Beacon Roofing Supply Inc (BECN) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Beacon Roofing Supply fiscal year 2008 fourth quarter and year end earnings conference call. My name is Kristen, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question and answer session toward the end of this conference. (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 it's 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 would now like to turn the call over to Mr. Robert Buck, Chairman and CEO. Please proceed, Mr. Buck.

Thank you Kristen, and welcome everyone to our fourth quarter and fiscal year 2008 earnings call. As you might imagine, we are excited to announce these results, and we are particularly excited for our loyal shareholders and fellow employees, a lot of hard work went into making these results possible.

I will begin the call with a few summary comments, and then David Grace, our CFO, will present the financial details for the quarter and the fiscal year. When David is finished, Paul Isabella, our President and COO, will answer prepared questions that we know you want answered during this call, and then when Paul is finished, we will open the call for additional questions you may have.

At the conclusion of our third quarter earnings call a few months back, if you recall, I stated that our fourth quarter was off to a strong start, and you can see from our just-released earnings, the fourth quarter remains strong. Our growth was strong, our margins improved, and we controlled costs in a manner that you have grown to expect from us. EPS for the quarter is higher than even the highest estimates, many of which were updated recently, and again, we are grateful for this performance in these tough financial and economic times.

The first quarter of fiscal '09 is off to a very good start, and I sense a good feeling in our Company that we will have another successful fiscal year. I will now turn the call over to David and he will present the financial details for the quarter and the fiscal year. David?

Thanks, Bob. For the first time in quite a while all of our results for the quarter are from our existing markets. Sales increased 14.9% to $567.2 million, from 493.8 million in 2007. With residential and non-residential roofing product sales increasing 36.8% and 6.6% respectively, while complimentary product sales declined 11.8%.

Roofing product sales benefited from unusually large and frequent rises in price during the fourth quarter, mostly in residential shingles. We also saw strong reroofing activity in storm-affected regions, and continued growth in commercial roofing activities in most markets. Complementary product sales, which we believe are much more discretionary in nature than roofing products, continued to be negatively impacted, by both the slowdown in the economy and lower levels of new residential construction.

We estimate inflation in our product costs based upon our current inventory's product mix and invoice costs, as compared to the invoice costs of the same products a year ago. Based upon this estimate, our product costs were up 11 to 14% compared to 2007 levels, while pricing to customers increased slightly ahead of those product cost increases. While there was very little inflation impact on our complementary products, we estimate that about 75% of our roofing product sales growth in the quarter came from inflation.

We closed two branches and did not open any during the current quarter, with one branch open in the fourth quarter of 2007. We operated a total of 175 branches as of the end of this quarter, compared to 178 last year. We had 64 business days in 2008, compared to 63 days in 2007, which we estimate boosted our sales growth by 1.8%. Fourth quarter gross profit was 139.7 million for 2008, as compared to 108.2 million in 2007, a 29.2% increase, with gross margins increasing to 24.6% from 21.9% in 2007.

We use a weighted average cost method in valuing our inventory, and the impact of that method combined with buying ahead of the price increases, allowed us to increase gross margins as we increased our pricing, in concert with the vendor-announced price increases. The effects of the price increases, along with increased demand in the storm-affected regions, and a slight mix change towards residential roofing products, led to significantly higher gross margins. While we cannot precisely calculate the effects of these unusual price increases on our gross margins, we expect our future average gross margins to be in the range of 23 to 24% dependant upon product mix.

Operating expenses increased 8.9 million, or 10.9%, to 90.8 million in 2008, from 81.9 million in 2007. Despite year-over-year head count reductions, payroll-related costs increased by 5.1 million, as our strong quarterly performance saw us reach performance-based pay and profit sharing goals.

Bad debt expense increased 3.5 million, as we experienced higher write-offs, and increased our reserves due to the economic and credit climate. Increased transportation costs and higher sales volumes pushed Other expenses up $1.4 million, while Depreciation & Amortization dropped about $1 million. During the quarter, we expensed 3.7 million for the amortization of intangible assets. Recorded under purchased accounting, compared to 4.5 million in 2007.

Operating expenses as a percentage of net sales decreased to 16.0%, from 16.6% as we leveraged our fixed costs over our higher sales base. Interest expense decreased 1.1 million from the paydown of debt since 2007, and also lower interest rates.

Income tax expense of 17.8 million and 17.7 million was recorded in 2008 and 2007 respectively. The slight increase in our effective rate to 41.7% in 2008 from 50.5% in 2007, was primarily due to the allocation changes affecting our state taxes and true-ups of prior years' accruals. We expect our future tax rate to range from 40.5 to 41.5%. As a result of all I have mentioned, we had net income of 24.9 million in our fourth quarter, compared to 11.3 million in 2007.

Diluted net income per share was $0.55 compared to $0.25 in 2007, a 120% increase. Our earnings before interest, taxes, depreciation and amortization, and stock-based compensation, our adjusted EBITDA, which is reconciled to our GAAP net income in our press release, was $58.5 million in 2008, as compared to 36.9 million in 2007.

As for our fiscal year results, annual sales increased 8.4% to $1.78 billion in 2008, from 1.65 billion in 2007. Our acquired markets increased $119.4 million, where our existing markets saw a sales increase of 19.3 million, or 1.3%. We estimate that overall inflation was approximately 2 to 4% for the fiscal year. 2008 had one more business day than 2007, which we estimate increased our sales 0.4%.

Our overall gross profit increased 12.3% to $420.0 million in 2008, from 373.9 million in 2007. Existing markets saw their margins increase to 24.8% from 23.5%, while overall gross margins increased to 23.5% from 22.7%, mainly due to the same factors I previously discussed for the quarter, along with higher 2007 calendar year end vendor rebates.

Existing markets operating expenses as a percentage of sales decreased to 18.8% in 2008 from 19.0% in 2007, as we leveraged our fixed costs over the increased sales. Overall operating expenses as a percentage of sales was down slightly to 18.2% from 18.5%, due primarily to the lower cost percentages at North Coast. Overall operating expenses increased 21.2 million, or 7%, to 325.3 million, almost entirely from the increase in our acquired markets of $20.4 million.

In existing markets, a bad debt increase of 4.4 million, and a selling and warehouse expense increase of 2.5 million, driven by the transportation cost increases, was partially offset by savings from our cost-out program, and other savings of a combined $4.1 million, and lower depreciation and amortization of $2.0 million. Interest expense decreased 1.5 million in 2008, while income tax expense was 28.5 million in 2008, compared to 9.4 million in 2007. Our effective income tax rate was 41.4% and 40.3% for 2008 and 2007 respectively.

As a result of all I have mentioned, our net income for 2008 was 40.3 million, compared to net income of 25.3 million in 2007. Adjusted EBITDA was 133.8 million in 2008, as compared to 107.7 million in 2007. Diluted net income per share was $0.90 in 2008 compared to $0.56 in 2007. Cash flow from operations was 49.6 million in 2008, as compared to 63.8 million for 2007. Inventory levels increased by 44.1 million as we built up our inventories, especially in residential asphalt shingles ahead of announced price increases, and to ensure sufficient availability in the regions affected by the storms in 2008. Due to these increases, inventory turns were down in 2008 as compared to 2007, as the pricing environment settles, we expect inventory turns to range from 5.5 to 6.5.

Accounts Receivable increased 17.4 million in 2008, primarily due to the higher revenues. The number of days outstanding for Accounts Receivable based upon fiscal year sales increased slightly in 2008, but are still within an acceptable range. Prepaid expenses and other assets also increased by 9.6 million, mainly due to higher levels of vendor rebates, caused by the increased purchases during the third and fourth quarters. Accounts Payable and Accrued expenses increased 44.1 million in 2008, mostly again from the higher levels of inventory purchases, and increases in income taxes payable, and increases in performance-based pay accruals.

Capital expenditures in 2008 were 5.7 million compared to 23.1 million in 2007, as we substantially reduced capital spending due to the business slowdown, and prior year required upgrades to the fleet of some of our more recent acquisitions. Net cash used by financing activities was 23.8 million in 2008, compared to net cash provided by financing activities of 83.7 million in 2007. As we pay down debt in 2008, while 2007 reflected the refinancing of our debt. As I mentioned, our adjusted EBITDA for 2008 was 133.8 million, which when divided into a net debt of 350.6 million as defined under our credit facilities, gives us a ratio of 2.62:1, down from 3.48:1 at the end of 2007, and well below the required ratio of 4.1.

To summarize key points, organic sales grew 13.1% in the quarter on a same-business day basis. Gross margins was up in the quarter to 24.6%. Operating margins for the quarter were 8.6% compared to 5.3% in 2007. Fiscal year operating margins were 5.3%, and without the purchase accounting amortization, they would be at 6.2%. Diluted net income per share for 2008 was $0.90 compared to $0.56 in 2007.

Lastly, we ended the quarter with cash on hand of $26 million, all availability under our credit facilities and solid balance sheet ratios, as we continue to be good stewards of our assets in very tough times. Bob?

Thank you, David. Our man from [Gloucer].

What I would like to do now, we are going to go through our process of answering prepared questions, and Paul is going to do that. He will state the question, then go through the answer, and then when he is finished, we will open the call, so let me turn it over to Paul.

Good morning. We have 14 questions. I will get right into it. Number one, please explain further your improvement in gross margins, and at what levels we can expect them to be in the near future. We experienced gross margin gains, because we were able to pass through price increases from our vendors in a timely manner.

Additionally, we employed our traditional business practice of buying ahead of price increases. The frequency and high level of increases were very unusual for our industry, and we expect that our gross margins will level off in the near future to 23 to 24%.

Number two, can you quantify the effect of the price increases on your results? We have attempted to do this in our 10-K, although it is very difficult considering all of the SKUs, we believe the extraordinary price increases added about 7% above normal inflation for sales in the fourth quarter. We estimate that our gross margins benefited by about 60 basis points, as we increased our prices in a timely manner. We also think this added about $0.11 to our quarterly and annual EPS net of incremental costs, and taxes, of course.

Number three, please discuss the impact of storms in the fourth quarter. We have enjoyed some renewed demand from the early hail storms and should see additional demand from Hurricane Ike in this fiscal year. We are glad we have locations which can help folks reroof to protect their homes once again. The storm-related demand is normal for our industry, the only difference being that in fiscal '07 we had none. About 10 to 15 branches are currently servicing the communities impacted by the storms.

Number four, can you give us an update as to pricing in the industry after the recent drop in petroleum prices? Vendor price increases began in our third quarter and continued into the fourth quarter. Price increases begin in our third quarter and continued into the fourth quarter, price increases for commercial products occurred mainly in the fourth quarter, and were substantially less than residential. We have not seen any indication of price decreases from our suppliers yet, but we are cognizant of that possibility, and we will be prepared if that happens.

Number five, how much growth in the quarter is from price and how much is from unit growth? That is always a difficult question to answer, but we are happy to give our perspective. In the past, we have answered this question by comparing major SKUs over the same period of time for the prior year. By using this consistent method to answer this question, we believe about 75% of the growth was from inflation, and 25% from volume for roofing products.

There is very good volume growth in the Southeast and Southwest due to storms, and we also recorded good growth in the sheltered Midwest region, which did well without as much storm activity in the quarter. Commercial roofing activity continued to grow, despite the recent drop-off in new construction, which we believe reinforces the importance of reroofing.

Number six, how about complementary products? Our complementary products continue to struggle, especially in regions more affected by new construction. Remember, the purchase decision for these products is much more discretionary than our roofing products, and therefore their volumes will be more influenced by the economy. Gross margins in this category were up slightly for the quarter, but volume is still dragging, and we don't have insight yet into when we will see an uptick. We think margin percentages will remain stable in this category.

Number seven, can you please comment on why payroll is up substantially in the quarter in comparison to last year? Due to our terrific performance during the quarter and in comparison to our Q4 performance in '07, payroll, profit sharing and other related costs increased by 5.1 million, due to higher incentive and commission-based pay plans.

To give a little more perspective, our payroll for Q4 increased about 3% over Q3 levels, while operating income increased about 86%. We are also pleased that operating costs as a percentage to sales dropped from 16.6 to 16.0 in Q4 of this year from Q4 of '07. We are on top of our expenses, and payroll expenses increased because our employees were paid for exceptional performance, and we are excited for them.

Number eight, remembering your cost-out initiatives, what was the employee head count at the end of 2008 as compared with the start of the fiscal year? We ended the year with 2,464 employees, which is down from 2,708 at the start of the fiscal year, for reduction of 244, or about 9% of our work force. We have added some head count during the last two quarters, and that was done with caution because it is our busy season, and we enjoyed some volume gains. We monitor this expense category very closely.

Number nine, can you comment on the quality of your Accounts Receivable at the end of Q4? While we did have a 3.5 million increase in bad debts for the quarter, our credit policies and procedures are working well in all regions, and as always, we are being conservative and consistent in this area. Our days outstanding, are one day above last year, only one day above last year, and we have increased our reserve to a level that we believe considers the tougher economic climate we are facing. A very important fact is our over 61 days past due percentages are below 2007. Our bad debts as a percent of sales did decline to 0.6 for the year, above our usual 0.35% of sales, but this is still very good performance considering the softness in our economy. We continue to monitor credit daily, with a special emphasis on our commercial customers. Our credit organization continues to shine in our eyes.

Number 10, can you update us on regional performance? While we don't really like to give our competitors a road map of our successes or problem areas, I will give some color that will help answer this question. The sheltered regions, which we specifically set out to improve in 2008, ended the year performing quite well, and it is a good feeling knowing that we have the right leaders in place. North Coast did well, as did the Southeast, and we believe our most mature regions, the original six, as we call them, continued to outperform the competition. I would like to compliment all of these leaders and their employees for their hard work and dedication.

Number 11, please update us on your debt covenants. Are you pleased with the progress? As Dave discussed in his comments, we are at 2.62:1 in our only pertinent covenant, which is adjusted EBITDA to net debt, we also have about $26 million in cash at the end of year. This gives us even more availability and a higher cushion than at the beginning of the fiscal year, and remarkably, our ratios are even better than at the time of our last acquisition in April of 2007, and cash has grown substantially since year end.

Number 12, do you have an update on guidance and analyst estimates for 2009? We are comfortable with the analyst ranges at this point in time. While we believe will enjoy some sales and profit benefit from our 2008 price increases in Q1 and Q2, we will be up against tough comparisons for Q3 and Q4 of next year. Growth in sales and improved EPS, which we are striving for, will be appreciated by our shareholders, considering the tough economic and credit environment.

Number 13, how is business going so far in the fourth quarter? As we have done in previous quarters, we will give you a quick snapshot of the current quarter. We are pleased with the results through November, with October especially healthy. Sales growth was driven by the price increases in unit growth in the regions, which are helping with the storm damage, and gross margins remain firm so far.

And lastly, number 14, has anything changed regarding your acquisition strategy? Not really. For the near future, we remain on the sideline. We are still talking to prospects because the economic reasons for consolidation still remain. However, we don't believe there is a specific timetable, nor do we felt pressure to complete X number of acquisitions in the next several years.

We have a strong balance sheet, excellent banking relationships, and we continue to exercise good stewardship of our assets. As most of you know, cost control growing organically, and steady gross margins are the business priorities at this time. Those continue to be the primary plays in our playbook, and I believe our financial results confirm the wisdom of our strategy.

Okay.

Bob?

Thanks, Paul. Let's open up the call for questions that were not handled there. I hope you appreciate those, because some of those questions we hear when we are out on the road doing road shows. But Kristen, we are available for calls.

Thank you. (OPERATOR INSTRUCTIONS) We will take our first question from Michael Rehaut, JPMorgan.

This is actually [Ray Huang] on for Mike. Couple of questions. I was wondering if you can give some more color on the commercial side of the business? Relative to historical kind of slowdowns, is there usually a delay in terms of your activity there, and what is happening in the general market?

There have been a lot of questions about the commercial side, and first thing I want to do is remind everyone that in commercial, reroofing is actually a bigger part of that segment than residential. Reroofing is about 80% of the commercial business. I would expect that new commercial construction would decline, and we will get our growth in that area from reroofing, and there is always a possibility of price increases.

So that is how I see that segment. I try to stay away from predictions. I basically have read everything about commercial new construction, so I think '09 we will work hard to emphasize reroofing, and that area.

Okay. That is helpful. Following up on your comments in the first quarter so far, you said October, November were pretty good, but is that like, you are talking about 10 to 15% sales growth so far? How should we be looking at that?

I think what we always try to do is state how the quarter is going, and it is off to a really good start. October, as David said, was very healthy, and so we are optimistic about the first quarter, and I think the estimates for the year look very doable, and so we are off to a good start.

Okay, thank you.

So it inflates percentages. So we are doing very well.

We will take our next question from Michael Cox with Piper Jaffray.

Good morning. Congratulations on the quarter, gentlemen.

Thank you, Mike.

On the pricing side, I was wondering if you could just comment on what sort of signposts we should look for, in terms of looking at the shingle companies cutting prices. Seems like asphalt costs remain at very high levels despite the drop in oil prices, so seems unlikely they would be dropping prices any time soon, but if you could provide color there, it would be helpful.

Actually, you are correct. Asphalt prices have held up and mainly because asphalt is not the primary thing that the refineries like to make, and there have been some shortages regarding asphalt. So I think that is one factor that keeps the prices up.

Our anticipation is that the shingle manufacturers will not reduce prices. I think they needed those price increases and we worked hard to pass them on. So we don't anticipate that. There is not a capacity issue where new plants have come online in the last several years, actually several plants were closed as a result of the GAF acquisition of Elk.

So I think we are positioned, prices will remain at this level, subject obviously to changes in the future. But that is how I see it. I agree with you, Mike, that asphalt prices are high. The manufacturers are recouping past losses from the cost of manufacturing. So I agree with you.

Okay. That is helpful. And then on the balance sheet, your cash balance has moved higher to it's highest level in the last year and a half or so. Will that be used to pay down debt over the next couple of quarters as you generate cash?

Yes, and I will let David respond to that, but he has taken away my checkbook, and so we are on the sidelines regarding acquisitions. But right now we are building cash, and David, do you want to add to that?

Sure. Currently we only have the term debt left to pay down as a possibility. We did, if you notice, have an excess cash payment, cash flow payment of about $7 million that will be due in May.

Currently we do not have plans to pay down the term debt any further, but if we come to a choice where we have a bunch of excess cash, that is what we would do. We think right now it is the best thing we can do is to keep building the cash, and if we choose to in the future pay down that term debt, but we have no plans for that right now.

Great. Thank you very much, gentlemen.

Thank you, Mike.

We will take our next question from Jack Kasprzak of BB&T Capital Markets.

Thanks, good morning, everyone.

Good morning, Jack.

I wanted to ask a little bit more, I guess it is on the subject of guidance, the $0.11 a share that is attributable to the unusual price increases that you detail in the quarter, is that being stripped out as basically a way to suggest that it is one-time in nature, and the jumping-off point, the basis for projecting fiscal '09 should exclude that?

Yes, I believe that is the right direction to take. And what we are really trying to do there is that if those price increases don't happen next year, that you would normally need to take that out of your base assumptions. We also have stated further, though, that we think currently at the $0.86 that the Street has, that we are comfortable with that position and if you do the math, that would give us an approximate 6 to 7% increase over the, over the base after deducting the $0.11.

Right, okay. And so given that scenario, the growth that that implies would come from, basically come from the first half of the year, primarily from storm, continued storm-related demand. Is that more or less the situation as you see it today?

There are two factors. One is that because there were no storms last year, and also prices in the first half are higher than last year. So we have good headwind in the first half, and so we are excited about that. David, do you want to--?

Sure, and I think you are absolutely correct. Once we hit February and March of 2009, we will start against the tougher comparison when we first saw those price increases.

We have told folks that we think we can do between 23 and 24% margins, and I think if you do the math with the price increases over the first two quarters, an expected slight drop in unit volume, then you become comfortable with the Street that has 3 to 4% revenue growth for us, with those type margins, and that is how we get to the $0.86.

Right. Okay, great. Thank you.

Thank you.

We will take our next question from Ted Kundtz with Needham.

Hello, everyone. Bob, if you could kind of comment a little bit more on this recessionary environment that we are in here, and how this is, it doesn't seem like it's affecting your residential business all that much. Could you just throw out some thoughts on that? Are you seeing any impact of the recession at all on your business?

Ted, one thing to look at would be the three segments that we disclose, commercial, residential, and complementary. You will see the complementary segment being affected by the economy, because that particular purchase is a lot more discretionary. Folks don't need to reside their house. They don't need to put a new deck on, or replace windows or doors. They can defer that.

But the roofing side, both commercial and residential, that is holding up, and so again, that helps folks get comfortable with the fact that the majority of our business is replacement, and I think that is probably the easiest way to look at it, and that is why we show all three segments. And it helps a lot, I think, to show that we are not immune from recession, but we are recession-resistant because of the nature of the products.

I know you have always said that, and it has always been true. I am just wondering in this particular recession, being as severe as it is, if you are seeing any signs of it, but sounds like you have not up to this point.

Yes, the fourth quarter was--

It sounds like the first quarter is starting off very well as well.

Correct.

Okay. The other thing, and I think this question was kind of answered, but the inventory levels did move up in the fourth quarter. They generally go down in the fourth quarter, because it is a big quarter for you, in terms of shipments and installations. Are you comfortable with the inventory levels where they are at, and is there any, as long as prices are okay, there is probably no risk of having to revalue your inventory downward in case prices did move down?

Yes, and what you need to do is take that in comparison to 2007, Ted. I mean in 2007, we had expected that once GAF bought out that there would be some pricing changes, and we wanted to slim down our inventory, especially in September. And we did see some of those price changes come through in October and November of last year.

This year contrastly, we saw prices increasing, and wanted to have the stock on board to be able to sell at lower prices as the prices kept increasing, and we also had the effects of Ike come through right at the end of the quarter, and we certainly bulked up those 10 to 15 branches we had in that region quite immensely, to be honest with you, at the end of the quarter to take care of that business.

Okay. So it sounds like a good strategic move on your part to do that. Sounds like it will also benefit margins in the first couple of quarters here.

Yes, again as we move, this is Paul. As we move through this first quarter, we will see a natural reduction of inventory as we sell off what we bought in October for storm and other related regions.

Right. Okay. Thank you very much.

You are welcome. Thanks, Ted.

We will take our next question from David Manthey with Robert W. Baird.

Hi, this is Kyle O'Meara on the line for Dave. Just wondering if you could, I know it might be a little bit hard to quantify it, but if you could talk about the pricing impact to sales growth in commercial and residential, as well as complementary products, please?

Sure. So start with the easy one. As far as commercial, we think probably half of that was price. Carlisle, who is our major supplier of commercial roofing products announced two price increases, one in June and one in August. We really didn't see too much of the one that they announced in October, so that was late in the quarter, and we did see some effect of that.

In the residential product, it is probably in the 80 to 90% of that growth is price, and that comes from, again doing that year-over-year comparison we do on our inventory, but there is certainly some unit growth there, and it is in some of the strong effected areas, but it is also some strong results on the East Coast that we have had. As for complementary products, there is no price increases in there for the quarter, we believe, any event or material, so that the entire loss in growth there was from unit volume.

Okay, great. And then just as far as reroofing, in respect to both res and non-res have you seen any evidence of attempts to defer spending for either of those?

It is hard for us to see that because we talk to our contractors, we ask about the tone of business, because recall our customer is the contractor, and whether a homeowner is deferring replacing his roof, we wouldn't know. Think of the product, it is different than a remodel product where someone is redoing a bathroom, or adding a room addition, or something like that. So it is really hard to say. We don't do surveys. Maybe we should.

But we really just pay attention to great service, having the product available, but that is basically it. In many respects, it is a nondiscretionary purchase. It is not something that someone really wants to do. It is something they feel they need to do. So a good question. We just don't have surveys to indicate that. I hope that helps.

We will take our next question from Ryan Merkle with William Blair.

Thanks. My question has been answered.

Great. Thanks, Ryan.

Thanks, Ryan.

And we will go next to Scot Ciccarelli with RBC Capital Markets.

Hey guys, how are you?

Hi, Scot, how have you been?

Not too bad. Two questions. Can you guys just comment on your outlook for let's call the new residential piece of the business, number one.

Number two, I would be interested in any comments you might have regarding the health of your contractor customers. Obviously there has been pretty broad damage across the contractor base. I would think your specific customer base is a little more insulated, just given their focus on roofing, but any kind of color on that would also be helpful. Thanks.

Housing starts, I read reports. There are a lot of different outlooks. The most recent report I read was Owens Corning, and I think everyone knows that brand, a very good company that we are close to. They anticipate second half of '09 to show improvement in housing starts. The total year may be flat, but they think the second half will pick up. I have read similar things from others, but that particular report comes to mind because it is actually sitting here on my desk that I have recently read. So that appears to be the general consensus. Housing starts are at a level now not seen since the '60s.

So to show quarter-over-quarter improvement in the second half of the year sure looks like it is going to be a possibility, particularly with the stimulus packages that are out there, mortgage rates are lower than in a long time. So I think there are a lot of things afoot that could make housing starts look, from a comparison standpoint, a lot better in the second half of '09.

Is it fair to assume any let's call it upside or improvement there, would be incremental to your current expectations?

Yes, I think there is a possibility for that.

Okay.

I think the second half of your question had to do with the health of our contractors, and I want to turn that over to our wise CFO here and see what he has to say.

Well, what I would really like to say is it is nice to have a group of customers, roofing contractors. Their main objective in life is hard work, and we have third and fourth generation contractors that have been through some tough times like this.

Since a big part of their cost structure is payroll, they know how to shrink their crews, but a greater aspect is that we get to see them almost weekly, and the residential guys, as they finish up jobs, we know they have finished up a job, they come to us for new material. We ask for payment on the previous job. It is a very, very much loyal-based system, and it is a system that our guys out in the field, they do a very good job. Some of these contractors are their business friends, and they know what they are doing, and they stay very active in that approach.

As for some of the commercial guys, we have larger jobs with them, but these companies, they are not financially based as much as you would expect. They don't have big bank loans. They live job to job and we live job to job with them, and provide them with the credit they need to carry them over from those jobs, as they get paid themselves.

Okay, great. Thanks a lot, guys.

You are welcome.

We do have time for a few more questions. We will go next to Robert Nicholson with Pine Cobble Capital.

Good morning, guys. Terrific execution on the quarter.

Thanks.

I guess my one question for you as you look at guidance for next year, and what is embedded in that, it strikes me that embedded in that is a reduction in average pricing per square for residential shingles, because if pricing stayed where it is now, and you ran that through, even as you are lapping the increases from last year, you get to a very different EPS number than where the Street is. And so my question is, are you being conservative in your perspective, or do you actually expect shingle pricing to retrench pretty meaningfully, as we get into the spring and summer?

Well, we always like to be conservative, particularly when estimates are involved.

Yes.

We in the past couple years, have been able to be conservative, and then perform up to your expectations, and occasionally beat them. So our nature is to be conservative. We are certainly not anticipating further price increases. We think our margins have firmed, and we are seeing that in the first quarter as well, and we anticipate a successful year because of that.

Okay. Leave aside increasing of prices, is your expectation at this point, that the level where shingles are feels about right going into next year?

Yes, I think so. I think even if they went down a little bit, we would still be fine with those estimates.

Okay, great. Thank you.

David was going to comment. Usually he interrupts me, but go ahead.

The only thing I was going to say is remember for the first five months or so, we do have that advantage in pricing, even if they come down somewhat compared to last year, they will still be up substantially.

Yes.

Okay. Thanks, Robert.

We will go next to Brent Rakers with Morgan Keegan.

Yes, this is Nicky Prather for Brent Rakers. One quick question. In terms of your cost-out program, can we talk about goals for fiscal '09 in dollar terms, of what else you think you can strip out, and then also what it was in the quarter?

Well our approach hasn't changed from last year. I mean every region is challenged to run at the lowest cost and cost percent of sales that they can.

We constantly watch volume and as we see any specific region or branch, let's say falling below any of those sales numbers, we are very aggressive to take an action. To quantify for the whole year would be difficult on this call, but again, it is the same consistent approach we took last year.

And, remember Nicky, what we do is we do a budgeting process and the cost-out initiatives as far as this year, will only come at a point in time where we feel we are going fall short of those budgeted revenues.

As such, we think we are okay through the first, October and November, as we have mentioned, and if that comes into play during January, February and March, then as a management team, we will do the right things, and I think that we have shown people that that is how we react. We will not predict what the future is because we can't, but once we see the indicators to us that say there is going to be a change in revenues, we are going to react, and that is when the cost-out initiatives come into play.

Yes, but the approach, Dave is correct. The approach has continued to do what we did last year, and lever those reduced costs as we go through time.

Okay, thank you. That is helpful. And then real quick, on bad debt expense, the reserves went up in the quarter. Is that something that as a percent of sales, we are going take forward and continue to be conservative, or was that kind of a one-time anomaly for the quarter?

It is certainly not one-time. It is probably reflective of the economic and credit times that we are in. Remember, even at 0.6%, if we were to take credit cards for those same sales, it would probably cost us at least 2%. If we can stay in the range of 0.3 to 0.75% or so during these times, that is a remarkable accomplishment by our credit department, and they do a great job.

Okay, thank you.

You are welcome.

We will take our next question from Robert Kelly with Sidoti.

Good morning. Thanks for taking my question. Just on the trend month to month throughout the quarter, I believe you said coming out of 3Q, you were seeing low double-digits and it looked, did you see pricing or volume accelerate towards the back half of the quarter? Maybe just some help there.

Yes, I think as we went through the quarter, there were certainly additional price increases, especially from the shingle manufacturers, and then as I mentioned, the price increases from the commercial kicked in after they did them in June, and then again in August.

We also saw a little bit of the tail effect of some of the hail storm business being done in the summer, and also remember that a lot of the commercial work for the municipalities, especially the schools are done in the summer, and we think we won our fair share of jobs in those aspects, especially in the New England region, and the region around Ohio Valley with North Coast, so we have done a good job.

Great. And just one final one. A year ago we were talking about competitive pressures, and that is the reason for the margin degradation. Someone asked about the health of your customers. How about the health of your competitors? Have you seen competitive pressures abate here, or is it just a matter of the rising tide lifting all boats?

I think our competitors are doing well, and it is almost an answer that you do region by region, and even branch by branch, but we have good competitors. I think they are doing really well at this point.

Thanks.

Thank you.

We have time for one final question from Adam Leight with Tiger Management.

Hi, good morning, guys.

Good morning.

Just a quick question, I was wondering relative to your guidance for next year, kind of how much of the earnings you think will occur in the first half versus the second half?

The quarter to quarter comparisons we stay away from, but I can say generally that the first half looks awfully strong, because last year was really the beginning of a slowness through the first and second quarters. So I would characterize our year as that, where our comparisons are easier first and second quarter. And with the quarter being off to a good start, it sure looks like that.

So relative to I think last year and year before that, kind of first and second quarters tended to offset each other somewhat. Second quarter tended to be a loss. Are you expecting something different this year?

No, we will still have the seasonal aspects to our business. Q2 for us, because we are so concentrated our northern regions will be the lowest quarter. Bob was talking about in comparison to last year, which is really the only thing to go on, and we will still have seasonality.

Okay. Thanks very much.

You are welcome.

That does conclude our question and answer session. At this time, I would like to turn the conference back to Mr. Buck for closing comments.

Thank you, Kristen. And thanks, everyone, for your questions. As usual, David, Paul and I will be available for additional questions immediately following this call. And as usual, I would like to close this time together by emphasizing several points.

First, we really are pleased with our double-digit organic growth of approximately 15% for the fourth quarter. Our gross margins were up for the quarter and for the fiscal year. Paul and all the other officers of the Company, are very focused on delivering on our Lean and clean culture, which is something that we have a lot of pride in here at Beacon.

Next, we are building cash. Our balance sheet is very strong, and we want to always be known as good stewards of our assets, and we trust that our efforts are pleasing to our employees, our suppliers who support us, and our shareholders. The first quarter is off to a good start, and we certainly have the talent in Beacon to do well, even if the business gets soft as the fiscal year unfolds. So we really feel good about where we are, and how well we are doing.

And again, thanks for your interest and support of our Company. I can tell you that our employees also appreciate your support, and they are working hard to continue earning your trust and confidence. So thanks very much for calling in. I appreciate your support, and we are going to work hard to make this a very successful fiscal year, and at this time we will conclude the call. Thanks very much.

That does conclude today's conference. Thank you for participating.