Beacon Roofing Supply Inc (BECN) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Beacon Roofing Supply FY14 second-quarter conference call. My name is Tim and I'll be your coordinator for today.

(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 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 today, May 9, 2014. 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 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.

Now I'd 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 2014 second-quarter earnings call. I'd like to start by addressing the overall market dynamics in Q2. As we have stated in the past, weather can impact our business both favorably and unfavorably. Our second quarter is typically our lowest sales and EPS quarter of the year as many of our branches are in northern climates and harsh weather does impact contractors' ability to start and complete work. Snow, ice, wind and cold does have an impact on roofing.

In the second quarter, the harsh weather never let up, not only for our northern branches, but many of our other branches that typically see milder winters. This impacted our results. While weather can impact the timing of work being done, we believe it does not impact the overall demand over the course of the year. In general, the work will still need to be done. And based on the severity of this winter, we feel it will translate into additional work besides the pent-up demand. As a result, we believe that demand for both residential and commercial work will be strong for the remainder of the year.

From a geography standpoint, the results of two of our reported regions had an impact on our results. The Northeast and Midwest the were well off of last year's sales numbers and had a combined sales miss nearly equally to the entire Company miss year over year. This type of sales miss has a major impact on competitive pricing and cost leverage in those markets. From a gross margin perspective, these two regions made up nearly 60% of the total GMS for the quarter year over year. A third regional, the Mid-Atlantic, had a 15% miss versus prior year. This miss combined with the Northeast and Midwest generated a sales miss well above the total Company miss. And all three of these regions combined accounted for the total Company gross margin miss year over year.

Many parts of our Mid-Atlantic region are in milder weather geographies. These branches were not spared the impact of the prolonged unseasonal winter. Despite the difficulty some of our regions had, our Pacific region was up 12% year over year and the Southeast was up nearly 9%. Very solid performance. Our large Southwest region was up 1.3%, being up against strong comparisons from the prior year. However, even the strong sales performance from these regions wasn't enough to offset the Northern branch misses.

Typically, during Q2 we make cost adjustments, which we did this year. However, we couldn't offset the sales and GM miss in such a short period of time. We know the demand will come back and we are very focused on the full year as we run the business day to day. Along the same line, given our confidence in our business model and growth strategy, we did not slow down our investments in the quarter. We used the strength of our balance sheet to continue to invest in new equipment, new branches and inventory. We are confident that these actions will position us well to take advantage of demand in the future.

And now on to the numbers. We begin by reporting revenues of $385 million. The quarter began much like we ended the first quarter. The harsh weather that started in November and December worsened in January and February and wasn't much better in March, which was a cause for our year-over-year decline of 7.5%. We did however, see some slight improvement in March low single-digits year over year but not enough to offset the impact of the first two months of the quarter.

Diluted earnings per share for the quarter ended at a loss of $0.25 versus break-even in the prior year. This fell well short of internal expectations and definitely is a number we do not feel good about. The bulk of the impact can be attributed to a number of factors from soft demand that lowered our top line and also created pressure on our gross margins, plus the operating expense impact of our investments in new branches over last year. While keenly aware of the need to drive the business to achieve monthly and quarterly performance, we understand the balance required to execute our long-term growth strategy.

On the cost side, greenfield openings bad debt, which we believe will be recovered, and other cost increases also impacted EPS in the quarter. The biggest piece of this was our investment in new branches. For the full year, however, they will add 2% to 3% incremental sales. We worked very hard to get the number of them open during the quarter. Q2 gross margins ended at 22.5% versus 24% in 2013. This was also lower than the 23% we reported in Q1. We saw a pricing decline in the quarter by 1.5% as a result of the overall low market demand, partially offset by decreased product costs. This impacted gross margins by 90 basis points.

The mix of our business also shift to lower margin commercial roofing and complementary products as the weather had a more significant impact on the residential products. Sales in each line of business were down, although residential roofing was down the most from the prior year. This mix shift impacted gross margins by 40 basis points. All of our regions have announced price increases and we're optimistic that pricing will improve as demand picks up in the second half of the year. We did see gross margin improve in the quarter with March ending at 22.9%.

We have stressed in prior calls that we will continue our greenfield investment strategy. The startup of any new branch incurs additional operating expenses for which we will not have immediate sales to offset. We opened 4 new greenfields in the quarter, which makes 8 for the year and 17 since last year. In the quarter, incremental operating expenses from these 17 greenfields contribute an additional $3.9 million in cost versus the second quarter of last year. In addition to the Greenfield, we have seen an increase in our healthcare costs, which added about $800,000 year-over-year. Also the soft winter demand increased the aging of our accounts receivables and drove an incremental $1.4 million bad debt expense to increase our reserves. As I said, we do believe we will recover this bad debt as we collect from our customers.

All of this was offset, to some extent, by the continued leverage of our operating expenses as we reduced our spending in non-fixed areas. That being said, operating costs within the existing markets ended at 27% of sales and approximately 350 basis points above last year's rate. Keep in mind, our new greenfields show up in our existing market numbers.

A few comments on growth. From an organic standpoint, as I said, sales declined 7.5% in the quarter. We began January down 14%, February down 15%, and then saw a positive 3% growth in March as the weather broke slightly. Since we had no acquisitions in the last 12 months, organic sales equals our total sales for the quarter. In addition, we had the same number of selling days. So this also reflects the same days basis.

From a strategic standpoint, we continue to pursue growth opportunities from acquisitions and Greenfield branch openings. On past calls I have said we were targeted approximately 25 new branches for the full year. And based on our progress to date, we are on track to hit that number. We opened 4 more branches in April and month-to-date May to bring the 2014 total to 12. We have signed 20 leases for the balance in progress. I'll continue to give updates on this during the year. As I have said, these branches should add 2% to 3% organic growth for the year. For 2015 and beyond, we are planning approximately 20 new openings per year.

Consistent with what I have said in the past, we remain active in the acquisition market. We continue to talk to numerous companies. It's still very difficult to predict when owners will sell, but our intent has not diminished. This has been, and will be, a vital part of our growth story.

By line of business, our residential business was impacted the most, down 12.1%. Our complementary business declined as well but only 4.1%. We do expect to see our complementary business grow in the second half as new construction and remodeling activity gains more strength. Our commercial business was down the least at only a 2% decline. We continue to be very optimistic regarding our commercial business in the second half of the year given the number of projects and bids currently in process.

Now a little more on the current market conditions. As I said, selling prices were down in the quarter but we don't see this continuing in the second half. Most manufacturers have announced or implemented price increases in the 5% to 7% range to take effect in the third quarter. As I said, March gross margins ended at 22.9% and it appears April is trending above that. As demand continues to pick up, we are optimistic about being able to pass on these cost increases to the end market. In addition, as I previously stated on the last call, we have initiated our own price increase, which will help offset some of the internal cost increases like insurance and benefits.

The late harsh winter has prevented any gain in the market to date, but it appears many distributors are poised to raise prices in the May/June time frame. Strong May and June demand will help firm these. April sales were up 25% over our March sales this year. Year over year, they were up 2% and very close to our internal plan. There is no doubt the back half of April had more normalized spring weather in most regions and our sales were up significantly in the last two weeks.

Now for an update on the outlook for 2014. Taking a look at the full year, we believe organic sales growth should be in the 5% to 8% range. This is in line with current industry projections. We feel the demand for the remainder of the year will be strong, as I said earlier, and we are working hard to make up the sales in the EPS miss in the balance of the year. All branches and leaders have adjusted plans for the second half.

It's been a challenging gross margin environment with the severe weather causing lower demand and driving aggressive pricing. We have been proactive about buying ahead of the vendor price increases and getting price increases out into the regions. We expect with these steps and strong demand, margins will be in the 23% to 24% range for the full year. With Q2 behind us we are optimistic about the second half of the year. Price attainment is critical during this time and we are very focused on this along with our constant focus on customer service.

As I talked about in Q2, operating costs did rise as a percent of sales year over year. We pride ourselves on focused cost control and we will see that play out in the second half. We will continue to invest in the business through greenfields and ensuring our fleet operations are in top shape. These type of investments will pay off quickly as new branches grow to maturity over the next few years and we realize lower fleet expense. We believe full-year operating expenses will be in the 17.5% to low 18% range. For the year, we see operating income in our stated range of 6% to 8%. And from an EPS standpoint, as best we can see now, we think we will be at the bottom portion of the current analyst range, which is $1.50 to $1.80.

As I said in the past, our long-term focus in execution has not changed. We are in a very solid and growing market. We are growing and have a great team of people who focus on our customer base by providing excellent service. Also, we will continue to focus on sales attainment, gross margin increase and cost control.

Now I'm going to turn the call over to Joe who will go over some more financial highlights and then we'll take some questions. Joe?

Thanks, Paul, and good morning, everyone. I'll highlight a little more detail on a few key financial results and metrics that are contained in our earnings press release and the second quarter slides that were posted to our website this morning.

Total sales for the quarter decreased 7.5% to $385 million. There were no acquisitions in the comparative period. By product group, the decrease was as follows -- residential roofing sales down 12.1%, non-residential roofing down 2.3%, complementary product sales down 4.1%. For comparison purposes, there were the same number of days in Q2 of 2013 as in Q2 of 2014 -- 63 days.

In addition to weather impacting sales, margin was a challenge this quarter as rates decreased 130 basis points to 22.6 from 23.9 last year. This drove a large portion of the unfavorable impact on our year-over-year financial performance. The lower gross margins were due primarily to lower demand in the marketplace, coupled with a decrease in our selling prices. Overall, average selling prices, in comparison to last year's Q2, were down 1.5% due to a challenging pricing environment. Declines in pricing were across all lines of business causing margin declines with residential and commercial roofing down 1.5 points and complementary down about 1 point.

We did see product costs come down slightly in the quarter. Not enough to offset the selling price declines previously mentioned. Residential and commercial roofing product costs declined approximately 0.5% while complementary product prices were down approximately 1%. In addition, our product mix shifted to lower margin commercial roofing and complimentary products.

Residential roofing declined to 48.3% of our sales versus 50.8% in the prior year. Commercial increased to 35.3% from 33.4% in the prior year. And complementary increased to 16.4% from 15.8% in the prior year. The mixed shift in the quarter drove a 40 basis point decline in our year-over-year gross margin. To summarize, our gross margin decline of 130 basis points, we lost 150 basis points to pricing declines, made up 60 basis points of that in lower product costs and lost 40 basis points due to the product mix shift.

Operating expenses, which are shown in slide 2, were up just over $6.3 million and increased to 27% of sales from 23.5% in the prior year. The majority of the increase in spending comes from our continued investment in our greenfields Paul described and added $3.9 million in year-over-year spending on the 17 new greenfields that were not in last year's comparable numbers. In addition, bad debt expense rose by $1.4 million as a result of softer winter demand pricing and the aging of our accounts receivable, which caused us to increase our reserve for uncollectible accounts. We've always felt it's important to serve our customers through challenging business environments like this. We're confident that as volume improves, we should be able to reduce the allowance back down.

Our health insurance rose $0.8 million as a result of increased claim costs and the number of participants. These costs were partially offset by lower depreciation and amortization costs as well as lower selling costs. Interest expense and other financing costs were up $0.5 million in the second quarter as the 2013 numbers reflected a $1.3 million credit for the recognition of the change in fair value of ineffective interest rate derivatives, which have now expired. Our effective tax rate was 39.3% compared to 40.4% last year.

This savings was primarily from a lower Canadian provincial income tax rate. That loss $12.1 million for the quarter compared to a net loss of $0.2 million last year. Diluted net loss per share was $0.25 compared to break-even for the same period last year. Our adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization adjusted for stock-based compensation, was minus $7.3 million, negative 1.9% of sales for Q2 as compared to $11.6 million, 2.8% of sales in Q2 2013. The primary reason for the decline was a lower earnings in 2014.

Now a quick moment to discuss the first half year results. This begins on slide 3. Year-to-date, total sales slightly increased a first half record of $937 million. Our first half organic sales, which excluded acquired branches, decreased 1.5%. As Paul mentioned at the beginning of the call, the year, and especially the quarter, were impacted by a prolonged, severe winter. We had the same business days in the six-month period for both FY13 and FY14. Our sales in existing markets by product group were down with the expectation of non-residential, which was up 3.8%, residential sales down 5.4% and complementary sales down 1.7%.

In our geographic regions, our West region grew almost 19% on a year-to-date basis, Southeast was up 12.4% and Southwest was up almost 3%. The largest decline on year-to-date basis came from our Northeast at 9.3% followed by Mid-Atlantic at 8.1%, Canada at 6.8% decline and Midwest at 3% decline. Gross margin in our existing markets decreased for the first half of FY14 to 22.9% from 22.4% in FY13. Again, this can be attributed to a more aggressive pricing atmosphere due to the lower demand as well as the mix shift.

On slide 5 (sic - see slide 4), we discuss existing market operating expenses. As you can see from the table, and as Paul mentioned, we continue to invest in our greenfield strategy. Greenfield investments drove $6.4 million increase in spending on a year-to-date basis. Percentage of sales, operating expenses and existing markets increased to 21.4% from 20.2%. Interest expense, financing costs and other was $5.2 million year to date for 2014 compared to $3.9 million year to date 2013. Similar to the quarter, the increase is primarily a result of a 2013 credit of $2.6 million, again, for the recognition last year in the change in fair value of the ineffective interest rate derivatives, which have now expired. Our net income was $2.8 million for the first half of the year compared to $18 million in 2013. That income per share was $0.06 versus $0.37 in 2013.

Regarding the status of our balance sheet, as slide 5 shows, cash flow from operations was a solid $36.1 million compared to $20.6 million last year. Capital expenditures year-to-date 2014 $11.8 million compared to $10.8 million year-to-date 2013. We still expect capital expenditures to be approximately 1.2% to 1.5% of sales for the full year, mostly due to a continued fleet upgrade and the additional greenfield costs. Net cash used by financing activities was $37.6 million this year.

We ended the quarter with $34 million of cash on hand and available borrowings of $331.6 million under our revolving lines of credit. Our current ratio was 2 to 1, same as Q2 2013. The results of our two bank financial covenants at the end of this quarter were also improved. Our total leverage ratio improved to 1.59 to 1 compared to 1.62 last year. And our interest coverage ratio improved to 16.2 to 1 compared to 15.07 to 1 last year. These metrics demonstrate the strength of our balance sheet, which provides us with the capability to continue to execute on our growth strategy of new branch openings and acquisitions.

We will now respond to any questions you may have. Thanks.

(Operator Instructions)

David Manthey with Robert W. Baird.

First question is in the inventory level is pretty high and the turns were the lowest that I've seen in any second fiscal quarter. I know that, clearly, business being slow had an impact on that.

But can you parse out or give us an idea of how much was related to just weak sales versus the build of the pre-buy? And I guess the other way to get at that would be to think about when you think, okay, how much did we lose in terms of revenues this quarter -- approximately how much that was -- we can get an idea of the normalized inventory level, if you could.

Dave, I think -- good question. But we've made a focused strategic decision to buy deeper in the winter. I believe -- we believe that pricing will be -- this is the lowest point of the year in terms of the buy. I think the manufacturers, because of the pressure they have on themselves, much like we're seeing with some of the healthcare costs are going to continue to want to push this first price increase through.

I think if you look at the sales miss year over year, and then if you attribute it to, which we believe the majority of it is weather, especially in those Northern regions, just year over year, I mean you could say we missed 30% of the increase. 20% of the increase could be as a result of missed sales. The rest is the buy we would have -- it probably isn't even that -- it's probably 15% to 20% of the increases because of sales miss versus the load up we did in inventory, most of which is residential product.

Right. Okay. And then, Paul, just to press you a little bit on the organic growth that you're expecting. You're saying 5% to 8% for the full year. And back of the envelope, I'm coming up with -- that translates to about 13% growth in the second half.

I know that volumes, obviously, ramp in April is much, much smaller than when we get into the heart of the selling season. But with April at 2% and you are looking out, you feel confident that you're going to get a pretty significant uptick here relatively quickly?

Yes, Dave, I think -- yes, your math is -- might be a tad high. When we look at it it's like 11% or so that we're forecasting. And that could change, obviously, if we get more price. And we're being hopeful.

But it is about, yes, 11.5% in the back half in terms of growth to get us to what our current forecast is. So I am confident, one, with our view of commercial, which is very strong. And I think [Carlisle] talked about that also. We see an awful lot of demand and it's a lot of pent-up demand and damage that we are going to see.

I also think the residential piece has really been blocked severely through even the end of the first quarter and Q2. I think that coupled with hail events that have occurred in the last month, some a couple of days ago -- we still haven't assessed those and there is probably still more severe weather that will occur. So we kind of put that whole thing together.

And then the greenfields, which really, I mean 17 of them started 12 months ago. That's when we started. And they didn't generate much and we've talked about that for a long time, that in that first year the accretion would be break-even the slight negative.

So I think in a lot -- in a number of those greenfields are located in hail markets, storm markets. And I think they are poised now to grab some of that volume.

So the only thing, Dave, that I'd throw caution out, and as we talk about it internally, is the fact that our year ends the end of September. October is a huge selling month for us, right? So the question will be, will weather cooperate with the contractors so they can get all this work done that they want to get done?

Obviously, they would like to do as much as they humanly can before the end of the calendar year. Ours ends in September. That could be the only thing we're fighting against in terms of the numbers in the back half. But other than that, Dave, we're positive about what we see.

Ryan Merkel with William Blair.

So I had a similar question to Dave's in that I think I was surprised April up only 2% year over year, yet you kind of have this strong outlook for the second half. It just doesn't really square. But I guess you said the last two weeks of April were much stronger. So was that kind of trending towards that double digits?

Yes. The number, actually, between the first half and the second half of April was massive. It was in the 40% range of increases -- even higher. Now some of that you could knock down because there were some -- one time a year we ship some product in this time frame that normally would have went in March went in April.

But even when you do that, the gain between first half, second half April, is up significantly. So that gives us -- as we exited April, we had a certain daily sales rate. When we did the calcs on the remaining 106 shipping days, which are only Monday through Friday, we didn't throw in any Saturdays, which we are going to use in some regions, we get a daily sales rate that's very close to the rate we exited April at. So that gives us a lot of confidence, Ryan.

Okay. And then my other question is, I was positively surprised you mention you could do $1.50 this year just given the slow start. And it sort of implies a very strong margin ramp in the second half of the year, year over year.

So I guess what's the confidence there? Is that mostly a sales story or are you doing something on the pricing side? Something on the cost side? Because it just looks like a really strong ramp in order to get to that $1.50.

If you look at the progression of our gross margin, Q1, I believe, was in that 22.9% range. We ended up 22.6% in Q2. As we project out with our internal forecast, we are thinking Q3 in that 23.5% range and Q4 in the 23.9%

If April is any indication, we don't have closed numbers yet. Right? But as we do an awful lot of detailed tracking and are all in, it appears that the April number is up above 23%, like 23.2%, 23.3%.

And we still did -- and I won't talk about weather anymore -- we still did have some impact of weather in early April. I know Pittsburgh had just -- that whole area and a lot of places in the North had a difficult time shipping in the first half. So that's pretty encouraging.

And what ends up happening is the first quarter -- not sequentially, year over year we were down about [178] basis points. Q2 we were down 130 year over year. Q3 our projection is to kind of even out and be flat. And then Q4 we go up year over year 80 basis points. So it isn't like we're out of control with the rates. The total year rate ends up in that 23.5% range. I said 23% to 24%.

Now that could change, obviously, if we could get more pricing. We are being extremely focused on pushing price out into the market because we've got input costs. As we reload shingles in this summer, late summertime frame, there is going to be new pricing. We are going to have to make sure we are ready for that. And we have had other internal costs that we have to offset.

So we are not waiting on the price increases. Right? As soon as the market allows, we're pushing now to get the increases. So that's kind of the story of pricing. And we will see continued product costs down in the second half, anywhere up to 50 basis points of impact that will help us too.

And then just on SG&A, it's kind of implying $106 million, $107 million 3Q and something a little higher in 4Q. Just not the a lot of ramp from the 140 you just put up. Is that directionally about what you're thinking?

Yes, I think so. I think we had that overweight. There is some, let's say, costs that don't repeat in these greenfield startups. You just don't hire people and then flip the switch. We bring in people. We do training prior. There is a number of costs that could impact. Even the leases stack up before the opening because you got to get in and dress out the branch.

So some of the repeats -- we talked about bad debt. That's purely, we believe, a function of the weather being so lousy and we help our contractors through that period. We have a lot of confidence. We have a great credit team. We have a lot of confidence we will pick that up.

So there is going to be some natural offsets, I think. And let's face it, Q2 is our toughest quarter. It's got high fixed costs and the weakest demand quarter. And so we don't lever down as well as we lever up. That's kind of the story.

If you look historically at our results, we've always talked about 60% to 70% fixed. We still believe that's correct. Although, like a lot of companies, we are much more fixed in the down cycle and much more variable in the up cycle.

So we tend to think that as the volume comes up, we won't have a lot of incremental costs to it. And that's how we plan to run and manage the business.

I think the other element that we didn't -- haven't talked about is the acquisition piece year over year. The sales were up, and it's in our filing, from $32 million to $53 million. Gross margin was about flat. Operating income was improved but it was negative.

If you look at the make-up of the acquired markets is Northern California, which actually performed fairly well, and then that whole Pittsburgh market, which just got crushed throughout the winter because of the weather. They just have not been able to ship. There has been a lot of process change up in that region.

A lot of cost that has been removed to lean it out. But I think that's also going to improve and that should help us as we move forward. And their gross margins were impacted too.

Kathryn Thompson with Thompson Research Company.

A question on acquisitions. We have been focusing really mainly on the interior products distribution, a greater acceleration and the consolidation of that network. And exterior, such as yourself, has -- it's farther along than interior. But could you give an update on what trends you're seeing in terms of consolidation and the status of your willingness to be more active in the market? Thank you.

Thanks, Kathryn. There hasn't been an awful lot of activity in general. And I think it's part and parcel to a lot of companies having a difficult 2013. We are intent on continuing our acquisition activity.

We've had a great history since going public, and even before, of acquiring outstanding companies. And if you look at our kind of playbook around the Company, you can see that with Best Distributing and Quality Roofing, Enercon in Western Canada -- the list goes on and on.

So I think as we go through this year, there is the potential for more consolidation to occur. I think there is some of our competitors are also very interested in consolidating.

So I think much like we occurred a number of years ago, and it's occurred a couple of times, where we have a bit of a gap in the acquisition process and it's going to reignite and reheat up. And I think you'll see more consolidation as we get through -- whether it's the end of this year or next year. And we should be right in the fray there to be -- we certainly want to be very active there.

Great. Thanks. I know we talked a little bit about volumes and I appreciate the color that you gave at the end of April and to early May. But maybe thinking about looking at one region or two that had been relatively stronger in the quarter just reported, including this Pacific Northwest and the Southeast, did you see an acceleration of trends in those markets too? And if you could get maybe a frame up in terms of how to think about things year over year, how the quarter came to close in those markets just to give confidence that this isn't just a weather catch-up.

I think the markets where we saw growth, I think they were less impacted by weather. There is no doubt. Florida -- we could talk about rain and all that. But I really don't focus on that because Florida is a good weather state.

The Southeast did have some impact, as you can remember the ice storms in Atlanta and Georgia in general. That impacted us. But they still had very solid growth and I think it's a function of that market coming back.

The Southwest didn't have quite the same growth. But that region, Texas and places east and even a little bit north of it -- a lot of economic growth. A lot of new construction. A lot of reroofs and very strong economic activity there. We have 20-plus branches in the Texas region. We are going to expand even more there.

So I think that the trending is just positive in those regions. I think we're -- the impact was, as I said, was these -- whether it's 50% of our branches when you include the Mid-Atlantic -- that just got trounced during the quarter and we couldn't delever them enough on the cost side. But they're very strong regions with, we think -- can't quantify it -- but very good market share and the Northern piece of it is heavy, heavy commercial with North Coast and New England. So I think the recovery is going to be strong there.

Just to clarify though, in the markets that were stronger, you haven't seen a deceleration of trends and it's continued and, if anything, has improved. Is that a correct characterization?

Well with April just coming in, I can't say that because I don't have the book. I know for sure in the mid part of the country that trend will increase, yes. It has increased.

Michael Rehaut with JPMorgan.

I just wanted to circle back to pricing trends for a moment. And I think it's an important part of your back half outlook. And I apologize if I'm asking you to go over something you have already stated.

But just trying to get a sense of, number one, how pricing trended throughout the past quarter. If it stabilized perhaps in March and April as the sales trends also stabilized. And if that's part of your confidence in the price increases that you have announced and how you're thinking about the manufacturers announced price increases as well -- their ability to hold.

Sure. This is Joe. I'll try to add on. I know a lot of that Paul provided to some color to a moment ago so I'll just give you a little more detail as well.

The short answer to your question is, yes. Our confidence is kind of based upon as we saw that stabilization a bit in April, which helps to drive the gross margin up and we saw some of the improvements.

The combination of those two factors going on, as Paul had described, one, pricing. So our view, and what we have started to see and believe we will continue to see for all of Q3 and Q4, is improvement in pricing.

And two, again, we did, as we talked earlier -- first question on the call was our winter buy program. We did buy in the winter buy a little heavier in the past. And we think that is going to help us from a cost perspective when we get into quarter three and quarter four as well, too, which is why a trend we've seen does appear as though the gross margin piece has bottomed out in the Q2 period and beginning its way up for Q3 and Q4, as Paul talked about.

Great. Thank you. And sorry I didn't fully capture that earlier in the call.

The second question, I just wanted to take a step back on the M&A front. And I know Kathryn kind of mentioned this as well. But when you take bigger picture, as you look at the industry itself, we believe, as I believe do you, that the industry is still relatively fragmented. There is a lot of opportunity there.

I was wondering if you could just kind of take a step back and just remind us of the overall size of the market itself, number one, across residential, commercial and other building products. Obviously there are some larger players, such as yourself, that represent a good portion of that, plus or minus. And I don't have my numbers in front of me so I apologize -- a plus or minus around 40% of the industry, if not a little more.

I am wondering if you could kind of characterize the remaining opportunity. What percent of those remaining sales are kind of bigger, 5% to 10%, type properties or companies that are available or on the market? Or is it a lot of, at this point in the game and this part of this -- in this point of the stage of consolidation in the industry, is it more like 1%, 2%, 3% type opportunities? And certainly there could be a lot of those but you will have to string them along and there will be more singles and doubles, let's say.

The market size roughly is $20 billion, it's projected to continue to grow, so that's good news. The split is 50% res, 35% commercial or so, 15% complementary. I think there are -- if you look at the big players like ABC, well over $4 billion, ourselves, Ally. They are well over $1 billion, $1.5 billion. RSG, SRS -- that makes up a chunk of the market. But there is still even 50% available. You look at our share, we're roughly at 10%, 11% share.

So there, from a broader view, there is room for us, no doubt, to help and continue to consolidate the market. I can't speak on the drive my competitors have in terms of that consolidation. I would think it's there, especially for some of the smaller ones.

But, obviously, for all of us it has to be based on, I'd assumed, on right correct pricing. I think if you just look at some of the companies I mentioned, obviously they are bigger. They haven't indicated a willingness to sell. There are, though, a number of others in that $200 million to $400 million range.

And then below that it's $50 million to $100 million. We have viewed the $50 million to $100 million sales company as a very good acquisition for us. It usually fills out geography we're not in and we can help -- we help our cost structure by consolidating that back room and utilizing our resources.

So I wouldn't necessarily say that it's only singles. But I think there will be a number in the $15 million to $100 million to $150 million range. And that's okay with us because it will supplement this, whether it's 20 branches we open up next year or in that range. It will just help supplement that part of our growth strategy.

Sam Darkatsh with Raymond James.

I'm going to ask the same question I think in a different way or at least if I could ask you to be more specific. Of the 11% to 12% or so organic growth that you're expecting in the back half, how much of that are you anticipating is coming specifically from pricing actions and how much of that's volume?

Sure. This is Joe. I'll take a quick stab at that one to give you a little bit more clarity on it.

The two big pieces, one that Paul talked about, be sure to mention, is the greenfield growth as well too. So that's one of the big drivers to it. I think Paul talked about for the full year that will add 2% to 3% to our total volume.

On your specific question regards to pricing, pricing in our forecast for the back half of the year will be anywhere between 50 to 100 basis points of improvement over current. So 0.5 point to 1 point of our growth in the back half of the year will be from pricing.

Thank you. And so with your unilateral price increase that you announced, did that go through at the end of March as anticipated? What was the competitive response? And April, the plus 2, how much of that plus 2 was ASP growth versus volumes?

The Beacon price increase we sent out was, for the most part, met with response from our competitors in terms of the same announcement that they put out. I believe ABC might even have put it out before us.

Given the market conditions, we've -- we saw in some regions some traction. I mean but we're talking 5, 10 basis points. And, Sam, I purely believe it's a function of the difficult weather. I think as we push forward that will kind of get melded with our drive to push the manufacturers price increase across, which we are very intent on doing, in addition to the Beacon price increase, to cover our increased expenses, especially on medical benefits.

So what were -- so the ASP's growth in March -- I'm sorry, in April -- versus the 2% organic growth that you said, how much of that was ASP growth versus volume growth?

We don't have final numbers.

April, you mean?

April, yes.

Can't comment. We don't have the full detail on that one yet.

It would be too difficult without closed numbers, Sam. I was trying to give you -- and we do a fairly good job of tracking this all in margin very tightly and then we reconcile it to the financials after we close. And we are pretty darn close.

So we have some high degree of confidence that will -- April is going to push above the 23, which is very encouraging for us. And I would think some of that is -- or a majority of that is pricing. But we'll find out (inaudible - multiple speakers)

If I close -- if I could sneak one more question in. By fiscal year-end, where do you anticipate your inventories to be?

I couldn't -- I can't go -- give you that projection right now. There is no doubt it's going to be reduced.

Unless something very odd happens, some kind of major storm event. But I would expect it to be close, slightly above last year's ending number, Sam.

We ended last year at roughly $251 million in inventory at September 30. So much lower than today. As we talked about, we ramped up on the inventory buy.

That may extend us over longer another 30 days or 60 days more than what we have in the past. But still, by year-end it will be higher than last September but not nearly as high as it is currently.

Yes. I can't give you an exact number. There's going to be the greenfield impact for sure. Absent any acquisition, it's going to reduce. There is no doubt.

We watch input and output every single day. We have controls in place to watch that. And we know we have plenty of inventory on hand to get us through the selling season.

We will have to reload probably in the summer/late fall. But we feel pretty good about where we're at from on inventory standpoint -- our ability to control that through September.

Yes. From a broader perspective, more to think about the inventory ramp up is temporary not a permanent structural change carrying higher inventory.

That's a good point.

Ken Zener with Key Bank.

I appreciate the comment on the sequential sales trends in the quarter as well as your guidance. I wonder if you could perhaps talk about the different product categories though. Because I know Carlisle talked about some of the 20% lift in March implying -- more consistent with the trends that you had in terms of year over year strength in commercial.

If you could give us some reasons why, i.e. a warehouse is more motivated to get a roof than a residential person is. And within your back half 11% -- we talked about the price in the greenfield -- but could you comment on how you think the residential, vis-a-vis the commercial, will play out? Because that obviously impacts the margins as well.

Yes. I think if you just look at what happened in the second quarter, a tremendous amount of work was held up. No doubt, right?

So as we look at both sides -- and I think there was probably more damage on the commercial side than on the residential side due to winter. Talk about Carlisle's number, which was higher single digits, I think there will be kind of the same in terms of their growth. Now that could change on the resi side depending on if the storm activity that we have seen or more storm activity comes in. I think they will both be very robust.

I naturally would think residential is going to be higher than commercial. Complementary -- that's always been a wild card and it's a small piece of our volume, $300 million some odd. But I would think that that's going to grow in that 3% to 5% range. I could be conservative there. So I think the split's going to be higher residential growth than commercial in the back half, unless on the complementary side.

And then --

(inaudible - multiple speakers) a mix issue that we were talking about has impacted on our gross margin, which is probably where you are going with it. And you're right. The mixed impact cost us 40 basis points because of the higher commercial.

And I think that probably will continue a bit as we go through the back half of the year. That's our assumption because we do feel the commercial business is going to be pretty strong through the rest of the year.

So given that you're talking about mix, in the past you've talked about a kind of a margin spread between the two businesses. Would you like to make any comments on that?

Well in the quarter it's similar, maybe slightly more. We've talked -- a few years ago we used to say 1,000 basis points, then 1,100 basis points. It's in that range. Maybe slightly higher for Q2. And it really hasn't changed that dramatically.

Okay. I wonder, since you're taking a more organic approach to your growth rather than just the M&A, obviously, I think you find new organic branch openings attractive here. That's why you are doing it and it's obviously more profitable than M&A, often.

Can you talk about the -- how the differential between your store count, your branches opening this year, yet the lower sales pace? Will we actually see a lift next year as those plants -- excuse me, those branches, mature? So essentially are we going to see more -- will 20 stores next year actually deliver quite a bit more than 2% to 3% growth, would you think, because the stores from this year are actually picking up steam in terms of market penetration and improving their mix?

Yes. If you just -- if we were to look at the 17 that we opened up new last year Q2, and kept carrying those through 2015, yes, for sure that number is going it increase. We had about $11 million in sales in Q2 for greenfields. And in April we did over half of that amount in those same branches.

So Q3 is going to be significantly up from Q2. I think year-to-date it was some $20 million for the greenfields and we are talking about anywhere from $65 million to $75 million for the full year for those branches.

As we measure it, we're going to measure it like we do acquisitions. So some of those will drop off in 2015 and go into -- we just won't be talking about it, although we are going to track it for ourselves.

But you can assume, and we should assume, that if a branch averaged $2 million in its first year, it better get to $3 million, $3.5 million or $4 million in the second, third year. And then get closer to $6 million, $7 million, $8 million as we go out into the fourth year and get to our branch average.

Yes. I think the important part there is that we don't view the greenfield as a replacement for the acquisition strategy, but a compliment to it. We will continue to pursue both of those. But it is really important -- you're on the right track -- is we talk about $3.9 million in additional operating expenses for the quarter, $6.4 million on a year-to-date basis.

It's really no different than our discussion when we talk about acquisitions. When we bring on a new acquisition, the incremental costs associated it, the integration to bring it into our Company. We have that time factor that it is more of a drain on us than a help.

I think we do, and I think everybody needs to think about the greenfields in that same light as well to another element of our growth strategy that has startup costs associated with it. But then as you rightly asked, then we will see the accelerated growth and profitability from it as we get to future years. So good question.

Brent Rakers with Wunderlich Securities.

A lot of talk today about inventories and your own inventories. But could you give us your perception about what you think the channel inventories look like, both within the other roofing distributors but also, possibly, within the lumber yards?

Brent, that's a really tough question. We go through it here trying to get the best intelligence we can and it's very difficult. I think -- because I hear tidbits both ways. But I think in general the buy -- [Armadate] is down in the quarter year over year.

So I think the buy could be flat to slightly up. I don't -- there is some indications that the lumber yards haven't loaded as heavily. But again, that would be pure speculation on my part. I don't have any data to back that up.

And, Paul, I guess my follow-up to that is if we're talking about Beacon [yourselfs] possibly not having to go into rebuy to -- until the late summer or fall, does that create an element of risk if the demand is maybe softer than you think in that May/June time period -- that manufacturers maybe lose some ability to raise price but also possibly discount price given maybe the softness in the buys from the distribution channel in the June quarter?

Yes. I don't -- hey, anything is possible. I doubt it. I still believe, we still believe, with all the intelligence we have, pricing is at its lowest point as most folks bought inventory in the winter.

I just think there is enough pent-up demand. I think there is enough of this hail repair work. I think the storm damage is also -- winter damage, I should say -- is going play into it. So I'm not awfully concerned.

I do know, as I said, we are intent on getting price increases. We didn't get them last year. We obviously didn't get them in Q2. So there is a tremendous amount of pressure on our people. And I know they also want to get price because they are cognizant of the healthcare costs going up. We also had merit increases that kicked in because we do give our folks pay increases and we do need to offset those whether through productivity or through price.

So, no, I'm not concerned. We didn't go as deep as we could have gone on the inventory piece. We certainly had the cash to do it. But we took what we think was a prudent step to have the right levels to support the -- especially to support the spring breakout and the storm volume, which has occurred in a lot of our West regions.

Neil Frohnapple with Longbow Research.

Operator, this should be the last question.

Thanks for squeezing me in. Just a quick follow-up on price. I know it's been discussed a lot already.

But I believe your prior guidance had 1% to 2% positive price realization for the full year. And with the 50 to 100 basis point realization that Joe mentioned you expect in the back half, gets you all-in for the full year probably below 1%. So did this all just occur in 2Q in the delay in pricing or are your expectations maybe a little bit lower on the 5% to 8% realization?

We're trying to be prudent with what we put out in terms of these types of discussions with the best intelligence we have and the trending of gross margin. We have seen in the past past years gross margin spike considerably from quarter-to-quarter. So if volume firms up even more and/or we have -- meaning more overall pent-up that comes out and/or some of this storm repair work being very strong, that could change our view.

But, yes, as you look at it now, Neil, that's how the math works for the year. So I don't know if we're being overly consecutive. I think we're being realistic with what we have left in the year and where we're coming from given how hard Q2 was.

Great. And then just a quick follow-up. Have any of the other large distributors pulled the five-day percent price increase completely off the table? Or is it just simply delayed at this point?

I'm not aware of anyone pulling it. I do know it is delayed. There are indications that most -- not indications -- most have reannounced for this May, mid-May, even late May for some of them, time frame.

And, of course, that varies by distributor. That varies by region. You have some smaller ones that might want to hold prices. But that is no different than even in 2008 when we had close to 10 price increases during that year. We had folks trying to hang on to price.

The bottom line is our input costs for the second year going up. Last year we didn't get price. We need to get price. I would assume the rest of the competitors are feeling the same pressure. They indicated that, a number of them, in there price increase letters. Their own specific company price increase letters.

And that concludes the questions. Now I'd like to turn the call back over to Mr. Isabella for his closing comments.

Thanks. Just to go over a couple highlights quickly. Our second quarter sales, as you know, were $385 million, down 7.5% from the prior year. Again, attributed mainly to abnormally severe cold and snow in many of our regions. We did achieve, though, record sales through the first half of $937 million.

As we said, we continue to invest in growth. We're not going to stop. Opening 4 new branches in the quarter, 8 year-to-date, and are still planning approximately 25 for the full year. And as I said, it should add 2% to 3% organic sales growth for the year.

We're continuing to be active in the acquisition market. This portion of our strategy has always been uneven but we are still very positive about making additional acquisitions.

Joe talked about cash generation in the quarter was solid at $37 million, above last year. And our debt ratio continues to be very low at 1.59.

Demand is increasing and we are confident we will have a strong second half of the year. Everyone within the Company is focused on that.

I want to thank all of our investors for their interest in our Company as well as our customers and employees for their loyalty. This concludes our earnings call. Have a good day.

And that concludes today's conference call. We appreciate your participation.