QXO, Inc. (QXO) Q2 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Beacon Roofing Supply's Fiscal Year 2015 Second Quarter Conference Call. My name is Audrey and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session toward the end of this conference. At that time, I will give you instructions on how to ask a question. 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, May 8, 2015, and except as required by the 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. Paul M. Isabella - President, Chief Executive Officer & Director: Thank you. And good morning and welcome to our 2015 second quarter earnings call. As mentioned in our press release this morning, I'm very pleased to report that with 7.4% growth in the quarter, and 7.7% growth year-to-date, Beacon was able to surpass $1 billion of sales in the first half of the year for the first time in company history. This demonstrates the execution of our growth strategy through existing stores, new branch openings, and acquisitions. We're very proud of this achievement, and of course, we will continue executing on our strategic plan. During the second quarter, we did see harsh weather across many of our regions. In many of our markets, this weather dampened our ability to grow revenue even higher in the quarter. We did, however, deliver solid sales growth, increase gross margins, and lower operating expenses as a percent of sales over the prior year. We're very pleased with the results both in sales and margin considering the challenging market conditions. Our team did a very good job during the quarter. EPS came in at minus $0.20 which was ahead of last year by $0.05. We believe we are well-positioned for the balance of the year, as volume increases. We also maintained our strong balance sheet by achieving improvements in accounts receivable, reducing inventory per branch by over 20% and lowering our debt balances even while completing two acquisitions since year-end. And now a little more on revenue. As I mentioned, our sales grew 7.4% over the same quarter last year. Acquisitions and new branches made up most of that gain with same branch sales adding just under 1%. In addition, I'm pleased to report that overall, all three of our product lines grew over the prior year with residential up nearly 10% and complementary up nearly 14%. Commercial was up slightly at 1.2%. Not counting acquisitions, all three product lines did have growth. The residential increase was partially due to our greenfield strategy which traditionally begins with a higher percentage of residential sales. We will continue to see increased sales from these new branches as the selling season gets into full swing. Our complementary sales growth in the quarter was driven in large part by our Applicators acquisition in Maine, but we also saw growth within our existing business as well. Looking across the geographical footprint, we saw good complementary growth in our West and Midwest regions. From a trending perspective, this product line has seen consistently positive existing sales growth in seven of the last eight quarters, which is very encouraging. The smaller commercial growth in the quarter was from the very difficult weather conditions we saw and the heavy concentration of commercial work that is in our Northern climates. This is not concerning at all for us. It's worth noting that commercial sales have grown in six of the prior – eight prior quarters in existing business. Our expectation is that this product line will see mid single-digit growth for the balance of the year. We have a strong commercial business across the country, supported by many of our branches and branch teams. Looking at our reported regions for Q2, we saw existing sales growth in four of our seven regions. The West and Midwest led the way with double-digit gains. This was fueled by storm damage repair, new branch openings and same branch sales increases. We also saw solid growth in Canada and the Mid-Atlantic region. These gains were fueled by same-branch sales increases across all product lines. The Southwest, Southeast and Northeast were down in the quarter, which was not a surprise. As mentioned on our last earnings call, the Southeast and Southwest continue to deal with post-storm demand issues and intensified pricing pressure. And as already mentioned, the Northeast saw many projects delayed as a result of the weather. As we have mentioned in the past though, we believe these markets will correct as normal patterns of reroof, new construction, and weather damage occur. Joe's going to talk in more detail about gross margin and operating expenses during his portion of the call. I will repeat though what I said earlier, we've made great progress on both during the quarter. Our team did a good job of growing gross margins during a very bad weather quarter and also showed leadership with controlling and improving our cost position. This should help us as we move through the balance of the year and see more volume. As always, we continue to look for ways to eliminate non-essential costs from the business. This continuous improvement mentality is a part of our company culture and has been for a long time. And now, a little on the outlook. The month of April started off slow due to wet weather but finished up stronger, ending with total growth of approximately 8% and organic growth of approximately 5% over the prior year, a good start considering the weather. With our combination of acquisitions, new branches, and existing branch growth, we believe we can grow sales in the 6% to 8% range for 2015. And in terms of gross margin, we'll continue to work to combat pricing pressures as we've done in the first half by improving system pricing and reducing our product costs as necessary. As a result, we believe our gross margins will continue to be in our stated range of 22.5% to 24%. Earlier in Q2, we announced price increases on most product lines that follow the manufacturers' announced increases. Our increases are being put into effect this month and our estimate is that, it'll take 30 to 60 days to see if these will hold in the end market. Of course, I'll have more information on the next earnings call regarding this. In regards to new branch openings for 2015, we're still planning to open approximately 10 for the year. We have announced five year-to-date, and as we execute the estimated 10 new branches for 2015, that'll give us 50 new locations in the last four years without taking into account acquisitions. Acquisition activity over that timeframe has added 47 locations. We are proud of the nearly 100 branches we will have added and know that they'll continue to grow both in sales and profit over time. And from an acquisition perspective, we continue to talk to numerous companies. As we've said before, it's difficult to predict when sellers will sell, but we know we have the capital structure and operating strength to do multiple deals and we'll continue to work on executing these as we have in the past. Our pipeline continues to be full and we're optimistic on future deals. As I said, our balance sheet is in great shape and we're poised to continue our growth. Regarding our SG&A cost, as we said on the last call, we believe the full year will be in the 18% to 18.5% range. Related to EPS, the current analyst consensus is $1.34 with a high of $1.41 and a low of $1.29. And as we've said in the past, with all the variables we face such as pricing, demand and weather, it is difficult to pinpoint a full-year estimate. As it stands now though, our view is towards the midpoint of the range. And of course, I'll have a better update on our next call based on how spring and summer volume and pricing develop. As always, we're working hard to maximize earnings for the year by executing the fundamentals of our business plan, focusing on excellent customer service, sales growth and cost control. And now, I'm going to turn the call over to Joe, where he'll give a little more detail on the financials for the quarter. Joe?

Thanks, Paul, and good morning, everyone. Now I'll highlight a little more detail of the few key financial results and metrics that are contained in our earnings press release and the second quarter slides that were posted to our website this morning. As Paul mentioned, we had solid top-line growth of 7.4% for second quarter sales of $413.2 million. Gross margin increased over the prior year by 80 basis points. Our operating expenses were down as a percentage of sales as we were able to cut costs even with the backdrop of our investments in greenfields and acquisitions from the prior quarter. Operating expenses did increase in dollars due to our acquisitions and greenfield costs as we continued the investments in growth. But, in fact, if you factor out both of those investments, our dollars of expenses are actually down year-over-year. The teams did an excellent job of lowering operating expenses during the winter season. In the quarter, we lost $0.20 in EPS, an improvement over the prior year by $0.05. For comparison purposes, there were the same number of days in Q2 of fiscal 2014 as in Q2 of fiscal 2015, 63 days. Paul already went through our Q2 sales results in detail, so I'll not repeat any of that information here. But I will go through our monthly sales trending. As compared to the prior year, our average sales per day at an existing branch basis were higher in two of the three months of the quarter. January started good with sales up 13.6%, followed by a softer February due to winter weather, with sales down 2.3%, but finished the quarter in March with continued harsh weather, but sales still up slightly over the prior year by 1.2%. On another positive note, the gross margin rate was 23.4%, up 80 basis points from a year ago. In summary, pricing remained relatively flat and declined by less than a point in the quarter from the prior year, but was offset by a product cost decline of approximately the same amount. The remaining 70-basis-point increase to gross margin can be attributed to a shift in mix to more residential and complementary sales. While commercial prices remained flat compared to the prior year, residential prices declined 2% to 3% from the prior year and drove the majority of the pricing decline, while complementary prices went the other way and actually increased 2% to 3%. Our supply chain did a great job in offsetting the majority of the price declines, with total product cost declines. As just mentioned, our product mix had an impact on our gross margin as volume shifted from commercial roofing to residential and complementary products. Residential roofing increased to 49.5% of our sales versus 48.5% in the prior year. Commercial declined to 33.4% from 35.4% in the prior year. And complementary increased to 17.1% from 16.1% in the prior year. The diversification of our product line is something we focused on across our existing branches, and also through our acquisitions. Now on to operating expenses. Total operating expenses were $111 million, 26.9% of sales. The year-over-year increase of $7 million, but it's down as a percentage of sales. This amount includes operating expenses from acquisitions, which amounted to $5.4 million. Excluding the acquisitions, our existing market operating expenses were up $1.5 million over the prior year, but down 70 basis points to 26.3% of sales. And of that amount, $4.7 million can be attributed to the 26 greenfields opened up in the last 12 months. As we have mentioned, a greenfield has a higher operating cost as a percentage of sales until the branch is up and running at our average branch volumes. When you look year-over-year at the remaining costs, they're actually down $3.2 million. This can be attributed to lower selling, G&A, warehouse expense, as well as lower stock comp expense, bad debt expense and lower amortization as well, too. All of these demonstrate that our efforts to drive costs out of the business are continuing. As always, we look for ways to leverage our cost structure. Interest expense and other financing costs were flat year-over-year. Our net loss was $9.8 million for the quarter compared to $12.1 million last year. Diluted net loss per share was $0.20 compared to $0.25 for the same period last year. Our income tax benefit reflected an effective tax rate of 41.5% compared to 38.6% last year with the difference primarily due to a smaller loss this year combined with favorable one-time items from amended federal and state income tax returns filed in the second quarter. Regarding the status of our balance sheet, as slide 5 shows, cash flow from operations for 2015 was $62.5 million compared to $36.1 million last year. Year-over-year increase is from a slightly higher net income combined with significant improvements in working capital requirements. Inventory was down $60 million from Q2 of last year. This demonstrates the lower winter buying activity that Paul mentioned. Inventory balance is even lower when you consider the 26 greenfields we opened over the last 12 months and the three acquisitions from Q1 and at the end of Q4. If you look on a per-branch basis, inventory was down almost 22% from the prior-year last quarter. Capital expenditures excluding acquisitions were $5.4 million compared to $11.8 million in Q2 of 2014. As you recall, last year, we made significant investments in our fleet with the addition of our greenfields and also replacing existing equipment. For the year, we expect capital expenditures to be much lower at less than 1% of sales. Net cash used for acquisitions was $69.7 million. Our current ratio was a strong 2.37:1 versus 2.03:1 at the end of last year. The results of our two-bank financial covenants at the end of this quarter were also strong. Our leverage ratio increased to 1.68:1 compared to 1.59 last year. And our interest coverage ratio decreased to 12.68:1 versus 16.2:1 last year. Our additional investments in acquisitions, greenfields, fleet equipment and inventory drove the majority of the change in these ratios. But even at the current level, it still (17:10) demonstrate the flexibility and capability to execute on our growth strategy as Paul described. Now, a quick moment to discuss and summarize the first half-year results. Sales for the first half of the year were up 7.7% over the prior year, and as Paul mentioned, a record as we passed the $1 billion mark for the first time in company history. Of the increase, greenfields contributed 4.2% and acquired business 3.3%. Same-stores are also up slightly year-over-year. Turning to slide 3 of the earnings slides, I'll highlight how we did across the regions. Five of our seven regions grew in the first half, with the Midwest and West with double-digit gains, fueled by strong volume, new branch openings and same-branch sales increases. Southwest and Southeast were down as these regions continue to deal with post-storm demand issues and intensified pricing. Gross margin rate was 23.2%, up 40 basis points from a year ago. In summary, pricing declined by approximately 1% in the first half from the prior year, but was offset by a product cost decline of approximately the same amount. The remaining increase to gross margin can be attributed to the shift in mix to more residential and complementary sales. As just mentioned, our product mix had an impact on gross margin as volume shifted. Residential roofing increased to 48% of our sales versus 47% in the prior year. Commercial declined to 35.4% from 37.9% in the prior year. And complementary increased to 16.6% from 15.4% in the prior year. Again, as I mentioned, this diversification of our product line is something we have focused on across our branches and through our acquisitions. Now on to operating expenses. For a year-to-date basis, they were $224.7 million or 22.3% of sales, which is a year-over-year increase of $20.9 million. All this amount includes operating expenses from acquisitions, which amounted to $10.7 million. Excluding the acquisitions, our existing market operating expenses were up $10.2 million over the prior year and up 10 basis points. But of this amount, $10.9 million, almost all of it, can be attributed to the 30 greenfields opened up over the last 18 months. Greenfields, as you know, have a higher operating cost as a percentage of sales. So the branches are running at our average volumes. When you look at year-over-year, the remaining costs are down $700,000. This is attributed to lower stock comp, bad debt expense, amortization, offset by some slightly higher selling and G&A expenses. We continue to see operating leverage in the business and expect that to continue in the second half of the year. Interest expense and other financing costs were flat year-over-year. Our net earnings for the first half of the year were $3.1 million compared to $2.8 million last year. And diluted net income per share was $0.06 compared to the same $0.06 in the same period last year. Our income tax expenses reflected an effective tax rate of 29.7% for the year, compared to 39% last year with the difference primarily to the favorable one-time items for amended federal state and income tax returns filed in the second quarter. With that summary, we'll now respond to and take any questions you may have.

Thank you. We'll go first to Luke Junk at Robert W. Baird. Luke L. Junk - Robert W. Baird & Co., Inc. (Broker): Good morning, guys. Paul M. Isabella - President, Chief Executive Officer & Director: Good morning. Luke L. Junk - Robert W. Baird & Co., Inc. (Broker): So, the first question, Paul would just be, curious to get your perspective on the underlying shingle market here. Obviously, you've had some weather-related ups and downs to start the year, but the April number obviously stabilizing and seeing some good growth through the end of the month. Relative to kind of the full-year outlook for shingle volumes one of your public suppliers is kind of leaving (21:22) expectation out there that the market would be kind of flat in calendar 2015 here. Just curious to see where your view might differ from that positive or negative for the full year outlook. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. It's a good question and very pertinent. As we or as I make the rounds and have conversations with different entities, there is a view with some that the shingle market will grow slightly above the $107, whether it's $110, $111 in that range. And I realize the commentary on the flat market. That being said, it's difficult, Luke to predict what the market is going to do. That's why we have to stay focused on our plan, right, to grow the greenfields, really take share, continue to work on the acquisition piece, because we can't rely on the fact that the market will grow to $115, $118 or even $112. There is a lot of optimism, though. Store volume is, let's say, slightly down from last year, but there's still an awful lot of time left in terms of the spring season, let alone the tropical season, right? And there's a lot of strong indicators out there, at least on existing home sales, and I know there's different views on new construction. But still there's a lot of optimism on it for the year. Luke L. Junk - Robert W. Baird & Co., Inc. (Broker): And then, I guess based on that and what we've seen in the first quarter in terms of the EPS guidance at the midpoint of the range, you said in your prepared remarks, it would look that we need something on the order of 25% or so growth in the second half of the year to get to the midpoint of the range. Could you just discuss how comfortable you are with that range of growth in the back half? Paul M. Isabella - President, Chief Executive Officer & Director: Well, I mean, it puts it in a traditional, kind of traditional range for us in Q3, Q4 and that you want to range it 6% to 9% year-over-year for each of the quarters, right? So, it's not that unusual. We know Q2 was tamped down because of weather. We thought not to get micro on Q2 related to your question, but we thought March was going to kind of blow out much stronger towards the end of the month, but there's just no way it could, given the weather. That probably took away 2 points to 3 points of existing growth just there. But there's a lot of confidence now. Our shipping rates through the end of April, especially – as I said, the beginning of the month was wet. Our shipping rates are much stronger now in May. They're very strong as we've got actually normal weather. So I don't think it's – we feel fairly comfortable with the 6% to 9%, but there is variables, right? If store volume stops completely, if the economy hiccups and we don't see existing home sales or a new construction growth as they think, those are all factors, and/or if pricing goes the other way, I'm somewhat optimistic that pricing has stabilized. We've seen that. It will be – it's yet to be seen next 30 days to 60 days, as I said, about increases but there's been no doubt less buying this winter from – it seems like everyone. I'm sure you're aware of the industry output numbers into distribution. So we feel very good with the 6% to 9% for the back half.

The other piece that I would just add on to that as well too, because your question is a lot around the EPS guidance and range as Paul described in this call as some of the things that drive towards the second half of the year improvement is – we've talked about – and Paul mentioned the gross margin numbers, right? We've seen some good solid improvement in our gross margin in the first half of the year. And as Paul said, we expect that to continue into the second half of this year, too, so good margin improvement. Plus on the cost side, we've talked about this quarter some of the benefits we've seen on the cost from how – again, part of our continued strength is managing our cost structure and you saw that come through again this quarter. So that's another variable which plus the 6% to 9% growth that Paul talked about, gross margin, operating expenses, all those pieces are what – are the variables that make up our thoughts on the second half of the year forecast. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. And we did not put any – really any price in the back half. We assume flat year-over-year, and I think you folks know where we ended the last two quarters last year. Luke L. Junk - Robert W. Baird & Co., Inc. (Broker): Okay. That is very helpful. Thank you, guys. Paul M. Isabella - President, Chief Executive Officer & Director: Okay. Thanks, Luke.

We'll move next to Trey Grooms of Stephens.

Yeah. Good morning. This is Drew Lipke on for Trey. Paul M. Isabella - President, Chief Executive Officer & Director: Good morning.

Hey, Drew. How are you doing?

I'm pretty good. First question was just you've done a good job in terms of rightsizing your inventory on a per-branch basis. You talked about that being down over 20% year-over-year after being down 9% last quarter. We're going into the busier selling season here. Do you expect to see a sequential increase in your inventory as we move into the third and the fourth quarter of your year?

Yeah. I mean, for third quarter, without getting into exact numbers, we will see an increase in the per-branch inventory. And I think that's a natural build. It happens most second to third quarters most, I say. Obviously, last year it went down because we were so high in Q2. So, we did a good job of reducing inventory and ended on a net of $361 million, but in that is about $40 million of acquisition and greenfield inventory that as of right now aren't generating anything in the way of EPS. So if you take those out, the numbers from a net basis is good. Q4 typically we drop inventory. We have – we're very consistent. We get closer to the $1 million per branch at the end of September. So we feel very good about the way we're controlling inventory right now. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. This quarter's inventory per branch, we talked about – we got more in line with where it has traditionally been, if you look back two years and three years ago. And I think you'll see that same kind of strategy unfold for us when you look at third and fourth quarter, too. So the inventories that we've traditionally had and inventory per branch in third and fourth quarter, those are probably more of the levels where this year we'll head towards as well.

Okay. And then, the decision to have no pricing in your back half of the year guidance, and then we know the manufacturers have the price increases out in the market, what – just kind of what's the rationale for not including any additional pricing? And what level of price increases have you guys put out there and what do you feel you might be able to realize?

Yeah. We put out, in general, 3% to 5% kind of to follow and mimic manufacturers. We just – I won't say we're conservative, but just given the – even though we've done better, right? Q1 we lost in total, we went down 2%, 2.8% in Q2 of last year. We do realize we have – we were down 2.6% in Q3 and 2.3% in Q4. So there is some optimism that even in the absence of gaining price that some of the actions we've taken we could some something positive, I guess, we just didn't feel positive enough to bake it into the forecast. So, we're working very hard to push the increases through. But, it's yet to be seen. It's gated by how competition acts, how demand is for the next couple of months. I mean, we know have some hyper regions, the Northeast. It's coming off of a very difficult winter. So, they have a lot of volume right now. Maybe it'll be easier for them to get some price. We'll just have to see. And, of course, there's been a lot of storms out in the mountain area in Colorado and maybe there's an opportunity there. But in general, we just didn't think it was prudent to bake it into any forecast that we would talk to the Street about.

All right. I appreciate it, guys. Good luck. Paul M. Isabella - President, Chief Executive Officer & Director: Thanks.

Thanks, Drew.

We'll take our next question from Ken Zener at KeyBanc.

Good morning. Paul M. Isabella - President, Chief Executive Officer & Director: Hey, Ken.

Good morning, Ken.

Appreciate your commentary, as always, guys. In terms of what you're seeing out there, could you tie off your – the notion of you being one of the larger distributors, largest public distributor, with your same-store branch being down 20% year-over-year in this last quarter versus ARMA shipments were down 35%? Could you kind of – I mean, realizing (30:44) you are not the industry, but there's a difference there between what you destocked and what ARMA indicates for shipment. Could you kind of highlight what that might mean to you broadly about inventory levels? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. I think, one, it's – first, I'll say we are not concerned at all by any delta between that and our shipments. I think there's no doubt as we did not see the sales that we saw in the back half of March that had an impact. And then there was some other actions that we took related to different pieces and channels of our business where we did have to add some inventory. So, we're not – we knew what we were doing. We knew the control points. We're not concerned at all about any delta. You'd have to get in and pluck out the Vs (31:32) on every manufacturer on what they shipped and why they shipped it. And I think there's very little correlation other than directionally, we're aligned very well with the reduction. And based on business need, we think that the 20-plus percent is a good number for us.

Okay. The other elements which I find interesting is your gross margin. It's 23%-and-change. You're looking for that same level in the back half? If I could just – have you – if I missed it in the commentary, be explicit around that. It seems like you said you're going to be going up in the back half. Is that correct? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. No, no...

(32:14)? Paul M. Isabella - President, Chief Executive Officer & Director: ...I mean, in my – yeah. In my comments I gave the ranging we always give.

Right. The 22.5% to 24%. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. Always, right, because there's a lot of unknowns and I won't give you any details by quarter because we typically – well, we wouldn't give guidance by quarter.

Sure. Let me... Paul M. Isabella - President, Chief Executive Officer & Director: But there's a view that we would be above 23% in the back half with gross margin. I don't think it would get as high as 23.5% but we feel fairly comfortable, even in the absence of no price that we could be above 23% in the back half and that's what we're working towards. Obviously, we're working towards more, of course.

Right. And I ask you that – go ahead, Joe.

I was going to say we made great progress in the first half of the year, as you saw. Mix helped us kind of tremendously through that. So that's the piece we'll watch as we go through the second half of the year when we may see a little bit more commercial kind of pickup in the second half of the year which will have an impact on that mix number to us.

Good. Thanks for (33:20). I mean, if commercial comes back, is that kind of a difference between you being above 23% and being perhaps below because res is obviously at its higher margin, or is it you're expecting your res gross margin, whatever it is, to actually go up?

No. I don't think – one, I don't believe the commercial increase, which we do expect, right? I mean, there's no doubt we have a lot of branches in the North. They were impacted. As I said in my prepared remarks, I'm not concerned at all about commercial growth. We're seeing a lot of strong growth right now in those regions commercially just because of the pent-up. So, as you look at our mix from first half to second half or second quarter, let's say, they are probably – there could be a shift back to more normalized, a little higher commercial, a little lower on complementary and resi. But I still think we could have strong complementary mix given Applicators and some of the other initiatives we have to grow those complementary lines. And, of course, we're bullish on the fact that we're going to be able to continue to shift residential products. So, no, I don't think if commercial – to get to your question, if commercial increases that guarantees that margins are going to be below 23% at all.

Thank you, guys. Paul M. Isabella - President, Chief Executive Officer & Director: Thanks.

We'll go next to Bob Wetenhall at RBC Capital Markets.

Hey. Thanks for all the color. I wanted to understand your comments on commercial, which it would seem to come in kind of more sluggish, and you guys highlighted weather. Is this a situation where it's not demand destruction and you're going to see the volume recover in the next quarter, or how should we think about commercial volumes? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. I mean, in my prepared remarks, 5%, 6% growth in Q – in the back half, we'll call it, could be more. It's very difficult to predict how much is going to come up. No doubt there is a lot of compression during – well just stick to Q2 – during the January to March timeframe. We thought we'd see more come out at the end of March. It didn't. A lot of delays, as you – I think everybody knows what happened up in Boston and points kind of South, a little bit West, even North of there and that's where we have a big commercial business as well as the upper Midwest, right? And I think that just got delayed, push down those projects, and they're going to come back out. So maybe the 5% is conservative. I know Carlisle talked about bigger numbers, but we're also in different geographies than Carlisle. So that's kind of the lay of the land for the second half.

Got it. And help me think through. We're obviously in a deflationary asphalt environment and I looked at your pricing on the resi side and I'm thinking what's it going to take either from a demand standpoint or from an OEM to distributors standpoint to reverse negative pricing trends? And historically, what's going on with pricing when you do have these lower asphalt costs and how do you manage with that? Thanks very much and good luck. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. Thank you. There's been a lot of fluctuation, just in the last six years on asphalt, right, going from $400 to $800 back down to $600, now earlier, at least from the August-September timeframe, it's gone down to maybe $400 a ton. The last seven weeks, eight weeks, I think it's been – in general, if you look at the total contribution. It's been relatively flat. So that's good news. Of course, a good percentage of asphalt gets pulled and you'd be using paving. We'll just have to see what – how much paving does pop and then what that means for pricing. There's a view that if it is a strong paving season, that will help stabilize and bring it up. I mean, to date, we have not seen any deflation as a result of asphalt. If we were to, we would deal with it. We would deal with our manufacturer partner and figure out how to reduce our input costs, but do some offsets. But it's not right now is worrisome, especially in light of the comments that the manufacturers have made about intending to keep any deflation they see as profit given the difficult year they had last year, which is really just fine with us.

Terrific. Thanks very much. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. Thank you.

And we'll go next to Keith Hughes of SunTrust.

Yeah. I had a question on acquisitions. You spoke a little bit in the prepared text and in the release. But, I guess, looking more specifically, the last couple of years, given the tough industry conditions, is that starting to push more particularly smaller owners to the table? Are they more willing to sell, given what's happened to the industry of late? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. It would be difficult for me to generalize because we see selling in both periods, strong demands, strong results, and down markets maybe weaker results. So, I think, Keith, there's no set rule. Our pipeline is very, very large. We continue to talk to owners but it's always paced on it, and that's not an answer intended to baffle you. It's really what we see. It goes both ways. It really does.

Okay. Second question, on the price increase. There was a delay by one of the manufacturers around what's been discussed (39:24) to be a systems issue. Have you seen any changes of behavior of late of any of the manufacturers around their announced the increase? Paul M. Isabella - President, Chief Executive Officer & Director: No, none. None at all. I mean, they're all been firm about price going up and we're going to follow that and hopefully, the industry does because the bottom line is regardless of how we look at, where we're at, demand points, squares of shingles, all you got to do is look at our pricing for the last six quarters and it's not been positive, hasn't been grossly negative, but it's been negative. And on, the residential side, of course as you know, it's been more. And I think what I've heard from the manufacturers that they also heard, as I said earlier, last year, maybe even the year before. So I think the industries do to increase prices and get the increases. And then I think just that means we – all I can do is control Beacon, of course. We have to be firm with the fact that especially to our great customer base that it's time to raise prices and we need to do that.

Okay. Thank you. Paul M. Isabella - President, Chief Executive Officer & Director: Thank you.

And we'll move next to Kevin Hocevar at Northcoast Research.

Hey. Good morning, everybody. Paul M. Isabella - President, Chief Executive Officer & Director: Hey, Kevin.

Hello, Kevin.

Looking just specifically at the commercial side of the business, pricing seemed to hold up. It was pretty flat. It looked like both from your procurement standpoint and to your customers. And I know that industry is similarly seeing lower raw materials from the lower oil prices. So, I'm just wondering, what – do you expect that to continue to be relatively flat going forward or do you expect that to change at all? Paul M. Isabella - President, Chief Executive Officer & Director: No, I don't – I mean, we don't have one concern about it going down. I mean, think about the quarter we just came out of. Some of our biggest commercial work comes from the northern climates, as I said earlier, and we did fairly well on pricing. I also think we have, relatively speaking, manufacturers that are very disciplined. I know Carlisle has talked about any deflation they see, they're going to want to keep. I would assume they're going to do that based on what I know about Carlisle. And again, that doesn't bother us. So I'm – if anything, as volume increases, I would hope, no guarantee of course because I can't predict the future, I would hope that we would see some little bit of positive pricing on the commercial side. There's no reason to think bad.

Okay. Got you. And then not to beat a dead horse, but on the inventory per branch, just so I'm making sure I'm hearing you right, it sounds like you expect it to be similar to maybe two, three years ago level. So, on the whole, as the year progresses, you would expect to have a lower year-over-year inventory per branch, essentially having leaner inventories all year this year compared to last year. Is that fair to say? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. The same or slightly lower, yes.

Okay. All right, guys. Thank you very much.

We feel good about our inventory control process.

Okay. Thank you. Paul M. Isabella - President, Chief Executive Officer & Director: Okay.

We'll go next to Michael Rehaut at JPMorgan.

Hi. Good morning. It's actually Jason Marcus in for Mike. Paul M. Isabella - President, Chief Executive Officer & Director: Hey, Jason.

Hey, Jason.

My first question is just going back to the gross margins. I know obviously mix helped a lot in the quarter, but it sounds like at least a portion of the improvement was driven by higher year-over-year gross margins in the complementary products. So I just wanted to see if you could give a little more color on some of the trends you saw there and if there are any specific product categories that stood out? And then as you look into the back half of the year, if that year-over-year improvement you think can hold in complementary products? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. Good question. Complementary, in general, has been a pleasant surprise for us. If you look at pricing for the last three quarters, it's been positive. And along for the last two quarters, we've seen a little bit of product cost increases. So what it means is the manufacturers' price increases, we're kind of pulling those through. Remodeling index is up and then you throw Applicators which is a very strong company, up in Maine, and that's why we bought them, right, because they have great mix of complementary products, mostly vinyl siding and windows. They're very strong. So – and we're working very hard in all of our other regions to push complementary products which would include vinyl siding, windows, doors and to a lesser extent, waterproofing. I think though the biggest portion of that LOB for us, line of business, is vinyl siding, which just seems to be very strong. So I mean, I wish I could predict that we'll see two points of price for the next two quarters, I can't. But if you look at last year, we were negative in Q3 in pricing and slightly positive in Q4. So I mean, there's some optimism there that if the demand continues as we've been seeing it, then we could see positive pricing.

Okay. Thanks. And then, just looking at your balance sheet, I think leverage has come down a bit over time and at pretty low levels right now. And I know you've made a couple medium-sized acquisitions over the last six months, but if you think about longer term, your appetite for maybe making a significantly larger acquisition, how would you think about that in terms of leverage on the balance sheet and what would you be comfortable with? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah, I'll let Joe answer that.

Sure. You're right and thanks for kind of pointing out the good work that we've kind of done, focused on our leverage and keeping our balance sheet kind of clean. You're right, at that 1.68, we're in good shape. I think, as we've always traditionally kind of talked about, keeping it under 2 in a regular recurring operation for us is a comfortable spot for us to be, although in times of acquisition, you have seen us go up to the 3, 4, and with a plan to work out and get it lower after that point in time. Beyond that, we would have to think more difficultly of growing above that kind of threshold of leverage really because of a lot of the seasonality in our business and want to keep flexibility as well, too. But right now, based on the clean balance sheet we have, again, we think we have a lot of capability to continue on our path of growth through acquisitions here. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. And the other part of your question, we do have an appetite to potentially do a larger deal. We have access to funds, equity, so I think we're in great shape from that standpoint.

All right. Thank you. Paul M. Isabella - President, Chief Executive Officer & Director: Thank you.

We will take our next question from Brent Rakers at Thompson Research Group.

Yes. Good morning. I wanted to talk a little bit about price maybe in a little bit different way. We've been talking a lot about absolute price and all that, but I'd like to talk a little bit about relative price. Could you talk about – I think this is the first quarter maybe in the last five or six where in the residential category you've had at least parity between what your costs have done versus what your pricing has done. Can you talk to that maybe specifically about what Beacon is doing, but maybe also about if there's some sort of change in discipline at the distributor level in the channel? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. I mean, Brent, I wish I could say there's a discipline change at the distribution level. I can only surmise that all of my competitors are tired of losing price or being in a very difficult pricing market, but I really can't comment on it because I don't know. I think we did see some stabilization relatively speaking, although there's still a lot of pressure in different regions, the Southeast, we talked about and really Southwest focused mostly in Texas because of being on backside of storms. I don't – of course, we continue our supply chain efforts with a lot of intensity and we do have great manufacturer partners. I don't think we've really changed anything. Some of it could be timing of the inventory we pull through on the cost side. Although, like I said, I think we're getting even better on the supply chain piece. But to me, it's good news that pricing has stabilized somewhat. We'll find out now in Q3 and Q4 as we round out the deeper negative comps from last year, what happens on the residential side. You would think naturally that with increased volume, increased demand and some of these smaller storm markets, that we've seen some activity in Oklahoma, West Texas, Colorado, even down in the Gulf area and maybe, there'd be some pressure there to help. But it's yet to be seen.

Paul, when you talk about some of the demand challenges in the Southeast and Southwest and how that's created some pressure on price, does the reverse work as well? So when you see some of your stronger numbers in the Western region and then some of the upper Midwestern markets in the quarter, do you see prices firm to even improving a bit in those regions because of the stronger demand? Paul M. Isabella - President, Chief Executive Officer & Director: Without getting into a lot of detail, we do typically see that, yes.

Okay, great. Thanks. Paul M. Isabella - President, Chief Executive Officer & Director: Thanks, Brent.

And our next question comes from Ryan Merkel at William Blair. Ryan J. Merkel - William Blair & Co. LLC: Thanks. I guess first, just a clarification. Paul, did you say that the second half of April and early May is tracking at that 6% to 9% organic? Paul M. Isabella - President, Chief Executive Officer & Director: Second – say it again, Ryan. The second half of April? Ryan J. Merkel - William Blair & Co. LLC: Yeah. You said the second half of April, it picked up. And then into early May, I think you made a comment that things had stayed pretty strong. It's dangerous to extrapolate any one given month, I get that. But I'm just curious if that, the last four weeks are sort of tracking organically up 6% to 9%? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah, I mean in keeping with what we've talked about in the past, I don't want to go too deep into the quarter because we always just talk about that first month. I guess, I can summarize and say, we feel pretty confident right now about the volume of late, right. And so, that should parallel my comments about the 6% to 9% in the back half. Ryan J. Merkel - William Blair & Co. LLC: Okay. Fair enough. Paul M. Isabella - President, Chief Executive Officer & Director: Otherwise, it's too deep in the quarter, yeah. Ryan J. Merkel - William Blair & Co. LLC: Okay. And then, secondly, can you remind us what you're assuming that the greenfield are going to add this year in terms of organic growth? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. Well, I mean, if you look at the splits for the full year, I mean, it's really – if you go to our pure existing, it's half existing, half acquisitions which would be, let's just say, if we do the 6% to 9% range for the back half, 6% to 8% for the full year. Half is existing, half is acquisitions. And it's going to be a point or so, maybe 1.5 points of existing, so the balance of that is going to be the greenfields. And they're very rough numbers, right? It's hard to predict how that's going to end up. Ryan J. Merkel - William Blair & Co. LLC: Right. Okay. And then lastly, I think you might have touched on this, but is the Northeast sort of popping back, now that the weather is cleared? We've had this record snowfall. I'm just curious, both for resi and non-resi, if you're starting to see this kind of big burst of demand or if that's still on the comp. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah, a good question. I could tell you, we didn't see enough of it in March, for sure, and I wish we had seen more in April, but the weather just hung on up there and it was even wet. Of late, I can comment that the demand has been very strong up there. Ryan J. Merkel - William Blair & Co. LLC: Okay. Paul M. Isabella - President, Chief Executive Officer & Director: And the view – and maybe even better than that, right, is the attitude of the contractor base is very positive in terms of their backlogs being full up in that area. And we're hearing that for a lot of places around the country in general that contractor have a lot of optimism, because of backlogs. But again, time will tell on what comes out as we produce sales. Ryan J. Merkel - William Blair & Co. LLC: Okay. Thanks. Paul M. Isabella - President, Chief Executive Officer & Director: Thanks, Ryan.

And we'll go next to Garik Shmois at Longbow Research.

Hey, this is actually Mark Zikeli on for Garik today. Paul M. Isabella - President, Chief Executive Officer & Director: Hey, Mark.

Just touching on the residential price increase for May, I mean, you said you needed to be firm with your customers and you're just talking about good backlogs here. I mean, can you just talk a little bit about the receptiveness of your customers to this price increase? And it seem like they're in a good position now to pass along inflation or would you say you're getting some pushback? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. I think regardless of how I feel, how we feel and then of course, our position, it's too early. We just came out of a very rough winter. And I think for me to make a comment about tens of thousands of customers that we have and make a blanket statement, it wouldn't be appropriate, because I haven't taken data points from 50% of them. I think though in general, most of our customers would understand that we've taken it on the chin for a couple of years and given that the manufacturers, as of right now are pushing very hard that they want to increase pricing. I would hope, right that they would see the value in us pushing that and the competitors pushing that through the channel allowing them to get that same pricing. Of course, that's gated by – with their end customer. That's always gated by strong or weak volume in any particular region.

Okay. And just quickly on gross margin in the quarter, did you quantify what the impact of – just lower direct product cost versus the savings you got from diesel this quarter?

Sure. You are right, another good question around the cost side of it. From a diesel perspective, last quarter, we started to see an impact where we had a couple of hundred thousand dollar minor impact to it. This quarter, it really started to step up quite a bit. We saw much better benefit. We saw almost an $800,000 year-over-year benefit from lower kind of fuel cost in our cost structure. In fact, if you look across our total cost structure, as I mentioned, I mean going from $104 million to $111 million, greenfields drove about $5 million increasing, acquisitions drove about $5 million increasing. We had several other cost increases, standard business increases for everything from compensation increases, insurance, other kind of business increases, depreciation, other costs that cost about $3.5 million. But the efficiency was the good part. Things like the fuel costs, we had almost $4 million in efficiencies from other areas we were able to kind of save our operating expenses during the course of the quarter. So, a good quarter from a operating expense perspective. I've been waiting for somebody to ask, so I can give you all that detail. So, thanks for bringing that up.

Yeah, no problem. Best of luck this quarter.

Thanks. Paul M. Isabella - President, Chief Executive Officer & Director: Thank you.

And that does conclude the questions. Now, I would like to turn the call back over to Mr. Isabella for his closing comments. Paul M. Isabella - President, Chief Executive Officer & Director: Great. Thank you. I just have a couple of minutes here to close it out, and some of these are repeats, but they're worth repeating. Our second quarter sales up $413 million, up 7.4% from the prior year and most of it was attributed to the greenfield and acquisition investments. And we said, we had smaller existing growth. We continue doing a very good job of executing our growth plan, combining new branches, acquisitions and existing branch sales as growth levers and we're going to continue to work that to improve it. Residential sales grew nearly 10%, complementary nearly 14% in total, while commercial was up slightly at 1.2%. And really the repeat on this is this is a great example of our product diversification and placement across the country. Gross margin improved 80 basis points versus the prior year. This is significant when you consider we lost 80 basis points in the quarter due to price. We were able to reduce product costs offset the price decline and also benefited from the mix shift towards residential and complementary products, as we've talked about on the call. I think we did a good job here, considering that it was a tough weather demand quarter. Mentioned the five greenfields that we've opened up so far, with a plan to open up approximately 10 and we'll give you more updates on the next call on that. We're very excited about that. Operating costs as a percent of sales were down even with the additional costs from the investments of greenfields and acquisitions. Joe talked about our balance sheet. It's in excellent shape. Our disciplined buying approach on inventory this quarter has not only strengthened our already strong balance sheet, but will benefit us in the future. And, kind of in summary, we're in a great market. I've said this before. Roofs fail, and we're going to get some great complementary growth, I believe. And it's going to – the market is going to continue to grow. We're well positioned to capitalize on this growth with our branch count and product placement. And we are executing the elements of our strategic plan and we'll continue to do so. I think our future is very, very bright. I want to thank all of our investors for their interest in our company as well as our great customers and employees for their loyalty. This concludes our earnings call. Thank you.