Beacon Roofing Supply Inc (BECN) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply fiscal year 2009 first quarter conference call. My name is Connie 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 toward the end of the conference. At that time I will give you instructions on how to ask a question. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

On this call, Beacon Roofing Supply may make forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to those set forth in the Risk Factors section of the Company's latest Form 10-K.

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, Connie. Welcome, everyone, to our first-quarter earnings call for fiscal year 2009. We are obviously very pleased to announce these results, and it is always satisfying to exceed the expectations of our analysts, which in turn is very good for our loyal shareholders and fellow employees. A lot of hard work by our employees made these results possible.

As usual, David Grace, our CFO, will present the financial details. And when David is finished, Paul Isabella, our President and COO, will answer prepared questions. When Paul is finished, we will open the call for additional questions that you may have.

And let me just say that our new fiscal year, fiscal '09, is off to a very strong start. Our growth was solid, gross margins improved, and expenses were well-controlled. In addition, you can quickly see the quality of our balance sheet and in particular the quality of the receivables and the continued reduction of our debt ratios.

Again, the fiscal year is off to a strong start and we are working hard to keep it going that way. We have a very good tactical and strategic plans in place that are being executed very well by our officers under Paul's leadership.

I will now turn the call over to David and he will present the financial details of this performance, and then Paul will take over. Thank you. David?

Thank you, Bob. And just as a reminder, all of our results for the quarter [are] now from existing markets.

Sales increased 16.3% to $463.3 million from $398.4 million in 2007 with residential roofing sales increasing 58.4% as we benefited from higher year-over-year prices combined with strong demand from the damage caused by Hurricane Ike. Non-residential roofing products declined 4.7% as activity slowed, especially in the regions which experienced an early onset of winter. Complementary products, which we believe are more discretionary in nature than our roofing products, were down 17.3%, and continue to be negatively impacted by both the slowdown in the economy and the lower levels of residential construction.

We estimate inflation in our product cost based upon our current inventory's product mix and the invoice cost as compared to the invoice cost of the same products a year ago. Based upon this estimate, our product costs were up 12 to 14% compared to 2007 levels, while pricing to our customers increased slightly ahead of the product cost increases.

In addition, we had 62 business days in 2008 as compared to 61 days in 2007, which we estimate further boosted our sales growth by 1.9%. Almost all of our overall sales growth on a [same sales day] basis in the quarter came from price increases. Volume gains in residential roofing were offset by volume losses in non-residential and complementary products. We closed four branches and did not open any during the quarter compared to one new branch opening and one closing during the first quarter of 2007. Today, we operate a total of 170 branches as of the end of the quarter compared to 178 last year.

First-quarter gross profit was $116.0 million for 2008 as compared to $91.7 million in 2007 a 26.5% increase, with gross margins increasing to 25.0% from 23.0%. The increase was largely the result of a product mix shift to more residential roofing products, which have substantially higher gross margin than the more competitive non-residential products. And continuing from the fourth quarter, we also still experienced the benefit of lower weighted average cost of residential roofing products in comparison to current price levels of those products in the marketplace.

We do not expect this weighted average cost benefit to continue much beyond the first quarter, and expect future gross margins to range from 23% to 24.5%, dependent upon product mix.

Operating expenses as a percentage of net sales decreased to 16.9% from 19.1% as we controlled our variable costs and leveraged our fixed costs over the higher sales base.

Operating expenses increased $2.4 million or 3.2% to $78.3 million in 2008 from $75.9 million in 2007. Despite year-over-year headcount reductions, payroll and related costs increased by $2.7 million as our strong quarterly performance saw us record increased performance-based pay and profit-sharing.

Warehouse expenses increased $0.7 million, mainly from the costs associated with the four branch closings, while credit card fees increased due to higher sales and there were also increases in other certain administrative costs.

Transportation costs were lower by $0.5 million due to the drop in diesel prices, while depreciation and amortization dropped about $1.2 million mostly due to the drop-off in amortization related to purchase accounting. During the quarter, we expensed $3.2 million for the amortization of intangible assets recorded under purchase accounting compared to $3.9 million in 2007.

Interest expense decreased $0.9 million from the paydown of debt since 2007, and somewhat from lower interest rates. Income tax expense of $12.9 million and $3.5 million was recorded in 2008 and 2007 respectively. The slight increase in our effective rate to 40.9% -- 40.9% in 2008 from 40.2% in 2007 was primarily due to the allocation changes affecting our state taxes. We expect our future tax rate to range from 40.5% to 41%.

As a result of all I have mentioned, we had net income of $18.6 million in our first quarter compared to $5.2 million in 2007. Diluted net income per share increased $0.29 to $0.41 compared to $0.12 in 2007, a 242% increase.

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 $46.6 million for 2008 as compared to $26.0 million in 2007.

Now, a little bit about cash flows. Cash flows from operations was $5.0 million in 2008 as compared to $2.8 million in 2007, boosted by the larger operating income. In addition, we experienced typical seasonal decreases in accounts receivable and inventory that totaled $84.2 million and $19.2 million respectively in 2008. However, these favorable factors were more than offset by a decrease in accounts payable and accrued expenses of $122.1 million. The latter decrease was beyond the normal seasonal effect principally due to larger payments of previously accrued income taxes and some accelerated payments to certain of our vendors.

Inventory turns were consistent in 2008 as compared to 2007 as the price increase environment has settled and inventory returned to a more normal level.

In accounts receivable we realized a decrease in our sales -- in our day sales outstanding in 2008 as compared to 2007. However, we are conscious of the current economic and credit conditions, and remain conservative in our allowance for doubtful account reserve.

Capital expenditures in 2008 were $2.0 million compared to $1.1 million in 2007 as we increased capital spending slightly to continue proper scheduled replacement of older equipment.

Net cash used by financing activities was $6.8 million in 2008 compared to $1.6 million in 2007, mainly to pay down existing debt. As of the end of the quarter, our trailing 12-month adjusted EBITDA was $154.3 million, which when divided into our net debt of $347.6 million as defined under our credit facilities gives us a ratio of 2.25-to-1, down from 3.67-to-1 at the end of last year's first quarter, and well below the required ratio of 4-to-1.

To summarize some key points, organic sales grew [14.4%] in the quarter on a same-business-day basis. Gross margin was up in the quarter to 25.0%. Operating margins for the quarter was 8.1% compared to 4.0% in 2007.

Diluted net income per share was $0.41 compared to $0.12 in 2007. The balance sheet continues to improve, with cash on hand of $22.1 million, a working capital ratio of 2.6-to-1 and a debt-to-capital ratio of less than 50%. And now, back to Bob.

Thank you, David. As we have done in the past, Paul now has prepared questions. And these questions we give a lot of thought to, because we know these are topics that you really want to hear about. And Paul is going to read the question; go through the answers, which will give you some insight into very key points. When that is finished, I think we will have quite a bit of time for questions from all of you. So I'm going to turn it over to Paul and he will go through the questions and the answers.

Good morning. Let's jump right into it. I have 13 questions and answers.

Number one, we know gross margins continue to expand. Please explain the causes of the improvement, and at what levels we can expect them to be in the future.

Due to the price increases over last year and some solid demand from Hurricane Ike, our mix of residential roofing increased dramatically in the quarter from 37% in '07 to 51% in '08. And as you may know, those are our highest gross margin products. We estimate that the higher residential mix contributed about 130 basis points of the gain, and -- our overall margin gain, with another 70 basis points coming from having lower average cost inventory than the current market price.

We expect that the inventory cost advantage will taper off within the next quarter, as Dave said. And we expect that our gross margins will level off in the near future to 23 to 24.5% -- again, mostly dependent upon our product mix.

Number two, can you give us on an update on pricing in the industry after the recent drop in petroleum prices?

Vendor prices seem to have stabilized at the high levels they reached in our fourth quarter of last year. We have not seen any indication of price decreases from our suppliers yet, but we're cognizant of that possibility, and we will be prepared if it happens. While we cannot predict or control the future of asphalt pricing, some of our suppliers have already announced price increases for the spring.

Number three, how much of the growth in the quarter is from price and how much is from unit growth?

It is always a difficult question to answer, but we are happy to give our perspective as we have in the past. In the past, we've 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 almost all of the overall same-day basis growth was from price increases.

By product group, we estimate that 50% of the residential roofing sales growth was from volume, while the commercial and complementary products had volume drops in excess of their price increases.

Number four, please discuss the impact of Hurricane Ike in the first quarter.

We have enjoyed some incremental demand from Ike, especially in the 10 or so branches in or around Houston. We are glad we have locations which can help the impacted folks reroof their homes, and expect the activity to continue for a few more months.

Storm-related demand is normal for our industry, the only difference being that there was unusually low storm activity in 2007.

Five, nonresidential roofing has dropped off significantly for the first time in quite a while. Can you give us an idea of what you are seeing in the marketplace?

There's no question we're seeing a slowdown in new commercial construction. We also think that some of our lower current volume is related to an early onset of winter as compared to last year.

Our strongest commercial regions are in the North, such as the Upper Midwest, New England and upper mid-Atlantic regions that have experienced quite a bit of snow and harsh cold weather. We are hopeful that after the worst of the winter conditions end, we will see business pick up in the spring as it did last year, although this year may be different, due to the greater uncertainties related to the economy.

Six, how about complementary products?

Our complementary products continue to struggle especially in regions more affected by new construction. Remember, the purchase decisions for these products are much more discretionary than with roofing products, and therefore, these sales will be more influenced by the economy.

Gross margins in the category were up slightly for the quarter, but volume is still dragging, and we don't have insight yet as to when we will see an uptick. However, we think margin percentages will remain stable in this category.

Seven, can you please comment on why payroll is up substantially in the quarter in comparison to last year?

Due to our solid performance during the quarter in comparison to our Q1 performance in '07, payroll, profit-sharing and other related costs increased $2.7 million, as Dave said, due to the higher incentive and commission-based pay plans. However, we incurred less overtime expense despite the higher sales, and our headcount has been lowered.

In addition, we are pleased that our overall operating costs as a percent to sales dropped significantly, from 19.1% to 16.9% this year versus 2007. We definitely are on top of our expenses. And payroll expenses only increased because many of our employees were paid for exceptional performance, and we are excited for them.

Number eight, remembering your expense control initiatives, what was the employee headcount at the end of the first quarter as compared to last year first quarter?

We ended the quarter with 2,372 employees, which is down from 2,515 at the end of Q1 of last year for a reduction of 143, or about 6% of our workforce. We've reduced our headcount as usual for the winter period, and will adjust it again once winter has passed. As you know, this is our largest expense category, and we monitor it very closely by region.

Number nine, can you comment on the quality of your accounts receivable at the end of Q1?

Bad debt expense was lower than last year, and dropped as a percentage of sales from 0.37% to 0.48% in 2007. We are being conservative and consistent with our bad debt reserves, and believe they're adequate considering the softness in our economy. Our days outstanding were less than last year, and our over 60-day past due percentage, a detail we watch carefully, was also below 2007. We continue to closely monitor credit daily with a special emphasis on our commercial customers as our credit organization continues to perform very well.

I hope you concur that reducing our bad debt expense in our first quarter as compared to last year's first quarter is quite an accomplishment considering the economic times.

10, please update us on the strength of your balance sheet. Are you pleased with the progress?

As Dave discussed in his comments, we are at a 2.25-to-1 ratio in our only pertinent debt covenant, which is a required adjusted EBITDA to net debt ratio of less than 4-to-1. We have continued to pay down our debt. And we also had about $22 million in cash at the end of the quarter. As I just mentioned, the current condition of our AR is acceptable, and our inventory levels, despite the effect of inflation, are only up modestly from last year. We work hard to maintain these healthy conditions, and our balance sheet is in excellent shape considering the state of the economy and credit woes affecting the country.

11, do you have an update on analyst estimates for full year 2009?

We are still comfortable with the analyst ranges at this point in time. While we enjoyed some sales and profit benefits from the 2008 price increases in Q1, and may somewhat again in Q2, we will be up against especially tough comparisons in Q3 and Q4. We think growth in sales and improved EPS for the full year which we're striving for will be appreciated by our shareholders considering the tough economic and credit environment.

12, how is business going so far in the second quarter?

As we have done in previous quarters, we will give you a quick snapshot of the current quarter to date. But remember, in our business, we can have large swings of activity from month to month, particularly in the winter. January sales were weak especially in our northern regions, but gross margins held up reasonably well. And sales are still strong in the Southwest, driven by the storm damage. It is very difficult for us to evaluate the overall industry conditions during winter, but we believe current estimates for the year are reasonable.

13, has anything changed regarding your acquisition strategy?

Not really. For the near future, we most likely will remain on the sideline. However, we still talk to prospects because the economic reasons for consolidation remain. We don't believe there is a significant timetable for any acquisition, and we do not feel the pressure to complete X number of acquisitions within a certain time period.

We have a strong balance sheet, excellent banking relationships, and continue to exercise prudent stewardship of our assets.

As many of you know, have heard from us before -- cost control, growing organically, and steady gross margins represent our business priorities at this time. We believe our financial results confirm the wisdom of our strategy.

Now I'll turn it over to Bob.

Thanks, Paul. These are very positive numbers. And it's always fun to have an earnings call like this. And just to let you know, despite a great quarter, my office renovation has been put on hold, and the Falcon, whatever that -- 7X has been delayed. So just my small attempt at humor here to the tough environment. So let's use that humor to launch the questions. So fire away. Thank you.

(Operator Instructions) [Tom Hayes], Piper Jaffray.

I guess in regard to pricing expectations, and I guess specifically with the [March] increase that's kind have been floated [out in] the Street, what are your thoughts as far as realization of that increase, and then thoughts on holding the prices through the back half of the year?

Like last year, there was some skepticism in the beginning when prices started coming out because demand was low. And everyone was very pessimistic.

So it's going to happen again. Maybe even three have been announced, but it could be two. But I think they will be there. We could be wrong, but I think they will stay. And there's good reason for it. I believe the manufacturers need it, and will try very hard to keep it, and we will certainly try very hard to implement it. I think it's necessary.

Okay. Just as a follow-up, you indicated both on the call and in the Q that the gross margin trend's in the 23% to 24.5% range, which is about 50 basis points higher than previously ranged. Could you just comment on your thinking for the higher end of your guidance?

Yes. At the time we made that announcement in December, we had not seen the dramatic spike in the gross margins from the product mix change that happens when we have more residential. I hope people know that we told them in the past that commercial products actually have 700 to 900 basis point lower gross margins. And as the residential product mix changes, that affects the overall margin rate which puts us into that 24.5% range.

Michael Rehaut, JPMorgan.

This is actually Ray (inaudible) for Mike. Just a couple of questions -- I was wondering if you guys were able to -- I think in the last quarter, you did an analysis on what the EPS benefit from the price increases on the storm-related activity was. I was wondering if you had that for this quarter?

We had not done that for this quarter. What happened, Ray, that we saw as far as the effect on the weighted average cost is that we started out very strong in October and lost probably 40 basis points in November, and then a couple of -- 10 or 20 basis further in December. We think the effect on the weighted average cost is actually gone now.

As far as the hurricane and margins, there are no price deals in the hurricane area. We do not think they're substantially higher than the margins we have across the rest of the country, and nor should they be, just because there is a hurricane. So we have not seen much effect on gross margins from the hurricane.

Do you guys break out what the storm-related activity in terms of the sales benefit was this quarter?

We do not. And again, it is a little difficult to tell. We have 10 branches in that [location] -- in and around Houston. And if you take the average that we have per branch of $10 million, the most I think they could exceed during the year would be maybe 30 or 40% increase of revenues. So that puts it in the 30 to $40 million range. And we've told folks in the past that we think the hurricanes might last 4 to 9 months, depending on the severity. And as you know, the early part of it has the most of it, if that gives you some ideas.

Our Houston locations were doing well before the storms hit. So it is very difficult for us to tell where the total revenue growth is coming from.

(multiple speakers) I also want to add, if I can jump in -- I think there is also a feeling that fiscal '08 had hurricane volume. And it really didn't. So as we go into the second quarter, there is no hurricane volume that we need to -- no one wants to see another hurricane. But I just wanted to let everyone know on the call we didn't have any hurricane volume in '08.

Ike happened in the first quarter, and actually probably caused us to get off to a slow start in the first quarter because the first couple of weeks of our fiscal year, everyone was trying to figure out what was going on in that part of the country, trying get back to their homes and so forth.

So no hurricanes was very unusual. But no hurricanes in fiscal '08. Obviously, there are now in '09, and still waiting to see whether August or September of fiscal '09 has an additional hurricane. History would say that there will be, but who knows where and how much. So I just wanted to clarify that. So I will take the next question, or please ask the next question.

David Manthey, Robert W. Baird.

Wherever that hurricane hits, hopefully not Tampa. Did you talk about -- maybe for Paul, I am wondering about the profit improvement at SDI and North Coast? And if you could talk about what the profitability there is on an EBIT basis today versus what it was a year ago at those two business units?

As we have said in the past, we recognize the need of course to drive overall improvement in every region. But we have also specifically talked about those two regions. And we have placed an awful lot of emphasis -- we're pleased to say they have made great progress over the last 12 months plus -- their (technical difficulty) procedures, processes, just about everything.

And if you look at the comparisons against the other regions, we have always said our goal was to get them up to company averages from an operating income standpoint (technical difficulty) progress up the ranking. So now, for instance, Shelter's in the top quarter of the company from overall measurement perspective.

Okay, thanks. And North Coast -- also on track?

Yes, as far as North Coast goes, we continue to tell folks that it takes a three- to five-year period to make improvements. North Coast is a very strong commercial company. They are probably the best in the industry at commercial work that I have seen since I've been here. But they need a better product mix to make improvements in their EBIT line.

And we're starting to introduce some of those products in some areas, two to three branches at a time. We may add some branches that are residential only to give them some leverage on their SG&A.

But they have come a long way from where they started from. It is a very good acquisition. We just need some time. And I hope to be able to tell you in two years' time that much like Shelter, when we told folks we could do that, that they are going to be at that level too.

In a different perspective, North Coast -- attention to the fundamentals has been very encouraging. In particular, they're focused on receivables and inventory and all of those kind of things that a good distributor does. So we are not only happy with their continued improvement in operations and income, but specifically, just getting into the details in those branches, they are doing really well. And so we like that.

So that always bodes well for continued improvements. You have to first stick to the fundamentals, and then everything else comes along.

The other thing too with North Coast is not only are they jumping on all of the great practices that the other regions have to offer. But we've been able to extract a number of key things from that business, because it is an extremely strong business, especially on the selling side, that we have been able to translate to the commercial businesses of the other regions. So it has really been kind of a double positive hit for us as we have introduced the Beacon practices, and then taken away some of the best North Coast practices to the other regions.

Brent Rakers, Morgan Keegan.

I guess let me start with some of the head count reductions and the branch closings. It looks like the level of headcount reductions on a year-over-year basis is starting to taper off. I guess maybe for Paul, do you feel comfortable now with where the total headcount reductions are? And then maybe if you could elaborate a little bit more on the strategy behind the branch closings and maybe even in what regions those were affected?

One, we're in our current winter period for sure. So (technical difficulty) see the weather we are seeing, we'll continue to adjust. So there, in terms of a strategy, we look at the number every day. We're very cognizant of our efficiency level. Our first concern is always to serve our contractor base.

So by no means are we finished. If sales don't materialize to the levels we expect, we will make adjustments. And we have been pretty consistent, I think, quarter to quarter, considering the amount of sales we generated (technical difficulty).

If I could ask the monitor to check the static. We're hearing some static here. Connie, are you there?

Yes, give me just one moment.

We don't want to interrupt the accent from Gloucester here with any the static, so that's why we want to do --.

Robert Kelly, Sidoti.

Thank you for taking my call. The question that I had, industry pricing, you have seen stabilization. Assuming that you do have some threat of deflation in the second half of the year -- you mentioned you are prepared for it -- how do you actually try to combat that just out of -- within your --?

Well, the biggest thing we do ahead of time is (technical difficulty) inventory, which we are in good shape. We will take down those shingles, which we turn very quickly -- usually it's at least six to 9 times per year, depending on the season, that we turn (technical difficulty). And that is where we have seen the vast majority of the price increases. So it is very controllable.

Now, if we do see a drop we hope that it's not (technical difficulty), which would probably be harder to react to. But if the manufacturers have come out with some price increases, even if things drop off a little bit, the perception is that is they will bring them down slowly if they need to.

What I would say it is that we haven't seen the drop in asphalt pricing that maybe some people perceive is out there. And until that happens, that (technical difficulty) where we [act] differently.

And as far as -- you talked about the sustainable gross margin rate, 23 to 24.5%. Does that assume stabilization at these levels, the current level of elevated pricing?

Yes. If we saw a big decrease in prices, that would affect us in the downward. And if we see price increases, it may rise above that. But we will have to wait (technical difficulty) what happens in the market.

Scot Ciccarelli, RBC Capital Markets.

Question, are you guys -- just in terms of the pace of business, particularly on the commercial side -- I am assuming business that you're doing now has kind of been prebooked, if you will, because you knew there were certain projects going on.

But given what is going on on the commercial side, are you guys expecting a material dropoff as we get to your second half?

Well, we talk to our VPs all of the time, as recently as yesterday. And those jobs are not prebooked. Some will be reroofing jobs caused by winter weather issues. Some could be scheduled for months ahead, because the projects are underway.

But reroofing is not a scheduled kind of event. We still -- and we temper it, but we are hearing -- and Paul, you have had this conversation -- that it's -- they're optimistic. The contractors are. Our VPs are.

We take that, listen to it. But we temper it. And our tactical plans are pretty real-time every day, every week. So the reroofing aspect of commercial is awfully strong. It's 80% of the business.

Given that amount, that gives us even more optimism, given the strength and the -- I guess, harshness of this winter, although you certainly can't predict anything, and we don't like to even talk about weather. But the reality is at present, it's been very difficult for contractors to even get on the roof in the northern climates.

But as Bob said, though, there is some tempered optimism coming out of our regions that are strong commercially about prospects over the next six months once they can actually start working.

Okay, that is helpful. And then any kind of color regarding your specific competitive situation would be helpful, just in terms of -- there's a lot of businesses, both large and small, under a tremendous amount of pressure given what is going on in, obviously, the real estate market, as well as the broader economy -- I know roofing is obviously a lot more insulated. But any kind of feel or color would be helpful.

Color regarding our competitors?

Yes.

That would be hard for me. Most of them are private, so I really couldn't give you a lot of information on that.

I guess what I'm looking for -- are you seeing people kind of close doors, close shops, that kind of stuff? Or because of the stability of the industry, you're not really seeing that?

You're right, it is a stable industry. And again, these are private companies, well-run, five to 10 to 15 locations. Probably own the real estate, do a good job of inventory management, receivable management. The people I know -- good cash flow in this environment. Those are good companies.

Fred Taylor, MJX Asset Management.

I had a question. I heard, and I think you mentioned it on previous calls -- not a huge interest in growing by acquisition, but more by organically.

And looking at the cash flow statement, and maybe you can't make $18 million in net income every quarter. But I am just doing some quick math that if you keep receivables and inventory under control, you could well generate north of $40 million or $50 million of free cash flow this year.

And where would you say the demands on that cash flow go? Would it go to debt repayment, or possibly share repurchase? Or might you change your tune on acquisitions?

Yes, well, let's start with part A, which is our attitude on acquisitions. We still -- our long-term growth objective is to grow organically five to 10 and acquisitions 10 to 15. We have exceeded both those numbers since going public.

So the acquisition strategy is still very key to what we do. So that will continue. What we have said is we are on the sidelines, accumulating cash -- as I said, keeping our powder dry. And that is what we are doing. And we are accumulating cash. And I think your free cash flow estimate is probably low for the year. So we would continue to build that cash.

But as we speak today, we are -- we do look at acquisitions. And that's part of our growth strategy. But we are also a very conservative company. I think we are in great shape now, probably as good a shape to make acquisitions of anyone I know. Does that answer your question?

It does. Just a follow-up -- I agree, I lowballed the cash flow as well, and think it will be more. Have the rating agencies had a chance to digest this quarter's numbers, and might you be chatting with them?

We don't have rated debt. We had a onetime rating on our debt. So they don't even look at them.

Ted Kundtz, Needham & Co.

Hello, everyone. Bob, could you comment on the outlook for new construction? We know it's awful, but is it worse now than it was a year ago? And how much of an impact could that have on you guys going forward in terms of your volumes? It's a year-over-year change I'm looking for. Do you see it as a lot worse than last year, or is it kind of comparable to last summer?

Ted, that is an excellent question. The problem is I'm not a builder. They would probably have a better sense of where they think calendar year '09 is going to be. My personal opinion -- and again, I'm not a builder -- but my personal opinion is housing starts are at a low point.

For us with our product mix, we will benefit from an increase in housing starts. Inventory levels are going down. I think the government is going to get mortgage rates down. Foreclosures are going to stabilize because people are going to be supported. There are a lot of things happening that will be very good for housing.

Even in January, existing home sales went up. And I am sure some of those home sales of existing -- the seller was possibly buying a new home someplace.

So I think it is in a cyclical bottom. It could bounce along at these rates for several months and then get a lot better later in the year, mainly because everything is aligned that way. People are saving more. Mortgage rates are down, and homes are more affordable. So that is how I see it.

I'm just wondering -- in your mix of the residential business, is it still roughly 70% kind of reroofing and 30% new construction related? Or has that mix changed, where it's really much more reroofing now than it had been because of this decline?

I don't think there is any question, especially in the markets that we are in, that it has climbed above that. I couldn't give you an exact percentage. We usually rely on an industry research company to provide us for that.

But think of where we are in the northeast, along the East Coast. And we are not in Florida or Nevada, and all the big homebuilding states, which got hurt the most. So there's no question in my mind that the reroofing has probably climbed above 75%. But I couldn't prove it to you. It's my personal opinion.

I'm just trying to get the delta there from last year to this year. Okay, thank you.

[Garland Buchanan], Babson Capital.

I apologize; all my questions have been answered.

I hope they were answered well.

And that concludes the questions. Now I would like to turn the call back over to Mr. Buck for his closing comments.

Okay, I appreciate it. Thanks again for your questions. And again, David, Paul and I will be available for additional questions immediately following this call. And as usual, I would like to close the call by emphasizing several points, kind of in bullet point fashion.

Number one, we are really pleased with our double-digit organic growth of around 16% for the quarter. Gross margins were up for the quarter, both in dollars and as a percentage to sales.

Operating margins as a percent of sales actually doubled from 4.0% to 8.1%. And this is something we talk about all the time. Our balanced product mix coupled with the diversified geographic footprint that we have -- it serves us so well, and will continue to serve us well in the future as we deal with economic situations.

Our balance sheet is very strong, and we want to always be known -- and we have said this before, and it bears repeating -- always be known as good stewards of the assets entrusted to us. And we believe our results in all of these areas are pleasing to our employees, our suppliers and our shareholders.

So thanks very much for your continued interest and support of Beacon. And speaking on behalf of our employees, we all truly appreciate it, and we look forward to seeing you in the coming months. Thanks very much.