Paul M. Isabella - Chief Executive Officer, President and Director Joseph M. Nowicki - Chief Financial Officer, Executive Vice President and Treasurer.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division Ryan Merkel - William Blair & Company L.L.C., Research Division Kathryn I. Thompson - Thompson Research Group, LLC Michael Jason Rehaut - JP Morgan Chase & Co, Research Division Sam Darkatsh - Raymond James & Associates, Inc., Research Division Kenneth R.

Zener - KeyBanc Capital Markets Inc., Research Division Brent D. Rakers - Wunderlich Securities Inc., Research Division Neil Frohnapple - Longbow Research LLC.

Good morning, ladies and gentlemen, and welcome to Beacon Roofing Supply's Fiscal Year 2014 Second Quarter Conference Call. My name is Tim, and I will be your coordinator for today. [Operator Instructions] 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 future financial performance of the company, including the company's financial outlook.

Bear in mind that such statements are only predictions, and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings.

The forward-looking statements contained in this call are based on information as of today May 9, 2014, 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 Factor 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. Now I'd like to turn the call over to Mr. Paul Isabella, President and CEO. Please proceed, Mr. Isabella..

Thank you, and good morning, and welcome to our 2014 second quarter earnings call. I'd like to start by addressing the overall market dynamics in Q2. As we have stated in the past, weather can impact our business, both favorably and unfavorably.

Our second quarter is typically our lowest sales and EPS quarter of the year, as many of our branches are in northern climates, and harsh weather does impact contractors' ability to start and complete work. Snow, ice, wind and cold does have an impact on roofing.

In the second quarter, the harsh weather never let up not only for our northern branches but many of our other branches that typically see milder winters. This impacted our results. While weather can impact the timing of work being done, we believe it does not impact the overall demand over the course of the year.

In general, the work will still need to be done, and based on the severity of this winter, we feel it will translate into additional work besides the pent-up demand. As a result, we believe that demand for both residential and commercial work will be strong for the remainder of the year.

From a geography standpoint, the results of 2 of our reported regions had an impact on our results. The Northeast and Midwest were well off of last year's sales numbers and had a combined sales miss nearly equal the entire company miss year-over-year. This type of sales miss has a major impact on competitive pricing and cost leverage in those markets.

From a gross margin perspective, these 2 regions made up nearly 60% of the total GM miss for the quarter year-over-year. A third region, the mid-Atlantic had a 15% miss versus prior year. This miss, combined with the Northeast and the Midwest, generated a sales miss way well above the total company miss.

And all 3 of these regions combined accounted for the total company gross margin miss year-over-year. Many parts of our mid-Atlantic region are in milder weather geographies. These branches were not spared the impact of the prolonged unseasonal winter.

Despite the difficulty some of our regions had, our Pacific region was up 12% year-over-year, and the Southeast was up nearly 9%, very solid performance. Our large Southwest region was up 1.3%, being up against strong comparisons from the prior year.

However, even the strong sales performance from these regions wasn't enough to offset the northern branch misses. Typically, during Q2, we make cost adjustments, which we did this year. However, we couldn't offset the sales and GM miss in such a short period of time.

We know that demand will come back, and we're very focused on the full year as we run the business day-to-day. Along the same line, given our confidence in our business model and growth strategy, we did not slow down our investments in the quarter.

We used the strength of our balance sheet to continue to invest in new equipment, new branches and inventory. We are confident that these actions will position us well to take advantage of demand in the future. And now onto the numbers. We begin by reporting revenues of $385 million. The quarter began much like we ended the first quarter.

The harsh weather that started in November and December worsened in January and February and wasn't much better in March, which is a cause for our year-over-year decline of 7.5%.

We did, however, see some slight improvement in March, low-single digits year-over-year but did not -- but not enough to offset the impact of the first 2 months of the quarter. Diluted earnings per share for the quarter ended at a loss of $0.25 versus breakeven in the prior year.

This fell well short of our internal expectations and, definitely, is a number we do not feel good about. The bulk of the impact can be attributed to a number of factors from soft demand that lowered our top line and also created pressure on our gross margins, plus the operating expense impact of our investments in new branches over last year.

While keenly aware of the need to drive the business to achieve monthly and quarterly performance, we understand the balance required to execute our long-term growth strategy. On the cost side, greenfield openings, bad debt, which we believe will be recovered, and other cost increases also impacted EPS in the quarter.

The biggest piece of this was our investment in new branches. For the full year, however, they will add 2% to 3% incremental sales. We work very hard to get a number of them opened during the quarter. Q2 gross margins ended at 22.5% versus 24% in 2013. This was also lower than the 23% we reported in Q1.

We saw a pricing decline in the quarter by 1.5% as a result of the overall market demand, partially offset by decreased product costs. This impacted gross margins by 90 basis points.

The mix of our business also shifts to lower-margin Commercial Roofing and Complementary Products as the weather had a more significant impact on the residential products. Sales in each line of business were down, although Residential Roofing was down the most from the prior year. This mix shift impacted gross margins by 40 basis points.

All of our regions have announced price increases, and we're optimistic that pricing will improve as demand picks up in the second half of the year. We did see gross margin improve in the quarter, with March ending at 22.9%. We have stressed in prior calls that we will continue our greenfield investment strategy.

The startup of any new branch incurs additional operating expenses, for which we will not have immediate sales to offset. We opened 4 new greenfields in the quarter, which makes 8 for the year and 17 since last year.

In the quarter, incremental operating expenses from these 17 greenfields contributed an additional $3.9 million in cost versus the second quarter of last year. In addition to the greenfield, we have seen an increase in our health care costs, which added about $800,000 year-over-year.

Also, the soft winter demand increased the aging of our accounts receivables and drove an incremental $1.4 million in bad debt expense to increase our reserves. We do -- as I said, we do believe we'll recover this bad debt as we collect from our customers.

All of this was offset to some extent by the continued leverage of our operating expenses as we reduced our spending in non-fixed areas. That being said, operating costs within the existing markets ended at 27% of sales and approximately 350 basis points above last year's rate. Keep in mind, our new greenfields show up in our existing market numbers.

A few comments on growth. From an organic standpoint, as I said, sales declined 7.5% in the quarter. We began January, down 14%; February, down 15% and then saw a positive 3% growth in March as the weather broke slightly. Since we had no acquisitions in the last 12 months, organic sales equal our total sales for the quarter.

In addition, we had the same number of selling days, so this also reflects the same days basis. From a strategic standpoint, we continue to procure growth opportunities from acquisitions and greenfield branch openings.

On past calls, I've said we are targeting approximately 25 new branches for the full year, and based on our progress to date, we are on track to hit that number. As I said, we opened 4 more branches -- I'm sorry, we opened 4 more branches in April and month-to-date, May, to bring the 2014 total to 12.

We have signed 20 leases for the balance in progress. I'll continue to give updates on this during the year. As I've said, these branches should add 2% to 3% organic growth for the year. For 2015 and beyond, we are planning approximately 20 new openings per year. Consistent with what I've said in the past, we remain active in the acquisition market.

We continue to talk to numerous companies. It's still very difficult to predict when owners will sell but our intent has not diminished. This has been and will be a vital part of our growth story. By line of business, our Residential business was impacted the most, down 12.1%. Our Complementary business declined as well, but only 4.1%.

We do expect to see our Complementary business grow in the second half, as new construction and remodeling activity gains more strength. Our Commercial business was down the least at only a 2% decline.

We continue to be very optimistic regarding our Commercial business in the second half of the year, given the number of projects and bids currently in process. Now a little more on the current market conditions. As I said, selling prices were down in the quarter, but we don't see this continuing in the second half.

Most manufacturers have announced or implemented price increases in the 5% to 7% range, take effect in the third quarter. As I said, March gross margins ended at 22.9%, and it appears April is trending above that. As demand continues to pick up, we are optimistic about being able to pass on these cost increases to the end market.

In addition, as I previously stated on the last call, we've initiated our own price increase, which will help offset some of the internal cost increases like insurance and benefits. The late harsh winter has prevented any gain in the market to date, but it appears many distributors are poised to raise prices in the May-June time frame.

Strong May and June demand will help firm these. April sales were up 25% over our March sales this year. Year-over-year, they were up 2% and very close to our internal plan. There is no doubt the back half of April had more normalized spring weather in most regions, and our sales were up significantly in the last 2 weeks.

Now for an outlook -- an update on the outlook for 2014. Taking a look at the full year, we believe organic sales growth should be in the 5% to 8% range. This is in line with current industry projections.

We feel that demand for the remainder of the year will be strong, as I said earlier, and we are working hard to make up the sales and EPS miss in the balance of the year. All branches and leaders have adjusted plans for the second half.

It's been a challenging gross margin environment, with the severe weather causing lower demand and driving aggressive pricing. We have been proactive about buying ahead of the vendor price increases and getting price increases out into the regions.

We expect through these steps and strong demand, margins will be in the 23% to 24% range for the full year. With Q2 behind us, we're optimistic about the second half of the year. Price attainment is critical during this time, and we're very focused on this, along with our constant focus on customer service.

As I talked about in Q2, operating costs did rise as a percent of sales year-over-year. We pride ourselves on focused cost control, and we'll see that play out in the second half. We will continue to invest in the business through greenfields and ensuring our fleet operations are in top shape.

These types of investments will pay off quickly, as the new branches grow to maturity over the next few years, and we realize lower fleet expense. We believe full year operating expenses will be in the 17.5% to low 18% range. For the year, we see operating income in our stated range of 6% to 8%.

And from an EPS standpoint, as best we can see now, we think we'll be at the bottom portion of the current analyst range, which is $1.50 to $1.80. As I said in the past, our long-term focus and execution has not changed. We're in a very solid and growing market.

We are growing and have a great team of people who focus on our customer base by providing excellent service. Also, we will continue to focus on sales attainment, gross margin increase and cost control. Now I'm going to turn the call over to Joe, who'll go over some more financial highlights, and then we'll take some questions.

Joe?.

Residential Roofing sales, down 12.1%; Non-residential Roofing, down 2.3%; the Complementary Products sales, down 4.1%. For comparison purposes, there were the same number of days in Q2 of 2013 as in Q2 of 2014, 63 days.

In addition to weather impacting sales, margin was a challenge this quarter as rates decreased 130 basis points to 22.6% from 23.9% last year. This drove a large portion of the unfavorable impact on our year-over-year financial performance.

The lower gross margins were due primarily to lower demand in the marketplace, coupled with a decrease in our selling prices. Overall, average selling prices in comparison to last year's Q2 were down 1.5% due to a challenging pricing environment.

Declines in pricing were across all lines of business, causing margin declines with Residential and Commercial Roofing down 1.5 point and Complementary down about 1 point. We did see product costs come down slightly in the quarter, not enough to offset the selling price declines previously mentioned.

Residential and Commercial Roofing product costs declined approximately 0.5%, while Complementary Product prices were down approximately 1%. In addition, our product mix shifted to lower-margin Commercial Roofing and Complementary Products. Residential Roofing declined to 48.3% of our sales versus 50.8% in the prior year.

Commercial increased to 35.3% from 33.4% in the prior year, and Complementary increased to 16.4% from 15.8% in the prior year. The mix shift in the quarter drove a 40 basis point decline in our year-over-year gross margin.

To summarize, our gross margin decline of 130 basis points, we lost 150 basis points to pricing declines, made up 60 basis points of that in lower product costs and lost 40 basis points due to the product mix shift.

Operating expenses, which are shown on Slide 2, were up just over $6.3 million and increased to 27% of sales from 23.5% in the prior year.

The majority of the increase in spending comes from our continued investment in our greenfields Paul described and added $3.9 million in year-over-year spending from the 17 new greenfields that were not in last year's comparable numbers.

In addition, bad debt expense rose by $1.4 million as a result of softer winter demand pricing and the aging of our accounts receivable, which caused us to increase our reserve for our uncollectible accounts. We've always felt it's important to serve our customers through challenging business environments like this.

We're confident as volume improves, we should be able to reduce the allowance back down. Our health insurance rose by $0.8 million as a result of increased claim costs and the number of participants.

These costs were primarily offset by some lower depreciation, partially offset by lower depreciation and amortization costs, as well as lower selling costs.

Interest expense and other financing costs were up $0.5 million in the second quarter as the 2013 numbers reflected a $1.3 million credit for the recognition of the change in fair value of ineffective interest rate derivatives, which have now expired. Our effective tax rate was 39.3% compared to 40.4% last year.

The savings was primarily from a lower Canadian provincial income tax rate. Net loss, $12.1 million for the quarter compared to a net loss of $0.2 million last year. Diluted net loss per share was 25% -- $0.25 compared to breakeven for the same period last year.

Our adjusted EBITDA or earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation, was minus $7.3 million, negative 1.9% of sales for Q2 as compared to $11.6 million, 2.8% of sales in Q2 2013. The primary reason for the decline was a lower earnings in 2014.

Now a quick moment to discuss the first half year results. This begins on Slide 3. Year-to-date, total sales slightly increased to a first half record of $937 million. Our first half organic sales, which exclude acquired branches, decreased 1.5%.

As Paul mentioned at the beginning of the call, the year and especially the quarter, were impacted by a prolonged severe winter. We had the same business days in the 6-month period for both fiscal year '13 and '14.

Our sales in existing markets by product group were down with the exception of Non-residential, which was up 3.8%; Residential sales, down 5.4%; and Complementary sales, down 1.7%. By geographic regions, our West region grew almost 19% on a year-to-date basis, Southeast was up 12.4% and Southwest was up almost 3%.

The largest decline on a year-to-date basis came from our Northeast at 9.3%, followed by Mid-Atlantic at 8.1%, Canada a 6.8% decline and Midwest, the 3% decline. Gross margin in our existing markets decreased for the first half of fiscal year '14 to 22.9% from 22.4% in fiscal year '13.

Again, this can be attributed to a more aggressive pricing atmosphere due to the lower demand, as well as the mix shift. On Slide 5, we discuss existing market operating expenses. As you can see from the table and as Paul mentioned, we continue to invest in our greenfield strategy.

Greenfield investments drove $6.4 million increase in spending on a year-to-date basis. Percentage of sales, operating expenses in existing markets increased to 21.4% from 20.2%. Interest expense, financing costs and other was $5.2 million year-to-date 2014 compared to $3.9 million year-to-date 2013.

Similar to the quarter, the increase was primarily the result of a 2013 credit of $2.6 million, again, for the recognition last year and the change in fair value of the ineffective interest rate derivatives, which have now expired. Net income was $2.8 million for the first half of the year compared to $18 million in 2013.

Net income per share was $0.06 versus $0.37 in 2013. Regarding the balance of -- or the status of our balance sheet, as Slide 5 shows, cash flow from operations was a solid $36.1 million compared to $20.6 million last year. Capital expenditures in year-to-date 2014, $11.8 million compared to $10.8 million year-to-date 2013.

We still expect capital expenditures to be approximately 1.2% to 1.5% of sales for the full year, mostly due to continued fleet upgrades and additional greenfield costs. Net cash used by financing activities was $37.6 million this year.

We ended the quarter with $34 million of cash on hand and available borrowings of $331.6 million under our revolving lines of credit. Our current ratio was 2:1, same as Q2 2013. The results of our 2 bank financial covenants at the end of this quarter were also improved. Total leverage ratio improved to 1.59:1 compared to 1.62 last year.

And our interest coverage ratio improved to 16.2:1 compared to 15.07:1 last year. These metrics demonstrate the strength of our balance sheet, which provides us with the capability to continue to execute on our growth strategy of new branch openings and acquisitions. We will now respond to any questions you may have..

[Operator Instructions] And we'll take our first question from David Manthey with Robert W. Baird..

First question is the inventory level was pretty high and the turns were the lowest that I've seen in any second fiscal quarter.

I know that clearly, business being slow had an impact on that, but can you parse out or give us an idea of how much was related to just weak sales versus the build of the pre-buy? And I guess the other way to get at that, would be to think about, when you think, "Okay, how much did we lose in terms of revenues this quarter?" Approximately how much that was, we can get an idea of the sort of normalized inventory level if you could..

Dave, I think it's a good question. But we've made a focused strategic decision to buy deeper in the winter. I believe -- we believe that pricing will be -- this is the lowest point of the year in terms of the buy.

I think the manufacturers, because of the pressure they have on themselves, much like we're seeing with some of the health care costs are going to continue to want to push this first price increase through.

I think if you look at the sales miss year-over-year, and then if you attribute it to which we believe majority of it is weather, especially in those northern regions just year-over-year.

You could say we missed 30% of the increase, 20% of the increase could be as a result of missed sales, the rest is the buy we would have -- it probably isn't even that high, it's probably 15% to 20% of the increases because of sales miss versus the load up we did in inventory, most of which is Residential Product..

Right, okay.

And then Paul, just to press you a little bit on the organic growth that you're expecting, are you saying 5% to 8% for the full year, and back of the envelope, I'm coming up with -- that translates to about 13% growth in the second half? And I know that volume has obviously ramped in April, it's much, much smaller than when we get into the heart of the selling season.

But with April at 2% and you're looking out, you feel confident that you're going to get a pretty significant uptick here relatively quickly?.

Yes, Dave, I think yes, your math is -- it might be a tad high. When we look at it, it's like 11% or so that we're forecasting. That could change, obviously, if we get more price, that we're being hopeful. But it is about, yes, 11.5% in the back half in terms of growth to get us to what our current forecast is.

So I'm confident, one, with our view of Commercial, which is very strong, and I think Carlisle talked about that also. We've seen an awful lot of demand in -- and so a lot of pent-up demand and damage that we're going to see. I also think the Residential piece has really been blocked severely through the -- even the end of the first quarter and Q2.

I think that, coupled with hail events that have occurred in the last month, some a couple of days ago, we still haven't assessed those. There's probably still more severe weather that will occur. So we kind of put that whole thing together and then the greenfields, which really, I mean, 17 of them started 12 months ago, and that's when we started.

And they didn't generate much, and we've talked about that for a long time that in that first year, the accretion would be breakeven to slight negative. So I think in a lot -- and a number of those greenfields are located in hail markets, storm markets and I think they're poised now to grab some of that volume.

So the only thing, Dave, that I'd throw caution on, as we talk about it internally, is the fact that our year ends, the end of September, October is a huge selling month for us, right? So the question will be, will weather cooperate with the contractors so they can get all of this work done, that they want to get done? Obviously, they'd like to do as much as they humanly can before the end of the calendar year.

Ours ends at September. That could be the only thing we're fighting against in terms of the numbers in the back half. But other than that Dave, we're positive about what we see..

And we'll take our next question from Ryan Merkel with William Blair..

So I guess I had a similar question to Dave, in that, I think I was surprised April only up 2% year-over-year, yet you kind of have this strong outlook for the second half. It just doesn't really square.

But I guess, you said the last 2 weeks of April were much stronger, so was that kind of trending towards that double digit?.

Yes. I mean, the number actually between the first half and the second half of April was massive. It was in the 40% range of increases, even higher. Now some of that, you could knock down because there were some, one time a year, we ship some product in this time frame that normally went in March, went in April.

But even when you do that, the gain between first half, second half April is up significantly. So that gives us -- as we exited April, we had a certain daily sales rate.

When we did the calcs on the remaining 106 shipping days, which are only Monday through Friday, we didn't throw in any Saturdays, which we're going to use in some regions, we get a daily sales rate that's very close to the rate we exited April at. So that gives us a lot of confidence..

Okay. And then my other question is I was positively surprised, you mentioned you could do $1.50 a share just given the slow start. And it sort of implies a very strong margin ramp in the second half of the year year-over-year.

So I guess what's the confidence there? Is that mostly a sales story, or are you doing something on the pricing side, something on the cost side because it just looks like a really strong ramp in order to get to that $1.50?.

Yes, if you look at the progression of our gross margin in Q1, I believe it was in that 22.9% range. We ended up 22.6% in Q2. As we project out with our internal forecast, we're thinking Q3, in that 23.5% range; in Q4, in the 23.9%.

I April is any indication, we don't have closed numbers yet, right, but as we do an awful lot of detail tracking on our all-in, it appears that the April number is up above 23%, like 23.2%, 23.3%. And we still did -- I won't talk about weather any more. We still did have some impact on weather in early April.

I know Pittsburgh had just -- that whole area and a lot of places in the north that a difficult time shipping in the first half. So that's pretty encouraging. And what's happening is the first quarter, not sequentially, year-over-year, we were down about 170 basis points. Q2, we were down 130 year-over-year.

Q3, our projection is to kind of even out and be flat; and then Q4, we go up year-over-year, 80 basis points. So it isn't like we're out of control with the rates, the total year rate ends up in that 23.5% range, I'd say 23% to 24%. Now that could change obviously if we can get more pricing.

We're being extremely focused on pushing price out into the market because we've got input costs. As we reload shingles in this summer, late summer time frame there's going to be a new pricing. We're going to have to make sure we are ready for that, and we've had other internal costs that we have to offset.

So we're not waiting on the price increases, right? As soon as the market allows, we're pushing now to get the increases. So that's kind of the story of pricing, and we will see continued product costs down in the second half, anywhere up to 50 basis points of impact that will help us too..

And then just on SG&A, I mean, it's kind of implying $106 million, $107 million in 3Q and something a little higher in 4Q, just not a lot of ramp from the $140 million that's put up.

I mean, is that directionally about what you’re thinking?.

Yes, I think so. I think we had that overweight. There is some, let's say, costs that don't repeat in these greenfield startups. It isn't -- you just don't hire people and then flip the switch.

We bring in people, we do training prior, there's a number of costs that get impacted, even the leases stack up before the opening, because you got to get in and dress out the branch. So, there's some of the repeats, we talked about bad debt, and that's purely, we believe, a function of the weather being so lousy.

And we help our contractors through that period. We have a lot of confidence, we have a great credit team. We have a lot of confidence, we'll pick that up. So there's going to be some natural offsets, I think. And let's face it. Q2 is our toughest quarter. It's got high fixed costs and the weakest demand quarter.

And so we don't lever down as well as we lever up. I mean, that's kind of the story..

If you look historically at our results, we've always talked about 60% to 70% fixed, and we still believe that's correct. Although like a lot of companies, we're much more fixed in the down cycle and much more variable in the up cycle.

So we tend to think that as the volume comes up, we won't have a lot of incremental cost to it, and that's how we plan to run and manage the business..

I think the other element that we didn't -- haven't talked about is the acquisition piece year-over-year. The sales were up. It's in our filing, from $32 million to $53 million. Gross margin was about flat. Operating income was improved but it was negative.

And if you look at the makeup of the acquired markets is Northern California, which actually performed fairly well. And then the whole Pittsburgh market, which just got crushed throughout the winter because of the weather. It just has not been able to ship.

There's been a lot of process change up in that region, a lot of costs that's been removed to lean it out. But I think that's also going to improve, and that should help us as we move forward and the gross margins were impacted too..

We'll take our next question from Kathryn Thompson with Thompson Research Company..

Question on acquisitions. We have been focusing, really, mainly in the interior products distribution with greater acceleration and the consolidation of that network.

And exterior, such as yourself, is further along the interior, but could you give an update on what trends you're seeing in terms of consolidation and the status of your willingness to be more active in the market?.

Thanks, Kathryn. I mean, there hasn't been an awful lot of activity in general. And I think it's part and parcel to a lot of companies having a difficult 2013. We are intent on continuing our acquisition activity. We've had a great history since going public and even before of acquiring outstanding companies.

And if you can look -- if you look at our kind of playbook around the company, you can see that with Best Distributing and Quality Roofing, Enercon in Western Canada, right? That list goes on and on. So I think as we go through this year, there's the potential for more consolidation to occur.

I think there's -- some of our competitors are also very interested in consolidating. So I think much like we occurred a number of years ago, and it's occurred a couple of times, where we have a bit of a gap in the acquisition process.

It's going to reignite and reheat up, and I think you'll see more consolidation as we get through, whether it's the end of this year or next year. And we should be right in the fray there to be -- we certainly want to be very active there..

I know we'll talk a little bit about volumes, and I appreciate the color that you gave at the end of April and to early May. But maybe thinking about looking at 1 region or 2 that had been relatively stronger in the quarter just reported, including the specific Northwest and the Southeast.

Did you see an acceleration of trends in those markets too? And if you could give -- maybe frame up in terms of how to think about things year-over-year? How the quarter came to close in those markets, just to get confidence that this isn't just a weather catch-up?.

Yes, I think the markets where we saw growth, I think they were less impacted by weather. There's no doubt, right? Florida, and we can talk about rain and all that, but I really don't focus on that because Florida is a good weather state.

The Southeast did have some impact, as you can remember the ice storms in Atlanta and Georgia, in general, right? That impacted us, but they still had very solid growth and I think it's a function of that market coming back.

The Southwest didn't have quite the same growth, but that region, Texas and places east and even a little bit north of it, a lot of economic growth, a lot of new construction, a lot of reroofs and very strong economic activity there. We have 20-plus branches in the Texas region, we're going to expand even more there.

So I think that the trending is just positive in those regions. I think where the impact was, as I said, was these -- it's 50% of our branches when you include the mid-Atlantic, that just got trounced during the quarter and we couldn't delever them enough on the cost side.

But they are very strong regions with, we think, can't quantify, but very good market share. And the northern piece of it is heavy, heavy commercial, the North Coast and New England. So I think that recovery is going to be very strong there..

Just to clarify though, but in the markets that were stronger, you haven't seen a deceleration of trends and it's continued and if anything has improved.

Is that correct characterization?.

Well, with April just coming in, I can't say that because I don't have the book. I know for sure, in the mid part of the country, that trend will increase, yes. It has increased..

And we'll take our next question from Michael Rehaut with JP Morgan..

I just wanted to circle back to pricing trends for a moment, and I think it's an important part of your back half outlook and, apologize if I'm asking you to go over something you've already stated, but just trying to get a sense of; number one, how pricing trended throughout the past quarter, if it's stabilized, perhaps, in March and April as the sales trends also stabilized? And if that's part of your confidence in the price increases that you've announced, and how you're thinking about the manufacturers’ announced price increases as well, their ability to hold.

Sure. This is Joe. I'll try to add out. I know a lot of that Paul provided some color to a moment ago, so I'll just give you a little more kind of detail as well to.

Short answer to your question is, yes, our confidence is kind of based upon, as we saw that stabilization a bit in April, which helps to drive the gross margin kind of often we saw some of the improvements. The combination of those 2 factors going on, as Paul had described; one, pricing.

So our view of what we've started to see and believe it will continue to see for all Q3 and Q4 is improvement in pricing. And two, again, we did, as we talked earlier, the first question on the call was our winter buy program.

We did buy and the winter buy was a little heavier in the past, and we think that's going to help us from a cost perspective when we got into quarter 3 and quarter 4 as well too, which is why the trend we've seen does appear as though the gross margin piece has bottomed out in the Q2 period and beginning its way up for Q3 and Q4, as Paul talked about..

Great. And sorry I didn't fully capture that earlier in the call. The second question I just wanted to ask, take a step back on the M&A front and I know Kathryn kind of mentioned this as well.

But just a bigger picture, if you look at the industry itself, I mean, we believe -- as I believe do you that the industry is still relatively fragmented, there's a lot of opportunity there.

I was wondering if you could just kind of take a step back and just remind us of the overall size of the market itself; number one, across Residential, Commercial and other building products.

And obviously, there are some larger players such as yourself that represent a good portion of that, I think, plus or minus, I don't have my numbers in front of me, so I apologize, plus or minus around 40% of the industry, if not a little more. I'm wondering if you could kind of characterize the remaining opportunity.

What percent of those remaining sales are kind of bigger, 5% to 10% type properties or companies that are available or on the market? Or is it a lot at this point in the game, in this part -- in which point of the stage of consolidation in the industry, is it more like 1%, 2%, 3% type opportunities, and certainly, there could be a lot of those, but you'll have to stream them along and there'll be more singles and doubles, let's say?.

Yes, I mean, the market size roughly is $20 billion, it's projected to continue to grow, so that's good news, right? The split is 50% Res, 35% Commercial or -- so 15% Complementary. I think there are -- if you look at the big players like ABC, well over $4 billion; ourselves; Allied, well over $1 billion and $1.5 billion; RSG; SRS.

And that makes up a chunk of the market, but they're still even 50% available. If you look at our share, we're roughly at 10%, 11% share. So there -- from a broader view, there is room for us, no doubt, to help and continue to consolidate the market. I can't speak on the drive my competitors have in terms of that consolidation.

I would think it's there, especially for some of the smaller ones. But obviously, for all of us, that has to be based, I would assume, on correct pricing. I think if you just look at some of the companies I mentioned, obviously, they're bigger. They haven't indicated a willingness to sell.

There are though a number of others in that $200 million to $400 million range. And then below that, it's $50 million to $100 million. We have viewed the $50 million to $100 million sales company as a very good acquisition for us.

It usually fills out geography we're not in, and we can help -- we help our cost structure by consolidating that backroom and utilizing our resources. So I wouldn't necessarily say that it's only singles, but I think there will be a number in the $15 million to $100 million to $150 million range.

And that's okay with us because it will supplement this, whether it's 20 branches we open up next year or in that range, it will just help supplement that part of our growth strategy..

And we'll take our next question from Sam Darkatsh with Raymond James..

I'm going to ask the same question, I think, in a different way or at least if I can ask you to be more specific.

Of the 11% to 12% or so organic growth that you're expecting in the back half, how much of that are you anticipating is coming specifically from pricing actions and how much of that is volume?.

This is Joe. I'll take a quick stab at that to give you a little more clarity on it. The 2 big pieces, one that Paul talked about, but sure, he mentioned is the greenfield growth as well too, so that's one of the big drivers to it. I think Paul talked about for the full year, that will add 2% to 3% to our total volume.

On your specific question with regards to pricing, pricing in our forecast for the back half of the year will be anywhere between 50 to 100 basis points of improvement over current. So 0.5 point to 1 point of our growth in the back half of the year will be from pricing..

So with your unilateral price increase that you announced, did that go through at the end of March as anticipated? What was the competitive response? And April, the plus 2%, how much of that plus 2% was ASP growth versus volumes?.

The Beacon price increase that we sent out was for the most part, that was response from our competitors in terms of the same announcement that they put out. I believe ABC might have even put it out before us. Given the market conditions, we saw in some regions some traction.

I mean, but we're talking 5, 10 basis points and that type, Sam, I surely believe it's a function of the difficult weather.

I think as we push forward, that will kind of get melded with our drive to push the manufacturers' price increases across, which we're very intent on doing in addition to the Beacon price increase to cover our increased expenses, especially on medical benefits..

The ASPs growth in March -- I'm sorry, in April versus the 2% organic growth that you said, how much of that was ASP growth versus volume growth?.

We don't have final numbers..

April, you mean?.

Yes, April, yes..

Can't comment really without the full detail on that..

It's a bit too different without closed numbers, Sam. I was trying to give you -- and we do a fairly good job of tracking this all in margin very tightly and we reconcile it to the financials after we close and we're pretty darn close.

So we have some high degree of confidence that April is going to push above the 23%, which is very encouraging for us. And I would think some of that is or a majority of that is pricing, yes. But we will find out..

If I could sneak one more question in.

By fiscal year end, where do you anticipate your inventories to be?.

Oh, geez, I can't go -- give you that projection right now. There's no doubt, it's going to be reduced unless something very odd happens, some kind of major storm event. But I would just expect it to be close to slightly above last year's ending number, Sam..

We ended last year at roughly $251 million in inventory at September 30, so much lower than today's. As we talked about, we ramped up on the inventory buy -- that may extend us over longer, another 30 days or 60 days more than what we have in the past.

Still by year end, they'll be higher than last September, but not nearly as high as it is [indiscernible].

I can't give you an exact number. There's going to be the greenfield impact for sure, and absent any acquisition, it's going to reduce. There's no doubt. We watch input and output every single day. We have controls in place to watch that. And we know we have plenty of inventory on hand to get us through the selling season.

We'll have to reload probably in the summer, late fall, but we feel pretty good about where we're at from an inventory standpoint, our ability to control it through September..

Just from a broader perspective, more to think about the inventory ramp-up as temporary, not a permanent structural change. We're just carrying high inventory now..

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

I appreciate the comment on the sequential sales trends in the quarter, as well as your guidance.

I wonder if you could perhaps talk about the different product categories though, because I know Carlisle talked about sort of the 20% lift in March implying -- and more consistent with the trends that you had in terms of year-over-year strength in Commercial.

If you could give us some reasons of why, i.e., are warehouses more motivated to get a new roof than a residential person is? And then within your back half kind of 11%, you talked about the price in the greenfield.

Could you comment on how you think that the Residential vis-à-vis the Commercial will play out because that, obviously, impacts the margins as well..

Yes, I think if you just look at what happened in the second quarter, a tremendous amount of work was held up, no doubt, right? So as we look at both sides, and then I think there was probably more damage on the Commercial side than on the Residential side due to winter, talk about Carlisle's number, which was higher single digits.

I think they will be kind of the same in terms of their growth. That could change on the resi side depending on if the storm activity that we've seen or if more storm activity comes in. I think they'll both be very robust. Naturally, we would think Residential is going to be higher than Commercial.

Complementary, that's always been a wildcard, and it's a small piece of our volume, $300-some-odd million, but I would think that, that's going to grow in that 3% to 5% range, I could be conservative there. So I think the split is going to be higher Residential growth and Commercial in the back half and less on the Complementary side..

That plays into the mix issue that we were talking about that has impacted on our gross margin, which is probably where you're going with it. And you're right, the mix impact cost us 40 basis points because of the higher Commercial. And I think that probably will continue a bit as we go to the back half of the year.

That's our assumption because we do feel that Commercial business is going to be pretty strong through the rest of the year..

So given that you're talking about mix, in the past, you've talked about kind of a margin spread between the 2 businesses.

Would you like to make any comment on that?.

Well, I mean, in the quarter, it's similar, maybe slightly more. We've talked a few years ago, we used to say 1,000 basis points, then 1,100. It's in that range, maybe slightly higher for Q2. And it really hasn't changed that dramatically..

Okay. I wonder since you're taking a more organic approach to your growth rather than just the M&A, obviously, I think you find new organic branch openings attractive to you that's why you're doing it and obviously, more profitable than the M&A often.

Can you talk about the -- how the differential between your store count -- your branches opening this year, yet the lower sales pace? Will we actually see a lift next year as those plans -- excuse me, those branches mature, so essentially, we are going to see more -- will 20 stores next year actually deliver quite a bit more than 2% to 3% growth, would you think, because the stores from this year actually picking up steam in terms of market penetration and improving the mix?.

Yes. If you just -- if we were to look at the 17 that we opened up new from last year Q2 and kept carrying those through '15, yes, for sure, that number is going to increase. We had about $11 million in sales in Q2 for greenfields, right? And in April, we bid over 1/2 of that amount in those same branches. So Q3 is going to be significantly up from Q2.

I think year-to-date, it was $20-some million for the greenfields. And we're talking about anywhere from $65 million to $75 million for the full year for those branches.

As we measure it, we're going to measure it like we do acquisitions, so some of those will drop off in '15 and go into -- we just won't be talking about, although we are going to track it ourselves.

Yes, you can assume, and we should assume that if a branch averaged $2 million in its first year, it better get to $3 million, $3.5 million or $4 million in the second, third year and then get closer to $6 million, $7 million and $8 million as we go out into the fourth year and get to the -- our branch average, yes..

I think the important part there is that we don't view the greenfield as a replacement for the acquisition strategy, but a complement to it. We will continue to pursue both of those, but it is important you're on the right track as we talk about $3.9 million in additional operating expenses for the quarter, $6.4 million on a year-to-date basis.

It's really no different than our discussions when we talk about acquisitions. When we bring out a new acquisition, the incremental costs associated with it, the integration to bring it into our company, and we have that time factor that it is more of a drain on us than a help.

I think we do and I think everyone needs to think about the greenfields in that same light as well too. Another element of our growth strategy that has start-up costs associated with it, but then as you rightly asked, then you'll see the accelerated growth in profitability from it as we get to future years, so good question..

We'll take our next question from Brent Rakers with Wunderlich Securities..

A lot of talk today about inventories and your own inventories.

But could you give us your perception about what you think the channel inventories look like, both within the other roofing distributors, but also possibly within the lumber yards?.

Yes, Brent, that's a really tough question. We go through it here trying to get the best intelligence we can, and it's very difficult. I think because I hear tidbits both ways, but I think in general, the buy -- ARMA data is down in the quarter year-over-year. So I think the buy could be flat to slightly up.

I don't -- some indications that the lumber yards haven't loaded as heavily, again, that would be pure speculation on my part. I don't have any data to back that up..

And Paul, I guess my follow-up to that is if we talk about Beacon, yourself possibly not having to go into rebuy to -- until the late summer or fall, does that create an element of risk if the demand is maybe softer than you think in that May, June time period, that manufacturers maybe lose some ability to raise price, but also possibly discount price, given maybe the softness in the buys from the distribution channel in the June quarter?.

Yes, I don't -- I mean, anything is possible. I doubt it. I still believe, we still believe with all the intelligence we have, pricing is at its lowest point as most folks bought inventory in the winter. I just think there's enough pent-up demand, I think there's enough of this hail repair work.

I think the storm damage is also -- winter damage, I should say, is going to play into it. So I -- I'm not awfully concerned. I do know, as I said, we are intent on getting price increases. We didn't get them last year. We obviously didn't get them in Q2, so there's a tremendous amount of pressure on our people.

And I know they also want to get price because they're cognizant of health care costs going up. We also had merit increases that kicked in because we do give our folks pay increases, and we do need to offset those, right? Whether it's through productivity or through price. So no, I'm not concerned.

We didn't go as deep as we could have gone on the inventory piece. We certainly have the cash to do it, but we took what we think was a prudent step to have the right levels to support the -- especially to support the spring breakout and the storm volume, which has occurred in a lot of our West regions..

We'll now take our next question from Neil Frohnapple with Longbow Research..

Just a quick follow-up on price. I know it's been discussed a lot already, but I believe your prior guidance had 1% to 2% positive price realization for the full year, and with the 50 to 100 basis point realization that Joe mentioned, expect in the back half gets you all in, I think, for the full year probably below 1%.

So is this all just, I mean, occurred in 2Q and the delay in pricing? Or are your expectations maybe a little bit lower on the 5% to 8% realization?.

Well, we're trying to be prudent with what we put out in terms of these types of discussions with the best intelligence we have and the trending of gross margin. We have seen in the past, past years, right, gross margin spike considerably from quarter-to-quarter.

So if volume firms up even more and we have, meaning, more overall pent-up that comes out and/or some of this storm repair work being very strong, that could change our view. But yes, as you look at it now, Neil, that's how the math works for the year. So I don't know if we're being overly conservative.

I think we're being realistic with what we have left in the year and where we're coming from, given how hard Q2 was..

Great. And then just a quick follow-up.

Have any of the other large distributors pulled the 5% to 8% price increase completely off the table? Or is it just simply delayed at this point?.

I'm not aware of anyone pulling it. I do know it is delayed. There are indications that most -- well, not indications, most had re-announced this May, mid-May, even late May for some of them time frame. And of course, that varies by distributor, that varies by region.

You have some smaller ones at whole prices, but that is no different than even in '08 when we had close to 10 price increases during that year. We had folks trying to hang on to price. I mean, the bottom line is our input costs for the second year are going up. Last year, we didn't get price. We need to get price.

I would assume the rest of the competitors are feeling the same pressure. They indicated that as number of them in their price increase letters, their own specific company price increase letters..

And that concludes the questions. Now I'd like to turn the call back over to Mr. Isabella for his closing comments..

Thanks. Just to go over a couple of highlights quickly. Our second quarter sales, as you know, were $385 million, down 7.5% from the prior year, again attributed mainly to abnormally severe cold and snow in many of our regions. We did achieve, though, record sales through the first half of $937 million. As we said, we continue to invest in growth.

We're not going to stop opening 4 new branches in the quarter, 8 year-to-date and are still planning approximately 25 for the full year. And as I said, it should add 2% to 3% organic sales growth for the year. We're continuing to be active in the acquisition market.

This portion of our strategy has always been uneven, but we're still very positive about making additional acquisitions. Joe talked about cash generation in the quarter was solid at $37 million above last year, and our debt ratio continues to be very low at 1.59. Demand is increasing, and we are confident we'll have a strong second half of the year.

Everyone within the company is focused on that. I want to thank all of our investors for their interest in our company, as well as our customers and employees for their loyalty. This concludes our earnings call. Have a good day..

And that concludes today's conference call. We appreciate your participation..