Beacon Roofing Supply Inc (BECN) 2018 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Beacon Roofing Supply's First Quarter 2018 Conference Call. My name is Andrew, and I'll be your coordinator for today. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

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

These forward-looking statements fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company's financial outlook. The forward-looking statements contained in this call are based on information as of today, February 8, 2018, 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 & 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 first quarter 2018 earnings call. We will be conducting our call slightly differently today. Unfortunately, I have come down with a bad case of the flu, so Joe will handle all of our prepared remarks and the Q&As. I apologize for any inconvenience, but I came down with this during our annual managers meeting last week, which was a great event with more than 800 Beacon and Allied employees and 300-plus vendor representatives in attendance. Lots of good things happening and a great way to bring the Allied team into our organization. As you will see, we had a very strong quarter and a great start to 2018.

With that, I'm going to turn the call over to Joe.

Thanks, Paul, and good afternoon, everyone. We're very excited about our strong start to 2018 and anticipate a third consecutive year of record sales, adjusted EBITDA and adjusted EPS.

Total sales growth during the first quarter was a very strong 12%, with an organic growth rate of 8.3%. First quarter adjusted EPS was $0.68, levels materially above consensus estimates. We certainly benefit from U.S. tax reform during the quarter, but we also produced strong revenue growth across each of our 3 segments and generated solid operating cost leverage during the period. Adjusted EBITDA was in line with consensus forecasts, but a meaningfully lower tax rate and lower interest expense supported the EPS upside.

Headline adjusted EPS moved from $0.56 last year to $0.68 this year, a 20% year-to-year increase, plus after adjusting for the $0.08 share count dilution tied to our September secondary offering, our adjusted EPS would have been $0.75 to $0.76, representing a more significant 34% year-to-year improvement.

Now to provide some color on our first quarter sales. Our Q1 sales growth represents back to back existing market growth rates above 8% during the September and the December quarters. And our top line performance exceeded our internal and Street expectations. As with Q4, our monthly sales growth rates accelerated over the course of the first quarter. October daily sales increased 4.3%, November up 5.5% and December jumped 17%. During the strong December month, it's also worth mentioning that the final 1- to 2-week sales were negatively impacted across much of the country by the extreme cold temperatures.

To start out our Q2, our January organic sales were flat to the prior year. Many of our regions were negatively impacted by the unusually cold temperatures and winter weather. And while the year ago comparisons may not appear particularly difficult, the prior 2 years were up 19.5% and 13.6%, respectively.

We're not at all complaining about the cold and snow. As you know, we have advocated the need for colder weather and heavier snowfall during the winters as a driver of stronger summer repair demand. While the weather could hurt our second quarter, we believe that for full year 2018, the winter weather conditions should be a positive for Beacon and for the overall roofing industry demand.

We estimate the incremental demand contributions from Hurricanes Harvey and Irma at approximately $40 million during the period, topping our previous expectations. About 60% of the contribution is from Florida, and the remainder in Texas. The pace of demand from these 2 events has continued in January, and we anticipate the impacts continuing longer than previously thought.

Investors should note that storms remain an important part of our business. However, due to our scale and breadth of coverage across North America, there's no more balance nationwide from these events than in the past. While we experienced a good increase in revenue from hurricane activity during the first quarter, the year ago period saw benefits from Hurricane Matthew and a range of local and regional hail demands that did not carry over into the current year.

Next I'd like to speak about our sales by line of business. Residential roofing produced strong organic daily sales growth of 9.6%. The consistency of this segment's growth is particularly impressive with residential roofing seeing 14 straight quarters with growth rates above 5%.

Complementary products represented our strongest-performing category with an 11.7% increase. This segment's benefiting from higher levels of price inflation, a strong macroeconomic backdrop for both new construction and home improvement as well as specific Beacon initiatives to drive growth. We're having great success operating our complementary products businesses, both standalone operations and through cross-selling and integrating these products within legacy Beacon branches.

Platform investments that we've made within the waterproofing and insulation areas have been a highly successful part of Beacon, and all this bodes well with our recent addition of the Allied interiors business.

Our non-residential roofing category produced a 4.3% increase, following a mid to high single-digit increase in the September quarter. We're very pleased by the return to positive growth within this business for the second quarter in a row.

Next, I'll move on to some geographic highlights. We saw 5 of our 7 regions post positive growth during the quarter, with the 2 declining regions each down only 1%. Our strongest 2 regions were the West, up 25%; and the Southeast, up 24%.

The West region benefited from easy year ago comparisons as heavy rainfall levels disrupted activity in California last year. In addition, this region saw tremendous complementary product growth, in part, the result of working closely with Lowry's, our acquisition from just this last summer, to build out our waterproofing sales in that region. The West region has now posted 2 consecutive quarters of 20%-plus growth.

The Southeast market delivered 24% growth while seeing each of its 3 product categories producing double-digit gains. As mentioned earlier, the Florida market was particularly strong as that state benefited from Hurricane Irma demand.

Now let's move on to gross margins as noted on Slide 4. Existing market gross margins came in at 23.9% compared to 25.1% in the year ago period. There were several mix and timing-related impacts that caused the decrease. I'll spend a few minutes here to walk through them.

First, as we talked about last year, the prior year Q1 benefited by approximately 30 to 50 basis points tied to a true-up for annual vendor incentives, our annual volume gates. In the current year, the incentive true-ups just occurred earlier as we hit the volume gates much sooner in the calendar year. So the timing of the benefit was slightly different this year.

Second, our gross margins also experienced an unfavorable mix shift geographically. As we have discussed, different regions have different margin profiles. Our sales growth was clearly a positive in terms of GM dollars, but the mix geographically did have an impact on our GM rate.

Third, there were also some timing-related disconnects between vendor fall cost increases and our price increases to customers. We saw this particularly within the complementary products category, which experienced significant price increases following the hurricanes. It's always difficult during the slower winter season to pass through price increases when volumes are at some of their lowest levels. But given the inflationary raw material trends, strong product demand and a favorable economy, we remain quite optimistic about spring pricing opportunities.

On the positive side, we're very excited to report that our overall pricing increased 50 to 75 basis points during the first quarter. We realized a 400 to 450 basis point increase in our complementary products category, which drove the bulk of the quarterly gain.

Commercial roofing prices increased approximately 30 basis points, and residential roofing prices declined slightly around 40 basis points. We continue to see positive pricing trends and markets experiencing strong levels of demand, while other softer-demand regions saw more challenging prices. Our strongest price gains were realized on the West Coast, Florida and the Mountain regions.

Overall product costs increased 175 to 200 basis points, with all categories experiencing cost inflation. Complementary saw costs of 450 to 500 basis points, while both roofing categories saw product costs up approximately 40 basis points.

Now let's move on to operating expenses. Before going any further, I want to remind investors that we implemented a change to our supplemental disclosures involving adjusted operating expense and adjusted EPS. With today's release and going forward, our supplemental adjusted EPS disclosures reflect add-backs for all intangible amortization expenses, which is different than the prior years, our nonrecurring acquisition costs and certain interest and other financing costs. The comparable year ago numbers provided in our supplemental slides are also adjusted to reflect this new methodology.

In addition, during the current quarter, we've excluded the net positive onetime impact from tax reforms. That's an item that I'll discuss in more detail later in my prepared remarks.

Total operating expenses were $220.7 million or 19.7% of sales. Excluding acquisition costs of $23.8 million, adjusted operating cost was $196.9 million or 17.5% of sales. This compares favorably to the year ago first quarter with operating expenses of $182 million or 18.2% of sales, 70 basis points of improvement, very strong operating leverage. And this is even prior to any of the Allied synergy impacts. There's a lot to look forward to in operating expense leverage going forward.

The $23.8 million of acquisition costs consists of $18.2 million of amortization for the acquired intangibles and $5.6 million of nonrecurring charges associated with the Allied acquisition.

As noted on Slide 5, existing market operating expenses were $210.6 million for the quarter. When adjusting for the outlined nonrecurring charges, our adjusted existing market operating costs were $188.5 million or 17.4% of sales, also representing a strong improvement of 80 basis points over the prior year.

Interest expense and other financing costs increased from $13.6 million to $22.6 million in the current period. Adjusted for excluded items would result in a decrease from $12 million in the year ago quarter to $10.3 million in the current quarter. Current-quarter adjusted interest expense excludes the interest tied to our new high-yield bond offering for the Allied transaction.

As you know, we closed on those bonds early to take advantage of some outstanding interest rates, in fact, 4.875%, very outstanding. The interest costs for this early period will all be funded by CRH post-closing as part of our working capital true-up as outlined in the sales agreement. Current period interest expense also benefited from a reduction in our debt tied to our September secondary offering. We used the proceeds to pay down our debt and, therefore, lowered our interest expense.

Now I'd like to spend some time talking about our effective tax rate, onetime tax items and our tax guidance going forward following the recent U.S. tax reform. Please refer to Slide 6 in our supplemental slides.

The recent passage of federal tax reform had a significant favorable impact on our fiscal first quarter. First, I'll talk about the 2 nonrecurring impacts. The largest of which is the revaluation of our deferred tax assets and liabilities, which provided a $0.68 benefit to our earnings. This is primarily from our deferred tax liabilities booked as a result of our accelerated amortization depreciation taken for tax purposes.

The second nonrecurring item is a much smaller $0.01 negative impact from the repatriation tax of foreign earnings and profits. On a cumulative basis, this amounts to a $0.67 net benefit to our GAAP earnings this quarter, a great benefit from the tax law change, but noncash in nature and certainly, not recurring. As a result, we thought that it was appropriate to remove it from our adjusted EPS calculations.

On a more permanent basis, we estimate that the changes to the U.S. federal rate will reduce our long-term effective tax rate from 38% to 39% down to 26% to 27% going forward. However, our fiscal year 2018 has one quarter under the old rate structure and 3 quarters under these new lower rates. On a blended basis, which is what we're required to use for each quarter of this year, this works out to an average effective rate of approximately 30% for 2018.

During the first quarter, this rate was further reduced to 25.3% as we adopted a new FASB accounting standard involving the treatment of stock-based compensation, which provides an additional tax benefit when stock-based compensation is exercised. Previously, it was recorded directly to the balance sheet. This caused a favorable $2 million benefit to our tax line.

While this could continue to have an impact on our effective rates in future quarters, we expect it to be much smaller, and it's also difficult to precisely predict quarter-to-quarter.

In summary, for adjusted Q1 EPS, we benefited by $0.09 from U.S. tax reform and an additional $0.03 attributable to the new FASB standard.

Now I want to shift gears for a couple of minutes to talk about our important acquisition of Allied. We officially closed our acquisition of Allied on January 2. As Allied's former parent's a public company and has not yet disclosed December's quarter results, we'll not be able to provide an update on their recent quarterly performance prior to our ownership. However, since closing the transaction, we have been moving rapidly forward on the integration. We're following a proven path on this integration and many of our team were heavily involved in the large acquisition of RSG just 2 years ago.

Our beliefs going into the transaction have proven to be accurate as we are now seeing firsthand how similar the cultures are between Beacon and Allied. This has created an excellent working relationship between our 2 teams. We're currently working through the combination of our 2 sales organizations and remain intensely focused on our existing customers and maintaining or growing our positions with them throughout the process.

We also remain firmly committed to achieving $110 million in cost synergies related from the combination, and the early signs are very positive across all areas of savings. As with the RSG targets, the 3 main components of our synergies include branch consolidations, SG&A-related savings and procurement benefits. In addition, we also have optimization targets representing a fourth component to our synergies.

Next, I want to spend some time talking about our cash flows and balance sheet. As noted on Slide 8, first quarter operating cash flow was down $40 million. This is not a surprising sign to us given our incredibly strong September quarter. Q1 results were primarily impacted by increases in inventory and accounts payable.

The inventory was primarily due to acquisitions and in locations where we are serving storm volumes as you would expect. The AP increase is a timing-related issue tied directly to the very high AP we had at the end of September quarter coupled with our seasonally lower product purchases in the first quarter.

As a reminder, in fiscal 2017, cash flow benefited from a $229 million boost related to accounts payable, and we anticipated giving some of this back in 2018.

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. All of these are shown on Slide 7.

Total inventory turns were a strong 4.8x in the quarter, in line with last year's levels. Winter weather negatively impacted our sales the last 1 to 2 weeks of December. Otherwise, we would have expected inventory turns to look even better. Inventory turnover has been a key metric for us and we've shown solid improvement during the past several years, and we expect that to continue as we integrate Allied.

Our accounts receivable days sales outstanding was essentially unchanged versus the comparable period last year coming in at 30.8 days versus 30.7 in the comparable year ago quarter.

Our headline working capital increased to $2.14 billion at quarter end from $683 million in the comparable quarter a year ago. However, this year's current assets included a $1.3 billion in restricted cash from our bond offering that was waiting for the closing of the Allied transaction on January 2.

Excluding this amount, adjusted working capital as a percentage of revenue decreased year-to-year from 16.8% to 16.4%. The teams continue to do an excellent job on managing our working capital. And as we get further into the Allied integration, we should see this continue to improve.

First quarter capital expenditures were $7.4 million compared to $7.3 million in the prior year. We produced favorable CapEx performance in each of the past 2 years, and we anticipate this lower rate of spending will continue into 2018. Similar to when we purchased RSG, we should see a rationalization of our fleet across the branches. Our debt leverage ratio improved to 1.9x in the quarter as compared to the prior year, flat sequentially to the prior quarter.

As a reminder, leverage reached 4.3x immediately following our announced acquisition of RSG 9 quarters ago. While we anticipate a similar jump now that Allied has closed just after quarter end, we expect strong cash flow coupled with debt reduction will similarly lower leverage over a 2- to 3-year period.

Now turning to Slide 9, I want to provide a bit more detail regarding our updated 2018 outlook. We're keeping our revenue view for 2018 unchanged at this point. We continue to anticipate a range of $6.6 billion to $6.9 billion, a big range. With that said, we do believe there is a favorable bias to annual revenues given our strong Q1 results, favorable recent pricing trends and a likely stronger hurricane demand contribution than we have earlier anticipated.

As you know, though it's very early in our fiscal year, so winter weather and storms can create volatility, and we prefer to be more conservative at this point of the year with our formal expectations. As the year progresses, we'll look to narrow our guidance ranges in future quarters.

Our adjusted EBITDA view has been kept unchanged for the year at $560 million to $600 million, representing margins of approximately 8.5% to 8.7%. While there will be quarter-to-quarter fluctuations in our performance, we remain confident in our full year expectations. Importantly, we remain 100% confident and committed to our existing $110 million run rate synergy targets related to the Allied combination across all areas of savings.

Lastly, our adjusted EPS has been increased to a range of $3.40 to $3.70. This new range is $0.45 above our earlier outlook, primarily reflecting the effects of tax reform, coupled with our strong Q1 results. We remain very positive on our outlook over the next several years and certainly, our combination with Allied represents an important step in reaching our long-term goals. We'll continue to pursue further opportunities for growth both organically and by acquisition within the roofing and broader building materials distribution industries as well.

During 2018, we will remain intensely focused on combining our 2 great companies while also ensuring a tight focus on running our base business and serving our valued customers.

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.

(Operator Instructions) And our first question comes from the line of Garik Shmois with Longbow Research.

Congratulations on the quarter. Just wanted to ask about gross margins. I think previously coming out of 4Q, you had guided to full year gross margins of, I think, 25.2% to 25.5%, if I'm not mistaken. And I'm not seeing that today.

Recognizing that mix was a headwind in Q1 and assuming the storm markets will remain strong moving forward, is it fair to assume that mix will potentially impact gross margins through the balance of the year? And how should we just think about the range that you had provided previously?

Sure thing, I'll give you a quick view on that one. If you look at our margins, as I went through it, most of it was really all timing related, Garik. So our view on it is, we're still in the same position where we were previously in regards to the gross margin and most importantly, the operating income range that we put there as well, too.

Many of those issues were kind of timing related and based on, as I mentioned, what we saw around -- what we're seeing around demand, what we're seeing around some of the current pricing, what we're seeing just overall in regards to the market conditions, we feel pretty positive about the margin number and our ability to still get there. Still early in the year. Lot of opportunities. So we're sticking with that same range as before.

And our next question comes from the line of Phil Ng with Jefferies.

Curious to get your thoughts on 2Q trends in light of just colder weather in general? And your thoughts about the full year did sound like you're a little more upbeat about demand, particularly on the hurricane side. Is that on just hurricanes that have happened or are you expecting a bigger storm activity this year?

Hey, Philip, yes. Just to give you a view on the storm piece. No, our comments were really in regards to the 2 hurricanes that we already saw and the storms that we're lapping over a bit from the prior year.

Our initial view on the storms, I think, last year we -- last quarter, we talked around $100 million estimate as the full year impact from those 2 hurricanes. Just based on what we've seen this quarter so far and what the teams are telling us, it probably views like that will be a little bit higher.

Our estimates now are probably closer to $120 million we'll see from those storms that will impact us in this year. And we think they'll also go through all 4 quarters of the year as well, too.

And our next question comes from the line of Ryan Merkel with William Blair.

So want to ask about gross margin. Can you just talk about the pieces of the year-over-year decline, the 120 basis points for core? How much was the timing of rebates? How much was sort of geographic mix? And then how much was timing price cost?

Yes. A little of all the above, Ryan. I can give you a few of the pieces to it in some level of depth. And you hit on some of the items, but as with anything, there's -- I have a list of about 10 items that went through it as well, too.

Clearly, the timing of the vendor incentive gates, as you know, was an impact to it. That could be anywhere -- our range is probably between 15 and 30 basis points we might have seen from the vendor incentive gates that occurred. Some of the geographic product mix elements to it, that could be another 30 basis points to 40 basis points.

We had other issues around just the mix of business as well, too. I think, as we -- as you saw, we had a little bit more 2 step or direct business, which cost another 5 to 10 basis points in there as well, too. We also had some accounting changes as well, too, where some items that we previously put within revenues around our service revenues, we now put to the other income line as well, too. And that also was a 10% to 20% impact on it.

The rest, just in regards to the timing of the price increases going through, that probably was somewhere around 50 basis points or in that particular range. I think that gets you the big pieces to it. I probably have another 6 other kind of puts and takes to it, but that probably gives you the key items to it.

Again, if you look through it from our view, a lot of it was really all timing. It -- the gross margin rate in the current quarter really doesn't concern us. We feel quite positive on going forward in the rest of the year, especially when you put on top of it, this quarter will start to have the Allied business combined with ours driving great margins. You saw it in the pro forma work we previously established.

And of course, we're going to start to see some of the synergies that will roll through as well, too. We'll see that in the second quarter. So all those will help us substantially going forward in the business.

It's worth reminding everyone that we will have and we have had fluctuations from quarter-to-quarter for a lot of reasons. Joe just went through his detailed list, right? And that's why we pull everybody back to the full year as we focus on those numbers as we work through every quarter. So we feel very confident about the full year.

And if I could just ask a follow-up just on resi price cost. It sounds like you're pretty optimistic for the spring price increases. So do you think that you can neutralize that? Is that what's sort of baked into your guidance?

Yes, we do. We are pretty optimistic around the spring. One of the pieces we've always talked about, right, at a high level that you need demand, you need raw material, input price increases, inflation, right? So we've got a good environment in both of those 2 from strong demand, strong input prices to it. So yes, we're feeling pretty optimistic about getting into the spring and being able to neutralize that impact.

And our next question comes from the line of Keith Hughes with SunTrust.

Just to be clear on the hit on timing of price increases affecting the gross margin. Is that more of a residential roofing issue or felt more in the complementary products segment?

It was some of both. We saw it substantially. So the question had to do with the timing comment that was made about the price increases from the manufacturers versus what we were able to pass along.

We saw it in -- actually, all 3 areas, but most prominently, we saw it on the complementary products and on the residential roofing products. Those are the 2 areas. Complementary had a big impact because it was a large increase, right, 400, 450 basis points.

So it was a large cost increase and price increase that went through with it. So the timing on that did have an impact. Residential, not as big of increases to it, but bigger proportion of our business. That help Keith?

Yes, Keith, a lot of that on the complementary side had to do with lumber just related to the hurricane volume we saw down South, right, where they were passing increases through. That's the biggest piece of that on the complementary side.

And our next question comes from the line of Kathryn Thompson with Thompson Research.

My questions are more focused around Allied. Just want to confirm that you're still on track for $30 million to $40 million in synergies to be realized in fiscal '18.

And then just more stepping back, looking more strategically, with Allied being rolled into the Beacon network and also integrating with RSG, what are the top operational changes that we should expect seeing going forward? And what are the top opportunities for potential synergies, not just looking at Beacon and Allied, but Allied with the RSG network?

Okay. I think I got the 6 parts to that question. Let me see if I can kind of work through them for you.

It's all Allied. It's all Allied.

First, your top line question around just confirming our synergies that we would expect to see in this year. $30 million to $40 million range, yes, absolutely still kind of intact. If anything, as I hope you heard through my call, the tone of my optimism and in Paul's, through his coughing, his optimism as well, too. The work we've done is pretty strong on all the synergies. So yes, that is still the range that we have, $30 million to $40 million, feel very confident of it within the current year.

Second, your question was a broader one, really about as we think about Allied and bringing them on board, the opportunities. I think a lot of them are the ones that we probably confirmed -- I'll give a couple here and then I'll hand it over to Paul, who's writing down some good notes.

But a couple of them that we talked about through the initial transaction I am seeing as really coming through. One of them, we talked earlier on around pricing, right, that they have a good price discipline in how they do things. They have some good pricing tools in place that they utilize. We're becoming even more confident with what we see in their abilities and processes there. So I think that's an opportunity across the companies that you'll really see us be able to take advantage of.

Second, we talked a lot early on about some of the longer-term benefits they've had as they've gotten into what we describe as RSAs or hub and spoke, really looking at the operations a little bit differently about how they run and looking at a market area.

We've studied those, done a lot of good work and we have some thoughts on some go-forward plans as well there, too. Not short term, but clearly, there's a good advantage to us as we think about the businesses that way.

Last one that I'll point to is we also have talked about our ability to -- now that we have interiors as part of our product capabilities and breadth, as we look at everything from national accounts to how we sell and how we might be able to also position the interiors business with our exteriors business as well, too.

Those are the 3 biggies that I'll mention as opportunities, which really we talked about previously and man, if anything, we're becoming more confident that they have been confirmed through the work we've seen.

Yes, and the only thing I can add, Joe did a good job of going through, would be with RSG, it's just the increased even further density in some of these MSAs that RSG brought us. We had even more with some of the great Allied branches, and Joe talked about the optimization we'll do in those markets, right, to reduce cost and get deliveries to customers quicker.

The only other piece I'd add is the great private label business that they have developed throughout the years. That, combined with ours, gives us quite a bit of heft that we're going to focus a lot of attention on to grow as much as we can quickly.

Our next question comes from the line of Jay McCanless with Wedbush.

Wanted to follow on that question on Allied. Do you believe that bringing them into the fold now is going to help you on the pricing side for residential roofing? And with the price discipline you mentioned as well as the additional scale, is that going to help you push price a little bit better?

Yes, I would say, absolutely. That was one of our initial points in the transaction and actually something that we've talked about for a while, that consolidation with the industry is we felt is a good thing. And we continue to feel that as well, too. So yes, just to be clear, we do think that the combination of us with Allied, their price discipline will help us.

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

First off, what was the October organic sales growth? I missed that.

October was -- I got to look back to my script. I think it was 5 -- is that 5.5%?

Yes, 4.3%.

4.3%.

Okay. And then second, forgive me, if this is what you just went over when you talked about hub and spoke and pricing and that sort of thing. But Joe, you mentioned optimization targets, and I'm just a little unclear, is there some way you could just give us some examples of optimization targets related to Allied you'd be looking to achieve?

Sure. Be happy to. I'll give you some concepts of kind of what they are. And as you know, we've talked publicly before about there being a big range, right, and that range was $110 million up to -- and I think we've said $150 million, $160 million top end side. And it's really, a lot of the optimization falls in how you're driving it above some of that $110 million number that we've talked about.

Categories of things in there. It is some of what I mentioned around how we look at and operate our branches and our structures. Everything from hub and spoke and RSAs and related, really trying to get more efficient in our structure around those branches, Dave, and how we work with them.

Really trying to get within a specific market area their branches to more effectively look at how they use inventory trucks, fleet, logistics, scheduling, even people and resources as well, too. So great opportunities there.

And the second part is just looking across some of even all of the -- we talked about our functional areas of how we run the business as well, too. Are there ways to look and do things more efficiently and more effectively?

With the RSG transaction, we really just pulled their business into ours. And this time, we're just looking, are there more effective ways to use systems, automations and processes that are better and will help us improve. Those are the ideas.

And our next question comes from the line of Michael Rehaut with JPMorgan.

I wanted to follow on an earlier question about maybe prior couple of questions around Allied and as you fold it in, realizing not only cost synergies but also top line synergies.

And working off of a, let's say, pre-Allied steady state business perhaps growing in the mid-single-digit range, would it be too early to kind of give us a sense of given the size of Allied and the opportunity that you might see, what that might add?

Not trying to ask for guidance here or anything, but as you think of like fiscal '19, fiscal '20, could that add 1 point, 2 points, 3 points of incremental sales growth opportunity? Or any way to kind of frame how you're thinking about the combination from the top line side?

Yes. You bet. I think, Michael, to answer your question right up front, you looked at it from the right way. This is not a short-term piece. It really is long term. So it's not how it'll impact in the current year as we integrate the company, but it's really as you do look further down the road to 2019, 2020.

When you bring them together and you have that level of density and our teams kind of coming together and really driving the integration in place, that's when we'll start to see some of it, from all the things we mentioned, sharing of products, interior, exterior products, density within certain market areas everything that we have done.

I think this is what helps fuel, as we've talked about, a 5% to 10% organic growth rate, right? That's what we have described for a long time as our kind of goal. I think this is how you get there by bringing the 2 companies together. So yes, good opportunity. Clearly, top line. Clearly, long term as well, though too.

And our next question comes from the line of Michael Eisen with RBC Capital Markets.

Just following up on the prior question. When thinking about kind of your optimism of demand from the roofing -- legacy roofing business looking out to the rest of the year, have you guys changed your way of thinking of what type of level of growth Allied could bring in year one?

And then following on from a longer-term perspective, have you guys already started to have -- and have they been more positive conversations around the cross-selling between interior and roofing products and how that plays out at a faster pace?

Sure, Michael. Good questions. One, yes, we are optimistic in regards to what we continue to see on the residential market, right? As I described in my kind of opening comments to it.

If we look -- it's really more of a longer-term optimism, as I mentioned when I was talking to the other Michael from JPMorgan, when we were describing and talk about when we would see that. So it's not really a short time, it's more of a long-term issue that we will see that growth, and we are very optimistic about that piece.

And it'll be across not only the residential elements of our product, but it will be across the complementary elements, too, where we have a very strong complementary platform, which we think will enhance a lot of what the branches do currently at Allied today.

On your cross-selling piece, certainly, we've had discussions and began those dialogues across all of our branches today and with our major customers as well, too. So that's already taking place. But again, it's not something I would bake into this year's forecast or numbers. It'll be something we'll talk about in 2019 and 2020.

Yes, that's why we use this 5% to 10% range, right, because as we combine these 2 great sales groups and management teams, we're confident that good things are going to come from that, and everything we're planning is geared towards generating those good things, meaning upside on the organic sales side. So I would say it'll just press us as we go through the end of '18, '19, '20 to drive closer to the high end of that range.

And our next question comes from the line of Truman Patterson with Wells Fargo.

I just wanted to touch on, you guys had some nice leverage on your OpEx line, dropped 70, 80 bps, which was a little surprising. We were at a trade show earlier this week, and it seems like there was a lot of chatter about freight costs picking up, oil costs are up.

I guess, if you guys could just elaborate on that a little bit, what actions you're able to take to mitigate these costs? And maybe dive into what you're seeing your own labor inflate at? And any potential of your talent being poached by outside transportation companies?

Sure. I'll talk a little bit about it. And you're right. Thanks for the recognition. We did have a great quarter on operating expense leverage.

We've talked for a long time about our focus on OpEx leverage. We've talked for a long time about our 60-40 fixed variable relationship, and we really overperformed that this time around as well, too. So thanks for noting the 70 basis points improvement that we saw, it was great leverage.

Looking at some of the pieces to it. Yes, seeing the diesel and fuel cost increase, but fuel is only around a $25 million annual spend to us. So even as it does increase every 10%, it's not as significant of a number to us as you would expect.

So we've also done a lot of things to make improvements on the diesel side our fleet, of how we operate. We've got logistics systems in place and we're getting more efficient all the time on how we route the trucks as well, too. So all that helps to offset some of the costs to it.

Our annual wages, not seeing a significant impact there. Our annual merit programs run 2%, 3%, 4% depending on on average where folks are at. And that's stuck in that same level. We haven't seen a significant impact on the wage inflation piece across the board anyway.

Drivers clearly are an area that we've put a lot of focus and attention to, and it's a challenging market, but we've come up with some pretty creative solutions in our approaches to keep them, retain them and attract them as well, too. So we've been doing a good job there on our drivers. It's always an area that we're paying attention to right now.

Besides that, other areas where we focused on, just about every area. Wages and salaries are our biggest areas. So we're constantly looking at ways to, as we have, increase some utilization of automation and others in our areas. We've looked at it across. We had some good savings this quarter, even around some of our insurance benefits and others as we have recalibrated and looked at some of those items.

So across-the-board, healthcare insurance is another area, where even though we're seeing cost improvements, we've done a great job in managing our programs, and that's been a benefit to us as well. Those are a few items anyway. Hope that gives you a little bit of sense of we're attacking this from many avenues to try to continue to work that down.

And I think as you really put the Allied integration on there as well, too, we'll be able to leverage those costs even further, right, because then, all of a sudden, we'll be combining a lot of those shared resources, whether it's from finance, HR, IT and others over a much broader sales base. So all that will help us to get the leverage in even better shape.

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

I apologize if I missed it. I know you talked about pricing. I believe you're talking about a year-over-year. Could you talk to perhaps sequential pricing in residential, both kind of to out to customers and what you're paying on the cost side? And then comment on inventory, if you can, not only for you, but I guess maybe just broadly?

Yes. Sure. You bet. Sure thing. So on the sequential pricing was the first part and the second one was on inventory. Those are the 2 that I think I heard. So on the sequential pricing, we were actually up, I think, 40 basis points sequentially, if I remember correctly.

Yes, 0.3% to 0.4%. Down a bit.

Yes, correct. Yes, right. So on the residential element to it. So our residential pricing on a sequential basis, it was actually -- is that the first quarter numbers here? It improved, actually, 40 basis points on a sequential basis on the resi pricing side.

The second question on inventory, the inventory increases and where we were seeing it. Inventory in total is up about $75 million. Of that, roughly around $22 million of it had to do with the acquired companies.

The remaining pieces of it, there's another $30 million of it, which is from the storm markets. And then the remaining portions were in some of our higher-volume markets like California. So all of the increase in the inventory we had was pretty much aligned with where we would expect it to be between acquisitions and the storm markets.

Yes, Ken, the other piece is just, so you have it on the pricing piece, sequentially, commercial is flat with that slight gain, and then complementary is up from the 2 and change to 4 and change or so. So a lot of strength.

And our next question comes from the line of Trey Grooms with Stephens.

It is actually Blake Hirschman on here for Trey. Apologies if I missed it in your comments, but you guys kind of touched on some of the company-specific initiatives you're working on to drive the growth we're seeing in the complementary segment. I was just wondering if you guys could dive into that a little bit more?

Sure. So the question was really trying to get at, what are we doing on the complementary side to drive the volume and performance there.

Well, I think as you know, one of the biggest areas has been our focus on the acquisition side, right? We made several acquisitions in the last 18 months. Lowry's most recently over the summer on the waterproofing side. Prior to that, about 1.5 years ago, ProCoat, also on the waterproofing side.

On the insulation business, a company called Eco about -- EIS, probably about -- just about a year ago. And before that, RIS, on the insulation business to us. And we also had combined several companies in the windows, siding business as well, too, that we've done through the last few years, Acme out in Michigan and a couple others.

So we've made several great acquisitions that have really helped to boost the complementary side of our business. We've also aligned a specific person in charge of those categories. So we've gone to more we have direct individuals responsible, waking up every day thinking about growth within those complementary business categories, which has also helped us as well, too.

We've incorporated that discipline right into the plans and budgets across each of our selling regions so they all have specific goals and targets on the complementary business for us as well, too. All those things have continued to push and drive complementary sales through our business.

Yes, really no different than what we've done with these -- we started these a couple of years ago as major pushes on the organic growth front, both product-wise and channel.

If you look at national accounts, 2 step, commercial growth, complementary was the fourth leg of that besides obviously we continue to focus on res roofing.

So it's just a continuation of all the efforts, Joe mentioned the acquired side, then, of course, our intense focus on growing organically in each of our regions. And Allied has a nice complementary business also that will add to ours, so it'll be even -- we'll have even more opportunity to grow.

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

So Joe, you gave an update on your top line outlook and reiterated, I guess, your top line outlook. It sounds like you're incrementally more positive about the storm side. Can you talk about some of the other components reroof, new resi? And then give me your thoughts on the non-res market as we -- the non-res market and also your non-res growth as we progress through the year?

Sure. You bet. Matt, I'll take you through some of the components, too. One, on the non-res side, the last piece we mentioned. Yes, we had 2 quarters in a row now of positive growth on the non-res, the commercial side business, which is great.

And based on -- as you know, we have some low comps in the remaining quarters of the year as well, too. So we're pretty optimistic on what we're going to be able to do to continue to grow that side of the business for us.

The residential side of the business, what can we say, it's continued to be strong all the way through. This is another quarter that we've had of solid improvement in there. And I think the number was 14 quarters over that 5% range. So strong growth in the residential.

We see that demand continuing from the storms that have occurred all the way through. We have seen -- we continue to see the good macroeconomic foundation under as well, too, where you're seeing the existing home sales continue to be strong, even new constructions continue to be strong as well, too.

So on the residential side, probably looking at a mid-singles kind of growth for the full year, which is very similar to what we're thinking about on the non-residential as well, too, in that mid-singles range.

Complementary, what we were just describing, has -- we have had a lot of strength, and for all the reasons we went through, from acquisitions through our focus and attention there as well, too. And that's probably more in the mid- to high-single digits where you'll see that occur. So that gives you a general view of our overall kind of revenue piece.

I want to go back to one question earlier because I found out the detail sheet I was looking for on some of the specifics kind of broken down in component, the question that was asked around the quarter-over-quarter our sequential sell price changes. And Paul gave you the total numbers, which were correct. But you were looking for the detail as well, too.

On the detail side, our low slope sequentially from a quarter-over-quarter was pretty much flat. Our steep slope quarter-over-quarter was down, looks like, just about 1 point. And our complementary was up quarter-over-quarter a little over 5 points.

That gives you a sense of them. But Paul was correct, he had mentioned in total that weighted average about 40 basis points. Just to give you the specifics. Thanks. I'll hand it back now.

And that concludes today's questions. Now I would like to turn the call back over to Mr. Joe Nowicki for closing comments.

Thanks all for joining this afternoon's call. We appreciate the interest from the investment community, our customers' business and the commitment of our employees. We look forward to speaking again during our second quarter conference call. Have a great evening.

Ladies and gentleman, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, enjoy the rest of your day.