QXO, Inc. (QXO) Q2 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Beacon Roofing Supply's Fiscal Year 2012 Second Quarter Conference Call. My name is Roxanne, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. On this call, Beacon Roofing Supply may make forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors including, but not limited to, those set forth in the Risk Factors section of the company's latest Form 10-K. The company has posted a summary financial slide presentation on the Investor section of its website under Events and Presentations that will be referenced during management's review of the financial results. On the call today for Beacon Roofing Supply will be Mr. Paul Isabella, President and CEO; and Mr. David Grace, 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, Roxanne. Good morning, and welcome to our fiscal year 2012 second quarter earnings call. I'm pleased to report that we continued our strong growth trends from Q1 into Q2, which has resulted in a very impressive first half. All aspects of our operating results showed improvement. For the quarter, sales were up 28% organically. Gross margins improved from 22% to 23.7%, and we leveraged our operating costs nicely, reducing them from 24.3% to 21.2%. Our team continues to do a very good job of satisfying customer demand while also executing our overall strategic plan and providing impressive results. Our EPS results of $0.07 for the quarter beat our expectations and far exceeded last year's loss of $0.13. Dave will go through the details of our financial results in a few moments. As has been the case over the last few quarters, our 2 largest product groups, Residential and Commercial Roofing, continued to deliver double-digit growth in the quarter. Reroofing remains strong. We continue to service storm-damaged demand and have the benefit of industry-wide price increases implemented since last year. The milder weather this year compared to last year certainly helped stimulate demand for the second quarter, but we also believe there is an underlying overall improvement in demand for our industry. All but 2 of our geographic regions showed double-digit sales increases in the quarter, with only Canada at 7% growth and the West at 3.5% growth lower in the quarter. As we emphasize on each of these calls, this points to the overall strength of the reroof market as new construction, although improving some, continues to remain at historically low levels for both residential and non-residential products. There continued to be fairly strong demand from storm damage in the Southeast and Midwest, and while this demand may decrease over the coming months, there have been some early season hail events in the Midwest, Texas and Carolinas, which will add some volume over the next few months. Pricing for the quarter was strong versus prior year as last year's increases for both residential and non-residential products are still impacting us. During Q2 of this year, we saw seasonal price discounting, especially on asphalt shingles, ahead of announced price increases from our manufacturers. With demand strong, we currently expect these price increases to hold. We expect to see the impact from these in the June timeframe. We'll provide more detail later in the call. Our acquisition integration continues as Enercon, Fowler & Peth and The Roofing Connection are assimilated into our business. We feel good about the progress of these companies and look forward to even better operating results in the future. And we recently were able to obtain a very favorable secured credit facility for the next 5 years at very good rates. This will enable us to continue our acquisition activity, as well as take care of normal working capital needs. In terms of Q3, April was up 15% organically versus prior year as the milder weather continued although the effect is lessening. Storm demand and good reroofing volume, as stated previously, helped us off to a good start in the quarter. And as always, we'll continue to focus on our core initiatives of providing excellent customer service to our contractor customers, sales growth and operational excellence. As we have said many times in the past, we're in a very solid market that historically has seen growth due to the large amount of reroof that exists. We believe we're well positioned to grow and generate solid earnings due to our product and geographic diversity, our solid customer service and customer base and the strong culture of execution our team possesses. Our first half results, we believe, demonstrates the strength of our company. Now I'm going to turn the call over to our CFO, David Grace. After he is finished, I'm going to go through a few key topics like I did in Q1. David?

Thanks, Paul. Good morning, everyone. If you are using our slides to follow along, let's begin with Slide 1. Our fiscal 2012 second quarter organic sales, which reflects our existing markets by excluding sales at branches acquired since the beginning of last year's second quarter, increased 28.2% to $379.7 million. We had 64 selling days in both 2012 and 2011. Total sales for this quarter, not shown in the slides, increased 33.4% to $395.2 million from $296.3 million in 2011. In our existing markets' lines of business, Residential Roofing sales increased 46.0%, while Non-Residential Roofing increased 17.4%, and Complementary products were up 6.7%. Milder weather increased our roofing sales this quarter, along with higher industry-wide selling prices and strong Residential Roofing business in most markets, including some continued reroofing activity left over from last year's storms. Non-Residential Roofing sales growth continued strong, also further helped this quarter by year-over-year price increases. In Complementary products, they rebranded in all of our regions due to the milder weather and increased remodeling activity. As you can see in the first slide, all of our regions had organic sales growth for the quarter, with double-digit increases in every region but the West and in Canada. Both of those had single-digit increases. We estimated the impact of inflation on our sales and gross profit by looking at the changes in our average selling prices and gross margins. Selling prices were up overall 7% to 8% with non-residential products the strongest at 10% to 12%; Residential Roofing up 6% to 7%, while Complementary Products were flat to last year. Our gross margins were up during the quarter, so inflation in our cost of goods sold was slightly less than these increases. We operated a total of 193 branches at the end of this quarter compared to 178 last year. We opened a new branch in both this year's second quarter and in last year's second quarter. Total gross profit was $93.7 million compared to $65.2 million in 2011, that's a 43.7% increase. Existing gross margins increased to 23.7% from 22.0% in 2011. We had a higher concentration of residential sales, which typically have higher gross margins, along with improved gross margins in those same residential sales supported by the increase in average selling prices and also higher demand in most markets. Existing market operating expenses, which is Slide 2, increased by $5.5 million or 7.7% to $76.6 million from $72.1 million in 2011. Acquired market operating expenses was $6.4 million. Payroll and related costs, including incentive-based pay, overtime and profit and sharing increased $6.2 million in our existing markets. That was mainly due to gross profit and operating income exceeding our expectations but also due to increased to -- for the increase in the sales volume. Selling expenses increased $1.0 million, mainly due to increased fuel costs and other transportation costs. Bad debts were at $1.2 million lower, primarily due to a lower percentage of past-due accounts, as the milder winter enabled more of our customers to stay current with their required payments. Finally, depreciation and amortization decreased $1.0 million due to a drop-off in amortization related to purchase accounting and lower depreciation due to lower capital expenditures in recent years. Operating expenses, as a percentage of net sales, dropped to 21.2% overall and 20.4% in our existing markets, due primarily to the favorable impact of the higher sales but partially offset by expense increases that I just mentioned. Interest expense was up $0.1 million to $3.3 million in the second quarter as interest rates have increased slightly. Income tax expense was $3.3 million in 2012, reflecting an effective rate of 51.4% compared to 38.3% in 2011. The higher quarterly effective rate was due primarily to certain discrete items and less of a beneficial impact in this year's second quarter from the low Canadian tax rate. We continue to expect our annual rate to be approximately 39.5%, excluding discrete items. As a result of all I've mentioned, our net income was $3.1 million for the quarter compared to a loss of $6.2 million in 2011. Of the $9.2 million increase in net income, we estimate that 20% to 30% of it was attributable to inflation of our products sold. Our diluted net income per share increased to $0.07 from a loss of $0.13 in 2011, which is shown in Slide 3. Our earnings before interest, taxes, depreciation and amortization and stock-based compensation or adjusted EBITDA, which is reconciled to our GAAP net income in our press release, was $17.8 million for 2012 as compared to $0.9 million in 2011. Now let's take a quick look at our year-to-date results, which start on Slide 4. Year-to-date, 2012 sales increased organically 21.7% or 23.7% on a same number of business days basis. Total sales, not shown in the slides, increased 26.2% to $885 million from $701.1 million in 2011. On a same-days business measure in existing markets, Non-Residential Roofing sales increased 18.1%, while Residential Roofing and Complementary Products increased 36.4% and 3.2%, respectively. Regionally, all but our Canadian region were up over 10%. Total gross profit was $211.0 million compared to $160.0 million in 2011, that's a 31.9% increase. Overall, in existing market, gross margins were 23.8% compared to 22.8% in 2011. Existing market operating expenses, which is Slide 5, increased by $9.5 million or 6.4% to $156.5 million from $147.0 million in 2011. Acquired market operating expenses were $10.5 million. Mostly for the same reasons discussed for the quarter, payroll and related costs increased $9 million, and selling expenses increased $1.9 million in our existing markets. Other G&A expenses increased $1.8 million from higher professional fees, higher general insurance and higher travel costs. Due to the same factors as for the quarter, bad debt expense decreased $1.6 million, and depreciation and amortization decreased $1.8 million. Operating expenses, as a percentage of net sales in our existing markets, declined to 18.3% from 21.0%. Interest expense was down slightly this year compared to last year. The 2012 income tax expense was $15.3 million, reflecting the effective tax rate of 40.7% compared to 39% in 2011. As a result of all I've mentioned, our year-to-date 2012 net income was $22.3 million compared to $3.9 million in 2011. Of the $18.4 million increase in net income, we estimate that 30% to 40% was attributable to inflation of our product costs -- of our products sold. Our net income per share improved to $0.47 compared to $0.08 in 2011, a 488% increase as shown on Slide 6. As Slide 7 shows, cash flow from operations was $80.3 million in 2012 as compared to $68.8 million in 2011. The higher cash flow from operations was primarily due to year-over-year increase in net income, which was partially offset by less favorable changes in working capital. The year-to-date 2012 changes in working capital consisted of favorable impacts from a decrease in accounts receivable of $82.8 million and a $54.7 million increase in accounts payable and accrued expenses. This was partially offset by the unfavorable impact from an increase in inventory of $48.7 million and a $44 million increase in prepaid expenses and other assets. Our days sales outstanding in accounts receivable were down slightly, due mainly to the higher residential sales in March this year compared to last year. Inventory turns increased year-over-year as the positive impact of the higher sales more than offset the negative impact of this year's higher inventory levels. The increase in prepaid expenses and other assets was primarily due to higher amounts due from vendors for incentives, which resulted from a higher level of purchases and increased seasonal special buys. Lastly, the increase in accounts payable and accrued expenses was primarily due to normal seasonal factors and a high level of inventory purchased later in the second quarter this year compared to last year. Capital expenditures in 2012 were $8.6 million compared to $4.1 million in 2011, and cash used for acquisitions was $44.4 million in 2012. Net cash used by financing activity was $0.8 million in 2012 compared to $4.9 million in 2011. We announced on April 5 that we entered into a new 5-year senior secured credit facility consisting of a $550 million U.S. credit facility and a $50 million Canadian credit facility. That was with Wells Fargo's Bank as lead arranger and a group of other lenders participating. The new credit facility refinanced our prior combined $550 million credit facilities that were mainly provided through GT (sic)[GE] Antares. As a result of the financing, we will take a charge of approximately $6 million in Q3 due to the write-off of deferred financing costs and the fact that our swaps will become effective for accounting purposes. The charge is approximately $3.6 million net of tax or about 7% to 8% of earnings per share. The new facility provides us with low interest rates and readily available funds for future acquisitions and ongoing working capital requirements. We used $75 million of available cash to lower our term debt, but added substantial availability under our revolver. The paydown of the term debt is expected to lower our annual interest expense by $1.6 million at current interest rates and also assuming that we don't need to reborrow those funds under our new revolver. Let's summarize a few key points from my presentation. Organic sales were up 28% for the quarter with organic gross margins at 23.6% compared to 22% in 2011. Organic operating expenses, as a percentage of sales, were down to 20.4% from 24.3% in 2011. Diluted net income per share increased to $0.07 from a $0.13 loss in 2011. The first half of fiscal 2012 was very strong. Business is good in most of our markets, and we generated net cash flows of $28 million in the first half, despite spending $44 million on acquisitions. While the milder weather has certainly helped us and as expected we benefited from year-over-year price increases, it is with -- it was great execution by our team to obtain these results. We continue to have a strong balance sheet, which along with our new credit facility, forms a solid foundation for future growth and building value for our investors. And I'll turn it back over to Paul now for a few comments.

Great, Dave, thanks for the report out on the great quarter. Like we did in Q1, I'd like to give a little more color on the same -- actually, the same topics we talked about in the Q1 call: sales, pricing and EPS. I'll start off with sales. With this year's much milder winter, and it's a little difficult to determine if any of the upswing in activity is pull-forward or how much it is of activity scheduled for the spring or an indication of an increased overall demand in our markets, but April continued to be strong, up 15%. That's a good sign. That, along with a strong performance in almost every region, makes us more inclined to believe that some of the growth is from increased demand, not just pull-forward. We knew going into fiscal 2012 that due to last year's tough winter, higher year-over-year [Audio Gap] Q3 and Q4. As we have said, trends in non-storm regions have been very encouraging as a number have seen double-digit growth. We see this as a very positive sign that reroofing activity is strong and hopefully will continue for the rest of the year. And as stated earlier, there's been some small hailstorm activity in a few of our regions so far in the spring. So in summary regarding sales, we're very pleased with the growth we had in the first half of 2012, and we believe it could be a sign of a better economic atmosphere for the remainder of the year. I'll now talk a little bit about price trends within the industry. Residential shingles continued to see somewhat of an up and down, at times, pricing cycle. As usual in calendar Q1, the manufacturer offered pricing deals during this slower period and ahead of 2 announced price increases. Indications are that the distribution linked at the supply chain stocked up heavily. This may, to a certain extent, cause our selling prices to fall off some temporarily due to the competition as this inventory is sold off, and that's a natural thing that occurs during this period. If demand remains strong, though, we think at this point the first round of announced price increases will take hold some time in Q2. The second round of announced price increases will also likely require continued demand to take hold, perhaps in calendar Q3. In the non-res market, 2011 was the first year in a long time that prices went up and stayed up, as we ended the calendar year with prices up a healthy 10%. In this market, it's tough to track pricing changes or predict future changes, as most of the projects are sold through bids for specific work and can't be easily compared. We think pricing for the full year of 2012 may react much like it did in 2011, as we have already seen some planned increases effective early April due to raw material pressures on our manufacturers. With these products, it's more difficult to stock up as logistically. It's more efficient to ship some of the materials directly from the manufacturer to the job site. We invested at some additional inventory but not nearly to the extent of our asphalt shingle inventory. For our Complementary Products, we saw some small price gains in 2011, but they still need demand to increase to have some needed price increases take hold. All of these changes position us well for the remainder of fiscal 2012, as demonstrated by the positive impact of the first half price increases. We also expect the pricing benefit to remain for the second half as the further price increases take hold, as there seems to be stronger pressure on the manufacturers from our increasing raw material costs, higher transportation costs and some pressure from the most recent hail activity. And I'll talk a little bit about EPS. As we had mentioned, for the first half of 2012, we were well above our expectations in sales and gross margins, and our team did a fantastic job of leveraging our operating cost to provide a robust $0.47 of EPS. We're off to a good start in Q3 as April was up double digits compared to last year, certainly not as robust as Q1 and Q2 but still strong, as we start to go against tougher year-over-year comparisons for the last half of the year. We are still expecting a better base demand outside of storms as we have alluded to, and we're comfortable saying that we'll be at the higher end of the current analyst range for the year or about $1.55 for the full year. This is before the impact of any non-operational charges that Dave talked about or income, such as the refinancing charges, which will total approximately $0.08 in Q3. If the strength we see -- we are seeing continues, with a little help from proposed price increases, we may be able to meet the analyst consensus for the second half, which was higher than $1.55. As you know, our business has many factors that can influence results, including the overall health of the economy and weather events. So at times, it makes it difficult to predict, but we're confident about the second half right now. This range for the full year represents excellent performance, considering last year's heavy storm volume and overall positive market demand. And now I'd like to open up the call to any questions you might have.

[Operator Instructions] We will take our first question from Michael Rehaut with JPMorgan.

This is actually Jason Marcus in for Mike. So my first question is, I wanted to know how much you would estimate that the increased residential sales helped out gross margins during the quarter. And then also if you could kind of go over again what the differential between gross margins for Residential, Commercial and Complementary Product currently is.

Yes, the pricing and the gross margins for Non-Residential products were up slightly, but the main switch for better gross margins was from having more residential sales. They went up to 50% of our sales this quarter. And they also increased slightly in gross margin percentage within that product group. The Complementary Products were basically flat year-over-year in gross margin.

Right. And the differential between gross margins for each of the segments, do you have that available?

Yes. It's about 1,100 to 1,200 basis points higher for our Residential Roofing Products than Non-Residential Roofing products. On the Complementary Products, we're about in the middle range of our gross margins, so they're around that 23% or so. But the biggest differential is definitely to the non-residential products, which are sold in bulk for very big jobs and are competitively bid for almost every job project that we do with our customers.

Okay. And then back to pricing for a minute. So you mentioned that selling prices may fall off a bit due to the inventories. I was wondering if you could just kind of clarify that. And would that just be kind of like a 1- to 2-month short-lived event? Or can you just kind of go into that in a little bit more detail?

Yes. Let me just add something and Dave can jump in. We don't -- we're not trying to predict that prices are going to fall. But typically, what happens when we see price increases announced and some pre-buy activity, other distributors stock up. And then there is the potential as they try to push that inventory through the system that they lower price. And hence, that, for some piece or some small short period, we follow a little bit. That's really what that refers to. We don't have absolute evidence that, that's going to occur, but that has typically happened for a month period or so in the past. Dave, I don't know if you have anything you want to add.

Yes. I would say like Paul mentioned, that's what typically happens and we're conservative, and we just want to tell folks because when we went through 2010, some of that happened for a longer period of time. Now what we will say is that, that's not the case for April. So far, to date, is that the pricing has held up, the margins have held up, and they haven't dropped. And I think competition is like us is -- servicing our customers, there's enough demand there. So pricing is holding up okay so far.

Yes. And our position is the same as it's been in prior years where we have -- where we see price increases from the manufacturer. It's our responsibility as stewards of the company to make sure those -- that input cost to us gets pushed out into the marketplace to make sure that we recoup that. And the manufacturers, as I said, they are definitely seeing it. Carlisle mentioned it on their call, as well as Owens Corning. They're seeing an awful lot of raw material pressure, some of that they didn't recoup. So I know they're going to continue to push very hard based on what they're seeing. In turn, we have to take that and push it out into the marketplace. So we're going to continue to do that, and we have no strategy to push back, go backwards. But we're just, as Dave said, being conservative. We make sure that we mention that to the group.

We'll go next to Ryan Merkel with William Blair.

My first question is on April sales. I think you said organically, it was up 15%. And then Dave, I think you said that April, the pricing was still good. So could you just give us what the price impact was at that 15%?

It's probably pretty close to what it was for Q2, Ryan, and not that far off.

Okay. And then do acquisitions still add about 5 points?

Yes.

Okay. And then can you be a bit more specific about the size of the first spring price increase for both residential and non-residential? What exactly were those price increases?

Yes. On the residential side, the announced was higher -- closer to 10%, like 7% to 9%, 8% to 10%, depending on the manufacturer. The commercial increases were slightly over 5%. And the second round is similar but again, the first ones are just starting to nest in the market. And as I said, the second ones will be a function of demand, which again, we think is going to hold up but we wouldn't see those until the -- probably the July timeframe or August even.

So if I wanted to be conservative and just assume the first round sticks, what exactly then would pricing be in the second half of the year for both residential and non-residential?

It would be up nearly that 5% to 10%. Again, it's different by product, Ryan, so it's a little difficult to give you -- us to give you an exact answer. But I've used the middle of the range. And remember, the price increases from last year really didn't kick in until June. So the year-over-year actual will be whatever price gains we get. But the second ones take a hold, it could be in that 10% to 12% range again. It's just hard to see that far out with price increases.

Yes. I know and I appreciate that. And when you said that prices might go lower, you didn't mean negative. You just meant it would be less than 7%, 8% potentially.

Yes, absolutely.

All right. And then last one for me. Gross margin, how are they trending thus far in the fiscal third quarter? Because it would seem to me that sequentially, they would be higher due to seasonal factors, but am I missing something?

No, you're correct. That's the assumption. Like I said, I think they're continuing to hold, which means that they'll track pretty much how they do seasonally and bump up a little bit in April, May and June, like they always do.

And Ryan -- and there's always differences regionally. We see price holding more effectively in one region, and then in another region, we see pressure and struggles. But that's not uncommon, and it's kind of even without price increases how we see the markets anyways.

We'll go next to David Manthey with Robert W. Baird.

First of all, I guess the key question here is that the pull-forward of storms and warmer weather in the first calendar quarter, it would seem to me that given the strength you saw in the Southeast and the fact that Midwest and Canada were the weakest seems to argue against that is the key driver to what we're seeing here. But could you sort of talk about which market you see as the purest kind of non-storm-impacted and non-warm weather-impacted area and what that means for the underlying demand in your industry right now?

Yes. I'll take a shot at it and then Dave can chime in. I mean, if you look at I guess Canada where we showed up 7%, definitely no storm activity. If anything, they've seen a little bit of market decline. So there's just a good indication of us being able to execute, I think, to take advantage of maybe some share gain and just solid execution. The Northeast also, which had a milder winter, they're up considerably as the charts show. And we think it just points to the overall strength of the reroof. So yes, there definitely -- was some pull-forward naturally, and we've talked about that. We talked about it in our Q1 call because of the warmer weather. But there's still, even to a certain extent, the Mid-Atlantic was up, which again historically doesn't see any storms a little further north in that area, and they've been operating very strongly. So we just think -- we have to acknowledge that there is a pull-forward. To what extent, it's very difficult for us to calculate. But we also see as a result of these other regions non-storm, et cetera, where we see some pretty positive results. There's a lot of activity in the commercial side. There's a lot of quote activity also on most of the regions, where we get to look a little more forward, obviously, than residential. Dave, I don't know if you want to add anything.

No. I'm not so sure we have a region like that, David, that didn't have a milder winter and doesn't have any -- or doesn't have any storm damage. Because as you know, in the Southeast, they had storms last year. The Midwest had them. The Southwest had some. The West Coast didn't have any but remember last year, the West Coast was up dramatically. And we actually expected them to flatten out somewhat in sales this year because they had such a good jump last year. So I don't think there's a typical market that we can point to. In New England which did have the weather events, they didn't see a drop-off in sales in April. It certainly was nowhere as strong as the year-over-year comparisons for Q1 and Q2, but if you would think if there was a lot of pull-forward there, that April would be hurting quite a bit, and it's not.

Yes. Dave, if you dig into -- and we don't get into that level of detail, the Southeast were there weren't storms, there were still some real positive growth year-over-year and really no great impact as well as storm impact. So that's what leads us to be a little more confident than we were at Q1. And I'm also -- we didn't see the prices taking hold like we think they're going to take hold now.

Yes. And that leads to my second question. I mean, I agree with you. I guess in the Southeast, there's really -- it doesn't matter there was a warm first calendar quarter because there's never an impediment to getting on a roof and doing the work. So that has beneficial impacts on this pricing uptick, I would imagine. So as you look at the underlying demand being good and you look the -- it seems like there's been a reasonably high level of hailstorm activity out there, so you put those things together. Is there any reason why you feel -- I guess there's this inventory thing but I mean, once we clear through that, it would seem that this price increase, the second round, April, May, June, the 6% to 12% variety, would have a pretty good chance of holding this year as well. Is there any other reason why -- I mean, in the absence of something falling off dramatically, why those wouldn't have a pretty good chance of sticking this year?

I mean, my view is in the absence of some other dramatic economic occurrence, no, I think you're right. I mean, that's why we talk openly about the $1.55 and then the potential of going higher based on if all those factors hit and if we have a more normal storm year. They had spring hail. As you said, there were some but nowhere near the level of last year. But also some of the hail that occurred last year, we think, went a little longer this year than the view we had when we talked last in Q1. So all those things kind of add up. But yes, if we get the normal demand, we see the strong demand we're seeing now, there's no reason to think that this -- and the pressure manufacturers are seeing, there's no reason to think the second wave of price increases won't stick.

Okay. Just one more quick one for Dave, I apologize here. The gross profit margin impact from the mismatch sort of the timing issue of price increases, can you isolate that, Dave? And we're talking 10, 20 basis points here that ultimately goes away as that gap closes.

Yes, I think you're in that range. It's not as much as it would be in the past because again, if the demands there, we won't see the discounting of the inventory from competition. I would add one more thing about your comment about the Southeast. What's a little difficult for us is no one else reports their results in an area like Florida, where we're probably taking market share. We're doing very, very well year-over-year. And the guys down there do a good job, and they're taking market share. We don't know if it's the market improving because no one else has any other information. So it's a little difficult to tell.

We'll go next to Ken Zener with KeyBanc.

Paul, you -- the 5% to 10% guidance that you're giving core, which is volume and price, I was just doing some of the back of the envelope and I wonder if you can help us tighten up that range because by my calc, the up 10% would imply volume price core and the second half being down 3%. And to hit your 5%, you'd have to be down 9%. Now it could be wrong, but could you help us -- it's a pretty wide range there. I know that there is pull-forward but -- I mean, is that down 10%? I mean, is that still a realistic view for the kind of core sales in the second half?

Well, again, it is a wide range. The $50 million or so of acquisition, obviously, that would be additive. And it's our conservative view just based on what we see right now. Dave, I don't know if you want to add any of the -- any more of the analytics.

I just wondered if it's too conservative. You guys are conservative which is good but it just seems like -- I mean, you're affirming a kind of $1.55 number. You're saying residential price, which is -- it sounds like it was down modestly, sequentially call it 3%, but it's set to ramp, right?

Down in price in Q2?

Quarter-over-quarter.

No. It was about level quarter-over-quarter. And you know the thing is what we're a little wary of is what happened in 2010. If you can say that the economy is going to stay up the way it is, and this is going to stay up, you're right. The 5 is way too low and even the 10% maybe lower than we expect. Weary because last time we saw the industry stock up like this, it caused a problem, and history can repeat itself. We hope it doesn't. We hope the economy is a little better. The demand is a little better from the storm damage and things like that. And those price increases go through, and then you'll be absolutely correct. We won't see that type of situation we're in [indiscernible].

Yes. And then you said the residential, the gross margins were kind of flat sequentially as well, correct? On the residential side?

Sequentially, yes. Sequentially, they were flat.

Right, I'm correct. It's just that as I -- if I look at your business, your core volume on a 3-year stack basis where you just kind of add up the percentages, it was clearly a kick in the second quarter, up around 15% on that basis. But it just seems as though your 5% to 10% range, which I understand your conservatism but it's only kind of pointing to low single-digit growth on a 3-year basis, which isn't wild but it certainly makes your outlook quite conservative. So I appreciate that. I guess one issue on the greenfield. Do you feel that your branches or how many of your 190-plus branches are running near utilization rate that you feel or you are considering or looking at adding on branches because they're already at that $10 million or whatever sales per year? I mean, are you actually looking actively to go greenfield in some of your markets?

Yes. At this point, I would say that we still have at just about every facility ample capacity, which means -- obviously, as volume increases, the market increases. That helps our leverage against those fixed costs. We still though, for a variety of reasons, are looking at other greenfields. We just opened one up in Louisiana, then we did one in North Carolina and one in Virginia. And we're looking at other locations right now, either because they're further away from existing geographies. Again, I remember our strategy has been contiguous openings, where we do see the stack-up of volume in one branch and then have to move to help another branch. We still though have ample capacity at just about every branch in the system. In the past, we've quoted 20%. Now that changes branch to branch, but I still think that holds true for a majority or almost all of our branches. But that won't prevent us from maybe doing 2, 3, 4 or 5 branches up in the next 12 months as greenfields.

We'll go next to Sam Darkatsh with Raymond James.

Most of my questions have been asked and answered. Just a couple of clarification questions. The April up 15%, what is the May and June year-ago comparisons compared to April?

As far as sales volumes?

Yes, sir.

Yes. April is the smallest month of the quarter. So -- and again, it's a little more difficult to read into it. Last year, for us, June was by far the biggest quarter -- the biggest month in the quarter. But that because you started stacking up the storm business as we went forward.

Can you give us a sense of the year-ago growth rate in May and June versus April?

I don't have that in front of me.

Okay. And then my last question, Owens -- on the residential side, Owens is saying that they think that for the year, units will be down or volume will be down about 5% or so. Is that -- that holds with your line of thinking also for the year?

The problem is it goes market to market. They're much more national than we are and participate in the storms more than we perhaps did. I couldn't even comment. I don't think we're predicting that volumes will go down this year in our region, so I would say no.

We serviced storm demand last year, for instance, in Kansas City with 4 branches or 5 branches. They're shipping to 20, 30 outlets and so it could very well for them just based on the amount of volume they shipped last year and into markets that we don't even play in.

We'll go next to Robert Wetenhall with RBC Capital Markets.

This is Dudley [ph] filling in for Bob. So if you said that your selling price was up 7% to 8% and then gross margins increased by about 150 basis points, so that kind of works out to what suppliers are raising their prices 5% to 6%. Is that...

You can't do it that succinctly because the residential mix went up, which have higher gross margins overall. It would have points to us probably maybe a 50 to 100 basis points lower, if that.

We'll take our next question from Jim Barrett with CL King & Associates.

Paul, if you didn't mention it, I know it's a small base. Any evidence of demand picking up in any of your regions from new homebuilders?

Yes, there is. There's some on the East Coast. Carolinas, up in the Mid-Atlantic and then definitely some in Texas. Again, though, as we've said, it is off and you're saying off a very small base, compared to the rest of our business. So -- but any little bit of that volume helps. The prediction on starts on the grading groups that I've seen has it going up in the high 600s, even 700. So that will help if it does -- if that occurs. Whether it's up 10%, 15% this year, it will help us to a small degree.

And finally, is the lag generally 3 months? Or is it a little bit longer when we look at starts versus when the roof is actually put on?

It's -- could even be shorter just depends, but 60 to 90 days is reasonable.

We'll take our last question from Neil Frohnapple with Northcoast Research.

Given how low your net leverage is now, are the acquisitions you are targeting still in the $60 million to $100 million range? Or have you reconsidered the size that you'd be willing to do?

I think we've talked about the $60 million to $100 million as the average in the range, but that doesn't preclude us from doing something larger if it presented itself. So we really just look at the quality of the acquisition, whether it's the smaller one-offs we've done like the one in Halifax, that was one branch; or the Enercon's or the Fowler & Peth's that were much bigger. So no, I don't think it's -- we'll still go after that average range, but it won't prevent us from doing something smaller or potentially something bigger if it presented itself and it was a right company to acquire.

Okay. And then finally, CapEx expectations for the full year, $15 million to $20 million range. Are we going to see a ramp-up maybe as we move through the year with the increasing volumes? Or how should we think about that?

Yes. The CapEx of that $15 million to $20 million is still adequate for what we need to replace. If we see some storm damage or something else in an area that didn't have any last year, we may have to shift equipment around or we may have to purchase a little bit more. But it shouldn't be effectively higher than that.

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

All right, thank you. Let me go over a few highlights of today's call. Adjusted EPS for the quarter ended at $0.07 versus minus $0.13 in 2011. Overall gross margins were strong ending at 23.7% for the quarter, up 170 basis points versus last year. As we've discussed, price had a positive impact in the quarter of approximately 7% to 8%. We believe these price gains, the carryover from last year, will impact us at least the next quarter, although seasonal discounting could lower the impact a little as we said, that we should see the most recent price increases take effect in June and beyond. Residential and Commercial growth for the quarter was strong, coming in at 46% and 17%, respectively. Complementary Products also showed increase of 7%, which is encouraging, considering the discretionary nature of these products. Available cash remains very strong at $171 million although we'll use, as Dave said, $79 million to pay down debt in Q3. And our acquisition pipeline is very active, as we've said in previous quarters. And we're confident that we'll make additional investments this year. We're off to a good start in 2012, and we're working hard to continue this execution in Q3 and 4. As always, I'd like to thank the employees of Beacon and the support of our investor base. We're working very hard to execute our business plan. Thank you for your interest in our company. David and I are available as always for any other questions you might have. Thank you and this concludes the call.

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