Beacon Roofing Supply Inc (BECN) 2006 Q2 法說會逐字稿

Good day, ladies and gentleman, and welcome to the Beacon Roofing Supply fiscal year 2006 second quarter earnings conference call.

My name is [Jackie], and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

On this call, Beacon Roofing Supply may make forward-looking statements, including statements about its plans and projections and future economic performance. Forward-looking statements are subject to a number of risks and uncertainties. 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.

I would now like to turn the call over to Mr. Bob Hawke, President and CEO of Beacon Roofing Supply.

You may proceed, sir.

Thank you, Jacki.

Thanks to everyone for dialing in today for our second quarter earnings conference call.

We are very pleased with these results. The sales performance was very strong with total sales increasing 87%. We're particularly happy with our organic growth of 24%. All of our product lines are performing well, and I'm happy to report that sales performance is also very good in all of our regions.

Our acquired companies are performing above expectations. Again, our objective, I've mentioned before, is to buy good companies with very good management teams, and I can say that our acquisitions to-date certainly reflect that strategy.

Profitability is also very strong as we try very hard to control our costs, and we're excited about our operating leverage in our business.

David has a lot of good details that he wants to cover at this time, so let me turn it over to David, and then, after that, we'll open the call for questions.

David?

Thanks, Bob.

I will first discuss our results for our second quarter fiscal 2006, which ended on March 31, 2006.

Net sales increased 87.3% to a record 322.4 million in 2006, from 172.1 million in 2005. Our existing markets achieved internal growth of 41.5 million, or 24.1%, while our acquired markets contributed 108.8 million of the revenue increase.

The internal growth in our existing markets was comprised of residential roofing growth of 34.9%, nonresidential roofing growth of 14.7%, and complementary product growth of 18.9%. We estimate that inflation contributed 6% to 8% of the total sales increase with similar price increases in both roofing -- in both roofing product groups, while complementary products saw inflation towards the lower end of the range.

Due in part to the mild winter, sales growth was especially strong along the East Coast, especially in New England and the mid-Atlantic states. We also continue to experience strong sales growth in the Southeast and Gulf areas, which have also boosted our acquired market performance above our expectations.

We have opened seven new branches since 2005. We also acquired 62 branches since that time through December 31, and we operate a total of 147 branches as of the quarter-end.

We have 63 business days in 2006, while 2005, had 62.

Sales per day averaged 5.1 million in 2006, versus 2.8 million in 2005.

Our second quarter gross profit increased 87.9% to 77.8 million in 2006, from 41.4 million in 2005. Our existing markets, which include JGA for the quarterly reporting for the first time, had gross margins consistent at 24% for both 2006 and 2005.

Our overall gross margin increased slightly to 21.1%, as compared to 24% in 2005, due mainly to the slightly higher gross margin mix in our acquired markets. Gross profit in our existing markets increased $10 million and grew at 24.1%, the same rate as their comparable sales.

Operating expenses, as a percentage of sales in our existing markets, decreased to 18.1% in 2006, from 20.9% in 2005, as we continue to leverage fixed costs over increasing net sales and also due to the inclusion of JGA's lower operating cost as a percentage of their sales. Overall, operating costs as a percentage of sales decreased to 20.3% in 2006, from 20.9% in 2005, due to the performance as I just mentioned in our existing markets, plus offset, somewhat, by shelters higher operating costs as a percentage of sales.

Total operating expenses increased 29.5 million, or 82.2%, to 65.4 million in 2006, from 35.9 million in 2005. Acquired market made up 26.8 million of the increase, while existing markets saw operating expenses increase 2.7 million, by just 7.6%. The existing markets operating expense increase is primarily related to an increased payroll and related costs of 3.1 million, or about a 14% increase.

We combined savings of 1.1 million in professional fees, general insurance, and our provision for bad debts, offset by increases in depreciation, rent, and selling expenses, totaling 1.3 million. These increases in our variable expenses were within our expectations, considering the increased sales volume in the additional branches opened since 2005.

Included within our operating expenses is 0.7 million in stock-based compensation in 2006, as compared to 0.2 million in 2005. We expect to encourage stock-based compensation of approximately 0.7 million in each of the remaining quarters of fiscal 2006.

As a result of all the foregoing, our 2006 second quarter income from operations increased 125.6%, or 6.9 million, to 12.4 million from 5.5 million in 2005. Operating margins at our existing operations increased to 6% in 2006, from 3.2% in 2005, while our overall operating margins increased to 3.8% from 3.2%.

Interest expense increased 3.1 million to 4.3 million in 2006, from 1.2 million in 2005. Interest rates have increased, and we have increased our borrowings to finance our acquisitions.

Income tax expense was 3.3 million in 2006, compared to 1.9 million in 2005. We have estimated our fiscal 2006 effective income tax rate to be 40.5%, while effective rate for 2005 was 43.6%. As we have previously discussed in past calls, the drop in our effective rate is due to strong earnings performance in each of our regions.

As a result of all I have mentioned, our second quarter net income increased 98% to 4.8 million, as compared to 2.4 million in 2005. Diluted net earnings per share was $0.16 per share, compared to $0.09 in 2005, an increase of 78%.

Now, a brief discussion of our year-to-date results.

Sales increased 78.4%, or 291.0 million, to a record 662.3 million in 2006, from 371.3 million in 2005. Our acquired markets contributed 226.1 million of this increase, while our existing markets achieved internal growth of 64.9 million, or 19.1%. We again estimate that inflation contributed 5% to 8% of this increase.

Our total gross profit increased 76.1% to 161.5 million in 2006, from 91.7 million in 2005. While our overall gross margins dipped to 21.4%, as compared to 24.7% in 2005, mainly due to the addition of the JGA and ISI's lower gross margin. Margins at our existing markets were consistent at 25.5% for both periods.

Existing markets, selling, general, and administrative expenses as a percentage of sales decreased to 17.3% from 19% as we continue to leverage fixed costs over increasing net sales. Overall, SG&A expenses, as a percentage of sales, were 18.6% for both 2006 and 2005, due to the performance of our existing markets and the inclusion of JGA and ISS lower SG&A expenses, as a percentage of sales, offset by the higher operating costs as a percentage of sales at shelter.

Overall, SG&A expenses increased 54.5 million, 79.1%, to 123.4 million in 2006, from 68.9 million in 2005. Included in SG&A is 1.3 million of stock-based compensation in 2006, as compared to 0.3 million in 2005.

As a result of all the foregoing, 2006 and income from operations was 38.1 million, an increase of 66.9%, from 22.8 million in 2005. As a percentage of net sales, operating income decreased to 5.7% from 6.1%.

Interest expense increased 6.2 million to 8.3 million in 2006, from 2.1 million in 2005. We also reported a $0.9 million loss on our early retirement of debt in 2005.

Income taxes increased to 12.1 million in 2006, from 8.7 million in 2005. As I've discussed previously, our estimated 2006 effective income tax rate is 40.5% as compared to 43.7%.

As a result of all I've mentioned, our 2006 first half net income increased 58.5% to 17.7 million, from 11.2 million in 2005. Net income as a percentage of sales was 2.7% as compared to 3% for 2005. Diluted net income per share was $0.61, compared to $0.41in 2005.

Year-to-date cash flow from operations was 35.7 million during 2006, compared to 2.8 million in 2005. Our sales growth drove our income from operations to 38.1 million from 22.8 million in 2005.

Inventory levels, exclusive of the effects of businesses acquired, increased by 32.8 million, mostly due to the seven new branches open since March 31 of 2005, and anticipation of continued strong sales growth -- of a strong sales growth rate and the spring season.

Inventory turns, exclusive of our acquisitions, stayed relatively constant in 2006 compared to 2005.

The cash impact from the growth of inventory was more than offset from a seasonal decrease in accounts receivable and increases in accounts payable, exclusive of the effects of the businesses acquired.

The number of days outstanding for accounts receivable, based upon sales for the first two quarters, increased by several days due to the inclusion of our acquisitions in 2006, as compared to 2005. DSOs in our existing markets were consistent.

In 2006, our revolvers increased by approximately 144.8 million. We have also received approximately 56.1 million from the refinancing of our senior notes payable and received net proceeds of 51.6 million from our secondary offering. The cash provided by these financing activities was primarily used to finance our 279.6 million in acquisitions.

As we have previously announced, we completed two major acquisitions during this quarter. On January 10, 2006, we purchased certain assets CNF Roofing Materials, Inc. doing business as Pacific Supply Company, a West Coast distributor of roofing and other building products through its four branches. Pacific had net sales of 53 million for the year ended December 31, 2005.

And on January 17, 2006, the Company purchased certain assets of Mississippi Roofing Supply, Alabama Roofing Supply, affiliated companies, which distribute roofing and other building products primarily in Mississippi and Alabama through three branches. These two companies generated combined sales of 76 million for the year ended December 31, 2005. In association with these acquisitions, we amended the revolving lines of credit and term loans to increase them by an additional 50 million and $10 million respectively.

To recap key results for our second quarter, sales increased 87%. Internal growth was 24%. We've maintained our gross margins in our existing markets at 24%. Operating margins in our existing markets increased to 6% in 2006, from 3.2% in 2005. Diluted net income per share was $0.16, compared to $0.09 in 2005, which represents a 78% increase.

For the year-to-date, cash flow from operations increased 33 million to $36 million. Diluted net earnings per share was $0.61, compared to $0.41 in 2005, which represents a 49% increase.

And now now I'll turn it back to Bob.

Okay, David.

Thanks so much.

I would be happy to take any questions at this time.

[OPERATOR INSTRUCTIONS]

And your first question comes from [Michael Lehont].

You may proceed, Michael.

Hi, guys. This is actually [Ray Huna] in for Mike.

Just had a couple of questions -- I was wondering if you could give an estimate on how much the Gulf Coast rebuilding effected the sales in the quarter? I was wondering if you break that out further, and whether or not you expect that to accelerate over the next few quarters?

There was no effect on our existing growth. We talked about organic growth of 24%. That's truly no effect at all from the Gulf. We did have a storm in Texas that is shown in our existing numbers -- I think that storm was called Wilma -- and that impact was pretty minor.

The Gulf region -- I don't think it will accelerate. They are having difficulty -- they meaning people in that region -- with getting all the work done. It's still there, but I've been told that, at times, it's hard to get laborers to get the jobs done. Insurance reimbursements aren't as fast as homeowners would like. So the work is there. I don't see it accelerating.

So, like the Mississippi River Supply and Alabama Roofing Supply, were they the primary beneficiaries this quarter of that effort down there?

Yes.

Also, another question -- what do you guys expect for gross margins and SG&A going forward? How are the acquired businesses going to be affecting that?

I'll turn it over to my friend from Boston here.

Was the question gross margins?

Yes, and SG&A

Gross margin should be maintaining around that 24%-level as far as the existing market goes. The acquired markets should come up slightly compared to what they were for the year to-date mainly because shelter is doing better in that area. Those should fluctuate around 24% to 25% still.

Okay.

And the SG&A--?

I don't expect much changes in the level of SG&A. As far as the performance in the acquired markets, you will see a change in that because they just went through a seasonal period where -- where they, in all, shelter was and a winter. So, we should see those margins come up in operations, back up to the 3% to 4% level that we had in our pro forma.

Okay. Great.

Thanks a lot.

And your next question comes from David Manthey.

You may proceed, David.

Okay.

Thank you.

Hi, guys.

I was wondering, in terms of the strength that you're seeing in the core business today, does that open up incremental opportunities for new market start-ups given the fact that if volumes are so strong at existing operations that maybe they max out sooner, or am I over-thinking this?

No, you're not over-thinking it, but the answer is we have capacity in our existing locations. We're always looking for opportunities for market expansions, and usually, that comes from areas where branches are starting to reach capacity, but we're fine.

We're still looking for our six to 12 branches open per year, and again, just want to state that our long-term growth of 5% to 10% is our target. David has completed a study -- or nearly completed a study -- of capacity where we're bumping up against capacity issues, and we don't have a problem at this time. So, I don't think it will have an impact on new branch openings.

Okay.

And then, from a financial standpoint in leverage, David, do you think about contribution margin or gross profit read-through -- metrics like that -- in the business? Just, when you're looking at leverage, it would seem that those would be good proxies for leverage metrics? Do you have any thoughts on those?

Those aren't metrics that I use. What we've traditionally used is really free cash flow to debt, or EBITDA to debt, and again, it probably goes back from when we were a private company, but it's a pretty pretty good measure of how your building cash compared to the debt levels that you have. Our free cash flow, which, basically, we define as income from operations plus the non-cash expenses such as depreciation and amortization and stock options and the like, minus cash, interest, and cash taxes, was about $31 million for the first six months. That's pretty strong and gives us pretty good visibility that we've covering any of the debt payments that would be required of the about $300 million in debt that we have currently.

Right. Okay.

And then, just finally, Bob, in past calls, you give us thoughts on what you're seeing as quarter to-date and your thoughts on current estimate ranges? Any comment you want to make on those two items?

Yes, I think I can do that.

I always talk about the long-term growth rate of 5% to 10%, and we're certainly not changing that. We're performing above our internal budgets, which we're pleased about and don't see a reason that that would change. So, the business is steady.

I do want to save, though, that the mild winter does have an impact. The organic growth in the second quarter, I am sure that some of the work that was done in that second quarter under normal winter conditions, or tougher winter conditions, might -- might have bent -- probably could have been done in the third quarter in normal circumstances, wouldn't have been done in the second. But that's always hard to determine.

But I think our growth rate will hit our targets. We're comfortable with the estimates for the last six months of this fiscal year, and we've looked at those. This is bottom-line.

And the estimates that we're seeing from our analysts represent about a 25% increase in earnings over the last year -- final 6 months, and that would put us in the neighborhood of about 60. And we're comfortable with those things -- those numbers.

Does that help a little bit?

Definitely.

Thanks very much. Great quarter.

Thank you. Appreciate it.

Your next question comes from [Jeff Keelamonka].

You may proceed, Jeff.

Hi. Good morning, and congratulations on a fantastic quarter.

Actually, we asked them to screen your call, but somehow, you got through.

Well, I can hang up.

But in all seriousness, just first, a couple housekeeping items and a couple questions -- in the past, used you've given out sales growth rates by residential, non-residential, and complementary products. Can you provide some numbers and a little color on how each of those segments are performing?

Sure.

For the quarter -- and this would be in total -- the 24% organic growth and that we had, Jeff, I'll start with that. For the quarter, residential was 35; commercial, 15; and complementary was 19; and that totals up to the 24. And year-to-date, organic was 19%; is 24%, residential; 15, commercial; and 16% complementary.

Those are some big numbers, particularly in residential. Do you think that residential, again, has to do with the mild winter that you just spoke about or other factors?

It's hard to say. We do think that's part of it, and also, we want everyone to remember, last year, we had particularly cut tough comps. The second quarter last year, I think our organic growth was 17%. So, these numbers are on top of that. So, we're extremely pleased with what our field is -- our field is doing.

But I do what -- let me just add a couple of things. for the quarter, the two fastest growing regions were New England and mid-Atlantic states. So, those are non-storm areas. Those folks are doing a great job.

Our folks in the Carolinas continue to do well -- I think I mentioned them last time -- and Texas is obviously doing well, It's across the board, Jeff, and we're pleased about it.

Have you made any changes in promotional programs, incentive programs, to drive the growth in those markets because, obviously, they're some of your more established markets.

We're taking market share. Our people in New England and the Roof center, which is Mid-Atlantic, particularly New England, are working very hard on the sales organization that is very focused on prospecting and adding new contractors, and those people there are just doing a great job of bringing in new business. And you hate to single out people because then other people would like for you to talk about them, but New England is really doing a good job. We have a big emphasis in the mid-Atlantic states as well, getting new business. So there is, afoot, a lot of things like that. West-end, which is Texas, is doing very well in that area.

What our objective is is to grow through all these cycles, and the best way to do that is to work on the sales process and make sure that it's always there and constant because business won't always be like this. We want to get our numbers, that 5% to 10% growth rate, even when times aren't as good. But if you are good, it's particularly good during great times like now. So, we are working working on that.

The mid-Atlantic states are doing a great job in the commercial area, which is an emphasis we put forth to them maybe 18 months ago. I just -- yes, I think good things are happening in the sales arena.

That's great.

Could you talk a little bit more also about the inventory investment? Was that largely driven to -- in anticipation of continued price increases or were there other considerations there?

In general, Jeff, that was really done because of the seasonal period. And what you saw in March was a very strong month, so they need to build their inventories a little quicker than they have in the past. Now, some of the manufacturers have announced some price increases in May and some of them at the end of April -- which I'm not sure that they've gone through yet -- but it was not in great anticipation of any imminent market increase.

We turn our inventories about six times, so most of that stuff would have been turned out by then. It was truly based upon the increase in revenues that we saw.

And last question, and then I'll turn it over to someone else.

Are any color on the state of the acquisition pipeline?

It's still very good, Jeff. That's a good question. David and I, and others, are working on that.

Again, our strategy is to buy good companies with great management teams. We turned down a lot more deals that we take. I think the industry will continue to consolidation. There's no reason for that to change

Thank you very much.

You're welcome.

Thanks for calling in, Jeff.

You're welcome.

Your next question comes from Michael Fox.

You make a proceed, Michael.

Good morning, guys. Congratulations on the quarter.

My first question is on the inflation outlook. I was wondering if you could provide us a little quarter as to what you're anticipating here. Looking at the back-half of the year, should we assume the 6% to 8% run-rate could carry us forward?

That's a good question, but a hard one to answer.

It's very hard to predict. It's kind of hard to predict gasoline prices. We react to what happens. We are very on top of it. If there is a price increase, our systems are such that we pass it on and pass on as soon as we can.

We also want to be a good supplier to our customers. We're not trying to maximize profits on -- during these times. I think you can see that with the gross margins being steady.

Predictions are difficult. I really don't know. I thought, honestly, when the fiscal year started, there would be little or no inflation. I was proven wrong, so I'm hesitant to forecast.

But David, is there anything you want to add?

The only thing I would say is that we're really at the mercy of the manufacturers that supply us. And again, they've announced some 5 to 7 price increases in May. I haven't seen anything has extended beyond that for the summer season or the fall. Again, it's petroleum-based products, so their product cost goes up, I think they'll try to pass it on also.

Okay.

You talked a little bit about the Gulf state region. I was wondering if you could touch on the new market in Southern California. How Pacific Supply is performing to your expectation?

I was there about a month ago visiting those locations again. The results in January, February -- part of January, February, March, and now, April, they're doing extremely well. It's just an outstanding company, and we feel fortunate that we were able to bring them into our company.

So, they're doing well. Gross margins are very good. Their product lines nicely mix between residential and commercial. So, it really fits the profile, and we're very happy with that company.

And looking at longer-term, I assume California could be a very strong growth opportunity for you. Is there a, perhaps, a branch number that you could speak to or a size of market that you look at, longer-term, for California?

At this point we are in our integration mode. Very soon, we will be doing budgeting, and our leadership in the West Coast will be presenting to us to a growth plan for new branches, and we're also -- we'd be very happy with other acquisitions that might come become available.

So, it's a little premature. We don't want to run too fast out there at this point. We just want them to take care of customers and convert to our computer system and get used to us.

But we will be going through the budgeting cycle very soon. We may be able to talk more about that in the next couple of months.

My last question is, as you look at the month of April, you certainly had a very strong performance in your fiscal second quarter. Do you see this momentum continue into the early parts of Q3?

As I've said before, these growth rates are way above our expectations. We continue to do well in the third quarter. We're above our internal budgets, and I just don't expect this kind of growth rate to continue. Of course, I did expect the second quarter to be as good either.

So again, it's hard to predict other than to say we're in this for the long-term. This is going to be a sizable company that understands how to grow organically and by acquisitions. It's hard to predict what -- what the future holds, other than, we have a plan to deliver the numbers that you read about.

Alright. Great.

Thanks a lot.

Thank you.

Your next question comes from Brent Rakers.

You may proceed.

Good morning.

Bob, I appreciate the comments that you have given about the regional make-up of performance, but is there any way you'd be willing to get a bit more specific, even to provide some -- some hard numbers to make us better understand what the impact has been on the warmer weathers in the Northeastern markets?

It's difficult. I don't think it would be a good thing for us to, even from a competitive standpoint, to get into it too much detail other than all regions are doing well. All of them are double-digits. Nobody is holding us back.

And so, the detail that I've given you is meant to let you know that our geographic diversity is working for us, and if New England slows down, maybe someone else will come to the plate. But it's all doing well. It really is.

Great. Fair enough, Bob.

And then, on the JGA, back-checking some of these numbers, it looks like JGA may have contributed 31, 32 million in the quarter, which I think would be the seasonally low quarter for them on an annual basis. When you acquired them, they were at a run-rate of 74 a year. I was wondering if you could maybe talk us through what you have done there that maybe you could transfer to extend the growth of some of the other acquisitions you have made since then?

Do you want to talk about? Of course, that's another way of asking about regional performance.

JGA is doing well, and we're going to pull up some numbers to see if we can help with that a little bit.

Just one second--. Do you have another question while I just--?

Maybe while we wait on that one, and I apologized on this if I'm given wrong numbers, but I saw earlier that you had talked of maybe the gross margin range was in that 24% to 26% area. And I guess I would have thought with a little bit of a mix shift in the existing business, that the gross margins would have shifted up a little bit as a function of that. Maybe if you could comment a little bit more on the gross margins, particularly, in the existing markets?

The existing is 25.5, so it in the upper range of that 24 to 26. And again, the commercial business is doing awfully well. Those gross margins are normally lower than residential. So we're in the upper-end of that range.

And the other thing I would comment, Brent, you're a little bit -- pretty accurate with your number as far as JGA goes. A lot of JGAs growth has come in the two-step business, which, again, hurts gross margin, which is why the 24% margin is staying relatively consistent. What I think is happening there is that's what's taking off right now in that area. They're certainly doing very well in their one-step business, but their product mix has shifted a little bit toward the two-step, which would blend the gross margin rate down a little.

Okay. Perfect.

And then, I guess another question on the gross margin, and I guess the pricing issues.

I mean, obviously, with the inventory turns, I would assume there would not be any kind of short-term impact to gross margins, but you can comment on that briefly as well?

You're absolutely right.

I haven't seen any impact because pricing for the first quarter, we saw stagnant pricing when we compared our March 31 inventory to our December prices. So, there has been many changes in this quarter. So, I don't think you'll see much of an increased now.

If they jump them of more than the 3% to 7% they're talking about, you could see us gain a little bit there, but again, with the inventory turning back quickly, it really goes out the door pretty quick.

And then, just one final question, and you probably listen to some of these production builders talking about as the construction market gets a low bit tougher, going back to suppliers and seeking concessions. I guess just a point of clarification as to how much exposure you actually have to some of these production builders?

Well, again, we like the attributes of this industry were somewhere between 70% and 80% of business is reroofing. So, our exposure to the production builders is minimized because of that, and that continues to be the case.

Okay. Fair enough.

Thanks a lot, Bob.

Your next question comes from Timothy Jones.

You may proceed, sir.

Good morning.

A number of questions if you'd would be so kind -- first of all, the 8%, obviously, you're just passing -- is that mostly higher asphalt costs or are you joining gasoline costs in there too? I would think it's mostly asphalt.

The 8%, sir--?

You talked about roofing inflation being about 6% to 8% with roofing at the high-end of that.

What it is, is the asphalt pricing to us is not part of the product mix. When we're buying completed shingles.

But it isn't with the manufacturer--?

I have no idea how their pricing their products to us as far as their raw materials costs.

But they were then talking about another 5% to 7% increase coming up shortly?

Yes, and they're talking about that in May.

Amazing. Okay.

Secondly, you, historically, broke-out quarterly the acquisitions versus the internal growth in a chart, or in a table, which I found very helpful. You appear not to have done it this time. Any you comment on that?

We did it. It's in the queue, sir.

It's in the queue, but not in the release?

Yes. and we had, in the past, hadn't put it in the release. It's mainly in the queue. We did break-out the product sales, and that is also in the queue again.

Good.

The organic is 24.

Yes, but you had a very good table that I found -- both on sales and on earnings segments.

It's in there.

Okay. Great.

Lastly, I've followed the building industry for 38 years and the remodeling -- I have, virtually. If you take your 35% gain and pull out the 8% inflation, that's a 27% unit growth. You can look at it two ways. You can look at the residential as 20% higher growth than commercial as opposed to 9 the year before. This 27% growth is out of sight on an internal basis -- on a unit basis -- to compare it to what the historical rate of the Roofing industry is. I know that you said that you got some benefit from the third quarter because of the weather. Could you address this a little bit more because this is out of sight?

Also remember, sir, that you're going from our lowest sales period. that we have during any quarter. So, an increase in dollar volume will cause a higher percentage. It truly, as Bob had mentioned, happened in New England, the mid-Atlantic states, and in Texas, and it is volume driven. We're picking up market share, and we've also seen an increase that was because of the mild weather, they were able to do more roofing in those areas. It sounds simple, but that's truly what happened.

Could I just ask one last question on that subject?

The increases in commercial roofing stayed at 15%, and then, went from a 24 to 35 in residential. These factors have benefited in a lot of business offices in both areas of remodeling. Why didn't it affect the commercial for the same factors?

Well, one of the reasons is it's just the nature of the business, and a commercial project is scheduled much longer ahead of time than a residential products. Now, they would be able to go through that work, but think of your own home. They can do a roof on a home in one or two days, and jump to the next one very quickly.

It takes more time to organize a commercial job than that. The jobs are much larger, upwards to -- $10,000 home job, you could have a 1 million-dollar commercial job. It just takes more time.

Do you do any of the rubber roofing that the Carlyle Sons -- that type of roofing?

Yes. I believe from not telling tales out of school, we are probably their largest customer.

Thank you very much.

You're welcome.

And you have time for just one last question, and that will be from [Bill Stellinoff]

You may proceed, Bill.

Thank you.

Good morning.

Good morning, Bill.

The question I would like to ask you, and I apologize, It took me some time to get through this queue, and I hate to get so specific, but looking on page 12, the heading is here. It refers to the table from the prior gentleman here of existing and acquired markets. And while -- I apologize -- I haven't had that much time to study this, but here is the gist of my question, which I'd like to ask you if you would please comment upon -- excuse me.

Looking at the -- for the March quarter in the acquired markets, and, specifically, focusing upon the operating margin here, it's not meant to be critical, but I would like to ask you how much time do you think you need, going forward, to bring the operating margin figure up? I know part of this is, obviously, from purchase accounting -- that you just have had it for a brief period of time, but to get this back in -- the operating margin -- is it reasonable to expect it would go up to the magnitude of 6%, comparable, if, in fact, you would fully digested it and restructured the acquired markets to your own business model?

The first comment I would say is that is during the winter period for shelter, which makes up the majority of the acquired markets for that second quarter.

The second thing, you're absolutely right. The purchase accounting has a drastic effect on this quarter because it's a low quarter, and we have approximately $2.5 million worth of amortization of customer relations during the quarter.

Okay.

So, that affects it.

The third thing I would say is that to expect them to get to 6% in our second quarter, that's a stretch. That's a tremendous accomplishment. More in the 3% to 3.5% range would be a good accomplishment, and that will take a couple of years as it has with some of our other acquisitions. As time goes on, those customer relations actually drop because they're based upon their present values.

Thanks.

Again, it wasn't meant to be critical on this, I just wondered what time it would take for you to achieve an increase consistent with your expectations.

Good question, and you had it accurate. The fixed cost of purchase accounting and amortization, with the second quarter, which is our lowest quarter, that fixed cost stays, and then, the quarterly numbers increase in sales. You're absolutely right.

If I may, other question, if you have time, please?

Sure.

Regarding Tim's question about the, literally, the phenomenal growth. If you take out, in terms of looking at the 24.1, or just round it off to 24%, quarter-over-quarter increment, 6% to 8% attributed to price, by definition, the rest of it attributable to volume, two questions related to that -- one, did I sense that you were expecting that Q3 may have had some, quote, forward push-through, into this quarter, and therefore, borrowed something from the next quarter, or did I get that wrong?

It was -- we think from quarter one into quarter two, there might be some push, and I think quarter two is very strong because the weather was so good. So, there may be some borrowing from quarter three -- if I'm answering that correctly for you.

Well, yes. Just one comment to add to it -- if I go out and talk with roofers, it's not a precise sample of any [inaudible], but the backlog of work here in the Northeast and Mid-Atlantic is so strong that it's difficult to envision that -- and I hate to be [inaudible] about this -- but it's a difficult to envision a slowdown in the remodeling work, and the backlog that people are quoting for forward times to complete and take on work.

I don't know. I guess my job is to worry about things, and I always worry. I could probably get roofers in this room who would say the backlog, three weeks ago, was stronger, and again, our objective is through all the cycles. Let's figure out how to take market share, through 5% to 10%, and even when roofers are looking for work, and the backlog isn't as good, let's open branches, let's add products, and let's do all that.

So I try to keep my ear on the marketplace as best I can. We don't have a trade association that publishes a bunch of information. So, just talking to roofers is not such a bad thing. They're the ones that are closest to it, but I had conversations both ways. I have them where it's going to be strong, others saying I wish I had more work. That could come down to the personality of the owner of that business even.

I tell you this. We are paid to worry about the future. We watch our costs. We watch the inventory turns, and do not represent that anything other than we're a fundamentally sound company that has a good business strategy that will take us through a long period of time.

Related to the issue of the 27% unit volume growth, is it possible to make some sort of a judgmental guess that part of this is attributable to an upgrading or, if you will, a mix-shift to a higher-end shingle even within residential and non-residential roofing materials being higher-end?

No, I don't think so.

Not all unit volume growth--?

That shift happened 10 years ago.

Okay. It's not happening?

No, and our company has always wanted to focus on the higher-end products, so that's not a paradigm shift even for us. So, I don't see anything there. Well, thank you for your questions -- your responses rather. Okay.

Appreciate it.

And at this time, gentlemen, I will hand it back over to management for closing comments.

Bob, you may proceed.

I appreciate, again, everyone's call in to this conference call.

Again, we're very happy with our results. We will continue to work hard to meet your expectations for the long period of time. We're excited about our industry. And again, our objective is to open branches, make good acquisitions that bring us new geography, motivate our people to exceed expectations, and we're excited about it.

We appreciate your support of Beacon, and we will look forward to our call next quarter.

Thanks so much for calling in.