Beacon Roofing Supply Inc (BECN) 2013 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to Beacon Roofing Supply's fiscal year 2013 third quarter conference call. My name is Tiffany, 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. This call will contain forward looking-statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform 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 the today, August 9, 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 10K. The Company has posted a summary financial slide presentation on the investor 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, and good morning, and welcome to our third quarter earnings call. We certainly had a very challenging quarter, with a number of dynamics impacting our results. However, we still delivered solid results in many parts of our business. I will go over a few of those. We are still very focused on our overall growth and business plan. From a total sales perspective, we did achieve record third quarter sales, ending up 12% versus 2012 at $627 million. This was fueled by our solid acquisition growth and by 1.2% organic sales growth. This was below our expectations, but considering the difficult storm comparisons and general market softness, we are pleased the organic rate is positive.

For the quarter, we delivered $0.55 of EPS versus $0.62 of adjusted EPS in 2012. These results also came in below our internal expectation. Harsh wet weather impacted a good portion of the quarter in most of our footprint. Both Owens Corning and Carlisle mentioned this on their recent earnings calls. There was a reference to this being a wettest weather in 50 years on the Carlisle earnings call. Late winter snowfall in the Midwest and Mountain region and rain during most of the quarter in most regions prevented contractors from performing work. Rain days year-over-year for most regions were significantly up nearly double in most major markets in the quarter. Adding to the sales shortfall was a lack of severe weather, specifically hail, in 2013. Major hail dents in our Q2 and Q3 were down nearly 30% over last year. That, coupled with the 2012 hail occurring in two of our most dense regions, the southern portion of our Mid-Atlantic and the Midwest, made for tough comparisons.

Lack of hail storms less available roofing days caused demand to be much lower than expected. As an indicator, manufacturer shipments of shingles into distribution were down 32% in the April to June period, per industry data, and first calendar half shipments into distribution were down 12%. This is an indicator of market weakness during the quarter and calendar first half. This weaker demand impacted our ability to achieve higher levels of price in the quarter, specifically on asphalt shingles. This, combined with shingle input cost increases from the manufacturers, hurt gross margins. Some of this was offset by price gains on our commercial and complimentary products. On the other hand, other elements of our business continue to improve, showing our commitment to continuous improvement. Let me mention just a few of them.

First, cost control during the quarter was very good, coming in at 15% of sales for our existing markets, down from 15.9% last year. Also, operating margin came in at a very strong 7.6% for the quarter, which falls in the upper end of our stated range. We're also very pleased about acquisition integration, as we delivered $65 million in sales and 3% operating income, including $1.7 million of amortization. Without these expenses, the acquired markets delivered 5.6% operating income, good results given the newness of most of our acquired markets. And our greenfield push continues as we opened two branches in the quarter. That is three new openings through three quarters, with a fourth added in July. We still plan to open approximately 10 in fiscal 2013, and are on track to open 20 next year, which is an increase from what I stated on the last earnings call. And finally, bad debt continues to be another bright spot, as the work we have done improving this process shows in the results.

Now, as I've done in past quarters, I will give a little more detail on sales, gross margin, and EPS. With regard to sales, by month, Q3 organic sales were as follows. April was down 2%, May was up 3.3%, and June was up 2.5%. As I said, below our expectations. These are all on a same-day's bases. For the quarter, resi sales were flat, commercial sales up 1%, and complimentary showed some good growth, up 5%. Three of our reported regions, Southeast, Southwest, and the Northeast did attain double-digit, or near double-digit, organic growth. The flip side to that was two other reported regions, the Midwest and Mid-Atlantic, had negative growth of minus-7% and minus-16% respectively, most of that being a result of very strong hail damage repair comparisons from the prior year.

For the start of the fourth quarter, July sales were relatively strong, coming in with total growth of 17% and organic growth of 10%. That is 5% based on having a extra day in 2013. This is good news, and show some catch-up from Q3. Results are even more positive, given the continued weakness in some of our markets impacted by difficult storm comparisons from 2012. We will continue, as always, to push for sales growth in the remainder of the quarter. For comparison, last year Q4 total growth by month was July down 3%, August down 4%, and September flat on same-day's basis. For Q4, we are estimating we will achieve 6% to 8% organic growth. That's our the best estimate right now.

Let's move on to gross margins. As you can see from the Q, gross margins were down in the quarter around 150 basis points in total versus last year. Manufacturers did announce two major price increases since December of '12 on shingles, amongst other product lines. Despite our strong buying effort, some of these increases were passed along to is in our product costs. Distribution. Roofing distribution in general has been unwilling or unable to pass these price increases into the market. We attained approximately 1 point of overall price in the quarter, and actually should have seen 5-plus points. This lower price attainment, and to a lesser degree this slight mix change, commercial versus residential, coupled with increased shingle costs impacted GM. At present, as best we can tell, most distributors have been restocking shingles at the new pricing.

Based on this, it does seem very logical that pricing increases will be realized by distribution in the back half of the year. This is what historically occurs. We are continuing to push price increases in all of our markets. Earlier in the year, I thought gross margin in the back half of this year would come in just north of 24%. It came in 70 to 80 basis points below in the quarter. Our stated range for gross margins has not changed at 22.5% to 24%, and we do know this can fluctuate by quarter based on many factors, some of which I mentioned already. We are working very hard to get gross margins in the higher end of this range. Right now, we see gross margins for the fourth quarter in the 23% to 23.5% range without any price gain.

EPS. On our Q2 call, we said we were comfortable with a range of $1.75 to $1 85. Based on gross margin results in the third quarter and sales softness, and the potential for the same in Q4, I think modifying the full year EPS range is appropriate. Last year we delivered $0.60 in Q4 with a relatively strong market and good storm volume. The analyst estimates for Q4 average $0.73, with a high of $0.77 and a low of $0.68. After analyzing it, I believe we will be at the lower end, or even below the lower end of the fourth or guidance. Given this, and our year-to-date EPS, I think that puts us in a range of $1.50 to $1.60 of EPS for the full year. If demand picks up, and solid price is realized 5% plus or so for the quarter, we could achieve the higher end of that range. If not, it will be in the lower end of the range.

This year has been quite different from the last two. I see three key factors. Very harsh weather, much lower storm demand, and then as a result, intensified competition. We realized there will be years that have intense storm volume and years that don't. I think it is important to remember that a majority of the work we service is replacement, reroof business. That is one of the reasons we performed so well during the very difficult recession years. I also think it is important to say that the quarter's performance does not reflect any change in our core business elements that make Beacon strong. Although we certainly understand that we have to execute our financial plan on a quarter-by-quarter basis, a longer time horizon is, in our view, also very important to look at, and a very good indicator of our overall strength. We have proven this with our results over the last 10 years or so.

Also, the relative infancy of the industry consolidation, coupled with the nature of reroof business, our geographical and product diversity, our strong balance sheet, and sure to normalized storm cycle positions us well to grow, and capture additional market share over time. We will continue focusing on our strategic plan, which emphasizes outstanding customer service, strong growth, the footprint expansion, and operational cost excellence. I know we will continue to perform and attain our long-term growth objectives. And now, I would like the call over to Joe, who's going to go over some more financials highlights. Joe?

Thanks Paul, and good morning everyone. Paul did a great job summarizing our financial and operational performance for the quarter. I will highlight more detail on a few key financial results and metrics that are contained in our earnings press release, the for 10-Q filing, and the third quarter slides that were posted to our website this morning.

Total sales for the quarter increased 11.9% to a third quarter record of $627 million. The majority of that growth came from acquisitions that added $65 million to our revenue for the quarter. Our fiscal 2013 third quarter organic sales increased 1.2%. Our sales in existing markets by product group increased as follows; residential roofing sales up 0.2%, nonresidential roofing up 1.1%, and complimentary product sales up 5.2%. As Paul described, these increases were achieved despite a negative impact from unfavorable weather conditions, including fewer hail storms during 2013 and a significant increase in rainfall that prevented contractors from performing work. On a positive note, the commercial business showed positive existing market growth after four straight quarters of decline. In addition, the complementary sales trend continues to be encouraging, as it expands our product line diversification.

In our geographic regions, the Southeast region achieved the highest existing market sales growth of almost 40% for the quarter, while our Southwest region had an increase of 10%. In both these regions, there were positive impacts from storms. Our Midwest region, sales were down the most in the quarter, 16%, due primarily to some tough spring and early summer weather reducing the number of available roofing days. Gross margin decreased to 23.5% from 25.1% last year, driving a significant unfavorable impact on our year-over-year financial performance. Paul went through in detail the lower gross margin of 2013 were due primarily to increase in the net product costs of our residential roofing sales not consistently passed through to customers.

We also had a slight decline in our mix of total residential roofing sales from 51% down to 49%, which generally have higher gross margins than our [wood] products. Overall average selling prices in comparison to last year Q3 were up slightly, approximately 1%, but not as much as we had expected, due to the soft demand environment. Our residential roofing product gross margins declined from last year, due primarily to the cost increase already mentioned, while our average commercial roofing margin was flat. Complementary product gross margins was down slightly, despite having higher average prices in that category.

Existing market operating expenses, which are shown in Slide 2, were down about $3.7 million to 15% of sales from 15.9% in the prior year. We benefited from lower bad debt expense and incentive accruals, but we also demonstrated our commitment to leveraging our cost structure across our growing revenue base. While we did not get all the leverage we would like, we made solid progress. Even our improving in bad debt expense reflected improve AR processes that are driving a better aging and quality of our AR. Overall operating expenses for the quarter as a percentage of net sales decreased 15.8% from 16%, mostly due to the leverage from higher sales, offset by increased operating expenses from the acquisition.

Interest expense and other financing costs were down $5.5 million in the third quarter. The prior year included $4.9 million of charges associated with the April 2012 refinancing. Our effective tax rate was 40% compared to 41.1% last year. Our net income was $27.2 million for the quarter compared to a net income of $25.4 million last year. The diluted net income per share was $0.55 compared to $0.53 for the same period last year. Our adjusted diluted income per share for last year was $0.62 after adding back the impact of last year's charges associated with the refinancing and the impact of an adjustment of $1.2 million for the Enercon contingent consideration as part of that acquisition. Our adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, adjustments for contingent consideration, and stock-based compensation was $58 million, 9.3% of sales, for 2013, as compared to $60.2 million, or 10.7% of sales in 2012.

Now I'm going to spend just a couple minutes on the year-to-date results, which start on Slide 4. Year-to-date sales, again aided by acquisitions, increased 7.7% to a nine-month record of $1.56 billion. Our fiscal 2013 nine-month organic sales, which excluded sales at branches acquired since the beginning of last year, decreased 2%. It is important to note that we were up against a very strong organic sales increased of approximately 12% in last year's first nine months. There we had some storm business in the first quarter and unusually warm weather in the second quarter. We had 189 selling days in the first nine months, compared to 188 days last year, causing our organic sales to decrease by 2.5% on an average sales-per-day basis.

Our sales in existing markets by product group were as follows. Residential roofing sales, down 1.6%; nonresidential roofing, down 4.8%; and complimentary sales, up 5%. In our geographic regions, Southeast and Southwest regions both showed double-digit existing market sales growth through a nine-month period, while our Canada region achieved an increase of 2.5%. Most of the other regions were down close to 10%. Overall gross margin decreased for the nine months of fiscal 2013 to 24% from 24.3%. Existing markets declined to 23.7% from 24.3%. Similar to the main reasons mentioned in the third quarter's decline, the lower gross margins year-to-date were mainly due to an increase in net product costs of our residential roofing product sales not consistently passed through to customers. Existing market operating expenses for the first nine months of fiscal 2013, which show up on Slide 5, were down $3 million, or 1.2%, from last year. Decline was due primarily to lower bad debt expenses, partially offset by higher payroll and related costs.

Operating expenses as a percentage of net sales increased to 18% from 17.7% in the nine months. In existing market, that percentage increased slightly to 17.5% from 17 4%. The overall rate increase was mostly due to the acquired markets impact, which has a higher expense rate. Interest expense, other financing costs were down $8.1 million, as we benefit from the change in the value of our of older interest swaps in the first half of this year and from lower debt outstanding. As mentioned earlier, the prior year included $4.9 million of charges associated with last year's refinancing. Income tax expense year-to-date reflected an effective rate of 40.2%, compared to 40.9% last year. Our net income was $45.2 million for nine months, compared to $47.7 million last year, while the diluted income per share was $0.92, compared to $1 for 2012. Adjusted diluted net income per share was $0.90 for this nine months, compared to an adjusted $1.07 last year, as is calculated in the press release, and also detailed out on Slide 6. Our adjusted EBITDA was $111.5 million, or 7.2% of sales, for 2013, as compared to $119.1 million, or 8.2% of sales, in 2012.

Slide 7 shows cash flow from operations was a very strong $49.4 million, compared to $35.3 million last year. The higher cash from ops was principally due to more favorable changes in working capital this year. Our year-to-date DSO and inventory turns in existing markets improved. Capital expenditures in 2013 were $17.9 million, compared to $12.2 million in 2012. We expect CapEx to be approximately 1% to 1.2% of sales for the full year, mostly as a result of our continued fleet upgrade. Net cash used for acquisitions in the nine months of 2013 was $64.5 million, compared to $94.5 million last year. Net cash provided by financing activities was $17.1 million this year, mostly from the proceeds of option exercises.

Our current ratio was at 1.9 to 1 at the end of the quarter, also the end of last year's third quarter. Our net debt-to-capital ratio was 29.1% at the end of the quarter, compared to 23.1% at year end, and 25% at the end of last year's third quarter. The results of our two bank financial coverage at this year's third quarter were as follows. Our leverage ratio, 1.61 to 1, and that was 1.62 at March 31, 2013. Our interest coverage ratio was 16.7, compared to 15.07 at March 31. These metrics demonstrate the strength of our balance sheet, which provides us with the capability to continue to expand on our growth strategy of new branch openings and acquisitions.

With that, we will now open up to any questions you may have. Thank you.

(Operator Instructions)

Each caller is limited to one question and one follow-up. Ryan Merkel, William Blair.

Thanks. Good morning everyone.

Good morning Ryan.

For the first question, just want start with the pick-up you saw in July. I think you said it was 5% on a daily basis, and you're kind of guiding to 6% to 8% for the fourth quarter. Is this a broad-based recovery across all of the product categories? And then just confirm, and is this mostly volume, right, at this point?

Yes, it would be very difficult for us to calculate price this quick at the end of the quarter -- of the month. So we believe it is volume.

Is it broad-based? Is it resi, non-resi, and then complimentary products that are all picking up here in July?

Yes. If you take a look -- as you dig a little deeper into the July results, it is acrosst all of the elements. There is still, though, as I mentioned, even in July, and that is part of the concern for Q4 in the very near term, is the impact of last year's storms become even more, I guess, a drag on the quarter. Especially, and as I said, southern portion of the Mid-Atlantic, Midwest, Upper Midwest, there still at awful lot of resi drag there. Yes to answer your question, at least July was better news, up in total 10%, but again with the extra day, it's It is 5%.

Okay, and then just moving to the price comment. I think you said that distributors are now restocking at the higher OEM price increase. Was that the August 1 price increase, that's the first part of the question. Then secondly, when would this actually go through the contractors, though? Because my guess is inventory's still a little bit high out there in the channel with some of the lower-priced products still out there. So how long might it take to even be selling to the contractors at a higher price?

Yes, good questions. In terms of August, now this is not -- this has nothing to do with the August price increase. If anything I think that potentially could be pushed out into September, or not materialize at all. That is my view. This is from the prior increases, the two, the one they did in December, then the one they did later on, set for the March/April time frame. As we said, we saw -- what we did see at least some good news, 1 point of price attainment in the quarter where we really needed to see 5 or 6 points. I can't -- it is difficult for me to comment, Ryan, on the inventory level for the competitors.

The view for the last four weeks-plus, has been that there's just been a lot of all of reloading. So you could be correct about distributors having inventory available, more inventory available. But again, you would assume, again without looking into the manufacturers' P&Ls or their competitors' P&Ls, that they're reloading at a higher level -- at a higher pricing level. Therefore, they're going to be more willing to push it through. To your question about when we should we see it, when we did the second quarter earnings call, I thought we were going to start seeing price movement, bigger price movements end of May. Kind of push that back, as I did road shows, to the end of June. And then what materialized was is only the 1 point.

So if you asked me now, I'd say, geez, within the next four weeks we should see prices -- right now, contractors need to see higher prices. That's the bottom line, because manufacturers, as they say, their input costs are up and they've passed price along to the channel. So the channel should push those prices down to the contractors. That's what we have done historically. We're working real hard in every market to raise prices and show price realization. So as far as I am concerned, we should see more of it now realistically, based on what is happened in the last quarter, another four weeks, six weeks, something like that.

Okay that's helpful, yes. Owens Corning did say that a lot of distributors were rebuying at the higher price, so potentially it does move a little faster.

Yes, which is good news.

Okay. And then last question. You had a little bit of a squeeze, as you mentioned, on the resi side. You had a flat pricing there in the quarter. So did you absorb, what 5 points, from the OEMs? Is that the spread? Is that why the margins are down there, or what was really the spread? What did you absorb from the OEMs versus what you've had (multiple speakers)

Yes, that is a relative, looking at approximates because we do not have a exact number. It is in that 5 point range that we absorbed, that we would normally have pushed price through the channel as we went through the back half, May/June time frame. So one of our thoughts, and that is why the guidance, I ranged it $1.50 to $1.60, is that, that normally would get pushed through. If we can see some of that realization in the fourth quarter, that helps us, obviously, with our numbers for the quarter.

Very good. Thanks. I will defer to others.

Okay, Ryan. Thank you.

Keith Hughes, SunTrust.

Thank you. On acquisitions. You had some of them in the fold for a while, and their operating expenses are a good bit higher than we see at the existing Beacon operations. If you move forward 12 months -- or however far in the future, do you think you get those down closer to what we traditional see from Beacon operations?

Yes, I think we've historically said it is a three- to five-year run to normalize acquisitions. I think, due to the efforts of our teams in the field, we have been able to accelerate that. So I think in 12 months, the cost profile will start to get closer to normalize, and of course there will be variations by the fact that one of those acquisitions, which was a healthy chunk, was heavy commercial. They're naturally going to have a lower cost base, a lower also gross margins. I think we will definitely see more normalization.

As I said in my comments, I was quite pleased, not totally pleased, when you strip out the amortization expense at closer to the 6% range. I think as we go through the next 12 months, we did not do any other acquisitions. That would move up in the 7% to 8% range. Gross margin, for the most part, has been reacting quite well in the acquisitions. Part of what you saw was the full quarter impact of that Western acquisition that was heavy commercial pulled down the number a bit.

But we still have, remember we did two -- three of those acquisition in the late November/late December timeframe. So they're still relatively new. We did the IT conversion a few minutes after acquisition. So now we are really getting into the meat of all the transition that occurs, which again typically does not take six months. Historically it has been over a year. So yes, I think within 12 months from today, all things being equal, no change in other acquisitions, we should see for sure the cost rates get closer to the -- our annual 17%, high 17% rates.

The number you refer to, the 6%, you're saying the acquisitions are doing a 6% margin, excluding the amortization, is that correct?

Yes, that $1.7 million in the quarter. Without it -- with it in, the expense in, it was 3%. You pull it out and it goes to 5.6%. Just another way we look at it. Because knowing that, as we go through the seven-year bleed-off of amortization, it lessens. And there are, in that cost number, there are, naturally, startup costs that still go on, because we have folks out there working in the acquisitions, making changes, getting them up to speed in terms of process control, things like that.

Final question on the commercial arena, can you give us a feel of what you're hearing in the channel in terms of upcoming work? Project type, heavy, things like that?

Yes, good question. Carlisle talked a lot about it. Obviously, Dave did on his call. They are pretty optimistic in the back half. It is interesting, I do not have anything different to say then what he said. Our markets have -- there is no doubt, our markets have been pounded down, even though we showed flat growth year-over-year. But some of our markets have been pounded down because of the weather. So it is this view of a 6- to [8]- to10-week lag in some of the normal work popping out. If you believe that, which is another data point, that means we can see some increased volume in our fourth quarter. And then because we do not stop at year end, right, in October and November. That is one element. I do not disagree with what Carlisle said.

I also do see, and we do see in general, is pressure coming from municipalities and any kind of state-funded public work where there has been quite a bit of push-off last quarter, even through July. That being said, we see the trending a little better in July commercially, and we are fairly optimistic, but again, those are opinions based on market data, triangulation talking with the manufacturers.

Thank you.

Okay, Keith.

As a reminder, each caller is limited to one question and one follow-up question. Thank you. Michael Rehaut.

Thanks. Good morning everyone.

Good morning Mike.

First question on the gross margins. You noted that you expect to get a little bit more in terms of the price pass-through in the upcoming quarter. Yet your guidance was from 23% to 23.5%, and that's a little bit below the 23.5% that you hit on the third quarter. So the question is, you would expect it to be equal to the third quarter, unless perhaps the margin degraded throughout the quarter, and even if you getting a little bit back you won't get to the average for 3Q? Is that the right way to think about it, or --

Yes, I think -- thinking about in the absence of any, obviously any price standing in Q4, that's the way to think about it. When I talk about 23%, 23.5%, $1.50, $1.60, we can go through the sales estimate, maybe [6.7%, 6.8%] really very difficult to forecast sales, right? We can do all of that. I did not put any price in the guidance numbers I gave. And so there is a little bit of range on gross margin. If we get price, it could be -- it could help us, some of the drag that occurred in June, a little bit in July, although we do not have July final numbers yet. Timeframe can be buffeted by an increase through the end of August /September, get us closer to 23.5%. Right now I'm not prepared to say we go above 23.5%.

Again, as I said in the prepared comments, from six -- geez I do not know if it's been six months we have been talking about, I thought realistically, the back half was going to be low 24%s. But yes, and just based on input costs, inability to get price in the market, competitive pressure, it has dropped down to the 23.5% for the quarter.

This is Joe. I would add to that, that there are three things that really are going drive the margin, right? It's the price, cost, and the third element being the mix of the products in there as well, too. Paul talked about the price piece being probably pretty consistent, not have a lot of expectations for price. The cost part, I already talked about what is happening to input cost piece. So you know what direction that will have on it. The third one is a mix as well, too. At this point we're not anticipating any significant change in the mix, as Paul described.

Okay. That's helpful there. So obviously, then, it's kind of along the lines of that idea that, likely, let's say the June gross margin was probably well below 23%, is that fair?

I would not say well below, no. We have not given break points on any gross margin, but it was lower than April's rate.

Right.

But not significantly, Michael.

I appreciate that. Second question, just on the organic sales growth outlook. I guess 10% in July, 5% on the same-day basis, and you're looking for 6% to 8% for 4Q. On a total-days basis, is the fourth quarter have the same amount of selling days as a year ago? And do you expect the organic sales rate to remain similar throughout the quarter, despite September being a little bit of a tougher comp?

Yes. I don't, I mean as you look at August and where we last year, it was not on a same days, it was not unbelievably up or down. Although we did see the trending in our fourth quarter going down. I think we could see, it is so hard to predict sales, right, because our backlog is a couple days a week, if that, of commercial in front of our face. I think we could see the same kind of momentum. The inference is August and September, on a same-day basis, Is going to be greater than what July was. As I said, July was fairly strong if you just look at the numbers, at [10 points, at 5%]. So we're going to need to do 8% to 9% August and September. And with a slight drop-off in August from last year, and then the flatness of September on a same-day basis, it is doable. Next question there?

Ken Zener, KeyBanc Capital Markets.

Good morning, gentlemen.

Good morning.

Paul, you're making very interesting comments this quarter on the price dynamic that you guys are receiving versus what is going on in the channel. So I just want to be clear. When you talked about the 1% price for the Company, 5%, I am assuming the bulk of that is happening in the residential segment, is that correct?

Well, when you look at the weighting of resi, and you can see the splits in the Q, I think resi sales were $284 million or so in the quarter. I mean, it is certainly a big chunk of it. Commercial was relatively flat. Complementary was up.

Right. The reason I framed it that way is that it seems as though if you did not get the price relative to cost, that your gross margins -- more in that residential, would've gone down. So can you just update us on the spread between the residential and the commercial, if you will? As you have done in the past. And then talk about the dynamic. Have you seen this occur, where there is a disconnect between the price and the volume? Was that more associated with regional pressures, meaning where in the Midwest you were down a whole bunch, pricing was weaker than another area? Thank you.

Yes. I think there is no doubt, to answer the last part of your question, there is more intense regional pressure on the resi side that keeps price pushed down. In total, our resi price attainment was up about 1.5 points. We have seen in the past increased material costs coming in. We typically offset those with some form of price, whether it is in commercial or complementary. This is not that unusual. Some of this we believe, although we really need to see and go through the fourth quarter, so some of it is timing. Although we're going to continue to watch it.

I think the spread has really not changed, and I do not have, if you're talking about the gross margin spread. We have been talking about a range of 1,000 to 1,200 basis points. I don't think it changed that much, a little bit in the quarter. Again, I do not have exact numbers sitting in front of me on that spread. So yes, we did see decent, albeit with the competitive pressure, decent resi price attainment at a 1.5 points. We wanted it to be 5-plus points. We saw some complementary, we saw basically flat commercial. As a result of the input costs going up, that made it a little bit of a mix, that is kind of where the GM dropped.

Great.

Hey, this is Joe. I will add just a little more color as well to it. As Paul said, we talked about in the call, the commercial margins, both year-to-date, and also for the quarter were pretty consistent. So on the residential side, your point is right. The gap's narrowed a little bit, not as much on the year-to-date, but certainly in the current quarter where we've seen the residential margins come down. So the gap between the two of them has gotten a little closer this quarter.

Good I appreciate that.

Yes, part of our challenge, I think, has been the fact that last year between storm volume and overall demand, however you want to defined demand (technical difficulty) the buy price was very advantageous from the manufacturers, [both seasonally] (technical difficulty) as calls, and that pushed our gross margin up quite a bit.

And that is why we really never said publicly in any forum that we were going to hit 25% gross margins this year. We kept the range the same, 22.5% to 24%, and thought we, as we said a couple of times now, that we would end up maybe a little bit above the 24% in the back half. It has ticked down, just due to the competitive pressure. And this has happened before, and I think we're just going through a little bit of a cycle, that is all.

I definitely agree. And if you could just -- would you say that wherever you are in residential, and the spread of that to commercial, that we are at a more normalized level right now? Second, there were multiple price increases, that the April increase, which is what you're saying you're seeing one real increase in residential shingles this year. There is two announcements. The first one is what you are saying is actually in effect. The second one, it does not appear to be the case. You did see a price increase from the distributors -- the manufacturers. Thank you.

Yes, I do not think -- I cannot say that the spread is more historical. For this quarter, it could be, as Joe alluded to, a little tighter. But we have not tracked it in definitive exact numbers, given a range of the difference between commercial and resi, as I said in that 1,000 basis points. It did trend up a bit to 1,200 basis points. It is tighter this quarter, but again, I think in the future, you are still going to have that very similar 1,200 basis point spread as we go through time.

Kathryn Thompson, Thompson Research Group.

Hello, thanks for taking my questions today. Just want to pull the string a little bit farther on pricing. Manufacturers are getting pricing, but based on feedback we have gotten from the channel from our industry contacts, that obviously, and you saw it today, distributors are having less success in passing on pricing to their end customers. How much of this is a function of customer pushback? Or perhaps to maybe more of your peers, a fear of losing that incremental volume, and distributors holding back from passing on the increase? Thank you.

Yes, I think they are all intertwined, Kathryn. I think ultimately, in any market situation, at least for us, where you have softer demand, and especially, I mean, if you really see when we go into our storm markets where we had hellacious volume last year, that we probably got our unfair share of work, and now a lot of those homes have been reroofed, demand is down. Contractors have less work, they have more time to shop. It ultimately starts with them pushing back and shopping.

So that then turns into a, who's going to lose share, who's going to gain share. So I think, although our results certainly aren't anywhere near what we thought they were going to be, I think framed with where manufacturers' shipments have been through the first calendar half, let alone the second quarter where they were way down. And some of our markets where we see volumes in general, the amount of work we see available, not just our sales, way down. I think we did relatively well, even getting 1.5 points and containing the increases from the manufacturers at that level, it is very difficult to gauge because I do not know what any of our competitors have done.

But I think quite frankly, without trying to settle for our results, because we certainly are not satisfied. I think we still did relatively well, but I think it all starts with contractors having less work, more time to shop, and putting more pressure. That has been the way it is been, at least since I've been here.

Sam Darkatsh, Raymond James.

Good morning, Paul and Joe, how are you?

Good.

Excellent. A couple of questions. Most of my questions have been asked and answered. Joe, I guess both these questions are for you. The inventory, ending inventory per branch, in dollars was up 3% year-on-year. Do you have a sense of what that might have (technical difficulties) trying to get a sense, were you guys also, by the end of the quarter, buying at the higher prices? I'm just trying to get a sense of whether your commentary around the channel inventory, and the channel participants having been buying at the higher prices, was reflected in what you guys were seeing also?

Yes. At least, Sam, on the second part of your question, it wouldn't be appropriate for us to comment on what we have bought and how we bought in June. Our inventory is up a bit, because we had to restock for customer service reasons. But if you look at the inventory, I think the $50 million increase year-over-year, $35 million-plus of it, is acquired market-base. Joe, I don't know (multiple speakers) 3%?

No, I think that is the biggest part of the answer to your question, Sam, is of the $50 million increase, $35 million is from the acquired stores' part of it. If you really take that into consideration, you might end up at a -- you math, I would have to work through that with that with you. Your math might tell you a different story on our other existing, the other stores that we have.

But Sam, specific to the volume comment, I mean, we have not calculated that. Now, what the 3% becomes, it's probably going to 0% or less, if you factor in any COGs increases.

That concludes the questions. Now I would like to turn call back over to Mr. Isabella for his closing comments.

Great. Let me go over a few highlights of the call today. Most are repeats, but I think they are worth repeating. Sales for the quarter ended up a record $627 million, which means we continue on our growth curve. As we said, adjusted EPS for the quarter ended at $0.55 versus the $0.62 of last year, and for the full year we believe will end up in a range of $1.50 to $1.60. Now, obviously that is dependent, as I said, on sales performance, and gross margin performance, pricing performance. We believe we are able to totally control costs, and we will continue to do that in the quarter. Overall gross margins, as we said, ended at 23.5%, down from the prior year, impacted by weaker demand, tougher competition, and some cost increases.

Operating margin for the quarter was a very strong 7.6%, and we will continue to push at the work getting into the higher end of our stated 6% to 8% range. Residential and commercial sales for the quarter were flat, complementary was up 5%, which is good news. Incremental sales from acquisitions was the $65 million I mentioned, with solid operating results. They're doing quite nicely with the integration progress. As we've talked, most of the questions referenced price increases on shingles have not worked their way through the channel yet. I am confident they will. We just have to continue to push price and taking a hard stand, quite frankly, on raising prices in every one of our markets.

Our acquisition pipeline is still very active. We are confident we'll make additional investments in the future. As I also said, we are focused on opening approximately 10 branches, it could be 9, it could be 11, in 2013. We are extremely focused and have done a lot of pre planning by location on opening 20 in 2014. These branches will help ensure our organic growth well into the future. And our business model has not changed. The market and market dynamics have not changed. We will continue to grow, we will continue to focus on cost control and gross margin growth. We will continue to drive best practices across the Company.

Our market is large and growing, and serves mostly replacement business. New construction is growing, and that is good. There will, however, be periods when weather and market conditions impact results, positively and negatively. The key for us is to continue executing our strategic plan, and provide compelling shareholder and customer value.

And in closing, as always, I want to thank the employees of Beacon and their support, and the support of our investor base. We will continue to work on executing both our short-term and long-term plans. Thanks for your interest in our Company. Joe and I are available for any other questions you may have. Thank you, and this concludes the call. Have a good day.

That concludes today's conference call. Thank you for your participation.