Beacon Roofing Supply Inc (BECN) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Beacon Roofing Supply's fiscal year 2014 third-quarter conference call. My name is Marr and I will 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 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 today, August 8, 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 investors section of its website, under events and presentations, that will be referenced during management's review of the financial results. On the call today for Beacon Roofing Supply will be Mr. Paul Isabella, President and CEO; and Mr. Joe Nowicki, Executive Vice President and Chief Financial Officer.

I would now like to turn the call over to Mr. Paul Isabella, President and CEO. Please proceed, Mr. Isabella.

Thanks, Marr. Good morning and welcome to our 2014 third-quarter call.

We are pleased to report solid Q3 sales growth of 5.8% and nearly flat EPS to the prior year. We accomplished this while encountering headwinds in the residential roofing market from continued softer demand and increased competition.

Diluted earnings per share for the quarter ended at $0.54 versus $0.55 last year. This was a significant rebound from Q2 and good performance given the pricing and competitive environment, combined with our investments related to growth.

Our sales results in this softer residential market demonstrates the strength of the overall reroof market, which makes up over 80% of our sales volume. For the most part, reroofing is not a discretionary spend and not a luxury spend. Roofs do fail.

Hail damage is also part of this. This year we have serviced hail damage, but in total, less than what we serviced last year. And much less than 2011 and 2012.

As we have said in the past, this repair work does fluctuate year to year, but it does exist year to year. In the quarter, we also achieved growth in all three of our product lines with commercial being very strong. This speaks to the diversity of these product lines across our expanding branch footprint.

By line of business, our commercial products grew fastest at 9.7%, followed by complementary at 6.4%, and residential at 2.7%. Complementary is another bright spot for the quarter that continued into July.

For the last four out of five quarters, we have seen positive existing sales growth for all three product lines. Q2 was the exception with the difficult weather conditions. We are confident we can continue to grow each of our lines of business, especially our residential business, as we move through the fourth quarter.

Although not a direct indicator of distributor sellthrough, reported shipments of shingles into distribution as reported by ARMA was down nearly 3% in the second quarter, and down 5.4% if you include Canada, as our numbers do. Again, we believe this points to the strength of reroof and our ability to grow in the down shingle market.

We have been able to capitalize on the strong commercial market because of our regional strength and product diversity. While it has driven our topline, it does impact our overall gross margins as commercial projects typically carry lower margin rates.

This mix impact is nothing new to us as sales fluctuates over time. Mix impacted gross margins by 20 basis points in the quarter.

Our greenfield branches continue to contribute to our solid growth rate for the quarter and actually drove almost half of our year-over-year growth. Most of this greenfield growth is going to reroof customers.

From a geographic standpoint, five of our seven reported regions had positive growth quarter over quarter. This is good news. The Northeast and Midwest rebounded well from Q2 weather-related impacts.

Leading the way was our Midwest region with a very strong 18.4% growth, followed by the West region at 11%, Mid-Atlantic at 9%, Canada at 4.9%, and the Northeast at 4%. These regions offset declines in our Southeast and Southwest regions at 8.4% and 4.6%, respectively.

Sales growth trending by month in Q3 was up 1.6% in April, 8.3% up in May, and 6.7% up in June. Positive trends in all months, although June was impacted by a stretch of wet weather in the South and West that impacted our customers' ability to start work.

Gross margins ended the quarter at 22.7%, although down year over year, they are slightly up from Q2. All three of our lines of business had GM rates up sequentially from Q2. These were slight gains, but progress nonetheless.

Year-over-year pricing did decline 2.6% in total. There has been, as I said, there has been market pressure in almost all regions with the Southeast and Southwest seeing the most pressure. Residential pricing has been impacted the most.

Fortunately, we have been able to offset most of the negative price with lower input costs. Joe will give more detail during his portion of the call.

As discussed on the last call, we have attempted to raise price with earlier price increase announcements. Obviously, distribution has not been able to achieve price gains year to date. As you would expect, price increases from the manufacturers have, for the most part, not gone through.

We do expect the challenging price environment to continue in the short term, although we are still actively working to drive price realization. We continue to focus on growth in all of our markets as we attempt to stabilize pricing.

Related to new branch openings, we continue with our greenfield investment strategy. We opened nine new branches in the quarter, which makes 17 for the year and 26 since last year.

In the quarter, incremental operating expenses from these 26 greenfields contributed an additional $5 million of cost versus the third quarter of last year. We believe these investments are clearly having the favorable sales impact we intended.

And we are on track to open 25 new branches for the full year, as we have said on past calls. Through July, we added 5 more to bring the total to 22. These branches should add approximately 2% organic growth for the year.

For 2015 and beyond, we are planning approximately 20 new openings, as I've said in the past, many of which are in progress at this point. So we're very excited about our new branch openings strategy.

July sales were up sequentially 7% over June sales. In addition, year over year they were up 9%. We're off to a solid start as we enter some of our historically busiest months, especially considering July of 2013 was up 11% versus 2012 organically.

For July, residential sales were up 6.5%, so better than where we ended Q3, commercial up 10%, and complementary was up a very strong 14%. Taking a look at the full year, organic sales growth should be in the 4% to 5% range.

We do see overall strong demand continuing in Q4 benefiting from our diverse product offering, coupled with our greenfield strategy. As a result, we should see sales growth in the range of 7% to 10% for the quarter versus 7.4% organic growth in Q4 of 2013.

That has been a challenging gross margin environment this year as a result of softer residential demand, as I said, it increased competitive pricing. However, with a pickup in residential demand, which we believe we will see in Q4, we think margins in Q4 will improve slightly, sequentially.

An item, of course, that could impact this is stronger than expected commercial volumes and the corresponding mix impact. We will continue to focus on offsets to lower gross margins, such as higher sales and additional cost reductions. As we have said the past, we believe gross margins overtime will be in the 22.5% to 24% range based on mix, seasonality, and, of course, demand.

We believe full-year operating expenses will be in the 18% range, much like last year which ended at 17.9%. And for the full year, we believe EPS will be at the bottom end of the current analyst range.

Consistent with what I've said in the past, we remain very active in the acquisition market. We're very optimistic. We continue to talk to numerous companies.

It's still very difficult, of course, to predict when owners will sell, but our intent is not diminished. This has been and will be a vital part of our growth story. I'm confident we'll be able to execute transactions in the near future, but as always, any investment in an acquisition has to have the proper return criteria, and I know our investor base appreciates this.

As I've said in the past, our long-term focus and execution has not changed. We're in a very solid market that has demonstrated steady growth over many years. We are driving growth and will continue to do so.

We have a great team of people who focus on our customer base by providing excellent service every single day. And as always, we will continue to focus on sales attainment, gross margin increase, and cost control.

And now, I'd like to turn the call over to Joe who will go over a little more detail on the financials.

Thanks, Paul, and good morning, everyone. Now, 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 third-quarter slides that were posted to our website this morning.

As Paul mentioned, we had a strong quarter in topline growth as total sales increased 5.8% to $663 million. There are no acquisitions in the comparative period, and for comparisons there were the same number of days in Q3 of 2013 as in Q3 of 2014, 64 days.

We were also able to drive favorable sequential improvement in margins since we're up 10 basis points from Q2, although they remained a challenge year over year as they declined 80 basis points to 22.7% from 23.5% last year. The lower gross margins this quarter were due primarily to continued price pressure, combined with a higher mix of commercial roofing products.

Declines in pricing were across all lines of business with residential down 3.8%, commercial roofing down 1.6%, and complementary down 1%. The good news is we were able to reduce our product cost to help offset a good portion of the selling price declines. Residential product cost declined 3%, commercial roofing product cost declined approximately 0.8%, and complementary products were approximately flat.

Our product mix caused an unfavorable impact on gross margin as volumes shifted to lower margin commercial and complementary products. Residential roofing declined to 47.9% of our sales versus 49.3% in the prior year, while commercial increased to 37.6% from 36.2% in the prior year, and complementary remained at 14.5%, similar to the prior year.

So to summarize, our gross margin declined of 80 basis points, we lost 260 basis points to pricing declines, but we made up 200 basis points of that in lower cost and lost 20 basis points due to product mix shift.

Operating expenses once again reflect our strong commitment to cost control. They were up just over $5.6 million over the prior year, but stayed flat at 15.8% of sales. The majority of the increase in spending comes from our continued investment in our greenfields, which added $4.9 million in year-over-year spending on the 26 new greenfields that were not in last year's comparable numbers.

Volume related to variable selling, delivery, and fleet costs drove another $2.4 million of the year-over-year increase. In addition, bad debt expense was $0.6 million higher than in the prior year.

It was actually a reduction to our operating expenses of $0.6 million as collections improved, just a lower reduction than in the prior year, which was a $1.2 million credit. Traditionally, we increase our reserves in Q2 as the winter seasonality causes collection delays, and then Q2 and Q3, we lower those reserves as collections improve. The increases were partially offset by a $2.4 million reduction in our stock-based compensation expenses that recorded for previously issued performance-based equity awards.

Overall, we're pleased with our ability to effectively manage our cost structure while investing to grow the business. Interest expense and other financing costs were down $0.2 million in the second quarter versus the prior year, primarily the result of lower LIBOR rates. Our effective tax rate was 38.1% for the quarter as compared to 40% last year, savings primarily from lower Canadian provincial income tax rate and slightly lower US state tax rates.

Our net income was $26.8 million for the quarter compared to $27.2 million last year. Move in net income per share was $0.54 compared to $0.55 for the same period last year.

I'll now take a moment to discuss our year-to-date results. These are also included on the slides beginning on page 3. Year-to-date total sales increased 2.8% to a record $1.6 billion. Organic sales, which exclude acquired branches, increased 1.5%.

Paul mentioned at the beginning of the call, demand picked up extremely well from Q2 despite some significant headwinds from competition and soft demand. We had the same business days in the nine-month period for both fiscal year 2013 and 2014, 189 days.

Our sales and existing markets by product group, our nonresidential up 6.3%, complementary up 2%, while residential sales are down 2.3%. In our geographic regions, our West region grew almost 18%, Midwest up 5.7%, Southeast up 3.5%, and Southwest flat.

The largest decline came from the Northeast at down 3.7% and Mid-Atlantic down 1.9%. It should be noted that the Northeast and Mid-Atlantic both rebounded nicely from a harsh prolonged winter that impacted the second quarter.

Gross margin in our existing markets decreased for the year to 22.8% from 24% in fiscal year 2013. Again, as previously mentioned, this is attributed to the more aggressive pricing atmosphere and due to lower demand, as well as a temporary shift towards more non-res business which carries a lower margin.

Slide 5, we discussed our existing operating expenses, as you can see from the table. As Paul mentioned, we continue to invest in our greenfield strategy. Greenfield investments drove a $9.7 million increase in spending on a year-to-date basis.

Percentage of sales, operating expenses in our existing markets increased to 19% from 18.4%. Interest expense, financing of costs, and others was $7.7 million year to date 2014, compared to $6.6 million year to date 2013.

This expense would be down year over year if not for our 2013 credit of $2.6 million for the recognition of the change in fair value of the ineffective interest rate derivatives, which have now expired. Our net income was $29.6 million through third quarter compared to $45.2 million in 2013, net income per share was $0.59 versus $0.92 in 2013.

Now, for a moment on the balance sheet. As slide 5 shows, cash flow from operations year to date was an outflow of $46.8 million, compared to inflow of $49.4 million last year. Change is a result of a combination of lower net income, higher I debt AR balances from the increased sales, and higher inventory balances as a result of our winter buy.

Inventory is actually down $22 million from the second quarter, reflecting our traditional seasonal decline as we work down the winter buy levels. We are up $64 million from the prior year, although greenfield investments drove $35 million of that increase.

We expect to continue to decrease inventory as we go through Q4 and should end the year with approximately $325 million to $350 million in inventory, which is an increase of about $75 million to $100 million over the prior year, but in that, will be about $40 million within our greenfields.

Capital expenditures year to date 2014 were $26.1 million, compared to $17.9 million in year to date 2013. We expect CapEx to be approximately 1.5% of sales for the full year, mostly as a result of the continued fleet upgrades and the addition of greenfields.

Net cash provided by financing activities was $51.5 million. We ended the quarter with $26 million of cash on hand and available borrowings of $242.6 million under our revolving lines of credit. Current ratio was 2.0 to 1, same as the prior two quarters.

The results of our two bank covenants at the end of this quarter were as follows. Total leverage ratio increased to 2.26 to 1, compared to 1.61 last year, and our interest coverage ratio decreased to 15.54 to 1, compared to 16.72 to 1 last year.

Our additional investments in greenfields, fleet equipment, and inventory drove the majority of the change in these ratios, though even at current levels, they still demonstrate the flexibility and capability to execute on our growth strategy. We believe both should improve as we go through the next two quarters, where we traditionally will work down inventory and drive additional cash flow as a result of higher revenues. With that, we will now respond to any questions that you may have.

(Operator Instructions)

Ryan Merkel, William Blair.

Hey, guys, good morning. Just wanted to follow up on the gross margin commentary. I think you said, sequentially, you thought gross margin could improve slightly.

And I'm just wondering, what gives you the confidence there? Is it the better sales in July? Is it the gross margin that you saw in July? Is it maybe volumes you feel like are firming up?

Because it just feels like there's a lot of inventory still out there, as you mentioned, ARMA data was down 3% in the second quarter. Just looks like shipments are down year over year. Maybe just walk us through why you think the gross margins could be up sequentially?

Yes. Obviously, as we talked about on our Q2 call, there are estimates as best we can buttonhole. There's no doubt that there was some noise in the Q3 number in terms of increased commercial direct shipments and two-step shipments, that some of those should have fell in our Q2, so that gives us reason to believe that they'll increase.

And then there was also the belief that despite the pressure on the residential pricing, that that volume will be higher, July is a good evidence that -- and it's only one data point, we don't have GM for July yet, but it's good evidence that we're going to hopefully see that increased residential growth rate.

So we don't want to be talking about that we're going to get up into the 23.5% range, but just looking at all the factors that we can see, input costs, incentive rates, the mix, then the start in July, gives us the stronger belief that we'll be up slightly sequentially. But we say slightly from the 22.7%.

Okay. And then for my follow up, again, back to the ARMA data and back to resi shingles be down about 3% year over year in the quarter, and just generally, reroofing shingles have been decline for a few years now.

I'm just wondering what you think has changed in the roofing market? Why have the shingles continued to decline? Is there a few factors that you can point to?

No, without me being able to interpolate all the economic data, I think a big piece, Ryan, are the storms that we saw in 2011 and 2012 that took an awful lot of housing stock out of that. And based on some data on big-ticket spend, although consumer confidence is increasing, I just think maybe folks aren't releasing some of that.

I do think, though, that it's no different than 2010 when we had a down year and 2009 I know we were towards the end of that recession. I think the industry cycles, but the fact is on the resi side, especially, there's tens of millions of structures put in place that were put in place 40 years ago, 30, 20, 10 years ago. I think it's like 140 million structures.

Those roofs are failing. They're going to fail. And it's just a question of when.

So our job is to -- whether the ARMA data ends up at 112 million squares for the year or 116 million, which would be up from last year, we have to figure out how to gain more share through service excellence. So it's not -- I can't give you an exact reason, but I can say the industry through decades has been steady.

The housing stock is still, even though there's still obviously a lot of new homes, there's still a lot of old housing stock, not even talking about the commercial side that will fail. So, I think we're just there was a lot of pull forward, and we see it, the microcosm of that is we see it in our, for instance, in the, I won't get too specific, but the Southeast region, which is now getting pummeled with low price and very weak demand.

Nothing is really changed there other than two years ago they had mammoth storms across that whole area, including the hurricane that brushed up against the coast, and our sales were record. I'm sure our competitors sales were record and I'm sure, I didn't go back and look at that ARMA data, I'm sure it was up heavily. And as we talked internally, without any jaded glasses on, we still see that impacting them as we strip through all the other layers of what's really going on.

So you had our competitors that going into that region, that start a business up because the volume was strong. It takes more out of the market then. If they don't leave, it's just the same relatively smaller pie with more competitors.

So I think that little microcosm occurs across the country. And that's what I think we're seeing.

But that can change very easily. We're still bullish, of course, on the entire industry and the market, as I said, and we're still bullish on next year that we'll return to normal growth rates, normal storm rates.

And then as we continue to do everything we do internally across this improvement, share gain, not giving away anything, and that's why we attack on price and you see price going down, but we can't give away share, good things will happen.

Sam Darkatsh, Raymond James.

Good morning, Paul, Joe, how are you? Two quick questions. First, I guess it's hard to figure out the status of channel inventories now, but as it relates to pricing, you said that pricing was down 2.6% in the quarter and residential was down 3.8%.

Did it gets a little bit easier as the quarter progressed? What does July pricing look like? Are we starting to see some signs of stabilization there?

Or is it still at this 3%, 4% degradation range? And then I've got a quick follow up.

Yes, Sam, I think part of the 3.8%, there's no doubt there was impact with some of the mix that I talked about with heavier two-step in the quarter. And heavier direct commercial which impacted, some of that was lower pricing also.

We don't have hard numbers that I can talk about for July. We do feel, though, overall that we're in the trough. Not that we're going to springboard of the trough, but we think there's signs across our regions that gross margins are stabilizing and they will increase slightly, and that there in lies the slight sequential gain quarter to quarter.

I think what happened is we came out of the winter, all of us were hungry for sales growth, which we all went after. Demand didn't plump up as we thought. There was some storm volume.

It is, though, overall less than last year, at least in our regions, and there's just much more intense competition. You even see the commercial pricing down slightly. I won't say that's noise, but it is an indication even with the robust sales that there's still a little bit of pressure on pricing.

So we believe we are in the trough. Of course, time will tell with that. And things should improve as we go through this quarter.

My follow-up question, I noticed the reversal on the stock option expense, the $2.4 million. Which, I think if my math holds, was a $0.03 benefit in the quarter. Do you have a sense of where we should be looking at stock comp on a quarterly basis going forward once that adjustment has already been made?

Well, one, and Joe can chime in, the only reason that would get reintroduced is if as we go through time we have the confidence based on our forecast, based against our internal plan because we do a variable comp plan for the executives, that that would change and then we would put a charge in. In terms of predictability going forward, Joe, you can comment on that.

Yes, I think for the current year, Sam, we're in pretty good shape. We've accrued it the level where we need to be, so it shouldn't be an impact significantly favorable or unfavorable in the fourth quarter. And then next year going forward to it, it'll probably get back to some of the normal levels that we have had in place around that.

Very helpful. Thank you both. Appreciate it.

Trey Grooms, Stephens.

Hey, good morning. First question is around the commercial strength that you have discussed.

With that, I'm sure a lot of that is being driven by reroofing, of course, but are you guys getting the sense that we are starting to see any improvement in new commercial? And you guys are seeing any benefit from that?

Yes, I don't have enough data, hard data in front of me, Trey, but I do know that quite a bit of what we saw, goodness we saw in the quarter in July, had a new roof component into it. So I think that's good news. I just don't have the splits.

I know our percentage of growth in the quarter mimics what Carlisle is seeing. We're not obviously huge with them all over, but we do have a big upper Midwest, Northeast pretty large presence with them.

Right.

So all that's good news. And it continues, as I said in July, which is great news.

Right. Absolutely. Okay. And then given the current pricing dynamics, where they stand in both res and non-res, especially given the outperformance in non-res, can you update us on that margin difference there?

I guess, it's typically in that 1000 to 1100 basis points, I think, what's you've mentioned before. Are we still in that range or has that changed given what we've seen in pricing?

I think, no, in general, it's that same range. We could go 50 or 100 either way, but it's still 1100 or so basis points.

As you've seen, the pricing on the residential as we talked about, got a little bit more compressed and the pricing on the commercial part. So that may have narrowed the gap a little bit in there, Trey, but not significantly.

All right. Thanks a lot for taking my questions. I'll jump back in queue. Good luck.

David Manthey, Robert W. Baird.

Hey, guys. Good morning. First off, on shingle pricing, could you just talk somewhat qualitatively about that market?

And what do you think that it's going to take to get some meaningful sustainable improvement in the shingle prices? Do you think we need higher asphalt prices? Consolidation?

Supplier behavior? Is it just storms? As you look forward, how do you map out shingle pricing over, say, the next three to five years?

Dave, you hit a lot of them right there. I think the storms obviously help. It's the consistency of the storms year to year.

So as I talked about the Southeast where we have mammoth storms, we do quite well, but then we see a trough. But if we had that consistency across the country, where there's some normalized volume year to year that's somewhat equal, that takes that equation out.

I think general economic health, maybe with homeowners having more either equity or disposable income to spend on reroof, that's going to help. I think there are a number of factors. I just think for the last couple years, we've been in a somewhat of a little bit of an economic malaise that's kept shingle growth, square shipments, i.e., growth down to a relative flat level, 110, 112, 113 or so.

I do also think, Dave, you mentioned consolidation. I think that will help in time. It's not going to be in the near term, but as the industry on the distribution side continues to consolidate, which it will, that should help pricing greatly because there's an awful lot of folks out there.

And that obviously creates an awful lot of pricing pressure. Some of it unfounded, in my mind.

Okay. Thanks for that. Follow up then, over the past couple of years, you've clearly loaded up on inventory on the prebuy.

I'm just wondering, any thoughts as we look to next year how you're going to approach that? And one thesis is that there's too many locations out there and there's too much inventory in the system broadly.

When you look at the inventory per location at Beacon, that number is up, by my numbers, maybe as much as 25% or 30% versus where it used to be. I'm just wondering has something changed in the business? Or is this just all indicative of a loading up on the prebuy and then the demand just not materializing and that number will drift down over time?

Yes, Dave, I think it is the latter, which you just stated. We made a conscious decision to load up. We think we did it effectively and I think it shows in our COGS, especially as we've gone through these last two quarters, because we're making progress on the cost side.

So I don't think anything inherently has changed. I think it's just opportunistic on our part and really part of our strategy.

In terms of what we'll do next year, that's a little bit a ways away. The year prior, we took a much more relaxed approach to loading up, per se, and negative things happened with price increases and then us thinking we were going to get price increases and us reloading at the same time. This really didn't happen this year because we had the inventory.

Ideally, in any lien situation, you'd love to have no inventory or -- and we'd love to have much lower inventory just from a cash standpoint, but when you weigh it against the cost of capital and what we get on the other side of COGS, I think it's positive. And Q2, Dave, quite frankly, didn't help us because we loaded up and then as you know where our sales went. That put a tamp in it.

We made good progress, as Joe said, in Q3 with the inventory reduction, and then we're going to have a natural burn in that $50 million to, call it, $75 million, $80 million range between the end of Q3 to Q4, which is the natural burn. We won't be on the $250 million, as Joe said, but we'll be in decent shape considering the greenfields.

Hey, one other thing I wanted to add to that, Dave, as well, too, and Paul started to get to it is, keep in mind a good portion of our inventory build up is in the greenfields, which you have a lot of inventory there, though it's not exactly generating as much revenue now.

But if you go back to the specific numbers, you're right, our inventory per branch right now about $1.570 million a year ago. Same quarter about $1.465 million, two years ago about $1.422 million. So, while it's up some, at this particular point in time of the year it's always a little bit higher when you look at inventory per branch.

Yes, and Dave, the other thing I think that is important, Joe gave a little more color on that that jogged my memory, the 10 greenfields we opened up in 2013, we opened up most of those towards the end of Q4 of last year. And we just opened up five more in July. Which have virtually no sales.

And then we still have a number planned, the balance estimated three to get to the 25 in Q4. And then we already have a number of the ones for next year, the 20. Some of those have already been incurring inventory.

So it is kind of a mixed piece of very low sales. But on the pure branch count, you're right. But with much higher inventory because we're loading up for greenfields.

Okay. I guess, we're looking at a trailing basis and per location. So the sales levels wouldn't matter and where we are in the season shouldn't matter either.

You're saying there's nothing different about the business, it's more just the demand dynamics, is what I'm hearing?

Yes. I think it's a demand dynamic and then the fact that this year we bought more winter buy inventory. That's it.

And we did it for, we believe now, all the right reasons, just because if you look at our COGS, you can see it. And that's a function of that.

Got it. Okay, guys. Thanks a lot.

Kathryn Thompson, Thompson Research Group.

Hello, thanks for taking my questions today. Just one point of clarification on guidance, you said the lower end of the current endless range, I would assume it would put it in for the next quarter? And the mid-$0.60s in terms of EPS?

Yes, when you do the math, we're trying to keep it to a range because as we found out last quarter, things change. But, yes, as best we can tell, that lower end is I think it's $1.27, might have changed already to $1.28, $1.29 range. And then with the $0.59, you can do the math in the mid-$0.60s. Yes.

Okay. Perfect. And then could you give just a little bit more color on acquisitions?

I know it's been a central portion of your strategy. But obviously, you can't force a sale and the environment has to be essentially really -- whoever your target has to be in the mood to sell.

But what about the current market dynamics make it more less or favorable? And what is the pipeline right now in terms of potential acquisitions? Thank you.

Yes, good question. And obviously, I can't share any of the confidential information, but I can say our pipeline is more robust than it's been for a long time. The discussions we're having are more robust than they've been for a long time.

I think the lull we saw in 2013 was a function of the market being down and a lot of folks' margin being impacted. We go back to our basic premise that we will continue to acquire, but we do have hurdle rates that we look at, whether it be return, IRR, or ROIC to make sure we get to. And obviously, those get mitigated by strategic importance.

So all I can say is the timing does fluctuate. We've seen lulls before, not just in the last year and a half, year and three quarters. We've seen them five years ago, six years ago.

We have every expectation that in time, we will execute more acquisitions and they will be good acquisitions. We've been very fortunate to buy high quality companies throughout our, the lineage of Beacon, even before being public.

So, we're positive about what we're going to be able to execute in the coming months, years. But it's a never-ending quest to stay in contact and evaluate and that whole process.

Perfect. Thanks so much.

Brent Rakers, Wunderlich Securities.

Yes, good morning. I was hoping you could talk through a little bit on the new branches? You talked around the revenue contribution in the quarter and obviously you gave some of the SG&A numbers.

Just maybe if you could talk through the specifics on revenue and then also accretion dilution from that in the quarter? The target for the year? And then maybe also how historically the revenues and profit contribution has ramped on a greenfield opening?

I'll let Joe take that and then I'll chime in as necessary.

Hey, Brent, I'll give you a little bit of information in regards to it. It's something we don't go to that level of detail disclosure, but from the top-level perspective, I think as Paul mentioned, we saw about $18 million in revenue from the greenfields for the quarter. Based on the new ones. And on a year-to-date basis, somewhere around $29 million, so some good growth from them.

Our margins tend to be in line with the rest of our margins of our business, so they tend to focus more on residential when we start them up, so they have a little bit higher margins. But from a line of business perspective, they tend to be pretty much aligned with it.

Obviously, as they ramp up from a volume perspective, traditionally the first year is anywhere from $1 million to $3 million in revenue on a full-year basis to them. Obviously, the costs of getting to be a lot of caution put in place early on.

But our intent is we've been pushing all of our greenfield is, regardless of that, to still be at a breakeven level in the first year. Definitely cash flow positive, but trying to get them to breakeven.

By the second year, they're usually coming close to the, ramp up in revenue is pretty much close to doubling at that point in time. And they're clearly driving positive in favorable operating income at that level.

It's usually by around the fourth year, maybe a little longer, fifth year for some depending on the specific market, where you'll start to see them getting back to more of our traditional values around operating income levels for them, so.

Okay. Great, Joe. Actually, that detail is real helpful.

And maybe for my follow up, I just wanted to follow up on some of Dave's questions about the impact of the prebuy this year. Just wondered maybe your thought process on obviously the next year prebuy, but do you believe that, or to what magnitude did the prebuy this year create some sort of negative influence on industry pricing given the supply-demand balance for this season?

That's a very difficult question for us to answer given we only have so much insight into the markets and everyone else is a private company. I think our history with pricing has been fairly steady and positive.

As I did say though earlier, we're going to compete on price. We will not lose share, but we'll fight on the other side, the cost side, to try to offset that, especially during this period. So Brent, I can't say and I don't think it had an impact in terms of taking the market down.

Whether we bought three months or six months, and I'm just using that for example purposes, I don't think it has much bearing on what happens in the marketplace. In terms of pricing of that product, we keep it at a very, very contained level within our own organization. So, I don't think we are aware of the issue at all by any means.

Paul, do think current spot pricing for manufacturers is comparable to the level of pricing paid on the prebuys over the winter?

For us, I can't really comment. That's a tough question for me to answer because I don't have -- when you say spot, I would think that other smaller competitors of ours would have a much higher pricing, I would think. But without having data, Brent, it would be irresponsible for me to say anything.

Okay. Thank you. Thanks, Paul.

Neil Frohnapple, Longbow Research.

Hello, good morning, guys. Paul, could you elaborate a little bit more on what caused the magnitude of the nonresidential roofing product price decrease?

I know you mentioned heavier direct commercial sales, but I was just surprised it was down despite the higher volumes and given that it's less inventory intensive than residential, and then obviously there's the July 1 price increase from the manufacturers. And just wondering if you're seeing any signs of traction with the higher volumes or if it's at least stabilized pricing at this point?

Yes, good question. And I mentioned earlier that the commercial job wasn't noise for sure, but it wasn't mammoth. We've had past quarters where we've had up volume with price down a 0.5 point or even 1 point.

I think part of it, Neil, was just quite frankly the mix of products we sold across the country, maybe some larger jobs with a little less favorable pricing, I'll say. I think that will levelize.

It is important for us to continue to drive sales. We are a very strong partner with a number of these commercial manufacturers. And I think it's in both of our interests, all of our interests, to continue to drive share gain across the country.

So, I'm not at all concerned about the pricing because that can fluctuate, and I don't see any -- there's no evidence that pricing on the commercial side is deteriorating. If anything, our expectation is that it would improve from Q3.

Price increases, they're twofold. I think anything that the commercial folks push through, there's going to be more acceptance in the marketplace just given that, to your point, the volume.

On the residential side, where there's been price increases, I think in general there's going to be massive push back to accepting anything for the fall. Very little, if any, other than special cases where you have special orders.

Very little has been accepted from the spring price increases. I just don't see it happening in the fall at all. Internally, of course --

Got it. Thanks. And then --

Of course, internally with our price being down, Neil, we would never want to accept any kind of a price increase on the residential side.

Right. Okay. And then, obviously, the FY2015 is very difficult to predict at this point and you're probably not ready to guess on guidance. But just as you look at your gross margin range for this year of 23% to 24%, obviously, it will probably coming out the lower end of the range, but what will it take to get back to the 23.5% upwards to 24%?

Certainly, if the difficult March and June quarters don't repeat, you'll be in much better position. But has anything changed in the business where you might see more like 22.5% to 23% for an extended period of time, especially if we see some sort of mid-single-digit type organic volume growth?

Yes, my comments I said, in the near term, we're going to see pricing pressure and gross margin pressure. I talked about very slight increases from Q3 to Q4. So, whether that plays out for quarter and then we're into the winter anyways, and for two quarters.

I think normalized economic activity, normalized storm volume, for us internally, selling more shingles, we still have a huge opportunity to sell more complementary product which has higher gross margins than our average rate. I think all those things are going to help.

We certainly don't want to minimize our commercial product sales, but as shingles get back to normal and if complementary can continue to grow, we saw some good things in the quarter. And I know July is only one little piece, but it's been a while since we saw 14% complementary gain.

I think those are the things that will get us back, besides the bigger picture of industry consolidation, maybe less erratic competitive behavior, which we do see, especially we've seen the Southeast and the Southwest. I think those things will get us back to where we normally have been.

Great. Thanks, guys.

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

Great. Just a few things that I want to emphasize on my close. And they are repeats.

Sales were up to $663 million, which is that 5.8%. Strong commercial sales growth and relatively good complementary growth. And we did achieve, as Joe mentioned, a record $1.6 billion in revenue through the first nine months.

We're pleased with that and we're pleased with our progress on growth. With that, all three of our major product lines had existing sales growth. And in the last, also in the last four of five quarters, other than this tough weather-based Q2 this year we had.

And despite this resi pricing pressure that we saw, we were able to offset it with lower product cost and that's just a, I think, a product of how tight we run the business. We're going to continue to invest in growth with our greenfield openings.

We will end up at 25 or more for the full year. And we have 20 earmarked minimum for next year, the year after, and the year after.

As I reiterated in my comments and answers to questions, we're still very active in this acquisition market. And we do have a robust pipeline. And this portion per share of our growth strategy has been uneven in the past, but we're still very positive about making additional acquisitions.

With 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.

Ladies and gentlemen, again that does conclude today's conference. We thank everyone for joining us.