Beacon Roofing Supply Inc (BECN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply fiscal year 2010 second quarter conference call. My name is Shaun, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question and answer session toward the end of the conference. (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. The Company has posted slides on the Investor section of its website under events and presentations that will be referenced during 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, Shaun. Welcome, everyone, to our second quarter -- our winter quarter earnings call. As I said in our press release, our second quarter results did fall short of our expectations. And as you know on a beautiful day in May, it is hard to remember the horrible winter we all endured, but most of the country received record breaking snowfall in January and February. I am excited to report, however, that we began to see strong business trends late in the quarter, and the third quarter is off to one of our best starts in quite some time. David and Paul will give you more details regarding that just in a moment. One of our best analysts recently said undue focus should not be placed on Q2, and I hardly agree with him. I think there was a time in February when all 50 states actually had some snow on the ground in varying amounts. So let's not talk about weather any more, and I think what you would rather hear is what has been going on currently.

We saw solid growth in late March and solid growth in April. Price increases will be passed on. Excellent cost controls are in place, and I am excited about our acquisition pipeline. We do expect a strong second half, and we are hearing from contractors that they are bidding more work now than they have for a long time. We see many positive trends for our business and the industry. I am going to turn the call over to the Wise Mariner from Gloucester so he can present the financial details. And again, David has prepared a few slides to augment his comments, and those slides can be accessed on our website. After David speaks, I will ask Paul and David to comment on topics that I know are important to you. At this time I am going to turn the call over to David, our CFO, who will lead us through the financial details of the quarter and six months, and then he will turn the call back over to me. David, it is yours.

Thanks, Bob. Good morning. If you are using our slides to follow along, let's begin with slide one. Sales decreased 10.6% to $285.4 million from $319.3 million in 2009. Organically, excluding the two branches we have acquired since last year, our sales decline was 11.1%. Residential roofing sales decreased 17.0% as we did not have the benefit of the 2009 activity from Hurricane Ike which may have been a larger influence in the quarter than we had estimated previously. Additionally, new residential construction continues to be near all-time lows while residential reroofing was weak in certain other markets. Nonresidential roofing declined 4.4% as commercial activity remained slow, but we have started to anniversary the larger drop of our sales from last year. Complimentary products were down only 0.6%, perhaps finally showing some signs of bottoming out.

Regionally, we saw sales growth in the Mid-Atlantic, Southeast, and Canada. Big drop offs in the Southwest and the West while sales decreases ranged from 4% to 7% in the Northeast and Midwest. We continue to estimate inflation in our product costs based upon our current inventory's product mix and invoice costs as compared to the invoice costs of the same products a year ago. Based upon this estimate, our product costs were relatively flat as compared to 2009 levels. However, as I will discuss later, prices to our customers were down slightly. We had 63 business days in 2010 and 2009. We operated a total of 172 branches as of the end of this quarter compared to 169 last year. We acquired one branch this quarter and merged a branch with another while we closed two branches during last year's second quarter.

Gross profit was $61.1 million compared to $74.3 million in 2009, a 17.8% decrease with gross margins declining to 21.4% from 23.3%. The lower sales volumes during a tougher winter climate created gross margin pressure. But there were other factors which also influenced our gross margin for the quarter. The areas affected by Hurricane Ike saw the largest drop off in gross margin percentages. We had a higher concentration of nonresidential sales which have lower gross margins, and we had a higher concentration of two step sales to various end- sellers of asphalt shingles who were stocking up before the price increases happened. These negative factors on gross margin were partially offset by higher vendor incentives as a percentage of sales.

Operating expenses, which is slide two, decreased $5.7 million, or 7.9%, to $67.1 million from $72.8 million in 2009. Included in 2010's expenses were about $0.5 million in operating expenses from our recently acquired branches. In total, payroll and related costs were $2.8 million lower than last year's second quarter as we benefited from a headcount reduction, lower incentive-based pay, and a lower profit sharing accrual. General and administrative expenses decreased by $2.2 million as bad debts decreased by $1.9 million due to a drop in total accounts receivable and improved aging. Depreciation and amortization decreased $0.8 million mostly due to the drop off in amortization related to purchase accounting.

Operating expenses as a percentage of net sales increased to 23.5% from 22.8% all due to our lower sales. The 2010 income tax benefit was $5.0 million reflecting an effective tax rate of 43.8% compared to 40.9% in 2009. The 2010 benefit includes the reversal of $0.5 million discreet item. Without this benefit, our effective tax rate was 39.4%. As a result of all I've mentioned net loss was $6.5 million for the quarter as compared to $2.4 million in 2009.

Slide three shows our net loss per share increase of -- from $0.09 to $0.14 -- increased by $0.09 to $0.14 compared to a $0.05 loss in 2009. Our earnings before interest, taxes, depreciation and amortization, and stock-based compensation are adjusted EBITDA, which is reconciled in our GAAP to our GAAP net income in our press release was $2.1 million for 2010 as compared to $10.2 million in 2009. As for our fiscal year-to-date results which is slide four, sales decreased 16.6% to $653.1 million from $782.6 million in 2009 due mostly to the same factors mentioned for the quarter although nonresidential sales fell more in the first quarter of this year. Our gross profit decreased 21.5% to $149.4 million in 2010 from $190.3 million in 2009. Gross margin decreased to 22.9% from 24.3% due mostly to the same factors mentioned for the quarter.

Slide five shows our operating expenses decreased $14.2 million to $136.9 million from $151.1 million in 2009. Payroll and related costs dropped $7.0 million, while other general and administrative expenses dropped $4.0 million included $2.6 million in bad debt reductions. We also saw savings in selling expenses of $1.6 million while D&A dropped $1.3 million and warehouse expenses were $0.3 million lower. Operating expenses as a percentage of sales increased to 21.0% in 2010 from 19.3% in 2009, again due to the lower sales. Interest expense decreased $0.6 million in 2010 due to our continued debt paydown while income tax expense was $0.1 million in 2010 compared to $11.2 million in 2009.

Our net income for the first half of 2010 was $1.4 million compared to $16.2 million in 2009. As you can see in slide six, diluted net income per share was $0.03 in 2010 compared to $0.36 in 2009. Adjusted EBITDA was $29.1 million in 2010 compared to $56.8 million in 2009.

Slide seven shows the components of cash flows. Cash flows from operation were $25.6 million in 2010 as compared to $84.8 million for 2009. We experienced a favorable decline in accounts receivable of $66.9 million in 2010 but saw an unfavorable increase in inventory and prepaids totaling $26.1 million while accounts payable and accrued expenses decreased an unfavorable $32.8 million. Inventory turns were lower in 2010 compared to 2009 due to the drop in sales and our buildup of the inventory of shingles prior to the announced price increases. Our days sales outstanding in accounts receivable were up year-over-year due mostly to the lower sales. Capital expenditures in 2010 were $3.3 million compared to $4.8 million in 2009, and we spent $6.6 million on acquisitions in 2010. Net cash used by financing activities was $8.7 million in 2010 as we made our $7 million term loan prepayment earlier this year.

To summarize a few key points from my presentation, sales contracted 11% in the quarter and gross margins were down to 21.4%. Operating expenses decreased by $5.7 million. EPS dropped from a 5% loss to a 14% -- $0.14 loss. Our balance sheet remained in very good shape with cash on hand of $90 million, a working capital ratio of 2.7 to one, and a debt to total capital ratio of 44% compared to 49% last year. There is no question it was a tough winter, and we are glad it is behind us. But the future looks brighter as we are seeing signs of sustained growth and a more rational industry dynamic in the pricing of our products. Back to you, Bob.

Thanks, David. I am going to move now into the Q&A, and we'll start with a very important number. And for Paul and David, I would like for both of to you comment on gross margins. Gross margins were down 190 basis points for the quarter and below our estimates of 23% to 24.5% over a long period of time. What I would like for you to do is explain and quantify the Q2 influences as you see them. And then also speak about the gross margin guidance. Is it so accurate on a go-forward basis? So would you two jump into that?

This was a more competitive pricing quarter than we have seen in awhile. I will let Paul elaborate further on that in a moment. However, I am able to explain and quantify two major areas that significantly influenced our Q2 gross margins. First, we had a higher mix of nonresidential roofing and complementary products which have lower gross margins than our residential roofing products. We also had a higher concentration of two-step sales to other distributors who stocked up on asphalt shingles before the price increases. The two-step sales have lower gross margins than one-step sales to our contractors. These two items caused approximately 30 and 50 basis point reductions, respectively, in our gross margins. As for the competitive outlook, Paul, can you comment on that for us?

Sure. There is no doubt a tough winter with low demand meant almost every job was being shot by our contractors, and when we have smaller number of jobs within a market, we need to be more aggressive to maintain our share. The lower cost inventory most distributors purchased ahead of the price increases should have eased the gross margin drop, but it didn't in Q2. We believe the drop was temporary, and looking ahead, we still expect our overall annual gross margin average to range from 23% to 24.5% as we have said in the past dependent on product mix.

David, I want to go back to you. In your prepared remarks, year-over-year inflation was basically flat. Talk about pricing as you see it in both those markets. So, residential, and nonresidential markets. So give us an explanation there.

Since our last earnings announcement, the asphalt shingle manufacturers instituted a price increase of 5% to 7% generally for purchases after February. We were told those increases were driven by lower supplies of asphalt, and the expectation that the price of asphalt will rise as the demand for asphalt paving rises in the spring and summer. In April, the four largest manufacturers announced further price increases of 5% to 7%, effective starting in the middle of May. So it is apparent that at least the first price increase will stick. We will have to wait and see if the announced price increases in May is the last one for a while. A further support that manufacturing price increases will be passed on, is the fact that our competitors have announced price increases on their websites, and we have seen many examples of internal communications announcing future price increases. We have also alerted our customers with letters, and our websites have been updated regarding the need for price increases. As we have said in the past, our job is to react properly to any increases as they take hold like we did in fiscal 2008. We are also hearing os some proposed price increase from nonresidential manufacturers and in our complimentary products as those markets appear to be improving, but it is really too early to determine when and how those will materialize.

Okay. Paul, second quarter sales were pretty tough. Can you give us an idea of what you see in each of your markets currently?

Sure. We knew we were up against tough comparison to last year due to the effects of Hurricane Ike, but we also saw a very tough winter in many of our regions. We were perhaps a little short on our estimate of sales from Ike which we estimated were $24 million to $28 million as our Southwest region was off more than that. While we are certainly not pleased with the 17% drop in residential sales, it should be noted that 2009 showed an unusually large increase of 37%. Just like in Q1, we're seeing a few positive signs as six of our 11 regions had residential sales growth. As for the nonresidential business, again, there are some positive signs with six of our regions showing nonresidential sales growth as we have started to anniversary last year's big dropoffs. As for complementary products, we may be finally seeing the bottom with the possibility of future growth. January and February were off $43 million in sales due to the harsh winter along some of the East Coast and middle part of the country as well as even Texas, and even though we made up some good ground in March, it just wasn't enough. We have tried to stay away from monthly sales comparisons in the past, but with such a drastic difference by month due to the winter storms, we thought it would help if we did. January was down 14%. February was down 28% while March was up 8% and April was up over 8%.

Good to hear. Paul, I am going to stick with you and going to turn it to operating expenses. Operating expenses were down 67% for the quarter. What I would like for you to do is give us an idea how that was accomplished. Update on employee headcount at the end of the quarter as compared to last year, and other line items that are important. Okay?

Yes. I think you meant $67 million, and that for sure is a good number. It is obviously, as Dave stated, down from last year and down sequentially.

What did I say?

The previous quarter.

What number did I say?

67%. That's okay.

Sorry about that.

That's okay.

That's all right.

$67 million.

From a broader view we ended the quarter with 2,114 employees as compared to 2,272 at the end of last year's second quarter for a reduction of 158 or about 7% of our workforce. Beyond the related savings in payroll of $2.8 million for the quarter which also included lower incentive-based pay and profit sharing, we saw savings in many other expense line items. Our reductions in general of administrative costs including bad debts totaled another $2.2 million. For sure, I know our investors appreciate our diligence in operating the business day-to-day based upon the volume of business we see. As we have said in the past and will say it again doing more with less is our practice at Beacon and not just the slogan. Everyone from the branch, regional, and corporate level is focused on reducing and-or containing costs.

I like the sound of 67% reduction better.

We're trying.

We'll think of that as a future goal. David, bad debts down for the second quarter in a row which is a great performance. Tell us about the quality of accounts receivable as we came out of the winter quarter, okay?

Yes. We continue to be conservative and consistent with how we create our bad debts reserve. Although the total allowance is lower compared to last year, we still have about the same coverage of our over 60 day past due percentages. Our days outstanding at the end of the quarter was up an additional four days than last year's, but that was mainly due to the lower sales and to the fact that we had a larger percentage of our sales for the quarter in March than we did for the other two months, as Paul mentioned. Our 60 day past due percentage, a detail which we watch very carefully, is down 340 basis points compared to 2009 which is a very good sign of the quality. We are quietly optimistic, and our [credit] organization continues to perform very well. All of our people are keenly aware of the need to continue to monitor the quality of the receivables.

David, move on to other balance sheet items. Give us highlights and any ratios that are important to us.

As you saw in our press release, we had about $90 million in cash at the end of Q2, down about $20 million from Q1. However, during this quarter, we made the $7 million required prepayment on our term loan which was one quarter earlier than last year. We also spent, as I mentioned, $6 million on an acquisition, and we invested more heavily in inventory earlier in the quarter. Inventories were up intentionally to take advantage of the manufacturers' winter buying programs in advance of expected price increases. As I just mentioned, AR is in good shape, and we are at a 2.2 to one ratio under our only pertinent debt covenant which is to maintain an adjusted net debt to EBITDA ratio of less than four to one.

Let me also recite a few other ratios. Our current ratio is 2.7 to one, compared to 2.3 to one last year, and net debt to capital ratio is 37% compared to 42% 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 over the past couple of years. This is providing useful as an attractive opportunities for expansions come along.

I am going to wrap up the Q&A with a couple of comments on two key areas. One is estimates for 2010, and then I want to talk a little bit about acquisitions. So let me talk about 2010 total year. We did fall short of our income expectations for Q2. It is hard to anticipate that kind of winter early in the year, but we did fall short. We are now just slightly behind year-to-date estimates, but we believe we can make up the shortfall in the second half. So we remain comfortable within the current analyst ranges for fiscal 2010 estimates. Paul recently stated here a couple minutes ago that January and February sales were off $43 million, which is a big number, and it is a number that's too big to recover in just the month of March. So we fell short of our income expectations for Q2 due in large measure to that very harsh winter with large snowfalls across big parts of the country and across some of our largest regions. February manufacturer price increases appear to be holding as David said, and the manufacturers have announced additional increases in May. And I have to say that those increases, along with the positive signs we saw in revenue growth in March and April, provide us with great confidence going into the back half of the year. Remember, one of our key goals continues to be operating income margins of 6% to 8%. So those are my comments regarding estimates.

Before I open the call to questions, let me talk about acquisitions just briefly. A lot of times, folks will ask has anything changed regarding our strategy, and it really hasn't. We have acquired several small, high quality companies lately that really fit our objective of gaining geographic territories in new markets and filling in existing markets. And really the economic and business reasons for consolidation in our industry remain, in our objective that we have always said, is we want to lead the consolidation. We think we can do that. We have the financial resources, the management talent to do that. I don't have in my mind any specific timetable for any acquisitions and really do not feel the pressure to complete a certain number of acquisitions this year. As you all know, we do have a strong balance sheet. We have excellent banking relationships, and we will continue to exercise prudent stewardship of our assets. And with Paul and David's help and all of our officers managing our current business profitably is always a main priority. So that's -- those are the eight prepared questions with our answers. Gentlemen, I would like to turn this over to the folks on the call with your questions. So let's do that now.

Thank you. (Operator Instructions) Our first question is from Michael Rehaut with JPMorgan.

Hello. It is actually Ray Wong on for Mike. First question. Given the buildup in inventory this quarter ahead of the price increases, where do you think the gross margins you talked about being comfortable with that 23% to 24.5% range. But given that you have bought ahead of these price increases, do you think the near-term here in the third quarter the fourth quarter that those margins could actually be above that range that you have given?

To give you a little more color, we have already seen a rise in April in our margins that we can test off of our computer system. So we're relatively comfortable that they're coming back. As we go into this, if those May increases do pop and the manufacturers push those out to the field, I think you're accurate that we will see a little bit more of an increase during the short-term. And then it should level off again as the prices get out into the marketplace, and everybody is buying at the new pricing level. But it does take, as we have said in the past, 30 to 60 days for these price increases to go through, and it is one of the factors why we didn't see much of it in Q2 is because it is just not out in the marketplace right yet. But they're starting to as we speak.

Okay. Second question on the sales growth. That was helpful given the month to month sales. If you can give us what May and June did last year just so we can get an idea of comps for the rest of the third quarter?

As far as?

Just what May and June of last year's third quarter did on a year-over-year basis?

I just don't have that information in front of us.

Okay. Just lastly on the interest expense, I know you have some [flops] resetting. What do you expect for interest expense for the back half of the year?

As you saw in the Q, we tried to give you a little bit of picture that it is dropping to about 4% on average for our debt. So if you take the $330 million we have in term debt plus another $15 million or so in the installment loans and multiply by 4%, that will give you the answer.

Great. Thank you.

Our next question comes from David Manthey with Robert W. Baird.

Hello. Good morning.

Good morning.

We have seen competitive price increases on things like vinyl siding and some of the commercial products I think we've seen built up in [mod] bid. Are you anticipating any price increases on the complimentary side? Or in EPDM or other commercial products?

I think [Cowel] has openly expressed the fact that they to want increase prices. Both EPDM and their TPO products. I think they said on their call that actually the polyisocyanurate, which is the board insulation that goes under commercial single ply went down a little bit. I think as things get a little bit better, they're going to try to gain some of those price increases. I think they want to recover some of the raw material costs they have seen over the past couple of years where they haven't had price increases. As for the other complimentary products, I think you're absolutely correct, vinyl siding -- I think you're going to see some of that go up as market conditions improve. Windows and doors I think will follow a little bit along the same lines. The other complementary product are really just too small to comment on in a call like this.

As Dave mentioned earlier, there are some good signs on the volume side with both complementary and nonres, with complementary starting to bottom out and some projections moving forward from [Fredonia] that we are going to see annual growth in that which is good. And then, Carlisle had some volume growth in their quarter which is also good that would help the price increase.

Okay. Thanks, Paul. I think you also said that you misjudged the impact of Hurricane Ike. Do you have a new estimate as to what you think it is, and I assume that we've completely lapped it at this point?

We're pretty much through it by April, Dave. It may have been 10% to 15% higher than we thought. It is hard to tell. What we're seeing, mainly in Houston, is that there is just not a lot of reroofing that's left. It seems like a lot of those homes got reroofed in the past year or two from Rita before that, and reroofing in that area is quite slow right now.

Okay. And then last question on the weather as well. Do you believe that some of the areas where you had the worst weather in January and February and weren't able to sell the products for the contractors to get on the roofs, is it possible that those could be some of the stronger areas as we get into the roofing season? That there is some pent-up demand there?

I don't think there is any question about that. And Paul can elaborate a little further. In the Northeast where I am, we see it up in the areas that got hit the hardest. And in the Pennsylvania area, we're certainly seeing some of that and down into the Mid-Atlantic.

As Bob alluded to, as we poll the regions, talk to customers, contractors -- there is no doubt there is increased comments and optimism that there is pent-up demand that we're starting to see, and that they believe is going to continue, Dave.

Thanks very much.

Thank you.

Our next question comes from Robert Kelly with Sidoti.

Good morning.

Good morning.

Question on what you're seeing in nonres, the 4% drop year-on-year. Is that a comment on the market improving -- end-user demand improving? Or is that partially share gains and some other stuff helping you out there?

I think it is both. There is no question we have anniversaried some of the large dropoffs from last year, so I am not so sure it is improving as just flattening out. There is always a possibility. We have a very strong team in New England and in the Midwest with North Coast and in the Carolinas with Best and a few other areas in the Mid-Atlantic. These people know how to sell nonres roofing, and I think, as far as my personal opinion, goes we're the best at it. When there are jobs out there, we tend to gain market share.

I understand.

Let me add something. It also speaks of the importance of reroofing because we all know the commercial new construction is very, very flat -- very, very weak. And so for this segment to only decline 4% knowing that the new construction in commercial is so low really talks about the strength and the need for reroofing and the nondiscretionary aspect of it. So it is something I would like to add to what David just said.

I think, Bob, you're right. We see it in most of our regions as you said, new construction is down so low on the nonres side. Our people have had to continue to shift their focus on the reroofing. So for us, it is very encouraging that we see positive signs. Compared to prior quarters, we're talking plus 20% drops. So it is a combo, as Dave said, of the lapping, and it's also, we believe, a combo of shift to reroof and some share gains.

And thank you for the color on the gross margin compression. As far as the remainder, you gave us [30 and 50] for mix and the two-step sales. Was the rest of it just fixed [past key ] leverage? What made up the remainder of the decline year-on-year?

It is certainly the competitive nature, as Paul pointed out, and he can elaborate further. But there is no question when there is less business around you need to fight for it harder.

As Bob said, it is as we sit here up in Boston in beautiful weather it is hard to recall some of the angst that at least I know went through January and February especially with the majority of our regions just having some very difficult weather that for sure impacted these people and impacted the ability of contractors to get on roofs. And so as those jobs decreased, there is just naturally going to be more competition, and that's what we saw. And we definitely don't want to lose share so we compete as best we can to make sure we're getting our fair share.

Great. Just one final one on the recent acquisition activity. Kind of a departure from what we have seen from you historically. Usually you're buying a much bigger type target, this recent push into Central Florida seeing a little more piecemeal. Can you talk about what Florida looks like two to three years down the road? What your plans are for that state?

We like being in Florida, and we were excited to get into Orlando, Tampa, and cities south of that. You're correct. Our normal acquisition, if there is a normal acquisition, would be something with sales of $60 million to $100 million or so. When we are presented with those kinds of opportunities, we will take it. Particularly, if it is getting us into an area that we're excited about. Florida is highly populated. There is a lot that will be going on in future years. It is at a low point now, so we were excited about entering those markets at the low point and enjoy the ride up. So we like Florida. It will be a great market for us.

Let me just add as you look at Florida, we're really happy to have IBM's strong residential house.

Thank you.

And Phoenix on the commercial side.

Our next question comes from Scott Ciccarelli with RBC Capital Markets.

Hello. Scott Ciccarelli.

Hello, Scott.

A couple questions. First, I know what the historical mix has been, but do you have a feel for what your mix is today between reroofing and new home construction? Is there any way to better measure that?

We just recently purchased the [Fredonia] Report. and they estimated that the residential is about 90% reroofing now. In some of our areas, it may even be higher than that. The nonres piece they said was still at about 80% to 85%, but I just don't believe that in today's market. Their data has to be a little bit stale. It is above 90%. In some of our markets, it might be all of our business right now.

There is no doubt there has been a much bigger shift than [Fredonia] has reported on the nonres side in most of our markets.

So is it fair to assume any kind of pickup in new home construction could have a pretty quick and material impact on the business?

That would be a big help.

And I understand any nonres increase. I know, again, [Fredonia] is projecting small gains as you go out five years, 1.5% a year in new, nonres construction, but any pickup there will help.

Okay.

Scott, I think you should buy a new house to help us out.

I will take a loan. How is that?

All right.

Another question. You talk about some of the impacts on the gross margin. You also mentioned that margins look like they're better in April. Just so we understand the competitive dynamics. Was the gross margin pressure most intense in January and February and then eased in March? Sounds like that's what the cadence of the sales was in the quarter.

I think that's pretty accurate. January was the worst month. February was so slow that the business you had you could ship in certain markets. So it wasn't effective because some of the markets weren't shipping much at all. It did come up in March a little bit compared to January. So that's good news, and then the trend we see in April is further in our opinion that it was temporary. And we'll get through it once we get into what's called the roofing season which is really from May until November.

And let me add, as Dave I think mentioned earlier, we have seen some real positive signs in the market from our competitors in terms of them announcing price increases and-or communications on the street. Just about in general that they also wanting to make sure they pass along manufacturer price increases which is good for the entire industry in terms of as the manufacturers pass to us.

That's helpful. The last question, Bob, just a clarification. You made, as you traditionally do, comments on analyst estimates. Just so it is clear because you did fall a little bit short I I think of what most people were looking for this quarter. Were you referring to the full-year earnings expectations out there of a little over $1.00 in earnings?

Yes. I was talking about the total year which would mean we're going to have a pretty nice second half.

Got it. Okay. Thanks a lot.

Thank you, Scott.

Our next question comes from Evan -- Ivan Marcuse from Northcoast Research.

How are you doing?

Good.

Real quick -- most of my questions have been answered. And on the acquisition front, what did you pay for the two that you made in April?

We haven't disclosed that yet. It will come out on the following Q. Four branches at $20 million and one branch at $8 million. I think you can assume with the normal margins we have talked about in the past, the pricing will be at that level.

So just more or less amortization costs going into the second half, how much do you expect that to be up in the next few quarters?

It shouldn't be up much at all. In fact, it should be down a little bit more because we have anniversaried the North Coast acquisition which will drop it a little bit. These recent acquisitions have very little good will -- not good will, but customer amortization in them. So I expect it to be flat, and I am not being coy on the price, Ivan. It is just that we really want to stay away from telling people what we're paying for these companies. It is out in the marketplace too much. That's how we feel anyways.

No problem. And then, the last question is, as a proxy, what percentage of your expenses are fuel costs would you say?

Probably less than 1% -- I mean, less than 5%.

Great. Thanks for taking my questions.

We have time for a few more questions. Our next question comes from Jack Kasprzak with BB&T Capital .

Thanks. Good morning, everyone.

Hello, Jack, how are you?

Very well, Bob, thanks. With regard to the comment on the increase in sales to the two-steppers. Never heard you mention that, and I don't want to underscore it if it doesn't need to be. But does that signify anything about the marketplace for the spring and summer that they're maybe more active in buying ahead of price increases to you?

I don't believe so. Most of the stuff we sell to the two-steppers, lumberyards and things like that. They're in areas in most instances that we don't trade in. It's because they're in like rural parts of the Midwest, rural parts of the Carolinas. They did the same things we would do. Everybody in the industry was talking about these price increases, and they thought they could get a little advantage ahead of it and went out and bought. This has always been a part of our business. It is just was magnified because of these price increases, and as comparison to 2008 when they happened, no one at that point in time believed they were going to happen. So they didn't do such a large buy. That's the difference this year.

Without seeing their financials, you can only -- at least we can only assume that their inventory levels at the end of last year were extremely low as there were a lot of distribution.

Let me, Jack -- let me add also if you consider the logistics of two-step versus one-step. In a one-step, we're selling to a contractor delivering to a home site, and he is going to put the roof on next week. In a two-step, we're shipping in bulk material that might not be used for 30, 45 days. So the weather is not that big of a factor. So naturally when you have this kind of winter, the percentage of two-step is going to go up because the need for the shingle is not weather-dependent. They were just trying to get ahead of the price increases. So just visualize your lumberyard. You have snow on the ground, and it is okay -- you want to go ahead and buy the material.

Got it. That's very helpful. Second question. I guess you touched on this, but I will ask it anyway. The strength that was apparent in late March and April after the weather improved. Is that really more skewed to residential sales, or is it across the Company?

It is really across all of our products groups. It is still weak in the Southwest, but almost every other region in April at least had some small increases. It was only two regions that didn't have increases which is great news to us.

Great. Thanks very much.

Our next question comes from Ryan Merkel with William Blair.

Thanks. Just a couple questions fro me. First on April sales higher than 8%, can you give us a sense of how much was price and how much was volume?

That's a difficult one to tell right now because the margins were compressed, so it is probably mostly volume, Ryan, to be honest with you. I think as we push forward into May in those second rounds of price increases here from the manufacturers, that's when you're going to see the price. It is delayed as we have always said it is. It is just a little more than we expected.

Okay. And second question on the price. Should we think about modeling 7% in the June quarter, and then racheting up there after?

Yes, if once we get through the end of the June quarter those price increases stuck -- yes, I think that's the right assumption to make.

Okay. On your website you put 15% across the board price increase. Eventually, we could get that high?

Yes. What we put there was that the manufacturers have raised price 15%, and that's the accumulation of the announcement they made in Feb. and just made 30 days ago or so or less. In that range, in addition to some of the short-term buying decreasing as we come out of the winter. So, yes, as demand continues to increase, there would be an expectation that manufacturers would pass on that approximate 15% increase to us, and then we would pass it on.

Okay. Great. And last question on operating expenses. You have done a really nice job there, and I think, Paul, you have had a lot to do with that. Are we now moving from defense to offense? And if so, what's coming back? And if there is still some defense left, what still is coming out?

I guess it depends how you define defense or offense. I think for sure as I have said on past calls our people are very aggressive with looking at costs. We work our tails off containing and reducing where we can. So for sure, as we go into this quarter, and volume goes up as it does every year from our Q2 to Q3, our costs will go up. We, though, have a good lower base. So percentages will still be much lower obviously than Q2. No, we're still optimistic that there is waste out in every region, out in every branch, and the teams continually are tasked with getting rid of it. Balanced, of course always, with our number one priority which is to have the best service in the industry every day.

All right. Thanks. Appreciate it.

Okay.

We have time for one more question. Our next question comes from Brent Rakers with Morgan Keegan.

Good morning. Wanted to, Dave, you talked about earlier -- and it's been talked about a couple times now about the -- you referred to it as a recovery in gross margins in the month of April. I just wanted to get a better sense of whether that was a recovery to kind of the normal range? Or just kind of a small bounce back in stepping toward the normal range?

It was a step back. It wasn't small. It was more than half of a step back to the 23% range. Very encouraging sign. We have not closed off the books entirely for April so we have to see exactly what it comes out to once we go through all of the mass [reconciliations] we have to go through for the rebate accounting. But it is a good sign, and stepping forward, we just think that's what will happen because as the cheaper inventory bleeds out of our competition, the prices will come back.

Dave, that brings up a good point. Do you have a sense for where Beacon is with the lower cost inventory relative to the majority of your peers out there right now?

No. We wouldn't have any idea. You talk to our regional guys, and their branch managers drive around and say -- hey, [Bradco's] branch in Florida has shingles to the roof, and the next guy will say that the branch in Massachusetts doesn't have much. So it is really hard to tell.

Last question, I think it may be as much a follow-up to the previous question maybe in a different way. Headcount on a seasonal basis didn't drop off as much as it has over the last couple years. I wondered if you could comment on that? And then maybe also in terms of if we're in the mode where Beacon starts hiring more rather than cutting going into the busier season. And then I guess the last question is, how many people come on from the April acquisitions?

Brett, I think what we saw was our preparation in our Q1 in terms of some of the the headcount reduction that was prior to Q2, and that could be the difference you're seeing. In terms of addbacks, we will as volume increases there will be the need I am sure to add back warehouse folks and-or drivers and-or roof loaders in the appropriate regions. But the guys are pretty thrifty, and they're going to maintain the levels as long as they can at the current levels as long as they're providing proper service.

How many people from Phoenix and LRS?

About 30 people.

30 people. Okay. Great. Thank you.

Thanks.

I would like to turn the call back over to Bob Buck for closing.

Thanks for your questions, everyone. We really appreciate it. As usual, Paul, David and I will be available for follow-up questions immediately after this call. With just a few minutes remaining, let me close the earnings call with some summary comments. Number one, you have heard, and we like reporting that we have seen good growth since late March. Operating expenses are being well managed which I think you have come to expect from us, and Paul and David are doing a great job in that area. Balance sheet is strong, and it puts us in a great position to capitalize on growth opportunities as they arise. We have planted the Beacon flag in Central and Southern Florida and also in Baton Rouge, Louisiana, and we're excited to welcome our new employees to the Company and look forward to what they're going to be able to do to keep us successful in the future. Secular trends and fundamentals for the industry are quite positive and strong, and we have some good tail winds that will help us in the second half.

I always say this, but it bears repeating. This Company and its resources are owned by our shareholders, and we're just merely caretakers. We will expand and make acquisitions in prudent ways, basically by keeping that relationship in mind. And I will close by saying I want to thank all of our hardworking and dedicated employees who have made our success possible and who will drive our future success. Thanks again for your interest in and your support of Beacon. We're dedicated to delivering good results in fiscal 2010, and we are ready to capitalize on the positive things that are occurring. So thanks for your time, and this concludes the call. I appreciate it.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.