Paul Isabella - President and CEO Joe Nowicki - Executive Vice President and CFO.

Sam Darkatsh - Raymond James Garik Shmois - Longbow Research Jason Marcus - J.P. Morgan David Manthey - Robert W. Baird Ryan Merkel - William Blair Ken Zener - KeyBanc Keith Hughes - SunTrust Matt Bouley - RBC Capital Markets Kevin Hocevar - Northcoast Research Jim Barrett - C.L. King & Associates Brent Rakers - Thompson Research Group.

Good morning, ladies and gentlemen. And welcome to Beacon Roofing Supply’s Fiscal Year 2015 First Quarter Conference Call. My name is Hanna, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session toward the end of this conference.

At that time, I will give you instructions on how to ask a question. [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 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, February 6, 2015 and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures.

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 CEO; and Mr.

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

Thank you. Good morning and welcome to our call. We had a solid start to 2015 that was marked by several achievements. First, we had sales of $596 million, which is 8% over the prior fiscal year and a record for the first quarter. This demonstrates the execution of an important element of our strategic plan to organic and acquisition growth.

Second, we increased margin 10 basis points over the prior year and 60 basis points over the last quarter. We are very pleased with the results, both sales and margin considering the challenging market we are in. And third, we close on two key acquisitions, an Applicators Sales and Services in New England and Wholesale Roofing Supply in Texas.

These acquisitions were also slightly accretive to our bottomline, including the purchase accounting impact. This is a good start these two businesses and we look forward even better results in the future. This also demonstrates our ability to acquire very well run companies.

EPS came in at $0.26, which exceeded our internal expectations, although, below last year, we are still very pleased where we ended. Now a little more detail on revenue. As I just mentioned, sales grew 8% year-over-year, organic growth was a strong 4% with acquisitions adding the other 4%.

This growth numbers are an encouraging start to the year, especially in the 4% organic growth, considering the down market we are in. I am pleased to report total all three of our product lines grew over the prior year, with residential up 11.2% and complementary up 18.5%. Commercial was slightly up in the quarter.

Both residential and complementary had solid organic growth. The residential increase was in large part due to our greenfield strategy implemented over the last few years, which traditionally begins with a high percentage of residential product sales.

It is important to note as we have highlighted in the past, industry data shows roofing shipments down approximately 5% and 4% for the calendar fourth quarter and full calendar year. We feel good about our organic growth against these numbers even more so when you factoring the pricing loss we had in the quarter.

Our continued growth positions us to take full advantage of an upswing in reroofing and new construction as both segments are expected to grow in calendar year 2015. Our complementary sales growth in the quarter was driven in large part by our Applicators acquisition.

But from a trending perspective this product line has seen positive existing sales growth in six of the last seven quarters, which is very encouraging. Commercial sales being flat in the quarters not concerning as we are up against the 7% gain in last year's first quarter.

It’s also worth noting that commercial sales have grown in five of the seven prior quarters in existing business. All indications are that this product line will continue to see mid single-digit or higher growth for the balance of the year. Commercial construction appears to be strong for 2015 based on industry data for most segments.

We look forward to participating in this volume. Looking at our reported regions for Q1, we saw organic sales growth in four of our seven regions, the Midwest and Northeast let the way with double-digit gains. This was fueled by combination of storm repair work, new branch openings and existing branch growth.

We also saw solid growth in the Canada and Midwest -- Mid-Atlantic regions. These gains were fueled mostly by strong organic growth. The Southwest, Southeast and the West were down in the quarter, which was not a surprise. The Southeast and Southwest continue to deal with post-storm demand issues and intensified pricing pressure.

The Southeast actually had strong unit growth on residential products even with negative storm volume factored in. As we've seen many times in the past in storm markets, we believe these markets will correct as normal patterns of reroof, new construction and harsh weather occur.

In terms of gross margin -- margins, we ended up 23.1%, which was up over prior year and prior quarter, we showed improvement despite the challenging pricing environment. On operating expenses, they ended at 19.1%, which was an increase over prior year, but a large part of this increase was to support our branch growth strategy and acquisitions.

We believe these investments are critical to our future growth and margin expansion. And as we’ve previously stated, the new branch typically takes three to five years before the volume ramps and we attain our targeted operating cost structure and operating income. Once these get closer to our average branch sales, cost leverage will improve.

And as in the past, we continue to look for ways to eliminate non-essential cost from the business. This continuous improvement mentality is part of the Beacon culture. We are very excited about the 40 branches we have opened in the last three years, as we know we will see solid sales and margin expansion in the future.

Now I will give some information on the outlook for 2015. The beginning of Q2 started strong from a sales perspective as January organic sales were up 15% and in total up 19%. Our product lines were up double digits in the month. For the balance of 2015 we are positive about our ability to grow sales.

I already mentioned the data on new construction which is optimistic. There is also optimism on existing home sales and remodeling. Without combination of acquisitions and organic growth, we believe we can grow in the high single-digit range for the full year.

In terms of gross margin we will continue to work to combat pricing pressures as we did in 2014 by improving system pricing and reducing our product costs. As a result, we believe our gross margins will continue to be in our stated range of 22.5% to 24%.

But demand will be the key for improving gross margins in the balance of the year and as a reminder, Q2 was typically our lowest gross margin quarter.

In regards to new branch openings for 2015, we are planning to open approximately 10 for the year, give our three recent acquisitions and 40 branches opened in the last three years we believe 10 is the right number for 2015. This does not mean we are changing our growth strategy by any means.

As we opened this 10 in 2015 that will bring our four-year total of 50, as the economy continues to improve we will be well-prepared to expand our business. And from an acquisition perspective, we continue to talk to numerous companies and as we've said before, it's difficult to predict when sellers will sell.

We had the capital structure and operating strength to do multiple deals and we will continue to work on executing these as we have in the past. Our pipeline is full and we are optimistic on future deals. Related to EPS, our current analyst consensus is around $1.36.

No doubt providing a full year estimate can be challenging given all the variables we are facing now. That being said, though, we are comfortable at this time with the full year consensus. Again, as you know, there are many variables to take into account.

For instance, many parts of the country haven't seen harsh weather during the last month and this month. This is having an impact on our ability to drive sales and hence margin in those markets. The good news is spring is just around the corner for our northern businesses. And as always, we’ll keep you updated as we go through the year.

All-in-all, we believe Q1 was a great start in a challenging environment. We continue to demonstrate solid growth in gross margin expansion. Our balance sheet is in great shape. Inventory performance in the quarter was very good and our branch expansion strategies being executed well.

We will continue to execute the fundamentals of our business plan focusing on excellent customer service, sales growth and cost control. We have a great team of people and great customers. And now I’m going to turn the call over to Joe and he can go over little more detail on the financial highlights of the quarter. Thanks..

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

As Paul mentioned, we had a solid quarter, topline growth of 8%, our first quarter record sales of $596 million. Gross margin increased both over the prior year and over the prior quarter.

Our operating expenses were up primarily due to our acquisitions in greenfield as we continued the investments in our growth and for the quarter, we drove EPS of $0.26. For comparison purposes, there were same number of days in Q1 of fiscal 2014 as in Q1 of 2015, 52 days. Paul already went through our sales results in details.

So I will not repeat any of that information here but I will go through our monthly sales trending. Compared to the prior year, our average sales per day on an existing branch basis were higher in each of the months of the quarter. October started out good with sales up 3% followed by a softer November with sales up 1.4%.

But we finished the quarter with strong December where existing sales outpaced the prior year by 12.4%. Some of the monthly change is weather-related but it can also be attributed to our organic growth from 2014.

On another positive note, the gross margin rate was 23.1%, up 10 basis points from year ago and 60 basis points from the fourth quarter of last year, the very important trend that we are excited about.

Total pricing declined by 200 basis points in the quarter from the prior year but was offset to large extent by product costs decline of 180 basis points. The remaining 30 basis point increase to gross margin can be attributed to shift in mix to more residential and complementary sales.

While commercial and complementary prices remain relatively flat compared to the prior year, residential prices declined 380 basis points from the prior year and drove the majority of the pricing decline. Our supply chain team did a great job in offsetting the majority of the price declines with total product cost declines of 180 basis points.

As just mentioned, our product mix had a 30 basis points favorable impact on gross margin as volumes shifted from commercial roofing to residential and complementary products.

Residential roofing increased 46.9% of our sales versus 45.5% in the prior year while commercial declined to 36.7 from 39.5 in the prior year and complementary increased to 16.4% of our sales from 14.9% in the prior year. Now on operating expenses, total operating expenses were $113.7 million or 19.1% of sales.

This represents a year-over-year increase of $13.9 million. That amount includes operating expenses from acquisitions which totaled $5.3 million. Excluding acquisitions, our existing market operating expenses were up $8.7 million over the prior year and 70 basis points to 18.8% of sales.

Break that down a little further, so of this amount, $5.7 million can be attributed to the 26 greenfields opened up in fiscal 2014. As we had mentioned previously, greenfield has a higher operating costs as percent of sales until the branch is running at our average branch volumes.

The remainder of the increase can be attributed to the combination of one-time cost related to insurance and sales incentives combined with recurring costs for benefits, incentive compensation and incremental headcount to support our growth in areas like supply chain and IT.

These costs were partially offset by lower depreciation and amortization expense. As always, we continue to look for ways to leverage our cost structure. Cost control is a historic strength for Beacon and our spending is always made with the future in mind. With that, we anticipate full-year existing market operating expenses of 18% to 18.5% of sales.

Regarding the balance -- the status of our balance sheet, inventory was up $13 million from Q4 and $6 million from Q1 of last year. This is all in support of our robust organic growth in the three acquisitions we just completed. If you look on our per branch basis, inventory was actually down almost 9% per branch from the same quarter last year.

Capital expenditures including acquisitions in Q1 were $3.1 million compared to $5.4 million in Q1 2014. As you recall last year, we made significant investments in our fleet with the addition of our greenfields and replacing older equipment. For the year, we expect capital expenditures to be much lower less than 1% of sales for the full year.

Net cash used for acquisitions was $69.7 million. Our current ratio is a strong 2.53 to 1 versus 2.38 to 1 at the end of last year.

The results of our two bank financial covenants ended this quarter were as follows, the leverage ratio increased to 1.96 to 1 compared to 1.42 last year and our interest coverage ratio decreased to 13.96 to 1 compared to 16.73 to 1 last year.

Our additional investments support the capital and working capital associated with our strong organic growth drove the majority of the change in these ratios. Even at the current level, they still demonstrate the flexibility and capability we have to execute on our growth strategy. Now, we’ll respond to question and take any questions you may have..

[Operator Instructions] And we’ll take our first question from Sam Darkatsh with Raymond James..

Good morning, Paul, Joe.

How are you?.

Good. Good morning Sam..

Good morning..

Couple of questions. First of all, the decision to take the inventories down, it looks based on your payables that continued into the second fiscal quarter as well.

Strategically, is that a function to just rightsize inventories on a per branch basis or are you anticipating better product costs in the spring and summer because of the lower oil prices right now?.

Yeah, Sam, I think if you look at the last year in the first quarter, we had done some buying that was, I won’t say abnormal but it was higher than in the past. And we didn't do that for sure in this quarter given that we were set from an inventory standpoint balanced against service.

And there is no doubt, your other comment about rightsizing inventory. There is no doubt a constant effort by us to make sure we have the right type of inventory at the right branch. So as we’ve placed more emphasis on our supply chain, you head us talk about investing more on the people side there. We think we are making progress in terms of that.

And if you give then that really takes it. I think it's maybe what you’re alluding to and that’s where we are at this quarter in inventory. We’re still analyzing the winter buy. I am not going to get tangled up on oil and asphalt and what that pricing could do.

I mean, as of right now we haven't heard much or at all from our manufacturers about prices going down as a result of that. So again yesterday's Carlisle call, they mentioned that any deflation they might see on input cost, they would want to take into their profits. I can’t speak for any of the manufacturers but that could very well happen.

So we have not made the decision from an inventory standpoint to do anything as of yet in this quarter. I think at this point right now at the point in time and it could change. I think our balance will be lower than it was last year as we exit this quarter. But again that could change..

And then a follow-up to that, Paul, you mentioned that 22.5% to 24% gross margin target for the year is primarily dependent upon demand. I think you said demand is the key. You think demand is far from more critical than pricing would be then.

What would be the inference?.

Higher outbound pricing, Sam?.

Yeah..

Yeah, I think, demand -- to the large extent, what we’re finding in this market, demand gates a lot of pricing activity to our end market. If it’s weak demand i.e.

our Q2 which is usually our lowest sales quarter because of the winter weather in the North and our lowest gross margin quarter and that's somewhat a function of lower demand, higher competition, less jobs to go around hence pressure on pricing. And I think if -- and it's interesting, it's always double-edge sword for us, right.

That’s probably all our distribution and manufacturers. We have all these storms right now that are pretty heavy at the end of January and February, up in the Northeast but with that could bring robust volume in the spring, I’ll guarantee that. And then as we look at a lot of the industry indicators whether it is for new resi construction.

I mentioned it in my prepared remarks, pre-modeling or all the data that’s out there from McGraw on commercial, it appears that it could be a very robust year for both new construction and then, I still believe on the reroof side. So, I think that demand is the gate and if demand is relatively healthy for the most part.

There still might be regional differences. The Southeast continues to see a tremendous amount of pricing pressure as does right now Texas, because they are on the backside of falling strong volume they see in the general area of Texas, Oklahoma and even Louisiana..

So putting words in your mouth if I could, you are thinking that pricing and product costs are pretty much level out for the next three quarters or so. So that’s why the volume would and I guess mix, but volume would be the key.

Is that how I should read it?.

Yeah. Hey, Sam, I can’t predict the future in terms of what’s going to happen with product costs, right. I just don’t see -- in my opinion, I just don’t see the manufacturers taking price down because they have lower input costs. So, I think in my mind, there is a view that it could stabilize.

And then if there is demand, we are still hopeful that we will recover some of this, all of us, including the manufacturers because their margins have been squeezed and we will recover some of the pricing that we lost last year..

Our next question comes from Garik Shmois with Longbow Research..

Thank you. Just wondering if you can dig in a little bit more just trying to underlying demand trends, particularly in December and January you called out what appears like a strong double-digit growth so far.

I understand that there is some weather impacts in certain markets but are you starting to see after several years of ethics for return in particular, the reroofing market on the residential side and if so, what could that pertain for the next year or so?.

Yeah. In the absence of specific exacting current data, right, it’s difficult. The Fredonia data points to that mid -- let’s say below 5% reroof growth. I think given the fact that we had such a soft ’14 in total square checked, I mean, it came in under 110 million squares, which I think for the year was down about 4%, 4.5%, 4.4%.

I had a view that there is pent-up residential demand. The question is when will it come out, when will we see it. I think the other piece that’s important to note for us and I tend to -- we all tend to focus on here is that we are only at roughly 10% market share. So there is ample opportunity for us to go find customers to sell product to.

We just have to continue to be very aggressive. So it isn’t a function of us being so saturated. There's nowhere to go.

But that being said, strong reroof in ‘15 would definitely help and I think the manufacturers are thinking that square shipments are going to be up between 3% and 5% next year and we’ll just have to see how that plays out as we get into the spring..

Garik, this is Joe. The other part that I would add on and I will. Absolutely, our growth in December and January was great. Do keep in mind, we did have some of the weather impacts last year. Last year, our December was down 3% and our January was down, I think almost 14%. So just keep in mind, we did have some Dow numbers last year.

But that doesn't discomfort that we still are having some great growth organically and as a result of the acquisitions too..

Yeah. Thank you for that. And I guess just switching to mix and the benefit that you had this quarter was a 30 basis points of favorable mix from our residential complementary products.

Is it fair to assume that type of mix benefit moving forward to margins is sustainable? We are to assume that residential is going to continue to recover into 2015, or is there any reason to think that you shouldn’t continue to get several hundred -- several tons of bps of worth of margin benefit moving forward?.

Yeah. We don't have -- in our internal planning, we don’t have any mix gain calculated in. And the reason why is that these product lines can fluctuate from quarter-to-quarter and they have in the past.

So for instance, I gave you the kind of, little bit of data points on commercial and Carlisle talked yesterday about how optimistic they are about 2015 so. And it just seems like there's more public work, there is more private work. We see a lot of quoting activity.

So if that happens then that mix could change back and it could go the other way but we are just doing, let's say a much higher level of commercial work than residential. No, we don't have any view that we are going to gain 30, 50, 80 a quarter in mix right now.

It could happen but it's really dependent on the market and how well we execute within those markets..

Acquisitions is the other part I would add. All right. The acquisitions play into it well -- as well. The company's acquired depending on their mix, just like Applicators that we bought, we described. In fact, they got it higher, much higher complementary product mix which shifts things around for us bit.

So as we make acquisitions that also shifts or has an impact on the mix, impact also, Garik..

Okay. Thanks so much and best of luck..

Thank you..

Thank you..

Our next question is from Michael Rehaut from J.P. Morgan..

Good morning. It’s Jason Marcus in for Mike. The first question is going back to the gross margins for a second.

I was wondering if you could talk about the progression of the gross margin throughout the quarter and maybe if you could give us a read on what January looked like?.

Well, I will start. Joe can maybe give you some color. January, we haven't finalized the month. We haven’t closed the books and we typically wouldn't give detailed margin info within the quarter. We talked about sales.

So it’s -- suffice to say, we are still seeing continued pricing pressure as we go through January, as you can imagine, especially as the slow start of the ply, peak month, late month, up in the north. All it does is putting more pressure on pricing..

As Paul mentioned, unfortunately, we do not give detail by month through that. So, I can’t get into more detail there.

The only part I would add to what Paul described as he talked about I think during his prepared comments, as well too is part of the first quarter results that we reported, we do always do see a little bit of a benefit sometimes in our margin as a result of any year-end incentive gates or others that have probably been impact to us.

So keep in mind that always helps us when we do our first quarter numbers. And then as Paul said, pricing usually is more difficult as we get into the second quarter element. But, again, we look long-term. As Paul described, long-term, we are still well on track towards the established goals..

Okay. Thanks. And then going to the greenfield just for a minute. I know last year, you had a very strong year with new branch openings and you are scaling back a bit in 2015.

I was hoping maybe you could talk about the competitive dynamic that you're seeing from some of your competitors and how many greenfields you are seeing them open in the some of the markets that you invest that would be helpful?.

I mean, I don’t have an exact count but there is no doubt, some of our competitors have followed either us to some locations or opened up their own as part of their own growth strategy. I mean, despite that we’ve still seen very solid progression in terms of sales growth with our greenfields. And I think that's a function I will go back to.

It’s a function of us having 10% market share. So given that, I think, whether we opened 10 or 20, we are still going to execute those. I made the decision to do 10 just based on the fact that we had the three acquisitions and the other 40 that are still nesting.

That share could very well or even later this year, we can figure out we are going to raise that target something higher and next year, we could go back up to 20 or 25.

So it’s the answer -- a little more direct answer, I don’t see necessarily the competitive pressure as our competitors are opening up greenfield branches any different than normal pressures that we have seen for years and every market we are in..

Okay. Thanks..

Okay..

Next question is from David Manthey with Robert W. Baird..

Hey, guys. Good morning..

Hey, David..

Good morning, David..

First off, just some quick ones here.

Relative to your outlook here on the EPS and the growth, what is your expectation mainly for shingle pricing in 2015? I mean, if you are comfortable with the range, you must have at least a view on that? I mean, you are looking for zero or what are you expecting?.

Yeah. I mean, I think for -- internally, we weren’t bullish enough to go either way. We factored in nothing related to price as we go through the year..

Okay..

But again, I think Dave, as I said it will be gated by demand. If we start seeing -- let's say as Texas for instance, Southwest rebounds, that’s going to help shore that up. Southeast is the same. The other parts of the country, there is pressure. But it’s not quite as severe as those two areas..

The other part I would add, Dave, is we will do what we’ve continued to do over the last few quarters, which is really the pricing pressure. Our teams have done a great job of offsetting a good portion of that with cost reductions as well too. We are going to continue that trend..

Okay. In the high single-digit growth, you are talking about when you are saying mid-single-digit. It sounds like residential, plus same in non-residential, complimentary probably better than that, plus acquisitions from greenfields, leading up to high single-digit.

You are talking about units there, volume growth?.

Yeah. We are talking volume growth..

Okay..

Assuming pricing pressures..

Okay.

And then January, just roughly, I mean, I know things would ramp up through the quarter but January as a percentage of second quarter fiscal sales would be positive -- is it a quarter 20%?.

Yeah. Typically, it is 20, high 20s, as a percent of the quarter..

Okay. And then on the growth this year or this quarter I should say, majority of it came from acquisitions in greenfields and the vast majority of those two components would be residential in nature.

Could you talk about the gross margin trends, excluding acquisitions in greenfield? What are you seeing, and how plan on that rolling out over the course of the next year?.

First, before we get into any detail, Dave, I can tell you, one of the things that’s important to talk about is the fact that, as we look at organic growth, for sure of course greenfields is in there, but greenfields does get mixed with what we would call our other maybe retail businesses would cause same-store sales.

So as we are opening up all these greenfields in many of the 26, may only 3 or 4 were really out of range as well call were adjacencies. So we take an awful lot of product to seed. We don’t have an exact number, but it can be high percentage from one branch over and the same applies to the cost.

So you have the cost number we cited was for the leases, the people, but there are other folks involve from other parts of those regions that help sell, that help get it set up. So there is a lot of mixing.

So it might be difficult to talk of the separation between what we are seeing of Purex, what you would call same-store and greenfield because it really gets kind of mixed up together.

Joe, I don’t know if you have any?.

Yes. The only other piece I would add is that, yes, our acquired markets had slightly higher kind of gross margins than the existing markets. The existing markets, again the bulk of the volume and the existing market gross margin percentages were pretty constant year-over-year from first quarter of '15 to first quarter of '14.

So they were pretty stable. The acquired ones had a higher gross margin to it. We talked about the mix differential at applicators, which is some of what drove that..

Your next question comes from Ryan Merkel with William Blair..

Thanks. Good morning, everyone..

Hey, Ryan..

Good morning, Ryan..

So just a follow-up on gross margins. I think typically in the first quarter gross margins are at the highest for the year and then we’ve seen a step down the rest of the year.

I am wondering, is that part of your outlook? Or given that you think you are going to have improved demand, do you think that the rest of the year gross margins kind of be around 23, maybe even little higher?.

Yeah, I mean, it’s -- Joe can also chime in, but it’s difficult to me, wouldn’t typically give you gross margin estimates by quarter..

By the way, it’s not necessarily what you had described, while certainly that’s up from what we saw last year, lot of that was the pricing environment.

If you go back to a different demand situation like '12, you saw the gross margins in '12 they did dip down in the second quarter, but the third and fourth quarter came back stronger than what the first quarter kind of was. So it’s not always as you described it there.

That was last year situation, but going back over a longer-term period of time, that always that case, right..

And Ryan I guess in the absence of any major mix shift, I mean you could assume that there could be some consistency for the balance of the year, but again that also assumes reasonable demand, which doesn’t put impact pricing negatively and it also assumes that we don’t gain any price.

So obviously, we would love to be seeing some price again, even what we’ve seen in the last two years, right with the pain that we suffered on the pricing..

Right. Okay. Fair enough. And then I guess on the resi price, another quarter here where we’re down year-over-year. If the OEMs keep prices the same, we are kind of zero percent price like you sort of assuming.

What code do we actually start to get back to neutral on year-over-year resi prices, is it 2Q, or is it more in the back half?.

Yes, again, I think -- it sounds like I have a recording here in my head, but I think, Ryan, it could happen at will. For us, it would be Q3. It could happen in the breakout in the spring or it might not be until the fourth quarter. It really is a function of demand. I think the manufacturer is still that way.

I can’t speak for my competitors, but we believe its demand gated. So if we see let’s say new construction does both commercial and residential does what folks think it’s going to do up double-digit plus, remodelling continues to grow. Existing home sales grow.

And then there is storms right in the right areas, then you could see some good progression on pricing. In the absence of that, I think it would be much -- not much the same because again it’s difficult to say what’s going to happen in April, May, June..

The other part I would add, Ryan, as well too, as you know the difficult weather last year in that January, February, March timeframe added additional inventory into the channel in total. And I think that also had a negative impact on pricing as you guys know as we went through last year as well too.

So as we talked about our inventory levels, we’re in better shape right now..

Yeah, that’s a good point that Joe has brought up, because there is no doubt and there is a realization and it’s fairly simplistic right that a lot of lower priced inventory in the channel with weak demand does not help the market, does not help pricing. It doesn’t really help anything. And that’s for sure what happened in '14..

Right. Okay. Thanks..

Thank you..

Our next question is from Ken Zener with KeyBanc..

Good morning, gentlemen..

Hi, Ken..

Good morning, Ken..

I leave gross margin alone for one question here. Can you talk -- can you just give us a sense operationally, you said inventory was down about 9% per branch, which is generally referring to residential versus commercial which has been? So given the level we are at, talk to us if you would about operational risk.

So how low closure inventory go that would feel comfortable relative to not being under-inventory, A? And then related to that, again not focusing on gross margin, but with asphalt down call it 10%, if it’s on a six or one year basis -- six month or one year basis, it’s obviously down by different regions.

But what is actually the risk to how low you can run your inventory if you think there is no price inflation on the horizon even if manufacturers are going to hold price?.

Good question. I think without getting into the specifics of inventory by product line, it’s a tougher question to answer. We certainly -- the first priority for us is to make sure we have product to serve our customer base, right. And within that, given 260-plus branches, there is going to be -- we know there is going to be inefficiencies.

We are working to get rid of those inefficiencies by proper demand planning, proper order placement, and all those stakes. I mean the level, no doubt the way we ended the quarter Q1, when you strip out acquisitions and the greenfield inventory, which was there for the most part prior year, I mean we ended up like around $280 million of net inventory.

And at that level, we probably couldn’t run in the summer because it wouldn’t allow us enough inventory to run, but something reasonably above that 40 million, 50 million it would be the range I would say for in season type of level.

So again that really says that we wouldn’t have done a major buy, which is the surplus of inventory, which sits and then you sell it, right. So, that’s item one. On the asphalt side, I think I really just answered it..

That’s fine. It just seems like there is no real risk the way it’s running, I mean they might be stable, but that’s okay. So that’s why I was just going to kind of your operational units and inventory..

Yes. And Ken asphalt has moved up and down over the last 4 or 5 years and it’s not -- there is just not a one to one for us, like it was let’s say in '08 when it went up so much and asphalt really doubled, but that was a whole different situation.

I think the appetite, again this is my opinion, the appetite for the manufacturers who want to keep any input costs decreases, because they are seeing the same pressure we are seeing on healthcare cost increases. There is wage inflation, folks do get raises, etcetera. There is got to be some offset.

So if they take that approach, even if asphalt drops more, again it’s only and we don’t know exactly their bill of materials. It’s a small -- we believe a small percent of the product A ship and manufacture. We just don’t think there is going to be an impact..

And Ken, its Joe. The one other thing I will follow up, your question is also right on target regards to inventory and how low do you go on that as well too.

As the finance guy, I am always kind of be in the drama around inventory levels lower, return on invested capital being sure that we keep the turns up high and it’s balancing act, because if we don’t have the inventory to sell, that’s a whole another problem to have.

So we look at it from exactly the view that you just described and it’s important to know we do keep that in mine, both in turn the return on invested capital element, plus also what we do is sell inventory. So we need to have it there..

Our next question comes from Keith Hughes with SunTrust..

We talked a lot about your inventory in this call.

Do you have any sense in the channel, if the inventory behave that you’ve exhibited is being done by your competitors?.

Yeah, I mean, I think a peak as I drive by yards, but that’s not real scientific method. Everything we’ve heard right, mostly back channel from customers or manufacturers, would say that there is similar behavior right now going on..

And we’re still in the winter months, is there still time for behavior to change? I assume I won’t really know where we stand for another 30 days.

Is that fair say?.

Yeah. Even a little longer, but 30 days would be reasonable for us to really had a position of what we’re going to do and I would think the other folks too. Winter, we’re still be in the middle of winter, so we’re not going to know what kind of demand requirements there is going to be in the April and May.

So we’re just going to have to do we normally do and look at our demand plan for what we think our internals look at, what our internal sales value say per region. And we’ll buy product to make sure we have a readiness to serve. But in terms of any massive winter by, I mean, right now we’re still analyzing and we’re in a holding mode..

Got it.

And Joe, the sales excluding acquisition of our segments, is there anyway to quantify what greenfields added to the sales of residential and non-residential complementary?.

Yeah. That’s a difficult one, Keith, to kind of get into it as we kind of talked about before. When we open greenfields, a lot of volume shifts around, especially if it’s in existing markets and the majority of our greenfields are in existing markets where we have a current location.

So it’s very difficult to kind of breakout how much of the volume is from that exact greenfield.

Certainly, I can tell you for those stores what the volume was, but that doesn’t necessary tell you how much the incremental volume was from greenfields because many of times in those greenfield stores we open, we shift volume around, we shift customers around and it’s very difficult to break it down more specific.

Was it a big impact of the organic growth for the quarter? Certainly, it was a big help to us, yeah..

But it could be as high as even and this should be a very rough estimate. 30% of that volume is coming from seeded customers that are doing business with us in existing locations and that changes by the branch, by location, how much volume we’re pushing out into that area anyway with the longer drive from the base branch.

We’re trying to put a lot of pen to paper on that one and it’s a little more difficult to figure out. Suffice to say, I mean, that’s why we emphasize our organic growth is strong, right. Greenfields are in that, but we know we’re getting existing growth. And in some of these regions, the existing was double-digit, with or without the core greenfields.

Of course acquisitions would be out with the core greenfield what we record at that branch in or out. I mean, we’ve seen some pretty strong growth in our reported regions..

Our next question is from Robert Wetenhall with RBC Capital Markets..

Hi. This is actually Matt Bouley on for Bob. Thanks for taking my questions. So just on res. Good morning.

You talked about Carlisle, I know they called out weather as being a negative headwind, I guess, in November? So I’m just wondering if you could highlight, what were some of the factors that led to the slowdown in non-res? And then on your outlook in 2015, just which verticals within non-res are you think you might see strength and weakness?.

Yeah. When you talk, I kind of mentioned in my prepared remarks. No doubt the comp year-over-year didn’t help and then the fact that we had been growing every quarter. And we don’t -- November was not as strong.

It kind of mirrored Carlisle, but part of the challenge with us trying to match up directly with Carlisle, they serve all over the country and we typically only buy with them in certain regions and they might be growing more in another region that we’re not for whatever reason.

So we kind of mirrored that and it was really a function of whether some job delays, that said and it wasn’t anything other than that. And some of that volume came back in January. That's why we talked about commercial been up to all three of those product lines in January being up double-digit.

What was the second part of your question?.

Going forward into 2015, what’s our thoughts for the remainder of the year….

Oh! Yeah. On segment….

And what factors might be driving it..

Yeah..

Yeah. No. I think when you look at McGraw data and the architectural indexes, they’re all strong. We know public work is going to be strong. We can see it now, schoolwork especially, new construction and we’re starting to see a lot of activity quotations on reroof. So, we think, we feel good about that.

There’s never a guarantee, right, but we feel good about it. And there’s also a lot of private work, whether it be office building, retail, things like that. So every segment as you go through manufacturing plants, select utilities, public works, they are all pointing to anywhere from 5% to 9% to 16%.

Now, again, these are estimates, but it's encouraging, they’re not saying 1%, so it’s really across the Board..

Thank you. That’s helpful.

And then you called out direct sales is down in the quarter? I’m just wondering if you can remind us of the gross margin differential between direct and warehouse sales? And then, what were the factors that led to that decline and where do you see direct sales this quarter?.

Yeah. I don’t believe we’ve called -- we have ever called out gross margin numbers between direct and indirect..

No. I think, as we describe it before, good portion of the direct sales tend to be more on that commercial side of our business. I think we have talked about is the differential between our commercial and our residential kind of product margin.

I think, we’ve always described that, but in the area of 10 points of gross margin difference between those two. So, that’s probably as close as we’ve got into providing detail on it..

Our next question is from Kevin Hocevar with Northcoast Research..

Hey. Good morning, everybody..

Good morning, Kevin..

Good morning, Kevin..

I was wondering if you could comment on the winter discounting packages being offered by the manufacturers. Are they pretty standard in the typical kind of mid single-digit discounts? I know they’ve talk about trying to be more disciplined.

But I was wondering if you could comment on -- are they kind of inline with the store trends, the packages being offered?.

Yeah. Good question. We typically don’t comment on discounting. What I can comment on is, you’re using the word discipline. I think the manufacturers have done at least a consistent job of being very disciplined this winter.

I don’t -- I believe all of loss, manufacturers and I would think distribution wouldn’t want to see a repeat of 2014, there was just so much inventory in the channel that really caused a lot of issues. So you can you infer whatever you’d like to from those comments about discounting. But they’ve been very disciplined..

Got you. Okay.

And then in -- with lower fuel prices, will you get any benefit on the shipment n of your products to your customers? Would that helps margin at all or that largely be passed through?.

No. That will provide us a little bit of help to our cost structure is a result of lower fuel costs. Absolutely, we have a fleet of vehicles. We do that delivery and installation -- delivery at our end customers, so certainly we’ll. That’s not a -- it's not a overly significant cost to our core financials.

It’s one of many elements that will help us drive some cost down the ship..

And then our last question is from Jim Barrett with C.L. King & Associates..

Good morning, Paul and Joe..

Hi, Jim..

Hi, Jim..

Paul, with the challenges the industries had especially in ‘14, have you noticed a notable increase among the smaller distributors to consider selling out and/or are they now considering selling out at what you would view as more attractive, more reasonable multiples?.

Yeah. It’s a good question. We really don't see any appreciable change. I mean, I’ve been here for over seven years. And as I look back on those years, there has been different ups and downs to a lot of selling and no selling. But I mean, I can't say that activity is necessarily increased because of that.

I mean, a lot of these smaller distributors are very well run and they’re profitable even in these difficult times, right, just as we were when we were the $100 million, $200 million and $400 million. So I haven’t seen any change. And on the multiple side around the price side, I guess, I speak the price in that multiples.

I mean, we’ve just been very consistent in our approach to make sure we don't overpay for the business we’re buying. And we fight very hard, not get the itch to overpay to get an asset because we know we have to pay back. And then I think all the shareholders would appreciate the fact that we’re very disciplined with that.

So I can’t -- we hear of deals in the market that are rich, but I’ve no proof in front of me, a piece of paper that talk about the sell price, show the sell price. I do know that we pay and our levels have been consistent with what we’ve done in the past. And that’s all we are going to do in future. And they are all balanced out.

Some of you might pay a little more for, some of you might pay a little less for and it balances out..

Our last question comes from Brent Rakers with Thompson Research Group..

Yes. Good morning. I have two questions. First one, you talk a lot about the weather facts in December and Januarys.

You maybe give us a better sense of how some of the year around Southeast, Southwest, western markets performed in those months?.

Well, the South -- I’m sorry.

Brent, are you talking about the Q1 or January?.

More end of the quarter, I guess, December month being so good and then the January month as well.

I mean, how much of that was just northern markets and comp issues and how much of that was southern markets, western markets, maybe coming on a little stronger?.

Yeah. There is no doubt. We saw strength in the northeast. And then the Mid-Atlantic was reasonable. Canada was very strong in the quarter. I don’t think there was any appreciable change during the quarter. We know December was a little higher for us, from a growth standpoint. But the pressure for the Southeast and the Southwest was there all quarter.

It’s been relatively consistent. Some of it kicked in the Southeast because as the hill was finally of dried up down in, that the Gulf Basin there. And the Southwest has been fighting rough comps because of storms for a number of months. So I think there is any change, any great change during the quarter..

Great. And then just the last question. If you could talk a little bit about G&A and selling and warehouse expense in the event that comps growth starts to be in that that mid-to-high single digit level.

Talk about the variable fixed cost mix and maybe how attractive you think the operating level can look onto that kind of situation?.

Yeah. I mean, I’ll start up from a higher level, Joe had talked about it. We ended at 19.1 for the quarter. If we take out acquisitions, it was 18.8. We’ve said that for the full year, we’ve been in the 18 to 18.5 that’s a big range so it could mean 18.1, 18.2. We continued to have a lot of cost activity -- cost actions that we’ve always had.

We try to heighten that and then no doubt as you alluded to as acquisition gains steam and as greenfield branches gain team, we’re going to gain leverage, no doubt to get down close to that 18% cost level.

Joe, I don’t know if you have any more detailed info?.

I think the big issue, Paul, as you mentioned, as the greenfields continue to gains steam that’s where, as we talked about higher operating expense, currently is a percent just because of the fact, they are in the ramp up volume phases.

As they gain speed in terms of volume and go through the year and then into next year, that will have the biggest kind of leverage impact on our operating cost structure..

Yeah. Regarding the rest of our costs, there has been no significant change really in that fixed variable relationships done in the past. If I take the greenfield piece out of it, the rest we continue to do what we’ve always been focused on doing.

We have a clear cost reduction culture around here at Beacon and that we’ve spend a lot of time focused on it, that hasn’t changed..

Yeah. And when you look at things like, whether it would be acquisitions, which you can see in the Q or greenfields. I mean obviously, if we are talking about being slightly accretive, slightly dilutive, there is no doubt that operating costs are close to gross margin levels. So there is virtually no leverage there, right.

And that’s just the function of having a $1.5 million branch shoot per year or $2 million for year annualized, sales branch that just can’t -- it just can’t level all the cost because you’ve got a full lease and usually, you have some nearly a full complement of people.

You are going to have complement of depreciation because you have to deliver product, et cetera, et cetera, right. That will change as we go through time and that’s -- which it will get us down close to the 18% level..

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

Great. Thank you. Here are a few highlights, all repeats but we’re talking about. First quarter sales were $596 million, up 8% from prior year. And as we said, split somewhat evenly between organic and acquired growth and it is a record for Q1. Resi sales grew 11.2% and complimentary 18.5%. We’re very pleased with that while commercial was basically flat.

And it is a great example of our product diversification. We talked about gross margin being up 10 basis points and 60 basis points from prior quarter. Two acquisitions we’ve closed down are great companies and we look for big things from them, as we go through this year and next year and beyond.

EPS, we talked about was in line with our internal projections. So we feel good about it. And we are optimistic about achieving our full year internal plan. We spend a lot of time talking about operating costs. But we feel good about it and we’ve had a great history at Beacon, of controlling costs, reducing cost doing what we need.

But we also -- we also have a strategic plan that's really anchored in growth. And those growth elements are acquired growth, new branch growth, and then same-store or existing growth as best we can separate those.

As volume improves in our greenfield branches and acquisition integration continues, we will see solid cost leverage as I alluded to, with the full year estimate being in that 18%, 18.5% range. Our balance sheet is in excellent shape and will allow us to deliver on our near and long-term growth goals.

And as I've said repeatedly over the last number of years, we’re in a very good market that's going through some temporary demand pressures specific to residential roofing. But we are well-position to outpace the industry growth and deliver much improved results as our markets normalize. And we believe our future is very bright.

I want to thank all of our investors for their interest in our company, and as well as our customers and employees for their loyalty. This concludes our earnings call. Thank you..