Beacon Roofing Supply Inc (BECN) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to today's Beacon Roofing Supply's fiscal year 2013 second quarter conference. My name is Sarah and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session toward the end of the conference. At that time, I will give instructions on how to ask a question.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. This call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigations Act of 1995 regarding future events and the future financial performance of the Company, including the Company's financial outlook. Bear in mind that such statements are only predictions, and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings. The forward-looking statements contained in this call are based on information as of May 10, 2013 and, except as required by law, the Company undertakes no obligation to update or revise any of these forward-looking statements.

Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release. On this call, Beacon Roofing Supply may make forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements, as a result of various important factors including, but not limited to, those set forth in the Risk Factors section of the Company's latest Form 10-K. The Company has posted a summary of financial slide presentation on the Investors section of its website under Events and Presentations that will be referenced during management's review of the financial results.

On the call today for Beacon Roofing Supply will be Mr. Paul Isabella, President and CEO, and Mr. Joe Nowicki, Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Mr. Paul Isabella, President and CEO. Please proceed, Mr. Isabella.

Thank you. Good morning and welcome to our second quarter earnings call. We delivered breakeven, or minus $0.02 adjusted EPS in the quarter, versus $0.07 in Q2 of last year. We do recognize we had a very challenging quarter, due to strong sales growth comparisons from Q2 of last year and harsh, wet weather in most regions, weather that continued into parts of April and May in the Midwest, in particular. In terms of EPS, I believe it's important to note that since going public, only in 2005, 2006 and 2012 did we deliver positive EPS in the second quarter. Q2 has always been our weakest quarter, due to winter weather.

Our sales for the quarter were a record $416 million, which is approximately 5% above last year, and we were able to increase our gross margins by 20 basis points year-over-year. Our slight negative organic growth is somewhat encouraging, given the prior year comparisons and weather, as I had mentioned. As a reminder, last year in Q2 we had total sales growth of 33% and organic growth of 28%. Organic residential growth last year was 46% and commercial was 17%. So when I match up our 2013 Q2 numbers against last year -- last year's results, I have a positive view of what our team delivered. And as we track our results internally, we delivered EPS close to our plan. As I have said on past calls, we recognize that quarterly fluctuations in sales and EPS occur to a number of factors, including demand and weather variations in our markets. As in the past, we will continue to focus on the long-term market fundamentals and, of course, day-to-day execution of our operating plan.

In the quarter, overall selling prices were flat to last year and we were able to deliver higher gross margins, as mentioned. We believe pricing in the quarter was impacted by lower demand for both residential and commercial products. Gross margins will continue to be influenced by a number of factors, such as mix, market demand and, of course, product cost. We're pleased with the Q2 gross margin results.

Our acquired markets generated $41 million of sales for the quarter and are making good progress with regard to the integration process. Their results are expected to improve as we move through the year. Our acquisition pipeline is still very full, and we continue to talk to attractive companies. We're also placing more emphasis on our greenfield branch openings and plan on opening roughly 10 new branches this year, as I mentioned on the Q1 call. We will continue this effort moving forward, as we plan to open 10 to 15 new branches per year.

And now as I've done in the past, I'll give a little more color on sales, pricing and EPS. With regard to sales, by month, Q2 organic sales were as follows. January and February were down approximately 2%, and March was down 12%. These were all on a same days basis. Joe will talk about the line of business growth rates for the quarter and first half. We did have two of our reported regions deliver positive growth in the quarter, encouraging when you consider they are somewhat weather neutral regions. And we saw positive sales in March and April, when we actually had normal spring weather; and sales in the more weather neutral regions were positive during these months. April 2013 sales versus April 2012 were up in total 11%, and basically flat organically. Considering the harsh April weather conditions this year in several of our regions and the fact that last April was up 15% organically, we're again encouraged by the results. And as a part of the recent harsh weather, there have been some localized hail damage events that we expect to be servicing over the next few months.

For Q3, our organic sales comparisons become easier after April, as last May was up only 4.2% and last June was down 16%. As you look at Q4 2012, the organic sales comparisons were negative each month last year, July down 2%, August down 4%, and September down 10%, for a quarterly total of approximately minus 4% on a same days basis. These easier comps should make our reported sales results easier in the second half.

Pricing. As mentioned in total, pricing is flat for the quarter. Residential and commercial prices were basically flat, and complementary was up slightly. As a reminder, there were a number of vendor price increases announced in December and January that were mostly scheduled for February and April implementation. They were announced for all product lines and averaged 5% to 10%. We did pre-buy some inventory as a result of this, as you can see from our Q2 financials. It's important to note that the inventory increase contained $37 million from new acquisitions. As is normal for the industry, price increase realization is typically delayed, as distribution sells through cost advantaged inventory. This year has been no different. Except with a weaker winter demand, price realization has been delayed even more than normal. We're hopeful that the increases will take hold in the next month or so. We are watching this very closely. As always, as higher prices are passed on to us, we in turn have no choice but to pass them along to our customer base.

EPS. On our Q1 call, we said we were comfortable with the midpoint of the full-year analysts' estimates. That number, at that time, was $1.81. The current analysts' range is $1.79 to $1.98. Now that we've had more insight into how the year is progressing, I think it makes sense to tighten that range of expectations. I believe a forecasted range of $1.75 to $1.85 makes sense at this time, as a guide, based on the first half results. There are a number of positive economic signals, and re-roofing continues to be a large share of the roofing market, over 80%. And I do believe pent-up repair work still exists for both res and non-res demand in general and, of course, from the harsher winter that we just saw.

Our overall market dynamics have not changed. We are confident that we'll have a stronger second half. But as we have said in the past, it's difficult to predict future volume or price attainment with any certainty. The higher end of this annual EPS range implies strong price realization, as well as double-digit organic growth. As always, we'll focus our energy on achieving the upper portion of the range.

And now, I'll turn the call over to Joe Nowicki, our new CFO, to go over the financial highlights. As you might have seen from our previous press release, Joe joined us a little over a month ago. He has deep public company experience, coming from Spartan Motors, where he was CFO, and before that, Herman Miller. Joe has been a great addition to the team. I'd also like to thank, at this time, Rick Welker for doing a great job in the acting CFO role. Joe?

Thanks, Paul, and good morning to everyone on the call. I'll highlight some of the key financial results and metrics contained in our earnings press release, Form 10-Q filing, and the second quarter slides posted to our website this morning.

Total sales for the quarter, aided by our acquisitions, increased 5.3%, to a second quarter record of $416 million. Our fiscal 2013 second quarter organic sales decreased 5.1%. Now this represents our existing markets and excludes sales of branches acquired since the beginning of last year's second quarter. It's important to note that we were up against a 28% organic sales increase in last year's second quarter, when we had unusually warm weather.

Our sales in existing markets by product group declined as follows. Residential roofing sales, 1.4%, nonresidential roofing, 11.2%, and complementary product sales, 3.2%. Unfavorable weather conditions impacted this year's sales, especially in comparison to last year's very favorable conditions. Commercial business has been softer over the last few quarters. It's also important to note that we had one less selling day in this quarter compared to last year. Therefore, organic sales decreased only 3.6% on an average sales per day basis. All the decline was from the commercial side, with residential slightly up on an average sales per day basis.

In our geographic regions, our Southwest region showed double-digit existing market sales growth for the quarter, while our Southeast region had an increase of 3%. Our other regions were down, due mostly to some tough comparisons to the very mild winter last year and the commercial roofing market slowdown. Acquired market sales were $41.3 million for the quarter, or approximately 10% of the prior year's Q2 sales.

Gross margin increased to 23.9% from 23.7% last year. The softness in commercial sales, as previously mentioned, drove a higher mix of residential sales, which traditionally carry higher margins. Overall, average selling prices in comparison to last year's Q2 were relatively unchanged, while down slightly from this year's first quarter. Our roofing product gross margins improved slightly over last year, while our complementary product gross margins was down slightly, despite higher average prices in that category.

Existing market operating expenses, which are shown in slide 2, were down about $1 million, due primarily to less bad debt expense, resulting from a lower percentage of past due accounts and continued improvement in our collections processes. Operating expenses as a percentage of net sales increased to 23.5% overall, mostly due to the impact from our acquired companies, including a higher rate of amortization expense on intangible assets and certain professional fees. In our existing markets, operating expenses increased to 22.1% from 21.2%, mainly to the impact of the lower sales.

Interest expense was down $1.3 million in the second quarter, as we benefit from a change in the value of our older interest rate swaps this year. These interest rate swaps are now expired. We reported an income tax provision in the second quarter, despite the pre-tax loss, as a result of certain discrete items and pre-tax income in the US.

Our net loss was $0.2 million for the quarter, compared to net income of $3.1 million last year. The net loss per share was $0.00, compared to diluted net income per share of $0.07 last year. The adjusted net loss per share was $0.02 for this year, as calculated in our press release and also shown on slide 3. The adjustment reflects a benefit of $1.3 million from the change in fair value of certain interest rate derivatives. Our adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, and adjustments of contingent consideration and stock-based, was $11.6 million for 2013, as compared to $17.8 million in 2012. The lower adjusted EBITDA reflects decreased earnings and interest expense, as previously mentioned, partially offset by higher depreciation and amortization as a result of the acquisitions.

Now to take a moment on our first half results. This starts on slide 4. Year-to-date total sales, again, aided by our acquisitions, increased 5.1%, to a first half record of $930 million. Our fiscal 2013 first half organic sales, which excluded sales at branches acquired since the beginning of last year, decreased 5.1%. Again, it's important to note that we are up against a very strong organic sales increase from last year's first half, 22%, when we had some storm business in the first quarter and unusually warm weather in the second quarter. We had 125 selling days in the first half, compared to 124 days last year; therefore, our organic sales decreased 5.3% on an average sales per day basis.

Our sales in existing markets by product group were down as follows. Residential roofing sales, down 3.5%, nonresidential roofing, down 8.2%, and complementary product sales up 2%. Unfavorable weather conditions impacted this year's sales, along with the less storm business.

In our geographic regions, our Southwest region showed double-digit existing market sales growth for the first half, while our Southeast and Canada regions had increases of 4%. Our other regions were down similar to the second quarter.

Gross margin increased for the first half of fiscal 2013 to 24.3% from 23.8% last year. As mentioned for the second quarter, our acquired companies have had a higher mix of residential roofing sales and we also benefited slightly from higher average prices in the first half of the year. Our residential roofing product gross margin improved slightly over last year, while our nonresidential roofing and complementary product gross margins were relatively flat.

Existing market operating expenses for the first half of fiscal 2013, which are shown in slide 5, were relatively unchanged. Payroll and related costs increased $1.3 million, due primarily to higher sales and delivery wages associated with the greater mix of complementary sales and driving further average distances for roofing deliveries. We also had a slightly lower percentage of direct sales this year, which have a much lower service cost. In addition, in last year's first half expenses, we realized a reduction of $1 million resulting from an adjustment of the contingent consideration. Favorably impacting us, bad debt expense declined $2.4 million, due primarily to a lower percentage of past due accounts. Lastly, existing market depreciation and amortization expense decreased $1 million, due to a drop-off in amortization related to the intangible assets, and lower depreciation, due to relatively low levels of capital expenditures in recent years.

Operating expenses as a percentage of net sales increased to 20.7% overall, and to 19.3% from 18.4% in our existing markets. The overall rate increase was mostly due to the acquired markets' impact. Existing market expense rate increase was mainly due to the impact of lower sales.

Interest expense was down $2.7 million, as we benefit from the change in the value of our older interest rate swaps and also from the lower total debt outstanding. Income tax expense reflects an effective tax rate of 40.4%, compared to last year's 40.7%.

Our net income was $18 million for the first half, compared to $22.3 million last year, while the diluted net income per share was $0.37 compared to $0.47. Adjusted diluted net income per share was $0.35 for this year, compared to an adjusted $0.45 last year, again, as calculated in the press release and shown on slide 6. Our adjusted EBITDA was $53.4 million for 2013, as compared to $58.9 million in 2012.

As slide 7 shows, the cash flow from operations was $20.6 million, compared to $80.3 million last year. The lower cash from operations was principally due to less favorable changes in working capital this year. In particular, the inventory increased by $87.3 million since year-end, excluding the impact from acquisitions. As Paul mentioned, we built certain key inventories ahead of announced vendor price increases. Inventory turns in existing markets slowed to 3.2 times in the quarter from 4.8 times last year, as a result of that buildup and because of the lower sales. Although since quarter end, our inventory levels have already declined by over $20 million as a result of our seasonal sale trends.

Capital expenditures in 2013 were $10.8 million, compared to $8.6 million in 2012. We expect our cap expenditures to be approximately 1% to 1.3% of sales for the full year, mostly as we continue to upgrade our fleets.

Net cash used for acquisitions in the first year was $64.5 million, compared to $44.4 million last year. Net cash provided by financing activities was $29.9 million this year, mostly from seasonal revolver borrowings and proceeds from option exercises. Our current ratio was at 2 to 1 at the end of the quarter, compared to 2.1 to 1 at year end and 1.8 to 1 at the end of last year's second quarter. Our existing market days sales outstanding and accounts receivable were 36.2 days, as compared to 36 days in last year's second quarter.

Our net debt to capital ratio was at 23.5% at the end of the quarter, compared to 23.1% at year end and 20% at the end of last year's second quarter. The results of our two bank financial covenants at the end of this year's second quarter were as follows. Total leverage ratio was 1.62 to 1, compared to 1.55 at December 31, and our interest coverage ratio was 15.07 to 1, compared to 14.92 to 1 at December 31.

We'll now respond to any questions that you may have. Thank you.

Thank you.

(Operator Instructions)

Michael Rehaut, JPMorgan.

Good morning. This is actually Jason Marcus in for Mike. My first question is on gross margin. So far this year, you've seen a nice improvement. And just looking into the back half of 2013, do you think that it would be fair to assume that gross margins can continue to improve on a year-over-year basis for the next two quarters?

I think what you'll see, we have said it even last year earlier, before the year began and we've been able to telegraph it, I think quite well, that gross margins would be in that low 24% range. I think as we look out to the back half, we see -- we do see some increase, but we're in the small basis points, 10, maybe 20, as we go through the back half and through a more robust selling season.

Okay. And then next, on the SG&A. So the SG&A came in a little bit higher than we were looking for, and I think that was really driven by the higher SG&A from the acquired market, the 35.9%. So the first part is, how long does it typically take to bring down acquired market SG&A to the Company average? And then, are you still comfortable with SG&A for the full year in the 17% to 18% range?

Yes, we are comfortable in the 17% to 18% range. And there's no doubt that -- and it also, some of it, depends on the mix of the acquired markets, if it's heavy residential or roof load, it might have a little higher SG&A. But typically, we're looking, as purchase accounting bleeds down, to normalize it within the first three years, it gets down closer to the 19% range. I think an ongoing base would be in the more 17% to 18%, or a little higher than 18%, for the acquired markets. So yes, there's a combination of the acquired -- the start-up cost, purchase accounting in the quarter, no doubt, and then also just the overall impact of the sales being off a bit, that put pressure on the cost piece. Because we certainly aren't going to rip so much cost out that it hurts the business.

Okay. Thanks.

Okay.

Ken Zener, KeyBanc Capital Markets.

Good morning, Paul. Can you talk about the -- I understand your comments about the gross margin, but could you just update us perhaps on the spread between res and non-res?

I think it really hasn't changed for us much. We've been talking over the last, what, 12 months, Ken, probably that it's in the 1100 to 1200 basis points. It went up a couple of years ago, where we had, I think, historically had said 900 to 10 points, roughly and now we're up. But that hasn't changed.

Okay. And as we think about the acquisitions coming in, that's basically a 400 basis point lower mix, right, as those are moving through the first 12 months of the year?

In terms of gross margin?

In terms of overall margins.

Again, are you talking gross margins or --

No, that would be EBIT.

Yes. I mean, they're naturally going to be lower as they come in, because of the burden of start-up costs and purchase accounting. So yes, as we talk about where do we think we're going to be for the year, it's in that mid-single digit operating range to finish the year out. So yes, they're naturally going to be -- they always are lower in that first year. And then as we burn off that, improve operations, integrate them as we do, then it moves up to the Company average.

Would you say your comments around industry-wide price increase that you had in your press release, given what we had happen last year, what is your sense of the channel? There was -- obviously, a large competitor had disclosed some information. But what is your sense of where the industry is and the likelihood of this February, which is now hitting in April, May, sticking, and then the next one actually holding, if you would? Thank you very much.

Sure. Yes. I think a couple of points. One, and I alluded to it a bit in my comments, there's no doubt the longer winter has pushed this -- one of the reasons -- it pushed the stickiness of the price out. Two, as normal distribution bought in inventory, I can't tell if they bought more or less. Let's just say it's the same as last year. So I think I have a relatively high confidence level that that first price increase will stick and we'll realize it in the next month or so. I had thought it was going to happen this month. But again, without being able to predict the future, there's no guarantee of that.

So I don't think the market or the channel has changed or done anything differently. I think it's just a question of the winter has really pushed out when the increases are going to hit the market. The manufacturers are still extremely confident, and I know their behavior is such that the products that are being repurchased now are at the new pricing, which gives me confidence that there will be the increase.

The second one?

I don't know so much about the second. That one's going to maybe take a little longer. I'm really referring to the first, that's just starting to get through the market now. The second one, we're just going to have to wait, probably another two months.

Thank you, sir.

It will be gated, Ken, by volume, too, you know.

Understood.

Okay.

Ryan Merkel, William Blair.

Hello, guys. How are you?

Good morning, Ryan.

Wanted to go back to an earlier question on gross margin, just so I heard you right. Did you say that gross margins in the third and fourth quarter could be up year-over-year by 10 basis points?

No, it's more the sequential -- I'd have to look at what we did last year in the quarter, but more sequential of where we're at now, just slightly up as we go through the balance of the back half. If you looked at last year, we were in the 25% range. So they're going to be lower than last year. It's more Q2 year-to-date.

Got you. So it was a sequential comment. Okay. And then I wanted to ask about, what do you think acquisitions will add to EPS in the back half of this year?

Well, we had talked, I think on the last call, that we thought they'd be accretive by $0.10 or so. And given -- and really, it was part of our plan to have lower sales in the first half, just because of the way they came in, when they were acquired, and the winter. I think we'll probably see in that $0.08 range, something like that for the -- $0.06 to $0.08 range for the back half.

Okay. And then I wanted to ask about the non-resi market. I know weather's impacted things there, but is that the primary driver or is there more to it than that? Is demand just weaker? I think the government sequester has got to have some impact there.

That's a great question, Ryan. All indicators and all the data points I'm able to pull from say that it isn't necessarily a weak demand situation because of the outlook or the economic indicators. I mean, there is no doubt, and you can go through the Carlisle transcript of what they saw. And they've been actually doing quite well in recent quarters. They were pushed down big time by weather. I think, as we talked last fall, there was a natural fall-off in public work and then it just continued with the more difficult weather conditions. I don't see, though, any underlying issue with demand, like we're just going to have a weak second half. Everything our folks, as best they can tell now -- and remember, our backlog is right in front of our face. But we do look at quoting activity, which is up. And some of those jobs are a month out or a year out or longer, based on where they're at in their project cycle. It's positive. So I don't have any reason to think that anything has changed dramatically with the fundamentals of the commercial roofing market.

Okay. And just last one, if I can, just going back to the gross margins. Again, year-over-year, you're in a pretty good inventory position at a low cost base, plus mix is on your side. So I'm still not quite clear why year-over-year you wouldn't see gross margins at least on par with last year. What's really the driver then as to why they're lower year-over-year? Is it because price/cost isn't as favorable?

Yes, I think, without giving you too much detail, I think that's a piece of it. And the other piece is just as commercial comes back, and it's been down, it's been negative double digits here, as it comes back to what we think, there's going to be a mix impact there that will drag down the rate, just because of the gap between resi and commercial.

Okay. Great. Thanks for taking the questions.

Thanks, Ryan.

Neil Frohnapple, Northcoast Research.

Hello, Paul and Joe. How you guys doing?

Hello, Neil. Good. How are you?

Good. Do you guys still anticipate mid-single digit organic growth for the full year, and can you just provide a little granularity on differences between the three product groups? With non-res being a little weaker this past quarter versus res, do you anticipate maybe res being above that mid-single digit number and non-res maybe being slightly lower? Could you provide some more color there?

It might be difficult, at this point, to give you a lot of granularity by product line. But in general, if you look at the ranging that I gave, that $1.75 to $1.85, the EPS piece -- and not to get off track, but the EPS piece is slightly under the bottom of the range now, and it kind of matches up also to the bottom end, lower end, of the sales range, which implies about 3% organic growth, if we hit that. If we go on the other side of the 180, that's when we get up closer to that 5% number that I talked about on the last call.

Both of those numbers, 3% and the 5%, are full year. So that's full year.

Yes, full year. Obviously, the back half, you're closer to -- at the lower end, higher single digits, and at the upper end you're up double digits, above 10%, to achieve those. And that's, quite frankly, contingent upon price realization and how strong the market's going to be for these next five-and-a-half months.

Plus the (Inaudible) underway, as well.

Yes.

Great. Thank you. And then, a follow-up on the non-residential commentary. Paul, you talked about you're confident about the residential price increases sticking. It's still too early to tell. But based on the quoting activity you've seen on the non-residential side, and typically distributors don't stock as much inventory of non-resi products, so could you provide a little bit more granularity on maybe when we could see the non-residential price increase and your conviction level there? Thank you.

That's a more difficult question, just because of the way the volume has been somewhat suppressed in Q2. I know the manufacturers committed to making up for any of their input costs, and they're very disciplined. Carlisle's extremely disciplined on pricing, and that helps. My optimism level is above -- on a zero to 10, it's above the 5. I think as volume comes back, I do think we will see price realization on commercial. To what degree, Neil, it would be very hard for me to tell you right now.

Great. Thanks very much, guys.

Thank you.

Thanks.

Kathryn Thompson, Thompson Research Group.

Hello. Thank you for taking my questions today. Of the roughly $37 million increase in inventories in the quarter, that was -- $37 million was driven by acquisitions. For the balance, how much of the dollar increase was driven by higher priced roofing product that was purchased in the quarter versus anything else we should take into consideration?

Well, the majority of the inventory build was for residential product that we started purchasing at the end of Q1 in December, when the manufacturers announced the price increases that second week of December. And you saw a slight increase in Q1. And then it continued as we received and purchased that same resi inventory in the quarter. In terms of commenting on whether it's high priced or low priced, we don't get into that level of detail, except to say that as all distribution typically does every year, when there's a price increase they purchase ahead of the price increase, and then as the increase goes in, you have advantaged inventory. If it's a 8% increase, of course, you have that advantage as you're selling through.

Some of the feedback we've gotten from independent distributors this year is that the ability to buy roofing products in advance of a price increase was lower this year relative to last year and previous years. Did you see that trend this year?

No. No, our ability to buy was only gated by our ability to buy, meaning our desire to say we either want $10 million more, $1 million more, or $40 million more. The manufacturers, for the most part, as you look at them in total, have had the ability to ship product and the ability to provide product during that quarter at the pre-price level -- pre-price increase level.

And I know you've answered a few questions on the May price increase, but just one follow-up on that. Is there anything structurally in the industry regarding demand that would lead you to believe that that price increase wouldn't be successful?

No, I don't think so. If I you saw or felt -- and my folks, this isn't just me, obviously, there's a lot of data points we pull -- that there was something, some underlying issue with either the economy or the whole thesis of re-roofing that didn't work all of a sudden, then maybe. But no, the industry fundamentals are the same. A large portion of what we sell goes to re-roof. Housing market continues to improve. We see it in different parts of where we do business. And, no, I don't think there is any fundamental weakness that would prevent. The only thing that could happen is if demand, for some odd reason, wasn't as robust as we think it's going to be, because of all the weather and all the pent up demand, not just from weather but just from the last few years, doesn't occur, maybe as occurred in '10. But we don't see those dynamics duplicating. But again, I can't predict the future with any high degree of certainty, so we'll just have to work through these next four weeks to six weeks.

Sure. Final question. Any change in incentives offered by manufacturers this year versus last year?

Could you repeat that? I'm sorry, you kind of --

Are there any changes this year in incentives offered by manufacturers versus last year?

Yes. We typically have never commented on the level of incentive buys. It's so proprietary for all distribution. Suffice to say, pull myself back a bit, we're a big company. We believe we have an outstanding purchasing group. That's not just the corporate group, but the entire executive team and the team out in the field. And we think we buy effectively. But in terms of talking about comparisons year-over-year, that wouldn't be appropriate.

Okay. Great. Thanks for answering my questions today.

Thank you.

Thanks.

David Manthey, Robert W. Baird.

Hello. Good morning, guys.

Hello, David.

First off, the current tone here, you've got residential revenues flat versus what amounted to pretty perfect weather last year. And as I'm looking at that and the implications relative to the main part of the selling season, it looks pretty positive. And then, Paul, you're basically endorsing, with a range, but the same level of guidance as last quarter. And I'm just wondering what the moving parts are. Is that because of the price seems like it's pushed out maybe a month longer than you thought, or how are you thinking about that? It looks like this is a very positive demand sign early in the year, and I'm just wondering why that is.

Yes, it is. Dave, we were pretty pleased when we looked at -- when you just -- obviously, when you look at the raw number as a stand alone, you'd say geez, that's a yawner. But then when you go back and remember what the heck happened last year when we had the tremendous, especially on the residential side, huge residential growth. And then we kind of pinch ourselves and go back to '11 and see the changes even from '11, not just on gross margin and sales, but also on SG&A percentages, and they're all favorable. I think that you hit the nail on the head.

One of the driving influences for me right now is winter has just taken longer to get untracked. We had snow in April in the Midwest and Denver. And I'm not one to talk about weather, but it's just really -- that and the wetter conditions have just kind of pushed things out a bit. So I'm optimistic that there's pent-up demand as a result of that. But, the year -- we're into May now, and there's only a number of months left, so I want to be a realist on the side of how much price is going to hit, when is it going to hit, and then how much of the pent-up demand really does come out. And that's the reason for the range.

Okay. Fair enough. And then on the -- not to keep hitting on this, but the gross margin going forward. You talked about the non-res business coming back, and that would only have that type of negative impact if the mix changed, meaning that non-res would be growing faster than residential. Is that your expectation that non-res is going to be stronger than residential?

That's the view right now, because it's been so pushed down for the last number of quarters that we've had. I think it's three where we've seen that negative pushback after the original, I think, eight quarters of double-digit growth we saw.

Right. Okay. And then finally, again on the non-res business, I want to check your head on, do you think that's a good business? When you think about capital investment or acquisitions, does it factor in for you? And I'm just wondering, do you have the right products in the right places? And again, just underlying all of that, is it a good business or is it just something you need to be in because you're in the roofing business overall?

No, not -- for us, non-res business is an excellent business. It provides -- especially, Dave, when we match -- when we mix it up in a branch that's got the other products, it really helps the SG&A piece, because you can do multiple deliveries. It expands your customer base, some that do crossover work. And the gross margin belies what we can do on the operating income side, because the cost to serve is so much lower. Salespeople cover bigger territories, have bigger budgets. There's a lot of products that are delivered direct versus truck delivered or out of our warehouse. So no, I think -- and when you look, which I do, we look into the -- deep into the numbers on operating income for commercial businesses. It can be, and in many instances is, higher than the branches that are all residential. So no, it's a great business and it helps buffet changes in demand of the other products. And that's why, for instance, Canada, historically the legacy piece of Canada, on the east portion of Canada, has been commercial and we're trying to mix up residential. But they've had historically extremely high operating income, because they just know how to run that business and the cost to serve is very low, and they're very good at it. So no, it's a great business.

Final question from me, just in terms of -- you were looking to move non-residential products into residential-only locations and vice versa. And I know you had some early successes with that. Based on what you just said, Paul, is that something where you're looking to accelerate that effort this year?

Yes. I think especially as the selling season takes place, the Midwest has really pushed extremely hard to start up -- jump-start their commercial business. And they've been relatively successful, albeit at a smaller level. And then you have the West Coast, where we've done a couple of acquisitions in the last year that were predominantly commercial, and we're pushing extremely hard to put residential in there. Same with North Coast, heavy, great commercial business. And we've been adding shingles, actually for the last five years, so the percent now is over 25% residential there. We're going to continue that, Dave. It makes a lot of sense. Same for Florida, where we had a heavy commercial business. We're pushing very hard on the residential.

Okay. Well, thanks very much.

Thank you, Dave.

Sam Darkatsh, Raymond James.

This is Josh filling in for Sam. Thanks for taking my questions.

Hello, Josh.

Hello, Josh.

I wanted to get a little bit more specificity on the mix of new construction that you're seeing in your sales, residential versus non-residential, what's the mix within each of those?

It's about the same, and it changes by geography. For us right now, it's around 15%, roughly.

For both, even with strong --

There seems to be a little more steam on the residential side. There's no doubt, as you look at different geographies. I won't get into a lot of detail, but we're definitely making progress on the residential new construction side, probably quicker right now than commercial.

I think in total, that overall mix hasn't changed over the last few years. It's been pretty constant.

Yes, the historical number for both is a little higher. Historical, going back before the '08 problem areas of the recession, where it was over 20% to 25% for both, and it dropped off, we think, in the 10% range. We don't track every single job. That wouldn't be real productive for us or for our customer base.

And then, is there a target for inventory that we should be looking at for the end of the fiscal year, in terms of dollars?

Yes, we typically don't put out targets. There's no doubt that in our second quarter inventory increases. Our turns were down into the low threes. That will -- the turns will improve. Inventory will decrease. It's already decreased since the end of March quite a bit. And we'll continue that trend, always, though, with a first thought, we've got to make sure we service our customer base. So we will have the needed inventory on-hand. But it naturally just bleeds out as we go through the end of the year. But we've never talked about a target.

Okay. And then just to fill in a blank here. You talked about the spread in gross margin between residential and non-residential. What's the spread, residential versus complementary?

Let's say it's in the middle of those two, roughly.

Okay. Thank you very much.

All right. Thank you.

And it appears we have time for one or two more questions. Keith Hughes, SunTrust.

Thank you. Question's back on non-residential. Not for near-term demand, but are you getting indications from contractors that building business, building plans, things for later on in the year, things of that nature, is that being seen by your folks in the field?

Yes, there is more optimism about the activity as you move out into the future. I know specifically, Carlisle's very positive about not just normal activity, because roofs expire, in the average, 17 years. But also, they believe there's still a lot of pent-up demand commercially, not necessarily new construction, but re-roof, that will occur. And I think that -- Keith, I think that kind of parallels what I said earlier about the quoting activity we look at, which we see across the country that our people do, estimating activity is up, and that's usually not for jobs necessarily next week, but they could be out 10 months, 6 months.

Is that kind of the range, six months to a year, when you would start to see when quotation activity moves up?

Yes, yes.

All right. Thank you.

But again, there's jobs also that -- it's somewhat of a moving target. There's jobs that translate -- jobs we estimate now that translate into sales within a couple of weeks.

Do the shorter term ones tend to be smaller than the longer term you were referring to earlier?

Yes, typically, just because of the inherent complexity of a larger building, with more hands on it. Building owner, architect, specifier, that development process. And then if it's multiple buildings, it's going to take longer, typically.

All right. Thank you.

Okay. Thanks, Keith.

And that concludes the questions. Now I would like to turn the call back over to Mr. Isabella for any closing remarks.

Great. In closing, let me go over a few of the highlights. And these are repeats. Adjusted EPS for the quarter ended at minus $0.02, versus $0.07 in 2012. And for the full year, as we said, we feel comfortable with the range of $1.75 to $1.85. Overall gross margins were solid, ending at 23.9% for the quarter, up over last year. Residential sales for the quarter were flat, while commercial were down 9.8%. And again, not entirely surprising, given the strong comparisons we were up against from last year and the overall harsh winter weather this year.

Incremental sales from all of our recent acquisitions should total approximately $230 million in 2013. And as I said, the price increases are still working their way through the market, and we'll have a much better idea the extent of those increases and timeframe. I'm still very hopeful and positive that they will be realized and we will attain those. And our acquisition pipeline is very active and we're confident we'll make additional investments in the near future.

As always, I'd like to thank the employees at Beacon and the support of our investor base. We're working very hard to execute our business plan. Thank you for your interest in our Company, and Joe and I are available for any other questions you might have, here in the Peabody office. Thank you, and this concludes the call.

Thank you. Again, that does conclude today's Beacon Roofing Supply conference. We thank you all for joining us.