Good morning, ladies and gentlemen, and welcome to the Beacon Roofing Supply's Fiscal Year 2012 Third Quarter Conference Call. My name is Chris, 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 referred to 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 like to now turn the call over to Mr. Paul Isabella, President and CEO. Please proceed, sir.

Thanks, Chris. Welcome, everyone, to our fiscal year 2012 third quarter earnings call. Beacon had another very strong record quarter, exceeding our internal expectations, once again, and we also exceeded the prior year in many key measurements. Almost all of our regions had exceptional results. Sales in total were up 3.7%, while existing market sales were down 1.5%. The existing market's slight decline was a result of the strong sales comparisons from Q3 of 2011. This was due to extensive storm damage repair that we serviced late in Q3 of last year. Markets in the Midwest, Texas and Carolinas were heavily impacted in that quarter and beyond. We believe we did an excellent job of replacing much of that storm volume this quarter -- this past quarter. Our team worked very hard to come very close to flat organic sales against extremely tough sales comparisons. We're very pleased. Compared to the prior year, our adjusted EPS results of $0.62 exceeded last year's $0.51, and existing market operating income came in at a very robust 9.6% versus 8% last year. These are excellent results that point to our ability to control cost and lever gross margins across our regions. We have a great management team, an overall team. Our acquired markets did very well in the quarter, with adjusted operating income coming in at 8% which is close to the company average for the quarter, adjusted for higher acquisition-related amortization and the Enercon earn-out. We recently executed several strategic acquisitions. Cassady Pierce of Pittsburgh, and Structural Materials of Los Angeles, joined the Beacon family. We also added Contractors Roofing & Supply of the St. Louis market last week, which combined with our new greenfield branch recently opened in St. Louis, gives us a solid presence in that large market. In just…

Thanks, Paul. Good morning. If you are using our slides to follow along, let's begin with Slide 1. Our fiscal 2012 third quarter organic sales, which reflect our existing markets by excluding sales at branches acquired since the beginning of last year's third quarter, decreased 1.5% to $525.2 million. Total sales for this quarter, which isn't shown in the slides, increased 3.7% to $560.5 million from $540.7 million in 2011. We had 64 selling days in both 2012 and 2011. In the product groups for our existing markets, Residential Roofing sales increased 1.7% while Non-residential Roofing decreased 4.9%, and Complementary products were down 3.0%. Although we saw a sequential strength in most markets and we benefited from the higher industry-wide selling prices, we could not overcome last year's strong existing market sales, which were boosted by re-roofing activity from the storms. Non-residential Roofing saw its first drop in year-over-year sales in 8 quarters. As volume was off about 15%, our prices were up 10%. Complementary Product sales fell off slightly after a rebound in the second quarter. The regions with the most storm damage in last year's third quarter suffered the largest sales decline in this year's third quarter, with Residential Roofing leading the losses in those markets. Two regions had total existing market sales growth for the quarter, the Mid-Atlantic and the Southwest. We estimated that the impact of inflation on our sales and gross profit by looking at changes in our average selling prices and gross margins. Selling prices were up overall 3% to 5%, with Non-residential Roofing products as strong as that 10% to 11%. Residential Roofing, up only about 1%, while Complementary Products were up 3% to 4%. Our gross margins were up during the quarter, so the average changes in our product costs were less…

[Operator Instructions] And we'll take our first question from Michael Rehaut of JPMorgan.

My first question is with regards to the fourth quarter guidance of $0.59. It would appear that embedded in that would be a gross margin, I believe, below 24% or even maybe approaching 23%. So I just wanted to know if that's -- if my math is correct on that, and also how to think about gross margins for 2013, given the fact that 2012 would still end up stronger than the last couple of years, and I know mix plays a big role in that. So that's my first question.

Sure. I'll take the first part of it and Paul can chime in on the 2013. I think you're off a little bit. I would expect the margins to be about 100 basis points higher than that calculation. Typically for Q4, compared to Q3 sequentially, we do see a drop and that mainly relates to a mix change because we do more Commercial business in the summertime, mainly with the municipal work with schools and colleges, and things like that, that comes along. So I think if you were, again, to be about 100 basis points higher, the math would come out a little bit better. Remember, we have some acquisitions in there now, too, in comparison, which have about the same gross margins we have, but the expenses are a little bit higher.

And the second part about 2013, I think as always is a case, and as we mentioned, it is a truly -- a lot of it is a function of the health of the market, the overall economy. I mean, there is no doubt re-roofing is going to continue as it does and that's been our thesis for a long time. It's hard to predict, I'd like to think, though, that our gross margins are going to continue to be strong. We have outstanding buying practices. We have a very organized group of individuals that are running our regions and branches, very disciplined. So given, I think, solid demand -- future solid demand and an improving overall market in the low single-digit growth, as it has in -- for the last 20 or 30 years, other in the last 3 or 4 years where we've got issues, and I'm optimistic that we're going to have some pretty solid gross margins as we move forward.

Okay. The second question around the acquisitions. You've done 3 now in the last 6 months or less. I was wondering if you can just review how your -- what that impact would be. I think in total, you're talking about $150 million, roughly of sales. What EPS impact that might have on 2013? And if you see this -- the pace that you've had in the last 4 or 5 months, if you see that pace continuing into the back half or into 2013, or if not accelerating.

I'll answer the question about the next year's powers, the EPS. When we bought these last 3 that we've happened to do this year, we estimated that each of them would be 1% to 2%, mainly F&P and Cassady, and now Structural. So I would think for next year, they will be in that $0.05 to $0.07 range, perhaps a little stronger. We've already done some things that are going to make some changes in those entities and take advantage of some of the synergies that we've had talked about as we made those acquisitions. I think you still have to remember that purchase accounting and amortization for those is still in the 2% range, where our normal amortization is averaging only less than a 0.5%, so they have a disadvantage there. But gross margins are good at those companies. We've made some changes. We've expensed all the purchase accounting stuff that we had to under the new rules, so next year looks like it will be brighter for those.

Yes, if you look, as I've mentioned, on the -- that focused on the adjustment operating income in the Q, you can see the acquired markets at about 2.7. As Dave said, there's a nice chunk of that besides the Enercon piece, which is fairly substantial. There is a big piece of amortization, and you add those 2 together and that's where you come up with the -- I came up with the 8.4% operating income. So we're pretty pleased with the improvement. And as Dave said, we think the -- there should be a good contribution in 2013. The second part of your question about the future, I mean, we're as active as we have been in the last 2 years. And we have a tremendous pipeline of folks we're talking to. So we're hopeful that we'll continue to do deals as we go through the future. No guarantee, and obviously I can't talk about -- we wouldn't talk about the specifics, but we're as active as we've ever been. And the climate seems -- given the 3 we've done plus Enercon last year, and Halifax, and then the CRS acquisition last week in St. Louis, there just seems to be an awful lot more activity.

And I would just point out, Mike, that we think we'll be in that 10% to 15% range that we've been talking about. We know we took a hiatus during the recession, but we're getting back into those levels, and the $260 million we did over the last 15 months is proof of that.

Yes, if you look at -- we're going to end the year, and I didn't mention it on my opening comments, but based on what we're projecting internally, we'll end the year over $2 billion in sales, closer to the $2.50 billion. And so you take that $260 million against that, and that fits in nicely with our acquisition strategy, as Dave mentioned, at 10% to 15%.

Just to make sure I heard that right. So $0.05 to $0.07, though, in the beginning of your comments, David. Do you expect these last 3 to be $0.05 to $0.07 accretive for next year?

Yes, at least that, Mike. Again, that's what we had talked about when they first purchased them for the first 12 months. So they'd probably be a few cents above that.

And we'll go next to Sam Darkatsh of Raymond James.

Two questions, if I could. First off, you've talked about the channel inventory last quarter being a big flush with the deep shingle buy. How would you categorize that now after the quarter specifically, as it relates to the industry inventory? And then secondly, can you remind us as to your Complementary segment, what that mix is as it relates to the builder of business? I would think that with the new home construction activity over the past, now, 6 to 9 months or so, we'd start to see that reflect itself into a little bit better results in that particular segment, if you could?

Yes, I'll start off with the inventory question and Paul can chime in again. It's hard to tell what the industry is doing because again, no one else is public but us. We would hope that the inventories have come down like ours always have. We would also hope that during the summer month that the industry -- and we plan on it, is going to shrink because we always shrink heading into the winter period. Last year, we went down by about $70 million from June to September. I would expect about that same decline. And I think what that provides for as the inventory turns is a possibility of those price increases coming forward. Owens Corning mentioned that once the inventory bleeds out of the industry, we'll get some help there.

Yes, and I don't have too much to add. I mean, we -- in the Q again, you could see we ended up at net 284 against 269 last year. So we're not that much over. And as Dave said, we did bleed down to about 200 at the end of the year. So we would expect the same thing to happen. I don't -- as I talked to my folks or make observations in the market, there is no doubt the industry bought a lot. It appears that it's bleeding anything most of us now are buying, which I don't think there's an awful lot of buying going on, is at the new pricing. So I think it's just -- without being able to predict exactly at some point, there'll be increased buying, especially if demand holds up, as I referenced, then that's when we should see prices take a better hold in the market.

And then your Complementary segment, if you could talk to that?

Yes, the Complementary Products, the largest piece of that business is vinyl siding, then perhaps wood sidings and windows and doors and those types of items. We don't sell a lot directly to the builders, but we have built the programs. I still think it's a very small piece of our business, it perhaps is under 10% to 15% of that business, if it's even that high. And again, we're selling to their subcontractors, so it's a little more difficult for us to track it, but it's still small. We've seen no great new housing boom. When it comes, like, we'll be happy, but right now it's a small increase that's helping, but it's just not significant yet.

Yes, that's why we continue to make comments about the more discretionary nature of this product because it's more remodeling-based for us. And we just haven't seen the pop yet. We do feel, I think, in the future, as whether it's home-building coming back or just the economy gets healthier, unemployment discretionary spending increases, that could be a very good growth area for us, maybe even above the other 2 categories, albeit it's much smaller.

And we'll go next to Kathryn Thompson, Thompson Research Group.

First on gross margins, how much did mix benefit gross margins in the quarter versus price, in other words, getting the benefit of some of the prebuy? And tagging on a little bit earlier to your commentary on gross margins, can you maybe clarify how sustainable are gross margins going forward, particularly as you ramp up acquisitions, your being in acquisition mode?

Well, the first question, the price increases that happened in the asphalt shingles, we've got about a 1% average selling price increase. So if you do the math, that means approximately 2/3 of that was from better buying of lower costs that we have with the increase of about 170 basis points and overall gross margins. So I'd say it's about 1/3 price and then 2/3 better buying. As far as the gross margins and stuff, I'll let Paul answer that for next year.

Yes, I mean, I mentioned earlier about the need, of course, to have a healthy economy and demand, et cetera. On the acquisition piece, if you look in the Q, I believe, but I don't have it in front of me, I believe it was 27%, yes, 27.7% for the acquired markets on that $35 million of sales. So that's a nice difference where we ended the existing markets, which were around 24.9% for the quarter. So in of late, our acquisitions have been flushed or had a much larger percentage of resi than commercial. So I think, actually, Kathryn, that's going to help us as move forward.

Okay, and quick, and 2 kind of housekeeping items from the quarter. Interest rate -- run rate on a quarterly basis going forward, and a little bit more clarity on the Enercon charge in the quarter?

Sure. The interest rate really hasn't changed because we still have the older swaps in place. So it's going to be around that 4% average on our outstanding debt. As far as the Enercon charges, we made an estimate last year when we purchased them as required under the new acquisition rules, and estimated that at that time to be almost the lower end of $4.9 million. During the year, they had a bit of a struggle and we're required each quarter to revisit that. At December, we thought they wouldn't make it, and the probability would be, it was that we would pay a lower amount. Well, they had a very good, strong spring season, and came back and made the lower end of the target. So we had to readjust that at that point in time by $1.2 million. Overall we were only off $250,000 from what we thought we would be at last year. Just one of the quirks of accounting is that you have to estimate that each quarter, and it's such a short timeframe that we had on that earn-out that it was difficult to predict where they would end up.

And we'll go next to Neil Frohnapple of Northcoast Research.

Can you comment on the quoted activity within the Commercial business? Has it slowed down recently with the drops we've seen in the Architectural Billings Index? And just any color on future outlook, that would be helpful.

Yes, we do track quoting activity. And it's been relatively strong, but it sure fluctuates and it doesn't -- necessarily for us, isn't a true indicator of volume. It's really a question of timing and when are those jobs going to be let because of the CapEx funds available, et cetera. I mean, there's no doubt, we have seen some -- if you look and recall from many of our filings, our Commercial growth over these last 8 quarters has been -- was very consistent double-digits, 11%, 12%, 14%, 14%, 15%, 11%, 15%, 16% last quarter, and then the minus 4.9, and so -- and I mentioned in my opening comments, last year, Dave and I commented, I think it was Q2, where we thought the back half of last year might be breakeven, as down single-digits commercially. So we were surprised as we plowed through and continued to see some very strong activity. So I mean, this -- we view this as a bit of a lull. And some of it also, I think is -- and we talked about it earlier in the year. Some of it was -- especially up in the Northeast and the Upper Midwest, where we have big commercial entities, was this mild winter, where there was probably a little bit of pull-forward and there wasn't a lot of damage caused, very hard as we mentioned before to measure. There just wasn't lot of damage. But we're still very optimistic. We have some great commercial regions that really do quite well, and we have great manufacture partners. So we're not concerned, although we continue to watch as many indicators as we can, going forward.

Okay. And then, Owens Corning noted that it had seen a slowing of volumes over the last 6 to 8 weeks. Have you seen this in any of your regions? And is the hot weather, lack of rain, causing this weakness? Or any other color, that would be helpful.

Yes, I think, depending on the region, we see some slowdown. Canada has had -- maybe they're seeing some of the things we saw in the last few years. There has been a little slowing there, but nothing huge. I think the biggest difference is probably the fact that manufacturers are shipping into distribution, and they shipped a tremendous amount of inventory -- price-protected inventory earlier in the year. And now, they're seeing distribution burn off that volume. There have been some storms. There was some carryover storm volume from last year and then spring hailstorms this year, but not to the degree there was last year. So I think that's probably some of the softness they're seeing. We've seen that, overall, continued to see a decent -- although it's very competitive, a decent re-roof market in most of our regions on the shingles side.

And we'll go next to Ken Zener of KeyBanc.

The -- I appreciate your monthly data that you gave us. Often more data just causes confusion, but this quarter, I think it's very relevant. I think you said April was up 15 year-over-year, and May was up 4, and then June was down 16, I believe, then you said July was down, too, is that correct?

Yes.

Now and then you had said down 6 on same-sales days, is that correct?

Yes, there's 1 less day -- 1 more day this year compared to last year.

Correct. Now could you just, for reference I guess, give us a sense of how much June '10, the comp was up, given that, that was apparently the most difficult month there? A, and then B, one of the building product companies that I had spoken with, and I'm surprised others haven't talked about it, well, we knew the weather was mild, the winter, but can you talk about how you think the excess heat might have impacted activity, given that we were nationally in a rather hot time. How that might have suppressed demand?

Okay, last year, residential was up about 15% in the third quarter. So it would be equal with 2010's level, if that's really what you were looking for. I think that you would also say that last year, a bunch of that business was shipped into the storm markets, and wasn't really reflective of what was happening in the markets outside of the storms.

Yes, we had quite a pop in the Central Midwest, right at the end of May last year. And it really burst through June and propped up -- increased June sales. And we had very similar activity in the Carolinas that really pushed June up, and then very little activity related to storm.

Okay, and then I guess, how would you think about the hot weather that we've been going through impacting as well? Because I realize it was a tough comp, but do you think that impacted demand at all?

Well, as I talked to my guys around the circuit during the quarter, any given quarter, but specifically this one, there's no doubt in the Midwest especially, and in most locations, the heat has forced contractors to try to get on the roof earlier and leave earlier during the day, and that has hurt some business. How much? Very hard for us to say. I mean, as part of the overall cycle I think we see, with whether it's a tough winter, mild winter, a tougher Q2, all those comps. And that's why we like to look at -- I like to look and remind myself of the 20-, 30-year view of this industry, and how it grows at these fairly consistent single-digits. And once we get some of the new housing back to normal levels, even though it's a small percentage of us and then the re-roofing demand continues, it's going to bode well for us going forward. It's very hard to predict though, Ken.

It is, yes. I guess, and then the gross margin -- in the past you've talked about the spread between res and commercial. If you wouldn't mind kind of updating us there because it seems like the res, even though pricing was up only 1% year-over-year on the residential, it seemed like it was an incredibly strong quarter. A, and then B, how does that relate to -- I know you gave the gross margin guidance and I appreciate that, David, for the fourth quarter. But how -- given my view that the residential was quite high this quarter, what causes the deceleration? Is that your kind of flushing out the lower-cost inventory?

Yes. It's the turn of the inventory. The industry will have to buy new inventory at the higher prices, as Paul just mentioned. It's also the fact that we need to push for the price increases once that inventory turns. So we may be able to make up for the differential, but there's no question, as you mentioned, the difference between Commercial and Residential shingles is larger than it used to be. We used to say, when I first started, that it was 8 to 1000 basis points. Then we went to 1000 to 1200. It's probably at least another 100 or 200 above that now, the differential.

Right, because, I mean, it gets to 25, it would have to spike sequentially?

Correct.

And we have time for one more question, and we go to Keith Hughes with SunTrust.

You've done several transactions here over the last couple of months, what is the competitive landscape for acquisitions look like? Has there been any change, particularly with the private equity activity in your industry?

Well, I mean, every acquisition we make, there's negotiations and discussions. So -- I mean, we don't necessarily know all the elements that we're competing against. But there's no doubt, it's -- we've focused a lot of energy on establishing relationships over a long period of time. So we don't think there's -- the last couple there have been that much in the way of competition. But we're prepared to do whatever we need to buy quality companies within the realm of what we've been paying in the past, based on the strategic fit and value of that company.

David, the last couple of deals, can you give us sort of a range of what you paid in terms of valuation?

It's probably 100 to 200 basis points higher than the 6x to 8x we've been saying, but I would qualify that because these last few acquisitions have been, what -- I won't call them fold-in acquisitions, but they're becoming part of another region. So when we purchased these companies, we know we have some synergies. Now, I'm not using those synergized amounts in the multiple because that's just not how we've ever talked about the businesses, but you can be assured with F&P and with Cassady Pierce that there are some synergies there that, because we're putting them in existing regions, we're going to benefit from. So the ultimate purchase price, I think will be perhaps below that 6x to 8x range, that multiple that we've been talking about.

Yes, Keith, and the same applies Structural out in LA that we just purchased July 1. I mean, we have 4 existing branches out there that met up with our 6. So now we have a very strong footprint. There was very little overlap -- have a very strong footprint on the sales side and operating side to get some leverage, and as Dave said, as we move forward, which ultimately, on a forward basis, will reduce that multiple.

And this concludes the question-and-answer portion. I would like to now turn the call back over to Mr. Isabella for his closing comments.

Yes, just couple of comments and they're repeats, but they're worth repeating. Adjusted EPS for the quarter came in at $0.62 versus $0.51 last year. We're very pleased with that. We talked about the gross margins ending up in total at 25.1%, 140 basis points above last year. As I mentioned earlier, sales should end over the $2 billion mark, close to $2.50 billion, and we're very proud that we've been able to now break and hopefully be able to break that as we close out this year, the $2 billion sales level. That's obviously with the acquisitions. Price was up slightly for steep slope roofing in the quarter. The Commercial Roofing continued to have strong pricing, as we said, increased by 10%. And we believe shingle pricing could rise additionally as inventory purchased in the early spring should bleed out of the channel, and we're very focused on that. We continue to execute on the acquisition portion. I know a lot of questions were -- are geared towards that, on a growth strategy, as we welcome Cassady Pierce, Structural Materials and Contractors Roofing & Supply to the Beacon family. And as I said, our acquisition pipeline is very active and we're confident we're going to make additional investments in the near future. And lastly, we're comfortable with the analyst estimates for the fourth quarter at $0.59, which puts us at approximately $1.66 for the full year. We believe we've done a very, very good job this year, very strong second -- first half as we thought, and a very good job in the second half bumping up against some very, very large storm-generated sales last year. As always, I'd like to once again thank the employees of Beacon and the support of our customer and investor base. We're working very hard to execute our business plan and to drive continuous improvement. Thanks for your interest in our company, and David and I are available in the Peabody office for any questions you might have. Thank you, and this concludes the call.

This concludes today's presentation. Thank you for your participation.