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

David Manthey - Robert W. Baird Ryan Merkel - William Blair Sam Darkatsh - Raymond James Garik Shmois - Longbow Research Keith Hughes - SunTrust Jim Barrett - C.L. King & Associates Ken Zener - KeyBanc Jason Marcus - JP Morgan Will Randow - Citigroup Robert Wetenhall - RBC Capital Markets.

Good morning, ladies and gentlemen and welcome to the Beacon Roofing Supply's Fiscal Year 2016s First Quarter Earnings Conference Call. My name is Nicole, and I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference.

At that time I will give you instructions on how to ask a question. [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 risk 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 5th, 2016, and except as required by law, the Company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures.

The reconciliation of these non-GAAP measures is set forth in today's press release. 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 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 and financial slide presentation on the Investors section of its Web site under Events & Presentations that will be referenced during management's review of the financial results. On the call today for Beacon Roofing Supply, will be Mr.

Paul Isabella, President and CEO; and 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 2016 first quarter call. As mentioned in our press release this morning, we started the year off with a very solid first quarter. Sales for the quarter were approximately $976 million, which represents total growth of almost 64% over the prior year and organic same days growth of approximately 12%.

We delivered $0.41 of adjusted EPS for the quarter, strong growth versus last year. Our team did an excellent job of growing sales and margin, controlling costs, integrating RSG and the three additional acquisitions, we executed in December, and as always, focused on servicing our loyal customer base.

We formally closed on the RSG transaction on October 1st, and then acquired three companies in December, RCI, Roofing Supply of Omaha, Roofing and Installation Supply of Dallas, and Statewide Wholesale of Denver.

These three solid companies give us additional geographic and product density and it also demonstrates our commitment to adding tuck-in acquisitions as part of our growth plans, as we had mentioned previously, and I will give a little more color on the quarter.

As we mentioned on our last earnings call, the first quarter started strong with October sales up 58%. November was up 64% and December up 74%, all on the same days basis. The acquisitions completed during 2015 and Q1 of 2016, combined with our Greenfield branch growth and existing branch sales were all positive drivers of this 64% total growth.

Positive sales growth during the quarter was delivered by five of our seven reported regions. In our West, Southwest and Southeast regions, we saw strong double digit sales growth. In addition, we saw solid contributions from the Northeast and Mid-Atlantic.

All three of our product lines grew over the prior year, with residential up almost 77%, commercial up 59% and complementary up over 37%. Demand in general was strong in the quarter, and milder weather also was a contributing factor in this growth. Existing same day sales were up for all three product lines as well.

Residential existing sales were up over 15% in the quarter, this was mainly driven from same store sales as well as Greenfields opened in the prior years. Our complementary sales grew approximately 14% on an existing same day basis.

Growth in the quarter was driven in large part by our Applicators' acquisition made last year, but we also experienced growth within our existing business as well. Six of our seven reported regions had strong complementary growth, with five registering double digit gains.

From a trending perspective, this product line has seen positive existing sales growth, in 10 of the last 11 quarters. We will continue to focus on growing this product line. Our commercial product line registered 6.4% sales growth for existing same days in the quarter.

We experienced growth in our Northeast region and registered double digit gains in our Southwest and West regions. The gains were offset somewhat from our Midwest and Southeast regions. Its worth noting, that commercial sales have grown in eight of the 10 prior quarters on an existing basis.

Along with the solid sales growth, gross margins increased nicely over the prior year. This is the fifth consecutive quarter, in which the gross margin percent increased over the prior year. Excluding the fourth quarter of last year, the 23.9% gross margin rate is the highest in 12 quarters.

From an operating expense standpoint, we experienced excellent leverage as we grew sales. When excluding onetime costs related to the RSG acquisition, our operating expense as a percent of revenue declined over 100 basis points, just 17.9% for the quarter. We are very encouraged by the leverage gain this quarter. Our balance sheet remains strong.

Inventory per branch increased 11.5% from the prior year, mostly due to the RSG acquisition. The legacy RSG branches are on average larger and carried more inventory, than a typical legacy Beacon branch.

We increased cash flow from operations, and we were able to fund three acquisitions from cash generated in Q1, while keeping our revolver right around our initial draw. This is a good example of our strong ability to generate cash.

Looking ahead at the current quarter, we expect to generate strong cash flows and make progress on our commitment to delever. I'd like to now provide an update on the RSG integration. As mentioned in prior calls, the integration process has been in full force since the October 1st close.

Three major categories of savings were branch consolidation, SG&A and procurement. We have completed major milestones in each and are leveraging a proven framework that we file rigorously, to ensure all deliverables are being met. We are on track for all elements. We have accelerated and completed our bridge consolidations.

We are on track with SG&A savings, as the majority of our overlapping positions have been reduced with completion anticipated by Q3, other indirect savings have been identified and are in the process of being implemented, and we are making good progress with direct material cost savings, as we align our buy.

We have converted over 50% of the RSG branches to our IT system and the remainder will be complete by April. The combined team is doing a great job, executing our plan, while driving excellent financial results for the combined company.

We are committed to achieving our stated $30 million savings for this fiscal year, ramping up to $50 million in the second year, and Joe will provide more detail into the acquisition related costs. Now on to the outlook for 2016, for January we had same days organic growth for approximately 20%.

This is a very good start to the quarter and indicative of the continued strong demand and milder weather during the months. Looking at the combined company, we see revenue in the range of $3.8 billion to $4 billion for 2016, and in terms of gross margin, we expect to be in the range of 23% to 24% for the full year.

This estimate has no impact from pricing in it. In regards to do branch openings for 2016, we will continue to evaluate potential openings in markets here it fits our strategy.

Our focus for 2016 is to ensure RSG in the three acquisitions made in December, are integrated properly, as well as driving profitable growth from the existing Beacon and RSG greenfields. Greenfield bridges have been and will continue to be over time, a solid growth mechanism.

The investment required to open these branches is favorable, and provides the opportunity for strategic placement in areas we want to grow in. In terms of additional acquisitions, the structure of our financing allows to effectively meet our working capital needs and continue with our acquisition strategy.

We have the flexibility to continue making acquisitions, while maintaining ample liquidity, as working capital needs increase. As we have said in the past, it is difficult to predict when sellers will sell. Our pipeline remains full, and we should be able to close additional deals in the fiscal year.

Regarding our SG&A expenses, excluding one time costs and incremental purchase accounting to the RSG transaction, we expect to be in the range of 18% of revenue. Related to EPS, the current range of estimates is $1.80 to $2.06.

As we have said in the past, it is very difficult for us to give full year guidance, with the unknown variables we face such as pricing, demand and storm repair, this early in the year. Especially entering a historically weather impacted second quarter.

As we have said in the past, we do believe RSG will add approximately $0.30 EPS in 2016, that's without the impact of one time costs and incremental amortization. On the last earnings call, I stated felt we would be in the range of $1.80. I am not changing that view at this point.

And as we have done in the past, we will update this on the next earnings call. As always, we are working diligently to maximize earnings for the year, by executing the fundamentals of our business plan, focusing on superior customer service, sales growth, cost control, and making sure the integration is successful.

And I am going to turn the call over to Joe, and he can go over a little more detail on the financial highlights of the quarter.

Joe?.

Thanks Paul and good morning everyone. Now I will highlight a little more detail on a few key financial results and metrics that are contained in our earnings press release in the first quarter slides that were posted to our web site this morning. Overall, Paul said it was a very good quarter.

We had strong top line growth of 63.8% for record first quarter sales of $976.5 million. This is driven primarily by our acquisitions, even excluding these, we still had existing market growth of 11.8%. Gross margin increased over the prior year by 80 basis points.

Operating expenses were up in total, mainly due to the costs related to the RSG acquisition, excluding these costs, our existing market operating expense, as a percentage of sales, declined to 120 basis points, demonstrating great leverage.

As a result, for the quarter, we achieved a record EPS of $0.41, an improvement of $0.15 for almost 59% over the prior year. For comparison purposes, there were the same number of days in Q1 of fiscal 2015, as in Q1 of fiscal 2016, 62 days.

Paul already went through our Q1 sales results in detail, so I will not repeat any of that information here, but I will go through our monthly sales trending. As compared to the prior year, our average sales per day on an existing branch basis were higher in each of the three months in the quarter.

October sales were up 7.7%, November sales were up 13.1%, and we finished the quarter strong in December, with sales up over the prior year, by 17.3%, driven primarily by a 21.4% increase in residential sales. On a very positive note, the growth margin rate was 23.9% for the quarter, which is up 80 basis points from a year ago.

In summary, pricing declined slightly in the quarter from the prior year. Mix within the legacy Beacon brand just drove a slightly favorable impact to the gross margins. The addition of RSG took the gross margins down slightly.

As we previously discussed, legacy RSG business carries a lower gross margin percentage, but this provides us with an opportunity, as we move forward and is clearly part of our integration plan. We experienced a slight negative impact in gross margin, due to the increased and direct sales versus the prior year.

The percentage of direct sales increased to 15% from 14.7% in the prior year, as we previously mentioned. Our direct sales had lower gross margin margins and operating expenses, as compared to our warehouse sales. Commercial and residential prices declined approximately 2% compared to the prior year.

This was partially offset by complementary prices, that were up over 1%. Sequentially, overall prices are down less than 1%. Our product mix had a slightly favorable impact on existing gross margin, as volume shifted from commercial roofing to residential and complementary products.

Residential roofing increased to 48.7% of our sales versus 47.2% in the prior year, while commercial declined at 35% from 36.8% in the prior year, and complementary increased slightly to 16.3% from 16% in the prior year. The diversification of our product line is something we focused on our costs to our existing branches and through our acquisitions.

Now on to operating expenses; total operating expenses were $203.6 million or 21.1% of sales. This represents a year-over-year increase of $92.6 million. This amount includes operating expenses from acquisitions of $94.8 million, of which $26 million was RSG acquisition related costs.

Excluding the acquisition costs, our existing market operating expenses were up $5.5 million over the prior year Q1, but, were down 120 basis points as a percentage of sales. As previously discussed, within existing markets, we do include greenfields.

$1.4 million of the existing market operating expense increase can be attributed to the six greenfields opened up in last year. As we have mentioned, greenfield branches have a slightly higher operating costs as a percentage of sales, until the branch is running in our average branch volumes.

There is also an increase in volume related payroll and benefit costs of $3.3 million. Net debt expense was up $2.2 million for the prior year, primarily as a result of select customer account reserve, and the fact that in the prior year, there was a credit bounce due to some favorable collections.

But overall, we continue to have a very low trailing 12 month bad debt expense of under 0.2% of sales. We continue to look for ways to leverage our cost structure. Cost control is a historic strength for Beacon. With the acquisition of RSG, we are already seeing a significant improvement in our operating cost leverage.

Interest expense and other financing costs were up $13.6 million versus the prior year. This increase is primarily driven from our debt balances increasing over $900 million, in conjunction with the RSG acquisition. We are managing this very closely, and making every effort to delever and reduce this cost.

During the quarter, we paid down over $100 million of our debt, and that allowed us to make three acquisitions that we announced in December, and still end the quarter with the same balance we started with. We intend to meet our commitment of reducing our leverage to under two in three years.

Our income tax benefit reflected a much lower effective rate of 32.8% for the year compared to 39% last year. This was driven primarily by the treatment of onetime RSG acquisition costs and other discrete items. When you adjust for these, our effective tax rate would be approximately 39%, which is consistent with the prior year.

Our net adjusted earnings were $24.7 million for the quarter, compared to $12.9 million last year, an increase of almost 59%. Diluted adjusted net earnings per share were $0.41 compared to $0.26, the same period last year.

Our adjusted EBITDA for the quarter was $73.4 million, which is 7.5% of sales, compared to $34.3 million in the prior year, or 5.8% of sales. It's an increase of 113.4%.

Now I want to provide some clarity on the $29 million non-recurring charges in incremental amortization that we show on the earnings per share and EBITDA tables included in the press release. Approximately $1.2 million of those costs are related to the extinguishment of our prior debt and interest rate swap.

$4.3 million is related to the acceleration of stock options, due to RSG employees that left the company. $5.7 million is related to the step-up in amortization, with the increased customer intangible assets from the RSG acquisition. For the full year, we expect this number to be approximately $23 million.

$3.4 million is related to the cost of a new debt issuance, both one time expenses and the amortization over the life of the debt agreements, and the remaining $14.9 million is related to non-recurring costs associated with completing the transaction such as legal accounting/consulting fees.

In addition, this amount includes costs to implement our synergies, such as the severance and lease termination costs. Regarding the status of our balance sheet, cash flow from operations for the quarter was a positive $44.7 million compared to $40.2 million last year.

Inventory was up $151 million from Q1 of last year, and on a by-branch basis, it was up 11.5%, primarily from the RSG acquisition, and also the three other acquisitions we made in December. Capital expenditures, excluding acquisitions in Q1, were $2.2 million compared to $3.1 in Q1 2015. We are carefully evaluating our fleet, with the addition of RSG.

For fiscal 2016 though, we still expect capital expenditures to be close to 1% of sales. Net cash used for investments was $941 million, reflecting our acquisitions during the quarter. Keep in mind, that $307 million of the RSG acquisition was funded through the issuance of common stock, and is not reflected in the cash flow statement.

As I mentioned earlier, we paid down over $100 million of our debt during the quarter, and we still intend to meet our commitment of reducing our leverage to under two in three years. Current ratio was a strong 2.28 to 1, versus 2.53 to 1 at Q1 2015.

As Paul mentioned, we have made great progress on the integration and in taking the actions necessary to achieve the synergies. We are still very confident in the accretion amounts as stated. We will now respond to and take any questions you may have..

[Operator Instructions]. Our first question comes from the line of David Manthey of Robert Baird. Your line is now open..

Thank you. Good morning guys. .

Good morning Dave..

So first question on the second quarter; obviously, seasonal impact, strong year, and you're a bigger business, so I assume you will be making larger losses in the off season.

But just outside of the normal seasonality and the addition of RSG, is there anything else that we should be thinking about, as we model that quarter? I am really fishing here, but I am just looking for anything else that you think will be helpful, as we are thinking about that quarter, given that you're a different company this year, than you have been in the past?.

Well I mean, for sure Dave. We will have to see the balance of Feb and March from a seasonality standpoint. January was somewhat mild, right across the country. On the East Coast, we had that storm couple of weeks ago, that did impact sales. That would be one factor.

The other piece is, RSG, brings with us a lot of Southern exposure, which could be helpful in the quarter. But again, this is also dependent on demand in those areas, weather of those areas; because as you know, even from last year, Texas, etcetera, had some pretty rough weather. Southeast U.S., as we went through the winter period.

Joe, I don't know if you have anything to add in terms of differences?.

The other two pieces I would add David; as you know, traditionally, margins are a little bit softer during the second quarter. Always happens; kind of demand down a bit. Pricing can get a little bit more aggressive. So usually, you will traditionally see a little bit lower gross margins in Q2.

And from a cost structure perspective, again, the percent of sales will usually kind of go up as a result of less volume. But keep in mind, there is the other one, which is the new one to think about Dave is, the benefits from the synergies and the transaction, right; we had a lot of cost this quarter that started to occur.

Some of the benefits, you didn't see as much this quarter. Towards the end of the quarter, we started to see some, but not as much. In the second quarter, you will start to see some of the benefits, meaning growing our operating expenses, as we go to the second-third, but definitely by the fourth. But you will see some in the second beginning..

Okay, thank you for that. Second, it was interesting, maybe your strongest organic growth rate seem to be in the south and the west part of the country, versus the northeast, mid-Atlantic and Midwest, which, where you think that, the mild winter weather would have the biggest positive impact. You mentioned RSG's exposure to the South.

Are there any thoughts that you can provide, relative to that geographic balance, just positives, negatives that influence those numbers this quarter?.

Yeah Dave, its interesting, because there are so many. One, are the comps, of course from prior year; and then, the other piece is -- if you look at Q1 across the country in general, it was above average rain.

So that did impact some of the numbers, but then as that dried out, and/or on the West Coast, because of the fear I guess, if El Niño and others, a lot of work that was generated out west. Some of that drying period in the Southeast, Southwest, it generated an awful lot of volume. And we saw some slight storm value that we picked up.

I mean, as we look at, the most maybe telling region, our reported region that we look at, that might be different than just the ups and downs of those things that I just mentioned was the Midwest coming out of some of the strong-strong storm volume they had last year, which happens every year, if there isn't a repeat within that timeframe.

But we are not concerned at all about it. So in speaking, and it really speaks to your first question, there is relative optimism across the country and volume, even if its, for instance its Canada, where they are talking about slight increases. But for all three of our product lines, there is relative optimism on the growth side.

And then what changes that of course, is going to be, what's going to happen in the spring, well I think it is good weather now, [indiscernible] forward, what will happen in April, May, June to that. But even with that, contractor sentiment is positive. So I don't have anything else to add from a geographic standpoint Dave..

All right. I appreciate it. Thank you..

But I will add, the West was up the most, and that really is a function of folks getting ready for the rains that occurred in January, where they got hurt; because obviously, contractors aren't running out to do the work, because it rained mostly in that month out there..

Thank you. And our next question comes from the line of Ryan Merkel of William Blair. Your line is now open..

Thanks. Good morning guys and very nice quarter..

Hey Ryan. Thanks..

So the 12% organic growth was really the headline for me, a really strong number.

I am wondering, how much of that do you think was sort of the market improving? How much do you think was sort of weather, and then how much do you think was sort of share gains? I know that's sort of a hard question, but just do the best you can?.

That's a tough one. I think if you look at a start with, as best we can tell. But its also blended. You look at the greenfield element of that. But you'd have to go back almost to 2012 and take all those greenfields that we started opening in 2012, 2013. 2014 was the biggest year. Last year smaller, of five. That might be 50% of that total growth.

But again, you are going back four years. If you just take last year's greenfield, very-very small. So that you could imply then, if you go down the path, existing sales, same store were stronger. And then you could say, the chunk of that, is the elements that you talked about. And that's very hard for us to term.

I mean, I could say, half of it was weather, but I just don't know. I mean, there is no doubt there is an impact, especially in December, and not having the heavy-heavy snows we had in previous years, there is just no doubt about it. For me to bust that out, its very hard.

On the greenfield piece though, going back to 2012, there definitely has to be share gain, because there are new branches that we put in, and they continue to grow, and they are actually positive right now..

Ryan, if you look at last year's kind of numbers as well, Q [ph] might give you a little over the story; because last year for the first quarter, right, we are up 4.4%. Underneath it, Ryan, the commercial was actually down, roughly a percent. This year, the commercial is actually up 6%, so that's one thing I would kind of consider the answer to it.

And the second is the other element, is kind of residential. The residential piece that last year for the quarter, up 7, this year up 15. We also saw last year was -- October-November was really soft.

October was up 3, November almost kind of flat, at 1%, and what we really had was a much stronger kind of October and November, and I think those helped carry us through a bit. It's hard to [indiscernible]..

Yeah.

Bottom line, weather helped, but you were sensing there is underlying improvement in industry demand, is that fair?.

Yeah, I think so. Carlisle talked a bit about it yesterday and in their projection for 2016. Obviously, they have done some great things on the profit line as we look. So we feel good about the commercial, in terms of being consistent. I think we could see stronger growth.

And again, time will tell, as we get through the spring on residential and complementary, which has done very well. Some of it, due to the acquisitions, and some of it due to new construction, which is tied typically more to, let's say vinyl and windows, and things like that.

So as I said earlier today, the indicators, the optimism and the view coming from the field is firmer, stronger. Some of it of course is seen because of weather, but even beyond that, backlogs are fairly healthy. But again Ryan, time will tell, as we go through these next months, and that's why I said, hey, I am going to stay on the $1.80.

Of course, we are working as hard as we can to beat that, but we just have to see what the spring brings?.

No I get that. That's appropriate. And then second question, price; just talk to us about what the shingle OEMs are saying? And then, as we think about modeling the rest of the year, my understanding is, shingle prices have been sort of flat now for few quarters.

So I am thinking, wow, we had year-over-year declines in selling prices in this current quarter.

Should that go to more neutral, assuming we don't have more down price, if we just extrapolate it to sort of the current trends, and then we can have more volume point through, is that the way to think about it?.

So it's good. I mean, we certainly hope that price gets back to neutral. If I could summarize, from my vantage point, certainly can't talk for the manufacturers, the shingle manufacturers. But my view is that, things will stay much the same, the same activity, posture in the winter buy, from last year.

The same pricing posture, if they want to be consistent; and I said it a year ago, we are talking about, oh my lord, oil is down and asphalt's down, what's going to happen to pricing? And our view, was that the manufacturers who want to take those input costs, to kind of counteract the difficult 2014 they had.

And they did, and I think they are going to continue to do it. Carlisle said yesterday, and I think that's great. So yeah, our best, I guess hope, is that price is neutral for the balance of the year. But again, we will just have to see.

I wouldn't be totally surprised if we went through Q2, and saw a bit of negative pricing, just because -- again, it will depend on Feb and March in terms of the weather demand, all I could stuff. But I am not concerned about all about the current trending. We just have to see, as we go through time.

Joe, you want to add something to that?.

Yeah, if you look at the historical data, as well too, Ryan, you will see, how worst quarters on the residential that you are asking about; from a price perspective, was really the fourth quarter of 2014 and the first quarter of last year, where it was down roughly 4% both of those two.

Since then, each of the last kind of three or four quarters now, its kind of moderated a bit and kind of little bit better. So you have seen some improvement. Still negative, but it really hit the low point for decreases of I have backed, about a year ago. And it has gotten a little bit better every quarter..

Thank you. Our next question comes from the line of Sam Darkatsh of Raymond James. Your line is now open..

Good morning, Paul, Joe, how are you?.

Fine Sam. Good morning..

Good morning Sam..

Couple of questions here; first off, with respect to your per branch inventory; Joe, I think you mentioned that the change year-on-year 33:27 Your sell-through was -- there is a 12% organic -- I mean, you drew down organic inventories as the quarter progressed, because you would imagine that inventories would normally be up, similar to where your residential sales might be, to support that sales level.

And you are saying, I think that the only change was acquired in patches.

Is that the way to look at it?.

You are on the right kind of ballpark there, Sam, absolutely. We did see some slight increase in the Beacon branches as well. So even the Beacon branches were up a little bit in kind of year-over-year inventory, per branch.

But the bulk of what drove that 11%, kind of year-over-year increase, was mostly from the RSG and the size of those branches in there..

Do you think that was endemic, Paul, in the industry, that the channel worked inventories lower, which also would be, I think favorable for your pricing impact -- outlook, as you suggested earlier?.

You would intuitively think that. But again, I don't have any datapoints. We know the ship two [ph], based on an ARMA data we heard was high. And we ended the year with -- close on the shingle base, 112 million squares versus the 106 million last year; and a lot of that was in that Q4. So there was a lot of inventory in the channel.

But I am sure, other folks saw similar sell-through, which is encouraging. To get to their exact numbers would be impossible for me to comment on -- on what I just said..

The other part looking forward, we will have to be cautious though a well too is -- it will have a little impact. We talked about how we consolidate or combined some of the branches between RSG and Beacon, right? So we at Beacon, also added 26 bigger branches than what we had before as well too. So that would be bigger inventory.

So we might see a slight impact on our inventory per branch. The consolidated numbers go up, which yes, on the RSG size. But we have some bigger branches now too, that we combined in as well..

And just naturally, there is going to be an improvement too, Sam, as we go through the 20 plus branches that we put together. There will be efficiencies driven, but that won't occur for a number of months, as we go through the year..

Last question, if I could; EBITDA multiples from prospective selling businesses that you are looking at in the acquired pipeline. What are they looking like -- perhaps prior to when you made the RSG deal? Are they starting to come in, as the appetite for sellers to sell a little bit bigger now.

What are your thoughts? I know you said the pipeline was full, but you could put some color around that?.

Yes. If you went back probably to every call I have done for the last three years, I have set the pipelines full, because it has been, and it was no different this year. And they do come in waves. So I think, there might have been a little more activity, after the RSG deal went through, we were able to purchase some very-very good companies.

I won't comment on the multiples, other than to say, we are very-very conservative in our approach, and its all based on the value that the company is going to bring to Beacon. We spend an awful lot of time, analyzing it, looking at the trailing, as well as the future. So from that standpoint, it is in the range of what we have done in the past..

I think that's probably the big [indiscernible]. There has been no material to your question. Is there anything significantly happening in the pricing of the acquisition to the market? No, not right.

Same as we have seen, but as Paul said, the significant part that has been happening is, seems like a lot more people are really interested, and we are getting lots of calls, and its all really good..

Thank you, Joe..

We will continue to do what we do. We will evaluate all those companies that come through and look at the placement density, our geographic footprint, because as you know, we are a growth company and we are going to grow..

Thank you. And our next question comes from the line of Garik Shmois of Longbow Research. Your line is now open..

Hi, thank you. Congratulations on the quarter. Just want to dive a little bit more on inventories, just to get some clarification on your prior comments. Understanding that your inventory per branches is starting to move up a little bit with the RSG acquisition and you are now consolidating into larger branches.

But what is your expectation with inventories over the next several quarters, how long will it take? If it will take at all to get inventories per branch back down? And I guess secondly, maybe a little bit more color, because I think it might be unclear, because the market now is trying to take some of your inventory comments I think negatively.

Is there a disconnect between where channel inventories are right now, mainly on the shingles side, and where you think they need to be, over the next several months, to position yourself for the spring season?.

Yeah. I mean our inventory has a typical trending as you go through time, anyway typically, where we close very hard in the fourth quarter; and then, even last year, it was somewhat flattish, as we went through first quarter, building the second, building the third, because that's our season, and then typically to drop off in the fourth.

So I would expect the same thing to happen, as we go through the year this year, as we get ready for the season towards the end of Q2, and that build through Q3, and then close the year in Q4.

I don't know what you are referring to with my inventory comments, other than the ARMA data, which is a good sign that there was pull in demand, because distributors have to order material for manufacturers.

And we have a, I think a strong distribution channel, that is smart about the money they spend on inventory, and they buy because they believe they are going to sell it. So I would think, the sell-through, for them -- as I said on a previous question, was strong in the quarter, as it was for us. So the competition for me is a positive.

I don't know if you have any follow-on for that?.

That's how I interpreted it, but the stock price is now down about 3% after starting the day strong. So I figured, it was related to that. But just wanted to shift gears, just real quickly on the -- some of the acquisitions that you made into the quarter, RIS in particular. You have talked about building out complementary products.

Now, you have taken on some installation. Just wondering if this is, maybe a shift in strategy, in which you are looking to take on additional complementary products in penetrating deeper into those verticals..

Yeah. Our complementary business has been strong for years. We have also sold installation for years. RAS came available, and we saw a great opportunity with their large branch footprint across the country, to bolster the legacy installation sales we have, and to even expand that.

So when you look at the percent of complementary to our total, its still relatively small. We would however, entertain, other complementary acquisitions, whether it'd be windows, vinyl, insulation of course, because we think it is a good LOV line of business to be in to grow. But its not going to dramatically change the mix of our products.

And ProCoat was another example of that, that we did earlier last year. That was also sidewall, exterior products, finished wall products, stucco. That was new for us, but its small, and I wouldn't expect to see any grand expansion there.

But it just helps, in certain geographies, pick up additional sales in its exterior, and it fits in our complementary basket. So it’s a consistent strategy I think that will help us grow..

I think Garik, this is Joe; one other item I will go back to was that, the whole question goes to inventory per branch. The other thing we spent a lot of time on is, I mentioned, because some of the sizes of our branches are growing, is just watch our inventory turns as well too.

So if you look underneath it, our inventory turns, in total, they are roughly around the same as they were last year for this quarter as well too. So as our branches change, and as either inventory changes, terms will be another metric that will pay attention too to help also kind of drive, just so we have the right levels there..

Okay. Thank you. That makes sense..

Thank you. And our next question comes from the line of Keith Hughes of SunTrust. Your line is now open..

Thank you. Kind of building on the last question, are you starting to see more contractors really go multi-product at this point? I mean, there has always been some, and I know that it's just in the market.

But is there a trend that way at this point, or is it more of what we have seen historically?.

Yeah, nothing that I could speak to. So I'd have to say, its just what we have seen historically. But these folks are very adaptable, and if there is an opportunity for them to do other work they are going to. But there is no data that tells me, that anything has changed dramatically..

So with you getting or at least dabbling in some other product here; whereas of course, one of your big competitors has done it in a bigger way.

Is this something that is like a test phase for you, will we see more of them? What would be your kind of long term view?.

In terms of what products?.

You have got insulation, distribution, you did something -- stucco? I mean, these are fairly small, in terms of the magnitude?.

Yeah, the stucco element of ProCoat is small, and that's a smaller market, but still a very good market. There could be some more activity there. But again, in terms of the total company, we are going to end the year at just $3.8 billion to $4 billion would be small. And as I said, on the installation piece, we already sell installation.

It’s a natural complement to homebuilding. And so that's something we have done for years, and adding RIS is just a nice solid business that we added to an existing product line already..

The piece that I would just add to it, Keith, is the bulk of our business is, and will continue to be in the roofing part of it. So residential, commercial, best way to continue to see a lot of our kind of focus and energy. Complementary, we said is a great kind of diversifications part of it, but roofing..

Yeah, and that points to our sheet, with the heavier percent of resi and commercial. Very little complementary, and then of course, if you just look at the history of the greenfields that we have opened from 2012, they initially all start from a 100% residential roofing.

So yeah, there is no intent, I mean, to clarify at all, to change our strategy at all. We are a roofing company, but we are going to sell complementary products, because it’s a nice add-on for contractors that do both, and contractors that only do complementary..

Okay. Final question.

Joe, what will be the run-rate, interest expense moving forward?.

Run-rate? Sure, you bet. Our run-rates cost to debt is -- total weighted average cost-to-debt is roughly around on that 4% number, and we have got that $1.1 billion [indiscernible] debt is the current balance. So I use the 4% on it.

And as we have said, we are trying to kind of -- we will be delevering over the course of the next three years, and we have set a $100 million a year, trying to get that -- trying to balance down to start to delever it a bit.

So you kind of phase something like that in over the remainder part of the year, Keith, and use that 4% weighted average cost of debt, so it gets you in the ballpark..

Okay. Thank you..

Thank you. Our next question comes from the line of Jim Barrett of C.L. King and Associates. Your line is now open..

Good morning Paul and Joe..

Good morning Jim..

Yeah Paul, I am realizing the synergies from buying RSG, and specifically employing greater buying leverage with vendors; can you give us any color on how that is progressing and are there any differences between the vendors you sell residential versus non-residential versus complementary products?.

It would be difficult for me to get into any level of detail, just given the commercial nature of lines of business. Of course though, there are going to be differences between what RSG did and what we did in terms of their relationship with the vendor, etcetera, even incentives pricing.

And all we are doing is really aligning those, so that we are consistent. That's it. And that's part of that $50 million. We have said in the past, that those three big buckets that I talked about, a third of it for each is a good way to look at it..

Okay.

Is it fair to say, the majority of your vendors provide volume discount?.

That's for sure. There is someone in the industry. We [indiscernible]..

And then on a related note, will the benefit from having this greater scale and the increased buying leverage -- should I assume that will happen essentially immediately? There is no lag to that process?.

No, there is a lag typically, because you got inventory on hand, right, that has the -- the way our accounting works. And so any new purchases that are made, that are aligned to new contracts, etcetera, and also then sell-through. So there is a focused pipeline..

And so if you think about it, most of the contracts, we did all the work early on in the quarter. By the end of the quarter, we were probably starting to buy under those new contracts. So you have got some inventory, that's at the new contract in the old, and then we will start to work it off as we go through the second quarter..

Okay. Okay, that's helpful. Thank you both..

Thanks..

Thanks..

Thank you. Our next question comes from the line of Ken Zener of KeyBanc. Your line is now open..

Good morning gentlemen..

Good morning Ken..

We talked about this last quarter. I just want to go into it again, because its impressive. I mean, your organic in res was around 15% on your existing base. Closer to 18%, when accounting for the year-over-year price deflation.

So very strong, obviously, how you talked about your greenfields and stuff, Joe? I mean, people have asked the question about trying to break it out, but its so strong, and I think that number last year was about 10%, significantly outpacing the initiative.

You can go into just, again, maybe if you try to parse that out, how you are able to get that type of momentum from the greenfields? If it was two or three points from all those greenfields you have opened up, that are continuously expanding? And if my math is right, Joe, if you can comment? It looks like RSG was up 21% year-over-year organically? I think you had given a number of 3.40 this year versus the implied 2.80 last year.

But you could comment on how they grew, you think, so fast, considering they might not have those greenfields? Just trying to understanding how the different businesses are giving us insight there, in terms of execution?.

So from a greenfield perspective, you are right. As the grenefields have grown, and not so much, and not even just the six from last year.

But you have to go back to the 40 of them that we have done over the last, kind of three years, right, and all of those -- they are in the growth phases, where they are growing faster than our average kind of organic growth in the market today. I don't know if I have, there is 46 of them in total.

I don't know if I have it at my fingertips what the exact growth impacts were, of those kind of greenfields, in total for all of them. So if I look at them, in some of the pieces, they did great growth.

In fact, just going back from last year, if I look at all 46 of them that we did, looks like it was almost -- those guys might have almost did -- almost come close to kind of double in size kind of year-over-year. So they had a lot of good growth, from those 46 kind of greenfields. But again, small numbers in total, but they had good solid growth.

Your second question in regards to the RSG kind of growth, first quarter to first quarter, I don't know where that number you mentioned came from. Here is the one part, where I would say is in there, that we need to be kind of cautious of -- when we talked about RSG, or the numbers as we talk about, in acquisitions for RSG.

We also have some of these combined branches in here, because we know, we talked about, we combine branches, right? So there was volume from Beacon branches that were mixed in with RSG branches. So we put that, and we call that as kind of that RSG kind of business in total as well too. So some of it is yes, they have had continued growth.

Some of it is, these combined branches, and are also adding to their growth. So that's where some Beacon volume has been there as well too..

We obviously want to stay focused on, talking about total Beacon. But there is no doubt. The RSG core branches for the quarter did well. The greenfields grew, and that team did a very-very good job of growing..

I think when you really look at the RSG branches, excluding their consolidated ones; their revenue growth would be pretty much aligned with where the Beacon based revenue growth was as well. So I just kind of looked -- found a report, and looked the legacy RSG branches, excluding the ones that were consolidated in.

And their growth was too much in line and similar to the Beacon legacy branches as well too..

Okay, good. I appreciate that. I was just using some numbers from the Q, maybe I misinterpreted them. The second question then, given your view that -- if you think the retail price deflation might be flattening out, and you had gross margin expansion due to your lower input costs, i.e., from the manufacturer side.

When you guys talked -- and I realized, its very difficult. Does that imply, all of the -- price deflation is slowing, but you are also -- price deflation from your manufacturers, that would come net income a little bit. So you are positioned to have lower, I guess res, gross margins. Is that the right way to interpret your comments Paul, or --.

Not necessarily..

No, not at all. I mean, this moves in fact both ways, right, and it’s a f unction of strength to weakness in any given region, how the manufacturers want to play within that region, and then, the competitive nature of the distribution base there. So they are not necessarily connected.

So if it goes the other way, it could also mean, that gross margins increase. That's something I can't predict, that's why we gave the range of 23 to 24 with no price impact for the balance of the year.

But, if there is an impact, for whatever reason in the balance of the year, of course, we are going to work very hard to try to offset it with reduced COGS to get a relative same rate, and of course, grow sales and make up the dollar piece..

Thank you very much..

Thanks Ken..

Thank you. Our next question comes from the line of Jason Marcus of JP Morgan. Your line is now open..

Good morning..

Good morning..

First question, on energy costs.

Do you have a chance as to how much of a benefit lower steel costs impacted the quarter? And then, what do you think the challenge for that could be, in 2016, based on current oil prices?.

That's a good question. What we saw this quarter was somewhat similar to what we have seen in the last quarter. There is about $1 million, so we saw about $1 million benefit in our cost structure, as a result of the lower fuel costs on a year-over-year.

Given where its at, versus last year, I think from my perspective; I think we will probably see that continue through each of the next few quarters as well too, as long as fuel costs continue on the same kind of trend year-over-year..

Okay, great. Next question on the complementary products pricing. So that has been a nice positive over the last several quarters.

Was just hoping, you could maybe break out, which products are seeing the largest price increases that you have across that business, and if its more focused on the residential side or the commercial side?.

So its more focused on the residential side, and I can't get into the individual pricing of products. I think its somewhat uniform across many of the major products, like siding and windows. It is good news for us. Its good to see that grow.

I think there is some -- whether its overall economic health and trends, indicators that we see getting better, and/or tied to new construction, which we also see. And then internally, we continue to work to -- let's say, improve our methodology for pricing, to eliminate manual overrides.

In terms of pricing, all of those things are a factor within it..

Okay.

Then just lastly, for depreciation and amortization, is that -- $24 million in 1Q, is that the run rate for the rest of the year, or was there anything one time in that?.

No, that's probably a pretty good number. If I look at the full year numbers -- now keep in mind, that's three elements to it, right? So there is our historical depreciation, which runs around $8.5 million, and there is the historical amortization that runs around $9.5 million.

Then you have got the incremental amortization, which is kind of the step-up pieces of it, and that's the $5.7 million. You put those two together, and yeah, you are getting that combined kind of D&A number of somewhere around 24. And its pretty consistent with what I would expect to see through the rest of the year.

It might step up a little bit, but I think its going to be right in that range..

All right. Thanks..

Thank you..

Thank you. Our next question comes from the line of Will Randow of Citigroup. Your line is now open..

Hey, good morning, and congratulations on the quarter..

Thank you..

Yeah. It has been done a number of times. But just to be more clear, could you talk about drivers of gross margin improvement for existing stores, year-on-year.

Particularly, how much of it was the prices you pay versus the pricing that came in, as well as mix?.

Sure. Let me give you a little bit of more kind of color on that as we talked about before. So from a price perspective, we will talk about that piece first. So from a price perspective, we saw roughly around 150-ish basis point decline in margins, as a result of the price impact.

Commercial, and residential, both down, offset by the complementary being up and commercial and residential, both down, somewhere around 200 basis points and complementary up somewhere around 100 basis points. Put all that together, we lost about 150 basis points as a result of pricing.

On the cost side, we made up around 260 basis points on the cost side from it. Commercial and residential were the two biggest kind of drivers to it. Both up somewhere -- somewhere between 2.5% and 3%, and complementary costs actually down slightly.

Mix is the third element, and mix actually shows up as kind of a negative, you lost 30 basis points due to mix, but there is really two pieces in there. On the legacy Beacon branches, we actually made up around 40 basis points in mix, because of that shift towards more residential, right? That was good.

But then when you pull out the RSG element to it, and you have talked about that slightly lower gross margins. That, probably from a mix perspective, cost us 70 basis points. So you got the 40 from Beacon legacy, 70 from RSG, going the opposite direction, is a negative impact of mix with 30 basis points.

So just to recap, price hurt us about 150 basis points. Cost helps us about 260 basis points. Mix, hurt us by about 30, and that gives us from 23.1 to 23.9..

Thanks for that. And then as a follow-up, I have talked about it on several related, call it, building calls. But you know, the stock market hasn't been performing well. Those are questions, whether or not consumer confidence will break down.

However, you are delivering some good numbers, potentially, somewhat due to weather in terms of year-on-year organic comps, which are surprisingly positive.

Can you talk about how you think about the market today, given the economic backdrop and the question, that at least investors are having in regards to the sustainability of economic recovery?.

Of course, I can't. As I said on a number of other answers, I can't predict a future related to the economy at all. But what I do know, and I think its very-very important to continue to remember, and we said almost on every call, majority of our product is a re-roof type of product, type of a repair, and 15% plus or so is new construction.

So when you think about a roof, they are going to continue to deteriorate, they are going to continue, on the commercial side, to be repaired and/or replaced, and on the residential side, replaced. And that fact will not change, regardless of what's happening in the economy.

It could be slowed, as it was may be three or four years ago, couple of years ago, because folks want to wait, maybe another season etcetera. But I still am bullish overall on our industry and on our market, than of course with our size, density, all of those things, the amount of roofing we had in our sales. We are optimistic.

But again, its hard to predict what exactly is going to happen with storm volume. How much to pull forward on weather and things like that. But we are still very optimistic. And that's why we are talking about $3.8 billion to $4 billion in sales, and still anchored on that $1.80 current range of EPS. And as I said, update that to Q2.

I think those are the --.

Thank you. And congrats again..

Thanks..

Thank you. And our next question comes from the line of Robert Wetenhall of RBC Capital Markets. Your line is now open..

Hey, good morning.

How are you?.

Good morning.

Good, how are you?.

Good morning..

Good, thanks. Hey, I just wanted to ask a question, I think you are targeting $30 million of synergies this year with the RSG acquisition. You have owned the asset now for a couple of months.

What's the likelihood that you realize those synergies, and is there a chance that you guys beat those synergies? I am just thinking about, where you are in the process and integration, if there is upside to the $30 million figure?.

Yeah. I mean, we have said $30 million and $20 million. We are at the 99.9999% view that we are going to achieve those. So I will just say 100%, because we are just not going to miss them. We have a number of great leaders driving them.

We have a tremendous amount of planning that is involved in this, and tracking, and we are doing the right thing, so we don't upset sales. In terms of that, I feel extremely good about what we have done from a process standpoint and execution to get to the 30 this year and 20 next year.

With a lot of that being run rate entering the year at a $50 million rate. Is there a chance we could add some upside? There is. Its difficult to quantify right now, because there is things that might go bum. So there is some protection we have in the $50 million. But we will just have to go through the year.

We probably wouldn't be able to tell, until the fall of exactly where we are going to end up. But in terms of the target, we are on it, and we are working to make sure we execute it..

All right. So that's pretty encouraging. And obviously, there is some movement. It sounds like big pull forward in 4Q ahead of estimates for storm demand and maybe some stuff in the channel right now.

Talk to me about your internal expectations for same store organic growth during the balance of the year? Because there is obviously a bit of noise right now, and its showing up in your share price. You post a great quarter, the stock is getting hit.

What's the right way for us to model the same store sales piece outside of RSG?.

So I think its roughly, as I alluded to in the last call in this spot. As best we could tell now for the full year in the 5% range, same store existing, we would call organic..

So you just feel like that's on track, and you are just having, basically, a bit of a time shift with -- between the prior quarter and this quarter, effectively?.

As we see it now. Now we will obviously update that guidance, as we get in and do our Q2 earnings call, because we will have that behind us, and we will be in the season a bit. So we will know what's happening, as best we can. We do believe the other good news is that the winter buy behavior, that was muted last year, and exhibited by the cannel.

We believe its going to occur again this year, and there is not going to be a lot of sell-through of inventories from the manufacturers to disrupt the channel. But as demand firms up in March, April, we should see some of that buying pattern increased by everybody; because assuming that we are going to have a strong year, we will see stronger sales..

I would just add to that, Bob, as well too is; we won't stop when we get to 5% on the growth. Trust me, the market got to continue to grow. We are seeing the strength there, like we did this quarter at the 11.8% organic growth. You bet we will keep driving the business as far as we can..

No throttle on that. That's right..

I like you guys. Congratulations [indiscernible]. Good luck..

Thanks..

Thanks Bob..

Thank you. That concludes the questions. Now, I would like to turn the call back over to Mr. Isabella for any closing remarks..

Great, thanks. Here are a few highlights from our earnings release. Our first quarter sales were a record, to repeat, $976 million, up almost 64% from the prior year, with great gain obviously from the RSG branches' debt acquisition, in addition to same store and greenfield growth.

Resi sales were up 77%, commercial up 54%, complementary up 37%, as we said. Now this is a great example of our product diversification and the strength of the RSG acquisition. Gross margins improved versus the prior year, to 23.9%, and to be clear, inventory is positioned well, and we believe the winter buy will be like last year, muted.

Our per branch inventory did increase, from $1.2 million to $1.3 million, but as Joe said and I said, that as a function of the RSG acquisition, and we are to continue to manage inventory very-very well. Our balance sheet is healthy and will allow us to deliver our end year and long term growth goals.

We feel good about our capital structure and cost of capital. And as we said, we generated enough cash in Q1, to pay for the three additional companies we purchased, after the RSG close. We are in a great market that's going to continue to grow for the elements I just talked about in that last answer.

We are well positioned to capitalize on this growth with our branch count, product placement and density in large markets. We are executing the elements of our strategic plan and we will continue to focus on this. Our integration efforts are on-track, related to RSG.

We are very focused on this, and are following a detailed planning process, as I said, to ensure customer satisfaction and sales growth as always number one, and that we hit the synergies we committed to hitting. RSG is an excellent company and makes the combined company even better.

We have added a very hardworking, winning oriented group to Beacon; and our team has risen to many challenges over the last three to four months, and they have done an outstanding job. And our customers have also responded very positively to the combined company, as we work to provide as much value for them as possible.

I like to thank all of our investors for their interest in our company, as well as our customers and our 4,000 plus employees for their loyalty. This concludes our earnings call. Have a great day..

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's call, you may all disconnect. Have a great day everyone..