Beacon Roofing Supply Inc (BECN) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply Fiscal Year 2007 First Quarter Earnings Conference Call. My name is Onika and I will be your coordinator for today. (Operator Instructions.) As a reminder, this conference is being recorded for replay purposes.

On this call, Beacon Roofing Supply will make forward-looking statements, including statements about its plans and objectives 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. Robert Buck, President and CEO of Beacon Roofing Supply. Please proceed, Mr. Buck.

Thank you, Onika. By the way, I'm recovering from a pretty bad cold. I actually lost my voice last week, so it's a little raspy. But we'll get through this. But thanks for dialing in to our first quarter earnings call. I want to make a few comments before I turn the call over to David Grace, our CFO.

First of all, I am proud to report a 12% sales increase over the first quarter of last year despite having five fewer days as compared to last year. And that's approximately 8% fewer selling days in our first quarter than last year's first quarter. I also want to say that having five fewer days does make all other comparisons difficult, and we're going to do our best today and with subsequent calls to us to qualify the impact of those days on our results this morning. Okay?

We also have 3.2 million more shares outstanding this year versus last year due to our secondary offering that we executed December '05. As I reported during our fourth quarter, business is very soft at this time. The change started in October. Ironically, right on the heels of a very strong organic growth for the fourth quarter. It's somewhat understandable because of the impact of massive storms like Katrina and Rita last year. And really, no impact from storms this year. That was an unusual circumstance.

And secondly, everyone has heard about the drop in new housing starts, which has a lesser impact on our Company because our business is dominated by re-roofing. I also want to mention again the long-term importance of a balanced product mix and geographic diversity. While our residential product segment is soft, our commercial business remains robust and it really acts as a counter balance to the residential segment.

And let me mention a few things about regional performance that I really haven't done in the past, but I think we owe it to you. I'm very pleased with our organic growth in the Northeast, which incorporates all of our operations from New England, south to Pennsylvania and Delaware. Our Carolina operations are doing well. And our Canadian region continues to exceed our expectations.

We're seeing our biggest weakness in the Mid-Atlantic States, Texas, and the Gulf States. And that's attributable to the lack of re-roofing business after major storms hit in the area. Our geographic diversity really does help to mitigate those kinds of regional disruptions. Our existing locations continue to perform well in challenging times. I'd like to point out that expenses are being controlled and we are moving ahead with plans to add more customers and new branches, so that we come out of the current softness in great shape to capture more market share.

We're proud to say that every branch is now operating on the same IT platform because we recently converted the last remaining region of Shelter. And having everyone on the same IT platform will help us to continue to improve the performance of that acquisition. Now, I'd like to turn it over to David Grace who has a lot of details to share about this quarter. And when he's finished, we'll be happy to take your questions. So, David?

Thanks, Bob. Good morning. The following will be a discussion of our results for our first quarter of fiscal 2007, which ended on December 31, 2006. I will refer to this quarter as 2007 and the comparable quarter ended December 31, 2005 as 2006.

Net sales increased 11.9% to a record $380.2 million in 2007, from 339.9 million in 2006. Our acquired markets contributed 54.6 million of this revenue increase, while our existing markets saw a decrease in net sales of 14.3 million, or about 5.5%. 2007 had only 61 business days, compared to 66 business days in 2006, which was the principal cause for the contraction in our existing markets.

Our existing market sales for the first quarter of 2007, based on our daily sales average, increased 2.3%, due to strong non-residential roofing sales. Last year's first quarter sales were unusually strong at 14.3% internal growth. And we also experienced lower inflation in 2007 than in recent quarters. Our definition of existing markets or internal growth excludes branches acquired in the four quarters prior to the start of the reporting period. Our internal growth, after adjusting for those five extra business days in 2006, was comprised of residential roofing contraction of 3.2%, non-residential roofing growth of 11.9%, and complementary products contracted about 2.2%.

We estimate that inflation contributed 2 to 4% of the total sales over 2006, with slightly higher price increases in nonresidential roofing products compared to our residential roofing products or complementary products were somewhat flat to last year. We estimate our inflation based upon our current inventory's product mix and invoice costs as compared to invoice costs of the same products a year ago. We believe our net inventory costs, including associated rebates, has been relatively flat since January of 2006.

We also opened six--we also have opened six new branches since the first quarter of 2006 and closed two in our acquired markets as we--and we also acquired 13 branches since that time and we operate a total of 155 branches at the end of the quarter. Overall sales per day averaged approximately 6.2 million in 2007, versus 5.1 million for 2006. Our first quarter gross profit increased 9.6% to 91.7 million in 2007, from 83.7 million in 2006. Our existing markets had gross margins of 23.8% for 2007 and 24.4% for 2006.

The decrease was caused partly by a product mix change towards more nonresidential roofing products, which generally have lower gross margins than our other products, and also by increases in the general competitive conditions in most of our existing markets. However, the 2007 existing gross margin includes an increase in rebates as a percentage of sales. Our overall gross margin rate was 24.1% in 2007, compared to 24.6% for 2006 due to the same factors.

Gross profit in our existing markets decreased 5.0 million, or 7.8%, which is slightly below the respective sales contraction. Operating expenses in our existing markets declined 1.9 million, or 4.6%, to 39.7 million in 2007 from 41.6 million in 2006, while acquired markets increased 14.6 million, including 1.2 million for the amortization of intangible assets recorded under purchase accounting.

The existing markets operating expense decline was due primarily to reductions in bad debt expense and some savings in group insurance, along with lower payroll and related costs that resulted from having one less payroll week in 2007 than in 2006. These factors were partially offset by increased salary expense for new corporate and regional support positions to help us manage our rapid growth and increased warehouse expenses, mostly for our new branches.

Stock option expense also increased 0.7 million to 1.3 million in 2007 from 0.6 million in 2006. We expect to incur a stock-based compensation of approximately 1.3 million per quarter for the remainder of fiscal 2007.

Existing markets operating expenses as a percentage of net sales increased slightly to 16.1% from 16.0% primarily due to the effect of the lower sales. Overall operating expenses increased to 18.6% of net sales in 2007 from 17.0% in 2006 primarily due to the higher operating cost percentages at Shelter and Pacific regions, and the impact from the additional amortization that I mentioned above.

As a result of all the foregoing, our 2007 first quarter income from operations decreased 18.1%, or 4.6 million, to 21.1 million from 25.7 million in 2006. Operating margins at our existing operations decreased to 7.7% in 2007 from 8.4% in 2006. Our overall operating margins also decreased to 5.5% from 7.6%, mostly due to the inclusion of our acquired markets lower operating margins.

Interest expense increased 2.3 million to 6.3 million in 2007 from 4.0 million in 2006. The increase was primarily from our increased borrowings to finance our acquisitions and from the rise in interest rates. Income tax expense was 5.9 million in 2007, compared to 8.8 million in 2006. We've estimated our fiscal 2007 effective income tax rate to be 40.2%, as compared to 40.5% in 2006. As a result of all I've mentioned, our first quarter net income decreased 32% to 8.8 million as compared to 12.9 million in 2006. Diluted net income per share was $0.20 compared to $0.31 in 2006, a decrease of 35%.

Cash flow from operations was 3.6 million in 2007, compared to 19.6 million in 2006, resulting from the decline of 4.6 million in operating income and a $51 million decrease in accounts payable and accrued expenses, due in part to early payment discounts offered to the Company in 2007 and the seasonal changes we see in purchase volume. Partially offsetting these factors was a decrease of 42.5 million in accounts receivable in 2007, mostly due to seasonal changes in our sales volumes and an improvement in the number of days outstanding.

In 2007, we refinanced our credit facilities, paying off our outstanding revolver borrowings of 228 million and increased our senior notes payable to 35 million--$350 million, which generated more borrowing available at lower interest rates, and approximately 47 million in cash at the time of closing. The cash provided by these finance activities was partly used to finance some of the 11.4 million in capital expenditures.

[GAAP] key results for our quarter, sales increased 11.9%, adjusted internal growth increased 2.3%, again against a very strong 14.3% growth last year. We successfully completed our refinancing in the first quarter, which provides us with increased liquidity for potential acquisitions that are a good match with the Beacon business model.

That ends my section of the financials. And now we'll take questions.

Yes. Thank you, David. We'll open it up for questions at this time.

(Operator Instructions.) Your first question comes from the line of Michael Rehaut. Please proceed.

Hi. Good morning.

Good morning, Michael. How are you?

Good. How are you?

Great, thanks.

On the--I was wondering if we could focus on the sales growth for a moment. You gave some commentary on the regions. What are you seeing in terms of potentially share gains and--in your existing branches? And if you could kind of give us your thoughts on what you expect to achieve in 2007 with regard to either organic share gains from existing branches or new branches.

Share gain I wouldn't be able to tell you because we really don't have the data for all the products that we sell. So I really can't answer that, other than to say every location has its own budget, its own marketing plan. And it's very difficult to look at a 20-square-mile area in a certain city and talk about share gain. But I am impressed with New England. All the categories are growing well. The quality group of companies, which is Pennsylvania and Delaware, are certainly growing faster than the industry. Canada continues to--their several years of growing faster than the industry. So--but location by location, or even regions, we just don't have market share data.

And Michael, I'd like to remind everybody that beginning with our second quarter, the Shelter regions will be included in the existing market internal growth calculations. So, just keep that in mind.

Okay. And you're saying that the Northeast--you are pleased with the Northeast. Are you saying that that demonstrated growth in the quarter?

Yes.

Just one last question on the margins. You were able to kind of come into our estimate. What are you expecting for the next couple of quarters in terms of margins, and how do you look at the cost inflation and the pricing that you're able to push through?

Well, to begin with, for the next several quarters we think they'll track a little bit below last year. Again, there's a little bit more of a competitive market. As far as pricing, there's been some--several price increases announced by several of the shingle manufacturers. We really haven't heard much from the nonresidential or commercial manufacturers. I'm not so sure those will stick throughout all our regions. We're generally looking at a flat period for the next few quarters as far as pricing goes. I don't expect them to decline at all though.

Okay. So like the first quarter made modest gross margin contraction. That's reasonable?

Yes. And the first quarter may be overstated just slightly. Because last year in our first quarter, if you remember our conference call, we actually told people that we had $400,000 to $600,000 in increased rebates that we had earned that we didn't expect to earn as of our September quarter last year. That was in Canada.

Yes.

Your next question comes from the line of David Manthey. Please proceed.

Hi. Good morning. In terms of the competitive pressures that you're seeing, given the fact that you are mainly re-roof as opposed to new construction, is the competitive pressures--is the root of that because other players in the industry are tied to new construction and it's just flowing through the entire channel? And then, in terms of the pricing that you've been able to get to this point--and you said that you don't think pricing will come down, David. Even as competition remains intense, you still think you'll be able to hold the line?

I think we'll in general be able to hold most of the line as far as percentage goes. One of the things that happens in a slowdown with new construction in our industry anyway, Michael, is that--I mean, David, is that the new construction workers will then try to go out and do re-roofing. So they in general don't market as well, so their prices are in general a little bit lower. That is certainly an influence on the industry when these things happen. And I think that's what we're seeing today.

Your next question comes from the line of Michael Cox. Please proceed.

Thank you very much for taking my questions. My first question is--relates to looking at the full year here in terms of the sales growth. You've talked a lot about 5 to 10% growth for your business. And I was just wondering if you could comment on how you see the full year shaping up relative to those expectations?

The outlook for the second quarter, January is soft, but we're in the winter months, so it's going to be too early to predict what February and March are going to do. It's been extremely cold in the Midwest, even up in our newly acquired business in Minneapolis. Pretty much nothing is going on. Northeast is very cold. But again, that can change very quickly.

We continue to believe that long-term our growth rate is at 5 to 10%--hard to predict quarter-to-quarter. And there's a lot of the year left. So we're kind of waiting to see how it unfolds before we do any bold predicting, other than to say it's certainly too early to predict a second quarter.

Your next question comes from the line of Brent Rakers. Please proceed.

Good morning. Bob, I think I just want to maybe follow-up with that last question. I mean, obviously, we had I think a really warm December nationally, and obviously, a really cold - at least by a comparison basis - January. I was hoping you could maybe give us more color around what the comps did--the same store sales, if you will, did in December, and then also January. And maybe particularly with some of those Northern markets that you referred to that are performing really strong, if you could give us a sense from how they may have rolled December to January.

December was pretty good for us because of the warm weather. And it's a little bit hidden because the first quarter had those five less days. But as a month, December was good because it was warm. But January's been kind of difficult.

Bob, would you--I mean, how was--in terms of scale, how was January? I mean, is it down zero to five, or is a little more than that?

Well, it is more than that. And it's very soft. So--but it's hard to--that doesn't make a trend. I remember the fourth quarter last year, which was one of the best quarters in the year. July was very soft. And August and September were outstanding. So we--our visibility is pretty short.

And, Bob, would you--Bob or Dave, could you maybe give us a sense for how important the month of January typically is to the first quarter relative to the other months?

It's difficult to say, but usually in January the roofers in the North and the colder climates would be off more than they would be on. If February turns around and March turns around with warmer months, much like last year, you'll see a dramatic change in those areas.

I'd say March was a lot more important--.

--Yes. Just in total volume, February--and probably January is probably the slowest month in general for the ones in the North.

Your next question comes from the line of [Sarah Burns]. Please proceed.

I'm sorry. Hello. I was looking at your acquisition pipeline. Given the softness you are seeing and some of the pricing pressures from your competitors, how is the acquisition pipeline looking?

It's very good. It has been since we've been public. It probably has ticked up in recent months. So we're encouraged by that part of our strategy. As far as pricing for the acquisitions, it's not affected by recent trends or quarterly results or things like that. We're buying--hoping to buy businesses that have been in business for a very long time. And those--the prices for businesses don't spike up and down as quickly as you might think.

Okay. Thanks.

Thank you.

(Operator Instructions.) Your next question comes from the line of [Andy Schaeffer]. Please proceed.

Hi. I was just seeking clarification on the impact of inflation on your sales numbers for the first quarter of this year versus last year. Did you say this year it was pretty flat and last year maybe it was a positive 2 to 4%?

No. I said this year, the way we do our calculation off of invoice costs, it showed around 2 to 4%. But in reality, because of increases in rebates and stuff, it's been pretty flat since last January. Last year, right after the hurricanes, the prices shot up in the quarter, and it was probably in the 6 to 8% range, if not higher, for the quarter.

And is that taking into account the impact of rebates in that quarter, too?

Yes. Last year, as soon as the hurricane hit, most of the manufacturers, especially the shingle manufacturers, increased their prices dramatically.

Okay. Thank you.

Thank you.

Your next question is a follow-up from the line of David Manthey. Please proceed.

Hi. Thanks. In terms of the gross margin here, actually daily sales were pretty much in line with what we were expecting, but better actually. It was mainly gross margin that was the issue. And I'm wondering if you can help us with when you talk about the mix shift year over year. Could you also into some detail about what was within the core residential and core nonresidential? What were those gross margins this year versus last year?

Well, I can give you some general ideas. In general, the residential--I mean, the nonresidential [inaudible - audio glitch] to 400 basis points below the residential margins. So you can do some rough calculations to get the net margins. One of the reasons I can't give you an exact answer is because of the way the rebates are reported. Sometimes they're on the total sales and you really have to allocate a manufacturer between residential and nonresidential volume.

That being said, the product mix change to nonresidential was quite--pretty dramatic. It went from 34.9% up to 38.2%. And that does have an effect on the gross margin level.

So in terms of the gross margins within those two categories, could you just talk about the deltas then year-over-year? Were residential gross margins down and nonres flat, or how were they?

I would say overall the nonres was flat and the residential margins were down slightly. And again, that's off of--we run our system off invoice costs. So the net margins could've been affected somewhat by some increased rebate percentages for this year.

All right. Thank you.

Your next question comes from the line of Jack Kasprzak. Please proceed.

Thanks. Good morning. David, did you--I just want to clarify. Did you just say nonres margins were 300 to 400 basis points below res?

It's in that range, but in general, we try to tell people it's 100 to 400 because if you get smaller nonresidential jobs, you can almost make as much margins as you do on the residential work. But the larger jobs are certainly much lower than the residential products.

Okay. And then, I was going to ask on a different subject, in light of the fact that it looks like Building Materials Corporation is going to buy ElkCorp and I suppose create some further consolidation among the shingle suppliers, how do you guys view that in terms of does it present any--what challenges might it present? Or might it present some opportunities for you as it does, I guess, represent some consolidation among suppliers and perhaps at least portend some firming pricing longer term in the shingles, if you want to make that assumption?

Sure. And we've thought a lot about it and had a lot of conversations. Our purchases from Elk related to our total, they were an--they were a smaller vendor for us. Because they were truly more of a regional company in Texas and the Gulf Coast and so forth. So they were a good vendor for us in Texas and a lesser vendor in other parts of the country.

So for us, the merger may not be as significant as to other distributors who had a bigger--dependent upon them in a bigger way than we do. So we don't see a big impact on us. GAF is--we're very significant to them. And now that they've bought Elk, we'll be even bigger--a bigger slice of their total sales. So as a large player in this business, we like the fact that we can--that we are large as well. So the impact on us will not be as significant.

And Jack, just to give you an idea, they represent--their products represent less than 3% of our total sales.

Okay. Great. Thanks very much.

You're welcome.

Your next question comes from the line of William Richards. Please proceed?

Hey, guys. Bill Richards calling from Gabelli and Company. I had just a very quick question. Who are your strongest competitors here in the Northeast?

Well, you've got two sides of the--the commercial side I would say would be Bradco is pretty strong.

And another smaller company called [Admiral] that's up here that sells Firestone. Residentially, it could be Bradco. ABC has some locations up here. And then, there's some small regional guys that certainly have their market niche.

Okay. Thank you.

Your next question comes from the line of Mukul Kochhar. Please proceed.

Hi, guys. Just a quick question on the gross margin side. The pressure that you--the competitors--especially the competitive pressure that you saw this quarter, is that really unusual and you expect that to go away once things normalize?

It's probably--I wouldn't say it's unusual. It's certainly unusual over the last three to four years when the growth has been so strong. But in the past, it can be temporary until things settle out. And then, when things settle out, you pretty much go back to the norm where the residential guys are buying from the guys that they feel loyalty to and who service them.

And certainly in these times, it proves the value of service to our customers. And having new trucks and being able to deliver where they want to and how they want to is still just as important. And if our prices are slightly higher than our competitors - 2 to 3 to 4% - the customer is willing to pay for that service.

And also, if you go back in history even a four or five-year snapshot, our gross margins vary within a pretty tight range and usually vary mostly because of product change, not competitive pressures.

All right. Sounds good. And I mean, if these competitive pressures, let's say they go away and normalize. I mean, have you quantified the impact that you actually saw this quarter? I mean, just give us visibility into what the positive would be if these go away.

I really couldn't give you a number. And again, it may seem like the gross margin percentage has a large change, but that differential is actually quite small in the marketplace. I wouldn't be able to divide it up amongst competitive and inflation. It's just too difficult.

Thank you. Thank you, guys.

Thank you.

Your next question comes from the line of Brent Rakers. Please proceed.

Yes, guys. Just a couple other questions. You refer to the hurricane benefit last year in the December quarter. Could you remind me of kind of a sense of what you think that was in terms of dollars and how much of that maybe also spills into the March comp last year?

Yes. And Brent, we'll talk about that because we were researching that at the time it was happening, and we even talked about it yesterday. It's difficult, but we'll give you our best answer in that regard. We think it's somewhere between $60 and $70 million of business. And that is not a significant number to a $1.5 billion company.

But when it happens in a four-month period, if you roll through the math of $70 million times the gross margin times the--or just take it down to operating income and tax effect, it's not significant on an annual basis, but it can be for the quarter. So, a big impact last year in a concentrated period of time. So I'd say 60 to 70 million.

And then, 60 to 70 was all in the December quarter. Do you have a sense for how much more maybe trickled into the March quarter of '06?

Yes. We had more. I'd have to research that and we can talk about that offline. But we've never looked at it in that much detail. But we certainly can study it for you. But it was in both quarters.

Yes. That 60 to 70 is what we feel for both quarters.

I'm sorry--I'm sorry, Dave?

That's what we feel for both quarters.

Both quarters meaning the December and the March quarter?

Yes.

Oh, that's a combined number. Okay. Okay, great. Thanks a lot.

Thank you.

Your next question comes from the line of Michael Rehaut. Please proceed.

Hi, thanks. Just a couple of points of clarification. You had mentioned that your January is trending down more than 5%. But just within the quarter itself, I think you might have mentioned or hinted to that January is the smallest month, if I remember correctly. Can you give us an idea--is that like maybe 20% of the month's sales or something on that type of level?

We could look at it. I don't know.

Yes, I could look at it. It's a moving average because, obviously, we have all the new acquisitions in there this year that we didn't have last year.

Right. But I mean, in general, it's safe to say at minimum that it's--.

--Probably 20 to 25%. February is probably 20 to 25%, and then 30 to 40% for March. And those are just rough estimates, Michael.

Right. No, I understand. I appreciate just putting some context. Also, when you had said before that the nonres margins were anywhere from 100 to 400 bps of margin less than residential, you were referring to gross or operating?

Gross.

Gross margins.

So--right. So does that even out a little bit on the SG&A line and produce a little bit better level of parity on the operating margin?

It certainly does even out. That's the way we look at it also. We're somewhat indifferent whether we do nonres or residential because of that factor.

Right. So I guess the SG&A is also proportionately lower on a percentage basis?

Yes.

Okay. And just lastly, with the 60 to 70 million, would you say that most of that was in the December quarter, if you had to guess?

I would guess, no. I would say some of it is still in this--in our second quarter. And the reason I say that is, again, because of Shelter. I mean, remember, we only owned Shelter last year for 2.5 months of our first quarter, and fully for the third quarter. And those areas where those hurricanes were, were not extensively in the northern areas, of course, so they don't have as much seasonality.

Economic--or reconstruction activity in those--some of those areas was pretty slow to begin because it was so hard to get into the area. I was recently in New Orleans visiting--I've got to say New Orleans like I lived there or something--but New Orleans with our VP visiting Lafayette and New Orleans and other places. And the--there's just nothing going on. You can drive down streets and see damaged homes.

And you'd think you'd see contractors and trucks and hear hammers and saws and things, but it's--the population hasn't come back yet. So it's still pretty much very slow down there. I was surprised that so much time has elapsed and how devastated that area is. So it's still strong. It took a long time to get into--with products. And then, now, it's taking a long time to repair things.

Your next question comes from the line of Michael Cox. Please proceed.

Thanks. Just a couple of follow-up questions here. I was wondering if you could touch on the comparisons by month here in the second quarter. Given that January of '06 was such a mild month, was the 24% growth in Q2 last year uniform across the quarter or did that vary?

It was pretty warm. But I think, if my memory is right, March was gangbusters. But I'd have to look back. I just--I don't have it in front of me. But the first part of winter was particularly warm. I just remember New England being strong the entire winter.

Yes. And we have to keep reminding people, Shelter is going to be in that internal growth calculation for this next quarter, so you sort of have a moving target of where we're planning to disclose for internal growth. And Shelter has that big region down in the Southwest in the Gulf.

Okay, fair enough. In terms of recently we've had--we've seen a private equity group make an investment in one of your competitors. I was just wondering if you feel that that will change the competitive landscape or the acquisition environment in any way.

I don't think so. My belief is that the industry is dominated by the smaller companies. You're referring to RSG, which was I think about a $600 million company with a lot of locations. I believe that our targets are companies that would be smaller than a private equity would like to get involved with. But recently though, 20% of Bradco was bought by Apollo. I think most folks know that. So that activity was recent. But I don't think you'll see a private equity company purchase a four-location distributor in some market.

So, I've been wrong before, but I think the private equity I think would like to place bigger bets. I think our industry is attractive for private equity, but the number of targets are limited.

Okay. And my last question is on the SG&A rate. I was just wondering in these uncertain times if there are measures in place, or perhaps it's too early or too short-term sighted to try and reduce SG&A in the near [future]?

I think we'll get rid of our CFO. That will help for a time. Other than that, actually I do want to point out that existing locations was 16.1% versus 16 last year, and that's in a situation where we had five less days. If you adjust it to similar days, you'd see a decline in SG&A. But it's high on our list to always watch it. And I don't think--I think companies--that should be a normal thing you do. You don't go from, well, let's manage cost this month, and then you forget next month. But it's a constant. I think our systems are good enough that we can stay on top of it.

I mean, we--David still sends email to people when he sees a meal expense too heavy. And so, we do watch the details, but we can always get better. But the first quarter, if you study that, that would indicate our existing locations run by our regional VPs in those regions are doing a pretty good job. But you've got to watch it in winter months--watch the travel, unnecessary spending. And we do that, and we will continue doing it and hopefully doing it better as time goes on.

Ladies and gentlemen, due to the allotted time, we have time for one more question. Your next question comes from the line of Mike Peasley. Please proceed.

Hey, guys. I think most of it's been covered. But I just wanted to follow-up on that $60 and $70 million impact on the hurricanes. Was that existing operations or was that due to the acquisitions you made in that area last year at this time?

Prior to the Shelter acquisition, we didn't have any locations.

Yes, I didn't think so.

No. The Texas branches can help out in those areas. We will have customers that will pick up and go into a storm area--they're called Storm Chasers--and will continue to buy from Beacon back in another region. So--but the biggest--we had more of an impact because of Shelter than if we had not bought Shelter. So--and we like that business. I mean, it happened and we were part of the helping folks down there get their houses dry.

And--but I think the biggest issue is this year there were no storms. And I remember not too long ago I was talking to [John Colten] about that. The impact, I said, would be more dramatic if you had one year of a lot of storms and the next year no storms, as opposed to storms every year. So I think '06 was the anomaly because there were no major storms. They happened, but they just kept going out into the North Atlantic.

And that's okay. I mean, we don't--this business isn't--at least or business has not been built on storms. We don't want people to get hurt and property damaged. But it was a strange event that you'd have the biggest storms of all time hit one year and zero the next year. So that is pretty much a nonrecurring $60 to $70 million this year.

Okay, great. Thanks for answering all of those questions.

You're welcome.

Thank you.

Thanks for calling in.

Your next question is a follow-up from the line of Brent Rakers. Please proceed.

Yes, Dave. You had mentioned earlier in the call I think that you thought maybe gross margins would be lower than last year the next several quarters. I was wondering if you could comment maybe in reference to that on the rebate trends and the impact on that that you're seeing. But also, I think you referred to a lot of inventory prebuys in the quarter that I assume translates to healthier gross margins from that front as well.

Yes. The prebuy was actually the year before where we made the rebate programs that we didn't expect. This year it was pretty much a normal year. And we ended the year with inventories at about a seasonal level for us. Going forward, as far as the gross margins are concerned, it's hard to say if we've hit the bottom yet in this new home construction market, or it's going to take a couple more months to really hit the bottom and then have those guys get back to work.

I think when you have an influx of those roofers who are used to doing new construction work, they proceed and they price those jobs cheaper and they are usually easier. And they're not as skilled as our re-roofers. So that's the pricing influence that happens in the marketplace. How long that lasts, I just don't know. I mean, it depends on whether we've hit the bottom now or are we going to start turning and at least make it flat.

Dave-and I know, obviously, it sounds like we're--you're in a period of a lot of uncertainty, both seasonally and just with conditions. And I think you guys have commented in the past on kind of outlook. And I know the long-term outlook hasn't changed. But any comment on kind of what you're thinking for fiscal '07--revenue growth or EPS or anything there?

Yes. Both of us will comment. I'll start with we need a little bit more visibility into current sales trends. As David said, whether the residential segment has hit bottom and will rebound over the next several months or has it not, and that rebound is pushed out. We don't know. But I think we'll know more as time goes on. And another factor is whether the economic activity in the Gulf will reemerge, or is that area many more months away from a rebound. So I think we'll know more and we will certainly talk about that when our visibility and our forecasting can be a little bit more accurate.

That's our problem. We--first quarter, we did have organic growth in the face of covering hurricanes and things like that, and that's kind of encouraging. And then, in the second quarter, you have major markets like Dallas shut down because of snow. And the middle part of the country, ice and closing branches for days and things like that. So we just need to have a little bit more visibility into that to see what happens.

Great. No, that's fair enough. Thanks a lot, Bob.

Yes. And I will tell you, some people are saying it has hit bottom and the second half is going to be outstanding, and that would be fine. They're better forecasters than I am. But as soon as I know, we will talk more about it, absolutely.

Thanks, Bob.

That concludes the questions. I would now like to turn the call back over to Mr. Buck for closing remarks.

Okay. Thank you, Onika. Just a few points of emphasis, and I appreciate everyone taking the time. First is only a few regions aren't doing well, and they really are the Mid-Atlantic, Texas, and Gulf states. Our folks in the Northeast down through Delaware are doing fine. Canada is doing fine. The Carolinas. And interestingly enough in those regions, all the segments are growing well in the first quarter.

Commercial is doing well. Some folks might have seen Carlisle's results today. And that confirms that commercial is doing well. And I think their outlook is optimistic. Existing markets operating income was lower due to losing four days--or five days and would have been more comparable otherwise. And with calls to us we can maybe talk more about how to do the math on that. But it's very difficult to lose an entire week of volume in a quarter.

And I think, therefore, the guys have done a pretty good job of controlling expenses with SG&A up only .1% despite losing those five days. The growth plan is in place and it's unchanged. New branches are on deck. Two have been opened already this fiscal year.

I'm encouraged with the acquisition prospects. I like our geographic diversity. It's a strength for us and it helps mitigate those regional disruptions that we talked about. The slowness continues, but that slowness doesn't at all change my long-term optimism in our business. Weather is hurting us. We--locations in Oklahoma, Missouri, Dallas, places like that. Currently, it's too cold to work in some parts of the country. Although it looks like next week will be better. But the weather will turn and over the long-term it becomes less of a factor.

The quarterly results are in my mind good, but the comps are difficult. And that's just real life. But the business fundamentals are really the most important things to focus on. And I've got to tell you, it's a lot more fun when we're beating estimates by $0.06 or $0.08. Even then, our business fundamentals were the same.

This is a great industry that offers us many opportunities. It can be seasonal and can be affected by major weather events. But all that really are just snapshots into a larger picture of our growth opportunity. So it's a great business. Beacon's a great company in a very solid industry, and we're excited about that.

We'll get through these issues--the issues of comps, the issues of weather, hurricanes, because that's just the nature of the business. So, we're optimistic. And I appreciate everyone calling in, the questions, the support of our Company. And we'll wind it up now unless David has some comments.

No. Thank you very much for your time.

Thanks for calling. Goodbye.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.