QXO, Inc. (QXO) Q2 2016 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Beacon Roofing Supply's fiscal year 2016 second quarter earnings conference call. My name is Iela, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. At that time, I will give you instructions on how to ask a question. As a reminder, this conference call is being recorded for replay purposes. This call will contain forward-looking statements, including statements about its plans and objectives, and future economic performance. Forward-looking statements are only predictions and are subject to a number of risks and uncertainties. Therefore, 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 factor sections of the company's latest Form 10-K. These forward-looking statements 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. The forward-looking statements contained in this call are based on information as of today, May 2, 2016 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. The company has posted a summary financial slide presentation on the investor section of its website under events and presentations that will be referenced during management's review of the financial results. On today's call 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. Good afternoon and welcome to our 2016 second quarter earnings call. I want to take a moment to address the format of today's call. Since the 10-Q will be filed later this week, Joe and I will spend slightly more time on our prepared remarks to ensure we provide enough detail on the quarter. Now on to the quarter. As you can see from our press release, we continued the momentum established in the first quarter and had a truly outstanding second quarter. For the reasons I'll address during the call, I believe the second half of the year will be strong as year and that our full year results will exceed the estimates we discussed on the last earnings call. Aided by the acquisitions made this year, most notably the RSG acquisition, which is being integrated very effectively, strong organic growth and favorable weather conditions, we achieved record sales of over $823 million. This represents nearly double the prior year with existing same days growth over 27%. This is incredible second quarter performance, and I'm very proud of the Beacon team and appreciative of our customers. In what is normally our toughest quarter because of winter weather, we delivered positive adjusted EPS, coming in at $0.03, representing $0.23 improvement versus last year. Our team did an excellent job of growing sales and margin, controlling cost, integrating our Q1 acquisitions and, as always, staying extremely focused on servicing our loyal customer base. The financial results are even more impressive when you consider the amount of integration activity we have been engaged in over the last six months. And now, a little more color on the quarter before I provide updates on some of our strategic initiatives and what we're seeing in the industry. Six of our seven regions reported positive growth and each month of the quarter was strong. Our northeast region led the way with strong double-digit growth fueled by contractor backlog and aided by the milder winter versus last year. In addition, the Mid-Atlantic, Southeast, Southwest, and Midwest regions saw strong double-digit plus sales growth. Milder warmer weather did have an impact on these four regions, but contractor optimism and backlogs also seemed to be strong across most of this footprint. On an existing same day basis, sales were up for all three product lines as well, demonstrating our strength in the markets we serve. Residential existing sales were up over 31% in the quarter. This was mostly driven by same-store sales in greenfield growth and the milder winter weather we encountered. Our complimentary sales grew approximately 20% on an existing same days basis. Growth in the quarter was driven from our existing business across most of our footprint. This product line continues its steady increase and has seen positive existing sales growth in 11 of the last 12 quarters. We will continue to focus on growing this product line across our footprint through strategic acquisitions and sales personnel, adding this product to the sales offering. And economic indicators related to this pipeline are positive and should mean solid demand for the full year. Our commercial product line registered 23.5% sales growth for existing same days in the quarter. All of our reported regions grew in the quarter, and five of them experienced double digit growth. Also, it's worth noting that commercial sales have grown in nine of the 11 prior quarters on an existing basis. Along with the solid sales growth, gross margins increased nicely over the prior year. This is the sixth consecutive quarter in which the gross margin percent increased over the prior year. In terms of pricing, we saw a slight decline in the quarter, much as we've had the last few quarters. We were able to offset this for the most part with reduced material cost. I'm not surprised that pricing was slightly down. Again, Q2 is typically our toughest quarter, and even with the milder weather and improved results, there's strong competition in most markets. Recently though, shingle price increase announcements have been made by several manufacturers to be implemented in the May – June timeframe. This is being driven for the most part by severe weather in Texas and the corresponding demand it is driving. We also have recently announced price increases due to the same reasons mentioned above. Other roofing distributors have followed suit and announced in these same areas. Implementation date is in the same May – June timeframe, and we'll be watching this very closely over the next few months. And one last comment on pricing. One of our primary goals, as you know, is to grow sales. We will be smart about our approach to pricing given our growth plans and balance that with our solid management of material input costs. We believe we can keep gross margins in our stated range and will work to maintain the balance between strong growth, solid gross margins and the resulting price movement. Related to working capital, as we have consistently done in the past, we managed working capital very effectively in the quarter. Receivables, inventory and payables are under control. Net expense continues to be very positive and inventory turns were much improved year over year. This resulted in strong cash flow from operations of $80 million on a year to date basis. From an operating expense standpoint, we experienced excellent leverage as we grew sales. When excluding one-time loss related to the RSG acquisition, our operating expense as a percentage of revenue declined nearly 500 basis points for the quarter compared to last year. As we have added over $1.2 billion of acquired revenue, we are intensely focused on minimizing cost increases as we grow the top line while still modestly reinvesting as needed across the company. We are also benefiting from lower SG&A costs related to our bridge consolidation and other SG&A synergies. The operating expense leverage should continue in the back half as the synergies continue to ramp to full run rate. We are very encouraged by the leverage gained in this quarter. And I'd like to provide an update on the RSG integration and synergy plans. We have made excellent progress on the initial phase of the integration. We are tracking to our plan. The primary focus since deal close has been to fully execute on our synergy strategy, drive maximum efficiencies and cost savings in the business, and ensure positive customer impact. In addition, we have successfully transitioned all legacy RSG branches on to the Beacon ERP. We accomplished this through four waves with the last wave being complete on April 2. Our team did an outstanding job as we converted over 85 branches in six months while still running the business very well. Having all branches on our system allows for further integration in the Beacon best practices and enhances our controls platform. Our estimate for fiscal year 2016 synergy savings is on plan and we're working very hard to find upside to that total of $30 million. Overall, post-RSG close, our combined field and headquarters organization structure is performing very well and executing the RSG in the other acquisitions following RSG very well. The size and complexity of the RSG and other acquisitions can't be minimized, and our team has done an outstanding job of rallying, going the extra mile over the last six plus months. The team has proved to be extremely resilient in the face of change and it performed very well. As important, the organization is primed for more growth. Vital training has been stepped up for the branch and sales teams. Customer programs are in place to insure outstanding service and incremental sales volume. Our supply chain, information technology, finance, and audit teams, to name a few, have been enhanced. All of the elements that make us successful are under control and fueling our performance. We are absorbing our acquisitions and making Beacon stronger as a result. We will remain very focused on continuing this progress. As an example, we're now placing extra focus in energy on sales synergy resulting from the recent acquisitions. Our combined 600-person outside selling force is one of the largest in the industry, and they are focused on growth and customer value add. These in addition to our 360-plus branch managers and a 500-plus person inside sales team greatly enhances our ability to service customers and grow. We have a very diverse mix of business with our three product lines, and our team is focused on expanding these across our footprint. And now a little information on greenfields and acquired growth. As you know, greenfield branches have been and will remain a piece of our growth strategy for many years, as do acquisitions. From fiscal 2012 to the current year, legacy Beacon and RSG has opened up 65 greenfield branches. As these mature, they will continue to contribute to the top line as they gain market share on the bottom line as the cost base is leveraged from the higher revenue. Our strategy to pursue opening more greenfield locations three years ago is proving fruitful as they grow to maturity and contribute to our sales gains. To date this year, we have opened up one branch, which is by design. Given the acquisitions we have closed this year and the integration effort required, we most likely will end up at one or possibly two for the full year. As we have said in the past, this number will vary year to year based on our acquired business load and business conditions. There are many markets we want to expand in. and if acquisitions don't materialize as planned, we will consider opening up greenfield branches. Now I'd like to spend some time specifically addressing the six acquisitions in addition to RSG we have made this year. In December we purchased: RCI Roofing Supply of Omaha, Nebraska; Roofing & Insulation Supply of Dallas, Texas; and Statewide Wholesale of Denver, Colorado. RCI consists of five branches selling mostly residential and commercial roofing products. The acquisition gives us solid density across their footprint and the ability to service our Nebraska, Iowa, and Colorado customers. RIS, Roofing & Insulation Supply, consists of 20 branches selling residential and commercial insulation and residential roofing-related products. The insulation portion fits into our complementary line of business and will augment an existing product line for us. We like the prospects of this business tapping into a fast-growing industry bolstered by energy conservation and being able to leverage their business model across the wide breadth of Beacon locations. Statewide consists of one branch in the Denver market, selling primarily residential roofing products. It has a great reputation and customer base that will now have increased service options across our large branch footprint in that market. In April, we acquired Atlantic Building Products out of Eastern Pennsylvania, and Lifetime out of Charlotte, North Carolina. Atlantic Building Products serve customers out of two branches and sells mostly complementary products. We feel its business model aligns with our strategy and allows us to increase our footprint in a busy Philadelphia marketplace. Lifetime has six locations that sells mostly complementary product and serves the Carolina market. Lifetime also fits within our strategic framework and allows us to better serve the southern Virginia and Carolinas, where the demand for complementary products is strong. Today we announced the acquisition of Fox Brothers Company out of Central Michigan. Fox has four locations selling mostly complementary and residential roofing products. We like the alignment to our business model, as Fox gives Beacon better presence in the central and southern Michigan area from which to greatly expand. These six most recent acquisitions are all great companies that also give us the opportunity to expand all of our lines of business within their footprint. This will act as another growth lever for us in markets they serve in the future. To summarize acquisitions, as I've said in the past, it is difficult to predict the timing. I can say, however, that since we announced the RSG acquisition, we have seen a noticeable increase in the level of acquisition-related activity, which ranges from initial contact from prospective sellers to sellers advancing their timelines to deals actually being done. We'll continue to make acquisitions where it makes economic sense, knowing at the same time we have to drive our debt leverage lower. Since the close of RSG on October 1, we have been able to reduce our debt leverage to 3.6 times. We're very focused on our commitment of getting below two times in three years. Before I get into our guidance, I would like to talk briefly about the significant storm activity in a few of our key markets that I mentioned earlier. In the past two months, there have been hail events in South Carolina, Texas, and other smaller markets we serve. The extent of the roof damage is being evaluated, but early estimates point to a large amount of re-roof as a result. We could see strong sales volume in these areas over the balance of the year. This is fueling the higher end of our range that I'll speak to in a moment. Our ability to service contractors in the impacted storm markets has been greatly enhanced as a result of the large RSG branch additions as well as other acquisitions we have recently closed. Adding a large amount of Southern U.S. branches from RSG and the Wholesale Roofing acquisition we executed in late 2014 has greatly expanded our available capacity to service customers working in these storm markets. We are currently mobilized in these markets with trucks, people, and inventory to ensure we provide our usual excellent service. Now I'd like to provide an update to the guidance we gave on the first quarter call. With an additional quarter of visibility and coming off our incredible Q2 performance, I'm very optimistic about the full year and anticipate earnings above our prior estimates. Before I get to the specific elements, I'll set the table by saying that for April, we had existing same-days growth of approximately 15% over the prior year. There was one less day this April versus last year. This is a good start to the quarter after a strong March, especially considering the more difficult weather, both rain and snow we saw during the month of April, especially in the first half of the month. Based on what we've seen for the first two quarters and current trends, I expect full year revenue to be in the range of $4.1 billion to $4.2 billion for 2016. And in terms of gross margin, I expect us to be in the range of 23.5% to 24% for the full year. Regarding our SG&A expenses, excluding one-time costs and new purchase accounting related to the RSG transaction, we expect to be in the range of 17.8% to 18.1% of revenue for the full year. This is solid improvement from the prior year. As for adjusted EPS, the current analyst range is $1.70 to $2.12 with a midpoint of $1.92. On our last earnings call, I commented that we would be in the range of $1.80 for the full year. Now that we're deeper into the year and with our strong first half performance and favorable market dynamics that I've outlined, I now believe that we will be in the $2 to $2.10 range for the full year. I do want everyone on the call to understand that my optimism is not unbridled, but my level best guidance at this point in the year. As we have said in the past, it's very difficult for us to give full year guidance with the unknown variables we face such as pricing, demand, and storm repair, and the resulting sales variability quarter to quarter that occurs. At this point, many customers and vendors see a stronger demand profile for the second half in most parts of the country and meaningful spring storm volume has occurred. We will continue executing the fundamentals of our customer service, pricing discipline, cash generation, cost control, and continued synergy attainment with RSG and all of our acquisitions in order to finish the year as strong as we started. And now I'm going to turn the call over to Joe so he can provide further detail on the financial highlights of the quarter. Joe?

Thanks, Paul, and good afternoon, 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 second quarter slides that were posted to our website this afternoon. We've included a few extra slides this quarter to help explain the results in more detail. In my prepared comments, I'll also go into more depth on a few key areas like synergies, RSG acquisition costs including amortization, and our outlook for the remainder of the year. Overall, it was a great quarter. Slide 3 provides an adjusted income statement for the quarter and year to date, excluding the non-recurring costs associated with the RSG acquisition as highlighted in our press release. We had strong top line growth of 99.3% for record second quarter sales of $823.5 million. This was driven primarily by the acquisitions which are made over the last year consisting of RSG, ProCoat, RCI, RIS and Statewide. In addition to the acquisitions, we saw significant growth in our existing markets of 27.7%. Gross margin increased over the prior year by 40 basis points. Operating expenses were up in total, mainly due to higher volumes and costs related to the RSG acquisition. Excluding those costs, operating expenses as a percentage of sales declined 490 basis points, demonstrating great leverage. As a result, for the quarter we achieved an adjusted EPS of $0.03, an improvement of $0.23 over the prior year, a very solid quarter with positive earnings in what is typically our toughest quarter of the year. For comparison purposes, there are 64 days in Q2 of fiscal 2015 and 63 days in fiscal 2016. Paul already went through our Q2 sales results as shown on slide four, 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 on an existing branch basis were higher in each of the three months of the quarter. January sales were up approximately 20%. February sales were up 44%. And we finished the quarter strong in March with sales up over the prior year by 18%, driven primarily by a 31% increase in residential sales. On a very positive note, our total gross margin rate was 23.8% for the quarter, up 40 basis points from a year ago and, on an existing market basis, it's up 70 basis points. Sequentially, our gross margin rate was reasonably flat, down about 10 basis points from Q1. Pricing declined in the quarter roughly 230 basis points from the prior year. This is slightly more than the past couple of quarters driven by both residential and commercial market pricing declines in specific geographic markets. This was partially offset by a product cost decline of 180 basis points. Mix drove 90 basis points of improvement in the quarter, primarily due to increased sales in our residential line of business. There was a slight decrease in direct sales in the quarter compared to the prior year, and that had a positive impact on gross margin as well. The percentage of direct sales decreased to 18% from 18.4% in the prior year. As we've previously mentioned, our direct sales have a lower gross margin and operating expenses as compared to our warehouse sales. Commercial and residential prices declined approximately 2% to 3% compared to the prior year. This was partially offset by complementary prices that were up slightly. We were able to offset a majority of these price declines with lower product costs across all three categories. Our product mix had a favorable impact on existing gross margins as volumes shifted into more residential products. Residential roofing increased to 51.4% of our sales versus 50% in the prior year. Commercial declined to 31.5% from 32% in the prior year, and complementary decreased to 17.1% from 18% in the prior year. On a sequential basis, mix also had a favorable impact as we traditionally see occur in Q2. Residential was up 270 basis points, complementary up 80, and commercial was down 350 basis points. Now on to more detail about our operating expenses. Total operating expenses were $191.9 million or 23.3% of sales. This represents a year-over-year increase of $80.9 million. This amount includes operating expenses from acquisitions of $82.3 million, of which $11.2 million was RSG acquisition related costs. As shown on slide five, excluding acquisition costs, our existing market operating expenses were only up $5.4 million over the prior year and down 470 basis points as a percentage of sales. We're getting great cost leverage with the incremental volume. As previously discussed, within our existing markets, we do include the greenfields. $0.5 million of the existing market operating expense increase can be attributed to the six greenfields opened up in last year. As you know a greenfield branch will have a higher operating cost as a percentage of sales until the branch is running at average branch volumes. There was an increase in volume related payroll, benefit and stock compensation cost of $8 million, depreciation and amortization was up $0.5 million. These cost increases were partially offset by a reduction in bad debt expense year over year of $1.7 million and other SG&A of $1.9 million. It should also be noted that we're seeing the benefit of the synergies take place. As Paul mentioned, integration of RSG business has gone well and we're on track to our fiscal year 2016 goal of $30 million. The three areas of synergies, as you recall, are branch consolidations, procurement, and other SG&A savings. To date, we have combined 26 branches and began seeing the benefit this quarter. Potentially there are some additional branches that could be combined if the economics are right. We will continue to evaluate these as we go through the year. From the branch consolidations, we've experienced savings from lower head count, lower fleet expenses, lower rent expense and other operating efficiencies that occurred from the combination. Roughly a third of this year's savings will come from branch consolidations. Regarding procurement synergies, we've aligned all legacy and RSG and Beacon purchasing agreements with top vendors. We saw some benefit in Q1, which increased substantially this quarter and it should continue in the third and fourth quarters. And finally, we have captured savings related to staffing efficiencies and overlap. We've been able to realize significant economies of scale through the combining of the two organizations. As we look to the full year 2016 we're on track towards achieving our goal of $30 million in synergies. Interest expense and other financing costs were up $10.5 million versus the prior year. This is primarily driven by our debt balances increasing over $900 million in conjunction with the RSG acquisition. We are managing this very closely and making every effort to delever and reduce this cost. I'll talk more about that when I review the balance sheet. Our income tax benefit reflected a lower effective tax rate of 37.5% for the year compared to 41.5% last year. This was driven primarily by the treatment of the one-time RSG acquisition costs and other discrete items. Adjusting for these, our effective tax rate would be approximately 39% which is consistent with the prior year. On a related note, it's important to make you aware that our cash tax rate was under 10% when you include the impact of the RSG NOLs and transaction costs from the acquisition. They represent a significant benefit to our cash flow, in fact, over $30 million this year alone, and are one of the ways that allows us to continue to pay down our debt. Our net adjusted earnings were $1.7 million for the quarter compared to a loss of $9.8 million last year, an increase of $11.5 million. Diluted adjusted net earnings per share were $0.03 compared to a $0.20 loss for the same period last year. Our adjusted EBITDA for the quarter was $36.9 million or 4.5% of sales compared to negative $3.6 million in the prior year, negative 0.9% of sales, outstanding year-over-year improvement, driven by our strong sales growth and operating results. Now I want to provide some clarity on the non-recurring expenses that we list on the press release and also on slide six. We incurred $12.4 million of non-recurring costs in the quarter and $41.9 million year to date. Approximately $5.5 million of costs are related to the integration, including severance and retention costs and lease termination costs. $1.2 million is related to the cost of the new debt issuance expenses that are amortized over the life of the debt agreements. $5.7 million is related to the step up in amortization with the increased customer and tangible assets from the RSG acquisition. For the full year, we expect this to be approximately $23 million. Slide seven provides a breakdown of our amortization costs both including and excluding this incremental amortization amount. Now let's talk about the status of our balance sheet. As noted on slide eight, cash flow from operations year to date was a positive $80.7 million compared to $62.5 million last year, a great performance year that supports the funding of our acquisitions and the paydown of debt. In total, we continue to do a great job in managing our working capital. Our AR balance has increased in dollars due to the acquisitions, but our total DSO has remained reasonably flat to the prior year, around 39 days. At the same time, we've also reduced our bad debt expense down to 0.1% of sales for the quarter. Our inventory balance has also increased due to the acquisitions. But with the increased volume of sales, our turns have improved from 2.9 last year second quarter to 4.1 this year. Our days payable outstanding is also consistent to the prior year at about 40 days, overall, solid working capital management. Capital expenditures excluding acquisitions in Q2 were $8.9 million compared to $2.2 million in Q2 of 2015. We have been carefully evaluating our fleet with the addition of RSG. In fiscal year 2016, we still expect capital expenditures to be less than 1% for sales. Net cash used for investments was $941 million, reflecting our acquisitions year to date. Keep in mind that $307 million of the RSG acquisition was funded through the issuance of common stock and is not reflected on the cash flow statement. We paid down over $50 million of our debt this quarter, which allowed us to significantly reduce our net debt leverage, as noted on slide 10. Keep in mind that we were able to reduce the debt in addition to funding over $100 million of acquisitions year to date excluding RSG. At the end of second quarter, our net debt to EBITDA leverage stood at 3.6 times. That's down from the Q1 number of 4.2 times and our October leverage ratio of 4.3 times. We're making great progress, and we continue to see improvement that generates strong cash flows and EBITDA. We still intend to meet our commitment of reducing our leverage to under two times by 2018. Our current ratio was also strong, 2.03-to-1 versus 2.32-to-1 at Q2 2015. Now I'd like to quickly highlight some of the first half results as shown on slides 10 and 11. For the first half of the year we had strong top line growth of 78.4% for record sales of $1.8 billion. This was driven primarily by the acquisitions we have made. In addition, we saw significant growth in our existing markets of 18.3%. Gross margin increased over the prior year by 60 basis points. Operating expenses were up in total mostly due to the higher volumes and costs related to the RSG acquisition. Excluding the RSG transaction-related costs, our existing market operating expenses as a percentage of sales declined 210 basis points, again demonstrating great leverage. As a result, we achieved an adjusted EPS of $0.44, an improvement of $0.38 over the prior year. In summary, pricing declined in the first half roughly 200 basis points from the prior year. All this was completely offset by a product cost decline of 230 basis points. Mix within the legacy Beacon branches also drove improved margin. Our product mix had a favorable impact on existing gross margins. Volumes shifted into more residential products. Residential roofing increased to 49.6% of our sales versus 47.8% in the prior year. Commercial declined to 33.7% from 34.7%, and complementary decreased to 16.7% from 17.5%. Total operating expenses were $398.2 million or 22.1% of sales. This represents a year-over-year increase of $173.5 million. But this amount includes operating expenses from the acquisitions of $179 million, of which $41.9 million was RSG acquisition-related costs. Excluding the acquisition costs, our existing market operating expenses were only up $10.5 million over the prior year but down 250 basis points as a percentage of sales, again, great leverage. Interest expense and other financing costs were up $24.1 million versus the prior year, due to the RSG acquisition financing. Now before moving on to Q&A, I'd like to provide a little more detail on how we did in Q2 compared to the Street estimates and also discuss our current guidance going forward. We exceeded the average Street estimates for the quarter by a healthy $0.24. The majority of that was the result of our revenues which were over 20% higher than the street average, almost $150 million more in revenue. Our gross margin rates were pretty much aligned with where most of the analysts were. The dollars of gross margin were significantly higher, just due to the higher revenues. We did achieve better operating expense leverage than most analysts had anticipated, in fact, almost 300 basis points better, due primarily to benefits of our synergies and our lean cost structure. In total, it was primarily the high revenues and better operating expense leverage that drove the overperformance to the Street estimates. As Paul mentioned, we're raising both our revenue and our adjusted EPS guidance. We expect revenues to be in the range of 4.1 billion to 4.2 billion, and adjusted EPS to be in the range of $2 to $2.10. Slide 12 provides more details on the key assumptions underlying our sales guidance. Achieving the low end of the range of $4.1 billion assumes the second half of the year's 30% greater in sales per day than the first half. This is driven in large part by the seasonality of our business. It also assumes a low to mid single-digit existing market growth in the second half of the year that results in full year existing market growth of approximately double digits. In the low case, we do not assume any price increase will stick and we do assume that some of the volume in Q2 is pulled forward from the second half of the year. We've also included about $70 million in additional revenue over the first half of the year due to the acquisitions we completed so far this year. Achieving the high end of the range assumes high single digit existing market growth in the second half of the year, which results in mid teens for the full year. It also includes an assumption that we will be able to pass along some price increases in selected store markets, but this is partially offset by assuming some of the high volume in Q2 was pulled forward from the second half of the year. It also includes a little higher volume from the acquisitions that we did and average storm impact in the second half of the year. Slide 13 lists some of the key assumptions for the adjusted EPS guidance. You'll notice that due to the seasonality in our business, we count on driving almost 80% of our EPS in the second half of the year. To hit the low end of the range, we need sales of approximately $2.3 billion in the second half of the year. This case also assumes that product mix is consistent with the first half of the year and also assumes that gross margin will be up about 20 basis points from the first half of the year, which is ten basis points from the prior year. And that's primarily a result of the full impact of the RSG purchasing synergies. The low end also assumes our traditional operating expense leverage of 50% variable costs and total RSG synergy improvements at the target level for 2016 of $30 million. To hit the high end of the adjusted EPS range will require sales of $2.4 billion in the second half along with the ability to pass through the price increase previously noted. Gross margin is assumed to be up 30 basis points in the second over the first, which is roughly 20 basis points over the prior year, due to slightly improved pricing and the full impact of the RSG purchasing synergies. The high end of the range assumes our traditional 50% variable cost structure and assumes some minimal synergy achievements over the target of $30 million. I know I spent a lot of time unpacking the current quarter in the forecast. There's a lot of complexity in our financials right now with many moving parts as a result of the acquisitions. I wanted to be sure to spend as much time as possible providing clarity to the quarter's results so that all of our investors will be as excited in our future as we are. We'll now respond to and take any questions you may have. Due to time constraints, we're limiting questions to one per caller, please.

Our first question comes from David Manthey from Robert W. Baird. Your line is now open. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): Okay, thank you. Good afternoon, guys. Paul M. Isabella - President, Chief Executive Officer & Director: Hey Dave.

Hey, Dave. David J. Manthey - Robert W. Baird & Co., Inc. (Broker): As it relates to the guidance, as everyone, I guess I'm a little confused here when we look at you saying average storm volume versus above average, I mean, given the timing of the Texas storms in mid March and even into April, and the size of them, and your exposure to those areas, it would seem like it would almost be impossible not to have an above average storm period. So I'm just wondering given the fact that you exceeded Street estimates as you said by $0.24, but you're only increasing the high end of EPS range by $0.23, just hoping you can give us a little bit more color on what you mean basically by average. Do you mean average from here, or average including the storms you already know about? Paul M. Isabella - President, Chief Executive Officer & Director: Dave, let me take a swing at it. You look at where we're at through the first half and we know, as anyone that looks at it and can assume there's been some pull forward, very difficult to calculate. And also knowing, based on that and other factors, there's variability. We did the best job we could with our internal team looking at what the back half looks like including that current storm volume. Now, remember, the majority of that volume is centered around Dallas, and, of course, we have branches there. We have about 11 or so that we can go further out, let's call it 11, that can service that. But as you look at the potential gain there, it's nowhere near an East Coast hurricane type event or even Hurricane Ike going up through the middle of the country. What we mean by normal is other areas of the country besides the bit we saw in San Antonio, the bigger volume we saw in Dallas, for sure, there's a little bit of volume. It won't really move the needle, but it will help the east coast branches in Spartanburg, South Carolina. We're really talking about Denver, which is on the backside of hail they've had a year, a year and a half ago. The upper Midwest that had hail a year, year and a half ago. We still have four to six weeks left in the storm season, and I think it's just us looking at that saying what's the entire country done and then us trying to predict the variability of how much pull-forward. We know there's some in there versus these last five, six months. That's as simple as it is, Dave.

Our next question comes from Keith Hughes from SunTrust. Your line is now open.

Thank you. Just talking on acquisitions, you highlighted some of the deals recently, and some of your deals of late have had more of a complementary product focus in various areas. I just want to talk more about what the strategy is there. How do you integrate those with your surrounding roofing focus branches and what does that look like in the future? Paul M. Isabella - President, Chief Executive Officer & Director: Great question. And I tried to allude to it without spending a whole page on it. But if you look at what we've done, there certainly was a compliment of roofing acquisitions we did. We talked about Statewide and RCI. If you look at Lifetime and Atlantic, they're on the East Coast, Lifetime in the Carolinas, Atlantic up in Philly, in an area where we already have some pretty good complementary businesses. So they will just be a good add-on to an already strong base and they fill out geographies some a little bit different product lines down in the Carolinas within complementary. So they fit quite nicely as does RIS and what we're trying to do is expand all of our lines of business, and as I said, we can't predict when specific acquisitions will come available, but as we see ones that make sense, that drive good EBITDA and fit strategically, we're going to go after those. Now in the case of Lifetime and Atlantic, there's not a lot of sales volume but they're also in areas where we also have a very strong commercial and residential roofing business. So we will use their branches, their salespeople to go ahead and offer those two product lines in addition to the complementary. And really the same for Fox Brothers up in Michigan, they have very large branches. They do sell shingles, but we believe we can sell even more shingles and we also can introduce commercial roofing, which we're going to do in that area. So I think it fits nicely into our strategy of buying good acquisitions in good geographies whether they're adjacencies or somewhat separate because if you look at Michigan, we're in Detroit and Grand Rapids only, all commercial roofing. Although our team there has a very good experience with residential products, it's just a great base for us to expand.

I think it's a combination of the two pieces, as Paul mentioned, Keith, which is really good. It's both complementary spread through our branches plus also the locations. Getting into good locations that we're not in and really trying to enhance and increase our geography as well, too.

Our next question comes from Kevin Hocevar from Northcoast Research. Your line is now open.

Hey, good afternoon, everybody, and congrats on a nice quarter. Wondered if you could comment on inventories. Wondered if you could break out the legacy inventory per branch versus the RSG inventories. Give us a sense where that's at. And with the upcoming price increase, I mean, the industry's looking pretty strong. Wondering your plans on inventories heading into that price increase. You think it has a decent chance of sticking, do you plan on building inventories ahead of it or kind of curious of your thoughts on how you're going to manage that.

Good question. Sure, I'll go through some details of the first part for you, Kevin, around our kind of inventory profile today, and then Paul will talk a little bit about our go-forward strategy. So our inventory profile today from a turns perspective, I'm going to cover both. Turns as I mentioned, 4.1 versus 2.9 last year, great improvement. If you look at the legacy branches, it's similar. Our Beacon legacy turns with 3.9 versus 2.9. The RSG legacy branch is 4.6. And then those branches we combined had turns of 4.3, so as you can see just great performance on all of them. Now look at the inventory per branch. Our Beacon legacy per branch inventory went up slightly from $1.340 million to $1.360 million, so 1%-ish, and really driven primarily by the increased sales. We had 25%-plus sales going through them, and that's what really drove the inventory to be up slightly. So overall, well managed and in good shape. The legacy RSG branches, their inventory per branch about $1.940 million each. And the branches we combined had a little over $2 million of inventory per branch on those combined ones, again, bigger branches. So in total, our inventory per branch went from $1.340 million to $1.430 million. So up a bit, but really our focus around the turns, you see significant benefits improvement in the turns and also the legacy Beacon branches on an inventory per branch, right in line with where they have been. Paul M. Isabella - President, Chief Executive Officer & Director: And in terms of the second part of your question, Kevin, again, I'll say we're managing inventory very, very well. As I said on the last call, there was no planned winter buy; there was not a winter buy. We bought December, January, February for the incremental volume we saw, and you can obviously see the increase we had year over year. In terms of what we're doing now, of course we're going to buy inventory to satisfy demand to service customers, especially in the Texas market. And as I alluded to, that is fueling the manufacturers' price increases and ours. And also with ours, it's a result of increased costs as we move more trucks, people, et cetera into the area. So in general, our inventory is going to stay well under control, and we're going to buy what we need to satisfy demand. We're certainly not going to do any equivalent of a winter buy in the third quarter. That's the best way I can answer that.

Our last question comes from Bob Wetenhall from RBC Capital Markets. Your line is now open.

Hey, pretty awesome quarter. Paul M. Isabella - President, Chief Executive Officer & Director: Hey, Bob.

Nice to see. Hey, talk me through – and thanks for all the detail. You guys did a great job. I'm just trying to think about – you touched on a lot of things. I think Joe's comments were there were a couple of moving pieces. I'm just trying to understand the interplay between the mix shift in the second half of the year and how we should be thinking about organic growth trends by product line and also how that relates to your comments that pricing was down, but you're going to keep getting some raw material relief as well as mix benefit. And we're just struggling to reconcile the two. I know there are a lot of moving pieces, but it would just be great to understand how in back half of the year speaking to your guidance we should think about that. Thanks and good luck, guys. Paul M. Isabella - President, Chief Executive Officer & Director: Thanks, Bob.

You bet, Bob, this is Joe, and I'll give you just a quick view on some of the mix shift parts. As we put together the forecast on those two bookends, the low end and the high end, in both cases, we really assume the mix pretty consistent in the second half of the year to what we saw in the first half of the year, which as you know, there was more residential product in the first half of the year than we had seen in the prior year. So we're thinking that same shift is what we're going to see in the second half of the year. So there will be an improvement and an increase in residential product, which'll drive a mix gain or benefit slightly in the second half of the prior year. But it should be pretty much aligned with the mix of products. The residential versus complementary versus commercial sales mix that we saw in the first half of the year we'll see in the second half of the year. Paul M. Isabella - President, Chief Executive Officer & Director: And related to the pricing element, we've seen for the last number of quarters, and I think I mentioned it in my prepared script, negative price. And I think it's just a function of the demand not being quite as strong, and then the volumes, of course, the corresponding volumes. We have offset that to a large part over the last few quarters. We just do not project any major flip on that, meaning that all of a sudden because of Texas, let's say, the whole country is going to go to positive pricing. Of course, we would enjoy that if it occurred and we're certainly working to that end. But as we looked at the base case, it was similar negative pricing to what we saw, with the offset thereabouts in the product cost because we think we have some good trending there. And I think in the best case it lessens in that fourth quarter let's say or even later fourth quarter gets closer to zero as we make improvement with pricing. And it depends on the degree. In Texas, the manufacturers announced increases in the 3% to 5% range. We announced something larger and so did our competitors just because of the amount of equipment and people we have to bring in to mobilize, our costs are going to go up a bit. So we've just done our best job at predicting what we think the back half looks like with all the variables we have. And we think we laid out a pretty concise plan of the $2.00 to the $2.10 based on all the elements that could potentially impact it.

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