Beacon Roofing Supply Inc (BECN) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply fiscal year 2008 first quarter earnings conference call. My name is Gwen, 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 the 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 risk 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 10K.

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

Thank you, Gwen, and welcome everyone, to our first quarter 2008 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. During last quarter's earnings call I tried something new by preparing in advance a few questions and answers covering important topics that we anticipated were important to you, and you'd want covered in this call. I received many very complimentary comments about that approach, and decided to do it again on this call. However, after that, we will open the call for additional questions that we might not have covered.

For the quarter, total sales increased 5% while organic sales declined 12%. The quarter began strong but slowed significantly in December because of heavy snows in Canada, the Midwest and Northeast. And despite a slow December, we were able to meet earnings per share estimates for the quarter. That accomplishment was made possible because we focused on expense controls throughout the quarter. You will hear more about our expense control efforts later in the call as we explain to you how we are managing our Company through tough economic times. Our leadership team is committed to running a lean and efficient Company and Paul Isabella, our new COO, is doing an outstanding job executing this business plan. The expense targets by branch, the expense reduction targets by branch and region are taking place, and are being monitored weekly.

And during this call, I'd like for you to take note of our profitability, our cash flow, inventory management and control of capital spending. Also please notice the strength of our adjusted EBITDA which was disclosed in our earnings release. And finally, gross margins appeared to stabilize, and we anticipate that will continue. But before I turn the call over to David I want to communicate again that we have a solid business operating plan, and very importantly, I am very proud of our leadership team and the tough decisions they are making. So I'm going to turn this over to David after which I will get back to these questions and answers. Thank you.

Thanks, Bob. Good morning. In the first quarter of fiscal 2008, net sales increased by 4.8% to $398.4 million from $380.2 million in 2007. Our acquired markets, which is mainly the North Coast acquisition we made last year, added $64.7 million in net sales while existing markets, which includes all of the branches except for those included in our acquired markets, saw a sales contraction of $46.5 million or 12.2%. There continues to be lower levels of new home construction activities in most of our markets, with flat to declining material prices. These factors combined with a tough start to winter caused our residential roofing product sales to drop 18.9% for the quarter. Nonresidential roofing was flat to last year overall, but we saw growth in markets we did not-- which did not experience the effects of the early winter snow and cold. Complimentary products reacted much like our residential roofing products, down 15.2% and across most existing markets.

We estimate inflation in our product cost based upon our current inventory product mix and invoice costs as compared to the invoice costs of the same product a year ago. Based upon this estimate, our product costs have fallen 1% to 2% from fiscal 2007 levels. Our suppliers have announced price increases, ranging from 5% to 15%, which were to be effective in mid-February. But it is too early to predict what the final level of pricing will be for the remainder of fiscal 2008. We opened one branch and closed one branch during the quarter. We also acquired 17 branches since the first quarter of fiscal 2007 and today we operate a total of 178 branches as of the end of the quarter.

We had 61 business days in both 2008 and 2007. Our overall first quarter gross profit was $91.7 million for both 2008 and 2007 as we saw our overall gross margin drop from 24.1% to 23.0%. Acquired market had $10.5 million in gross profit. Our existing markets saw a drop of $10.6 million or 11.5%. Our overall gross margin rate includes the impact of North Coast mostly nonresidential roofing product sales which have lower gross margin rates than our other products. Existing markets had a gross margins of 24.3% for the first quarter of 2008, compared to 24.1% for 2007. We also saw only a 30-basis-point drop in our invoice gross margin rate in 2008 compared to 2007. Hopefully indicating a bit of stabilization in pricing. We also benefit from enhanced short-term buying in calendar year end programs from our vendors which we had previously had not expected to obtain.

Total operating expenses increased $5.2 million or 7.4% to $75.9 million in the first quarter of fiscal 2008 from $70.7 million in 2007. Our acquired markets operating expenses of $9.5 million were offset somewhat by a decrease of $4.3 million in our existing markets operating expenses, due to savings in some of our variable expenses from lower revenue levels but also from cost cutting measures. Payroll and related costs decreased by $3.2 million, primarily from a reduced headcount notwithstanding that we've added seven branches. That seven branches have been opened since 2007. We also generated existing market savings of $1.8 million, and other general and administrative expenses primarily from savings in insurance, travel, and allocations to our acquired markets, partially offset by our higher bad debt expense as we increased our reserves due to the industry slowdown.

During the first quarter of 2008, we expensed a total of $3.9 million for the amortization of intangible assets recorded under purchase accounting, including $1.6 million in our existing markets, compared to a total of $2.7 million in 2007. Existing market operating expenses as a percentage of net sales increased to 19.9% from 18.6%. Due to the lower net sales and the relatively fixed nature of our operating expenses. Overall operating expenses increased to 19.1% of net sales in 2008 from 18.6% in 2007 due to those same factors offset somewhat by the inclusion of North Coast which has lower operating cost as a percentage of their sales.

Interest expense increased $0.7 million to $70.0 million in the first quarter of 2008 from $6.3 million in 2007. In the first quarter of 2007, we refinanced our credit facilities with a larger facility with more favorable terms. We've also incurred additional borrowings later in 2007 to finance our acquisitions. Interest rates have decreased somewhat from the prior year's first quarter which affected interest costs on our variable debt. Income tax provisions of $3.5 million and $6.3 million were recorded in 2007, 2008, and 2007 respectively, an effective tax rate of 40.2% for both quarters. As a result of all I've mentioned, we had a net income of $5.2 million in our first quarter of fiscal 2008 compared to $8.8 million in 2007. Diluted net income per share was $0.12 compared to a net income per share of $0.20 in 2007.

Our earnings before interest, taxes, depreciation and amortization and stock-based compensation or adjusted EBITDA, which is reconciled to our GAAP net income in our press release, was $26 million for 2008 as compared to $29.2 million in 2007. Our cash flow from operations was $2.8 million for the first quarter compared to $3.6 million in 2007, as income from operations decreased to $15.8 million in 2008 from $21.8 million in 2007. Accounts receivable decreased by $78.0 million in 2008, primarily due to the normal seasonal decrease intensified due to the early winter conditions in our Northern regions. The number of days outstanding for accounts receivable, including North Coast, increased slightly in 2008 as compared in 2007. Mainly due to the higher mix of nonresidential sales.

Inventory levels increased by $7.3 million as we took advantage of some calendar year enhanced buying programs offered by our vendors. Average inventory per branch was down about 8% in 2008, as compared to 2007, with inventories -- with inventory turns down slightly due to the lower sales volumes at the end of the quarter. Accounts payable and accrued expenses declined $76.9 million. Again, primarily due to the normal seasonal decreases we experienced while prepaid experiences in other assets increased by $5.9 million. Net cash used in investing activities in 2008 was $1.1 million compared to $11.3 million in 2007. As we've intentionally reduced our capital expenditures due to the industry slowdown. Net cash used by financing activities was $1.6 million in 2008 compared to a net cash provided by financing of 50-- $48.6 million in 2007. In 2008 we had a slight decrease in our revolver and long-term debt while 2007 activity primarily reflects borrowings under our new term loan to finance our prior revolving facilities and term loan and payment of the related deferred financing costs.

To recap key points for the quarter, overall sales increased by 4. 8%, while existing markets were down 12.2%. Existing market gross margin was 24.3%, up from 24.1% in '07. Existing market operating expenses were down $4.3 million as we continue to look for cost saving measures during these tougher times. Our adjusted EBITDA for the quarter was $26.0 million as compared to $29.2 million in 2007. That gives us a 3.67% debt to adjusted EBITDA ratio as defined in our -- under our credit facility, within our comfort range for leverage. Inventory levels and turns along with the quality of our accounts receivable and related days sales outstanding are within our expectations considering the slowdown in the industry. Diluted net income per share was $0.12 compared to $0.20 in 2007, meeting the average street estimate. And now back to Bob.

Okay, thank you, David. What I'll do now is go through these questions that we have prepared that I know are important to you, and then I'll open it up for questions after that. So the first question, can you give us some trend information relative to gross margins? Gross margins appear to have settled somewhat compared to the fourth quarter of '07. They are up about 130 basis points in existing markets, partly from increased vendor incentive rebates, but also from higher invoice gross margins, and a slight shift to more residential products comparing Q1 to Q4. Our invoice gross margins, which exclude the effects of vendor rebates, are also only off 30 basis points from quarter one of 2007. And just as a reminder, these margins were off more than 100 basis points in Q4 of '07 compared to Q4 of '06. A good sign, but it's tough to tell if it will continue into the future, but nonetheless a good sign.

The second question, has the sales decline stopped or at least slowed down? We were actually seeing some encouraging signs in October and November of our first quarter, but since then, and it has been slower, the Northeast and other Northern regions were hit with a very early winter and heavy snow in December. But some other areas were sluggish without the weather effect. So there are some bright spots. Texas, Canada, Pennsylvania, Delaware have held up better, would be the answer to that question.

The third question. Which product segment has shown the most firming of margins, if any? In our opinion, nonresidential is still more stable at this time than the others. Residential was down in all regions while commercial has seen some growth in our more Southern regions. We think the harsh winter may affect us come springtime.

Question four. What areas of expense or cost control is Beacon doing the best job? We have instituted what we call our cost out plan which is a detailed line by line scrutiny of every region's operating expenses, and no region is exempt. We're proactive in this approach. This approach assumes a lower level of sales to begin with, and then our planning starts at that point. Quarter one is an example. Operating expenses, as David said, in our existing regions were $4.3 million less than the first quarter of fiscal '07, with $3.2 million of that savings coming in the form of payroll and those related costs.

Next question. What is the employee headcount at the end of the first quarter 2008 compared to the fourth quarter of last fiscal year? At the end of our first quarter, we had 2,495 employees, down from 2,708 at the end of the fiscal year. Some of the reduction is seasonal, but most of the reduction represent cost saving measures, especially in the lower performing regions. Now as compared to the first quarter of '07, our headcount is down 323, which is a 12% reduction. And, of course, those numbers that I'm showing factors out the acquisition of North Coast and wholesale roofing.

Next question. Your bad debt expense appears a little higher in quarter one as compared to past years. Can you maintain your historical bad debt expense as a percent to sales in the current fiscal year? We still believe we can keep our excellent track record intact in 2008. Our credit systems are in place, in all of the regions, and we're being very conservative with our accruals in this area, especially in regions which have experienced the early winter problems.

Next question. Does shelter continue to underperform? What areas of improvement are you seeing, and what additional changes do you anticipate? We have now replaced the original leaders and controllers in all three of the shelter regions. Paul Isabella, our new COO, has visited the regions over the past two months and has been actively involved in the development of their cost out plans. We believe we are headed in the right direction in those regions, and some signs we are seeing which are good are better inventory control, we have finished the initial pricing model changes on our ERP system. We've also instilled our [Sox] systems of controls in their daily routines, expense reduction goals are set and are being monitored weekly, and they are being achieved.

Next question. Can you comment, Bob, on scheduled price increases from your suppliers? Most of the major asphalt shingle and some vinyl siding manufacturers have announced 10% to 15% price increases effective in mid-February. Nonresidential manufacturers have also announced price increases in the 5% to 10% range. With the rise in petroleum we do believe a portion of the price increases will stick, but we cannot gauge that at this stage. There has also been increases in granular costs to the shingle manufacturers. And we're being told that raw material costs have to be passed on, and we will pass those price increases on to our contractors.

Please update us on your debt covenants. As David said, we are at 3.67 to 1 in our really only pertinent covenant of adjusted EBITDA to debt. That gives us around $36 million in availability or cushion, and we continue to monitor this closely.

This is always a big one. Do you have an update on your guidance for 2008? We have not changed our initial guidance. We think that range -- we're comfortable with that range, and we feel we can outperform 2007 earnings per share of $0.56 even if the pressure continues on sales.

If the market -- next question, if the market continues to slow, what additional steps might you take to reduce operating expenses? We have put in place our cost-out programs which now you've heard four or five times, but those are in place, and we will reduce expenses further if we anticipate further sales decline. If need be, we are prepared to take a much closer look at closing underperforming branches or consolidating regions.

Second to last question, how is business going so far in the second quarter? Frankly, it hasn't gotten much better than the first quarter, but the winter period for us can change our outlook from week-to-week due to weather conditions. Some regions have bounced back, and others have not. So basically, it is still soft.

And the final question before I open to your questions. Can you discuss your acquisition strategy during these economic times and tight credit markets? For the near future, although we are still talking to folks, we are on the sideline. The economic reasons for consolidation of this industry still remain. However, we do not believe there is a specific timetable, nor do we feel the pressure to complete X number of acquisitions in the next several years. We also do not want a highly leveraged balance sheet at this point in the economic cycle. In our view, we have excellent banking relationships, and we want to show them and our shareholders good stewardship.

And finally, we do not want to make an acquisition we might regret during these uncertain times. Cost control, grow organically, improvement of gross margins are paramount. Those are the plays in our play book at this time. So those are the 13 questions David and I got together and thought you might want to hear. And so I'd like to open it up now to questions from the floor. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Michael Cox with Piper Jaffray.

Hi this is July Johnson for Mike. Thanks for taking my questions. My first question would be on the rebates. What do you see in terms of sustainability of rebate programs noted in the Q?

For 2008, we're just in the process of negotiating those rebate programs with our vendors. This was not really a tremendously material amount of dollars that we're seeing, but did it affect the percentages in the fourth quarter. That can happen quite often because we close our year, as you know, in fiscal of September, and we need to try to estimate through the end of the year how we're going to do with those programs. We actually had to buy some additional material to meet those, but I think they'll go back to the other levels that we've experienced in the previous quarter for next year, though.

On a full year basis would you expect it to be comparable with '07 levels, or do you expect to see a difference?

I think it will be comparable as a percentage of sales, yes.

All right. That's helpful. Thank you. And then my second question would be on the price increases. Given the tough sales environment, what level do you expect -- I mean, I know you're still in the process of kind of working through that but do you have any feeling for what level of price increases will stick?

Not yet, and-- but we will certainly let everyone know when it's clearer.

All right. And then my last question, and I'll jump back in queue, would be the weather impact in the quarter. Is there any way to quantify the weather impact or expectations for second quarter given some pull through sales in the second quarter from weather related pressure?

Sure. Not that we're making a big deal of this, because weather affects us every winter period, but in the past we've done an average sales calculation based upon the regions that -- from last November's change to this -- to last December's change. It's in the range of anywheres to $5 million to $10 million. And it's specifically in the Midwest. Some of the Northeast certainly in the Northern areas, but below that it's -- it was rain and stuff and not snow, so it's pretty hard to tell how much of the impact is from that.

New England had particularly high snowfall December of '07 versus '06. I don't think there was much snow in December of '06 at all. So we did do that calculation, and hopefully that gives you an idea of the impact.

That's helpful, thank you very much. I'll jump back in queue.

Thank you.

And we'll go next to Michael Rehaut with JPMorgan.

Hey guys this is actually Ray [Horn] in for Mike.

Hey Ray.

Just going back to the upcoming quarter, looks like you guys are facing pretty easy year ago comp. I think organic sales are down about like 14%. I think also weather-related, you guys have an (inaudible)-- you guys said it was slowing down in January still but is that on a sequential basis or like a year-over-year basis?

That's on a year-over-year basis. Sequentially January does not relate too much to December anyways because it's much harsher weather. And sometimes the roofers really don't, don't even schedule the work in January.

Okay so on a year-over-year basis you're still down versus the 14% from last year?

Right.

Okay. I guess I know you can't comment too much on the price increase but if you can remind us what -- how that-- how those price increases have affected you historically? And how does that affect the timing of your margins and what the magnitude of those price increases were?

Historically, they haven't been as large as this at one point in time. And t's not that we try to take advantage of our customers, but we need to pass on the costs that get told to us, and we in general have gone up as the industry has along the same margin percentages. So if the industry went up 5%, we would boost our prices 5%. I'm not--don't-- not comfortable with giving you any guidance to what happens to a 10% to 15% announced price increase. I've never experienced that since I've been here.

And in terms of like the timing, like when they implemented and how that eventually go through margins was that like a one to two quarter lag or--?

It can be 30 to 60 days. It depends on how quickly the inventory turns into the marketplace.

Okay, cool. Thanks a lot.

And we'll go next to David Manthey with Robert W. Baird.

Hi, good morning guys. This might be a little simplistic, but when we look at the quarter you just reported and earnings per share were down about $0.08 year-over-year, and as you said, if things are still soft is and by most accounts, res isn't getting any better, maybe a little worse. And if non-res is expected to deteriorate potentially further going forward, is it too optimistic to think that you'd be able to overcome that kind of Delta? I mean would earnings down in that same range be reasonable, or is there some reason why you're going to be able to crank those a little bit higher and maybe closer to flat?

Well, the thing to point out is the operating expenses being down over $4 million, and if you annualize that kind of improvement, it becomes a significant number. And then last year the second quarter was unusually bad. So those two factors really give us that confidence. Knowing what's going on with our operating plan really helps us.

And the other thing I would add to that is, a little bit is that we're hoping that we can sustain some of that gross margin increase that we experienced in the quarter. I think going forward, as the industry settles into what type of demand there is, I think I've said in this the past, we think that will help stabilize gross margins.

Okay. And then in terms of the non-res market, you're seeing flatness now. Are you seeing any signs or any indications that things might be slowing? And if you could remind us what your outlook is for the coming year. Are you looking for flat, or do you expect it to be down?

I'm not so sure we're looking to flat. We were flat despite the fact that our strongest regions had the most winter period, which is New England and parts of the Midwest with North Coast and the like. So there's still a potential that we could eek out some gains there. I think the outlook, from what we're hearing from our vendors and the like, is there's still some business around. Whether that comes through once the winter season is over, we're not sure of. But snow and rain in the winter periods helps the roofing industry. It really shows the leaks that are there, and it deteriorates the roofs a little quicker. So we're hoping for a good start to the spring.

Okay, thanks very much.

We'll go next to Mukul Kochhar with Oppenheimer.

Hi guys, good morning. Couple of quick questions, on the gross margins I know you said the year end adjustment was probably not material for the year, but is there any any sort of a number that you can give us for how much that adjustment was so that we can adjust the quarter?

I'd prefer not to disclose that because of really competition reasons. What I would say, we had to buy some materials, as I mentioned, to meet that objective, and it's truly not material for the year at all.

All right. And just on this a little bit forward. I mean the second part, I think that is in the Q and you've said in your prepared remarks as well, is that the first quarter rebates are a little higher. Now just to get a little bit of more clarity on that, I mean I'm assuming that these rebates are more on the accessories, rather than the shingles. The manufacturers on the other hand are trying to raise prices, right?

That'd be a bad assumption. But typically, the rebate programs that we can influence would be the A and B products of our inventory which would include shingles and commercial products that we turn quicker. The slower turning inventory items we just wouldn't be in a position to make a buy. It would not help us that quickly.

Okay. So these are (inaudible) side of volume in which case they're probably selective, the big distributors are getting more of this, right?

I would say that's true.

All right. Thanks a lot. Appreciate it.

Thank you.

We'll go next to Andy [Urando] with Needham & Company.

Good morning.

Morning.

Morning.

Reroofing seems to be mostly a nondiscretionary investment. Do you see any pent up demand building, not just related to weather, but also longer term? And when would you expect to realize revenues from that?

That's been discussed in the industry. We've-- some of our manufacturers have talked about pent up demand, because you can't postpone it forever, so I think that's an accurate statement. And we hope to see that later in this quarter.

Later in the quarter? Okay. What about longer term over the last couple of quarters? Seems like revenues have been a little light. Do you see that extending out into '09, '10, and when would you see real ramp up?

I think that's somewhat due to general economic times. We can't predict the future, and anybody that thinks they can in this type of market with the new housing and somewhat what's going on with the economy is foolish. We need to play with the cards we have, like Bob says, and use our play book for the things that we can affect in our business. And when the growth comes we'll be well positioned to take advantage of it.

Good. On that note actually, you appears to mentioned that you believe the Company's getting market share. Can you provide some color on this?

We believe that, absolutely. It's hard to quantify that because we're the only public Company in the business. So it's all kind of one-off analysis that we're doing well. And probably half our competitors are on this call disagreeing with that but we think we're doing well in the marketplace.

Then just a housekeeping. Looks like the share count was down, diluted share count, quarter-over-quarter, what was that?

That's 100% tied to the fact that the stock price is down, and it affects the amount of options that are included in the calculation.

Thank you very much.

Thanks.

We'll go next to Jack Kasprzak with BB&T Capital Markets.

Thanks. Good morning, everyone.

Good morning.

You-- Bob, you mentioned earlier you just referenced there's still a fragmented industry out there, lots of players. Are we at a point where business is bad enough that you're seeing a shake-out occur in the industry where you're seeing some smaller, maybe marginal players shut down?

No, we aren't. I think this business -- this is a stable business because of the reroofing aspect, and those companies would just hunker down and reduce their costs and their contractors are loyal and would get through. Now, there has been -- there was a company in Florida that filed, but that was a larger company associated strictly in Florida, and that's a -- that is a different market than the rest of the country.

Okay. Also, too, with regard to the bigger picture, what macro indicators do you think are most important? We know roofing is largely-- we believe it's largely replacement driven business so should we be looking for or do you guys look for a stabilization and and/or improvement in existing home sales? Some indicator that perhaps there are better times ahead in the roofing market, or is it -- anything else you might look at that could help us?

Well what we've -- what we've done in the past is tried to correlate roofing demand to interest rates, housing starts, and it's hard to correlate. The long-term demand for roofing, both residential and commercial, it's important to add those together is quite stable over a long period of time. And so we've done our best to try to correlate it to interest rates and new construction, but it can go in the opposite direction. But usually it's a very steady line with 2% to 3% growth over a long period of time, and we think that will continue. So we have tried to correlate. I think interest rates are very important. Employment s very important. But it still is a nondiscretionary purchase over the long period of time.

Okay. Great. Thank you very much.

Thank you.

We'll go next to Ivan Marcuse with Keybanc.

Hey guys, thanks for taking my question. What's your outlook for the commercial construction going out to the year? Are you seeing it to be flat year-over-year, or are you seeing-- are you hearing from sources that the backlogs may be slowing down? Could you give me a little bit of color on that?

We haven't talked to anybody about backlogs that's quantified. We think it's-- that markets still stronger than residential and will remain stronger. That's our outlook. The manufacturers, like Carlisle, have been optimistic for 2008.

Okay, thanks.

Thank you.

And then last question, with prices being increased and residential and maybe not nonresidential being a little bit softer going forward, are you-- what are the possibilities of-- are you going to be able to price a full -- pass through a full price increase? Is that your anticipation?

That certainly is going to be what we're going to try to do, absolutely.

All right. And then -- and that would be all. Thanks a lot.

Thank you.

We'll go next to Jeff Germanotta with William Blair.

Hello.

Jeffrey.

Wanted to understand a little bit some more the cost savings initiatives. You talked about the $4 million that's in your press release. You indicated that that could be annualized within the core business. Are you prepared to take more in the core, would be one of my questions, and what would it take to get to you do that? And secondly, can you also address that from the acquisition side of things? I assume you're reducing costs, trying to harvest synergies there as well.

Sure. The reason we're pretty comfortable with that is that we think we can scale the business somewhat to the activity that we anticipate. And that's truly what we did for quarter. We saw, as Bob mentioned, October and November going along pretty well. But once the winter hit, we knew that we had to scale back pretty quickly, and achieve that. Going forward, if we also see that, we're going to anticipate lower revenue dollars, we have prepared to be able to do that cost-out program, run those same types of analysis that we did to create that reduction and do it again. That's what we need to do right now in the business, as Bob mentioned. We can try to increase gross margins, we can try to get some revenue growth in some areas, but we know we can control our costs.

Are there -- as you think about -- you've talked about the core business. As you think about the recently acquired business, is there a dollar amount of costs you've taken out there that we should extrapolate as we think about our forecast going forward?

Very hard to compare to the year before, for North Coast, because it was run as a private company. But all of our regions are subject to this cost-out program, whether they're acquired or not. And we're doing the right things. I couldn't even give you an answer there, Jeff. They're a very private company with a multitude of ownership so it's just not relevant.

That is their culture, though. Even before we bought them, that was a -- every branch was run by an owner, and so they have a history of running their business with the eye on the bottom line.

Okay. And then just the last question or kind of a follow-up to that. Do you anticipate any asset impairment charges going forward?

Not anticipated.

Thank you.

You're welcome.

We'll go next to [John Emwork] with Iron Works Capital.

Thanks. Before I ask my question can you just clarify the debt covenant that you've talked about? Is it adjusted EBITDA to interest coverage? You referred to it as EBITDA to debt, but that didn't make sense.

It's actually EBITDA to total debt, which would include the bank that we have the term loans and the revolver, and then any equipment financing that we do. And by adjusted EBITDA, we mean traditional EBITDA, but they also allow us to add back the costs associated with stock options, and they also allowed us for last quarter, for instance, to add back the pro forma results of the acquisition we did for North Coast.

That's a trailing 12-month 3.-- what was it?

3.67, sir.

To one.

Yes.

Okay. And the question I had was, how much inventory, extra inventory did you buy in the quarter and what were-- to make the rebate breaks and what was the cost savings from that?

The amount we bought was in the millions of dollars, spread out amongst our 178 branches. And I do not wish to disclose any of the rebate information at all, to be honest with you.

Thank you very much.

Thanks.

We'll go next to [Peter Reed] with [Mass] Capital Management.

Good morning. I have just a couple of follow-up questions on your vendor rebates. Do the hurdles which you have, if I understand it correctly, your rebates, you get nothing up to a certain hurdle, and then a significant amount over whatever that hurdle or break may be. Do those typically increase annually?

It depends on the negotiation with the vendors, and need to clarify something. Very few of the dollars are associated with annual goals. Most of them are assumed goals that you've made during the year and we book those monthly and quarterly as we go through the year. The percentage that you earn at the end of the year is small as a percentage for the total product value but it's because it's really a retroactive, in that it includes all purchases for the entire year that would affect the quarter.

And then when you say that you expect vendor rebates to be similar as a percentage of sales to fiscal year 2007, given some of the top line trends, should we assume that that means there will be less dollars received in fiscal year 2008?

Yes.

Okay. Thank you.

And we'll take our next question from Robert Kelly with Sidoti & Company.

Good morning. Thanks for taking my call.

Good morning.

You guys talked about the year-over-year sales trends thus far in 2Q. How about the gross margin trends?

We did speak to that a little bit, and one of the important things that we looked at is our invoice gross margin which really is again, how we sell to our customers and what the -- what the vendors price was on their invoice -- that was down 30 basis points, which trending from Q4 of '07 we were down more than that. So I think there has been a flattening of gross margins. It's-- again this industry is not going to be hundreds of basis point changes, it's going to be tens. If we can get a little bit hear and there, that helps us out.

Can we read some of the stabilization as the competitive conditions easing, or is it just internal things you all are doing?

I think it's a little bit of both. We're trying hard with our customers. We believe that we should be paid for the services that our employees give to these customers. So in order to maintain that and give the service those gross margins we feel are very reasonable for our industry.

And just a quick point on the balance sheet with acquisitions now on the back burner. Do you have a targeted debt level where you want to be by the end of F '08?

Don't really target it, but with no, no acquisitions you would see that trend down by anywhere's between $10 million to $40 million depending on the levels of inventories, which can change, depending on the activity is in the industry.

Thanks you very much.

We'll go next to Brent Rakers with Morgan Keegan.

Good morning. Just wanted to follow-up. If we could get a little bit more specific on some of the monthly comp trends, and then what you're seeing in January, I think on the last conference call you talked about October/November trends in kind of the mid-single digits. And then as December came about there's $5 million to $10 million of weather effect. I guess I -- maybe if you could kind of throw out a December number, how much that dropped from October/November levels.

Well December really isn't ever comparable to October/November.

I guess on the year-over-year base, Dave.

Yes, and really what we saw is most of that $5 million to $10 million was in that one month, virtually all of it.

Dave, in terms of scale are we talking December down 20%, 25% or so?

I don't believe it was that much. Remember, December is a smaller in total volume month, so it's probably in the 10% to 20% range though, no question.

And then presumably January is continuing that down 10% to 20% kind of numbers?

No, January is continuing down about where we were for the quarter, for Q1.

Okay, great. And then a couple of questions on, I guess first on the bad debt expense. Were there specific write-offs, or are these just additional reserves taken in the quarter?

Virtually all of it was reserves, and in fact we actually had lower write-offs in this quarter compared to 2007. We're being cautious. The winter period can affect our customers to pay us on time. And sometimes we need to carry them through the winter period and we need to be cautious during those times.

And then just last question. On the insurance claim number, could you give us -- I think you said it was $1.8 million, but that was two or three different items. Could you specifically quantify the insurance number?

It's a multitude of insurance programs. It's partly because we had good claims experience in our health plans, but it's also we're self-insured for worker's comp and some of our other general insurance policies. We just have a very good safety department. Our Safety VP, Sergio, does a great job for us, and those benefits are being paid back by having lower claims.

Is that something Dave then thought that occurs-- should occur again at the same level in Q2, Q3, Q4, or is it something that you kind of got the benefit here and it kind of goes back up to a normal level in the next nine months?

We've been experiencing this for the past few quarters and think it'sa good trend. And will, should continue into the future if we continue to do good execution job on our safety programs and those other items that I mentioned.

Great, thank you, Dave.

Thank you.

And at this time we have five minutes left for questions. We'll go next to [Brad Krause].

I had a question as a shareholder the only thing that really freaks us out, I guess is the debt load and your ability given the trends that you're seeing, which are not positive to the seasonality of your business, to do everything you guys need to do coming into this season. Can you just put our minds to rest that you have enough liquidity to operate?

Yeah, I'll put your mind to rest. This is a very typical season for us. And the reason that we do a trailing 12-month calculation is to smooth out some of those trends. We actually have in our facility, for instance our loan rate on receivables, we increase it by-- from the 85% to 90% during these times. It's something this Company has gone through since it started. We're very good at controlling those levels during the winter period. And at $36 million or so in total cushion that we have today, we've paid down the revolver another $10 million to $15 million since the end of the quarter. That's typical for this time of the month. We watch it very closely. We're used to doing this. As a private Company, we actually had much more higher ratio of debt than this. And we're just experiencing and we'll get us through this winter period, and once the season starts again then it won't be a worry at all.

And as you extrapolate out the availability, you guys won't have trouble when you in turn the carrying working capital when things, obviously I think the seasonality of your business sales go up a lot, obviously in the summer you won't have any issues with that?

No, and again, it's a trailing 12-month calculation so that gets smoothed out. And what typically happens is we buy inventory, the terms for our vendors, equalize with the turns to our customers so they sort of self-level against our debt. And mainly that's the revolver debt. So we've not experienced in the past and do not expect it in the future.

Thank you.

And we'll go next to [Justin Harrison] with Ramsey Asset Management.

Good morning. Question. On the second half of your year is usually pretty back waited pretty good, and as a result, the operating expense as a percentage of sales is always a good bit lower. In light of the cost cutting you're talking about, can you give any more kind of thoughts or commentary on how this year set back half might look compared to the first half compared to prior years?

What we think is if we keep these operating levels the way they are and head into that period, it's somewhat easier to adjust upward, of course, with costs and getting people employed and trained, than it is to do the cost cuts, which is always very difficult for our employees. I think that if we need to ramp that up a little bit, we'll be able to, but going into that period, we're in a good position. If those revenues come and we see increases over last year, we'll be able to provide for that, and perhaps take a little bit of the profit early on when we're a little lighter than we normally would be.

Okay. Thanks. And the -- on the complimentary products that seems to be tracking with the residential from the organic, and you seem to comment about that in the up-front. Is that a good way to look at it moving forward?

Yes, I think what we've seen is the complimentary can move a little differently than just our residential roofing products because sometimes we're gaining market share there because we're introducing those products into areas where we don't currently sell them, but those are mainly residential products. We believe the mix of remodeling to new construction is a little less than the roofing product, but it's in line with that because most of the items we sell, such as vinyl siding, replacement decks, such as synthetic decking and replacement windows, they are remodeling things, and are a little bit more consistent than new construction materials.

Got you. Thanks. And then just real quick on the debt covenants again, making sure I'm doing the math right here. Is the numerator just about $400 million? Is it the 407 minus the 7.3? Or is-- is that right?

That's correct.

Okay. And then on that, have you in light of the ongoing, just general market weakness, have you -- has there been new initial conversations with any of the banks on possible scenarios should there be further material weakness in construction?

No. Although we have a great relationship with them, the less we can talk to our bankers lately, the happier we are. We're going forward with the idea that that's not going to be a problem, we've controlled it in the past. And we're hoping that we don't have to talk to them over next few months.

Got you. Thanks for taking my call.

Thank you.

And that concludes the questions. Now I'd like to turn the call back over to Mr. Buck for any closing comments.

Okay. Thank you, Gwen. And thanks, everyone for calling in today and your interest. Dave and I will be available for additional post-call follow-up questions, so feel free to do that. Let me close with several points. The market is slow, especially in Northern areas where the winter is upon us. But there are other regions that are doing better, and Texas and Pennsylvania, Delaware are some of our bright spots. Commercial is still okay, and if you factored out the December issue with snow, we would have had growth in the commercial area, and commercial is also strong in Texas. Invoice gross margins were only off 30 basis points. We think that's a positive sign. And we also really believe our field officers are doing a good job in existing locations controlling expenses.

Again, existing market expenses were down over $4 million. Headcount is down 323. Price increases appear to be on the horizon, and we think a portion of those will stick, and we will pass those on to our customers. So we're controlling the costs for the level of business we have, and if we see revenue growth, either through price increases or demand, coupled with the price -- or the cost decreases that we've implemented we will have a very good year. So thanks again for your interest and support, and we'll be available for additional follow-up questions. Thank you.

Thank you, everyone. That does conclude today's conference. You may now disconnect.