Beacon Roofing Supply Inc (BECN) 2012 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Beacon Roofing Supply fiscal year 2012 third quarter conference call. My name is Chris and I will be your coordinator for today. At this time all participants are in 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 section of the Company's latest form 10K.

The Company has posted a summary of financial slide presentation on the Investor section of its website under Events and Presentations that will be referred to during management's review of the financial results. On the call today for Beacon Roofing Supply will be Mr. Paul Isabella, President & CEO, and Mr. David Grace, Executive Vice President and Chief Financial Officer. I would like to now turn the call over to Mr. Paul Isabella, President and CEO. Please proceed sir.

Thanks Chris. Welcome everyone to our fiscal year 2012 third quarter earnings call. Beacon had another very strong record quarter, exceeding our internal expectations once again, and we also exceeded the prior-year in many key measurements. Almost all of our regions had exceptional results. Sales in total were up 3.7%, while existing market sales were down 1.5%. The existing market's slight decline was a result of the strong sales comparisons from Q3 of 2011. This was due to extensive storm damage repair that we serviced late in Q3 of last year.

Markets in the Midwest, Texas, and Carolinas were heavily impacted in that quarter and beyond. We believe we did an excellent job of replacing much of that storm volume this quarter -- this past quarter. Our team worked very hard to come very close to flat organic sales against extremely tough sales comparisons. We're very pleased. Compared to the prior year, our adjusted EPS results of $0.62 exceeded last year $0.51.

And existing market operating income came in at a very robust 9.6%, versus 8% last year. These are excellent results that point to our ability to control cost and lever gross margins across our regions. We have a great management team, and overall team. Our acquired markets did very well in the quarter, with adjusted operating income coming in at 8%, which is close to the Company average for the quarter, adjusted for higher acquisition related amortization and the Intercon earn out.

We recently executed several strategic acquisitions, Cassidy Pierce of Pittsburg, and Structural Materials of Los Angeles, joined the Beacon family. We also added Contractors Roofing & Supply of the St. Louis market last week, which, combined our new greenfield branch recently opened in St. Louis, gives us a solid presence in that large market. In just over a year, we have executed approximately $260 million of acquisitions. These acquisitions give us an expanded footprint and continue our progress towards our goal of having national coverage.

We're in position to close the year out strong. Year-to-date operating income is 7%, versus 4.5% last year, which is in the middle of our current stated 6% to 8% goal, and we still have another profitable quarter to go. Gross margin came in at a total of [about] 25.1%, compared to 23.4% last year, which is great progress. Our year-to-date performance has been excellent. Sales are up 16.4% in total year-to-date, and 11.7% organically. Operating expenses are down 90 basis points.

And as I said, EPS went from $0.60 in 2011 to an adjusted $1.07 for 2012 year-to-date. As I referred to earlier, this is a reflection of the hard work of our employees, tremendous leverage of our operating expenses, and shows our ability to execute our strategic plan, which is focused on customer service, quality growth and operational execution. Now, as I did on the last few calls, I'd like to give a little more detail on three important points impacting our business, namely sales price and EPS.

Let's start with sales. As I just mentioned organic sales for the quarter were down 1.5%. However we're still very satisfied with the overall demand that we saw in Q3, as we beat our internal sales plan for the quarter. And a level of activity in residential reroofing was strong enough to support year-over-year average price increases, albeit ours was small at 1% or so. As you may recall on our last earnings call, we had commented that we thought shingle pricing might fall in Q3. Even though the shingle by across the industry was deep, purchases from the manufacturer, pricing increased in the quarter which was great news.

This, along with our aggressive inventory purchases in Q2 and in the early part of Q3, enhanced our gross margins in many regions. The drop off in non residential roofing in Q3 was expected to occur at some point this year, Dave and I had even talked about it last year on our Q2 and Q3 calls. However, the activity was strong enough in that marketplace as well to support year-over-year average price increases of about 10%. As for complementary products sales, they fell back slightly, probably due to some pull forward activity into Q2 from the milder winter weather.

We normally don't talk much about our monthly sales due to the significant effect the weather can have on any individual month sales. But we thought for this quarter it might help show the movement of overall sales as we went up against last year's very tough Q3 sales comparisons. As we disclosed on our Q2 earnings call, April is up about 15%. Then May was up about 4%, and June fell back about 16%. Sales per day, later in Q3, just couldn't keep up with last year's very high storm business that started primarily in the middle to the end of last May. No doubt our June 2011 was a very strong month.

July overall sales this year were much better, down only 2%, or 6% on a same days sales basis. Again, against a very tough comparison of July last year, when there was still a large volume of storm business. Again, we are very pleased with this result. We will also be aided moving forward by hail storms that occurred in some of our markets this spring. As the summer progresses, our team is working very hard to offset the tough comparisons as we did in Q3, due to the heavy storm damage sales we had last year.

On the last earnings call I said full year organic sales would be between 5% and 10%. Our view today has not changed and we believe we will end the year -- the full year with approximately 7% organic growth, which equates to approximately a 2% organic drop-off in sales in Q3. Again, as stated relating to Q3, we view this as very good results because of the high level of storm sales in Q4 of 2011.

Now I'll talk a little bit more about the trends in pricing within our industry. As usual, in calendar one, the shingle manufacturers offered pricing deals during that slow period, and ahead of two announced price increases. As stated earlier, indications are that the distribution link of the supply chain stocked up heavily as a result of those offers. However, as we just mentioned, this increased inventory did not cause our average selling prices to fall in Q2 or Q3 as compared to last year.

And at this point, if our competition has sold off most of its inventory and if demand remains strong enough, we believe that at least a portion of the first round of announced price increases will take hold sometime during our Q4. In the non res market, 2011 was the first year in a long time that prices went up and stayed up as we ended the calendar year with average prices up a healthy 10%. In this market for sure it's tougher to track pricing changes, or predict future changes as most of the projects are sold through bids for specific work and cannot easily be compared from period to period. We think pricing though, for the remainder of the calendar year 2012, will be at least able to hold the current levels. For our complementary products, we saw some small average price gains in 2011, but that market still needs demand to increase to permit some additional needed price increases. All these pricing trends position us well for the remainder of 2012, as demonstrated by the positive impact of the third quarter pricing levels.

Related to EPS, as we have mentioned, our year-to-date 2012 results were above our expectations in sales and gross margins, and our management team did an excellent job of leveraging our operating costs to provide a robust $1.07 of adjusted EPS. We're off to a reasonably good start in Q4 as July sales were up much less than June, which we think confirms our belief that there's higher base demand outside of storm areas.

Given all of this, we're comfortable with the current analyst average EPS estimate of $0.59 for the fourth quarter. On the last call we said we thought we would end the year at approximately $1.55, it could possibly get closer to the analyst estimates at the time of $1.62, based on pricing or storms. Our current Outlook is $0.04 above that at $1.66. Again, this means we have done a very good job of replacing last year's storm volume, leveraging cost and gross margin.

I will now turn the call over to David for his discussion of some more of the details of the financials. David?

Thanks Paul. Good morning. If you're using our slides to follow along, let's begin with Slide 1. Our fiscal 2012 third-quarter organic sales, which reflect our existing markets by excluding sales that branches acquired since the beginning of last year's third quarter, decreased 1.5% to $525.2 million. Total sales for this quarter, which is not shown in the slides, increased 3.7% to $560.5 million, from $540.7 million in 2011. We had 64 selling days in both 2012 and 2011.

In the product groups for our existing markets, residential roofing sales increased 1.7%, while non residential roofing decreased 4.9%, and complementary products were down 3.0%. Although we saw sequential strength in most markets, and we benefited from the higher industry wide selling prices, we could not overcome last year's strong existing market sales, which were boosted by reroofing activity from the storms. Non residential roofing saw its first drop in year-over-year sales in eight quarters, as volume was off about 15%, but prices were up 10%. Complimentary product sales fell off slightly after a rebound in the second quarter.

The regions with the most storm damage in last year's third quarter suffered the largest sales decline in this year's third quarter, with residential roofing leading the losses in those markets. Two regions had total existing market sales growth for the quarter, the mid-Atlantic and the southwest. We estimated that the impact of inflation on our sales and gross profit by looking at changes in our average selling prices and gross margins.

Selling prices were up overall 3% to 5%, with nonresidential roofing products as strong as at 10% to 11%, residential roofing up only about 1%. Our complimentary products were up 3% to 4%. Our gross margins were up during the quarter, so the average changes in our product costs were less than these increases. We operated a total of 200 branches at the end of this quarter, compared to 185 last year. We opened a new branch and acquired six branches in both this year's third quarter and in last year's third quarter.

Total gross profit was $147 -- $140.7 million compared to $126.7 million in 2011, an 11% increase. Existing market gross margins increased to 24.9%, from 23.4% in 2011. We had a greater concentration of residential sales, which typically have higher gross margins, along with improved gross margins in those residential sales, supported by the slight increase in our average selling prices and sufficient demand in most markets. Existing market operating expenses, which is Slide 2, decreased by $1.3 million, or 1.6%, to $80.6 million from $81.9 million in 2011.

Acquired market operating expenses increased by $7.1 million to $8.8 million. Payroll and related costs, including incentive-based pay, overtime, and profit sharing increased $0.6 million in our existing markets, mainly due to higher delivery related wages and overtime. Bad debts were $1 million lower, primarily due to a lower percentage of past due accounts as the milder winter enabled more of our customers to stay current with their required payments, and that favorable trend continued into Q3.

Finally, depreciation and amortization decreased $1.3 million, due to the drop off of amortization related to purchase accounting, and lower depreciation as related to lower capital expenditures in the more recent years. Operating expenses as a percentage of net sales increased to 16.0% overall, but were consistent year-over-year at 15.4% in our existing markets. Interest expense was up $4.8 million, to $8.2 million in the third quarter, as the benefit from our lower debt was more than offset in the third quarter by the negative impact from non cash charges of $3.7 million, for the ineffectiveness of certain swaps, and $1.2 million related to the refinancing of our credit facility. Income tax expense was $17.7 million in 2012, reflecting an effective rate of 41.1%, compared to 39.5% in 2011. The higher quarterly effective rate was due primarily to certain discrete items, a higher effective state tax rate, and less of a beneficial impact in this year's third quarter from the low Canadian rates. We currently expect our annual tax rate to be approximately 40%, excluding any future discrete items.

As a result of all I've mentioned, our net income was $25.4 million for this quarter, compared to $24.1 million in 2011, excluding the charges and the interest expense mentioned above, and also a $1.3 million non cash charge due to the adjustment of an acquisition earn out, and net of the related tax benefit of $2.5 million from these special charges, our net income would have been $29.6 million, all which is reconciled to GAAP measures in our press release. Our diluted net income per share increased to $0.53, or $0.62 without those charges, from $0.51 in 2011, and this is shown in Slide 3. Our earnings before interest, taxes, depreciation, amortization and stock-based compensation, or adjusted EBITDA, which is also reconciled to our GAAP net income in our press release, was $60.2 million for 2012, as compared to $50.8 million in 2011.

Now let's take a look at our year-to-date results which start on Slide 4. Year-to-date, 2012 sales increased organically 11.7%, or 12.9% on a same number of business days basis. Total sales, again, not shown in the slide, increased 16.4% to $1.45 billion from $1.24 billion in 2011. On a same business days measure in existing markets, residential roofing increased 20.7%, while non residential roofing and complimentary products increased 8.4% and 0.8%, respectively.

All regions have gross for the first nine months, with four regions above 10%. Total gross profit was $351.8 million, compared to $286.8 million in 2011. That is a 22.7% increase. Overall, in existing market gross margins were 24.3% and 24.2% respectively, compared to 23.1% in 2011. Existing market operating expenses, which is Slide 5, increased by $8.2 million, or 3.6%, to $237.1 million from $228.9 million in 2011. Acquired market operating expenses increased by $17.6 million to $19.3 million. Payroll and related costs increased $9.6 million, selling expenses increased $2.0 million, G&A expenses increased $1.9 million, while we saw savings and bad debt of $2.6 million, and depreciation and amortization decreased $3.1 million, all in our existing markets. Operating expenses as a percentage of net sales in our existing markets declined to 17.2% from 18.6%. Interest expense was up $4.7 million, due to the same factors I just mentioned for the quarter.

The 2012 income tax expense was $33.0 million, reflecting an effective tax rate of 40.9%, compared to 39.4% in 2011. As a result of all that I have mentioned, our year-to-date 2012 net income was $47.7 million, compared to $28.0 million in 2011. Of the $19.7 million increase in net income, we estimate that 25% to 35% was potentially attributed to inflation of our products sold. Without the year-to-date impact of the special charges I mentioned for the quarter, our net income would have been $50.9 million.

Diluted net income per share improved to $1, while $1.07 without those charges, compared to $0.60 in 2011. That is a 78% and it is shown in Slide 6. As Slide 7 shows, cash flow from operations was $35.3 million in 2012, as compared to $37.7 million in 2011. The slightly lower cash from operations was principally due to less favorable changes in working capital this year, partially offset by favorable -- by more favorable impacts from the increase in net income and higher non-cash items.

The year-to-date 2012 changes in working capital consisted of unfavorable impacts from a decrease in accounts receivable of $19.8 million, and a $21.1 million increase in accounts payable and accrued expenses. More than offset by unfavorable impacts from increases in inventory of $62.1 million, and $20.5 million in prepaid expenses and other assets. Our accounts receivable day sales outstanding were down compared to last year, mainly due to a lower concentration during this quarter of sales in June compared to last year.

Inventory turns were flat, as the positive impact of higher sales offset the negative impact of this year's slightly higher inventory levels. The increase in prepaid expenses and other assets was primarily due to higher amounts due from vendors for incentives, which resulted from a higher level of purchases and increased seasonal special buys. Lastly, the increase in accounts payable in accrued expenses was primarily due to normal seasonal factors. Capital expenditures in 2012 were $12.2 million, compared to $9.9 million in 2011. Cash used for acquisitions was $94.5 million in 2012, compared to $34.8 million in 2011. Net cash used by financing activities was $41.8 million in 2012, compared to $3.8 million in 2011. This year's financing activities included the pay down of debt at the time of our refinancing.

Finally to summarize a few key points from my presentation, organic sales declined 1.5% for the quarter, but organic gross margins were 24.9% compared to 23.4% in 2011. Organic operating expenses as a percentage of sales were unchanged from the third quarter of last year at 15.4%. Diluted net income per share increased to $0.53 from $0.51 in 2011, even after those special charges we just talked about. The first nine months of fiscal 2012 were very strong, although our existing market sales have slowed recently in comparison to last year, but we expected that. Margins appear to be holding up pretty well in most of our markets, and we continue to successfully assimilate our recent acquisitions. We have a strong balance sheet, along with our new credit facility, that continues to form a solid foundation for future growth and building value for our investors.

And now, Chris, I'd like to turn the call over for questions and answers.

(Operator Instructions)

Michael Rehaut, JPMorgan.

Thanks. Good morning everyone, and nice quarter. And David, best of luck -- it has been great working with you.

I appreciate that Michael; thank you.

My first question is with regards to the fourth-quarter guidance of $0.59. It would appear that embedded in that would be a gross margin, I believe, below 24%, or even maybe approaching 23%? So I just wanted to know if my math is correct on that? And also, how to think about gross margins for 2013, given the fact that 2012 would still end up stronger than the last couple of years? And I know mix is a big role in that, so that is my first question.

Sure. I'll take the first part of it, and Paul can chime in on 2013.

I think you're off a little bit. I would expect margins to be about 100 basis points higher than that calculation. Typically, for Q4 compared to Q3, sequentially, we do see a drop, and that mainly relates to a mix change because the do more commercial business in the summertime. Mainly we have the municipal work with schools and colleges and things like that, that comes along.

So I think if you were, again, to be about 100 basis points higher, the math would come out a little bit better. Remember, we have some acquisitions in there now, too, in comparison, which have about the same gross margins we have, but the expenses are a little bit higher.

Okay.

And, Mike, the second part, about 2013 -- I think as always is the case, and as we mentioned, it is a truly, a lot of it is a function of the health of the market, the overall economy. There is no doubt, re-roofing is going to continue as it does, and that's been our thesis for a long time. It is hard to predict. I'd like to think, though, that our gross margins are going to continue to be strong. We have outstanding buying practices, we have a very organized group of individuals that are running our regions and branches -- very disciplined.

So given, I think, solid demand -- future solid demand -- and an improving overall market in the low single-digit growth as it has for the last 20 or 30 years, other than the last three or four years where we've had issues; and I am optimistic that we are going to have some pretty solid gross margins as we move forward.

Okay. Second question around the acquisitions -- you have done three now in the last six months or less. I was wondering if you could just review how you're -- what that impact would be? I think in total you are talking about $150 million, roughly, of sales. What EPS impact that might have on 2013? And if you see the pace that you have had in the last four or five months, if you see that pace continuing into the back half, or into 2013? Or if not, accelerating?

I'll answer the question about the next year as far as the EPS. When we bought these last three that we've happened to do this year, we estimated that each of them would be 1% to 2%, mainly F&P and Cassady, and now Structural. So I would think for next year they will be in that $0.05 to $0.07 range, perhaps a little stronger. We have already done some things that are going to make some changes in those entities and take advantage of some of the synergies that we have had talked about as we made those acquisitions.

I think you still have to remember that purchase accounting amortization for those is still in the 2% range, where our normal amortization is averaging only less than 0.5%, so they have a disadvantage there. But gross margins are good at those companies; we have made some changes; we have expensed all the purchase accounting stuff that we had to under the new rules. So next year looks like it will be brighter for those.

Yes, if you look, as I'd mentioned, when I focused on the adjusted operating income, and in the Q you can see the acquired market's at about 2.7%. As Dave said, there's a nice chunk of that, besides the Enercon piece, which was fairly substantial, there was a big piece of amortization. You add those two together and that's where I came up to 8.4% operating income. So we're pretty pleased with the improvement, and as Dave said, we think there should be a good contribution in 2013.

The second part of the question, about the future -- we are as active as we have been in the last two years, and we have a tremendous pipeline of folks we're talking to. So we're hopeful that we'll continue to do deals as we go through the future. No guarantee, and obviously I can't talk about -- we wouldn't talk about -- the specifics, but we are as active as we have ever been. And the climate seems, given the three we have done, plus Enercon last year, and Halifax, and then the CRS acquisition last week in St. Louis, there just seems to be an awful lot more activity.

And I would just point out, Mike, that we think we will be that 10% to 15% range that we have been talking about. And we know we took a hiatus during the recession, but we are getting back into those levels, and the $260 million we did over the last 15 months is proof of that.

Yes if you look at -- we're going to end the year, and I did not mention it on my opening comments, but based on what we are projecting internally, we will end the year at over $2 billion in sales, closer to the [$2.05 billion]. And so you take that $260 million against that, and that fits in nicely with our acquisition strategy, as Dave mentioned -- the 10% to 15%.

Just to make sure I heard that right -- so $0.05 to $0.07, though, at the beginning of your comments, David, you expect these last three to be $0.05 to $0.07 accretive for next year?

Yes, at least that, Mike. Again, that is what we had talked about when they first purchased them, for the first 12 months, so, they'll probably be a few cents above that.

Great. Thanks for all of your comments.

Sam Darkatsh, Raymond James.

Good morning Paul, David.

David, I'd like to echo Mike's commentary in terms of best wishes in your future endeavors.

Thank you.

Sure. Two questions, if I could -- first off, you've talked about the channel inventory last quarter being a bit flush with the deep shingle buy. How would you categorize that now, after the quarter specifically as it relates to the industry inventory? And then secondly, could you remind us as to your complementary segment -- what that mix is as it relates to the builder business?

I would think that with the new home construction activity over the past 6 to 9 months or so, we would start to see that reflect itself into a little bit better results in that particular segment. If you could?

I'll start off with the inventory question, and Paul can chime in again. It is hard to tell what the industry is doing, because, again, no one else is public but us. We would hope that the inventories have come down like ours have. We would also hope that during the summer months, that the industry -- and we plan on it -- is going to shrink, because we always shrink heading into the winter period.

Last year, we went down by about $70 million from June to September. I would expect about that same decline. And I think what that provides for as the inventory turns is the possibility of those price increases coming forward. Owens Corning mentioned that once the inventory bleeds out of the industry we will get some help there.

I don't have too much to add. In the Q, again, you can see that we ended up at net $284 million against $269 million last year. So we are not that much over. And as Dave said, we did bleed down to about $200 million at the end of the year. So we would expect the same thing to happen.

I don't -- as I talk among my folks or make observations in the market, there is no doubt the industry bought a lot. It appears that it is bleeding, anything -- most of us now are buying, which I don't think there's an awful lot of buying going on, is at the new pricing. So I think it is just, without being able to predict exactly, at some point there will be increased buying, especially if demand holds up as I referenced. And that is when we should see prices take a better hold in the market.

And then your complementary segment, if you could talk to that?

Yes the complementary products -- the largest piece of that business is vinyl siding. Then perhaps wood siding, some windows and doors, and those types of items. We don't sell a lot directly to the builders, but we have builder programs. I still think it is a very small piece of our Business. It perhaps is under 10% to 15% of that business, if it is even that high. And again, we are selling to their subcontractors, so it's a little more difficult for us to track it, but it is still small. We have seen no great new housing boom. When it comes, we will be happy, but right now it's a small increase that is helping, but it is just not significant yet.

Yes, that is why we continue to make comments about the more discretionary nature of this product, because it is more remodeling-based for us. And we just haven't seen the pop yet. We do view, I think, in the future, whether it is homebuilding coming back, or the economy gets healthier, unemployment, discretionary spending increases -- that could be a very good growth area for us, maybe even above the other two categories, albeit it is much smaller.

Thank you much.

Kathryn Thompson, Thompson Research Group.

Thanks for taking my questions today.

First on gross margins -- how much did mix benefit gross margins in the quarter versus price? In other words, getting the benefit of some of the pre buy? And, oh, tagging on a little bit earlier to your commentary on gross margins, could you maybe clarify how sustainable are gross margins going forward, particularly as you ramp up acquisitions? Your being in acquisition mode?

Well, the first question, the price increases that happened in the asphalt shingles -- we got about a 1% average selling price increase. So if you do the math, that means approximately two-thirds of that was from better buying or lower costs that we have, with the increase of about 170 basis points in overall gross margins. So I would say it is about one-third price and then two-thirds better buying.

As far as the gross margins and stuff, I will let Paul answer that, for next year.

Yes, I mentioned earlier about the need, of course, to have a healthy economy and demand, et cetera. On the acquisition piece, if you look in the Q, I believe -- and I don't have it in front of me -- I believe it was 27% -- yes, 27.7%, for the acquired markets on that $35 million of sales. So that is a nice difference, where we ended the existing markets, which were around 24.9% for the quarter. So and of late, our acquisitions have been flush, or have a much larger percentage of resi and commercial. So I think, actually, Kathryn, that is going to help us as we move forward.

Okay. Great. And two housekeeping items from the quarter -- interest rate run rate on a quarterly basis going forward, and a little bit more clarity on the Enercon charge in the quarter?

Sure. The interest rate really has not changed because we still have the older swaps in place. So it is going to be around that 4% average on our outstanding debt. As far as the Enercon charges, we made an estimate last year when we purchased them as required under the new acquisition rules, and estimated it at that time to be almost the lower end, or $4.9 million. During the year, they had a bit of a struggle, and we're required each quarter to revisit that.

At December, we thought they would not make it, and the probability would be was that we would pay a lower amount. Well, they had a very good strong spring season, and came back and made the lower end of the target, so we had to readjust that at that point in time by $1.2 million. Overall, we were only off $250,000 from what we thought we would be at last year. Just one of the quirks of accounting is that you have to estimate that each quarter, and it's such a short time frame that we had on that earn out that it was difficult to predict where they would end up.

Okay great. Thanks so much, and best of luck Dave.

Neil Frohnapple, Northcoast Research.

Good morning guys. Can you comment on the quoting activity within the commercial business? Has it slowed down recently with the drops we have seen in the architectural billings index? And, just any color on future outlook there would be helpful. Thank you.

Yes, we do track quoting activity, and it's been relatively strong. But it, for sure, fluctuates, and it does not necessarily -- for us, isn't a true indicator of volume. It is really a question of timing and when are those jobs going to be let, because of CapEx funds available, et cetera. There's no doubt we have seen some -- if you look and recall from many of our filings, our commercial growth over these last eight quarters has been -- was very consistent double-digits -- 11%, 12%, 14%, 14%, 15%, 11%, 15%, 16%, last quarter. And then the minus 4.9%.

So, and I mentioned in my opening comments, last year Dave and I commented -- I think it was Q2 -- where we thought the back half of last year might be break-even, down single digits commercially. So we were surprised, as we plowed through, and continued to see some very strong activity. So we view this as a bit of a lull. And some of it also I think is -- and we talked about it earlier in the year -- some of it was, especially up the Northeast, and the upper Midwest, where we have big commercial entities, was this mild winter, where there was probably a little bit of pull forward, and there wasn't a lot of damage caused.

Very hard, as we mentioned before, to measure. There just wasn't a lot of damage. But we are still very optimistic. We have some great commercial regions that really do quite well, and we have great manufacturer partners. So we're not concerned, although we continue to watch as many indicators as we can going forward.

Okay. And then Owens Corning noted that it's seen a slowing of volumes over the last six to eight weeks. Have you seen this in any of your regions, and is the hot weather, lack of rain, causing this weakness? Or any color there would be helpful.

I think, depending on the region, we see some slow down. Canada has had -- maybe they're seeing some of the things we saw in the last few years. There's been a little slowing there, but nothing huge. I think the biggest difference is probably the fact that manufacturers are shifting into distribution, and they shipped a tremendous amount of inventory -- price protected inventory -- earlier in the year. And now they are seeing distribution burn off that volume.

There have been some storms. There wasn't carryover storm volume from last year and the spring hail storms this year. But not to the degree there was last year. So I think that is probably some of the softness they're seeing. We've seen, overall, continue to see a decent -- although it is very competitive -- a decent re-roof market in most of our regions on the shingle side.

All right; thank you, and best of luck David.

Kenneth Zener, KeyBanc.

Good morning gentlemen.

I appreciate your monthly data that you gave us. And often more data just causes confusion, but this quarter I think it is very relevant. I think you said April was up 15% year-over-year, May was up 4%, and then June was down 16%, I believe? Then you said July was down 2%, is that correct?

Yes.

Now, and then you said down 6% on same sales days, is that correct?

Yes, there's one less day -- one more day this year compared to last year.

Correct. Now, could you just, for reference, give us the sense how much June 10 the comp was up, given that, that was apparently the most difficult month there? A. And then, B, one of the building product companies that I had spoken with -- and I'm surprised that others haven't talked about it -- while we knew the weather was mild, the winter, but can you talk about how you think the excess heat may have impacted activity, given that we were, nationally, in a rather hot time? How that might have suppressed demand?

Last year, residential was up about 15% in the third quarter. So it would be equal with 2010's level, if that is really what you were looking for. I think that you would also say that, last year a bunch of that business was shipped into the storm markets, and was not really reflective of what was happening in the markets outside of the storms.

Yes, we had quite a pop in the central Midwest right at the end of May last year, and it really burst through June, and propped up, increased June sales. And we had very similar activity in the Carolinas that really pushed June up. And then very little activity related to storm.

Okay. And then how would you think about the hot weather that we have been going through, impacting as well? I realize there was a tough comp, but do you think that impacted demand at all?

As I talked to my guys around the circuit during the quarter -- any given quarter, but specifically this one -- there's no doubt, in the Midwest especially, and in most locations, the heat has forced contractors to try to get on the roof earlier and leave earlier during the day. And it has hurt some business.

How much? Very hard for us to say, it is part of the overall cycle I think we see, with, whether it is a tough winter, mild winter, a tougher Q2, all those comps. And that is why we like to look at -- I like to look and remind myself of the 20, 30 year view of this industry, and how it grows at these -- it's fairly consistent single digits, unless we get some of the new housing back to normal levels, even though it is a small percentage of us. And then, the re-roofing demand continues, it is going to bode well for us going forward. It is very hard to predict though, Ken.

It is, yes. And then, the gross margin -- in the past you've talked about the spread between res and commercial. If you would not mind updating us there? Because it seems like the res, even though pricing was up only 1% year-over-year on the residential, it seemed like it was an incredibly strong quarter. A. And then B, how does that relate to -- I know you the gross margin guidance and I appreciate that, David, for the fourth quarter. But how, given my view that the residential is quite high this quarter, what causes the deceleration? Is that, you're flushing out the lower cost inventory? Thank you.

Yes, it is the turn of the inventory and stuff like that. The industry will have to buy new inventory at the higher prices, as Paul just mentioned. It is also the fact that we need to push for the price increases once that inventory turns. So we may be able to make up for the differential, but there's no question, as you mentioned, the difference between commercial and residential shingles is larger than it used to be. We used to say, when I first started, that it was 800 to 1000 basis points. Some, we went to 1000 to 1200. It is probably at least another 100 to 200 above that now, the differential.

Right. Because when it gets to 25 it would have to spike sequentially.

Correct.

Thank you very much.

Keith Hughes, SunTrust.

Thank you. You have done several transactions here the last couple months. What does the competitive landscape for acquisitions look like? Has there been any change, particularly with some private equity activity in your industry?

Well, every acquisition we make, there is negotiations and discussions. We don't necessarily know all the elements that we are competing against, but there is no doubt we've focused a lot of energy on establishing relationships over a long period of time. So we don't think there, the last couple, there have been that much in the way of competition. But we are prepared to do whatever we need to buy quality companies within the realm of what we have been paying in the past, based on the strategic fit and value of that company.

David, the last couple of deals -- can you give us a range of what you paid in terms of valuation?

It is probably 100 to 200 basis points higher than the six to eight times we have been saying. But I would qualify that, because these last few acquisitions have been what -- I won't call them fold in acquisitions, but they're becoming part of another region. So when we purchase these companies, we know we have some synergies. Now I am not using those synergized amounts in the multiple, because that is just not how we have ever talked about the Businesses.

But you can be assured, with F&P, and with Cassady Pierce, that there are some synergies there that, because we are putting them in existing regions we are going to benefit from. So the ultimate purchase price, I think, will be, perhaps, below that six to eight range, that multiple that we have been talking about.

Yes, Keith, and the same applies to Structural out in LA that we just purchased July 1. We have four existing branches out there that met up with our six, so now we have a very strong footprint. There was very little overlap -- have a very strong footprint on the sales side and operating side to get some leverage, as Dave said, as we move forward. Which, ultimately on the forward basis, will reduce that multiple.

All right thank you.

And this concludes the question-and-answer portion. I would like to now turn the call back over to Mr. Isabella for his closing comments.

Yes, just a couple of comments, and they are repeats, but they're worth repeating. Adjusted EPS for the quarter came in at $0.62 versus $0.51 last year, we're very pleased with that. We talked about the gross margins ending up in total at 25.1%, 140 basis points above last year. As I mentioned earlier, sales should end over the $2 billion mark, close to [$2.05 billion], and we're very proud that we have been able to now break and hopefully be able to break that as we close out this year, the $2 billion sales level. That is obviously with the acquisitions.

Price was up slightly for steep slope roofing in the quarter, and commercial roofing continued to have strong pricing, and as we said, increased by 10%. And we believe shingle pricing could rise additionally, as inventory purchased in the early spring should bleed out of the channel, and we're very focused on that. We continue to execute on the acquisition portion; I know a lot of questions are geared towards that, on our growth strategy, as we welcome Cassady Pierce, Structure Materials and Contractor's Roofing & Supply to the Beacon family. And as I said, our acquisition pipeline is very active and we are confident we're going to make additional investments in the near future.

And lastly, we're comfortable with the analyst estimates for the fourth quarter at $0.59, which puts us at approximately $1.66 for the full year. We believe we have done a very good job this year, very strong first half, as we thought; and a very good job in the second half, bumping up against some very large storm generated sales last year.

As always, our like to once again thank the employees of Beacon and the support of our customer investor base. We're working very hard to execute our business plan and to drive continuous improvement. Thanks for your interest in our Company, and David and I are available in the Peabody office for any questions you might have. Thank you, and this concludes the call.

This concludes today's presentation. Thank you for your participation.