Beacon Roofing Supply Inc (BECN) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply fiscal year 2007 fourth quarter and year-end earnings conference call. My name is [Dana] and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. At that time, I will give instructions on how to ask a question. (OPERATOR INSTRUCTIONS) as a reminder, this conference 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 the Company's latest Form 10-K.

And now at this time, I would like to turn the call over to Mr. Robert Buck, President and CEO of Beacon Roofing Supply. Please go ahead, sir.

Thank you, Dana, and welcome, everyone, to our fourth quarter and fiscal year-end 2007 earnings call. I will begin the call with a few comments and then David Grace, our CFO, will present the financial details of our performance. After that, we have prepared answers to several questions that we know you want us to address and then we will open the call for any additional questions.

For the year, sales increased approximately 10% to $1.645 billion. Our organic sales growth, adjusted for the same number of business days this year as compared to last, was only a -3.3%. Now, we aren't satisfied with our sales numbers because they fall below our historical organic growth rate and our forecasted long-term sales growth rate of five to 10%. But they are certainly better than companies than are over-weighted in the new housing construction industry.

You are reading many of the same headlines as I do and therefore know we are operating in a very difficult environment. But we believe our sales performance shows again the importance of geographic and productline diversity and the fact that we're not tied fully to new construction.

Regarding profits for the quarter, we were able to meet Street estimates of $0.25 a share. Controlling costs was a key to hitting those estimates because we are in a competitive market and gross margins are always adversely affected during such times.

Regarding profits for the year, we beat estimates by $0.01 per share. Now, that ain't bragging at all, but it is just good for the soul to say it. There is no celebrating going on here. I can tell you that, but let me also say that if our markets continue to stay soft, as many have and are predicting, we are prepared to cut costs even more, particularly in acquired markets that aren't performing up to corporate averages. We have sophisticated benchmarking reporting systems that allow us to possibly isolate the problem areas. We have set targeted cost reductions with specific goals by region and by branch in those under-performing regions. Those plans will be monitored every week and will be adjusted to fit the economic climate if it changes.

But please don't misinterpret my comments as pessimistic, but rather our commitment to act to protect our profitability and strong cash flow. Our industry segment is more stable than those dependent upon new construction, but we aren't complacent or cavalier about that advantage. And we want you, our long-term investors, to understand and believe that. I know our leadership team believes that. Paul Isabella, our new COO is onboard to shepherd our business plan as we operate profitably even if the industry doesn't recover.

And our industry will improve, but for now, we are just taking the conservative path of action. Our leadership in the industry will continue to shine through these tough economic times.

I do want you to notice again our profitability and particularly our strong cash flow, which was in excess of $60 million in fiscal year 2007. We reduced our debt in 2007 during probably the toughest market for decades. Not good enough in our opinion, but certainly worthy of mention.

Before I turn the call over to David, I have several points that I want to emphasize. The strength of several regions is worth highlighting. The Northeast, North Coast, which is our new acquisition, Canada, Texas, and Carolinas, re-roofing and non-residential is still growing in those geographies. We have weakness in the Mid-Atlantic, West Coast, Shelter and the Southeast. That was still evident in the fourth order, but we are seeing signs of growth in the Mid-Atlantic and Shelter Midwest regions as we began our new fiscal year.

Gross margins in our existing locations were down only 70 basis points in the quarter and 80 basis points for the year. I look for signs of stability in those markets in the coming months. Also keep in mind that comps were extremely difficult for the fourth quarter. I don't say that to get a pass, I just mentioned that to make a point that could go unnoticed.

So now I'm going to turn it over to David for his comments and then we will get back to the questions I just talked about.

Thanks, Bob. I will first discuss the results for the fourth quarter of fiscal 2007, which ended on September 30 of 2007, and then briefly our fiscal year results.

Our net sales increased 14.5% to 493.8 million in 2007 from 43.3 million in 2006. The increase was primarily due to the acquisitions completed since the beginning of last year's fourth 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 during the fourth quarter of last year.

Existing markets, which includes all branches except for those included in these acquisitions, saw a sales contraction of 35.4 million, or 8.3%. There have been continued lower levels of new home construction activities in most markets and flat to declining material prices. There has also been a significant slowdown in reconstruction and re-roofing activities in the markets that experienced damages from the hurricanes, which was because for our Residential Roofing Products sales in our existing markets to decline by 16.4% in the fourth quarter. Non-residential roofing was flat, while complementary products in existing markets decreased by 1.6%.

On a sales -- on a same-sales-per-day basis, our existing markets were actually off 9.7% as 2007 had one additional day in comparison to the fourth quarter of 2006. That quarter saw growth of about 14%.

We estimate inflation in our product costs based upon our current inventory's product mix and invoice cost as compared to the invoice cost of the same products a year ago. Based upon this estimate, our product costs have fallen one to 2% from 2006 levels. Our sales as well as our gross margins, which I will discuss in a moment, reflect reductions in selling prices to our customers in response to that cost drop and further price reductions due to market conditions.

We have opened eight new branches and closed two since the fourth quarter of 2006. We also acquired 23 branches since the beginning of that quarter and operated a total of 178 branches at the end of this year.

We had 63 business days in the fourth quarter of 2007 compared to 62 in 2006. Sales per day averaged approximately 7.8 million in 2007 versus 7.0 million in 2006.

Our fourth quarter gross profit increased by 5.7% to $108.2 million in 2007 from 102.4 million in 2006, again, due to our acquisitions and the new branches, however, overall gross margin rates dropped to 21.9% in 2007 from 23.7% in 2006. Our overall gross margin rate includes the impact of North Coast's mostly non-residential roofing product sales, which traditionally have lower gross margin rates than our other products.

Existing markets had gross margins of 23.0% for the fourth quarter of 2007 compared to 23.7% for 2006. This decline was mostly caused by an increase in competitive conditions due to the business slowdown in the industry and an increase of 280 basis points in our non-residential product sales mix as compared to 2006. We experienced the highest margin compression Residential Roofing sales, with complementary products down less and non-residential generally down about 50 basis points.

Total operating expenses increased 9.3 million, or 12.7%, to 81.9 million in 2007 from 72.6 million in 2006, with acquired markets increasing 13.8% -- $13.8 million, while operating expenses in our existing markets declined by $4.6 million as we saw an increase in expenses from our new branches more than offset by cost-saving measures and other factors which I will discuss.

Total operating expenses in 2007 included 4.6 million for the amortization of intangible assets recorded under purchase accounting compared to 2.7 million in 2006. Also included in the 2007 operating expenses is approximately 1.9 million in operating (technical difficulty) costs at those eight branches we have opened since 2006.

The major components of the 4.6 million decrease in existing market expenses is as follows -- payroll and related costs were decreased by 2.7 million, primarily from payroll cost saving measures, offset somewhat by the new branch cost. In addition, we saw savings of $2.0 million in other, general and administrative expenses, primarily from cost savings in insurance, travel and also from lower bad debt expense. Existing market operating expenses as a percentage of net sales increased to 17.2% from 16.8%, primarily due to the lower existing market sales and relatively-fixed nature of our operating expenses. Overall, operating expenses decreased slightly to 16.6% of our net sales in 2007 from 16.8% in 2006, primarily due to the inclusion of North Coast which has lower operating cost as a percentage of its sales.

Interest expense increased $1.0 million to $7.3 million in 2007 from $6.3 million in 2006. In the first quarter of 2007, we refinanced our credit facilities with a larger facility with more favorable terms. We incurred additional borrowings in 2007 to finance our acquisitions and interest rates also increased somewhat from the prior year's fourth quarter which affected our interest cost on our variable-rate debt.

An income tax expense of $7.7 million was recorded in 2007, an effective rate of 40.5% compared to income tax expense of 8.9 million in 2006 and effective rate of about 38%. The increase in our overall effective rate was primarily due to a reversal of previously-accrued income taxes of about $0.6 million in 2006.

As a result of all I have mentioned, we had a net income of $11.3 million in our fourth quarter of 2007 compared to 14.6 million in 2006. Diluted net income per share was $0.25 compared to a net income per share of $0.32 in 2006. Our earnings before interest, taxes, depreciation and amortization and stock-based compensation, or what we call adjusted EBITDA, which is reconciled to our GAAP net income in our press release, was 36.9 million in 2007 as compared to 37.5 million in 2006, a decline of only approximately 2%. Strong EBITDA performance like this, along with our working capital improvements allowed us to increase cash flow during the quarter and pay down our revolver by over $18 million.

Now a brief discussion of our results for 2007's fiscal year. Sales increased 9.7% to 1.65 billion in 2007 from 1.50 billion in 2006. Our acquired markets sales increased 194.5 million, while existing markets saw a sales contraction of 49.4 million, or 4.8%. Deflation contributed approximately 1% of this decrease. Fiscal year 2007 had 200 252 business days compared to 256 business days in 2006, which we believe lowered sales by approximately 1.5%. After adjusting for those fewer days, our internal sales contraction for 2007 was 3.3%.

Our overall gross profit increased 2.7% to $373.9 million in 2007 from $364.1 million in 2006. Our overall gross margin declined to 22.7% compared to 24.3%, while existing markets saw their margins decline 23.4% from 24.2% due to the same factors I previously discussed for the quarter.

Existing market operating expenses as a percentage of sales increased to 16.3% in 2007 from 16.9% in 2006 as we saw a deleveraging of our fixed cost due to decreased net sales. Overall operating expenses as a percentage of sales increased to 18.5% from 17.6% due to the same factors and also Shelter's higher operating costs as a percentage of their sales, offset somewhat by a lower cost of percentage at North Coast.

Overall, operating expenses increased 40.3 million, or 15.3%, to $304.1 million per. Included in this increase in expenses is approximately 3.6 million in operating costs at those eight branches opened since 2006.

Stock based compensation was 5.0 million in 2007 as compared to 3.2 million in 2006. We also incurred 14.3 million in amortization of intangibles in 2007 as compared to 9 million in 2006.

Interest expense increased 8.0 million -- excuse me -- to $27.4 million in 2007 from $19.4 million in 2006, while income taxes were 17.1 million in 2007 compared to 31.5 million in 2006.

As a result of all I have mentioned, our net income for 2007 was $25.3 million in 2007, down from $49.3 million in 2006, a 49% decline. Adjusted EBITDA was [100.7.7] million in 2007 as compared to 127.3 million in 2006, a 15% decline. Diluted net income per share was $0.56 in 2007 compared to $1.12 in 2006.

Our cash flow from operations was 63.8 million for 2007 compared to 82.8 million in 2006. Our income from operations decreased by 69.8 million in 2007 from 100.3 million in 2006.

Accounts receivable, excluding acquired amounts, increased by 22 million in 2007 due to the seasonal increase at North Coast since it was acquired in April, somewhat offset by decreases in our other regions. The number of days outstanding for accounts receivable, excluding North Coast, decreased slightly in 2007. Inventories levels, also excluding amount -- acquired amounts, decreased by $13.8 million due to the intentional slowing of purchase to better correlate inventory levels with the lower sales trend and to enhance our year-end physical inventory process. That was offset somewhat by the additional inventory at our eight new branches. Average inventory per branch was down about 10% in 2007 as compared to 2006, with inventory turns, excluding North Coast, consistent with 2006.

In addition to the positive impact from decreased inventory, prepaid expenses and other expenses, excluding acquisition amounts, decreased by 7.0 million mainly due to the lower levels of vendor rebates receivable.

Net cash used by investing activities in 2007 was $143.3 million compared to $355.3 million in 2006 due primarily to our acquisitions, for which we paid $120.2 million and $336.3 million respectively. Net capital expenditures in 2007 increased by $4.1 million compared to 2006 due to the higher number of purchases of new transportation and warehouse equipment to service a much larger number of branches.

Net cash provided by financing activities was $83.7 million in 2007 compared to $280.6 million in 2006. The net cash provided by financing activities in 2007 primarily reflects borrowings under our new term loan to refinance our prior revolving facilities and term loans and payment of related deferred financing costs. The net cash provided by financing activities in 2006 primarily reflected borrowings under our prior revolving lines of credit and term loans, mostly for our acquisitions and the net proceeds from our secondary stock offering in December of 2005.

In 2008, excess cash will continue to pay down our debt or build cash. In fact in the current quarter, we have at least temporarily repaid our revolver in full.

To recap key points for the quarter, sales increased 14.5%, with existing markets down 9.7%. Existing markets gross margins was 23.0%, down from 23.7%. Existing market operating expenses were at 17.2% versus 16.8%, including $1.9 million in new branch costs.

While net income fell to 11.3 million from 14.6 million, a decline of 22%, adjusted EBITDA declined only 2% to 36.9 million from 37.5 million in 2006. We believe a 2% decline in EBITDA is worthy of emphasis and should highlight that much of the decline in our net income is caused by purchase accounting amortization. Diluted net income per share for the quarter was $0.25 compared to $0.32 in 2006, meeting Street estimates. For 2007, cash flow from operations was $63.8 million compared to $82.8 million, with inventory turns and accounts receivable's DSOs in line with our sales volumes.

I will turn it back over to Bob now.

Thank you, David. Let me now go through questions that we have put together based upon conversations we have had at various investor conferences, phone calls, etc. And the purpose here is to make sure we get important questions answered to you before we open it up to the floor. I have 11 of those questions. I will state the question and then I will go through the answer and I am hopeful this is helpful to you.

First, can you give us some trend information relative to gross margins?

Gross margins remained pressured in most regions and across all of our product groups. However, gross margins have settled down somewhat sequentially as compared to the third quarter, down about 40 basis points in existing markets, with a slight shift to non-residential products and we are down 70 basis points year-over-year. Residential and our complementary products are down 100 to 150 basis points, while non-residential is down only about 50.

Next question, has the decline stopped or has it at least slowed?

It seems to have slowed, but we would rather not make a prediction and that is why we are so focused on cost reductions for fiscal '08.

Third question, which product segment has shown the most firming-up of margins, if any?

The answer to that would be non-residential is more stable at this time than the other products.

Is the commercial market still strong and what data would indicate that?

It is still stronger than residential and our suppliers remain optimistic about 2008 on their various earnings calls that have occurred over the last several months.

Next question, what areas of cost expense control is Beacon doing the best job?

We are good at controlling -- we are good at controlling expenses, as you can see from our reports, despite having about 70% of our costs being fixed. Our existing markets are better at this than our Shelter regions, but we are fixing that.

We also used our budgeting process that we wrapped up just in the beginning of October to realign any costs which were not properly structured for the business level we expect. Now we need to execute on that budget. Expenses at our existing locations were down $5 million in the fourth quarter of '07 versus '06 to give you an indication.

What is the employee headcount at the end of '07 as compared to fiscal '06?

At the end of '06, we had approximately 2,641 employees and after you deduct the 208 employees that joined us from North Coast and Wholesale Roofing, we have 2500 at the end of fiscal '07. Therefore, the best comparison is to 2641 employees in fiscal '06 to the 2500 at the end of this year, which is a reduction of 141 people.

Your bad debt expense appears good at the close of '07. Can you maintain that historical bad debt expense as a percent of sales going in to 2008?

We believe we can keep our excellent track record intact in 2008. Our credit systems are now in place in all regions, which is not something we could say a year ago at this time. We believe this is an area of excellence for our company and will bode well for us in 2008.

Shelter continues to underperform. What areas of improvement are you seeing and what additional changes to you intend to take?

We know we are behind in Beaconizing, as we call it, our Shelter business. Part of it is because of the high levels of business they had in late 2005 and most of 2006 from the hurricanes. Part of it was the leadership problem we had (technical difficulty) two of the three regions that we purchased. We have replaced those leaders who now have new regional controllers, who have spent tremendous amounts of time training their branches and their regional offices.

We believe we're headed in the right direction and some signs we are seeing are better inventory controls along with better terms in our Shelter business. We have done the initial pricing model changes on our ERP system, which will result in improving gross margins. We have also instilled our SOX systems and controls into their daily routines. We have budgeted improvements in their expenses and given them the foundations and we are comfortable they will deliver. Expense reduction goals will be set and monitored weekly by Paul Isabella, our new COO.

Can you comment on attempted price increases from your suppliers?

We have not seen any price increases as yet. While several suppliers have tried, really none have stuck. With the rise in petroleum, we to see some price increases in the future, but we still believe we need to see business at least flatten out before our vendors and ourselves can increase prices.

Again, our plan is not to wait for this to happen, our plan is to reduce costs now and if those price increases do come along, that will just be that much better for the business.

Please update us on your debt covenants. Do you have any concerns about them?

We are currently at 3.48 to 1 in our only really pertinent covenant, which is adjusted EBITDA to net debt. That actually gives us about $50 million in availability or cushion, depending on how you want to look at it, and we run sensitivity models on this every month and report to the Board with that data on a regular basis.

The last one. What is your guidance for the new fiscal year?

Please understand our nature is optimism, but our business plan is based upon realism. And by that, I mean this -- we really believe that we can achieve the midpoint of current sales and profit estimates for 2008. It could be achieved with an industry recovery in the second half of the year, or it could be achieved by watching ever expense every day, particularly at our Shelter regions, which Paul Isabella will be all over as he begins its terms and our company.

I am hopeful that those 11 or so questions help you as you evaluate our performance. In our time left, which is only about 10 minutes, I would like to open it up now to questions from everyone on the call.

Thank you, sir. (OPERATOR INSTRUCTIONS) Michael Rehaut of JPMorgan.

Hey guys, this is actually Ray Huang on from Mike. I had a couple of questions. The first question, if you could provide some more color on the cost savings initiatives and also if you could possibly quantify that, a dollar amount or basis points for '08?

We would rather not go into the specific of the dollar amounts other then to say we have isolated it to underperforming regions like Shelter. And the way we do it is we take their various line items, compare them to corporate averages and it is truly millions of dollars. We are confident in our ability to do that, because we have a lot more locations running at corporate averages than we don't.

The plan will be written, goals set by location, by regions, timetables and we will be, as I said before, shepherded by Paul Isabella, along with all of the rest of us. And there could be an argument made that, look, it will start improving in the second half, don't do anything rash and our approach is we are not waiting for that. If it happens, we will still be in great shape and we would have a recovery plus cost control at the same time, so we're going to move ahead with that immediately.

Okay, that's helpful. Also, just a follow-up, I think on a couple of different conference calls you guys had mentioned that the acquisition pipeline looked pretty full. Are you still seeing that? And also what kind of opportunities are out there right now and what would you be most interested in at the moment?

The pipeline is still full. Several companies in different parts of the country are doing quite well. The Northwest is extremely strong -- not saying that is one that we're targeting, but of the acquisitions we look at, that area is still very strong.

We are passing on acquisitions that are in troubled areas, like Florida, because our model is not to buy troubled companies. But it is still part of our growth plan and that is why we highlighted, in some detail, the strong cash flow, paying down the revolver, the covenant cushion and so fourth. But we do not feel pressure to make acquisitions, if they, along, fine, if they do not, we will continue to pay down debt, control our cost and deliver value to the shareholder that way.

Okay, great. Thanks, guys.

David Manthey of Robert W. Baird.

Hi guys. Good morning. I was wondering if you could talk a little bit more about non-residential construction. Some of the most recent data that we've gotten from McGraw-Hill and others would imply that we're going to see a deceleration on the nonres side and then, in general, with the confidence or the tone of corporate America getting worse, what is your confidence level that you can grow your nonres business and if you could address both new construction and re-roofing?

A lot of that data, whether it is McGraw-Hill or Dodge or so fourth, would be new construction. And in the commercial markets, about 80% would be to repair existing facilities, so that is one thing to consider. It is a little bit of a smaller percentage than residential, but our suppliers remain bullish for 2008.

Brent Rakers of Morgan Keegan.

Good morning. You talked -- you alluded to, Bob, I think in your opening comments about trends in the month of October and November. I was hoping you could be a little bit more precise with the trends you have been experiencing the last couple of months?

Yes, it is interesting. October was a good month and we saw a nice surge in November. So what we would like to see is a couple of Novembers put together, but we started the year feeling pretty good. I was particularly pleased that we are seeing some strength in the Mid-Atlantic, which is traditionally our most -- the region most related to new housing. They have had a couple of good months.

Bob, are you suggesting that existing market business has increased in both October and November?

No, it increased more in October -- or in November and of course November is not done, but -- what I am saying is I hesitate to say we have hit the trough other than we are not seeing the declines that were very worry some earlier --

And remember, Brent, that is a comparison to last year. And the fourth quarter being down 10%, I think what Bob is really saying is we are not down as much as that.

Okay, okay, great. And then I guess my follow-up to that is, you talked -- and again, I guess in the comments you mentioned now, too, you talk about the decline slowing. By my calculation, on the re-roofing side of the business, the declines in the September quarter accelerated pretty significantly and I guess I would love to hear your insights as to what would dispute those concerns?

Well, what we were talking about was sequentially to Q3 and I know they're not directly comparable, especially with the commercial products because in general, the commercial does surge a bit in the winter months, especially in the northern regions that we have. But sequentially, we have seen that it isn't any worse that it was in Q3. Obviously, compared to last year, where we had a very strong quarter, up almost -- up 14%, it is down comparison to that. That is what we were trying to speak to.

Okay, great. Thanks.

I just wanted to add to that. The reason we did that was fourth quarter was so strong and we had these sequential numbers that we think are encouraging because the third quarter was a good quarter for us and fourth quarter firmed up on a sequential basis.

Thank you.

And it appears we have time for a couple more questions. We'll go next to Ted Kundtz of Needham.

Yes, my questions have been answered. Thank you.

John Emrich of Ironworks Capital.

Thanks. In trying to model with all of the acquisitions, are you seeing revenue in sequential trends, decreasing revenue -- or organic trends, rather. I was wondering if you could just talk a second about seasonality? I'm trying to build a model off the most recent activity and I guess June/September would historically be the strongest quarters and then December -- I am looking back over history, is down 10% sequentially normal?

No, it is not quite that strong. Just to give you a general idea and I can actually fill you in a little bit more off-line is that our -- really, three-quarters we have our Q1, Q3 and Q4. There can be within 200 to 300 basis points of each other. It's Q2 that we have the larger drop and that one is down about 500 basis points compared to the others.

What is that basis point number?

It is two to 300 for those quarters, they are within each other and the larger drop is four to 500 basis points in Q2.

You're talking about percentage of revenue change?

Yes.

Okay. And then -- let me right that down -- and then, from a gross margin perspective, you are running about 22% right now and again, going into the seasonally weaker period -- this is my second to last question -- it would be difficult to hold even these lower gross margins?

No, because what happens in general in the winter periods is residential becomes a bigger mix of our product mix. So that will affect it somewhat.

To the upside?

Yes, the residential product mix will go up.

Okay.

(technical difficulty) and offset it.

Okay, and then, next year -- I give you credit for even trying to provide guidance a year out in such a volatile environment, even as broad as it was, but it looks pretty clear that new home starts are going to be down and other, pick your number, 15 to 20% in '08 versus the '07 so this inventory overhang can clear. Getting back to the stronger quarters, do you hold gross margins in that environment and is that a victory?

I think that would be a victory and the other victory is our acquired operations do better with our new plan. So I think we hit -- as I said before, we hit a good next year, either with a small recovery in the second half or executing on our cost reduction savings plans.

Okay, and then last question would be, I am not clear how variable SG&A levels are. If I look out to a 10% sequential decrease or five to 10% sequential decrease from -- in March from December -- let me start over. December, are the levels that you're running in SG&A right now a pretty good range to use for the next few quarters or when things drop off in March, does SG&A drop commensurately? Or are we kind of the rock bottom right now, levels that you're operating?

The plan for 2008 and our budget is to reduce some of those costs, about 70% of our costs are fixed in the SG&A line items, so we can do some of those fixed costs by closing branches if we need to or consolidating them. But really what we're trying to do is keep the controllable expenses in line with our volume (inaudible) business and that is where we think we can be most effectively -- effective, especially over a short period.

Julie Johnson of Piper Jaffray.

Hi, thanks for taking my question. First, I would ask for a little bit more color on Shelter. I was wondering if you could give a little bit of clarity to when you expect Shelter to be performing at the Company average from a margin standpoint?

Well, we have always said in the past that it takes three to five years to get one of the operations that we purchase up to our corporate levels. You know, we do readily admit that was a little bit behind because of the volume of business they had when we first purchase them, but we fully expected now that we have created the budget, they are on Mincron, which is our ERP system, and that they have leaders and controllers that are willing to do the types of things that we have done in the past that we have a shot to do it within two to three years.

That being said, this is a lot of work. It is not like we're just going to cut our ways to success. You have to teach these new regions to do business the Beacon way and that take some time.

All right, that's helpful. Thank you. And then my next question is from a modeling perspective. Do you have any thought in terms of CapEx for fiscal '08?

We expect it to be in the range of 0.75% of revenue if things do not happen the way we predicted them in the budget, upwards to about 1.25 percent of revenues. And that seems like a wide range, but that is one of the controllables that we have that we can either slowdown or keep maintaining the equipment because most of it is transportation and our hydraulic equipment.

Sure, that makes sense. And then my last question, what are you thoughts about branch openings in fiscal '08 maybe in some of those markets where you are seeing more strength?

If we have a market where we have strength and can open a branch like we have in the past, we will continue to do that. We do not see a great opportunity for that in 2008. Maybe one or two at the outset -- at the higher level.

We will be taking our final question today from Bob Fetch of Lord Abbett.

Good morning. Can you speak to your Accounts Receivable in terms of the level and the quality and what level of reserves that you have?

Sure. If we exclude out North Coast, which we have recently acquired -- not that they have a problem in their Accounts Receivable or anything, but just make it comparative -- our DSOs our actually down slightly from last year. That is pretty much intentional. We have tightened up the little bit in credit and areas that we have seen problems, but the other factor is that we get to see the residential guys every week, it is not like they buy something from us and then work on a job for a month at a time, so we can monitor them pretty precisely.

I think that going forward, we think we can maintain bad debts in that three-tenths of a percent of revenues. We have done it consistently now for over each years. And that was certainly through sometimes that weren't as good as '05 and '06, so we want to maintain that. Probably as an indication, reserve levels are up slightly from last year as a percentage of the total receivables and again, that is trying to provide a little bit of a cushion for going forward for some of the smaller ones that you just can't give the attention of detail just because of their size and you may see some of those slip by.

What range of experience have you had in the past in some of your weaker cycles?

The highest I have seen in the past fifteen years was about 0.4 percent of revenues.

Okay, do you folks have commercial backlog that you speak to?

No, in general, we have commercial business that we can see out a little bit further than the residential business, but it is still less than a month, and whether we ultimately get that PO from the customer is suspect until we actually get it.

Okay, and lastly, if you were to think about the level at which housing starts become a problem as far as where your breakeven level might be, what level of the national starts do you think that might be?

Don't even monitor it. We are so focused on a branch by branch local market that a national number does not mean anything to us. And in reality, think about it, we are not in Arizona, we're not in most of California or Arizona or Florida. It just doesn't -- it is not something that we can predict for our business. Use to predict for our business.

And that will conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Buck for any closing comments.

One second, please. We appreciate everyone's dialing in today. It is always gratifying to us to have the support and we finished the year by hitting sales and EPS targets. We are taking a very strong position regarding underperforming regions. We're not waiting to see a recovery in our industry. We believe we can perform better, even in tough economic times, so we want everyone to have that assurity.

As we review our results for existing locations, including the JGA acquisition, there is tremendous upside profitability from all other regions as they work to move their performance up to the corporate average. We're very focused on that and I hope that gives your confidence.

Again, thanks again for your time this morning. Thank you for your support of our company over the long-term and David and I will be available for questions and we look forward to seeing you sometime near -- we look forward to seeing you in the future. Thanks very much for calling. Thank you. Bye-bye.

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