far, has the upside been driven by more storm activity in this year or some reroofing or new construction? Any color would be helpful.

Yes, I -- there's no doubt, I'll go back, right, last year was an interesting year. The industry data we've seen is in this $130 million range, right, from 2016. The view now is that it could end very comparable to that this year. Last year, those extremely heavy storm -- Texas storm base, not just Dallas-Fort Worth but down in San Antonio with some major storms, there was activity in other parts of the country, but that was the majority. This year's been a little bit different. We -- as I said in my prepared remarks, we continue to see a bit of that 2016 storm hangover from -- goodness from -- in Dallas. They got hit again, not as heavy, earlier this year. But then we've also seen activity in the upper Midwest or the Midwest, call it. We referenced KC and then Denver got hit a few months ago. So I think there's been more balance. There's been actually some in this Mid-Atlantic region here in the Virginia area that we're capitalizing on, right? So I think it's just more balanced. And it's probably, in total, is going to be close to last year's storm volume and that gets us to that similar year-over-year square count that the industry is referencing right now or at least the dialogue is. We still have to get through the balance of the calendar year, right, but those are the projections right now.

Yes, this is Joe. The other part that I would add too, as we've said before, last year wasn't necessarily an anomaly. The years before were really soft and lower in regards to the strong volume. So you really saw last quarter -- the last year was more normalized, and this year seems like it's coming again different, as Paul said, more widespread, but a little bit more of the traditional level.

Yes, and I think to Joe's point, it's even more normalized because it's in other locations [other than the one] in big state, which is phenomenal because we had a great presence in Dallas-Fort Worth, San Antonio, Austin, et cetera, and Houston, right? But we're seeing actually a more normal from a hail impact. Now what we haven't seen and we've referenced is the fact that we've had 2 milder winters in our northern climates, including Canada, obviously Northeast, upper Midwest, which impacts work going out further. We -- I think we had maybe underestimated that a bit at the beginning of the year, but now you definitely can see it, our teams are seeing it and it forces us to dig deeper to find work in those areas, right? But that, again, will be part of the cycle of what I'll call a deferral with this high R&R because at some point, you know we're going to have either really bad weather or these roofs are just going to fail anyways, no different than as we talked 4, 5 years ago about pent-up resi demand, which we now think has pretty much normalized and we're starting to see this outflow, including storm repair work as well as new construction, come out.

Got you. That's all really positive, but I'm surprised from a pricing standpoint, you still have some reservations. What's -- I guess, what's the push back on pricing just given the strength you're seeing?

Yes, I mean, first, I'll just say there's always a balance of achieving sales goals with pricing in any market. We still continue to be very region -- locally based in terms of allowing our branch managers and sales reps to lead the charge because they're extremely skilled, right? So -- and we have a lot of competitors. I mean, we know we're still consolidating the industry. We believe we are one of the leaders in that consolidation, and that's going to take a bit. In the meantime, we -- there's still competition out there that we have to keep a mindful eye to, and that's really what we see and believe on the pricing side. Now the good news is we've seen some sequential goodness. We've seen the flattening. And then in some of these higher-demand areas, specifically Denver, et cetera, we've seen some positive growth. So I think it's just -- not us being cautious, but just trying to forecast what potentially can happen as we move out. And all these things, as you know, are very difficult to put a very tight forecast to for the obvious reasons.

Yes, Phil, the piece that I would add as well, too, and I know you track all that stuff in detail, if you look at that quarterly trend over the last 8 kind of quarters or more, you're seeing a great pricing movement on it, right? So on a sequential basis, we're up almost 100 basis points on the residential side, 120 basis points from last quarter. And look, year-over-year, that spread has been kind of getting smaller and smaller. So the good news is, is it does appear that pricing is all moving in the right direction as we had talked about. So we're starting to get some price.

Yes, and part of that, I think, is what you've seen, and many of you know and you've referenced it, in deflationary times, it's harder. And now we're seeing in the manufacturers, no doubt you've listened to the other calls recently, they're seeing RAS going up and that just substantiates the fact that we're going to see more pressure. They're seeing the pressure. We definitely want to push price through, no doubt we do. And then I think it gets easier as inflation pops up a bit from the manufacturing side. It's just being prudent with the organic growth piece vis-à-vis the input cost. And so far we've managed it quite well.

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

So coming into the quarter, people were worried about negative price cost. And from what I can tell, you had flat roofing COGS and you had flat pricing. So gross margins really didn't get squeeze this quarter. Did I hear that right?

Exactly. That is really key point [to it as well] too. That was a big kind of concern going into it. We've said how we had began to see that pricing law shrink. It continue to shrink sequentially, 120 basis points in residential better and that whole cost price thing kind of went away and that's why our margin's pretty much where [we were not] impacted. So you're right, good observation. Correct.

And how did you hold roofing COGS flat because the OEMs have put through 2 price increases? So either you're not paying them or the timing issue and that's going to roll to the P&L in a quarter or 2, right?

Yes, I won't get into too much in detail, other than to say our input costs are pretty varied when you think about it, right, regionally based in some instances, multi-manufactured based in some instances. And we have a very good, one, relationship with those manufacturers and we have a great purchasing group. And I think we're able to diffuse that, and that's what you see as a result. So there's no future negative that you're going to see, right? It's really a function of how we do our jobs. And whether it's OC, I know who publicly reported and made comments, I mean, they're a piece of our input cost and then there's a lot of variations to that input cost all over this country, right, for various reasons: strength, size, whatever it might be, right, timing. That really is...

Yes, the other part I would add on the accounting element side of it, so we use a weighted average cost approach for our inventory and for our cost of goods sold valuation, not a FIFO-type basis. So it's not the oldest cost. It's an average of them. So if there were price increases, you'd already be seeing them in there as it goes through it as well, too.

Okay. And just quickly if I could, in the quarter, residential was up 5%, nonres was down 5%, but margins were flat year-over-year. But the mix should have pushed the margins up [is the] difference. So why were the margins flat? Or where was the offset, I guess?

Yes, the margins did -- you're right. We did get a benefit on the mix part of it, but the mix impact on the overall gross margin piece gave us probably about maybe 30 basis points. A lot of our overall gross margin gain from the acquisitions was a big win, a big win for us. We got almost a 20 basis point improvement from the acquisition side of it. So in total, that flat on gross margins, we lost around 15 basis points on price, 30 basis points on cost; mix part of it, about 26 favorable and acquisitions, about 21 favorable. So the mix piece favorable on the acquisitions. Those were the 2 that helped to offset a bit the price in cost. But still, when you're talking 15, 30 basis points, they're all pretty much flat.

And again, I'll just comment, I think that's, again, it's worth repeating. Of course, we'll take that because it speaks to the strength of the companies that we've acquired, right, and their strong gross margin, vis-à-vis their position in their markets and how they go-to-market even so quickly after coming on to the fold, so that's very good news for us.

Your next question comes from the line of Keith Hughes from SunTrust.

In your guidance you talked about -- the revenue guidance, you talked about not assuming that you get any -- I'm assuming that residential roofing pricing in the fourth quarter. Are you assuming that your input costs in residential roofing go up in the EPS guidance?

Can you repeat that one more time? You're kind of breaking up a bit. Do we assume that -- what costs go up on the...

I'll just say it again. So you had said in your revenue guidance for the remainder of the year, which is the fourth quarter, that you are not assuming that your pricing in residential roofing went up, I think that's correct. Are you assuming that your input cost on residential go up and your EPS guidance for the fourth quarter?

Yes, we -- there actually is a slight improvement in our price in the fourth quarter. Just like we've seen every quarter, the pricing's gotten a little bit better, so there's a slight improvement in the pricing implied in our fourth quarter guidance piece. That's probably what's driving the gross margin impact that you're referring to, the quarter-to-quarter, third to fourth.

But are you assuming that your roofing -- your residential roofing input cost go up in the EPS guidance for the fourth?

No, we're not.

You're not assuming, I guess. Okay. And one other question, turning to commercial. Do we have the same kind of situation going on there in commercial with limited price pass-through but input cost being up? Was that -- did I hear that correctly?

The commercial part, again, was pretty much awash on price and cost as well, too. So on the commercial piece, the price impact and the cost just about washed each other as well too. So there was -- it was very interesting. Across commercial, residential and complementary, the change in each of them from year-over-year was pretty much flat. I mean, less than 10 basis points. Price cost [disparity] in all 3.

And we've had 4 quarters of negative comps and organic growth in nonresidential that will be past that after this report. Just on a comp basis, should we assume volume is up in the fourth quarter in nonresidential?

Yes, we had said mid-singles, yes.

Yes.

Mid-singles. And that -- where do you think the market's been growing? Is there any way to tell?

It's very difficult for us to get market data. Carlisle have talked about kind of the range of mid-singles, maybe even slightly higher. But again, I won't comment on their results or even their commentary. I know [you're a student] of that. My view is that the market is in the 3% to 5% growth range going forward. So I -- for us, given the comps and given where we've come from, although part of that, too, is the fact that we had some pretty big growth in the winter quarter a few -- last year, right, that pulls a lot of work forward, that mid-singles for us, I think, is a good number for Q4.

Your next question comes from the line of Kathryn Thompson from Thompson Research Group.

I'll shift from margins because I know we've focused a bit on that in the Q&A to the top line. Could you give us additional color in terms of regional trends, also an update on your complementary product rollout, where it stands today in terms of the dollar amount? And are you still on target for 7 to 8 greenfield opportunity for this year?

Yes, I'll give a little bit on the greenfield one, and then Paul can talk about some of the by region elements to it. But on the greenfield perspective, we've gotten 4 opened so far, and there's a couple more that are in the queue yet for the quarter. So we won't get to the 10 range, but we'll probably get to the 5, 6 range for the full year when we go through them. As you know, we balance those for the most part with the acquisitions. The Lowry's acquisition keep us busy here for a bit. And as Paul mentioned, our acquisition funnel is still quite full, and we're working to do some other items there as well too. That gives you the greenfield view on it.

Yes, and from a growth perspective, the reported regions, as you look at the organic piece of the 2.2%, the 5.5% on res, negative 5.3% commercial and that make up 6.3% in complementary, it was a bit of an interesting mix. Now the Northeast was up 0.5% or so; Mid-Atlantic, a couple of points; Southeast, 3. I mentioned in my prepared remarks, Southwest was down nearly 8; and the Midwest, those 2 I mentioned specifically, up 15. The West, [up 8] -- I'm sorry, I also mentioned the West; Canada, down 16. So that's kind of the lay of the land in total. Res, it was similar. And then on the commercial side, we saw a lot of pain in the northern climates, like Canada being down almost 27%, the Northeast being flat, the Midwest being down and the Mid-Atlantic being down almost 13%. So it's kind of varied as you go through the regions.

The other item, just to pick up in regards to complementary as well too, Kathryn. We've seen really strong, consistent growth in the complementary side. And that's been all part of our focused effort and initiatives to really drive more the complementary business. So we haven't been surprised by it. In fact, we think it will continue. In fact, in addition to that organic growth that we talked about, the acquisitions, that $36 million of acquisitions, more than -- I'm looking at the numbers of the $36 million, probably more than 2/3 of it was complementary related business as well, too. So good, strong in complementary, should continue to see that growth rate be high.

Your next question comes from the line of Luke Junk from Baird.

First question, great to hear that we're seeing some positive price finally on shingles in certain markets. What I'm wondering is, are there any dynamics in those markets that would help to explain better pricing traction in certain geographies to the exclusion of others? Or would you say this is just demand related, in which case, this could be a precursor to more broad price improvement across the country?

Yes, Luke, the one part that I would add is like we've seen in prior quarters, when we drill down on that price change by all of our regions and markets, we see a combination of some up, some down, some flat. That common characteristic, which is what you were getting at, is primarily all demand driven, where we see them -- the largest kind of price increases. So we have several of our regions that have that significant year-over-year price increases across various categories. But it's really where the demand is there. It's been a lot of our storm related or high-demand marketplaces. That's where we get the price, and that seems to be the biggest underlying characteristic that's the similarity across all of them.

Yes, very consistent, actually.

Okay. Helpful. And then if I can just sneak in a follow-up. I don't know if anyone's asked (inaudible) acquisition question knowing that you can't predict anything, but just a general tone of the pipeline in discussions right now.

Yes, Luke, it's really the same. As I said -- I referenced earlier, the pipeline's full, as it has been. We're very active in talking to various companies really that represent all of our major LoBs. And it's as it always has been since I walked in the door and prior, it's really a function of when they're ready to sell, right? So we're patient. And we -- again, I'll reference, as evidenced by our acquired results, we're very selective, right, in the companies we talk to. So we're optimistic as we have been because we know and believe we have the recipe to pull in great companies.

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

I'm just wondering on nonres. Appreciate the color on the fourth quarter and the expected ramp, but I think this year's surely been weaker than you had expected and the quarter had been as well. I think you're banking on some projects coming in, particularly in the second half of the fiscal year and that was going to drive your prior guidance, that was positive. Just wondering where that stands as far as your visibility in nonres was concerned and the comfort that we have that you're going to be able to grow in line with or a little bit better than the market.

That's a really good question because I ask that about every week, maybe every day. We actually are -- the team -- the field teams are very positive about the commercial backlog they're seeing, right? And a lot of it, as I said and referenced, has been pushed. I hate to use the word deferred for the eighth time on this call, but a lot of that work has been pushed in deferred. And so now the question ultimately is with the 60-odd days left in the quarter, are we going to get it all in? I mean, we're definitely positive about where the backlog is, and we know the impact items. They're real. The 2 winters in a row that were very mild has an impact because it just does not wear down roofs no different than any other heavy rains, UV damage or hail damage. So we're pretty positive. The teams in the field are pretty positive. And what's interesting, and I've referenced this a number of times, our heavy commercial regions besides California are in the Upper Midwest, Upper Northeast, even the Mid-Atlantic, which have been impacted by this, and that's where we're feeling we're going to have some better results as we move forward.

Okay. And then just a point of clarification, just on the slide deck. When you indicate the headwinds for fiscal '17 margin expectations being the isolated competitive pressure, I just want to be clear, and we've had a lot of discussions about margin expectations and input cost expectations across the different categories, is the isolated competitive pressures, would you characterize that as broad-based for the competitive environment? Or is this really just targeted to incremental competition on the nonresidential side?

I think it's more of a -- so as we think about it, it's more focused within specific markets. It's not a broadband competitive pressure across all. Where, as we talked about with pricing, the part that's interesting, pricing in the high-demand areas, we get good pricing in it. It's really just in certain specific areas where there's a heightened amount of competition or a post storm or others where it has an impact. Isolated.

Yes, that's...

(inaudible) whether it's residential or nonresidential or complementary?

(inaudible)

That's right. It's the same. It's the same. It's always a function of how busy is that city, town, whatever it might be, a region, how much competition, who's aggressive, who isn't, our position. It's very focused on local markets, yes.

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

Yes, just a very short wrap. I just want to thank everybody for joining the call. And as always, we appreciate our investors' interest, our customers' business and of course, our employees' dedication. As I said, we're in a great market. We have a great business, and we're very, very positive about the future and what the future holds. And as always, we look forward to speaking to you again on the next call. Have a great evening.

This concludes today's conference call. You may now disconnect.