Beacon Roofing Supply Inc (BECN) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Beacon Roofing Supply's fiscal year 2008 second quarter earnings conference call. My name is Jennifer, and I will be coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. On this call, Beacon Roofing Supply will make forward-looking statements, including statements about 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. On the call today for Beacon Roofing Supply will be Mr. Robert Buck, Chairman and CEO; Mr. Paul Isabella, President and COO; and Mr. David Grace, Chief Financial Officer.

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

Thank you, Jennifer. Welcome everyone to our second quarter 2008 earnings call. I will begin the call with a few summary comments and then David Grace, our CFO, will present the financial details of our performance. As I've done for previous calls, I prepared a few questions and answers covering the important topics that we know you want covered during this call. After I handled the prepared questions, we will open the call for additional questions that you might have. For the quarter, sales increased 6% while organic sales decreased 6.7 which is a big improvement over the 12% decrease in organic sales during the first quarter. I'm excited to say that the third quarter is off to a strong start and we are hopeful that trend will continue.

EPS for the quarter was in analyst range, albeit on the low end of that range. And, as you know, our second quarter, which is our winter quarter, is highly dependent upon the weather. You will hear more about our expense control programs on this call and we explained that gross margins firmed up at our existing branch locations and we also want you to take note of our strong cash flows, even during this winter quarter. We want you to be aware of these positives and this performance while at the same time we acknowledge that we can and will do better. Paul Isabella, our new CEO, is on the call and he is doing a fantastic job executing our business plan of running a lean and efficient company. The third quarter is shaping up well and we have a strong handle on our cost and capital spending. I'm also very proud of the officer leadership team and the tough decisions they are making. What I want to do now is turn it over to David. He will give financial results and then I will come back with the Q&A. David.

Thanks, Bob. I would like to say a quick happy birthday to my wife, Jen. Now, on to the financial results. In the second quarter of fiscal 2008, our net sales increased 6% to 304.3 million from 286.9 million in 2007. Our required markets which are comprised mostly of North Coast commercial roofing systems, added 36.4 million in net sales. Existing markets, which were comprised of 160 branches not included in our inquired markets, saw a sales contraction of 19.1 million, up 6.7%. There continues to be a lower level of new home construction activities and in some instances lower levels of reroofing and remodeling with flat to slightly declining material prices as compared to 2007. Towards the end of the second quarter we raised some of our prices to our customers in response to price increases received from some of our suppliers. We do not believe these increases had a material impact on this quarter but they will have some effect in the future.

Residential roofing products sales continue to struggle in most of the regions with a drop of 10.5% for the quarter. Nonresidential roofing grew by 4.2% with most markets seeing good activity except in the midwest which was down mainly due to a harsher winter. Complimentary products reacted much like our residential roofing products, down 12.1% and again across most of the existing markets. We estimate inflation in our product cost based upon our current inventory product mix and invoice cost as compared to invoice cost of the same products a year ago. Based upon this estimate, our product costs were flat to fiscal 2007 levels. As I mentioned, our suppliers have increased prices for residential roofing and some complimentary products ranging from 5 to 15% which were effective on February 1, and this increased our weighted average cost of those products. We closed one branch during the current quarter compared to three openings during the second quarter of 2007. We also have acquired 17 branches since the second quarter of fiscal 2007 and we operated a total of 177 branches at the end of this quarter. We had 64 business days in both 2008 and 2007 second quarter.

Our overall second quarter gross profit was 68.4 million for 2008 as compared to 66.2 million in 2007, a 3.4% increase with overall gross margins dropping from 23.1% to 22.5%. Acquired markets contributed $6.4 million in gross profit while existing markets saw a drop of 4.1 million or 6.3%, slightly below the rated drop in revenues. Our overall gross margin rate includes the impact of North Coast mostly non-residential roofing product sales which have lower gross margin rates than other products. Existing markets gross margins of 23.2% for 2008 compared to 23.1% for 2007, the second consecutive quarter that we have seen higher gross margins. We have seen the residential roofing product margins improve some with complimentary products somewhat flat, but nonresidential roofing project margins continue to be slightly lower. The residential roofing product margins were enhanced by increased buying before supplier price increases while the non-residential roofing product margins continue to be hurt by competitive pressures.

Total operating expenses increased 4.9 million or 7.0% to 75.3 million in 2008 from 70.4 million in 2007. Our required market operating expenses of 9.7 million were offset somewhat by a decrease of 4.7 million or 6.7% drop in our existing market operating expenses due to savings from cost cutting measures and also somewhat from lower variable expenses due to the lower revenue. Payroll and related cost decreased by 3.0 million primarily from a reduced head count not withstanding less favorable medical claims and four additional branches opened since 2007. We also generated existing market savings of 1.1 million in other selling, general, and administrative expenses as we continue to see benefits of our cost our program in many expense categories and also due to allocations in our acquired markets. During the second quarter we expensed a total of 3.7 million for the amortization of intangible assets recorded under purchase accounting, including 1.6 million in our acquired markets compared to a total of 2.5 in 2007.

Existing markets operating expenses as a percentage of net sales remain consistent at 24.5% as we were able to save variable costs as noted above equal to the deleveraging of our fixed cost. Overall operating expenses increased to 24.8% of net sales in 2008 from 24.5% in 2007 due to the same factors but also the inclusion of North Coast which has a higher operating cost of percentage of sales, especially during the winter season. Interest expense increased 0.3 million to 6.7 million in the second quarter of 2008 from 6.4 million in 2007. This higher interest expense was primarily due to the increase in debt from the acquisition of North Coast partially offset by lower interest rates on the variable rate debt as compared to 2007. An income tax benefit of 5.5 million and 4.3 million were recorded in 2008 and 2007 respectively, the slight increase in our effective rate to 40.5% in 2008 from 40.2% in 2007, is primarily due to the allocation changes affecting our state income tax rates. As a result of all I mentioned, we had a net loss of 8.1 million in our second quarter 2008 compared to 6.3 million in 2007. Net loss per share was $0.18 compared to $0.14 in 2007. Our earnings before interest taxes depreciation and amortization and stock-based compensation are adjusted EBITDA, which is reconciled to our GAAP net income in our press release was 2.9 million for 2008 compared to 4.1 million in 2007.

And now briefly on to the results for the year to date. Sales increased 5.3% to $702.6 million in 2008 from 67.2 million in 2007. Our acquired market sales totaled 101.1 million, existing markets saw a sales contraction of 65.6 million or 9.8%. We estimate that deflation contributed approximately 1% of this decrease year to date 2008 and 2007 both had 125 business days. Our overall gross profit increased 1.4% to 160.1 million in 2008 from 157.9 million in 2007. Our overall gross margin declined to 22.8% compared to 23.7% while existing markets saw the margins increase to 23.8% from 23.7% mostly due to the same factors I previously discussed for the quarter along with higher calendar year end rebates. Existing market operating expenses as a percentage of sales increased to 22.0% in 2008 from 21.1% in 2007. As we saw deleveraging of fixed cost due to decreased net sales offset somewhat by the cost savings of our cost out program. Overall, operating expenses as a percentage of sales increased to 21.5% from 21.1% due to the same factors offset somewhat by a lower year to date cost percentage at North Coast. Overall, operating expenses increased 10.1 million or 7.2% to 151.2 million.

In our existing markets, lower head count and our cost out programs helped reduce our operating cost by $9.0 million or 6.4%. We also encourage 7.7 million in amortization of intangibles from purchase accounting in 2008 as compared to 5.2 million in 2007. Interest expense increased by 1.0 million to 13.7 million in 2008 from 12.7 million in 2007 while income taxes were a benefit of 2.0 million in 2008 compared to an expense of 1.7 in 2007. As a result of all I mentioned, our net loss was 2.9 million compared to net income of 2.5 in 2007. Adjusted EBITDA was 28.9 million in 2008 as compared to 33.3 million in 2007. Net loss per share was $0.07 compared to a diluted net income per share of $0.05 in 2007.

Cash flows from operations increased by 19.4 million, 192% to 29.5 million for 2008 as compared to 10.1 million for 2007. This was despite a drop of 8.0 million in income from operations to 8.8 million in 2008 from 16.8 million in 2007, including an increase of 3.6 million in non-cash charges. However, accounts receivable decreased by 93.9 million in 2008, primarily due to normal seasonal decrease and lower revenues. The number of days outstanding for accounts receivable based upon year-to-date sales increased somewhat in 2008 due in part to the higher mix of non-residential roofing sales that generally have longer payment terms.

Inventory levels increased by 29.0 million as we build your inventories beyond the normal seasonal increase, especially in residential asphalt shingles ahead of announced price increases. Inventory turns down somewhat in 2008 as compared to 2008 mainly due to the drop off in sells and the aforementioned purchasing deals. The benefit from the decrease in accounts receivable was also partially offset by a mostly seasonal decrease of 57.6 million in accounts payable and accrued expenses. Prepaid expenses and other assets decreased 6.1 million due to seasonal collections of vendor rebates receivables.

Net cash used in investing activities, which consists solely of capital expenditures, decreased by 16.0 million in 2008 to 1.2 million from 17.2 million in 2007. We have substantially reduced capital spending due to the business slow down in the prior years required [up gauge] to the fleets of some of our recently acquired acquisitions. Net cash used by financing activities was 23.9 million in 2008 compared to net cash provided by financing activities of 48.8 million in 2007. For the trailing 12 months ended in March, our adjusted EBITDA was 103.3 million and when divided in to our net debt of 370.2 million as defined under our credit facilities gives us a ratio of 3.58 to 1, down from 3.67 to 1 at December 31, 2007, and still below the required ratio of 4 to 1. As you can calculate from our recently filed 10-Q statement of cash flows for 2008, we paid down approximately $22 million in debt and increased cash by 3.3 million during the quarter, solidifying our balance sheet somewhat.

Recap key points for the quarter. Over all sales increased 6.0% with existing markets down 6.7%. Existing market gross margins seem to have stabilized, up slightly to 23.2% from 23.1%. Existing market operating expenses down 4.7 million for the quarter and 9.0 million for the year to date as we continue to execute our cost out programs. With reductions in our debt and our trailing 12 months adjusted EBITDA of 103.3 million, we remain compliant with our debt covenant. Inventory levels in turns along with the quality of our accounts receivable and related day sales that are outstanding within our expectations considering the slow down in the industry. Again, the net loss per share nor the quarter was $0.18 compared to $0.14 in 2007 mainly due to the expected seasonal loss at North Coast. Now back to Bob.

Thanks, David. What I want to do now is go through these important questions that are often asked and we will get through these and then open the call. The first question, which product segment has shown the most firming up of margins? The answer is surprisingly nonresidential is less stable at this time than the others, although we continue to see sales growth from this segment, albeit in low single digits. Residential roofing product margins, especially with the price increases beginning to take affect, seem to be stabilizing while complimentary product sales were down in most regions, and when you add it all together, gross margins in existing regions are up. That is certainly good news.

Second question. Existing market sales declined less in the first quarter. Can you give us more details? After a tough December and January, we saw some encouraging signs in February and March, although the prior year comparisons are easier. As we said in the past, we are looking for, I said in the past, I'm looking for a sustained period of perhaps two or three months of good activity before we might conclude the worst may be over. The northeast and other northern regions who were hit with an early winter, they rebounded somewhat during the quarter, but then some other areas were sluggish such as the southeast, mid south and west. There are bright spots, again the northeast, Canada, mid Atlantic, Central Plains all held up best in the second quarter.

The question, third question. We are all aware of the slowdown in nonresidential -- I'm sorry, in new residential construction. Can you quantify any slowdown in reroofing? Let's take a stab at that. As you may know, we do not have a completely accurate method of tracking new versus reroofing. Maybe we can make a few suggests to help you understand the situation. So we will go through a little math at this time. Let's assume that 33% of our 135 million in residential roofing sales in the second quarter, let's assume those were for new housing construction. According to published reports, new housing starts were off 29% in our second quarter of 2008. That calculates to about a $13 million decline in our sales that would be related to new construction. That leaves about 1.1 million drop in reroofing revenues of 90.2 and that 1.1% or $1.1 million drop is 1.2% of sales. We believe again that this mathematical exercise helps show the stability of reroofing even in very difficult markets.

The fourth question. What areas of cost expense control is Beacon doing the best job? We continue on with our we call cost out initiatives which involves a detailed line by line scrutiny of all expenses in every region almost on a weekly basis. We are pro active in this approach. We have assuming a lower level of sales to begin with. Then we plan appropriate cost reductions at that level of business. Operating expenses in our existing regions were $4.7 million less for the quarter with about $3 million coming in payroll savings. That equates to about a 6.7% savings, equaling the drop in sales, and in our mind truly an accomplishment considering the high percentage that we have a fixed cost. And let me say that we appreciate the hard work and tough decisions being made in the regions to accomplish this.

The fifth question is what was the employee head count at the end of quarter two as compared to the end of the fiscal year '07? The answer is at the end of our second quarter, which ended March 31, we had 2431 employees, which is down from 2708 at the end of the fiscal year 2007. Decline of 277 employees or 10.2%. Some of the reduction is seasonal. Many are from cost saving measures, especially in the lower performing regions. Of course these reduction numbers that I'm pointing out, they do factor out the acquisition of North Coast and Wholesale Roofing.

Next question. Can you comment on the quality of your accounts receivable at the end of the second quarter? We are happy to do that. Our credit systems are in place in all regions, and we believe our reserves are conservative in this area. Our days outstanding are up only three days, partly due to a higher mix of nonresidential sales that traditionally have longer terms than residential sales. Our over 61 days past due percentage, it has improved since December. We are about 100 basis points below last year including North Coast receivables in both periods for comparable comparisons. So we believe we made it through the winter season in pretty good shape.

Next question. Can you update us on shelter's performance? We have the right leaders in place now. We have consolidated the Central Plains region with the Midwest and in addition to that we have transferred ten other shelter branches to our North Coast and best distributing regions. Expense reductions are set, and they are monitored weekly by Paul Isabella and are being achieved. We are on the right track. We need to continue to execute. And with any kind of sales improvement, we will enjoy strong operating leverage.

Next question. Can you comment on scheduled price increases from your suppliers? Price increases of five to 15% on major asphalt shingles and some vinyl siding products are in the marketplace and seem to be sticking. These supplier have also announced additional price increases for our third quarter. Nonresidential manufacturers have also announced price increases in the 5 to 10% range. Those are mainly effective for June 1 and thereafter. These price increases in our mind are warranted due to the rise in price of crude oil and we intend to pass these cost increases on to our customers wherever competitively feasible.

Next question. Please update us on your debt covenants. Do you have concerns about them? As David just discussed in his comments, we are at 3.58 to 1 and our only pertinent covenant which is adjusted EBITDA to net debt. That gives us about $43 million in availability or cushion, if you will, and this covenant measurement actually improved in the second quarter due to the good cash flows, pay down of debt and we will continue to monitor this closely.

Question number ten. Do you have an update on your guidance for 2008? We are still hoping to improve upon 2007's earnings per share of $0.56. Although we fell further behind in the second quarter, the existing markets actually performed slightly better in that quarter than last year with most of the delta and EPS caused by the highly seasonable period at North Coast. I will tell you the start to quarter three gives us good encouragement. With that in mind, the next question is how is business going in the third quarter? April went very well. It's good to see growth again. Some of that may be, may have been pent up demand from winter, but it was encouraging. Again, until we see sustained growth for another 60 days we will remain cautious.

And the final question, before we open it up, is has anything changed with our acquisition strategy since the first quarter? The answer is no. Not for the near future. It has not changed. Although we are talking to the folks, but basically on the sideline. The economic reasons for consolidation of this industry they still remain. However, we do not believe there is a specific time table nor do we feel the pressure to complete X number of acquisitions in the next several years. We do not want a highly leveraged balance sheet at this point in the economic cycle. We have excellent banking relationships and we want to show them good stewardship. Finally, we do not want to make an acquisition we might regret during these somewhat uncertain times. Basically, expense reductions, grow organically, and improve gross margins, those are paramount to us. Those are the plays in our play book at this time. Nothing fancy but just solid play making. So those are the prepared questions and answers. I hope I have touched on many of the topics that you wanted me to. But at this time we do have time to open it up for questions.

(OPERATOR INSTRUCTIONS) We will hear from Michael Rehaut of JPMorgan.

This is [Ray] (inaudible) calling in for Mike. Just a follow up on the price increases of 5 to 15%. We are actually hearing from some suppliers that they were actually not able to pass along price as much as they expected. How much of the 5 to 15 have you been able to pass through?

Say again? Our competitors --

Some of the manufacturers some of their comments have suggested that they were unable to pass along those price increases to their customers?

I think our manufacturers have been pretty successful, they've been very firm and that's how we are reacting to it. So I would have to find out more off line on which ones you're speaking about. At this point, I think most folks are very clear on that because of the price accrued. It continues to increase and in our view and I'm sure in theirs they really have no choice.

Okay, then just following up with the your comments on April. Is it growth year-over-year or is it more like sequential seasonal pick up?

Growth, year-over-year.

Is that across all business segments and products?

It really is strong. Pretty much all but not all. I think we do have some summary comments about where the strengths are. The northeast, mid Atlantic, Texas, Canada, southwest, and Midwest. Our North Coast operation is doing quite well. That's where our strengths are. West coast still appears to be flat. Everything else is good. You put it together is growth year-over-year.

Just lastly on the cost out initiatives, how much have you guys saved so far since you implemented that program and how much further do you guys think you can do on that? I have a followup to that, if you could break out your cost of goods sold, what the fixed versus variable costs are approximately?

We saved approximately $9 million year to date. 4.7 million for Q2, [Ray]. As far as the fixed and variable for the [COGS], it's 100% variable. We really don't manufacture or add costs to the invoice costs that we get from our vendors.

I was under the impression that you said most of the costs were fixed.

That would be the SG&A costs were fixed. 60 to 70% of those are fixed. We've been able to during Q2 save more variable costs than the actual deleveraging of those fixed costs.

Thank you.

Robert W. Baird's David Manthey has our next question.

Good morning. All else equal, when you look at the next quarter, given that I think you mentioned you picked up a bit of an inventory gain from buying ahead of the price increases, could you quantify that and then if we look to next quarter, will the reduction in gross margin as that goes away, be offset by am increase from the price increases that are actually being implemented by you? That's a long question but hopefully you got that.

Yes. Dave, that's twofold. One, we made purchasing deals during the quarter which will benefit us in Q3. Whether that goes away in Q4 is another matter. Under proper accounting for rebates and special buy income as we call it, that really gets pent up as a reserve against inventory until we sell the product. We had some at the end of the December and we have even more of that at the end of March. As far as quantifying by dollars, I mean it's less than 2 to 3% of total inventory.

Okay. In terms of the nonresidential market, on the new construction side are you seeing signs of weakness there yet? And if you could talk about little bit longer term, have you historically seen any correlation between new nonres construction and nonres reroofing?

We obviously think that the new nonres construction is the weakest of the two in that marketplace. Reroofing is such a strong component of that that it's somewhat difficult to tell. There is still construction activity in a lot of markets that is happening. Whether that's going to go away at the end of the roofing season in October or November is another matter. As far as in the past, there really hasn't been much of a correlation. I was here in the early 90s and new construction basically stopped. But the reroofing is the only thing that kept up the industry at that point in time. I'm not sure there is a direct correlation. I'm sure with the economy that is happening to across the country, there is going to be slow down in reroofing. How much it is, I'm not sure. In the past it's been very small.

Actually, the number of regions that showed growth in the commercial areas, increased in the second quarter. So our commercial business did better in the second than the first. That segment is helping us and the manufacturers still are looking for a good '08 in that regard.

Did you guys see growth in '01 and '02? In nonres reroofing?

We were flat in the first quarter. Well, we saw minor growth in the first quarter. And then the second quarter I think it's in the Q, we saw 4% growth in nonres commercial in the second quarter.

I meant 2001 and 2002, Bob.

We did see growth in 2001. Remember our year end is in September. It was before 9/11 and the effects that happened after that. 2001 I think we had about a 6% drop in nonresidental business? A chunk of that, Dave, was deflation. It might have been the majority of it. We think unit volume was still okay. But, as you know it, we have the great product mix and able to offset that. We actually had some growth in 2002 in total on organic basis albeit it was less than 2%.

Great. Thank you.

Due to time constraints, our final question will come from [Justin Harrison] of Ramsey Asset Management.

Good morning. I was hoping if you could comment on some of your thoughts for the back half nonresidential growth. I'm kind of looking at the two year trend because we have pretty much (inaudible) comp this year. Going back the past three quarters, the two-year trend in your existing markets seem to be going down pretty strongly from about, kind of quick math, 21% to 3% to minus 10. I was just wondering what your thoughts are and why that will reverse and why we'll see some growth in the back half?

Our looks on the second half is not the return to the robust years. We are seeing the same kind of slower growth in the second half. Our opinion as well as the manufacturer is the second half will be a growth period.

So there will be sequential growth -- or year-on-year growth in the back half of commercial?

Let's hope so, that's what we are anticipating.

Remember, we had much stronger growth in '06, upwards to 20% almost throughout the whole year in nonresidential roofing which we felt was much above what the market was doing at that time. We took market share and to continue to have low single digit growth for the rest of 2008 in our eyes is great news to us.

Go you. Okay. Thanks, David.

That concludes the questions, I would like to turn the call back to Mr. Buck for his closing comments.

Okay. I appreciate that. Thanks everyone for dialing in and I just have a few closing comments. David and Paul and I will be available post call for telephone calls, emails and so forth, so we will be available to you. Thank you for your questions. Let me close with these points of emphasis. The market was slow in some regions in the second quarter, but we are encouraged by the growth in the third quarter, particularly in the northeast, mid Atlantic, Midwest, southwest and Central Plains. Our commercial business is strong for us in most regions including, again, the northeast, Canada, north coast which is our acquisition from a year ago, and the southwest. Thirdly, gross margins are firming up, which is encouraging for us because it is happening at a time when we are doing a good job reducing operating expenses. The affect of price increases will be more pronounced in our third quarter since most price increases were announced mid to late March. It appears that more price increases are on the way.

In conclusion, we are controlling our cost for the level of business we have. We are now entering the busy season for our fiscal year in good shape operationally. If business holds up, the performance in the second half will be very encouraging. That concludes the call. Again, I appreciate your interest and support in our company. Look forward to seeing many of you and talking to you in the future. Thank you very much.

That does conclude our conference for today. Thank you all for your participation and have a great day.