Beacon Roofing Supply Inc (BECN) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Beacon Roofing Supply fiscal year 2009 third quarter conference call. My name is Brendan McNabb and I'll be your coordinator for today.

At this time all participants are in listen only mode. (Operator Instructions) 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, Brendan, and welcome everyone to our third quarter earnings call for fiscal year 2009.

This was another solid quarter for Beacon, with profits much higher than street estimates. We delivered great expense controls along with very strong cash flows. Now with nine months under our belt it's gratifying to all of us here in the leadership team to report that profits this year are nearly double the same period last year. This is no time for extended celebrations or high fives around the office because we still have a lot of work to do. However I certainly don't think there's any wrong if I say a big thank you to all of our employees, many of whom might be listening who worked so hard to achieve these results this quarter and for the nine months. We do have a wonderful team at Beacon who are really getting the job done in very tough economic times.

As has been our custom on these earnings calls in the past, our CFO, David Grace, presents the financial details right after I speak. In the past, we would provide answers to nine or ten prepared questions that we believe were tops on your list. That's worked very well for us and I've received a lot of good feedback, but in an effort to keep these calls fresh and relevant and meaningful to you I've decided to change the format a bit for this quarter's call. So after David's presentation we will go right into a Q & A and we will not be using prepared questions and answers like we've done in the past.

Our third quarter results were very encouraging to us. David will point out how our attention to the fundamentals of our business is paying off and it's paying off in regards to strong cash flows, lower operating expenses and strong earnings per share. We have a solid business plan still in effect that will keep us on track the rest of the year and into 2010. I would like to remind everyone that our business model does serve us well because we're balancing good results and residential roofing with soft demand in commercial and also our geographic diversity also gives us stability in much the same way. So just a few other points.

Gross margins are firm. We continue to receive notices of price increases from various vendors. Our balance sheet is strong because of our attention to accounts receivable, management of inventory and our efforts to improve debt ratios and return on assets and equity.

So what I'd like to do now is turn the call over to our sterling CFO, who will lead us through the financial results and he will do that in his normal proper New England tone, so everyone here is David Grace and I'll be back after he gives more details about the financials.

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

For the third quarter sales decreased 9.9% to $463.6 million from $514.6 million in 2008 with residential roofing sales increasing 10.4% as we benefited from the higher year-over-year prices, partially offset by volume drops in most of our regions. Non-residential roofing declined 25.6% as commercial activity has slowed significantly. We did not experience the expected pick up after a rough winter season.

Complimentary products which we believe are more discretionary in nature were down 25.1% and continue to be negatively impacted by both the slowdown in the economy and lower levels of residential construction and remodeling. Regional sales were down except for in our Southeast area, Southwest, and in Canada, before the effects of the exchange rate. We are estimating inflation in our product cost based upon our current inventories product mix and invoice cost as compared to the invoice cost of the same products a year ago. Based upon this estimate our product costs were up 11% to 13% compared to 2008 levels. We also had 64 business days in both 2009 and 2008.

We did not open or close any branches during the current quarter or during last year's third quarter. We operated a total of 169 branches at the end of this quarter compared to 177 last year. Third quarter gross profit was $107.8 million for 2009 as compared to $122.2 million in 2008, a 10.3% decrease with gross margins decreasing slightly to 23.3% from 23.4% in 2008. The drop in sales volume is creating some margin pressures but it has been manageable so far.

Operating expenses as a percentage of net sales decreased to 16.0% from 16.2% as our regional management has done very well in controlling our variable costs with a volume of business we're experiencing. We also continue to manage our overhead costs closely. Operating expenses decreased $9.0 million or 10.8% to $74.2 million in 2009 from $83.2 million in 2008. As I said before our regional management reacted appropriately to the lower sales volumes with costs up only $1.4 million or $1.9 million sequentially from our second quarter of 2009 while sales were up 45%.

Payroll and related costs were $5.4 million lower than last year's third quarter as we benefited from headcount reductions and overtime reductions as well as reduced incentive pay. Selling expenses were lower by $3.1 million primarily due reduced to reduced transportation costs, from the drop in diesel prices and lower sales volumes. Depreciation and amortization decreased $0.7 million, mostly due to the drop off in amortization related to purchase accounting but also due somewhat lower than usual capital expenditures in fiscal 2008.

General and administrative expenses increased slightly by $0.1 million, where an increase of bad debts of $0.6 million was almost fully offset by a reduction in other expense categories. During the quarter, we expensed $3.0 million for the amortization of intangible assets recorded under purchase accounting compared to $3.7 million in 2008. Interest expense decreased by $0.4 million from the pay down of debt since 2008 and lower interest rates. Income tax expense of $10.8 million and $12.7 million were recorded in 2009 and 2008 respectively with a slight decrease in our effective tax rate to 38.7% from 41% in 2008. That was due to adjustment of our year-to-date estimate of 2009's effective rate to 39.8%.

As a result of all I've mentioned we had net income of $17.2 million in our third quarter compared to $18.3 million in 2008. Diluted net income per share fell $0.03 to $0.38 compare to $0.41 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 $42.4 million for 2009 compared to $46.4 million in 2008.

As for our fiscal year to date results, sales increased 2.4% to $1.25 billion from $1.22 billion in 2008, mainly from higher prices but also from strong reroofing from the areas affected by Hurricane Ike partially offset by volume losses in non-residential and complimentary products. Our gross profit increased 6.4% to $298.1 million in 2009 from $280.3 million in 2008. Gross margins increased to 23.9% from 23.0%, mainly due to the 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 18.1% in 2009 from 19.3% in 2008, as we were able to control our variable costs very effectively over the higher sales, partially because the sales increase was principally from higher prices. Operating expenses decreased $9.1 million to $225.4 million.

We saw savings in transportation costs of $4.2 million, mainly due to the drop in diesel prices while G&A decreased about $1 million due primarily to lower insurance costs while D&A dropped $2.9 million. Payroll and related costs also dropped $2.3 million due primarily to the recent savings I discussed for the third quarter while warehouse expenses were $1.3 million higher primarily from the cost of closing six branches. Interest expense decreased $2.4 million in 2009 while income tax expense was $22.0 million for 2009 compared to $10.7 million in 2008. The adjusted year-to-date effective rate as I mentioned before to 39.8% in 2009 compared to 41% in 2008.

As a result of all I've mentioned our net income for the year-to-date 2009 was $33.4 million compared to $15.4 million in 2008. Adjusted EBITDA was $99.2 million in 2009 as compared to $75.3 million in 2008. Diluted net income per share was $0.74 in 2009 compared to $0.34 in 2008. Cash flows from operations were $84.3 million in 2009 as compared to $29.2 million in 2008 boosted by our higher operating income. We experienced decreases in accounts receivable and prepaids that totalled $55.1 million and $2.6 million respectively, which were partially offset by a decrease in accounts payable and accrued expenses of $24.4 million.

Inventory was also a negative cash flow factor increasing by $8.1 million as we negotiated larger bulk buys to obtain higher short-term vendor incentives on our residential roofing products. Inventory turns were flat in 2009 as compared to 2008. While we realized a decrease in our day sales outstanding and accounts receivable in 2009, as compared to 2008. However, we remain cognizant of the current economic and credit conditions and continue to be conservative in our allowance for doubtful accounts reserve.

Capital expenditures in 2009 were $10.7 million compared to $2.3 million in 2008, as we increased capital spending for scheduled replenishments of older equipment and also purchased one of our leased facilities. Net cash used by financing activities was $16.6 million in 2009 as we continue to pay down our existing debt.

To summarize key points, sales contracted 9.9% in the quarter. Operating expenses were down $9.0 million or 10.8% for the quarter. The quarterly operating costs were up only 2% sequentially from second quarter while sales grew 45%. Operating margin for the quarter was unchanged from last year's strong third quarter rate of 7.2%. Year-to-date operating margin was 5.8% compared to 3.8% in 2008. Year-to-date diluted net income per share was $0.74 compared to $0.34 in 2008. The balance sheet at June 30, 2009, is in very good shape with cash on hand of $83 million and working capital ratio of 2.2:1 and debt to total capital ratio of 50%.

Back to you Bob?

Okay David, thanks very much. What we'll do now rather than do the prepared questions and answers -- we would like to open up the call to your questions and we'll spend the remaining time doing that.

Thank you. (Operator Instructions) We'll take our first question from [Katherine Thompson with Thompson Research Group.]

Hi, thank you. Following up on your inventory commentary, how much of the inventory increase in the quarter is due to pre-buying activity and could you clarify the timing of the flow through of that inventory?

I wouldn't say that it's dramatically different than last year, Katherine. Some of it has to do with the timing of when you make the buys during the month. I would say we turn our inventories currently especially the residential roofing products close to seven to eight times so the flow through for that will be through July and partially through August. The pricing has been pretty consistent though so I'm not so sure there's an advantage or anything else like that by doing these bulk buys, it's just what's happening in the marketplace right now.

And speaking of the pricing environment, could you give a little bit of color on what you're seeing right now as overall roofing pricing?

I'll take that, Katherine. This is Bob Buck. Pricing as I've explained it is very solid to up. In the last three or four weeks we have received notices of price increases that will take effect in August and also September, so pricing is up and it's reflected also in our gross margin, so our objective as we get price increases would be to pass them on to our customer contractors, so that's what it looks like now. I rarely predict price -- what prices are going to do in the future but at this point because of asphalt pricing and price of crude and so forth, I would anticipate prices to remain solid with a trend toward up based upon recent activity from our vendors.

Could you clarify the magnitude of the increase?

Oh, sure. They're published. I could send you reports that we get and the price increases are usually 5% to7%.

Also you're lapping a little bit tougher comps due to Hurricane Ike last September? How do you manage your business around this and how are you thinking about planning your business over the next six to nine months given what we've seen some glimmer of hope in the residential housing market?

Well, we do manage the business based upon the business we enjoy. We look at our sales daily. We look out as far as we can with the visibility that we have. Storms are a normal part of our business. Ike really affected more the first quarter of fiscal '09 than anything else, and it continued for six to eight months.

If there are storms -- which people are predicting storms again this year -- you would have similar volumes. That's hard to predict but there are folks out there who predict storms. Where it comes we don't know. We're very strong on the east coast so if a storm hit on the east coast we would have more branches involved in that than if it hits the Gulf coast.

So, the comps -- we had an outstanding first quarter of '09 and would anticipate if there were storms again we would have an outstanding first quarter of 2010. The estimates that I see for '09 this fiscal year -- the fourth quarter -- look good to us and so we confirm that those numbers are solid and we would anticipate performing at that level in the fourth quarter.

Okay, great. Thanks very much. I'll get back in the queue.

Thank you, Katherine.

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

Thanks for taking my questions. My first one is on sales trends as the quarter progressed. I was wondering if you could comment on how those played out relative to your expectations?

Yes, they started out more slowly and then firmed up as the quarter went on. The fourth quarter looks more solid than the third quarter, but, Michael, it's early in the quarter but at this point, we can say particularly commercial, that commercial is more solid in the fourth than it was in the third.

Okay, that's helpful, and on the commercial side of the business, I believe you called out in your Q some increased competition. I was wondering if you would comment a little bit more about that.

Yes, and what we're talking about there is just obviously there's less jobs around so the contract is -- when they do win a job, coming back for maybe a second or a third try to try to get better pricing and we don't blame them. We have partnerships with our vendors though and when that happens, we all make a decision whether we want to go after the job and sometimes the margins can be a little bit tighter, but they've been holding up okay.

As you can see, we only had a 10 basis point drop compared to last year and that tells us that we're doing a good job out in the field and pricing at the right level to win the business, so it's been firm but we always keep an eye on it and Paul's group does a very good job on a daily basis watching that, and if we see some things that change we're going to go after our people and remind them of what we're trying to do.

Michael, let me chime in on that. I would say our own internal credit policies control a lot on what jobs we take, what contractors we continue to do business with, even more than pricing, so I think most folks would look at our bad debt situation as awfully good management, so in addition to price, we watch credit very closely.

Okay, that's helpful and just to clarify on the Ike related demand, is that now behind you in terms of what you're seeing in that region?

Yes, it is. After a while, it dissipates and Paul could comment about that. I think that it's pretty much behind us.

Yes, for the most part, in the last few months really it's dissipated down to I guess pre-storm levels so our group in those regions have worked very hard moving to other lines of business or just continue to drive market share gains.

Okay, great. Well thank you very much.

Thanks, Michael.

We'll take our next question from Michael Rehaut with JPMorgan.

Hi, guys, this is actually [Ray Horn] on for Mike. First question on the margins, I think historically you guys have talked about 23% to 24.5% range and was wondering if you can give any update on this for the fourth quarter and potentially if you looked out into 2010 and then also related to that, just if you can give us some color on the margin trends by each segment for the quarter, like up or down sequentially year-over-year?

Sure. I think we'll be pretty consistent of where we are, dependent upon product mix changes. The commercial non-res products have 800 to 900 basis point lower gross margins, so if we see a shift there, you may see it drop towards the lower end of that 23% to 24.5%, but we're pretty comfortable with the range they're in now.

I think that will continue into next year. It's hard to predict the future, but in reality if that product mix stays the same way it is, we'll be consistent.

By product group, margins in the commercial products -- they're within the range they were last year. We do have some areas of the country where it might be a little bit more competitive or in a branch or a region. That happens all the time. The average prices actually went up slightly -- the average gross margins went up slightly in commercial products for the quarter. They were about flat for the complimentary and the non-residential roofing once you include the incentive incomes in there, so we're in good shape right now.

Is that on a year-over-year or sequential basis?

Both.

Okay and then just a follow-up question on the commentary about July and the fourth quarter so far. Is that on a sequential basis or year-over-year basis or you get some more color on that in terms of magnitude of growth or declines?

That's comparable periods. So that would be fourth quarter of this year versus fourth quarter of last year.

So were you planning on sales so far up on a year-over-year basis for July?

No, but what I was stating is that it's a start to the fourth quarter particularly in the commercial area was better than in the third.

And remember Ray we're starting to anniversary all of the price increases. The vast majority happened of them happened before July of last year so we're going to start seeing less of a price increase for our revenue increases and more matching to just volume changes.

Right. Okay, thanks guys.

Thanks.

We'll take our next question from Ivan Marcuse with KeyBanc Capital Markets.

Hi guys. Thanks for taking my question. On a non-res side of the business you said you saw some price increases. Are you getting price increases more from the residential or from the non-residential. And then on top of that, are you seeing -- you said non-residential has improved towards the end of the third quarter. Would you think that you should see the same type of volume decline in the fourth quarter or will it be a little bit less than a year-over-year basis?

The price increases in recent weeks were more residential. What we are hearing -- I think even heard thought on Carlisle who is a commercial manufacturer -- their earnings call was they would like to see price increases happen as well but the firm announcements of price increases is mainly from residential.

Great and do you expect that that volume in the non-residential side to probably stay about equal to what you saw this quarter or do you see a gain -- I know there's a little bit of seasonality to it but do you see it staying the same or getting worse? Where do you see the trend on a year-over-year basis?

Well the trends in July showed improvement but again it's too early to predict what the quarter would be.

Okay, great and then my last question is the operating expenses, you did a great job there. Do you think you'll be able to maintain that same level going into the fourth quarter or do you think you'll see a little bit of a bump up since there's a little bit more business taken in the fourth quarter?

This is Paul. We should see relatively same level or even improve on a percent basis as we go through Q4. Our regions have done a great job of maintaining cost control, headcount control and over time control so we feel very good about that

Great. I'll jump back in the queue. I appreciate you taking my questions.

Before we get to the next question, Brendan, back to expense controls. It might have been lost a little bit in David's presentation. I'd just like to, and he's frowning at me now -- but what I want to say is on a sequential basis -- and these are pretty dramatic numbers.

Sales in the third quarter were $143 million higher than the second quarter and that's seasonal in nature, but that's a 45% increase in sequential sales, normal for our business. Operating costs went up $1.4 million on that $144 million, so I just wanted to add that and Paul and David and I were talking about that prior to the call. That really demonstrates the real positive operating leverage that we get in our business.

So as the economy turns, as commercial firms up, we are so well positioned to have great operating leverage so I just wanted to put those numbers in there because there's a lot of folks who are making that happen so sales up $144 million, costs up $1.4 million. That's a pretty outstanding business model, so go ahead Brendan, I just wanted to add that in.

Okay. We'll take our next question from [Ryan Merkel] with William Blair.

Thank you, good morning.

Good morning, Ryan.

My first question could you give us the volume and price break down by product category?

Sure. As far as the residential products which have the largest amount of price increase obviously, we think we're down about 15% in volume which would mean that the price increases are about 25%. That's probably a little bit high because the price increases happened during the third quarter of last year and it's a little difficult to actually do the actual calculation but a good estimate would be 15%. As far as the commercial products, it may have about another 2% to 3% in price in there so it's a little bit more down in volume. The complimentary -- depends on really the group -- what I would say about that is some of them down a little less and some of them up a little bit more than the actual total change.

Okay, thanks and then on the price increases given that you're lapping the price increases from last year and then it sounds like you may be getting some more price increases in the 5% to 7% range, can you give us an idea of what the price might be in the fourth quarter?

I don't think that the price increases that are announced for late August and September will affect us at all, so I think you would compare that to last year's quarter and I think by the end of the quarter they are obviously up 25% to 30% like we said last year but I think probably you'll see a mix so maybe two-thirds of that will go away this quarter, so you'll see much lower overall inflation factor when we announce it in November-december.

Okay, thank you very much.

Thanks.

We'll take our next question from Ivan Holman with RBC Capital Markets.

Hi, guys, it's Scot Ciccarelli. Sorry about that. Couple questions. First of all with we talk a little bit more about the non-residential business? Was there weather impacts or any other disruptions in the quarter or was it just a lower run rate of the business?

That's always, Scot -- that's a fair question -- it's always difficult. Rain will affect the non-residential to a great extent. New England was -- particularly the greater Boston area -- was extremely wet in the spring and David lives there. He can comment more on that but it was day after day.

That has a big effect on the commercial business and then as we are looking at July, you have a different situation and then their numbers are better than they were in the third quarter because it is drying up.

Okay. I guess what I'm trying to grapple with here, Bob, is if reroofing is such a big chunk of that non-residential business let's call it 80% and the sales are down 25%, obviously, the reroofing part was impacted and I'm trying to figure out how much of that was the external disruption and how much is just the lower run rate because account of what's going on with the commercial real estate market. Any other color you can provide would be helpful.

The reroofing is the primary part of commercial business. Now by region that can be different because of new construction activity, but reroofing dominates our New England business. It's a big part of our southwestern business, so that hasn't changed.

The only thing I would add is Carlisle was probably down 35%, so we did a little bit better than we did -- obviously they are in some different markets than we are. Just some color from what we're hearing from the field -- just this non-reaction of this stimulus plan to really put any money out on the street for the cities and towns to do the repair work seems to have slowed down some of the awarding bids but that's anecdotal and I'm not so sure that's a driver but that could be some of the cause. Like Bob said July looks a little bit better so maybe some of the money is being released.

And quoting activity, through this whole period quoting activity has been relatively strong, if that's an indicator, at some point those jobs will get awarded.

Okay, that's helpful. Thanks a lot guys.

Thank you.

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

Hi, this is Kyle O'Meara in for Dave. Could you quantify the hurricane contribution to the quarter and more importantly looking out over the next two quarters, I think last year you took probably about a $15 million to $20 million contribution to the fourth quarter and $30 million to $40 million in the first quarter. Does that sound about right to you guys?

No. It would have been the Q1 and Q2 of last year. We really didn't see any appreciable effect in our Q4 of last year from Hurricane Ike. Now there was obviously some more hail damage last year that we're seeing in some of the markets we're in and that would have had an effect for Q4 of last year.

All right, and then for the current quarter, was it minimal contribution from hurricanes?

If any.

Okay. And then could you just -- I don't know if you have it in front of you, the days for fiscal 2010 on a quarterly basis, selling days?

Yes, I can send that to you.

Okay, great. Thank you very much.

Okay.

We'll take our next question from Brent Rakers from Morgan Keegan.

Good morning. Wanted to follow-up on -- there was some questions earlier about the non-residential markets, and I appreciate the additional color in the Q with the regional data, but I was hoping you could maybe take it a step further and talk about how non-res performed in the period -- both in the northeast region and then maybe separately how it did in the upper midwest region?

Yes. I think we're seeing same softness in almost every area. [Narcos] who's In the midwest region -- there's no question they've seen a slowdown and whether it's temporary or not is really the question.

In New England as Bob mentioned we had quite a bit of rain. I don't like using weather as an excuse and neither do our folks but that could delay some things and we're hopeful things get back a little bit more to normal in August and September. Bob said there was an improvement in July, that's pretty much across all the regions. I don't think it's anything that's regional in nature. We're strongest in the northeast, Canada did very well during the quarter and the midwest fell off.

As you said the numbers are in the quarter -- in the Q now.

Okay, and then just one other question. There's some commentary about gross margin and it seems maybe to show up a little bit in the inventory as well -- that you had a special buy opportunity from some of the shingle suppliers and maybe that helped the gross margins. I guess first is that so and second, how much did that impact the quarter and will that have ramifications for the next quarter as well?

I think that the special buys are just the vendor's way of adjusting their prices temporarily. That happens all the time. Normally it doesn't happen into the summer season but because of some of the softness I think that will continue on a little bit.

When it ends I'm not sure, that's based upon how they arrange their production and how often -- how much they want to keep their plants running. That's really their decision of how they go to market.

David, do you have any degree in terms of what the impact was in this quarter? I don't. It's a blended rate. It actually goes right into our cost, Brent. We don't track it that accurately as far as the weighted average cost system. Thank you, David.

We have time for a few more questions. We will take our next question from Saul Ludwig with KeyBanc.

Good morning guys. Great job on the operating expenses coming down $9 million. How much of that $9 million was things like commissions were down and your diesel fuel was down which happened just by themselves. And how much of the decline in operating expenses was management action where you actually took steps to lower your cost?

Paul you got that?

Yes, I do. From a -- first you've got to look at the biggest piece and that's headcount where we had just about a 9% decrease in headcount year-over-year which is (inaudible) payroll. To a lesser extent we had impact from fuel. But overall, I would say the majority of the actions and commission plants -- the majority of the actions were from management actions that we had taken over the last number of months to adjust our costs for the sales volume.

And these staffing reductions, were these just people who work in the various branches and load trucks or were they salespeople or are they temporary cuts or are they going to have to come back?

No. Well they will come back if volume increases substantially, as we talked about the sequential, if you looked at that as Bob mentioned and Dave mentioned earlier -- the sequential volume gain we have from Q2 to Q3 was substantial and we held costs relatively the same and actually headcount went down slightly. So yes, these are not -- the majority of these are not temporary headcount reductions.

That's not something we did knee jerk just to survive a quarter. We did it through our normal process of trying to be as efficient as we possibly can.

And just to circle back on this -- this $9 million reduction in operating expense this year versus last year, would you think say $3 million of it came about just because of commissions and fuels and $6 million was management initiated actions or would you split it different than that?

I would say that you're not that far off. But Saul, the commissions are not down that much.

Remember gross margin percentages only went down 10 basis points and we were down 9% in sales volumes, so I don't think that's a major impact. Now some of the incentive based pay -- because last year was such a strong quarter -- does certainly affect that. But fuel really kicked in in Q4 last year where we saw the substantial price increases. We are also saving because we bought some new equipment and those types of things that always happen. But in almost every expense category that we have in our SG&A line, we have seen some savings. So whether it's temporary or not, some of it has to do with the times and we need to make those correct decisions when we're spending the money for our stockholders and I think we've done a very good job with that.

Thank you very much.

Thank you.

And our final question comes from Joe Gagan with Atlantic Equity Research.

Hi guys how you doing?

Great.

The question about the residential roofing business and what happens to sales results after there's a lot of storm related demand. So you have 21 of your 170 offices are located in Texas, right? And you've outlined over the last several quarters how you've generated a lot of business because of Hurricane Ike, right? So I just wanted to get your confirmation. I would assume that after an area gets a lot of business because of the storm, that would mean the following periods that have significantly less, because all of the people have already -- a lot of the people have replaced roofs that have been thinking about it because of the storm. So I think you said earlier that most of the storm related business is gone.

So could we infer that because you have so many offices in Texas out of your whole percentage that that's going to be a significant hit to residential roofing sales in the future and then I have a follow-up to that.

Well, Texas is not the largest concentration of locations at all. The biggest concentration would be the mid-atlantic, New England, and southeast. About 10 or 11 branches were affected by Ike, so not all branches in Texas were affected.

And you're correct, a storm has the tendency of causing replacement of roofs in a compressed period so you might have a reroofing activity in a nine month period that could be equivalent to what would have happened in two years, so that does happen.

Our objective is to grow through all those cycles. And if you look at total roofing demand over the years, including storms, it's very steady growth because one year the storm is in Texas nationally and the next year it hits the east coast, so total roofing demand is very stable, because storms move around. So to us, we don't, we really don't make our business plan based upon any storms and we don't project for it, budget for it.

And -- but the folks who are running Texas and other parts of the country put a budget plan together post-storm that includes other segments, additional complimentary products to replace the bulge in storm demand, so it's pretty normal. There were two years in our Company, fiscal '06 and '07 where there were no storms. And so fiscal '09 is more normal we're there's one major storm somewhere in the United States that would hit Beacon locations. So the expectation is that every year, there will be that activity.

To us, the more abnormal situation is when you have a year of no storms, so I would anticipate fiscal '09 and 2010 would be pretty normal regarding that.

Okay, and I have a question on the residential roofing business. I've done some survey work with roofing contractors all over the country, right? And and these guys are telling me their residential roofing business was year-over-year was down, and many of them said it was significantly down, right? And yet you had 10% increases in your residential roofing business, right? And so now we're sitting here at August 7th, right?

So you must have a feel for what's going on. You've already commented and said that your non-residential is improving. So I'm just trying to figure out in my mind what's going to happen with this residential business specifically. Can you comment on that because it seems like the 10% is a good result and it seems that it might be difficult to continue.

Well, I think I commented earlier about estimates for fiscal '09 that we were comfortable with. Residential, we are not in states like Florida and Arizona and Nevada where new construction is a dominant activity. But reroofing is also very high in residential areas so we think that's one of the more stable parts of our product segment.

We've had five quarters in a row of growth in residential, and the housing market hasn't turned yet, so think of that. When you have the worst housing market in the history of the United States and our residential segment has been growing for a year and a half. So, as that turns and stabilizes, whether it's because of government stimulus or mortgage rates being low, who knows what -- we think residential in the future looks very positive to us.

It does, okay, good. All right, thank you.

Thank you.

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

Okay. Thank you, Brendan. And thanks everyone for your questions. I do want to remind you that Paul, Dave and I will be available for follow-up questions at the conclusion of this call and with just a few minutes remaining let me close with a few summary comments.

First, gross margin percentages were solid in the quarter and on a year-to-date basis they've improved 90 basis points compared to last year. Operating expenses are lower as a percent to sales for the quarter and year-to-date and that's only possible because of our management team -- that team runs a lean and clean Company which is a core value of our culture. Operating income, net income and earnings per share on a year-to-date basis are all up significantly and we're proud of that.

And finally we take pride in our reputation as good financial stewards. We recognize that this Company and its resources are owned by the shareholders, not the management team, and so we are merely caretakers. All of our decisions are based upon cherishing our employees and keeping our resources safe and secure for our shareholders.

Because we focus on those two groups, it keeps us very well grounded so we're excited about the first nine months of '09, I think we've exceeded estimates throughout the fiscal year, so I really want to conclude just by thanking you again for your interest and support of Beacon. Our employees do get motivated by your support and they're dedicated to delivering good results in the fourth quarter and we're ready for the opportunities that a wait us in fiscal 2010, so I appreciate your interest. Thanks for calling in, and call us with follow-up questions and we'll be available. Thanks very much.

Thanks.

That concludes today's conference. Thank you for your participation.