Beacon Roofing Supply Inc (BECN) 2017 Q4 法說會逐字稿

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

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

These forward-looking statements fall within the safe harbor provision of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company's financial outlook. The forward-looking statements contained in this call are based on information as of today, November 20, 2017, and except as required by law, the company undertakes no obligation to update or revise any of the 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 & 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 fourth quarter 2017 earnings call. During today's call, we will provide a detailed review of our quarterly results, update our pending acquisition of Allied and offer initial expectations for fiscal 2018.

Fourth quarter results provided a solid finish to a record 2017 year. Both 2017 and 2016 produced back-to-back years of record sales, adjusted EBITDA and adjusted EPS. Our Q4 EPS was in line with Street estimates after adjusting for the $0.01 drag tied to our late-September secondary offering. Fourth quarter cash flow was outstanding, and we finished 2017 with record operating cash flow of $315 million, 2.5x the 2016 level.

Our fourth quarter 2017 was highlighted by accelerating sales growth throughout the quarter, broad-based strength across our 3 reporting segments and strong organic sales trends across the majority of our geographies. Overall, pricing declined modestly year-to-year. Although we had anticipated neutral to modest price gains for Q4, we saw a modest decrease in residential pricing as we drove strong volume in the quarter. Our residential business outperformed for the quarter related to both sales and gross profit dollars and that more than made up for the slight drop in pricing.

In addition, core pricing continues to firm across all 3 product categories, and we've recently published a price increase as did many of our competitors. We are pleased that gross margins were in line with our guidance and operating cost generated positive year-over-year leverage for the second consecutive quarter. We will continue to remain focused on both gross margin improvements and keeping a tight management on cost. And of course, Joe will provide more color on both in his portion.

The big news this past quarter was, of course, our announced acquisition of Allied Building Products. This acquisition is truly transformative for Beacon, both for our existing exterior products and our entrance into the interior products category. We remain on track to close this transaction as planned on January 2, following highly successful debt and equity financings.

Total sales growth for the quarter ended at 9.8% with organic growth coming in at a very robust 8.2% daily rate, even with the negative impact from the hurricanes and difficult year ago hail-related comparisons in Texas. Revenue exceeded our original growth expectations by 1% to 1.5%.

While we have heard many other building products companies call out quarterly headwinds from the hurricanes, Beacon saw only a modest negative impact to our sales from Harvey and Irma in the quarter, being only a couple of million dollars. We saw most of that volume come back in October as repairs began.

We believe this favorable sales trend we saw in the quarter is a testament to the consistency of reroofing, which makes up approximately 80% of demand and the attractive economic drivers we are seeing in our business. The combination of these factors has continued to release strong previously differed pent-up reroofing demand in our residential business.

I'd also draw attention to our robust September month performance when we delivered our highest monthly daily sales growth in nearly 18 months. We talked last quarter about higher rainfall being a disruption to our business throughout Q3. The September month by contrast experienced drier national conditions that made for a more favorable work environment for our customers, and this in turn helped produce the very strong September month. I bring up this example to reinforce the long-term consistency of our business while recognizing that there can be and will be month-to-month and quarter-to-quarter weather-impacted variations.

Now a little bit on our LOB trends. Residential roofing produced strong organic daily sales growth of 9.3% on top of a prior year strong growth rate of 9.1%. This segment has posted positive growth in 14 consecutive quarters. Complementary products delivered a strong 7.3% daily sales growth in the quarter. Growing our complementary business remains a key strategic focus area for the future, both organically and through acquisitions. We believe this highlights the benefit from our regionally focused efforts growing this important product category.

While we are certainly excited about the strong performance of our 2 residential-centric categories, we are extremely pleased with our nonresidential roofing segment. Commercial roofing grew 6.5% in the fourth quarter, solid performance. 6 of our 7 regions posted flat or positive growth in commercial and overall growth increased in each month during the quarter. We're also pleased by the pricing stabilization within commercial roofing and that we've been able to keep our commercial pricing and product cost in close parity the past 2 quarters.

As mentioned during the last call, nonres comparisons remain easier in 2018, and we expect this benefit -- to benefit growth. On a geographic basis, we saw 6 of our 7 regions post positive growth during the quarter. Our strongest region was the West, which delivered nearly 24% organic growth, fueled by double-digit growth in all 3 product lines. We also saw strong double-digit increases in Canada, the Midwest and Mid-Atlantic markets. Canada's growth was also double-digit across all 3 lines of business while the Midwest was driven by strong residential category growth in part representing storm-related benefits within certain markets.

In terms of gross margins, we ended Q4 with gross margins of 25%, levels in line to modestly above our previous guidance commentary. For the full year 2017, gross margins improved slightly versus 2016.

Net pricing remain competitive in certain markets, and we responded accordingly. Remaining competitive in our markets was a contributing factor to our stronger revenue performance, as I mentioned. In our stronger demand markets, including our West Coast and Mountain regions, we saw nice improvements in pricing. As a company, our focus remains geared towards maintaining or expanding gross margin percentage and driving revenue growth on a company-wide and region by region basis. But we will always be flexible in response to localized market conditions.

As previously mentioned, we announced the 5% to 8% price increase across our entire product portfolio at the end of September, and, as you would expect, it remains too early to determine the market's acceptance of the increase. And again, we'll continue to balance our end market pricing with our organic sales growth plans.

And for a second straight quarter, we were able to drive positive operating cost leverage during the period. Adjusted operating expenses improved approximately 20 basis points versus the year ago fourth quarter. Joe will discuss these margin-related items in greater detail during his portion of the call.

And in terms of new branches or greenfield branches, we opened up one additional branch early in the fourth quarter in Canada, bringing the full year total to 4. While our long-term plans continue to include new branch openings, we anticipate a more conservative greenfield strategy during fiscal 2018 as we absorb the new Allied locations and work through the integration.

Before I talk about our announced acquisition of Allied, I want to remind investors that we completed 5 acquisitions for a combined sales run rate greater than $130 million during fiscal 2017. These businesses bring attractive gross and operating margins to Beacon as well as improving our geographic penetration and product portfolios across the U.S.

Since the formal announcement related to Allied, our Beacon leadership team has been busy implementing the preliminary stages of our integration. Our early meetings with the Allied team have been highly productive with strong progress being made as we approach our January 2 close. I continue to be extremely impressed with the quality of the Allied talent. The 2 companies share a common culture that's based on intense customer focus, teamwork and delivering strong financial results. And as I've said previously, this is truly a transformative combination.

And as a reminder, the internal and external team members supporting us during the integration phase and after close are nearly identical to those that assisted Beacon during the RSG integration, and the majority of our synergy targets are based heavily on the cost benefits realized in that combination. We continue to remain comfortable with our $110 million synergy target.

In terms of our new financing, we are appreciative of the support many of you on today's call have shown us through your participation. Joe will summarize where we ended up. Overall, we had excellent results.

And as a reminder, our pro forma debt leverage upon the closing of RSG was 4.3x. 2 years later, we have been successful in reducing our net debt leverage to 2.7x when excluding the recent equity offering proceeds.

Now I'd like to turn your attention towards our initial 2018 guidance. We are responding to suggestions from many of you in transitioning our future adjusted EPS-related disclosures to remove 100% of our intangible amortization expense going forward. We believe this approach is consistent with many other highly acquisitive public companies. As a reminder, our approach for the last 2 years has been to remove the incremental RSG amortization only. We believe this new approach provides a clear line of sight for investors analyzing our business and is much more similar to the way we evaluate our own performance internally.

For 2018, including a 9-month contribution from Allied, we are anticipating total sales of $6.6 billion to $6.9 billion, adjusted EBITDA of $560 million to $600 million, and adjusted EPS of $2.95 to $3.25. For comparison purposes, Beacon produced adjusted EPS under our new methodology of $2.68 in fiscal 2017. Investors should view this $0.40 of estimated improvement in 2018 as being approximately $0.15 to $0.20 from assumed growth in our core business and $0.20 to $0.25 attributable to Allied.

And now, I'll turn the call over to Joe for additional color.

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 fourth quarter slides that have been posted to our website. In my prepared remarks, I'll go into greater detail on gross margins, operating expenses, key balance sheet metrics and elaborate on our initial fiscal 2018 outlook.

Before going any further, I should make a key point about our adjusted operating expense and adjusted EPS disclosures. Our fourth quarter adjusted commentary relates to our previous 2 years approach of excluding incremental RSG amortization from both SG&A and from our adjusted EPS disclosures.

However, as Paul noted earlier, we have listened to the feedback many of you have provided and, on a go-forward basis, our adjusted disclosures will exclude all intangible amortization in addition to other onetime acquisition-related items.

When I talk later in my prepared remarks about our 2018 guidance, my adjusted EPS references will be based on exclusion of all amortization.

For the quarter, we reported adjusted EPS of $0.93, which compares favorably with adjusted EPS of $0.88 in the year-ago period. We lost $0.01 in Q4 tied to dilution from our secondary offering. After adjusting for this difference, our results were identical with Street consensus, which, for the most part, did not include the secondary. Our fourth quarter adjusted EBITDA increased to a record $132.6 million from $127.5 million in the year-ago period.

Regarding our monthly sales trends, they strengthened every month. July daily sales increased 5%, August increased 7.4%, and September jumped to 12.3% growth. Weather did have some impact on the flow of activity throughout the quarter. Greater participation created lower available workdays for our customers during the early parts of the quarter but conditions were generally more favorable for roofing work during September. In addition, the impact of Hurricane Harvey produced a slight unfavorable impact on overall August sales but a slight benefit to the September month.

Importantly, our 3 primary business lines, residential, commercial and complementary, each saw their monthly growth rates accelerate over the course of the quarter. October month produced a daily existing sales increase of 4.3%. The month was aided by a slightly positive contribution from incremental hurricane business in Texas and Florida, but negatively impacted by greater rains year-to-year.

Now on to gross margins. We're very pleased with our fourth quarter and 2017 full year gross margins. For the year, we produced a modest gross margin increase despite slightly slower organic sales growth versus the 2016 year and also some challenges in striking a balance between market deflation and supplier's attempt at multiple price increase announcements. We're very proud of the work our purchasing team accomplished in 2017 as well as the pricing discipline shown by our regional and local leaders in the marketplace.

Worth noting is that in 3 of the past 5 quarters, Beacon has delevered gross margins above 25%. By contrast, the company produced only 3 quarters above 25% during the previous 46 periods. We've clearly made positive structural improvements on the gross margin front as we realize attractive economies of scale in our purchases.

Our overall product mix had a more neutral impact on our gross margins than in recent -- other recent periods. Residential roofing represented 54% of sales, nonresidential roofing was 29% and complementary, 17%.

Direct sales represented 13.8% of sales compared with 14.4% in the comparable year-ago quarter. Beacon's overall pricing declined approximately 30 basis points, with residential roofing declining between 100 and 150 basis points, and commercial up nearly 30 basis points. Similar to Q3, our complementary products category experienced solid price improvement and gained 200 to 250 basis points of positive price. We continue to see positive pricing trends in markets experiencing strong levels of demand, while other softer demand region saw more challenging prices.

Beacon constantly evaluates the prevailing price dynamics on a local market basis and adjusts our practices accordingly to drive the greatest benefit for gross profit and operating income dollars.

Overall product costs increased approximately 50 basis points during Q4, with a 250 basis point increase in complementary products being the primary driver. Residential roofing cost decreased around 60 basis points, while commercial roofing cost decreased approximately -- or increased, excuse me, approximately 50 basis points year-to-year.

Moving on to operating expenses. Total operating expenses were $235.3 million or 18.2% of sales. Excluding nonrecurring cost of $19.3 million, adjusted operating cost was $216 million or 16.7% of sales. This compares favorably to a year-ago fourth quarter adjusted operating expenses of $199 million or 16.9% of sales.

The $19.3 million of nonrecurring cost includes $8.3 million additional amortization for the acquired intangibles from the RSG acquisition and $11 million of other nonrecurring charges associated with our acquisitions. Including -- included in that is substantial cost tied to the planned purchase of Allied, all of which are in line with our previous estimates.

As noted on Slide 5, existing market operating expenses were $224.8 million for the quarter. On adjusting for the outlying nonrecurring charges, our adjusted existing market operating costs were $205.6 million or 16.5% of sales, representing an improvement of 50 basis points year-over-year.

While we were pleased with our second quarter -- our second consecutive quarter of favorable cost leverage, SG&A came in above our earlier expectations. The primary driver to the higher operating expense was variable cost tied to the stronger expected sales and gross margins. Rising diesel cost have also been a factor in our higher operating cost the past several quarters, with fuel prices up double digits year-to-year. We also had a favorable insurance accrual last year that did not recur this year. Excluding all these items, our operating cost leverage would have been even more pronounced during Q4.

Interest expense and other financing costs decreased from $16.9 million to $13.5 million in the current period. Adjusted for one-time cost would result in a decrease from $14.8 million in the year-ago quarter to $12.4 million in the current quarter. One-time cost tied to repricing our term loan B facility last year represented most of the year to year decrease, although, in addition, we saw benefit from our equity raise that allowed us to pay down debt. All of this goes combined with even a stronger cash management program. It also should be noted that we completed several important debt financings following quarter end that will put us in an attractive position to close the Allied purchase and retain significant interest coverage and financial flexibility going forward.

In October, we completed a $1.3 billion senior notes offering at 4 7.8%, and we secured a new $970 million term loan B facility at 3.6%. And also, a $1.3 billion ABL facility.

Our effective tax rate for the quarter was 38.9% on a GAAP basis and 38.7% on an adjusted basis, which is also in line with our expectations.

Next, I want to spend some time talking about our cash flows and balance sheet. As noted on Slide 6, full year cash flow from operations was very strong at $315.2 million, levels 2.5x that of 2016. Some of this was a result of the timing of our accounts payable payments, coupled with the move of our year-end physical inventory, both of which provided a onetime favorable impact. But even without that impact, a very strong cash quarter end year.

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 improved and were a strong 5.4x in the quarter versus 5x last year. Inventory turnover has been a key metric for us we've steadily improved during the past several years. The excellent results were driven by a strong revenue trend to finish Q4, but should be considered even more impressive given some build in inventories in our storm-impacted markets.

Our accounts receivable days sale outstanding was unchanged versus the comparable period last year coming in at 34.8 in both periods.

Our working capital increased to $825 million at quarter end from $765 million in the comparable quarter a year ago. As a percentage of revenue, average working capital increased year to year, but was flat at 18% on a sequential basis, although, if you take out the excess cash from our secondary offering, which we're holding just for the acquisition, the percentage was closer to 17.4%, which is probably a more appropriate comparison.

Year-to-date capital expenditures were $39.8 million compared to $26.3 million in the prior year. Our CapEx spending has been favorable in each of the past 2 years at 0.6% of sales in '16 and 0.9% in 2017. The RSG transaction resulted in branch closings and consolidations, which provided excess fleet and a reduction in new CapEx needs.

Our debt leverage ratio improved dramatically from 3.4x in the third quarter to 1.8x. Even after you exclude the benefits from our secondary stock offering, our leverage would have fallen to 2.7x levels exceeding our earlier public stated targets of 3x. We've made great progress.

Now turning to Slides 8 through 10. I want to provide more details related to our initial 2018 outlook. In many respects, our additional disclosures are in response to your comments. We're hopeful that today's added color will help clarify this for many of you. It is worth repeating what Paul previously mentioned. We're also transitioning our adjusted EPS approach to a methodology we hope will be similarly analyst- and investor-friendly. Following the approach implemented by many other acquisitive companies, our supplemental non-GAAP adjusted EPS will exclude one-time nonrecurring items and also all of Beacon's intangible amortization costs. We believe this will facilitate more consistent comparisons of operating results between our acquired and existing operations as well as to our industry peers, who are either acquisitive or nonacquisitive. We are anticipating 2018 sales of $6.6 billion to $6.9 billion, representing expected sales growth rate of 51% to 58%. For the pure legacy Beacon organic growth, we're starting with a range of 4% to 8%, and we expect an incremental $50 million to $60 million to come from the run rate of our 2017 acquisitions. And then for Allied, we expect that their 3 quarters of contribution will add $2 billion to $2.1 billion to Beacon Sales. Regarding our organic assumptions, there are a couple of points I'd make. The wider range reflects weather-related uncertainty with the upcoming winter, the challenges of quantifying the ultimate contribution from hurricane demand and potentially difficult hail-related comparisons next spring. It also should be noted that we're assuming neutral pricing in 2018. And while we hope this will have an upward bias, we believe it remains more appropriate to be conservative.

By line of business, complementary products could represent our strongest area in 2018 given macro conditions and also, our internal programs and focus. For commercial, we expect that the improved trends seen in this fourth quarter will continue into 2018, and we expect continued growth in residential roofing.

As noted in Slide 10, we're anticipating improvement as a percentage of sales in both our gross margin, a range of 25.2% to 25.5%, and adjusted operating expenses, 17.7% to 18%.

In terms of profitability, we're estimating 2018 adjusted EBITDA of $560 million to $600 million. And under our updated definition of EPS, we project a range of $2.95 to $3.25. For comparison purposes, 2017 adjusted EBITDA was $364.4 million and adjusted EPS was $2.68.

I'm not going to go through all of our line item commentary, but we have provided fairly extensive details in our appendix, Slides 12 and 13, which reconcile our GAAP net income to our adjusted EPS. It also provides some detail on amortization, depreciation and interest expense.

Additionally, Slide 18 provides a reconciliation of our historical GAAP and EPS to our adjusted EPS numbers. Importantly, our Allied synergy assumptions and previous accretion guidance remain intact for the first full year of contribution. However, given our anticipated January second closing date, the 2018 fiscal year includes only 3 quarters of Allied in our assumptions.

Now I'll turn it back to Paul before we take your questions.

Thanks, Joe. We're extremely excited about the future, in particular, both with the integration of Allied and the combined companies growth and profit improvement opportunities.

Beacon has a proven track record of acquiring and integrating very good companies, both large and small. We remain extremely well positioned to be a leading consolidator in the fragmented roofing and building materials market. We also have entered related verticals, including insulation, waterproofing and, with the closing of Allied, interior products. These adjacent categories provide a larger potential market opportunity where we will have a similar ability to execute our proven roofing market growth strategy.

2018 will be a year where we focus intensely on combining 2 great companies, and you can also be certain that we will stay very focused on running our base business. 2017 was another very solid year for Beacon, and I'm very proud of our team for their continued loyalty and commitment.

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) And the first question comes from the line of Keith Hughes with SunTrust.

I guess, on the 2018 guidance you have in the guidance, $30 million to $40 million of synergies being realized in fiscal '18, I assume that's over 3 quarters, so about $13-or-so million a quarter. Is that the pace you think you'll see going into fiscal '19, kind of $110 million number? I'm just kind of figuring out how the pace is going to come during the life of the integration.

Okay, Keith, good question. And yes, you're correct on the $30 million to $40 million is for the 3 quarters that they'll be under our kind of ownership. If you take another quarter in there, you'd get to roughly that $55 million number, which is what we said we'd be after 4 quarters for the full year, and then I would just continue to ramp that up in a similar almost straight-line approach for the full year, because by the end of that second year, as we mentioned, will be to the $110 million number. It's very similar how they're going to pace to how the RSG synergies paced. You should see that same trend with it.

Okay. And the adjustment in terms of EPS, well, the reported year's $2.60 sort of, whatever, the difference or the change there is you're excluding all the amortization from RSG, is that correct?

Correct. We're excluding all of our amortization, Keith. So previously, we just excluded the incremental amortization. Now what we're doing is we're taking out the Allied incremental, the Allied base and also, all the rest of our amortization as well, too. So you won't see any amortization numbers in what we provide. It will be totally in the adjustments.

And on the '18, again, guidance here of EBITDA and revenue, it looks like kind of a mid-8 type number. Very similar to what we're going to see or what we saw here in 2017. I'm a little surprised it's not a little higher, quite honestly, given you have another year of core growth. Is there any other sort of offsets and with the synergies, too, coming in, is there any sort of offsets you're assuming within those numbers to the existing or Allied business?

Sure. Yes, it still is all in pace with what we talked about because this year, we'll be about 8.3%. Our base business does add 10, 20 basis points on top of that. Then with the Allied business, which is a little bit lower than that to start, so their EBITDA rate is slightly less than ours especially for the 3 quarters. That hurts us a little bit. You add the $30 million to $40 million in synergies, and that gets you to that 8.5%, 8.6%, 8.7% kind of EBITDA rate. Now that'll continue to grow when you add one more quarter on it, so an additional pacing of the synergies you'll get closer to 9% for a 12-month period of time, which is what we've been talking about. Then when you get to the second full year, you'll be right at that 10 number, which is what we described before. It's really just the pacing a lot of the synergies and getting the Allied business on board.

Okay. And a final question in your outlook for the -- for '18 for the existing Beacon business, which you discussed earlier. What -- for the residential roofing market, what do you think for, I don't know if it's fiscal or calendar '18, however you want to do it, what do you think that market looks like going into next year?

Yes, I think, Keith, it's -- well, a lot of it is going to depend on what happens with the normalized storm volume. I mean, that's always the wildcard. I'd like to think we’re going to see low single-digit growth. And then as we've talked about, we want to grow above that, right, to position us in that midrange on the resi side. That's probably the best we can do right now without knowing what will happen, especially during the all-important hail season. We will have some carryover from Denver and Minnesota storms, but Texas is also waning, and then we'll get a bit on the Florida piece, but not an awful lot.

Before we go to the next question, I did want to raise a point, something just to mention. We understand from some feedback, there was some technical difficulties with the presentation on our website that it couldn't open. For anybody that's been trying, it has been corrected, so it should be up and running and working now. So just a FYI.

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

So maybe, talking about pricing, the September price increase, I don't recall, but is that a normal practice to have this kind of Q3, Q4 price increase? And if it's not as I remember, what was really behind the decision to raise price in September?

Yes, I think it has been, the last few years, somewhat normal for the manufacturers to put out that increase. This year, the extra fuel was some of the storm volume that we had seen -- continue to see in a couple of the markets like Denver and Minnesota market. And then of course, the hurricanes had a bit of an impact that is going to impact the number of the distributors that are in those 2 markets, both Houston and, more so, in Northern Florida. So yes, it is normal. [Has been].

I was more speaking for you guys, Paul, sorry, not to manufacturers. But have you guys -- maybe my memories failing me, but have you guys followed what these fall ones in the past?

This one feels -- it's been mixed. This one, though, feels definitely firmer for us. I mean, as I said in my prepared remarks, we're going to have to wait to see exactly what happens. But given the -- I mentioned the pent-up coming out. Our ability and desire to continue to grow organically, I mean, I feel more comfortable, but it's going to take time for this to come out. That's all on the resi side.

Okay. All right. And then maybe a little bit about the assumptions for '18. I notice you have Allied growing only low single digits. I guess the thought there was maybe there was some storm benefit, both on the roofing side but also on the wallboard side. Can you walk through why the lower assumed organic growth rate or growth rate for Allied versus the core Beacon?

Sure. On the Beacon side, when we look at are organic growth rate, it's not just the market assumptions, but we've had a lot of initiatives going on organic growth over the last 12 months. Everything from complementary sales that we've been driving, through the work we've done on our e-commerce platform, to the sales efficiencies, the work we've done through our national accounts programs and other. All of that's combined to drive a little bit higher than market. And as you know, we've seen 200 to 300 basis points, on average, higher than normal market growth. So on the Beacon side, it's pretty easy to use a higher growth rate. The Allied side of it, we just went with the core assumption on what the market growth levels are. We didn't put as much incremental growth in there at this point. As you know, we're still kind of getting into that business. We actually don't actually own them quite yet. But after January, as we get into more detail with our numbers, we'll be able to provide you with some more input on that. This was probably our first pass at it, Matt.

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

First off, as we're looking to the first quarter of fiscal '18 where you put all this financing in place but you don't receive the benefits from Allied sales, could you provide us with some guidepost around interest expense, tax rate and share count for that first quarter?

Sure, you bet. Dave, just to give you a little bit more feedback on it. So first, on the interest part, yes, we did do the financing, but the way that the deal is structured, we'll be reimbursed on the interest cost that are incurred during this quarter for that amount. So really, the interest expense impact will be neutral on us. So don't think of any incremental interest event. It will just be just our base Beacon interest expense, as it has been previously. Second, your question was kind of in regards to the share count. Really don't include anything around the preferred because they're not issued until January 1. So as far as the first quarter goes, assume that it's just our 61 million plus the secondary that we did, which was roughly another 7 million shares. So assume somewhere around 68 million to 69 million. I think we have in the document 69 million as the shares to use during the first quarter.

Okay. And then second, as I'm looking through the 2018 guidance and looking at the midpoint, just making sure my math is right here, so the midpoint of revenue is about $6.75 billion. If you take the Slide 10 and the midpoint there of gross margin and adjusted operating expense, you end up with effectively an EBITDA number of about 7.5%. And then if you add in the $55 million of depreciation that you have in a subsequent slide here, I'm coming up with an EBITDA number that would be closer to that $560 million level. I'm just wondering, number one, is that math, correct? And number two, if $560 million EBITDA sort of represents the midpoint of all of these ranges, what would represent upside to that $600 million?

Well, I think you $560 million is a little low. The other piece would be the synergies in there. So keep in mind, you've got another $30 million to $40 million of synergies on top of it. So that should get you closer to the middle point of that EBITDA range, which is somewhere around $580-ish million, so that should kind of get you closer, which is that 8.5%, 8.6% number that we were talking about previously. And as far as upside potential to that number would go, Dave, that's really all, clearly, the standard increases of everything from how organic growth trends, impact of storms, weather conditions and variability they may have on it plus, obviously, it's on the synergies as well, too. It's really early. We're sticking with $110 million. Of course, as you know, we always push for a higher number, but $110 million is our goal. That also could push us to the upside as well.

And Dave, we also assumed flat or neutral pricing for 2018 just given what we've seen in the last year, even though of course, we're going to continue to work hard to increase pricing, we want to put in something that's realistic as we -- especially, as we drive sales and gross margin dollars up.

And the next question will come from the line of Ryan Merkel with William Blair.

So just to start, sales accelerating through the quarter was nice to hear. I think you said September was up 12%. Just wondering, is underlying market conditions improving? I know you mentioned Harvey sort of hurt August and helped September, but it seems to me that underlying demand maybe sort of improving here. What's your read?

Yes, I mean, we're seeing some good trends that would validate your comment, especially on the res and complementary. I mean, commercial, I think is going to have, as Carlisle has alluded to, should have a reasonable year next year in terms of close to mid-single digits, maybe a little less. We have the comp benefit. I think though, when you look at all the economic indicators, and then the pent up on the res side, and then the pent-up on the res side and then our push on complementary as well, as we're going to continue to push on commercial, yes, I think that it's much more positive than it was 3 or even 6 months ago, in my view.

Okay. That's great to hear. And then secondly, as it relates to the guide on pricing, I get it, be conservative, have it in as neutral. But if you were to get some of that 5% to 8% increase across the portfolio, how much might that add to the EPS guide? Is that something you have handy?

No, not off the top of my head, actually, on the pricing. Because you're asking for, again -- say that one more time, Ryan.

Incremental price.

Well, you're assuming neutral, but I think you said you put through a 5% to 8% increase across the portfolio.

Yes. There's a lots of puts and takes, as you know, Ryan, between that and the material cost and what we're going to see on the other side of it coming in from the manufacturers, which is one of the leading push -- pushers, let's say, of our price actually going up in the end market...

$6.7 billion times 1% is a pretty big number, if you could get it, of course. But as Paul said, it's kind of early to tell on that one. The good news is on the price -- the good news on the price is when you really look at kind of price changes that you have seen in terms of we always report. We gave you our residential, commercial, and complementary pricing. We've had 3 quarters in a row now of gaining price on complementary. This is the first quarter on commercial where it's continued to get better. And commercial turned the corner this quarter and got positive as well, too, pricing. The only one that's still negative is the residential one, which is better than it was a few years ago but it's still at a negative number to it. Fortunately, we're able to offset some through some, of course, cost improvements in there. But the trend, you get 2 of the 3 all heading in the right direction.

But certainly, Ryan, we could model, and you could model any change up on a net-net price basis against the neutral and then come up with that net impact would be net income or EPS impact would be, Ryan.

Okay. All right. And then just lastly, the cash EPS number under the new definition for '17 is $2.68, and then bridging to the $3.10, the midpoint of guidance. What's the bridge there? Is that all Allied? Or is there an incremental amortization add back in there as well?

So you're going from the $2.68 number you said? To...

To the $3.10, which is the midpoint of the EPS guidance, yes.

Yes. So that $2.68, that's the Beacon one. So that's the Allied addition to it. It's also the addition of the synergies piece to it. And that would be it. Just those 2 items because the $2.87 number already is adjusted for the all the amortization pickup. It's taken all of the amortization out in the $2.87. So it's really just the additional amount of the Beacon. Well, there is some incremental, obviously, Beacon EPS as well too. So the Beacon improvement and performance year-over-year, Allied synergies.

Okay. So just to clarify, so Allied is adding, I think, you said $0.25 to $0.30. Is that right? Did I hear that right, in '18?

Within that range, correct, yes.

And the next question will come from the line of Philip Ng with Jefferies.

Pretty encouraging to see mid-single-digit growth in commercial, but curious, have you seen that competitive activity in that business kind of level out after a choppy year? And can you give us a little color on how your visibility in commercial was? Has it improved? Has it gotten worse? Just curious just because it's been a -- it was a tough year to kind of forecast growth in that business.

Yes. I mean, from a visibility standpoint, it definitely has gotten better. I think from a competitiveness, there's still -- we still have regions, of course, around the country, many that are extremely competitive between whether it's competitor -- competitive distributors or manufacturers. And I think that's going to continue, right? We're going to be gaining an awful lot as we bring Allied into Beacon. We have a very strong commercial business, and I think that's going to help us. But time will tell, obviously. We're planning on not only just the cost synergies but to figure out how we can drive sales synergies on all of our major product lines. But from a competitiveness standpoint, I think, we're still going to see -- continue to see it on, really, all 3 of our major lines. That's the way it's been, and I don't expect any great step function change. Where we see differences, of course, is where we have a hyper demand in some of these hail regions.

Okay. That's helpful. And then on your pricing guidance, I guess, my question is less so from a revenue standpoint. You're assuming neutral, but on a price cost standpoint, because the manufacturers obviously announced some price increases as well, are you assuming that price cost to be neutral and implicit in your synergy guidance for 2018? Are you accounting for any procurement savings that you could potentially realize next year just by being a much bigger player?

Yes to both of those. So on the first question, I kind of separate them in 2. On the pricing part, exclusive of the synergies, we're assuming the price cost is net neutral. But our gross margin does improve year-over-year because of some of the synergies that we'll roll through in the 3 quarters that we own Allied.

Okay. But there are some implicit procurement synergies in that number?

Yes. Yes, there are.

(inaudible)

And just one last one for me. Can you kind of help us annualize the revenue or EBITDA contribution on Allied on a full year basis, Joe?

Sure. That has stayed consistent with what we talked about the last go-round on the announcement. So our incremental EPS number was that $0.50 to $0.60 of incremental EPS from it. And from a EBITDA perspective, which was the second half of your question, I think the Allied piece of it pre-synergies, is approximately in that 150 -- well, for a full year, it's little over $200 million. $210 million, I think, was a number we talked about on the acquisition, and that hasn't changed. That's for the full 12-month period, which is, I think, what you asked, right?

Yes. So is a simple like just thinking of taking that $200 million and growing it like 2% and impacting on the synergies that you talked about? Is that a good way to think about it?

Well, that's -- yes, but keep in mind, there's the timing of it, right? So we're only going to own Allied for 3 quarters of this year, right? So you got to adjust the 9 months piece of it as well, too. So we'll only get 9 months of it this year.

And the next question will come from the line of Garik Shmois with Longbow Research.

Just wondering how we should think about smaller bolt-on acquisitions into fiscal '18, and if there could be an opportunity. I know you're busy integrating Allied, but could that be an opportunity for growth?

I mean, I -- no doubt. As we get through closing, we're going to need to focus all of our energy through, I'd say, a good part of the year on Allied and less so on bolt-ons. So there's still always the opportunity, right? We just want to make sure we stay focused on what we're supposed to deliver with the integration, both on the sales and an EBITDA -- from an EBITDA standpoint. But we continue to talk to folks. Our pipeline is as active as it's ever been. And it's not out of the question in a 12-month period that we would do a small bolt-on.

Okay. Switching on the residential cost, in the quarter. I think they were down about 60 bps, and I understand that you're expecting neutral price cost in fiscal '18. But all else being equal, how should we expect residential costs to trend from this point forward? Would there be some, I guess, layering in from any inflation earlier in the year? Is there a chance for residential costs to, I guess, to the previous question, continue to be favorable?

Yes. This is Joe, I'll take that one. I'm going to answer this exclusive of all the synergy part of Allied, right? So let's leave that out of it because, of course, that will have a favorable impact on the whole thing, but let's put that aside. Excluding that, if you look at the current quarter, basically the cost versus price was pretty much neutral on both commercial and complementary. So the cost impact versus the price impact pretty much offset each other. So on commercial, it was kind of a net neutral. Complementary, a net neutral. Residential was the only one where, basically, the price loss was more than what we were able to get on the cost piece of it. So therefore, we were minimally, 50, 60 basis points kind of net unfavorable for the quarter. If you fast-forward that to next year, kind of our assumption is that that's going to be flat, right? So you can call it a conservative assumption if you want to think that we're going to get more price that we don't have rolled in here, or you can call it an at-risk assumption if you think we're going to have more kind of cost that we won't be able to pass through. We tend to take the approach that we'll be able to offset those 2, which, if you look over a longer period of time, we have been able to.

And I think really, on the resi side especially, the determining factor will be actually do we actually see the market accept any price increases because, I think, if you -- if we do, you'll see the cost piece probably tick up just a tad, right? But it's hard to predict until we see what's going to happen in the end market as we move through these next 3 or 4 months and then into the spring.

Got it. And then lastly, just a clarification on the slide related to CapEx as a percent of sales coming down in fiscal '18, is that inclusive of Allied, the 0.6% to 0.8%? Or is that on a pro forma basis?

Over the longer term, the 2018 we got in here, CapEx, yes, 2018, 0.6% to 0.8%. Yes, that would include the Allied piece in there, so that's a pro forma with the Allied numbers. Because, as you know, we traditionally run somewhere around 1% of sales, and our expectation is with Allied, we'll be able to work that down next year, similar to what we did with RSG. So yes, that includes RSG -- or excuse me, Allied. That includes the Allied acquisition.

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

Nice way to finish out a year. It's a pretty exciting time for the company. I was hoping you could give me a little bit more color about your commentary. It sounds like you're very bullish on complementary, if I'm hearing you correctly. Mid-single-digit organic growth. It sounds like commercial side of the business is turning the corner, and it sounds like you anticipate that continuing to next year. And you sound strongly positive from a volume side in spite of the competitive marketplace on resi. Like if you had to say between 1 and 10, where are you for these segments in terms of your optimism?

You always ask the tough question. Well, from a -- my view, from a 1 to 10 in all of these, I mean, we're -- I'm very confident, call it a 7 or an 8, because we have a lot of growth plans in place. We have a lot of different levers we're going to attack, continue to attack, like complementary, right? We have not only sidewall product like siding and windows, but we have the insulation piece, we have waterproofing piece that we're going to continue to focus on. And then the same really on commercial as those -- as our comps, as we bounce up against the weaker comps from last year and then just the amount of energy we're putting on the commercial piece to grow it. And then, of course, just to tag along, not so much the acquired markets, but Allied, just presence commercially. And then resi, as I've talked, I just think there's a lot of pent-ups. So, yes, all of us are extremely confident of our ability to drive growth. That's why we put in, Bob, and everyone on the call, I'll repeat it again, that's why we put in the neutral pricing. Of course, we want to drive pricing, but we want to drive growth -- sales growth organically and gross margin dollars even more, right? So we're going to balance it in different markets to make sure we achieve that end. And then as demand continues to firm, we'll just see what happens with pricing as we go through the year.

Yes. Nobody's got a crystal ball on the price side, I get that. It sounds like there's pressure on OpEx going into next year and you're going to have modestly better gross margin. And it's incredibly helpful, thanks for the detail for next year on your top line as well. How should we -- within the framework you gave us, can you give us a little finer precision in terms of segment operating margins? And it's just all the pieces fit together. Directionally, it's just a little bit unclear with some of the dynamics on price cost, plus, in your overlay, you mentioned procurement benefits plus the 50 to 60 basis point adverse price cost in resi this quarter. Is there any guidepost you guys could give us for segment operating margin performance?

The answer that I would give you there, Bob, is it's no different than what we've traditionally seen. As we've always talked about it, we get higher gross margins on the residential versus the commercial business and our complementary is in the middle. But when you get the cost structure, the SG&A in place to support those, you end up with pretty comparable kind of operating income numbers, which is what you're asking, between our residential, commercial and our complementary business. And that overall relationship hasn't really changed much. It's moved around a little bit, but not too much. So my answer would be it's been consistent. What we're looking at for '18 is pretty consistent with what we've seen in prior years of how those segments line up. Or categories, rather. Not by segments, but product categories.

And last question. You've got a predacious amount of free cash flow, the best I've ever seen the company have. You're obviously putting greenfield on hold, really slowing it down while you do the integration, which makes a lot of sense. What are you going to do like with all this free cash flow coming in? And as you work through the cycle, you're giving us a bullish view on volumes next year. Sounds like your margin structure, intact, on a growing top line. You've got line of sight visibility to EBITDA. You're going to put up a lot of free cash flow next year. What's the program in terms of capital allocation given where we're at?

I'll answer your question on the capital allocations, and really, our priorities kind of haven't changed. So we are a -- we -- don't think about us paying a dividend, it won't happen. Don't think about us doing share repurchase, it won't happen. Our focus is going to be continue to invest to grow this business. But our first priority right now is like going to around our debt, right? We have this $3 billion of debt. I told you the great details. We've got a great program. Our execution on our debt and our capital structure was phenomenal, went exceptionally well, great rates on it. But with that, that's going to be one of our focus is, is working on continuing to pay down the debt, and we'll also watch selectively, as Paul said earlier, for opportunities to grow the business. While there are some small amount of acquisitions, there are a small amount of tuck-in acquisitions or small amount of greenfields, we'll continue to grow the business.

And I think we've proven, from a net-debt leverage standpoint, that we know how to take that number down, right? As I mentioned in my remarks, 4.3x down to 2.7x. So we're going to focus on that same thing, and then that will give us the fuel to do what we've been doing for -- since we went public, and that's to continue to consolidate market.

And the next question will come from the line of Kathryn Thompson with Thompson Research Group.

Just first, on hurricane and fire throughout the U.S. Now that we have some distance from Hurricanes Harvey and Irma, could you give a little bit more color on the impact at Beacon other than the $2 million headwind you had in the quarter? And then following that, given Allied's strong positions in Florida, Southern Texas and Northern California, could you also give some perspective on potential storm contribution to the Allied network, particularly their interior products division and the Texas market?

Yes, that's something, obviously, that's top of mind for us. I mean, we're in this for next year, we're thinking, for the full year, $80 million to $100 million, $110 million of total impact. So it's over a point we think the split obviously, with heavier roofing volume in Florida than Texas. And right now, the view on interiors, just given the number of branches in the -- more of the that damage occurring in Houston, that it's still probably a little early, but we're thinking $10 million to $15 million impact for the year next year once Allied comes on board. That's probably the best we can do right now, and I think we'll just continue to obviously stay focused on what we do best, and that's servicing those damaged areas, helping the contractors there to get their (inaudible) down. And then we'll see, we'll be able to probably have a better idea (inaudible) first quarter (inaudible).

And is that $80 million to $110 million, that's inclusive of Hurricanes Harvey and Irma? Or is it more just the...

Yes, (inaudible).

Okay. Inclusive of -- Okay. So that puts it closer to the Katrina impact we had 2 to 3 quarters of $60 million to $100 million-type benefit?

That number is for the full year. That's a number (inaudible) over the next 4 quarters, right? So take a quarter of that because really, probably the first 3, the next 3 quarters will be the heaviest and then it will start to tailor off in the fourth quarter -- 4 quarters from now.

Yes, that was the reference. It's a little less than that, Kathryn.

Okay. And I promise this will be the last guidance question, but just to hammer in on the obvious. With the guidance provided, I just wanted to confirm that there's nothing changed from your original expectation for Allied in terms of contribution from a core standpoint when you initially announced in August versus the guidance you gave today. Just want to ensure that there's nothing fundamentally different in terms of the incremental earnings contribution.

Very fair question. Absolutely nothing's changed. We've done a lot of additional work as -- since the announcement and trying to understand the financials and get a better picture of the company, and it has just reinforced our position and the numbers that we have in play. So nothing has changed. Strong company, good company, great acquisition, good synergy potential. Looking forward to it.

And the next question will come from the line of Will Randow.

I guess, you guys have seen a pickup in terms of volume, and I want to talk on 2 points regarding the September price increases rarely work, at least for the manufacturers. And wanted to get, it sounds like that might be your view as well with no expectation for price increase next year. And then on the volume side, is it just because volumes are running so strong that you have that 4% to 8% handle for next year? Or is there some other underpinnings, meaning, you believe you're back to mid-cycle? Just wanted to get your view on what's driving that guidance range as well as pricing?

Yes. I mean, you said it all on the price piece, right? That's why we didn't include anything for 2018 right now. Obviously, we're always supportive of trying to raise price given the last number of quarters when we didn't get any, right? That's in our best interest, although it was deflationary times. So we're going to support that. But if we come to the realization that we're not going to get the price, well, we're going to do what we normally do and that's push back on the manufacturers.

The second part of your question, on the organic growth range, we gave a 4% to 8% growth on the core Beacon part of it. So my view on that one is it's continuing on the momentum of everything we started this year, right? If you look back the last 12 months, we started -- well, more than that, probably 18 months ago, we started a big push on organic sales from national count growth, complementary product growth, things we did within 2-step, different channels to market. We had a lot of growth, e-commerce, sales effectiveness, sales force that have -- a lot of things we did to really drive organic growth, and that's taking off and that's what's fueling some of the high organic growth than what the market has today.

And then as a follow-up, I guess, you guys have mentioned the amortization. It seems like that probably stepped up relative to your additional assumptions. But would love to get a finer point on that, if I could. I know it's excluded from, obviously, adjusted guidance. And then also, the other point I was hoping you could [hand out] input cost relative to pricing, are you assuming neutral for next year in...

First one on your amortization question, it actually is going down on some of our base kind of acquisitions, right? Because as some of our older acquisitions have fallen off, part of the thing why we want to exclude the amortization, you have this accelerated amortization approach that's really high on the first 5 years and then it falls right off. So some of our older acquisitions are starting in that falling off point, so that's why some of that base amortization you see as less. Where it increases is because of the Allied transaction in there, the RSG is pretty stable kind of year-over-year. The Allied will be the incremental part. So I hope that answers that question. And your second question...

That was price...

Yes, in terms of -- yes I mean, other than if you exclude synergies, the impact would be neutral given, right now, price is neutral. Now as we get clear visibility as we go through into the second quarter, we'll update everybody on that. But that's the assumption for purposes of what we put together for 2018, okay?

Our next question will come from the line of Stephen East with Wells Fargo.

On the synergies, you feel pretty comfortable on your path for $110 million. I guess, a couple of questions on potential upside to that as we look out over the next few years. First, on the potential for the hub-and-spoke that Allied is doing, I guess, where do you see that going and what could that mean? And then the second part of that is if you used RSG as your proxy about renegotiation of contracts, et cetera, from greater scale, just giving bigger economies of scale, if you will, if you use that as a road map, what type of potential would be there?

Well, I mean, I'll start out by saying again we're comfortable with the $110 million. I mean, we have all of our energy set on making sure that we achieve that because that's -- that was part of the deal, and it's part of the pro forma. I mean, in terms of any, what we call, optimization, we're going to focus extremely hard, right, on both the way Allied runs things in their markets as well as any of the other pieces with the organization structure, and of course, purchasing. I mean, it -- yes, we have our sights obviously set higher, as you would, in any case, right, to try to drive a base number. At this point, I think it's premature to talk about upsides for the $110 million just because we're still validating exactly where we're at. We do know, as I said, and I'll repeat again, we feel extremely comfortable with the $110 million, but we're still going through pre -- really pre-integration work, and it won't be until after we close that we really dig into -- and we're one company, really dig into those pieces to understand the upside. And as we do, and as we did on the -- with RSG, we'll make sure we talk to everyone as we go through these next earnings calls. Keep everybody updated.

Sure, I understand. And this may not be a completely fair question for you to look at even beyond the integration of Allied. If you wouldn't mind, as you look at the interior business, and as you've spent more time now, several months with Allied, if you will, one, how do you think about the interior business today maybe versus back in August when you made the announcement? And two, does it get you more or less excited about the potential to maybe consolidate that side of the world?

Yes, I mean, we're -- I feel the same way. It's a great business. They've done a good job of it. There's an opportunity to consolidate, there's an opportunity to do greenfields. It's a seasoned team that knows what they're doing. So nothing has changed in my view of that business other than let's integrate it, let's continue to drive improvement with sales growth and EBITDA growth within that business. So for us, it's like any of these adjacencies or platforms we've talked about with insulations, smaller, albeit, waterproofing smaller, albeit, and then the complementary elements of siding and windows and doors and some of those platforms. This is very exciting for us.

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

Thanks. We went a little longer today, but we thought it was important to make sure we got through as many questions as we could given it being a year end and the fact that we're going through a new adjusted methodology with EBITDA. And hopefully, you enjoyed that. So I just want to thank everybody for being on the call today. As always, we appreciate our investors' interest, our customers' business, and of course, our employees' dedication. And we look forward to speaking again on our next call. Have a great evening and a great holiday. Thanks a lot.

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