Beacon Roofing Supply Inc (BECN) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen. Welcome to Beacon Roofing Supply fiscal year 2009 second quarter conference call. My name is Patrick, and I will be your coordinator for today. (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 Chief Executive Officer; Mr. Paul Isabella, President and Chief Operating Officer; 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 Patrick. Welcome everyone to our second quarter earnings call for fiscal year 2009.

We are very pleased to announce these results, and again, it's very gratifying to us to exceed the expectations of our analysts. I can tell you there is a tremendous amount of work done by our employees to make these results possible. And I really can't overstate how much David, Paul, and I appreciate their hard work and dedication.

And there is an old phrase that goes something like, it's the rough seas, not the calm ones that make good sailors. Well, we have some really good sailors at Beacon, and they continue to perform well in tough economic times for our company.

As is our custom on these calls, David Grace, our CFO, from Gloucester -- just to let you -- remind everyone -- will present the financial details. And when David is finished, Paul Isabella, our President and COO will provide answers to questions that I know are important to you. When Paul is finished we will open the call for additional follow-up questions that you have.

Fiscal year 2009 has been a strong year for us. The first quarter results were very encouraging, and now we are pleased to report the results of a very strong second quarter. Gross margins have improved over last year. Expenses are being controlled throughout the company. You can quickly assess the quality of our balance sheet, and I would like to point out the quality of our receivables, the excellent management of inventories, and the continued reduction of debt, the improvement of our debt ratios, and the improvement of return on assets and equity. Fiscal '09 is half over now and we are proud of these results.

We also want you to know that we actually never relax, and we are constantly evaluating and reevaluating our plans to make sure we stay on course. I've said it before, and I guess I have to say it again because he is sitting right next to me, that Paul is doing an excellent job.

So I'm going to turn it over to the man from Gloucester, who is going to present the financial details of our financial performance this quarter. So David, take it away.

Thanks Bob. Just as a reminder, currently all of our results for fiscal 2009 are from existing markets and considered organic.

For the second quarter sales increased 4.9% to $319.3 million from $304.3 million in 2008, with residential roofing sales increasing 37.2% as we benefited from the higher year-over-year prices combined with strong although weakening demand from the roof damages caused by Hurricane Ike.

Non-residential roofing declined 12.6% as commercial activity slowed, especially in the regions which experienced tougher winter conditions.

Complementary product sales, which we believe are more discretionary in nature, were down 27.1% and continued to be negatively impacted by both the slowdown in the economy and lower levels of residential construction and remodeling.

Our estimated inflation in our product cost based upon our current inventories product mix and our invoice cost as compared to the invoice cost of the same products a year ago -- based upon this estimate, our product costs were up 13% to 15% compared to 2008 levels.

We had 63 business days in 2009 compared to 64 days in 2008, which we estimate reduced our sales by 1.7%. All of our overall sales growth on a same-day sales basis in the quarter came from inflation. Small volume gains in residential roofing were more than offset by volume losses in non-residential and complementary products.

We closed two branches and did not open any during the current quarter compared to one closing during the second quarter of 2008. We operated a total of 169 branches as of the end of this quarter compared to 177 last year.

Second quarter gross profit was $74.3 million for 2009 as compared to $68.4 million in 2008, an 8.6% increase with gross margins increasing to 23.3% from 22.5%. The increase was largely the result of a product mix shift to more residential roofing products which has substantially higher gross margins than the more competitive non-residential market. We did not benefit from lower weighted average costs of residential roofing products as we had in the previous two quarters and expect future gross margins to range from 23% to 24.5%, dependant upon product mix.

Operating expenses as a percentage of net sales decreased to 22.8% from 24.8% as we controlled our variable costs and leveraged our fixed costs over a slightly higher sales base. Operating expenses decreased $2.5 million or 3.3% to $72.8 million in 2009 from $75.3 million in 2008.

Selling expenses were lower by $1.3 million, primarily due to the drop in diesel prices.

And we saw a savings of approximately $1.1 million in general and administrative expenses, largely from lower insurance costs.

Depreciation and amortization dropped about $1 million, mostly due to a drop-off in amortization related to purchase accounting but also due to lower than usual capital expenditures in fiscal 2008.

And despite year-over-year headcount reductions, payroll and related costs increase by $0.4 million due to increased benefit and profit sharing costs.

Warehouse expenses increased $0.5 million, mainly from the costs associated with the two branch closings.

During the quarter we expensed $3.0 million from the amortization of intangible assets recorded on the purchase accounting compared to $3.7 million in 2008.

Interest expense decreased by $1.1 million from the pay-down the debt since 2008 and lower interest rates.

Income tax benefits of $1.7 million and $5.5 million were recorded in 2009 and 2008, respectively, with a slight increase in our effective tax rate to 40.9% from 40.5% in 2008.

As a result of all I've mentioned, we had a net loss of $2.4 million in our second quarter compared to a net loss of $8.1 million in 2008. Diluted net loss per share fell $0.13 to a loss of $0.05 compared to a loss of $0.18 in 2008.

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 $10.2 million for 2009 as compared to $2.9 million in 2008.

As for our fiscal year to date results, sales increased 11.4% to $782.6 million from $702.6 million in 2008, mainly from higher price increases but also from the strong reroofing from the effects of Hurricane Ike.

Our gross profit increased 18.9% to $190.3 million in 2009 from $160.1 million in 2008. Gross margins increased to 24.3% from 22.8%, mainly due to a product mix shift to the higher-margin residential roofing products, but also from the benefit of lower weighted average costs in our first quarter.

Operating expenses as a percentage of sales decreased to 19.3% from 21.5% in 2008 as we were able to leverage our fixed costs very effectively over the higher sales, especially since the sales increase was principally from higher prices. Operating expenses decreased $0.1 million to $151.1 million.

We continue to see savings in transportation costs, mainly due to the drop in diesel prices, while G&A decreased due to lower insurance costs, and depreciation and amortization dropped $2.2 million. These savings were mostly offset by the increased payroll and related costs of $3.1 million, due primarily to the increased incentive-based pay and higher warehouse expenses, primarily from the cost of closing six branches.

Interest expense decreased $2.0 million in 2009 while income tax was $11.2 million in 2009 compared to an income tax benefit of $2.0 million in 2008.

As a result of all I've mentioned, our net income for 2009 was $16.2 million compared to a net loss of $2.9 million in 2008. Adjusted EBITDA was $56.8 million in 2009 as compared to $28.9 million in 2008. Diluted net income per share was $0.36 in year-to-date 2009 compared to a loss of $0.07 in 2008.

Cash flow from operations were $84.8 million in 2009 as compared to $29.5 million for 2008, boosted by the larger operating income.

We also experienced typical seasonal decreases in accounts receivable and prepaids that totaled $113.4 million and $7.3 million, respectively, which were partially offset by a decrease in accounts payable and accrued expenses of $69.6 million.

Inventory levels have not changed materially as compared to the beginning of fiscal 2009. Inventory turns are up slightly in 2009 as compared to 2008, and we realized a decrease in our days sales outstanding in accounts receivable as compared to 2009. However, we are conscious of the current economic and credit conditions and remain conservative in our allowance for doubtful accounts reserve.

Capital expenditures in 2009 were $4.8 million compared to $1.2 million in 2008, as we have increased capital spending for scheduled replacement of older equipment.

Net cash used by financing activity was $7.9 million in 2009 as we continued to pay down our existing debt.

As of the end of the quarter our trailing 12 month adjusted EBITDA was a record $161.7 million, which when divided into our net debt of $270.4 million, as defined under our credit facilities gives us a ratio of 1.67 to 1.00 -- well below the required ratio of 4.0 to 1.0.

To summarize key points for the quarter, organic sales grew 6.6% in the quarter on a same-business-days basis. Operating expenses were down $2.5 million for the quarter. Operating margin year-to-date was 5.0% compared to 1.3% in 2008. Year-to-date diluted net income per share was $0.36 compared to a loss of $0.07 in 2009. The balance sheet at March 31, 2009 continues to improve, with cash on hand of $98.1 million, a working capital ratio of 2.5 to 1.0, and a debt to total capital ratio of less than 50%.

Now back to Bob.

Now we're going to turn to Paul to go over the questions that we've put together along with the answers. So Paul, you do that. And when that's finished, we'll open up the call.

Great. Thanks Bob. I have 12 questions, so I will jump right into it.

The first one -- it looks like your recent gross margin expansion has waned. Please explain the current influences and at what levels we can expect them to be in the future.

To start with, Q2 is traditionally a lower gross margin quarter for us than other quarters. Due to the price increases over the last year and some solid, although diminishing demand from Hurricane Ike, our mix of residential roofing increased dramatically in the quarter from 41% in '08 to 54% in '09. And as you may know, those are our highest gross margin products.

Most if not all of the Q2 gross margin improvement over the last year was due to this product mix change. Any price advantage from having average cost inventory lower than the current market price has evaporated, and we expect the gross margins will remain as Dave said in the 23% to 24.5% range in the near future, again, mostly dependent on our product mix.

Second question -- can you give us an update on pricing in the industry? The announced vendor spring price increases are now in the market, and early indications are that they will hold up. While we can't predict or control the future of asphalt pricing, we have our eyes and ears open so that we will be prepared for price changes -- either increases or decreases.

Third question -- how much of growth in the quarter is from price and how much is from unit growth? In the past, we have answered this question by comparing major skews over the same period of time for the prior year. By using this method we believe all of our overall same-day basis growth was from price increases. As for volumes by product group, we estimate residential roofing was up 6% to 9% while commercial had a volume drop slightly higher than their drop in sales, and complementary products dropped in volume about equal to their sales decline.

Number four -- please discuss the impact of Hurricane Ike in the second quarter. We continued to see some year-over-year incremental demand from Ike, especially in the 10 or so branches in and around Houston, but it dropped off considerably as compared to Q1. We are glad we have locations which could help the impacted folks reroof their homes and businesses and expect the activity to continue for a few more months. Storm-related demand is normal for our industry in most years, the only recent exception being unusually low activity in 2007.

Number five -- non-residential roofing continues to show signs of weakness. Can you give us an idea of what you are seeing in the marketplace? There's no question we are seeing a slowdown in new commercial construction. But we also think that some of our lower recent volume is related to the tougher 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 experienced quite a bit of snow and harsh cold weather in the second quarter. We have not seen as much of an increase in activity in April as we would've liked after the tough winter. Non-residential sales in the northern regions have not bounced back yet, although quoting activity is busy and our customers remain optimistic about upcoming product projects. We have seen some pockets of stronger activity such as in the Southeast and Midwest.

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 are much more discretionary than with roofing products and therefore these sales will be more influenced by the economy. Gross margins in [these] (technical difficulty) categories were up slightly for the quarter, though volume is still dragging, and we don't have any insight yet into when we'll see an uptick. However, we think the margin percentages will remain stable in this category.

Seven -- remembering your expense control initiatives, what was the employee headcount at the end of the second quarter as compared to last year's first quarter? We ended the quarter with 2,272 employees, which was down from 2,431 at the end of Q2 of last year, for a reduction of 159 or about 6% of our workforce. We reduced our headcount as usual for the winter period, and we're adding to our headcount somewhat for the spring as necessary. As you know, this is our largest expense category and we monitor it very closely.

Eight -- can you update us on the quality of your accounts receivable at the end of Q2? Bad debt expense was up slightly for the quarter, but we are flat year-to-date against last year and slightly lower as a percentage of year-to-date sales at 0.53% compared to 0.59% in 2008. We are being conservative and consistent with our bad debt reserves and believe they are adequate considering the softness in our economy.

Our days outstanding at the end of the quarter were about four days less than last year while our over-60-day pass-through percentage, a detail we watch carefully, was up only slightly compared to 2008.

We continue to closely monitor credit daily with a special emphasis on our commercial customers. Our credit organization continues to perform very well, and all of our people are keenly aware of the need to monitor the quality of receivables.

Number nine -- your balance sheet looks very strong. Can you review the pertinent ratios for us? As Dave discussed in his comments, we are at a 1.67 to 1.0 ratio in our only pertinent debt covenant, which is a required adjusted EBITDA to net debt ratio of less than 4.0 to 1.0.

Let me recite a few other ratios. Our current ratio is at 2.25 to 1.00 compared to 2.10 to 1.00 at March 31, 2008. Net debt to total capital is at 0.42 compared to 0.54 last year, and return on equity for the trailing 12 months ended in March 2009 was 17%.

We have continued to pay down our debt. We had almost about $98 million of cash at the end of the quarter, although some of that built up in cash was temporary due to a seasonal decline in working capital needs.

As I just mentioned, the current condition of our AR is good. Our inventory level excluding reserves was up only modestly from last year, despite the effect of inflation.

We work hard to maintain these healthy financial conditions, and our balance sheet is in excellent shape considering the state of the economy and credit woes affecting the country.

Number 10 -- do have an update on the analyst estimates for fiscal year 2009? We're comfortable and confirm the most recent analysts fiscal year ranges at this point in time. While we enjoyed some sales and profit benefits from the 2008 price increases and Hurricane Ike in Q1 and Q2 of this year, we will be up against especially tough comparisons in Q3 and Q4.

We think growth in sales and improved EPS for the fiscal year, which we are striving for, will be appreciated by our shareholders considering the tough economic and credit environment.

11 -- how is business going so far in the third quarter? As we've done in previous quarters, we'll give you a quick snapshot of the current quarter to date. But remember, in our business we can have large swings in activity from month to month and even week to week.

April was weak, down year-over-year as we have started to lap the prior-year price increases in residential roofing products. Three regions including West End, who has been servicing the Hurricane Ike damage, grew while the other seven regions of saw declines. As we stated, with non-residential roofing there does seem to be some optimism from the residential roofers that activity will pick up soon.

Lastly, number 12 -- has anything changed regarding your acquisition strategy? No it hasn't. We still talk to prospects because the economic and business reasons for consolidation in the industry remain. Acquisition activity can't be turned on and off. We do not believe there is a specific timetable for any acquisition and do not feel the pressure to complete a certain number of acquisitions within a certain period of time.

We have a strong balance sheet, excellent banking relationships, and continue to exercise prudent stewardship of our assets. As many of you 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 will turn it back over to Bob.

Thanks Paul. What we would like to do now is to spend the last 15 minutes or so answering your questions. So let's start with that.

(Operator Instructions). Michael Rehaut, J.P. Morgan.

This is actually Ray Wong on for Mike. The first question on the cash balance is it increased pretty nicely, and I guess you guys mentioned part of it was seasonal, but does that mean you guys expect to be more of a cash user in the back half of the year? And what are some of the major drivers that could impact cash flow in the second half?

Well, it's pretty typical for us in the March quarter to see a reduction in our working capital. We will use some of that cash in June quarter, and we -- by the end of the year we probably will see it come back up to near where it is today, so I wouldn't say we're going to be a user of cash during the second half, but we are just warning people that it is more of a spike just for right now, and the long-term results towards the end of the year may prove to be equal to that.

This is a follow-up. I guess the net debt to capital is also down pretty nicely, under 42%. What sort of comfortable level would be good for you guys, and do you have like a target for that.

Yes. We've said as a distribution company that we believe that it should be between 2.0 to 3.5 to 1.0 ratio. We are well below that now. And what that really points out, Ray, is that we haven't made an acquisition recently to build up that debt a little bit, so when we are at 2.0 or below, that would be typical, like now, that we haven't made an acquisition. And when we are towards the higher end, it probably means that we've had made a recent acquisition. Anything within that range is very comfortable with us because we carry a lot of receivables and inventory that provide a lot of security for the banks.

Great. Just a last question -- you guys mentioned the headcount reductions. Could you remind us what head -- what labor is as a percentage of your costs? And also possibly if you guys could give what your fixed versus variable cost structure is?

Labor is about 50% to 60% of our cost, dependent upon the time of the year. It will be obviously stronger during Q2 when the revenues drop and the fixed costs don't. What I would say is that as we go forward, we will adapt that level of payroll dependent upon how much we have in revenues and gross margin dollars.

What was the rest of your question, Ray?

Just in general what the fixed versus veritable costs are for the business.

It's about percent to 70% of our SG&A is fixed, and that includes basically the base salaries of our employees.

Yes. And this is Paul. As I said in the prepared questions, we are down year-over-year about 6%, which is that [168]. We took a slight uptick as we get into season, but we're -- in general we've been down in the 200 rain as -- range as we've gone through these past quarters. We've been pretty aggressive in every region at really watching headcount. We know it's a big piece of the -- our costs, and we will continue to do that as we look at volumes moving forward.

Scott Ciccarelli, RBC Capital Markets.

I guess I have another question kind of related to the SG&A question. If you look at you guys historically, what you've typically seen is relatively flat SG&A spend in terms of dollars on a sequential basis from December to the March quarter, and yet we are down pretty sharply this quarter from December. Was there anything else that was impacting that? Is that just running a leaner cost structure, or is there some other things that might have been maybe expenses shifted from this quarter into another quarter, etc.?

One of the major factors is incentive pays. If you noticed in the comments that I gave, that year-to-date payroll was up almost -- over $3 million. So we recorded quite a bit of incentive pay because of the blockbuster quarter we had in Q1. So some of that went away with Q2, where our results are not as drastically different than we had under our expectations.

Beyond that, we do a good job. The guys in the region and the branches, when sales go down in this quarter, they take care of things. And we do the right things and adjust our cost structure because we have lower volumes.

Scott, this is Bob. It is pretty typical that the second-quarter operating expenses will be less than prior year. I mean, at least last year our operating expenses in the second quarter were less than they were the prior year. So you will naturally see that. So our second quarter, we just did a good job, but we watch this business daily, weekly and react in pretty real-time basis. So not a whole lot unusual at all in the second quarter. Just normal, good cost control.

That's helpful. And then maybe one of you guys can -- maybe Paul can clarify a little bit on the gross margin. I understand that you didn't have the lower costs built in in terms of kind of the timing on buying and stuff, but your gross margins this quarter were actually below what you are expecting in the future. Can you just help clarify that for me? I wasn't quite clear on what -- why that was.

I think we've been saying for the last number of quarters that as our prices -- as we lap the price increases from prior year, we would see a decrease and we would be in this 23% to 24.5% range. And that's pretty much what's happened. We saw -- held true to what we've been saying and predicting for the past few quarters.

And I would add one thing. Q2 is typically a lower gross margin quarter for us. And just think it in normal terms. There is less business around, so the customers spend more time shopping, just like many people in today's economy are. They will get two and three prices, and we might have to be a little more competitive in Q2, because if they have work, they know they can get a better price because they are the one that won the job.

Right. Okay. So far that's seasonal. All right. Great. Thanks a lot guys.

Michael Cox, Piper Jaffray.

My first question is on operating expenses. As we look through the balance of the year, should we continue to expect year-over-year declines like we saw in the second quarter?

I would say you are going to see some of that. The biggest thing I would say, Michael, is we are going to react properly when we see things change. And if volumes don't come back somewhat, we are going to make the right restructuring of costs to save some of that money. I think, compared to last year, you're going to see that payroll, especially because some of the incentive pay if you remember we booked in Q3 and Q4 last year, so we should see some savings there, because now this year we are at head of the expectations, so we booked some of that ahead of time. So I think it will continue on.

That's helpful. Can you talk a little bit about use of cash? I believe you have some restrictions on paying down some of your long-term debt, but with the cash flow you are generating, what do you plan to put that to use toward, given acquisitions? Or perhaps a little bit on hold?

I will answer a little bit of it and then Bob can chime in about the acquisitions. We don't have any restrictions on paying down debt, but with interest rates -- the variable interest rate on our term at 2 over LIBOR, we are paying slightly less than 3% on that interest, so it doesn't make a whole lot of sense to pay it down right now if we want to continue to have the ability to do some growth in the future by making some acquisitions.

I like the comment someone had last quarter that says we are hoarding cash, and that's exactly what we're doing. We're staying strong, and when things get a little bit better, we will be able to help make some moves.

Yes, I can chime in. We are in a fortunate position where we are building cash. We are putting it in our war chest so that we can be ready if opportunities come available. So we like the situation we're in, so -- we do view it on a net cash basis. We pay very close attention to all the balance sheet ratios. So we are -- and we have a really good credit facility. No maturities in the near future. So when you combine that with a cash-flow-generating business, we are just getting stronger every day so that we can take advantage of opportunities.

Does that help, Michael?

Yes, it does, yes. My last question is on the pricing environment. It's my understanding the tightness of supply following the hurricanes and some of the capacity that's been taken off-line has provided a firmness to the pricing environment. Could you talk a little bit about what level of unit volume decline would be needed to change that dynamic and perhaps lead the manufacturers to ease some of the price increases that they've made?

That would be hard because they are closer to their issues than we are. I don't think there is any pressures for them to reduce pricing because capacity is properly established now in the industry. The big four manufacturers make great products, the demand is good, and I don't see a need for any one of those to get outside of that, [to] hold prices because you just don't know what's going to happen.

Another storm, other cost increases, and now you've got the stimulus happening, so the demand for asphalt is going to increase more every month. So the shingle manufacturer isn't first in line regarding that demand. Only about 15% of the demand for asphalt is used for roofing. A lot of the dynamics involved in that. Our anticipation is that pricing is going to be very steady, and that's what I think the rest of the year looks like.

Let me add just another point on the cost piece, as Dave talked about our ability to flex up or down, and I think that's really important. We watch costs very, very tightly as the regions do of course and the branches. As volume goes down or up, depending on the time frame -- obviously we can't do this daily -- they will adjust. But always there is an overriding supposition that we have to have outstanding customer service, so even though we are looking at costs and driving costs down, regardless of volume, the branches know our differentiator is customer service. So it's important to note that.

David Manthey, Robert W. Baird.

Dave, could you tell us the number of days in the third quarter and the fourth quarter?

I believe they are both 64. It's equal to last year anyways.

Okay. We have 64 in each of the last -- in the third and fourth quarter last year. Okay. Good.

Could you talk about gross margins between non-res, res, and complementary in the quarter? Has there been any material shift there just in ballpark terms between those normal relationships?

What I would point out, and what we do, David, is we watch invoice margins, which is basically what the vendor charges us on the invoice not counting rebates against what we charge our customers. Commercial products or non-res has actually come up a little bit. And some of that is because the projects may be a little smaller or we may have different customers doing them. It's a little more difficult to tell there.

Residential invoice margins are actually down somewhat from last year. That's really expected because last year remember we really had two price increases in March of last year and were able to put those out to the customers before we had to replace the product at the higher price.

Complementary is about flat to last year. Now, when you combine that with the effect of rebates, and the residential products have much higher rebates than the non-res products, that really changes the product mix and helps our gross margin out when you take that into effect.

Okay. So would it be safe to say that between res and non-res that historical 700 and 900 basis point delta may be at the low end this year because of what's gone on in non-res?

Not at the low end. It's probably in the 800 to 900 range.

Okay. That's helpful. Thank you.

Jack Kasprzak, BB&T Capital Markets.

With regard to weather in the quarter, is there any way to quantify the impact versus last year? And if not, could you at least qualitatively talk about how you feel the weather this winter, which I assume was more severe than the March quarter of last year, how it impacted you?

I don't believe there is any way for us to quantify it. We've heard stories about how many roofing days there are and how much snow there was. Bitter cold obviously affects the commercial jobs because they use glues and heat guns and stuff like that that really can't be used once it's below freezing. The general sense is that it was a tougher winter, but I really can't lay any quantitative numbers on that.

Was it a sort of winter where there was enough severe weather that might have created some roofing demand for the spring and early summer?

I believe so, yes.

Yes, I do too.

And with regard to asphalt pricing, for the June quarter it looks like complementary product sales will still be tough. It looks like non-res is still a tougher kind of situation, even though a lot of that is replacement. But on the residential side, do you think pricing will be additive to sales for the June quarter?

Compared to last year?

Yes.

If you take our volume, we should have some price increase. We incurred price increases from the residential shingle manufacturers March 1 of about 5% to 6%. So some of that will carry through. Now, there is no guarantees that those prices will stick. They seem to be right now, and the four major manufacturers have not announced any differences, but I mean as it goes forward I think a lot depends on how the economy does and if things get a little bit better out there.

Robert Kelly, Sidoti & Company.

Great work on the balance sheet.

In the prepared questions you had talked about the April start and then you had two other reasons outside of the hurricane affected areas that were up year on year. I believe that's what you said. What are those regions? And what are the drivers of the strong volume there?

Well, we won't give specific regions because of really competitive situations, but the Southeast was very well. Some of that is that we've gotten some new products down there to sell, and the Southeast, above -- excluding the hurricane areas, also did very well.

Okay. Great. And then just maybe touching on pricing trends, it seems like the asphalt-driven price increases affects the residential business, whatever percent shingles is of your mix, but how about the rest of your product mix? What do the pricing trends look like for non-res products and the complementary products? As we enter your second half.

It's been flat. Recently if you go quarter to sequential quarter, compared to last year we think it's up 3% to 5%. Carlisle is one of our major suppliers, and I think that's the same relevant range that they've said their prices are up, so I would rely on that. They are by far our largest supplier of commercial products.

So you are still seeing positive movement even outside shingles?

That's year-over-year so it hasn't increased since really the September quarter sequentially.

Well, and the other way to look at that is we're not seeing from our manufacturers any desire to reduce prices either.

Due to time constraints, we have time to take just a few more questions.

Jeff Germanotta, William Blair & Company.

You've been busy taking out costs, whether it's branches, some headcount. You've put new leadership in some of your business units. Have those efforts largely run their course, and are you where you want to be, or is there more work to do?

I think I can reduce Grace's salary of little bit more, maybe Isabella. But -- I'm just [kidding] (technical difficulty) That's a legitimate question, but we always look at it, Jeffrey, and we have a thing called cost-out budget where we do forecasting based upon different scenarios. And so then what we try to do is manage all those line items as a percent of sales, and if you can't get it in one area, you try to get it somewhere else.

And so that's our -- that's part of our culture, the lean and clean culture. And our branch managers endorse that. Our employees understand that the more productive we are, the better it is for them and profit-sharing contributions, and so we talk a lot about cost control as a -- as just good business. So we don't want to one day take the pedal off of cost control and the next day you can do what you want.

Our culture is constantly watching that and for all the right reasons. Not to increase anyone's bonus. We are very careful as Paul said with customer service. But the reason for cost control is to make sure that you produce the appropriate operating income for the business you enjoy. So we couch the issue of cost control very much in that area of just good business practice, and so there is always -- I don't know about a company that can't find areas where you can improve productivity or decrease waste. So -- and you have been to see us in a lot of locations, and I think you kind of know how we operate, so there is always room for improvement.

Brent Rakers; Morgan, Keegan.

First on the warehouse expense, up $0.5 million year-over-year, despite I guess having eight fewer branches. David, could you maybe give me a better sense of the components of that, how that could still be up year-over-year?

Yes, sure. And basically what happens when you close a branch -- and we -- I'm not a believer in all these restructuring charges and things popping to the bottom line, below the line. We incur those directly in our SG&A. And we've closed eight since then, and if they are about $100,000 to $150,000 apiece to close, that would be in the range. So that $500,000 you saw for the second quarter, $300,000 to $400,000 of that is for closing the two branches.

And I guess, David, my follow-up to that then though, are there -- other than rent expense, what other items would be (technical difficulty) [if] still, even despite the $300,000, to still be even modestly up year-over-year?

Perhaps it's the transfer of the inventory. Our warehouse expense excluding those charges is actually down for the year, so we're doing a good job. And you will see that as a bit of a future benefit as we go forward. We've incurred all those costs upfront closing those branches, and we will not have those in Q3 and Q4.

And then just final question, and just to follow up again on this gross margin in the residential roofing, and again I just want to clarify, David, it seemed as (technical difficulty) [you] noted that there is some competitive pricing pressure in that business, but you also referred to -- that the invoice last year, maybe it did have some benefit from inventory profits. Could you maybe give more clarity in each of those issues?

Yes. I think going forward in Q3 and Q4, Q3 has probably had some partial benefit from those price increases, which we won't see this year. Perhaps it's 10 to 30 basis points. Q4 on the other hand, as we did in our filing last year, probably had 60 to 70 basis points of improvement, which we won't see those -- that this year. So if you took last year's and scaled it down by that level, I think you will see you will be in the range that we're talking about for the next two quarters.

Hey Brent, before you go, the other thing that we've tried to do is talk about gross margins and the range for the year, and we mentioned 23% to 24.5%, depending on product mix. So we try to guide that so you -- to be helpful to you. To put all those factors together, what does gross margin come out to be? So that's a reminder of what we mean when we say 23% to 24.5%. It's a mixture of a lot of different things.

Gregory Macosko, Lord Abbett.

Just with regard to your comments on the non-residential market and kind of April and kind of what you've been seeing, would you say that you were -- were you expecting stronger demand there? Is there sort of delay or people postponing actual repairs at this point?

We expected a little bit of a bounce in April, but sometimes that takes a little longer to come out and to really come into fruition because jobs have to be started up in most instances. You know, we were down 12% -- a little bit more of that in volume for the quarter. If you listened to Carlisle's call, they were down much more than that, but we are in a different area than they are in total.

We're in the Northeast and the Midwest, and our guys are telling us that there is some work out there that's going to come in. A lot of quoting activity going on. The stimulus hopefully will help some school work and some municipal work and some government work for roofs. We're cautious, but the signs are that there is some pent-up demand from the harsher winter. But we have to go out and earn those jobs.

But you also said that sort of new construction is a key part of that. How would you break that out? Or any sense of how much the mix is new versus repair on that business in non-res?

Non-res traditionally is about 80% repair in our markets, and nationally. That has probably come up quite a bit because the new construction has dropped off. So if it was above 80%, that wouldn't surprise me. The stimulus isn't just for new construction. I saw the list in Massachusetts, and 95% of it looks like it's repair work to me. But I'm not sure what the other states are doing.

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

Okay. Thanks everyone for your questions. And we'll wrap up the call now. And Paul, David, and I will be available after this call for follow-up questions. We do have several already scheduled.

But let me close now with a few summary comments. Gross margins for the second quarter actually increased over last year in both dollars and percentages, which is encouraging. We posted an operating income of $1.5 million in the quarter -- and compare that to last year a $6.9 million loss. And I have to say that's quite an accomplishment because the second quarter is our winter quarter and our slowest quarter.

Again, the balance sheet is quite strong. The trends are positive. Our reputation as good financial stewards really is important to us, and we will always work hard to protect that reputation.

We believe the results are also encouraging to our employees, who have reason for optimism. Our vendors -- this kind of performance is very important to them as they look at the strength of probably one of their larger customers. And our shareholders -- as a shareholder, I certainly appreciate it, and I know all of you do as well.

So I will close by again thanking everyone for your interest in and your support of Beacon. Our employees are very motivated by your support, and they will continue to work very hard to deliver more strong results in the second half of fiscal '09. So we're looking forward to our next earnings call, and I really do appreciate your interest, and we look forward to talking to you over the next several weeks and months. Thanks very much.

This concludes today's conference. We thank everybody everyone for their participation.