Beacon Roofing Supply Inc (BECN) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Beacon Roofing Supply's Fiscal Year 2007 Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

On this call Beacon Roofing Supply may 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 Company's latest Form 10-K. And, now I would like to turn the call over to Mr. Robert Buck, President and CEO of Beacon Roofing Supply. Please go ahead, sir.

Good morning, ladies and gentlemen, and thanks for taking the time to dial in to our third quarter earnings call. We are excited to report another quarter of record sales. This was made possible with the addition of North Coast Commercial Roofing, which is a commercial roofing distribution company headquartered in Twinsburg, Ohio which is a suburb of Cleveland. Even though we recorded total sales that exceeded most sales estimates for the third quarter, we are disappointed that our organic sales component wasn't higher. As you read in our Press Release, our organic growth for the quarter was a negative 2%, which in our opinion does show good improvement since our second quarter. And I also want to highlight that our sales performance is significantly better than new home constructions statistics would show, or the result for distributors who sell products for the housing industry.

During the third quarter we have all continued to hear, almost daily, about the worst new housing construction market in years. Yet Beacon was able to keep pace with sales levels from a record quarter last year. I believe our performance, while certainly below our expectations, does show the stability of the roofing industry even during very difficult economic times. Our business model and strategy, which incorporates a balanced product mix of residential and commercial products and geographic diversity, does insulate us somewhat big economic swings. When residential construction is down the commercial market often does counter balance that impact. And, the re-roofing industry, both residential and commercial, is driven by re-roofing decisions that are non-discretionary.

Regarding profit for the quarter we believe a study of our results will show our ability to control costs during a tough environment. We are currently in a very competitive market, which will improve in our opinion, but the competitive market may continue until there is an up-swing in the new housing construction market. David will share with you in a few moments some detailed numbers that show that our operating expenses are holding steady in a flat to down market. In addition, our receivables are in very good shape and we are proud of how we have managed inventory. Cash flow is strong and will only improve in the future as residential construction firms up.

So let me turn the call over to David with more specifics about the quarter. When he's finished I will add a few summary points and open the call for some questions. He is quite a bit under the weather so that normal Gloucester accent will have a cough to it and so good luck, David.

I'll first discuss our results from the third quarter of fiscal 2007, which ended on June 30th, 2007 and then I'll discuss our year-to-date results for the third quarter.

Our net sales increased 19.1% to $484.9 million in 2007 from $407.1 million in 2006. This increase was primarily due to the acquisition completed since last year third quarter, namely North Coast Commercial Roofing Systems acquired at the start of this year's third quarter and Roof Depot and RSM, which were acquired last year. Existing markets, which includes all branches except for these acquisitions, saw an internal contraction of $8.7 million or 2.1%. There have been continued lower levels of new home construction activities in most of our markets and flat to declining prices. In addition, there has been a significant slowdown in re-construction and re-roofing activities in the markets which experienced damages from the hurricanes Katrina and Rita, which have caused our residential roofing products sales in our existing markets to decline by 8.1%. Non-residential roofing and complementary products sales in existing markets increased by 5.1% and 1.7% respectively.

There have been continued high levels of commercial construction activities in most of our markets. We estimate our inflation based upon our current inventories' product mix and invoice costs as compared to invoice costs of the same products a year ago. The compressions of our gross margins would indicate that we have actually seen further price decreases despite support from our venders.

We have opened 8 new branches and closed 2 since the third quarter of 2006. We also acquired 23 branches since that time and today we operate a total of 177 branches as of the quarter end. We had 64 business days in the third quarters of both 2007 and 2006 and sales per day averaged approximately $7.6 million in 2007 versus $6.4 million for 2006.

Our third gross profit increased 7.5% to $107.8 million in 2007 from $100.3 million in 2006. Our existing markets had gross margins of 23.4% for 2007 and 24.6% for 2006. Our overall gross margin rates dropped to 22.2% in 2007 from 24.6% in 2006. Our existing market gross market decline was caused by an increase in competitive conditions due to the business slowdown in the industry and a slight increase in our non-residential products sales mix. We experienced the highest margin compressions in the markets that have a higher mix of new residential roofing sales, such as in our mid-Atlantic and California regions. For our other regions with a higher mix of re-roofing sales have experienced generally lower market compressions in the 50 to 100 basis point range. Our overall gross margin includes the impact of North Coast, mostly non-residential roofing product sales, which traditionally have lower gross margin rates.

Total operating expenses increased $13.4 million or 9.7% to $81.2 million in 2007 from $67.8 million in 2006 with acquired markets representing the entire increase. Operating expenses in our existing markets were flat and $67.8 million of both 2007 and 2006. Total operating expenses in 2007 included $4.4 million for the amortization of intangible assets recorded under purchase accounting compared to $2.5 million in 2006. Stock option expense also increased by $0.5 million. Also included in the 2007 operating expenses is approximately $1.4 million in operating costs at the eight branches open in existing markets since June of 2006.

While there was no overall change in our existing markets, 2007 operating expenses as compared to 2006, I would like to mention the major changes in the components of those expenses. Payroll and related costs increased by $0.8 million primarily from those new branches, offset somewhat by payroll cost saving measures we have in place. We saw savings of $0.6 million in other general and administrative expenses and another $0.6 million in other selling costs, from cost cutting, while warehouse expenses increased by $0.3 million principally from the new branches.

Depreciation and amortization expense increased $0.4 million for 2007 compared to 2006. Existing market operating expenses as a percentage of net sales increased to 17.0% from 16.7%, primarily due to the lower existing market sales and the relatively fixed nature of our operating expenses. Overall operating expenses remained unchanged at 16.7% of net sales in 2007 from 2006 due primarily to the inclusion of North Coast, which has lower operating costs as a percentage of its sales.

Interest expense increased $2.6 million to $7.4 million in 2007 from $4.8 million in 2006. We have refinanced our credit facilities in November of 2006 and incurred additional borrowings to finance our acquisitions, both of which increased our debt levels since June 2006. Interest rates have also increased from the prior year, which affected our variable-rate debt. An income tax expense of $7.7 million was recorded in 2007, an effective rate of 40.2% compared to income tax expense of $10.6 million in 2006, an effective rate of 38.3%. The increase in our overall effective rate was principally due to the impact of a reversal of previously accrued income taxes of $0.6 million in 2006.

As a result of all I've mentioned, we have a net income of $ll.5 million in our third quarter of 2007 compared to $17.1 million in 2006. Diluted net income per share was $0.26 compared to $0.38 in 2006. Our earnings before interest, taxes, depreciation and amortization and stock-based compensation or adjusted EBITDA, which is reconciled in our net income, to our net income in our Press Release was $37.4 million for 2007 as compared to $39.6 million in 2006, a decline of 6%.

Now a brief discussion of our results for the first three quarters of the fiscal year. Sales increased 7.7% or $82.6 million to $1.15 billion in 2007 from $1.07 billion in 2006. Our acquired markets contributed $116.8 million of the increase where our existing markets saw an internal contraction of $34.2 million or 4.6%. Inflation has contributed less than 1% of this increase. The first three quarters of fiscal 2007 had 189 business days compared to 194 in 2006, which contributed to some of the contraction in our existing markets. After adjusting for fewer days, our internal sales contraction for 2007 was 2.1%.

Our over all gross profit increased 1.5% to $265.7 million in 2007 from $261.8 million in 2006. Our overall gross margin decreased to 23.1% for 2007 compared to 24.5% in 2006. Our existing markets saw their margins decrease to 23.6% in 2007 from 24.4% in 2006 due to the same factors I previously discussed for this quarter and a slight product mix change to non-residential roofing.

Existing market operating expenses as a percentage of sales increased to 16.9% from 16.3% as we saw a de-leveraging of our fixed costs due to decreased net sales. Overall operating expenses as a percentage of sales increased to 19.3% in 2007 from 17.9% in 2006 due to the same factors and shelters, higher operating costs as a percentage of sales offset somewhat by lower cost percentages at North Coast. Overall operating expenses increased $31 million or 16.2% to $222.2 million in 2007 from $191.2 million in 2006. Included in the increase in expenses is approximately $3.4 million in operating costs at the 8 branches opened in existing markets since of June of 2006. Stock-based compensation was $3.9 million in 2007 as compared to $2.2 million in 2006. We also incurred $9.6 million in amortization of intangibles in 2007 as compared to $6.3 million in 2006. Interest expense increased $7.0 million to $20.1 million in 2007 from $13.2 million in 2006. And income taxes decreased to $9.4 million from $22.7 million in 2006.

As a result of all that I have mentioned, our net income for 2007 decreased $20.7 million to $14.0 million in 2007 from $34.7 million in 2006. Adjusted EBITDA was $70.8 million in 2007 as compared to $89.9 million in 2006, a 21% decline. Diluted net income per share was $0.31 compared to $0.79 in 2006. Our net cash provided by operating activities was $52.3 million for 2007 compared to $65.8 million for 2006. Our income from operations decreased to $43.5 million in 2007 from $70.5 million in 2006.

Inventory levels increased by $13.9 million due to 7 additional branches and expected sales, seasonal sales increases with inventories consistent in both 2007 and 2006. Our accounts receivable increased by $19.6 million in 2007, mostly due to seasonal changes in our sales volumes. The number of days outstanding for accounts receivable in 2007 based upon our year-to-date sales increased slightly, mainly due to the higher mix of non-residential roofing sales including North Coast that generally have longer payment terms. The negative cash impact from these increases in accounts receivable and inventory was more than offset by mostly seasonal increase of $43.0 million in accounts payable and accrued expenses.

Our net cash used in investing activities in year-to-date 2007 was $141.6 compared to $301.8 million, due primarily to our acquisitions for which we paid $120.2 million and $285.7 million respectively. Net capital expenditures, year-to-date 2007 increased by $5.4 million compared to year-to-date 2006 due to a slightly higher number of purchases of new transportation and warehouse equipments to service our larger number of branches. Net cash provided by financing activities was $94.7 million in year-to-date 2007 compared to $243.4 million in year-to-date 2006. The net cash provided by financing activities in 2007 primarily reflects borrowings under our new term loan to refinance our prior revolving facility and term loans and payment of related deferred financing costs. The net cash provided by financing activities in year-to-date 2006 primarily reflected borrowings under our prior revolving lines of credits and term loans, mostly for acquisitions and also includes the net proceeds from our secondary stock offering in December of 2005.

To recap key points from the third quarter, sales increased 19.1% with existing markets down 2.1%. Existing markets operating expenses were 17.0% versus 16.7% including $1.4 million in new branch costs. While net income fell to $11.5 million from $17.1 million, a decline of 33%, adjusted EBITDA declined only 6% to $37.4 million from $39.6 million in 2006. Diluted net income per share for the quarter was $0.26 per share compared to $0.38 in 2006. Cash flow from operations for year-to-date 2007 was $52.3 million compared to $65.8 million in 2006. Inventory turns and accounts receivables days outstanding are in line with our sales volumes. Year-to-date diluted net income per share was $0.31 compared to $0.79 in 2006.

And now back to Bob for some pre-comments before taking questions.

Okay, thank you David. I have just several points of emphasis that I'd like to convey before we take your questions. Even though we don't disclose regional results, I do want to share with you our strongest regions and also those that are still soft to help you understand our performance.

Our strongest regions are the Northeast. Canada still is performing great. Texas we're very happy with. The Carolinas and that organization are doing a great job and newest region that we moved into with the North Coast acquisition, they are doing real well. Re-roofing and commercial roofing is still doing well, all those regions. Matter of fact, commercial roofing is doing well in most all regions, which supports our supposition that product mix and geographic diversity is a winning business model and strategy.

Operating income is down mainly when you study the numbers because of compressed gross margins, but only down 120 basis points and mainly only down in regions where new construction was the dominant line of business. This includes regions such as the mid-Atlantic, the Southeast and the Gulf Coast. Our operating officers did a very good job in existing locations controlling expenses. Expenses were flat to 2006 despite adding 9 new branches that David mentioned. And we have some-- with your questions we can break down some of these operating expenses. I'll take you now to acquisition and amortization and new branches and actually show that operating expenses are down as a percent of sales year-over-year.

Our growth plans are in place. The new branches that have been opened in recent years will prove out to be a great platform for future growth. Acquisition integration is on schedule and improvements will be seen in future quarters. And again, our performance should reinforce that we're not as tied to new construction as many folks have thought. Our results are significantly better than companies that are more directly related to new housing. Our objectives are to grow through all economic cycles and we are accomplishing those goals as we move from fiscal year to fiscal year. Our organic growth since going public is over 9%. We're steadfast in our goals to grow the sales and profits of our company with organic growth of five to ten and acquisitions adding 10% to 15%. So, I wanted to make those points and now we are prepared to take your questions at this time. Thank you.

(Operator Instructions) We will take our first question today from Michael Rehaut with JPMorgan.

It is actually Ray Holnut for Mike. Wonder if you could provide some trends throughout the quarter. Seemed like at our conference back in June you guys said April and May were doing pretty well. I'm just seeing how June kind of compared to those months?

Yes sure. When we said-- had stated back then that April was up slightly compared to last year and we confirmed that May was flat to last year, we're down 2% for the entire quarter. June is obviously a much higher percentage of the total compared to those other two months because we start to get into the roofing season. And it was down slightly. I mean that could be days difference at the end of the month or something like that and remember last year we had started to see a pick-up in the June month also.

Okay, also given the change in the availability of credit in the market, have you seen an impact on your kind of acquisition pipeline? How would you characterize that or have valuations changed at all?

The pipeline is still very strong. People who are reaching that point in their business life that they would like to sell their businesses are still coming to us. The consolidation trend will continue so the pipeline is quite full, which is something I report to the Board on a regular basis. I do want to say we were prudent. We always will be. Our targets are good companies that will be accretive but I also want everyone to know that we are mindful of leverage and will not exceed the four times debt to EBITDA. We believe that the acquisition consolidation strategy is a long-term strategy and our Company is not a roll up that looks at this as a race to the end. We will do it at a measured rate. I hope that helps.

Okay. Would you expect to use some of your cash to pay down some debt? It looks like your net debt to cap kind of rose almost 500 basis points this quarter.

Yes in general we will always use our excess cash flow from our businesses to pay down debt. That's pretty much an automatic feature of our loan facility as being a revolver so over the next few months to few quarters you'll see that come down. Now there are some seasonal influences in that, which may bring it back up during the January/February/March months but that's pretty typical.

Michael Cox of Piper Jaffray.

My first question is on the Gulf States Region. I was wondering when we should begin to see that turn in terms of the lapping the comparisons or is it something, broader issue, in that market?

Well, what we've talked about before is the difficult comps of a lot of activity associated with those hurricanes. That comparison is gone. We no longer have that. That really stopped in the third quarter or actually in the second quarter. What we have now is a region where there is no economic activity. These storms came through. The homes that could be fixed that people want to fix, that's happened. So normally post storm re-roofing can be slow for a while. The same phenomena-- we're not in that market. The same phenomena would be in Florida at this time. Florida has had four or five years of constant storms and the re-roofing just really slows down post storm. Every roof that should have been replaced gets replaced in a very compressed period of time. That settle out and then you return to normal activity. So the Gulf Coast is just lack of activity at this point, not a comparison thing.

Okay that's fair and I was wondering if you could walk us through the profitability of the acquired markets? The margin percentage seemed lower than what we had expected. How much of that is the amortization of intangibles and then how long will that be a drag?

Okay and David will also answer this. I do want everyone to know that the way we present our numbers when we say acquisition profitability that includes acquisition amortization. It includes conversion cost into our computer system. It also-- all of our locations, all of our regions have a corporate allocation so it's a fully absorbed number, so we'd have to go through those details and we're willing to do that so the profitability that you see on a Q is straight off of our financial statements, not trying to get back to operating income that's not burdened by acquisition cost or corporate overhead.

And that being said by Bob, which is very accurate, there is about $2 million worth of amortization in those numbers and some additional depreciation, which would bring it up to a higher level. Also, and the fact is is that the Roof Depot and RSM, entities that we do, are included in a regional company and have their separate regional charges that would be affected there.

We do have what I call a waterfall chart that shows those, that overhang of acquisition amortization and the way it falls off over a period of time, so over time those costs will go down naturally. But from our financial statement standpoint we view that as operating expenses when truthfully it has nothing to do with the operations themselves. It's an accounting allocation that is we want to group into those acquisitions.

Just so I am clear on this so on the amortization side assuming no acquisitions in our model then we should start to see that taper off through the balance of I guess fiscal 2008 but then when additional acquisitions are announced that would step up.

Yes I'm sorry I missed that part of your question. Typically for customer relationships they start off at about 20% to 23% the first year and then they go down about 2% reduction per year for the early years and that increases for the first five years. And that's mainly because that calculation is based upon the net present value of the cash flows from the customers that we're capitalizing so for instance for our North Coast you would see that at roughly 22% and then it would go to 20%, then 18%, then maybe 15%, then-- and further on down the line.

Let me add, Michael, something else. Our goal on acquisitions is 10% to 15% per year. The last, since the IPO we've purchased companies with annualized sales of $850 million, a lot more than we anticipated but the acquisition strategy is opportunistic. That's why on that-- in that Press Release we put adjusted EBITDA and when you look at that in a very tough environment EBITDA only went down 5.5% for the quarter because the rate of acquisitions have been so fast and that's not the plan. Again, we're not just out here buying companies as fast as we can. We do it because they're strategic. If we get back to the more normalized 10% to 15% acquisition rate, the falloff of acquisition amortization will be quicker than the add on of acquisition amortization. Right now that's been increasing at a dramatic rate so as an idea in the-- you know, you've got $3 million increase just in that line item in one quarter and you have $6 million for the year. So we wanted to give some color on this Press Release about the impact of making that many acquisitions in a short period of time and then contrast that with the strong cash flow that we have to the point if you made no acquisitions you'd be debt free in four or five years.

That's very helpful. I appreciate it. Thanks a lot, guys.

(Operator Instructions) Ted Kundtz of Needham & Company.

A couple of questions for you, just on the residential if we just focused on the residential roofing product line could you break out what is new construction related versus re-roofing in that area and talk about what are you seeing in the new construction market? Is it just totally dead for you guys or are you seeing-- maybe you could give us some idea of volumes there, revenue volumes.

The new construction we look at region by region. The regions most affected by new housing construction-- I think that's what you mean, housing.

Well, I started looking at it as a total-- like if you just added up the new construction piece of the residential.

Okay residential, we're most affected in the Mid-Atlantic, which is Maryland, Virginia, Washington, that greater Washington area. We are affected in the Southeast, which would be Atlanta south and then in the Gulf regions. Their component of new housing is higher so we're more affected by that. I don't want to predict things other than show you what recent trends are. The greater Washington area recent trends have been good. It's not like it was earlier in the year. It is firming up and as soon as I say that it will not firm up in 60 days but I do want to tell you that's what we're seeing. We're seeing it firm. We talked about it a lot yesterday at our Board meeting, what is the prediction? A lot of people that we're talking to think the first half of next year. I really-- I'm just telling you what I hear and telling you what we see in our business and those regions that are most affected. It will come back and it started more than a year ago. I think it was last Spring when the big builders started announcing big declines in starts so it's-- we're into 12 months and-- or even more, maybe 18 months, so it should be firming up. I hope that helps.

Well, I was looking for a dollar amount. I was looking for what dollar amount is-- do you have in new construction, residential new construction?

I would give that to you if I had it. We don't categorize it that way. When a truck leaves our branches we do not know if it's going to a new housing development or a re-roof. We do know our customers and what they do predominantly. We also know what the industry is doing on published statistics. That's why I fall back to regions that-- and even branches that are more associated with new housing. We just, we don't have a number because we don't categorize it that way. I would let you know if we categorized it that way.

Just another follow-up question is your kind of outlook for the next quarter, is there anything that-- it sounds to me like things are going to be pretty much status quo here for a while. Do you have any thoughts on that on your next quarter and--?

Well yes. As you know, we don't provide guidance other than to state and restate our long-term goals for organic and acquisition growth and I just mentioned those so I don't need to restate them. I can say we believe these goals when they are adjusted up or down will certainly give everyone guidance to that so we have not changed our long-term goals and really see no reason to. And again, our organic growth for the last three years has been very strong. Regarding the quarter, we don't give guidance but normally our fourth quarter if you go back in history is one of our best quarters and at this time we're hopeful that we can match that performance from last year would be our estimate at this time. And regarding fiscal '08, we are right in the midst of our planning and budgeting cycle and those numbers will be approved by the Board very soon. Once that is wrapped up we will also be able to give folks a better idea of what next year looks like. But again, we only budget organic growth and we would be targeting our long-term growth rate for next year.

Okay and one final question, just any change in the commercial outlook? Are you seeing any slowing there taking place?

No we really aren't. It's still very strong. David, do you have a--?

No. It's especially strong where we're the strongest in commercial, which is in the Northeast, the new North Coast region, [Ontario], Canada and somewhat in Texas and the Carolinas.

Also I might want to refer to Carlisle. Carlisle has-- they have been doing very well but that's another data point that might help.

Jeff Germanotta of William Blair.

My first question has to do with receivables. It looks like we're getting a little extended in days. Might there-- can you elaborate a little bit on that and what are-- coincidence to that, what are you seeing with delinquencies and write-offs?

Okay, the question regarding receivables, that's a product mix. We're actually in very good shape from a days outstanding so the increase in number of days, which I think is 3 for existing locations, is associated with commercial. Our bad debt expense in the third quarter was really good. Our forecast for the year also looks very good. We're very confident in that area. It's something we really stay on top of. And really it's not just because we're very good at, when you have so many customers you don't have exposure to any customer that represents more than 1%, 2% of your sales so the nature of our business is if you stay on top of it day in day out you should perform well. Our long-term history through all the cycles for bad debts, Jeff, as a percent to sales is quite low.

And the other thing I would add is that our percentage over 61 days which our credit department, which does a great job, is tracking is actually in better shape than it was last year so we are not seeing any type of degradation of that, of the quality of our accounts receivable.

And my second question would have to do with your cost reduction programs. You had outlined some in months back. I am wondering how we're tracking to achieving that and/or if you've increased your cost reduction efforts.

Examples of what we do in that area, it's a topic at all meetings, and I say all meetings, I mean branch manager meetings, our Executive Committee meetings. Headcount control is very important. That is a report that comes out on a constant basis and actually that headcount is lower now even though it's a busy season than it was at the beginning of the calendar year, so that should be encouraging. We have, just as an inside information, we have a solid expense review. It's a process where every month we analyze all expense variances by line, by location, by region and the controllers account for that description of any variance. So we think cost controls are in good shape. I did mention on my comments I was going to give some color regarding expenses and David can go through those in detail, but if you take either year-to-date or quarter-to-date the operating expenses in the Q and adjust for acquisition amortization with the theory that that's not an operating expense and then also adjust for the fact that we have opened branches for future growth, you will actually see operating expenses as a percent to sales lower even though organic growth is down 2%. So we could always do a better job and we will continue to do that but, Jeff, I think that's a certain culture we have. We call it "Lean and Clean" at our Company.

And the other thing I would add just quickly, Jeff, is that one thing that we always track in our business is sales per employee and also sales per our truck. And for the quarter after we purchased North Coast, which we need to include in, both of those are above last year, so we're working our trucks the proper way. Our employees are still providing the throughput for the revenues. The problem is the gross margin story and there's not a lot that we can do about that right now with the competition that's out there but it's truly typically a temporary thing in our industry.

Yes actually our productivity as we look at it, which is sales per employee, is up 8% in the quarter and revenue per vehicle is up over 4%.

Thank you. I'll get back in the queue with follow-up questions.

And at this time we will have time for one more question. We will take that from [Bart Bhutata] of Principal Capital Management.

First, I just wanted to clarify on the Gulf Coast you mentioned that in that region the majority of the new-- majority of the sales before the slowdown were new construction and I thought that with the hurricanes going on there would be significant re-roofing in the past. Could you just explain that to me again what happened there?

Thanks for the question because maybe I did a bad job with the first question. What I was saying is that most of the sales were hurricane related in fiscal '06. There wasn't a lot of new housing going on down there. Post storms there's no now housing or re-roofing going on, so it's kind of a double whammy in that part of the world.

And before the storms, how would you characterize this region? Was it your typical region that was more heavy towards new construction even before the storms?

Well, remember we did not own those regions or those branches before the storm. Our general sense would be that it would be normal towards the rest of the industry where you would have a mix. I am not so sure that there's a housing boom going on there before the hurricane so I would expect the same 30% to 20% new construction compared to re-roofing.

When we say Gulf areas, our branches are located at Montgomery, Alabama, Jackson Mississippi, Mobile so these are not major cities but the wonderful markets, places we want to be but we didn't own them prior to the storms.

All right fair enough and then given the overall market slowdown, are you seeing better opportunities to make acquisitions at perhaps more attractive prices or are the market conditions making some local owners more likely to sell at this point?

I don't think so and I'm often asked that question. Maybe I'm just not a good negotiator but folks sell their businesses because of personal reasons. It could be a state issue. It could be a family issue, succession management and these businesses are private family owned. Most of them have been in business for decades and so when the time comes to sell if it's a good business it's probably been run well. In this market if they are doing as well as we are they're flat, maybe down a little bit. We have passed on businesses that aren't performing as well and even at a bargain purchase price we wouldn't want to own those so our acquisition model is more associated pay a fair price for good business and people are selling for the right reasons, not because they're scared of the market because they've lived through all the markets. They want to sell their business because it's the right time in their lives to do that.

And as you look at the acquisition pipeline presently, what kind of prices are you seeing? What kind of multiples are you seeing?

And that's always difficult, particularly on a call like this where who knows who is on this call but we have said historically that we will pay 6 to 8 times adjusted EBITDA. Now when that is all said and done, the adjusted EBITDA is only known by the two parties who are negotiating. I have found that good businesses it's difficult to buy a well run business that's prosperous for less than 5 times and if you have to pay more than 8 times David and I get worried about it because that's a hefty price so it usually settles out in a range where a business owner at his stage in life wants to move into something else and we usually are in that neighborhood of multiple.

And when you talk about that multiple range, is that a forward the first year projection multiple or historical?

Oh I'm sorry. That's trailing.

Trailing okay. And just on one more clarification, did you close any branches in this quarter?

Yes we consolidated. We had two branches in Tulsa, Oklahoma and we consolidated the [IRS] of the old Shelter branch into the IRSM branch. That's pretty typical when we make an acquisition that's in the same market place as our existing operations.

So year-to-date 2000 in fiscal '07 how many branches did you close or consolidate?

We have closed 2 and those were consolidations and we have added 8 new branches so those would be all in our existing markets.

And this is year-to-date?

Yes.

And that concludes our question and answer session. At this time I would like to turn the call back over to Mr. Buck for any closing remarks.

Thanks to everyone for calling in. We, as I always say and I always mean, we really appreciate your interest and support of our Company. We are working hard to grow through all economic cycles and the goals are the same. The industry is doing fine. I think housing will improve. Picking an exact date is difficult but it will. We are very proud of the product mix, the geographic diversity that we enjoy that helps us grow through the cycles. We're also particularly proud of our management team. Some of those regions I mentioned earlier are just doing extremely well and are run by very talented officers and are being helped out by a lot of folks out there working hard.

And I'll conclude now by saying thanks very much for your support and David and I will be available the rest of today or anytime for your additional follow-up questions.

Thank you very much.

Thank you very much.

And that will conclude today's conference call. Thank you for your participation. You may disconnect at this time.