Beacon Roofing Supply Inc (BECN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply Fiscal Year 2010 Third Quarter Conference Call. My name is Melina and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

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

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, Melina, and welcome, everyone, to our third quarter earnings call. Our results for the quarter fell short of our expectations and most of your estimates. We had enjoyed a long run of performing above estimates and we want to get back to doing that as quickly as possible. Paul and David have excellent business plans in place to improve results in our fourth quarter and beyond.

But, you know, on a positive note, I am pleased to report sales growth for the quarter, which is really the first time in quite some time that we've been able to report quarterly growth without the aid of a major storm. Also looking on the bright side, our commercial and complementary product lines were very strong in the quarter, and operationally we're certainly in good shape and our operating expenses are well under control.

In the coming months, our focus will remain on improving gross margins across all product lines, with particular emphasis on commercial and complementary products.

Our competitors and contractors have been unusually aggressive with pricing, and I believe for fear of a double-dip recession. Our business was very firm at the beginning of the quarter and we believe pricing was, also. But as the quarter moved along, pricing was stagnant and didn't rise as we expected. However, we do not believe this is the new norm.

So for now, I'm going to turn the call over to David Grace, our CFO, who will give you a lot more details about the quarter. And then after David speaks in his special accent, I will ask Paul and David to comment on business topics that I know are very important to you. So David, would you go through the details at this point?

Thanks, Bob; good morning. If you're using our slides to follow along, let's begin with Slide 1. Organically, excluding the seven branches we acquired since last year, we had a slight sales decline of 0.1% to $463.1 million in 2010. Total sales, not shown in the slides, increased 2.3% to $474.3 million, from $463.6 million in 2009.

In our existing market, lines of business, residential roofing sales decreased 11.8% as re-roofing was weak, mainly in the areas that had the benefit of the 2009 storm activity. And new residential construction continues to be near all-time lows in all markets.

Nonresidential roofing increased 10.9% as commercial activity picked up after a slow winter period, and also due to a comparatively weak quarter from last year.

Complementary products were also a bright spot, with sales up 19.3%, the first rise in many quarters.

Regionally, we saw strong sales growth in the Northeast, Mid-Atlantic, and Canada, with the biggest drop-offs in the Southwest and Southeast, while sales decrease ranges from 3 to 8% in the Midwest and West.

We continue to estimate inflation in our product costs based upon our current inventory, products 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 relatively flat as compared to June 2009 levels. However, as we will discuss later, our average selling prices were down slightly.

We had 64 business days in both 2010 and 2009, while we operated a total of 177 branches as of the end of this quarter, compared to 169 last year. We acquired five branch in this quarter, while we had no branch changes during last year's third quarter.

Gross profit was $104.3 million, compared to $107.8 million in 2009, an overall 3.3% decrease and a 5.0% organic decline. Gross margins declined to 22.1% and 22.0% organically and over all, respectively, from 23.3% in 2009.

Increased competition and a higher concentration of nonresidential sales, which typically have lower gross margins, were equally responsible for our drop in gross margin percentage. These negative factors on gross margin were partially offset by higher vendor incentives as a percentage of sales.

Existing market operating expenses, which is Slide 2, decreased by $2.3 million, or 3.2%, to $71.9 million from $74.2 million in 2009. Acquired market operating expenses were $2.2 million for the quarter. In our existing markets, general administration expenses decreased by $1.7 million, as bad debts decreased by $1.4 million due primarily to the improved aging of our receivables.

Depreciation and amortization decreased $0.9 million, mostly due to a drop-off in the amortization related to purchase accounting, while selling expenses increased $0.5 million, mainly due to increased fuel costs.

Operating expenses as a percentage of net sales decreased to 5.6% over all, and 15.5% in our existing markets, from 16% last year -- again, due primarily to the expense reductions I just spoke of.

Interest expense declined $2.0 million in 2010 due to lower debt and our new interest rate hedges put in place. The 2010 income tax expense was $10.3 million, reflecting an effective tax rate of 38.8%, compared to 38.7% in 2009. The 2010 and 2009 tax provisions both benefited from the reversal of $0.2 million discreet items. Without those benefits, our effective tax rate was approximately 39.5%.

As a result of all I've mentioned, and as presented in Slide 3, our net income was $16.3 million for the quarter, compared to $17.2 million in 2009. Our diluted net income per share decreased $0.03 to $0.35, from $0.38 in 2009.

Our interest (sic) before interest, taxes, depreciation, and amortization, and also stock-based compensation, our adjusted EBITDA, which is reconciled to our GAAP net income in our press release, was $38.2 million for 2010, as compared to $42.4 million in 2009.

As for our fiscal year-to-date results, starting on Slide 4 -- existing market sales decreased 10.6% to $1.11 billion in 2010 from $1.25 billion in 2009. Recent strength in our nonresidential and complementary product sales didn't fully offset the year-to-date decline in sales of residential roofing products.

Our existing market gross profit decreased 15.6% to $251.7 million in 2010, from $298.1 million in 2009. Existing market gross margins decreased to 22.6 from 23.9, due mostly to the same factors I mentioned for the quarter.

Slide 5 shows our year-to-date existing market operating expenses decreased $17.2 million, to $208.2 million, from $225.4 million in 2009. Payroll and related costs are up $7.4 million, while other general and administrative expenses declined $5.9 million, including $4 million of bad debt reductions. We also saw savings in selling expenses of $1.1 million while G&A dropped $2.2 million.

Existing market operation expenses as a percentage of sales increase to 18.7% in 2010, from 18.1% in 2009, due to the lower sales. Interest expense decreased $2.6 million in 2010 due to the same-mentioned factors, same-mentioned change in our derivatives and the continued paydown in debt, while income tax expense was $10.4 million in 2010 compared to $22 million in 2009.

Our net income for the first three quarters of 2010 was $17.7 million, compared to $33.4 million in 2009. As you can see in Slide 6, diluted net income per share was $0.38 in 2010, compared to $0.74 in 2009. Adjusted EBITDA was $67.4 million in 2010, compared to $99.2 million in 2009.

As Slide 7 shows, cash flow from operations was $26.5 million in 2010 as compared to $84.3 million in 2009. We experienced a slight increase rather than a decrease in our accounts receivable this year, as we had an increase in inventory and we also had an increase in inventory of $24.6 million due to increased purchases of asphalt shingles from the short-term special buy programs.

Inventory turns were lower due to the drop in sales, and also those special buy shingle buys. Our days sales outstanding and accounts receivable were up year over year, due mostly to the higher mix of nonresidential sales, which generally have longer turns.

Capital expenditures in 2010 were $5.4 million, compared to $10.7 million in 2009, and we have spent $12.6 million on acquisitions in 2010. Net cash used by financing activities was $9.0 million in 2010, compared to $16.6 million in 2009.

And to summarize a few key points from my presentations, organic sales were flat for the quarter, with gross margins down to 22.1%. Organic operating expenses decreased by $2.3 million. EPS dropped from $0.38 to $0.35.

Our balance sheet remains in very good shape, with cash on hand of $82 million, a working capital ratio of 2.5 to 1, and a debt-to-total capital ratio of 43%, compared to 45.5% last year. Back to you, Bob.

Thank you, Dave. Let's go through some questions that really get at the heart of the matter. The first question for both of you, Dave and Paul, is let's get to the reason for the main divergence for the quarter. Our organic gross margins were down 120 basis points for the quarter and below our prior guidance of 23 to 24.5. I'd like for both of you to explain the reasons for that and let us know if our prior gross margin guidance is still accurate. We'll start with you, David.

As I mentioned in my prepared comments, we believe that the drop in gross margins was caused equally by more intense competition and a higher mix of nonresidential roofing and complementary products, which do have lower gross margins than our residential roofing products.

As we said during the Q2 call in early May, April gross margins showed signs of improvement, but May's rate fell back and June's margin rate of 22.6% did not reach the lower end of our prior margin guidance as we had anticipated.

As for the competitive outlook -- Paul, could you comment on that?

Sure. The low level of residential roofing activity we saw continues to hinder the realization of recent price increases in asphalt shingles into the marketplace. Admittedly, this is a bit of a surprise to us, as traditionally vendor price increases are put into the marketplace within 30 to 60 days. The lower-cost inventory most distributors purchased ahead of the price increases seems to still be present and causing prices to drift lower.

More significantly, nonresidential re-roofing continues to be very competitive-- a competitive market due to the relatively low volume of activity and the many alternative products available. With our smaller number of jobs within a market, we need to be more aggressive than we have to maintain our share.

We still believe the lower gross margins are temporary; and, as Dave just mentioned, June was at 22.6%. Looking ahead, we don't expect our fiscal year gross margins to drift lower than the current year-to-date percentage of 22.5%, and we're hopeful we can improve upon it.

Second question, David's, for you. You noted in your prepared remarks year-over-year inflation for the third quarter was basically flat. Please update us on pricing, both for residential and the commercial markets, would you?

Although the asphalt shingle manufactures instituted a price increase of 5 to 7%, generally for purchases after February, we have yet to purchase many shingles without discounts, which almost negate that price increase. We suspect that many of our competitors have also not purchased at that higher level.

As a distributor, small increases in product costs can still affect our profitability if we cannot pass them through. We have, along with our competitors, announced price increases; but again, the low volume of demand is hindering that effort. But hopefully, they will take hold this summer.

We also hear of some potential price increases from the nonresidential manufactures and from some complementary product suppliers, as those markets appear to be improving. But it's still too early to determine if those will materialize and stick.

And Paul, if you recall, during our last earnings call we were excited about April but the quarter, the third quarter, ended up with flat organic sales. So provide us with some monthly information for the quarter and give us an idea what you're seeing now in each of those markets.

Sure. As we stated on the Q2 call, March and April were strong. May was down about 1%, while June gave back most of April's gains, being down 5%. As Dave said in his prepared remarks, the areas that had very high levels of re-roofing last year following the storms continue to be very weak, which is affecting three of our regions.

Although there may not have been much storm business in Q3 of last year, there's no question that the amount of pull-forward demand from those storms has slowed re-roofing in those areas to very low volumes. However, we are seeing a few positive signs as six of our 11 regions had residential sales growth in Q3, while in last year's Q3 we only had two.

As for the non-res business, there's some positive signs as well, with, again, six of our regions showing double-digit nonresidential sales growth. And although it's a smaller piece of our product mix, complementary sales were up solidly through our market after many quarters of decreases. We hope to see that trend continue.

So basically, seeing these increases in multiple regions is good news in a tough economic climate. Our team continues to work hard to drive sales and improve their businesses, focusing on the fundamentals of selling and running an efficient business while working to raise gross margins.

From a July standpoint, July sales and gross margins are roughly in line with June.

Paul, sticking with you, you've done a really good job managing expenses in an uncertain market. And existing market operating expenses were $72 million for the quarter. Tell us how that was accomplished.

From a headcount standpoint, we added 63 people from the newly acquired branches. But organically, we had a reduction of about 6% of our total workforce during the quarter year over year. In addition, reductions in general and administrative costs, including bad debts, totaled $1.7 million, with some smaller gains in other expense categories.

As we've said in the past, I know our investors appreciate our diligence in operating the business day to day based upon the volume of business we see. And we're going to continue to do that at Beacon, both in the field and at corporate.

David, bad debts were down for the quarter. Actually, it's the third quarter in a row. Tell us about the quality of receivables at the end of the third quarter.

We continue to be conservative and consistent with our bad debt reserves. Although the total allowance is lower compared to last year, we still have the same coverage of our over-60-day past due percentage.

And our days outstanding at the end of the quarter were almost five days higher than last year, but that's mainly due to the shift to more nonresidential roofing sales, which generally have longer turns.

Our over-60-day past due percentage, a detail we watch carefully, continues to improve, down about 280 basis points compared to 2009, a very good sign. And as usual, our credit department continues to perform very well and all of our people are keenly aware of the need to continue to monitor the quality of those receivables.

That is a good job. What I'd like for you to do now is just follow up with other highlights of the balance sheet, would you?

Sure. As you saw in our press release, we had about $82 million in cash at the end of Q3, down about $8 million from Q2. However, during the quarter, we spent about $6 million on acquisitions and working capital was up about $24 million; but that is very usual for this quarter. As I just mentioned, AR is in good shape and we had a 2.33 to 1 ratio under our only pertinent debt covenant, which is to maintain an adjusted net debt to EBITDA ratio of less than 4 to 1.

Let me also recite a few other ratios. Our current ratio is at 2.5 to 1, compared to 2.2 to 1 last year. And net debt to total capital is 43%, compared to 47% 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 few years.

Thanks, Paul and David. I'm going to handle two topics now. The first is going to be estimates for 2010 and then I'm going to talk about acquisitions. Then after that, we'll turn the call over to an open question-and-answer format.

While we fell short of our income expectations for the third quarter and we're behind year to date as the longevity of the drop in gross margin has surprised us, but mostly for the commercial and complementary markets. As you know, our longstanding policy has been not to issue guidance, but we think our analysts and shareholders would appreciate some more color about expectations for the fourth quarter.

We believe we have enough visibility at this time and we estimate our earnings per share for the fourth quarter to be in the range of $0.40 to $0.44. We could certainly exceed that number if our efforts to improve gross margins, especially in commercial and complementary products, are successful, and if our residential product sales firm up during the quarter. So that's my comment on estimates for the fourth quarter.

Let me talk about acquisitions. Often, people-- when we're out talking about the Company, people ask, "Has anything changed about your strategy?" And really, nothing has changed. We've acquired several small but quality companies lately that fit our objectives of gaining geographic territories and new markets and filling in in existing markets. The economic and business reasons for consolidation in this industry remain, and our plan is to lead that consolidation.

We have a strong balance sheet, excellent banker relationships, and we continue to exercise pertinent stewardship of our assets, as you've just heard. But managing our current business profitably is always a main priority.

And I will say this -- I still believe that the higher tax rates that are certain, I think, to be increased beyond 2010, could spur some activity between now and the end of the calendar year.

So basically, acquisitions remain a very important strategy to help us enlarge our footprint across the US and Canada, so we're excited about that opportunity.

So that's our prepared questions and answers, my comments, and what I'd like to do now is turn the call open to questions from those who've called in. So let's do that at this point.

(OPERATOR INSTRUCTIONS) Each caller is limited to one question and one follow-up. Scot Ciccarelli, RBC Capital Markets.

Hey guys, how are you?

Morning.

I guess my main question here is, can you just give me a little bit more color, and give us a little bit more color, regarding the price increases that we've seen from the vendors versus the competitive activity in the marketplace. Where in the supply chain, I guess, are we seeing the resistance to price increases?

Basically you're seeing it from the distributors to the manufacturers. I listened to Owens Corning, which is the only public company manufacturer that reports, and they say that net selling prices are flat since 2008. So the price increase, really, has never been pushed out into the field. There was inclinations to do it in April and May, but once it came time to make the purchases, they discounted off that purchase price.

So at our level, the contractors are pushing back to us for lower prices. And it's not just in asphalt shingles -- it's across most of our product lines. And it's because once they get a job, they want to be able to price it correctly and they're using their pull, when they have a job, to pit one competitor against another in distribution. So in the end, it's at all three levels. And it's a partnership. I imagine the contractors' profits are down, ours are down; and, from what we saw with Owens Corning, so are theirs.

On the competitive front, has the recent large merger in your industry had an influence on that?

It's probably too early to say that, to make a comment on that, because it's so recent. But I am bullish on that merger; I think that was a good move for both ABC and Bradco. I think it's going to be really good for the industry. ABC is a very well-managed company and has very good pricing discipline. So I anticipate, as I've said before, that it will have an effect of stabilizing the business, and that's what I think.

That's not where the incremental price complication is coming from?

No, I think-- again, we've done a pretty good job on the residential side; those margins are pretty tight. The complementary and commercial products is where we saw more erosion in gross margin. So the competition from fellow distributors in complementary and commercial is a little bit tougher than it is on the residential side.

I got it.

Let me just add -- really, nothing, though, in terms of that merger has inherently changed anything within the landscape. I mean, there's still a tremendous amount of competition. We probably referenced that a year ago on our conference calls; it's just gotten more intense, as Bob said, especially on the commercial side with commercial construction continuing to be so low and overall volume being down in general. There's just a lot of competition.

Okay. And then, a quick housekeeping item. Interest -- is this a good run rate going forward, David?

Yes it is, based upon the volume-- the amount of debt we have right now.

Great. Thanks, guys.

David Manthey, Robert W. Baird.

Hi, guys.

Good morning.

In terms of the margin trend, you began to answer the question with the previous answer. Can you talk about trends within-- between res, non-res, and complementary, give us an idea of where the biggest opportunity-- It seems like you're focused on non-res and complementary as areas of the most improvement there.

And then, in terms of pricing over all, what type of increase in demand do you think it takes to get pricing back on track? Do you just need to clean out the inventory in the channel? Do you need a hurricane? What do you need to happen for that to increase?

As far as the gross margin goes, Dave, there is room for improvement in all three categories. We were just comparing to last year, that the residential gross margins were about equal with last year when it's all in, counting rebates and the special buy programs. The improvement that can happen there is if we can get some of these price increases, we will have that cheaper inventory to sell for a while.

As for the non-res and the complementary, the non-res business has many alternatives of products, unlike the asphalt shingle industry, which basically has that one. So you give much more choices to building owners, the contractors, they can play one off against another. And in certain markets, TPO, which is a thermal plastic product, or EPDM, may be more favored. But in the end, they still have those choices.

The complementary products are still a discretionary purchase, and to get someone to buy up to a better vinyl siding or a better decking is a little more difficult when the economy's so bad. So as people make their purchases, you need to drop those prices a little bit to convince them to switch to the other products.

And I'll let Paul comment on the second half of your question.

In terms of-- to go back a little bit on Dave's, we are continuing to focus on all three of those lines of business. We don't necessarily discriminate because resy might be closer to where it was at the beginning of the year last year; we continue to put a lot of effort with our routines and controls related to pricing and the analytics we use. So we'll continue that and intensify it.

In terms of the volume, for us it would be good to see the residential volume just show some positive growth from prior year. And without being able to read the future, that's going to help an awful lot. There's just-- if you look at our results-- and I mentioned, in my answers, we still had six regions that showed some very strong growth, and that trailed down through the rest of their P&L -- good GM, very good cost control as a percent of sales, and the rest.

And then, we had these three regions that there's right now a void from the massive impact of the storm in the pull-forward of homes that have been, and commercial structures, that have been re-roofed during that period. So I think-- and we didn't see that with Rita and prior hurricanes. As we move forward and that repairs itself and gets back to a normal cycle, I think that's when you'll see demand pick up and things normalize. And a timeframe -- I don't have it.

The one thing I want to make sure people understand now is that the residential roofing products are our most profitable products right now because of the price increases that happened in '08. So when you see a slight mix change not in nonresidential, it will hurt our profitability a little more than it has in the past because there's no question that the residential roofing products are the most profitable. Going forward, that's a good sign because that's one of the things that are down the most right now and to us has the most opportunity to show increases in the future.

Okay. And then second question -- in terms of the revenue breakdown by geography that you showed in the 10-Q, should we assume that non-res was also stronger in the Northeast, Mid-Atlantic, and Midwest, or is that not right? I'm just trying to get a gauge on the residential versus the nonresidential -- where they trend similar across the geographies and where there are heavier weightings in one or the other.

They were, except that you said the Midwest, which the Midwest is relatively flat. But in the Northeast and Canada, certainly, through the Mid-Atlantic and down, actually, into the Southeast, the non-res business was strong. The residential business, except for in the Southeast, was strong in those areas, too.

All right. Thanks, guys.

Tom Hayes, Piper Jaffray.

Thanks, this is Dan [Garofalo], on for Tom today. Hi, guys. Just a question, just in terms of gross margin breakdown on residential versus commercial -- can you provide any information as far as what that was for this quarter and what those typically are in a normalized situation?

I'll answer the second half of that question and tell you what they typically are. Our residential roofing products re the most profitable. Then comes complementary, which is perhaps 200 basis point to 300 basis points below those residential products. And the lowest gross margin profitability is the non-res, which is about 900 basis points below the residential roofing products.

Okay. And then, on the residential side of things, just in terms of the breakdown, the revenue breakdown -- are you able to quantify, typically, what comes from new construction and what comes from replacement? Or are you not able to give that sort of granularity?

Typically, we don't. No, we're not able to break it out and we don't. And we don't try to chase it. It would be too difficult.

But the new construction business continues to be all-time lows. Some industry statistics that we-- say that it's around 10% for both the non-res and the residential. So again, that's a bit of a tailwind for us when it kicks in again.

Okay, very good. And then, lastly, just on the large merger that did take place. As far as opportunities going forward, do you see any opportunities in terms of talent that's available, or also acquisition availability while they go through the process of merging those two companies?

I did not hear that.

I'm sorry; can you hear me now?

Yes.

I can take that, Bob. It's just about ABC and Bradco. There's no question, when you combine two companies of that size that you should see some people fall out and we may have the opportunity for them to come to visit us and ask for a job, and we may not. We're not headhunters -- if people are looking for a better opportunity, we're willing to give them the opportunity.

And as Bob said earlier, it's early in that process and I'm sure they're involved in a lot of work integrating branches that are close to each other, integrating product lines, doing what they have to do with the under base. So I think it'll take a while for them to just go through the integration process. And as you can imagine, we're watching it very closely. But ABC's a very good company.

Okay, very good. Thank you for taking the question.

Jeff Germanotta, William Blair.

Hi, good morning. My question pertains to the fiscal fourth quarter guidance. Bob, could you put a little more context, or perhaps some ranges, around the type of volume price or gross margin that you're hoping for in the fourth quarter? I would assume on a sequential basis from the third or the fourth quarter, you're looking for a little bit of an uptick in each of those categories.

Not much. We looked at $0.40 to $0.44; we are not thinking that gross margins are going to go much higher than they were in June and July. So that forecast is pretty (inaudible) in that regard.

You (inaudible) 40 basis point in gross margin improvement will help us get there.

But isn't the fourth quarter a little better volume expectation than the third?

Yes.

Across all categories, including residential, wouldn't it be?

Right.

But probably not much on the pricing side.

We'll still, Jeff, be competitive so it's especially-- well, across all of our regions, but especially in the three that we talked about, there's still going to be tough competition there, price-wise.

We don't expect much inflation either, Jeff. It just seems to have flattened out.

Okay. Thank you very much.

Kathryn Thompson, Thompson Research Group.

Hi, thanks very much for taking our questions today. You may have mentioned this in the prepared comments; I apologize for being repetitive asking questions. When you talked about how (inaudible) in May, June, and into July, could you also describe how margins have progressed in that time?

Yes, we did answer that a little bit, Kathryn, in the prepared statements. As we said on the Q2 call, we had made about halfway back to the 23% margin we do, which put us in the 22% range for that month. It fell off again in May, and in June it came back to around 22.6%. But you can tell, May put us down a little bit more than we thought we were. Again, it was a bit of a surprise to us. A bunch of that is in the non-res business and the complementary business. But we need to work hard to get them back up to the levels we used to be at.

Are you continuing to see progress into July (inaudible)?

July was about in the same range as June was. About the same drop in sales and about the same gross margin.

Okay. Also, in talking a little bit about your most recent Canadian acquisition, a little bit more of a manufacturing-type business, and I think you stated earlier that your aren't changing your overall strategy. But I did want to get your thought process on that particular acquisition, and should we expect more manufacturing types on acquisitions going forward?

That's not really a manufacturer, Kathryn. It's a fabricator. What they do is buy finished product from the manufacturers and they may cut or shape that product to do a tapered roof system. We do that in the United States, but the manufacturers do that for us here. In Canada, they have a product that's used more for tapered called fiberboard; in the United States, it's mainly ISO, which is not cut like that. It's just a different process. It's the same business.

And it's really nothing new for the Canadian business. They have a small piece that they're doing that type of work. Now this complements that, gives them access to a little deeper into western Canada so we don't have to ship as far.

Thanks. And just stepping back broadly -- there's been obviously a lot of focus about role of the federal residential tax credit and how this impacted the market, and it clearly appears to have impacted you guys. What is your outlook over the next 12 to 18 months in general for residential housing? And what will it take to get to what you project should be more normalized growth?

I just met with some folks yesterday that showed me six or seven different forecasts for new housing starts. All were up versus 2010. But what's interesting is if you go back to forecasts a year ago, it's lower but still showing growth. Because the sustainable housing starts, most people believe, need to be around 1.5 million a year and for three years in a row, it's been substantially below that, creating what I think in the long run is going to be a really good five- to seven-year housing market because we're so far under what used to be built for the size of the country and the population growth.

But most people projecting growth up to 600,000, 700,000 starts a year. So we monitor that; it's certainly not our business, but most folks are saying 2011 will show growth over 2010 is what we're seeing now.

This week, we saw one homebuilder have a very good quarter, another, not so good. Generally the news is better out of homebuilders; they're buying land, getting ready for a secular improvement in that area, which excites us on the long-term basis.

And remember, 10 to 15% of our sales-- right now, about 10% of our sales is new housing. So as housing comes back, it will have a sales impact but not as great as re-roof, which is the predominant share of our sales. But it will be good economic news to see housing starts go up because that means disposable income is up and then the other pieces of re-roofing will open up more.

Thank you. We have time for one or two more questions. Ivan Marcuse, Northcoast Research.

Hi, guys. In the commercial business, you're up year over year. And with new construction down slightly year over year, 10-year market, most of that was, I was assuming, the replacement. So how much of that would you say was from pent-up demand or from the regular replacement cycle?

And do you think that type of rate is sustainable for the next few quarters, or do you see that pent-up demand with the good weather sort of peeling off here, which is going to make difficult comps, (inaudible) comps? Start [lapping] at X -- any sort of storm-related event.

That's really difficult to tell, Ivan. What we're seeing is a lot of the larger jobs, whether they're pent up or were put off for a while, they're coming back. The smaller work continues to struggle a little bit, which is the middle market stuff that, to be honest with you, we make more money at.

As far as compared to last year, last year was a big down quarter, remember. So we barely got back up to where we were in 2008. So it wasn't like this was a great increase in activity over normal times.

I think that will continue forward; very difficult to tell. What always happens in the non-res business is you need to worry about the fall. Because when the fall hits, sometimes it can slow down drastically because people will rush to get those done in October-November, and then you're going to have a tougher winter.

We just don't have a backlog system. There isn't one that we could create that would help us with the answer so we just have to try to run the business for what we see in the near future, not the far future like that.

Great. And then, just real quick -- both in the residential and nonresidential, what was the year-over-year percentage and price and volume, broken out?

I would expect that non-res was down a couple of points in pricing to our customers. As you saw, we said we were roughly flat for purchase price so our gross margin's down, so it's down a couple of points. It's down a couple of points in the residential business, but less than the non-res. And for complementary, it's probably down about the same as the non-res.

The residential roofing product, despite it being just a more competitive market, it's about equal to last year, which is good news.

Great. Thanks a lot for taking my questions.

Keith Hughes, Suntrust.

Thank you. As you look at pricing moving forward in the residential market, are you expecting more sequential pressure in this guidance you gave us, or are you looking more flat sequentially?

More flat. That's how we see it. The way to beat that estimate would be to improve those margins. The way to hit that estimate is for things to be stable.

And just looking at the history of residential shipments, it looks like we've now anniversaried the big surge in storm damage and you'll be going up against easy comps. Would we not see some re-roofing business come back in the weak market you talked about earlier, starting basically now and moving forward?

Yes, I think that's a possibility. The thing is you just don't know how many roofs as a percentage of the roofs that would have got done this year compared to last year. What I really say is we just don't know. Typically, you're absolutely right. After a six-month lag, things start to become more normal again. I'm just not prepared to say that in that [Texas] market because it surprised us a little bit this quarter that it didn't come back some.

Okay. Final question -- on the residential business. Given the results that you put up here, where do you think this is in terms of share of your markets? We've seen some numbers better than this from some other players. Just what's your view on that?

I wouldn't know that and I don't know what numbers you're talking about because there's no other public companies in this market.

All right; that's all for me. Thank you.

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

Thanks, everyone, for your questions. Paul and David and I will be available for follow-up questions immediately after this call. With just a few minutes remaining, let me close this call with several summary comments.

First, our acquisition pipeline, as I said, is full and we're very active. Our balance sheet's strong and it's getting stronger with the quality of receivables, the good cash flow, the management of CapEx, and so forth.

Our cash remained above $80 million as we paid down debt and made several acquisitions.

As I said a few minutes ago, I believe the long-term secular trends are strong for the industry. And even recently, Fredonia, a recognized research leader for our business, predicted stronger long-term growth rates than previously forecasted, and we agree with that outlook.

And for those who focus on the long term, that's certainly good news. And recall, also, that Paul mentioned that more regions are growing organically significantly more than last year at this time. I think that's a good indication of the health of the industry throughout the country.

We have good business plans in place for the current quarter and have begun our budgeting and strategic planning for 2011 and beyond. We're confident that we will deliver results in line with our long-term growth goals.

I will close now by thanking, as I always do, our hard-working and dedicated employees, who have made our success possible and who will drive our future success.

So again, thanks for your interest and your support of our Company. We really appreciate it. That ends the call for now and we'll be available for follow-up calls immediately after this. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference and you may now disconnect. Everyone have a wonderful day.