Paul Isabella - President & CEO Joe Nowicki - EVP & CFO.

Ryan Merkel - William Blair Ken Zener - KeyBanc Jason Marcus - JPMorgan Trey Grooms - Stephens Keith Hughes - SunTrust Garik Shmois - Longbow Research David Manthey - Robert W. Baird.

Welcome to the Beacon Roofing Supply Fiscal 2014 fourth quarter and year-end conference call. My name is Doug and I will be your coordinator for today. [Operator Instructions].

This call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company including the company's financial outlook.

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

The forward-looking statements contained in this call are based on information as of today, November 25, 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.

A reconciliation of these non-GAAP measures is set forth in today's press release. On this call, Beacon Roofing Supply may make forward-looking statements including statements about its plans and objectives and future economic performance. Forward-looking statements are subject to a number of risks and uncertainties.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors including, but not limited to, those set forth in the Risk Factors section of the company's latest Form 10-K.

The company has posted a summary financial slide presentation on the Investors Section of its website under Events and 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 Chief Executive Officer and Mr.

Joe Nowicki, Executive Vice President and Chief Financial Officer. I would like to turn the call over to Mr. Paul Isabella, President and CEO. Please proceed, Mr. Isabella..

Thanks, Doug. Good morning and welcome to our fourth quarter and fiscal 2014 earnings call. Once again this quarter, we made solid progress on elements of our strategic plan driven by new acquisitions, greenfield branch openings and organic growth in all of our lines of business.

We completed one acquisition within the quarter and two immediately following the end of the quarter for a total of three acquisitions within 60 days. In addition, we opened nine more greenfields during the quarter for a total of 26 new locations in fiscal '14. Our total sales growth was 6.3% for the quarter and 3.8% for the full year.

Both our fourth quarter and full year delivered record sales. We’re pleased with this considering the soft residential market. As a reminder, it's important to note our full year was negatively impacted by harsh winter weather that caused a 7.5% year-over-year decline in our Q2 sales.

The soft demand in the residential market continued through our fourth quarter and put additional pressure on market pricing. We were able to offset most of this pressure with lower material costs due to the persistent efforts of our supply-chain team. Nonetheless, our total gross margin declined 60 basis points from the prior year, a 22.5% of sales.

For the full year, we ended at 22.7%, down 100 basis points from the prior year. Our diluted EPS was $0.48 for the quarter versus $0.55 in the prior year, primarily as a result of lower gross margin combined with higher operating expenses in support of our new retail locations.

This was below our expectation and representative, though, of the competitive market pricing. For the full year 2014, our diluted EPS was $1.08 versus $1.47 in 2013. Now, I'll give you a little more detail on revenue. First, our greenfield strategy is exceeding our expectations.

We went above our internal goal of 20 to 25 by opening 26 in '14, as I mentioned with the majority in the West and South. They drove two-thirds of our growth in Q4 and half of our growth for the full year. The greenfield sales are primarily residential which also helps our GM rate. Based on this growth, we believe we're gaining share in those markets.

We're very excited about what these and the other branch openings from 2012 and 2013 in total 40, will deliver in the coming quarters and years. If you assume average branch sales for these 40, sales should be in the range of $400 million once they mature. We're also very excited about the three acquisitions we just completed.

All-weather products was completed in August. They distribute primarily residential roofing with three branches in Vancouver, Canada. They provide a great geographic complement to our existing locations in Western Canada. In addition, shortly after our year-end, we were able to close on two other acquisitions.

Applicator Sales and Service is headquartered in Portland, Maine and is a good complement to our existing New England facilities with its heavy complementary mix. Finally, we closed on Wholesale Roofing Supply of Dallas, Texas in October.

Wholesale Roofing primarily sells residential products and is a great geographic fit with our already strong presence in the Dallas market. All three of these acquisitions have been market leaders in the geographic space. We're very pleased to add them to the Beacon family of companies.

These transactions demonstrate our commitment to growth via acquisitions, a key strategy we will continue to focus on that also demonstrates the strength of our balance sheet. All three lines of business this quarter again demonstrated healthy growth.

Residential sales in existing markets were up 5.5% which is their highest quarterly rate of growth this year. As noted, this is primarily the result of our greenfield strategy. Even with lower residential demand in most markets across the country, we were able to grow this line of business above what we believe the industry has grown.

Q4 industry data shows the volume of shingle shipments into distribution down 2.3% with year-to-date numbers in the minus 4% range. This demonstrates the execution of our strategic plan and more specifically, our ability to offer meaningful solutions to our customer base.

This growth position us well for the coming years as the market recovers from its current lows.

Commercial sales were up 5.4% which continues the solid growth we have seen for the last year-and-a-half and finally, complementary was up a very strong 11% and reflects the continued diversification efforts we have been pursuing primarily through siding and window sales. For the full year we grew complementary products close to 5%.

Increased repair and remodeling spend in new construction has fueled this growth. If you look at our business by geographic regions, for the quarter we saw five of our seven reported regions growing organically. The Midwest and Northeast led the way with double-digit gains. This was fueled by storm and greenfield volume from the 2013 and 2014 openings.

We also saw solid growth in the West, Canada and mid-Atlantic regions. The Southeast and Southwest both down double digits in the quarter, continued to struggle with volume as a lack of normal storm volume, lower residential reroof and new construction work has impacted overall demand and pricing.

As we've seen in the past, this type of market will correct over time, being no different than the recovery of normalized reroofing after the impact of Hurricane Ike, for instance. Sales were also up year-over-year for every month of the quarter with Q4 organic sales as follows. July was up 8.5%, August up 6.5% and September was up 3.4%.

September volume slowed down slightly as storm volume began to decline mostly in the two regions mentioned and several commercial projects were delayed across the country.

As stated, I feel very good about what the team has done to grow the top line of the business, especially in light of this very soft residential market and the overall pricing pressure we continue to see. Moving to gross margins, our Q4 gross margins ended at 22.5% versus 23.1% in 2013.

As I mentioned, the Southeast and Southwest in particular have continued to see intensified pricing pressures. For the year, gross margins were 22.7% versus 23.7% in 2013. This continues to be a challenge as we enter 2015. Attempts to increase price have had limited success this year.

Our market pricing for the fourth quarter was down approximately 230 basis points, primarily all due to residential products. As I mentioned, we've had success in offsetting some of the price declines with product cost reductions for Q4. Our product costs were down approximately 170 basis points.

We will continue to focus on input cost reduction as well as intensified efforts at improving our pricing methodology in each branch. It's worth noting that not all of our regions struggled with gross margins and operating income attainment.

Our Midwest, Northeast, Pacific and Canadian regions reported regions did very well at meeting or coming very close to year-over-year improvement in both categories. This supports our belief that the current market conditions and a few large markets, namely the Southeast and Southwest, are having a very big impact on results.

As these markets improve, our total company performance will also improve. We're working very hard to make that happen. Product mix for the quarter shifted slightly more to complementary products and slightly less residential and commercial products as a percentage of the total. The overall impact of mix on gross margin for the quarter was minor.

Moving onto operating expenses, our existing market operating expenses were up over Q4 of the prior year by 40 basis points at 16.5% of sales. Almost all this percentage increase was driven by investments at the end of 2013 and 2014 in greenfield stores.

As we have previously discussed, a new branch typically takes three to five years before the volume ramps and we get to our targeted operating cost structure and operating income. We should see operating improvements in 2015 as they mature.

But beyond that, we know the challenges we face from gross margin pressure will require us to continue and even ramp up our focus on driving more leverage through our operating cost structure and lowering our overall operating cost as a percent of sales.

We do know, however these greenfield investments will help drive higher levels of results in the future and we're very excited about that. Keeping with past practice, let me tell you how the current quarter, our first quarter in the new fiscal year is shaping up. October was up 6.2% which was a good sign.

All three product lines were up, gross margins was up slightly sequentially from September, income is in good shape and we're happy to say our fiscal year is off to a good start. November had been continuing to that trend until the cold weather hit last week. Hopefully December will be mild enough to pick up the work that we might miss in November.

Shifting gears now to our outlook. As we look forward to 2015 and beyond, our goals are the same. Profitable growth through greenfield branch openings, acquisitions in same branch sales increases. As part of our annual five-year planning process, we’ve reaffirmed that direction and the tactics to get us there.

We do not believe there are any long-term structural changes in the market we operate in. Roofs do fail for a variety of reasons. Age and storms take a major toll. For the most part, reroofing is not a discretionary spend.

And even though new construction has flattened somewhat, it is still up and expected to continue growing, as our existing home sales.

Related to new branch openings, the number of new openings may come down from previous thoughts because we just completed the three acquisitions that added eight branches, plus our acquisition pipeline is robust and as we make progress in that arena, we may reduce further the number of new branches for 2015.

We're not changing growth or profit objectives, but we did want to let you know how we view branch growth and that we use a detailed integration process regarding both new branches from acquisitions and new branches from greenfield openings. And as you've seen on the last 90 days and as I mentioned, we're still very active in the acquisition market.

We continue to talk to numerous companies. As we've said before, it's difficult to predict when sellers will sell. We’ve the capital structure and operating strength to do multiple deals and we'll continue to work on executing these as we have in the past. Our pipeline is full and we're optimistic on future deals.

Our balance sheet is in great shape and we're poised to continue our growth through acquisitions. Also regarding 2015, industry data suggests market growth in the 2% to 3% range. When combined with acquisitions we already have completed and the greenfields we have in place, I expect sales growth for the full year to be well above that range.

We'll continue to work to combat pricing pressures as we did in 2014 by improving system pricing and reducing our product costs, all in an effort to drive improvements to our GM year-over-year. As a result, we believe our gross margins will continue to be in our stated range of 22.5% to 24%.

Related to EPS, in general our practice and preference is to not give guidance this earlier in the fiscal year. We believe this is prudent and a conservative practice and there are multiple reasons why. As you know, winter can wreak havoc in our second quarter and a number of storms in spring are unpredictable.

I can say our fiscal year is off to a good start and all of our growth plans are intact and working well. I'm also very optimistic that we're going to have a good growth and profit year. As the year progresses, I will be in a better position to assess the published range and give guidance.

And now I'm going to turn the call over to Joe and he can go over a little more detail on the financial highlights of the quarter and the year..

Thanks, Paul and good morning, everyone. Now, I'll highlight a little more detail on a few key financial results and metrics that are contained in our earnings press release and the fourth quarter slides that were posted to our website this morning.

As Paul mentioned, we had a strong quarter and top line growth as total sales increased 6.3% for a fourth quarter record of $726.5 million. The all-weather acquisition occurred on August 29. As a result, there was a small amount of acquisition revenue included in the quarter.

Excluding the acquisition, our existing sales increased 6.2%, driven primarily by the 26 additional greenfields that were added in 2014. For comparison purposes, there were the same number of days in Q4 of 2013 as in Q4 of 2014, 64 days. Sequentially, sales were up 9.5% from third quarter, following our traditional seasonal pattern.

Our monthly average day sales were reasonably consistent for each of the three months of Q4, although we experienced a slight decline in daily commercial sales through the quarter that was offset by an increase in residential sales.

As in prior quarters this year, our biggest challenge was in the gross margins line which decreased 60 basis points from the prior year to 22.5%. This was driven primarily by a 230 basis point decline in total pricing, partially offset by 170-basis point improvement in product cost.

Declines in pricing were seen across the residential roofing products that were down 430 basis points and commercial roofing products that were down 60 basis points. Complementary prices were up slightly with a 40-basis point improvement.

The good news is we were able to reduce our product costs to help offset a good portion of the selling price declines. Residential product costs declined 260 basis points. Commercial roofing product costs declined approximately 40 basis points and complementary product prices were down about 50 basis points.

Our product mix had a negligible impact on gross margin as volumes shifted from residential and commercial roofing to complementary products. Residential roofing declined to 48.5% of our sales versus 49% in the prior year. While commercial declined to 37.3% from 37.8% in the prior year and complementary increased to 14.2% from 13.2% in the prior year.

To summarize our gross margin decline of 60 basis points, we lost 230 basis points to pricing declines, made up 170 basis points of that in lower costs and had no impact from product mix shift. Existing market operating expenses were up $9.8 million over the prior-year Q4 and up 40 basis points to 16.5% of sales.

The majority of the increase in spending and percentage increase comes from our continued investment in our greenfields which added $6.1 million in year-over-year spending on the 26 new greenfields that were not in last year's comparable numbers.

In addition, 7 of last year's 10 greenfields were just starting out in the Q4 of 2013 and also added incremental costs to the 2014 numbers. Volume related variable selling; delivery and fleet costs drove another $3.9 million of the year-over-year increase.

In addition, there was also a $900,000 year-over-year increase accounts receivable reserves based on our year-end aging analysis and reserve methodology. Although in total, our actual write-offs continue to remain very low at below 0.2% of sales. The acquisition of All Weather also added incremental operating expenses of $200,000 for the quarter.

Interest expense and other financing costs were up $600,000 in the fourth quarter versus the prior year, primarily as a result of a small foreign exchange loss. Our net income was $24.2 million for the quarter compared to $27.4 million last year. Diluted net income per share, $0.48 compared to $0.55 for the same period last year.

Adjusted diluted income per share of $0.48 in the current year versus $0.56 in the prior year. I'll now take a moment to discuss our fiscal year 2014 full-year results, this begins on slide 3. Fiscal year 2014 total sales increased 3.8% to a record 2.33 billion. Organic sales which exclude acquired branches increased 2.9%.

Demand picked up extremely well in the second half of the year from the harsh winter weather that impacted us in Q2. We had the same number of business days in 2014 as in 2013, 253 days. We experienced sales growth in all of our lines of business for the full year.

Our sales in existing markets by product group are nonresidential up 6%, complementary up 4.7% and residential up 0.2%. Our Midwest and West regions both drove double-digit organic sales growth while our Northeast and Canadian regions achieved an increase of around 2%. They were both negatively impacted the most from the harsh winter in Q2.

The Southeast and Southwest all experienced low single-digit declines year-over-year as a result of heightened price competition and lower storm volume. Overall gross margins decreased by 100 basis points for the year to 22.7% from 23.7% in 2013.

Our margins continued to decline in the second half of the year, primarily as a result of lower selling prices in our residential roofing product sales partially offset with lower net product costs. Existing market operating expenses for 2014 which are shown on slide 4 were up $22.7 million from last year.

$12.1 million of the increase can be attributed to the 26 greenfields that we implemented this year. The remaining increase was primarily due to higher payroll and warehouse expenses due to the increased volumes, as well as higher accounts receivables reserves as I previously mentioned.

Interest expense, financing costs and other was $10.1 million in 2014 compared to $8.2 million in year-to-date 2013. This was driven primarily by a higher debt balance on our revolver during the second half of the year as a result of our of our winter buy program.

Our income tax expense reflected a full year effective tax rate of 39.3% for the year compared to 40.2% last year. The decrease was driven by benefits from state tax credits. Net income $53.8 million in 2014 compared to $72.6 million in 2013.

Per diluted share was $1.08 versus $1.47 in 2013, adjusted diluted net income per share $1.08 in 2014 compared to $1.45 last year as reconciled in our press release.

Regarding the status of our balance sheet, as slide 5 shows, cash flow from operations for 2014 was $55.8 million compared to $78.5 million last year, a change primarily a result of lower net income. Inventory was down $98 million from Q3, reflecting our traditional season decline as we worked down the winter buy levels.

We were up still $50 million from the prior year although the greenfield investments drove approximately $20 million of that. Capital expenditures, excluding acquisitions in 2014, were $37.2 million compared to $26.1 million in 2013. The increase there was primarily a result of our fleet replacements in addition to our greenfield ramp-up.

In the coming year, we expect capital expenditures to be much lower at approximately 1% of sales for the full year. Net cash used for acquisitions was $1.5 million compared to $64.6 million last year. This of course will increase with our two most recent acquisitions. Our current ratio was a strong 2.35 to 1 versus 2.25 to 1 at the end of last year.

The results of our two bank financial covenants at the end of this quarter were as follows. The leverage ratio increased to 1.88 to 1 compared to 1.63 last year and our interest coverage ratio decreased to 14.79 to 1 compared to 15.95 to 1 last year.

Our additional investments in greenfields, fleet equipment and inventory drove the majority of the change in these ratios, but even at the current levels they still demonstrate the flexibility and capability to execute on our growth strategy. We'll now respond to and take any questions you may have..

[Operator Instructions]. And our first question is from Ryan Merkel with William Blair..

The first question I had was with regard to the guidance you gave for the fiscal fourth quarter which I think was around $0.68, I'm wondering, what surprised you to the downside? It looks like it might be a little bit on gross margins, but maybe more so on OpEx? So maybe walk through that first?.

Ryan, I think the bigger issue had to do with the gross margins piece. If there was one thing that declined it really would have been the gross margins and even the top line in the sales.

We would have expected a little bit higher sales growth as we were going into the quarter and also a better or improvement on the gross margins piece of it which really, the pricing element was what drove most of the lower margins, as I mentioned I went through..

The residential took, Ryan, quite a bit of brunt of the negative pricing as we -- sequentially went from three to four, so that surprised us a tad. And I know as we started the quarter and I know I've alluded to it that's our sales, we thought they'd be in the 8%, closer to 10% range.

So, the combination of that definitely hurt and us doing nine greenfields in the quarter added costs. That wasn't a surprise, but it was really minimal. And we're not concerned at all about OpEx as we go through the dialogue and strip out whether it's greenfield sales and greenfield costs.

Whether you do it for 2014 or even the ones we started late in 2013, our OpEx rates year-over-year are very close. I think they're in the 17.7, 17.8 range. I think the bigger surprise, Joe hit it was missed sales.

We really anticipated sales being more robust and it started out the quarter fairly decent and I thought we'd see a build in August and September. August dropped a bit and then September dropped even more and then pricing just continued to deteriorate as we went through..

And the second question, in the markets where you have opened new greenfield branches, I'm wondering, are you giving up a little bit of margin to gain the sales there initially? Or does that answer depend on the region where you opened a new branch as you talked about in the prepared remarks?.

That's a really good question, Ryan, because obviously we're always concerned about that as we open up new branches and try to get placement. I mentioned the word share gain which obviously we're doing because you can only see so much of those sales.

If you look at our full-year greenfield results, they were somewhat negative on operating income, but not really a big impact on EPS, maybe $0.01 or $0.02. The gross margin is above company rate, but typically it's been slightly below the run-rate for normalized regimental sales.

I think even though it's accretive to our baseline rate, there is just a little bit of price you give up in those markets, but it's not enough to really move the dial. And if you look at our fourth quarter greenfield performance. We were actually positive on operating income at fairly decent gross margin rates..

And our next question is from Ken Zener with KeyBanc..

If you could restate the connection between asphalt which is -- there is two elements impacting, obviously the pricing on res.

One is the demand and from industry structure perspective, if you could comment on how -- or if you've thought about 2014 versus, let's say how the business was operated, yourself and peers, versus 2012 or 2011 when the distributors were less consolidated? Do you think there's less appetite to perhaps buy inventory into the normally discounted winter period given what pricing's done this year and/or confidence in where pricing is going to be? It seems to me that the inventory piece, as you have a cheap access to capital and others do, it might have shaken things up a little bit versus how the industry was three or four years ago.

If you could just comment?.

Yes. It's hard, Ken obviously to see into all of our competitors' inventory balances. We can look at where the [indiscernible] data is saying the year is going to end, down from last year's squares. I think we're at $89 million through three quarters, maybe it ends up at 108 or 109 and I'm kind of estimating. So, that pressure is down.

There was, I think a fairly healthy winter buy. I think it's less -- inventory has an impact. I do think, though, demand is the gate. In the absence of demand, it causes the pricing pressure. And then it gets magnified when folks are holding inventory that they bought at lower prices, maybe in the February, March timeframe.

In terms of the appetite moving forward, it's very difficult to predict. We’re still formulating our winter buy strategy. We typically have not gone crazy and by any means bought for three-quarters of the year or the full year. I do think the manufacturers also had a very difficult year.

As you are close to the industry, you know, they weren't able to get any price for the most part. If anything, prices have been going down from them, as evidenced by our COGS to some degree. I'm sure they're very interested in trying to stabilize the market and gain some price. It's very difficult to say what the winter buy is going to be.

You would think that it wouldn't be as deep as last year, but that's just an opinion I have. Now you had mentioned asphalt at the beginning of the discussion. Asphalt pricing has been somewhat in a slight upward pattern even in the June timeframe when oil dropped.

The latest asphalt data that I have a November shows it close to $600 a ton even with oil dropping significantly. Now, we'll see what will happen in the next few months if that will tail down.

There is been a lot of discussion about more decoupling now, asphalt versus a barrel of oil than in the past, especially with some of the low light crude that they're pulling out of the shale fields. But I'm certainly not an asphalt expert. There is no doubt that the graph I'm looking at shows asphalt pricing as moving up in the last year.

I would imagine that's putting pressure on the manufacturers from an input cost standpoint. I think they're going to be positioning themselves towards the end of this year, beginning of next year, to do what they normally do.

And then you I would expect them to be -- you would think, to be firmer in their approach to pricing as we go through the spring and we would like to take the same posture with the marketplace because we know we need to get price..

One other thing I would add to Paul's comment in regards to winter buy and inventory is we made a lot of progress this quarter really reducing the inventory. If you look at our inventory per branch or per location with the number of locations that we currently have it's up maybe 6% to 7% in total.

We've done a great job of really reducing that inventory level getting to where we're about at the same spot we were a year ago just up a little bit..

Operationally, since the branches -- the Texas acquisition, obviously there is a lot of revenue associated with a nine acre facility. Perhaps you could talk about if that approach is replicable or if DFW is such a unique market? Thank you so much..

The wholesale group is built has built an outstanding business over the last couple of decades. The folks that are running it are staying on with us. We're very pleased. They have had very high levels of performance and we certainly had branches of that magnitude in size and then we also have small branches that supports different smaller markets.

We're always obviously analyzing our cost structure and what makes sense. I think the good news for us with wholesale is that it's a great add-on for the branches that we have in Irving, Garland, McKinney and Fort Worth to make us even stronger in the Dallas market..

And our next question is from Michael Rehaut with JPMorgan..

It's actually Jason Marcus in for Mike. First question is on the SG&A. I think historically you've talked about being comfortable in that 17% to 18% range on a longer-term basis.

And I think, obviously, over the last couple of years you've been at the high end of that range and part of that is because of the large number of branches you've opened up over the last year or so.

But as we think about 2015 and beyond, would you expect SG&A to still remain at the high end of that range as you continue to ramp up? And if not, when would you expect the SG&A to go below that?.

First, there is no doubt, as I alluded to earlier that the greenfields have had an impact on our percent against sales and we recognize that. The exciting thing for us is that these greenfields are still just -- they're very immature, they are in their infancy.

So as they flesh out and drive more sales, that cost percent it is going to change dramatically. I'm not at all concerned about our SG&A level.

Historically we’ve been very tight fisted with cost control, while at the same time knowing we have to invest in certain priorities, whether it's IT to make sure we're doing all the right things there, supply-chain, etcetera and of course, our sales force in the field.

I think you'll see us go back down towards the 18%, but it's going to take the time of those greenfields to mature. And then of course, that's always impacted on other factors such as how the market does in general, etcetera.

I think you'll see us trend back towards the 18% and then as we continue to grow those greenfields that will get even potentially better..

The one piece I would add to that, Jason, just as a way of example, as you look at our existing operating expenses, right? Because you saw on the slide they're up roughly $23 million, $22.7 million year-over-year.

Of that amount, $19 million of it really has to do with greenfields, $12 million of it is from the greenfields we opened this year but there is also an incremental $7 million from the greenfields we opened at the end of last year that were up and that's because you start them in fourth quarter then you have a full year of expenses that went on to the whole year and heightened as volume went up.

So when you take that into consideration, that's 19 of the 23. And then if you take that to the operating expense percent of it, right? Last year our operating expense number on existing was the 17.6. If you take out those, the number comes very close to that for the current year.

Maybe it's 20 basis points higher than that, but it's very close to that same number. So, excluding the greenfield investments, we've done a really good job of managing the cost structure..

We look at this as an investment, as I mentioned and if you look at our fourth quarter results, considering four greenfields, they were accretive, very slightly, but they were accretive. Much faster than any acquisitions we typically do and they're still in their infancy, generating very little sales compared to the average branch sales..

And then just in terms of the recent acquisitions you've made. I think you've said it will add about $88 million new in revenue for 2015.

How should we think about the breakdown across the segments just on a rough basis?.

The segments as in-line of business you mean?.

Yes. Residential versus commercial versus complementary..

Virtually, I can give you a rough idea. The majority of it's going to be residential roofing and then there will be a portion of it, call it a third quarter to a third of complementary sales. Window door -- window and siding.

Okay?.

And then just on the tax rate, is 39% to 40% that still that range you're looking for, for next year?.

Correct. Yes, it is..

And our next question is from Trey Grooms with Stephens..

Quick question on the pricing, Paul, you mentioned that pricing continued to deteriorate on the residential side through the quarter.

Have you seen any signs of stabilization since the quarter end? And what is it going to take in your mind to start to see a more rational environment on pricing as we look into next year?.

Trey, it's difficult to use one data point, October, to say, hey, things are changing. We certainly look at margins every day. We look at pricing from a square pricing standpoint. As I said earlier, October's gross margin was up slightly, but there could be some noise in the September versus October number related to mix, etcetera.

The gut feeling I’ve is that we're close to the bottom, but we're also entering a period now of even rougher demand as evidenced by last week when our sales weren't at 100%% of normal rate because of the cold weather. And now we get that back fairly quickly before the winter really sets in. So, it's difficult to say.

There is still a lot of pressure specifically in the Southeast, more intense in the Southeast and Southwest and I think across the country we're still, both on a residential and to a lesser extent, we're seeing commercial pricing pressure in most of our markets. It's just very severe in the Southeast and the Southwest right now.

So, to answer, it's very difficult to predict. We will need to get through November and that will give us a better idea..

But to answer your question on what changes it, really it's the demand item that you mentioned. What really changes the pricing, it's demand. When we look at the demand it's more normalized weather, more normalized storm volume, really, the demand is what will change the pricing most dramatically..

And then to try to get a little bit more clarity on your commentary around 2015 sales, you mentioned market growth, 2% to 3% range is the expectation and if my math's right, I think the new acquisitions are going to -- or the acquisitions you did just recently will add 3% or 4% from the -- over last year.

And then the 26 branches that you added in 2015 and then also thinking about your plans for waterfalling on additional branches next year, what kind of impact will those 26 branches from 2014 and then your expectations for 2015, roughly what kind of impact could that have to next year's sales numbers?.

I'll speak to '15. Joe can go back to '14. It's in that same range. The estimate for the greenfield impact is in the 3% to 4% range for 2015 in addition to the $88 million. That's why I'm positive, I'm optimistic on the sales growth piece because we have the acquisitions in hand and we're going to attempt to even grow them more.

And then of course, we’ve the greenfields that we already put in place. Not just the 26, but there's still those 10 that we did in 2013 that most of them, 7 of them as I recall, are late in the fourth quarter of 2013 they're going to continue to grow, not just in 2015 but 2016, 2017 and into 2018 as they mature..

Trey, you're right. You've nailed the three factors. When we think about the demand for next year, it's going to be those three things. It's going to be the acquisitions, not only the ones we've done, but hopefully the additional ones that we'll do as we go through next year.

It's going to be the greenfield as they continue to ramp up and grow, plus our initial -- some new greenfields that we'll do next year that will drive it. And then the third part is the one that Paul said, the market demand, 2% to 3%. That will see how that shakes out as we go through the year.

But you're absolutely right, those of the three big factors and that's why Paul said we're comfortable we're going to be above the market rate of 2% to 3%. You're right..

[Operator Instructions]. And our next question is from Keith Hughes with SunTrust..

Your inventory ended up pretty far ahead of where you were last year. I guess the question is, how much did any of the acquisitions impact that and where is your general feeling on your inventory levels right now versus expectations next year of demand..

Keith, it's difficult. I caught most of your question, but you're fading away there..

So the first question is, your inventory's up pretty high, 20% of where you were at the fiscal year-end last year.

So did acquisitions impact that number at all? And what's your general feeling on inventory versus what you're expecting for next year, the 2% to 3% growth?.

Yes, well, if you look at the 251 versus the 301, you add 25 for the greenfields onto that. That gets in that range of 275ish, so we were 25 higher than last year and I really just attribute that to buying patterns during the fourth quarter, some of it due to year-end incentives, things like that and service.

For the balance of this calendar year, i.e. quarter, we should be in that same 310 plus the greenfield range to close out the calendar. So, we'll be closer on a net-net basis to the end of last year.

So we're well-positioned considering that we added 26 branches this year and there will be a couple that we're going to load up in Q1 more than likely that will also have inventory that will be additive to that number.

So we feel one, we're in good position as we get into the winter and then as I said, we haven't formulated our winter buy and what we're going to do yet..

I think if you look at it by branch, the acquisitions drove some too, Keith, you're right. If you look at it by number of branch, it's actually up roughly around 7%. So, our per branch inventory varies, but they're up roughly between 5% and 7%..

Okay and let me just add one thing. We missed part of Trey's question on -- I think he asked on the 2014 greenfield volume. If you look at our 26 branches that we opened up, they contributed approximately $45 million in sales in the year..

And our next question is from Garik Shmois with Longbow Research..

Just wanted to reconcile first off some of the commentary around commercial pricing, it seemed like it was down somewhat in the quarter and I think some of your remarks indicated that the commercial pricing landscape remains challenging as well.

If I recall back into the prior quarter, it seems like some of the commentary around commercial pricing was mostly attributed to mix. And then broader strokes, your remarks today indicated that mix really didn't have much of an impact.

So just wondering if you could reconcile maybe the discrepancy there and how much of the pricing landscape on the commercial side truly is competitive versus mix and how we should be thinking about that moving forward?.

The mix comment was in relation to the impact on our gross margins. As you move from higher gross margins residential to the lower gross margins commercial which is the way it's been for us for forever. That's typically our reference to mix and its impact on gross margins.

If you look at commercial pricing in the quarter, it was down a half a point or so. Last quarter down 1.6, the quarter before, 1.5, 0.9. There has been pressure in general over the last six quarters or so on commercial pricing, but not -- anything troublesome other than I think as we see pressure on the residential market.

Distributors like ourselves continue to drive sales. So, we continue to drive for work in our other lines of business like complementary which you saw was up 11% this quarter. And then of course, we continue to drive where we're strong commercially across the country.

I think other distributors are doing the same thing and I think I put that puts a little pressure on commercial pricing even with the relatively strong growth rates. I mean you can read the Carlyle earnings release.

They've done very well and they're projecting '15 to be very strong and actually their calendar quarter from a growth standpoint to be strong. So we're still very optimistic about commercial. We believe it's going to continue to grow. We think that right now the pricing is, I don’t want to say it's noise, but it's not worrisome.

We would love to be seeing positive pricing. We're going to work towards that, but right now, I think with in general the way the total market is impacted by residential, it just puts a little bit of pressure on it. That's all..

The other piece I would add is though, with that pricing decline in commercial, we were able to offset almost all of this quarter with lower product costs as well too. So we did a very good job of that element of it for the quarter. Thanks..

And then I guess just a follow-up question on your greenfield openings and just the timing of it in the fourth quarter, you went slightly ahead of your stated plan. You also are indicating that maybe the pace of greenfield openings in fiscal '15 may slow as M&A opportunities appear to be robust and that would offset.

Just wondering if you could maybe provide a little more color around the timing around the nine branch openings in the last quarter and why the decision was to open them when you did?.

We had stated at the beginning of the year we would do 20 to 25 branches. So as we loaded our plan, as I think everyone would expect us to do, right. We would have a very detailed plan of what cities we wanted to open to and then we begin the preparation work. Some things and many things work smoother than others and we were able to open up the 26.

We had in our sights back -- internally back in Q2 that we would get to 25 and then we were able to get that extra branch. I think part of the timing is for us to get them open as much in advance as we can prior to winter. So, that's one of the reasons. I guess if we had our druthers, I would have pulled them all up into Q3.

That just wasn't possible physically. Moving forward, so that's kind of Q4, there is really no magic there other than that we were hitting our plan. The timing of it by month was six in July, two in August and one in September. So we kind of feathered down and a lot of them, from my earlier comments we’re geared towards Q3 that fell into July numbers.

Going forward in past calls I've said we do approximately 20 and that was really without taking into account any other factors. Since then, we've done three very strong acquisitions. There is an element of integration that has to occur there.

They are equivalent to -- well they are equal to eight branches, but their sales value is much higher obviously compared to greenfield which might have $1.5 million of sales in the first year. So my comments are just intended to let everyone know that there could be a change from the 20 down to 15 down to 12 down to 10.

I think it really just depends on how the year progresses with other acquisitions and then how the integration continues on the 40 that we've done in the last three years.

So there is really no change in our direction other than to say, hey, if we do another acquisition of 10 branches, we might only do 5 to 7 greenfields in a year and part of it is our digestion process and the staffing process, things like that..

And our next question is from David Manthey with Robert W. Baird..

Objectively, looking at the [indiscernible] industry data, reroofing squares are down about 25% since '05 and I think about seven of the last nine years despite the fact recently that we've seen an uptick in consumer confidence, home values, turnover in housing stock.

I'm struggling when we talk about weather or cyclical factors; it just seems like too long a timeframe.

I'm hoping you can give us some comments or thoughts on why you think shingle volumes have been down for almost a decade now and what changes next year?.

Well I think, Dave, that you can't -- not that you are [indiscernible] the impact of storm volume, but if you look back in the early '04 - '05 timeframe besides average hail volume, you had awful lot of tropical storm activity.

Back, I think in '05 - '06, some of that volume on average produced 12 million - 13 million squares of product in that couple year timeframe. Then even as you saw the recession take place in 2007, there was still an uptick in 2008, 2009 with mostly Hurricane Ike and hail activity.

I do think storm volume is a, especially in the last two years is a major factor.

And then without having evidence in front of my face, I believe that the recession that we went through has still caused some deferrals to occur and that's why we're so optimistic because as things normalize, whether it's existing housing starts increasing, new construction increasing more than it has this past year both of those, as well as repair remodel continue to gain steam.

You saw our progress on complementary and then as storms normalize -- not that I'm wishing for a tropical storm or hurricane or hail, but as that just normalizes as I think that will drive that square volume back up.

So I think there is a number of factors that have been in play and then maybe the biggest from the terms of a change is the fact that back in the early 2000s, we were building way more new homes than we're now over 2 million starts and as you know, we went way back to 400,000, 500,000 and we're up to roughly 1 million or so units this year..

And second, I'm trying to understand the ramps of these greenfields and could you talk about the growth rate that you saw, let's say this year, in the ones that were opened in fiscal '13, just to give us an idea of how fast they grow? And then second related to that, maybe if only directionally, could you talk about what happens to gross margins in year two?.

Dave, it's tough to talk about this year or any kind of average because I have to tell you, some of them do really great right out of the chute with great locations. Some of them a little slower out of the chute. It really kind of depends.

On average, though, what we're seeing really ties to what we’ve talked about before that in the first year of a new greenfield, first full 12 months, you're seeing somewhere between $1 million to $3 million in revenue for them. Again, it depends on storms. It depends on a whole bunch of things where that geographic area might be.

But the first years has been this year and roughly in that same range. So, expect to see the same. In the second year, most of the times we'll see that number start to double, so you're talking $2 million to $4 million. So they've really started to ramp up. It's a longer process, as we've said.

It takes probably five years to get these new greenfields where we want them to in total, but so far what we've seen has been in-line with most of our estimates. There hasn't been too much of a surprise from that amount..

Okay.

And gross margins in year two?.

Yes, the gross margins in year two tends to improve a bit. I think Paul talked earlier about in the first year when you open up, first thing you know is we start primarily with residential, so it starts with residential. So they have higher gross margins than our average branch because their mix is more towards residential.

And as Paul said, when we start them out, pricing somewhat can be a little bit more compressed early on. Still a good gross margins on them, but can be a little bit more compressed. As they start to grow and develop, they drive margins even higher. So, you do see them go up in the second year, yes..

Yes typically, Dave, what we've seen is because there is still, I use the word immature and that might not be the right word, but they're still in their infancy from a sales standpoint.

If an average branch is nine or so and they're doing three, there is still a little bit of pressure on the gross margin as they attempt to get a foothold on the market. So they certainly don't go from their first year and the second year to our normalized rate, but they make progress.

Probably, I think the data we've seen is in the 1 - 1.5 range on average and I’ve variance all over the place based on location, if they are in a storm markets, the health of the region they're in that kind of thing.

But in general we see progress so that by year three, four, we're up to the normalized rate before -- that we see in the other branches..

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

So let me go through some of highlights from our earnings release. Our fourth quarter sales were $726 million, up 6.3% from the prior year, attributed mainly to the greenfield investments. We achieved a record $2.3 billion in revenue for our fiscal year 2014. Q4 also had record sales.

All three of our major product lines have had existing sales growth for five of the last six quarters. Despite strong residential pricing pressure, we were able to offset most of this with lower product costs. We continue to invest in growth, opening nine new branches in the quarter, 26 for the full year.

This drove approximately 2% organic sales growth. We're continuing to be active in the acquisition market. We closed on three acquisitions in the last 60 days. We’ve a very robust pipeline. This portion of our growth strategy has always been uneven. We're still very positive about making additional acquisitions.

Our balance sheet is in excellent shape and will allow us to deliver on our near and long term growth goals and I might even say better than the competition, many of whom have highly leveraged balance sheets and higher financing costs.

We're in a very solid market that is going through some temporary demand pressures specific to residential roofing, but we're well positioned to outpace the industry growth and deliver much improved results as our markets normalize. Our future is very bright.

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 a great holiday..