Beacon Roofing Supply Inc (BECN) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply fiscal year 2009 fourth quarter and year end conference call. 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 towards the end of this 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.

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. The Company has posted slides on the investor section of its website under events and presentations that will be referenced during the management's comments.

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, Elizabeth, and welcome to our fourth quarter earnings call for fiscal year 2009. This was another solid quarter for Beacon, and our profits were much higher than street estimates. We delivered great expense controls along with strong cash flows and regarding the year, fiscal 2009 was a very good year for us, and this is a great opportunity to say thanks to our leadership team for delivering record profits. Very proud of our Company and the hard work and dedication of our employees who made these record profits possible. We have a wonderful team here at Beacon that's certainly getting the job done and in very tough economic times.

Now, as is our custom on these earnings calls, our CFO David Grace will present the financial details for the quarter. As a reminder, as Elizabeth just said, we have prepared slides to augment David's comments. They can be accessed on our website. After his presentation, I will ask both Paul and David to comment on key topics I know are important to you.

Our fourth quarter and fiscal year results are very encouraging to us. David will point out how attention to the fundamentals of our business is paying off with strong cash flows, lower operating expenses, and strong earnings per share. We do have solid plans in place to keep us on track in fiscal 2010 and years beyond that. Our business model will serve us well as we balance very good results in residential roofing with soft demand in commercial roofing. Our geographic diversity also gives us stability as we look forward to possible economic recovery in the coming months. Our balance sheet is strong, again because of the detailed attention to accounts receivables, management of inventory, both of which supports our efforts to improve our debt ratios, return on assets, return on equity. Now I would like to turn the call over to our CFO, David Grace, who will lead us through the financial details. In his now famous and proper New England accent is David Grace.

Thanks, Bob. Good morning, everyone. If you are using our slides to follow along, let's begin with slide one. For the fourth quarter sales decreased 14.0% to $487.7 million from $567.2 million in 2008. This year's fourth quarter residential roofing sales decreased 6.7% as new residential construction continues to be at all time lows and residential reroofing was a bit weak. Nonresidential roofing declined 21.2% as commercial activity remains slow. Complementary products, which we believe are more discretionary in nature, were down 17.8% and continue to be negatively impacted by both the slowdown in the economy and lower levels of residential construction and remodeling. Regionally, sales decreases range from 8% to 30% with a stronger activity in the southeast and the weakest in the west. We estimate inflation in our product costs based upon our current inventories product mix and their invoice costs as compared to the invoice costs of the same products a year ago. Based upon this estimate, our product costs were up about 3% to 5% compared to 2008 levels. We had 64 business days in both 2009 and 2008, and we operated a total of 172 branches as the end of this quarter compared to 175 last year. We opened three branches late in this year's fourth quarter while we closed two last year.

Fourth quarter gross profit was $113.0 million as compared to $139.7 million in 2008, a 19% decrease. The gross margin decreasing to 23.2% from 24.6%. The current drop in sales volume is creating some margin pressures. Of the larger factor in the decrease is due to 2008 having many large price increases in asphalt roofing shingles, which created a cost advantage for us as we have previously discussed.

Operating expenses, which is slide two, as a percentage of net sales decreased to 15.7% from 16.0% as our regional management continues to perform very well in controlling our variable costs for the current volume of our business. Operating expenses decreased $14.3 million or 15.7% to $76.5 million from $90.8 million in 2008. Sequentially from Q3, operating costs were up only 3.1% or $2.3 million, while sales were up 5.2%. Payroll and related costs were $5.5 million lower than last year's fourth quarter as we benefited from lower head counts and overtime reductions as well as reduced incentive pay. Selling expenses were lower by $2.7 million primarily due to the reduced transportation costs from the drop in fuel prices and the lower sales volumes. Depreciation and amortization decreased $0.9 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. General and administrative expenses decreased by $4.8 million as bad debts decreased by $3.5 million mainly due to a very large increase in reserves in 2008 and reductions in T&E and insurance expenses in the other areas. Interest expense decreased $0.6 million from the paydown of debt since 2008 and slightly lower interest rates. Income tax expense was $11.9 million and $17.8 million in 2009 and 2008 respectively as our effective tax rate decreased to 38.4% from 41.7% in 2008. We have adjusted our year-to-date estimate of 2009's effective rate to 39.3%. As a result of all I mentioned our net income was $19.0 million in the fourth quarter as compared to $24.9 million in 2008.

Slide three shows our diluted net income per share fell $0.13 to $0.42 compared to $0.55 in 2008. Our earnings before interest, taxes, depreciation and amortization and stock compensation or adjusted EBITDA which is reconciled to our GAAP net income in our press release was $45.2 million for 2009 as compared to $58.5 million in 2008.

I will now discuss our fiscal year results. Please see slide four. Our net income for 2009 was a record $52.4 million compared to $40.3 million in 2008. Adjusted EBITDA was $144.4 million in 2009 as compared to $133.8 million in 2008. Diluted net income per share was a record $1.15 in 2009 compared to $0.90 in 2008. I would also like to point out that our operating margins shows an improvement to 6.3% in 2009 from 5.3% in 2008.

Slide five shows the components of cash flow. Cash flow from operations was $87.6 million in 2009 as compared to $49.6 million for 2008. Boosted in part by the larger operating income. We experienced decreases in accounts receivable and inventory that totaled $56.1 million and $14.2 million respectively in 2009, which combined with slightly above -- which when combined were slightly above a decrease in accounts payable and accrued expenses of $67.5 million. Prepaids also increased $2.3 million. Inventory turns were slightly higher in 2009 as compared to 2008. While we realized a decrease in our day sales outstanding and accounts receivable in 2009, mainly due to a higher mix of residential product sales which offer shorter terms. Capital expenditures in 2009 were $13.7 million compared to $5.7 million in 2008. As we increased capital spending for the scheduled replacement of older equipment, more in line with historical replacement, and took advantage of market opportunities to purchase one of the least branches -- one of our lease branch facilities. Net cash used by financing activities was $17.6 million in 2009 as we continued to pay down existing debt. Sales decreased 2.8% to $1.73 billion from $1.78 billion in 2008.

Please see slide six. As inflation in residential roofing products and strong reroofing from the effects of hurricane Ike mostly in the first half of 2009 was offset by volume losses in nonresidential and complementary products. We also operated six fewer branches for most of 2009. Our gross profit decreased 2.1% to $411.1 million in 2009 from $420.0 million in 2008. Gross margins increased to 23.7% from 23.5% mainly due to the product mix shift to the higher margin residential roofing products, but also from a significant benefit from lower weighted average costs in our first quarter.

The last slide, number seven, shows that operating expenses decreased $23.4 million to $301.9 million and to 17.4% from 18.2% as a percentage of sales. Our payroll and related costs dropped $7.8 million for the same reasons I discussed for the fourth quarter savings. In transportation costs were lower by $6.9 million mainly due to the drop in fuel praises. G&A also decreased $5.7 million as bad debts decreased$ 2.9 million and we experienced savings in insurance costs and T&E. Depreciation and amortization dropped $3.9 million, while warehouse expenses were $0.9 million higher primarily from the cost of closing six branches during 2009. Interest expense decreased $3.0 million in 2009 and income tax expense was $33.9 million in 2009 compared to $28.5 million in 2008. As I previously mentioned, we adjusted our effective rate to 39.3% in 2009 compared to 41.4% in 2008. We expect our future tax rate to range between 39% and 40%.

To summarize a few key points from my presentation, fiscal year diluted net income per share was a record $1.15 compared to $0.90 in 2009. I would really like to say thanks to all of our leadership team for a job very well done. Sales contracted 14% in the quarter. Operating expenses decreased 15.7% of sales from 16.0% of sales while $14.3 million for the quarter. Fiscal year operating margin was 6.3%, which is above the lower end of our annual goal compared to 5.3% in 2008. The balance sheet at the end of the year is in very good shape with cash on hand of $83 million, a working capital ratio of 2.4 to 1 and a debt to total capital ratio of 45% compared to 51% last year. In our net debt to equity ratio was 39% compared to 48.9% last year. Turn it back over to Bob now.

Thanks, David. As I mentioned, I am going to ask Paul and David to comment on some topics that I know are important to you, so let's get into that. First, David, give us your perspective on pricing. This has been a hot topic for months, and tell us your perspective.

Sure, Bob. We think the proper comment we should make on pricing is that it is very stable right now. Asphalt shingles saw two price increases during our fiscal year in March and September, but some of those increases were offset by bulk buying incentives. We have seen no material price increases from the nonresidential manufacturers lately. Traditionally the winter is a quiet period for price increases, so we will all have to wait and see what the manufacturers decide to do in the spring. As this is out of our control, our job is to react properly when any changes happen.

All right. Paul, you have your ear on the market place and nonresidential roofing is still soft. Tell us or give us an idea of what you're seeing in this marketplace.

Bob, we continue to be concerned. There is no question there has been a slowdown in new commercial construction into a much lesser extent and we also think that reroofing on a commercial side may be at least temporarily affected by the economic downturn we're in. For us the slowdown started about a year ago, so we hope to see the year-over-year comparable results flatten out in our second quarter, maybe even sooner. As we noted in the past, though, geographic diversity is a big asset for us. Almost every region has been affected negatively, except for the southeast where our JGA Beacon region was stronger than the others in the fourth quarter.

Okay. David, I am going to ask you to comment on gross gross margins, things that affect gross margins. Also tell us what you think the future holds in that area.

Sure. We are still experiencing a benefit from the product mix change to more residential roofing products from the lower gross margin nonresidential roofing products, but now we have roughly the same prices of a year ago. For Q1 of 2010 we still expect slightly lower year-over-year overall gross margins, but the sequential change from Q4 of 2009 should be minimal assuming the same product mix. By product group for Q4 our margins, which include vendor incentives, were down slightly for nonresidential roofing and complementary products, while they are somewhat flat in the residential roofing products.

Okay. I am going to go back to you now. This is always a tough one for us to answer, and you do a really good job, but would you explain how much of our growth in the quarter was from price and how much was from unit growth?

Sure. Again, what we try to do here is compare our SKUs that we have on this year with the same prices from last year and create an inflation index for the product mix that we have in our inventory. By using this consistent method to answer this question, we believe the overall contraction in volume was about 4% greater than our sales decrease which was slightly better than in Q3. As for volumes for the quarter by product group, we estimate residential roofing was down around 14%, while commercial had a volume drop slightly more than the drop in their sales and complementary products dropped in volume about equal to their sales decline.

Paul, your big initiative has been expense controls. I think a lot of people would like to hear how that's going. I would like for you to include some discussion about head count, any changes that might have occurred in that regard.

Yes. There is a few pieces obviously to this. We ended the year down year-over-year 206 people or 8% of our workforce as a result of volume changes. There is no doubt we're proud of what our regions are doing with overall expense control, especially as we go through difficult times. Doing more with less has been our practice at Beacon. I think we have proven that over the last few years, and we believe our people are some of the most productive in the industry.

In general though as we've talked about on past calls our budgeting process is very detailed. It works up from the branch level into the regions, and that's watched weekly, monthly, of course quarterly as all those teams are held accountable and know they're held accountable to a budgeted level for sales and costs and as things move, whether it is sales up or down, costs are then adjusted, and the team has done a very good job as evidenced by our percent of cost to sales for not only fourth quarter, but the full year in 2009.

With you again, and this is kind of a softball question for you, Paul, because this is a pretty good area, but it is one that is always asked, and tell us about the quality of receivables at the end of the fourth quarter, would you?

Yes. As with everything else on the operations side and really across all business we're very, very focused on working the ARPs. We finished the year very strong with bad debt expense down $3.5 million for the quarter and $2.5 million for the year. As a percent of our fiscal year sales, annual bad debt expense was 0.42% compared with 0.57% in 2008, so good progress. We continue to remain conservative and consistent with our bad debt reserves. Dave won't have it any other way, and believe they're adequate considering the softness in the economy. Our days outstanding at the end of the quarter were about seven less than last year. Some of this improvement was due to lower mix of non-RES sales, which typically has 60 day terms instead of the 30 for RESI. Our over 60 day past due percentage, a detail which the teams watch very carefully is down slightly compared to 2008 and still at a manageable level. As I said we continue to monitor credit daily with a special emphasis on our commercial customers. Our credit organization continues to perform very well and all of our people continue to be keenly aware of the need to monitor the quality of our receivables. They have really done a good job.

I am going to cover two things before we open it up. Before I do that, David, wrap up our time together with highlights of the balance sheet and are we in good shape going into the new fiscal year?

This is even a bigger softball question for us. It is remarkable how well we have done in improving our balance sheet over the past year-and-a-half, two years. At the end of September we are at a 1.9 to 1 ratio in our only pertinent debt covenant, which is required adjusted EBITDA to net debt ratio of less than 4 to 1. Let me also give you a few other ratios. Our current ratio is at 2.4 to 1 compared to 1.9 to 1 last year. Net debt to total capital is 39% compared to 49% last year, and return on equity averaged for the fiscal year was about 13%. We continue to pay down our debt, and we had $83 million in cash at the end of the year. As Paul just mentioned, the current condition of our AR is good and our inventory level is down about 7% compared to last year. We work hard to maintain these healthy financial conditions, and our balance sheet is in excellent shape, especially considering the state of the economy. This should prove very useful when attractive opportunities for expansions come along.

Good. You did well for a softball question there. Let me cover two things here before we open it up to questions from the call.

The first topic is analysts estimates for fiscal year 2010, and I want to say at the outset we're very comfortable with current estimates for sales and profits. Our management team has really good control systems that allow us to stay on top of operating results on a realtime basis, and that gives us confidence that we can deliver results in 2010 that our shareholders will be proud of. So the topic of analysts estimates, the short answer is we're comfortable with what's out there.

Second topic is acquisitions, and what's our strategy, has it changed, we get this question often when we're out on one-on-one visits, and the answer is the economic and really the business reasons for consolidation in our industry, they're compelling. The reasons for consolidation are compelling. We have a strong balance sheet. We have excellent banking relationships, and we're very hard at work regarding this key growth strategy. We're excited about the prospects that are in our pipeline. We look forward to an active 2010. With those eleven topics we've just covered, I would like to open the call now to questions from you. Please go ahead.

Thank you. (Operator Instructions). We'll go first to Jack Kasprzak with BB&T Capital Markets.

Thanks. Good morning, everyone.

Good morning.

Congratulations on another good quarter. Bob, with regard to your comment on analyst estimates that is you're comfortable with the range and as I look at first call, I see a mean estimates $0.96 for fiscal 2010, which was down from the $1.15 you reported today, so obviously you're comfortable with earnings being down. What would have to happen for earnings to be flat or up in fiscal 2010 as you look at the marketplace today or is that even in the realm of possibility?

Well, we never go into a year thinking we can't do better than the prior year. A few things, though, because that's absolutely true. We kind of have to look back at 2009 and recognize kind of the one-time event of Ike, and its impact on fiscal 2009, and to make 2010 equal to or better, I think a few things would have to happen.

One would be commercial pricing would have to go up. Number two would be a nice recovery in the second half, economic recovery in the second half of our fiscal year, which some people are predicting. I think storms certainly help. It doesn't create new business. It just pulls it forward to the storm and the aftermath. Continued winning of new business, just executing extremely well our business plan. We have a good budget going into the fiscal year that we feel very strong about, but if you add on top of analyst estimates the things I just mentioned, I think that would bode well for 2010 and does that adequately answer your question?

It does. Thanks. Second question was, do you think you're taking market share? Is there any way to gauge that?

I should probably turn that over to Paul, but since I blurred it in there, Paul.

Yes, we don't have any really solid indicators other than looking at where the markets are going and then what we're down, but we think we're taking share on the commercial side and somewhat on the residential side. Without any hard indicators it is very difficult to give you a concrete answer.

A couple of things to add to that would be as you look at the results of commercial vendors, manufacturers, our results would indicate we're taking share in the commercial realm. Regarding residential based upon our analysis of acquisition prospects, I think we're taking market share there as well. Those are results that we're very comfortable about. I just wish I had national data or government data that could assure you of that, but I think we are taking market share.

Okay. Thanks. Finally, would you be disappointed if you didn't make an acquisition during fiscal 2010?

I would be. Our CFO loves cash. He has accumulated a bunch of it. He would be happy, too, but, yes, we would be disappointed if we did not.

Very good. Thanks a lot.

You're welcome.

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

Good morning. Congratulations on a very nice quarter.

Great. Thanks, Michael.

My first question is on the acquisition side. I was just curious if you could talk about what the pipeline looks like, if seller's expectations have come down and what those discussions are looking like right now?

Pipeline looks very good. We're very active. Sellers can be -- they do stick to their guns, and their prices, and one thing to remember is our strategy is to buy well-run companies who have a long history of doing well, so that kind of changes things also, but pipeline is good. I like the prospects that we're talking to very, very much, and the discipline of what you pay for an acquisition is a combination of our discipline along with our negotiating ability with the sellers. So hopefully none of those guys are listening to this call, but good pipeline, good companies, and we're excited about it.

Okay. And my second question is on the balance sheet and you noted the cash balance you built up and held now for a couple of quarters. Should we expect that cash balance to maintain the general level here or even build as you generate cash until an acquisition occurs, or will you look to pay down debt in the meantime and then draw upon the debt, your revolver at which point you do make an acquisition?

Yes. Michael, this is David. The facility that we have doesn't allow for that type of temporary paydown. It is the only thing we owe right now is term debt, and if we paid that down as a prepayment we would lose that availability. Fighting pretty hard, it is tough to hold cash when you have to pay interest on the other end, but our interest rate is actually quite low for the variable debt at two over LIBOR, and we can make up 50 or 60 basis points of that with the interest on the cash, so we're losing 2%, but if we were to have to try to go out and refinance that even credit has gotten a little bit better recently, the expense would be much higher than what we're paying right now. So the best use is to build the cash, do some of those promise acquisitions that Bob was just talking about, and then if we have to tap the revolver, and the revolver is also quite inexpensive at one over LIBOR.

Okay. My last question is on working capital. It has been -- looks like relatively flat in 2009 in terms of source versus views, but as the business, presumably in the second half of next year, starts to get a little bit better, would you expect working capital to be a use of cash as you build up working capital into a better environment?

It may turn out to be a use of some of the components. Obviously accounts receivable and payable will go up when the revenues go up, but we're actually carrying a bit more inventory right now than perhaps we would under normal circumstances, and that's because our vendors have offered us some buying programs that we took advantage of, and we have to carry a little bit more inventory to be able to do that. So receivables and payables will go up a bit and hopefully in units and we may be able to drop our inventory a little bit as we go forward. It could be flat again next year, too.

Great. Thank you very much.

Our next question comes from Ivan Marcuse with Keybanc Capital Markets.

Hi, how are you doing?

Good, Ivan. Recently you acquired a couple of branches through a distressed seller. Do you see more opportunities out there like that and with the strength of your balance sheet and cash position do you think you will get more aggressive in branch growth in 2010 from more organic ex acquisitions, or how do you see that playing out through the year? That's a possibility. It is unpredictable because these are private companies, but that's a possibility, and we are looking for that possibility.

Do you see your organic branch growth being a little bit more aggressive this year just due to the fact your financial position or do you think you will just maintain what you have done historically?

I think we'll continue on with the methods we have done in the past, which is to open them when markets hit service level constraints. Now, that being said, we have a lot of markets where we have excess capacity right now, and that's a little bit of help from the price increases that have happened with the residential roofing where volumes are actually down in those areas and down in the commercial. So we'll be judicious as we always are with the branch openings, but if there are some distressed ones that we can fill a market in or something else like that, we'll certainly take advantage of that. We actually just -- a little bit of a correction going forward. We're considering the two that we got from that distressed company as new branch openings. They were literally shut down before we took them over, so there is not much of an acquisition there at all.

Great. Paul, on the non-res side, are you seeing is it equal between EPDM roofing and TPO or seeing one one worse than the other or can you give a little bit more detail and how is the pricing holding up for both TPO versus EPDM or is ita all about the same?

I think pricing as best we can tell is all about the same, but in both have taken a hit if you look at even our numbers for the back half or last three quarters of 2009, commercial year-over-year was down considerably compared to 2008, and I think it is pretty much all lines, so EPDM is down as well as TPO.

And the only thing I would add, Ivan, is that the TPO especially through Carlisle is a bit of a more new construction product and it is also more in the southern markets. Our strongest commercial markets are EPDM in the northeast and midwest and throughout Canada, so we would naturally see EPDM not drop as much.

Great. One last quick question, with storm demand probably being down in the first quarter and second quarter of this year, would pricing on the residential, would that be down also? Were you able to get a pricing benefit last year because of such a strong storm demand or would you say that would probably remain flat?

I don't think there is any question our gross margin for Q1 is going to be down compared to last year. It was about 25% if you remember last year, and that was again because of the advantage we have of having lower cost inventory heading into the quarter. The markets are regional and local. We'll see competitors be aggressive in markets and we'll see other markets where we can maintain pricing. It is a day-to-day battle, and how it comes out is individual to those branches, but we truly don't see any trends that would indicate that now as we sit here today.

Great. Thanks a lot for taking me questions.

You're welcome.

We'll go next to David Manthey with Robert W Baird.

Hi. Good morning. Just to be clear on the outlook here, Bob, you're saying you're comfortable with the estimates out there. Is what you're saying that you're comfortable with the $0.96 for fiscal 2010 before storms, pricing and acquisitions? I don't want to put words in your mouth, but is that what you're saying?

Usually when I say we're comfortable with estimates I am looking at the mid-range.

Okay. All right. And second in terms of SG&A, if you look at the growth in SG&A during fiscal 2008 it was less than your revenue growth and then the decline in fiscal 2009 was actually greater than your revenue declines and I am wondering if the environment remains somewhat lack lustre and we're flat or down slightly again next year, do you have additional SG&A levers that you can pull to keep that trend going or at some point do your SG&A dollars start to even out with what is going on on the top line?

Well, I will start off and then Paul can finish up. When we realistically look at the business, we did 6.3% operating margins for this year. Our goal is that 6% to 8% that we have always talked about, so we're still at the lower end of that scale. What we need to do is continue to make improvements in the regions that aren't performing as well. It is not necessarily making wholesale cuts, which we prefer to stay away from, and Paul can fill you in a little bit about the operations stuff.

Yes. Dave is right on. We for sure are very focused on sales volume as it lines up against our budget and then the cost as that lines up and obviously SG&A is a huge piece of that. As we see any changes, we make quick decisions to, by region and branch to decrease costs to take actions, but Dave brought up a good point, because we still with 172 branches have a number of branches that aren't performing, averages across any measure. We have a number of branches that aren't average, and we tend to put a lot of energy focused in the region managers focus on those branches to get their SG&A in line with their sales and their GM dollars.

Great. Thanks a lot.

Thank you.

Our next question comes from Michael Rehaut with JPMorgan.

Thanks. Good morning, everyone.

Good morning.

First question just goes to drilling down a little bit more on the pipeline to the extent that you can, you mentioned a couple of times, Bob, that you kind of are excited about what's out there and as perhaps we're seeing hopefully in and around the trough of over the next few quarters the trough of this downturn, are we to expect -- I guess the question I am getting at is size of the acquisitions. They have ranged in the past. Are you more focused or what's out there right now is it more the smaller end of the range or are you entertaining prospects in sort of the mid-range of what you have done historically or towards the high-end?

Michael, it is good to hear from you. It is all ranges. Our pipeline as you might expect would be that way, and the focus is more opportunistic. We like new geography. We like strong management team when the owner retires. We love the number two guy to, or gal to run the business, and so not a whole lot has changed. You could see a broad spectrum of deals, Michael. It could be small or large.

To add onto that as Bob said earlier and I think Ivan asked a question about branch growth and Dave mentioned, we typically expand when we reached capacity or service level, but that doesn't mean we aren't looking at even smaller branch growth outside of geography where it would open up new territory for us or be an adjacency to existing region or product line. I think we're open to both ends size wise.

Right. It would seem that new branch growth aside from the more opportunistic transaction you did in a couple months ago, that organic branch growth would really be not in the cards per se given that, like you said, you only really do that when you're hitting service level constraints and today you're at excess capacity from a lot of your existing footprints. Is that fair to say?

Yes. That's an accurate statement. I think growth in number of branches would be more likely to come from acquisitions than from opening new branches.

Right. Just a couple of thoughts on the first quarter as it relates to just some initial thoughts with sales trends and also, David, you mentioned gross margins. Is it fair to say also any thoughts on SG&A as we look towards the December quarter?

SG&A, Paul and David, first quarter is too early and we don't want to give that kind of detail other than we have our reports, our daily and weekly, so we kind of manage the business based upon the business we enjoy, but do you want to add to that at all?

The only thing I would add is, Michael, when you're looking at it make sure you're looking at it sequentially. Last year in the first quarter has a bit of noise in that because we had such a good quarter that we have some incentive pay increases in there that if we just make budget for this quarter obviously they won't be in there. So the best way to look at it is sequentially and as we go forward you should see some clangs if the revenue changes.

In terms of any SG&A change, we would have no reason to make any increase in SG&A. Our trend is to stay focused on that percent of costs against sales and the mix within that, and then the regions make adjustments as they go through time in the moment of selling that week or as they forecast for the next weeks, months, and the entire quarter they'll look at making whatever adjustments they need to make with man power over time, et cetera, selling expenses.

Right. I guess the reason I ask is just in the back half of 2009 you had very strong controls relative to the sales drop, where as normally you would expect SG&A to rise as a percent of sales and I was wondering as we look forward into the next quarter if that trend of maintaining SG&A on a year-over-year can be continued, but I think you're also pointing to some tough comps in the year ago.

The other thing to remember is last year compared to the year before, in 2009 it is really a tale of the first half where we're very strong in the first half and saw the business fall off that we could react to in the second half. It is all about timing, and comparisons to the prior year. That's why I really would like the analysts to look at it sequentially. I think that's a better measure than looking year-over-year because of the noise that's in the prior year.

One last question if I could. Last couple of years you were good enough to break out organic margins, growth in SG&A, and of course getting from that operating margins, organic versus the acquired. In 2007 you kind of had broken out that the acquired business was more break even in 2008 on an operating margin basis. We have here 1.6%. Just curious if you can give any thoughts in terms of how 2009 shaped up, ie Further improvement with north coast in particular?

We really haven't broken out that, Michael. We have given out the acquired market information when it is pertinent that there is no prior year matching information. That's about as far as we want to go. The competitors are on the phone and we need to try to keep things as general as we can in those areas. It gives them a map to which regions are performing well and we need to stay away from that a bit.

Is it fair to say overall that you continue to make progress there in terms of getting the business closer to the corporate average.

Absolutely. That's our goal, again as Paul was talking about operating expenses and growth, is that we push the regions at our corporate averages. Those are the ones we look at the closest and those are the best opportunities to see improvement.

We line that all out. That isn't something that of course we react weekly and monthly, but we line that all out with the budgeting process. Thanks, Mike.

Great. Thank you.

You're welcome.

We'll take our last question from Jeff Germanotta with William Blair.

Good morning. In looking at SG&A expense from the fourth quarter of 2008 to the fourth quarter of 2009 it is down about $15 million. I am wondering if you can give us some sense of how much of that is structural fixed cost takeout versus variable cost takeout, which is likely to come back as volume improves?

When we look at last year, Jeff, remember we had such a tremendous quarter that a lot of that, and I am not sure if you consider this structural or not, is incentive based pay and because 2008 had such a strong second half where the reverse was true for 2009, you have some comparability issues amongst the quarters. I would say that the bad debt takedown of $3.5 million, that's back to near our normal levels of 4 --. As far as the over head, we have six less branches, but we haven't cut to the bone in corporate and stuff because that's the level we operate in most instances and there is not a lot to cut there. I think we're happy with the levels and again if I can impress upon anything is that sequential comparison is more relevant, I think.

If we look at things sequentially, in the third quarter you had $74 million SG&A and in the fourth quarter $76.5 million. Do we look at that 74 to 76 as a baseline? Is that what you're saying?

Yes, in the percentage of sales up 5.2% from last quarter and the costs were up 3.1. Again, that's leveraging a little bit because we had higher sales volumes, but the variable costs went up in line about with the sales.

So that's your SG&A for the current level of sales. As sales volume rises, and as demand rebounds, is there a variable component that will be increasing at a faster rate?

I don't think it will increase faster because one, as we just discussed, we have some excess capacity in the branches, which means we're going to be able to leverage some of those fixed costs a little better than normal. I look at it as a step function from distributors. They have a certain amount of fixed costs they don't need to add within a range of sales increases. I think that's where we are now, Jeff, that if we saw some revenue increases next year that would show very good leverage and operating costs would not rise as fast as the sales increases.

Assuming you don't do an acquisition, what incremental sales do you think you can add to the current infrastructure without a material increase in costs?

We haven't added that up. That's a good question. We do look at it branch by branch and we know where the opportunities are. We just haven't compiled it in total, sorry.

And the tax rate was slightly lower in the fourth quarter. Is there anything unusual or continuing regarding that issue?

Yes. One that's a little unusual, and if you look at the K you will see a little more descriptive nature there, is that we had income in some states mainly in the Texas area where Hurricane Ike was, they don't have an income tax. When do you a portionment and stuff like that you save money there. We have also now combined all the US entities into one, so we won't have any more of he trap losses that we had in the past that sometimes drove the rate up higher than it should have been.

Thank you very much.

Thanks, Jeff.

Thank you, Jeff.

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

Thank you, Elizabeth. Thanks, ladies and gentlemen for your questions. Just to let you know, Paul, David and I will be available for follow-up questions at the conclusion of this call, but with just a few minutes remaining I would like to close the call with some summary comments, some most really have been talked about, but want to emphasize this.

Gross margin percentages remain solid. Our operating expenses are lower as a percent of sales for the quarter and year-to-date. That's only possible because our management team runs a lean and clean company, which as all of our Company folks know is a core value of our corporate culture. Operating income, net income, earnings per share, all for the year are up significantly and honestly we're proud of that.

Finally, very importantly, we take pride in our reputation as good financial stewards. We recognize that this Company and its resources are owned by our shareholders, and we are really caretakers of those resources. All of our decisions are based upon cherishing our employees, keeping our resources safe and secure for their future. So focusing on employees, shareholders and our customer contractors really does keep us grounded.

Again, in closing thanks again for your interest and support of Beacon. I can tell you for sure our employees are motivated by your support, dedicated to delivering good results in fiscal 2010 and we're ready for any challenges and opportunities that lie ahead. I appreciate your time. It ran a little longer than normal, but this is the fiscal year end and we appreciate all your questions, and that concludes the call for today. Thanks very much.

Thank you.

That does conclude today's conference call. We thank you for your participation.