Beacon Roofing Supply Inc (BECN) 2015 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to Beacon Roofing Supply's FY15 first quarter conference call. My name is Hannah 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, February 6, 2015, 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 & Presentations that will be referenced during Management's review of the financial results. On the call today for Beacon roofing supply will be Mr. Paul Isabella, President and CEO; and Mr. Joe Nowicki, Executive Vice President and Chief Financial Officer.

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

Thank you. Good morning and welcome to our call.

We had a solid start to 2015 that was marked by several achievements. First, we had sales of $596 million, which is 8% over the prior fiscal year and a record for a first quarter. This demonstrates the execution of an important element of our strategic plan through organic and acquisition growth. Second, we increased margins 10 basis points over the prior year and 60 basis points over the last quarter. We're very pleased with the results of both sales and margin considering the challenging market we're in.

And third, we closed on two key acquisitions in Applicators Sales and Services in New England and Wholesale Roofing Supply in Texas. These acquisitions were also slightly accretive to our bottom line, including the purchase accounting impact. This is a good start for these two businesses and we look forward to even better results in the future. This also demonstrates our ability to acquire very well-run companies.

EPS came in at $0.26, which exceeded our internal expectations. Although below last year, we're very pleased where we ended. Now a little more detail on revenue. As I just mentioned, sales grew 8% year-over-year. Organic growth was a strong 4% with acquisitions adding the other 4%. These growth numbers are an encouraging start to the year, especially in the 4% organic growth, considering the downmarket we are in.

I'm pleased to report in total that all three of our product lines grew over the prior year, with residential up 11.2% and complimentary up 18.5%. Commercial was slightly up in the quarter. Both residential and complimentary had solid organic growth. The residential increase was in large part due to our greenfield strategy implemented over the last few years, which traditionally begins with a high percentage of residential product sales.

It is important to note, as we have highlighted in the past, industry data shows roofing shipments down approximately 5% and 4% for the calendar fourth quarter and full calendar year. We feel good about our organic growth against these numbers, even more so when you factor in the pricing loss we had in the quarter. Our continued growth positions us to take full advantage of an upswing in reroofing and new construction as both segments are expected to grow in calendar year 2015.

Our complementary sales growth in the quarter was driven in large part by our Applicators acquisition. But from a training perspective this product line has positive existing sales growth in six of the last seven quarters, which is very encouraging. Commercial sales being flat in the quarter is not concerning as we were up against the 7% gain in last year's first quarter. It's also worth noting that commercial sales have grown in five of the seven prior quarters in existing business. All indications are that this product line will continue to see mid-single digit or higher growth for the balance of the year. Commercial construction appears to be strong for 2015 based on industry data for most segments. We look forward to participating in this volume.

Looking at our reported regions for Q1 we saw organic sales growth in four of our seven regions. The Midwest and Northeast led the way with double-digit gains. This was fueled by a combination storm repair work, new branch openings, and existing branch growth. We also saw solid growth in the Canada and Mid-Atlantic regions. These gains were fueled mostly by strong organic growth.

The Southwest, Southeast, and the West were down in the quarter, which was not a surprise. The Southeast and Southwest continue to deal with post-storm demand issues and intensified pricing pressure. The Southeast actually had strong unit growth on residential products, even with negative storm volume factored in. As we have seen many times in the past in storm markets, we believe these markets will correct as normal patterns of reroof, new construction, and harsh weather occur.

In terms of gross margins, we ended at 23.1% which was up over prior-year and prior-quarter. We showed improvement despite the challenging pricing environment. On operating expenses, they ended at 19.1% which was an increase over prior-year but a large part of this increase was to support our branch growth strategy and acquisitions. We believe these investments are critical to our future growth and margin expansion.

And as we have previously stated, a new branch typically takes three to five years before the volume ramps and we attain our targeted operating cost structure and operating income. Once these get closer to our average branch sales, cost leverage will improve. And, as in the past, we continue to look for ways to eliminate nonessential costs from the business. This continuous improvement mentality is part of the Beacon culture. We're very excited about the 40 branches we have opened in the last three years as we know we'll see solid sales and margin expansion in the future.

Now I'll give some information on the outlook for 2015. The beginning of Q2 started strong from a sales perspective as January organic scales were up 15% and in total up 19%. All product lines were up double digits in the month. For the balance of 2015 we're positive about our ability to grow sales. I already mentioned the data on new construction which is optimistic. There is also optimism on existing home sales and remodeling. With our completion of acquisitions and organic growth, we believe we can grow in the high-single digit range for the full year.

In terms of gross margin we'll continue to work to combat pricing pressures as we did in 2014 by improving system pricing and reducing our product costs. As a result, we believe our gross margins will continue to be in our stated range of 22.5% to 24%. But demand will be the key for improving gross margins in the balance of the year, and as a reminder, Q2 is typically our lowest gross margin quarter.

In regards to new branch openings for 2015, we are planning to open approximately 10 for the year. Given our three recent acquisitions and 40 branches opened in the last three years, we believe 10 is the right number for 2015. This does not mean we are changing our growth strategy by any means. As we open these 10 in 2015, that will bring our four-year total to 50. As the economy continues to improve we will be well-prepared to expand our business. And from an acquisition perspective, we continue to talk to numerous companies, and as we've said before, it's difficult to predict when sellers will sell. We had the capital structure and operating strength to do multiple deals and will continue to work on executing these as we have in the past. Our pipeline is full and we're optimistic on future deals.

Related to EPS, our current analyst consensus is around $1.36, no doubt providing a full-year estimate can be challenging given all the variables we are facing right now. That being said, though, we are comfortable at this time with a full-year consensus. Again, as you know, there are many variables to take into account. For instance, many parts of the country have been seeing harsh weather during the last month and this month. This is having an impact on our ability to drive sales and hence margin in those markets. The good news is spring is just around the corner for our northern businesses. And as always we will keep you updated as we go through the year.

All in all, we believe Q1 was a great start in a challenging environment. We continue to demonstrate solid growth in gross margin expansion. Our balance sheet is in great shape, inventory performance in the quarter was very good and our branch expansion strategy is being executed well. We will continue to execute the fundamentals of our business plan, focusing on excellent customer service, sales growth, and cost control. We have a great team of people and great customers.

And now I'm going to turn the call over to Joe and he can go over a little more detail on the financial highlights of the quarter. Thanks.

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

As Paul mentioned, we had a solid quarter. Top-line growth of 8% for first-quarter record sales of $596 million. Gross margin increased both over the prior year and over the prior quarter. Our operating expenses were up, primarily due to our acquisitions in greenfield as we continued the investments in our growth, and for the quarter we drove EPS of $0.26. For comparison purposes there were the same number of days in Q1of FY14 as in Q1 of 2015, 62 days.

Paul already went through our sales results in detail so I'll not repeat of that information here, but I will go through our monthly sales trending. Compared to the prior year, our average sales per day at on existing branch basis were higher in each of the months of the quarter. October started out good with sales up 3%, followed by a softer November with sales up 1.4%, but we finished the quarter with a strong December where existing sales outpaced the prior year by 12.4%. Some of the monthly change is weather-related, but it also can be attributed to our organic growth from 2014.

On another positive note the gross margin rate was 23.1%, up 10 basis points from a year ago and 60 basis fro the fourth quarter of last year, so a very important trend that we're excited about. Total, pricing declined by 200 basis points in the quarter from the prior year, but was offset to large extent by a product cost decline of 180 basis points. The remaining 30 basis point increase to gross margin can be attributed to a shift in mix to more residential and complimentary sales. While commercial and complementary prices remained relatively flat compared to the prior year, residential prices declined 380 basis points from the prior year and drove the majority of the pricing decline.

Our supply chain team did a great job in offsetting the majority of the price declines with total product cost declines of 180 basis points. As just mentioned, product's mix had a 30 basis point favorable impact on gross margin, as volumes shifted from commercial roofing to residential and complimentary products. Residential roofing increased to 46.9% of our sales versus 45.5% in the prior year, while commercial declined to 36.7% from 39.5% in the prior year, and complimentary increased to 16.4% of our sales from 14.9% in the prior year.

Now onto operating expenses. Total operating expenses were $113.7 million or 19.1% of sales. This represents a year-over-year increase of $13.9 million. That amount includes operating expenses from acquisitions, which totaled $5.3 million. Excluding acquisitions, our existing market operating expenses were up $8.7 million over the prior year and 70 basis points to 18.8% of sales.

Let's break that down a little further. So of this amount, $5.7 million can be attributed to the 26 greenfields opened up in FY14. As we have mentioned previously, a greenfield has a higher operating cost as a percentage of sales until the branch is running at our average branch volumes. The remainder of the increase can be attributed to a combination of one-time costs related to insurance and sales incentives combined with recurring costs for benefits, incentive compensation, and incremental headcount to support our growth, in areas like supply chain and IT. These costs were partially offset by lower depreciation and amortization expense.

As always, we continue to look for ways to leverage our cost structure. Cost control is a historic strength for Beacon and our spending is always made with the future in mind. With that, we anticipate full-year existing market operating expenses of 18% to 18.5% of sales. Regarding the balance -- the status of our balance sheet, inventory was up $13 million from Q4 and $6 million from Q1 of last year. This is all in support of our robust organic growth and the three acquisitions we just completed. If you look on a per-branch basis, inventory was actually down almost 9% per branch from the same quarter last year.

Capital expenditures, including acquisitions in Q1, were $3.1 million compared to $5.4 million in Q1 2014. As you'll recall, last year we made significant investments in our fleet with the addition of our greenfields and replacing older equipment. For the year, we expect capital expenditures to be much lower at less than 1% of sales for the full year. Net cash used for acquisitions was $69.7 million. Our current ratio was a strong 2.53 to 1, versus 2.3 to 1 at the end of last year.

The results of our two bank financial covenants at the end of this quarter were as follows: the leverage ratio increased to 1.96 to 1 compared to 1.42 last year, and our interest coverage ratio decreased to 13.96 to 1 compared to 16.73 to 1 of last year. Our additional investments to support the capital and working capital associated with our strong organic growth drove the majority of the change in these ratios. But even at the current levels, they still demonstrate the flexibility and capability we have to execute on our growth strategy.

Now we'll respond to -- and take any questions you might have.

(Operator Instructions)

Sam Darkatsh, Raymond James.

A couple questions, first off, the decision to take the inventories down. It looks, based on your payables, that that continued into the second fiscal quarter as well. Strategically, is that a function to just right-size inventories on a per-branch basis, or are you anticipating better product costs in the spring and summer because of the lower oil prices right now?

Sam, I think if you look at last year in the first quarter we had done some buying that was, I won't say abnormal but it was higher than in the past, and we didn't do that for sure in this quarter given that we were set from an inventory standpoint balanced against service. And there is, no doubt, your other comment about right-sizing inventory, there's no doubt a constant effort by us to make sure we have the right type of inventory at the right branch, so as we've placed more emphasis on our supply chain and you heard us talk about investing more on the people side there, we think we are making progress in terms of that.

And that really takes it, I think it -- maybe what you were alluding to and that's where we're at this quarter in inventory. We're still analyzing the winter buy. I'm not going to get tangled up on oil and asphalt and what that pricing could do.

As of right now we haven't heard much at all from our manufactures about prices going down as a result of that. I think on yesterday's Carlisle call, they mentioned that any deflation they might see on input cost they'd want to take into their profit. I can't speak for any of the manufacturers, but that could very well happen.

So we have not made a decision from an inventory standpoint to do anything as of yet in this quarter. I think at this point right now, at the point in time, and it could change, I think our balance will be lower than it was last year as we exit this quarter. But again, that could change.

And then for a follow-up to that, Paul. You mentioned that 22.5% to 24% gross margin target for the year is primarily dependent upon demand. You said demand is the key. You think demand is far more critical than pricing would be, then, would be the inference?

Our outbound pricing, Sam?

Yes.

I think demand -- to a large extent, what we're finding in this market demand gates a lot of pricing activity to our end market. If it's weak demand, i.e., our Q2, which is usually our lowest sales quarter because of the winter weather in the north and our lowest gross margin quarter, and that's somewhat a function of the lower demand, higher competition, less jobs to go around, and pressure on pricing.

And I think if -- and it is interesting, it's always a double-edged sword for us, as for probably all of distribution and manufacturers. We have all these storms right now that have hit pretty heavy at the end of January and February, doing a lot of shutting down up in the Northeast, but with that, could bring robust volume in the spring, I'll guarantee you that.

And then as we look at it, a lot of the industry indicators, whether it is for new resi construction, I mentioned it in my prepared remarks, remodeling, or all the data that is out there for McGraw on commercial, it appears that it could be a very robust year for both new construction, and then I still believe it on the reroof side.

So I think the demand is the gate, and if demand is relatively healthy, for the most part, there still might be regional differences, the Southeast continues to see a tremendous amount of pricing pressure, as does, right now, Texas because they're on the backside of all that storm volume they've seen in the general area of Texas, Oklahoma, and even Louisiana.

So putting words in your mouth if I could, you're thinking that pricing and product costs are pretty much level out the next three quarters or so. So that's why volume, and I guess mix, but volume would be the key? Is that how I should read it?

Sam, I can't predict the future in terms of what's going to happen with product cost, right? I just don't see, in my opinion, I just don't see the manufacturers taking price down because they have lower input cost. So I think, in my mind, there is a view that it could stabilize, and that if there is demand we're still helpful that we will recover some of this, all of us, including the manufacturers, because their margins have been squeezed, that we'll recover some of the pricing from -- that we lost last year.

Garik Shmois, Longbow Research.

Just wondering if you could dig in a little bit more just on underlying demand trends, particularly in December and January you called out what appears like strong double-digit growth so far, and I understand that there were some weather impacts in certain markets. But are you starting to see, after several years of head fix, a return in, in particular, the reroofing market on the residential side, and if so, what could that portend for the next year or so?

In the absence of specific exacting, current data it's difficult, the Fredonia data points to at mid or let's say below 5% reroof growth. I think given the fact that we had such a soft 2014 in total squares shipped, I mean it came in under 110 million squares, which I think for the year was down about 4%, 4.5%, 4.4%. I had the view that there is pent-up residential demand; the question is when will it come out, when will we see it?

I think the other piece that is important to note for us, and I tend to -- we all tend to focus on here, is that we're only at roughly 10% market share, so there is ample opportunity for us to go find customers to sell product to, we just have to continue to be very aggressive. So it isn't a function of us being so saturated there is nowhere to go. But, that being said, strong reroof in 2015 would definitely help and I think the manufacturers are thinking that square shipments are going to be up between 3% and 5% next year, and we will just have to see how that plays out as we get into the spring.

Garik, this is Joe, the other part that I would add on, while absolutely our growth in December and January was great, do keep in mind we did have some of the weather impacts last year. Last year our December was down 3% and our January was down, I think, almost 14%. So just keep in mind we did have some down numbers last year, but that doesn't discount the fact we still are having some great growth organically, and as a result of the acquisitions too.

Thank you for that. And I guess just switching to mix and the benefit that you had this quarter, the 30 basis points favorable mix from residential complimentary products. Is it fair to assume that that type of mix benefit, moving forward to margins, is sustainable if we are to assume that residential is going to continue to recover into 2015? Or is there any reason to think that you shouldn't continue to get several hundred or several tens of bps worth of margin benefit moving forward?

We don't have, in our internal plan, we don't have any mix gain calculated in. And the reason why is these product lines can fluctuate from quarter to quarter, and they have in the past. So for instance I gave you the kind of little bit of data points on commercial, and Carlisle talked yesterday about how optimistic they are about 2015. So, and it just seems like there's more public work, there's more private work, we see a lot of quoting activity.

So if that happens, then that mix could change back and it could go the other way, but we're just doing, let's say, a much higher level of commercial work than residential. So no, we don't have any view that we're going to gain 30 basis points, 50 basis points, 80 basis points a quarter in mix right now. It could happen but it's really dependent on the market and how well we execute within those markets.

Plus acquisitions is the other part I would add, Paul. The acquisitions play into it as well. The Company is required, depending on their mix, just like Applicators that we bought, we describe and talk about they've got a higher, much higher complimentary product mix, which shifts things around for us a bit. So as we make acquisitions, that also shifts or has an impact on the mix impact also, Garik.

Thanks so much and best of luck.

Michael Rehaut, JPMorgan.

Good morning, it's Jason Marcus in for Mike. The first question is going back to the gross margins for a second, I was wondering if you could talk about the progression of the gross margins throughout the quarter and maybe if you could give us a read on what January looked like.

I will start. Joe can maybe give you some color. January we haven't finalized the month, we haven't closed the books and we typically wouldn't give detailed margin info within the quarter, we talk about sales.

Suffice to say, we're still seeing continued pricing pressure as we go through January. As you can imagine, especially as the snow started to fly mid-month, late month, up in the North. All that does is put even more pressure on pricing.

As Paul mentioned, unfortunately we do not give details by month through there, so I can't get into more detail there. The other part I'll add to, what Paul described as he talked about, I think, during his prepared comments as well, too, is part of the fourth -- the first quarter results that we reported, we always do see a little bit of a benefit sometimes to our margin as a result of any year-end incentive gates or others that have a positive impact to us. So keep in mind that always helps us when we do our first-quarter numbers.

And then as Paul said, pricing is usually more difficult as you get into the second quarter element. But again, we look long-term, and as Paul described long-term we're still well on track towards the established goals.

Okay, thanks, and then going to set the greenfields for a minute, I know last year you had a very strong year with new branch openings and you're scaling it back a bit in 2015. But I was hoping maybe you could talk about the competitive dynamic that you're seeing from some of your competitors and how many greenfields you're seeing them open in some of the markets that you exist. That would be helpful.

I don't have an exact count, but there's no doubt some of our competitors have followed either us to some locations or opened up their own as part of their own growth strategy. Despite that, we've still seen very solid progression in terms of sales growth with our greenfields, and I think that's a function I'll go back to. It's a function of having 10% market share.

So given that, I think whether we open 10 or 20, we're still going to execute those. I made the decision to do 10 just based on the fact that we had the three acquisitions and the other 40 that are still nesting. Next year it could very well, or even later this year we could figure out we're going to raise that target to something higher and next year we could go back up to 20 or 25.

So the answer -- a little more direct answer, I don't see necessarily the competitive pressure as our competitors are opening up greenfield branches, any different than normal pressure that we have seen for years in every market we're in.

Okay, thanks.

David Manthey, Robert W Baird.

First off, just some quick ones here, relative to your outlook here on EPS and the growth, what is your expectation, mainly for shingle pricing in 2015? If you're comfortable with a range, you must have at least a view on that. You're looking for zero or what you are you expecting?

I think internally, we weren't bullish enough to go either way. We factored in nothing related to price as we go through the year.

And again, I think, Dave, as I said it will be gated by demand. If we start seeing let's say Texas for instance, Southwest rebounds, that's going to help shore that up; Southeast, the same. In other parts of the country there's pressure, but it's just not quite as severe as those two areas.

The other part I would add, Dave, is we'll do what we continued to do over the last few quarters, which is really the pricing pressure. Our teams have done a great job of offsetting a good portion of that with cost reductions as well, too. So we're going to continue that trend.

In the high single-digit growth you're talking about when you're saying mid-single digit, it sounds like residential plus same and nonresidential, complimentary probably better than that, plus acquisitions in greenfields leading up to the high-single digit, you're talking about units there or volume growth?

Yes, I was talking volume growth.

Okay.

Assuming pricing is (multiple speakers).

Okay. And then January, just roughly, I know things would ramp up through the quarter but January as a percentage of second-quarter fiscal sales would be, what, is it a quarter or 20%?

Typically, it's 20%, high 20%s, as a percent of the quarter. (Multiple speakers) close to 25%-ish.

And then on the growth this year, or this quarter I should say, majority of it came from acquisitions in greenfields, and the vast majority of those two components would be residential in nature. Could you talk about the gross margin trends excluding acquisitions in greenfields, what you're seeing and how you plan on that rolling out over the course of the next year?

First, before we get into any detail, Dave, I can tell you one of the things that's important to talk about is the fact that as we look at organic growth, for sure, of course, greenfields is in there. But greenfields does get mixed with what we would call, or other, maybe, retail businesses would call same-store sales. So as we're opening up all these greenfields in many of the 26, maybe only three or four were really out of range, as we call it, or adjacency, so we take an awful lot of product to seed. We don't have an exact number but it can be high, a high percentage from one branch over and the same applies to the cost.

So you had the cost number we cited was for the leases, the people, but there are other folks involved from other parts of those regions that help sell, that help get it set up. So there's a lot of mixing. It might be difficult to talk about the separation between what we're seeing of [purigs] what you would call same-store and greenfield because it really gets kind of mixed up together. Joe, I don't know if you have any comments on that.

No, the only other piece I would add is that yes, our acquired markets have slightly higher gross margins, and the existing markets. The existing markets, again, the bulk of the volume in the existing market gross margin percentages were pretty constant year-over-year from first quarter of 2015 to first quarter of 2014, so they were pretty stable. The acquired ones had a higher gross margin to it; we talked about the mix differential at Applicators, which is some of what drove that.

Ryan Merkel, William Blair.

So just a follow-up of gross margins. I think typically, in the first quarter gross margins are the highest for the year, and then we'd see a step-down the rest of the year. I'm wondering is that part of your outlook or given that you think you're going to have improved demand, do you think that the rest of the year gross margins would kind of be around 23%, maybe even a little higher?

Joe can also chime in, but it is difficult and we wouldn't typically give you gross margin estimates by quarter.

But by the way, it's not necessarily what you had described. While certainly, that's what we saw last year, a lot of that was the pricing environment. If you go back to a different demand situation like 2012, you saw the gross margins in 2012, they did dip down in the second quarter but the third and the fourth quarter came back stronger than what the first quarter kind of was. So it's not always as you described it there. That was last year's situation, but going back over a longer-term period of time, not always that case, Ryan.

But Ryan, I guess in the absence of any major mix shift, you could assume that there could be some consistency for the balance of the year. But again, that also assumes reasonable demand, which doesn't impact pricing negatively, and it also assumes that we don't gain any price. So obviously we would love to be seeing some price gains given what we've seen in the last two years with the pain that we've suffered on the pricing side.

Right, okay, fair enough. And then I guess on the resi price, another quarter here where we're down year-over-year. If the OEMs keep prices the same, with a kind of 0% price like you are sort of assuming, what quarter do we actually start to get back to neutral on year-over-year resi prices. Is it 2Q or is it more in the back half?

Again, it sounds like I have a recording here in my head but I think, Ryan, it could happen in -- well, for us it would be Q3. It could happen in the breakout in the spring or it might not be until the fourth quarter.

It really is a function of demand. I think the manufacturers feel that way. I can't speak for my competitors but we believe it's demand-gated.

So if we see, let's say, new construction does, both commercial and residential, does what folks think it's going to do, up double-digit plus, remodeling continues to grow, existing home sales grow, and there's storms in the right areas, then you could see a good progression on pricing. In the absence of that I think it will be not much the same, because again, it's difficult to say what's going to happen in April, May, June.

Yes, the other part I would add, Ryan, as well too, is as you know the difficult weather last year in that January, February, March timeframe added additional inventory into the channel in total, and I think that also had a negative impact on pricing as you guys know, as we went through last year as well, too. So as we talked about, our inventory level's in better shape now.

And that's a good point that Joe just brought up, because there's no doubt, and there's a realization, and it's fairly simplistic, that a lot of lower-priced inventory in the channel with weak demand does not help the market, does not help pricing, doesn't really help anything and that's for sure what happened in 2014.

Right, okay, thanks.

Ken Zener, KeyBanc.

I'll leave gross margin alone for one question here. Can you talk -- can you just give us a sense operationally, you said inventory was down about 9% per branch, which is generally referring to residential versus commercial, which is dead.

So given the level we're at, talk to us if you would about operational risk. So how low could your inventory go that you would feel comfortable relative to not being under inventory, A. And then related to that, again, not focusing on gross margin, but with asphalt down, call it 10% if it's on a six or one-year basis, six-month or one-year basis, it's obviously down, it's different by different regions but what is actually the risk to how low you can run your inventory if you think there is no price inflation on the horizon, even if manufacturers are going to hold price?

Good question. I think, without getting into the specifics of inventory by product line, it's a tougher question to answer. We certainly -- the first priority for us is to make sure we have product to serve our customer base.

And within that, given 260 plus branches, there's going to -- we know there's going to be inefficiencies, we're working to get rid of those inefficiencies by proper demand planning, proper order placement on all those things. I mean the level -- no doubt, the way we ended the quarter, Q1, when you strip out acquisitions and the greenfield inventory, which wasn't there for the most part prior-year, we ended up around $280 million of net inventory. And at that level we probably couldn't run in the summer because it wouldn't allow us enough inventory to run, but something reasonably above that, $40 million, $50 million would be the range, I would say, for in-season type of levels.

Although again, that really says that we wouldn't have done a major buy, which just is a surplus of inventory which sits and then you sell it. So that's item one. On the asphalt side, I think I really just answered it, our inventory --

Yes, that's fine, it just seems like there's no real risk to prices running. They might be stable, but that's okay, so that's why I was just going to kind of your operational units in inventory.

Yes, and Ken, asphalt has moved up and down over the last four or five years, and it's not -- there's just not a one-to-one for us like it was, let's say in 2008, when oil went up so much and asphalt really doubled. But that was a whole different situation then.

I think the appetite -- again, this is my opinion, the appetite for the manufacturers to want to keep any input cost decreases because they're seeing the same pressure we're seeing on healthcare cost increases, there is wage inflation, folks do get raises, etc. There's got to be some offset.

So if they take that approach, even if asphalt drops more, again, it's only -- and we don't know exactly their building materials, it's a small, we believe, a small percent of the product they ship and manufacturer. We just don't think there's going to be an impact.

Ken, this is Joe. The one other thing, I'll follow up. Your question is also right on target in regards to inventory and how low do you go on that as well, too? As the finance guy, I'm always kind of beating the drum around inventory levels, lower return on invested capital, being sure that we keep the terms up high, and it's a balancing act because if you don't have the inventory to sell, that's a whole other problem to have. So we look at it from exactly the view that you just described, and it's important to know we do keep that in mind, both the return on invested capital element, plus also what we do is sell inventory so we need to have it there.

Keith Hughes, SunTrust.

We talked a lot about your inventory on this call. Do you have any sense in the channel if the inventory behavior you've exhibited is being done by your competitors?

I take a peak as I drive by yards, but that's not real scientific method. Everything we've heard, mostly back channel from customers or manufacturers, would say that there's similar behavior right now going on.

And we're still in the winter months. Is there still time for behavior to change? I assume we won't really know where we stand for another 30 days, is that fair to say?

We're even a little longer, but 30 days would be reasonable for us to really have had a position of what we're going to do, and I would think the other folks too. We'll still be in the middle of winter so we're not going to know what kind of demand requirements there's going to be in April or May, so we're just going to have to do what we normally do and look at our demand plan, look at what we think our internal -- well, look at what our internal sales values say per region, and we'll buy product to make sure we have a readiness to serve. But in terms of any massive winter buy, I mean right now we're still analyzing it and we're in a holding mode.

Okay, and Joe, the sales excluding acquisition segments, is there any way to quantify what greenfields added to the sales of residential, nonresidential, and complementary?

That's a difficult one, Keith, to kind of get into as we've kind of talked about before. When we open greenfields, a lot of volume shifts around, especially if it's in existing markets, and the majority of our greenfields are in existing markets where we have a current location. So it's very difficult to kind of break out how much of the volume is from that exact greenfield.

Certainly I can tell you for those stores what the volume was. But that doesn't necessarily tell you how much the incremental volume was for greenfields because many times in those greenfield stores we open, we shift volume around, we shift customers around. It's very difficult to break it down more specific.

Was it a big impact of the organic growth for the quarter? Certainly it was a big help to us, yes.

But it could be as high as even, and this would be a very rough estimate, 30% of that volume is coming from seeded customers that were doing business with us in existing locations. And that changes by the branch, by location, how much volume we're pushing out into that area anyway, with a longer drive from the base branch.

We've been trying to put a lot of pen to paper on that one, and it's a little more difficult to figure out. Suffice to say, that's why we emphasize our organic growth is strong. Greenfields are in that but we know we're getting existing growth, and in some of these regions the existing was double-digit with or without the core greenfields.

Of course acquisitions would be out but with a core greenfield, what we record at that branch in or out. We've seen some pretty strong growth in our reported regions.

Robert Wetenhall, RBC Capital Markets.

Hello, this is actually Matt Bouley on for Bob; thanks for taking my questions. Just on non-res, you talked about Carlisle. I know they called out weather as being a negative headwind, I guess in November. So I'm just wondering if you could highlight what were some of the factors that led to the slowdown in non-res, and then on your outlook in 2015, just which verticals within non-res do you think you might see strength and weakness?

I kind of mentioned in my prepared remarks, no doubt the comp year-over-year didn't help and then the fact that we had been growing every quarter. November was not as strong. We kind of mirrored Carlisle but part of the challenge with us trying to match up directly with Carlisle is they serve all over the country, and we typically only buy with them in certain regions, and they might be growing more in another region that we're not for whatever reason.

So we kind of mirror that, and it was really a function of weather, some job delays. That's it. It wasn't anything other than that and some of that volume came back in January.

That's why we talked about commercial being up to -- all three of those product lines in January being up double-digit. What was the second part of the question?

Going forward into 2015 what is our thoughts for the remainder of the year (multiple speakers) might be driving it.

I think when you look at McGraw data and the architectural indexes, they are all strong. We know public work is going to be strong, we can see it now, schoolwork especially, new construction, and we're starting to see a lot of activity, quotations on reroof. So we feel good about that; there's never a guarantee but we feel good about it.

There's also a lot of private work, whether it be office building, retail, things like that. So every segment, as you go through manufacturing plants, electrical utilities, public works, they're all pointing to anywhere from 5% to 9% to 16%.

Now again, these are estimates but it's encouraging. They're not saying 1%. So it's really across the board.

Thank you, that's helpful. And then you called out direct sales as down in the quarter. I'm just wondering if you can remind us of the gross margin differential between direct and warehouse sales, and then what were the factors that led to that decline, and where do you see direct sales this quarter?

I don't believe we've ever called out gross margin numbers between direct and indirect.

I think as we've described it before, a good portion of the direct sales tend to be more on the commercial side of our business, and I think what we have talked about is the differential between our commercial and our residential product margins. I think we've always described that in the area of 10 points of gross margin difference between those two. So that's probably as close as we've gotten to providing detail on it.

Kevin Hocevar, Northcoast Research.

I was wondering if you could comment on the winter discounting packages being offered by the manufacturers. Are they pretty standard in the typical mid-single digit discounts?

I know they've talked about trying to be more disciplined. But I was wondering if you could comment on, are they kind of in line with historic trends, the packages being offered?

Good question. We typically don't comment on discounting. What I can comment on is you are using the word disciplined. I think the manufacturers have done at least a consistent job of being very disciplined this winter.

I believe all of us manufacturers, and I would think distribution, wouldn't want to see a repeat of 2014 where there was just so much inventory in the channel that really caused a lot of issues. So you can infer whatever you would like to from those comments about discounting. But they've been very disciplined.

Got you, okay. And then in turn, with lower fuel prices, were you at any benefit on the shipment of your products to your customers? Will that help margins at all, or would that largely be passed through?

No, that will provide us a little bit of help to our cost structure as a result of lower fuel costs, absolutely. We have a fleet of vehicles we do that delivery at our end customers, so certainly will. But it's not an overly significant cost to our total financial. It's one of many elements that will help us drive some costs down this year.

Jim Barrett, CL King & Associates.

Paul, with the challenges the industry's had, especially in 2014, have you noticed a notable increase among the smaller distributors to consider selling out, and/or are they now considering selling out at what you would view as more attractive, more reasonable multiples?

Good question. We really don't see any appreciable change. I've been here for over seven years and as I look back on those years, there's been different ups and downs to a lot of selling and no selling, but I can't say that activity has necessarily increased because of that. A lot of these smaller distributors are very well-run and they're profitable even in these difficult times, just as we were when we were the $100 million, $200 million, $400 million.

So I haven't seen any change. And on the multiple side or on the price side, I guess I'll speak to price and not multiples, we've just been very consistent in our approach to make sure we don't overpay for the business were buying, and we fight very hard not to get the itch to overpay to get an asset because we know we have to have the payback. And I think all the shareholders would appreciate the fact that we're very disciplined with that.

So I can't -- we hear of deals in the market that are rich, but I have no proof in front of me, a piece of paper talk about the self price, show the self price. I do know what we paid, and our levels have been consistent with what we've done in the past, and that's what we're going to do in the future and they all balance out. Some you might pay a little more for, some you pay a little less for, and it balances out.

Brent Rakers, Thompson Research Group.

Two questions. First one: you talk a lot about the weather effects in December and January. Can you maybe give us a better sense of how some of the year-round Southeast, Southwest, western markets performing in those months?

Well, the South -- I'm sorry Brent, are you talking about Q1 or January?

More end of the quarter, December month being so good, and January month as well. How much of that was just northern markets and comp issues, and how much of that was southern markets, western markets maybe coming on a little stronger?

There's no doubt we saw strength in the Northeast and the Mid-Atlantic was reasonable. Canada was very strong in the quarter. I don't think there is any appreciable change during the quarter, we know December was a little higher for us from a growth standpoint. But the pressure for the Southeast and Southwest was there all quarter.

It's been relatively consistent, some of it kicked in in the Southeast because of the hail has finally kind of dried up down in the Gulf basin there, and the Southwest has been fighting rough comps because of storms for a number of months. So I don't think there's any great change during the quarter.

Great, and then just last question, if you could talk a little bit about G&A and selling and warehouse expense, in event that comp growth starts to be in that mid to high single digit level, talk about the variable fixed cost mix and maybe how attractive you think the operating leverage could look under that kind of situation.

I'll start off from a higher level. Joe had talked about it. We ended at 19.1% for the quarter. You take out acquisitions, it was 18.8%.

We've said that for the full year we'd be in the 18% to 18.5%, and that's a big range, so could mean 18.1%, 18.2%. We have continued to have a lot of cost activity, cost actions that we've always had; we try to heighten that.

And then no doubt, as you alluded to, as acquisitions gain steam and as greenfield branches gain steam, we're going to gain leverage, no doubt, to get down closer to the 18% cost level. Joe, I don't of having more detailed info.

No, I think the big issue, Paul, as you mentioned, as the greenfields continue to gain steam, that's where, as we talked about, higher operating expense currently as a percent, just because of the fact they're in the ramp up volume phases, as they gain speed in terms of volume and go through the year and then in through next year, that'll have the biggest leverage impact on our operating cost structure.

Regarding the rest of our cost, there has been no significant change, really, in that fixed variable relationship than in the past. If I take the greenfield piece out of it, the rest we continue to do what we've always been focused on doing. We have a clear cost reduction culture around here at Beacon, and everybody spends a lot of time focused on it, and that hasn't changed.

When you look at things like, whether it be acquisitions which you can see in the queue, or greenfields, obviously if we're talking about being slightly accretive, slightly dilutive, there's no doubt that operating costs are close to gross margin levels. So there's virtually no leverage there.

That's just a function of having a $1.5 million branch per year, or $2 million per year annualized sales branch that just can't -- it just can't lever all the costs because you've got a full lease, and usually you have some -- nearly a full compliment of people, you're going to have a full compliment of depreciation because you have to deliver product, etc. That will change as we go through time and that, Brent, will get us down close to the 18% level.

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

Great, thank you. Here are a few highlights, all repeats but worth talking about.

First quarter sales were $596 million, up 8% from prior year. Again as we said, split somewhat evenly between organic and acquired growth, and it's a record for Q1. Resi sales grew 11.2%, the complimentary 18.5%, we're very pleased with that while commercial was basically flat.

And it's a great example of our product diversification. We talked about gross margin being up 10 basis points and 60 basis points from prior quarter.

Two acquisitions we've closed on are great companies and we look for big things from them as we go through this year and next year and beyond. EPS we talked about, it was in line with our internal projection so we feel good about it and we're optimistic about achieving our full-year internal plan.

We spent a lot of time talking about operating costs but we feel good about it and we've had a great history at Beacon of controlling costs, reducing costs, doing what we need, but we're also -- we also have a strategic plan that's really anchored in growth, and those growth elements are acquired growth, new branch growth, and then same-store or existing growth as best we can separate those.

As volume improves in our greenfield branches and acquisition integration continues we'll see solid cost leverage as I alluded to, with a full-year estimate being in that 18%, 18.5% range. Our balance sheet is in excellent shape and will allow us to deliver on our near- and long-term growth goals.

And as I've said repeatedly over the last number of years, we're in a very good market that's going through some temporary demand pressures specific to residential roofing, but we are well-positioned to outpace the industry growth and deliver much improved results as our markets normalize. We believe our future is very bright.

I want to thank all of our investors for our their interest in our Company, and as well as our customers and employees for their loyalty. This concludes our earnings call. Thank you.