Beacon Roofing Supply Inc (BECN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply fiscal year 2011 third-quarter conference call. My name is Jim and I will be your coordinator 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 the conference.

(Operator instructions)

As a reminder, this conference is being recorded for replay purposes. On this call, Beacon Roofing Supply may make forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are subject to a number of risks and uncertainties.

Actual results may differ materially from those indicated by such forward-looking statements. As a result of various important factors, including but not limited to those set forth in the risk factor 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. Paul Isabella, President and CEO, and Mr. David Grace, Chief Financial Officer and Executive Vice President. I would now like to turn the call to Mr. Paul Isabella, President and CEO.

Thanks Jim. Welcome, everyone, to our 2011 third-quarter earnings call. We delivered an excellent quarter thanks to strong markets and strong execution by our team. EPS for the quarter was $0.51 versus $0.35 in Q3 of 2010. This is a record, as was our sales of $541 million for a third quarter for us. I'm very proud of the team as they continue to service customers and deliver results.

Some of the drivers of this quarter's results were strong sales in our 2 biggest product groups, as David will talk about in a minute, as well as our continued operational execution; controlling costs and running the business effectively.

Both residential and non-residential roofing were strong, with each having approximately 15% growth. Our commercial business has shown double-digit growth over the last 5 quarters, while residential turned positive year-to-date with its strong third-quarter performance.

Part of our geographical region showed significant sales growth in the quarter with 3 of them being in storm-impacted areas. The 2 not showing growth were down less than 5%, which is good news. Our people have worked extremely hard in the storm areas; long days and weekends filled with overtime, servicing contractors, or helping home and building owners in need of the roof repairs and replacements. We truly appreciate the work these employees are doing.

We expect the storm volume to continue until the end of the calendar year, although its impact will lessen over time.

We also continue to make progress on a key initiative, growth through acquisition, completing the purchase of Enercon Products based in Edmonton, Canada. Enercon has a strong history of excellent customer service and financial results.

The sixth branch has had approximately $45 million in sales in new geography for Beacon, and it's a great platform for future growth. And I'm pleased to have Justin Rumpel staying on to run the business.

During the quarter, we were able to purchase additional inventory, especially asphalt shingles, ahead of the announced price increases. The ability to invest in inventory like this speaks to our financial strength and cash position. This investment, along with increased demand, helped our gross margins in the quarter as lower-cost inventory sold through and existing market gross margins came in at 23.3%.

In terms of our acquired markets, we are making good progress as we delivered approximately 2% operating income during the quarter, net of approximately 2.5% purchased accounting. The teams in each of the acquired businesses are doing a very good job of driving improvement as they execute the business plan.

We looked forward to a good fourth quarter as July sales growth was at our Q3 levels. In terms of full-year EPS, we believe it will be at the higher end of the current estimates. As always, we'll continue to focus on our core initiatives; providing outstanding customer service to our contractor customers, sales growth both organically and from acquisitions, and continued operational excellence from our people as we finish the year.

Now I would like to turn the call over to David Grace, our Executive Vice President and CFO, who will take you through the details of the financials. After David is finished, we'll turn the call over for any questions you might have.

Good morning. If you are using our slides to follow along, let's begin with slide 1. Our fiscal 2011 third-quarter organic sales, which reflect our existing markets by excluding sales at branches acquired since the beginning of last year's third quarter, those increased 11.6% to $520 million.

Total sales not shown in the slides increased 14% to $540.7 million from $474.3 million in 2010. It was a strong quarter for most of our regions and above our expectations overall.

In our existing market lines of business, residential roofing sales increased 14.6% and non-residential roofing increased 15.4%. Our third-quarter roofing sales this year were favorably impacted by higher industry-wide selling prices and business in several markets that experienced significant spring hail storms.

Non-residential roofing sales have been strong all year. Our complementary product sales declined 6.6% after 4 consecutive quarterly increases, due in part to the expiration of last year's short-term tax incentives. Regionally, we saw strong double-digit sales growth in the West, Midwest and Southeast; the only decline was in Canada, and they were only down 2%. The other regions, as you can see, existing market sales were up 2% to 8%.

We estimate inflation in our net product cost based upon our current inventories product mix and invoice cost net of short-term buying programs, as compared to the similar cost of the same products a year ago.

Based upon this estimate, our overall net product costs were up about 1%, as compared to June 2010 levels, although our asphalt shingle costs actually dropped about 1% since that time. However, since the end of our second quarter of this year, our overall net product costs have increased about 5%. We had the same number of business days in this year's third quarter as last year.

While we operated a total of 185 branches at the end of this quarter, compared to 177 branches last year. We opened 1 branch and acquired 6 during this quarter, while last year, we acquired 5 branches in the third quarter.

Total gross profit was $126.7 million, compared to $104.3 million in 2010, a 21.5% increase. Existing market gross margin increased to 23.3%, from a low rate of 22.1% in 2010.

The higher average selling prices previously mentioned increased demand in most markets, and our ability to build inventories prior to some vendor price increases helped to return this year's third-quarter gross margin rate to a more seasonally normal rate. In addition, we had a slightly higher concentration of residential sales, which typically have higher gross margins.

Existing market operating expenses, which is slide 2, increased by $6.1 million, or 8.4%, to $78.7 million, from $72.6 million in 2010. Acquired market operating expenses increased $3.4 million.

Payroll and related costs, including incentive based pay, overtime, and profit sharing, increased $4 million in our existing markets. That was mainly due to gross profit and operating income results above our expectations, but also to service the increase in sales.

Selling expenses increased $1.8 million, mainly due to increased fuel and credit card costs. Other general and administrative costs increased $1 million, due primarily to higher professional fees, higher general insurance and higher travel expenses.

Depreciation and amortization decreased $0.9 million due to a drop off in amortization related to purchase accounting and lower depreciation due to low capital expenditures in recent years. Operating expenses as a percentage of net sales dropped to 15.1% overall and 15.6% in our existing markets, due primarily to the favorable impact of higher sales, partially offset by the expense increases just mentioned.

Interest expense declined $0.3 million in 2011, due mostly to lower outstanding debt since last year's third quarter. Income tax expense was $15.7 million, reflecting an effective tax rate of 39.5%, compared to 38.8% in 2010, as 2010 included a larger benefit from a discrete item.

As a result of all I've mentioned, our net income was $24.1 million for the quarter, compared to $16.3 million in 2010. Our diluted net income per share presented in slide 3, increased by 45% to $0.51 compared to $0.35 in 2010.

Our earnings before interest, taxes, depreciation and amortization and stock-based compensation, or what we call adjusted EBITDA, which is reconciled to our GAAP net income in our press release was $50.8 million for 2011, as compared to $38.2 million in 2010.

As for our year-to-date results, which are shown beginning with slide 4, our fiscal 2011 existing market sales increased by 6.9%. Total sales not shown in the slides increased 10.2% to $1.24 billion, from $1.13 billion in 2010. In our existing markets lines of business, non-residential roofing sales increased 13.8%, while residential roofing and complementary products increased by 2.8% and 3.1% respectively.

Regionally, we saw the strongest year-to-date sales growth in the Midwest, Northeast, Mid-Atlantic, and West, while the largest decline was in the Southeast. The other regions' existing markets sales changed only slightly. Total gross profit was $286.8 million, compared to $253.7 million in 2010, a 13% increase.

Existing market gross margin was 23.1 compared to 22.6 last year. Existing market operating expenses, which is slide 5, increased by $10 million, or 4.8%, to $218.3 million from $208.2 million in 2010. Acquired market operating expenses increased by $9.6 million.

Payroll and related costs increased $8 million in existing markets, mostly in the same categories mentioned for the third quarter. Selling expenses increased $3.2 million, mainly due to increased fuel and credit card costs, just like the quarter.

Our year-to-date bad debt expense increased by $2.5 million due primarily to an increased allowance for potential bad debts. Depreciation and amortization decreased $2.8 million, due to the same factors mentioned for the quarter. And warehouse expenses were down $0.9 million from lower maintenance costs.

Operating expenses, as a percentage of net sales, declined to 18.3%, from 18.7% in our existing markets, due primarily to the impact of higher year-to-date sales partially offset by the impact of expense increases as just mentioned.

Interest expense declined $4.7 million in 2011, due mostly to the lower debt and lower interest rate hedges that went into effect as of April of last year. The 2011 income tax expense was $18.2 million, reflecting an effective tax rate of 39.4%, compared to 37.1% in 2010. Last year's rate benefited from larger reversals of discrete items.

As a result of all I have mentioned, our year-to-date net income was $28 million, compared to $17.7 million in 2010. Our net income per share, represented in slide 6, was $0.60, compared to $0.38 in 2010. Adjusted EBITDA was $79.4 million for 2011, as compared to $67.4 million in 2010.

Now on to slide 7. This shows cash flow from operations was $37.7 million in 2011, as compared to $26 million in 2010. The higher cash from operations was principally due to a year-over-year increase in operating income.

In working capital, a favorable increase in accounts payable and accrued expenses was more than offset by unfavorable increases in accounts receivable, inventories, and prepaid expenses and other assets. Our day sales outstanding in accounts receivable were up, mainly due to a higher concentration of June sales this year, compared to last year.

Inventory turns were relatively flat year-over-year, as the impact of this year's larger build-up of inventory was offset by the effect of higher sales. The larger inventory build-up was due primarily to more special buys and other purchases made in anticipation of price increases and stronger fourth-quarter sales.

Capital expenditures in 2011 were $9.9 million, compared to $5.5 million in 2010, while proceeds from asset sales were up $0.8 million. Cash used for acquisitions was $34.8 million, compared to $12.6 million in 2010. Net cash used by financing activities was $3.8 million in 2011, compared to cash used of $9 million in 2010.

The current-year amount was net of cash proceeds of $3.2 million from our new equipment financing.

To summarize a few key points from my presentation. Organic sales were up 11.6% for the quarter, with organic gross margins at 23.3%, compared to 22.1% in 2010. Organic operating expenses as a percentage of sales were down to 15.1% from 15.6%. The diluted net income per share increased 45% to $0.51 from $0.35. With cash of $108 million and a very strong balance sheet, we plan to continue to invest in future growth as additional attractive opportunities arise.

That concludes the formal portion of our call. We now would like to turn over the call and respond to any questions you might have. Thank you.

(Operator Instructions)

Michael Rehaut, JPMorgan.

Thanks. Good morning, everyone.

Good morning.

The first question has to do with gross margins. You showed nice improvement, obviously, both sequentially and year-over-year. I was trying to get a sense of how much of that improvement was driven by mix versus the inventory buy or pre-buy. And, you reiterated in your fourth quarter outlook or I think it was in your 10-Q, that you expect the previously stated gross margin range to continue to hold. But, how are you to think about the fourth quarter? Can the current rate of 23.3% or 23.4%, can that be maintained? Or would the benefits from the inventory pre-buy, perhaps, fade slightly as you worked through that?

Michael, well as you mentioned, gross margins for the quarter were up 120 basis points, compared to Q3 of last year and up sequentially for the quarter. It is pretty typical for us to have an increase from Q2 to Q3, mainly because the winter period is just much more competitive for a smaller number of jobs. Going forward, we still think we have an advantage in having a large amount of inventory, as you can see on our balance sheet. And, that should carry through at least through the fourth quarter, and perhaps into Q1 of next year if the price increases that have been announced for the fall do, in fact, happen.

So I don't think that benefit will go away quite yet. We actually saw very little benefit from a mix change. We do those calculations at the end of each quarter. Most of the change was because we bought that inventory at April's and March's rates. And as we bought further into the quarter when the prices increased, we use a weighted average cost system, which would diminish the effect of the price increases during this quarter.

Yes and typically, Mike, also we see and could see in our fourth quarter increased commercial sales, which could have an impact, lowering that 23.3% just because we tend to have larger shipments during July, August, September of commercial products.

And July's results came down a little bit compared to the Q3 levels, but that was a product mix change to those non-residential roofing products.

Okay. No, that's very helpful. The second question, looking at the M&A landscape, obviously, you are able to tack on the Enercon Company. Maybe if you could just give us an update in terms of how you are looking at the current landscape? I mean, obviously, the macro environment continues to be extremely choppy. But yes, to the extent that let's say we get back to slightly more stable backdrop, how would you be looking at 2012 versus 2011 in terms of activity remaining roughly similar? Or perhaps, an increase in kind of the bolt on M&A that you have done so far? Or any thoughts in that regard?

Yes, I'll start and then Dave can tack on whatever he would like to. Our external statements really haven't changed. Our pipeline is full, very full. We continue to have discussions with a number of different companies, and as part of our stated growth plan -- acquisitions are a big piece of that. And in the last what, 15 months plus or so, we have done $100 million or so of acquisitions.

I think there is a good opportunity for us moving forward to do Enercon size/type deals, but as we said a month before Enercon, which we're obviously not going disclose what's going on, we're still very active. We think there are a number of very interesting companies, but it is very difficult to predict their willingness to sell or our ability to close. So, we're going to continue just what we have been doing. And that's continue to talk to folks, and we are confident that we'll be able to execute our plan, which is -- typically we average over 3 years to 5 years or so in terms of the growth.

And I would say -- unlike some of the economy, the roofing industry this year will get a little bit of a boost from the storm business and it will make some of the companies healthier. And it is not like we want to pay for temporary business, but it will make them healthier and perhaps they'll see the sign to come market their business and sell it.

Great. Thank you.

Thank you.

(Operator instructions)

Keith Hughes, SunTrust.

Morning.

Hi. Thank you. Just two questions. The first, one of your suppliers on their conference call talked about the storm damage that we have seen so far is approaching what we saw a couple years ago, had some historic years of storm damage. What is your view on that given your current geographic spread? How good is it going to be the next couple of quarters, I guess is the question?

As Paul said during his opening comments, we think we will at least see some good business for that through Q1 of next year, our Q1 of next year, so the end of the calendar year. You know it probably affects anywhere from 15 to 20 of our branches, mainly in what we call Shelter Midwest. Some of the same ones in Shelter Southwest, a little bit of business at Best Distributing, which is in the Carolinas and Tennessee, but my personal opinion is, it just isn't as big as the '04 hurricanes or Katrina, or Katrina plus hailstorms. So, it is a very good year, but to say it is historic, we are not seeing it quite as those levels. Even I provided us a bigger benefit because we have a very strong business at West End in Texas.

Okay. Second question. The guidance you referred to earlier, the high-end of the range, were you speaking to the full-year range or fourth-quarter range?

The full-year range, which was I believe $1.10, was a -- prior to this call, it was $1.10, the high end.

All right. Thank you.

Tom Hayes, Piper Jaffray.

Great. Good morning, gentlemen.

Good morning.

I guess my first question is, we've seen a fairly wet spring in several areas. And despite the strong 3Q you guys turned out, I was just wondering if maybe there was some business that's likely going to be pushed to the fourth quarter that you saw out there?

That's a possibility. The heat has also been affecting some of the roofers in the central part of the country, because it has been so hot and they've slowed down a bit. It is just very, very difficult to try to quantify that stuff. You get a sense of it that you had a very strong June, and maybe July slowed down a little bit in those areas with some heat, and then it would build back up again. We don't get a backlog system like other companies have the benefit of being out there seeing to the future. Our backlog for residential might be a couple of weeks. So, there is a sense that it's there, but I can't confirm it with numbers.

Okay, then I get -- sorry, go ahead.

No, no. I'm sorry. Go ahead.

I guess just on the sustainability of the growth that you guys have seen in the commercial non-res segment. I mean it has been a great run. Is this a kind of a catch-up of projects that have been delayed or a modest recovery on the commercial side?

It is both of those. We had been saying earlier in the year we thought our back half would be closer to single digits, lower single digits. So, we were pleasantly surprised when our third quarter came in as robust. And we continue that into July, and we believe it will continue -- decent growth will continue in the fourth quarter.

I think some of the municipalities are starting to see that they have to fix some of the roofs that they have problems with too. And even if they don't have the money, my little hometown in Gloucester, Massachusetts had 5 buildings that they had to do, andthey did them all this summer. So, I think you'll see some of these municipalities start doing that type of work. And, it's pent-up, but again it is very hard to quantify.

Back to the original question about the rain. There is no doubt. It impacted us in April. I think we had mentioned that April sales were down 8% year-over-year. And then we did see the rebound in May, being up 14%, and June being up 25% or so, 25% year-over-year. So I'm sure some of that volume that came out in May and June was a result of pent-up demand from March and April where weather was still impacting us.

Good. Thank you.

Okay.

David Manthey, Robert W. Baird.

Hi. Good morning, guys. First off, are you in allocation from any of the shingle manufacturers today and are you hearing that any other distributors are in allocation?

I can't speak for any other distributors. We have not had any problems getting shingles from any of the manufacturers. OC had announced an allocation a number of months ago, but it's somewhat of a modified -- we just haven't had issues, at all, with supply. And Dave, I can't speak for the other. I haven't heard anything related to other distributors.

Okay, fair enough. Dave, just given that you had a slight drop off here, because of some of the acquisition-related D&A, could you give us an estimate for what you think D&A is going to be in fiscal '12?

In fiscal '12? I don't have that number on the top of my head, but I can send you a quick note and give you an update.

Okay. Sounds good. Thanks. I'll get back in the queue.

Ryan Merkel, WIlliam Blair.

Thanks. Good morning, everyone.

Morning, Ryan.

So it sounds like sales accelerated throughout the quarter. Is July off to kind of that low-teen start, or is it closer to that number you just said for June?

No. It's, as I had mentioned, at the overall level of Q3. July was.

Okay.

15's (multiple speakers).

And then in early June and even mid-June, there were some significant price increases on both the resi and non-resi side. Have these gone through, and are there more still to come, or is that going to be it for the year?

The announced price increases, we think the first 2, the April and the May-ish one, are in the marketplace. So if you bought material today, you would pay that. I think the 1 announced for July is pushing through, but it is not at its fullest extent if you were to buy inventory at that level today. We are on a weighted cost system, average cost system. So the prices flow through and have a lag effect on our gross margins, because when you get the benefit of the earlier purchased inventory. I listened to one of the manufacturer's earnings call and they said they thought pricing was up much higher than that. But I wasn't sure whether they were talking about the current pricing or pricing that happened during the quarter.

Yes, and a little more color. We think the announced July increase, which is the larger one, could hit towards the end of August. We are keeping an eye on that in the marketplace. And then as Dave said, the September, the most recently announced September increase for shingles, we are just going to have to wait and see on that.

Thanks, and just real quick, how much did price inflation help the quarter?

Well, our gross margins went up by about 140 basis points. And we said net product costs were relatively flat, so that is 150 basis points.

Thank you.

Scot Ciccarelli, RBC Capital Markets.

Hey guys. How are you? David, I think you had said you only had about 20 branches that were impacted from the storms. Is there a way to help us quantify what the storm impact was in the quarter?

Yes. Again, it's a little difficult, because some of those markets were already doing okay in themselves before the storms hit. And you don't know if you retain some of that business, or you are just working on storm business. Dallas/Fort Worth was an area that was impacted. Kansas City, certainly. Tennessee. Charlotte, North Carolina, and then some in Oklahoma. If you take those 15 or 20 branches and they can increase 50% over a period of time and they're $10 million average, you come up with a number. The real question is how long that business lasts and how much the impact is. And like we said, we think it is going to be through the end of the calendar year.

Okay. And then it sounds like there has been a number of price increases from the vendors. Some are have already been fully flowed through the market, some that are of kind of pending. When you guys think about the next couple of quarters, what's the best way to think about the pricing environment at this stage?

I think you need to stage it through the quarter. And I think that at the end of the quarter, you may see a much larger impact as we start selling and the inventory turns through for the whole industry, not just us. That's what you need to see those prices to become effective at the contractor level. We will start paying the higher manufacturer prices as they come out. We have no choice. And we try to push that price out into the marketplace, but the relative amount of peoples' inventories will make a difference in that. So year-over-year, at the end of Q4, you could see prices up 10% to 15% in the asphalt shingles. It's very difficult to see how much the prices increase with the commercial products, because everything is a job bid, much larger jobs, and it's hard to compare one job to another from the year before.

We are starting to see though a bit of the commercial price increases hit the market, but it is very, very small. Very small at present.

But, is there resistance at the contractor level? I mean there's certain times where it seems to be better received than others. I'm wondering what the end user appetite is at this stage.

Yes. I think in general, Scott, there is still a tremendous amount of competition in every region, even the storm regions. And also, we have to remember that our competitors also, I'm sure, without knowing exactly, purchased inventory ahead of any price increases, even potentially commercial product. So, I guess it's -- part of what's driving this is still strong competition in every one of our regions that we deal with every day on many of the jobs.

Stay tuned, in other words? All right. Thanks guys.

Thank you.

Ken Zener, KeyBanc. Mr. Zener, your line is open. Please go ahead.

Hello?

You there, Ken?

I'm here. Are you able to hear me?

Yes. That's better.

Thank you. Sorry. Having some phone issues here. The pricing that you talked about, related to the 140 basis points in gross margin. Since your gross margins are up 140 bps, sequentially in year-over-year, you're referring year-over-year on the gross margin, I assume?

Yes.

And that would imply if that pricing, assuming pricing was up 1.5% year-over-year, that means that it was up probably 8% to 9% sequentially. That's the math and index I'm using. Is that --

That's a little strong. We think it's more like 5% to 6% sequentially based upon our product costs. And then you can add the 140 basis points on top of that, so you're at 6% to 7% we think.

Okay. And when you are talking about 10% by the fourth quarter, that would assume another 6%, kind of 7% sequential pricing. Is that -- am I listening to you correctly?

Yes.

And then when you look at the historically the gross margin spread between residential and commercial, was -- historically you said 900 bps. I know it had kind of floated up to that 11% range. As we finish the third quarter, is that closer to 12% now in terms of gross margin spread res/commercial?

Yes.

And then the last question on the M&A, And I think David, you mentioned this. From your perspective, it's good that your potential targets are actually earning more money because your discipline around 9 times EV/EBITDA is pretty -- it's looked pretty firm historically. So to the extent that they earned their way into that multiple that would seem to point to increased M&A activity as one moved into the first half of next year. Would you generally agree with that, or?

Yes. I think comparatively 2012 will be better than 2011 because of that reason. And, you know you are right. We are pretty disciplined in how much we want to pay. We are willing to pay up for a company that can see better earnings in 2012, too. You go back to 2010 and when we were looking at companies then, you couldn't predict that. And I think the industry itself is a little healthier, so it's making that decision a little bit easier.

Are you hearing that actually from your potential targets? They're saying look, if we earn this, come back, the price is fine.

Yes. Well, not quite like that. But you hear that I want to wait until my earnings get a little bit better before we talk about you buying my business.

Thank you.

It's changed over the last year versus 2 years ago, 18 months ago, as things have improved for some of those folks.

Thank you very much.

Thanks.

Jim Barrett, CL King & Associates.

Paul, you have mentioned in the last few quarters that you sensed remodeling activity had strength and that explained why complementary sales were doing well. I understand the year-over-year comparisons, but have you sensed that remodeling activity has slowed down based upon your latest numbers?

Yes. Discretionary spend, we think, is down. Some of the home buyer credit from last year definitely fueled some of those purchases as homes were finished. But for sure, we have seen some retraction over the last 3 months, 6 months. Yes.

Okay. Well, thank you very much.

Thanks.

Kathryn Thompson, Thompson Research Group.

Thanks for taking my questions today. How much has inventory increased at a greater rate than your overall revenues growth on a year-over-year basis overall, sequential increase to a greater degree. How much has inventory been worked down since the June quarter end, and what is your target over the next 2 quarters?

To begin with, we wouldn't be reducing inventory, unless we saw a problem with pricing in the marketplace during the summer months. 1, we need to carry much more inventory in the storm areas to service that business, because it is almost a just in time system out there. When roofers finish up 1 house they want the materials on the next, because they have a large contingent of workers ready to do that roof. So we would not worry too much about inventories during August and September, either, and would want to maintain a certain level, especially during August, in case there is a hurricane or something like that.

The real question, Kathryn, comes down to what happens in the fall and whether or not this demand stays up in those storm areas and some of the increases we're actually seeing in our other markets and residential roofing maintained. We think we have good levels right now. We're very happy to have the inventory we have, because we think we are going to make a little bit more money on it.

Yes, and the driver -- we've got to remember the driver has been 4 announced price increases, 2 of as we've said, 2 of which have hit the market. And as Dave said, we keep a close eye on it. And if there is the need to peel that back down, we can do it relatively quickly, like we did last year.

But, it sounds like that decision won't be made until probably after September?

Right around September. 1, our year end is in September and it's typical for us to reduce inventories just because we have it count it all. And then we'll build back up if we see the demand in October.

Okay. And looking at the other side of it in terms of purchasing, could you give a little bit more clarity on roofing purchasing trends in the current market, particularly in storm-affected areas? In other words, are you still going to be -- if you could just give a little bit more clarity as to how much more product you are buying in order to keep up with demand?

Well, 1, the storm areas continue to be strong on the shingle side. We're going to see that demand as we said through, more than likely, through the end of the calendar year. Obviously it will slacken off in November and December, especially as any weather hits. But in terms of our purchasing plan, we have been keeping inventories relatively flat through this period. And unless something changes related to price, there won't be any big change in our inventory levels.

And to be honest with you, there may be competitors listening in on this call and we prefer just not to talk about that publicly.

Sure, sure. Absolutely. And my third question, for the same reason you might not want to answer, but wanted to get your thoughts on the potential success of a September roofing price increase. And, do you think -- can it be successful if there isn't a hurricane this year? Or a significant hurricane?

It's very hard for us to predict. With the storm demand as it is in our 3 regions, that obviously will help. For me, it is impossible to say, without a hurricane, what's going to happen. It could very well flow through if demand in the rest of the regions holds or increases slightly.

And the other factor with the price increase, it was based upon the price of oil going up and the price of oil has recently dropped to $85. So I'm not sure what will happen with that, and again, it is just out of our control. So.

Great. Thanks so much for answering my questions today.

Thanks.

We have time for a few more questions. Brent Rakers, Morgan Keegan.

Yes. Good morning. I guess first -- again, not to harp on this gross margin issue, but I think back at the end of December before there had been any talk or any -- certainly any implementation of industry price increases, you guys had provided a fiscal year gross margin guidance range of 22.5% to 24%. Now there seems to be inventory timing benefits in Q3 and probably also Q4 of this year. As you go into 2012, are we thinking 22.5% to 24% is still the new norm? Or should we knock that down kind of 50 BPs at the high and the low end to adjust for the inventory timing things?

Well 1, I think it was still depressed in the first 2 quarters of this year, so you have that softening effect for next year. But you know, if we can maintain in the middle of that range, which is around 23% to a little bit stronger than that, that's the normal rates that we should be able to get in our business with some demand coming through. If demand drops off, because there is no storms again next year, then I think gross margins will have to come back those 50 BPs you're talking about.

Dave, I guess what I'm trying to reconcile is some of your comments about the inventory timing benefit in Q3. Yet you still fell -- yes, toward the high-end of that range, but relatively not far off the middle of that range as well this quarter. Could you maybe speak to that?

Sure. And what it is, is price increases have been more difficult to come by. There is no question. And the lag effect that we usually talk to that 30 days to 60 days, we're seeing going out to 60 days to 90 days, because people have inventory, they're willing to sacrifice gross margins a little bit to maintain market share. Now that's a constant battle in any bid-type contractor situation. We think it lasted a little bit longer. We are glad, like I said, that we have a large amount of inventory at the end of June. We need to sell it at profitable pricing though, to help that get better.

Brett, that speaks to my comment before of the competitive nature, even in the storm markets.

Okay. Great. Then I guess my other question is just on the operating costs. I guess a little bit higher than I would have thought even with the upside revenue surprise. Could you maybe speak to if there was anything unusual tied to absorbing Enercon in the quarter? Or maybe also referenced in the Q, professional fees and insurance? Maybe you can speak briefly towards that?

I think, overall, you'll see some purchase accounting stuff in there and Paul told you that was about 2.5% of the revenues in the acquired market, so that added some. But, if you are talking about the existing market change, we are very performance-based pay orientated. When we meet our objectives, people get paid more and our sales people are paid on gross margin. Their gross margins dollars went up, so they earn more money.

You also have to take a look at the previous year, to see what was happening then. And as you remember, we had a tougher Q2, and didn't meet expectations, so that performance-based pay would have been lower at that period of time. The SG&A was $1 million. Some of that is because we are fighting to collect some of the money that's past due and things like that. The travel just naturally went up because we are doing some of that acquisition work more than we were doing past years. And then the insurance is just general increases that I think everybody is seeing.

Okay, great. Thanks very much, Dave.

Michael Rehaut, JPMorgan.

Thanks. Actually, my follow-up question was already answered. Thank you.

Great.

And I think that's going to end it for questions, Jim.

Certainly, sir. At this time, I'll turn the conference over to you for any additional remarks.

We are very pleased, as I said at the outset as we talked during the Q&A, very pleased with our results during the quarter and where we're at year-to-date now. Let me go over a couple of highlights. EPS for the quarter ended at $0.51 versus $0.35 from last year. Year-to-date, we're at $0.60, versus $0.38 last year. So, great progress there. Gross margins were strong in total, ending at 23.4%. And we had very solid growth, both residentially and commercially, at 14.6% and 15.4% respectively. And cash, even with Enercon acquisition, ended at $108 million. So, good work there. So, all in all, very good quarter. And as we said, we feel the fourth quarter will support full-year EPS at the upper range of the current estimates.

In closing, I would just like to thank all the employees again for their hard work and dedication. It is this team that delivered these results. Thanks for your interest in our Company, and Dave and I are available for any other questions you might have in our Peabody office. Thanks, and this concludes the call.

Thank you. That will conclude today's conference. We thank you for your participation.