Beacon Roofing Supply Inc (BECN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply fiscal year 2011 first-quarter conference call. My name is Tyrone and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. At that time, I will give you instructions on how to ask a question. (Operator Instructions)

As a reminder, this conference is being recorded 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 of section of the Company's latest form 10-K. The Company has posted slides on the investor section of its website under the events and presentations that we'll reference during management's comments. On the call today for Beacon Roofing Supply will be Mr. Paul Isabella, President and CEO, and Mr. David Grace, Chief Financial Officer.

I would now like to turn the call over to Mr. Paul Isabella, President and CEO.

Welcome, everyone, to our fiscal year 2011 first-quarter earnings call. We're very excited to report our first quarter delivered strong results with EPS coming in at $0.22, up $0.05 from Q1 of 2010 and total sales for the quarter being up 10.1% an organically up 6.6%. Our commercial and complementary sales were up double-digits for the quarter with residential sales basically flat year-over-year and improvement in those products over the more negative recent trend. We're also very pleased that our gross margins ended at 23.4% versus 22% in Q4 of 2010. While under our gross margin rate from last year's first quarter by 60 basis points, we welcomed the increase above 23% for the first time in 4 quarters. As in the past, operating expenses were well managed in the quarter. All in all, a good start to fiscal 2011 delivered by our dedicated and hard working Beacon team. As we have conducted previous earnings calls, David will present the financial details of our quarter and when he is finished, he and I will go over a few pre-planned questions, topics, and then take any questions you might have.

I will now turn the call over to David Grace, our Chief Financial Officer. David?

Thanks, Paul. When I refer to 2011 in my discussion, I am referring to this year's first quarter fiscal year 2011, while 2010 refers to last year's first quarter. If you are using our slides to follow along, let's begin with slide 1. Our fiscal 2011 first quarter organic sales, which reflect our existing markets by excluding sales at branches acquired since the beginning of last year, increased 6.6% to $391.8 million. Total sales, which are not in the slides, increased 10.1% to $404.8 million from $367.7 million in 2010. In our existing markets' lines of business, non-residential roofing increased 13.6% as commercial activity continued to rebound from low, 2010 levels. Complementary product sales were up 12.1%, the third consecutive quarter we increased as the remodeling market seems to be rebounding in several regions. Residential roofing sales were relatively flat with a decrease of 0.8%. While new residential construction continues to be at near all time low levels in all markets, some regions are seeing increases in re-roofing activity. Regionally, we saw the strongest sales growth in the Northeast and Mid-Atlantic while the largest declines were in the Southeast and West.

We continue to estimate inflation in our product costs based upon our current inventories product mix in invoiced costs as compared to that invoiced cost of the same products a year ago. Based upon this estimate, our net product costs were relatively flat as compared to December 2009 levels. We had 62 business days in both 2011 and 2010, while we operated a total of 177 branches at the end of this quarter compared to 172 last year. We closed one branch and sold our Winnipeg branch in this quarter, while we acquired one branch and closed one branch during last year's first quarter.

Total gross profit was $94.8 million compared to $88.3 million in 2010, a 7.3% increase. Existing market gross margins declined to 23.5% from 24.0% in 2010, mainly due to a higher concentration of non-residential sales, which typically have lower gross margins. However, the existing gross margin was up sequentially from 22.0% in our fourth quarter of last year. Existing market operating expenses, which is slide 2, increased by $1.9 million or 2.7% to $71.7 million from $69.8 million in 2010. Acquired market operating expenses were $3.3 million. Payroll and related costs including profit sharing and medical claims increased $2.6 million in our existing markets, principally due to increased incentive-based pay. Selling expenses increased $0.7 million mainly due to increase the fuel costs and higher credit card fees associated with the increased sales. All general administrative expenses decreased by $0.1 million overall, the bad debt component of those expenses increased by $0.7 million.

Depreciation and amortization decreased $1.0 million, due to a drop off in amortization related to purchase accounting and lower depreciation due to lower capital expenditures in recent years. Warehouse expenses were also down $0.3 million. Operating expenses as a percentage of net sales were down to 18.5% overall and 18.3% in our existing markets, due primarily to the higher net sales. Interest expense declined $2.1 million in 2011, due to lower debt and new interest rate hedges in place since last year's first quarter. The 2011 income tax expense was $6.3 million reflecting an effective tax rate of 38.6%, compared to 38%, 39.4% in 2010, and 2011 included benefits from certain discreet items. As a result of all mentioned, our net income was $10.1 million for the quarter compared to $7.8 million in 2010. Our diluted net income per share represented in slide 3 increased $0.05 to $0.22 from $0.17 in 2010. Our earnings before interest taxes, depreciation, amortization, and stock-based compensation are adjusted EBITDA which is reconciled to our GAAP net income in our press release, $27.7 million for 2011 as compared to $27.1 million in 2010.

In slide number 4 shows cash flow from operations was $57.5 million in 2011 as compared to $29.5 million in 2010. While we experienced smaller seasonal decreases in accounts receivable in inventories this year, these factors were more than offset by the favorable impact from a slightly lower reduction in accounts payable and accrued expenses this year. Our day sales outstanding and accounts receivable were up slightly year-over-year due mostly to the higher mix of non-residential sales which generally have longer terms. Inventory turns were up nicely from last year as we have reduced our asphalt shingles inventories due to the stabilization of that market. Capital expenditures in 2011 were $0.9 million compared to $0.6 million in 2010, while proceeds from asset sales were up $0.8 million. Net cash provided by financing activity was $0.8 million in 2011 compared to a cash used amount of $1.2 million in 2010.

Now to summarize a few key points from my presentation, organic sales were up 6.6% for the quarter with organic gross margins at 23.5%. Organic operating expenses as a percentage of sales were down to 18.3% from 19.0% in 2010. EPS increased from $0.17 to $0.22. With cash of $176 million and a very strong balance sheet, we are ready to invest in the future and future growth as it happens.

Now, back to Paul.

Thanks David, great job. Now, David and I will discuss some topics as we have in the past that we know all of you are interested in. I will start with the first one.

David, gross margins for the quarter came back very nicely, still down slightly compared to 2010, but now within our prior 22% to 23.5% annual 2011 guidance. What were the Q1 influences and give us an update on current trend?

Sure Paul.Unlike the last few quarters when there were multiple causes for the declines, the drop in gross margin in a year-over-year comparison in Q1 was caused almost entirely by the higher mix of non-residential sales and complementary products, which typically have lower gross margins than our residential roofing products.

Paul, can you talk a little bit about the competitive atmosphere that we're seeing out there?

Our residential roofing product gross margins have come back closer to normal after a tumultuous ride through last spring's inventory build and subsequent sell off. Complementary products, which are more discretionary than roofing products, continued to see lower gross margins due to low volumes in new construction and remodeling although we have recently begun to see increased remodeling activity. Non-residential gross margins are still off in the prior year, but are up about 30 basis points sequentially from Q4. Looking ahead, we expect our 2011 quarterly gross margins to continue to fluctuate close to or within our updated annual range of 22.5% to 24%. As you said during last quarter's call, October/November's overall gross margin showed a nice improvement and the improvement continued into December, although January was slightly lower. It is tough to say if that wasn't just due to the very harsh weather we've had. We're hopeful the results will continue through the rest of the winter and into the spring.

Let's move onto the next one. Dave, can you give us an update on pricing and inflation for the quarter?

Our weighted average costs for asphalt shingles was down about 4% to 6% year-over-year, as we have finally realized the full impact of past vendor discounts in our costs, most of which was passed onto our customers as you can tell from our slightly lower gross margins. A lot of the change in our shingle costs is simply having less aged inventory and more recently purchased shingles in our weighted average costs this year than last year. We continue to hear of some potential increases from the suppliers of all three of our product groups from the spring beyond the recent 1% to 3% increases experienced so far in non-residential and complementary products. But it is still a little premature to determine if they will materialize and stick in the marketplace.

Thanks, Dave.On another topic, let me give you an update on our Q1 organic sales, which were up nicely. October was up about 2%, November 9%, and December 9% giving us the 6.6% organic growth for the quarter. Our business, due to seasonality, is difficult to measure sequentially from quarter to quarter and last year may have had some more severe weather, but it certainly feels like activity in our industry is picking up. In January, which certainly saw some severe weather as I mentioned this year, we were down organically 3%.

The non-residential business continued strong in Q1 with all but two of our regions showing growth, some with high double-digit percent increases. Complementary sales of smaller portion of our total product mix were up in 8 regions and at a higher growth rate than in Q4. Residential roofing was inconsistent during Q1 with sales up in 5 regions, but lower in Canada and in the West and still down significantly in the regions which had storm business in 2009. Our management team continues to work hard to drive sales and improve the lower performing regional businesses, focusing on the fundamentals of selling and running an efficient business while working to raise gross margins as we have in the past.

Now, I would also like to give you some further details on expenses for the month. Existing market operating expenses were about $72 million for the quarter, up almost 3% from last year. At the end of Q1, we had about 100 employees in the branches acquired during fiscal 2010, while organically we had a reduction of about 5% of our workforce since the end of last year's first quarter. Despite this reduction, the largest factor in the increase in our existing market operating expenses was payroll and benefits at $2.6 million increase. Like many companies, a portion of our total payroll is incentive based and that portion increased due to better results for Q1. In addition, our bad debt expense increased along with fuel and credit card costs. However, we continue to reduce several of the expenses we can control. I know our investors appreciate our diligence in operating the business day-to-day based upon the volume of business we enjoy.

Moving on, David, bad debts were up slightly after decreases for 5 quarters in a row. Please tell us if the quality accounts receivable slipped in Q1.

We continue to be conservative and consistent with our bad debt allowance. Although the total allowance was lower compared to last year, it was up from year-end, and we have about the same coverage of our over 60 day past due total as we did at the end of last year's Q1. Our day sales outstanding in receivables at the end of the quarter was up slightly -- was up a little over a day over last year, but that is mainly due to the shift to more non-residential roofing sales, which again have longer terms. Our over 60-day past due percentage, a detail we watch very carefully, was down about 130 basis points compared to last year. Still a very good sign of the quality of our accounts receivable. We have struggled a little with collecting lingering amounts due from contractors who concentrated on storm business, but our core customers remain solid.

For our next topic, I would like to update you on the progress of our recently acquired branches. As you know, we separate them from our existing markets. We have always maintained that we need a period of time to bring acquisitions up to our organic earning levels, and some of these branches are located in markets hit harder by the economic downturn. We fully realized when we acquired these branches that they would have a tough first twelve months or so. The losses are concentrated in areas where we expected to struggle for a while. With that said, we continue to closely monitor their progress and we have taken what we think are the correct actions and still fully expect these branches to be accretive in 2011.

Moving onto our balance sheet, David, as you've noted in our prepared remarks, the balance sheet remains strong. Can you give us a review of the key highlights and the current pertinent ratios?

As can be seen in our press release, we had about $176 million in cash at the end of Q1, up about $65 million from last year, while [mag] capital was up about $35 million. A portion of these increases are expected to be temporary. For example, we have more purchases towards the end of this year's first quarter than last year and, therefore, accounts receivable did not drop seasonally as much as usual. As I just mentioned, AR is in good shape and we're at a 1.55 to 1 ratio under our only pertinent debt coverage covenant, which is to maintain an adjusted net debt to adjusted EBITDA ratio of less than 4 to 1.

Let me also recite a few other ratios. Our current ratio is 3.0 to 1 compared to 3.2 to 1 last year and net debt to total capital is 25% compared to 36% last year. We work hard to maintain these healthy financial conditions and our balance sheet remains in excellent condition.

Great, thanks Dave.To close the prepared questions and answers, I would like to give you an update on our comfort with the analyst estimates for the fiscal year 2011. We think the range in average of the analyst estimates for 2011 are reasonable and obtainable. Q1 was a great start towards obtaining that yearly goal and if current trends continue, we hope to be able to end the year above the average. We're optimistic about 2011 because our business is being run well by our dedicated employees, and we're in an industry that has positive growth projections. That concludes the formal portion of our presentation.

Now, we would like to open it up to questions from you.

(Operator Instructions)

David Manthey of Robert W. Baird.

Question on the pricing just so I understand the base and where we're going here. If you assume that shingles were $80 a square back in 2009 and then they tailed off here, the impact that you're seeing right now might be in the $77, $76 range. What would you expect as we hit the main part of 2011 here, we hit the June quarter? Would you expect that with the price increases that we're starting to hear about that we could see -- we would see $80 again or are you thinking we go to the mid-$80s on any kind of price increase?

The only thing that I think happened, David, is that the way we account for the special buys with the weighted average cost system, we have had some lagging rebates. It is not that the rebates change that much, but our invoice costs pretty much stayed the same, and as those rebates over the summer became in the larger amounts, we have realized those costs. Our selling prices to our customers has remained pretty flat, actually. The only reason that we're seeing a little boost this quarter is the gross margin sequentially has gone up on those products, but it is a cost aspect, not the pricing.

And, Dave, to add a little more color, as you know, all the major manufacturers announced increases in January, effective in March, although one just pushed that out to mid-April, so we're going to have to wait and see how demand is and if those prices stick as we go through these next few months.

Okay.

So, just to be clear, putting the two comments together, you're saying that if there are price increases assuming that $80 is a base level, you would assume it would be above that; it wouldn't be that you went below it and now you're fighting to get back to that level, correct?

Yes, and it is difficult to tell as you know because the products are so much different and it is not just 30 year laminates that we sell which I think you are referring to. It has been between $76 and $80 most of the year, and it depends on the customer and it depends on the size of the job and the region.

Okay. All right.

More of a technical question here, maybe for Dave. Can you give us the number of days this first quarter versus what it was in the year ago quarter? And then if you have the remaining three quarters of the fiscal year, that would be helpful.

It was 62 days for both and I think there is only one quarter difference this year, and I will send you that information, David. I don't have it in front of me.

Michael Rehaut of JPMorgan.

This is actually Jason Marcus in for Mike.

My question is, I was wondering if you expect an uptick in re-roofing demand in the Northeast given the hard winter and how that could potentially affect sales in 2Q and 3Q?

It is certainly the way it usually works, from my experience being there for quite a few number of years, and right now hopefully the safety factor is really what's happening out in those areas that have the heavy snow.Get the snow off the roofs, make the roofs safe. Unfortunately or fortunately that may cause some damage and show leaks that have been a problem, and that should make for a good spring. That's normally what happens, but again you really can't predict too much in today's economic times, but that's certainly what would normally happen.

And in the near term as you can imagine, with so much snow, and so much of the Northeast, it does hamper sales a bit. As Dave said, contractors are very active removing snow right now to protect the roofs from collapsing and then as we go through February and March and the thaw starts, we will just have to see what level of damage there is.

Okay.

My next question is, I'm just wondering if you have an estimate of the mix between re-roofing and new roofing activity and if you see any changes in the trends there?

New construction is still at such all time lows that it certainly has to be under 10% of the mix right now. I saw Carlisle's release yesterday where they upped their percentage of re-roofing to 75%. I think in our markets, we're well above that because we're in the northern more mature non-residential markets, certainly.

Ivan Marcuse from North Coast Research.

Real quick, you mentioned January sales were down, I think you said, 3%. Is there a difference between -- did you see -- is non-res better than that or is it equal with that or lower in January? How would you break down residential and non-residential?

Non-res continues to be better than residential, and the complementary products are also better than residential. We haven't finalized the sales numbers by region yet to be able to give you that information; and again I read Carlisle's transcript and they said they had a very strong January. Some of that is inventory build at distribution, because they have announced price increases, and of course we'll try to take a little bit of advantage of that and buy some inventory ahead of that, which would help their sales more than ours.

Got you.

On the inventory side, your days inventories are about as low as they have been in several quarters. Would you expect an uptick in inventories? Or -- you said that demand stabilized in residential, so how should we think about inventories in your buying patterns going forward?

Again, being here a long time, we're finally back to where we used to be; those are good levels for us. We need to turn our inventories 5 to 6 times. Lately, we've been investing in the asphalt shingles as you know, but we hope to see that flatten out so there is not really this -- it is not a game or anything, but being in purge-type thing where we have to buy a bunch of inventory because they've given us a deal for a short period and then we have to hold it. I would like to see the industry be under more normal terms where we can buy inventory as needed and not to participate in those types of buys.

To mimic what Dave is saying, this would be ideal for us, but that doesn't preclude us from having to make some form of buy as we move forward, depending on availability in a region, demand in a region, or price increase impact, something like that.

Tom Hayes of Piper Jaffray.

Paul and David, I was just wondering, could you provide a little more color on what's driving the strength on the commercial side? Is it just a catch up in delayed activity or are commercial vendors getting a little more proactive?

What I would really say is, remember, we had a pretty good drop off in 2009, and as we went through last year, that drop off continued in Q1 and part way through Q2 which we only had about a 5% drop in non-res. After that we started seeing year-over-year gains.

Some of it is truly just looking at comparative numbers year-over-year. The activity seems to have picked up. I think going forward to the rest of our fiscal year of 2011 we'll see some of it level off in comparison, but we think the activity is here to stay for a while at these levels.

Okay.

We had 6 or 7 quarters where commercial dropped as we went through the quarters, and now we have had 3 -- 4 where we have gained, so it is a good sign. We're not only are we coming back from the lows from 1 year, 2 years ago, but we're also making progress just on some (inaudible).

I can tell you this. It is all re-roofing. It is not new construction component.

Secondly, you guys have done a great job of cleaning up the balance sheet. It's probably the strongest it has been in awhile. What are your thoughts on acquisitions and a target contribution to top line growth going forward or over the next couple years?

We're still as we have said on past calls, we're still very active in the acquisition hunt. Our pipeline is full. Discussions continue, but as we have done in the past, it has to be the right acquisition in the right region at the right price for the right reason, and we'll just continue to work that equation.

And Bob is not on the call to tell me how bad my ac accent is this time, but he is actively out there with Paul and I looking at companies. Some of the companies just realize they're at a low point and have struggled to try to sell their company for less than what they think the going value or the long-term value is, but as time goes on we hope some of those companies get a little bit better and we can make some deals. Like I said, Bob is out there beating the street looking for stuff, and I think we'll get some done and it will add to the top line and hopefully equally to the bottom line.

Ryan Merckel of William Blair. Your line is open.

My first question is on the comment about January gross margins being a little bit lower. Is that a little bit lower sequentially in that we're still up nicely year-over-year?

Yes, that's correct. We'll be above last year certainly which last year I think was under 22. Some of it is mix, remember, during these winter months, when we're hunting for work, we'll probably see a little stronger non-residential business in the southern climates across the Northeast and portions of the Midwest have very much shut down because of the weather.

Okay.

And then as it relates to the price increases that have been announced for the spring, is it fair to say you're a little more optimistic this year that those will stick, given that demand seems to be coming back and that inventory levels in the channel appear to be more normalized?

For the asphalt shingles, we don't have any idea. Like Paul said, one of the manufacturers, PABCO, has already delayed their price increase. I am pretty comfortable and hopeful the non-res stuff will stick because that's where we need it.

All non-res folks announced in January also on sheet membranes, asphalt-based product, and accessories that they were going to increase 5% to 7%, in that range, most of it due to raw material pressures, so there is a very strong case that will occur I think more so than right now on the shingle side.

Again, it is tough to tell. We're in the middle of a pretty harsh period right now weather-wise, and we'll have to see what the demand looks like as we get through February and March.

Scot Ciccarelli of RBC Capital.

Two questions. I think you'd said January sales were down 3%. Can you remind us what kind of month January was last year, because I do know that the comparisons are a bit harder as we get into the March quarter from what we just went through?

It varies vastly by region. To me, I live in New England so last year in January the weather wasn't as bad. It was colder, but we don't have four feet of snow on the ground. After January, again, snow up there through the rest of the winter, so it is a little difficult to tell, but in reality January is one of the smallest months we have in our entire fiscal year, so I don't read a lot into it. We see the weather. We see some small changes. It is not down 15%. It is down 3% which I think is pretty good.

That's fine.

The next question is can you help me understand the change in gross margins just a bit better? Obviously, mix is a big impact, but it sounds like the margin rate has rebound nicely and Paul suggested it was competition. But, is it all less competition or is there something else going on there? And if it's a less competitive environment, why would it be less competitive now than it was just a few months ago?

Well, this is David.

I think that one thing that happens when pricing stabilizes from the manufacturer with asphalt shingles, specifically, that allows us to stabilize prices with our customers. And in the channel, especially at the distribution level, there was a lot of leftover inventory, and when people have inventory to sell, and they may have bought it awhile ago and it is a little bit cheaper than what they have right now, that causes a problem. That pretty much flattened out to us after September, and since that time we have seen that more stabilization in pricing, and it is not, again, that the prices have gone up to our customers that much. It is that our costs have finally realized all of those former discounts that we'd gotten over the summer and now they're in our weighted average cost.

They're still a high degree, and I imagine it is going to continue, a high degree of competition in every one of our markets, more so, we see it in the storm affected markets from '09, but the Mid-Atlantic Northeast has seen some decent volume gains as we alluded to in our prepared comments.

Daniel Carasso of Hain Capital.

Great quarter.

We all know there has been unusually inclement weather this winter. I'm going to build on a previous question -- particularly so in your strong geographical markets. I am wondering , can you give a little more detail on the relationship that is there between weather like this in December and January and roofing demand? When would cold in December and January weather tend to get your P&L?

It really depends on when the winter ends and when they can start repairing or replacing the roof that is have had problems. I have been here 25 years. I cannot quantify that, sir. I will just tell you out right that it is impossible to tell how much actual damage there is and when the roofers will get to it.

Okay.

And then my follow-up, December permits, new home sales and existing home sales all spike in that month in December versus November and though these are all [to a man] talking about debt or model on traffic in January and February to date, did those trends in home orders in March and April of this year, when would you expect that improving trend to start translating into revenues, roofing products at Beacon?

I think there is about a 30 to 60 day lag in new homes when the roof is done after the foundation is in, so I would expect it to happen about at that period. Remember, those homes have to be built in the markets that we're in for us to benefit from them, and I haven't seen any increases in the markets we're in. I talked to the regional guys all the time. There has been no increase, really, in new home construction in our areas.

Keith Hughes of SunTrust.

On SG&A for '11, is percentage of sales -- would we expect to be similar to '10 or are there any special costs that would be coming in?

I don't think there is any special costs. It may be a little lower than 2010, if this trend continues. As you can see, even though the expense level went up, we want to leverage our fixed costs in Q1, and if those levels continue, we should continue to see that. Again, remember, our pay system for employees is incentive based and a chunk of their pay is based upon us hitting the budget and beating last year, so if those increase will you see the payroll costs increase, but you still should see the leveraging of the fixed costs.

And all the normal controls that we have used for the last number of years are still in place, expense control, overtime control, head count, et cetera. That's not going to change.

Second question, you talked about the delay price increase from one of the residential manufacturers. Is there a reason given for that?

I don't know if there is a stated reason, but I think from what can be inferred is -- and it could be because of the weather in January, in the beginning of February, just lower demand, and the feeling that demand isn't high enough to support it, so they pushed it out. It doesn't mean that it won't occur. It has just been pushed out.

Some of it truly may be because of the weather. We wouldn't be able to buy much inventory in New England right now at all. We don't have the room for it. There is too much snow.

Robert Buck of Beacon Roofing Supply.

This question is for the man from Gloucester. Can you say target for me one time?

I will say park your car in Gloucester. How is that?

I think this is the last comment. I don't think there are any more questions. Congratulations on a great quarter. I'm proud of both you guys, proud of the Company. We'll see you soon.

Thank you very much, Bob.

Thanks, Bob.

Brent Rakers of Morgan Keegan.

I hate to follow up on this again, but I think it is important to understand it a little more clearly. Could you take us through some of the timeline of the discounts being offered by manufacturers on shingles? And then, when that stopped -- my follow-up, related question is, have those discounts were reverted back up to the smaller discounts we were offered 3 to 6 months ago or so?

No. This isn't truly much about them changing discount levels, because as they had their invoice price go up, Brent, they were changing the discounts for short periods of time, and then as that caught up over the summer, when the full impact of the invoice prices was in place, those discounts stabilized for us; and I think that's the difference. I think if you would have talked to Owens Corning, as they said on the last call, they haven't raised their net price since 2008.

That doesn't mean that within markets prices haven't changed or anything else like that, but overall that's the case with asphalt shingles. For us, we had a lot of inventory early on last year, as you knew, and we bought that before those invoice margins -- invoice costs increased, so as we bought the higher discounted but still same net price inventory, that is what affected our weighted average cost.

And just, Dave, just a follow-up on the gross margin ramifications of this, what you're saying is your pricing essentially has been consistently flat over the course of the year, but now that you are lower cost shingle is flowing through the cogs, that's actually the fact that is boosting the gross margins up?

That's correct. If you really do the math, you can see that our gross margins are off from last year, so we've given back any price reductions that we've had in asphalt shingles to our customers. Our margins are lower.

Ladies and gentlemen, this concludes the Question and Answer Session. Now, I would like to turn the call over to Mr. Isabella for closing remarks.

Folks, thanks for your questions. Dave and I will be available in our West End corporate office for follow-up questions immediately after the call. With just a couple of minutes remaining, I will close this earnings call with a few summary comments.

Our first quarter delivered a solid $0.22 per share up from $0.17 in 2010. Gross margins improved to 23.4%, the highest in 4 quarters. We're very pleased with that. Our balance sheet is strong and is getting stronger. Cash is approximately $176 million, and we'll continue to pay down debt. We continue to have more regions growing organically than we've had in several years. That's a good indication of the improving health of the roofing industry in general. We have a good business plan for fiscal year 2011. We're confident that we will deliver results in line with our long-term goals. Our company is well positioned geographically and from a product mix standpoint to enjoy positive earnings leverage with an improving economy.

I will close by thanking again our hard working and dedicated employees who made our success possible and who will drive our future success. Thanks again for your interest in Beacon. Have a good day.

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