Beacon Roofing Supply Inc (BECN) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Beacon Roofing Supply fiscal year 2010 fourth quarter and year-end conference call. My name is Karen and I'll be your coordinator for today. At this time all participants are in a listen only mode. We'll be conducting a question and answer session towards the end of this conference. At that time I'll give you instructions on how to ask a question. (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 web site 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.

Thank you, Karen. Welcome, everyone, to our fiscal year 2010 fourth quarter earnings call. While our earnings per share of $0.37 is at the lower end of analysts' estimates, we are actually pleased to report improving sales growth in many of our regions. Our commercial and complementary sales were solid, but we would like to see more firmness in our residential business for sure. Operating expenses were again well managed in the quarter but our gross margins remained under pressure because of our commercial business which, as most of you know, has been growing at a very fast rate and actually grew at its fastest rate in over two years. And the commercial business does have lower gross margins. Paul and David, in a few minutes, will talk in detail about our gross margins and the effect of product mix, demand, and competition. As we have conducted previous earnings calls, David will present the financial details of our quarter first and when he's finished, we will answer the questions that I know are important to everyone.

So, at this point I will turn the call over to David Grace who is just getting over a cold so he may cough occasionally, but he is our very able Chief Financial Officer. So, David, take us through your comments.

Thanks, Bob. If you are using our slides to follow on let's begin with slide one. Organically, excluding the nine branches we acquired since last year, our fourth quarter sales declined 3.8% to $469.0 million in 2010. Total sales, which are not on the slides, decreased only 1.1% to $482.6 million from $487.7 million in 2009. In our existing markets lines of businesses, residential roofing sales decreased 16.8% as reroofing again was weak, mainly in the areas that had the benefit of the 2009 storm activity. And the new residential construction continues to be near all-time lows in almost all markets.

Non-residential roofing increased 11.5% as commercial activity continued to rebound from the low 2009 levels. Complementary product sales were up 3.3%, the second consecutive quarterly increase. Regionally we saw strong sales growth in the Northeast and Mid Atlantic and the largest declines in the Southwest, Southeast and West, while the sales decreases range from 6% to 8% in the Midwest and in Canada. We continue to estimate inflation in our product cost based upon our current inventory product mix and invoice cost as compared to the invoice cost for the same products a year ago. Based upon this estimate, our product costs were relatively flat as compared to September 2009 levels. However our average selling prices were down slightly.

We had 64 business days in both 2010 and 2009, while we operated a total of 179 branches at the end of this quarter compared to 172 last year. We acquired two branches in this quarter while we opened three during last year's Q4. Gross profit was $106.4 million compared to $113.0 million in 2009, a 5.9% overall decrease and an 8.6% organic decline. Gross margin declined to 22.0% organically and overall from 23.2% in 2009. Increased competition for fewer orders and a higher concentration of non-residential sales, which typically have lower gross margins, were mostly responsible for our drop in average selling prices and gross margins. These negative factors on gross margins were partially offset by higher vendor incentives as a percentage of sales. Existing market operating expenses, which is slide two, decreased by $4.4 million, up 5.8% to $72.1 million from $76.5 million in 2009. Acquired market operating expenses were $3.5 million.

Payroll and related costs, including profit-sharing and medical claims, declined $2.4 million in our existing markets due, in part, to headcount reductions, while general and administrative expenses decreased by $1.1 million due to a reduction in bad debts and certain cost saving measures. Depreciation and amortization decreased by $0.9 million, mostly due to the drop off in amortization related to purchase accounting from our previous acquisitions. Operating expenses as a percentage of net sales were flat to last year at 15.7% overall, but declined to 15.4% in our existing markets, again due primarily to the expense reductions mentioned above. Interest expense declined $2.1 million in 2010 due to lower debt and our new interest rate hedges in place. The 2010 income tax expense was $10.4 million reflecting an effective tax rate of 38.1% compared to 38.4% in 2009. Both 2010 and 2009 tax provisions included benefits from certain discrete items.

As a result of all I've mentioned, our net income was $16.9 million for the quarter compared to $19.0 million in 2009. Our diluted net income per share, presented in slide three, decreased $0.05 to $0.37 from $0.42 in 2009. Our earnings before interest, taxes, depreciation, and amortization and stock based compensation, our adjusted EBITDA which is reconciled to our GAAP net income in our press release, was $38.9 million for 2010 as compared to $45.2 million in 2009.

Now on to the fiscal year results which start on slide four. Existing market sales decreased 8.7% to $1.58 billion in 2010 from $1.73 billion in 2009. Increases in our non-residential and complementary products sales were only partially offset by the annual decline of sales in residential roofing products, which benefited last year from higher average prices in storm businesses, especially from Hurricane Ike in the first half of 2009. Our existing market gross profit decreased 13.7% to $355.0 million in 2010 from $411.1 million in 2009. Existing market gross margin decreased to 22.4% from 23.7% due mostly to the same factors as I mentioned for the quarter.

Slide five shows that our annual existing market operating expenses decreased $21.6 million to $280.3 million from $301.9 million in 2009. Payroll and related costs dropped $9.8 million, while other general and administrative expenses declined $6.9 million including $4.7 million in bad debt reductions. We also saw savings in selling expenses of $1.1 million while depreciation and amortization dropped $3.1 million. Existing market operating expenses as a percentage of sales increased slightly to 17.7% in 2010 from 17.4% in 2009, mainly due to the lower sales. Interest expense decreased $4.7 million in 2010 due to the mentioned changed in our derivatives and the continued debt pay down. Income tax expense was $20.8 million in 2010 compared to $33.9 million in 2009, an effective tax rate of 37.6% versus 39.3% as we benefited from a higher level of discrete items in 2010.

Our net income for 2010 was $34.5 million compared to $52.4 million in 2009. As you can see in slide six, diluted net income per share was $0.75 in 2010 compared to $1.15 in 2009. Adjusted EBITDA was $106.3 million in 2010 compared to $144.4 million in 2009. As slide seven shows, cash flow from operations was $74.5 million in 2010 as compared to $87.6 million in 2009. We experienced a slight increase rather than a decrease in our accounts receivable this year, partially offset from the benefit of lower inventories and prepays. In addition we had a lower reduction of accounts payable expenses this year.

Our day sales outstanding in accounts receivable were up year-over-year but mainly due to the higher mix of non-residential sales which generally have longer terms from us. Inventory turns were about the same this year compared to last year. Capital expenditures in 2010 were $10.1 million compared to $13.7 million in 2009. And we spent $19.3 million on acquisitions in 2010. Net cash used by financing activities was $10.8 million in 2010 compared to $17.6 million in 2009.

To summarize a few key points from our presentation, organic sales were down 3.8% for the quarter, gross margins down to 22.0%. Organic operating expenses decreased by $4.4 million. EPS dropped from $0.42 to $0.37. Our balance sheet improved further in 2010 with cash on hand of $117 million, a working capital ratio of 2.8 to 1 and a debt to total capital ratio of 42% compared to 45% last year.

Back to you, Bob.

Thanks, David. What I want to do now is go through nine or 10 questions. I will present the questions and all three of us will take a turn and together answer them. So the first question is going to be to Paul and David, and the question is involving gross margins. Gross margins for the quarter to us were disappointing. They are down about 120 basis points, actually below our prior estimate of 22.5% to 24% that we talked about. So gentlemen, please explain that and quantify the influences and give us an update on current trends. And I think, David, you could start with that.

Great, Bob, thanks. As I just mentioned, we believe that the drops in average selling prices and gross margin were caused mostly by increased competition for fewer orders and a higher mix of non-residential sales which, again, typically have lower gross margins. In addition, the increased sales of complementary products, which also have lower gross margins than our residential roofing products, contributed to the lower gross margins. These negative factors on gross margins were partially offset by higher vendor incentives as a percentage of sales. In fact, after consideration of shingle incentives, our residential roofing gross margins were approximately flat to last year. As we said during our last two quarterly earnings calls, pricing remains somewhat erratic from market to market, and within our product groups, as end demand seems to fluctuate more than normal from month to month.

As for the competitive trends, Paul can you comment on that, please?

Sure, Dave. As Dave just mentioned, our residential roofing gross margin seems to have settled back closer to normal after a tumultuous ride through the spring's inventory build and sell off. Some encouraging news is that October's gross margin for these products was above the prior year's results. Non-residential reroofing continues to be a very competitive market due to historically low volume of activity and the many alternative products available. When there are a small number of jobs within a market we need to be more aggressive to maintain our share, especially on the larger projects. Complementary products, which are more discretionary than roofing products, continue to see lower gross margins, again due to the low volumes in new construction and remodeling.

Looking ahead, we expect our 2011 monthly gross margins to continue to fluctuate. October's and November's overall gross margins are showing a nice improvement, with October up to 23.2%, but we need to see a longer trend to see if these higher levels will hold.

That's good news, Paul, about October and November. But I'm going to go back to David. David, as you noted in your prepared remarks, year-over-year inflation for the quarter was flat. Update us on pricing, both residential and non-residential markets.

Great. Despite all the talk of price increases in asphalt shingles, our net purchase price for these products has remained stable almost since December of 2008. We have, along with our competitors, announced price increases, but again, the low volume of demand is hindering that effort. We continue to hear of some potential price increases from the non-residential manufactures and complementary product suppliers as those markets appear to be improving, but it's still premature to determine if these will materialize and stick for the future.

Let's move to sales growth. Paul, quarter four organic sales were down slightly. Can you provide us with some monthly information for the quarter and then give us an idea of what you're seeing in each of your markets?

Sure. This quarter, July started off slow, down about 7% organically, while August showed some improvement, and September further improved to where we were relatively flat to last year for the month. In October we saw year-over-year organic growth of about 2% and November is trending in the high single digits positively. The non-residential business continues to be positive with all but two of our regions showing growth in Q4, some with large double digit percent increases. Although it's a smaller piece of our product mix, complementary sales were up in eight regions although not as strongly as in Q3. Residential roofing was inconsistent during the quarter with sales up in only two regions and flat in two others but down significantly in the regions which had storm business in 2009. Our management team continues to work hard to drive sales to improve the lower performing regional businesses, focusing on the fundamentals of selling and running an efficient business while working to raise gross margins.

Okay. Existing market operating expenses, Paul, were $72 million for the quarter. Give us an idea of how that was accomplished.

Sure. From a headcount standpoint, we've added 102 employees in our newly acquired branches. While organically, we had a reduction of about 6% of our workforce. As David noted in his prepared remarks, we reduced our existing market operating expenses by $2.4 million or 5.8%, more than the sales drop of 3.8%. I know our investors appreciate our diligence in operating the business day-to-day based upon the volume of business we enjoy, and we'll continue to do that. As we've said in the past, doing more with less is our practice at Beacon, not just a slogan, from the branch level to the regional level to here at corporate.

David, here is a question for you. Tell us about bad debts. They were down for the fifth quarter in a row. Tell us more details about that performance. Talk about the quality of the receivables at the end of the fiscal year.

We continue to be conservative and consistent with our bad debt reserve. Although the total allowance is lower compared to last year, we still have about the same coverages of our over 60 day past due percentage. Day sales outstanding at the end of the quarter were almost five days higher than last year. That was mainly due to the shift to more residential roofing which have longer terms with us. Our over 60 past due percentage, a detail we watch carefully, continues to improve, down about 60 basis points compared to 2009, a very good sign. Our credit organization continues to perform very well and all of our people are keenly aware we need to continue to monitor the quality of our receivables.

Great job in that area, by the way. Paul, comment, would you, on the businesses we acquired during the fiscal year. And actually, will they be accretive in 2011?

Sure, Bob. We've always maintained that we need a period of time to bring acquisitions up to our organic earning levels. Some of the branches are located in markets hit harder by the downturn. We fully realize when we acquired these branches that they'd have a tough first 12 months or so. The majority of these acquisitions happened in Q3 and Q4 but we had to sell-through their higher priced inventory before they could benefit from our strong repurchasing power. We also had to build proper reserves under our methods which hurt their results in the short-term and purchase accounting amortization was about 1% of total acquired market sales. We've taken what we think are the correct actions and fully expect to see the branches to be accretive in 2011.

Okay. I'd like to look at the balance sheet, David, and I'd like to have you review the key highlights of the balance sheet, talk about ratios, how they are important to us.

Yes, and this is something we're obviously very proud of. And as can been seen in our press release, we had about $117 million in cash at the end of Q4, up about $34 million from 2009. While working capital was up about $33 million. This resulted in a free cash flow from operations of 190% of net income. That's about as high as we've seen it. As I've just mentioned, AR is in good shape. We're at a 2.11 to 1 ratio under the 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 2.8 to 1 compared to 2.4 to 1 last year. Our net debt to total capital was 42% to 45% last year. We've worked hard to maintain these healthy financial conditions. And our balance sheet is still in excellent shape, especially considering the state of the economy over the past couple years.

Thanks, Dave. Let me now comment on estimates for 2011 . As everyone knows, we want to keep investors and analysts as well informed as possible regarding our long term performance. We will have to see what happens to analyst updates as they update their model in fiscal 2011 before I can comment but estimates are, as everyone knows, highly dependent upon one's outlook for the economy in 2011. If the economy continues to improve, we're in a great position to benefit from that. And we also believe it's reasonable to expect growth in earnings per share to get back to our long term growth rate of 10% to 20%. And, by the way, we think that's attainable even with a flat to small top line growth. So we're optimistic about 2011 because the business is running well thanks to the hard work of a lot of people. Our acquisition pipeline is full and we are truly in a very good business.

And the final thing I want to talk about would be our acquisition strategy and what's going on there. Nothing has changed regarding our strategy. We've acquired several small businesses, quality companies, in fiscal '10 that fit right into our objectives of gaining geographic territories and new markets and filling in existing markets where that makes sense. The economic and business reasons for consolidation in our industry remain and we want to lead that consolidation. We're fortunate to have a strong balance sheet, excellent banking relationships. But we'll continue to exercise prudent stewardship of our assets. And always remember managing our current business profitably is our first priority. But we're excited about the acquisition pipeline and we're very confident what 2011 will bring for us.

So those are the prepared questions and answers. What I'd like to do now is open the call to questions from all of you and we'll take those at this time.

(Operator Instructions) Our first question comes from the line of David Manthey of Robert W. Baird.

Hi guys, good morning. Just a question about the reduction in the long term gross margin guidance to 22% to 23.5%. When I run the numbers through, I'm coming up with about half of the 110 basis point year to year decline in margins coming from mix if you use constant margins by segment. Can you talk to us about what the year to year change in gross profit was in residential, non-residential and complementary just so we have an idea of what moved because it seems like something had to be lower and I'm just trying to figure out what that was.

Are you talking about the quarter, David, or year-to-date?

Right now I'm just talking about the quarter.

Yes, what we continue to see is both the complementary and the non-residential products trend lower. And a lot of that for the non-residential business depends how many of the larger jobs we get which are obviously a cheaper price than the middle markets or smaller jobs that we hope to be able to get. You're pretty close with your math. I think it's about half due to product mix and maybe a little stronger than that, but the majority of the drop off is from those two areas. The shingle gross margins and residential roofing gross margins were about flat to last year for the quarter.

Okay. And then you said you expect the shingle pricing environment, it sounded like you expect it to be flat next year because you mentioned price increases in non-res and complementary. And as we roll into 2011, do we get a reset now with inventories getting straightened out that there's as good a chance of increases as ever? And assuming that the discounting environment will normalize next year with inventories and manufactures making less product, do you expect any increase or decrease in list prices next year?

Dave, this is Bob. October and November were quite positive for us, and we don't want to extrapolate that into the year, unless Paul and David want to do that. But we're positive about what happened at the beginning of our fiscal year and it's an awfully good time for us in the residential area. Carlisle and others have been talking a lot about price increases in commercial, which we think are needed and we would endorse. David, do you want to add anything?

Yes, the only thing I'd add, I think you're correct with the resetting of the inventory. As you can see we dropped our inventory drastically from June to September. And almost all of that decrease, David, was due to asphalt shingles. When we see a market flatten out there's no need to carry those excess inventory as we've had to do in the past because of the way the manufactures price to us. Maybe Paul can give you a little bit of an idea about what we think to really try to give you an idea of what the manufactures might do next year.

Yes, Dave, that's, I think, pretty difficult to predict. As we've seen in the past, pricing, whether it's a combination of list and discounts, are going to be driven by the market and how strong the market is. So my prediction powers I think are pretty weak in that area. I think we'll continue to do what we do -- price effectively in the marketplace, try to maximize our gross margins and continue to work with our manufactures, our partners, primarily shingle folks, to maximize cost benefit.

I think the biggest thing here is we're looking for some consistency next year, which will help us price the product to our customers and also get a better sense of what's happening in the marketplace.

Got it. All right guys, thank you very much.

Thank you. Our next question comes from the line of Jack Kasprzak of BB&T.

Thanks, good morning everyone. My first question is just for Paul. I didn't catch your comment, Paul, about the month of October. I think you said November same-store sales were up in high single digits after September being flat. What did you say about October?

Yes, October was up low single digits, 2%. That's organic growth. What I also said, and I do repeat, is November was better.

And that's total Company same-store. So the little bit of improvement there versus what you saw during the September quarter, I guess that is driven by the little bit of improvement in residential that Bob just referenced during the quarter? Would that be right?

Yes, overall that is correct. And remember, last year Q1 was a tough quarter for us when we first started seeing the drop off. So we rounded some of that and we think going forward year to year, it's at least against some comparisons that are more relevant in the marketplace without the storm business in there.

Got it. And with regard to the non-res business which has had two good quarters in a row here, and as you point out, strong sales, obviously that's reroofing activity, refurbishment activity. Are we just coming off a tough cycle in non-res where people delayed expenditures and you're just seeing a bit of a rebound in demand? Is that basically what's going on there?

Remember, part of that I think is that last year in general we saw, as you recall, saw a big drop off in commercial business in general, and since then it's come back. So we're building off a lower base to begin with. And there's no doubt a majority of the work we see is reroof versus new construction on the commercial side. And some of it for sure could be pent-up whether it was school work through the summer and early fall and now.

And I actually just read a report that said that the public sector actually had growth in the last three years, which is pretty amazing. It must be some of that stimulus dollars hitting the construction.

Okay, great. You guys talked about some price increases across your various lines, but specifically, are there any price increases for residential asphalt shingles out in the market right now?

No. There's none right now.

And you wouldn't see some of that heading into the winter period anyway. That will happen, if it does, in the spring when the season kicks in again.

Right, but maybe -- okay, that's fair. Maybe announced now or in the next few weeks for the spring but it's even still too early for that?

Yes, you're referencing manufactures' price increases to us? That was your question?

Yes.

Yes, we haven't seen that.

And as David said, that wouldn't be happening now. That would be first part of 2011.

Okay, great. Thanks a lot.

Thank you. Our next question comes from the line of Scot Ciccarelli of RBC Capital Markets.

Hi guys. Scot Ciccarelli.

Hi, Scott, how are you?

Not too bad. One of the questions I have is historically the residential reroofing business has been very stable but that has not been the case for certainly several quarters now. The questions are, number one, what do you think has changed in the business? And then, number two, given your long history in the business is there any proxy outside of storm related activity and storm related comparisons on how long and deep the unit downturn can really last?

This is David. One thing that I'll first comment on is it's actually been quite stable if you look at the markets outside of those storm areas. We've seen some pockets of growth in the Northeast, certainly the Mid Atlantic lately, and down the coast in the East Coast. The Midwest has struggled, Southwest has struggled and the Southeast has struggled where there's been storms. But those are the markets. They have been very resilient and I think that reinforces the industry and the reroofing. It's tough when a storm goes through in today's world where there's no new construction to go after once it goes through. That reroofing is gone and it consolidates perhaps a few years of reroofing into a very short period.

One thing to add to that, and I totally agree with David, when you think of Ike that went through Texas, down on the Gulf, that whole Galveston area, there's not a lot of rebuilding of even homes that were damaged. That area has not been a big bounceback that you would expect in a Florida or the Carolinas. But just to reinforce what David is saying, the residential and non-storm related regions are quite good. New England, Pennsylvania, Canada, the Mid Atlantic, and even residential Midwest is surprisingly, it was flat which is good. So there's no fundamental difference, Scott, to get the essence of your question. It's just the snapback from that big storm which is ranked, I think, in the top five of all-time, has not been strong at all, so nothing indigenous to our industry that we can see.

No, it just seems like there was maybe much more pull forward demand than what we have historically seen because of the storms, is that what the suggestion?

Yes, yes, you just said that better than I did, Scott. That's why you write reports.

Thanks, Bob. And then just a quick follow-up. You guys had mentioned more competitive environment because there isn't that much business out there. Is that being driven by certain competitors given some of the recent merger activity in the industry or is it really just across-the-board?

It's across-the-board and it varies by region. It just depends on what drives that branch of that competitor, so there's no, I don't see any predictable pattern. We have good competitors. They want work as much as we want work and so we see the competition region by region.

Got it. Thanks a lot guys.

Thank you. Our next question comes from the line of Tom Hayes of Piper Jaffray.

Hi, good morning, gentlemen. I was just wondering if you could remind us, you'd spoken previously about the mix between your reroofing activity and new roofing activity. Is it still about 90% in the residential side is reroofing and about 85% on the commercial side?

Just my personal opinion, and again, as we've said in the past, we don't have the ability to track this, they're both below 10% of new construction. There is not much construction going on at all.

I'll reiterate that. We see it consistently across all of our regions, whether it's a heavy commercial region or a heavy res region. The amount of new work we have is much lower than in the past, new construction work.

Shifting gears a little bit, if you look at your complementary products, how many of those products would be eligible for the tax credit that are subject to expire this month, like on the windows and stuff?

Very little. The products that are in that category, the largest one is vinyl siding which obviously does not have the ability for the credit. But we do sell some windows and doors which are eligible and some insulation in certain markets, batting insulation for residential.

Just lastly, I was wondering on the commercial side, is your product selection or your sales still predominantly asphalt? Or roughly how much of that is a transition to metal roofing?

Metal roofing is the fastest growing segment of the industry but it's still a very tiny portion. We sell single poly roofing which is EPDM and TPO. In some southern markets we also sell some built up and modified. But our metal roofing is still a very small percentage.

Okay, thank you.

Thank you. Our next question comes from the line of Kathryn Thompson of Thompson Research Group.

Hi, thanks very much for taking my questions today. You talked a little bit throughout the call about build trends since quarter end, and you talked specifically about margins. What is your outlook for margins as we go into next year? And what is the big disparity between what was going on in October versus what happened during the quarter for Q4?

For next year, as you saw in our press release, we'll stick to the 22% to 23.5%. We think we can do better than that. It is trending but it is a little bit inconsistent in almost all of the markets from month to month. The biggest difference, Kathryn, between the quarter and the first two months of this year is that, one, the asphalt shingles are actually trending a little bit higher than last year in gross margins, and we gained tens of basis points in the non-res and the complementary products. It's tough to say if that's, again, a continuing trend because especially with the non-res it's really dependent job to job how things get priced and how much money we make.

And I think we've mentioned on previous calls, besides the mix and the change in mix, we spend an awful lot of time, and we'll continue to do it, on process improvement just within our pricing matrix, how the branches work at pricing, et cetera, to try to drive some improvement.

How much would you say is process improvement versus the two points you just brought up with gross margins for asphalt in the non-res?

We just haven't done those calculations yet until the quarter ends and then we'll do those calculations.

Okay. Are there outliers from manufacturers with pricing, particularly in the residential side?

I don't believe so. There's still the smaller manufactures besides the larger four manufactures that you're well aware of, but we don't see much inconsistency. In fact, consistency is the word. Like I said, since 2008 we just haven't seen any changes.

Okay, thank you, just double checking on that. it sounds from the commentary that at least for you inventories are at reasonable levels, if you can confirm that. And then what do you think, what is your opinion for inventories for the industry as a whole and how does that play into your purchasing plans for Q1, really going into the next fiscal year, and how does that compare to a year ago?

One thing I would say before Paul gives you an idea, we're not going to discuss what we do in Q1. That is something that we hold dear to negotiations with vendors.

Yes, and from an industry standpoint, it's difficult to say. There is no doubt earlier this year, there was more purchasing than normal as we anticipated price increases. And not just ourselves. I have to believe our competitors also because the ARMA data says volumes were up in Q1, calendar Q1. And since that time, there's been adjustments made. We don't base what we're buying here on the industry. We'll base it on need and knowing that we have to satisfy every order 100%, that's our primary driver.

Yes, I understand how you (inaudible) from the industry, but getting back to the point, do you think that inventories right now are at reasonable levels or do you expect a continued lowering?

They are at reasonable levels. They may drop a little bit more in December because it's heading into the winter period but we're back to more normal levels of inventory compared to have to buying ahead of the manufacturers' discounting.

Obviously there's been a lot of questions about price increases and the market obviously isn't very conducive to any price increase right now, particularly on the residential side. In your opinion, what would it take for a price increase to successfully go through, say, the spring?

I think it would be two-fold. One, for residential, if that's what you're talking about, for the commercial side you need a better economy, more activity for the non-res business. And same thing with the complementary. Seeing housing starts double wouldn't hurt the demand for residential shingles. But the economy needs to get better and when that happens is anybody's guess. We're done guessing. We thought it would get better this year and it just hasn't.

And absent any improvement in housing, you wouldn't expect a price increase?

I didn't hear that.

I was saying, absent of any improvement in the economy, you would not expect a price increase?

No, but I will say that the gross margins for residential are improving, so we're doing a better job in that area. And if you compare year-to-date gross margins to the last couple years, they're very solid. It's really a product mix issue. When commercial is growing double digits and residential is going down double digits, it's hard to make up for the product exchange. But I think the pricing environment will get better, at least we're seeing it in October and November, but we're not taking those 60 days and making big predictions. But we think everyone likes to know the trend and the trend is positive.

Okay, great. Thanks so much.

Thank you. We have time for a few more questions today. Our next question comes from the line of Michael Rehaut of JPMorgan.

Hi, this is actually Jason Marcus in for Mike. Just regarding the storm activity last year, I was wondering how much of the storm activity contributed to Q4 into 2009 overall?

I don't think it's just the storm activity that happened from the previous year. It's the fact that even before that point a lot of that storm took up reroofing, especially, that we would be doing right now that just isn't there. That's more of the point than it is the storm, the activity, that we picked up because by then most of it was gone.

And then I think you mentioned that October and November showed improvement in gross margins. I think I missed the number, if you could just repeat that?

23.2% for October and we said that November was trending along those same lines.

Okay, great. Thank you very much.

Thank you. Our next question comes from the line of Ryan Merkel of William Blair.

Thanks, good morning guys. My first question, maybe Bob you could give us your view on the pent-up reroofing demand opportunity and if consumers are still deferring reroofing projects.

Gee, Ryan, single me out here on the call.

Or Paul.

I'm kidding. As everyone knows, reroofing is the dominant reason for demand of our product. We don't trace it by invoice or by shipment whether it's roofing or not. The fact that reroofing is the largest percentage I can remember in the business is because new construction is way off. And pent-up demand is more just empirical discussions, newspaper articles, things you see in your own neighborhoods where people are going to replace the roof but they may not do it until next spring. But there is absolutely pent-up demand because budgets are tight in cities, they are tight in states, individuals have tight budgets. And it's really interesting how we are performing well even despite those situations.

David and Paul and I have talked about the fact that there's a lot of empty houses out there, or soon to be empty, on the residential side. And despite all that, we're seeing growth in residential, the trend in gross margins are decent. So it's all about reroofing and when this economy turns, and that's one of my closing comments, when this economy turns, we're positioned pretty well to get very positive upside operating leverage for profits. So, does that help at all Ryan?

Yes, it does, and we agree. And then just secondly on vendor incentives, can you quantify how much it helped gross margins this year and do you expect the incentive to continue next year at the same level?

Absolutely not. The reason we say that, it's truly about competition and our vendors. The reason it's helped out is mainly because of short-term discounting programs, and that's the vast majority of it.

Okay, thank you.

Thank you. Our next question comes from the line of Ivan Marcuse of Northcoast Research.

Hi guys. I just have a couple quick questions. David, for inventory days, it's now down around low 50s. Do you expect to keep it in that range going forward or where do you think the actual level for inventories in terms of days?

Yes, Ivan. For the near futurity, it should stay at that level. Like I said, it may shrink a little bit for December. And we measure our inventory turns based upon our warehouse movement which you don't have the information for. But we strive to get it back to that six times that we've had in the past. And the only thing that I think could change that is if something drastic happens from the manufacturers in January and February that makes us buy more because they give us such a good deal.

Okay, great. And then you may have said this but I think I missed it. What was your estimate for inflation in residential, non-residential, complementary growth in house?

We didn't give that out but I'll give you some quick data. None of it is more than 1% up or down compared to last year. We saw a little bit in the non-res in complementary and shingles were flat to slightly down.

Okay. And then for depreciation and amortization, will that be down in 2011 or do you expect it to be flat to this year?

The purchase accounting amortization will continue to drop off. Basically there was a much higher charge in the earlier years from customer relationships than in the later years. It won't drop as much as last year but I can give you some more details on that off line if you give me a call.

Great, and then last question is, in the non-res side, do you see a significant difference in pricing on average between EPDM roofs and TPOs? Is one cheaper than the other or are they pretty much in the same ballpark per region?

Yes, just in terms of the general range, you could say TPO has slightly lower margins than EPDM.

And the other thing, Ivan, is I believe, it hasn't been confirmed, the labor costs for the TPO is cheaper than the EPDM.

Okay, appreciate you taking the time. Thank you.

Thank you. Our next question comes from the line of Keith Hughes of Suntrust.

My question has been answered, thank you.

Okay, that's it, Karen.

Would you like for me to go into the closing comments at this point? Okay, now is the time to wrap up the call. Thank you very much for the questions. Paul, David and I will be available for follow-up questions immediately after this call. We're all here in Herndon, Virginia or you can call our cell phones. With just a few minutes remaining I'll close this earnings call with a few summary comments.

First, our acquisition pipeline is full and we're very active. Our balance sheet is strong and actually is getting stronger. Cash is approximately $117 million, and remember, we paid down debt and made several acquisitions during fiscal 2010 while building that cash. I believe long term secular trends are strong for the industry. Freedonia, truly a recognized research leader for our industry, has predicted strong long term growth rates as well, and we agree with that outlook. For those who focus on the long term performance of our industry, that is certainly good news. We have more regions growing organically than we've had in several years. That is a good indication of the health of the roofing industry in general. We propped up budgets, our strategic plan is in place, so we have a lot of good business plans for fiscal 2011 and beyond. We're confident about delivering results in line with our long term growth goals.

Something I do want to mention in closing is our Company is well positioned geographically and from a product mix standpoint to enjoy positive earnings leverage with an improving economy and the eventual recovery of the housing market. And let me close as I always do by thanking our hard working and dedicated employees who have made our success possible and who drive our future success. So thanks again for your interest in our Company and support of Beacon and I appreciate the time you took to call in today. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.