QXO, Inc. (QXO) Q3 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to Beacon Roofing Supply's Fiscal Year 2015 Third Quarter Conference Call. My name is Alan, I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll be conducting a question-and-answer session towards the end of this conference. At that time, I'll 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, August 6, 2015, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release. On this call, Beacon Roofing Supply may make forward-looking statements, including statements about its plans and objectives and future economic performance. Forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including, but not limited to, those set forth in the Risk Factors section of the company's latest Form 10-K. The company has posted a summary financial slide presentation on the Investors section of its website under Events & Presentations that will be referenced during management's review of the financial results. On the call today for Beacon Roofing Supply will be Mr. Paul Isabella, President and CEO; and Mr. Joe Nowicki, Executive Vice President and Chief Financial Officer. I'd 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: Thanks, Alan. Good morning, and welcome to our 2015 third quarter earnings call. As mentioned in our press release this morning, I'm pleased to report strong Q3 sales growth of 8.3% and 4% EPS growth versus last year, $0.56 versus $0.54. In addition, as many of you know, on July 27, we announced the definitive agreement to acquire Roofing Supply Group, which will close on or about October 1 of this year. We're pleased with our quarterly results and delighted about the future addition of such a strong company as RSG to the Beacon team. We recognize that while we plan for the integration, we need to remain focused on Beacon's performance through year-end. Our team finished the third quarter very strong, as June had both strong sales and EPS. April and May were impacted heavily by the wet weather across many parts of our country. This variability is normal for our business, as we've said in the past, as much of the work delayed in April and May shipped in June. We are optimistic about Q4, as July sales ended much like June; more on that later. Our new acquisitions, Applicators Sales & Service and Wholesale Roofing Supply and ProCoat of Denver and our greenfield branches contributed to our overall approximate 8%. And our acquired businesses, as laid out in the Q, did quite well in the quarter. Gross margins reflected the larger residential and complementary mix of sales, ending over 29%, and operating income was breakeven including the impact of purchase accounting. We're pleased with the results of these quality companies. During the quarter, we acquired Denver-based ProCoat Systems, as previously announced, which will add to an already strong Rocky Mountain presence. ProCoat is the fourth acquisition completed in the last 12 months, and is a leader in the Denver and Fort Collins geography and adds to our complementary-based products. It matches up very well with our strong residential product line in that geography, and we will expand sales of that product in our network of branches. From a regional standpoint, sales growth during the third quarter was fueled by six of our seven reported regions. In many of our markets, we saw a rebound from the harsh weather in the second quarter from the first, as we expected. Along with a solid sales growth, gross margins increased over the prior year and sequentially from Q2. In addition, I'm pleased to report that, overall, all three of our product lines grew over the prior year, with residential up over 13% and complementary up approximately 10%. Commercial was up slightly at 1%. The commercial growth rate is, in large part, a reflection of the strong growth we had last year in Q3 at nearly 10% for that product line. Existing same day sales were up for all three product lines as well. Residential existing sales were up over 9% in the quarter. It's good to see our residential volume deliver such strong growth. Our complementary sales in the quarter was driven mostly by our Applicators acquisition in May, which is doing quite well. Looking across the geographic footprint, we saw good complementary growth in five of our seven regions and four that registered double-digit gains. As I said earlier, six of our seven regions had growth in the quarter. The West, Northeast and Southeast led the way with double-digit gains. This was fueled by pent-up demand from Q2, storm damage repair, new branch openings, and same-branch sales increases. We also saw solid growth in Canada and the Midwest region, both ending around 7%. These gains were fueled by same-branch sales increases across all product lines. The Southwest, as previously mentioned, was down in the quarter, which was not a surprise given the very wet weather. They continue to deal with post-storm demand issues and, as a result, intensified pricing pressures. As we've mentioned in the past, we believe these markets will correct as normal patterns of reroof, new construction and weather damage occur. In fact, this region was much stronger in June as weather and demand began to normalize and we saw that strength continue into July. Our balance sheet remained strong and we're able to reduce inventory per branch by over 10%; again, very good performance by our branch and supply chain teams. We remain very focused on cash management and cash generation as we work towards the end of the year. Joe will go through more detail on this in his part. And now on outlook for the balance of the year. As I said, the month of July picked up right where June left off, ending with total growth of approximate 9% and organic growth of approximately 4% versus the prior year. What's more reassuring than the percent increase is a sequential consistency we saw in July. The month ended with a daily sales rate much like June, which was the biggest month in Q3. This is a good start to Q4. Based on what we delivered in sales for July, we believe the full year total growth will end in the 7% to 8% range. We believe our gross margins will be in the range of 23% to 24% for the total year and Q4. Our fourth quarter estimate does not include any price component as we've not seen any price realization in our markets. In regards to new branch openings for 2015, we have opened six new branches to-date with South Boston opening on July 30. We have previously stated that we're targeting up to 10 greenfields in 2015. Given the transformative RSG acquisition and increased branch count, we will end with our current six new openings for the year. For 2016, we'll still evaluate potential greenfield openings in markets where it fits our strategy. For instance, the Pacific Northwest is a very attractive geography for our continued expansion. There are a number of these types of locations around the country that we'll continue to monitor and evaluate. And as you know, the investment cost to open these branches is low and will be a part of our growth strategy going forward, as has been the case for many years. In terms of additional acquisitions, as we've detailed in our July 27 announcement, we have structured our financing in a way that allows for both working capital needs and future acquisitions. As we've said in the past, it's difficult to predict when sellers will sell, but we continue to talk to numerous very good companies. Our appetite for acquiring these quality companies has not diminished. Our pipeline is as full as ever, and we're not slowing down and we're confident that we'll execute these tuck-in type of acquisitions. As has been our history, we'll ensure we don't lever the balance sheet, and I would add future acquisitions will be solid regional additions, much like Wholesale Roofing, Applicators Sales and ProCoat. Related to EPS, the current analyst consensus is $1.36 with a high of $1.41 and a low of $1.48. And as we've said in the past, with all the unknown variables we face such as pricing, demand and weather, even at this time of year, it's challenging to pinpoint a full year estimate. However, as it stands now, our estimate is in the $1.30 to $1.35 range and that's bolstered by our exit rate in June and, as I said, our strong July. 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. Our trending, as I said, through July is very good and we believe it will continue into August and September. But as always, we remain mindful of the variability that can occur in our market from month-to-month and quarter-to-quarter. In relation to RSG, we are preparing for the closing on October 1 by developing our integration plan, lining up the financing elements, and communicating with both the Beacon and RSG teams as permitted to ensure we have a successful integration. As we go through the balance of our fiscal year and RSG goes through its fiscal third quarter, I'm confident that both companies will stay focused on providing excellent customer service and delivering strong financial performance. We will focus on these same elements after close in addition to executing our integration plan. And now I'm going to turn the call over to Joe and he's going to go over a few more of the detailed financials. Joe?

Thanks, Paul. And good morning, everyone. Now I'll highlight a little more detail on a few key financial results and metrics that are contained in our earnings press release and the third quarter slides that were posted to our website this morning. We had solid top line growth of 8.3% for record third quarter sales of $718.2 million. Gross margins increased both over the prior year and the prior quarter. Our operating expenses were up in dollars and as a percentage of sales, but mainly driven by our investments in greenfields and acquisitions. And for the quarter, we drove EPS of $0.56, an improvement of $0.02 over the prior year. For comparison purposes, there were the same number of days in Q3 of fiscal 2014 as in Q3 of fiscal 2015, 64 days. Paul already went through our Q3 sales results in detail, so I won't 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 on an existing branch basis were higher in each of the three months of the quarter. April sales were up 2.6%, May up 5.7%, and we finished the quarter strong in June with sales up over the prior year by 5.8% driven primarily by a 12% increase in residential sales in June. On a very positive note, the gross margin rate was 23.6% for the quarter, which is up 90 basis points from a year ago and 20 basis points from the second quarter. In summary, pricing declined an estimated 160 basis points in the quarter from the prior year. This was partially offset by a product cost decline of approximately 70 basis points. The remaining 180 basis point increase in gross margin can be attributed to a mix shift to more residential and complementary product sales. The 45 greenfields opened up since fiscal year 2012 as well as strategic acquisitions that we've made in the last 12 months have significantly increased the mix of residential and complementary products. These lines of business have consistently delivered higher margins. In addition, our mix of direct sales also decreased in the quarter from 18.6% in the prior year to 17.4% in the current year. As we previously mentioned, our direct sales have a lower gross margin and operating expenses as compared to our warehouse sales. While commercial prices remained flat compared to the prior year, residential prices declined over 3% from the prior year and drove the majority of the pricing decline. This was partially offset by complementary prices that were up a little over 3%. While we are expecting pricing to improve in the quarter, the overall price decline was reasonably similar to what we experienced in Q2. Our supply chain team did a great job again this quarter, offsetting a good portion of the price declines with product cost reductions. As just mentioned, our product mix had an impact on gross margins as volumes shifted from commercial roofing to residential and complementary products. Residential roofing increased to 50.1% of our sales versus 47.9% in the prior year, while commercial declined to 35.2% from 37.6% in the prior year, and complementary increased to 14.7% from 14.5% in the prior year. The diversification of our product line is something we have focused on across our existing branches and through our acquisitions. Now on to our operating expenses. Total operating expenses were $121.4 million or 16.9% of sales. This represents a year-over-year increase of $16.4 million. This amount includes operating expenses from acquisitions, which drove $6.7 million of the increase. Included in this amount for the quarter we had a one-time adjustment for amortization expenses of $1.1 million related to the purchase accounting true-up for our acquisition of WRS. Excluding acquisitions, our existing market operating expenses were up $9.7 million over the prior-year Q3. As previously discussed, within our existing markets, we do include the greenfields. $4.3 million of the existing market operating expense increase can be attributed to the 23 greenfields opened up in the last 15 months. As you know, a greenfield branch will have a higher operating cost as a percentage of sales until the branch is running at our average volumes. Of the remaining existing markets' operating expense increase, $2.5 million can be attributed to an increase in non-cash stock compensation. As you may recall, last year in Q3, we took a one-time favorable adjustment of $2.4 million to account for lower performance-based equity award values. This year's cost is at a more traditional run rate. In addition, we also experienced an increase in payroll and employee benefits cost of $3.5 million in Q3 due to an increase in healthcare cost and also variable incentive compensation reflecting our improved performance. We continue to look for ways to leverage our cost structure. Cost control is a historic strength for Beacon. With the acquisition of RSG, we expect to see a significant improvement in our operating cost leverage. For fiscal year 2015, we still anticipate full year existing market operating expenses of 18% to 18.5% of sales. Interest expense and other financing costs were flat versus the prior year. Our income tax benefit reflected a slightly lower effective tax rate of 37.7% for the year compared to 38.1% last year. This was driven primarily by a lower effective state tax rate in 2015. Our net earnings were $28.3 million for the quarter compared to $26.8 million last year. Diluted net earnings per share were $0.56 compared to $0.54 for the same period last year. Our adjusted EBITDA for the quarter was $60 million compared to $53.3 million in the prior year. Regarding the status of our balance sheet, cash flow from operations for 2015 was a positive $11.2 million compared to negative $46.8 million last year. The year-over-year increase is from higher net income combined with significant improvements of working capital requirements mostly due to the lower inventory values. Inventory was down $12.8 million from Q3 of last year. Our inventory balance is even more impressive when you consider the 26 greenfields we opened over the last 12 months and the four acquisitions since Q4 of last year. If you look at it on a per branch basis, inventory was down over 10% from the same quarter last year. Capital expenditures, excluding acquisitions, in Q3 were $13.8 million compared to $26.1 million in Q3 of 2014. As you may recall, last year we made significant investments in new ring (18:31) greenfields and for replacements to our existing fleet. For the full fiscal year 2015, we expect capital expenditures to be slightly less than 1% of sales, which is well below our historical average of 1.2% of sales and last year's 1.5% of sales. Net cash used for investments was $98.3 million. Our current ratio was a strong 1.97:1 versus 1.99:1 at the end of last year. The results of our two bank financial covenants at the end of this quarter were as follows. The leverage ratio decreased to 2.04:1 compared to 2.26 last year. And our interest coverage ratio decreased to 13.9 compared to 15.5:1 last year. Now to briefly discuss the first nine months results. Sales for the nine months of the year were up 7.9% over the prior year and a record at $1.73 billion. Of the increase, greenfields contributed approximately 4% of our growth and acquired businesses 3.3%. Now I will highlight how we did across the regions. Five of our seven regions grew in the first nine months with the Midwest and West with double-digit gains. This was fueled by storm 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 increased pricing pressure. The Northeast picked up as the region came out of the harsh winter weather. The gross margin rate was 23.4% on year-to-date basis, up 60 basis points from a year ago. As just mentioned, our product mix had an impact on gross margin as volume shifted from commercial roofing to residential and complementary products. On a year-to-date basis, residential roofing increased to 48.8% of sales versus 47.2% in the prior year, while commercial declined to 35.3% from 37.8% in the prior year. The diversification of our product line is something we have focused on across our existing branches and through our acquisitions. Operating expenses on a year-to-date basis were 20% of sales versus 19.3% in the prior year. Similar to the current quarter, the major drivers are from our investments and acquisitions in greenfields. Our net earnings were $31.5 million for the first nine months compared to $29.6 million last year. Diluted net income per share was $0.63 compared to $0.59 for the same period last year. Our year-to-date adjusted EBITDA is $90.9 million compared to $83.5 million in the prior year. We are anticipating a strong finish to the year, as Paul, described earlier, which should drive full year adjusted EPS of approximately $1.30 to $1.35 and adjusted EBITDA of $161 million to $165 million. And as we look to 2016, the RSG acquisition will help drive even further EPS improvements. As mentioned in our July 27 8-K, we believe the acquisition will result in a minimum $0.30 increase in adjusted non-GAAP diluted earnings per share for 2016. This adjusted amount excludes cost to achieve the synergies, amortization of deferred financing fees, M&A fees, legal fees, stock-based comp, and related one-time cost and purchase accounting final adjustments. With that, we'll now respond to and take any questions you may have.

We'll take our first question from Keith Hughes with SunTrust.

Thank you.

Good morning, Keith.

Hey. How are you all doing? A couple of questions. First on the $0.30 accretion from the deal next fiscal year, you listed some things that include – did you say tax, how are you treating tax? I know there is some tax advantage aspects of the transaction, is that a fully taxed or cash or how does that work?

Sure. That's a good question. There are a lot of synergies from the deal from a tax perspective. As you recall, we had a lot of tax attributes, NOLs and related that we're carrying forward. Those are all a cash basis element, so what you'll see from a book perspective is our standard 39%- approximately rate on it, Keith.

So, on a book rate, it would be below the $0.30 number, is that correct? Or is the $0.30 included?

The $0.30 includes a book rate of the 39%. Yes, it does. From a cash perspective, we'll see a greater benefit in taxes from a cash perspective, which is even again another reason why we're so excited about the transaction.

That's very good. That's fantastic. Switching over to the business, the operating business now, specifically around the operating expenses in the quarter, you had talked about 18% to 18.5%, I think, for the fiscal year and that seemed to imply that those expenses as a percentage of cost of goods sold will come down in the fourth quarter. Can you just sort of characterize what do you think the operating expenses in the fourth quarter will look like?

Sure. One of the big drivers, obviously, is volume. As Paul talked about a strong fourth quarter, we always have a strong fourth quarter as volumes ramp up. So as a percentage of sales, you traditionally always see the operating expenses as a percentage of sales track down in the fourth quarter, volume will be the biggest driver. If I look at the elements to the operating expense piece, we've done a great job out in the field of controlling our overtime costs and really our labor costs in each of the branch facilities. So I think we'll continue to get leverage on those as we go through the quarter. Obviously, they'll ramp up somewhat as we have higher volumes, so a lot of those variable costs will increase and go with it. But overall, we'll get much better leverage in the fourth quarter. Our operating expense as a percentage of sales in the fourth quarter traditionally runs anywhere around 16%, 16.5% of sales.

Okay. And final question just on pricing in residential, I think you had said your tax, it was down 3% year-over-year. As you look through July and some of the increase announcements, do you think that's sequentially or year-over-year, however you want to phrase it, what does it look like as we head into the end of the summer and fall? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. Keith, it's one we wouldn't have any of the July results right now for pricing. We typically accumulate it on a quarterly basis. But our view internally is that the manufacturer price announcements will not stick in the market unless there's some event like a hurricane, which we can never predict. So, in our fourth quarter number, that range that ends up at $1.30, $1.35, we don't have any piece in there for price. Again, we think that if there still is, which could happen, some price loss on the residential side because it's still very competitive in a number of markets, we would get some offset on the cost side. And we also think – and again, without being able to pinpoint the future, that we could still see some mix favorability as some of our markets are showing more strength on the shingle side as we went through June, especially the Southwest that really had a very, very difficult April-May because of the record rains they had in Texas, the upper Midwest, we feel fairly confident there. So, yeah, pricing right now is still – I won't say a wildcard, but I think especially as we're approaching the end of the year, (26:52) number is – at least the view of it is forecasted to be flat year-over-year. And I know OC had talked about 10% growth, which based on some of the shingle strength we were seeing in terms of shipments, I could see that, but they're somewhat disconnected obviously from what we're seeing on pricing side – their numbers I mean.

And now we'll move on to Michael Rehaut with JPMorgan.

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

Good morning, Jason.

First question, going back to the gross margin, I know that a lot of the benefit in the quarter was due to the mix of a higher percentage of residential sales. But if you look at the residential piece versus the commercial and the complementary on a year-over-year basis, I guess, how was the gross margin performance across the different business lines? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. I think, fairly, I'll say, somewhat consistently that the residential piece is down a bit as you just look at that and extract it out, which we really never disclose, we talk about the difference between the residential, commercial, with complementary being in the center. But we've seen a bit of a tick, but it's offset again by the cost piece. Complementary has been fairly strong, as we've year-over-year, even sequentially. And commercial has hovered around the zero line for a number of quarters.

Okay. And then in terms of the $0.30 of minimum accretion that you're expecting from the deal next year, what do you think could be the key things that could potentially drive upside to that estimate? Paul M. Isabella - President, Chief Executive Officer & Director: Well, I'll start just from a market standpoint. For sure, if there is any market rebound, which we believe is going to occur at some point, and then all the other elements that are a piece of that: new construction, existing home sales, the continued strength in non-res, and if you listen to Carlisle's call, they did very well and they have a lot of confidence in that. I think that that lift specifically let's say the shingle is going from 107 million squares or 108 million squares to something above that, 115 million squares, 112 million squares, 118 million squares, 120 million squares getting back to 2011 (29:29) levels, given how low it's been of late, that will bode very well for us, especially given RSG's heavier mix on the residential side and then the growth we've seen with the greenfields, which are almost 95%, close to a 100% residential. That's what I think the upside is besides the obvious sell-through, as we integrate with RSG, the benefits we'll see of selling more complementary product as well as just having a better service offering for our customer base, more locations to ship out of. That will in my mind enhance sales and that's not calculated all in the $50 million of synergies. So we will have a revenue stream that we're going to work very hard on with the RSG team to make sure we're focused on that element also.

The other part Jason that I would add is the synergy element that Paul mentioned in terms of what could drive upside potential to our $0.30 number, it's really on how we execute on the synergies. We are extremely confident the amount we worked with outside consultants to help us determine the amount. They established a range. We kind of took a lower end of the range. We're very comfortable with the number that we've kind of included within that $0.30. But I think our ability to successfully work through the integration part of it could drive that even further. Based on the meetings Paul talked about we had last week with the folks from RSG, I think it provides us a lot of confidence in our ability to move through those synergies quickly. Great people, so be really helpful in the new company.

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

Next we'll go to Sam Darkatsh with Raymond James. Sam J. Darkatsh - Raymond James & Associates, Inc.: Good morning, Paul, Joe. How are you? Paul M. Isabella - President, Chief Executive Officer & Director: Good.

Hi, Sam. Good. How are you? Sam J. Darkatsh - Raymond James & Associates, Inc.: A couple of questions here. On the residential side, you noted that your net product costs were down 1% to 2% without – I mean, Owens I think specifically said their selling prices were down about 10% in the quarter, I know that's not going to be a perfect match. But, I mean, why such a gap? Were you doing some strategic buys? Is it mix? Why is there such a difference between what they're saying in selling prices for them and your net product costs? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah, Sam, that's very difficult for us to triangulate because of just the fact that they're selling many different markets to many, many different distributors besides ourselves. I wouldn't even try to comment on that other than to say we continue to focus on price attainment, price loss abatement. But we still have regions in the country, probably much like them where they're selling, whether it'd be the Southeast, Southwest, even parts of the Midwest, parts of the upper Midwest in pockets where we see extreme competition and enhanced pricing pressures. So I can't answer it, Sam. Sam J. Darkatsh - Raymond James & Associates, Inc.: Let me ask the question a different way then. The down 1% to 2% of your net product costs, why do you think the industry net product costs were down in the quarter in residential, were similar to you, a little bit worse or I should say not as well done as you did from keeping costs maintained? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah, I'd love to say, Sam, that we're better than everyone else, but I just don't have the data to back any of that up and I'm not trying to be cute. I think though if you want talk opinion data points because we have a lot of communication, I do with my guys and folks within the industry, there is a number of distributors that are feeling pricing pain. But again, it varies by region, it varies by mix, it varies by channel, whether it's new construction, whether it's reroof, et cetera, so it's very hard to say. I do know – typically historically, we focus very hard on value pricing. Meaning, we believe we provide superior value and we price accordingly, knowing also that we have to be competitive and take care of our customer base. But as I've said on many, many calls in the past, especially over these last two-and-a-half years, it's very difficult for us to walk away from share loss. We encourage share loss by pricing very high. So we're going to be competitive in the market because we want to be very careful with that, although it's very hard for us to measure. Sam J. Darkatsh - Raymond James & Associates, Inc.: If I could sneak in two more questions if they're quick. The non-residential trends were a little bit softer than your mid single-digit growth bogey or expectations previously. Is that weather or what is that? And then I've got just one really quick follow-up question, if I could. Paul M. Isabella - President, Chief Executive Officer & Director: Well, you're really loading up, Sam. Yeah, as I said, the commercial piece is interesting. Last year, as I mentioned, they had 10% very strong growth. And there is no doubt, when we look across our regions, we have some very, very strong regions commercially. And then we have some that were impacted, I would say, mostly due to weather again for us. I can't speak for anybody else. You look at Texas, you look at the upper Midwest, even the Ohio Valley over until Illinois, et cetera, down Kentucky, there is a lot of rain that continued even through June that impacted us. And so that's the primary reason there. Sam J. Darkatsh - Raymond James & Associates, Inc.: And then the final question. The 23% to 24% gross margin expectation in the fourth quarter is obviously quite wide. To try and to get to the high end versus the low end, is it a bigger deal, what your residential mix ends up being or is it pricing, what ends up happening there? Why such a wide swing in the fourth quarter and what could be the drivers positively and negatively? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. I guess, Sam, that's why we don't do full year guidance also. It's been hard, not because we don't want to. But just look at Q3 for a second, right, we vis-à-vis the whole year. I mean, if you look at it, 54% versus 56% and then the consensus one would say, yeah, boy that absolute value is a miss. But as we look at it and the exit rate in June, as I mentioned, and July build up, the view that August and September is going to continue the same on that gross margin range. The current consensus for 64%, the way we look at it right now, a range of 67% to 72% for us we think we're going to beat that. I think as you look at gross margin, it's very hard. There's a lot of factors. Mix, I said, it appears the residential and complementary could be stronger, meaning the same as Q3 exiting into Q4, but that could change. Pricing, you wouldn't think it would change a lot, but there's still pressure. So yeah, we do band up. We do open up the band from 23% to 24%. But pressed I'd say that it'd be our view now is that it's slightly above that midline for Q4. Sam J. Darkatsh - Raymond James & Associates, Inc.: Very helpful. Thank you. Paul M. Isabella - President, Chief Executive Officer & Director: Okay. Thanks, Sam.

Next we'll go to David Manthey with Robert W. Baird. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Hi. Thank you. Thank you. Thanks, guys. Paul M. Isabella - President, Chief Executive Officer & Director: Hi. Good morning, Dave. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): First of all, on that OC shingle comment, I'm pretty sure if you read what they said, their shingle selling price was not down 10%, but just to clarify that. First off, Joe, when you look at the fees or the one-time costs and things that you mentioned that would be included in the $0.30, can you give us an estimate for what approximately you think that might be?

You're referring to the fees that are not included, right, because I gave you a list of items that said this is kind of what an operating $0.30 increase would be and I said like this, things that will be kind of backed out of it, which is that cost to achieve the synergies and all those. I can't give you a specific on all those numbers right now, I'm working through all those pieces of it. When we get together in middle of September, we'll be kind of finalizing the bank deal and there will be some financials that get released at that point in time that really give one the detail in regards to RSG's EBITDA performance as well as gives you a lot more details on these costs as well too. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah, David. We've said the same thing about the EBITDA piece and that's just because we're not close, we're still two separate companies. And I think just out of doing the right thing until close, we're keeping that internal. As we go as close-to-close I should say, as Joe said, as we go through the bond financing element, a lot of that, David, will come out.

One of the biggest ones is also just the purchase accounting kind of finalization, right. As you can imagine, there is valuation work and a lot of detail that goes into that piece of it as well too. Hard to guess what that might be at this point. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): I see. Okay. I misunderstood you. I thought you said that would include those things, but as long as that's an operating number, we're fine there.

Yeah. Correct, correct. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay. And then second, you implied that the geos with strong demand maybe because of delays due to still ones or the ones that we're seeing the most price pressure. And that seems counterintuitive to me. I'm wondering if you can tell us a little bit about why that's happening. And is that to say that you're seeing price pressure more in the Southeast for example? And I'm just trying to attribute, is it possible that it's just that that's been the competitive geography for some time because of the landscape as opposed to the storm delays? Could you just help me understand what you meant by that? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. I think it's a combination, Dave, because the Southeast still is, to some extent, suffering from a demand standpoint. We did on a volume basis fairly well from a growth standpoint, but there still is pricing pressure. Go back to my comment, right, on (40:08) not wanting to lose share. They've been very aggressive and, at the same time, we've been able to do some things on the product cost side. The weather piece is very interesting for us because it was a tale of two cities almost and two stories down on the Southwest and Midwest where they saw horrific. And I won't go into the detail of those, but very difficult, let's say, year-over-year on a sales basis April, May, and had a major rebound in June as things dried out. But that also continued into July and so far only a couple of days, but the view for those areas is that it's still going to continue to be strong with, as best we can tell, continued price pressures. So we're continuing to sell. We think – we don't have any calculation, we think we could be taking share. And we're continuing to grow sales. So that's why versus last year where we kind of – in the fourth quarter, we kind of flattened out on our sales – from a sales standpoint, we ended up at that $0.48. I won't say the exact opposite is happening, but the strength coming out of May to June and then the flatness, same kind of sales per day rate, $12.5 million, $12.4 million is very encouraging to us, even with some of the price pressure. Yeah, that is historic in the Southeast for a number of years. Part of it could be attributed to three, four years ago that massive storm that went through that just hasn't repeated. Some of the reroof, much like Hurricane Ike, took a number of years. We're starting to see good things from a volume standpoint, but there's still a lot of price pressure. I don't know if that helps, Dave, but it's what we're seeing. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): It does. It does. It sounds like where you're seeing price pressure and where you're seeing better pricing conditions hasn't really changed all that much. You just mentioned it in the context of the current environment. Is that what I am hearing? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. And the only thing I could say is that, given the historic strength of the Southwest in general, the economy, et cetera, the fact that we've opened up greenfields there, my view would be that would recover sooner than the Southeast from a pricing standpoint, but that'll yet to be seen as we go through the balance of this year. And then as the new construction continues to grow in the Southwest, as it has been doing, and then all the other factors, remodeling index, non-res, all that. I would think that that would recover before the Southeast. But at some point also, the Southeast does have a decent economy, right. And I would think that we're also going to see some good recovery there in the price piece. The anchor I think to all of this is getting the 107 million squares back up to 112 million squares, 115 million squares, 117 million squares, and that's where there's just going to be more work for everyone. And I think that the pricing pressure will abate then. That's my view.

Moving on, we'll next go to Jim Barrett with C.L. King & Associates. Jim R. Barrett - C.L. King & Associates, Inc.: Good morning, Paul. Good morning, Joe. Paul M. Isabella - President, Chief Executive Officer & Director: Hey, Jim.

Good morning, Jim. Jim R. Barrett - C.L. King & Associates, Inc.: Paul, a question for you, if we could just dig down into the pricing pressure in the Southwest that you just mentioned. Is the pricing pressure coming from fellow distributors or are manufacturers also reducing price? I understand your product acquisition cost is down nationally, but just wanted to understand if one party was reducing price more so than the other? Paul M. Isabella - President, Chief Executive Officer & Director: No, I think, for me, it's a simple answer and it parallels probably any industry. When demand is down and you have folks trying to service that demand, i.e. the distributors, good distributors, there is going to be a lot of competition, there's going to be more competition. So if you look at the Southwest and you look at the amount of rain, that did occur in April and May and even into June and then you can go into other parts, but we want to focus on the Southwest because the Midwest, upper Midwest, and as I said Ohio Valley, Illinois had a lot of rain even into June. I mean, it just puts a huge amount of pressure because we are not going to stop trying to service customers or reach out to other customers, and our competition is doing the same thing. So that's the inducement. I don't think it has anything to do with the manufacturers at all. I think, if anything, my view the way they've operated this year has been consistent and I think positive for the industry. They didn't induce a large winter buy and I think, again, my view, they've been acting very rational. So what cures some of those issues is, as I said to Dave's question, is volume. So as we continue to see volume increase, demand increase from whatever, it could be storm, new construction, existing home sale flip, that should help us on the pricing side as we go through time. But again, time will tell with that. Jim R. Barrett - C.L. King & Associates, Inc.: Okay. And my follow-up, with the addition of RSG, you did highlight in your presentation a week ago that markets like Texas, Florida, California were going to be strengthened. Does their regional skew the addition of them, does it markedly change the core growth rate in the Beacon footprint relative to what it is currently? Paul M. Isabella - President, Chief Executive Officer & Director: The core growth rate. No, other than any revenue synergies that we do drive, those are very strong markets, whether it's from disposable income, generally MSAs, new construction for all three of those, right. They're dense markets for us. Jim R. Barrett - C.L. King & Associates, Inc.: Right. Paul M. Isabella - President, Chief Executive Officer & Director: One we're not concerned at all about number of branches that we'll be adding in those areas, because it will just help us serve more effectively. I think the other element that could have an impact and we will – yet to be seen as we go through our planning process is that again if you draw horizontal lines through the United States – wherever you want to draw, North Oklahoma or something, the RSG branch count is heavy down below that line. So from a seasonal standpoint, that should help revenue – should help revenue even out in our Q2, which typically is very challenging because of the winter weather. Jim R. Barrett - C.L. King & Associates, Inc.: Well, that's helpful. Thank you very much. Paul M. Isabella - President, Chief Executive Officer & Director: Okay, Jim. Thanks.

Next we'll go to Garik Shmois with Longbow Research.

Hi. Thank you. Just wondering if you could parse out a little bit more just the sales growth momentum that you saw in June and into July. I was wondering if you can maybe pinpoint specifically what's driving that. Are you seeing any end market starting to reaccelerate, whether it's contribution from new housing or reroofing starting to perk up, is it just a function of maybe some markets that were under water in April and May starting to dry out and you're starting to see some, I guess, normalization in demand? Is there anything that you can point to that's driving the renewed sense of optimism on demand? Paul M. Isabella - President, Chief Executive Officer & Director: I think I've mentioned the things drying out in some of the regions, no doubt. That is a big element of it. But I also think some of the back side of storms that might have occurred year-and-a-half year ago, two years ago in the Southwest, we're getting through those. There had been some small hail events in the Midwest, in the Southwest that are kicking in and helping a bit. I think the Northeast continues to be relatively strong with recovery of pent-up and on the commercial side, which has been strong, some of the public work coming out now in the summer. So I would say if I had to prioritize it, it was the drying out – the natural drying out and that's the variability, as I mentioned in my script, between some of our quarters, right, and the difficulty in prediction. But ultimately it all comes out. And the difference this year is we're seeing more strength at the end of the quarter and into July, into August, which makes us hopeful. So priority would be drying out. And then some markets where new construction continues to be relatively strong and our penetration in that has been good. And I think, quite frankly, our team is doing a very good job of going after and satisfying customer demand by providing value and doing awful lot of sales calls too.

Okay. That's very helpful. Just as my follow-up switching to OpEx, you provided the bridge with respect to the year increase. You provided the outlook for the full year. Just wondering if you can maybe – maybe two parts, is it possible to provide a sequential bridge from the March to the June quarter? Because we did see roughly a $10 million increase sequentially and I think over the last three years or four years, that figure has been relatively stable moving quarter-to-quarter. And then maybe what are these items that you outlined is seeing a step-up, which of those items are sustainable moving forward?

Sure. I can give you a little bit more detail on the quarter-to-quarter, the sequential kind of growth and where the costs were. You know all the big elements that we talked about on greenfields and acquisitions, right? As the acquisitions stepped in, you get a little bit more of those costs. But through the big items, one of them we have that non-cash stock comp piece, right? So from a quarter-to-quarter perspective, remember last year we had a reduction in that, and this year was more of a positive number and a little bit of an increase in that. The benefits costs was another quarter-to-quarter growth part of it. It's hard to guess the timing on the benefits piece, right. Being self-insured, it's all based on claims and when those come through and we just had increased claims this quarter. We are doing a lot of good stuff on our wellness and our healthcare programs, look at plan design as we go into next year as well too. So we're taking some steps to make sure we are providing great benefits to our employees, but also watching our cost as well too. The variable incentive compensation is another one that as we get close to year-end and as our performance is embedded, that has stepped up a little bit as well too. Other items in there, I think we had some benefits from bad debt expense through last quarter. This year the bad debt expense number just ticked up a little bit, again nothing significant, more just based on the dollars of receivables stepping up than anything else, nothing that I would have a concern with any at all. Those are probably the big drivers. Overall, the teams have done a great job kind of managing costs sequentially from quarter-to-quarter. You always have a drive up, because you had a big increase in revenue from second quarter to third quarter, that's always one of the biggest drivers.

With RSG coming on, is there any way to think about OpEx to sales as you look out to fiscal 2016?

That's a great question. It's a little bit too early for me to comment too much. Any general comment which I'd talked about in my prepared remarks is we're clearly thinking about that as a good kind of leverage opportunity to our total operating expenses, right. If we look across the company and our cost structures combined, we think we'll be able to provide some more leverage to our operating expenses to reduce that percent of sales in total, most definitely. A lot of great opportunities, we're doing the work right now on the integration to take a look at it.

Okay. Makes sense. Thanks.

And we'll go to Ken Zener with KeyBanc.

Morning, gentlemen. Paul M. Isabella - President, Chief Executive Officer & Director: Good morning, Ken. How are you?

Doing well. I think you're having a good conference call here based on the stock. Two questions for you. One is opportunity related to the acquisition in the complementary and also for complementary as it appears to be having higher margin contribution. Could you just brief us again really quickly, complementary windows side, how often is that directly related to a roofing project that you're doing? I just wanted to get a sense of that because there's obviously upside in the RSG acquisition related to that category particularly? Paul M. Isabella - President, Chief Executive Officer & Director: I don't – I mean, I personally don't have – I don't think anybody has data on how the complementary of vinyl windows side would tie in a percent basis to roofing work other than you can look at the market and look at our volume. There is no doubt, there is more of a direct tie package wise on the new construction side, the builders go out and are looking for a package, which is where we do a lot of our work. I think the bigger opportunity with RSG, no doubt, is that we – they have customers that do do some sidewall work also, some just roof, but some do everything, and they're going other places. They could be coming to us too, we'll find that out once we do close and look at the customer list to see what the overlap, although we think that overlap is going to be minimal. So the opportunity there is just to arm that 180-or-so person sales force at RSG with a line card of complementary once we close and give those folks one an opportunity to make more commission dollars and have another arrow in the quiver of product availability. But I can't give you any percentages of roof versus sidewall.

But it did sound like complementary was much more tied to the new piece of the business. Is that correct? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. I would say, in my view, from what I have – the data I've seen, there's a strong tie on the new construction side between sidewall product. Yeah, in our favor.

Okay. And my second question is, I think you've obviously discussed pricing and that type of thing, I wonder if you could take a step back with WTI at $45 and comment perhaps what you think that means about the pricing environment as a distributor you might face if you could be potentially facing a more deflationary just because of that input cost or what would be the offsets to that. I'm not talking quarter-to-quarter, but just broadly speaking as a distributor. Thank you. Paul M. Isabella - President, Chief Executive Officer & Director: Just to clarify, you said with the cost – did you say WTI, so you're talking about crude oil prices declining, meaning...

Right. And obviously there's a disconnect to asphalt and seasonal and road demand and that type of thing. But generally as a distributor, if you're potentially facing deflation on one of your product categories. And what the impact might be? Thank you. Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. Thanks, Ken. We've been talking about oil for, goodness, eight months, nine months and the drop that we've seen. We weren't – I think we had portrayed in earlier calls, we weren't as alarmed from the data we had collected based on what we thought was going to happen with, one, asphalt pricing, which did go down and now has stabilized to some degree. And then, two, the behavior at least it was an opinion we had, I had that behavior from the manufacturers to be rational and we try to do and that would be to take that material change to profit. And I think you see it from OC's release and Carlisle's release that that's what they did. So that for us that's good news, because they are not putting it in the marketplace. So I don't think unless there is some dramatic additional change and then asphalt pricing drops further, I just don't see that as being an element that's going to impact us. If anything, maybe on the upside going the other way I could as the manufacturers feel pressure from (56:20).

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

Next, we'll go to Ryan Merkel with William Blair. Ryan J. Merkel - William Blair & Co. LLC: Thanks. Just back on the price for a second. I know the OEMs try to put through June 1 price increase. So is it our understanding that that did not go through to distribution? Paul M. Isabella - President, Chief Executive Officer & Director: At this point, Ryan, for us, that is correct. Ryan J. Merkel - William Blair & Co. LLC: Okay. And then on the residential shingles, the price-cost spread is negative for you guys. I guess, two-part question. One, does that get a little bit better in the fourth quarter just based on comps? And then secondly, how come you can't manage that a bit better? Is that just the OEMs are just standing packed together and not giving distribution any kind of better deals to help you out? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. One, from a comp standpoint, no doubt, we were – last year's Q3 down 3.7%, Q4 down 4.3% on the res side, I think those are the numbers. So you would think we could get some relief there. That's my internal view. So I'm not as pessimistic about losing another 3 points. I think given the environment, we've done a pretty good job of balancing cost versus price. And it is fluid, it doesn't happen in one specific week or month because we're looking at product we bought three months, four months, five months, six months ago and we're selling now, right. So I think we're doing a good job. Could we do better? Of course, I think all of us can do better in what we do. And we'll continue to work real hard to get actual positive pricing in the marketplace and continue to work with our vendor partners to offset that where we can. Ryan J. Merkel - William Blair & Co. LLC: And then my final one there is back to the synergies estimate for RSG. Of that $50 million, roughly what percent is better buying and then what percent would be sort of corporate and just overhead? Paul M. Isabella - President, Chief Executive Officer & Director: Yeah. There's an element. I mean, we haven't gone through the details of the buckets, right. And we'll go through that as we go through time, whether it's during the bond piece or after close and give more detail on it. We're just not prepared right now. As you can imagine, there is an element of buying and it's nowhere near 50%, and I'd like to say it's less than a third right now. But I can't give you the details. As Joe said earlier in his remarks, we spent an awful lot of time over the last couple of months going through the details as best we could using outside consulting to pull apart all the cost elements and look at where there is overlap, et cetera, where there is opportunity on the procurement side. We think we have a very good plan, very detailed, and RSG and ourselves has a history of executing on the cost side. So we're very confident on it. But yes, there is an element of procurement. We will talk in more detail though as we get either closer to close or right after the close with that. Ryan J. Merkel - William Blair & Co. LLC: Very good. Thanks. Paul M. Isabella - President, Chief Executive Officer & Director: Thanks, Ryan.

Thank you.

And that conclude the questions. Now, I'd like to turn the call back to over to Mr. Isabella for his closing comments. Paul M. Isabella - President, Chief Executive Officer & Director: Great. Good questions. Good call. Let me just make a couple of summary highlight comments. Our third quarter sales grew nicely at 8.3% up to nearly $720 million, as we said, attributed to our greenfield acquisitions and same branch increases. As we said multiple times and very encouraging for us, July sales were very strong and we're hopeful, no guarantees of course, but we are hopeful that August and September will be much the same. Our teams are working extremely hard to execute that. We talked about our residential sales growing 13%, which is very encouraging for us. And complementary, a good part of the 10% approximately growth being on the Applicators acquisition, which again for us was an excellent and very strategic acquisition. And commercial up slightly at 1%. We talked about the reasons why in terms of the weather, timing, et cetera. And we're not concerned at all especially in light of the 10% growth we saw last year Q3. Good news is gross margins continue to improve even with this pricing pressure. That gives us even more hope that as demand gets better, pricing pressure will abate and we should see margins improve even more. Talked about our view of EPS at $1.30 to $1.35 and as you know that implies there about $0.67 to $0.72 I believe in Q4. So we're optimistic about that. Obviously, the key is there achieving that sales element through August and September and then a rough approximation of GM that I mentioned to Sam, 23.5% kind of above that slightly for the two months and July, which we still haven't hard closed yet. We've opened up the six greenfields to-date with South Boston, excellent location in South Boston and we'll stop at the six in light of the fact that we're going to be adding the RSG branches. But we won't stop. Strategically we're going to continue to look around the country and do the right thing where we think we have an opportunity to grow, whether it's standalone or with an adjacent branch that we might have in a region. Our balance sheet is healthy. Joe talked about that. And as we go through time with the RSG combination, it's only going to get better with all the great things that are going to come from that acquisition. Our market, I had been with Beacon almost eight years and I'm still amazed that the strength of the market considering some of the challenges we have, it's a great market, it's growing, it's going to continue to grow. We're well capitalized. We'll be even better able to capitalize on that growth as we bring in the RSG group of branches and that excellent team that's going to help us in those Southern exposure states. We'll continue to execute the basics of our strategic plan, which is focused on the customer, strong growth, cost control. And I know adding RSG is only going to strengthen that. We're going to be very focused, as Joe alluded to, and organize a methodical integration with RSG, that leaves nothing to chance, we'll have great communication, we'll be very logical to all and will benefit our customers and will benefit our employees and our shareholders. As always, I want to thank all of our investors for their interest in our company as well as, of course, our customers and our employees for their loyalty. This concludes our earnings call. Thank you.